Tuesday, March 9, 2010

Local Law Red Lights - What's SRI Now?

Life is tricky for the international corporation and the socially responsible investor. Consider poor Google. First Google withdraws from a gazillion dollar potential market in China rather than accepting censorship (OK, it was a little more complicated than that). Now Google finds its Italian managers convicted of a crime for failing to prevent a posting on Google's subsidiary YouTube – thereby violating the privacy of an Italian autistic child who was tormented by bullies in the posted video. UBS wants to disclose customer information in the US (to settle some tax evasion problems it created for itself) but is told not to by a Swiss judge. Variations in law from one country to the next have long posed problems for business, lawmakers and socially responsible investors, but the increased scope of cross-national businesses that could call anywhere home and the fact that the Internet knows no borders seem to be revealing some new strains.

In ancient times, when I was young, corporations doing business in more than one country knew each operation had to comply with local law, and they didn't think much beyond that. Suddenly, the SEC started using US accounting requirements to investigate US public companies that had paid bribes abroad and then failed to account for the bribes clearly and disclose them. The US Congress went a step further with the Foreign Corrupt Practices Act of 1977– it didn't matter if bribing public officials was an accepted way of life in Lower Slobovia, bribing a public official was illegal for the US public company (even if all the activity took place entirely in Lower Slobovia). Japan and most of Europe lacked similar laws. For some years US companies complained that this was a disadvantage in winning government contracts in emerging market nations, but the complaints drew little sympathy, and much of the world eventually adopted similar anti corruption laws with extraterritorial effect. FCPA enforcement is actually undergoing a revival right now.

Another 1977 Congressional action went beyond simple extraterritoriality to effectively supervene local law. The Anti-boycott law banned any form of complicity or cooperation in the boycott of Israel, even when refusal to comply would violate local law in some Middle Eastern countries. US companies effectively had to withdraw from certain markets unless they could find a way to sell that kept them completely insulated from any activity related to the boycott of Israel.

The world was just warming up. South African Apartheid triggered action by Congress (the Comprehensive Anti-Apartheid Act of 1986 banned new trade and investment), a call for boycott by the UN General Assembly and an unprecedented level of activity by investor groups.- all designed not just to supervene local law, but to overturn it.

All these older instances of government and investor social action around local law concerns had a common element – a response to a situation or activity that was widely perceived (at least at the time) as immoral. Some of todays local law issues seem a little more complicated. Consider China – censorship of political speech – bad. Attack on servers to find dissidents -worse. Here we have a good old fashioned evil activity – yet so far governments and investors don't seem to be lining up to protest. Part of this may be fear, China is a big enemy to make and a big market to lose. Part of it may be a philosophy of staying engaged with a country that sometimes seems to be moving in the right direction. Part of it may be timing, the censorship issue hasn't been in sharp focus for long – it may yet generate some serious heat from the SRI community or even a few governments.

What about the Italian YouTube situation?. Wherever you come out on this issue – and free transfer of information, decriminalizing activity that is a mere conduit for free information and other aspects of the YouTube side have merit - it's hard not to recognize that the Italians have a legitimate interest in protecting the privacy of Italians, especially autistic children - not exactly evil. Maybe Google can find a better way to screen YouTube postings for privacy violations, maybe it will have to pull YouTube out of Italy, maybe Italians will be so worried about losing YouTube they will change their law. In any case, you won't see Congress looking for ways to override Italian law and you won't see investors boycotting Italian stocks in Google's defense. Google is on its own.

Which brings us to the Swiss, noble defenders of bank secrecy. With Swiss Army knives opened wide, they hold their banks hostage to this policy – even when it may lead to a disastrous outcome on tax evasion charges in the US. Bank depositor privacy may not sound as good as privacy for autistic children, but it's probably not evil, especially when you consider the fact that the policy is supposed to have an exception where active tax evasion is involved. Once again, no legislature or investor group will ride to the rescue of UBS, they will just have to figure something out. The IRS will keep squeezing and the IRS will not really care about Swiss law applying to Swiss based accounts when US operations of a Swiss based bank have abetted tax evasion by US taxpayers.

For Google in Italy and UBS in America, it's back to the sixties. No matter how complicated it gets, multinationals still need to figure out how to comply with local law in every jurisdiction where they do business. Multinationals doing business in China may be headed for some South African style fireworks. First it was antifreeze in the toothpaste and lead in the toys, now its censorship and server attacks to preserve the status of the powerful. Who knows what's next, but running a capitalist economy with a dictatorship of the proletariat (as represented by party officials and friends, many of whom are getting rich) is like tectonic plates pushing against each other, sooner or later we will have an earthquake. Companies accepting censorship or otherwise accommodating Chinese laws that are 180 degrees away from rights Westerners perceive as fundamental may ultimately need need to do more than just comply with local law, they may need to placate active, socially responsible shareholders.

Photo Credit: Conner395


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