By Edison Tabra, Lawyer and Lecturer in Corporate and Business Law at the University of San Ignacio de Loyola
South American countries compete among themselves to attract foreign investment. The ideal profile for a potential investor is one holding a view to remain in the country long term and a desire to contribute to the economic development of the region. Corporate governance is one of the instruments of autoregulation that drives Latin American governments to promote the presence of this type of investor.
The consideration of this trend in South America, and the importance of corporate governance, begs the question: What is the most effective way to improve the practice of good corporate governance in South America’s business world?
One option is that governments regulate the legal system that establishes the laws to which businesses must comply and sanctions are imposed in the event that they don’t. Another option is to promote autoregulation in every one of its organisations by laying down values and principles of good practice through codes of conduct and codes of corporate governance. The role of state government would then be to draw up these recommendations for businesses, especially for those that are listed in the stock market, in order to improve the practice of corporate governance as part of their policies on social corporate responsibility.
This debate raises the suggestion that it is possible to use solidarity as a means of promoting autoregulation of companies with the practice of good corporate governance in the workplace.
Solidarity is a principle that is usually used in Latin America to invoke social uprising or strikes against government activities, or against the activities of multi-national companies. For example, according to the Office of the Ombudsman, the mining sector in Peru reported 149 cases of social conflict related to the environment in 2015. In other cases, the word solidarity is associated with the idea of benevolence and the promotion of acts of charity for those in need, or calling for economic collaboration in the fields of philanthropy or sponsorship. But does solidarity only serve to promote social uprising or help those in most need? How would it help in other fields if it were considered a business activity? That is to say, how does solidarity help business?
These interesting questions sit at the heart of my recent book Solidarity & Corporate Governance, a product of my doctoral thesis of the same name at the University of Navarra in 2013. This academic work proposes that solidarity has many different elements, such as principles or ethical corporate values, that can be included in the politics of good corporate governance and significantly influence the working of companies.
The idea of solidarity
Traditionally, in civil law (the Romano-Germanic judicial system), solidarity is a legal institution of civil rights that associates the compliance of private contracts. According to this idea, any of those indebted to an obligation must accept the consequences in the event of a breach of contract that injures the interest of the creditors. The creditors are legally authorised to demand from any of the debtors who comply with what was stipulated in the contract or, in the opposite case, compensate them financially with damages as a result of non-compliance.
Today, the idea of solidarity is not only linked to the law. Its practise is possible in other schools of thought, such as economics where its concept and elements can improve the politics of corporate governance and social corporate responsibility of business. My book proposes that the use of the criteria of solidarity can increase the activity of all corporations, making them more productive, efficient and influencing their internal and external environment. In the same way, the application of the criteria of ‘solidarity’ enhances the perception and reputation of a corporation ahead of other agents in the market. Following this line of argument, all such companies must comply with the necessary criteria in order to be so considered. In this way, the practice of solidarity enhances the corporate reputation of a company and contributes to generating a high economic value and ‘non-economic’ value before society.
In order for a business to be classified in this way it is not sufficient to just use the term ‘solidary’ without a requirement to put into practice its elements simultaneously and permanently. These elements are unity, association, reciprocation, a good community or social interest, gratuity, justice and respect for human dignity. The implementation of these ‘solidary company’ elements as values or corporate principles in programmes of corporate governance would reduce social and economic inequality within the organisation, would improve its efficiency and productivity and would provide benefits to all of the company’s stakeholders (investors, directors, employees, clients, creditors and the general public). That is to say, the practice of the elements of solidarity would reduce the inefficacy within the company, would increase its productivity and would generate an improved quality of life for many of its direct associates (stakeholders), as well as an improved corporate reputation. Additionally, the solidary company can contribute to better levels of sustainability, a better application of the notion of ‘long term’ and the encouragement of investor activism.
In Latin America, the social perception of being faced with ‘solidary companies’ that are not egotistical in sharing the benefits they generate and in encouraging the development of a region, would break down the terrible negative image that they have. But also, the elements of solidarity are an efficient mechanism of autoregulation in companies through codes of conduct or codes of good corporate governance. The practice of solidarity, as has been proposed, doesn’t mean not acknowledging its relation with charity; but rather emphasises its elements together with improving the activity of the company through corporate governance.
Solidarity can manifest itself in two forms: as a duty or as a value present in the codes of conduct or corporate governance. According to this idea, whoever is part of a business has an obligation to practice solidarity in their everyday work and with a view to defend the interests of the whole organisation. The solidary action requires the permanent quest for economic equality and the defence of the interests of the institution without denigrating the person or diminishing their rights. It is also the obligation of the CEO and the board of directors to ensure their work is to the benefit of the common good of the company and to the interests of its stakeholders. On the basis of the application of solidarity, the fiduciary duties would have greater importance as well as the fulfilment of the criterion ‘to comply or explain’ and so would prevent any form of individual opportunism. Corporate solidarity is the method to reach a good common practice in the company and to achieve their survival in the market.
Solidarity, business and corporate governance
Solidarity can contribute to the improvement of the practise of good corporate governance in business. The principle objective is not only to defend the interest of the actors but also the interest of the rest of the stakeholders in the corporation. According to this perspective, the interests of each of the members of the company are important to the success of the whole organisation. In compliance with the ‘solidary’ focus, all businesses must encourage participation of the investors in the company and request the support of the other members (directors, employees, creditors, consumers, among others). Their effective participation increases its economic value and will generate benefit in the long term for all.
The components of solidarity (unity, association, and the common good) play an important role in corporate governance. Its development allows the improvement of the criteria of ‘long term’, ‘value creation’ and ‘sustainability’ in the company and to serve the interests of the stakeholders. To create businesses means to create economic value for their members who work in them or depend on their activity. The challenge that faces these current corporations is to maintain their economic activity and also to transfer it to other markets and in this way not to stop generating economic wellbeing for all its members.
The board of directors becomes the centre of integration of each one of the aspirations of the stakeholders and must govern in favour of fulfilling each one of the said interests. In Latin America, the programmes of social corporate responsibility, in many cases, are ineffective because the populations perceives that only multinational companies obtain the benefits of exploiting their natural resources while they themselves do not receive any significant benefit.
Taking this viewpoint, solidarity plays a leading role in corporate governance. The implementation and practice of the components of solidarity in the programmes of good corporate governance of business can generate confidence in its investors, improve relations among shareholders and executives, and increase the productivity of workers. As a result, their levels of transparency, security, and confidence in market agents are raised and corporate reputation improved.
It is possible to argue that the ideas of solidarity applied to corporate governance would reduce inequality and doubt among principals and agents without requiring that the governments enforce laws of obligatory regulation. Businesses that practise solidarity in their programmes of corporate governance, integrating them as part of their programmes of corporate social responsibility, can prevent any opportunistic conduct on the part of their managers, also generating a degree of positive corporate reputation among society. Solidary corporate practice in business means aligning objectives to reach a common good or social interest of all its stakeholders. The codes of ethical conduct and the codes of good corporate governance are spaces where solidary precepts can influence the internal and external activity of the company. Only in this way can companies guarantee an adequate level of confidence and credibility in their sector.
Corporate credibility in Latin America is critical, especially in the mining and hydrocarbon sectors where people complain about multinational companies in regards to the environment, respect of human rights and the compromise of social governability. An investigation made by Spanish consultancy group MERCO shows that the concerns of the citizen in relation to business are ethical conduct (degree of honesty), levels of transparency, good governance, attention to employees, social contribution and compromise on climate change. These concerns influence the decisions of stakeholders and can damage the survival of the company. The inclusion of the criteria of solidarity can improve social perception of the citizen and of others in the market.
Solidarity and the influence of international organisations
The inclusion of solidarity and its hypothesis as part of corporate government of businesses is not the only one that is proposed in my book. It also emphasises the influence of solidarity on international organisations that promote the implementation of corporate governance in business. In particular, reference is made to international organisations, businesses of credit rating and businesses of consulting and auditing. The principle idea is that solidarity and its elements can be included in recommendations that organisations send out to their corporate clients and governments.
In the case of the Organisation for Economic Development (OECD), it is appropriate to include solidarity in their recommendations of corporate governance because of the influence they have on the companies and governments of Latin America. In this scenario, the elements of solidarity can play a fundamental role in the proposals of this organisation about the advantage held by companies that implement ethical standards. The proposal of standards or the ethical value of solidarity could prevent illegal conduct or opportunistic behaviour among the managers of the company. The decisions of the company will have to consider the interests of the stakeholders. In this way, solidarity and its components could significantly influence the implementation of the mechanism of compliance that are required to assure that the practices of corporate governance are achieved in an efficient manner.
In a similar way to the OECD, the United Nations (UN) also sends out material recommendations about the practice of corporate governance to promote international commerce. Its proposals recommend companies improve their levels of transparency to facilitate and promote their corporate efficiency for the development of their economic activity. It also recommends the strengthening of the role of investors to increase their ‘activism’ in the governance of businesses, the hiring of independent advisors and the use of the criterion ‘comply or explain’. The contribution of solidarity could make the level of fulfilment of the United Nations’ recommendations more efficient by including its elements, such as duties or ethical values, in the proposals of corporate governance. In this way, the implementation of these values would assure the most efficient fulfilment of corporate governance in business.
From a different view, the European Commission has formulated its own recommendations about the practices of corporate governance in the European Union. One of these is the promotion of innovation in companies and the formation of competitive markets, especially in the financial market. Other recommendations are to do with the mechanisms of selection of independent directors, the participation of the shareholders, the inclusion of the criterion of ‘diversity’ in the board of directors and supervision of the management of the CEO. But the most significant is the recommendation to create a legal framework for the practice of corporate governance, such as creating mechanisms of state supervision. In the same way as the OCED, the contribution of solidarity would be to provide elements that form part of the principles or corporate values that the business use to meet the recommendations given by the Commission.
“In Latin America, the programmes of social corporate responsibility are ineffective, in many cases, because the populations perceives that only multinational companies obtain the benefits of exploiting their natural resources while they themselves do not receive any significant benefit”
The World Bank presents interesting guidelines about the role of corporate governance in business. It also has the principle objective of finding the intermediary between governmental supervision and the exercise of liberty of the company. The Bank recommends that businesses implement a system of ‘checks’ and ‘balances’ to control the management of the CEO and his/her team. To this end, the board of directors must become an instrument of prevention and sanction against any opportunistic acts that may be committed by any director or manager. From the solidary perspective, the use of its elements would facilitate the process of supervision and internal control of the management of the company and force its management team to consider the interests of all those involved in the company.
Businesses credit rating can also make use of the solidary criteria and its mechanisms of evaluation to examine the state of the company and its financial product.
Solidarity and its elements would be one of the criterion that can be included as part of an evaluation of the fulfilment of corporate governance. It would also serve as an incentive for an efficient programme of fulfilment in the company dedicated to the defence of the interests of its stakeholders. It is possible for consulting and auditing companies to use similar solidary criteria, where corporate governance has become an effective and necessary mechanism to improve the processes of advising their clients. The recommendations depending on the criterion of solidarity would help to improve the reputation of these companies in the market.
In the business world, solidarity has been associated with charitable practice as part of a company’s programme of social corporate responsibility. However, this is a restricting notion because it only develops one of the elements – gratuity – and does not consider others, such as unity, association, reciprocity, the common good and justice that, together, can provide a more effective criteria for improving the work of a company.
In this article, the benefits of including solidarity and its elements of principles and values in all business practice, have been argued, as well as the benefits on their economic productivity and the benefits and values that must be fulfilled in order to be considered a ‘solidary business’. This idea of solidarity applied as part of the politics of corporate governance constitutes an adequate mechanism of autoregulation in companies in order to improve their practices of social corporate responsibility and their corporate reputation.
About the Author:
Dr Edison Paul Tabra Ochoa is a leading Lawyer and a Lecturer in Corporate and Business Law at the University of San Ignacio de Loyola (Lima, Peru). He holds a Ph.D and a M.A. in Culture and Government of Organizations at the University of Navarra (Spain). He has been Visiting Scholar of the Institute Catholitique (Rennes, France) and company law fellow of L.L.M. and PhD programs in Law at the University of Los Andes (Peru).