Corporate Social Responsibility: The Co-Responsibility of Business along Global Supply Chains 365839112X, 9783658391126

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BestMasters

Lilli Carlotta Sophie Maurice

Corporate Social Responsibility The Co-Responsibility of Business along Global Supply Chains

BestMasters

Mit „BestMasters“ zeichnet Springer die besten Masterarbeiten aus, die an renommierten Hochschulen in Deutschland, Österreich und der Schweiz entstanden sind. Die mit Höchstnote ausgezeichneten Arbeiten wurden durch Gutachter zur Veröffentlichung empfohlen und behandeln aktuelle Themen aus unterschiedlichen Fachgebieten der Naturwissenschaften, Psychologie, Technik und Wirtschaftswissenschaften. Die Reihe wendet sich an Praktiker und Wissenschaftler gleichermaßen und soll insbesondere auch Nachwuchswissenschaftlern Orientierung geben. Springer awards “BestMasters” to the best master’s theses which have been completed at renowned Universities in Germany, Austria, and Switzerland. The studies received highest marks and were recommended for publication by supervisors. They address current issues from various fields of research in natural sciences, psychology, technology, and economics. The series addresses practitioners as well as scientists and, in particular, offers guidance for early stage researchers.

Lilli Carlotta Sophie Maurice

Corporate Social Responsibility The Co-Responsibility of Business along Global Supply Chains

Lilli Carlotta Sophie Maurice Köln, Germany

ISSN 2625-3577 ISSN 2625-3615 (electronic) BestMasters ISBN 978-3-658-39112-6 ISBN 978-3-658-39113-3 (eBook) https://doi.org/10.1007/978-3-658-39113-3 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Responsible Editor: Marija Kojic This Springer Gabler imprint is published by the registered company Springer Fachmedien Wiesbaden GmbH, part of Springer Nature. The registered company address is: Abraham-Lincoln-Str. 46, 65189 Wiesbaden, Germany

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

2 Theoretical Foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Corporate Social Responsibility (CSR) Today . . . . . . . . . . . . . . . . . 2.2 Critique of Milton Friedman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Normative Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Incomplete Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.4 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Economic Theory of CSR / Corporate Co-Responsibility . . . . . . . 2.3.1 Not for profit CSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Strategic / for profit CSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 CSR as regulatory strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Limitations of CSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 3 5 6 7 8 8 9 11 12 13 13

3 Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Statutory Regulation of Global Supply Chains . . . . . . . . . . . . . . . . . 3.1.1 Social and Ecological Incentives Through Regulatory Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Legal Certainty and Reduction of Litigation and Reputational Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3 Resilience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Germany’s Due Diligence Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Scope / Companies Covered . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Due Diligence Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Regulatory Monitoring and Enforcement . . . . . . . . . . . . . . . 3.2.4 Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 17 18 19 19 20 21 22 24 24

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3.2.5 Environmental Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.6 Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.7 Ethical Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.8 Responsibility Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Discussion and Critical Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Not for Profit CSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Strategic / for Profit CSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4 CSR as Regulatory Strategy . . . . . . . . . . . . . . . . . . . . . . . . . .

25 26 27 29 31 31 38 40 42

4 Alternative Approaches for more Co-responsibility . . . . . . . . . . . . . . . . 4.1 Continuation of Existing Multi-stakeholder Initiatives (MSI) . . . . 4.2 Advancing International Solutions and Global Standards . . . . . . . . 4.3 Self-regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Sustainability Ratings and Rankings . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Corporate Commitment, Culture, and Governance . . . . . . . . . . . . . . 4.6 Governmental Support to Developing Countries / Shared Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Supportive Business Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Negative List Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 Sunset Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45 45 47 48 50 51

5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57 57 58 58

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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52 53 54 55

Abbreviations

AMA AWE BAFA BDI BHRRC BMAS BMWI BMZ CCRS CFP CSP CSR DD DDA EC EFAMA ESG EU EVA FDI GATT GRI HBR HDE HR

American Marketing Association Agency for Business & Development (Germany) Federal Office of Economic Affairs and Export Control (Germany) Federation of German Industries Business & Human Rights Resource Centre Federal Ministry of Labour and Social Affairs (Germany) Federal Ministry of Economics and Technology (Germany) Ministry for International Development Centre for Corporate Responsibility and Sustainability Corporate Financial Performance Corporate Social Performance Corporate Social Responsibility Due Diligence Due Diligence Act European Commission European Fund and Asset Management Association Environmental, Social and Governance European Union Ethics Association of German Business / Ethikverband d. deutschen Wirtschaft Foreign Direct Investment General Agreement on Tariffs and Trade Global Reporting Standards Harvard Business Review German Trade Association / Handelsverband Deutschland Human Rights

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viii

HRDD IBC IFIC IFW Kiel IGS IHK ILO ISO KAS MSI NAP NGO OECD RMG RSA SCI SME SRI UDHR UK UN UNCTAD UNGC US VPR WB WEF WTO ZVEI

Abbreviations

Human Rights Due Diligence International Business Council (IBC) International Food Information Council Foundation Institute for the World Economy Kiel Initiative for Global Solidarity Chamber of Commerce / Industrie und Handelskammer International Labour Organisation International Organisation for Standardisation Konrad Adenauer Stiftung Multi-Stakeholder Initiative National Action Plan Non-Governmental Organisation Organisation for Economic Co-operation and Development Ready-Made Garment Royal Society of Arts Supply Chain Initiative Small and Medium-sized Enterprises Socially Responsible Investment United Declaration for Human Rights United Kingdom United Nations United Nations Conference on Trade and Development United Nations Global Compact United States Voluntary Pollution Reduction World Bank World Economic Forum World Trade Organisation Association of the Electrical and Digital Industry

1

Introduction

In 1970, Milton Friedman famously argued that the only social responsibility of business was to maximise profits. Given public preferences and democratic empowerment, governments were to manage externalities and offer public goods rather than firms (Friedman, 1970; Kitzmueller & Shimshack, 2012, 52). Though plausible and applauded by many, Friedman’s argument no longer seems to hold in today’s increasingly global market. While globalisation has created significant wealth across the globe, aggravated inequality, excessive exploitation, and misconduct by multinationals have led to worldwide public outcry calling for new forms of corporate global governance. Social legitimacy is no longer granted solely through business value creation within a given legal framework. Rather, companies are considered co-responsible for solving social and ecological problems. This is also due to states, civil societies and global institutions having limited capacity to regulate global marketplaces (Prieto-Carrón et al., 2006). The United Nations’ (UN) 2030 Agenda for Sustainable Development (UN, 2015), the OECD Guidelines for Multinational Enterprises (OECD, 2011) or the European Commission’s (EC) Corporate Social Responsibility (CSR) policy (EC, 2011) provide a global framework for co-responsibility of business beyond mere profit maximisation. But despite various international efforts, there is still no common understanding of corporate co-responsibility and social demands are rarely clearly articulated, thus making it difficult for companies to anticipate. Yet, consideration of such demands is vital for companies to maintain their licence to operate. The Due Diligence Act (DDA) passed by Germany in 2021 is one example of the implementation of increasing societal expectations towards the economy (Fockenbrock, 2021). The DDA states that large companies are to observe and monitor social and environmental standards throughout their supply chain to ultimately protect human rights and the environment globally (Bundesanzeiger, 2021).

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2022 L. C. S. Maurice, Corporate Social Responsibility, BestMasters, https://doi.org/10.1007/978-3-658-39113-3_1

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2

1

Introduction

Inspired by the German DDA, this paper attempts to clarify the coresponsibility of business along global supply chains to derive measures that promote responsible business practices. For the purpose of this paper, corporate co-responsibility is understood similarly to Corporate Social Responsibility (CSR), that is the responsibility of business to align corporate policies and procedures with commonly accepted ethical standards and respect stakeholders’ rights in day-to-day business, as opposed to mere profit maximisation for shareholders (EC, 2021). The use of the term ‘co’-responsibility is to emphasise the shared responsibility of companies for social and environmental matters alongside governments and civil society. This understanding may be subject to further discussion and delimitation depending on the context. Methodologically, economic theory of co-responsibility is used to understand the market drivers behind CSR as well as existing limitations. With a regional focus on Germany, the DDA is analysed as an example of statutory regulation in its capacity to promote and enforce responsible business practices globally where voluntary approaches fail to do so. An interdisciplinary approach is taken including insights from (behavioural) economics, ethics and psychology to analyse the ethics, efficiency and effectiveness of the law in meeting public policy objectives. Based on the assessment of both governmental (legal regulation) and market drivers (shareholder and stakeholder preferences), alternative measures are derived that may prove useful in promoting and enforcing environmental and human rights standards globally. The following research is based on a literature review of secondary sources including existing studies and related research on the subject. Information was carefully assessed for its relevance and accuracy and only considered from trusted organisations and journals. Structure-wise, this paper is divided into five chapters. Following the introduction, Chapter 2 provides the theoretical foundations on why and to what extent companies bear social responsibility beyond profit maximisation and under which circumstances CSR materialises. Chapter 3 discusses the need for, and potential of statutory regulation exemplified by Germany’s DDA by ultimately comparing market and governmental drivers in their capacity to promote CSR. Based on the findings, Chapter 4 offers alternative (voluntary) measures to promote co-responsibility and accountability of businesses along global supply chains. Finally, Chapter 5 provides a summary of the findings as well as an outlook on future developments and limitations.

2

Theoretical Foundations

The following chapter provides the theoretical foundations as to whether, why and to what extent companies bear co-responsibility along their global supply chains. Firstly, a working definition of CSR is provided based on the European Commission’s (EC) Green Paper followed by current drivers for more co-responsibility. Afterwards, Milton Friedman’s argument of social responsibility equalling profit maximisation is discussed in view of today’s global market dynamics. The final section examines corporate co-responsibility from an economic perspective to understand under which market conditions CSR materialises including both opportunities of and limitations to CSR.

2.1

Corporate Social Responsibility (CSR) Today

To date, the role of corporations in society is controversial and the concept of CSR still lacks a commonly accepted definition. Yet, in the face of growing distrust of big businesses, high levels of uncertainty and poverty, and the backlash against globalisation, companies are under pressure to act more responsibly and contribute to wider societal value (Smith, 2003; WEF, 2003). In 2001, the EC published a Green Paper defining CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and their interaction with their stakeholders on a voluntary basis” (EC, 2001, 8). Here, CSR is understood both as a management tool and a political demand. Regarding the former, CSR should constitute a part of day-to-day business activities and be integrated into corporate governance structures to ensure that corporate policies and procedures are aligned with commonly accepted ethical standards and “respect stakeholder rights in areas such as working conditions, the environment or human rights” (EC, 2001, 17). From a political perspective, the EC © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2022 L. C. S. Maurice, Corporate Social Responsibility, BestMasters, https://doi.org/10.1007/978-3-658-39113-3_2

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also calls for voluntary contributions of corporations to social welfare and environmental development. As companies benefit from society (e.g., legal security, infrastructure, educated workforce), they should not only contribute to economic wealth creation by providing needed products and services, paying taxes, and creating jobs but also engage with society as ‘good corporate citizens’ by assuming additional responsibilities (EC, 2001). Among the drivers for more co-responsibility are ever more competitive product, employment, and capital markets as a result of globalisation, as well as the democratisation of information through advances in information and communication technology (Suchanek & Lin-Hi, 2006; Smith, 2003). More specifically, new technology has significantly improved transparency and traceability of global business practices with heightened media reach increasing the (reputational) risk of exposure of corporate misconduct. Governance scandals such as Enron, Deutsche Bank or Volkswagen have damaged the public standing of the private sector and increased expectations of businesses, while at the same time recognising the failure of governments to solve many social problems (Smith, 2003). The liberalisation and deregulation of markets has increased both opportunities for cooperation and intensified competition with growing pressures on labour costs and working conditions. This has oftentimes led to production being relocated to economies with weaker social and environmental regulations (Berger, 2019). Political steering at the global level is ever more limited with deficient institutional framework conditions, widespread externalisation of costs by businesses and subsequent erosion of public trust, demanding new forms of corporate global governance. Regarding the employment market in the Western world, employees enjoy an increasing scope of action (e.g., due to digital work/war for talent) with limited centralised control of behaviour, calling for organisational structures and culture to incentivise moral behaviour in the long-term corporate interests. Finally, although capital markets have been criticised and blamed for short-term profit thinking, there is a growing market for sustainable, long-term investments driving responsible business practices (Statista, 2021b). Business people are now more attuned to global inequities and CSR appears to have assumed strategic importance (Suchanek & Lin-Hi, 2006; Smith, 2003). Despite the broader question of whether one can take responsibility voluntarily, the view of voluntary engagement suffers from fundamental shortcomings as there is no mention under which circumstances and to what extent companies must engage in social and environmental issues. As Sethi already observed in 1975, the operational meaning of CSR is supremely vague and “it can mean all things to all people” (Sethi, 1975, 58 ff.). Oftentimes, voluntary engagement is expected in the form of charity, equating corporate responsibility with social

2.2 Critique of Milton Friedman

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contributions beyond business activities. This interpretation of CSR is questionable for several reasons. Firstly, it is unclear how responsibility for corporate charity can be justified and whether society can legitimately demand corporate benevolence. Secondly, corporate responsibility is only seen in terms of the use of profits, while profit-making is disregarded. Yet, charity can very well go hand in hand with irresponsible profit-making, concealing a lack of responsibility in the core business. Thirdly, the separation of corporate value creation (profitmaking) and corporate responsibility (charity) leads to a polarisation of profit and morality. Corporate responsibility appears to be located beyond business activity, undermining the core business and considering charity as a corrective action for profit-making. Given the above challenges, corporate responsibility as charity does not appear to be a useful basis for consistent CSR management (Gogoll & Wenke, 2017). As CSR in terms of additional voluntary engagement remains ambiguous to date, the definition of CSR used in this paper is based on the management perspective, according to which companies are to ensure that corporate policies and procedures are in line with commonly accepted ethical standards and respect stakeholders’ rights in day-to-day business as an integrated part of governance structures (EC, 2001). While additional corporate engagement can be pursued voluntarily, there is nothing voluntary about CSR as it constitutes a fundamental prerequisite for companies to keep their license to operate and survive in an ever more competitive market.

2.2

Critique of Milton Friedman

In 1970, Milton Friedman famously argued that the only social responsibility of business was to maximise profits within a given set of rules of the game, “engaging in open and free competition without deception or fraud” (Friedman, 1970, 178). Friedman believed that companies simply met their social responsibility through traditional business activities, producing needed goods and services at affordable prices. He argued that additional CSR would imply spending someone else’s money (shareholders’ or customers’) diluting the focus on profit and thus placing the company at a disadvantage. He equally questioned the competence of managers in engaging in social issues, whether the imposition of their values was desirable and whether they were potentially seizing the role of government (Smith, 2003). Public preferences combined with democratic empowerment implied that governments, not firms, should manage externalities and provide public goods (Friedman, 1970; Kitzmueller & Shimshack, 2012, 52).

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Participating in open and free competition without deception or fraud is noncontroversial in principle and congruent with the understanding of CSR as a management tool, aligning business activities with prevalent standards and regulations. Friedman assumed that rights of disposal, such as property rights, were always fully defined and that problems associated with externalities and public goods were solved. He also believed in complete contracts, i.e., that there was no room for discretion or action to the detriment of other parties. When assuming that companies always abide by the rules of the game without deception or fraud vis-à-vis all stakeholders and adhere to legal and ethical standards, then companies can indeed limit their responsibility to maximising profits. This is largely because, in a market economy, the rights of disposal and competition with respective incentives ensure that companies use their resources efficiently. This efficient use of resources is then equated with corporate responsibility since the ‘invisible hand’ of the market leads to the maximisation of overall economic welfare (Smith, 2008, 345; Gogoll & Wenke, 2017, 81). Today, however, it is widely accepted that Friedman’s assumptions were based on an inaccurate economic model isolating business from society, which in reality are interdependent (Smith, 2003). As Mintzberg wrote in 1983, “the strategic decisions of large organisations inevitably involve social as well as economic consequences, inextricably intertwined […] there is no such thing as a purely economic strategic decision” (Mintzberg, 1983, 12). Below, different aspects of Friedman’s argument will be discussed to reflect a changing understanding of CSR.

2.2.1

Normative Expectations

One critique of Friedman’s argument concerns the lack of consideration of normative ideas in society. Even if companies pursue profit maximisation responsibly and sustainably, this does not necessarily ensure acceptance of business activities by society (license to operate). It is no longer sufficient for businesses to refer to the profit target, even if demands by society are unjustified. Rather, companies must defend and explain their business practices by relating to prevalent ideas, hopes and fears in society. For a rational and constructive discourse, normative and ethical considerations must always be considered in addition to prevalent market conditions. When faced with undifferentiated criticism of the market economy and businesses themselves, companies are tasked to communicate and build a better understanding of economic and moral links among stakeholders. This includes clear communication of the limitations of CSR as to what can and cannot be

2.2 Critique of Milton Friedman

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expected of companies. Such expectation management requires that companies do not convey an altruistic impression. For instance, creating jobs is not part of CSR, as job cuts would otherwise be irresponsible. Besides, responsibility should not be separated from profit-making (e.g., accepting responsibility in the form of charity can be misunderstood as a correction of otherwise irresponsible profit-making) (Gogoll & Wenke, 2017, 82 f.).

2.2.2

State Regulation

Contrary to Friedman’s belief, markets may not always produce optimal outcomes as they do not operate in a vacuum and market failures such as information asymmetries and externalities may justify governmental interference (Hepburn, n. d., 9). National regulatory frameworks are to regulate social and environmental concerns, enforce ethical demands through legal regulations and thus harmonise legality and moral legitimacy (Gogoll & Wenke, 2017, 83). This is congruent with Friedman’s idea of the state to shape the ‘rules of the game’ in such a way that profit-making under competitive conditions always promotes the common good. However, if the state is supposed to deal with social and ecological problems through regulations and market interventions, then overregulation would be expected, which is precisely what Friedman would reject as a liberal thinker. At the same time, one can by no means assume that the regulatory framework and market competition by itself will ensure that irresponsible forms of profit-making are sufficiently unattractive to corporate decision-makers (Suchanek, 2010, 45). Ethical demands are inadequately and imperfectly covered by the politically framework, which only provides a general framework (outer limits) for economic action. In a dynamic world such as ours, moral evaluations of problem-situations are also constantly changing, and the legal framework is slow to react. The adaptation of regulation is further delayed and aggravated by powerful interest groups (lobby) who oftentimes prevent efficient and fair regulation by influencing the content of state regulations to their benefit. Finally, globalisation with its different national regulations, e.g., in employee or consumer protection, makes consistent international rules difficult. This inadequate framework entails a responsibility gap to be closed by businesses assuming co-responsibility (Gogoll & Wenke, 2017, 83 f.).

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2.2.3

2 Theoretical Foundations

Incomplete Contracts

Friedman’s assumption of complete contracts is particularly critical and unrealistic. For instance, labour law-related conditions such as worker protection are never fully regulated, which is especially true in global markets. Incomplete contracts allow for room for manoeuvre and profits can be realised in an irresponsible manner (Gogoll & Wenke, 2017). Recent scandals have shown that many companies are chasing profits regardless of the rules of the game, blazingly deceiving stakeholders and committing “elaborate and sophisticated fraud”, as has recently been the case with Wirecard (Deutsche Welle, 2020). Here, even the responsible auditing firm, EY, as well as the Federal Financial Supervisory Authority (BaFin) failed to scrutinise Wirecard’s operations, laying bare a system of many loopholes and inefficiencies and prompting the question of whether more regulation is needed (Financial Times, 2021; Tagesschau, 2021b). It follows that equating corporate responsibility with increasing profits is inappropriate as it disregards the fact that profit maximisation can be realised at the expense of third parties, such as environmental pollution or corruption (Suchanek, 2010). The possibility of opportunistic behaviour on the part of businesses leads to uncertainty among partners, which in turn increases transaction costs as additional research and controls are needed to reduce uncertainty (Gogoll & Wenke, 2017, 82).

2.2.4

Trust

Taking a corporate ethical standpoint, entrepreneurial freedom is inevitably linked to the responsibility not to abuse this freedom (Suchanek, 2010, 44 f.). The profit motive, as scandals such as Wirecard and Enron have shown, will not necessarily lead to moral and mutually beneficial behaviour. Companies in their capacity as corporate actors, however, are bearers of trust and must therefore justify this trust through integer business practice. Corporate integrity can be understood as a company’s reputation based on experience and expectations it has with its various stakeholders, not just shareholders, taking into account their legitimate interests. Such integrity requires the capacity for self-commitment to certain norms and values as well as credible communication thereof. The reliable implementation of this self-commitment then equals corporate responsibility (Suchanek, 2010, 46). Friedman, however, ignored the very foundations and prerequisites of the market economy, namely the combination of profit-making with ethics and responsibility as an investment in trust. Trust in society is a much-needed asset as regulatory frameworks and contracts are systematically incomplete. To prevent fraud and

2.3 Economic Theory of CSR / Corporate Co-Responsibility

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free riding, the social market economy needs co-responsible businesses that act with integrity (Enste, 2015). Although the observance of moral norms may lead to an increase in costs in the short term, it will likely be an economically profitable strategy in the long term. This is because consistent adherence to moral standards creates trust, which in turn lowers transaction costs when concluding contracts with market partners. Furthermore, trust enables new opportunities for cooperation and facilitates communication within the company and with other market actors. Moral conduct thus represents a productive investment in the future success of the company (Gogoll & Wenke, 2017, 84). In summary, there has been a considerable change in understanding of CSR from Friedman’s profit maximisation towards a “shared value” proposition (Porter & Kramer, 2011). In the short term, CSR may reduce profits in favour of social and environmental objectives, which is why Friedman considered managers who imposed social expenses to the business as “disloyal agents to their principals, the shareholders” (Bosch-Badia, Montllor-Serrats & Tarrazon, 2013, 11). When considering profits as the only value driver, any reduction in profits would indeed diminish value. However, it is important to consider the impact of CSR on risk and discounting rate as value is derived from discounting expected profits with the required return including risk premium (Bosch-Badia et al., 2013). Several papers demonstrate that CSR hedges social risk, e.g., from social activism or private politics (Orlitzky & Benjamin, 2001; Husted, 2005; Kitzmueller & Shimshack, 2012). CSR, therefore, creates value through risk reduction and is considered an investment rather than an expense. It follows that societal needs equally define markets and not just economic ones. By following shared-value strategies, businesses can “turn capitalism into an environmentally, socially, and financially sustainable economic system” (Bosch-Badia et al., 2013, 12; Porter & Kramer, 2011).

2.3

Economic Theory of CSR / Corporate Co-Responsibility

Economic theory can help understand corporate reasoning behind CSR efforts with social engagement promoting long-term profits and thus creating winwin situations. Companies must maintain and grow their economic, social, and environmental capital base to meet the needs of their contemporary and future stakeholders (Dyllick & Hockerts, 2002). Here, social preferences of both shareholders and stakeholders need to be considered. According to Friedman, there is no room for co-responsibility if all stakeholders, including shareholders, behave

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2 Theoretical Foundations

according to the homo economicus in its purest form, that is only pursuing their self-interest (Blackburn, 2008). If there are, however, social preferences in society, CSR can be driven by both shareholders and stakeholders having a preference for CSR (Kitzmueller & Shimshack, 2012, 58 f.). This is further illustrated in Figure 2.1 showing the taxonomy of when CSR can take place based on shareholders’ and stakeholders’ preferences.

Figure 2.1 CSR Taxonomy (S denotes social preferences and C classic, monetary preferences) *Kitzmueller & Shimashack, 2012 [Copyright American Economic Association; reproduced with permission of the Journal of Economic Literature]

If stakeholders (e.g., consumers) are willing to pay higher prices for socially responsible products and services, companies can maximise profits and CSR becomes part of a firm’s competitive strategy (Strategic CSR) resulting in winwin situations stipulating profit with good conscience. If, on the other hand, shareholders have social preferences, but stakeholders do not, companies can only engage in Not for profit CSR or try to establish certain ethical codes of conduct at the regulatory level applicable to the whole industry, creating a level playing field for all companies (CSR as regulatory strategy). If shareholders and stakeholders have a classic, monetary preference, CSR does not make any business sense and is not sustainable in the long run (No CSR). When both shareholders and stakeholders have a social preference, however, effects on profits are mixed (Kitzmueller & Shimshack, 2012, 58 f.; Enste, 2015, 8). In the following section, Strategic CSR, Not for profit CSR, and CSR as regulatory strategy are discussed in more detail to shed light on corporate reasoning behind CSR.

2.3 Economic Theory of CSR / Corporate Co-Responsibility

2.3.1

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Not for profit CSR

As illustrated in Figure 2.1 (bottom left), shareholders themselves can be concerned about the social or environmental impacts of their company and have a social preference for CSR. In this case, shareholders may be willing to forgo profits for CSR and even accept net losses by using their business ownership as a ‘do good’ corporate channel and alternative to donations (Kitzmueller & Shimashack, 2012). Whenever consumers do not have a social preference and will thus not reward CSR efforts, extra costs cannot be passed on to stakeholders. Here, profits are diminished in the social interest, but shareholders may gain utility from knowing that profits have been invested in socially responsible projects (Reinhardt, Stavins & Vietor, 2008). The social preference of shareholders may stem from altruistic motives wanting to help others rather than increasing their profits (Enste, 2015, 10). Altruistic shareholders sacrifice their own resources to increase the resource endowment of someone else without expecting compensation. From an evolutionary perspective, altruism should have gradually been superseded due to strong selection pressures with altruists having fewer resources compared to egoists over time. Various theories, however, including the Theory of Kin Selection, Reciprocal Altruism, and Indirect Reciprocity, explain how altruistic behaviour has nevertheless outlasted alongside egoistic traits (Fetchenhauer 2011, 436 ff.). Reputation building through indirect reciprocity seems to be particularly useful in the long-term even in today’s anonymous large-scale societies. Companies with a good reputation thanks to fair and ethical business practices will be rewarded by consumers and other stakeholders when visibly and credibly assuming co-responsibility for society even in cases where respective stakeholders do not benefit from CSR efforts directly (Enste, 2015, 10). Another motive for Not for profit CSR can be a negative preference regarding the allocation of profits. Especially in this day and age, executive pay is under close public scrutiny and shareholders may favour investments in CSR rather than increasing bonus payments for top management. As recent figures have shown, shareholders are increasingly interested and willing to invest in companies that act responsibly (Kitzmueller & Shimshack, 2012, 51 f.; EFAMA, 2020), which invalidates Friedman’s argument based on insights from behavioural economics and evolutionary psychology.

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2.3.2

2 Theoretical Foundations

Strategic / for profit CSR

Friedman’s main argument against CSR was that it is not in the shareholders’ interest (Friedman, 1970). Yet, the business case for CSR shows that businesses often engage in CSR precisely because it enhances shareholder value, e.g., by generating goodwill among consumers and thus improving reputation and sales (e.g., Fernández & Luna, 2007). As per Figure 2.1 (top right), the social, environmental or ethical preferences of stakeholders may have direct implications for the demand in product and financial markets, supply in labour markets and/or shareholder value maximisation. Voter preferences may equally translate into governmental market interventions that affect companies indirectly (Kitzmueller & Shimshack, 2012, 59). Furthermore, companies may generate long-term cost savings by investing in new technologies (e.g., energy-efficient, climate-friendly), which will eventually outweigh upfront costs (Reinhardt et al., 2008). It follows that social preferences inevitably provoke certain behaviour that affects corporate profits either directly or indirectly, emphasising the need to integrate CSR into corporate strategy (For-profit CSR) (Kitzmueller & Shimshack, 2012, 59). Over the past 30 years, almost 100 studies have analysed the empirical link between corporate social performance (CSP) and corporate financial performance (CFP). Despite methodological issues with some studies and challenges in determining the correlation and causality of the two, findings largely show a positive relationship between CSP and CFP suggesting that CSR does indeed yield financial dividends (Margolis, Elfenbein & Walsh, 2009; Schulz, 2015). Profit oriented CSR that is purely demand or market-driven, or as an effort against the risk of future regulation or activism, has equally been labelled “Strategic CSR” by Baron (2001) and “theory of the firm perspective” by MacWilliams and Siegel (2001). Such CSR activities are considered reactive as investors only respond to profits determined by other social stakeholders such as consumers, employees, activists, and/or regulators. “Purely profit-oriented investors do not motivate strategic CSR, they only respond to profits determined by other (social) stakeholders” (Kitzmueller & Shimashack, 2012, 59). Porter and Kramer (2002) further differentiate between responsive and strategic CSR. The former is intended to return profits to society while the latter aims to solve societal problems, simultaneously creating value for society and the shareholders.

2.4 Limitations of CSR

2.3.3

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CSR as regulatory strategy

As the market economy with its regulatory frameworks can never be perfect for pragmatic and systematic reasons, there are cases in which a given framework does not necessarily lead to socially accepted market outcomes (Homann & Blome-Drees, 1992; Enste, 2015, 7). Oftentimes, business practices are no longer considered moral or legitimate even if carried out legally according to a given framework (Wieland, 1999; 2000). With globalisation weakening the control of nation-states through national frameworks, multinationals can escape from national regulations and shift production to countries with less elaborate governmental regulations, e.g., concerning workers’ rights or environmental standards (Aßländer, 2011). Public scrutiny, however, also applies to companies trading with other economies along their global supply chains whose frameworks do not correspond to the moral concepts of their home country. This is enforced by new technologies improving transparency and media outreach (Smith, 2003). Given that the authority of nation-states is declining, corporations are often understood as new political actors that are no longer controlled by national regulations but at best by stakeholder pressure such as shaming campaigns or threats of boycott from international NGOs (Palazzo & Scherer, 2006). If companies wish to secure long-term profits, they must contribute to fair and sustainable development globally. This can be done, for example, by working on international standards such as ISO26000, a voluntary international standard and guidance on social responsibility (Wieland, 2012; ISO, 2018). Firms may also choose to overcomply with social and environmental regulations to better position themselves in regulatory negotiations. In doing so, businesses can prevent or influence future regulation or avoid enforcement of existing regulation. Over-compliance may also be used to encourage future regulation in order to gain a competitive advantage over less adaptable firms (Reinhardt et al., 2008). Furthermore, it is in companies’ own interest that poorer population groups and countries become cooperation partners, less so because of perceiving them as needy but rather creating new opportunities by investing in future markets. At the same time, reputational damage can be avoided by complying with international standards regardless of where business activities take place (Enste, 2015, 8).

2.4

Limitations of CSR

While it is widely accepted that corporations must give back to society as they profit from many aspects including legal security, infrastructure and an educated

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2 Theoretical Foundations

workforce (EC, 2001), corporate responsibility also has its limits. According to the taxonomy illustrated in Figure 2.1, CSR will not take place if neither shareholders nor stakeholders have a social preference and are either willing to forego profits to engage in CSR or pay higher prices for socially responsible products and services. While Friedman overlooked the possibility that profits and CSR can exist together, he was right in that social and environmental demands on companies are to be embedded in and respect the conditions of the market to be successful, otherwise potentially causing harm and leading to higher, not lower, social costs (Leschke, 2012). While CSR maximises profits and shared value in the long-run, companies are still facing capital market pressures for short-term profits. According to Bosch-Badia et al. (2013), the central goal of corporate communication is therefore to raise awareness among investors that long-term sustainability should receive greater attention in any sensible stock value estimation (Bosch-Badia et al., 2013). It must also be noted that there is no one-size-fits-all CSR and decisions very much depend on the anticipated responsiveness of a firm’s customer base and willingness to pay higher prices for socially responsible products, which will allow for sustainable competitive advantages or the likelihood of advancing regulatory requirements in the industry (Smith, 2003, 26 f.). Where the business case for CSR is absent or less evident, reliance must be placed on a normative case (business as a good citizen) and collective action is needed involving firms, governments, and NGOs (Smith, 2003), e.g., to jointly develop standards to create incentives for responsible behaviour and ensure a level playing field. Here, support is needed for the private sector to accompany the implementation of such standards (Berger, 2019). More general criticism exists that firms do not make optimal CSR investments in terms of choosing activities with the greatest net social benefits also due to budgetary constraints. Reinhardt et al. (2008) elaborate on different factors affecting CSR decisions including managers’ personal preferences (Friedman’s criticism), firm characteristics and size, the nature of the industry, technical capabilities and relevant expertise, geographic location, and existing regulatory limits. Given that these factors are largely unrelated to the social benefits and costs of CSR, consequent CSR decisions may prove inefficient. Besides, companies may know about the costs of CSR but have limited experience in assessing its benefits, again leading to inefficient CSR decisions. Overall, research has found that the choice of CSR activities is largely affected by a firm’s ability to sacrifice profits (Reinhardt et al., 2008, 233). Though ambiguity remains about the type, extent and expected areas of social engagement by corporates, the management perspective of CSR can help

2.4 Limitations of CSR

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reduce much of the ambiguity around voluntary engagement by focusing on the alignment of corporate policies and procedures with commonly accepted ethical standards in day-to-day business. Here, CSR is not a question of companies acting as quasi-governments and subject to managers’ preferences for charity but rather a set-up of company-wide governance structures to ensure that legitimate stakeholder interests are considered in management decisions. According to Michael Power, a deliberate process is required by which internal management systems become the “critical interface between regulatory and business values, and hence between society and organisational operations” (Power, 2007, 41). In the context of human rights due diligence (HRDD), which also constitutes a part of CSR, Landau speaks of “process-based regulation taking advantage of the inherent capacity of business to regulate itself and its superior access to company-specific information” (Landau, 2019, 14). Germany’s DDA is in line with the management perspective of CSR as it aims to improve the governance structures of organisations and to promote responsible business practices along global supply chains (The Federal Government, 2021). Economic theory of corporate co-responsibility based on social preferences can help to clarify why CSR is very much in the corporate interest as it can create win-win situations with profits and a clear conscience, which is also known as “orthogonal positioning” (Enste & Wildner, 2014, 14). Although the benefits of CSR are commonly known, CSR efforts have been considered insufficient to date, raising the question of how to incentivise responsible business practice and whether state regulation is needed, which will be the subject of this paper. While an economic perspective of co-responsibility is adopted, it is not implied that responsibility is necessarily correlated with financial success. Rather, this paper attempts to explain the rationale for businesses to engage in CSR to identify suitable instruments and approaches to promote corporate co-responsibility. Adopting a political or ethical perspective would likely come to very different conclusions. This, however, will not be part of this research.

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Analysis

The following chapter examines Germany’s Due Diligence Act (DDA), commonly known as Supply Chain Law, as a statutory instrument to encourage and enforce responsible business practices along global supply chains. Firstly, a more general introduction is given on why statutory regulation may be considered useful. Secondly, Germany’s DDA is discussed in more detail looking at its design and consequent implications for its effectiveness, efficiency and ethics. Finally, reference is made back to the economic theory of co-responsibility to illustrate how different CSR strategies turn out in practice and what challenges they may entail. This will serve as a basis for evaluation of both governmental drivers in the form of legal regulation and market drivers including stakeholders’ and shareholders’ social preferences in their capacity to promote corporate co-responsibility.

3.1

Statutory Regulation of Global Supply Chains

Global value chains are a fundamental part of globalisation, without which value creation would be inconceivable in most countries. However, markets do not always generate optimal outcomes as they do not operate in a vacuum. Market failures provide a rationale for government intervention to correct information asymmetries (e.g., consumers having limited information upon which to base their purchasing decisions), or externalities (e.g., pollution as a social cost of production). On behalf of the public, governments are to interfere in areas related to health and safety, the environment, social policy and the economy to meet societal demands and maintain a market framework (Hepburn, n. d., 9). Increasingly, discussions have evolved at the European and international level around how supply chains can be made more sustainable and which actors bear © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2022 L. C. S. Maurice, Corporate Social Responsibility, BestMasters, https://doi.org/10.1007/978-3-658-39113-3_3

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Analysis

responsibility as challenges exist in terms of compliance with human rights and environmental standards (Berger, 2019). A major challenge of existing guidelines provided by the UN, OECD or EC is their voluntary nature making them difficult to enforce. While industry-driven voluntary standards and certification schemes have been on the rise in recent years, none have been satisfactory in ensuring compliance and standards to date. In 2020, Human Right Watch (HRW) published a report noting that standards disregarded key human rights and environmental issues and monitoring systems failed to spot and correct any shortcomings. As an example, HRW stated both the Rana Plaza factory in Bangladesh and the Brumadinho dam in Brazil that had been inspected by auditors shortly before they collapsed (HRW, 2020). Matters are complicated further by the fact that multinational corporations are some of the wealthiest and most powerful entities in the world, with 69 of the richest 100 entities being corporations and not countries. Given the close links between governments and these multinationals, corporate activity has not always been sufficiently regulated and governments are said to have even eliminated existing protections for workers, consumers, and the environment in some cases. As a consequence, businesses have often escaped accountability for their misconduct (HRW, 2020). Although debates differ across countries, there is growing consent that new, legally enforceable laws are needed and states are increasingly requiring thorough due diligence to influence business behaviour for good social and economic impacts (Parker & Lehmann Nielson, 2011; Landau, 2019). Below, general benefits to statutory regulation are touched upon before examining Germany’s DDA in more detail.

3.1.1

Social and Ecological Incentives Through Regulatory Framework

For a long time, the concept of the social market economy viewed corporations as corporate actors with obligations related to their economic activities only (e.g., Friedman, 1970). But rather than just being an economic system, the market economy is an integral part of a broader social system regulating both social and economic affairs and aiming to reach non-economic targets in society (Aßländer, 2011). Although economic growth may go hand in hand with social development, economic forces such as globalisation, financialisation and technology have also combined in less beneficial ways. As a result, the economy risks becoming detached from its primary function of delivering societal progress (PwC, 2018). While accepting market mechanisms as the best way to solve the

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problem of scarcity, regulatory capabilities of state policy in social concerns are crucial. A national regulatory framework such as Germany’s DDA provides social and ecological incentives for achieving goals in the common interest and allows for rule-governed competition (KAS, 2020, 3). Within this framework, economic actors can operate freely while governmental interventions ensure that economic freedom does not violate the ethical and social targets of society (Barry, 1989).

3.1.2

Legal Certainty and Reduction of Litigation and Reputational Risk

Mandatory due diligence through legislation can also create legal certainty, which enables companies to direct their processes in a more targeted way. Legislation may further offer a legal lever for imposing standards throughout the supply chain, thus generating critical mass by widening the scope of companies that oblige suppliers to comply with certain standards. This would especially allow small and medium-sized enterprises (SMEs) with limited market power to implement such standards (KAS, 2020, 3). Reputational and legal damage can also be avoided by providing legal proof of having fulfilled certain due diligence obligations. This may further strengthen consumer trust as businesses would be obliged to continuously assess risks, measure CSR activities and impact, and regularly report on them. As for Germany’s DDA, with decreasing reputational risks, the image of German companies and respective quality products would also help retain and attract staff in an increasingly competitive global market for employees (KAS, 2020, 4; Nyborg & Brekke, 2004; Greening & Turban, 2000).

3.1.3

Resilience

In view of the global Covid-19 pandemic, a legal commitment to human rights and environmental due diligence is said to make global supply chains more resilient by encouraging businesses to conduct more in-depth risk management. Global value chains are rapidly growing in length and complexity with the value of intermediate goods traded globally tripling to more than $10 trillion annually since 2000. Yet, if not controlled for risk exposure, operating model choices have oftentimes led to unintended consequences as supply chains were designed for efficiency, cost, and proximity to markets rather than for transparency or resilience (McKinsey Global Institute, 2020). Better transparency and assessment

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Analysis

of risks can help to detect potential disruption and allow for early mitigation. Besides, legal commitment may incentivise companies to consider different supply chain options to recognise and prevent any supply failures from day one. In the future, it is likely that companies will increasingly diversify or shorten their supply chains. If human rights and environmental protection criteria are considered in this process, businesses will develop a better understanding of their exposure and respective weaknesses to inform resilient strategies (KAS, 2020). Contrary to this, Gabriel Felbermayr, President of the Kiel Institute for the World Economy (ifw Kiel), argues that a strict supply chain law may counteract efforts to make supplier relationships more resilient as the monitoring of every supplier will be expensive and create risks. As a consequence, German companies may reduce the number of suppliers, which in turn will render them more vulnerable in times of crisis (Felbermayr, 2021).

3.2

Germany’s Due Diligence Act

According to a survey by the University of Maastricht in 2015, Germany ranked 5th in the global human rights violations business index. Of 1,800 human rights violations analysed, 87 could be traced to German companies, following the United States with 511 cases reported, the United Kingdom (198), Canada (110) and China (94). Human rights violations included water pollution in Peru due to copper mining for car manufacturing, land expulsions in Uganda for a coffee plantation, and exploitation of workers in the apparel industry. In all cases, German companies were involved either directly or indirectly, according to complaints from NGOs, which were backed by the University of Maastricht’s global comparative study (EURACTIV, 2015; Kamminga, 2016). In an effort to counteract such violations, the German Bundestag approved a national Due Diligence Act (DDA) in June 2021 that will oblige companies to carry out due diligence regarding human rights and environmental issues along their global supply chains (BMZ, 2021). The law followed Germany’s National Action Plan on Business and Human Rights (NAP) adopted in 2016, which set out to encourage German companies to implement human rights due diligence on a voluntary basis, in accordance with the 2030 Agenda for Sustainable Development. The advancement of standardised parameters for German companies aimed to improve conditions for fair global competition based on the UN Guiding Principles on Business and Human Rights (Auswärtiges Amt, 2016). Between 2018 and 2020, the German Federal Government reviewed the extent to which companies with over 500 employees complied with due diligence obligations as laid

3.2 Germany’s Due Diligence Act

21

out in the NAP to monitor progress. The evaluation system allowed companies to explain the status of their implementation using free text options (comply or explain). Companies that fulfilled all human rights due diligence obligations or sufficiently explained their non-compliance were classified as “compliers” in the overall result (Auswärtiges Amt, 2019). Yet, the monitoring report found that merely 13 to 17 percent of companies had fulfilled the conditions, falling significantly short of the targeted goal of 50 percent. The introduction of Germany’s DDA was the legal consequence of this shortcoming as the NAP and the coalition agreement provided for a legal obligation to be promoted in Germany and at EU level (KAS, 2020, 3; Adelphi, n. d.). For the very first time in Germany, corporate due diligence obligations along global supply chains are now legally binding. This constitutes a paradigm shift away from purely voluntary CSR to compulsory human rights and environmental obligations (Supply Chain Initiative, 2021, 2). Although similar laws have been introduced in The Netherlands, the United Kingdom and France, Germany’s DDA is considered the strongest in Europe to date. While the purpose of the law, namely protecting human rights and the environment, is widely supported in Germany, responses to the law are deeply divided. Industry associations mostly condemn the law for asking too much of companies, while many civil society actors call it a “toothless tiger” not going far enough (Tagesschau, 2021a). Below, the design of the law is further illustrated and discussed in terms of potential advantages and disadvantages to establish whether the law is suitable to reach its objectives effectively, efficiently, and ethically.

3.2.1

Scope / Companies Covered

By 2023, Germany’s DDA will apply to more than 600 companies with over 3,000 employees and expand to include about 2,900 companies with over 1,000 employees in 2024. Affected companies are required to make a policy statement on respecting human rights, conduct regular risk analyses, set up a risk management system including a complaint mechanism, and annually and publicly report on remedial actions (BMAZ, 2021; Adelphi, n. d.). The Supply Chain Initiative (SCI), made up of different civil society actors, heavily criticised the law for reducing the number of companies covered by 60 percent compared to original plans put forward by Federal Ministers Heil and Müller. Initially, the bill targeted around 7,280 companies with over 500 employees, which was already below the requested threshold of 250 employees. SCI argues that even much smaller companies in high-risk sectors including textile or

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Analysis

agriculture can cause or contribute to environmental damage and human rights abuses and should therefore equally comply with the law (SCI, 2021, 4). Dolun Isa, President of the World Congress of the Uyghurs, shares this criticism of restricting obligations to companies with more than 3,000 employees: “as if supply chains of SMEs, of which there are many in Germany, could not also be tainted with human rights violations” (Die Zeit, 2021). Contrary to this, the Chamber of Commerce Düsseldorf (IHK) argues that despite the initial limitation to companies with over 3,000 employees, the law will place an undue burden on SMEs. When the bill was initially presented at federal level, it was explicitly emphasised that SMEs would not be affected. Yet, the law contains multiple regulations indirectly affecting SMEs as supply chains are defined rather comprehensively with neither a delimitation in depth regarding indirect suppliers nor in breadth, e.g., focussing on the production process of goods and services. It is unclear whether “all steps at home and abroad necessary to produce products and provide services” as indicated in the DDA also include non-production services such as financing, transport, or storage (Bundesanzeiger, 2021, 2959). Leaving much room for interpretation, companies directly affected by the law are likely to pass on pressures further down their supply chain including to SMEs. Equally, there are no product-related thresholds below which there should be no due diligence required if the percentage of a particular raw material in the end-product is marginal. Such thresholds would avoid disproportionate and inefficient measures for companies (IHK, 2021).

3.2.2

Due Diligence Obligations

The DDA will mainly focus on companies’ own business operations and their direct suppliers (contractual partners) with limited obligations relative to indirect suppliers. Companies are to review human rights and environmental risks of their indirect suppliers but must implement mitigation measures only when “substantiated knowledge” of possible violation of human rights is gained (event-related duty of care) (SCI, 2021, 3; BMAZ, 2021; Reuters, 2021). This restriction to direct suppliers is criticised by proponents of the law as it is said to undermine other internationally recognised standards of the UN and OECD, according to which companies must respect human rights along their entire value chain (SCI, 2021, 3). Given the fact that most human rights abuses happen at the beginning of supply chains in less regulated markets, most violations risk not being covered. With an event-based duty of care, businesses are likely to act only once damage is done as precautionary risk assessments are

3.2 Germany’s Due Diligence Act

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not required for indirect suppliers. This contradicts the risk-based precautionary principle at the heart of UN Guiding Principles, according to which “companies must act preventively and prevent violations before they occur” to ensure effective human rights protection (SCI, 2021, 3; UNGC, n. d.). SCI fears that the DDA will incentivise businesses to conceal rather than to disclose their value chain, turning a blind eye to any misconduct to avoid further action. Opponents, on the other hand, argue that companies should only be held accountable for what they can directly influence and control (IHK, 2021). This is in line with the ethical principle ‘Ought implies can’, according to which “an agent has a moral obligation to perform a certain action only if it is possible for him or her to perform it. […] If a certain action is impossible for an agent to perform, the agent cannot have a moral obligation to do so” (Britannica, n. d.). It follows that responsibility can and must be assumed only for one’s own company and direct suppliers provided corresponding contractual provisions. However, the law includes expectations for companies to also influence other links in their supply chain (Tier 2 onwards) without stating what companies should do to meet this expectation yet holding them accountable for actions of indirect suppliers with no contractual relationship (IHK, 2021). Companies are further said to be left alone with imprecise rules with the urgency of passing the law taking precedence over precision. The Federation of German Industries (BDI) notes that it remains largely unclear what the benchmark for a company’s contribution to a risk to human rights or the environment at indirect supplier level should be and when exactly it must take specific due diligence measures (BDI, 2021b). According to the law, companies must actively manage risks if there is “factual indications that make a human rights or environmental violation […] appear possible” (Bundesanzeiger, 2021, 2964). With such broad phrasing, the pressure to act is widely extended and could be used for abusive actions by third parties, e.g., defeated suppliers could harm other competitors in a tendering procedure. It is also questionable why direct suppliers in Germany and the EU should be affected by the DDA if they already abide by existing legal regulations. This may lead to a double obligation under different supervision, causing unnecessary, additional work (IHK, 2021). BDI equally condemns due diligence obligations as too vague and unpractical, which becomes evident in the range and understanding of protected rights not only including human rights but also labour, social and environmental standards. Legally, only the standards of the locally applicable law can be valid. In view of the DDA’s “duty of effort” rather than a “duty to succeed”, the effectiveness of the law in protecting human rights and the environment is highly questionable (BDI, 2021b).

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3.2.3

3

Analysis

Regulatory Monitoring and Enforcement

Affected businesses will have an obligation to record and publish due diligence related information once a year on their websites. The Federal Office of Economic Affairs and Export Control (BAFA) is planning to create sixty-five full-time positions to monitor reports as well as to conduct risk-based inspections in cases where the rights of affected parties are said to be violated or directly threatened by non-fulfilment of due diligence obligations (SCI, 2021, 5). The effectiveness of law enforcement will depend, among others, on legal bylaws specifying procedures for administrative control by BAFA. These bylaws are issued by the Federal Ministry of Labour and Social Affairs (BMAS) in coordination with the Ministry of Economics (BMWi). Yet, challenges may arise due to BAFA being subordinate to the BMWi, which has disapproved of an ambitious supply chain law in the past. SCI therefore stresses the importance of ensuring the independence of the authority to avoid any conflicts of interest (SCI, 2021, 5 f.). Furthermore, businesses are expected to support BAFA in providing information about themselves and their suppliers, shifting the state’s duty of criminal prosecution to businesses. This causes a conflict of interest as businesses must cooperate in criminal prosecution against themselves and their suppliers, which neither seems ethical nor effective. Besides, protection requirements existing under Germany’s Basic Law (Grundgesetz) are missing and BAFA will be entitled to enter the premises of suspected businesses without obtaining a court order. Clear regulations on confiscation and use of evidence including the protection of attorney-client privilege are equally lacking (BDI, 2021b). The perceived fairness of regulations can affect acceptance and respective compliance, which in turn has implications for the law’s effectiveness and direct costs as governments must raise considerable funds to enforce and monitor compliance. Equally, regulators must be subject to oversight to avoid any abuse of power. This may enhance the perception of fairness based on political accountability including potential avenues of appeal. In cases where businesses oppose a decision or action of the regulator, there should be a way for review by an independent body (Hepburn, n. d., 20).

3.2.4

Sanctions

Regarding legal sanctions, there is no civil liability provision in Germany’s DDA. German trade unions and NGOs may conduct civil proceedings in Germany on

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the behalf of injured parties as a form of representative action. When neglecting due diligence obligations, companies may be fined for administrative offense according to the severity of the violation as well as the company’s total annual turnover. Businesses may equally be excluded from public contracts for up to three years where fines exceed 175,000 euros (SCI, 2021, 5; BMAZ, 2021). One of the major demands of SCI was that German companies be held liable under civil law “for foreseeable and avoidable damages caused or contributed to by failing to comply with due diligence requirements” (SCI, 2021, 4). Yet, Germany’s DDA does not allow to hold companies accountable before German civil courts without a civil liability, unlike the French Due Diligence Act (Loi de Vigilance) and similar EU regulations currently in progress. According to SCI, representative action in civil proceedings will make it easier for those affected to claim for damages but in no way replaces a civil liability rule that would reinforce the basis for claims before German civil courts if and when damage occurs overseas. The potential deterrent and preventive effect of a civil liability is thus eliminated and the initial aim of advancing access to courts and compensation for those affected remains unmet (SCI, 2021, 4). Businesses, on the contrary, feel that far-reaching sanctions and penalties are not sufficiently defined and could be imposed arbitrarily. The threshold for sanctionability is considered unusually low only requiring simple negligence or minimal deviation from the authorities’ view with fines being even higher than fines for actual fault (companies themselves harming human rights and the environment). The special procedural status (besondere Prozessstandschaft) is considered unnecessary by critics as legal remedies are already available and businesses fear that the law may create incentives for abusive, media-effective lawsuits (Bundesanzeiger, 2021, 2964). While due diligence obligations for indirect suppliers are subject to sanctions, the practicality of enforcement remains unclear as companies have no contractual relationship with indirect suppliers (BDI, 2021b).

3.2.5

Environmental Provisions

Germany’s DDA has been criticised for only marginally touching upon environmental issues and thus failing to protect the environment holistically and independently. SCI calls attention to two such examples: 1) the law does not cover environmental destruction due to biodiversity loss, and 2) neither considers climate as a protected good. Rather, the DDA determines that environmental

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Analysis

destruction (e.g., of soil, water, air) be linked to human rights abuses. The proposed human rights link to ecological assets significantly restricts environmental protection and makes it harder for those affected and other stakeholders to report any violations, which is especially true in cases where environmental degradation is not clearly leading to human rights abuses. The chosen approach is said to neither comply with the prevention principle of environmental law nor cover other international agreements and European standards that Germany has signed up to. SCI therefore suggests having a general clause relating to damage and environmental goods rather than listing individual agreements, which is considered unproductive (SCI, 2021, 5).

3.2.6

Competitiveness

Opponents of the supply chain law see the competitiveness of nationally regulated companies jeopardised. Legal due diligence obligations regarding human rights and environmental standards are feared to result in cost-intensive measures including extensive risk analyses, mitigation, and reporting duties, which in turn lead to increasing prices and put German companies at a disadvantage against international competitors. Businesses are concerned about evasive reactions from customers, especially for price-elastic products, where demand reacts greatly to price changes and consumers are expected to turn to cheaper goods from non-compliant, foreign companies (KAS, 2021, 4). The stricter Germany’s DDA compared to UN and OECD guidelines, the greater the competitive disadvantages unless introduced throughout the EU or internationally. Apart from the scope and the depth of the law, the timing and related deadlines are equally crucial. Global supply chains are already negatively affected by the Covid-19 pandemic, ever increasing trade barriers (e.g., local certification requirements), and limited demand. To overcome the current economic crisis, Germany needs strong and internationally competitive companies. The DDA may impose high costs on companies both directly and indirectly affected by the law, resulting in competitive disadvantage, at least in the short-term. Additional costs may arise as a result of the law not adequately considering costs incurred for indirectly affected companies or internal capacity commitments for directly affected firms. Costs are assumed but not quantified and thus underestimate total costs (IHK, 2021). Gunther Kegel, CEO of the Mannheim-based sensor manufacturer Pepperl + Fuchs and President of the Association of the Electrical and Digital Industry (ZVEI), argues that the more qualified staff are diverted away from real value creation and attend to governance issues, the less innovation there will be, which

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in turn will harm competitiveness. According to Kegel, all companies would be placed under general suspicion instead of focusing on risk sectors, producing a lot of paperwork on which suppliers confirm compliance. However, “those who have no qualms about working with warlords will equally not have them about falsifying paperwork” (Die Zeit, 2021). Human rights would not be protected under the law as processes are considered both inefficient and ineffective. Contrary to this, others argue that the future competitive advantage of Germany as an export nation should lie in the fact that “Made in Germany” not only stands for technical product quality but also for fair wages, regulated working hours, safety in factories, trade union co-determination and environmentally friendly processes, right down to the beginning of the supply chain. According to Schwab (2021), this is becoming a strong selling point globally with consumers increasingly valuing responsible products and services over price. Yet, although the market for responsibly made products and services is growing and advantages can be realised by offering responsible solutions in compliance with certain standards, the increasingly global market calls for a uniform approach to prevent distortions of competition in the European internal market and to reduce complexity of hybrid regulatory mechanisms (BDI, 2021a). At the same time, with the German economic structure mainly being shaped by SMEs, a European or plurilateral regulation could also bring about competitive disadvantages for German companies, for whom it may be more difficult to implement cost-intensive measures compared to larger competitors (KAS, 2020, 4). The implementation of such standards would require ample private sector support and the promotion of administrative capacities of governments and business associations to successfully accompany new measures (Berger, 2019).

3.2.7

Ethical Considerations

Generally, Germany’s DDA is praised for putting human dignity at the heart of the global economy. Commitments put forward in the law are based on the Christian concept of humans and the principle of personality according to which every human is a creature and image of God, emphasising the need to uphold human dignity and human rights universally. All humans should be free, autonomous and should not be reduced to an object of economic interest (KAS, 2020, 3). This is equivalent to the human rights definition put forward by the UN according to which “human rights are inherent to all human beings, regardless of race, sex, nationality, ethnicity, language, religion, or any other status. Human rights include the right to life and liberty, freedom from slavery and torture, freedom of opinion

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and expression, the right to work and education, and many more. Everyone is entitled to these rights without discrimination” (UN, n. d.). Two obligations are deduced from this understanding in the context of global supply chains, namely the protection of all human rights and the compliance with ecological minimum standards for preservation of present and future generations (intergenerational justice). Germany’s social market economy provides a framework for action to harmonise the ideals of justice, freedom, and economic growth (KAS, 2020, 3). Paradoxically, the enforcement of excessively high due diligence standards could equally result in unintended harm and long-term damage to human rights with companies withdrawing from high-risk regions or shortening their supply chains to avoid potential sanctions under the law (KAS, 2020, 4). Yet, it is precisely the relatively low environmental and labour standards offering developing countries a competitive advantage and allowing them to integrate into global value chains (Berger, 2019). High standards risk jeopardising the competitiveness of developing countries with multinationals likely relocating to less regulated markets, small suppliers from the informal sector being pushed out of the market, and jobs in the formal sector migrating to the informal sector. Conditions in the informal market are often much worse and it cannot be ruled out that the law will worsen the situation for people in developing countries. Felbermayr, President of ifw Kiel, argues that if German companies buy less in developing and emerging economies, then businesses from China or Russia could take their place. While foreign firms could potentially ‘fill the gap’ as they are not subject to the law, this would by no means improve human rights in respective countries but rather result in job losses, an increase in poverty and a decline in knowledge transfer (Felbermayr, 2021; Vereinigung der Bayerischen Wirtschaft, 2019). The Ethics Association of German Business (EVW) takes a similar stance, calling the DDA immoral and inappropriate, only leading to exclusion, injustice, and poverty. To place German companies under the obligation to enforce Western standards uniformly and indiscriminately in other countries would equal moral imperialism. EVW further condemns the law as unsuitable to enforce better living conditions at the beginning of global supply chains. It would make little sense to oblige German companies to enforce social standards in China or Brazil, for example, that they cannot enforce, also ignoring that other cultures may have different views on human rights. Germany, just like any other state, does not have the right to dictate its ideas and standards to other countries. As for its monitoring, the law would merely become a reporting obligation of (undignified) conditions along global supply chains, combined with potential claims for damage in German courts if companies fail to report on it. Thus, the

3.2 Germany’s Due Diligence Act

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law would only serve to reassure the “do-gooders” and cement a “presumptuous moral imperialism” (EVW, 2020). Khan & Lund-Thomas equally describe CSR in global value chains “as a form of economic and cultural imperialism”, mainly driven by the global North and not including Southern voices in its development (Khan & Lund-Thomas, 2011, 74). Here, economic imperialism stems from businesses demanding CSR measures from local suppliers but being unwilling to share the costs. Cultural imperialism is attributed to the fact that norms and values underlying the CSR rhetoric originate from Europe and the USA (Khan & Lund-Thomsen, 2011, 81 f.). While CSR sets out to institutionalise new norms and values in line with international consensus about workers’ rights and labour standards, many of these norms are rooted in “a formal industrialised model of production, reflecting the historical experience of the affluent countries in the global North” (Kabeer & Sulaiman, 2019, 10). Given that the economies of the Global South are largely informal and located in very different contexts, CSR standards may be perceived as an imposition and not resonate with other countries. As for the different sustainability dimensions (economic, environmental, and social), there are various conflicting goals, e.g., between economic and environmental sustainability. Historically, developing countries have had minimal responsibility for climate change and now feel entitled to ‘grow first and clean up later’ (Berger, 2019). The imposition of environmental standards by Germany could negatively affect the economic development of trading partner countries. Taking the example of food and agricultural exports, country-level studies have generally found a negative impact of importers’ food safety standards on food and agricultural exports. This negative effect is even more prominent in developing countries (Institute of Development Studies, 2017). When enforcing sustainability standards globally, one needs to be mindful and respectful of different prioritisations across countries.

3.2.8

Responsibility Issues

According to international human rights law, it is “the obligation of Governments to act in certain ways or to refrain from certain acts in order to promote and protect human rights and fundamental freedoms of individuals or groups” (UN, n. d.). Human rights treaties consider governments having the primary responsibility for protecting and promoting human rights and environmental standards in their countries. While the United Declaration of Human Rights (UDHR) also states that “every individual and every organ of society … shall strive by teaching and

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education to promote respect for these rights and freedoms and by progressive measures, national and international, to secure their universal and effective recognition and observance” (UN, 1948), companies should not and cannot alone be held accountable for human rights violations under the DDA. Despite the fact that companies can have significant leverage along their supply chains (e.g., through procurement decisions and setting minimum standards), coherent national legislation and enforcement is needed to ensure that all employees benefit from better working conditions, and not only those who work for exports to Germany (KAS, 2020, 5). Alongside the responsibility of states and businesses, consumers too have purchasing power and contribute towards better business practices when choosing to buy ethical and sustainable products and services. As businesses fear reputational damage, purchasing decisions of consumers are an important lever (KAS, 2020, 5). In that respect, transparency and disclosure obligations can prove useful in enabling consumers to make informed decision. A recent study by Toussaint, Cabanelas and González-Alvarado (2021) found that consumers in the food value chain are sensitive to social abuse practices but face difficulties in accessing information to inform their purchasing decisions. On this account, opinion leaders such as retailers and wholesalers, unions, media, and governments are said to play a key role in enhancing awareness through information flows (Toussaint et al., 2021). It follows that besides companies bearing a co-responsibility as laid out in Germany’s DDA, consumers, civil society, and states are equally in charge to promote human rights. Hence, companies should not alone be held accountable for human rights breaches along their global supply chains. Furthermore, it is important for companies to consider and respect local law, legislation, and culture. Working conditions and safety standards are regulated differently across the globe and in some countries the right to go on strike and the right to collective bargaining are restricted or even prohibited by law. The DDA in its current form remains unclear about which standards to apply in countries with e.g., no minimum wage regulations. Local authorities are primarily responsible for upholding human rights and companies alone will not be able to ensure the enforcement of human rights in respective countries. The impression may arise that Germany is trying to impose standards through companies that could otherwise not be achieved in bilateral or multilateral negotiations (IHK, 2021). The German trade association (HDE) reiterates that businesses cannot be given the responsibility to enforce human rights elsewhere as legal standards and law enforcement are the task of respective states (HDE, 2021). Specht (2021), a reporter for Handelsblatt on labour market and trade unions, equally questions how companies are to manage what states fail to enforce with the help of human

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rights policies, sanctions and import regulations. “While politicians want companies to withdraw from critical regions, they use development aid to support corrupt regimes that turn a blind eye to human rights violations or are responsible for them themselves” (Specht, 2021). Specht’s statement also resonates with Kegel, CEO of Pepperl + Fuchs and President of ZVEI, who argues that German politics ducks when it comes to human rights violations and leaves this challenge to the industry to handle. One such example is Germany sending a delegation to Saudi Arabia in 2021 to export the German dual training system disregarding the human rights situation in-country (Die Zeit, 2021). Kegel argues that if Germany really wanted to show that human rights violations are unacceptable, one could, for example, only grant access to the EU market to companies whose home countries ensure certain standards through trade agreements or lower import duties for progressive countries. Germany would, however, have to absorb the economic implications of such measures. If business ambitions in Saudi Arabia already prohibit clear political discourse about human rights abuses with exports to Saudi Arabia amounting to less than one per cent of Germany’s foreign trade, the huge volume of business with China makes dialogue all the more impossible. The Chinese market is already more important than Germany’s domestic market and a ban on trade with China would threaten the very existence of many German companies. The German government is said to be well aware of this reality, choosing the easy way and instead of taking effective action itself demanding that companies take on countries such as China. Yet, especially SMEs have neither the resources nor the assertiveness and, in most cases, no justifiable reason to do so (Die Zeit, 2021).

3.3

Discussion and Critical Appraisal

3.3.1

Governmental Regulation

The challenge for Germany’s government is to ensure that the DDA is both effective and efficient: effective in that it reaches the objective it was introduced for, namely protecting human rights and the environment along global supply chains; and efficient in that it reduces compliance costs for companies directly affected by the law as well as more indirect costs borne by public (Hepburn, n. d., 4). Arguments can be made on both sides of the question of whether regulation and uniform standards are useful. Yet, as the proceeding analysis has shown, both proponents and opponents of Germany’s DDA consider the law in its current form inappropriate to fulfil its purpose.

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Effectiveness Central to being effective, clear specification of the objectives are needed to allow for compliance and enforceability (Hepburn, n. d., 18). However, German businesses have repeatedly expressed concern about objectives being broad and not sufficiently tangible (KAS, 2020; Felbermayr, 2021). The design of Germany’s DDA and respective implications for its implementation will significantly influence compliance levels, which in turn will affect its effectiveness. According to Hepburn, several factors are considered crucial for successful compliance: 1) businesses must be aware of the regulation and understand it; 2) businesses must be willing to comply (whether through economic incentives or enforcement); and 3) businesses must be able to comply (Hepburn, n. d., 18 f.). The analysis has shown that ambiguity remains about the exact due diligence obligations, keeping businesses from fully understanding what is expected of them. When it comes to monitoring and enforcement, there are doubts about the independence of the authority BAFA as well as conflicting interests in the monitoring process. Companies are expected to cooperate in the monitoring of themselves and their suppliers, thus decreasing the likelihood of compliance. Businesses have further raised concern about the feasibility of overseeing indirect suppliers due to missing contractual relationships, making compliance with the law practically impossible (Hepburn, n. d., 19; IHK, 2021). In addition, the DDA’s “Bemühenspflicht” only requires companies to make efforts rather than pressing for fulfilment or mandatory liability in case of the any violations, contesting whether meaningful impact can be achieved (IASS, 2021). Supporters of the DDA have equally questioned its effectiveness due to missing public liability and limited obligations relative to indirect suppliers, arguing that human rights abuses are most precedent at the beginning of the supply chain and would thus not be covered under the law (SCI, 2021). The relative effectiveness of Germany’s DDA is difficult to determine ex ante as similar regulations have not been widely used in the context of global supply chains and lack empirical evidence. Yet, its design and respective compliance implications may significantly hinder its effectiveness. Efficiency Regarding the DDA’s efficiency, again, it is difficult to assess costs (direct and indirect) and benefits of the law ex ante. “The most efficient instrument is that which maximises benefits it creates while minimising the costs it imposes” (Hepburn, n. d., 9). The level of flexibility given to companies in complying with the law can influence efficiency as companies will have an incentive to comply at the lowest possible cost. Compliance costs must further be proportionate to the size of the problem being addressed and not impose unnecessary costs, neither for regulated businesses nor for government itself (Hepburn, n. d., 19). Business associations

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have argued that extensive reporting requirements will be bureaucratic and costly with some measures being largely disproportionate and inefficient, e.g., having no product-related thresholds below which there should be no due diligence if the percentage of a particular raw material in the end-product is marginal (IHK, 2021). With compliance being both difficult und unlikely due to the DDA’s limited practicality, there are direct cost implications for government to enforce and monitor compliance, potentially also leading to inefficiencies. Yet, it should be noted that when governments intervene in the functioning of the market to achieve social and environmental objectives, economic efficiency may not be the decisive measure to go by so long as social targets are achieved. Ethics and fairness Fairness concerns have been raised related to the extend and feasibility of obligations, the process of monitoring and enforcement and the law’s potential impact in exacerbating poverty and inequality (BDI, 2021b; EVW, 2020). Such perceived unfairness of the law may influence acceptance and ultimately affect the level of compliance and the law’s effectiveness (Hepburn, n. d., 20). Human Rights Due Diligence (HRDD) Looking at HRDD-related regulations in particular, most initiatives are based on the belief that transparency will empower market actors to remunerate or punish companies for their human rights performance (Landau, 2019, 10; Weldon, 2015). However, Landau (2019) queries that simply incorporating HRDD in national or international law will by itself lead to improved business performance. Based on several regulatory studies, Landau illustrates four different features of HRDD that render it susceptible to cosmetic forms of compliance including (1) a high level of ambiguity; (2) a proliferation of guidance on what the concept requires of businesses; (3) a lack of any requirement for companies to be transparent about the due diligence process; and (4) a potential for the process (HRDD) to become disembedded from the standard or outcome, namely the responsibility to respect human rights (Landau, 2019, 15). 1. In view of Germany’s DDA, some of its language remains ambiguous and imprecise, leaving considerable scope for corporate discretion and opportunistic behaviour. According to Krawiec (2003), this may lead to an appropriation of the social benefits otherwise created by legal norms and compromises the normative goals of the law. For instance, companies are to actively manage risks if there is “factual indications that make a human rights or environmental violation […] appear possible” (Bundesanzeiger, 2021, 2964, §9(3)). Using the conjunctive in its German formulation, the pressure to act is widely extended and can be interpreted differently

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Analysis

(IHK, 2021). Potential cosmetic forms of compliance owing to such ambiguity are also known as superficial, creative, or paper compliance (Krawiec, 2003). 2. Another feature of HRDD, the proliferation of guidance, is concerned with the volume and diversity of existing guidance as is the case with CSR recommendations put forward by UN, OECD, EU, and national laws on supply chain due diligence. Black, Hopper and Band (2007) argue that guidance produced by various actors in various settings risks impeding rather than improving compliance as inconsistencies and mixed messages may impede the understanding of standards and requirements. The processes for developing the HRDD concept, such as those taking place on a sectoral basis through the OECD, are also limited by the need to maintain broad consensus, which leaves considerable discretion to companies in determining what constitutes adequate human rights due diligence (Landau, 2019, 17). 3. A third risk of due diligence being employed cosmetically arises when companies are not required to be transparent about the due diligence process (Landau, 2019, 17). This lack of transparency and accountability makes it more likely for businesses to engage in the process superficially, especially where HRDD measures are only adopted for reputational reasons to avoid public shaming or sanctions (Vogel, 2010). Given the lack of transparency, stakeholders have a hard time verifying information and regulators may not be able to assess processes that are capable of effecting real change (Landau, 2019, 17; Buhmann, 2018). In the case of Germany’s DDA, businesses are further expected to support the authority (BAFA) in providing information about themselves and their suppliers, increasing the potential for cosmetic compliance with companies assisting in their own assessment (BDI, 2021b). 4. Another feature of HRDD regulation is the focus on the process rather than outcomes, requiring companies to internalise public policy goals into their systems and processes (Landau, 2019, 18). This poses a challenge for companies as internal systems and processes are by their very nature focused on the company’s own goals, mainly on profit and market share, which may collide with public policy objectives (Black, 2008). With limited regulatory oversight and significant management discretion, commercial objectives are likely to prevail. Rather than focusing on risks that are deemed most severe in the public eye, priority is often given to risks that are easier or cheaper to manage or have the potential to be most reputationally damaging (Landau, 2019, 18; Ruggie, 2011). As Parker (2007) puts it: “To the extent that law focuses on companies’ internal responsibility processes rather than external accountability outcomes, law runs the risk of becoming an insubstantial sham, to the delight of corporate power-mongers who can bend it to their interests. Law might be hollowed out into a focus on process that fails to recognise and protect substantive and procedural rights” (Parker, 2007, 209). Regulating CSR through due diligence

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processes risks leaving lawyers in charge of social and environmental concerns, who may find legal loopholes to circumvent the law and avoid stricter regulations. The mere presence of the above features does not imply that HRDD processes are always employed cosmetically or that there is no potential for meaningful change. The extent to which companies employ (self-)regulatory measures that effect meaningful rather than cosmetic change depends on various factors including a firm’s motivation for adopting measures in the first place as well as the nature and levels of internal and external accountability (Vogel, 2010; Parker, 2007). Nevertheless, these features are to some extent inherent in Germany’s DDA, potentially making it prone to cosmetic compliance and thus ineffective in meeting its objective of protecting human rights and the environment along global supply chains. Comparison to other statutory regulations Comparison to existing statutory regulation in the EU and elsewhere remains difficult as national laws vary in terms of their scope and design. The French Loi de Vigilance is the most far-reaching, requiring companies to monitor human rights and environmental due diligence with sanctions for non-compliance (KAS, 2020, 2). The United Kingdom (UK) Modern Slavery Act and the Dutch Child Labour Due Diligence Act limit their scope to HRDD (Legislation.gov.uk, 2015; MVO Platform, 2019). While the UK Modern Slavery Act only stipulates reporting requirements, companies in France and in the Netherlands are to comply with due diligence obligations in their supply chains. Other due diligence regulations exist at EU level applying to specific sectors and/or types of companies. It is still early days and thus difficult to evaluate national go-it alone initiatives such as the French supply chain law passed in 2017 given that there have been no court rulings to date to assess its implications for the competitiveness of French companies (KAS, 2020, 5). However, according to an assessment by a group of NGOs, the French law showed poor results after being in force for two years. This is partly due to the French government taking little action to enforce compliance and French multinationals not responding well enough to the law (BHRRC, 2019b). Among business responses to the UK Modern Slavery Acts, the California Transparency in Supply Chains Act, and the United States’ (US) Dodd-Frank Act, there is mounting evidence for high level of superficial compliance (Cunha & Bell, 2017; Todres, 2012; Sarfaty, 2014), confirming the existence of ‘tick the box’ approaches with business performance particularly weak on taking action and tracking of responses of HRDD (Gilad, 2010; UN, 2018). The German EVW also alludes to existing supply chain laws not showing any effects and advises that rather than passing a national supply chain law, the Federal Government should convince through better public relations as public pressure appears much more effective in promoting responsible business practice (EVW, 2020).

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Analysis

Normative expectations Irrespective of potential shortcomings in the law, there is wide support of legal regulation among Germans. A representative survey conducted by infratest diamp in 2020 confirmed high expectations among society towards businesses and showed great support of measures put forward in Germany’s DDA. According to the survey, three out of four people (75 percent) in Germany are in support of a national supply chain law. 91 percent of those surveyed said it was the task of politicians to ensure that German companies respect human rights and social standards along their supply chains, indicating a clear mandate for the Federal Government to act (infratest dimap, 2020). While companies are well advised to attend to normative expectations to keep their license to operate, clear communication of what is realistically achievable is needed to manage expectations (Gogoll & Wenke, 2017, 82 f.). Regulators and policy makers may be influenced by public opinion but only because a regulation is popular it does not necessarily mean it is in the best interest of citizens (Hepburn, n. d., 14). Despite widespread approval of the law, there are doubts about its feasibility as most supply chains are complex and highly fragmented, making compliance with human rights and environmental standards along the entire supply chain nearly impossible. The Konrad Adenauer Stiftung (KAS) points out that this is particularly true for SMEs with limited resources for which “a complete monitoring of supply chains through regular on-site inspection or thorough tracing of each individual component hardly seems practical” (KAS, 2020, 5). Berger (2019) argues that lead firms can indeed exert decisive influence on production parameters along their global supply chains as they determine products, quality, and location, and hold a control and coordination function through contractual relationships. They can have direct control of subsidiaries and equally through foreign direct investment (FDI), thus also determining production parameters for legally independent suppliers. There are different forms of governance such as for 1) dependent value chains (control by determining product parameters); 2) modular value chains (suppliers produce standardised products according to buyer’s specifications); and 3) relationship-based value chains (high complexity and interdependence) (Berger, 2019, 12). However, the potential of exerting influence on suppliers along the value chain is not to be mistaken as responsibility for or control of indirect suppliers with the ability to enforce certain standards but rather constitute a broader setting of direction. Germany’s DDA While Germany’s DDA has stimulated vital national and international discourse about corporate co-responsibility, the impression arises that it has symbolic value rather than being practical. The success of the law strongly depends on its concrete

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design and due diligence obligations therein must be proportionate and feasible for companies in daily practice. For statutory regulation to be effective, it will at least have to fulfil the following criteria: › Due diligence and liability obligations must be clearly defined and be appropriate for corporate conditions as businesses need workable frameworks including SME-friendly regulations to avoid any competitive disadvantages. A legal catalogue of criteria must clearly determine what companies precisely must do within the framework of due diligence. Otherwise, there is a risk of withdrawal from countries in which companies have already contributed to higher standards, growth, and prosperity locally (BDI, 2021b). To ensure fair competition and viable implementation, rules should differentiate between corporate size, capacity, and sector. Clearly designed reporting obligations will further improve transparency for consumers and thus strengthen the influence of consumers as an important lever for sustainable growth (KAS, 2020, 5). › To date, it is unclear how Germany’s DDA will relate to the planned European law, bringing along uncertainty as to whether it will become obsolete before taking effect. International coordination and joint legislative measures at EU and UN levels will be crucial to allow for clarity across countries and to prevent competitive disadvantages. Uniform regulation will create a level playing field as a prerequisite for improving human rights and environmental protection globally (KAS, 2020, 6). However, limitations of legal measures in general and its impact on effective human rights and environmental protection should not be overestimated. While companies can contribute through their engagement in developing and emerging countries, the enforcement of human rights remains a sovereign task (BDI, 2021a). While current voluntary CSR efforts are insufficient in protecting human rights and the environment, Germany’s DDA proves, to some extent, unethical, inefficient, and ineffective in meeting its objectives. Recalling economic theory of co-responsibility as laid out in Chapter 2, CSR is very much in the own interest of businesses and also promoted without any legal regulation, driven by social preferences of shareholders and stakeholders. The following sub-chapter discusses existing CSR strategies including Not for profit CSR, For profit CSR, and CSR as regulatory strategy as they turn out in practice. Here, different market drivers such as attitudes of investors, consumers, and employees are examined in terms of their potential to promote CSR as opposed to governmental drivers in the form of legal regulation to ultimately determine the most promising instruments to encourage and enforce responsible business practices.

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3.3.2

3

Analysis

Not for Profit CSR

According to Kitzmueller and Shimshack’s taxonomy (2012), CSR can be assumed whenever shareholders have a social preference for it. Looking at the investment market, a growing number of investors (shareholders) are incorporating sustainability aspects into their investment decisions including environmental, social, and governance (ESG) criteria in addition to the traditional risk-yield relationship (KAS, 2020, 4). A survey with 1.000 respondents worldwide on reasons why investors considered ESG factors when making investments in 2019 found that 62% believed that it was “right to care about the world and society” (Statista, 2021a, 16), confirming altruistic tendencies among shareholders. While explanations for ESG investments are not mutually exclusive and the distinction between motives is difficult, a study by Borghesi Houston and Naranjo (2014) also found altruism as one reason for corporate managers to invest in CSR where investments were not necessarily aligned with shareholder interests but resulted from managers believing in a moral imperative to care for environmental protection, employee welfare, and other humanitarian and community-based investments (Borghesi et al., 2014, 165). These findings are indicative of shareholders possibly having similar attitudes. In 2020, the share of sustainably invested assets among investors globally was 18% with a forecast of 37% for 2025 (Statista, 2021a, 3). This trend towards increasingly sustainable investments show that financial markets are an important partner in the transformation of the economy. Sustainable investing can bring about structural change and create win-win situations whereby social and environmental protection is promoted, while the ever-growing need for investment will enable shareholders to profit from these new developments. For lack of global standards, the World Economic Forum (WEF) and the International Business Council (IBC) partnered with ‘the big four’ accounting firms (EY, Deloitte, KPMG, PwC) in September 2020 to create a reporting framework of 21 ESG standards. More than 80 global corporations agreed to adopt the framework including Mastercard, Salesforce, Unilever, and Dell (Insider, 2021a; WEF, 2021). These standards, also known as “Stakeholder Capitalism Metrics”, are drawn from existing voluntary standards and make it standard procedure for signatories to report on ESG metrics beyond good intentions, recognising corporate responsibility for all stakeholders including employees, customers, the environment, and shareholders. Given the profile of and leadership displayed by partaking companies, many other firms are planning to adopt the recommendations, acknowledging the importance of ESG factors to maintain their licence to operate (WEF, 2021, 5). With greater transparency and accountability on behalf of

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companies, greater rewards can be expected as investors’ appetite for sustainable products grow (Insider, 2021b). With sustainable investments growing inter alia thanks to shareholders’ social preferences driven by altruistic motives, expected higher returns, reduced risks, societal expectations, and client requirements (Statista, 2021a), the question arises whether legal regulation is necessary or whether market-led approaches such as the Stakeholder Capitalism Metrics may prove more efficient and effective in promoting responsible business practices. For many investors, corporate due diligence is already a key part of their risk management and an indicator for the robustness and profitability of an investment. In view of Germany’s DDA, Frank Specht, editor of Handelsblatt on labour market and trade unions (2021), speaks of “a lot of paperwork that no one will read in the end” (Specht, 2021). The value added by Germany’s DDA may be minimal for investors with comparability of data suffering due to a lack of harmonisation across countries (WEF, 2021). According to Specht (2021), companies are already keeping an eye on their suppliers and cannot afford to be accused of human rights violations as investors ascribe great importance to wider ESG criteria. Rather than promoting national solo efforts, investors would like to see a global ESG reporting standard-setting body that develops a comprehensive set of standards to avoid overlapping frameworks that ultimately miss the target of ensuring comparable, reliable information and lead to efficiency losses for investors (WEF, 2021, 6). In addition to Germany’s DDA, the German government adopted a groundbreaking sustainable finance strategy in May 2021 to mobilise investments for climate action and sustainability also including new reporting obligations for companies (Federal Ministry of Finance, 2021). Such regulatory efforts for sustainable finance underline that ESG criteria will become increasingly important for access to finance in the future. Statutory regulation and standardised reporting could serve as ‘unambiguous signal’ for companies to prove compliance with ESG criteria and build trust among stakeholders and shareholders, increase company attractiveness, and expand financing options (KAS, 2020, 4)—that is, if the law is indeed effective. Smith (2003) argues that if firms assume CSR and internalise externalities by themselves, a more efficient allocation of resources may be achieved than would often be the case under government regulation. This is due to firms having access to private information e.g., about present and future pollution activities, allowing them to identify better policies than less well-informed government agencies. Besides, firms possess relevant expertise and operational capacity, while government policies are driven by a variety of objectives, only one of which may be maximising social welfare and thus potentially leading to inefficient and/or ineffective regulation (Smith, 2003). Recent findings at EU level

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Analysis

indicate that the adoption of EU sustainable finance regulation had limited effects so far and may paradoxically promote further financialisation (Bracking, 2019).

3.3.3

Strategic / for Profit CSR

According to Kitzmueller and Shimshack’s taxonomy (2012), CSR is equally driven by social preferences of stakeholders who call upon companies to act responsibly and reward them for CSR efforts. Below, social preferences among consumers and employees are discussed exemplary for different stakeholder groups and market drivers for CSR. Consumer market On the face of it, there has never been a better time for companies to offer socially and environmentally responsible products and services as consumers are increasingly expressing concerns about the ethicality of their consumption. In 2019, the Harvard Business Review (HBR) noted that especially Millennials (born between 1978 and 1998) express a strong preference for brands that embrace purpose and sustainability (HBR, 2019). For about one third of German consumers, sustainability plays a major role in their purchasing decisions. When being asked what criteria was most important when buying food, 35% of Germans referred to “personal ethics and beliefs” (persönliche Ethik und Überzeugungen) including animal welfare and environmental issues, compared to a European average of 19% (Statista, 2019, 10 f.). About half of all consumers in Germany also pay attention to labels while shopping with organic labels receiving the most attention in 2018 (Statista, 2019, 12). Paradoxically, few consumers who lean toward ethical consumerism actually follow through with their purchase. In a survey in 2019, HBR found that of 65% who said they wanted to buy purpose-driven brands that advocate sustainability, only about 26% of respondents actually did (HBR, 2019). In Germany, a representative survey conducted by Spelndid Reasarch with 1,490 consumers between the ages of 15 and 69 measured attitudes, purchasing behaviour and willingness to consume sustainable fashion. Findings showed that sustainability in clothing was considered important by most consumers (79%) but less than one tenth of respondents owned several sustainably produced garments (UmweltDialog, 2021). The deviation of purchasing behaviour from consumers’ intention to engage in ethical buying can be explained by the so-called ‘intention-behaviour gap’ (e.g., Auger & Devinney, 2007; Carrington, Neville & Whitwell, 2010). Enste & Altenhöner (2021) further studied the discrepancy between intentions and behaviour based on insights from social psychology, behavioural economics, and management.

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Using the model of behavioural formation, they found that the intention-behaviour gap occurs whenever the short-sighted, intuitive human system (see Kahneman, 2011) dominates cognitive processing due to cognitive strain, ego depletion, decision fatigue or choice overload. In such cases, the intuitive system regresses to biases such as the status quo bias, the availability heuristic, and social norms as possible explanations for the failure to implement intentions (Enste & Altenhöner, 2021, 5). In the context of ethical consumerism, the failure to translate good intention into ethical purchasing decisions can in part be explained by choice overload and respective decision fatigue. In today’s information-rich world, people face a great many choices on a daily basis. Psychological evidence indicates that decision fatigue exhausts self-regulatory resources that drive the reflective system (Vohs, Baumeister, Twenge, Schmeichel, Tice & Crocker, 2005). As the reflective system is responsible for making good and deliberate choices (here: buy ethical products), a depletion of self-regulatory resources may reduce consumer consideration and lead to consumers not following through on their good intentions. Other research confirms that decision quality declines after extensive prior decision-making (Hirshleifer, Levi, Lourie, & Teoh, 2019). Cognitive strain may be another explanation for lack of ethical consumption (rational choice) as humans’ cognition is inherently bounded both in terms of knowledge and computational capacity (Simon, 1990). The sheer quantity of products and available information is impossible to process, and decisions are aggravated by the fact that transparency and quality of information are not a given. The International Food Information Council Foundation’s (IFIC) 2017 Food and Health Survey found that consumers are overwhelmed by an overload of and/or conflicting information about nutrition, making people sceptical about their choices (Food Business News, 2017). As a consequence of such overload, Reutskaja et al. (2020) demonstrate that having too much information or too many choices can lead to negative affective states connected with both the decision process and the choice outcome, e.g., not following through on buying ethical products or not being sure of the ethicality of the purchase (Reutskaja, Iyengar, Fasolo & Misuraca, 2020). A survey by Statista confirms that while 76,4% of Germans in 2018 decided against fair trade products for cost reasons, 64,9% perceived seals and labels too complicated, and 72,8% wanted to stay with their regular brands, confirming a status quo bias (Statista, 2019, 30; Enste & Altenhöner, 2021, 5). The intention-behaviour gap poses a challenge to companies as for them to engage in CSR activities, consumers need to match their expectations of sustainable offerings with actual willingness to pay higher prices to ensure firms’ financial sustainability. Prof Tim Jackson, author of Prosperity Without Growth, argues that choice in itself is not a bad thing. Rather, a different kind of choice is needed, one that facilitates ethical decision-making. Oftentimes information about the external

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Analysis

impact of products is not displayed, leading to purchasing decisions based on very little or no understanding of a product’s impact on people or the planet, thus undermining the ability of consumers to make informed decisions. Matthew Taylor, Chief Executive at the Royal Society of Arts (RSA) in London, speaks of cognitive frailties in the way that consumers exercise choice as well as frailties that come from the structures of power, which determine the context of choice. He argues that businesses shape rather than merely reflect consumer choices and companies must be held to account if the choices they shape are bad ones. To positively influence consumer choices, companies can empower consumers to make better decisions through both transparency and choice editing, where retailers remove unethical products from their shelves entirely. However, it is difficult to determine the boundaries of whether a product is harmful (The Guardian, 2011). Labour market As another driver for CSR, employees are increasingly demanding employers to engage in CSR. Given today’s ever more competitive labour market, CSR matters in attracting and keeping top talent as a source of competitive advantage in the future, especially if a firm’s reputation and image is valuable, rare, and not easily imitated (Greening & Turban, 2000; Zhang, Morse & Kambhampati, 2017). The 2016 Cone Communications Millennial Employee Engagement Study found that 64% of Millennials consider a company’s social and environmental commitments when deciding where to work and will not take a job if a company does not have strong CSR values. The study also found that 83% of respondents are more loyal to a company that helps them contribute to social and environmental issues (CONE, 2016). In light of these figures, a company’s CSR policy considering employees’ social preferences may add a competitive advantage by attracting and retaining a quality workforce (Greening & Turban, 2000). Furthermore, morally motivated individuals are found to behave more cooperatively than predicted by standard theory. If a business can attract personnel that are highly motivated by ethical concerns, moral hazard problems such as shirking (the avoidance or neglect of responsibility) can be reduced. Companies may thus use their CSR profile as a screening device to attract more productive workers (Nyborg & Brekke, 2004).

3.3.4

CSR as Regulatory Strategy

Regardless of stakeholders’ and shareholders’ preferences, firms may also choose to engage in CSR following a regulatory strategy to improve their position in current or future regulatory negotiations by either deflecting or influencing

3.3 Discussion and Critical Appraisal

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future regulation or avoiding enforcement of existing regulation (Reinhardt et al., 2008). For example, a study of self-regulation and codes of conduct in the media industry to regulate access to harmful content in the EU concluded that “selfregulatory schemes have generally been designed in response to regulatory crisis in which legislative control could only be avoided by instituting an effective selfregulatory scheme” (Hepburn, n. d., 40; PCMLP, 2004). Self-regulatory schemes with the implicit objective of acting before governments introduce other, more restrictive regulations represent a capture of the regulatory process. Here, the industry directly influences the regulatory framework to protect its interests or lessen potential adverse consequences (Hepburn, n. d., 40). Another study by Innes & Sam (2008) examined explanations for firms’ participation in a voluntary pollution reduction (VPR) programme initiated by government regulators. Findings were in support of an enforcement theory predicting that VPR participation is rewarded by relaxed regulatory scrutiny and that the anticipation of relaxed scrutiny spurred firms to participate in the programme (Innes & Sam, 2008). Over-compliance in social and environmental aspects can also be used to spur future regulation and achieve a competitive advantage over less adaptable firms (Reinhardt et al., 2008). In the context of Germany’s DDA, 42 German businesses issued a joint statement at the end of 2019 calling on the national government to introduce mandatory human rights and environmental due diligence. Among the signatories were companies such as Hapag-Lloyd, Nestlé, Ritter Sport, Tchibo and Vaude (BHRRC, 2019a). Besides promoting a value-based vision of themselves, these companies also recognise the economic benefits of such a law and no longer want to accept other players gaining competitive advantages by disregarding human rights (Schwab, 2021). Axel Schroeder, Sustainability Manager of Germany’s coffee chain Tchibo, told Global Insight that respecting human rights and environmental protection still represents a financial competitive disadvantage. Hence, signatories were calling for uniform standards for all market participants to hold companies accountable for making profits at the expense of people and the planet to ensure a level playing field (International Bar Association, 2020). Concluding remarks Given continuous voluntary, or rather self-initiated, CSR efforts driven by stakeholders’ and stakeholders’ social preferences as well as firms’ regulatory considerations, one might argue that the market on its own is promoting responsible business practices and that state regulation is thus not required. However, the analysis has also shown that market drivers are not always as impactful as one might hope and social preferences do not automatically translate into ambitious CSR efforts. For instance,

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although many consumers are well-intentioned, they do not always ‘walk their talk’ and cannot be counted on to promote CSR outcomes due to uncertain associations between their behaviour and values, perceptions, and attitudes (Haigh & Jones, 2006; Zhang, Morse, Kambhampati, 2017). If stakeholders communicate CSR preferences but do not reward them, or if companies fail to fulfil their responsibility in protecting people and the planet for other reasons, legal due diligence regulation may prove useful to incentivise social and environmental performance, increase transparency and enable consumers and employees to make informed decisions—that is, if legal regulation (the DDA) is indeed practical and effective in meeting its objectives rather than resulting in cosmetical compliance. It should be noted that, while uniform standards promise more transparency and accountability, existing regulations show significant flaws and even governmentrun certification label such as the “Green Button”, a flagship seal for sustainable textiles, do not yet cover all production steps. Two NGOs, Femnet and Public Eye, evaluated public reports of 31 companies that participated in the Green Button initiative from the very start. Many reports were considered inadequate, and the general standard and inspection process of the seal showed deficiencies (Femnet & Public Eye, 2021). There is “a danger that a state seal will enable greenwashing”, says Gisela Burckhardt, chair of Femnet’s board of directors (Süddeutsche Zeitung, 2021). This example shows that even well-intended initiatives and standards are not easily translated into practice and may result in inefficiencies and/or cosmetic compliance that ultimately fail to protect people and the planet. Overall, the analysis has shown that both governmental drivers in the form of legal regulation as well as market drivers (e.g., preferences of investors, consumers, or employees) bring about numerous opportunities and challenges for the promotion of CSR. It follows that there is no single actor or driver capable of ensuring human rights and environmental protection along global supply chains but rather a need for sharing responsibility and combining measures for complementarity.

4

Alternative Approaches for more Co-responsibility

Given the various challenges with both governmental and market drivers in promoting CSR, the following chapter presents alternative, or rather additional approaches to ensure that the behaviour of businesses is consistent with social and environmental objectives globally. It should be noted, however, that no single measure comes without its own challenges and a combination of firm-level efforts, long-standing supply-chain relationships and government efforts should be encouraged for complementarity.

4.1

Continuation of Existing Multi-stakeholder Initiatives (MSI)

As shown in the analysis, the level of compliance and effectiveness of regulations is influenced by the motivation of businesses in conforming with standards as well as the practicality of obligations. Therefore, existing voluntary business alliances and MSIs need to be continued to facilitate consensus building through collective identification of challenges, recognition of shared goals and interests, and creation of hands-on solutions and best practices (KAS, 2020, 6). With sufficient time, resources and preparation, multi-stakeholder dialogues can be an effective tool for bringing diverse constituencies together to enhance levels of trust, unite around complex, multifaceted and in some cases divisive issues, and improve the quality of decision-making for long-term efficiency (Ashraf et al., 2015; Dodds & Benson, n. d.). In doing so, standards are made inclusive and equal levels of ownership over the process can be ensured for intrinsic motivation and reduction of excessive costs and bureaucracy (KAS, 2020). Searcy (2017) outlines four different roles that MSIs can play in sustainable supply chains: (1) providing learning platforms; (2) developing standards; (3) developing enforcement mechanisms; © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2022 L. C. S. Maurice, Corporate Social Responsibility, BestMasters, https://doi.org/10.1007/978-3-658-39113-3_4

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and (4) issuing labels and certifications. Searcy argues that MSIs may address one or various of these roles and must involve stakeholders from both within and beyond the supply chain to ensure legitimacy (Searcy, 2017, 1). Legitimacy is a prerequisite for MSIs to work trustfully in society including both input and output legitimacy (Mena & Palazzo, 2012). The former depends on the extent to which an MSI is perceived as a credible system, requiring needs inclusion, procedural fairness, consensual orientation, and transparency. The latter is determined by the extent to which an MSI effectively solves the social or environmental problems it targets, offering collective solutions and ensuring rule coverage, efficacy, and enforcement (Mena & Palazzo, 2012; Tanimoto, 2019). While MSIs have the potential to improve social and environmental sustainability of global supply chains, they do not automatically ensure good performance. Soundararajan, Brown & Wicks (2019) argue that MSIs may fail to comprehensively address the needs and interests of various supply chain participants given the imbalance of power among stakeholders operating in highly competitive markets. Though said to be voluntary in nature, some MSIs have taken coercive approaches, leading to systemic problems of decoupling and hostility among members. Where deliberation is limited amongst participants, collaborative approaches have often failed to materialise (Soundararajan et al., 2019, 385). For MSIs to be effective, legitimacy must be ensured through independent monitoring and evaluation systems as well as organisational efforts to incorporate CSR into managerial processes (Tanimoto, 2019). One prominent MSI example is the International Organisation for Standardisation (ISO), an independent NGO with a membership of 165 national standards bodies. ISO brings together experts to share knowledge and develop voluntary, consensus-based, market relevant standards that support innovation and provide solutions to global challenges. Standards such as ISO 26000, a Guidance Document on Social Responsibility, are developed through a multi-stakeholder process including experts from the relevant industry, consumer associations, academia, NGOs, and governments (ISO, n. d.). After the collapse of the Rana Plaza factory in Bangladesh in 2013, two prominent multi-stakeholder agreements (Accord and Alliance) equally brought together lead buyers, trade unions and NGOs in an effort to improve health and safety conditions in the textile industry, moving away from buyer-driven compliance towards a cooperation-based model. Research by Kabeer, Haq and Sulaiman (2019) found that these agreements indeed contributed to improve health and safety conditions. Yet, MSIs do have their own challenges and legal obligations must be reviewed where voluntary initiatives fail to ensure human rights and environmental protection (KAS, 2020, 6).

4.2 Advancing International Solutions and Global Standards

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Advancing International Solutions and Global Standards

Given that human rights and environmental protection are global issues, consistent international solutions are needed to ensure sustainable and comprehensive improvement of standards. In the absence of a global state, national regulatory frameworks need to be expanded and adapted to cross-border activities of market actors in order to ensure compliance with standards in global supply chains (KAS, 2020). While global standards can be understood as global public goods, Wieland (2012) argues that not only governmental organisations can provide global public goods, but they may equally be created by private organisations or through cooperation among public and private actors (Wieland, 2012, 241). International institutions (e.g., multilateral organisations or investment and trade agreements) may help to develop and monitor framework conditions (KAS, 2020, 3). Here, co-responsibility of business takes effect in the form of regulatory responsibility (Enste, 2015). Uniform regulation will create a level playing field to prevent distortions of competition in the European market and reduce complexity of hybrid regulatory mechanisms (BDI, 2021a). The Global Reporting Initiative (GRI) is one of the most comprehensive and popular global non-financial reporting standards working with businesses, investors, policymakers, civil society, labour organisations and other experts to develop global sustainability reporting standards and promote their use by organisations around the world (GRI, n. d.). Reporting systems must meet the criteria of credibility, completeness, documentation of weaknesses and errors, and verifiability in order to enable organisations and their stakeholders to act and make better decisions that create economic, environmental, and social benefits for everyone (GRI, n. d.; Misiulaityte, 2020). While setting ambitious and desirable targets, it is questionable whether companies have an interest in communicating weaknesses and errors, especially to external stakeholders (Gogoll & Wenke, 2017, 114). The level of detail of GRI standards further complicates the assessment of an organisation’s key impacts and companies may implement the framework incrementally with the potential of omitting many of the core indicators. A study by Quilice et al. on positive and negative aspects of GRI reporting perceived by Brazilian organisations found that they considered the guidelines complex, ambiguous, and too flexible, undermining both the standardisation and the ability to compare reports (Quilice et al., 2018). In view of global supply chains, the GRI framework is primarily intended to help companies complete audits on their own operations rather than assuming extended responsibility throughout the supply

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chain. Although the GRI recommends that companies work closely with stakeholders to determine appropriate reporting boundaries for their company’s broader footprint, there is less focus on noncompany operations. Given that many social and environmental violations occur in the extended supply chain, the impact of GRI reporting on the environment and human rights in developing countries may be limited. GRI also remains short of the economy of scale necessary to gain universal support. There is no official certification of GRI, and the voluntary nature of the code allows companies to use reporting as an opportunity for public relations rather than a serious effort at measuring and improving performance (Neef, 2004). While global standards and international solutions are needed to ensure fair competition, transparency and comparability of information, accountability, and comprehensive enforcement of standards globally, problems persist in terms of the design, practicality, and effectiveness of such standards. Cultural and organisational differences across sectors and countries may further complicate consensus, acceptance, and implementation (UKEssays, 2018).

4.3

Self-regulation

Self-regulation involves a group of economic agents, such as companies in a particular industry, “voluntarily developing rules or codes of conduct that regulate or guide the behaviour and actions of members. The group is responsible for developing self-regulatory instruments, monitoring compliance and ensuring enforcement” (Hepburn, n. d., 6). In order to certify compliance with a particular standard, certification processes may be introduced either within the industry or through an independent body (Hepburn, n. d., 38). In doing so, information asymmetry in the market can be reduced (ITIF, 2011). Inefficient and ineffective regulation as illustrated in the context of Germany’s DDA risks raising production costs for businesses without achieving public objectives. Compared to traditional regulation, self-regulation may achieve policy objectives at lower costs and more effectively as it allows for greater flexibility and adaptability, and lower compliance and administrative costs (Hepburn, n. d., 34). Decision making and control is brought closer to the sector to directly address industry-specific and consumer issues. According to the Information Technology & Innovation Foundation (ITIF), self-regulation may also help businesses internalise responsible behaviour and principles given that rules are based on social norms and peer behaviour rather than prescribed from topdown. This can instil deeper respect and acceptance of the rules, lead to better

4.3 Self-regulation

49

firm behaviour, and avoid adverse situations where companies attempt to find exceptions and loopholes to externally imposed rules. In terms of enforcement, businesses provide a high degree of oversight as they closely monitor activities of their competitors and have an incentive to report any violations. Such bottom-up approach further allows companies to materialise on a higher level of technical and industry expertise than an external regulator and helps prevent lawyers from making unpractical rules for the industry (ITIF, 2011, 6). Finally, self-regulation can avoid conflicts with jurisdiction and legal restrictions. The imposition of regulations by governments on multi-national corporations (MNCs) may raise issues of sovereignty. Self-regulation avoids the issue of sovereignty while still promoting standards across borders (Bernsetein & Cashore, 2007, 352). In order to assess how well self-regulatory instruments address specific policy objectives, it is important to ask for the incentives affecting industry behaviour. If the interests of the industry and the community at large are aligned, there is a greater chance that industry initiated self-regulation will be effective (Hepburn, n. d., 40 ff.). Despite the potential benefits of self-regulation, there are both legal and economic limitations including the traditional free-rider problem (Hemphill, 1992). To be effective, self-regulation may set rules for the entire industry including firms that do not participate. These outsiders benefit from the regulatory regime without paying for the costs, which is unfair to contributing firms. For certain industries, self-regulation is therefore insufficient without additional government oversight. Critics further argue that self-regulation mainly serves to protect the interests of individual companies or the industry, especially if the interests of an industry and society are not aligned. Independent third parties may help monitor and enforce rules and government actors can exert pressures by threating with more restrictive and costly regulation in case of non-compliance. Self-regulation may also lead to imperfect outcomes with neither explicit or implicit government endorsement leading to regulatory uncertainty and causing businesses to delay investment decisions and stifle innovation (ITIF, 2011, 9). As criticism of Germany’s DDA has made clear, many businesses perceive the law to be an imposition of exaggerated and unpractical obligations not reflecting market realities and thus limiting companies’ motivation to comply with the law. Here, self-regulation based on a more participatory process may have proven useful to make standards more inclusive for business to internalise responsible behaviour and third-party oversight ensuring compliance. Whichever type of regulation, be it government and self-regulation, measures must be designed in a way that ensures ownership and is ‘fit for purpose’ to effectively meet public policy objectives.

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Alternative Approaches for more Co-responsibility

Sustainability Ratings and Rankings

Additional market drivers for CSR are sustainability ratings and rankings regularly published by independent institutes and specialised consultancies. While sustainability rankings may have different objectives such as informing the public or advising investment decisions, many rankings aim to improve corporate sustainability (Muli, 2013). Such ratings assess CSR performance based on available information. Prior to the assessment, rating criteria are defined, which then determine a company’s classification (AAA, AA, AAB, etc). Rankings assess and compare a company’s performance in relation to other market actors. It is possible that a company ranks high (relative performance) but may nevertheless perform poorly in the rating because the industry performs poorly overall (Gogoll & Wenke, 2017, 216 f.). Muli (2013) found that well established rankings have a greater impact on companies than newer rankings, ones that focus on a specific topic or are based in only one region. Rankings can impact companies’ CSR by stimulation discussion among employees, encouraging companies to evaluate their strategy for communicating sustainability, and providing a platform for sustainability experts to share success stories (Muli, 2013). EcoVadis is one such sustainability ratings provider offering “The World’s Most Trusted Business Sustainability Ratings” with a global network of more than 75,000 rated companies, covering over 160 countries and more than 200 industries (EcoVadis, n. d.). EcoVadis helps companies to manage their networks both upstream and downstream, either by sharing their performance with respective stakeholders or monitoring performance of upstream value chains. EcoVadis’ references include players such as Nestlé, Johnson & Johnson, Heineken, Coca-Cola, L’Oréal, Bayer, or Merck (EcoVadis, n. d.). Other rankings include KnowTheChain Benchmarks and Corporate Human Rights Benchmarks, seeking to tap into the competitive nature of the market as a powerful driver for change in confronting adverse impacts on workers, communities, and consumers (Know The Chain, n. d.; World Benchmarking Alliance, n. d.). While CSR ratings and rankings may incentivise CSR efforts, respective certification (e.g., EcoVadis medals) may equally function as a barrier for market access. Similar to discussions about legal regulation, those SMEs that are already struggling under excessive German and EU bureaucracy may find additional certifications burdensome and too expensive, though said to be voluntary. In addition, given the complexity of CSR within and across different industries, comparability of reports may be limited by the heterogeneity of sustainability reports, which reduces their value and usability for benchmarking (Langer, 2006).

4.5 Corporate Commitment, Culture, and Governance

4.5

51

Corporate Commitment, Culture, and Governance

As per CSR definition set out in Chapter 2, companies are to ensure that corporate policies and procedures are in line with commonly accepted ethical standards and respect stakeholders’ rights in day-to-day business as an integrated part of governance structures (EC, 2001, 17). While human rights and environmental standards are mostly driven by external pressures (e.g., government regulation, stakeholder preferences), internal corporate values must equally match these objectives to ensure successful implementation. Here, corporate commitment is needed to incorporated CSR into organisational processes in a meaningful way. Both a lack of moral behaviour (e.g., taking advantage of a customer or supplier) and moral behaviour (adhering to contracts even though better alternatives are available) have economic consequences. At the operational level, businesses must establish corporate structures and cultures to encourage ethical behaviour including corporate codes of conduct and value management measures. This is intended to relieve individuals from having to bear responsibility at the individual level (Gogoll & Wenke, 2017, 84 f.). Behavioural economics has shown that people often act irresponsibly not necessarily because they intend to act immorally but rather due to thoughtlessness or situational factors, e.g., being in a hurry (Enste, 2015, 23). Appropriate default settings can be used to automate responsible behaviour of managers and employees, meaning that they act morally unless consciously deciding otherwise (cf. Enste & Hüther, 2011, 46 ff. for examples of default settings). Companies are advised to introduce rules leading to such automatisms, e.g., signing up all managers to take part in a training on “coresponsible corporate governance” only having participants choose a date for the training rather than letting them decide whether to participate in the first place. In doing so, the default is set differently than if registration had to be done independently. Heuristics (mental shortcuts) work in a similar way and do not always ensure moral behaviour (see Kahneman, 2011). Businesses can provide rules of thumb that facilitate decisions at work, preventing misbehaviour and saving cognitive resources as employees can simply follow the rule(s). Establishing an effective link between ethical conduct and reward may help employees to align behaviour with business objectives, e.g., compensating top-level management for acting on behalf of stakeholders and adhering to standards (Enste, 2015, 24). Besides internal measures, external relationships including with suppliers, competitors, NGOs, investors, the state, and society are equally important to ensure ethical business behaviour (Gogoll & Wenke, 2017, 84 f.). Stakeholder engagement is strongly focused on social innovation leading to the integration of social and environmental concerns into management processes (Tanimoto, 2019;

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Alternative Approaches for more Co-responsibility

Spitzeck & Hansen, 2010). By continuously engaging stakeholders and taking account of their justified needs and interest, companies can learn about social or environmental concerns along their supply chains, which will allow for early consideration and risk mitigation, and ultimately secure their licence to operate in the long-term. Forms of stakeholder engagement as followed by Adidas, for example, may include formal stakeholder consultation meetings, meetings with investors and Socially Responsible Investment (SRI) analysist, employee engagement through surveys, internal information, and grievance channels, responding to enquiries from consumers and the media, and collaborating with other brands in joint initiatives (Adidas, 2016).

4.6

Governmental Support to Developing Countries / Shared Responsibility

According to international human rights law, the enforcement of human rights is a sovereign task (UN, n. d.). While German and European companies can make an important contribution through their engagement in developing and emerging markets, national governments are ultimately responsible for enforcing human rights in their states (BDI, 2021a). Yet, human rights problems are understood to be endemic to the organisation of global supply chains with many labour violations being rooted in upstream business practices of global retailers. Locke (2013) notes that successive efforts to enforce labour standards in developing countries have continuously put the main burden of proposed changes almost entirely on stakeholders in the Global South. Yet, it often proves difficult to place the responsibility for complying with labour standards on developing country governments, which are sometimes unwilling or unable to meet this responsibility. While global buyers are equally pressured to adhere to new standards and adopt corporate codes of conduct, the ultimate responsibility and costs of conducting audits and complying with respective codes rests largely with supplying producers (Kabeer, Haq & Sulaiman, 2019, 29). Against this backdrop, Locke (2013) speaks of the need for new institutional arrangements and policy coalitions to redistribute costs and rewards between all actors along the value chain, thus overcoming the conventional boundaries between producers and consumers, buyers and suppliers, NGOs and corporations, and developed and developing countries. This proposal represents a shift from a ‘spotlight’ perspective on the system (focussing on problematic conditions of production) to a ‘floodlit’ one, which looks at the broader political economy

4.7 Supportive Business Structures

53

of supply chain capitalism as the cause for environmental and human rights violations (Kabeer et al., 2019, 28; Locke, 2013). Along these lines, the NYU Stern Centre for Business and Human Rights (CBHR) in Bangladesh came up with a ‘shared responsibility model’ calling for an international task force to raise money and address remaining health and safety conditions in the ready-made garment (RMG) industry (Stern CBHR, n. d.). The commitment of Western buyers and governments is based on appeals to their sense of fairness and their ‘special obligations’. Yet, the commitment to economic justice for workers in global value chains expressed by Western actors is said to require a stronger and more institutionalised model of shared responsibility based on an equitable distribution of rights and responsibilities within the value chain rather than on special obligations. Concerns expressed by the US and the EU about workers’ rights in countries they import from carries equal obligations on their part. One suggestion put forward includes the redistribution of some of the revenue collected from low-income producing economies back to these countries to provide resources for decent working conditions and to promote mechanisms that hold the industry accountable (Kabeer et al., 2019, 30; Locke, 2013). Perhaps less controversial, support may be provided by the International Labour Organisation (ILO) as well as through bilateral and multilateral development policy instruments for capacity building in developing countries, not only to build a conducive business environment for national and international investors, but also promoting strong institutions (governments, associations, NGOs) that design, enforce, and monitor regulatory measures. Such efforts could also be supported by multilateral and regional development organisations such as World Bank (WB) and the United Nations’ Conference on Trade and Development (UNCTAD), which can build upon specific country knowledge (Berger, 2019; KAS, 2020). Berger (2019) further stresses the need for cooperation beyond policy silos and stronger inter-ministerial cooperation at national and international level to allow for an integrated understanding of policy that strengthens interdependencies between the three dimensions of sustainability and varying national and global problem contexts (Berger, 2019, 27).

4.7

Supportive Business Structures

Given that standards can often be a barrier to entry, especially for SMEs not being able to absorb additional costs for compliance, supportive business structures are needed to provide technical and financial assistance for successful implementation of due diligence obligations. Two such examples are illustrated below.

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Responsible Business Hubs. The newly established Initiative for Global Solidarity (IGS) funded by the German Development Cooperation (GIZ) supports the implementation of corporate due diligence to make global supply chains and networks fairer, more sustainable, and more resilient. IGS aims to promote cooperation between existing initiatives and supports approaches of shared responsibility between purchasing and producing companies. At country level, support structures for manufacturing companies are created through so-called Responsible Business Hubs that, among other things, strengthen grievance mechanisms in producing countries. The initiative will start with activities in the textile and clothing industry and will successively include other sectors. Initial partner countries are Bangladesh, Cambodia, and Vietnam. IGS also works closely with other projects in the field of sustainable and fair supply networks, standards, and sustainable consumption to leverage synergies (GIZ, 2021). The Business and Human Rights Helpdesk was established by the Federal Government and is anchored in the Agency for Business & Development (AWE). Experts in the field of development cooperation and environmental and social management are available to companies for individual consultations. The free advisory service supports private companies in complying with due diligence requirements and human rights along their supply chains (Agentur für Wirtschaft und Entwicklung, n. d.). There are additional online tools available free of charge such as the SME Compass and the CSR Risk Check. These tools help companies to fulfil their due diligence by helping them understand potential risks (e.g., local human rights situation or environmental, social and governance issues) and take respective action (DEG Invest, 2021).

4.8

Negative List Approach

Another approach, as contained in the General Agreement on Tariffs and Trade (GATT) treaty of the WTO, is the so-called negative list approach. In this type of agreement, countries explicitly list (unethical) products or services for which they will maintain trade restrictions. If a product is not on the list, there is no restriction and the product can be traded freely (DisCo, 2021). Felbermayr, President of ifw Kiel, argues in favour of directly punishing misconduct by foreign companies with appropriate sanctions. A negative list approach would prohibit companies that have engaged in misconduct from participating in German (or better European) value chains. Following a cascade approach, due diligence obligations may be limited to direct suppliers that can be controlled through contractual relationships (Felbermayr, 2021).

4.9 Sunset Regulation

4.9

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Sunset Regulation

A sunset clause is a temporary legal instrument that specifies the expiry of rules and regulations after a certain period of time unless there is substantial evidence that they should be renewed for another specified period (Licata, 1977). Given that Germany’s DDA has already been passed despite concerns about its effectiveness, the introduction of a sunset clause may prove useful to ensure that measures are indeed meaningful and meet the DDA’s objectives. Termination or renewal should be decided after a comprehensive ex-post evaluation. The extension of a sunset clause requires a reversal of the burden of proof, i.e. proponents must demonstrate why the sunset clause should be extended (Eijlander & van Gestel, 2006). Sunset provisions can be used to guarantee renewed legislative oversight, update laws to reflect the current state of society, which would otherwise become obsolete, or terminate laws that are no longer necessary or effective (Ranchordás, 2015, 31 f.). In Germany and in the Netherlands, sunset clauses have been included to tackle excessive bureaucracy, to reduce regulatory burdens placed on private actors, and to put an end to unnecessary policies (Ranchordás, 2015, 32; Steinhaus, 2008). The introduction of a sunset clause as an avenue of appeal can ensure comprehensive review of regulations after the DDA takes effect and may enhance perceived fairness of the law, which is partly influenced by the level of political accountability (Hepburn, n. d., 20). Providing a chance for timely review, businesses may perceive the law as more just, which in turn may increase levels of acceptance and subsequent compliance with the law. However, an excessive use of sunset clauses may be counter-productive, placing a disproportional review burden on regulators, creating legal uncertainty and a negative impact on the investment climate (Eijlander & van Gestel, 2006; Mandelkern Group on Better Regulation, 2001).

5

Conclusion

5.1

Findings

This paper attempted to clarify the co-responsibility of business along global supply chains to derive measures that promote responsible business practices. Unlike famously argued by Friedman, social responsibility of business today extends far beyond mere profit maximisation, partly due to ever increasing normative expectations, systematically incomplete contracts and regulation, and a general loss of trust in the market economy requiring companies to take a much closer look at the moral risks of their actions. While many definitions still understand CSR to be voluntary additional engagements, CSR is not separated from core business activity but rather concerns operations to be in line with commonly accepted ethical standards as well as respecting stakeholder interests in day-to-day business. CSR can thus never be voluntary but constitutes a fundamental prerequisite for companies to keep their license to operate for sustainable growth and survival in an ever more competitive market. According to economic theory of co-responsibility, CSR materialises if either stakeholders or shareholders have a social preference for it. Indeed, investors, consumers and employees increasingly take an interest in environmental and social issues and can be an important driver for CSR. Yet, current CSR efforts are still deemed insufficient in protecting the environmental and human rights along global value chains, which is why statutory regulation was discussed a potential instrument to promote and enforce responsible business practices where voluntary approaches fail to do so. Germany’s Due Diligence Act served as an example of such regulation and showed significant flaws in its design, ultimately rendering itself inefficient, ineffective, and unethical. Given the numerous challenges of both governmental and market drives in promoting CSR, alternative approaches

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2022 L. C. S. Maurice, Corporate Social Responsibility, BestMasters, https://doi.org/10.1007/978-3-658-39113-3_5

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Conclusion

were discussed including multi-stakeholder initiatives, global standards, and selfregulation. While some of these measures have the potential to be more effective than statutory regulation, each measure has its unique challenges and a combination and continuous review of measures is needed for complementarity and effectiveness.

5.2

Outlook

With more countries adopting legal supply chain regulations, new international expectations for responsible business behaviour are created. Yet, this paper illustrated that co-responsibility of business also has its limits with some expectations being unrealistic and legal regulation not always ensuring public policy objectives. Given that Germany’s DDA has already been passed despite its many shortcomings, it will be crucial to support companies in preparing for its implementation to avoid competitive disadvantages for German market actors as well as to ensure effective protection of the environment and human rights along global supply chains, which is a very legitimate yet challenging objective. With further EU regulation on the horizon, uncertainty remains about how the DDA will relate to the planned European law. International coordination and uniform standards will be crucial to allow for clarity across countries and to create a level playing field as a prerequisite for effectively and sustainably improving human rights and environmental protection globally. However, even with international solutions in mind, there are significant limitations to legal measures in general, and their impact on effective human rights and environmental protection. While companies may contribute through their engagement in developing and emerging economies, the term ‘co-responsibility’ should be emphasised, meaning that companies share responsibility alongside governments and civil society, all playing their part in promoting CSR and no single actor possibly being accountable for such objectives alone, given the complexity and interdependencies of global markets.

5.3

Limitations

While it is commonly accepted that CSR goes beyond mere profit maximisation, CSR still lacks a consistent definition. Different economic traditions and interpretations of CSR make it difficult, if not impossible, to derive clear implications for businesses that are applicable globally. Matters are complicated further as

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value systems vary across companies, industries, and countries, resulting in different and sometimes opposing (sustainability) priorities. Yet, advancing standards at national level and following go-it-alone approaches equally prove difficult as companies operate in global markets and risk being disadvantaged compared to their international competition. Given the complexity and interdependencies of global markets, there is neither one single actor nor one single measure that can ensure the protection of human rights and the environment along global supply chains. The impact of supply chain regulations is particularly difficult to assess due to the topicality of the subject, a lack of comparable legislation and respective evidence. This research has shown, however, that all actors share a responsibility to protect people and the planet and measures continuously need to be reviewed and improved due to existing shortcomings and ever-changing market dynamics.

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