State Ownership and Corporate Social Responsibility Agenda in International Instruments—Coping with Conflicting Regulatory Rationales?

Mikko Rajavuori

【Abstract】 The article discusses state ownership from a corporate social responsibility（CSR）perspective. It suggests that states, acting in corporate owner capacity, are starting to utilize the accomplishments and imbalances of global economic liberalization at an unprecedented scale. This development has, in turn, prompted enhanced regulatory interventions to reduce undue state influence over corporations with the aim of securing a level playing field in global markets. As a corollary, the intersections between state ownership and issues of CSR have also increased. These intersections raise several difficult questions. Should state-owned enterprises（SOEs）pursue more extensive CSR strategies than their private counterparts? Should state share holders arrange their ownership function in accordance with heightened CSR considerations? Could human rights law provide a normative base for such requirements？

In this article, the issue is approached from the perspective of two international soft law instruments commenting on the proliferation of state ownership, the United Nations（UN）Protect, Respect and Remedy Framework（UN Framework）and its Guiding Principles（GPs）and the organization for Economic Co-operation and Development（OECD）Guidelines on Corporate Governance of State-Owned Enterprises（OECD SOE Guidelines）. It is submitted that the

instruments' treatment of CSR reveals entrenched and conflicting notions about the rationales of regulating state ownership function.

The analysis is structured in four sections. Section 2 explains the increased significance of state ownership in the global economy. Section 3 discusses intersections between state ownership function and corporate social responsibility. Section 4 introduces the OECD SOEs and the UN Framework and the GPs, detailing their conflicting regulatory rationales regarding state ownership. Section 5 concludes.

1. The Fall and Rise of State Owner

Over the last century, the rationales for state ownership have varied among countries and industry sectors. At times, strong state ownership positions have been used to curb private enterprises amassing monopolistic market positions, as was the case in post-war Europe. More recently, state ownership policies have greatly influenced Chinese“Go Global” strategies, which have attempted to internationalize Chinese economy. In general, the important motivations behind strong state presence in markets through corporate ownership have included development, industrial and employment policies, the provision of public goods, the existence of natural monopolies and strategic national interests.

The last few decades have, however, witnessed major readjustments and restructurings of SOE sectors. Rooted in globalization, economic liberalization and deregulation, state ownership policies have primarily been characterized by waves of privatization since the late 1970s. States all over the world have sold major blocks of their ownership positions to the private sector. According to some estimates, privatization transactions between the late 1970s and the early 2000s amounted to US$ 1,230 billion globally, or roughly one-fifth of the total value of issues floated on public equity markets during that period. The rationales behind the privatization policies are well documented. In brief, SOEs are considered less efficient than private corporations because of their perceived governance problems:the double role of state as a market participant and a regulator has been seen to lead to idiosyncrasies in setting corporate objectives; the political interventions can lead to severe agency problems; and the presence of a deep-pocketed shareholder can prompt reckless risk-taking among managers. In the international setting, SOEs have been described as potential market irritants jeopardizing competitive markets and a level playing field. Consequently, the rationales skeptical of state ownership have been utilized in a number of regulatory initiatives aiming at reducing and controlling the scale of direct state involvement in corporations since the late 1970s.

However, several recent developments have greatly challenged the prevailing narratives of the demise of state ownership and the proliferation of private enterprise. Most importantly, recent studies suggest the increasing significance of SOEs and the states in corporate ownership roles, especially with regard to ownership in foreign corporations. United Nations Conference on Trade and Development（UNCTAD）statistics, for example, reveal that the number of state-owned multinational corporations（MNCs）has actually increased between 2010 and 2012. Currently, their market value corresponds to 11% of the market capitalization of all listedcompanies worldwide, and their overseas investments account for roughly 11% of global foreign direct investment（FDI）flows. According to some calculations, nearly 20% of the world's top 100 and over 10%of the top 2000 publicly traded MNCs are SOEs.

The surge of SOE sectors is often explained by the activation of emerging economies seeking to acquire technology, intellectual property, brand names and natural resources through ownership stakes in foreign corporations. True enough, SOEs have emerged strongly especially in developing countries. In recent years, the majority of SOEs acquiring foreign assets have emerged from developing countries and the absolute value of their M &As has steadily increased. Further, emerging and transition economies are home to roughly 60% of state-owned multinationals. As often pointed out, Chinese government is the largest shareholder in country's 150 largest corporations, holding up to 80% of the total stock market value. Despite these numbers, the increased significance of state ownership cannot be explained only by strategic interests of emerging economies. Instead, two additional developments have revitalized attention to state ownerships policies and SOE trade effects globally. First, the rise of sovereign wealth funds（SWFs）has continued to accelerate as a number of states have sought to target revenues fromcommodity exports or from foreign-exchange reserves to financial assets. Second, the magnitude of government interventions in addressing the global financial crisis has reopened the debate over state involvement in private enterprises in Western states since 2008. Together, these developments suggest that SOEs have strengthened their positions as important economic actors in the global economy.

2. State Ownership and Corporate Social Responsibility

As discussed in the previous section, the increased significance of state ownership in international markets has taken a variety of forms. After three decades of privatization experiences, the number of SOEs has started to increase and, contrary to many estimates, the global economic footprint of SOEs has grown fast. Alternatively, many states have assumed significant minority shareholder positions in corporations that do not fit in the traditional perception of public policy-oriented and market failure-correcting SOEs. In particular, states often find themselves as minority shareholders in former SOEs or as equity investors in completely new enterprises. Consequently, the active internalization of state ownership has led wholly or partly state-owned entities to assume similar roles with private MNCs in the global economy.

The strengthened state shareholder positions have been registered in several policy and regulatory spheres. In general, the proliferation of state ownership has been met with a plethora of regulatory interventions, mostly in accordance with a traditional Washington Consensus-type of policy set. Accordingly, the increased state activity in shareholder capacity has primarily been met with policy and regulatory interventions designed to control potential market distortions emanating from this relationship.

In Canada, for example, the Investment Canada Regulations have been augmented with guidelines directed specifically towards investment by foreign SOEs. Similarly, the activation of Chinese SOEs' overseas acquisitions has prompted the European Commission's interest in the relationship between Chinese state and its corporate nationals in the light of European merger control. In particular, the Commission has emphasized dissemination of the power of the central and regional holdingcompanies to exercise decisive influence on Chinese SOEs. Finally, in somewhat different context, the 2008-2009 bailouts in the automotive industry sector forced the US policy makers to assess their stance on the potential influence state shareholders were able to exercise over corporations. In the case of General Motors, the governmentcommunicated that“as acommon shareholder, the government will only vote on core governance issues, including the selection of acompany's board of directors and major corporate events or transactions”. In general, the government planned“to be extremely disciplined as to how it intends to use even these limited rights”. In sum, thecommonality between the regulatory approaches has emphasized the importance of countering the negative effects of state influence in corporationscompeting in international markets.

However, the issue of state influence can also be approached from a CSR standpoint. As a corollary to the increased significance of states in shareholder capacities, states increasingly find themselves in situations where corporations in their portfolios are subjected to severe criticism from CSR, sustainability and human rights perspectives. For example, increased SOE activity has been claimed to lead to corporate human rights violations ranging from resource development and land ownership issues to provision of surveillance technology to repressive governments. Due to their ownership structures SOEs are often confronted in more critical tones than their wholly private counterparts. In popular discourse, state ownership is usually portrayed as extension of state power and SOEs as emanations of the state. For this reason, the increased significance of states in shareholder capacities is often coupled with the idea of heightened economic, social and environmental responsibilities. SOEs may be expected to refrain from layoffs in spite of decreased profitability, to cap directors' excessive remuneration or to promote equal hiring opportunities. Against this backdrop it is surprising that SOEs and state ownership have remained conspicuously undertheorized in general CSR discourse.

Recent studies have, however, explored CSR dimensions of state ownership from a variety of angles. Three distinct research patterns can be detected. First, the most common approach has emphasized the shortcomings of SOEs with regard to CSR issues. It has been argued that SOEs' CSR strategies are not always on par with other MNCs' commitments; that SOEs are more likely to invest in countries with poor rule of law; and that often SOEs operate beyond normal regulatory mechanisms, making their potential violations harder to discern，investigate and redress. Second, others have drawn attention to states' enhanced abilities to exercise positive CSR influence over corporations. Some studies have posited that state ownership is usually associated with higher degree of CSR disclosures; that states are particularly well suited for social investor activism due to their long investment horizons; that the responsible investor activities pursued by states ripple throughout national firms, rendering their investments patterns more prone to societal and environmental considerations; and that active state ownership facilitates agreement on businesses' role in development. Third, SOEs are often presented as a special case of corporate human rights obligations in emerging business and human rights literature. In some conceptualizations, state-owned or controlled companies are considered parts of the state making them bearers of human rights obligations under international law like any other governmental entity. While scholarship on the impacts of state ownership on CSR issues is mixed, emerging research patterns are clearly signaling that the relationship is increasingly relevant.

3. Regulating State Ownership Function: Two Tales

This section provides a concise reading of two international instruments commenting on the proliferation of state ownership from a CSR perspective. First, the OECD SOE Guidelines are used to illustrate the prevalent narrative of embedding CSR considerations in state ownership function. Second, an emerging human rights reading of state ownership will be examined in the context of the UN Framework and the GPs. Ultimately, it is posited that the instruments portray conflicting notions on the rationales of regulating state ownership function.

3.1 The OECD Guidelines on Corporate Governance of State-Owned Enterprises

Issued in 2005, the OECD SOE Guidelinescomprise a set of non-binding guidelines and best practices on corporate governance of SOEs. The instrument accompanies the OECD Principles of Corporate Governance from state ownership perspective. Most fundamentally, the OECD SOE Guidelines focus on corporate governance issues that derive from acomplex chain of agents involved in the management and performance of SOEs. Accordingly, the guidelines'main function is to ensure a level playing field between private corporations and those entities where state has significant control, either through full majority or significant minority ownership. While non-binding, the instrument has been adopted and implemented in several jurisdictions. In Finland, for example, state ownership function has been remodeledto a large degree as per the OECD SOE Guidelines' suggestions.

The core idea of the OECD SOE Guidelines is to develop a set of governance practices in order to avoid market distortions emanating from state-corporation-relationship. To this end, the instrument proposes a variety of measures ranging from transparent ownership policies and equitable treatment of shareholders to restructuring of ownership function in order to isolate commercial objectives from political objectives. According to the OECD SOE Guidelines, there should be a clear separation between the state's ownership function and other state functions. Instead of ad-hoc political interventions, state ownership function should be guided by the owner state pursuing active ownership within the general legal framework and the legal structure of each company. Ownership policies are expected to be consistent, explicit and transparent to provide SOEs, the market and the general public with predictability and a clear understanding of the state's objectives in the long term.

As the OECD SOE Guidelines strive to recalibrate SOE governance to follow broadly the example set by general corporate governance and to mitigate market distortions, the instrument does not tackle CSR issues explicitly. Yet it is recognized that SOEs are also employed also in fulfilling essentially special public policy purposes. Further, it has been noted that“state-owned enterprises are often expected to operate at higher standards of corporate social responsibility than their private counterparts”. This expectation is often grounded in the historical position of SOEs as vehicles of social and industrial policy and as providers of public goods. The OECD SOE Guidelines do not deny the practicality or importance of such SOE roles. However, in the instrument's view, any obligations and responsibilities that a SOE is required to undertake in terms of public services beyond the generally accepted norm should be clearly mandated by laws or regulations. As per the instrument's transparency guidelines, the market and the general public should be clearly informed about the nature and extent of these obligations and their impact on the SOEs' resources and economic performance. This is to balance the multiple and contradictory objectives of state ownership“that lead to either a very passiveconduct of ownership functions or conversely results in the state's excessive intervention in matters or decisions which should be left to the company and its governance organs”.

While the OECD SOE Guidelines do not refer explicitly to CSR issues, they have been included in the scope of the instrument in its interpretative practice. The instrument provides for two different options their inclusion. First, all additional“public service”obligations have to be clearly mandated and communicated. Here, CSR issues are understood as public service functions that go beyond what is required from wholly private corporations. Second, the instrument suggests that the boards of SOEs should be required to develop, implement and communicate compliance programs for internal codes of ethics in conformity with state'snational norms and international commitments. The OECD SOE Guidelines also acknowledge that SOEs may play an important role in setting the business tone of the country, making it vital for them to maintain high ethical standards.

Together, the OECD SOE Guidelines' interventions recognize that SOEs' CSR policies have general significance also on the corporate governance level as well. On the one hand, their significance is bound to historical foundations of SOEs as public policy instruments. On the other hand, they are viewed as potential market irritants whose negative effects have to be controlled through transparent ownership policies. In sum, CSR issues are situatedin a more complex framework aiming to secure a level playing field between SOEs and private corporations. While state owners are empowered to use their shareholder positions to integrate CSR considerations in SOE operations, the procedures in facilitating this behavior are limited. States are expected to separate commercial and policy functions, to establish clear and transparent communications and to employ traditional corporate governance mechanisms. In short, the function advancing CSR agenda is embedded in the overall notion of securing competitive markets.

3.2 The UN Protect, Respect and Remedy Framework and the Guiding Principles

Unlike the OECD SOE Guidelines, the UN Framework and the GPs approach SOEs and state ownership from a clear human rights perspective. Since their unanimous endorsement on 16 June 2011 by the UN Human Rights Council, the GPs, draftedby John Ruggie, the Special Representative of the Secretary-General（SRSG）, have been heralded as one of the most important attempts to sketch a transnational regulatory framework to counter adverse human rights impacts caused by business enterprises. While not binding, the SRSG's instruments have enjoyed considerable traction in CSR sphere. For example, a number of international instruments and policy documents have recently been revised to correspond with the GPs.

During the span of the six-year mandate, the SRSG positioned corporate conduct in the context of liberalized and globalized trade, addressed governance gaps that enabled corporate human rights abuses and deemed existing regulatory responses ineffective to contain alleged corporate human rights impacts. The end result of the mandate, the UN Framework and the GPs, rested on three equally important policy sections, or pillars, according to which:（i）states had a duty to protect against human rights abuses committed by third parties, including business enterprises;（ii）business enterprises had a responsibility to respect human rights;（iii）victims of business-related human rights abuses needed greater access to effective remedies.

SOEs were a part of the SRSG's efforts from the early days of the mandate. Originally, they were approached from a practical perspective. In the first reports the SRSG stressed that：

Ways must be found to engage State-owned enterprises in addressing human rights challenges in their spheres of operation. They are becoming increasingly important players in some of the most troubling industry sectors yet appear to operate beyond many of the external sources of scrutiny to which commercial firms are subject.

The rationale was that certain SOEs' growing influence in some industry sectors should be reflected in the supervision regarding their human rights performance. Similar approach continued in the SRSG's following reports. In 2007, the SRSG claimed that“evidence suggests that firms operating in only one country and state-owned companies are often worse offenders than their highly visible private sector transnational counterparts”. Further, SOEs from emerging economies had not associated themselves with voluntary CSR initiatives. For the SRSG, there was“mounting concern in the public space about human rights protection and State-owned enterprises”.

While SOEs were clearly singled out because of their significance and potential impunity, the SRSG's approaches changed as the mandate progressed. Most importantly, SOEs started to emerge as a group of corporations that showed the greatest promise in changing their behavior as per human rights considerations. The development was discernible already in the SRSG's 2008 report introducing the UN Framework. SOE issues were grouped under state's ability to influence corporate cultures and policy alignments. The SRSG suggested that engaging SOEs was different from privately owned companies. Specific sustainability reporting required from Swedish SOEs was one such example. The SRSG's view was that“in principle, inducing a rights-respecting corporate culture should be easier to achieve in State-owned enterprises”. This was because“senior management in SOEs is typically appointed by and reports to State entities”. Further, SOEs presented home states with difficult reputational dilemmas: “beyond any legal obligations, human rights harm caused by SOEs reflects directly on the State's reputation, providing it with an incentive in the national interest to exercise greater oversight”.

In later reports, the SRSG continued to underline“strong policy reasons for home States to encourage their companies to respect rights abroad, especially if a State itself is involved in the business venture”. Because states conducted various transactions with businesses they were also given unique opportunities to help prevent adverse corporate-related human rights impacts. Specifically, “the closer an entity is to the State, or the more it relies on statutory authority or taxpayer support, the stronger is the State's policy rationale for ensuring that the entity promotes respect for human rights”. The SRSG also noted that some states were starting to push policies for greater“respect for human rights”in SOE operations.

To counter the developments in states' international market activities and gaps in SOE supervision, the SRSG's initial response was to emphasize how human rights treaty bodies had already held states responsible for SOE conduct. The commentary referred to states' role as the primary duty-bearers under international human rights law and the proximity of a business enterprise to the state. Further, state ownership and control also brought about the necessary means to ensure that relevant policies, legislation and regulations regarding respect for human rights were implemented, including SOEs' senior management typically reporting to state agencies and associated government departments having greater scope for scrutiny and oversight. Accordingly, the SRSG advocated that states had both the responsibility and the possibility to influence corporations operating with statutory authority, taxpayer support or in other cases where they were closely aligned with state functions. Human rights commitments of states were to be made categorical when interacting with market through corporate ownership. Ultimately, states were advised to use corporate law structures in shareholder capacity to advance human rights sensitivity in SOEs.

In sum, the SRSG made three significant assertionsregardingthe relationship between states and SOEs. First, SOEs were considered special because of a combination of their increasing international significance and potential impunity because of protective national measures. Second, the SRSG emphasized greater possibilities of attributing SOEs' acts to states. Third, when positioned within the state duty to protect pillar, the SRSG emphasized a wide range of influence possibilities states had over SOEs. In the UN Framework and the GPs, states were again empowered to use their financial power to push for CSR-related improvements in SOEs and other corporations in which state was involved in shareholder capacity. However, unlike the OECD SOE Guidelines, the UN Framework and the GPs framed the rationale of corporate involvement in terms of states' human rights obligations. Here, the instruments suggest that when states act in shareholder capacities their ownership function is actually constricted by international obligations emanating from human rights law and not by international obligations stemming from various market initiatives. Shareholder engagement and state ownership function are embedded in states' human rights functions.

4. Conclusion

Revitalized state ownership of internationalized corporations has been making waves around the globe. Both emerging and developed economies have witnessed a surge in various SOE sectors and state investment. Calls have been made for tighter regulatory frameworks for state investment, state shareholding and the acts of SOEs. So far, CSR dimensions of international instruments have not been systemically examined even though various initiatives have registered the increased state activity in the market sphere. For this reason, the OECD SOE Guidelines and the UN Framework and the GPs provide important sites for discussing both CSR effects and general parameters of active state ownership of corporations.

While the OECD SOE Guidelines and the UN Framework and the GPs have originated in totally different contexts and their aims differ considerably, both instruments acknowledge“the new rise”of state ownership, particularly with respect to international SOE operations. Further, both instruments are interested in regulating states active in shareholder capacities. Ultimately, both instruments seek to restrict state ownership function. However, while the OECD SOE Guidelines position themselves within the traditional regulatory regime characterized by a level playing field and competitive markets, the UN Framework and the GPs posit that state ownership function is restricted by state's international human rights obligations.

The instruments view CSR-promoting state shareholders in a very different light. For the OECD SOE Guidelines, additional CSR considerations communicated by a state shareholder may jeopardize the instrument's core aims unless arranged in a market-friendly manner. Conversely, the UN Framework and the GPs seek to embed heightened CSR considerations in the overall structure of state's international human rights obligations. Clearly, the OECD SOE Guidelines and the UN Framework and the GPs portray conflicting and deeply entrenched visions of the intersections of state ownership and CSR that have significance beyond the scope of the instrument themselves. Therefore, the question that needs to be asked in the future is how market-driven and human rights-driven regulatory rationales could or should be reconciled.