Trust in big business is rising as the business of CSR deepens. Politicians are asking corporate executives to help negotiate international environmental agreements. Bureaucrats are welcoming their advice on how best to implement environmental legislation. Nonprofits are bringing them onto their advisory boards. And consumers are looking to them for reassurance of the safety and sustainability of products.
Trust in the value of corporate self-regulation, voluntary supply-chain auditing, and private certification is rising, too, even in the face of corporate scandals, and even as the environmental crisis continues to escalate. Corporations are “critical agents of positive change on a range of environment and civil rights issues,” the executive director of the US Sierra Club, Michael Brune, told an audience of NGO and business leaders in 2017.1
Nonprofit leaders have also become increasingly trusting of the raw power of big business, seeing this power as a solution rather than a problem. “If you can get a company like Walmart right, it has a massive ripple effect,” argues Peter Seligmann, CEO of Conservation International.2
Government leaders are similarly putting their trust in big business to lead sustainability. This would seem to be particularly true in the United States, especially among Republicans who advocate for deregulation and privatization. But even leading Democrats are turning to big business for sustainability leadership. “Critics seem to think that when we ask our businesses to innovate and reduce pollution and lead, they can’t or they won’t do it,” then President Barack Obama said in a speech at Georgetown University. “But in America, we know that’s not true.” Former US Secretary of State John Kerry went even further when reflecting on the importance of the Paris Agreement on Climate Change going into force in 2016. “It is not going to be governments alone, or even principally, that solve the climate challenge. The private sector is the most important player.”3
Does big business really deserve so much trust? Looking behind the scenes at the consequences of the competition for market shares, profits, and power suggests that policymakers and activists should be far more wary of the sustainability promises and aspirational goals of big business. The same TNCs promising to be sustainable and responsible are suppressing evidence of environmental damage, denying climate change, and funding anti-environmental think tanks. They are spilling oil, polluting waterways, and generating mountains of plastic and electronic waste. They are introducing new chemicals with little understanding of the consequences for the health of ecosystems and people. They are sourcing through long, complex supply chains that hide environmental consequences, cast ecological shadows worldwide, and minimize labor costs and on-the-ground responsibilities. And they are setting up shell companies, evading taxes, and buying off politicians.
In short, as we will see in this chapter, the same TNCs emblazoned in CSR are seeking out every possible competitive advantage, even if this means breaking the law now and then. Let us begin by looking at the ways TNCs avoid – and illegally evade – corporate taxes, thereby weakening the administrative capacity of states to protect ecosystems, and leaving many of them selling off even more natural resources to sustain basic services.
If the profits are big enough, every TNC will push legal limits and risk their reputations. This helps explain why CSR has done so little to stop corporate tax avoidance. Around the world TNCs continue to shift and hide profits inside murky corporate structures. They continue to lobby governments for tax breaks, threatening to withdraw financing when political leaders push back. And they continue to finance political parties and pay off corrupt dictators to secure preferential deals.
Even companies with high brand trust are doing everything possible to avoid paying taxes. This is especially true in developing countries, where corporate tax avoidance is costing governments hundreds of billions of dollars a year: losses that help explain much of the poverty, inadequate social services, and weak environmental enforcement across the developing world.4
But corporate tax avoidance is common as well in jurisdictions with good governance. Over the past decade companies such as Amazon, Apple, Microsoft, Facebook, Google, and Starbucks have all butted heads with tax authorities across the European Union. The tactics of Google are typical. For years Google has been transferring its European profits to Bermuda, a tax haven, through Google Ireland Holdings, a company registered in Ireland where corporate tax rates and rules are highly favorable.
Google claims this is all perfectly legal. Whistleblowers came forward in 2013, however, alleging that Google’s set-up was circumventing UK tax laws and claiming that Google Ireland was little more than an administrative office to avoid taxes. Margaret Hodge, chair of a British parliamentary committee looking into the allegations, was less than impressed with Google’s legal justification of its tax structure, describing it as “devious, calculated and … unethical.” This inquiry did little to alter Google’s practices. In 2014 Google transferred around US$13 billion of its foreign earnings to Bermuda, paying roughly US$3 million in taxes on this income (a tax rate of about 0.024 percent). Nor has the controversy around Google’s tax maneuvers seemed to hurt the company’s global image or reputation as a CSR leader. According to the annual CSR survey by the Reputation Institute, consumers ranked Google as the world’s “most responsible” in 2014, 2015, and again in 2016.5
Like Google, Apple also routes profits through Ireland. And, again just like Google, the company insists it is completely legal, even though the company’s tax rate in Ireland was a mere 0.005 percent in 2014.6 Tellingly, the European Commission ruled in 2016 that Ireland’s tax deal with Apple from 1991 to 2015 was illegal under EU rules, and ordered the company to pay US$14.5 billion in back taxes and interest to Ireland (and possibly other states, if they were to pursue claims).
Apple’s CEO, Tim Cook, was livid, calling the ruling “total political crap,” and saying he would immediately appeal the decision.7 Significantly, the ruling did not affect Apple’s share price, once again signalling to big business the low risks and high gains of doing everything possible to avoid paying taxes. Plus, as investment analysts were quick to point out, with over US$230 billion in cash and securities on hand at the time, if absolutely necessary, Apple would have no trouble paying off these back taxes.
Starbucks in the UK has also gone to great lengths to avoid paying corporate taxes. The company launched in the UK in 1998. For years it faced public and governmental pressure to scrap its complex accounting and profit-shifting practices that left it consistently declaring losses and paying very little corporate tax; in 2015 the European Commission ruled that the tax break Starbucks was gaining in the Netherlands was illegal. Bending somewhat, that year Starbucks did end up paying corporate tax of £8.1 million to the UK government – but, revealingly, this tax bill was not far off the combined amount paid to the UK over the previous fourteen years (£8.6 million).8
Tax avoidance is just one of many enduring big business strategies to enhance profits and secure competitive advantages. To gain market dominance, companies are constantly pushing the legal limits of antitrust laws, as we saw in 2017 when the European Commission fined Google US$2.7 billion for anti-competitive practices for configuring its search engine to prioritize its shopping service. We even see some long-trusted brands, such as Volkswagen, brazenly breaking environmental laws to gain market access and sales advantages.
Volkswagen’s 2016 Annual Report – subtitled a “New Beginning” – says the company is now “committed to sustainable, transparent and responsible corporate governance.”9
Volkswagen’s new beginning included pleading guilty in 2017 to charges in the USA of conspiracy, fraud, and obstruction of justice for secretly installing illegal computer software into its diesel automobiles. Known as a “defeat device,” this software kicked in during emissions testing to lower nitrogen oxide levels. Starting in 2009 this device put Volkswagen and Audi models on American roads that were spewing out pollution as much as forty times above the US legal limits.
It may seem commendable to take responsibility and plead guilty to criminal charges. Yet, when US investigators first became suspicious of what Volkswagen might be up to, the initial response of executives was to attack the investigation as incompetent and the science underlying the suspicions as faulty. One investigator would later tell the New York Times: “They tried to poke holes in our study and its methods, saying we didn’t know what we were doing. They were very aggressive.” Then, as incontrovertible proof of wrongdoing began to emerge in 2015, Volkswagen executives stalled, lied, and ordered employees to delete computer files and destroy evidence.10
Volkswagen’s obfuscation didn’t end there. Just weeks before pleading guilty to the US charges, the managing director of Volkswagen UK, Paul Willis, was telling members of the British parliament that the company had “misled nobody.” When incredulous MPs pushed back, Willis ducked their questions, declaring himself “open” and, although unable to remember much, doing his best to answer “transparently.” Conservative MP Mark Menzies was unimpressed. “You come before us and your mouth opens and words cascade out and then the next time you come before us those words have changed in meaning.”11
The story of the defeat device is a reminder of the lengths even highly respected companies will go to expand markets and seek profits. Martin Winterkorn, the CEO of Volkswagen during the scandal, had set his sights on passing Toyota to become the world’s biggest automaker. At the opening of a new Volkswagen plant in Tennessee in 2011 he confidently told a group of American lawmakers, “By 2018, we want to take our group to the very top of the global car industry.”12
To take down Toyota, Winterkorn felt he needed a larger share of the American market. But his engineers were struggling to meet relatively high US emission standards without sacrificing the fuel efficiency and performance advantages of Volkswagen’s diesel cars, which Winterkorn saw as having the best prospects of strong sales.
In retrospect, the solution – to compete against the Prius Hybrid by introducing into the American market “clean diesel” cars equipped with an emission-control disabling device to increase gas mileage – might look extraordinarily risky. Yet in many ways it is not that surprising given the competitive pressures on automakers and the large performance bonuses for CEOs. Volkswagen is not the first automaker to install a device to thwart environmental regulations. Others, including Volkswagen, installed technologies in the early 1970s to shut off pollution controls to enhance performance. And Volkswagen is unlikely to be the last. A company pleading guilty to criminal charges is definitely unusual; but, it is fair to say, trying to get around regulations is commonplace.
Volkswagen’s defeat device suggests another lesson for those thinking through the potential for corporate self-regulation to advance global sustainability. In 2015, the year the scandal broke, Volkswagen reported losses of US$1.5 billion as revenues fell by twelve percent. By the time Volkswagen was pleading guilty in 2017, the company had already agreed to pay the American government US$4.3 billion in fines, and in the USA alone was looking at tens of billions of dollars in further costs to recall and repair the nearly 600,000 diesel cars sold with defeat devices (worldwide, as mentioned in the opening chapter, Volkswagen put the device in eleven million cars).
Yet here’s the rub. In 2015, even with the fines, bad publicity, and a decline in sales, Volkswagen was still the world’s seventh biggest company by revenue turnover, up from eighth place the year before. And Volkswagen’s sales resurged in 2016, with Audi sales in China leading the way. Around the world customers looking for a deal from a scandal-ridden company also helped offset some of the decline in Volkswagen’s diesel sales in Europe and North America. That year, for the first time ever Volkswagen reached number one in new vehicle sales (with 10.3 million), knocking Toyota (10.2 million) out of first place – a spot Toyota had held since 2011 when the Tōhoku earthquake and tsunami disrupted industrial production across Japan, allowing General Motors to outsell them. In the end Winterkorn’s prediction that Volkswagen would overtake Toyota by 2018 came true, two years ahead of schedule.
Winterkorn was forced to resign as CEO in 2015, retiring with the parting words, “I am not aware of any wrongdoing on my part.”13 A few Volkswagen employees have also faced criminal charges in the United States. Yet, when all is said and done, the scandal did not cost the company much. This outcome is surely not a good sign for those hoping CSR commitments and environmental self-regulation can hold corporate profit and growth compulsions at bay.
Volkswagen is far from the only big business to survive – and then thrive – after a scandal. And it is far from the only one to fight back with lawyers, or sacrifice a few employees, or turn to Orwellian doublespeak to declare a new beginning. Look at the Swiss company Nestlé, the world’s biggest food and beverage company. Notorious for contributing to a global health crisis in the 1970s by convincing mothers in developing countries to substitute infant formula for breast-milk, today Nestlé is claiming it is helping “billions of people” while striving “for zero environmental impact.”14
Or consider BP. Since pleading guilty to criminal charges and agreeing to pay billions of dollars in fines and compensation for spilling oil into the Gulf of Mexico in 2010, BP has put its sustainability unit into overdrive. Bob Dudley, who became the CEO of BP following the 2010 spill, is head cheerleader for the unit, telling the world in 2017 (without irony, I should say) that the company’s renewed environmental “strategy builds on two decades of action and advocacy on climate change.”15
Of course, what the CEO of BP means by “action” could include lobbying against climate regulation and sabotaging climate science. For climate change, big oil as a whole has worked long and hard to generate scientific uncertainty, stall investigations, and send governmental inquiries into tailspins, all the while declaring a commitment to serving society.
The Exxon Mobil Corporation is a good example. Rex W. Tillerson – who after eleven years as CEO stepped down in 2017 to become US Secretary of State – wrote in his prefacing letter to ExxonMobil’s 2015 Corporate Citizenship Report: “We have and will continue to engage relevant stakeholders to further develop climate science and broaden its understanding by society at large.”16
Yet over the last half-century ExxonMobil has suppressed evidence of climate change, funded climate-change deniers, and obstructed regulatory action. Back in the 1970s in-house researchers for Exxon were already linking the burning of fossil fuels with a potential warming of the earth, a decade before the global community was starting to worry seriously about the possibility of climate change. “The most likely manner in which mankind is influencing the global climate is through carbon dioxide release from the burning of fossil fuels,” a company scientist told Exxon executives in 1977.17
Keeping this research quiet, by the 1980s ExxonMobil had switched to attack mode, seeing climate science as a threat to its core business. It paid for advertising and opinion writing to question the accuracy of climate knowledge. It backed anti-environmental think tanks. And it financed counter-research to raise the levels of “uncertainty” for climate data and modeling.
By 2015 the story of ExxonMobil’s early research and decades-long cover-up was leaking into the public realm. Writing in the Guardian that year, the bestselling author Bill McKibben reproached ExxonMobil for helping to “organize the most consequential lie in human history,” his fury spilling over in his closing sentence: “In its greed Exxon helped – more than any other institution – to kill our planet.”18
In 2016 US prosecutors launched fraud proceedings against the Exxon Mobil Corporation for concealing the risks of climate change (and thus exaggerating its oil assets to shareholders). During one of the trials in 2017 the attorney general of New York wrote to the court: “Exxon’s top executives, and in particular, Mr. Tillerson, have made multiple representations that are … potentially false or misleading statements to investors and the public.” The attorney general also revealed that from 2008 to 2015 Tillerson used an alias account – under the name “Wayne Tracker” (Tillerson’s middle name is Wayne) – to email back-and-forth when discussing climate change with his executives.19
Big oil’s obstruction of environmentalism has been particularly strong. At times it even turns violent, as we saw when the Nigerian government executed Ken Saro-Wiwa (and eight others) in 1995 for protesting against Royal Dutch Shell’s human rights and environmental record in the Niger Delta. Eleven years later Shell would settle a claim by descendants and victims that it had conspired with the government, paying out US$15.5 million, but admitting no wrongdoing. The money is no more than a “humanitarian gesture … a compassionate payment,” the company said in a press release.20
TNC violence has been especially high in some sectors, such as industrial mining and logging in Africa, Latin America, and the Asia-Pacific. In places like the Philippines and Peru repression of indigenous peoples and local communities frequently characterizes industrial mining operations, including for the world’s biggest mining company, Glencore. Yet, although some companies are definitely worse than others, it is also the case that obfuscation and obstruction of environmentalism have long been the modus operandi of big business as a whole. It is not always so obvious, however, especially for companies able to hide their activities in the shadows of complex corporate structures and long supply chains.
Understandably, TNCs with billion-dollar brands have always tried to avoid being accused of doublespeak or brazen illegal acts; furthermore, as we saw in Chapter 3, many are now positioning themselves as sustainability leaders to decrease the risk of becoming a target of a government investigation or civil society campaign. Over the past decade consumer-facing brands like Apple, Disney, and Starbucks have tried in particular to limit their exposure to poor supplier practices.
One approach has been to start buying more products certified as sustainable, responsible, and conflict-free. And to varying degrees certification is helping to improve sourcing practices, as we saw in Chapter 3 with timber certified by the Forest Stewardship Council, seafood certified by the Marine Stewardship Council, and palm oil certified by the Roundtable on Sustainable Palm Oil.
Yet industry eco-labels are often little more than advertising stickers to entice environmentally conscious consumers. And even third-party certification tends to produce mixed environmental benefits. These schemes frequently end up deflecting problems into new locations as suppliers who are unable (or unwilling) to meet certification requirements seek new buyers. Certification schemes can also create a false dichotomy between “sustainable” and “unsustainable” products, as we can now see happening with palm oil, soy, and beef. Such a dichotomy can create incentives to bribe officials and forge paperwork to gain certification. It can also empower a misleading discourse of “sustainable” companies buying “sustainable” products – with “others” (often smallholders and local firms) the real problem.
To further limit exposure to poor supplier practices, consumer-facing brands have also put in place reporting and auditing programs, essential for any meaningful compliance with codes of conduct or CSR standards. As with certification, these programs are doing far less to improve environmental and social management than the brands are telling consumers, NGOs, and governments.
Confidential supply-chain reporting is designed to support the business goals of brand buyers, while reporting for public disclosure tends to present the brand in the best possible light. The conclusion of a study of sustainability reporting in the Asia-Pacific is true around the world: “Due to the absence of mandatory standards, corporations handpick those metrics that they can easily measure and disclose information on these metrics while ignoring those that cannot be measured or those that could possibly show a darker side of the corporation in terms of their sustainability initiatives.” Moreover, as another study of the history of sustainability reporting found, TNCs also tend to equate “narrow,” “incomplete,” and “partial reporting” with “actually being sustainable, or more commonly, with claims to be moving towards sustainability.”21
Equally troubling, audits frequently fail to detect problems or violations, even in cases where a disaster later strikes (e.g., a chemical spill or factory fire). At the same time brands tend to only cut a firm out of its supply chain for a grievous misdeed – such as decorating McDonald’s Happy Meal toys with leaded paint – or when doing so is valuable for placating social activists or reassuring consumers, such as when the toy company Mattel severed ties with Asia Pulp & Paper in 2011 following a campaign to shame Mattel for boxing its Barbie dolls in cardboard containing wood fiber from old-growth rainforests of Indonesia. Moreover, a supplier ejected from a supply chain may quickly find a new buyer, perhaps one with even lower standards.
For brand companies with a hundred thousand suppliers, at best auditors are only able to spotcheck a handful each year. In addition, private auditors have less power than government auditors to investigate factories (e.g., look inside drawers and lockers) and protect whistleblowers, with private auditors in countries like China facing especially great obstacles. As one German executive noted, in China “I am prohibited from going to see parts of companies even though they are supplying to me and I am a major buyer.” Additionally, some brands clearly do not want auditors to look too closely, alerting floor managers ahead of time to help the supplier pass an audit. “There is a whole industry of ethical auditors out there now who will find nothing if you pay them to go and find nothing,” explains one labor rights advocate.22
Auditing tends as well to focus on a brand’s Tier I suppliers, ignoring the ecological costs and labor exploitation in the labyrinth of Tier II and III suppliers. As one brand retailer said when discussing how this works for fair trade coffee, “I’m going to audit the crap out of your co-op coffee bean company to make sure you’re actually paying the farmers. Who checks to see if the farmer is paying the pickers? Nobody!” The difficulty and expense of auditing large numbers of small businesses and family operations partly explains why brand companies avoid auditing below the first layer of suppliers. But some of the gaps and loopholes in the auditing of corporate codes and private certification schemes are intentional, as these help keep prices low for so-called ethical and sustainable supplies bought from Tier I firms. “We will audit as far down as the brand wants to go,” explains one auditor.23
In short, audits are designed to protect the brand, not workers or the environment. When considering the value and effectiveness of audits, we need to keep in mind who is hiring the auditors, and whose interests audits serve. And we need to keep reminding ourselves why companies like Apple and Walmart and Nike are assuming the responsibility for the auditing of supply chains: it is enhancing their power to extract profits out of the shadows of a global economy of unsustainable consumption.