Transnational Private Governance and its Limits

Jean-Christophe Graz, Andreas Nölke

• Publisher: Routledge
• Year: 2007
• Print ISBN: 9780415414357
• eBook ISBN: 9781134122462
• Topic: Politics & International Relations
• Subtopic: Peace & Global Development
• Index: Politics & International Relations

This volume explores a variety of forms of transnational private governance where non-state actors cooperate across borders to establish rules and standards accepted as legitimate by other agents.

Transnational private governance is a core feature of the devolution of power that we observe in the global realm and that is bringing about new forms of authority. Transnational Private Governance provides theoretically and empirically informed insights into the interactions between states and non-state actors including domains beyond intergovernmental organizations, conventional non-governmental organizations, and multinational enterprises, covering a wide range of arrangements, from highly formal devolutions of power to lax and informal platforms of interaction between private actors. Contributing to the latest generation of globalization studies, the authors consider the relationship between states and markets as closely integrated and seek to broaden the scope of enquiry by including new patterns and agents of change on a transnational basis.

This book will be of great interest to researchers and students of political science, international political economy, economics, business studies, globalisation and law.

1 Introduction

Beyond the fragmented debate on transnational private governance

Jean-Christophe Graz and Andreas Nölke

Days before the collapse of the Berlin Wall in 1989, five US Army and Marine Corps officers introduced the concept of ‘fourth-generation’ warfare in an article published in the Marine Corps Gazette. Its basic outlines were as follows:

In broad terms, fourth generation warfare seems likely to be widely dispersed and largely undefined; the distinction between war and peace will be blurred to the vanishing point. It will be nonlinear, possibly to the point of having no definable battlefields or fronts. The distinction between ‘civilian’ and ‘military’ may disappear. Actions will occur concurrently throughout all participants’ depth, including their society as a cultural, not just a physical, entity.

(Quoted in Jonathan Raban, ‘The Truth about Terrorism’, New York Review of Books, 52 (1), Jan. 13, 2005).

The above quotation may point out that the roots of the dramatic change in American strategic ambitions were planted long before the presidency of George W. Bush Jr. and the opportunity taken by his advisors to launch a ‘war on terror’ after 9/11 (Golub 2004). It also shows the extent to which a shift towards states’ involvements with non-state actors cuts across diverse issues of political science. In the much-debated domain of globalisation studies, concerns about ‘widely dispersed and largely undefined’ phenomena, as well as claims about ‘blurred distinctions’, have contributed to the confusion. Attempts to clarify the economic and political transformations of contemporary capitalism have also led to a ‘fourth generation’ of scholarship – even though, on perspectivist grounds, the debate relates more on contending approaches than successive generations (Cameron and Palan 2003: 28). Whilst particular prominence was first given to the rising power of global markets (Ohmae 1990), the emphasis quickly shifted to the continuing role of the state in economic policy, if not at the national, then at the regional and international levels (Hirst and Thompson 1996). A third approach denies a priori assumptions about the relative importance of states and markets in the process of globalisation by considering their relationship as closely integrated (Mittelman 1996; Gill 1997; Germain 1999; Held et al. 1999). As the role of non-state actors across borders has become a matter of public debate as their influence has grown, a fourth strand of globalisation studies has sought to broaden the scope of enquiry to include new patterns and agents of change beyond states and firms (Strange 1996; Cutler et al. 1999; Hibou 1999; Higgott et al. 1999; Braithwaite and Drahos 2000; Ronit and Schneider 2000; Haufler 2001; Hall and Biersteker 2002; Cutler 2003; Sassen 2003; Bayart 2004; Djelic and Sahlin-Andersson 2006; Sassen 2006).

This book shares the assumption that the logic of action and the potential of change embodied by non-state actors has become a core feature of new forms of authority in the global realm. By exploring what we call transnational private governance, the book provides theoretical and empirical insights into the ability of non-state actors to cooperate across borders in order to establish rules and standards of behaviour accepted as legitimate by agents not involved in their definition. Non-state actors not only formulate norms, but often also have a key role in their enforcement. Accordingly, the current privatisation of rule making and enforcement goes much further than traditional lobbying in allowing private actors an active role in regulation itself. Domains concerned lie far beyond inter-governmental organisations, conventional non-governmental organisations (NGOs) and multinational enterprises. In this respect, the book covers a wide range of situations, from highly formal systems of power devolution to lax and informal platforms of interaction between private actors.

Existing research on transnational private governance is in its infancy. A decade after the first set of studies that brought the topic to general attention, it is high time to review a process that is evolving extremely rapidly and provides us with sufficient empirical evidence to develop some theoretical propositions. We still lack comprehensive concepts ordering the different types of private governance. Similarly, we do not yet know under which conditions actors ‘obey’ norms that are not defined by states. There is also insufficient evidence of which sectors and which organisational formats are most likely to rely on transnational private governance. Finally, it is unclear how we could reconcile these forms of governance with established concepts of democratic legitimacy.

This chapter outlines a research agenda on transnational private governance. It first presents two distinct scholarly traditions that in many respects stand as the most important contributions to our understanding of this phenomenon: on the one hand, approaches in comparative political economy (CPE) focus on institutional arrangements and coordinating logics of economic actors across nations; on the other, studies in global political economy (GPE) try to identify constitutive patterns of authority mediating between the political and the economic spheres of a transnational space. Although this distinction may be over-simplified, it may explain why GPE approaches give prime attention to channels of structural power across national economies, while CPE approaches examine how such transnational constraints require new forms of coordination among nations. Despite mutual indifference between them, we claim that important avenues of cross-fertilisation remain. We contend that three distinct issues are of particular relevance to overcome the divide between CPE and GPE approaches on transnational private governance: (i) providing conceptual clarification in order to define the social reality referred to as transnational private governance, (ii) identifying framework conditions that make transnational private governance possible and (iii) discussing normative implications that commonly raise many concerns. In our attempt to overcome the divide between CPE and GPE, we propose a framework of analysis, whose categories are delineated so as to offer a more systematic, yet flexible approach to understanding the conceptual, empirical and normative aspects of transnational private governance. The various contributors to this volume do not share a single theoretical perspective. They concur, however, on a political economy approach in which the interplay of structural constraints and actor-based processes drive the evolution of transnational private governance with significant normative implications. The remaining chapters of the present volume deal with various aspects of this analytical framework, each in their own way.

The core contention of the book is that transnational private governance is subject to important limits. While conventional analyses tend to highlight the newness and the innovative character of these forms of governance, we unambiguously question this view in emphasising limitations in three regards. The limits to transnational private governance refer first to the degree to which this phenomenon is really private, transnationalised and confined to governance per se. Second, the empirical framework conditions required for transnational private governance to be effective are circumscribed and can be for the most part systematically identified. Third, the normative shortcomings of transnational private governance clearly hinder its ability to embody procedural innovation in policy processes and to solve large socioeconomic concerns. The conceptual, analytical and normative underpinnings of this argument have emerged in concert with the project of this book. The key themes were included in the call for the ECPR 4-day workshop on the topic and served as guidelines in the extremely fruitful discussions we had on that occasion. The more detailed categories were developed subsequently so as to provide additional coherence in the process of revision. We gave each contributor a grid with core questions, themes and the more specific categories presented in Table 1.1 (hereafter p. 9) as a support to keep focus and coherence in this collective attempt to revisit transnational private governance. As the concluding chapter examines in detail, it appears that all contributors substantially share the overall argument on conceptual, analytical and normative limits to transnational private governance.

The CPE debate: when do firms obey norms that are not set by states?

The point of departure for the CPE debate is the perception that governments alone cannot solve all problems of transnational economic regulation. This appears to be particularly true for the regulation of business, while the macroissues of trade and currencies still clearly fall into the realm of intergovernmental cooperation. While the public character of currency and trade issues forces a certain degree of intergovernmental cooperation, this element is absent from business regulation. Furthermore, following Stigler’s (1971) early critique on the ability of business interest to capture the state in public regulation, the state command-and-control approach to regulation is considered too inflexible and too costly, therefore inclined, to be substituted by the market-based incentives of voluntary business self-regulation (Blundell and Robinson 1999).

Cooperation between companies and civil society actors in the context of concepts such as ‘corporate social responsibility’, ‘business ethics’ and ‘corporate citizenship’ has attracted considerable attention. Much hope has been invested in the idea that capitalist externalities such as environmental degradation and the mistreatment of workers can be severely limited by standards developed and overseen by private institutions (Braithwaite and Drahos 2000). Examples for these standards comprise inter alia the ISO 14000 norm on environmental management (Clapp 1998), the Coalition for Environmentally Responsible Economies (CERES) for environmentally responsible investments as well as the Forest Stewardship Council for sustainable forestry (both discussed in Pattberg 2004) or the human rights-oriented Social Accountability Standard 8000 (Braun 2001: 271).

Given the voluntary character of these institutions, CPE scholarship aims at identifying the circumstances under which private actors obey norms that are not set by states. The following factors appear to be among the most influential conditions inferred from initial empirical studies:

• The degree of competition between the participating firms: The adherence to environmental or social norms can be a clear disadvantage in a very competitive environment. In contrast, the existence of a monopolistic or oligopolistic structure can help in facilitating private governance: ‘Rules and standards that come from industry alone, without the participation of or enforcement by third parties, tend to be difficult to sustain due to competition among firms. . . other types of governance must supplement it – either by government regulation, or the dominance of a single private player’ (Haufler 2002: 10).
• The type of company involved: Not all companies appear to be equally suited for a participation in the diverse forms of codes of conduct. Since the enforcement of private norms very much depends on consumers being able ‘to respond to the signals being sent to reward those companies behaving well and punish those behaving badly’ (Haufler 2002: 11), big manufacturing companies with well-known brand names are particularly affected. Under certain circumstances, coordination service firms such as insurers or institutional investors can also attach importance to political, social or environmental issues as risks to be incorporated into contracts passed with key other (non-service) firms. Thus, service firms can assume a coordinating role as standard setters and third-party enforcers, especially if they are in an oligopolistic position (Nölke 2003b: 16).
• The type of issue involved: The success of corporate initiatives may also widely differ as a result of the nature of the problem (Kollman 2003: 34ff). Improving social and labour practices obviously has other implications for corporate and non-corporate actors than reducing environmental externalities; it often echoes core business concerns such as efficiency, competitiveness and technological innovation.
• The further development of post-materialist orientations: In a classic study on the declining significance of class voting, Inglehart (1977) found evidence of post-materialist orientations in the capacity of better-educated voters to make political decisions independent of class loyalty or other socioeconomic attributes. Recent analyses make use of a similar argument in considering, for instance, that codes of conduct that rely on the support of labour unions have much less impact than those based on environmental or human rights movements (Kollman 2003: 34). Given that most social groups promoting corporate social responsibility are themselves of middle-class background with post-materialist values, private governance also depends on the socio-economic environment of such groups. Thus, transnational private governance may be negatively affected by global economic crises (Rieth 2004: 189), but could also be supported by an expansion of the middle classes in the societies of the global South.

These issues indicate the broad range of preconditions that have to be met in order to make private norms an effective alternative to the conventional regulation of business. But even if these preconditions were met, we might still have second thoughts about such governance in view of its power effects and democratic deficit (e.g. Sundgren 1997; Wolf 2002). In the absence of the democratic institutions of the nation state, transnational private governance suffers from the fact that not all participating actors have equal power and some are not represented at all. This is particularly true for those of the wider public interest and from developing countries that are lacking the detailed knowledge that is necessary to participate meaningfully in private norm setting and enforcement. Many hopes have been vested in the ability of NGOs to compensate for these weaknesses (Haufler 2002: 8–10). NGOs can enhance legitimacy only on certain issues. Societal actors in transnational policy networks are variously represented within these networks (Nölke 2003a, 2003b). Unions and consumer groups lack influence on the transnational level (while big multinational enterprises are being favoured), and within the NGO community mainstream Northern interests almost inevitably prevail.

In spite of these critical remarks, however, one can conclude that CPE studies usually are reasonable optimistic with private governance considered to be an important option for preventing the regulatory deficit created by the absence of (inter-)state regulation of transnational business. Although existing codes may have severe shortcomings in terms of effectiveness as well as democratic legitimacy, it is the role of the academic debate to highlight these shortcomings and contribute to the identification of alternative solutions. The CPE debate has identified some of the key mechanisms of how private governance works in practice and has developed some proposals for improving them. This pragmatic approach, however, has prevented CPE scholars from focusing on the wider economic and historical context of transnational private governance, including any broad perspective of the power structures involved.

The GPE debate: transnational private governance within capitalist development

From a GPE perspective, most contributions to the CPE debate seem to be typical examples of problem-solving theories. Based on Robert Cox’s (1986: 207) famous dictum ‘theory is always for someone and for some purpose’ (emphasis in original), GPE scholars identify those studies as attempts to make the existing capitalist system work more smoothly. From a critical standpoint, GPE approaches are concerned with how the existing order came into being and, given the manifold exploitative features of capitalism, how to conceive its potential change. The focus is to place transnational private governance in the broader historical context of capitalist development. The line that separates public from private governance is not fixed and should be understood as contingent in time and space (Cutler 1997; Haufler 2002: 2–6). For example, rules for commercial transactions across boundaries were first developed by private actors (merchants) and only later adopted by states. State ownership of the economy was widespread in earlier times, but private firms such as the East India Company had broad regulatory competences. While stricter separation between the public and the private began with the industrial revolution, it is only in the late twentieth century (and within the Organisation for Economic Cooperation and Development (OECD) world) that it has taken on the clear character it has today.

By setting these assumptions within the broader framework of capitalism, GPE scholars focus on structural forces and power relations, in particular the structural power of capital. A structural conception of power emphasises the environment in which strategic interactions take place. The rise of private authority then points towards the development of the competition state, the deterritorialisation of capital and the related process of flexible accumulation (Cerny 1990; Sassen 2003, 2006; Graz and Palan 2004). Furthermore, it is connected with the rise of neoliberalism as a political ideology and an ongoing programme of large-scale reforms that confers on the private sector an efficiency supposedly lacking in the public sector. The form and the content of regulation should therefore not be treated separately from each other. Mechanisms and forms of private governance have implications beyond functional issues of market regulation and social justice.

Besides the significance of transnational private governance for legitimising neoliberalism, GPE approaches also focus on forms often far removed from those examined in CPE studies. Coordination service firms such as rating agencies, institutional investors, trade exchanges, investment banks as well as multinational law, accounting, insurance and management consultancy firms enjoy considerable authority over others, by setting and enforcing distinct standards of acceptable behaviour. For instance, institutional investors develop and enforce codes for corporate conduct that are based on crucial elements of the neoliberal economic model, such as the predominance of shareholder value. Rating agencies shape the behaviour of market participants by limiting the range of legitimate practices for companies based on similar principles – otherwise companies risk a downgrading of their debt and, correspondingly, higher costs for refinancing. Furthermore, private norms developed by accountancy firms undermine alternatives to the neoliberal business model, e.g. the long-term perspectives of German business based on considerable hidden reserves. These and other types of coordination service firms not only further the neoliberal orthodoxy but also are supported in this function by states. The concept of transnational private governance thus presumes a form of global hybrid authority which prompts increasing concerns about the scope of this new type of influence and the opacity of the means involved (Graz 2006a).

Most GPE studies fruitfully situate the historical, political and economic context of transnational private governance and present considerable explanatory potential in terms of structural forces and power relations. They also offer a clear normative perspective and a forceful critique of such authority. Yet, GPE scholars often neglect the concrete mechanisms of transnational private governance. Although some studies – particularly on merchant law (Cutler 1997, 1999, 2003), rating agencies (Sinclair 1994, 1999), international capital adequacy frameworks (Chavagneux 2001; King and Sinclair 2003), reporting standards (Soederberg 2003) or transnational elite clubs (Gill 1990; Apeldoorn 2002; Graz 2003) – go into much detail, they do not provide a middle-range theory of transnational private governance in contemporary capitalism that could be generalised and probed on empirical grounds. These shortcomings relate by and large to the epistemological and theoretical underpinnings of GPE approaches. First, there are obvious limitations in terms of complexity reduction for holistic historicist approaches focused on non-causal explanations. As Gill points out, ‘the idea is to transcend rigid theories of causality and move towards a more reflexive and dynamic form of political economy explanation [. . .], which insists upon the centrality of the interrelationship between the “subjective” and “objective” social forces in historical developments’ (Gill 1993a: 26–7). Second, critical arguments remain difficult to refute on empirical grounds. From a historical materialist perspective, developments contrary to an assumed rise of neoliberal capitalism reflect the dialectic of history. Polanyi (1944) called this a ‘double movement’, in that society inevitably seeks to protect itself from the market’s drive to commodify increasing spheres of everyday life. Third, the broad transformative posture of GPE approaches are usually not matched by more concrete proposals on how to overcome the current deficits of transnational private governance.

Overcoming the divide between CPE and GPE

A review of the two most important current debates on transnational private governance shows that, although hardly flawless on their own ground, they might lead to substantial explanatory power if taken together. GPE accounts provide a much needed historical background in explanations highlighting power relations, but still fall short of outlining a theory of private governance that could be generalised, nor do they present concrete proposals on how to use this mode of governance for a transformative agenda. CPE accounts, for their part, provide persuasive and concrete analyses of institutional mechanisms, completed by clearly identified practical proposals, but generally lack comprehensive explanatory power and normative discernment. Therefore, their picture of private governance remains descriptive and mostly inductive.

Yet, on conceptual grounds, both approaches focus on the transnational underpinning of contemporary politics in contrast to state-centred analyses. By highlighting the importance of private governance, both argue that the conventional state-centric accounts are unable to cover important forms of cross-border collective action. Similarly, on empirical grounds, both strands of analysis would have much to gain in searching to complement each other. While GPE scholarship has accumulated a wealth of knowledge about some of the critical capitalist infrastructures such as finance, law and technical standards, CPE enquiries have explored concrete attempts to tackle some of the worst effects of capitalism in the depletion of the environment and the mistreatment of workers’ rights. Finally, in their normative orientation, CPE and GPE studies have more in common than often assumed, despite their different terminologies and difficulties in finding a common ground for dialogue. Both sides worry about the outcome of an unfettered capitalist expansion; both worry over the democratic legitimacy of transnational private governance; and both sides search for ways on how to overcome this sorry state of affairs. Further convergence would therefore not undermine their aspirations to transform – although probably...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Illustrations
• Contributors
• Series Editor’s Preface
• Preface
• Abbreviations
• 1 Introduction: Beyond the Fragmented Debate on Transnational Private Governance
• Part I (Self-)Regulation in the Financial Sector
• Part II Transnational Corporations Facing Labour, Ecological, and Consumers’ Concerns
• Part III Prospects and Limits of Avant-Garde Cases
• Part IV Regional Integration as a Driving Force Towards Transnational Private Governance
• Part V Conclusions
• Bibliography