How business can promote the rule of law and why it’s essential they do so

Companies seeking to do business in foreign jurisdictions are more likely to succeed where there is contract certainty, protection of intellectual property, and a fair and independent court system.

The rule of law is critical for the conduct of good business.

It’s not hard to see that the rule of law is under threat in both mature and emerging markets worldwide. Protectionism, corruption, excessive bureaucracy, or arbitrary political and legal decision-making impede the ability of companies to compete fairly or protect their assets and investments.

Such was the starting point for a dinner, hosted by Odgers Berndtson, and led by Chad Holliday, the Chairman of Royal Dutch Shell, and Lord David Neuberger, formerly President of the UK Supreme Court. Attendees included a number of quoted company chairmen and non-executive directors.

The event was held in support of the Bingham Centre for the Rule of Law, an independent research centre that promotes the advancement of the rule of law in markets worldwide. (Full disclosure: the Centre was named for my late father, Lord Bingham, also a former judge). The Centre is supported by a business network of multinationals that include Shell, BT, Diageo, HSBC, Rolls-Royce, BP and Unilever.

Matters of sustainability

Chad Holliday noted that business is familiar with the concept of sustainability, but that the rule of law is seldom mentioned in this context. But many sustainability issues confronting international business, such as human rights or anti-bribery, are difficult to fulfil where the rule of law is weak.

 “The rule of law is not just a matter for our legal teams."

"It ensures the operation of free markets and the stability of commercial arrangements. It provides protection for our investments and intellectual property, as well as for our employees, suppliers and customers.”

Standing up for the law

Lord Neuberger, briefly an investment banker with Rothschild before embarking on a forty-year (and counting!) legal career that saw him reach the top of the UK judiciary, said: “It seems to me quite likely that, not merely the success of capitalism and companies, but their very survival, depends on the rule of law.”

More importantly, he argued, companies can do something about it. With their significant resources, financial muscle and contacts with government “large companies are in a very strong position in deeds and words to uphold, to improve and to stand up for the rule of law.”

 “It is to their risk registers that companies should be looking when investigating what if anything they are doing about rule of law issues.”

"Many corporate risk registers will highlight the absence (in some jurisdictions) of level playing fields in regulatory issues, lack of contractual enforceability, or problems of supply chain integrity and reliability, not to mention bribery and corruption. The challenge is to identify an active means of response that goes beyond compliance and monitoring.”

Toothless UK sanctions

While rule of law issues are typically seen through the lens of international business, one of the most striking aspects of the discussion was how much of the rule of law agenda remains to be addressed here in the UK.

Section 172 of the Companies Act, for example, sets out that directors should ‘have regard’ for a wider constituency of stakeholders (employees, customers, suppliers, local communities) when considering the long-term success of the business. In reality, the section is toothless in terms of sanctions and has no apparent effect on how directors take decisions.

Most pointedly, in the event of a hostile takeover, a company’s credentials as a responsible corporate citizen have no bearing on the outcome, while the takeout price becomes all consuming.

A mooted solution would be to ban stock lending, or for only longer-term shareholders to have a vote (or to have additional voting rights) on acquisitions, as exists in some continental European markets. There seems to be little momentum for such a change in the UK, however.

No room for complacency

It is easy to think of the rule of law as one of the UK’s greatest competitive advantages and one of its most valuable exports, but complacency is dangerous. As one guest put it, China is enjoying considerable economic success under a regime of ‘rule by law.’

You can find out more about the Bingham Centre Business Network at https://binghamcentre.biicl.org/business-network