Corporate Social Responsibility and Canadian Extractive Industries Abroad.

Justin Ling
B00526586
December 10th, 2010
According to author and Mount St Vincent professor Laura Penny, “Saying 'let the market decide' is
like saying 'let the car drive.'” This, a good rallying call for the anti-capitalist and alter-globalization
left, is an anti-thesis to the idea that corporations can be humanitarian actors on foreign soil. The intent
of this paper is to analyze to what extent it is possible for Canadian multinational corporations (MNCs),
more specifically in the extractive industry, to operate a zero-sum or even a positive-sum game in the
developing countries in which they operate. Furthermore, the paper will investigate the current way in
which the majority of these MNCs do operate. Herein there will be a natural bias, predominately
because in academic literature there is a preponderance to highlight the critical and use only the least
amount of positive examples merely as a contrast. This paper will likely follow those guidelines, but
there is no suggestion within that the examples of corporate malfeasance are by any means the norm, or
that they are the majority of cases. Finally, the paper will tackle these questions under the auspices of
'corporate social responsibility' (CSR), an industry and governmental term used to describe the
voluntary self-regulation (although with an increasing level of weak-handed governmental oversight)
of Canadian MNCs operating abroad.

The viewpoint through that this paper introduces and employs is, for lack of a better title, the 'One Toke
Over the Line' (OTOTL) theory. It is a facetiously named concept that many authors have expanded
upon in the past, under various other names. Essentially, when companies are given carte blanche to
operate abroad, what external regulations will they face? In CSR theory, there are three basics;
stakeholder, institutional and Austrian. This paper will not delve heavily into this nomenclature, but
will simply defer to Frynas' conservative analysis in Beyond Corporate Social Responsibility. He
writes, “Stakeholder theory predicts CSR activities as a direct result of external pressures from
different actors.”1 He further cites a definition of stakeholder that includes essentially anyone “who can
affect or is affected” by the policies or practises of the company. He continues, “Institution theory
predicts that firms' strategies and practises will become similar within a defined business environment,
as similar firms face similar social expectations.”2 and finally, he defines the Austrian theory as one that
places utmost importance on personal reasoning. That is, it suggests that the actions of corporations can
be reduced to individual decision-making and that the consumer can affect corporate behaviour through
the free market.3 This paper intends to reject all three, and will do so in process of looking into case
studies. Looking at these three theories is important because they are the foundation of why CSR
1 Frynas, Beyond Corporate Social Responsibility 15
2 Ibid 17
3 Ibid 19-20
works, rejecting them would be to undermine the very framework of the concept.

In short, these three theories seek to rationalize and suggest why all corporations should, and to some
extent, do operate with some level of humanitarian benevolence. While these three main CSR theories,
as well as other marginal concepts, certainly apply to a great number of companies and even some in
the extractive industry, there appear few instances of Canadian extractive MNCs taking the moral high
ground to the detriment of their profit margins. This, however, is a declared cognitive bias. Logically,
much of the literature, on both sides of the issue, will focus heavily on the infractions and not pay much
attention to those moral stewards of the Global South. Furthermore, this paper seeks to tackle how
Canadian companies operate in a global economy in the parenthesis of foreign policy. It does not intend
to tackle why these corporations should escape these regulations for the good of the Canadian
economy, as that is irrelevant for the eventual conclusion.

Frynas himself contradict the credibility of the stakeholder theory when he writes, “The 2001 boycott
campaign against Exxon made little impact on the company's strategy, despite shareholder resolutions
and media publicity.”4 While he does list several examples of pressure, from within the company and
from outside, that reverses an ethically questionable decision, he acknowledges that it was only made
after immense and extraordinary detrimental public pressure. Frynas gives an example of Shell oil,
who, in 1995, had plans to sink an oil rig, only to backtrack after international pressure continued for
months. This is a rare example. A further example of BP oil lends credence to the OTOTL theory. BP,
implicated in outright support for the abusive Colombian army as well as indirectly ordering attacks on
their critics, did not end the behaviour until after they were exposed and subjected to international
outrage. Is CSR, then, a practise to correct bad behaviour or a mindset to encourage ethical practise?
The use of 'responsibility' should certainly suggest the former.

Institutional and Austrian theories are somewhat loftier and don't tend to have much to back them up.
Institutional theory can work only assuming two factors; there are prominent actors in the industry that
operate and succeed because of their moral superiority and the other players can be convinced that
adhering to CSR standards will improve their profits, be they in the short or long term. The Austrian
school lends an extreme importance to the individual, and it suggests that consumer demand can
change corporate practises and policy. This seems unlikely, given that boycotts are often ineffective, as
Frynas points out in his example of the Exxon boycott, which did very little to change policy at the
4 Ibid 25
time.5

It seems a prevailing rule that, given the chance, MNCs will push well beyond the boundaries of what
is socially, legally and morally acceptable, only to backtrack and proclaim themselves changed once
international attention is shone upon them. This, too, generally speaks of the big players. For every
Shell and BP there are dozens, if not hundreds, of smaller players who are less beholden to external
pressures.

Some final variables must be added; to what extent are these MNCs impacted by Canada's lax laws,
how are they being affected the laws of the host country and how are they regulated, if at all, by the
international community?

These are best addressed by an example-by-example basis, as these variables change based on the year
and the host country. It, however, allows one to look at the required, rather than the voluntary, aspect of
CSR. Some, such as those in the Austrian school, would argue that CSR is best left entirely voluntary.
However, this by no means a mainstream view outside of economics schools. The MNCs themselves
seem to prefer to preach the stakeholder approach, as it appears as though they are accountable to the
general public, rather than to other corporations or to the free market.

Canada presents an unwillingness to tackle any serious regulatory framework. In the advisory group
report of the National Roundtables on Corporate Social Responsibility and the Canadia Extractive
Industry in Developing Countries, a collection of extractive MNCs and NGOs signed off on a series of
recommendations that would establish a regulatory framework on CSR. The components of the
framework represented a rather robust series of checks and balances that constituted a robust example
of the stakeholder theory in effect. The report called for, amongst other things,

“CSR reporting obligations based on the Global Reporting Initiative...An independent

ombudsman office to provide advisory services, fact finding and reporting regarding
complaints...A tripartite Compliance Review Committee to determine the nature and degree of
company non-compliance...The development of policies and guidelines for measuring serious
failure by a company to meet Canadian CSR standards...”6

These recommendations were never implemented. The Harper government did implement a CSR

5 Frynas, 25
6 Advisory Group Report, National Roundtables on Corporate Social Responsibility (CSR) and the Canadia Extractive
Industry in Developing Countries. III
counsellor two years later, but it is essentially toothless and was met with opposition by the very NGOs
who helped draft the roundtable report. According to MiningWatch, a Canadian NGO that investigates
alleged abuses and lobbies the government, listed their perceived shortcomings of the new office,
The CSR Counsellor may not create new performance guidelines. The CSR Counsellor may
only “review” the activities of extractive companies with the explicit consent of the company in
question. The CSR Counsellor has no ability to recommend any form of sanction for companies
found to be out of compliance with the voluntary guidelines. The CSR Counsellor does not
represent a mechanism by which Canadians can hold the Canadian government to account by
conditioning government taxpayer funded political and financial support for extractive
companies on their compliance with best environmental practices and with international human
rights standards. The CSR Counsellor has been given the mandate to investigate complaints
brought against NGOs by industry. 7

According to the CSR section of the DFAIT website, it is the office's responsibility to act,

as an impartial adviser and facilitator, an honest broker that brings parties together to help
address problems and disputes. This approach is based on the view that a credible, impartial and
transparent process can help identify workable solutions to disputes. 8

In other words, the office will be a liaison between the MNCs and those who filed complaints with the
body. At this point, it doesn't appear as though the office has done any actual arbitration, aside from a
few dozen fact-finding tours abroad. It is, however, very early in the CSR's mandate and it remains to
be seen if more tangible progress can be made. Given, however, the limitations listed by MiningWatch,
it seems unlikely that the office will live up to the expectations established by the roundtables.

One of the best case studies that can be drawn up on this topic is that of the Antimina mining project in
Peru. The massive project, spearheaded by two Canadian companies who created Peruvian-based
Compañía Minera Antamina, cost $2.3 billion dollars and is among the top ten largest mine projects in
the world. On top of that, it was perhaps one of the largest investments in a CSR campaign at the time.
Furthermore, it was subject to strict regulations by the Peruvian law. As David Szablowski points out in
his article on the project,

“From early on, senior management at CMA and its parent companies articulated a strong
commitment to social responsibility in public forums...It sought to required lands and peaceful –
and perhaps good – relations...the industry's financial stakeholders were strong drivers of the
trend towards addressing community issues.”9

While this may seem like a prime example of stakeholder-based CSR, the final results suggest that the
7 MiningWatch, “The Government’s New “CSR Counsellor” for the Extractive Sector” 05/01/2010
8 Department of Foreign Affairs and International Trade Canada, “The Review Process” 10/11/2010
9 Szablowski, Community Rights and Corporate Responsibility. 45
initial PR for the community-oriented programs were either lip service, or simply unpalatable once the
required concessions were made.

The project had two years in the planning phase before the company was locked into a long-term
investment with the Peruvian government, who owned the rights to the land. It was in this time CMA
worked diligently to create a bond between itself and the locals, who would be displaced when the
project began. Furthermore, it was subjected to CSR standards by the Multilateral Investment
Guarantee Agency, a section of the World Bank. If the agency deemed the project in violation of any of
its regulations regarding social or environmental practises, the investment could be cancelled, spelling
the likely end of the project.

As a result, CMA set itself up as the “benevolent patron”10 in the eyes of the locals. In fact, when things
began to go sour, this relationship endured and as such,

“CMA's Peruvian employees were cast as those responsible for deceiving local communities
while the distant Canadians (los canadienses) – often referred to as people from a developed
country – were presented as being essentially benevolent.”11

The plan would have seen CMA relocate all displaced peasants, however,

Barely five months after the conclusion of the final land-sale agreements, a revised construction
plan led the company to drop its land-for-land resettlement scheme and to opt instead for a
quicker cash-based resettlement program. CMA's Community Relations department was not
informed about the decision. 12

This soon became typical. Some of the landowners were paid off quickly for various sums while others
were shut out. Later, “CMA's plans for local development projects ground to a halt..”13

After this degradation of trust, a letter was sent to the World Bank by locals affected by the mining
project, which led to “an intensive regulatory response.” CMA quickly reiterated its emphasis on CSR.
This, however, led to minimal results. Despite the local development projects, which never manifested,
and even a large cash pool, known as canon minero, made up royalties and taxes that is to be spent on
development in the region where the extraction is taking place. The fund invested nearly a billion
dollars between 2007 and 2009. CMA's contributions constitutes a large portion of this fund. Even

10 ibid 49
11 Ibid 49
12 Ibid 50
13 Ibid 51
cash, it seems, solves nothing. Émilie Lemieux, who wrote a report blasting the status of the Canadian
mining sector in Peru based on her experiences there, writes,

“Despite the income it made through the canon minero, [the region of] Ancash has a poverty
level of 42%...The province of Huari, where the Antamina Mining Company is situated, is the
most economically favoured by the canon minero. Yet, Huari remains one of Ancash’s poorest
areas. For example, as the district that receives the most canon minero funds, the district of San
Marcos has a malnutrition factor of 45%. “14

Much of the blame, Lemieux says, can be shouldered on the poor administration of the fund and the
lack of directive on the part of CMA to do anything but dole out money. To this end, CMA also started
an entirely voluntary fund. Worth between $40 and $60 million a year, the fund primary involves “key
local interest groups, simultaneously strengthening relations with the State and representative
community organizations.”15

The lack of development has furthermore led to mass protests, especially by displaced indigenous
citizens, against pro-market reforms and further mining operations. These clashes have led to dozens of
deaths and hundreds of injuries.

Canada, home to 75% of the world's mining corporations, has yet to find an appropriate framework for
which it can ensure that its companies can operate abroad. CMA represents a good, but rather tame
example of the need for regulation. This need has created several watchdog NGOs and two private
member's bills in the House of Commons. One bill has yet to be voted on while the other, C-300, failed.
Intense lobbying on parliament hill by these MNCs led some, including the watchdogs, to suggest that
the political will of Ottawa to create a mandatory framework has been bent by corporate interest to
cling to the voluntary system that allows for a certain level of impunity. This would be unsurprising, as
it has been heavily suggested that Canada's foreign service is already filing into the role of a corporate
facilitator.

Peru, for example, became a target for the Canadian International Development Agency, almost
immediately after the country signed a free trade agreement. A conflict of interest can be deduced here,
as, “the agency considers that the mining sector can greatly contribute to the elimination of poverty if
managed in a sustainable and sound manner.”16 This, Lemieux writes, is rhetoric that has resulted in

14 Lemieux, Mining and Local Development 18

15 Ibid, 22
16 ibid, 35
three projects where,

“...the work is determined by the mining company and then oriented to the benefit of the local
communities, in the same approach that was observed in the CSR projects that had been
administered by the companies themselves...Essentially, it is looking to prove the good actions
of the Canadian companies, as well as its ability to bring development to the country.” 17

Assuming this is the case, the Canadian foreign service is essentially beholden to corporate interests in
a symbiotic relationship that raises questions of credibility and legitimacy in its mission of
“development.” Economic development, this case study shows, does not always translate into social
development.

There are many implications for Canada's foreign policy here, but the explicit ramifications are perhaps
of the most value. For one, this relationship between the “developed” world and the “undeveloped”
world appears to be largely typical of FTAs of this kind. The current administration has put a concerted
effort into building these relationships without establishing the complimentary regulations that would
set the rules to protect both countries. The issue with these theories of CSR that should, but largely do
not, drive policy and practise is that whenever they fail, lives are ruined. Perhaps worst of all, Canada
has developed trade relations with these governments without really taking an interest aside from their
natural resources.

Canada's rhetorical status of a so-called 'middle power' in the world, a global mediator with
development in mind, is jeopardized by its actions. In its push for rapid trade liberalization and
integration into the global economy, it puts its developmental responsibilities on the back burner at the
bequest of its economic growth. Frynas points out that these trade relationships can lead to a
measurable decrease in social development,
“Large foreign exchange inflows generated by extractive industries exports lead to the
appreciation of a country's currency exchange rates, which makes it more difficult to export
agricultural and manufacturing goods...Extractive industries also draw capital, labour and
entrepreneurial activity away from non-resource sectors...”18
To this end, it acts much alike one of these MNCs. In much the same way, CSR is used to sell the
project, but is quickly curtailed in the name of maximizing profit. The commitment to social
development is rarely revisited until problems occur that jeopardize economic development for the
company.

17 Ibid 35-36
18 Frynas, 134
The intent of many of those pushing for tougher CSR regulations is not to demonize or attack MNCs
operating abroad, rather, it is a recognition that corporations exist to maximize their profit margins.
Milton Friedman largely agreed with this, writing,
…there is one and only one social responsibility of business – to use its
resources and engage in activities designed to increase its profits so long
as it stays within the rules of the game, which is to say, engages in open
and free competition without deception or fraud19
This is where the Austrian theory, of which Friedman shared some tendencies, coincides with those
who push an alter-globalist agenda. Corporations should not have to shoulder the obligation of
voluntary CSR. The failure to create a governmental framework on the part of the G8, G20 and
“developed” countries has led to a growing disparity between the much of the world, such as Canada,
and the Global South. Economic colonialism will lead to a failing of this relationship.

The Canadian government can not take absolute responsibility for how its companies operate abroad,
but it should, at the very least, not directly fund and sponsor companies that are known to contradict
basic standards that would land them in serious trouble had they been operating in Canada. Sometimes,
companies can go beyond the realm of what is questionable and delve into the world of piracy. Jason
Switzer and Halina Ward point out the worst case scenario in a paper prepared for DFAIT,
“At its worst business investment can create incentive for violence, mobilize soldiers against
citizenry to secure economic assets for a ruling elite, legitimize autocratic regimes, and
undermine the emergence of democratic processes.” 20
This is certainly the implication for certain Canadian extractive MNCs that operating in the Democratic
Republic of Congo in the midst of its civil war. In their paper, Switzer and War outline numerous
recommendations for MNCs operating in proximity to local conflict, but it does not tackle the debate
regarding voluntary vs. mandatory CSR. This seems counter-intuitive, as the paper outlines a myriad of
suggestions and recommendations for MNCs. The scope of this paper would draw the natural
conclusion that the only group with the resources in place would, indeed, be DFAIT. Furthermore, these
extreme cases are instances where Canadian foreign policy overlaps and, often, contradicts its foreign
investment. How can DFAIT or the Department of Defence act as a peace-restoring force when
Canadian companies are themselves being drawn into the conflict? In fact, merely the presence of
unregulated extractive industries itself can lead to destabilization,
“...the prospect of gaining control over natural resource revenues may encourage the formation
of rebel groups and separatist movements. It has been shown that a country's dependence on
19 Whellams, The Role of CSR in Development: A Case Study Involving the Mining Industry in
South America. 37
20 Switzer, Ward. Enabling Corporate Investment in Peace: An Assessment of Voluntary Initiatives Addressing Business and
Violent Conflict, and a Framework for Policy Decision-making X.
 natural resources dramatically increases the threat of armed conflict.”21

To avoid the hypocrisy that presents itself here, Canadian must regulate how its companies act abroad.

The three ways in which it can do this are; by withholding funding from infracting MNCs, by
establishing an alien torts system or by pushing for an international framework that would be legally
binding.

Briefly, neither of the three are foreseeable options in the near future. The first option recently found
itself manifested in Bill C-300, a private member's bill which would have given,

...the Minister of Foreign Affairs and Minister of International Trade the responsibility to issue
guidelines that articulate corporate accountability standards for mining, oil or gas activities and
it requires the Ministers to submit an annual report to both Houses of Parliament on the
provisions and operation of this Act. 22

The reporting would have marked a departure from the current state, where the only information about
infractions is gathered by NGOs and journalists. Bill C-354, an infant bill that stands little chance of
getting passed in the current session, details an alternate solution,

This enactment amends the Federal Courts Act to expressly permit persons who are not
Canadian citizens to initiate tort claims based on violations of international law or treaties to
which Canada is a party if the acts alleged occur outside Canada. 23

Both bills are an improvement on the current state, simply because there is not regulation currently on
the books.

21 Frynas, 135
22 Bill C-300, Corporate Accountability of Mining, Oil and Gas Corporations in Developing Countries Act.
23 Bill C-354, An Act to amend the Federal Courts Act (international promotion and protection of human rights)
Bibliography

Frynas, Jedrzej George, Beyond Corporate Social Responsibility (Cambridge University Press, 2009),
<http://lib.myilibrary.com?ID=215570> ( 10 December 2010)

Whellams, Melissa, The Role of CSR in Development: A Case Study Involving the Mining In South America (Saint
Mary's University, Halifax, Nova Scotia) <http://bit.ly/i97Pc2> (January, 2007)

North, Liisa, Clark, David Timothy and Patroni, Viviana, eds. 2006. Community Rights and Corporate Responsibility.
Toronto: Between the Lines.

MiningWatch, “The Government’s New “CSR Counsellor” for the Extractive Sector.”
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