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We are in the midst of the so-called “third wave of autocratization.” Worryingly, the United States (US) is on this list. Given its sizable extra-territorial footprint – both its government and its companies (not least its financial sector) – there really will be no lifeboat for European or other non-US investors if the United States continues on its present path towards authoritarianism.
Experienced commentators are expecting civil unrest regardless of the outcome of the election. As Martin Wolf, the Financial Times’ chief economic commentator warns, even if Trump is clearly defeated, such regime change will not be the end of the crisis: “His party would again do everything it can to thwart a Democratic administration. The strategy of “pluto-populism” — the marriage of solipsistic wealth to white middle-class rage — would persist, with the help of the Supreme Court. Whatever happens in the election, the US’ role in the world will remain in question.” In the case that Trump loses the election but refuses to leave the White House, even greater levels of authoritarian abuse and human rights violations can be expected.
What can ‘we’ learn about engaging with countries where there is deep-rooted internal conflict?
‘We’ includes those US citizens – especially those with significant influence (e.g. Main and Wall Street executives) – who are currently sitting on the fence as bystanders. ‘We’ also means those who reside outside the country, those who care but might think they are powerless. Again, corporate and financial executives come high on the list.
Apartheid South Africa (SA) offers some important lessons. The regime, led by the National Party, lasted from 1948 to 1994 and was white dominated, fiercely “exceptionalist” and vehemently anti-communist. The US federal government and US companies with subsidiaries in South Africa played an important role there, for better and worse.
Multinationals, most notably including US and UK companies, were active enablers of the South African government for several decades. By 1975, US direct investment in South Africa was valued at $1.56 billion. With a direct investment position reaching $2.3 billion at the end of 1980, the US was the second leading supplier of direct investment capital to South Africa (shockingly, the UK was the first).
Pushed to disinvest by anti-apartheid activists – and later the Democratic Party itself – many companies supported a collaborative initiative named after its charismatic founder, Reverend Leon Sullivan.
The Sullivan Principles, a voluntary initiative, boasted 127 signatories and accounted for 80% of the US companies operating in SA within three years of its launch. Sullivan continued to solicit signatories before abandoning his initiative in favour of a complete exodus of US companies in 1987. At the heart of the initiative was a deal: if US corporations agreed to certain standards of fair employment in their South Africa operations, they should not be subjected to protests or shareholder divestment. This reputational cover was a major benefit to corporate signatories.
The Sullivan principles were a six-point code focused on workplace desegregation and equal pay for equal work. Although voluntary, this code intended to push US companies and their South African subsidiaries to publicly desegregate their workplaces, establish equal wage scales, and train and promote black workers. The Principles, along with similar codes such as the EEC Code of Conduct and the Canadian Code, notably challenged apartheid law and custom.
At the time of nationwide US protests demanding that universities and corporations divest from South Africa, Sullivan positioned the Principles as a practical, middle ground initiative. Although supported by the Carter administration, the code also sat well with Reagan’s approach to South Africa. Reagan and Assistant Secretary of State for African Affairs, Chester Crocker, crafted the “constructive engagement” policy – which appears to be the origins of this phrase which has now been adopted by traditional investors – as a “third way” between a never ending apartheid regime and immediate regime change and majority rule. Republicans believed the latter could lead to chaos and Soviet Union engagement.
The code was widely criticised by divestment advocates and some South African political leaders. According to Professor David Hirst, a leading US historian: “I think a lot of well-meaning people in the United States bought the Sullivan principles and constructive engagement, because it seems reasonable. Reagan would say, "If we're willing to talk to the Russians, why aren't we willing to talk to the South African government?" We're going to encourage them to moderate and reform — it sounds reasonable. But there was no real pressure. It was all talk. And it was exposed as that.”
Certainly, the self-reporting was easily gamed, not least because of the lack of effective social auditing. One example was the Ford Motor Company. At first glance, Ford appeared to be making progress towards successful implementation of the Sullivan Principles, scoring in the highest category of the company self-evaluations coordinated by Arthur D. Little (ADL). However, an external audit of Ford, completed in 1979 by the South African Institute of Race Relations, painted a far grimmer picture of Ford's operations, bringing into question the efficacy of other ADL evaluations. The initiative also shied away from the most contentious issues e.g. the right of Black workers to join a trade union. Most problematically, it kept going despite dramatically worsening civil rights in South Africa (eg the State of Emergency in 1985). It was not until 1987 that Sullivan acknowledged that escalation (i.e. divestment and disinvestment) was needed.
The initiative clearly helped President Reagan argue against sanctions, not least because the escalation of the “constructive engagement” strategy was very slow given the intransigence of the SA government. That has led academics including Zeb Larson, the author of “The Sullivan Principles: South Africa, Apartheid, and Globalization,” to conclude that “codes like the Sullivan Principles defuse more assertive action.”
Whether the Sullivan Principles contributed significantly to improving the well-being for non-white workers in South Africa is contested. They did little to address the lives of the African population outside of the workplace. However, James Stewart, the New York Times columnist, notes that “there is little doubt that the employment conditions improved greatly for black workers in U.S. companies that were signatories to the principles.” The workers in manufacturing industries of US subsidiaries were a particular case in point. By providing corporate, and by extension US government signaling of support to Black South Africans, the initiative explicitly challenged some core government laws and norms, e.g. segregation in the workplace.
Notably, the Principles empowered executives of US subsidiaries to take a stand, and not just on workplace issues. One example was the managing director of GM's South African subsidiary who publicly pledged aid to black employees who engage in civil disobedience and – without consulting GM's corporate headquarters – extended this aid to any of his black employees arrested for swimming at a "white" beach in Port Elizabeth. His action was backed by white business leaders in South Africa, which in part led the city council to desegregate its beaches. It seems likely that the Principles also encouraged more private lobbying, for example using scenarios to tell plausible narratives and the consequences.
But perhaps most importantly, the initiative directly empowered non-white employees to work alongside and possibly receive equal pay for their work. There is some consensus that this initiative was the “first earthquake” in the move to one person, one vote.
Some may think that apartheid South Africa in the 1970s-80s and the United States in 2020 are too different to make a comparison useful. Certainly, the United States is a much bigger economy than South Africa was then and it is not dependent on foreign investment. Although an empire in decline, the United States is a much more powerful country. In addition, the current Trump administration is dismissive of external engagement and put simply, full divestment from the dollar is not likely any time soon.
But European corporates and investors do have experience engaging in even less welcoming political contexts (e.g. Brazil, China and Russia). Moreover, the lack of desire to engage with US corporations long predates Trump.
In 2003, two large UK pension funds, RailPen and Universities Superannuation Scheme, launched a report – “Minding the Gap” – which highlighted the weakness of US corporate governance norms and called on UK fund managers to engage with their US investee companies as they would with UK or EU companies. The project was well ahead of its time and not a huge success for exactly the same reasons that engagement is said to be impossible today. Put simply, the bias against engaging with US entities is deeply rooted.
The facts state, however, that assertive engagement is possible with US entities – both corporate and also federal and state administrations. The Church of England showed what was possible with a company as resistant to change as Exxon.
Moreover, to self-censor now because of fear would be to invite even worse forms of government authoritarianism and corporate strongman behaviour.
But perhaps most importantly, non-US players are taking a huge bet on the US economy. US equities account for nearly 60% of global equity portfolios, a good chunk of govies, and the dollar is also the reserve currency, so there is a very strong case for “voice”, since “exit” in this situation simply is not possible. Put simply, it is because the United States is so dominant that it must be engaged with; of course adapting expectations accordingly, especially at the start.
It is widely reported (but perhaps apocryphal) that a US CEO once said: “South Africa is 1% of our business but takes up 30% of our board meetings.”
Depending on events in the US next week (November 4 election), many US companies and some international companies with a consumer facing brand could well be faced with a comparable choice. It is noteworthy that the Principles were introduced shortly after the very negative international press that followed the 1976 Soweto Riots.
So what can be learnt for today and with particular reference to the United States in this critical coming months, or the years ahead?
Here are our seven takeaways.
First, business executives have influence with authoritarian political leaders and engagement by international peers can trigger action by national corporate leaders. As Professor Michael Porter of Harvard Business School has noted about the United States: “If business leaders can help build trust in our democratic processes, we can do much to avoid civil strife.” Porter explicitly argues that executives could play an essential role in addressing such divisions because “they are often seen as non-partisan figures.” It is impossible to predict how this engagement could snowball and the impact this might have on staff, customers and elected officials.
Second, the leader(s) of this initiative should have a strong understanding of the ‘target’ country but also influence with external companies. Leon Sullivan had credibility, certainly in the 1970s, with civil rights campaigners in the United States and Black South Africans. It is interesting to speculate on who might play this role vis a vis the United States.
Third, collective action maximises corporate influence vis a vis governments and also helps to protect individual firms. The scope for action depends on other factors (e.g. how sensitive the government is to international bond markets). Interestingly, Trump’s first press conference about the pandemic was only after the dollar started to fall. Put simply, investors matter a lot even to the United States.
The current Trump administration is dismissive of external engagement and put simply, full divestment from the dollar is not likely any time soon.
Fourth, as the Principles showed, it is possible for foreign corporations to support issues which challenge dominant norms, and which involve taking sides, even on contentious (aka “political”) issues. This should be based on strongly-held corporate values and norms (cultural and other) of the country where the corporation is headquartered. In fact, foreign for-profit organisations are often the best suited to doing so – academics have shown that "investors from high social norm countries" are particularly effective at promoting ESG disclosure. There are many examples of this. Foreign investors (in this case, from the UK and US) played a significant role in triggering action by Dutch investors about the Royal Dutch Shell reserves scandal. More recently, a UK hedge fund has persuaded the Spanish airport group, Aena, to be the first in its sector to publish a climate transition plan.
Here are four issues that have both driven but are also symptoms of societal dysfunction in the United States – with knock-on effects globally – which non-US investors could help with:
- Executive remuneration, especially quantum;
- Corporate political spending and lobbying (“corporate capture”);
- Diversity at all levels of companies but in particular gender and ethnic diversity in the boardroom and an independent Chair;
- Acknowledgement of climate risk and at a minimum, reporting against the globally recognised guidelines from the Taskforce on Climate-related Financial Disclosures. Of particular relevance to US financial firms is the report of the Commodity Futures Trading Commission’s Climate-Related Market Risk Subcommittee entitled Managing Climate Risk in the U.S. Financial System. The Climate Subcommittee voted unanimously 34-0 to adopt the report and there is every reason for climate-aware non-US investors to support its implementation.
Many analysts and well informed insiders have noted that the US-headquartered mega managers have a particularly weak track record on the climate front although much the same can be said for the other three issues too. Why? One reason is that the executives of US fund management firms and US corporate executives share similar worldviews. As with all other countries, principled international leadership – ideally with a US partner co-leading – could help.
This means non-US investors adopting a top-down stewardship and proxy voting policy with default positions, to be implemented on the normal “comply or explain” basis. This would mean individual portfolio managers were not left responsible for initiating what could be sensitive actions, especially in the early stages.
Fifth, voluntary initiatives are not alternatives to policy and political change but rather can contribute to those goals, especially if the founders are aware of the dangers of co-option by the authoritarian government. It is critical that the leaders of voluntary initiatives recognise their limits and monitor their impact, soliciting critical feedback. If these initiatives start to provide reputational cover without changing things substantively on the ground, the leaders and members of these initiatives should terminate them and make this public. This is very relevant to countries which are even more authoritarian than the United States and where there is, currently, little prospect for the recognition of human rights. The Chinese government’s treatment of Uyghurs is a good example.
Sixth, companies will tend to ignore the really difficult issues if they can get away with doing so. Hence NGO, media and employee pressure is critical and these voluntary initiatives should be structured so as to make this input routine. The major importance of criminal players in the illegal (but tolerated) deforestation of the Amazon is a good example: without civil society pressure, this would not be on the agenda.
Seventh, when companies are being pressed to act, they will push their governments to do more to resolve the problem. Thinking ahead to possible events in the United States, this would help sensitise non-US governments who have influence they are not harnessing (e.g. the UK). And it would also embolden parts of the US administration that are willing to listen. State administrations have much unexplored potential to be a bigger part of the solution to issues as diverse as climate change and civil/human rights and this is regardless of the outcome of the November election. Take California as an example. If it was a sovereign nation, it would rank as the world's fifth largest economy, ahead of India and behind Germany. It also boasts the headquarters of over fifty Fortune 500 companies. California has been a leader in climate policy and international investors can do much to encourage this. And when engagement does not work, “denying debt” must be considered. AkademikerPension, a Danish pension fund, has decided to exclude Chinese bonds and equities because of human rights concerns.
To conclude, these seven lessons from the apartheid era can be adapted to current situations which also seem intractable. Sadly, this includes the United States. Whilst it is tempting to wait for the outcome of the Presidential election, this kind of procrastination will not help.
Raj Thamotheram, is Senior Adviser at Preventable Surprises, the responsible investment think tank.
Mattie Webb is a PhD Candidate, Department of History: University of California, Santa Barbara.
(1.) There was a “Second Amplification” of the Principles in May 1979. Principle 2 now included an addendum: “Support the elimination of discrimination against the rights of Blacks to form or belong to government registered unions, and acknowledge generally the right of Black workers to form their own union or be represented by trade unions where unions already exist.”