by Dan Negrea

The Washington Times

Corporate social responsibility illustration by Linas Garsys / The Washington Times 

In boardrooms across America, it is now accepted wisdom that corporations have both a profit responsibility to their shareholders and a social responsibility to their larger constituency of stakeholders. Their social responsibility regards environmental, social and corporate governance (ESG) principles.

A corporation’s freedom responsibility is a subset of its social responsibility: It is the recognition that dictatorships habitually violate ESG principles and that corporations doing business in countries with dictatorial regimes expose their stakeholders to significant risks.

The traditional view has been that corporations only have a profit responsibility: To earn a return on the monies entrusted to them by their shareholders.

The corporate social responsibility is a modern concept. It has its roots in the 1940s and 1950s, the early days of the Cold War with the Soviet Union.  Scholars and business leaders argued that business managers also had a duty to support their country in that crucial contest for freedom.

Today, the social responsibility of corporations is broadly accepted around the world. It is understood to include protecting the environment and human rights, dealing fairly with buyers and suppliers, delivering value to customers, doing good in their communities, and advancing diversity in management and the workforce. Even countries favor ESG principles, as attested in many U.N. resolutions.

ESG compliance has even become a disclosure item in corporate financial reports. This is mandated by law in Europe and done voluntarily in the United States.  The premise is that companies that violate ESG principles are riskier and that this risk should be disclosed.

Many oppose the social responsibility doctrine. They argue that the shareholders did not empower the corporate managers to make social policy choices.

But the freedom responsibility should not be controversial.  Dictatorships violate human rights and many other ESG principles. This results in disruptive counteractions at home and from the Free World. Corporations should recognize that it is risky to do business with dictatorships and disclose this to their stakeholders.

A case in point is Communist China, the United States’ largest trading partner.  It is a dictatorship with dreams of world domination and a major ESG violator.

Some China business risks are obvious. American companies incur  reputational, economic, and legal risks if they are associated in any way with the genocide in Xinjiang:  If they trade with Chinese companies that benefit from slave labor in Xinjian;  Or are involved in building the labor and reeducation camps there;  Or trade with companies involved with the security agencies of the Chinese government.

Other risks are less obvious but equally significant.

ESG emphasizes the protection of the environment and fair labor practices.  Yet, Communist China allows its companies to commit some of the worst environmental crimes in the world. And it opposes true freedom of association for Chinese workers: The Chinese Communist Party controls the official trade union and represses attempts to form independent trade unions. The official trade union cares more about management’s production goals than about workers’ rights.

American companies trading in China thereby benefit from a cost arbitrage:  Chinese companies have lower production costs than their competitors in democratic countries partly because of China’s inferior environmental and labor standards.  But there is global pressure on China regarding their standards and it is risky to assume that this arbitrage will continue. U.S. corporations should disclose their due diligence regarding their Chinese counterparts’ compliance in these matters.

U.S. companies should also disclose that doing business in Communist China is intrinsically riskier because it is a dictatorship engaged in a cold war with the United States.

U.S. companies in national security sensitive sectors will see their China supply chains disrupted. For example, the United States finds unacceptable its dependence on China for essential supplies like antibiotics or medical personal protective equipment and will reshore that production.

Another risk comes from the United States’ imposition of tariffs in response to Chinese illegal or unfair actions. Tariffs cause unplanned cost increases and supply chain disruptions.

Yet another risk comes from regulatory changes. In a dictatorship, they come unexpectedly, are often arbitrary, and cannot be successfully appealed. In China, for example, the government is pressuring foreign companies to permit the formation of a company Communist Party committee. The leadership of the committee is expected to see the company’s business plans and participate in key decision. Foreign companies find this intrusive but, according to the CCP, 70 percent of them have complied.

Business is a noble calling. The corporate freedom responsibility gives corporations an opportunity to contribute to the peace and prosperity of the world by distancing themselves from dictatorships.

• Dan Negrea served at the Department of State as the special representative for commercial and business affairs and as a member of the Secretary’s policy planning staff.  He was previously a Wall Street executive.