Foreign Policy, July/August 2001

Beginning in the late 16th century, European countries found a way to extend their global commercial and political power on the cheap: They granted charter companies monopolies over trade in designated areas and in return required the businesses to establish and maintain order there. Charter companies played an especially important role in the expansion of the British Empire, opening up North America for settlement and conquering India and Southern Africa before disappearing in the 19th century.

These companies had enormous powers. The 1621 charter of the Dutch West India Company gave it the right to "make contracts, engagements and alliances with princes and natives of the countries and also build forts and fortifications there, to appoint and discharge Governors, people for war, and officers of justice, and other public officers, for the preservation of the places, keeping good order, police and justice." Together with such powers, however, came escalating demands for moral responsibility. Missionaries insisted that the companies had the duty to facilitate the spread of Christianity, while many politicians expected the political values of their country to follow trade. The powers of the East India Company, declared British statesman Edmund Burke, "have emanated from the supreme power of this kingdom. . . . The responsibility of the Company is increased by the greatness and sacredness of the powers that have been intrusted [sic] to it." It was thus proper, he concluded, that the governor of the East India Company should be hauled in front of "the supreme royal justice of this kingdom" and held accountable for his actions in India.

Unexpectedly, the charter company concept is reemerging. At the forefront of economic globalization, transnational corporations, which have long pursued their business in developing countries with little oversight by weak local governments and even less by the international community, are being targeted by modern-day missionaries in the form of human rights and environmental nongovernmental organizations (NGOs). The idea that corporate economic power entails political and moral responsibility is also gaining acceptance in some Western governments.

Petroleum companies, large, highly visible, and often active in countries with undemocratic governments and dismal human rights records, are under especially strong pressure to promote reform in exchange for the privilege of making money. Oil companies are being told not only that they must behave according to international human rights and environmental norms, but that they must become agents of change by putting pressure on host governments to improve their own practices.

Consider Shell, which has extracted oil from the delta region of Nigeria since 1937. The company originally operated in the typical manner of the time, with little regard for the impact of its operations on the local population or the environment, and it got away with it. (An oil company official privately describes these early business practices as the "United Fruit model," a reference to the U.S. commercial behemoth the United Fruit Company, which held sway over large chunks of Central and South America for more than half a century.) Today, a chastised Shell makes considerable efforts to help the local population and limit environmental damage. Huge problems still exist: routine gas flarings (byproducts of drilling), frequent oil spills, and severe poverty. Nevertheless, even Human Rights Watch, one of Shell's harshest critics, admits that "development spending by the oil companies has also brought schools, clinics, and other infrastructure to remote parts of the country that might otherwise be far more marginalized by the Nigerian government."

Yet Shell remains a beleaguered company, closely scrutinized and constantly criticized by NGOs. Its installations are routinely sabotaged by groups with political agendas, by local people trying to make a living from siphoning off and selling oil, and by local entrepreneurs trying to increase the demand for the cleanup services they offer. When sabotage leads to fires that cause large numbers of casualties, NGOs hold the company responsible. And when Nigerian security forces dispatched to protect oil installations commit human rights violations, the company is also guilty.

In the most infamous case to date, the execution in 1995 of Ogoni activist Ken Saro-Wiwa and other members of the Movement for the Survival of the Ogoni People, NGOs accused Shell of complicity with the Nigerian military government. Meanwhile, critics dub Shell's programs to help local communities insufficient or inappropriate. For example, NGOs accuse Shell and other companies of destroying the environment and the health of the local population by flaring gas. Because some NGOs believe that all mining hurts rather than benefits developing countries, the groups also oppose a plan to capture the gas and pipe it to Ghana, where some of it would be used to power gold mines. No matter what it does, Shell cannot pacify its Nigerian and international critics, because what they want is beyond any single actor's capacity to deliver: a democratic, decentralized, efficient Nigeria, respectful of human rights and of the environment.

Difficult Neighborhoods

For transnational corporations doing business in developing countries, the rules of the game are changing. But pressure on oil companies and, to a lesser extent, mining companies, is particularly strong, all the more so when they operate in Africa, where the imbalance between the wealth and power of the companies and those of the host governments is particularly pronounced.

Oil companies are especially controversial and prone to attract the ire of NGOs for many reasons. The companies are big, which for many NGOs automatically translates into bad. Their power and wealth are completely out of scale with those of many oil-producing countries: In 1999, ExxonMobil's revenues totaled $185 billion, while Chad and Nigeria's gross domestic products (GDPs) equaled a paltry $1.6 billion and $43.3 billion, respectively. Oil companies, because they cannot choose where deposits are located, often operate in conflict-ridden countries governed by unsavory regimes, made all the more unsavory by oil revenue that encourages government centralization, fiscal irresponsibility, extravagant spending, and corruption.

Since unexploited oil fields are, by definition, located in underdeveloped areas, oil companies are also more likely to operate in pristine environments and disrupt the lives of indigenous people. And because they operate in volatile settings, oil companies become entangled in security operations conducted by their own or by government forces, with all the risks of human rights violations involved in the process.

Unlike other extractive industries operating in developing countries (such as copper and cobalt mining), oil companies are household names since they sell directly to consumers through service stations all over the world. As such, they are ripe targets for consumer boycotts. In the 1990s, human rights and environmental organizations campaigned, albeit unsuccessfully, for sanctions against Shell over its activities in Nigeria. Public pressure forced Amoco, Texaco, ARCO, and Petro-Canada to withdraw from Myanmar in 1998. (One U.S. company, Unocal, chose to stay in the country, but it was forced to take the drastic step of de-Americanizing: In 1997, it sold its service stations and refineries in the United States, eliminating the segment of its business most vulnerable to public action, and opened a twin corporate headquarters in Malaysia.) Consumers are not the only source of worry. Providing as they do a crucial economic commodity, oil companies could easily become targets of government intervention and regulation.

Oil companies themselves are partly to blame for bringing down the wrath of NGOs. Operating free of stringent government regulations so far, companies have caused enormous environmental damage in many countries: According to a recent CIA study, companies spilled some 2.5 million barrels of oil in the Niger delta from 1986 to 1996, and they contribute to global warming by flaring large quantities of gas for which they have no market. Their presence disrupts local communities that are not normally consulted (or even informed) about decisions that impact their lives. Even oil companies admit that the less reputable among them - never their own - encourage government corruption through payoffs.

Some NGOs from northern, industrialized countries would like to halt oil production altogether: Since oil and mineral riches in general have proven to be a curse for developing countries, why not leave them in the ground? This position was adopted in April 2000 by a coalition claiming to represent 200 NGOs from 55 countries that is determined to stop all World Bank financing of oil and other mineral extraction projects. (In fact, the group represents mostly northern NGOs or their branches in developing countries and Eastern Europe.) Such a radical position, however, has little resonance in poor countries, where the idea of renouncing oil revenue has no appeal. It is not only corrupt and greedy governments that want the revenue but also ordinary people desperate for a better life. Nongovernmental organizations hoping to halt oil development in Chad recently found little local support, which compelled them to change their tactics and look for ways to channel oil revenue to poor communities.

Having grudgingly accepted that oil companies are here to stay, many NGOs now seek to put them to good use. As "organs of society," such corporations have a "moral and social obligation" to respect the United Nations Universal Declaration of Human Rights, argues a recent publication of Amnesty International and the Prince of Wales International Business Leaders Forum. It is not enough that an oil company itself respects human rights, the publication notes. The company must also pressure its business partners and the government of the host country to do the same.

Corporations even have the responsibility to resolve conflicts and foster socioeconomic development, says the International Business Leaders Forum in a second report, The Business of Peace. The oil companies must "proactively create positive societal value by. . . engaging in innovative social investment, stakeholder consultation, policy dialogue, advocacy and civic institution building." In a similar vein, the U.K.-based NGO Global Witness published a report, A Crude Awakening, accusing oil companies in Angola of "paying vast sums (the future development potential of Angola) into a black hole" of government corruption and lack of accountability. Global Witness issued a series of recommendations, including that corporations should encourage transparency by demanding the Angolan state oil company Sonangol open its accounts to public scrutiny and prove it complies with Angolan law.

The Buck Stops Nowhere

Caught between the escalating demands of NGOs and the desire not to hurt the business interests of profitable corporations, governments seek compromises. The U.S. State Department and the British government are pushing voluntary guidelines developed in consultation with human rights organizations and mining and oil companies, including Shell, Texaco, Chevron, and BP. The guidelines require that the companies conduct a study of democratic and human rights conditions as part of their risk assessment, that they ensure the security measures they take to protect their installations comply with international law and do not violate human rights, and that they monitor human rights violations by the state security forces protecting their installations.

Such compromises, however, are rare. More often than not, governments try to split the difference between NGOs and big oil and in the process end up pleasing neither. The Canadian oil company Talisman Energy Inc. learned that lesson when it decided to invest $350 million in Sudan. The Bentiu oil fields, where Sudanese reserves are concentrated, are located in the worst possible area for a country divided by a civil war: in the south but close to the northern border, which means that southern insurgents insist the oil belongs to them, but the northern government controls the area. After years of unsuccessful attempts to find oil companies willing to work in such an explosive environment, the Sudanese government succeeded in attracting Talisman and the state-controlled oil companies of China and Malaysia to participate in the Greater Nile Oil Project. In July 1999, Sudan began exporting oil through a pipeline to Port Sudan on the Red Sea.

Already incensed by the imposition of strict Islamic law in Sudan, the abuses committed by soldiers against civilians, and the reappearance of slavery, international human rights organizations and church groups were appalled when oil revenue started flowing to the Sudanese government. They launched a divestment campaign against Talisman to force it to abandon the project. The value of Talisman's stock plummeted. The Canadian government sought a compromise: Talisman could stay in Sudan and avoid the imposition of sanctions by the Canadian government, provided it took an active role in ending the Sudanese civil war, encouraged Khartoum to improve its human rights record, and made sure the Sudanese government would use oil revenue for the benefit of its citizens and not to finance the war. Suspicious NGOs insisted, unsuccessfully, that they should be present when Talisman engaged the Sudanese government on such issues. Talisman had little choice but to agree, but it also hinted, ever so politely, that Ottawa was passing the buck: "We would very much like to see the Canadian government there - if you're going to have an effect, there should be a Canadian embassy there."

In response, other oil companies are learning the delicate art of passing the buck. Talisman was caught by surprise, with its investments already made, and it was forced to agree to demands it could never satisfy. In Chad and Cameroon, Exxon saw early on what was coming, and it deftly interposed the World Bank between itself and the NGOs. As a result, it is the bank that now finds itself in a seemingly impossible situation.

Chad, one of the world's poorest countries, sits on considerable oil reserves. In 1996, NGOs discovered that Exxon planned to drill for oil. From the NGO community's point of view, the project had two fatal flaws: It would provide a steady flow of revenue to a nondemocratic government, and it would build a pipeline to the coast through Cameroon, which would damage the rain forest and its inhabitants while providing revenue to another less-than-admirable government.

It is not easy to stop a determined oil company, nor is it easy to outmaneuver it. Exxon decided to move ahead with the project but also urged the World Bank to loan Cameroon and Chad the money they needed to pay for their small share of the investment in the project. Although the loans covered a mere 5 percent of the cost, the bank provided invaluable political benefits by diverting the ire of the NGOs from Exxon onto itself.

The result was a complex, three-way agreement between the World Bank, the Chadian government, and a number of NGOs. Under its terms, Chad's share of the oil revenue is not paid directly to the government. Instead, some goes directly overseas to repay the loans. The rest is to be spent under the supervision of a nine-member board that includes four NGO representatives. Even this board has little discretionary power: The agreement stipulates that 80 percent of the money must be spent on health, education, infrastructure, and rural development projects in Chad, 5 percent must return directly to the areas from which oil is pumped, and 10 percent must be set aside in a "future generations" trust, leaving only 5 percent to be spent at the discretion of the board. In addition, an International Advisory Group has been created to "further strengthen the mechanism for monitoring progress in the implementation of the Projects." Despite the multiple layers of supervision, it is far from certain that the agreement will work as intended. (Evidence already indicates that some revenue has been diverted to purchase weapons). But it is working for ExxonMobil, because the World Bank now finds itself in the hot seat, bearing the brunt of criticism if money is diverted or the system fails.

Return of the Pith Helmets

Charter companies played a crucial role in the first phase of globalization, opening up the world for trade and establishing empires. For the countries granting the charters, it was a wonderful system, reducing the cost of conquest and administration. For the charter companies it was also a wonderful system, allowing them to earn large profits and wield immense power. (The opinion of the populations where the charter companies operated probably differed, but they were never consulted.) The success of the charter companies, however, led to their demise, because even the most cost-conscious governments ultimately concluded that the administration of empires could not be left to private entities.

Can private corporations, and oil companies in particular, play a similar role in the second phase of globalization, combining their entrepreneurial activities with the role of political and moral reformers? NGOs clearly believe so. But it is a singularly bad idea to cast oil companies in that role.

First, they are not the right organizations for furthering moral causes. Oil companies may be "organs of society," but they are highly specialized ones, and their strengths lie not in devotion to democracy and human rights but in finding, extracting, and distributing oil. Corporations are not above the law and moral principles. Oil companies must improve their practices and should be held accountable for cleaning up their spills, for example, and for repairing the damage they have caused operating in "United Fruit" mode. But taking on the role of imposing change on entire countries does not fit the nature of these organizations. Indeed, a recent Shell-commissioned report examining 82 of the company's 408 development projects in Nigeria reveals that less than one third of those projects have been successful.

Second, the concept of oil-company executives lecturing developing-country officials on human rights and democratic governance is jarring because it evokes an image from a past that should not be restored: charter-company officials who saw themselves as agents of civilizations in distant countries "not ruled by Christian kings" (as they were described during that era). All that's missing are the pith helmets. And the problem goes beyond oil company officials. The attempt to couple increased economic globalization with a further globalization of moral values assumes that all people of the world share similar "wider values of civil society." Perhaps. But if these values are imposed from the outside, there is an unmistakable whiff of "white man's burden" rather than of universality.

Finally, trying to put oil companies in the role of reformers creates a process where nobody wants to take responsibility. The so-called partnership between NGOs, developed countries, and transnational corporations is beginning to look like a game in which each actor tries to pass the hot potato of reforming reluctant governments to somebody else. Neither the U.S. government, the World Bank, nor the human rights NGOs could convince the military regime in Nigeria to mend its ways in the past and cannot force change in Myanmar or Sudan today. So they saddle the oil companies with the task. And the oil companies are finding ways to pass the burden back. Above all of them, NGOs set unreachable standards, adding to the incentives of all involved to duck the burdens involved in achieving change.

Private corporations cannot reform developing-country governments; neither can the governments of industrialized countries, the World Bank, or the NGOs. Much of the change can only come from inside, and the process will be slow and convoluted. Outside actors can help, not by casting themselves as the agents of civilization and morality, but by themselves becoming more moral and civilized. A place to start might be for each to stop telling the others what to do and to clean up its own act instead - whether oil spills, the hubris that leads NGOs to speak for people they never consulted, or policies imposed by the World Bank and bilateral donors that hurt rather than help. Charter companies belong in history books, not in the 21st century.