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How the Global Shipping Industry Evades Corporate Responsibilities in the 2.0 Age

Finance
Published on:

HEC Paris Associate Professor Guillaume Vuillemey explores the ways the maritime shipping industry has evolved in the past 40 years to systematically evade its corporate responsibilities. In his groundbreaking research he reveals how this industry – which handles over 80% of global trade flows – uses flags of convenience and limited liability to flout international and moral law. This has repercussions on the environment and basic human rights. In a 30 minutes interview, Vuillemey outlines his approach of this industry and its links to what some are calling the “dark side of globalization”. Extracts.

Guillaume Vuillemey KnowledgeHEC - cover

listen to the podcast:

 

Guillaume Vuillemey, you've spent years researching maritime shipping industry and your results really challenge its engagement towards Corporate Social Responsibility. What drew your attention to this issue? 

Well, to be honest, I wasn't really planning to work on this issue at all. I've been working for several years on limited liability and trying to understand how firms face liabilities within our society. I explored the idea that limited liability, which is really a key feature of corporate law, could be used by corporations to structure themselves to evade responsibility in cases of environmental damages or other kinds of damages. But, in most cases, this hypothesis is very hard to validate empirically.

 

We can observe company-owned ships using data sets that are available but rarely studied. So, I explored the whole structure of shipping firms to study the costs of global trade.

 

With the shipping industry, however, one can observe with great accuracy these kind of features for one specific reason: most of the corporations in the economy have many subsidiaries but we don't know anything about their activities. That’s not the case in the maritime industry: we can observe company-owned ships using data sets that are available but rarely studied. So, I explored the whole structure of shipping firms, collecting detailed data on the ownership and operations history of all large merchant vessels that ended life over the 2000-2019 period. I observed how major companies have been able to evade responsibilities by structuring themselves so as to put all of the risk or most of the risk into those small, limited liability subsidiaries.

These conclusions have nourished a book you published last year, “Le Temps de la démondialisation”, in French. And you’ve summarized it in a 60 page working paper which will soon be published showing the links with what you call the “dark side of globalization”. You focused on the activities of over 1,700 merchant ships. How did you go about collecting this data?

Basically, I bought this data. All port authorities and shipping companies in the world have access to it. When a ship enters a port wherever it is, the port authorities can connect to a data set to learn about this ship. Who owns this ship? What is the flag of this ship? Is it well maintained or not? Where is it coming from? And so on. So, really, they have access to all of the information on merchant fleets worldwide. It’s there, but very few researchers have been using it, probably because they were not even aware of its existence. Yet, it turns out to be a very interesting data set to study globalization and the costs of global trade and far more easily available than data on subsidiaries in other sectors like banking or chemicals.

As a result, I saw the dramatic changes in the shipping industry, new trends going back 40 years. In the eighties, most of the ships were still owned directly by parent companies or by corporate groups. And they were not really avoiding any responsibilities or evading anything. Now, 90% of the ships globally are owned by single ship companies. So, in cases where those ships cause damage, it is extremely hard for a judge to get his/her hands on any other assets from the shipping companies just because these are distinct legal entities. 

You say that there have been huge changes since the 1980s. Why? What explains that 40 years ago there was much more control and so much less of the negative phenomenon in the maritime shipping industry that you point out today? 

I think that there are two main reasons. The main one is that there has been a rise in regulation and in potential liabilities that a judge can impose on a company in order to pay eventual damages in the US, in Europe, in Japan, in all of the major traditional maritime countries. So, shipping companies responded by trying to evade those regulations. The best way to do that is by registering into so-called “flags of convenience”, by moving to Panama, to Liberia, to the Marshall Islands, for example.

 

Following the first major oil spills and a rise in regulation, shipping companies responded by trying to evade those regulations, mostly by registering into so-called “flags of convenience” (Panama, Liberia...)

 

We can really see a clear shift these past four decades. Also, in the 60s and 70s, you have the first major oil spills and, for the first time, this sector starts to be much more heavily regulated. In other words, there was an attempt to try to evade regulations. The second reason is competition. It's a very competitive market and so once some players start to have such practices, all of the players want to do it just to be able to reduce costs and to keep up with the competitive environment. This framework drives taxes and regulation down, so a very large part of the global fleet is flagged with flags of convenience.
 

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