Corporate
Accountability:
Is Self Regulation The Answer?
By Kavaljit Singh
24 April, 2007
Countercurrents.org
The
globalization of trade and investment flows has been paralleled by the
emergence of Codes of Conduct. Although the first corporate code of
conduct was created by the International Chamber of Commerce (ICC) in
1949, the 1990s witnessed a plethora of voluntary codes and corporate
social responsibility (CSR) guidelines. There is no consensus on the
precise definition of a code of conduct. Codes can range from one-page
broad statements to detailed benchmarks and guidelines on how to conduct
business practices globally. Voluntary approaches are based either on
a self-regulation model or a co-regulation one between firms, citizen
groups, and governments.
It is important to underscore
that voluntary approaches did not emerge in a vacuum. Their emergence
has more to do with a change in the paradigm of how global capital should
be governed. Voluntary approaches, such as the OECD Guidelines on Multinational
Corporations (see below), were a direct response to UN initiatives in
the 1970s to regulate the activities of TNCs. However, it needs to be
emphasized that, unlike the UN initiatives, the OECD Guidelines were
not aimed at protecting national sovereignty or addressing developmental
concerns of the host countries, but at circumventing the UN initiatives.
The deregulation and ‘free
market’ environment of the 1980s gave greater legitimacy to the
self-regulation model embedded in the Anglo-Saxon business tradition.
Many developed countries, particularly the US, encouraged TNCs to adopt
voluntary measures rather than enacting and enforcing strict laws governing
their activities and behavior. The argument against regulation was based
on the belief that TNCs would undertake greater social and environmental
responsibilities through voluntary measures.
In the late 1980s, campaigns
launched by NGOs and consumer groups brought significant changes in
the public perception of corporate behavior, which in turn facilitated
the further proliferation of voluntary initiatives. Campaigns in the
developed countries focusing on popular consumer brands such as Nike
and Levi’s brought to public notice some of the appalling working
and environmental conditions in some of these companies’ overseas
production sites. Realizing that bad publicity could seriously damage
corporate and brand reputations and that their products could face consumer
boycotts, many corporations suddenly started adopting codes of conduct
and other CSR measures. Since the early 1990s, the majority of voluntary
measures have been undertaken by individual corporations. US-based corporations
were the first to introduce codes of conduct with jeans manufacturer
Levi’s adopting one in 1992.
Pressures generated by the
‘ethical’ investor community and other shareholders also
contributed to the proliferation of voluntary measures.
Given that there is often
a considerable discrepancy between a corporation undertaking to follow
a voluntary code and its actual business conduct (e.g., Nike), many
critics argue that CSR measures have become corporate public relations
tools used to create a positive corporate image. In today’s competitive
world, a positive image as a responsible company adds significant value
to a company’s business and reputation and helps it manage various
risks. Thus, the growing popularity of voluntary measures in recent
years has not ended debates on how to regulate TNC corporate behavior.
Types of Codes
Over the years, a variety
of codes of conduct governing whole corporate sectors have emerged.
Some of those to emerge from international organizations include the
International Labor Organization’s Tripartite Declaration of Principles
Concerning Multinational Enterprises and Social Policy; the OECD Guidelines
on Multinational Enterprises; UNCTAD’s Set of Multilaterally Agreed
Equitable Principles and Rules for the Control of Restrictive Business
Practices; the Food and Agriculture Organization’s Code on the
Distribution and Use of Pesticides; and the World Health Organization/UNICEF
Code of Marketing Breast Milk Substitutes. Business associations have
also drawn up codes, such as the US Chemical Manufacturers Association’s
Responsible Care Program and the International Chamber of Commerce’s
Business Charter for Sustainable Development. A diverse range of players
have been involved in the development of voluntary codes of conduct.
These include corporations, business associations, NGOs, labor unions,
shareholders, investors, consumers, consultancy firms, governments,
and international organizations.
Broadly speaking, codes of
conduct can be divided into five main types: specific company codes
(for example, those adopted by Nike and Levi’s); business association
codes (for instance, ICC’s Business Charter for Sustainable Development);
multi-stakeholder codes (such as the Ethical Trading Initiative); inter-governmental
codes (for example, the OECD Guidelines), and international framework
agreements (such as the International Metalworkers Federation agreement
with DaimlerChrysler).
Despite their diversity,
the majority of codes of conduct are concerned with working conditions
and environmental issues. They tend to be concentrated in a few business
sectors. Codes related to labor issues, for instance, are generally
found in sectors where consumer brand image is paramount, such as footwear,
apparel, sports goods, toys, and retail. Environmental codes are usually
found in the chemicals, forestry, oil, and mining sectors.
Codes vary considerably in
both their scope and application. Very few codes accept the core labor
standards prescribed by the ILO. Although codes increasingly cover the
company’s main suppliers, they tend not to include every link
in the supply chain. Codes rarely encompass workers in the informal
sector even though they could form a critical link in the company’s
supply chain. In terms of ensuring compliance, only a small proportion
of codes include provisions for independent monitoring.
It is interesting to note
that various types of codes have gradually evolved in response to developments
in the governance of TNCs. When the limits of self-regulatory voluntary
codes adopted by companies became apparent in the late 1990s, the focus
shifted to co-regulation in the form of multi-stakeholder initiatives
(MSIs) under which corporations, NGOs, labor unions, and even governments
draft and monitor codes. Unlike company codes, MSIs address a vast range
of issues and provide independent monitoring mechanisms and, therefore,
are increasingly viewed as a credible alternative. MSIs are set up as
non-profit organizations consisting of coalitions of companies, labor
unions, and NGOs that develop specific standards. Some MSIs (such as
Social Accountability International) have developed elaborate guidelines
under which they certify that a company complies with the standards.
Initiatives such as the Ethical Trading Initiative and the Clean Clothes
Campaign are increasingly seen as progressive MSI models by both corporations
and NGOs.
International Framework Agreements
also emerged in the late 1990s. More than 30 have been signed since
1999 in a variety of sectors, including mining, retailing, telecommunications,
and manufacturing. The framework agreement signed between the International
Federation of Building and Wood Workers (IFBWW) and Swedish retailing
giant IKEA in 2001 is an example. An Agreement is negotiated between
a transnational company and the trade unions of its workforce at the
global level. It is a global instrument with the purpose of ensuring
fundamental workers’ rights in all of the TNC’s locations
as well as those of its suppliers. A Framework Agreement includes special
reference to international labor standards and follows similar structure
and monitoring procedures to those of MSIs. Since they are negotiated
on a global level and require the participation of trade unions, International
Framework Agreements are considered preferential instruments for dealing
with the issues raised by globalization of investment flows by many
social movements.
International Codes:
Three Case-Studies
Given their wider coverage,
scope, and applicability, key features of three important international
codes are discussed below:
1. OECD Guidelines
on Multinational Enterprises
In 1976, the OECD adopted
a declaration on International Investment and Multinational Enterprises
under which these Guidelines were included. Although legally non-binding,
the Guidelines have been adopted by the 30 member-countries of the OECD
and 8 non member-countries (Argentina, Brazil, Chile, Estonia, Israel,
Latvia, Lithuania, and Slovenia). Thus, the coverage of the Guidelines
is vast, and most big TNCs fall under their remit. Addressed to businesses,
the Guidelines provide voluntary principles and standards to encourage
companies to follow responsible business practices. The stated objectives
of the Guidelines are to ensure that TNCs operate in harmony with the
policies of host countries and make positive contributions to them.
Compared with company codes, the issues covered under the Guidelines
are wide-ranging; they include employment and labor relations, environment,
information disclosure, combating bribery, consumer interest, science
and technology, competition, and taxation.
The Guidelines have been
reviewed and revised five times in 1979, 1982, 1984, 1991 and 2000.
After the 1991 review, a new chapter on Environmental Protection was
added, while implementation procedures and supply-chain responsibilities
on TNCs were included after the most recent review in 2000.
Even though the OECD does
not provide any independent monitoring and verification processes for
the Guidelines, it does mandate signatory countries to set up a National
Contact Point (NCP) to deal with the promotion, management, interpretation,
and dispute settlement of the Guidelines. Since 2000, more than 70 complaints
regarding violations of the OECD Guidelines have been filed by several
labor unions and NGOs at various NCPs. But very few complaints have
succeeded to date, indicating the inherent weakness of this institutional
mechanism. A number of reports by NGOs and labor unions have highlighted
the technical and administrative ineffectiveness and inability of NCPs
to handle complaints against TNCs. The Guidelines’ confidentiality
clauses and lack of transparency further restrict their use in creating
public awareness on complaint cases.
Some NGOs consider the Guidelines
a potentially powerful tool to put pressure on TNCs that they believe
are violating social and environmental norms. There is no denying that,
compared to individual company or business association codes, OECD Guidelines
have better value because of governmental involvement, but they are
still voluntary and non-binding in nature. The Guidelines do not confer
any rights on citizens in the signatory countries to take legal action
against TNCs for not implementing them. In the long run, a strategy
exclusively based on filing complaint cases will not be sufficient to
hold TNCs accountable to the general public for their actions.
2. The ILO Tripartite
Declaration of Principles concerning Multinational Enterprises and Social
Policy
The policy measures implementing
the ILO’s labor principles for TNCs are mainly contained in the
Tripartite Declaration of Principles concerning Multinational Enterprises
and Social Policy. Adopted in 1977, the Declaration is voluntary in
nature, despite efforts made by labor unions to make it legally-binding.
Concerned with employment policy, job security, and health and safety
issues, the Declaration calls upon governments, employers, labor unions,
and TNCs to work towards the realization of economic and social development.
It calls for formulating appropriate national laws and policies and
recommends the principles to be implemented by all concerned parties.
It seeks to promote consistent standards for both domestic and international
corporations. In addition, the Declaration makes specific reference
to the United Nations Universal Declaration of Human Rights, International
Covenants adopted by the UN, and the Constitution of the ILO.
The ILO has established a
bureaucratic system to implement the Declaration. Investigations are
carried out by the ILO secretariat, which sends a questionnaire to governments
to complete in cooperation with employers and employees. The secretariat
then compiles various national reports that it presents to the Board
of Directors of the Committee on Multinational Enterprises. The national
reports are usually vague with no reference to any specific TNC. Attempts
made by labor unions for strict implementation procedures of the Declaration
have not yielded any results so far.
In addition to the Tripartite
Declaration, several other conventions and labor standards adopted by
ILO have a direct bearing on the operations of TNCs. For instance, the
Declaration on Fundamental Principles and Rights at Work adopted in
2000 seeks the contributions of TNCs to achieve basic labor rights,
including freedom of association and the right to collective bargaining.
3. UN Global Compact
Launched in 2000, the Global
Compact is a recent initiative by the UN aimed at engaging TNCs to support
and implement ten principles covering human rights, labor, environmental
protection, and anti-corruption. These principles are derived from the
UN Universal Declaration on Human Rights, the ILO’s Declaration
on Fundamental Principles of Rights at Work, the Rio Declaration on
Environment and Development, and the United Nations Convention Against
Corruption. The stated goal of the Global Compact is to create “corporate
citizenship” so that business can become part of the solution
to the challenges of globalization.
To date, nearly 1,200 companies
(both domestic and transnational) have indicated their support for the
Global Compact in addition to some international business associations,
labor union bodies, and NGOs. The Global Compact runs a small secretariat,
liaising with other UN agencies. Companies join this initiative by sending
a letter of commitment to the UN Secretary-General. Each year, the company
is expected to publish in its annual report a description of the methods
through which it is supporting the principles of the Global Compact.
While some NGOs have welcomed
the Global Compact as a forum to engage with the corporate world, critics
have expressed their apprehensions that it would be largely used as
a public relations tool by TNCs. Some of their concerns cannot be overlooked.
Firstly, no one can deny that the Global Compact is a purely voluntary
initiative. Secondly, there are hardly any effective mechanisms in place
to ensure that companies comply with its ten principles. In other words,
there are no monitoring and accountability mechanisms. It is for the
company to decide which principles they wish to abide by in which of
their activities. Thirdly, there is no procedure to screen companies
– several TNCs that have long been charged with environmental
and human rights abuses in host countries have joined the Global Compact
(such as Nike, Royal Dutch Shell, and Rio Tinto).
Critics also fear that initiatives
like the Global Compact would further increase corporate influence within
the UN system in terms of policy advice. Little wonder that many critics
see the initiative as more of an image-building exercise (“blue-washing”
after the blue of the UN logo) than an attempt to improve social and
environmental standards on the ground.
The Limits of Voluntary
Approaches
Voluntary approaches have
several inherent weaknesses and operational difficulties, some of which
are summarized here. First, as discussed above, corporate codes are
purely voluntary, non-binding instruments. No corporation can be held
legally accountable for violating them. The responsibility to implement
the code rests entirely on the corporation. At best, corporations can
be forced to implement codes only through moral persuasion and public
pressure.
Second, despite being in
existence for many years, the number of companies adopting such codes
is still relatively small. Moreover, corporate codes are limited to
a few sectors, particularly those in which brand names are important
in corporate sales, such as garments, footwear, consumer goods, and
retailing businesses. A large number of other sectors remain outside
the purview of corporate codes.
Third, many codes are still
not universally binding on all the operations of a company, including
its contractors, subsidiaries, suppliers, agents, and franchisees. Codes
rarely encompass the workers in the informal sector, who could well
be an important part of a company’s supply chain. Further, a company
may implement only one type of code, for instance, an environmental
one, while neglecting other important codes related to labor protection,
and health and safety.
Fourth, corporate codes are
limited in scope and often set standards that are lower than existing
national regulations. For instance, labor codes recognize the right
to freedom of association but do not provide the right to strike. In
many countries, such as India, the right to strike is a legally recognized
instrument.
Fifth, the mushrooming of
voluntary codes in an era of deregulated business raises serious doubts
about their efficacy. There is an increasing concern that corporate
codes are being misused to deflect public criticism of corporate activities
and to reduce the demand for state regulation of corporations. In some
cases, codes have actually worsened working conditions and the bargaining
power of labor unions. Moreover, increasing numbers of NGO-business
partnerships established through corporate codes and CSR measures have
created and widened divisions within the NGO community and sharpened
differences between NGOs and labor unions. Voluntary codes of conduct
can never substitute for state regulations. Nor can they substitute
for labor and community rights. At best, voluntary codes can complement
state regulations and provide an opportunity to raise environmental,
health, labor, and other public interest issues.
Implementation Issues
Despite the recent proliferation
of codes, their actual implementation and monitoring remain problematic.
Information about codes is generally not available to workers and consumers.
Researchers have found that labor codes have often been introduced in
companies without the prior knowledge or consent of the workers for
whom they are intended. A key issue regarding the implementation process
is the independence of the monitoring body. Since large auditing and
consultancy firms usually carry out the monitoring of company codes
with little transparency or public participation, whether the codes
are actually being implemented or not remains a closely guarded secret.
Besides, auditing firms may not reveal damaging information since they
get paid by the company being audited.
Recent voluntary initiatives,
such as Multi-Stakeholder Initiatives (MSIs), are considered more credible
because NGOs and labor unions are involved as external monitors. But
the authenticity of such monitoring cannot be guaranteed by the mere
involvement of NGOs and civil society.
Researchers have found that
the development of standards by some MSIs has taken place in a top-down
manner without the involvement of workers at the grassroots level [1].
For instance, concerns of workers in India and Bangladesh were not taken
into account in the standards created by MSIs such as the Ethical Trading
Initiative and Social Accountability International [2].
If recent experience is any guide, the struggle to implement codes could
be frustrating, time-consuming, and ultimately futile. It dissipates
any enthusiasm to struggle for regulatory controls on TNCs. This was
evident in the case of the decade-long campaign in India on a national
code to promote breast-feeding and restrict the marketing of baby food
by TNCs along the lines of WHO code [3]. Therefore, voluntary codes
require serious rethinking on the part of those who consider them as
a cure-all to problems posed by TNCs.
The unveiling of corporate
scandals (from Worldcom to Enron to Parmalat) underline the important
role of strong regulatory measures. One cannot ignore the fact that
all these corporations were signatories to several international codes
while some of them (for instance, Enron) had developed their own codes.
Why State Regulation?
The proponents of neoliberal
ideology argue that states should abdicate their legislative and enforcement
responsibilities by handing them over to NGOs and civil society organizations
which should develop voluntary measures in collaboration with business.
Without undermining the relevance of such voluntary approaches, it cannot
be denied that the primary responsibility of regulating corporate behavior
of TNCs remains with nation states. It is difficult to envisage the
regulation of TNCs without the active involvement of states. State regulations
are the primary vehicle for local and national government and international
institutions to implement public policies. National governments have
the primary responsibility of protecting and improving the social and
economic conditions of all citizens, particularly the poorer and more
vulnerable ones.
There is no denying that all states are not democratic and that supervisory
mechanisms are often weak, particularly in developing countries. Despite
these shortcomings, however, states remain formally accountable to their
citizens, whereas corporations are accountable only to their shareholders.
National regulatory measures are also necessary to implement international
frameworks. The additional advantage of national regulatory measures
is that they would be applicable to all companies, domestic or transnational,
operating under a country’s jurisdiction, thereby maximizing welfare
gains.
The national regulatory framework
is very important and it will not wither away under the influence of
globalization. On its own, transnational capital lacks the necessary
power and ability to mould the world economy in its favor. Rather, it
strives for the support of nation-states and inter-state institutions
to shape the contemporary world economy. State policies are vital for
the advancement and sustenance of transnational capital on a world scale.
Investment decisions by TNCs are not always influenced by the degree
of national liberalization but are also governed by state regulations
in areas as diverse as taxation, trade, investment, currency, property
rights, and labor.
A stable economic and political
environment is also an important determinant. Transnational capital
looks upon legislative, judicial, and executive institutions not merely
to protect and enforce property rights and contract laws, but also to
provide social, political, and macroeconomic stability. In the absence
of such a policy framework, contemporary globalization would not have
taken place. Social and political conflicts are also resolved primarily
through state mechanisms. The fact that a strong and stable state is
a prerequisite for the development and sustenance of the market economy
is evident from the failure of economic reforms in transition countries.
In addition, state intervention is also necessary to prevent and correct
market failures. There are innumerable instances of market failures
with huge economic, social, and environmental costs throughout the world.
Pollution and monopoly power are the most popular examples of market
failure. The government can introduce pollution taxes and regulate monopolies
to correct the distortions created by market failure. Besides, the government
is expected to provide public goods and services (for example, schools,
hospitals, and highways) to all citizens because the market has failed
to do so.
In the context of global
capitalism, nation-states provide the legal framework within which all
markets operate. The notion of a ‘free market’ is a myth
because all markets are governed by regulations, though the nature and
degree of regulation may vary from market to market. Even the much-claimed
self-regulation or co-regulation model would lack legitimacy if it was
not backed by a government decree. In fact, it is impossible to conceive
of contemporary neoliberal globalization without laws, which do not
exist outside the realm of nation-states. Even the global rules on trade
enforced by international institutions (for instance, WTO) are not independent
of nation-states.
Whither Regulatory
Framework?
The first step towards regulating
TNC behavior begins at the national level. Host countries in particular
should adopt appropriate regulatory measures on transparency, labor,
environmental, and taxation matters. At the same time, home countries
should put in place regulations to ensure that the same standards are
followed by their TNCs irrespective of where they operate in the world.
The Foreign Corrupt Practices Act of the US, which penalizes US-based
corporations for their bribery and corrupt practices in foreign countries,
is a case in point.
National regulatory measures
could be supplemented by new forms of regulatory cooperation and coordination
between states at regional and international levels. By providing the
overall framework and guiding principles, regional and international
efforts should enhance the policy space and powers to regulate TNCs
and foreign investment in order to meet national developmental objectives.
At the domestic level, the
political climate in many developing countries has drastically changed
in the past two decades. Neoliberal policies now frame almost every
political process and go unchallenged even among some ranks of the left.
There is a strong lobby in many developing countries (for instance,
India) consisting of big business, the upper middle classes and the
media, which supports the entry of foreign capital and demands fewer
regulatory mechanisms. Some developing countries like India and China
are also witnessing the emergence of ‘Third world TNCs’
that are expanding their businesses in other countries. These developments
make the task of regulating corporations still more difficult. How can
such countries demand greater regulation of private capital flows? Besides,
it fragments the coalitions of developing countries and weakens their
collective bargaining power in international economic policy arenas
such as the WTO. Nonetheless, even though the task of re-establishing
the authority of states over TNCs may be difficult, it would not be
impossible provided efforts were backed by strong domestic political
mobilization. Herein the role of NGOs, labor unions, and other civil
society organizations becomes important to strengthen domestic political
processes.
It needs to be stressed here
that a robust, transparent and efficient supervisory framework is also
required to oversee the implementation of national regulations. Otherwise
expected gains from a strong regulatory framework would not materialize.
India provides a classic example of having a strong regulatory framework
but poor supervisory structures. In the present world, there is a need
for greater international supervision of private investment flows based
on cooperation between home country and host country supervisors.
While acknowledging that
voluntary approaches could be used as tools for leverage on corporate
behavior and therefore are worth testing, this chapter underscores the
need for enhancing the state regulatory and supervisory frameworks.
Any strategy aimed at privatizing regulation is bound to fail; even
the limited gains made in the past through voluntary approaches always
rested on governmental backing. Voluntary codes of conduct can never
be a substitute for state regulations. Nor can they substitute for labor
and community rights. At best, voluntary codes can complement state
regulations and provide space for raising environmental, health, labor,
and other public interest issues. As rightly pointed out by Rhys Jenkins,
“Codes of conduct should be seen as an area of political contestation,
rather than as a solution to the problems created by the globalization
of economic activity.” [4]
Notes and References
1. Linda Shaw and Angela
Hale, “The Emperor’s New Clothes: What Codes Mean for Workers
in the Garment Industry,” in Rhys Jenkins, R. Pearson and G. Seyfang,
(eds.), Corporate Responsibility and Labor Rights: Codes of Conduct
in the Global Economy, Earthscan Publications Ltd., London, 2002, p.
104.
2. Peter Utting, “Regulating
Business via Multistakeholder Initiatives: A Preliminary Assessment,”
in Voluntary Approaches to Corporate Responsibility: Readings and a
Resource Guide, A UN Non-Governmental Liaison Service Development Dossier,
New York, 2002, pp. 96-97.
3. Kavaljit Singh and Jed Greer, TNCs and India: A Citizen’s Guide
to Transnational Corporations, Public Interest Research Group, New Delhi,
1996, pp. 39-43.
4. Rhys Jenkins, Corporate
Codes of Conduct: Self-Regulation in a Global Economy, UNRISD, Geneva,
2001, p. 70.
Kavaljit Singh
is Director, Public Interest Research Centre, New Delhi. He can be reached
at [email protected].
The above article is based on his latest report, Why Investment Matters:
The Political Economy of International Investments (FERN, The Corner
House, CRBM and Madhyam Books, 2007).
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