Corporate Accountability:
Is Self Regulation the Answer?
BY KAVALJIT SINGH
Contributed to Bulatlat
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
Transnational Corporations (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 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 U.S.,
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 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.
U.S.-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 U.S. 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)
underlines 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 U.S.-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] Bulatlat
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 kaval@vsnl.com. 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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