Corporate Accountability: Is Self Regulation the Answer?

Contributed to Bulatlat
Vol. VII, No. 12 April 29-May 5, 2007

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.

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