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Mainstream, Vol XLV No 25

Corporate Accountability : Is Self-regulation the Answer?

Saturday 9 June 2007, by Kavaljit Singh

The globalisation 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 emphasised 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 behaviour. 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 behaviour, 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. Realising 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 (for example, 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 behaviour.

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 organisations include the International Labour Organisation’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 Organisation’s Code on the Distribution and Use of Pesticides; and the World Health Organisation/UNICEF’s Code of Marketing Breast Milk Substitutes. Business associations have also drawn up codes, such as the US Chemical Manufacturers Association’s Responsible Care Programme 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 organisations.

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, the 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’s agreement with Daimler Chrysler).

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 labour 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 thelate 1990s, the focus shifted to co-regulation in the form of multi-stakeholder initiatives (MSIs) under which corporations, NGOs, labour 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 organisations consisting of coalitions of companies, labour 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 eight 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 to company codes, the issues covered under the Guidelines are wide-ranging; they include employment and labour 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 labour 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 labour 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 labour 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 labour unions to make it legally-binding. Concerned with employment policy, job security, and health and safety issues, the Declaration calls upon governments, employers, labour unions, and TNCs to work towards the realisation 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. TheSecretariat 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 labour 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 labour standards adopted by the 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 labour 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, labour, environmental protection, and anti-corruption. These principles are derived from the UN’s 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 1200 companies (both domestic and transnational) have indicated their support for the Global Compact in addition to some international business associations, labour 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 summarised 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 labour 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, labour codes recognise 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 recognised 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 labour 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 labour 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 labour codes have often been introduced in companies without the prior knowledge or consent of the workers for whom they are intended. A key issue regardingthe 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 labour 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 the neoliberal ideology argue that states should abdicate their legislative and enforcement responsibilities by handing them over to NGOs and civil society organisations 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 behaviour 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 maximising 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 liberalisation but are also governed by state regulations in areas as diverse as taxation, trade, investment, currency, property rights, and labour.

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 globalisation 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 globalisation 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, labour, environmental, and taxation matters. At the same time, home countries should put in place regulations to ensure that the same standards are followed by theirTNCs irrespective of where they operate in the world. The Foreign Corrupt Practices Act of the US, which penalises 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 mobilisation. Herein the role of NGOs, labor unions, and other civil society organisations 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 materialise. 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 behaviour and therefore are worth testing, this chapter underscores the need for enhancing the state regulatory and supervisory frameworks. Any strategy aimed at privatising 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 labour and community rights. At best, voluntary codes can complement state regulations and provide space for raising environmental, health, labour, 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 globalisation 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.

[The above article is based on the author’s latest report, Why Investment Matters: The Political Economy of International Investments <http://www.fern.org/media/documents...> (FERN, The Corner House, CRBM and Madhyam Books, 2007)]

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