Rules On Corporate Ethics Could Help, Not Hinder, Multinationals

Most multinational companies automatically oppose calls for
enforceable standards of corporate social responsibility. Under growing
public scrutiny of their behaviour, many western companies have adopted
voluntary codes of business conduct. But for most, the notion of
enforceable standards remains anathema.Recently, however, some western companies
have privately questioned this posture. They have begun to recognise it
might be in their interest to operate under enforceable standards that
apply to all their competitors, rather than under voluntary ones that,
for all practical purposes, apply only to prominent companies.  

 
Public pressure, whether from activists or the press, has
largely driven interest in corporate social responsibility. But public
pressure tends to focus on highly visible companies, which is fine if a
company's competitors are all large public companies. But if
competition comes from less prominent businesses that can operate under
the radar screen of public attention - the competitive playing field
tilts. Well-known companies, worried about the harm that misconduct
could cause their reputation, must assume the costs of meeting broadly
recognised standards of corporate conduct. For example, a big company
might have to accept paying higher wages associated with employing
adults rather than children, or permitting trades unions to operate
freely in its factories.  

 
By contrast, a no-name company, confident that the public
will not notice its misdeeds, may not feel compelled to act so
responsibly.  

 
Only enforceable rules, applicable to all companies
regardless of prominence, can avoid this double standard. To a limited
extent, enforceable regulations already exist but their reach is
spotty. Some stock indices, such as FTSE 4Good, require qualifying
companies to comply with basic ethical standards. Certain international
financial institutions make similar demands of their loan
beneficiaries. Companies that are complicit in serious human rights
abuses risk liability under laws such as America's Alien Tort Claims
Act. And individual governments, sometimes prompted by trade
agreements, increasingly demand that trading partners regulate certain
corporate conduct. Still, this patchwork of enforceable rules hardly
leaves a competitive environment that is fair and predictable.  

 
The issue of social responsibility is not the first in
which corporations have recognised the advantage of broad enforceable
standards. A similar dynamic emerged after the US government's adoption
in 1977 of the Foreign Corrupt Practices Act, which made it illegal for
companies operating in the US to bribe foreign officials. That law
seemingly left US companies at a competitive disadvantage because their
foreign competitors remained free to continue securing business through
bribery.  

 
After years of complaints, the Organisation for Economic
Co-operation and Development in 1997 adopted a treaty requiring all its
member states to criminalise such bribery. According to the OECD, its
30 members account for some 70 per cent of world exports and 90 per
cent of foreign direct investment. China remains outside the treaty,
but as its companies increasingly operate overseas its exclusion will
become legally less tenable.  

 
The OECD has already begun a similar process in the area
of corporate social responsibility, but its guidelines for
multinational enterprises are, so far, only voluntary.  

 
Using the anti-bribery effort as a model, the OECD should
adopt a treaty requiring member states to enact laws similar to its
guidelines that would be enforceable under national criminal or civil
codes, carrying penalties such as fines or in extreme cases,
imprisonment. Like anti-bribery laws, this national legislation would
bind any company operating in that nation's jurisdiction.  

 
In addition, the United Nations, which has already drafted
non-binding norms on corporate conduct, might provide a forum to
negotiate a universally applicable treaty.  

 
What would enforceable standards look like? One must await
treaty negotiations to answer that question with certainty. In all
likelihood, the purpose of enforceable standards would not be to
preclude doing business in certain countries but to prescribe the
minimum standards by which corporations should conduct themselves in
all countries. In that sense, the standards would reflect recognition
that while international commerce may help alleviate poverty in
developing countries, it does so more effectively if grounded in
positive corporate conduct.  

 
In the human rights realm, for instance, enforceable
standards would certainly include the widely recognised core worker
rights: the right to organise and bargain collectively, and freedom
from forced labour, child labour and workplace discrimination.
Companies would have to ensure respect for these rights in their own
operations and those of their suppliers. In some cases, such as China's
refusal to permit independent trades unions, pragmatism may require
interim best-practice standards, but those requirements should be
upgraded to international standards as quickly as possible.  

 
Certain industries would require special rules. For
example, extractive industries, because they often contribute revenue
well beyond ordinary taxation, should face special rules on fiscal
transparency to maximise opportunities for public accountability.  

 
Manufacturing companies might be obliged to avoid sales to
a government once they learn it is using their product for human rights
abuse.  

 
Companies operating in conflict zones should be required
to take reasonable steps to avoid complicity in arbitrary violence.
Enforceable standards are unlikely to require a global minimum wage - a
move some developing countries would decry as protectionism. Wage
competition would remain appropriate as long as it is within the
context of full respect for workers' rights to organise and bargain
collectively. But governments and businesses would be prohibited from
competing by undercutting workers' basic rights as a route to lower
wages.  

 
Few if any of the standards likely to appear in a treaty
on corporate social responsibility would be difficult for most
multinational companies to embrace. The only thing these companies have
to fear is an end to unfair competition from less savoury competitors.
It is time, therefore, for them to begin publicly advocating
enforcement.  

 
The writer is executive director of Human Rights Watch