Over the past decade, corporate social responsibility ("CSR") has grown from a buzz word to a social phenomenon. Yet, despite the high profile CSR presently enjoys, it seems that few know what it really means, much less how it developed and why.
The benefits of voluntary corporate regulation at the international level are numerous. However, the effectiveness of such regulation can be undermined by improper implementation, a lack of monitoring and independent verification, and an inadequate commitment on the part of the employer corporation. In addition, many union groups, nongovernmental organizations ("NGOs") and others argue that voluntary codes of conduct are ineffective and that the rise of corporate social responsibility is simply a means by which multinational enterprises ("MNEs") are attempting to retard the eventual implementation of binding regulation of international labour standards.
This article attempts to offer an introduction to CSR and codes of conduct, particularly for labour and employment practitioners who may be faced with CSR issues in their practices.
What is CSR?
The International Organization of Employers (the "IOE") defines CSR as "initiatives by companies voluntarily integrating social and environmental concerns in their business operations and in their interaction with their stakeholders."
This definition recognizes, first, that CSR is voluntary corporate action and goes beyond simple legal compliance with domestic laws. Second, the definition views CSR as being a core aspect of business activities throughout a company and recognizes CSR as a means of engagement with stakeholders in the various markets in which a company operates.
- compliance with domestic laws, even if those laws are poorly enforced;
- adherence to international standards; and
- adoption of voluntary codes of conduct.
Corporate "Codes of Conduct," the primary instrument through which CSR is carried out, may be classified in a number of ways, but there are five main types:
- Company Codes are adopted voluntarily by companies and can relate to a company's head office operations, as in Shell's Revised Statement of General Business Principles, or be applied specifically to the MNE's suppliers, as in the case of Levi Strauss' Business Partners Terms of Engagement.
- Trade Association Codes are adopted by associations of firms based in developing countries, as in the case of the British Toy and Hobby Association Code of Conduct, or Manufacturers and Exporters Association Code and the Kenya Flower Council Code.
- Multi-stakeholder Codes are adopted as a result of negotiations between several stakeholders, including firms or their industry representatives, NGOs and/or trade unions. Governments may also be involved in the development of such codes. Some examples are:
- UK's Ethical Trade Initiative (the "ETI") Base Code;
- The Social Accountability International/Social Accountability 8000;
- The U.S. based Fair Labor Association (FLA);
- The Worldwide Responsible Apparel Production Principles (WRAP);
- AccountAbility 1000; and
- The European-based Clean Clothes Campaign (CCC).
- Model Codes are designed to provide a benchmark of what a particular organization regards as good practice, and act as a guide for companies and trade associations that are contemplating adopting voluntary measures. Model codes have been proposed both by trade unions, such as the International Confederation of Free Trade Unions' Basic Code of Labour Practice, and by NGOs, such as Amnesty International's Human Rights Guidelines for Companies. Also related to the model code is the International Chamber of Commerce's Guidebook for Responsible Business Conduct.
- Intergovernmental Codes are negotiated at an international level by national governments. They date back to the 1970s, when both the OECD Guidelines for Multinational Enterprises and the ILO's Tripartite Declaration of Principles Concerning Multinational Enterprises were adopted. Other intergovernmental codes include the European Union's Code of Conduct, the UN Norms of Responsibilities of Transnational Corporations and other Business Enterprises with Regard to Human Rights, and the Global Compact.
The Rise of CSR
In the mid-1970s, a number of developing countries passed legislation attempting to control transnational corporate activities within their borders. In addition, the UN and OECD adopted draft codes of conduct to ensure that developing countries would share in the gains from the growth of international corporate activity.
By the 1990s, the focus of regulation had moved from developing world subsidiaries to developing world suppliers and manufacturers, and voluntary initiatives for labour standards regulation were adopted by the business sector itself. The content of these voluntary codes of conduct varied greatly.
Changing public attitudes are an important part of the context in which modern corporate codes of conduct have been adopted. The awareness of global environmental and social issues has increased significantly since the 1970s, fuelled by the development of global communications systems, enabling corporations to control production activities on an ever-widening scale.
The growing adoption of codes of conduct is also a response by corporations to the concerted lobbying efforts by labour groups and NGOs for the creation of a global system of labour regulation at the WTO level, and the push for a social clause. MNEs are now aware, more than ever before, of the need to voluntarily account for their labour practices, if for no other reason than to prevent binding regulation from becoming a reality.
The Regulation of Corporate Social Responsibility
While MNEs are subject to national and regional regulation of CSR in some areas of the world (such as within the European Union), at an international level the OECD, the ILO and the UN have all attempted to create frameworks to regulate CSR.
The OECD Guidelines for Multinational Enterprises
The OECD's Declaration on International Investment and Multinational Enterprises (the "OECD Declaration"), promulgated in 1976, takes the form of a recommendation from OECD governments to MNEs to abide by a set of guidelines for multinational enterprises (the "Guidelines") that are annexed to the OECD Declaration.
- The OECD Declaration requires member countries, sub-ject to some aspect of national interest and international law, to treat MNEs in ways "no less favourable than that accorded in like situations to domestic enterprises" (i.e., the principal of national treatment).
- The OECD Guidelines state that "observance of the guide-lines is voluntary and not legally enforceable."
- An OECD member country is required to establish a national contact point to promote the Guidelines, deal with inquiries and help to solve problems that might arise between business and labour.
A complaints procedure exists through the Committee on International Investment and Multinational Enterprises, where disputes are usually dealt with through "clarifications" of the OECD Guidelines, not passing judgment on any specific conduct. This process acts as a severe limitation on the practical enforcement powers of the Committee. If a National Contact Point finds that a company has violated the OECD Guidelines and refuses to remedy the situation, the appellants and the Contact Point have no sanctioning power other than to publicize the violation.
The ILO Triparite Declaration of Principles Concerning Multinational Enterprises and Social Policy
The ILO adopted a Tripartite Declaration of Principles Concerning MNEs and Social Policy (the "ILO Tripartite Declaration") in 1977, which is regularly updated, to take into account the 1998 ILO Declaration of Fundamental Principles and Rights at Work. The ILO Tripartite Declaration focuses on the "social aspects of the activities of multinational enterprises, including employment creation in the developing countries." Compliance with the ILO Tripartite Declaration's guiding principles is on a voluntary basis, and is not intended to affect obligations arising from the ratification of ILO standards, rather, its aim is to "encourage the positive contribution which multinational enterprises can make to economic and social progress and to minimize and resolve the difficulties to which their various operations may give rise." The ILO Tripartite Declaration calls on Member States to ratify ILO Conventions:
- Freedom of Association and Right to Organize;
- Right to Organize and Collective Bargaining;
- Discrimination in Employment;
- Employment Policy, along with Recommendations;
- Discrimination in Employment;
- Termination of Employment; and
- Employment Policy.
Although the ILO Committee on Multinational Enterprises interprets the terms of the ILO Tripartite Declaration and receives reports from member countries on its application, it has no power to sanction a breach. Therefore, like the OECD Guidelines before it, the impact of the ILO Tripartite Declaration has been relatively limited.
The United Nations' Global Compact
At the World Economic Forum in 1999, Secretary General Kofi Annan proposed a "Global Compact" between the UN and the international business community to advance responsible corporate citizenship. The Global Compact challenges world business leaders to voluntarily "embrace and enact" within their sphere of influence ten core principles on human rights, labour, the environment and anticorruption. The Global Compact is now endorsed by most national governments, a variety of unions and NGOs, in addition to nearly 1,500 companies in 70 countries.
The Global Compact is not a regulatory instrument to "police" corporate conduct, nor is it a binding set of regulations or a corporate code of conduct. Instead, the goal of the initiative is to advance the ten universal principles through the "self-enlightened engagement of its participants."
On June 24, 2004, more than 500 CEOs, government officials and various heads of labour and civil society groups gathered at the first Global Compact Summit in New York. Some 20 major investment companies, including Credit Suisse Group, Deutsche Bank, Goldman Sachs, HSBC and Morgan Stanley, endorsed connecting financial markets to environ-mental, social and governance criteria and agreed to invite other actors in the financial world to make these factors standard components in the analysis of profitability and investment decision making.
The Anatomy of a Corporate Code of Conduct
Scope and Application
Codes of conduct vary tremendously in scope, depending on the industry in which the corporation is involved, the issues addressed by the code and the objectives of the code. Nevertheless, some general considerations should be addressed by all such codes:
- Any meaningful code of conduct must address the corporation's external relationships and not just narrowly focus on internal employees. The code should apply to suppliers, subcontractors and their employees.
- Should adoption of a code of conduct be compulsory for a company? Is a company permitted to withdraw from the code scheme at any time?
- Should a code of conduct's terms be mandatory or not? Are signatories bound by mandatory terms once they have signed, and are these obligations expressed with sufficient precision to influence and assess actual behaviour?
- How does the code address compliance? Even a voluntary code may be constructed to allow for a definitive measure of compliance. Is performance aggregated across the code's requirements as a whole, so that failure to meet an individual requirement does not lead to an overall failure to adhere to the code?
ILO Core Conventions
The ILO has identified a number of its conventions which it regards as "core," or minimum, labour standards, and which NGOs, unions and human rights organizations argue should form the basis of any corporate code of conduct related to labour. Based on the ILO Declaration of Fundamental Principles and Rights at Work, the core conventions are:
- C87: Freedom of Association & Right to Organize
- C98: Right to Organize and Collective Bargaining
- C29 and 105: No Forced Labour
- C138: Minimum Age (Abolition of Child Labour)
- C100 and 111: No Discrimination
- C110: Equal Remuneration
The ILO Core Conventions have a high degree of legitimacy within the ILO's tri-partite membership, as they are directly derived from the founding principles of the Organization that bind all members. Hence, explicit reference to the ILO Core Conventions allows parties to a code of conduct to have access to decades of ILO experience in implementing and interpreting these complex industrial rights.
For a code of conduct to be effective, it should contain a clear method of implementation and a means to ensure compliance. While a code will include a statement of principles concerning business behaviour, this does not necessarily result in the application of those principles in the firm's operations. The IOE, for example, has estimated that 80% of codes are really just statements about general business ethics and contain no implementation plan.
Monitoring, Reporting & Auditing
While the monitoring of proper code implementation may be done successfully through internal means, the legitimacy of the code will be heightened by external reporting or auditing of code compliance. External verifiers may be engaged in observing the actual practice of a firm or its suppliers or subcontractors, and may issue a direct report based on such observance. Alternatively, a financial audit analogy can be used-that is, the company itself undertakes the bulk of the information collection, which can then be turned over to externally accredited experts for an audit.
It may also be possible for code of conduct compliance to be audited and certified by an audit company established specifically for that purpose.
The independence of both auditors and monitors is critical to the success of voluntary codes of conduct, as is their ability to judge whether a code has been complied with or not. The function of auditors and monitors range from basic observation (e.g. is the factory's fire door blocked?) to more specialized judgements (e.g. are equal pay practices being adhered to?).
There is also the further question of what sanctions may be imposed when a code is not adhered to. In many cases, no clear sanctions are defined. Approximately 60% of the company and business association codes in the OECD inventory do not specify any penalties for non-compliance.
The Benefits of Voluntary CSR
Although voluntary corporate codes of conduct have been subjected to much criticism, there are some very clear benefits for those companies that choose to implement them. There are also benefits for employees who are the beneficiaries of code provisions, along with NGOs, suppliers and their employees, and consumers generally.
More and more consumers are "buying ethically" and are specifically seeking out goods and services that are produced under fair labour conditions. Publishing a corporate code of conduct and adhering to it may allow a company to benefit from ethical purchasing, raise its profile as a responsible producer, vendor or retailer and allow it to respond genuinely to criticisms of unethical labour practices.
The financial sector's interest in CSR may at least in part be explained by a recent Global Compact report undertaken in partnership with the Swiss government and endorsed by twenty major investment companies. The report, entitled "Who Cares Wins: Connecting Financial Markets to a Changing World," suggests that implementing CSR practices can lead to financial benefits. A 2003 survey indicated that 78% of European fund managers and analysts believe that the management of environmental and social risk has a positive impact on a company's long-term market value.
Another direct benefit of adhering to a code of conduct is the potential of attracting socially responsible investment. No longer a fledgling concept, ethical investing is now a main-stream force. While some estimates are more conservative, the UK Social Investment Forum has estimated that socially responsible investment assets in the UK alone increased from 22.7 billion pounds in 1997 to 224.5 billion pounds in 2001.
Finally, major stock exchanges in Europe and North America have now created indices comprised of ethically responsible companies, such as London 's FTSE4Good.
The Shortcomings of CSR and the Threat of Binding International Regulation
In spite of an increased willingness on the part of employers to address the regulation of labour standards on a voluntary basis, many labour and NGO groups argue that CSR does not go far enough.
Practice shows that many codes of conduct do not take the ILO Core Conventions into consideration. In a study of 140 codes of conduct in the OECD inventory, there was tremendous variation in the labour issues covered. Only three issues were dealt with in more than half the codes surveyed, namely:
- a general commitment to a reasonable working environment,
- an agreement to comply with local laws, and
- protection against discrimination or harassment.
The ILO Core Conventions were specifically mentioned in only one in ten codes.
The other major limitation of existing codes of conduct is a lack of independent monitoring. Of the 246 codes included in the OECD inventory, only just over 10% included provisions for independent external monitoring and only four out of 100 individual company codes had such provisions.
It was with great enthusiasm, then, that labour groups and NGOs welcomed the August 13, 2003 adoption of the Draft Norms on the Responsibilities of Transnational Corporations and other Business Enterprises with Regard to Human Rights (the "UN Draft Norms") by the United Nations Sub-Commission on the Promotion and Protection of Human Rights. The UN Draft Norms call on companies to "be subject to periodic monitoring and verification" by the UN or independent agencies, implying a level of enforcement that goes significantly further than the voluntary compliance and reporting encouraged by the Global Compact.
The proposed UN Draft Norms also go further than voluntary codes of conduct by stating that all private businesses, not just MNEs, should be legally required to comply with socially responsible standards. Currently, the UN Draft Norms are not legally enforceable, but they can be adopted with binding force by individual nation states or used as a guide in drafting domestic legislation.
On April 16, 2004, the Commission on Human Rights ("COHR") affirmed that the UN Draft Norms have no legal standing, but requested that the High Commissioner of Human Rights "…compile a report setting out the scope and legal status of existing initiatives and standards relating to the responsibility of transnational corporations and related business enterprises with regard to human rights…" ["The Responsibilities of Transnational Corporations and Related Business Enterprises with Regard to Human Rights Report of the High Commissioner to the Commission on Human Rights", Office of the United Nations High Commissioner for Human Rights, at p. 2.]
The Commission also asked that the Commissioner "consult with all relevant stakeholders in compiling the report, including States, transnational corporations, employers' and employees' associations, relevant intergovernmental organizations, non-governmental organizations and treaty bodies.".
Employer groups argue that implementing the UN Draft Norms will cause a negative reaction from the business community at a time when companies are increasingly engaged in voluntary initiatives to promote responsible business conduct and that that voluntary codes and guidelines, such as the UN Global Compact and the revised OECD Guidelines, are having a positive effect and should not be undermined by binding legislation.
Conclusions and Reccommendations
The proliferation of corporate codes of conduct, or at least discussion of such codes as part of the broader phenomenon of corporate social responsibility, leaves employer groups, NGOs, international labour associations and governments at a crossroads. While NGOs argue that international binding regulation is necessary to fill the gaps, employer groups argue that voluntary regulation should continue to be pursued.
An employer considering adopting a corporate code of conduct should take the following considerations into account:
- The adoption of a code of conduct must be motivated by a genuine commitment to its implementation, and to pro-viding the training, monitoring and reporting mechanisms necessary to make it work.
- The employer should set aside resources for CSR development and implementation-not only within its own operation, but also throughout its supply chain. Affiliates, suppliers, contractors and subcontractors in developing countries should be a particular focus.
- The code should take into account the ILO Core Conventions, as these are authoritative international instruments.
- Adherence to the code should be subject to independent verification by qualified assessors. The involvement of other stakeholders, including NGOs, will also add to a code of conduct's legitimacy.
CSR is an evolving topic. Staying informed and current with CSR developments, both domestically and internationally, will prove to be a valuable asset to your firm and to your clients.