International Business Self-Regulation: A Contribution to Public Policy

Dr. Virginia Haufler, Senior Associate, Carnegie Endowment for International Peace

There has been a drastic increase in self-regulatory initiatives, in the past few decades, ranging from individual codes to certification systems, and it is often hard to judge the levels of compliance and effectiveness. Egregious violations of common standards, particularly in areas of child labor and "sweatshops," have led companies to develop individual codes of business ethics. This is what Levi-Strauss adopted with their Global Sourcing and Operating Guidelines for selecting business partners on the basis of their work place standards and practices. A second type of self-regulation is through group standards, which are negotiated among a group of businesses and/or other organizations. The Chemical Manufacturers Association in the U.S. and Canada developed the program "Responsible Care" to set standards for the handling of toxic chemicals. It is becoming more common for NGOs that used to criticize corporations to form partnerships and work with them, such as the Rugmark program to prevent child labor in the Indian carpet industry. International organizations also have jumped on the bandwagon; they see partnership with industry as a way to attain their goals, as with a number of received UNEP industry initiatives. Certification systems have also been established to back many of these voluntary commitments. There are a variety of social, environmental, and other accounting and auditing systems to monitor and inspect for compliance, with standards such as SA8000, social accountability standards developed by the CEPAA.

A number of trends are evident in the area of business self-regulation. First, code adoption by corporation is increasingly common. Second, the issues that these codes cover are expanding, from narrow human resources type policies on nondiscrimination in the workplace, fair employment practices, philanthropy, etc., to broader issues of policy concern, including labor, environment, information privacy, and corruption. Environmental initiatives are the most advanced in terms of being incorporated into the organization?s management system, adopting auditing, accounting systems and monitoring. There have been substantive partnerships in a wide range of areas from climate change to forest conservation to the handling of toxins, with very public partnerships with prominent NGOs such as the World Resources Institute and Pew Center. Labor initiatives tend to be more recent to the game, with the most visible issues ? such as child labor ? getting the most attention, and rarely touching on such things as collective bargaining or living wages.

The scope of coverage typically applies only to a corporation and its employee but increasingly they are being extended to cover contractors and subcontractors and their employees, especially in textile, apparel, toy and sporting goods industries. Codes of conduct tend to be most likely to be adopted in industry sectors where there is high visibility and branding, trust is an important element of the business, business is close to the consumer, and where the number of players in the industry are relatively small. It allows companies to compete on quality in addition to price. When codes of conduct were initially introduced there was little in the way of a system to check on whether the company lived up to its own standards. Now internal monitoring systems such as audits and social and environmental accounting are becoming more common and external monitoring and certification systems are part of new group initiatives. Recently Nike invited NGOs to monitor its subcontractor facilities in Indonesia, and BP and Shell both now conduct annual environmental audits of their operations, two examples of how monitoring and certification is increasingly common. A few group initiatives do have enforcement mechanisms, with adherence as a pre-requisite for membership in a group or association. Violations result in being thrown out of the organization, termination of all business relationship, and/or persuasion and work to change behavior, but these are by definition voluntary initiatives, so the effects of non-compliance are not fully known.

Why would a corporation adopt self-regulation, set standards that are higher than ones required by law, and especially be socially responsible? After all, as Milton Friedman once said, ?the social responsibility of a corporation is simply to make money?. All of this activity has been in response to globalization. Another is that the economic environment for many industries has changed dramatically, with liberalization, deregulation, and increased competition for markets. Failures of state-led industrial policies and of communism reinforced this trend. The dismantling of the welfare state and more freedom for business to trade and invest globally has resulted in less economic security for individuals. But global governance has not kept up in terms of standardization, regulation and/or harmonization of conflicting national political systems. International negotiation is slow and hard and full of compromises, international organizations are under-financed, and existing national and international laws/standards are not consistently enforced if at all. National policymakers are increasingly reluctant to intervene in markets due to free market ideology, and there is a perception that governments no longer have the resources or expertise to intervene effectively, given technology and the speed of economic change. Power has shifted away from governments into the hands of non-state actors, including business. On the other hand, the emergence of open markets has been accompanied by increased transnational activism and coordinated action by civil society organizations and the information media, making it difficult if not impossible for any firm to hide its behavior from anyone. In particular, they have spotlighted violations in environmental, labor and privacy issues. The shift in strategy by many NGOs is to target business instead of government, and the consumer driven system puts emphasis on both cost and quality, with quality defined in part by how the product/service was produced. International politicians and business leaders now fear that the weakness of international authority to address the problems that concern most citizens?jobs, food, health?and the public goods that are not being supplied?will lead to a backlash against globalization. They?re looking for ways to supply these without losing the benefits of free markets.

In reaction to these changes international politicians and business leaders see voluntary self regulation as a means to reduce costs/ increase profits, build reputation and trust, and reduce political risk. With regard to competition with other firms, companies are looking for every competitive edge they can get. This includes competition based on quality and reputation and "ethical branding," thus boosting sales and the ability to get good employees. If codes are adopted widely, this prevents competitors from gaining advantage from exploitation?bottom line advantages to participation in standard setting. Companies are also looking for efficiency gains from standardization. And standard setting can be used to create new markets ? such as green products ? or gain access to old ones. Business is also focusing more on their relations with governments and civil society, as they want to avoid the costs of regulation, litigation, and bad PR, which can hurt their competitive edge. Finally corporate executives want to be viewed as leaders?even moral leaders. By supporting best practice initiatives, they are proactive in responding to changing political and social contexts, leading "strategic norm change" within the business community.

There are a few cautionary notes on corporate self-regulation. The first is that these voluntary standards are set in an unaccountable and non-democratic manner by business alone or in combination with NGOs, typically MNEs and NGOs from Western industrialized countries, with little sensitivity to local conditions and values. Second, standards are unevenly adopted within and across industries and are by definition voluntary, therefore self-regulation could mean no regulation. Third, they can be used by industry to co-opt critics, minimize justifiable litigation, and avoid government regulation even when it is needed. Fourth, high standards can be used to limit market access by others?often developing country firms?or even as a form of boycott against particular firms and particular countries, thus affecting who gets to trade and where investment occurs. Fifth, even those sincerely trying to be responsible and have difficulty implementing change?MNEs do not have as much control over firms operations as we imagine, they are bureaucracies, and the outsourcing phenomenon means that the control they have often is not direct but through licensing and buying power. Finally, the multiplicity of these initiatives may be overwhelming, allowing companies to pick and choose the standards they like best. Certification systems can be confusing for consumers and buyers, so their usefulness may prove negligible.

The trend of self-regulation is much bigger than most people realize, and is becoming more institutionalized?from single codes to group initiatives, from single issues to a broad array, from autonomous to embedded within government and international organization policy. Corporations are motivated by a strategic response to their economic and political environment and by learning and normative change within the business community. Given the limited capacity of government to regulate effectively internationally, support for self-regulation is a low cost way to change corporate behavior, restrain the backlash against globalization, and maintain the gains of a competitive global economy.

Despite these cautions, voluntary self-regulatory initiatives will become more important not less so. The trends indicate that these initiatives have great potential to change corporate behavior in positive ways. The fact that many corporations are now willing to admit they have social responsibilities is a breakthrough. These initiatives will become more important because governments do not have the capacity?technical, financial, political?to impose regulations on international business effectively and therefore they can be seen as a complement to traditional governance mechanisms. However, the positive benefits will only accrue if we develop further incentives and means to encourage them.

Prepared by Elaine French, Junior Fellow.