Private Sector and International Standard-Setting: The Challenge for Business and Government

Source: Carnegie

Virginia Haufler Discussion Paper #3

The trend towards voluntary standard setting would be interesting enough if it was limited to just one issue area. Instead, this trend has emerged across a wide range of policy arenas at the national and international levels. Nor is it limited to only one industry sector or to a set of unique individual corporations, but increasingly involves groups of corporations in different industries. Comparisons across issue areas tell us which common factors are leading to this common response. These factors must be fundamental facets of a changed global environment. The common turn towards private sector standard setting poses new challenges to both business and government.

The main elements in all three cases?labor standards, environmental management, and information privacy?are: the role of transnational and local pressure groups; the increased use of outsourcing in the production process; the threat of government or intergovernmental regulation; market competition and business leadership; technology as a source of problems and as a potential tool for their resolution; partnership and dialogue in standard setting; and the systems of implementation devised for these initiatives. (See Discussion Paper #2 for details on the cases)

1. Transnational pressure groups

Transnational pressure groups play a significant role in all three cases because they are capable of changing the cost/ benefit calculations of a firm. They make it difficult for corporations to conduct business as usual by targeting the reputation of a company, and by pursuing strategies that affect its ability to do business at all. Human rights NGOs such as Amnesty International and Human Rights Watch publicize the exploitation of workers in factories that produce or sell to major brand name companies, as in the case of Nike and Wal-Mart. Environmental activists such as Greenpeace mobilize large numbers of people to speak out against a company?s environmental pollution, as in its campaign against Royal Dutch/Shell over the disposal of an oil rig at sea. Consumer and civil rights groups alert everyone to pitfalls in the commercial use of personal data, as in the mobilization against the P-Trak proposal to make personal information available on the Internet. Transnational pressure groups play the least role in the case of information privacy, largely because it is still such a new and somewhat arcane policy area. Privacy International, based in London, and the Electronic Privacy Information Center, in Washington, D.C. are the major interest groups lobbying internationally on this issue, but they do not yet have the same public "weight" as the other groups.

Industries in which reputation is a key factor for selling services and products and in hiring talented staff are the most vulnerable to this pressure. This implies that industries that have a close relationship with consumers are most likely to be leading the standard setting trend, and this can be seen across the three cases. In the labor case, the firms most often involved in voluntary initiatives are in the clothing, textile, footwear, carpet, toy and sporting goods industries?all very consumer-oriented. In the information case, the industries that ask consumers for information are at the heart of the problem. The environment case is more mixed, but certainly transnational pressure groups often target firms that have a name brand familiar to consumers. NGOs are least likely to target firms in sectors that sell primarily to other businesses. Even these intermediate businesses, however, often compete on the basis of quality and their reputation with other businesses matters to them. No business likes to be at the bottom of any list, be it a list of major polluters, bad employers, or insecure websites.

Pressure groups can use tactics that go beyond targeting reputation, including everything from boycotts to lawsuits to?in extreme cases?sabotage. This can make it almost impossible for a firm to operate, which is tantamount to taking away its license to do business. Environmental groups have been particularly effective at using the legal system against polluters, particularly in the United States. Legal strategies work only where there are laws on the books that have been violated, which is not always the case in every issue area. More significant for all three cases is that public pressure can lead to the threat of government intervention and international negotiation. In all three areas, transnational pressure groups have been key players in putting these issues on the international agenda for inter-governmental negotiation.

Voluntary standard setting is a logical response to these pressure groups. These initiatives respond to the immediate concerns of the public, they provide reputational benefits that become a sort of "ethical" competitive advantage, and they lead to dialogue and even partnership between NGOs and the corporate community. The labor standards case stands out from the others because of the long-standing role of unions in worker-management relations. Human rights groups have expanded their agenda to include worker rights, and have been most active in pressuring corporations to adopt voluntary codes. Unions express concern that these codes sidestep traditional collective bargaining and labor-management relations. Human rights NGOs and unions do not necessarily think the same way about labor standards.

2. Outsourcing

The actual organization of the firm has been changing constantly over since the 1970s. Our vision of the multinational firm is of a well-defined, hierarchical organization that has subsidiary factories in many different countries. In the most extreme cases, the truly transnational corporation divides up the production process itself and produces parts in different places, assembles them someplace else, and then sells the product in still another location. Only a handful of corporations are quite so transnational. Almost all international corporations today participate in a much more decentralized production process. Instead of owning production facilities in multiple places, the firm contracts with other firms to produce parts, assemble goods, or deliver services. The most extreme cases are like Nike, which does not own any of its own factories, but instead contracts with literally sub-contractors to make its sneakers.

Outsourcing is central to all three cases, but is a particularly sensitive element for labor standards. Sub-contractors for textiles, toys, and carpets generally are located in developing countries with working conditions and wages that are much lower than those found in the firms and countries to which they sell. Outsourcing is also a key element of the information privacy case, because the personal information that is at stake is transmitted and often used internationally. Corporations also sub-contract to low cost suppliers in countries with low environmental regulation and enforcement. On the other hand, evidence indicates that MNCs have contributed to raising living standards around the world and increasing employment and economic activity.

Companies that operate internationally cannot monitor the practices of all their suppliers. Even though they include particular standards in their contracts, it would be difficult to ensure that all their thousands of suppliers are living up to those provisions. Many critics point to outsourcing as an organizational feature that leads to a "race to the bottom" in standards. Others point to outsourcing as an effective way to raise standards in developing countries by bringing in investment, stimulating exports, and transferring technology. The debate over outsourcing raises questions about the scope of control in modern firms, and links organizational features with a whole array of social and political effects. The only certain solution to the problems raised by outsourcing either is to have national enforcement of internationally accepted standards, or to stop the practice of outsourcing. The former is only slightly more likely than the latter. Private sector standard setting is a logical response to the issues raised by outsourcing production and services to firms located in countries with radically different political and cultural systems.

3. Threat of government regulation

In every case, the threat of national or international regulation affected corporate decision-making. Corporations want to avoid legal liability and preserve their flexibility in the face of rapidly changing technologies and markets. They view the threat of further regulation, especially the traditional "command-and-control" type, as having the potential to hobble them in international competition. The problem here is the disjunction between national regulatory systems, and the weakness of international law in these issue areas. Many corporations are ambivalent about whether they would prefer international law over competing national laws. Some corporations with international operations argue that they do not care whether standards are set high or low on any of these issues, just so long as they are consistent across countries. It is costly and inefficient to have to deal with such a variety of national regulatory systems. On the other hand, many corporations believe they can influence domestic policy much more easily than they can influence international policy, and therefore may oppose efforts to establish international rules, preferring the current fragmented system. Still others believe that an internationally accepted set of standards would be a good idea, but fear that political differences over the content of those standards would lead to an unworkable, costly, and inflexible system.

The dynamics of these ambivalent positions play out differently in each issue arena, and the biggest differences stem from differences in business-government relations in Europe versus the U.S. When it comes to the environment, corporations in the United States worry primarily about liability, and therefore focus on compliance with national law and regulation. After years of struggling against the EPA, both sides are now looking for new ways to protect the environment while leaving room for flexibility in corporate decision-making. In the area of labor standards, U.S.-based firms reject government intervention on human rights and labor standards abroad. The information privacy case is the most stark, with U.S. firms begging to be left alone, arguing that this brand new economic arena should not be put in a government straitjacket. Current U.S. policy favors market-based systems. European business-government relations are quite different, and corporations there are more interested in influencing the shape of national and EU regulations than they are in avoiding them altogether. At the same time, European business leaders and policymakers fear that a costly, complex regulatory systems could be a competitive disadvantage.

Voluntary standard setting by corporations is a logical response to the ambiguities and uncertainties of the current system. They respond to societal pressure, while avoiding rigid government interference. They are voluntary, and therefore can be applied in a flexible manner. They are potentially global in scope, and if adopted widely, would reduce costs, increase efficiency, and prevent other corporations from gaining competitive advantage. Encouragement of voluntary standard setting by the private sector also is a logical response for governments. Private sector self-regulation appears to balance the interests of business and society, without expanding government intervention in the economy.

4. Competition and leadership

Competition can be both a spur to standard setting, and a barrier. When firms compete on cost alone, then there is the potential that standards will not be upheld, or that firms with higher standards will be undercut by their rivals. When firms compete in part on quality, then raising standards becomes more likely. In general, once a firm adopts high standards, then it has an incentive to make sure as many others join as possible. In each case, the mix of cost versus quality considerations is different. In the environment case, many people make a compelling case that pursuing ecologically sound business practices is also sound business, since it can increase efficiency and lead to the development of new technologies and new markets. Not all firms are convinced of these competitive advantages, but this is one case out of the three where this case can be made. This is not true on the issue of labor standards. No one has made a compelling argument that raising worker standards will contribute to competitiveness and profitability, although that argument certainly could be made. The information industry case is particularly interesting, because two contradictory arguments can be made. A firm could be highly trusted by the public because it adheres to high standards of information privacy and gives each individual a choice about how the information will be used. Widespread trust of this sort is viewed by many as a prerequisite for all sorts of new commercial markets to emerge in the information industries. On the other hand, commercial vendors who ask consumers for information have an incentive to avoid giving them a choice on how it is used, since consumers may choose not to have that information used in any way at all.

One striking facet of these cases is the difference between large multinationals and small- and medium-sized enterprises (SMEs). The major companies are the ones often targeted by pressure groups, as mentioned above. Smaller firms are part of the supply chains for the larger ones, and therefore may be asked to adopt the same kinds of standards. The competitive advantages for them of doing so are not so clear, since their small size can make it difficult for them to meet those kinds of commitments. This is particularly true in the labor standards case, somewhat true on environmental issues, and probably not a significant issue in the case of information privacy.

In every case, the leadership of corporations and their top executives is critical to the adoption of voluntary standards. The top leadership in a company has to believe in the value of these initiatives for them to have any real meaning. John Browne of British Petroleum publicly speaks out on issues of corporate social and environmental responsibility, and has taken the company in a new direction. The Levi Strauss family has been dedicated to good relations with workers for many years. It is more difficult to identify a similar corporate executive on information privacy issues, although the independent consultant and computer guru Esther Dyson has taken a leading position. For most corporate leaders, good management practice mandates meeting "best practices" within the industry. To the degree that these voluntary initiatives are viewed as best practices, it is likely that there will be followers in addition to leaders.

5. Partnerships and engagement

Initially, in many cases, NGOs developed a set of standards they wanted corporations to live up to, and businesses individually developed their own corporate codes of conduct. Over time the two sides have become remarkably more willing to work together on issues of common concern. The environmental community has taken the lead in pursuing these sorts of dialogues, but the human rights community is beginning to participate with business in a way they would not have ten years ago. The result is that many voluntary standard setting efforts are developed cooperatively by groups of industry and NGO representatives. This dialogue is almost entirely absent in the information privacy case. The private sector is developing its own self-regulatory systems with little input from the groups most concerned about privacy protections. This may be in part due to the fact that this is an entirely new area, and interest groups have only recently mobilized. It may also be due to the lack of political sophistication on the part of many information industry players.

Many observers and participants argue that the only way to ensure the legitimacy of private sector standard setting is to make sure the process of developing and implementing them is a shared endeavor between business and NGOs. These three cases demonstrate to some degree the value of an open, participatory process: information industry privacy standards probably have the least legitimacy of the three cases. On the other hand, high levels of participation do not guarantee a solid outcome: the Apparel Industry Partnership came close to falling apart due to divisions and lack of compromise among the participants.

6. Technology

Technology can cause problems to emerge, and can also provide solutions. The information privacy case poses a choice between the benefits of new technology and the dangers it can pose to individual rights. In this case, technology itself is the problem because it allows industry to collect, collate, and communicate information in a way it never could before. The industry clearly believes technology is also part of the solution. No one argues that we can or should go back to living without these new technologies, and many people believe that the benefits we gain ultimately outweigh the costs. In order to respond to societal demands, the industry is rapidly developing software and hardware technologies that will alleviate, perhaps even eliminate, the problem. For them, new technology resolve the side-effects of the original technology and substitute for government regulation.

The environmental case is somewhat similar, since the technology for industrial production is the main source of environmental problems. Many people argue that we need to change production technologies in fundamental ways. They argue that new technologies will reduce pollution and waste, and lead to a less resource-intensive production system. This faith in technological progress shows up in some of the arguments in favor of adopting a voluntary standard setting system. According to the optimists, corporations that set and meet higher environmental standards will reap a number of rewards: increased efficiency and profits, a competitive edge in environmental technologies, and better relations with government and environmentalists. Many firms, however, view all this with a skeptical eye, and are unsure the environmental technologies really will produce the benefits claimed for them. Industries with high sunk costs, such as utilities, especially view these uncertainties as a barrier to adoption of new standards and new technologies.

7. Systems of implementation

Systems of implementation go beyond mere statements of principle, and lay out the organizational requirements of meeting stated standards. Only in the environmental arena have businesses made progress in linking standards with a management system to achieve them. The ISO14000 is the primary example of this focus on organizational process instead of outcome. The same kinds of management systems could be applied in the other two cases. Unfortunately, even the best process does not necessarily lead to an appropriate outcome. In all three cases, the problem of outsourcing makes business control difficult. That is why monitoring is so central to voluntary standard setting. Monitoring raises all sorts of conflicting questions about who should do the monitoring, how it should be done and how often, and how to convey the results of monitoring to the wider public. In all three cases, the majority favored independent monitoring by people external to the corporation. Within the business community, many firms prefer to benchmark their behavior against external standards and conduct internal monitoring instead. In the labor case, business has been reluctant to allow monitoring by NGOs, in part due to a real lack of trust in their neutrality. International organizations may have some role to play, but they generally do not have sufficient resources to do this on a large scale. Professional accounting and auditing firms may be an appropriate alternative, although this then raises issues of training and certification. Accountants and auditors already are playing a large role in the emerging monitoring systems in all three cases. Overall, it is difficult to evaluate the implementation of these standard setting efforts. The initiatives are still too new, and the information still too scarce.

If the kind of standard setting activity represented in these three cases becomes widespread, then they will present new challenges to all the participants. Governments will have to consider how they affect domestic regulatory capacity, since they are in effect a form of self-regulation by industry. On the one hand, relying on voluntary initiatives certainly lowers the cost of influencing and monitoring business behavior. In fact, they challenge governments to develop new institutional incentives for the private sector to expand these activities. On the other hand, these initiatives probably will not relieve the pressure on government to intervene, since in many cases the implementation of these codes is weak. The industrialized countries may view these voluntary private sector initiatives as a way to resolve the tensions between promoting foreign investment and high standards at the same time. But these initiatives may also simply reflect the decreasing capacity of governments to regulate domestically, or negotiate international agreements about the behavior of MNCs. The international integration of markets has changed the ability and willingness of states to intervene in economic affairs, or at least, in the affairs of MNCs. These initiatives may actually contribute to a backlash against globalization, since they can appear to be an abdication of government responsibility to the private sector.

Private sector standard setting poses new challenges for NGOs. To the degree that voluntary initiatives actually raise standards, the business sector will expect less criticism from these groups. NGOs will need to publicize good behavior, instead of concentrating all their attention on the bad. But the level of trust between many NGOs and the business community is quite low. Some may be willing to engage in dialogue and form partnerships for specific projects, but they may not be able to sustain a long-term relationship. Since many standard setting efforts probably will not meet all the criteria of many groups, and since implementation systems are still weak, the failures of these exercises will tempt many NGOs to return to their former tactics?of highlighting the violations of business, and lobbying government for strict regulation.

The corporate community cannot look upon voluntary initiatives as the end of the game. NGOs are not united in supporting them, so that corporations will still find themselves under attack. "Code fatigue" has already set in among some firms, and they will be tempted to return to old ways of doing business and dealing with the public. These initiatives require corporations to be much more open about their operations than before, and many find it difficult to accept this as the cost of doing business today. Engagement and transparency are essential for successful, legitimate private sector standard setting?but they go against the status quo within the business community.