Codes of conduct are a well-established tradition in the private sector. They are also becoming more common as ways to better match changing public attitudes and expectations from their stakeholders about their role in society. In many professions there has been a long tradition of regulating the behaviour of members through voluntary codes. Virtually every company has developed guidelines for staff on how to behave when confronted with dilemmas such as conflict of interests, gifts, theft, insider trading, pay-offs and bribery.
But codes are now being used to establish rules of good behaviour in relation to a host of other issues. Respect for labour rights, a clean environment and preservation of natural resources, and personal and political freedoms for citizens – these are some of the areas where corporate performance has come under close scrutiny from stakeholders and where private initiatives have emerged as a major force in corporate ethics programmes.
A close look at these codes shows that OECD companies are making a strong effort on environmental and labour issues. In fact, almost all of the world’s 100 largest multinational enterprises (MNEs) have issued environmental codes or EHS (Environment, Health and Safety) policy statements. The majority of them have also issued statements addressing labour practices. Other codes demonstrate a commitment to areas such as advertising ethics, consumer protection, genetic engineering and animal rights. Which companies do what largely depends on the industry they are in.
Mining, forestry and paper, for example, focus, though not exclusively, on rules of behaviour for environmental management, health and safety standards. Labour provisions are particularly common in the garment, footwear, rug and sporting goods sectors, where dismal working conditions, low wages and child labour have been well documented. Often, companies, whatever the sector, make some commitments in both areas and many codes contain provisions relating to health and safety in the workplace.
Apart from individual companies, business organisations also promote standards of business conduct. Well-known initiatives include the Business Charter for Sustainable Development drawn up by the International Chamber of Commerce, the Responsible Care Initiative of the chemical industry to improve its environmental, health and safety performance, and the Charter for Good Corporate Behaviour drawn up by Keidanren in Japan. Non-governmental organisations (NGOs), too, have issued sets of global principles, such as the Consumer Charter for Global Business developed by Consumers International, which links 200 consumer groups in more than 80 countries, or the Clean Clothes Campaign, a European initiative directed at the textile industry.
Moreover, it is commonplace to find labour unions, NGOs and other private groups participating in code initiatives with the private sector. The Ethical Trading Initiative in the UK is an example.
The standards which companies pledge to observe do not stop at the gate of corporate headquarters but are intended for all their operations in all countries. Many companies apply standards to their supply chain management, clearly expecting other business partners they work with to uphold their codes.
Supplier codes of this type are particularly prevalent in the retail and textile industries. Here, prospective suppliers and contractors are often screened for child labour abuse and may be asked to sign up to a code as part of any contractual arrangement. Chemical firms in the Responsible Care Initiative factor environmental principles into their procurement decisions. Indeed, their suppliers must provide safety, health and environmental information on their products.
The economic weight of large companies helps them to shape the terms of employment, the quality of jobs and rights of workers, the quality of goods and services, health and the environment in many countries and regions around the world. Royal Dutch/Shell Group operates in more than 130 countries, General Electric manufactures in 100 and the mining activities of Rio Tinto cover all continents. If outsourcing policies are taken into account, their influence becomes more considerable still; in the automobile industry, materials and component suppliers account for more than 60% of the cost of the goods sold in most cases, and up to 90% for some companies in the electronics and electrical equipment industry.
The question is, are these codes worth more than the paper they are written on? Will voluntary initiatives lead to the types of changes needed to contribute to a cleaner environment and better working conditions, for instance? Some stakeholders are sceptical. First, whatever goals a company pledges to reach or standards to obey, like fair working conditions, they must have a specific, practical application. Without this, codes will set only the overall ground rules for corporate conduct. Turning intentions into action requires commitment from top management down.
A comparison of codes reveals discrepancies. One code may focus on a single labour issue (for example, a commitment not to use child labour, or a commitment to contribute to the elimination of its use as a long-term goal) while another contains a full set of core labour standards. And these standards can differ too. Some pledge to comply with local law, others commit to exceed legal requirements and others make explicit references to ILO conventions and other internationally recognised standards. This can confuse suppliers, putting them under pressure to meet often competing standards. It highlights a need for devising more consistent policy.
The toughest part about a code is implementation and enforcement. Its administration is a formidable task at the best of times. Nor is company behaviour always transparent and easy to monitor. In fact, many companies prefer to monitor compliance themselves rather than use independent inspection services. The trouble with that is, when companies come under pressure from consumers and the media to rectify violations, their credibility takes a knock.
But management practices are evolving. A number of organisations, ranging from global accounting and audit firms such as KPMG, Price Waterhouse Coopers, to more specialised monitoring firms like Bureau Véritas, and NGOs, now provide external verification services. Also, auditing and monitoring standards are being developed. A large and growing number of internationally active companies are engaged in the process of adopting standardised and certifiable ISO 14001 or EU environmental management systems. They also disclose information about their performance through health, safety and environmental reports. For labour issues, similar standardised management systems are under development, e.g. Social Accountability 8000; Global Reporting Initiative (see OECD Observer No. 226-227 or www.oecdobserver.org/GRI/).
Another trend that appears to be increasing is dialogue and stakeholder participation. More and more companies are engaged in discussions with labour unions, environmental groups and other relevant stakeholders on various aspects of making voluntary initiatives effective. NGOs have provided expert advice, for example to retailers as they developed their approach to the problem of child labour in Pakistan’s soccer-ball producing sector. They have participated in the drafting of various model codes of conduct that can serve as general guidance for every company, regardless of sector (for example, CERES principles, SA8000). NGOs will continue to monitor and sponsor public relations campaigns against the activities of particular corporations, but direct stakeholder involvement may provide the best safeguard of proper implementation of and compliance with private codes and can help build up trust between companies and society.
There is also extensive government involvement in “voluntary” initiatives for corporate responsibility, both at the national level and through international organisations. The types of involvement include legal and regulatory incentives, tax expenditures, contribution to compliance expertise and so on. International norms and guidelines provide benchmarks which governments and businesses agree to, the Universal Declaration on Human Rights, the various protocols drawn up by the ILO and the OECD Guidelines for Multinational Enterprises being some examples.
Making a code fully operational takes years. Management systems are still in their infancy, which makes it hard to assess the effectiveness of these private initiatives. Clearly, the intense code activity of recent years has kept a spotlight on undesirable practices. There is some evidence that codes have reduced the number of children working in the Caribbean garment export industry. Also, it has been estimated that Responsible Care has reduced releases of toxic chemicals to the environment by almost 50%. At various times, companies have stopped doing business with overseas contractors who disregarded their standards and pulled out of countries where forced prison labour or violation of other fundamental human rights have been well documented.
However, such punitive measures can be counterproductive economically for the local communities (children may even be displaced to more hazardous industries) and do not help spread better practices. Remaining engaged with local contractors and working with them to improve their performance may in many cases be a better approach, as it reduces the risk of disruption and spurs development.
Codes were once largely a defensive response to accidents and scandals, like Bhopal in India, various oil spills and repeated discoveries of sweatshops in Asia. Often companies lead the way to improvement. A decision by Reebok not to sell footballs made with child labour was swiftly followed by similar commitments from other companies. This is happening despite the (short-term) costs such commitments entail.
Still, good corporate practices bring commercial benefits too. They help firms achieve a variety of goals – protecting corporate reputation, improving employee morale, enhancing consumer and client loyalty, and avoiding costly criminal and civil proceedings. Nike or The Body Shop brand themselves on their better practices (and even so, they have their detractors). Companies can strengthen their position on capital markets, for example, by being recognised by ethical investment funds, and even mainstream investors are now paying more attention.
So while some stakeholders feel that many companies just pay lip service to standards, these codes do in fact have “bite”. Companies who do not practice what they pledge risk adverse publicity and losing customers, even black-listing. Codes used as marketing tools but not backed by action can have legal consequences. But we are still a long way from a level playing field in business codes which could ensure a fair deal for companies as well as for the people and environment of the host countries where they operate.
*Maiko Miyake, formerly of the OECD and now with the World Bank Group, also contributed to this article.
• OECD, Corporate Responsibility: Private Initiatives and Public Goals, 2001.
• Kolk, A., van Tulder, R. and Welters, C., “International codes of conduct and corporate social responsibility: can transnational corporations regulate themselves?” in Transnational Corporations, Vol. 8, No. 1, 1999, pp 143-180.
• OECD Trade Committee, “Codes of conduct: Exploring their economic significance”, 2001; available at: http://www.oecd.org/oecd/pages/home/displaygeneral/0,3380,EN-documents-337-nodirectorate-no-10-no-24,FF.html
• Kinloch Massie, R., “Reporting on sustainability: a global initiative”, in OECD Observer No 226-227, Summer 2001.
©OECD Observer, No. 229, November 2001