Certain businesses use terminology such as "corporate social responsibility" or "corporate responsibility" because of the disturbing reference to "social". Others will use "sustainable, which sounds more positive, like an investment in the long term, whereas "responsible" suggests some obligations and duties and fortiori accountability and sanctions. Another term that has emerged in business schools is "business ethics".
All these terms encompass the same idea to describe the way companies or financial institutions do business. Business values such as profitability and efficiency should work together with ethical values such as honesty, integrity, fairness and transparency. At the heart of our subject is the question whether companies are committed to high standards of integrity and responsibility in their business practices and how they can achieve this.
Corporate Social Responsibility (CSR)
From the mid-1960s to the late 1970s, legal attempts were made to regulate corporate activities domestically and internationally but these attempts at mandatory regulation faced opposition from corporations and northern governments. Self-regulation was presented as an alternative. The 1980s saw a general shift away from state intervention. During the next 20 years, in the wave of deregulation and economic liberalisation, there was an explosion of codes of conduct or codes of business ethics. This was also due in part to a growing concern about the social and environmental impact of transnational corporations (TNC), manifested by bad publicity and consumer boycotts.
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In response, companies launched initiatives to design and adopt codes of conduct or more generally responsible investment guidelines. Multilateral and international organisations have also embraced this movement and established schemes and principles for CSR.
Corporate Self-regulation or Voluntary Codes of Conduct
Conscious that they had to embrace the discourse of CSR, companies have defined new ways of doing business--an ethical way of doing business--but only on the condition that they would be in the driving seat: that they would define the terms of the change and that these terms would be favourable to their business. Whether companies adopted these voluntary codes in response to accusations of bad behaviour or even in fear of bad reputation does not matter. What is noticeable is the trend to openly commit to embed CSR practices into their business.
Many transnational companies--among them the most controversial such as British American Tobacco Plc and defence companies such as BAE Systems Plc as well as whole economic sectors such as the extractive industry, trade and textiles--have adopted and published codes of conduct or business ethics.
In January 2009, BAE Systems Plc adopted a global code of conduct following the Woolf Committee's recommendations. Interestingly the Woolf Committee was commissioned by the company's board itself in the wake of a scandal fuelled by allegations that BAE's multi-billion-dollar arms trade with Saudi Arabia was propelled by bribery. Under this code of conduct, BAE commits "to behaving ethically in all aspects of business". It expects all employees to meet the ethical standards set in the code. It lists the five principles of ethical business conduct as follows: "(1) accountability--we are all personally answerable for our conduct and actions; (2) honesty--there is no substitute for the truth; (3) integrity--we say what we will do, we do what we will say; (4) openness--when questions are asked, we will be frank and straightforward in our answers; and (5) respect--we value each individual and treat them with dignity, respect and thoughtfulness."
These are only examples of a plethora of codes of conduct or sustainable policies adopted by many firms, small or large. Integrity is clearly part of CSR practices and it is publicly and openly proclaimed as a core value to business practices. CSR has thus appeared on the corporate agenda and in certain cases it has been moved forward at the board level. The current climate has reinforced the need for the board to check that they comply with the standards that they have themselves defined.
Although the codes of conduct that we are looking at are mainly from firms in the developed world, the consequence of their adoption by transnational corporations and large firms has been the adoption of these standards across borders. It is indeed expected that large corporate groups will apply the same standards along business channels across regions, beyond national boundaries and across governmental jurisdictions. The original domestic vocation of these codes of conduct is thus transformed and enlarged to a global dimension.
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In addition, despite the diversity of codes of conduct, standards have been harmonised. Common definitions of transparency, ethics and responsibility have emerged. For example, International Labour Organisation (ILO) standards have gained in legitimacy through these codes. Businesses have agreed to open up and engage in a social dialogue with stakeholders, including NGOs and trade unions and also governments. They have together set processes and established schemes to ensure proper compliance with their codes. They have been part of the fight against child labour and the awareness of abuses in supply chains.
The UK legislator has ventured into this domain. In 2000 the UK Government passed legislation directing pension funds to disclose whether or not they were taking into account social, ethical and environmental considerations in their investments. There is not, however, an obligation to take these factors into consideration, but the funds must state if they are doing so or not.
The Department of Trade and Industry then introduced the new concept of "enlightened shareholder value" when it drafted the new law on directors' duties in the Company Law Reform Bill. Section 172 of the Companies Act 2006 states that a director must act in good faith in the most likely way "to promote the success of the company for the benefit of its members as a whole", meaning its employees, suppliers, customers, the community and environment. The success of the company remains the overriding duty of a director but success is now defined more widely as including CSR metrics. A varied group of stakeholders has to be taken into account as well as shareholders. Some would, however, say that the new factors were standards which a director would have needed to consider in the exercise of the duty of care and skill in any event. "On this basis, Section 172 can be construed as nothing more than common sense." To fulfil this duty to promote the success of the company, the legislation lists six factors that directors must have regard to such as: (a) the likely consequences of any decision in the long term; and (c) the impact of the company's operations on the community and the environment. However, the board is not bound by these criteria; its final decision might ignore all six factors as long as it can justify that it has at least considered them limiting this section to a ticking the box exercise. Despite these limitations, this new legislation nonetheless reflects the UK Government's commitment to advance its vision of promoting business activities that bring simultaneous economic, social and environmental benefits and encouraging responsible business behaviour.
In addition to considering these factors, s.417 of the Companies Act 2006 requires large companies to publish an annual report including a review of the company's business which informs members of the company about how the directors have performed their duty under s.172. For listed companies, the business review must also contain information about environmental matters, the company's employees and social and community issues. This information is required "to the extent necessary for an understanding of the development, performance or position of the company's business". Listed companies are therefore expected to publish a report stating the impact of their activities on the community, the environment and the employees. As described in the White Paper, this new obligation on listed companies to include an "enhanced" business review on the directors' report is directed to make policies of companies as transparent as possible and to encourage meaningful narrative reporting although in practice it has had a limited impact. Such transparency should help to promote integrity. Integrity and responsibility have therefore been on the political agenda as well as the business one and when applied have borne fruit.
Multi-stakeholder Initiatives or International initiatives
Multi-stakeholder initiatives have emerged to address some of the weaknesses of voluntary self-regulation. They were inspired by a desire to harmonise and standardise the various CSR practices and standards defined by businesses as well as to ensure the actual implementation of these policies. For the most part, their approach has favoured changing business policy and practice through constructive engagement rather than confrontation.
They consist of initiatives led by NGOs, multilateral or international organisations to encourage companies to voluntarily participate in their projects. Their aim is to help investors integrate consideration of environmental, social and governance issues into their investment decisions and practices. To meet this aim, they have set up reporting, monitoring or auditing schemes and certification systems and regularly conduct research and analyse data.
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These initiatives have opened up the door to a "social dialogue" between the different stakeholders--companies, NGOs and communities--who one had thought would be in opposition to each other. They have standardised and harmonised practices and brought some order to a plethora of codes. As a result, CSR practices have gained international exposure and credibility. They have penetrated deeper into supply chains rather than remaining at the level of parent firms and affiliates.
Certain multilateral agreements had emerged in 1970s at the international level, such as, the OECD Guidelines for Multinational Enterprises and the ILO's Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy. The OECD Guidelines were adopted in 1976 and revised in 2000. They are a set of voluntary recommendations by governments to multinational enterprises operating in, and from, the territories of the 42 countries that adhere to the Guidelines. They are a multilaterally endorsed and comprehensive code of conduct that sets non-binding standards related to all the major areas of business ethics such as disclosure of information, workers' rights, industrial relations, environment protection, combating bribery, consumer interests, science and technology, human rights, competition and taxation. They aim to promote the positive contributions multinational enterprises can make to economic, environmental and social progress and to ensure that multinational enterprises act in accordance with the policies of the countries in which they operate and with societal expectations. To give effect to the Guidelines, the OECD has set up national contact points (NCP) which address complaints under the Guidelines. The UK NCP is, for example, a non-judicial mechanism that provides a degree of accountability for the environmental and human rights impacts of British companies operating abroad. It does not have any powers of enforceability, cannot impose penalties on companies or award compensation to victims. It can only investigate complaints and mediate. If there is no resolution of the complaint, the only action that the NCP will take is to issue a statement and make recommendations on the implementation of the Guidelines.
The ILO Principles were adopted in 1977 and revised in 2000. They cover employment issues such as non-discrimination, security of employment, wages and benefits and working conditions, health and safety, freedom of association and the right to organise. They constitute the most comprehensive code of conduct with respect to core labour standards. In addition they call on companies to respect specific international human rights agreements. The ILO has played a more predominant role in imposing the respect of basic workers' rights.
In 2000, the UN launched the Global Compact initiative, which involves business, labour, NGOs and governments. Like the OECD Guidelines, the original nine principles of the UN Global Compact are deeply rooted in international conventions and declarations and cover areas of human rights, labour standards and environmental sustainability. In June 2004 the fight against corruption was added as the 10th principle of the UN Global Compact, but it received less attention than the environment and labour rights. Less than a quarter (23 per cent) of the codes covered in the OECD survey addressed bribery and corruption. The members of the UN Global Compact are companies which commit through their CEO to comply with the 10 principles and to publish an annual report as to how they have implemented the principles.
Both initiatives, the OECD Guidelines and the UN Global Compact, are voluntary. There are no formal legal sanctions. The UN Global Compact relies on public accountability, transparency and self-interest of companies to comply with the Principles. It has introduced some integrity measures that promote dialogue between participants and local networks to help raise the quality of implementation efforts.
At the industry level, in 2002 the UK Government launched the Extractive Industries Transparency Initiative (EITI) at the World Summit on Sustainable Development in Johannesburg. This initiative gathers different players--businesses, governments, international agencies and NGOs--and aims at promoting transparency in payments made by extractive TNC to governments and government-linked entities. It is supported by a strong and varied international coalition which includes representatives of 31 countries, 21 companies and industry bodies, investors, World Bank, IMF, EBRD, as well as NGOs and international agencies.
In another illustration of the social dialogue that companies want to engage in, many firms use the Global Reporting Initiative Guidelines indicators to prepare their Sustainability Reports. These Guidelines aim at supporting reporting on social, environmental and economic performance by all organisations by setting a Sustainability Reporting Framework and Guidelines.
This is only the tip of the iceberg. The number of initiatives is huge and diverse, some more exacting than others. They have definitely helped firms to focus on CSR and achieve a greater degree of responsibility and integrity and a greater uniformity of standards.
However, as noted when we went through the list of these initiatives, the main limitation to these instruments is that they are non-binding either on states or on companies. The lack of accountability in the event of non-observance of their principles or standards is a significant obstacle to their credibility. Although these instruments have been crucial for the CSR agenda to promote integrity and ethics, they have remained weak in their lack of accountability.
The limitations of Self-regulation and Multi-stakeholder Initiatives
The image that emerges from this plethora of standards and codes of conduct is confusing. Corporations have defined ad hoc and piecemeal codes of conduct that often ignore crucial issues and stakeholder concerns. These codes tend to be concentrated in particular sectors and focus on the issues raised by these sectors. As shown by the OECD inventory of codes of conduct, the leading sectors are trade, textiles, chemicals and extractive industries. Out of 246 codes identified by the OECD, 83 per cent were company or industry/trade association codes. The types of issues addressed by codes therefore vary considerably and many key concerns such as collective bargaining rights, bribery and taxation are ignored.
In addition, too often CSR has not been really integrated into the business. There is a considerable gap between the CSR rhetoric and actual practice, which draws criticism from activists and creates risk for the firm. CSR is applied as a "bolt-on" to business operations rather than "built-in" to business strategy, resulting in CSR becoming a distraction and hindrance to business purpose and objectives, rather than a help. The solution to this problem, according to David Grayson and Adrian Hodges, would be to integrate CSR not into operations but into business strategy. Well-publicised business scandals that occurred in the 1990s and then in the 2000s have shed a negative light on CSR since they involved firms that had adopted codes of conduct.
Already in its report published in 2004, the UK NGO Christian Aid was stressing the failure of CSR to deal with corporate responsibility. Christian Aid denounces the inadequacy of voluntary codes of conduct to ensure good practice across a company's operations. Even companies that have championed voluntary CSR initiatives may "still fail to meet the standards they appear to have embraced. The rhetoric of many large companies belies the continuing damage they inflict". Christian Aid criticises the violations of ethical standards by those same companies that brandish the flag of CSR.
Even when stakeholders have incorporated ethical values in their strategic decisions, there is evidence that it has been done only partially and selectively. Unless it is proven that there is a business case for CSR, companies are reluctant to integrate CSR in their business strategies. This approach is common to neoliberals who only agree to take initiatives on board if it enhances the value of the firm--for instance if it acts as a form of insurance.
Finally, one of the most obvious limitations of corporate self-regulation centres on the lack of independent monitoring and verification. Stakeholders, especially NGOs, have tried to remedy this but, as CSR practices show, this is not sufficient. Implementation can only be guaranteed where there is an element of independent monitoring, but this has often proved to be a contentious issue because firms are reluctant to accept that a third party supervises the way they do business.
The instruments that they use lack credibility owing to the absence of sanctions. The UN Global Compact, for instance, is not binding on its members and does not monitor compliance. It does not put pressure on its members to comply with its principles; it relies on "public accountability, transparency and disclosure" to ensure compliance. Even if measures of accountability such as policies for communicating progress have been adopted, they have been insufficient and have not led to higher standards of CSR.
When stakeholders get involved, they are still too complacent with regard to large corporations and their investment abroad. One criticism is that they rely too much on dialogue and best practice learning. Although they try to correct some of the limitations discussed above, some critics may find them to be biased towards the North and towards easy causes.
The current economic and financial crisis has shown up a lack of business ethics. In practice there are still many uncertainties as to who initiates a CSR programme in a business, who finances it and implements it. Is this the board or the management? Who is in charge of supervising the day-to-day implementation? To what extent, if any, is the board involved in defining and supervising CSR implementation? There is still reluctance for business leaders to discuss business values and ethics in public or even in private. Usually CSR practices are perceived as incurring additional costs and too removed from the core business. There is uncertainty about the business case for CSR. Although there are more and more executives that believe that doing business responsibly leads to financial performance they are still reluctant to consider it seriously.
When companies publish CSR reports, they limit the scope of their reports to the field of corporate responsibility. It is important to differentiate the responsible companies from the irresponsible ones.
In any event, in most firms, CSR is not even on the corporate agenda. The number of companies that have adopted CSR practices is still relatively small in light of an estimated 82,000 multinational corporations, nearly one million affiliates and several million suppliers worldwide. These institutional investors put pressure on companies to focus on short-term investment. CSR is still perceived as a distraction to what should be the main goal of making profit.
However there are a few ethical funds and the new legislation on UK pension funds might change some priorities. Some Sovereign Wealth Funds (SWF), such as Norway's SWF, have selected the companies they are ready to invest in on ethical grounds and are willing to disinvest from major ones for "serious, systematic or gross violations of ethical norms". In the United States, shareholder activism has become a way of pressuring companies to adopt ethical policies.
In this context, a binding regulatory framework might be the solution to remedy a lack of ethical standards and define a level playing field. This legalistic approach is not new. It is part of the emerging corporate accountability agenda. This can take different forms. The main element is to ensure that sanctions in the event of non-compliance or processes to address complaints effectively are in place to make firms accountable. Corporate accountability implies "answerability", or an obligation to answer to different stakeholders, and some element of "enforceability", where non-compliance results in some sort of penalty. Another element is to ensure a level playing field where CSR policies and standards are as uniform and universal as possible. Regulatory defined CSR standards would apply to a larger pool of companies, rather than simply to those individual companies that choose to adopt voluntary initiatives.
The new regulatory framework would allow firms to define their own rules within a legal framework that would set common minimum definitions of standards and core ethical principles. This would set up a hybrid framework that would leave companies free to be more specific. The UK changes to the Companies Act are going in the right direction, as well as the French legislation on CSR, but these initiatives have to go further if they are not to be viewed as a tick the box exercise.
The recent proliferation of codes of conduct and other ethical standards has produced a new private ordering with a limited degree of accountability mainly through the NGOs as watchdogs. This ordering has been, for the most part, a substitute for any formal state regulation, but, in the light of ongoing failures and limitations, one must wonder how public and private ordering can better complement each other. It is possible to imagine a system where the state legislator would define a binding framework in which private codification would implement and decline rules relevant and specific to sector activity and practices. This would thus expand the regulatory impact of legislation and bring legitimacy and credibility to private governance. Companies would be accountable for the violation of, or non compliance with the binding rules.
In addition the current crisis has also brought about a review of the fundamentals of the economic system itself and highlighted the need to adopt standards of conduct and behaviour that favour trust and good business in the long-term. The excesses of this crisis have been mainly stocked by the pursuit of short-term shareholder value.
The emphasis now is increasingly on building long-term relationships based on trust between managers, employees, customers, suppliers and wider stakeholders. This long-term trust between parties is impossible unless their common objectives and values are anchored in something deeper than the effect on the next quarterly profit numbers. It must be anchored in ethical standards and effective CSR policies. State legislation may have an enabling role to play to ensure that CSR actually becomes embedded into corporate practice and is enforceable and to provide a fairer and more level playing field for all businesses. This legislation could be in addition to the existing set of voluntary codes of conduct already in place as an embryonic legal framework. Under these conditions CSR might become a more effective way of promoting integrity and responsibility and even economic stability.