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Towards Binding CSR Standards

Companies are increasingly aware that human rights problems are bad for business. Human rights issues are having a decided impact on how companies do business. In a survey of the world’s 500 largest companies, more than a third of respondents reported that human rights concerns had caused them to drop a proposed investment, and nearly a fifth said they disinvested from a country for that reason.

In a number of areas, steps have been taken to move beyond purely voluntary CSR standards. Leading companies have worked to reflect their human rights commitments in corporate practices. In some industries, particularly apparel, companies have agreed to not only codes of conduct, but also independent monitoring to increase the odds that they and their suppliers will live up to their word. The Fair Labor Association has a monitoring process that provides one example.

To a limited extent, enforceable regulations have also begun to emerge, though their reach is spotty. Some stock indices, such as FTSE 4Good, require qualifying companies to comply with basic ethical standards. Certain international financial institutions make similar demands of their loan beneficiaries. For instance, the International Finance Corporation, the private-sector lending arm of the World Bank Group, has said it will require companies to live up to the Voluntary Principles on Security and Human Rights, which provide for human rights protections and some company disclosures about payments. Companies that are complicit in serious human rights abuses risk liability under laws such as the U.S. Alien Tort Claims Act. In extreme cases, corporate executives could even face prosecution by the International Criminal Court. And individual governments, sometimes prompted by trade agreements, increasingly demand that trading partners regulate certain corporate conduct.

Moreover, public expectations already constrain the behavior of some large corporations. This is mostly the case for major companies based in countries with an active civil society and vigorous news media. In such countries, political leaders often respond to demands for corporate responsibility by endorsing standards for business conduct. These measures, in turn, provide a yardstick against which watchdog groups judge the behavior of the companies based there.

In each of these cases, however, constraints on corporate behavior are limited to those companies that fall under the regulatory or public eye, leaving other businesses free to break the rules. The first point to be made is that global rules would level the playing field. As things stand, more responsible companies sometimes lose economically for doing the right thing or face competitive disadvantages based on the standards applicable to their home country.

A company executive, speaking anonymously under Chatham House rules, acknowledged the difficulty of trying to operate ethically in difficult environments when there are no clear rules and other companies do not feel so constrained. As he put it, “Any regulation is better than no regulation.”

A second point is that companies eager to get ahead of the curve may be signed up to a dizzying number of CSR guidelines, codes of conduct, and voluntary commitments. Complying with these initiatives in their global operations can be time consuming and expensive, especially where monitoring and reporting mechanisms are built in. Rather than having to navigate so many divergent codes and make sense of emerging liabilities, it would be in the interest of these companies to operate under simpler, enforceable rules that eliminate ambiguity.

The current patchwork of rules hardly creates a fair competitive environment: it is piecemeal in its coverage and unpredictable in its enforcement. Different initiatives identify and interpret human rights standards differently, leading to divergent expectations. From the point of view of a corporate executive who needs to plan and manage risks, that should be an unsettling thought.