Globalization and Self-Regulation: The Crucial Role That Corporate Codes of Conduct Play in Global Business
298
Globalization and Self-Regulation: The Crucial Role That Corporate Codes of Conduct Play in Global Business
298Paperback(1st ed. 2011)
-
SHIP THIS ITEMIn stock. Ships in 1-2 days.PICK UP IN STORE
Your local store may have stock of this item.
Available within 2 business hours
Related collections and offers
Overview
Product Details
| ISBN-13: | 9781349376667 |
|---|---|
| Publisher: | Palgrave Macmillan US |
| Publication date: | 10/11/2011 |
| Edition description: | 1st ed. 2011 |
| Pages: | 298 |
| Product dimensions: | 6.10(w) x 9.25(h) x (d) |
About the Author
Read an Excerpt
Globalization and Self-Regulation
The Crucial Role That Corporate Codes of Conduct Play in Global Business
By S. Prakash Sethi
Palgrave Macmillan
Copyright © 2011 S. Prakash SethiAll rights reserved.
ISBN: 978-0-230-61155-9
CHAPTER 1
Self-Regulation through Voluntary Codes of Conduct
S. Prakash Sethi
The current wave of globalization has brought about a radical transformation in geopolitical arrangements. It has shifted the locus of economic power and bargaining leverage between private economic institutions, national governments, and regulatory authorities. National governments in developing countries have had to compete among themselves to attract and maintain MNC investments. They have been forced to make concessions to the MNCs in terms of taxes and other "giveaways," and thereby limit their ability to fashion domestic policies with better focus on national interest (Johnston and Yufan, 1995; Sethi, 2002). At the same time, governments of industrially advanced countries have been reluctant to exert political pressure because of domestic strategic and economic interests, and from a reluctance to interfere in the internal affairs of other sovereign nations. Nor have international organizations such as the United Nations and multilateral and regional entities organizations such as the World Bank, International Monetary Fund, and Asian Development Bank shown a willingness to cooperate and create effective and enforceable oversight mechanisms.
In the midst of all this stands the institution of the multinational corporation (MNC), which has become an engine of change through its access to capital, technology, organizational skills, and control of markets through brand recognition and dominant market share. In their current form and scope of activities, MNCs can and do exert tremendous influence by creating a new equilibrium in economic power and political leverage. Unfortunately, they have been unwilling to react to these situations in a proactive manner that would provide a balanced arrangement between private economic interest and societal needs (Sethi, 2003a).
Voluntary Codes of Conduct
Nature abhors a vacuum, and the current situation is no exception. A lack of effective legal responses from the national governments and other international, regional, and multilateral institutions to restrain MNC conduct considered socially undesirable has given rise to other organizations, mostly nongovernmental civil society organizations (NGOs), to challenge MNC hegemony in the international economic and sociopolitical arena. These NGOs have been quite effective in pressuring MNCs to be accountable for their business activities and their negative side effects in such areas as environmental protection, fair treatment of workers, human rights abuses, and bribery and corruption, to name a few. Even more important, an increasing number of civil society organizations have acquired enough financial and technological expertise to confront MNCs on equal terms in various legal and regulatory forums as to the MNCs' compliance with prevailing laws and regulations. Furthermore, where appropriate, they have also formed alliances—both among themselves and also with national governments—to seek greater accountability from MNCs for their conduct and modus operandi with regard to their core business activities.
A recognition of increasingly hostile sociopolitical environments on the part of individual MNCs and industry groups has led these organizations to take action in the form of voluntary codes of conduct that would outline corporate and industry responses to societal concerns. The primary focus of these codes of conduct is to: (a) assuage public concerns and build further trust in MNC assertions; and (b) take actions that would ameliorate these actions without unduly restricting corporate managements in the conduct of their business or imposing onerous regulatory oversight and heavy financial burdens.
Companies and industry groups have always had codes of conduct that are intended to provide a framework that defines a company's relationship with its employees, suppliers, and other stakeholders directly related to their business and financial operations. Industry-wide codes are intended to allow member companies to coordinate their activities in the public policy and regulatory arenas to protect the member companies' vital interests. The most common form of these initiatives are to be found in (a) companies' codes of ethics, and (b) industry trade associations (Paton, 2000; Howard, Nash and Bhrenfeld, 1999; Tapper, 1997; Sethi, 2003b; Sethi, 1979).
In a similar vein, a new class of voluntary codes of conduct has also emerged. These codes primarily focus on issues that cross both industry-specific concerns and national and regional boundaries. Broadly defined as universal codes of conduct, they are invariably initiated by a combination of stakeholders that may include national, regional, and international bodies; civil society organizations; and, private-sector institutions (Sethi and Schepers, 2011).
The economic case for voluntary cooperation among business enterprises is clear and compelling. Business organizations develop voluntary arrangements to standardize technical and quality standards for products, contracts, and other arrangements that create economies of scale and reduce transaction costs (Sethi, 2006). Companies may also cooperate among themselves to advance their economic interests in the political arena (Harris and Carmen, 1983; Wolf 1979; Clark, 1998). A third dimension of the benefit of industry coalitions is to protect companies from paying the cost of negative externalities (Murty and Russll, 2005; Afraro and Rodriguez-
Clare, 2004; Herve, 1990; Dybvig and Spatt, 1983). Examples of such externalities may be air pollution, untreated wastewater, et cetera. Individual companies and industries mobilize their combined efforts to minimize their cost burden for such externalities by pushing them onto the community.
Voluntary Codes of Conduct in the Sociopolitical Arena
The business case or the economic justification for the corporate social responsibility (CSR) principles or codes of conduct is infinitely more complex than those of the conventional business groups. In direct contrast to conventional principles or codes, CSR-related codes of conduct call for companies and industry groups to voluntarily assume some of the costs associated with the industry's negative externalities. The notion of voluntariness, however, creates a number of philosophical, operational, and accountability problems. Consequently, voluntary codes of conduct in the sociopolitical arena have a different rationale that includes both economic and noneconomic considerations, and raises difficult issues toward implementation.
a. Many companies are philosophically opposed to creating voluntary codes, which they view as giving in to their critics.
b. When it comes to an entire industry, there is the inherent difficulty of finding common ground among member companies that otherwise compete vigorously against each other.
c. Another set of difficulties emanates from individual companies' operational constraints, financial concerns, and, above all, corporate culture and management orientation toward responding to social and environmental challenges (Sethi, 2005; Hermann, 2004; Sethi, 1994). For example, when individual company codes significantly diverge from the overall industry position, the company risks alienating the rest of the industry and thus creating a hostile environment for itself in other aspects of industry activities where it must seek the cooperation of other industry members.
d. The long-term benefits of industry-wide cooperative effort, nevertheless, carry short-term costs that must be compensated for via improved productivity. This takes time and requires structural and organizational changes that are not always easy to accomplish.
e. The prevailing nature of competitive markets, shareholder expectations, incentives of the financial middlemen, and management reward system (i.e., agency costs) overwhelmingly emphasize the short-term character of earnings (Eisenhardt, 1989; Cho, 1992; Marrewijk, 2003). There is a strong incentive to underestimate long-term risks since recognition of these risks would lower the expected earnings of a company when compared with competitors that choose to ignore them.
f. When it comes to universal codes of conduct, the challenges of code creation, governance structure, performance monitoring, and accountability become almost insurmountable and raise potentially serious issues as to their viability. The major drive for the creation and implementation of universal codes invariably arises from sources that are outside the control of the corporate sector. And yet it is the corporate sector that is expected to bear the burden of code compliance.
Essential Characteristics of Corporate Social Responsibility–Related Codes of Conduct
A voluntary code of conduct consists of a set of activities that the sponsoring organization (SO) commits to undertake. The effectiveness of an SO's responses to society's concerns depends on a number of factors: the sociopolitical environment, public awareness, the emotional intensity generated by the issue, the dynamics of competition and industry structure in which the company operates, and the institutional character, corporate resources, and management style of a particular corporation.
To be effective, such a code must have a large measure of acceptability from all relevant stakeholders and must fit within the competitive realities of the marketplace. It must be dynamic and flexible to respond to evolving conditions. A specific action can be socially responsible only if it takes account of time, environment, and the interests of the parties involved. The same activity may be considered socially responsible at one time, under one set of circumstances, and in one culture. It may be considered socially irresponsible when any of these factors change.
A voluntary code of conduct is in the nature of a "private law" or a "promise voluntarily made," whereby an institution makes a public commitment to certain standards of conduct. The nature of voluntariness and, by implication, the flexibility afforded to companies depends on the basic premise that the sponsoring organizations and their critics share a common interest in improving the underlying conditions of the affected groups and regions, and a common understanding that it is in the interest of all parties to resolve the underlying issues within the realistic constraints of the available financial resources and competitive conditions (Sethi, 2003b; Melrose, 2004).
The private-law character of voluntary codes of conduct gives the sponsoring organization a large measure of discretionary action. It also imposes a heavy burden on the organization to create independent systems of performance evaluation, monitoring and verification, and public disclosure. This is a proactive stance, and perhaps the best of all possible worlds. It provides scope for experimentation and building consensus, and facilitates the enactment of public law. The success of this system, however, depends on the industry's ability to create and sustain a high level of public credibility. The private-law character of the code does not reduce the obligations of the companies or industry groups, it increases their burden to ensure that its skeptical critics and the public at large believe in the industry's responses and performance claims.
Companies, industry groups, and cross-industry (universal) alliances, therefore, must not only create a set of laws—a code of conduct—they must also provide a system by which their performance will be measured, evaluated, and verified. The private-law character of the code does not reduce the obligations of the companies or industries. It increases their burden to ensure that skeptical critics and the public at large are persuaded that the sponsoring organizations' performance standards are adequate and that their claims of performance are true. The organization will be expected to implement a system of policing, monitoring, and judging its performance while ensuring that the system is completely independent of the company—both in perception and in reality.
From the public's perspective, voluntary codes also serve an important purpose. They avoid the need of further governmental regulation with the prospect of imposing onerous regulatory conditions. They also allow the moderate elements among the affected groups to seek reasonable solutions to the issues involved (O'Rourke, 2003).
Individual Company-Based Voluntary Code of Conduct
A company-based code of conduct is the most likely initial corporate response to social pressures, especially when the issues involved emanate directly from the company's core business operations. A company-based code provides its sponsor considerable flexibility in defining the parameter of the social issue in contention—especially in its earlier stages of public awareness. It also allows the company to offer solutions that build on its strengths. There are also no problems of free riders and adverse selecton. Therefore, a meaningful company-sponsored code, when thoughtfully implemented and providing measurable results, can return enormous dividends in terms of first mover's advantage, enhancement in corporate reputation, and public trust.
However, the success of such an effort creates tensions with other industry members that are pressured by external stakeholders to follow the first company's example. Additionally, when there is not enough external pressure on other industry members, the company is likely to face pressure from its own shareholders for fear of lower profits, and from managers of operating units chafing under increased security and higher costs (Sethi, Veral, Shapiro, and Emelianova, 2011; Sethi, Lowry, Veral, Shapiro, and Emelianova, 2011). Therefore, it takes a determined top management that can resist short-term considerations in favor of long-term sustainability of the enterprise, lower risk, enhanced corporate reputation, and a more trusting regulatory environment. In the following chapters, we present two case studies—Mattel, Inc., and Freeport-McMoRan Copper & Gold, Inc.—that amplify both the strengths and weaknesses of individual corporate codes of conduct and the pressures they face from a company's external and internal stakeholders.
Industry-Based Voluntary Codes of Conduct
Industry-based voluntary codes of conduct dealing with societal issues serve an important business and social purpose. From the business viewpoint, such a code provides industry members with a mechanism to develop solutions that are focused, take cognizance of the industry's special needs and public concerns, and are economically efficient. They engender public trust through the "reputation effect" while avoiding being tainted by the actions of other companies (Sethi, 2003; Kapstein, 2001).
Voluntary business groupings, however, must contend with two problems, such as free riders and adverse selection, the magnitude and severity of which would adversely affect their collective operation. The free-rider problem accrues from the situation where some type of pressure and coercion is necessary to ensure that member organizations, which benefit from the collective effort, also share the cost of maintaining such effort in proportion to the benefits derived from them (Andreoni and McGuire, 1993; Conlon and Pecorino, 2004). Adverse selection occurs where companies joining the group are likely to exploit the benefits accruing from their participation in the group without any consideration of the harm that their actions might cause other members of the group (Inderst, 2005; Fabel and Lehmann, 2000; Wilson, 1980). The success and the longevity of an industry-based group depends on its ability to find a common ground wherein most members benefit in joining and adhering to the goals of the group and the methods employed in implementing them. Finally, industry-based groups also face major challenges in transforming this need to "do something" into actionable strategies. The difficulties faced by these groups arise from conflicts among member companies within the industry and a lack of trust by external constituencies in the industry's external sociopolitical environment.
Universal Codes of Corporate Social Responsibility
Universal codes of corporate conduct confront the same set of problems as industry-wide codes of conduct. However, in this instance, universal codes have fewer advantages of common ground, which prevail in the case of industry-wide codes of conduct. For universal codes, the issues of free riders and adverse selection are further amplified since in their desire to entice and encompass the largest number of corporate participants, code sponsors invariably yield ground in terms of meaningful adherence to the code's principles. Unfortunately, this relaxation or weakening of compliance standards—when accompanied with a relative lack of transparency—diminishes the reputational value of group membership and takes away what little incentive there remains to comply beyond empty rhetoric (Sethi and Schepers, 2011).
(Continues...)
Excerpted from Globalization and Self-Regulation by S. Prakash Sethi. Copyright © 2011 S. Prakash Sethi. Excerpted by permission of Palgrave Macmillan.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.