Issues
Calls for improved regulation of business activity have been prompted by a number of high profile incidences of negative social impact (Utting 2008; Broomhill 2007). Illustrative examples include the use of child labour in clothing manufacturing; concern for the relationship between some businesses and security forces (Pitts 2011); and the much documented treatment of workers in mobile phone factories in Asia. Heightened perceptions of social risk within corporations themselves have also provided an impetus for business regulation and reform (Utting 2008).
Governance and corruption are key issues for inclusive private sector development. Businesses have an important role in ensuring that their operations do not hamper good governance efforts (Sullivan 2006). Transparency and accountability in public financial management are crucial for equitable and inclusive economic development with positive social impacts.
National regulatory instruments, corporate social responsibility (CSR) approaches, and voluntary and self-regulation provide opportunities for overseeing the social impacts of business activity. The emergence of ‘soft law’ instruments to govern corporate conduct has also been accompanied by an increasing regulatory role for NGOs, trade unions, and businesses themselves (Nolan 2013). Challenges and complications can arise, however, when national legislation is not aligned with international standards or guidelines.
Interventions
National regulatory instruments
National regulatory instruments govern a broad range of business activities which have social impacts, including labour conditions, tax obligations, and sustainability reporting.
Advocates for mandatory regulation contend that the use of regulated codes helps to ensure a minimum level of compliance, as well as producing a central and comparable source of data that can be used by investors and other stakeholders (UNEP and KPMG 2006). However, some authors caution that mandatory regulation may be hampered by knowledge gaps between regulators and the industry, inflexibility, and a lack of incentives for innovation (UNEP and KPMG 2006).
Some donors have been supporting business environment reform approaches, which include reform of national regulatory instruments. Though much of this work focuses on reducing regulatory barriers and creating a business environment that is supports market-led growth, some initiatives provide oversight on the social impacts of business activity. Case study examples show that good regulations can: make it easier for poor entrepreneurs to register their businesses and enter the formal economy; help secure benefits; and protect workers, consumers and the environment (See for example Bettcher, Friedl and Marini 2009).
‘Soft law’ instruments
There is an emerging body of ‘soft law’ instruments that seek to mitigate any harmful impacts of business activity. These advocate a minimum level compliance with international standards in areas such human rights, transparency, and environmental impact. Though lacking the same legal status as mandatory regulations, soft law instruments are guidelines to which states adhere and which have a different status than voluntary approaches. Examples include:
- OECD Guidelines for Multinational Enterprises, which are recommendations covering all areas of business ethics, including steps to obey the law, observe international standards, and respond to societal expectations (OECD 2011).
- The UN Global Compact, which is a policy initiative for businesses that seek to align their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption.
- The Voluntary Principles on Security and Human Rights, which provides guidance to companies operating in conflict-affected or fragile environments to secure their premises while maintaining high human rights standards (Pitts 2011).
Voluntary approaches and self-regulation within firms
Voluntary approaches and self-regulation present a viable alternative to public and state-based forms of social governance. They give businesses the opportunity to develop country- or industry-appropriate approaches to social responsibility (UNEP and KPMG 2006).
When self-regulatory processes are sector or industry specific, their proximity can mean they have better access to industry information and are better placed than government regulators to identify potential problems (UNEP and KPMG 2006; OECD 2015). Self-regulators may also act with greater flexibility and can harness the collective interests of the industry to generate a higher level of compliance (UNEP and KPMG 2006). Despite such advantages, however, experts caution that self-regulatory processes can be hampered by conflicts of interest, inadequate sanctions, and under enforcement (UNEP and KPMG 2006; OECD 2015). Some experts also caution that companies may be less likely to disclose negative material in voluntary reports (UNEP and KPMG 2006), and that the structure governing self-regulatory schemes can be dominated by a small number of actors who favour the interests of long-established or larger firms (OECD 2015).
Many large international companies have introduced codes of conduct in their global supply chains, as they seek to influence the social and environmental impact of supply chain members (UNCTAD 2012). UNCTAD evidence finds that codes are no longer limited to certain sectors, but common across a broad range of industries, from pharmaceuticals, to packaged foods and meat (UNCTAD 2012).
Complying with codes of conduct can present notable challenges for small and medium enterprises (SMEs), particularly those in developing countries (UNCTAD 2012). Many suppliers may be new to CSR codes, have difficulty finding and collating the required information, and face challenges bearing the direct and indirect costs of CSR compliance (UNCTAD 2012).
Recent trends also include a growth in sustainability reporting in non-OECD countries.
Sustainability reporting
There has been a recent trend toward environmental and sustainability reporting in non-OECD countries. A survey from the International Finance Corporation (IFC) and the World Resources Institute found that sustainably reporting increased during the period 2004-2009 in six Asian countries (India, Indonesia, Malaysia, Philippines, Thailand and Vietnam). This increase was attributed to a combination of factors, including the efforts of national governments, training and consulting organisations, and professional accounting associations. However, sustainability reporting worldwide remains low.
Source: IFC and WRI 2009
Impacts
National regulatory instruments
Evidence on the impact of donor attempts to support national regulatory reform is limited. Much regulatory reform assistance is embedded within broader interventions, such as public sector reform, making it difficult to identify direct causal links (IFC 2008, p. 43 cited in Kirkpatrick 2012). Some authors have raised concerns about the capacity of business environment reforms to achieve positive social impacts (Kirkpatrick 2012). One study from Zambia, for instance, finds that though business enabling environment reforms can deliver economic growth, they have not delivered significant poverty reduction or job creation (CAFOD and JCTR 2014).
‘Soft law’ instruments
There is some, albeit limited, evidence that ‘soft law’ instruments have improved the social impact of businesses. The Voluntary Principles on Human Rights, for instance, have contributed to raising awareness of key issues among companies, increasing dialogue with stakeholders, and, in some cases, leading to ‘clear improvements in certain concrete country situations’ (Pitts 2011, p. 360). An illustrative example is the case of BP in Indonesia. BP engaged with expert consultants to analyse the human rights risks of operating in the country and included specific contractual language which obliged them to adhere the voluntary principles in their relationships with security providers (Pitts 2011).
Others note that the impact of principles such as the UN’s Global Compact are inherently difficult to assess as they promote adherence to a general principle and ethos, rather than a specific set of measurable goals (Hale 2011).
Voluntary and self-regulation within firms
Evidence on the social impacts of voluntary and self-regulation is also limited (Hiscox, Schwartz and Toffel 2008). Recent academic evidence finds that voluntary codes of conduct have brought about tangible improvements in working conditions, such as occupational safety and remuneration, but have had little effect on less tangible issues, such as freedom of association and collective bargaining (Lund-Thomsen and Lindegreen 2013). Some experts note that when CSR is about being responsive to the community and addressing real concerns proactively (including in the design and implementation of projects) it can play a prominent role. Others advocate the need to move beyond voluntary principles and introduce reporting mechanisms and procedures that bring about a measure of accountability.
- See: http://www.law.harvard.edu/programs/lwp/NLC_childlabor.html
- See: http://www.globallabourrights.org/reports/document/1412-IGLHR-China-AppleZhenDingTech.pdf
- Expert comments: Frances House.
- See: http://www.enterprise-development.org/page/whyber
- Expert comments: Daniel Franks
- Bettcher, K., Friedl, M., & Marini, G. (2009). From the streets to markets: Formalization of street vendors in metropolitan Lima (Reform Case Study No. 0901). Centre for International Private Enterprise. See document online
- Broomhill, R. (2007). Corporate social responsibility: Key issues and debates (Dunstan Paper No. 1/2007). See document online
- CAFOD & JCTR (2014). A pro-poor business enabling environment: the case of Zambia. Lusaka: CAFOD and the Jesuit Centre for Theological Research. See document online
- Hale, T. (2011). United Nations global compact. In T. Hale & D. Held (Eds.), Handbook of transnational governance. Cambridge: Polity Press. See document online
- Hiscox, M., Schwartz, C., & Toffel, M. (2008). Evaluating impact of the SA 8000 certification. Cambridge, MA: Harvard University. See document online
- IFC, & WRI. (2009). Undisclosed risk: cooperate environmental and social reporting in emerging Asia. IFC and WRI. See document online
- Kirkpatrick, C. (2012). Economic governance: Improving the economic and regulatory environment for supporting private sector activity (Working Paper No. 2012/108). UNU-WIDER. See document online
- Nolan, J. (2013). The corporate responsibility to respect rights: Soft law or not law? In S. Deva & D. Bilchitz (Eds.), Human rights obligations of business: Beyond the corporate responsibility to respect? Cambridge: Cambridge University Press. See document online
- OECD. (2015). Industry Self-Regulation: Role and Use in Supporting Consumer Interests (OECD Digital Economy Papers No. 247). Paris: OECD. See document online
- OECD. (2011). OECD Guidelines for Multinational Enterprises – 2011 Edition. Paris: OECD. See document online
- Pitts, C. (2011). Voluntary principles on security and human rights. In T. Hale & D. Held (Eds.), Handbook of Transnational Governance. Cambridge: Polity Press. See document online
- Sullivan, J. (2006). Corruption, economic development, and governance: Private sector perspectives from developing countries (Private Sector Opinion Issue 2). Washington: International Finance Corporation. See document online
- UNCTAD. (2012). Corporate social responsibility in global value chains: Evaluation and monitoring challenges for small and medium sized suppliers in developing countries. New York and Geneva: UNCATD. See document online
- UNEP, & KPMG. (2006). Carrots and sticks for starters: Current trends and approaches in voluntary and mandatory standards for sustainability report. Paris/Parktown: UNEP/KPMG. See document online
- Utting, P. (2008). The struggle for corporate accountability. Development and Change, 39(6), 959-975. See document online