CREDIT: <a href="">Nick</a> (<a href="">CC</a>).
CREDIT: Nick (CC).

Policy Innovations Digital Magazine (2006-2016): Innovations: Putting Teeth in Corporate Social Responsibility

Nov 21, 2006

Corporate social responsibility (CSR) has become a fashionable, if not particularly well-defined, term in recent years. The concept encompasses a broad range of activities that corporations may engage in, with varying degrees of enthusiasm, to demonstrate that they are addressing important human rights, environmental, and labor issues—many of which have been brought to their attention by activist groups.

A key component of the general discourse around CSR has been so-called multi-stakeholder initiatives, which bring together corporations, governments, and non-governmental organizations to talk about and in some cases develop mechanisms for addressing, particular areas of concern. The era of globalization has been replete with such initiatives intended to promote greater respect by transnational corporations of human rights and environmental principles. Among these are the UN’s Global Compact, the Voluntary Principles on Security and Human Rights, the Kimberley Process for monitoring the global diamond trade, and the Extractive Industries Transparency Initiative.

These initiatives have represented an effort to retake some of the control over the actions of transnational corporations that globalization has forced states to concede. Indeed, globalization has largely been defined by efforts to reduce state involvement in economies and reduce barriers to entry by corporations. Free-trade agreements, one of the key pillars of globalization architecture, contain provisions designed to limit states’ abilities to adopt and enforce regulations on corporations for purposes of protecting the environment and public health.

The CSR initiatives in a general sense have been useful venues for public debate about these issues. They may also have helped elevate the issues they seek to address to higher levels of awareness among policymakers and corporate leaders than would otherwise have been the case. Despite the existence of such initiatives, however, human rights and environmental problems continue to affect a broad range of corporate operations around the world, particularly in the oil and mining sectors.

A key problem affecting all of the voluntary CSR initiatives is that they are just that: voluntary, and thus lack any real enforcement mechanism for sanctioning corporations that fail to comply with the principles or standards promoted by the initiatives. The Voluntary Principles have recently faced difficulties arising from the refusal of companies to agree on criteria for expulsion from the process for noncompliance. The lack of enforcement capacity has led some skeptics to argue that these initiatives are nothing more than corporate "greenwash" that enable corporations to argue that they are taking CSR issues seriously but are in reality not fundamentally changing the ways they operate.

What can be done to put some teeth into CSR so that it becomes more than just an excuse to create more "talking shops" or glossy reports to be downloaded from a company’s website?

There are two key areas in which to look for answers to this question. One lies in strengthening governments' abilities and incentives to regulate corporations. Ultimately, governments have a responsibility to hold corporations accountable for operating responsibly. But fulfilling this responsibility is unlikely to happen given the inequitable power structure in the global economy that serves the interests of the rich countries (and the corporations that are headquartered there). Moreover, the skewed power imbalances in developing countries themselves enable the elites to benefit from globalization while leaving everyone else in the dust.

Recent efforts to hold corporations legally accountable for human rights violations via lawsuits in U.S. courts are a positive development, but the legal basis on which such cases have been filed may be too limited to have a broad impact on the corporate sector more generally. Efforts to "normativize" corporate obligations under international human rights law, such as the recently adopted UN Norms on Transnational Corporations, are also positive. But again they lack a vehicle for enforcement.

A second area is perhaps more promising. It lies in identifying what corporations are most interested in. Two items are critical for corporate profitability: Access to capital and access to markets. If ways can be found to link corporate performance on CSR issues to continued access to both of these things, real leverage could be established for holding corporations accountable.

For capital linkage, the focus should fall on the private banks that finance transnational corporations. They provide the lifeblood to corporations. Respect for human rights and environmental standards could be made a legally-binding part of the loan agreements between the banks and the corporations. In other words, capital will be cut off from a project if serious human rights or environmental violations are found to have occurred.

The World Bank has tried this approach with its social and environmental safeguard policies. The problem, however, is that the Bank has only once in its history ended a relationship with a company based on a social or environmental policy violation. The institution has effectively taken its ultimate enforcement mechanism—threat of divestment—off the table. Similarly, a group of private banks has adopted the Equator Principles, essentially committing to following World Bank standards for projects it lends to. Yet here again, there is no real sanction for violations of these policies.

What incentive would these banks have to require compliance with CSR criteria? Clearly, one or more major private banks would have to establish a moral leadership position and reap the benefits that position might produce, such as positive public relations, happier employees, etc.

Private banks also often have lower reputational risk tolerance than do large corporations, particularly in the extractive sector. Mining and oil companies are used to "keeping their heads down and letting the bullets fly over the top," as one mining company official once described it to me. Private banks are not. There is empirical evidence that social and environmental irresponsibility is increasingly translating into real financial risk. In this sense, banks will see a growing business case for ensuring real responsibility to protect against risk.

As for the other area of linkage, much could be done to deny markets to corporations that violate human rights and the environment. Large institutions, such as public utilities, universities, pension funds, and corporations that consume significant volumes of materials or are brand-sensitive could adopt legally binding contracts that discontinue materials or stock purchases from corporations that operate irresponsibly. In this way, such institutions could force corporations to compete with each other to provide the most responsibly produced products.

Market-based incentives could be found in a purchasers desire to maintain a clean corporate image and reduce supply-chain risk. Corporations that supply products to these markets must face a real risk of losing key clients if they act irresponsibly.

Putting teeth into CSR is a challenge. Incentivizing lenders and purchasers to care enough to recall their capital or cancel contracts if problems arise is a conundrum, but may be becoming easier to crack. Answering this question is about hitting corporations where they live—in the worlds of capital and markets—rather than in the comfortable confines of CSR dialogues. In this way, we can bite back some of the ability to hold corporations accountable that globalization has chewed away.

The views expressed in this article are those of the author and not necessarily those of Oxfam America.

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