Corporate Responsibility and Public Policy: Forming Constructive Partnerships and Avoiding Unholy Alliances

Kathryn M. Gordon^[1]
Senior Economist,
OECD
Division of Capital Movements,
International Investment and Services

The international business community has made and will continue to make essential contributions toward achieving the goal of sustainable development. It is worth recalling that the business sector's most important contribution is the conduct of business itself, its core responsibility is to yield adequate returns to owners of capital by developing profitable investment opportunities. In the process, companies provide jobs and produce goods and services that consumers want to buy. Economic history attests to the power of the business sector to raise general welfare and living standards when operating in effective governance environments.

Of course, corporate responsibility goes beyond this core function. Businesses also have to comply with legal and regulatory requirements and, as a practical matter, must respond to "softer" societal expectations that are not written down in law books. OECD research into the practices of some 2000 firms from around the world suggests that many businesses have invested heavily in improving their abilities to do this^[2]. Many companies have accumulated managerial expertise and contributed to the emergence of standards. Companies make this investment because they recognise their interdependence with the societies in which they operate. If surrounding societies are not doing well, the business sector will not flourish either.

However, interdependence is a two-way street. Societies can also act to nurture this relationship by creating appropriate systems of law and regulation as well as suitable channels for less formal influences on business behaviour such as those coming from employees, from employees' families or peers or from the press and civic organisations. It is for this reason that basic rights of all sorts -- human, labour, political and civil -- are essential ingredients of governance frameworks, one that allows the voices and interests of many groups to be heard. This was a key area of agreement among the business, trade union and NGO participants at the OECD's 2002 Corporate Responsibility Roundtable - economic activity is often so spread out and decentralised that appropriate high standards of business conduct cannot always be achieved via "remote control" from corporate headquarters or a government agency. If employees, surrounding communities or society in general are not able to make information public, to participate in political and civic life or to complain about wrongdoing, then no system - public or private - will be effective in encouraging appropriate business conduct. Thus, one of governments' most fundamental contributions is to reinforce and protect the basic rights framework.

In addition, if governments wish to help business sectors fulfil their mission, then they must be efficient and effective in the delivery of services that support business activity. These include protection of property rights, appropriate regulation, contract enforcement, provision of public goods and services and the financing of government activities via a disciplined, well designed tax system. If governments don't play their roles, the business community won't be able to play its part either: corporate responsibility goes hand-in-hand with government responsibility.

Indeed, this close link between government and private responsibility is increasingly recognised by both private managers and public policy makers. For example, emerging regulatory practice within the OECD tends to treat public regulation and private compliance as complementary, not competing efforts. Steps taken by regulatory and law enforcement authorities in several OECD countries attest to heightened public interest in private management systems for promoting compliance. Several member countries explicitly incorporate consideration of compliance and risk management practices into their enforcement strategies, for example, Australia and Canada (competition and trade practices), Switzerland (anti-money laundering), European Union (environment) and the United States (any business practice that is illegal under federal law). This is based on the recognition that companies are often indispensable partners in public law enforcement. This is particularly true when acceptable behaviour cannot be defined in advance by law in sufficient detail to cover all companies and all circumstances. Here, the company plays a crucial role in translating public law into private business practice. This "cooperative" approach (which is often backed up by threats of criminal or civil penalties or of regulatory sanctions for companies found to be operating in bad faith) is also appealing when the regulatory agency and the company clearly share the same objectives, for example, for occupational health and safety, where both workers and regulators have an interest in maintaining high standards.

For multinational enterprises, complying with formal law and informal expectations poses particularly formidable management challenges. Such companies often operate in dozens of countries and hundreds of markets. They have thousands of business partners and straddle a patchwork of legal and regulatory jurisdictions. If private initiatives to comply with law and with softer societal norms are successful, then this is a testimonial not only to the competence and the expertise of the business community, but also to the ability of societies to exert reasonable pressures for appropriate business conduct; the success of business initiatives in this area is inextricably linked to the quality of the external pressures that business faces. At the present time, multinational enterprises are confronted with a complex array of legal, regulatory and informal constraints on their action. Thus, multinational enterprises have to negotiate their way through a complex maze of binding and soft constraints on their behaviour. In a period of low confidence and shrinking international investment, their success in consolidating and extending progress in doing this could help foster the conditions necessary for a healthier world economy.

A particular challenge in this regard will be the search for a more successful interface between corporate action and public policy. The interface between corporate and government responsibility could well become the new frontier for pioneering new issues in private and public sector ethics. The challenges are two-fold.

• First, some companies operate in countries that present particular challenges for corporate responsibility precisely because government responsibility is so deficient (e.g. corrupt, not providing basic government services). Such enterprises have an important, but necessarily only partial, role to play in improving public governance. In these countries, companies, including OECD-based multinational enterprises, have an interest in being seen to assist in the search for solutions to what are often very deeply rooted, stubborn problems in the host society.
• Second, virtually across the globe, companies are trying to come to grips with their role in the public policy process. A recent OECD survey showed that, among the top 100 multinational enterprises, 27 set forth guidelines on political activity. On the one, hand they recognise that, as members of civil society, they have both a right and a responsibility to participate in the policy process. Yet, because of their significant resources and their vested interests in policy outcomes, it is difficult for them to avoid giving the appearance of exercising an undue influence on public policy. The question is: how can companies become constructive partners with governments while refraining from entering into unholy alliances? Companies recognise this dual face of participation in the policy process, but they will need help from governments and civil society representatives in developing their thinking on what constitutes a reasonable standard of conduct.

The OECD can contribute to this formation of constructive partnerships. The promotion of "government responsibility" lies at the core of the OECD mission, which is to help market-based democracies to manage their economies more successfully and to run their governments more effectively and at lower cost. OECD outreach activities with non-member countries seek to foster a process of shared, mutually beneficial learning on what works and what doesn't for economic policy and public management. The two pillars of OECD activity are its distinctive peer review processes and the creation of consensus-based, non-binding behavioural norms for governments and private actors. The OECD Guidelines for Multinational Enterprises (see box) are a multilaterally endorsed code of conduct for international business. They provide a forum in which governments, business, trade unions and NGOs can seek to identify and to encourage improved practices in this complex area.

For more information, please contact:

Organisation for Economic Cooperation and Development

kathryn.gordon@oecd.org

+33 1 45 24 98 42

www.oecd.org

^[1] The views expressed in this paper do not necessarily reflect those of the OECD or of the governments of its member countries.

^[2] See Corporate Responsibility: Private Initiatives and Public Goals. OECD (2001).