The Five Generations of Corporate Codes of Conduct and Their Impact

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THE FIVE GENERATIONS OF Human Rights Research CORPORATE CODES OF CONDUCT AND and Education Centre

Bulletin THEIR IMPACT ON CORPORATE SOCIAL

National Journal of RESPONSIBILITY Education Centre Constitutional Law University of Ottawa Prof. Errol P. Mendes, Director, HRREC 57 Louis Pasteur Order Form Jeffrey A. Clark, Senior Research Associate, HRREC CANADA K1N 6N5 Documentation Centre

Notes for discussion only. Tel: (613) 562 Fax: (613) 562 Please do not photocopy or distribute without permission of the authors. [email protected] 18 September 1996

Research recently undertaken by the authors shows that there are essentially four "generations" of issues of ethical and social responsibility dealt with in most business codes of conduct and corresponding management systems:

First generation: conflict of interest Documentation Centre Second generation: commercial conduct Third generation: employee and other third party concerns Canadian Human Fourth generation: community and environmental concerns Rights WEB Links International Human Rights WEB Links Recently, a fifth generation has begun to emerge: Gordon F. Henderson

Human Rights Law in Fifth generation: accountability and social justice Globalization, Justice This paper briefly discusses each of the five generations to show how corporate responsibility has gradually grown to address evolving expectations of businesses. We find that first generation issues tend to bear primarily on the company interest, while second, third, fourth and fifth generation issues deal in progressively greater fashion with the public interest.

The first generation of issues deals primarily with conflict of interest. The rationale is to protect the company from its employees. There is little public interest beyond shareholder interest in ensuring that companies prevent employee conflict of interest, except in the case of crown corporations. The business incentive to enforce these, on the other hand, is obviously strong. Many codes of conduct focus primarily on this issue. Limiting company codes of conduct to protecting the company from conflict of interest is consistent with the well-known Milton Friedman view that the only social responsibility of business is to increase its profits (Vyakarnan, 1992). According to this view, the company's responsibility is primarily to its shareholders. Codes of conduct therefore need not extend beyond ensuring that employees obey laws and act exclusively in the interest of the company, and by extension the shareholder.

The Friedman view was essentially a counter-attack to prevailing legal principles on social responsibility in American legislation and case law. These file://C:\WINDOWS\DESKTOP\Conflict%20of%20Interest%20Websites%20and%20Fil... 16/01/2004 THE FIVE GENERATIONS OF CORPORATE CODES OF CONDUCT AND THEIR I... Page 2 of 5

principles, which began to emerge in the post-war period, protected a company's right to make charitable contributions against shareholder action to block it (Walton, 1992:57-58). Furthermore, since the Friedman view was propounded in the mid-1970s, attitudes toward social responsibility and business have continued to evolve substantially. This evolution was hastened by a wave of public and business scandals in the US and abroad in the same decade, leading to the study of business ethics in universities and a renewed interest in the application of ethics in business itself (Werner, 1992).

Accordingly, ethical business conduct, the second generation of issues dealt with in codes of conduct, began to receive greater attention. Concerns include bribing foreign officials and arranging kickbacks. The public interest in ethical business practice is clear. Ethical business practices help protect the company's reputation and ensure fair competition by discouraging company employees from paying bribes to acquire business contracts. Host country governments whose officials do not take bribes are less likely to treat the company arbitrarily or abuse their powers. The Canadian government has an interest in ensuring that Canada is not brought into disrepute through corrupt practices of Canadian companies.

The company interest in incorporating second generation issues into their business practices may vary according to the willingness of the host country to enforce laws, and the determination of leadership in individual companies to ensure that they or their employees do not involve their company in corrupt practices. There is an extensive literature to suggest that, far from being antithetical, ethics and profitability go hand in hand (see, for example, Pastrin 1986 and Beaver 1994). Indeed, many companies--including General Electric--see a high level of business ethics as being critical component of their competitive edge.(1)

The third generation of issues, appearing in a reduced number of company codes of conduct, involves respect for employee rights as well as rights of others in direct relationship with the corporation, such as customers and suppliers. The business case for implementing these principles includes improved corporate relations, a motivated work force, and satisfied customers. Nonetheless, the notion of including employee protection abroad in codes of conduct is a relatively recent innovation that has emerged in part as a result of public outrage over working conditions of third world workers. Consider, for example, the extraordinary interest in Germany, Canada and other northern countries in ethical consumerism(2) and campaigns by social activists against the exploitation of child labour. There are also concerns about real or imagined capital flight from Canada to countries with lower labour standards, some argue, purely to take advantage of exploited workers (Elwell, 1993).

The fourth generation of issues addressed by codes of conduct take on a wider social responsibility challenge. These issues focus on the protection of the environment and respect for communities in which business activity occurs. The Bhopal and Exxon Valdes disasters showed that impacts of company activities can extend far beyond employees and customers to include entire communities and environments. Companies interested in reducing legal liabilities and maintaining their corporate image have acted accordingly to extend the reach of stakeholders addressed in Codes of Conduct to include community and environment. Some of the more progressive mining companies have paid particular attention to indigenous peoples. For example, the Final Report of the Whitehorse Mining Initiative, in which the Mining Association of Canada and some individual Canadian mining companies participated, not only recognizes that aboriginal peoples have constitutionally- protected rights to land and resources, but also declares that aboriginal peoples are entitled to opportunities to participate fully in mineral development at all stages of mining and associated industries and at all employment levels.

The fifth generation of issues emerged with troubling concerns around investment in countries whose governments do not respect basic human rights or the Rule of Law. The issues were first raised with respect to South Africa in the era of apartheid. The concern was that foreign business activity could help prop up the oppressive regime. Many companies accordingly signed on to sets of principles including the famous Sullivan Principles (Weedon, 1996) to promote equitable employment practices; others withdrew all together. These issues have become critical to commercial activity and file://C:\WINDOWS\DESKTOP\Conflict%20of%20Interest%20Websites%20and%20Fil... 16/01/2004 THE FIVE GENERATIONS OF CORPORATE CODES OF CONDUCT AND THEIR I... Page 3 of 5

investment in countries such as Burma and Nigeria. Concerns have been raised in many settings around the world by those who perceive that foreign investors are somehow complicit in the gross human rights abuses carried out by the governments of these countries.

In a nutshell, the fifth generation issues concern the extent to which a foreign investor fulfills its responsibility when it complies with the terms of agreement with a host government and obeys local laws. In many cases, the answer would be affirmative. International law accepts that every country has the sovereign right to develop its own resources. A company invited in by the country's legitimate government to help exploit those resources obviously is entitled to remain there and continue to do business provided that it complies with applicable laws.

But what of a situation of a government which has usurped power by means of force and is regarded as a rogue government by most of the international community? Is that government entitled to enter into arrangements with foreign companies that may impact on the human rights of its nationals? What if legitimate land claims by traditional peoples are being made, but the rogue government refuses to set up appropriate processes to deal with these land claims?

In such cases, we argue that a company has a certain responsibility to citizens of the host country to avoid participating in human rights abuses initiated by the rogue government. There appears to be an emerging consensus, among human rights activists and business leaders alike, that there is an argument for business to take an interest in labour standards, human rights, and the Rule of Law abroad. As Thomas d'Aquino, head of the Canadian Business Council of National Issues stated recently, the acceptance of rule of law, outlawing of corrupt practices, respect for workers' rights, protection of children, etc. are "good for business and most business people recognize this" (d'Aquino, 1996).

The normal rules, according to which the responsibility of companies ends at complying with applicable laws, are no longer perceived to be sufficient in the case of countries with rogue governments. Corporations operating in those countries are increasingly being expected to be accountable not only to those governments but also to the citizens of the countries where they do business and to the international community. Accountability could be realized by having regard to internationally recognized standards on, for example, forced labour or the rights of aboriginal peoples. It could also be realized through meaningful consultations with affected stakeholder groups.

Conclusion: The Need for Effective Implementation

Even if a company decides to integrate all five generations of issues into its activities, whether through a Code of Conduct or by other approaches, issues of implementation arise. Ingrained corporate culture and lack of appropriate corporate governance structures and training leads even the most well- intentioned corporation to fail on living up to their own Codes of Conduct (Center for Business Ethics, 1986).

Some companies have developed relatively effective management systems for implementing first and second generation ethical issues into their business activities. However, later generation issues can be more difficult to implement given the complexity of the matters at stake. Companies that have codes of conduct addressing later generation issues are sometimes criticized for lacklustre or erratic implementation of their policies. Even an acknowledged leadership company like Levi Strauss has been targeted by major Canadian nongovernmental organizations for not living up to the standards set out in its voluntary Code.(3)

The difficulty of the questions at stake need not necessarily lead to inaction. Ontario Hydro International is one of a handful of companies around the world that have integrated all five generations of issues into their Codes of Conduct. OHII has developed an innovative analytical framework (with the assistance of the authors) which it is hoped will lead to effective implementation of its Code.

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References

Bavaria, John, "Valdez Principles Picking Up Steam," in "Dispatches from the Front Lines of Social Responsibility," Business and Society Review, No. 81, 1992

Beaver, William, "Nuclear Nightmare in the Philippines," Journal of Business Ethics 13:271-279, 1994,

Center for Business Ethics, "Are Corporations Institutionalizing Ethics?", Journal of Business Ethics 5:85-91, 1986.

d'Aquino, Thomas, "Globalization, Social Progress, Democratic Development and Human Rights." Notes for an address for a conference organized by the International Centre for Human Rights and Democratic Development, Toronto, February 22, 1996.

Elwell, Christine, "Human Rights, Labour Standards, and the New WTO: Opportunities for a Linkage," Essays on Human Rights and Democratic Development #4, 1995.

Pastrin, Mark, The Hard Problems of Management: Gaining the Ethics Edge USA: 1986 quoted in Werner, Simcha B, "The Movement for Reforming American Business Ethics: A Twenty-Year Perspective," Journal of Business Ethics 11:61-70, 1992.

Vyakarnam, Shailendra, "Social Responsibility: What Leading Companies Do," Long Range Planning, 25:5 1992.

Walton, Clarence C., Corporate Encounter: Ethics, Law and the Business Environment, Dryden Press, 1992.

Weedon, D. Reid, "The Evolution of the Sullivan Principle of Compliance," Business and Society Review, No. 57, Spring 1986.

Werner, Simcha B, "The Movement for Reforming American Business Ethics: A Twenty-Year Perspective," Journal of Business Ethics 11:61-70, 1992.

Woollacott, Martin, "Keeping Bad Company: Multinational corporations' moral relativism spreading rapidly," Ottawa Citizen, November 23, 1995.

"Levi defends record on factory conditions," Globe and Mail, Friday, May 3, 1996.

1. GE's Code of Conduct declares that its "quest for competitive excellence begins and ends with our commitment to ethical conduct."

2. Ethical consumerism has emerged as a major response of civil society to the failure of the international community to promote fair labour standards and integrate human rights concerns into the global marketplace (Elwell, 1995, 26).

3. See "Levi defends record on factory conditions," Report on Business section, Globe and Mail, May 3, 1996.

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