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The OECD's revised 'Guidelines for Multinational Enterprises': A step towards corporate accountability?

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Introduction | What are the guidelines? | The review | Will these changes help improve corporate behaviour? | Continuous Improvement | What would this mean for business? | Conclusion | Taking Action

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Introduction

Public distrust of multinational companies has never been higher. As customers, shareholders or employees, people throughout the world share concerns over the growing power and influence of multinationals, and their social and environmental impacts. The public protest and media attention on the Seattle Ministerial of the World Trade Organisation (WTO) at the end of 1999 was not an isolated outburst, but part of a trend. Concerns about multinationals are so great today that any proposal which might increase their power comes under intense public scrutiny and opposition. 

Some of the public's concerns are misplaced, but many are not. As NGOs and the media now have global reach, the direct and indirect impacts of multinational corporations have become ever clearer to their customers, shareholders, and even employees. Their power to influence consumers and individuals has grown too, whilst their structures and webs of influence have become more complex and wide-ranging, reaching into many parts of society. Moreover, it has become obvious that multinationals have been wielding their vast financial, lobbying and political power to further their own narrow financial ends, regardless of the broader public interest that governments are elected to serve.

It is now clear that if governments are to regain public trust, especially in global fora such as the WTO, then they will need to regulate the activities of multinationals. For example, the World Economic Forum in Davos in January 2000 agreed that measures were needed to assuage public concern about multinationals, highlighting the possible role of the OECD's Guidelines for Multinational Enterprises. These Guidelines have recently been reviewed - can they really help deliver corporate accountability?

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What are the Guidelines

The OECD's Guidelines were first adopted in 1976, and have been revised several times since. They are part of a package of measures adopted by governments in a Declaration on International Investment and Multinational Enterprises. The other elements required governments to adopt 'national treatment' (a commitment to treat foreign-controlled enterprises no less favourable than domestic ones), to improve cooperation on international investment incentives and disincentives, and to minimise 'conflicting requirements' imposed on multinational enterprises by different governments.

The Guidelines set out the 'standards of behaviour' expected by OECD governments of multinational enterprises (MNEs) based in OECD countries. They cover almost the whole range of corporate behaviour from environmental impacts to treatment of workers, and from transparency and reporting to tax avoidance. The Guidelines were in part adopted in response to growing concerns that MNEs could unduly influence developing country governments and that foreign direct investment (FDI) by MNEs could be damaging and exploitative. The Guidelines were therefore expected to ensure that companies met certain basic standards and thus facilitate increased flows of FDI. This is still the underlying purpose, even though it has become clear that the activities of MNEs can be severely deleterious in social or environmental terms, and their power has grown such that they can now unduly influence developed country governments too.

The Guidelines are not at all widely known amongst businesses, NGOs or the public and as a result, for many years have had no detectable impact on the behaviour of individual corporations. There are several reasons for this. First, the Guidelines were, and remain, entirely voluntary for companies. Without incentive or sanction most companies have paid them no attention. Second, since the last revision in 1992, the Guidelines had become quite seriously outdated, even in comparison with many sectoral or company-initiated corporate codes. And third, they had a very weak implementation mechanism, through 'National Contact Points' (NCPs) which were supposed to offer advice to businesses and trade unions about the application and implementation of the guidelines. In practice most NCPs did virtually nothing on the Guidelines. A 1997 survey revealed that several NCPs did not even realise that they were the NCP. In other words they had received no inquiries about the Guidelines at all. This highlights the need to increase the Guidelines' profile if they are to have any effect.

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The review

The latest review of the Guidelines began formally in November 1998, and concluded with the adoption of a revised text by the OECD Ministerial meeting in June 2000. The review was triggered - at least in part - by growing civil society opposition to the ill-fated 'Multilateral Agreement on Investment' (MAI). In the face of opposition it was suggested that the Guidelines should be annexed to the MAI to offer some (albeit voluntary) responsibilities to balance the new rights that the MAI would have granted to investors. This would have required updating the Guidelines. The review was initiated, and has continued beyond the collapse of the MAI negotiations.

The review was undertaken by a Working Party comprised of OECD staff from the OECD's economic department (DAFFE) and some representatives from the Investment Committee (CIME) which is comprised of delegates from OECD member governments. During the review the Working Party consulted frequently with the OECD's formal advisory committees (the Business and Industry Advisory Committee (BIAC) - whose membership is business associations from OECD member countries, and the Trade Union Advisory Committee (TUAC) whose members are trade union associations). The OECD also consulted, albeit less frequently, with a number of NGOs, including Friends of the Earth (FOE) and ANPED (The Northern Alliance for Sustainability). 

The review has both revised the text, and developed clearer implementation procedures.

The revised Guidelines cover:

• General policies such as respect for human rights, compliance with the law, and protection for whistleblowers;
• Disclosure of financial and non-financial information;
• Employment and industrial relations, including trade union recognition, collective bargaining, discrimination, and child and forced labour;
• Environment, including environmental management systems, disclosure, life-cycle analysis, precaution and continual improvement;
• Combatting bribery, including illegal political donations; 
• Consumer interests such as labelling and consumer protection;
• Science and technology, including intellectual property; 
• Competition; and 
• Taxation, including use of transfer pricing.

New text has been introduced amongst the general policies on "contributing to sustainable development", human rights, good corporate governance, effective self-regulation, and encouraging suppliers and sub-contractors to apply the Guidelines. The environment section includes new text on disclosure, use of environmental impact assessment, precaution, continual improvement and environmental health and safety. There are also significant additions on child and forced labour, bribery and corruption, and consumer interests such as advertising and labelling. Despite these additions, and the redrafting of many other parts of the text, the Guidelines still fall short of the aspirations of NGOs and trade unions, both in tone and content.

The detail in most chapters is weak and there are many loopholes which make these voluntary expectations even weaker. For example, there are general exemptions to disclosure on grounds of "costs, business confidentiality and other competitive concerns". Similarly the employment standards are generally constrained by the "framework of ... prevailing labour relations and employment practices".

In FOE's view the text in general only meets what we would expect as minimum standards that governments should enforce through legislation. But if these minimum standards are met as a result, this would constitute an improvement in MNE behaviour. The OECD accepts that the Guidelines need more visibility if they are to have practical effect, and this requires effective implementation. The mechanisms for improving implementation are, however, still limited.

They centre on reviving NCPs by issuing new guidance on their role and remit based on four criteria: visibility, accessibility, transparency and accountability. NCPs in the country where the problem has arisen are now required to be open to complaints about 'specific instances' which they will try to resolve by facilitating agreement between the company and the complainant (by providing for conciliation or mediation if necessary). But if agreement cannot be reached, they are obliged to give their views on the case. This should involve naming the company. Where the activities under question are not in an 'adhering country' and there is no host-country NCP, then the NCP in the home country of the company is expected to be open to the complaint, and to endeavour to apply a similar procedure.

This clarifies that the Guidelines apply to all multinationals whose head offices are in 'adhering' countries (the OECD countries plus Argentina, Brazil, Chile and the Slovak Republic), even when they are operating in a 'non-adhering' country. This means that some of the most troublesome activities of multinationals in developing countries will be covered by the Guidelines. Regrettably, this clarification was used as a pretext to include even more loopholes in the text, to allow companies to take account of 'local circumstances' in deciding whether to strictly abide by the guidelines.

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Will these changes help improve corporate behaviour?

The public has a right to expect high standards of behaviour from the companies it permits to operate in our societies. The revisions to the text alone are unlikely to have any practical impact. Although there is new progressive language on human rights, and supply chain responsibility, there are still many loopholes and caveats.

Indeed we would anticipate widespread public and NGO disinterest, if not downright antagonism to the current draft of the Guidelines, unless it is openly and vigorously implemented. Unless implementation is conducted in good faith there is a real risk that the Guidelines will be used to justify behaviour and practices by multinational enterprises which undermine sustainability. 

Without incentives or sanctions neither progressive nor backwards companies will take any notice. More progressive companies are already ahead of the standards in the draft revised guidelines, and without any form of meaningful incentive or sanction, the vast majority of companies will continue to ignore them.

The implementation mechanism provides the possibility that Governments will 'name and shame' companies that flout the Guidelines - providing a minimal sanction through the threat of public exposure of their failure to adhere to the guidelines.

The adequacy of the new implementation procedure relies largely on the will of Governments - through their National Contact Points (NCPs) - to deal openly and effectively with specific cases. Complaints from NGOs or members of the interested public could lead to improvements in corporate practice, through a real risk to their public reputation. Or will complaints be ignored or bogged down in secretive procedures leading to meaningless ambiguous statements? Too much is left to the discretion of individual NCPs in these respects, especially in the content of reporting on specific instances.

And should an NCP fail to interpret the guidelines in a consistent manner, NGOs and the interested public have no mechanism of appeal. The result of this discretion, at worst, would be inappropriate and potentially wide-ranging variation in the standards of application of the guidelines in different countries.

Although the new implementation procedure is weak and minimalist, it opens a further possibility - that of using adherence to the Guidelines by companies as a condition of eligibility for discretionary public support, such as export credit guarantees or regional selective assistance. Friends of the Earth will be campaigning for such a link to be made, so that companies breaching the Guidelines face a material sanction.

• An effective implementation procedure would encourage more companies to ensure that they do meet the standards set out in the guidelines, encourage NGOs and the public to use the Guidelines as a minimal benchmark of performance, and encourage governments to institutionalise the Guidelines' standards in law, thus ratcheting up the overall standards of business performance and consolidating a fair level playing field for business competition.

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Continuous Improvement

FOE welcomes the progress made in the review, but sees the need for Governments to strive for 'continuous improvement' of both text and implementation. We will be monitoring carefully to ensure that there are no attempts to use the Guidelines as a 'smokescreen' for renewed efforts to liberalise trade and investment. The Guidelines are only a step towards the standards needed to bring multinationals to account in the current global economy.

It is most critical that the implementation procedures are kept under review, to ensure their effectiveness, but Friends of the Earth also advocates strengthening of the Guidelines text to what we would see as minimum standards including:

• A general policy of stakeholder accountability;
• That multinationals should respect the human rights of their employees and other stakeholders and also require and enable their suppliers and sub-contractors to do the same.
• No general exemptions from disclosure standards for 'costs, competitive concerns, and commercial confidentiality' and instead a presumption of transparency;
• Explicit inclusion of environmental impacts, resource consumption, employment, pay, and equal opportunities performance as material issues that should be reported upon.
• Disclosure of all political activities and political contributions;
• Avoiding the strategic use of lawsuits to discourage public input and engagement;
• Not seeking exemptions to tax systems or other legislative frameworks;
• Use of best available clean technologies to promote resource efficiency and pollution prevention;
• Setting clear targets for resource efficiency and pollution prevention;
• Use of Environmental Impact Assessment in all circumstances where potential impacts may be significant;
• A strong interpretation of the precautionary principle;
• No advertising, marketing or selling products that are restricted or banned anywhere within the OECD, such as certain pesticides or arms;
• Not using marketing and advertising practices which create a 'consumer lock-in' (such as arise in the case of use of baby-milk substitutes by lactating women);
• Not promoting and disseminating 'unsustainable technologies' such as nuclear power or genetically modified crops; and
• Not seeking to obtain intellectual property rights over indigenous or traditional knowledge in any form.

Friends of the Earth will also be pressing companies to meet such standards independently. To truly contribute to sustainable development as the Guidelines require, companies will need to do far more than abide by the letter of the rest of the Guidelines text.

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What would this mean for business?

BIAC argued strongly to maintain the 'essential' voluntary character of the guidelines, citing practical problems and claiming that any moves to make the guidelines more binding (such as a verified register of adhering companies) would be tantamount to introducing "a police state"! However we believe that BIAC is not representative of many major multinational enterprises. Informal conversations with individual, more progressive businesses - and indeed submissions by businesses to the public consultation - have indicated that they would be best served by strong guidelines and clear implementation procedures.

With a strong text and effective implementation the Guidelines could offer such businesses a consistent, high-profile set of standards that are applicable wherever they are operating. If the Guidelines were more widely known, then companies would be able to use them to reassure increasingly sensitive consumers and thus obtain marketing and investment benefits. They would also help companies maintain the good corporate reputation which is increasingly essential to recruiting high quality staff. Verification of compliance would require a package of tools to assess implementation of what are often intangible standards - which would help improve management practices overall. Last but not least, improved management - taking full account of such intangibles - is increasingly necessary to maintain profitability in the global marketplace.

As a result we expect investment analysts generally (and not just those concerned with socially responsible investment) to use adherence to the Guidelines as a benchmark for company performance and future value. The best performance will clearly be backed by evidence that the company can validate its adherence through effective management standards. 

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Conclusion

The Guidelines are far from perfect, but they do offer an extra way to challenge multinational companies, and they represent the 'expectations' of all the OECD Governments for corporate behaviour. FOE and other NGOs involved in the review intend to test the Guidelines' effectiveness, as well as continuing to pursue other avenues for international binding regulation on companies. If we find that the Guidelines are being used to promote 'greenwash' by companies, or as a smokescreen for more liberalisation by Governments, we will not hesitate to expose such hypocrisy.

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Taking Action

Use the Guidelines. The revised text of the Guidelines is available on the OECD web-site:
http://www.oecd.org/department/0,2688,en_2649_34889_1_1_1_1_1,00.html 
If you are concerned that an MNE is breaching the Guidelines get in touch with your NCP. In the UK the NCP is Paul Hawker (Head of International Investment Policy - Trade Policy Group) in the Department of Trade and Industry (Kingsgate House, 66-74 Victoria Street, London, SW1E  6SW - tel: 020-215 4510; email: paul.hawker@dti.gov.uk).

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