Multinational enterprises: Better guidelines for better lives

The OECD Guidelines for Multinational Enterprises have just been updated. What are the main changes and how might they affect international corporate behaviour?

Among the headline topics swept into the mainstream by globalisation has been the proliferation of multinational enterprises and the effects they have had on the places where they operate. Today, MNEs account for a large portion of global trade and investment, and are also major employers. Their ability to influence the well-being and practices in the places they operate in is significant.

To be sure, MNEs can be a force for betterment. A 2008 OECD report on pay and conditions in MNEs found that in general, foreign multinationals pay 40% higher in average wages than local firms, with an even higher differential in low-income countries of Asia and Latin America.

But how well behaved are MNEs in their host countries and what standards do we have to influence their conduct? The evidence of the benefits they bring to host countries in terms of jobs, capital and technology transfer is too often marred by abusive wage practices, poor working conditions and child labour. This problem applies not only to companies that come from developed countries, but increasingly to those from emerging markets, too.

Part of the problem is governance, both in firms and among public authorities competing for investment. This relationship can be imbalanced, as some large firms may have more financial clout than the regions or countries where they are based. They can be particularly influential in countries where there is conflict, or where governance is weak. In such circumstances, it is not hard to see how exploitative and even corrupt relations may develop.

Many international firms are acutely aware of these risks and have developed their own internal codes of behaviour in a bid to ensure high standards. Take Cadbury, the leading chocolate manufacturer. They have created a code of practice under which the company voluntarily refrains from marketing to young children or selling through vending machines in primary schools. Similar codes have proliferated at industry and sector levels too.

Governments also have codes, and chief among them are the OECD Guidelines for Multinational Enterprises, or MNE Guidelines. Originally drawn up in 1976, these guidelines provide a comprehensive set of voluntary recommendations on good corporate behaviour. They seek not only to protect rights, but to foster good governance and better risk management through provisions on anti-corruption, transparency, disclosure and tax. A total of 42 countries adhere to the guidelines, including all OECD members plus Argentina, Brazil, Egypt, Latvia, Lithuania, Morocco, Peru and Romania. Seven more countries are on course to adhere: Colombia, Costa Rica, Russia, Jordan, Serbia, Tunisia and Ukraine. All of these countries together represent over 85% of global foreign direct investment.

While not legally binding, all multinational enterprises headquartered in adhering countries are bound to comply. And adhering governments are required to deal with allegations of violations. These government-endorsed voluntary standards have been embraced by firms the world over to demonstrate their commitment to corporate social responsibility and sustainable development. They complement national laws and have inspired legislation in several countries. They work because they are designed to build an atmosphere of confidence and predictability between businesses, governments, labour unions and civil society.

The MNE Guidelines form part of a wider OECD Declaration on International Investment and Multinational Enterprises. They define an ideal set of investor responsibilities in a host country, while the Declaration contains commitments by governments to avoid discrimination against multinational enterprises, to avoid imposing conflicting requirements upon them and to co-operate on issues affecting investment.

A key challenge for the OECD has been to keep the MNE Guidelines fresh and relevant, while maintaining their consistency and authority. The MNE Guidelines were already updated four times through 2000, and the financial crisis that struck in 2008, by eroding trust in global business, hastened the need for a fifth review. In 2009 OECD ministers called for revisions that would “enhance their relevance and clarify the responsibilities of the private sector”.

Meanwhile, the landscape for international investment has changed since the start of the 21st century. New patterns of production and consumption have arisen, old ones have become more complex, and emerging giants like Brazil, China and India are attracting a larger share of world investment. This added pressure to other needs, such as addressing climate change, boosting development and improving human rights, all of which call for the highest standards of international business conduct.

So, it was with some anticipation that the new update of the OECD MNE Guidelines was finally issued at the 50th anniversary Ministerial Council Meeting in May 2011. All G20 countries were invited to fully participate in the update, while business and trade unions, as well as civil society, were involved. What has changed?

First, firms must now address both current and potential adverse impacts of their operations as an integral part of their management processes. This applies not only to the enterprise’s own operations, but to those of its suppliers too. No longer can firms turn a blind eye to how their suppliers operate, and indeed, are bound to conduct “due diligence” to ensure the firms they deal with abide by the OECD guidelines, too.

A second notable change has been to add human rights to the existing principles and standards, which already include disclosure, employment and industrial relations, environment, combating bribery, consumer interests, science and technology, competition and taxation. A new section draws heavily on the 2010 Guiding Principles for Implementing United Nations Framework for Business and Human Rights. In fact, the author of those principles, John Ruggie, worked closely with the OECD in drafting the new chapter, which establishes that firms should respect human rights in every country in which they operate, even if the host country has a poor record on human rights itself.

The guidelines also urge firms to maintain a vigilant eye, seeking out potential breaches of human rights, on an ongoing basis. As chair of the OECD’s annual meeting of ministers in June, US Secretary of State Hillary Rodham Clinton pointed to this important stipulation as she voiced support for the MNE Guidelines, and more specifically the section on human rights, saying that “…they will be helping us determine how supply chains can be changed so that it can begin to prevent and eliminate abuses and violence.”

The 2011 update has also expanded the scope of the key chapter on employment and industrial relations, which now stipulates that firms pay a decent wage that “should be at least adequate to satisfy the basic needs of the workers and their families.” This important add-on is in part thanks to ongoing efforts by the Trade Union Advisory Committee to the OECD (TUAC), which in its statement on the update considers that “…these elements significantly increase the relevance of the guidelines and their potential to raise the standard of responsible business conduct in a global context.”

One pivotal, if widely criticised, element of the MNE Guidelines is the National Contact Points (NCP). These government-run offices in signatory countries are responsible for encouraging observance of the guidelines, and for promoting and explaining them to the business community, workers and anyone interested in knowing how the MNE Guidelines work. Anyone may contact an NCP, which acts as a type of mediator.

However, critics have argued that NCPs have not fulfilled their role, pointing to long waiting times for considering complaints, potential conflicts of interest, weak oversight, and shortfalls in the public information effort.

The 2011 update responds to these criticisms by providing more guidance on how to promote the guidelines and make the results better known. It also includes instructions aimed at making the different NCPs act in a more uniform manner and gives them guidance on how best to handle cases that are simultaneously brought up in a national court of law.

The OECD MNE Guidelines have the potential to help level out the international playing field for business, too. Winand Quaedvlieg, who chairs the international investment and MNE group of the Business and Industry Advisory Committee to the OECD (BIAC), said that the “OECD needs to do its part by working closely with governments in order to promote in nonadhering countries the introduction of CSR standards comparable to the guidelines.”

More than just a policy tool for governance, the updated MNE Guidelines testify to the importance of dialogue in building a better world economy. They confirm the OECD’s federating role by having gathered stakeholders, not just around the table, but around the common goal of making sure that everyone benefits from the global investments that underpin so many of our economies and shape our futures.

References

OECD (2011), OECD Guidelines for Multinational Enterprises: Recommendations for responsible business conduct in a global context, Paris.

Alexander Hijzen and Paul Swaim (2008), “Do multinationals promote better pay and working conditions?” OECD Observer No 269, October.

Ruggie, John (2011), “Global business: To protect, respect and remedy”, OECD Yearbook 2011: Better policies for better lives, Paris.

See www.oecd.org/daf/investment/guidelines

©OECD Observer No 285, Q2 2011




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