Something to Believe In : Creating Trust and Hope in Organisations: Stories of Transparency, Accountability and Governance 9781351281317, 9781874719694

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Something To Believe In Creating Trust and Hope in Organisations: Stories of Transparency, Accountability and Governance

Edited by Rupesh A. Shah, David F. Murphy and Malcolm McIntosh

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The image on the front of this book, reproduced above, is entitled ‘Good News’, by S. Shanthiepan. It is taken from The Blessing Way of the Painted Dove: Rites, Images and Offerings from the Butterfly Peace Garden of Batticaloa (Colombo, Sri Lanka: The Butterfly Garden, 2002). Reproduced with permission. In addition to this picture, we have reproduced one of the stories written by children of the garden in the final chapter of this book. Through discussion with the members of the garden we have chosen to offer a small financial contribution to their work to acknowledge the generosity, giving and creative energy of the project. However, they requested more that our book ‘encourages real engagement with the issues that give rise to exploitation of and violence towards the “other” ’. We are sure they would be happy to hear your thoughts about this (or perhaps to receive your money), but they may be happiest if you were to give something back by working to change how you relate to the ‘other’, in your work, professional or family life. The Butterfly Peace Garden of Batticaloa, No. 1A Jesuit Street, Batticaloa, Sri Lanka.

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Something To Believe In CREATING TRUST AND HOPE IN ORGANISATIONS: STORIES OF TRANSPARENCY, ACCOUNTABILITY AND GOVERNANCE RUPESH A. SHAH, DAVID F. MURPHY AND MALCOLM McINTOSH EDITED BY

Published in association with:

2 0 0 3

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© 2003 Greenleaf Publishing Limited Published by Greenleaf Publishing Limited Aizlewood’s Mill Nursery Street Sheffield S3 8GG UK www.greenleaf-publishing.com

in association with New Academy of Business Carpenter House Innovation Centre Broad Quay Bath BA1 1UD UK www.new-academy.ac.uk Printed on paper made from at least 75% post-consumer waste using TCF and ECF bleaching. Printed and bound by The Cromwell Press, UK. Cover by LaliAbril.com/Utter.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission in writing of the publishers. British Library Cataloguing in Publication Data: Something to believe in : creating trust in organisations : stories of transparency, accountability and governance 1. Social responsibility of business 2. Corporate governance 3. Globalization - Social aspects 4. Trust I. Shah, Rupesh A. II. Murphy, David F. III. McIntosh Malcolm, 1953– 658.4'08 Hardback: ISBN 1874719691 Paperback: ISBN 1874719748

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Contents

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Sharon Capeling-Alakija, Executive Co-ordinator, United Nations Volunteers

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Rupesh A. Shah, David F. Murphy and Malcolm McIntosh

Part 1: Through some looking glasses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1. Something to have struggled for and now to believe in . . . . . . . . . . 22 T.M. Mbeki, then Vice President of the Republic of South Africa

2. PlanetHome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Malcolm McIntosh, writer and teacher, UK

3. From terrorism to trust: trusting our nature? . . . . . . . . . . . . . . . . . . 30 Mary-Jayne Rust, Jungian Analyst (Society of Analytical Psychology) and Art Therapist

4. Partnering trust: India’s corporate social responsibility heritage . . 36 Viraal B. Balsari, Consultant, Energy Environment Corporate Responsibility, TERI (The Energy and Resources Institute) / TERI-Europe

5. Tolerance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 E.M. Forster

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Part 2: How could it be possible to believe in our corporations? . . . . . . . 43 6. Demanding corporate responsibility is the key: the creation of a movement for corporate responsibility in Ghana . . . . . . . . . . . . . . . 44 Joseph Yaw Boateng, United Nations Volunteer, Association of Ghana Industries, Ghana

7. Corporate responsibility: the emerging South Asian agenda . . . . . . 53 Ritu Kumar, TERI-Europe, UK

8. Corporate governance, shareholder interests and managerial accountability in turbulent times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Scott Bourke and Neil E. Béchervaise, Australian Graduate School of Entrepreneurship, Australia

9. Strange bedfellows make for democratic deficits: the rise and challenges of private corporate social responsibility engagement . 79 Matthew J. Hirschland, Department of Political Science, University of Colorado at Boulder, USA

10. The rise of the ‘abdroids’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Roger Warren Evans, company director, barrister-at-law, UK

11. Changing focus: a business school for sustainable development . 104 Juliet Roper, Eva Collins and Mike Pratt, University of Waikato Management School, New Zealand

Part 3: Auditing for whom? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 12. Love in a time of chocolate: the corporate discipline of compassion . . . . . . . . . . . . . . . . . . . . . . 110 Adrian Henriques, Middlesex University, UK

13. Trouble at the Hard Rock Café: diamonds and corporate social responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Ian Smillie and Ralph Hazleton, Partnership Africa Canada

14. In search of transparency: corporate codes of conduct and women workers in Central America . . . . . . . . . . . . . . . . . . . . . . 133 Marina Prieto-Carron, School for Policy Studies, University of Bristol; Associate of the New Academy of Business

15. Voluntary governance or a contradiction in terms? Are voluntary codes accountable and transparent governance tools? . . . . . . . . . 142 Simon B. Archer, Torys LLP, Canada, and S. Tina Piper, Balliol College, University of Oxford, UK

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16. The auditor has no clothes: challenging the pursuit of objectivity in auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 Rupesh A. Shah, New Academy of Business, UK

Part 4: New initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 17. In the business of making peace: La Frutera and Paglas in the Philippines . . . . . . . . . . . . . . . . . . . . . 182 Charmaine Nuguid-Anden, United Nations Volunteer, Philippine Business for Social Progress

18. Corporate responsibility in New Zealand: a case study . . . . . . . . . 190 Bob Frame, Richard Gordon and Ian Whitehouse, Landcare Research, New Zealand

19. Reforming government; working with business: the Office of the Minister of State for Administrative Reform in Lebanon . . . . . . . . 207 Lubna Forzley, United Nations Volunteer, UNDP Lebanon

20. Living and learning in Stellenbosch, South Africa . . . . . . . . . . . . . . 216 Mark Swilling and Eve Annecke, Sustainability Institute, University of Stellenbosch, South Africa

21. It’s the film that matters, not the photo: good governance in development co-operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 David F. Murphy, New Academy of Business, UK

Part 5: Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 22. Under the trumpet flower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 Abdul Cader Riswana, Ismael Ashraff, Jinutheen Rasmina, Kanathan Dinojit and Stepan Sampath, The Butterfly Garden of Batticaloa, Sri Lanka

List of abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

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Acknowledgements

First of all we would like to thank all of the authors for their contributions and John Stuart and Dean Bargh at Greenleaf for their efforts to bring the book together. Special thanks also to the children of the Butterfly Peace Gardens in Sri Lanka. We would also like to acknowledge the supportive environment offered by a number of organisations with whom we have been working around the world. Rupesh and David would like to thank, in particular, the inspiring efforts of various staff, volunteers and partners of United Nations Volunteers (UNV) on the ‘Enhancing Business–Community Relations’ project, and of TERI-Europe on the ‘Corporate Responsibility in South Asia’ project. Malcolm would like to thank his colleagues at both the Sustainability Institute in South Africa and the Waikato Management School in New Zealand for their support and for showing leadership in looking over the horizon and seeing another day and another way. Finally we owe thanks to the presence, care and love of family and friends for bringing our various research, writing and educational games into broader relief.

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Foreword

The decisions and policies of leaders have always affected people’s lives inside and outside their organisations. Today, globalisation has magnified this influence, particularly in the corporate world. From telecommunication workers in Germany, to assembly line workers in Mexico, to shoppers in Tokyo, to activists in Johannesburg, millions of people all over the world are affected on a daily basis by the practices and belief systems of transnational corporations, governments, NGOs and international organisations. Understanding this, organisational leaders have long recognised the need to position themselves not only in relation to target ‘markets’ but also in relation to a wider community of stakeholders. In business, corporate accountability and corporate citizenship are simply the most recent buzzwords used to describe this challenge. In government the discourse is about good governance and transparency. In civil-society organisations, we talk of ownership, participation and legitimacy. But today’s context has lifted social responsibility higher on organisational agendas. It goes beyond the fact that globalisation has upped the ante. The collapse of major companies in recent years has also turned the spotlight on organisational ethics. Workers who have experienced the collapse of giant companies feel a deep sense of betrayal—as do their families and communities. Perhaps the day is near when an organisation’s overall performance will depend on whether it lives up to what the public and its own workforce consider to be basic decency. Ethics cannot be compartmentalised; and unethical behaviour can be contagious. Hence, it is crucial that our corporations, NGOs and public institutions infuse principles of accountability, fairness, transparency and responsibility into all aspects of organisational strategies and practices. I agree with Anita Roddick, founder of The Body Shop, when she says that: ‘Money is not the most important thing to people. What most people really want from their work is a feeling that they are part of something important.’1 To be sure, 1

In Sally Helgesen, The Web of Inclusion (New York: Doubleday, 1995): 7.

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wages matter, benefits count and working conditions mean a lot. People will make compromises to put dinner on the table. But organisations make a big mistake when they bank on desperation. In the long run, all of us want more—for ourselves and for the next generation. We may be constrained by need but, ultimately, we are driven by hope. Wanting our lives to count for something more is what motivates us to go that extra mile both inside and outside the workplace. And, as the world of work assumes a more important place in our lives, the workplace is, in fact, becoming our community. As a place, a social context and a culture, the workplace affects employees’ moods, energies and values; the way they raise and socialise children; and the values they form and pass on. The workplace now, as never before, is one of the key settings where building social capital (the social ‘glue’ that holds organisations, communities and societies together) is an explicit daily concern. In my role in the UN, I find that the very heart of this is building and sustaining trust. Without trust I have learned that it is difficult to lead. Without trust I know it would be difficult to get the extraordinary things done that I have come to expect of my colleagues at United Nations Volunteers. In my own efforts to be an effective leader, I devote considerable time and effort to creating a climate of trust based on mutual respect and caring. I put a priority on building a highly committed workforce and ensuring that our organisation values its people. How can we create societies, institutions, organisations and groups based on trust? It takes more than personal integrity to build such organisations. It is linked to how decisions are made; how information flows; and how performance is measured, reported and rewarded. It isn’t easy to pin down and it’s hard to measure, but it is, nevertheless, a crucial ingredient of organisational effectiveness. It requires us to challenge ourselves to think beyond things that can be easily measured and counted and be reminded that just because something is intangible doesn’t mean that it isn’t real and that it isn’t important.

Sharon Capeling-Alakija Executive Co-ordinator United Nations Volunteers Bonn, Germany 18 July 2003

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Introduction

Something to believe in: creating trust to create hope We have quoted in this book a small part of a speech made by the Vice President (now President) of South Africa on the occasion of the inauguration of the South African Constitution in 1996, and it seems an appropriate introduction to a set of diverse pieces on trust at the beginning of the 21st century: But it seems to have happened that we looked at ourselves and said the time had come that we make a super-human effort to be other than human, to respond to the call to create for ourselves a glorious future, to remind ourselves of the Latin saying: Gloria est consequenda—Glory must be sought after! (Vice President Thabo Mbeki, 1996).1

If there is a unifying theme to this book it is that nihilism can have its day, but we believe that humanity has much good work to do: good work to save ourselves from each other and to recreate our relationship with planet Earth. There are pieces in praise of chocolate and fair trade, chapters about responding to the needs of women workers in factories, stories explaining the state of our corporations, and exhortations to think again about sustainability. The work in this book is also of diverse geographic origin, with writers and experience coming from Australia, Canada, Ghana, India, Lebanon, New Zealand, Nicaragua, the Philippines, Sri Lanka, South Africa and the United Kingdom (UK). And there are examples of change in action: in progress towards place, structures and institutions that can construct trust. We trust that this is a book of hope and new energy.

1

The full text of Mbeki’s speech is available at www.polity.org.za/html/govdocs/ speeches/constmbeki.html.

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Decisions and choices But to begin at the beginning. How might you know whether you have picked up a good book? How do you know if what you are holding in your hands and weighing up is something that you might find valuable or interesting or whether it is a bit of resource consumption too far? We imagine that you’ve made some decisions and choices about whether this is going to be a valuable book for you already. How can you be clear about what these decisions were based on? Perhaps the publishing house is one from which you had previously had another good read? Maybe you’re just genetically predisposed to picking up books with blue covers? Or did the names of the authors ring bells in distant parts of the mind? Maybe it was the price? Maybe the book was an unexpected gift, which now finds you at this point? Or did the title or the position on the bookshelf or in the catalogue affect your perspective? In the decision to open up the book we suspect that at some point you would have interacted with at least one ‘community of interest’, an organisation or some individual. You may have even engaged a bit with the ‘more-than-human world’ to come to the decision. And your engagement with these actors would, at some point, have involved the game of trust. It seems to us that a lot of ‘trust-work’ is both invisible as well as unnoticed in the individual and collective conscious awareness. While we are acting on the unspoken confidence we have in the shop or bank to accept our bank card or cash, we are equally blind about the implicit trust we hold that our bodies will keep on choosing to breathe. And while we are hoping that our e-mail messages are being sent across the ether and that the governments around the world will keep collecting their taxes and doing their duties (or not as the case may be), we are also maintaining unnoticed faith that the sun and the ecosystems will keep on working their bright magic for us. Yet we are always forced to enter into the arena of trust. Playing the games of trust (rather technically labelled ‘building social capital’ in some circles) is incredibly fundamental to how we go on in our everyday lives. So the question that we have in our minds now is not ‘are we going to play?’ but instead ‘how are we going to choose to play?’

Making it up as we go on The initial stimulus for putting this book together came from a special issue of The Journal of Corporate Citizenship (Zadek and McIntosh 2002), which was devoted to issues of transparency, accountability and governance. We have taken a couple of articles that were submitted for that publication and added a number of others— some specifically commissioned for the book and others drawn from a range of other sources. In particular, for a number of these chapters we have drawn directly from recent research work in which the New Academy of Business has been involved. This

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includes an international action research project, conducted in partnership with United Nations Volunteers (UNV) (in Brazil, Ghana, India, Lebanon, Nigeria, the Philippines and South Africa), research with women workers conducted for the UK Department for International Development in factories and plantations of Nicaragua and another project involving collaboration with The Energy and Resources Institute (TERI) Europe and local partners in Bangladesh, India and Sri Lanka. As editors we feel we have played a fairly light hand in this gathering, collating and ‘mixing’ process. This is not to say that we have had no influence on the form of the book—even in choosing to work with each other we entered into a pact about how we might draw the book together. However, we have not tried to fashion a single editorial story or a specific theory of trust, transparency, accountability and governance from these pieces. They may perhaps tell one, but that will probably come from the junction of your reading combined with our telling. So, we are not sure how you will want to read this book. Perhaps you will want to go through each part in order or perhaps you will start at the end and go back; or you may want to pick or devour. Although we might be challenged for failing to possess a theoretical core, we are happy to start with a question: How can we create organisations, institutions, groups and societies that can nurture trusting relationships with one another and among individuals?

Part 1: ‘Through some looking glasses’ The first part is entitled ‘Through some looking glasses’. In this part you will find some short, thought-provoking pieces about the issues of trust, belief and change. We hope they provide some valuable historical points of reflection as you wonder about your own trust-work. As noted above, in May 1996 Thabo Mbeki gave an address entitled ‘I am an African’ on the adoption of the new South African constitution. As the people, country and continent continue their historic journey in shaping their future, we present a shortened extract of his speech in ‘Something to have struggled for and now to believe in’.2 We then proceed to a piece by Malcolm McIntosh entitled ‘PlanetHome’. Malcolm wonders whether ‘tolerance may then be thought of as the realpolitik of love’ and recalls the powerful call of Gregory Bateson ‘to learn to think in a new way’, where we, along with the planet and all of its web of relationships and energies, come together to form the universe. Taking on a theme where the webs of natural life may be considered as the ground of our experience and trust, Mary-Jayne Rust elaborates on a relationship between the trust we have within our inner worlds—within our bodies—and problems of mistrust in wider social spheres. In the chapter entitled ‘From terrorism to 2

www.polity.org.za/html/govdocs/speeches/constmbeki.html

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trust: trusting our nature?’ she connects our failed attempts to achieve trust in societies with our attempts to ‘transcend sensuality and instinct’ of the body and the physical and mental efforts to colonise, dominate and arrogantly govern other peoples and the Earth. Bringing to focus another great civilisation, we offer Viraal Balsari’s exploration of some of his understanding of trust in the context of Indian business. In ‘Partnering trust: India’s corporate social responsibility heritage’, Viraal touches lightly and succinctly on some important precedents for corporate governance in the subcontinent, including the ancient bhagyadari system and Gandhi’s evocative trusteeship model and on an emergent home-grown corporate social responsibility (CSR) agenda. Reconnecting with the earlier theme from Malcolm’s chapter, we include a passage from E.M. Forster called ‘Tolerance’. Taken from a 1941 BBC radio broadcast, which later appeared in a set of essays entitled Two Cheers for Democracy, the piece was originally written at the beginning of the Second World War. It is an appeal for humility and understanding: ‘ “Love is what is needed,” we chant, and then sit back and the world goes on as before.’ E.M. Forster, an author but also one of the founders of Liberty (formerly the Council for Civil Liberties) says ‘surely the only sound foundation for a civilisation is the sound state of mind’.

Part 2: ‘How could it be possible to believe in our corporations?’ In the second part of the book we ask the question: ‘How could it be possible to believe in our corporations?’ It is a question that has been on numerous lips for decades and will no doubt remain there. In Part 2 we explore some of the diverse approaches that people across the world, from Ghana to the UK and Australia and from South Africa to Bangladesh, are using to open the space for creating business that are able to create trust. A theme that emanates strongly in these explorations is the call to work for deeper, more systemic changes to current ways of understanding and undertaking business. Emerging from research conducted by the New Academy of Business in collaboration with United Nations Volunteers and the Association of Ghana Industries, Joe Boateng describes the emergence of a civil-society movement aimed at developing responsible business practices in a heavily industrialised region of Greater Accra, Ghana. In ‘Demanding corporate responsibility is the key’ he describes the role of youths in the region volunteering their time to mobilise a movement calling companies to account, where no such movement previously existed. In ‘Corporate responsibility: the emerging South Asian agenda’, Ritu Kumar starts with a comment that the region experiences ‘globalisation’ in one continent. She points out that one can experience three generations of the corporate responsibility agenda across South Asia: the first agenda of conflicts between communities and companies over natural-resource control, the second regarding the environmental and social limits to industrialised growth and the third generation

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concerning product and service consumption. The interplay between these generations results in the kinds of example from Bangladesh, India and Sri Lanka that Ritu cites, examples that provoke us to notice non-West-centric perspectives on corporate responsibility. Making specific reference to the outcome of an Anglo-American model of corporate governance in Australia, Scott Bourke and Neil Béchervaise explore ‘Corporate governance, shareholder interests and managerial accountability in turbulent times’. Scott and Neil consider corporate governance schemes, such as incentive compensation, and wonder about the possibility that they may have ‘compromised or undermined the governance of the firms that have collapsed’. The chapter points towards a ‘fundamental organisational conflict of interest’ and denial about the alignment between shareholders and managers—that is, principles and agents—in the Anglo-American model. Working with the philosophy of Thomas Kuhn’s notion of ‘normal science’, Scott and Neil connect these problems of governance to the hegemony of market-based economic thinking, which shelters the current mental models of executives, regulators and politicians from noticing the need for systemic change. In ‘Strange bedfellows make for democratic deficits’, Matthew Hirschland starts his chapter by referring to the art of another philosopher from the West in the 20th century, Karl Polanyi. Matthew wonders whether a second ‘Great Transformation’ between the movements of economic liberalism and social protection is under way, this time focusing on business as the locus for change. He explores the role of voluntary mechanisms for governing the social outcomes of business activity. Matthew delineates three areas of CSR activity: partnership-type arrangements; socially responsible investment initiatives; and code-making, reporting and monitoring regimes. He then poses a fundamental question about how transparent and democratically accountable these voluntary attempts at social protection really are. Roger Warren Evans suggests a need to move beyond the voluntary mechanisms between business and civil society by exploring ‘The rise of the “abdroids” ’. Arguing that ‘contemporary society is now riddled with the phenomenon of artificial personality . . . a cancer eating away at the body politic, negating personal responsibility, facilitating tax evasion, undermining moral imperatives’, Roger suggests that a legal direction is required for recreating trust between companies and society. Read the chapter to find some fascinating suggestions about redefining and renewing the underlying deal between society and its organisations. In the final piece of Part 2, Juliet Roper, Eva Collins and Mike Pratt describe the decision of the Waikato Management School in New Zealand to move their guiding vision towards education for sustainable development. ‘Changing focus: a business school for sustainable development’ retells something about the organisation’s path to this new vision. This chapter and the work of business schools, such as Waikato and the New Academy’s own teaching work,3 evoke once again Gregory Bateson’s notion of learning to think in new ways in order to transform our worlds. 3

For example, a master’s in Responsibility in Business Practice run in collaboration with the Centre for Action Research in Professional Practice at the University of Bath, UK; see www.bath.ac.uk/carpp/msc.htm.

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Part 3: ‘Auditing for whom?’ In the third part, ‘Auditing for whom?’, we have brought together a number of perspectives and cases on the practice of ‘auditing’, a phenomenon that has been described by Michael Power (1997) as a ritual of verification central to the creation of trust in societies. We share a desire that this process for the creation of trust and evaluation be seen as a ‘form of giving, rather than just measuring’.4 In ‘Love in a time of chocolate’, Adrian Henriques takes passion as his starting point for an introduction to social auditing. Chocolate arouses passion. It is sexy, addictive and part of many of our lives. Tracing supply chains, reassuring customers and rewarding producers is central to the new world order of transparency, accountability and improved governance. Ethical supply chain management could be seen as the essence of globality—our ability to think over the horizon and keep ‘the other’ present in every bite. We return to Southern Africa in ‘Trouble at the Hard Rock Café’ with a case study about ‘conflict diamonds’ as both a business and a development issue in Africa and internationally. Ian Smillie and Ralph Hazleton tell the story of these gems, the hundreds of thousands of diggers and the efforts to create a global certification scheme to regulate the industry, by preventing the sale of conflict diamonds in formal commercial establishments. Addressing the issue of to whom and how this form of ‘giving’ through evaluation should be directed, Marina Prieto explores the impact of codes of conduct on the lives of women workers in Nicaraguan plantations and factories. In ‘In search of transparency: corporate codes of conduct and women workers in Central America’, Marina suggests women workers—the intended beneficiaries of codes— are unable to engage with the process of change in business practices, which the monitoring process is supposed to elicit. She notes that lack of change on the ground is easily hidden by the incredible power imbalances, demands for strict confidentiality and commercial arrangements that dominate these practices. Marina calls for the replacement of commercial auditing firms with local monitoring groups with a passionate and well-argued reminder that auditing needs to be recreated as a practice in the service of the women workers. The following chapter, ‘Voluntary governance or a contradiction in terms’, agrees with Smillie and Hazleton that the huge challenge of ending corruption, theft and smuggling that continue to fuel the illicit trade in conflict diamonds worldwide may not be alleviated by a purely voluntary mechanism. In this chapter, Simon Archer and Tina Piper explore the voluntary quality of codes of conduct in the range of regulatory initiatives and existing law. Here you can learn about the lack of complementary ‘stick’ to the ‘carrot’ of voluntary governance through codes of conduct, since ‘there is no evidence of their enforceability in traditional legal forums, the courts, arbitration, mediation or other dispute-resolution procedures’. Simon and Tina finish their chapter with recommendations that could enhance the accountability and transparency of corporate conduct.

4

Susan Goff, Founder and Director of CultureShift Pty Ltd.

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We close this part with Rupesh Shah’s ‘The auditor has no clothes’, which attempts to deconstruct the widely assumed possibility of objectivity in the practice of auditing. He explores how ‘recourse to being objective is no longer useful in a search for legitimacy (or validity) and corporate accountability’ and offers alternative practices of critical subjectivity for auditors and other expert ‘evaluators’ to consider as they seek to legitimate their practices.

Part 4: ‘New initiatives’ In Part 4 we present a number of ‘New initiatives’ and cases where alternative forms of accountability, transparency and governance are being fostered. Drawing on the New Academy’s research in the Philippines and Lebanon as well as other international cases from South Africa and New Zealand, this part offers some different ways of thinking about the practice of creating trust in society. The first chapter in this part, coming from the New Academy of Business project with United Nations Volunteers, explores how a joint venture in the Philippines between La Frutera Inc. and the Paglas Corporation has provided economic opportunities to local communities and former soldiers of the Moro Islamic Liberation Front in Muslim Mindanao. In ‘In the business of making peace’ Charmaine Nuguid-Anden shows how this venture, through the charismatic vision of Datu Toto Paglas, a local community leader, has helped to promote prosperity and overcome conflict in the area. In ‘Corporate responsibility in New Zealand: a case study’ Bob Frame, Richard Gordon and Ian Whitehouse present a perspective on the development of responsible business practice in New Zealand. As members of Landcare Research, they explore their work with a number of companies in New Zealand and they offer a generic framework for corporate responsibility developed locally. The framework describes five different business paradigms, from ‘business as usual’ to ‘restoration’, which are presented as being played out in terms of issues of transparency, accountability, governance and sustainability. In the third chapter emerging from the work of United Nations Volunteers with the New Academy of Business, ‘Reforming government, working with business’, Lubna Forzley describes the work of a ministry in the Lebanese government—the Office of the Minister of State for Administrative Reform—in engaging with the private sector and reforming its own administrative capacity for the benefit of the country’s citizens. Mark Swilling and Eve Annecke, in ‘Living and learning in Stellenbosch, South Africa’, describe the emerging form and governance structure of the Lynedoch EcoVillage. As an adventure in building a safe and diverse community around a ‘learning precinct’ in a country that is working on its parallel rebuilding odyssey, this chapter suggests some of the practicalities of developing locally grounded forms of governance. In the final chapter in this part, David F. Murphy connects back to Malcolm McIntosh’s theme that the 21st century may be the century of governance. ‘It’s the

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film that matters, not the photo: good governance in development co-operation’ explores how the quality of governance is becoming recognised as both a condition and a foundation for sustainable development. The photographic metaphor offers a useful perspective on the issue of governance, challenging us to wonder whether ‘good governance should be seen as an absolute norm or an emergent process’.

Concluding stories We have chosen to conclude the book with a tale. The story is called ‘Under the Trumpet Flower’ and was written by Adbul Cader Riswana, Ismael Ashraff, Jinutheen Rasmina, Kanathan Dinojit and Stepan Sampath. These five children are from Batticaloa, a war-affected region in Sri Lanka’s Eastern Province. They have been part of a project called the Butterfly Peace Garden of Batticaloa since September 1996. The project has brought together children from various ethnic and religious groups and created a journey and space through which they are able to construct a new peace for their country. Part of this reconstruction effort has come in the form of a collection of stories by the children and others in the local community called Blood of the Mango, retold in English by Paul Hogan. The cover illustration for this book, by S. Shanthiepan, also comes from the energy of this project. In Richard Rorty’s exploration of justice and democracy, he calls for more stories and less grand theory, because ‘to retain social hope, [people] need to be able to tell themselves a story about how things might get better, and to see no insuperable obstacles to this story’s becoming true’ (Rorty 1989, cited in Reason 2003). Ben Okri (1995) says, ‘stories can be either bacteria or light; they can infect a system, or illuminate a world’. The director of the Butterfly Peace Garden, Father Paul Satkunanayagam, suggests that ‘by speaking with such exuberance and joy the children open a space where they can heal, one often denied them by hurried, heedless and fearful elders’. With peace in Sri Lanka being built step by step, the garden goes on and a second collection of stories, Cuckoo in the Jam, has also been published. We believe that the stories told by the lives of the children in Batticaloa and in their tale of ‘Under the Trumpet Flower’ offer some wonderfully generative beginnings and we are extremely grateful to the children for allowing us to exploit their creativity here.

A model of trust? In our different worlds we seem to be quite prone to capturing our rather wild and naughty feelings, emotions, relationships and values. We commodify them and return them to others, neatly packaged as fully controlled and controllable artefacts, complete with yellow-coloured price tags. To be sure, the existence of this

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book has done something akin to this already and trust (along with its twin, mistrust) is surely ripe for such packaging by some experts. But we have wondered whether it is so important to get the meaning, value or significance of trust honed down to a one-line definition, a series of indicators or to develop a ‘four-by-four matrix’ for engaging in trusting relationships? Could we instead just learn to go on by trying to bring trust to the front of our individual and collective minds a bit more, holding it there lightly as something worth paying attention to; noticing and appreciating how it is providing energy, creativity and peace? This book is an attempt to bring together some stories on trust and we hope that you will benefit from reading them. Throughout the process of bringing it together there have been moments where we did not know or fully understand one another’s motives, there were conversations where doubts were discovered but not expressed, and silences where doubts were expressed but not discovered. We cannot say that we discovered the truth about trust, transparency, accountability or governance or even that we managed to create a purely trusting work environment in the writing of this book. One of the hardest things that we find is to open ourselves up to learning and trusting those who are most marginalised: the poorest and those without voice and the least able to put on masks of expertise. Perhaps we can invite you to continue the attempts of the children of the Butterfly Garden to tell a new story by exploring how we can trust ourselves and one another more, reaffirm our lived experience and notice the ground we walk upon. Rupesh A. Shah David F. Murphy Malcolm McIntosh Bath, England April 2003

References Okri, B. (1995) Birds of Heaven (London: Orion). Power, M. (1997) The Audit Society: Rituals of Verification (Oxford, UK: Oxford University Press). Reason, P. (2003) ‘Pragmatist Philosophy and Action Research: Readings and Conversation with Richard Rorty’, Action Research 1.1. Rorty, R. (1989) Contingency, Irony and Solidarity (Cambridge, UK: Cambridge University Press). Zadek, S., and M. McIntosh (eds.) (2002) Special Issue on Corporate Transparency, Accountability and Governance, Journal of Corporate Citizenship 8 (Winter 2002) (www.greenleafpublishing.com/jcc/jcc8.htm).

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Part 1 Through some looking glasses

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for and now to believe in* T.M. Mbeki Then Vice-President of the Republic of South Africa

On an occasion such as this, we should, perhaps, start from the beginning. So, let me begin. I am an African. I owe my being to the hills and the valleys, the mountains and the glades, the rivers, the deserts, the trees, the flowers, the seas and the ever-changing seasons that define the face of our native land. My body has frozen in our frosts and in our latter-day snows. It has thawed in the warmth of our sunshine and melted in the heat of the midday sun. The crack and the rumble of the summer thunders, lashed by startling lightening, have been a cause both of trembling and of hope. The fragrances of nature have been as pleasant to us as the sight of the wild blooms of the citizens of the veldt. The dramatic shapes of the Drakensberg, the soil-coloured waters of the Lekoa, iGqili noThukela, and the sands of the Kgalagadi, have all been panels of the set on the natural stage on which we act out the foolish deeds of the theatre of our day. At times, and in fear, I have wondered whether I should concede equal citizenship of our country to the leopard and the lion, the elephant and the springbok, the hyena, the black mamba and the pestilential mosquito. A human presence among all these, a feature on the face of our native land thus defined, I know that none dare challenge me when I say—I am an African!

*

Statement of the then Deputy President, T.M. Mbeki, on behalf of the African National Congress, on the occasion of the adoption by the Constitutional Assembly of The Republic of South Africa Constitution Bill 1996, 8 May 1996. The full text of President Mbeki’s speech can be found at www.polity.org.za/html/govdocs/speeches/constmbeki. html.

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I owe my being to the Khoi and the San whose desolate souls haunt the great expanses of the beautiful Cape—they who fell victim to the most merciless genocide our native land has ever seen, they who were the first to lose their lives in the struggle to defend our freedom and dependence and they who, as a people, perished in the result. Today, as a country, we keep an audible silence about these ancestors of the generations that live, fearful to admit the horror of a former deed, seeking to obliterate from our memories a cruel occurrence which, in its remembering, should teach us not and never to be inhuman again. ... The constitution whose adoption we celebrate constitutes an unequivocal statement that we refuse to accept that our Africanness shall be defined by our race, colour, gender or historical origins. It is a firm assertion made by ourselves that South Africa belongs to all who live in it, black and white. ... It seeks to create the situation in which all our people shall be free from fear, including the fear of the oppression of one national group by another, the fear of the disempowerment of one social echelon by another, the fear of the use of state power to deny anybody their fundamental human rights and the fear of tyranny. ... But it seems to have happened that we looked at ourselves and said the time had come that we make a super-human effort to be other than human, to respond to the call to create for ourselves a glorious future, to remind ourselves of the Latin saying: Gloria est consequenda—Glory must be sought after! Today it feels good to be an African.

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a a PlanetHome 2_

Malcolm McIntosh Writer and teacher, UK

There was once a town in the heart of America where all life seemed to live in harmony with its surroundings . . . Along the roads, laurel, viburnum and alder, great ferns and wildflowers delighted the traveller’s eye through much of the year . . . Then a strange blight crept over the area and everything began to change. Some evil spell had settled on the community . . . Everywhere was a shadow of death (Carson 1962).

In 1962 Rachel Carson published Silent Spring, which heralded the rebirth of concern with the modernist project and the birth of the sustainability project. By referring to modernism and sustainability as projects I mean that they are both grand plans by humanity to manage their relationship with planet home. Carson’s concern was with the over-use of industrial chemicals in agriculture, which threatened the delicate balance of nature. The message of humanity’s failure to tread lightly on the earth was not new but, coming just a few years after the end of the Second World War and the great efforts at modernist reconstruction, her statement had a profound effect. It was a clearly articulated and scientifically supported argument for a revision of the grandest of projects—the development of humanity by managing and ordering social and natural conditions on planet Earth. The modernist development project was restated by President Truman in 1949 as ‘a bold new programme for making the benefits of our scientific advances and industrial progress available for the improvement and growth of underdeveloped areas . . . What we envisage is a programme of development based on the concepts of democratic fair dealing’ (Esteva 1992: 6). This programme has not delivered to 30% of the world’s people measured in terms of material affluence, and it has not taken into account the carrying capacity of planet Earth. At the beginning of the 21st century this has been referred to as ‘social deception’, having failed to deliver Keynes’s dream of humanity living ‘beyond scarcity’. The economist John Maynard Keynes thought that by the

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beginning of this century the love of money would be seen as a ‘one of those semipathological propensities which one hands over to the specialists in mental disease’ (John Maynard Keynes quoted in Brown and Lauder 2001: 197). In a similar vein Ivan Illich highlighted the love of money and the acquisitive society. Writing in 1992 he defined the transition of man from ‘bungling toiler’ to ‘needy addict’ through the development of the expectation of needs (Illich 1992: 89). In other words: Born to shop: I shop therefore I am; therefore I consume and produce endless waste. Latitude 51.39° N; longitude 2.38° W. A February morning early in the 21st century. The morning is crisp and clear, the sun is peeping over the edge early, even if the temperature is barely nudging above −5°C. A buzzard circles overhead, casually lifting on the updraft. A lone buck scrapes the undergrowth for food. Radio and shower noises in the house signal that humans are stirring, too. I have a clear head and this world just waits to be embraced. It feels good to be alive. I feel no cynicism or doubt about the sensations that I am experiencing; I believe that what I am experiencing is real and true. I am in awe of the scene that presents itself; I am one with my surroundings. I turn from the open window and re-enter a world of illusion, make-believe and ignorance. As I face the day there are so many things I do not know about my breakfast cereal, about the news item on Iraq, about the strength of the US dollar against the euro. Does it matter? Into this naïve state babies are born unknowing. Truth and trust come naturally, unspoken and unthought, as small lips suck on the warm breast. In her seminal book Secrets, Sisella Bok (1986) wrote that parents have a natural responsibility to keep some secrets from their children. We do not want our children to know everything that is out there. But, as we grow up, like the buzzard circling on the updraft, just passing the time, ‘ignorance, error, and prejudice lead us astray; we compensate through rationalisation and denial of the factors we most need to take into account’ (Bok 1986: 104). So we find a way to survive, and we sometimes forget to stop and think—to be in awe of this Earth that we share. As the poet W.H. Davies wrote in ‘Leisure’: ‘What is this life, if full of care, / We have no time to stand and stare? / . . . No time to turn at Beauty’s glance, / And watch her feet, how they can dance’ (The Book of 1,000 Poems, 1994). When we leave the world of innocence and beauty we must confront the horrors that we have wrought upon each other. How shall we face each and every day? Archbishop Desmond Tutu, who chaired the South African Justice and Truth Commission from 1996 to 1998, at the demise of the Apartheid regime in South Africa, was asked at the end of the hearings: ‘Most of us have given up all attempts to maintain our health, our spiritual lives, and our family routines. How are you coping?’ He answered: If your day starts off wrong its stays skewed . . . I try to have two, three hours of quiet per day and even when I exercise, when I go on the treadmill for thirty minutes, I use that time for intercession. I try to have a map in my mind and I go round the world, continent by continent—only Africa I try to do in a little more detail—and I offer all that to God (Krog 1998).

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What a good way to start the day with the right state of mind. E.M. Forster said: ‘Surely the only sound foundation for a civilisation is the sound state of mind.’ Speaking on the BBC World Service in 1941, at the start of the Second World War, he said: ‘ “Love is what is needed,” we chant, and then sit back and the world goes on as before.’ He called for tolerance as a more realistic strategy for this ‘overcrowded and overheated planet’, but that tolerance must not be thought of as weakness (see Chapter 5 for the full text of Forster’s speech). Tolerance may then be thought of as the realpolitik of love. To believe in planet home represents the politics of tolerance, the politics of hope, the triumph of awe over mortality, and a desire to believe in something—not in just anything but in this shared home for humanity. The scene of buzzard, buck deer and clear bright morning that comforted me today is very local; it is outside my window. In The Politics of Hope Trevor Blackwell and Jeremy Seabrook said: The green myth is calling people for the first time to take responsibility for the planet: it is no longer enough to go about your business dutifully, and hope that Providence or the powers that be, or even the hidden hand [of Adam Smith] will deal with the larger questions . . . The great emancipation comes from recognising the connectedness between the daily round and the wheelings of the planets. The green myth demands more, but it also offers more—a vision and an enlightenment which dispel all the semi-voluntary ignorance, anxieties and fear in which our lives are passed (Blackwell and Seabrook 1988: 104).

So I believe in planet Earth as planet home; in the local and the global: I believe in planet home In the buzzard and the buck In one world In one sanctity In reverence for our shared place Twirling, turning, blue and fragile through space

One world or an understanding of planetary ecology could be the end of illusion and cynicism as we know it. It is the evolution of a shared ecologically based vision, of common principles for managing shared values and a sensitivity to and a celebration of the diversity of histories of the planet and people. Intercourse around ecology provides a platform for liberation that celebrates the ‘other’ within the confines of the physical carrying capacity of the Earth. This is what Ulrich Beck (1991) has called our ‘ecological enlightenment’. It has been argued that the 19th century was concerned with entrepreneurialism, the 20th century with management theory and the 21st century will be the century of governance, particularly between people and people and between people and planet. The world could learn from the African notion of ubuntu— ‘humanness’. As the South African King Commission report says: ‘The notion of sustainability and the characteristics of good corporate citizenship can be found

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within the concept of sound human relations in African societies.’ Or, as Gregory Bateson wrote in 1972: ‘The most important task today is to learn to think in a new way’ (Bateson 1972: 462). There is a close link between trust, truth and love. One of the philosophical discussions of our age is that there are no truths, and therefore it is difficult to trust anything. Is this true? As philosopher Roger Scruton has said, ‘do not believe anyone who says there is no truth!’ In developing trust in, love of and belief in, planet home, it is useful to remember Barbara Ward’s (1979) Progress for a Small Planet in which she says that ‘the chief new insight of our century [the 20th]’ is an understanding of our ‘inescapable physical interdependence’. She wrote of humanity being in ‘this unsteady interregnum between imperial ages which may be dying and planetary society which struggles to be born’. With optimism she said that ‘no problem is insoluble in the creation of a balanced and conserving planet save humanity itself’. ‘We have a duty to hope’ (Ward 1979: 277). In the early 21st century the struggle for planetary society continues through the old individualism of the only world superpower, the United States of America. This is contrasted by the European model which has learned from the conflicts of the 20th century that the future lies in negotiation, not war, in eco-efficiency, not profligate consumption, and in narrowing, not widening, global socioeconomic disparity as we know that this leads to war and inequality. The European model could represent a new modernism: a counter to an outdated imperial programme of Darwinian survival of the largest and fittest, the biggest bully. There is seemingly an abject refusal of the super-affluent powerful peoples of the world to recognise the relationship between the individual, who must have rights, and the whole of humanity, who must have hope and order coupled with a sense of integrity and integration. We are confused, perhaps, by our densely populated urban spaces with the telecoms’ death of distance and the rattling of the metro; the contrast of aloneness and close comfort. Being pushed together may set us apart from each other. David Bohm, a nuclear physicist, in Wholeness and the Implicate Order, taught us that what we see is explicable and what connects us is implicate, and that there is far more of the latter than the former. ‘All matter is constantly in motion and insubstantial. The notion that the world and our universe are made up of separate things is an illusion and leads to endless confusion’, he has said (in a conversation between Joseph Jaworksi, David Bohm and Francisco Varela reported in Jaworski 1996: 176). Recent analysis by Princeton University of data received from a deep-space probe suggests that the cosmos is composed of 4% ‘ordinary matter’, 23% ‘dark matter’ and 73% ‘dark energy’ (anti-gravity that keeps the universe expanding) (Lemonick 2003). The planet, and each person, are dense and less dense areas of energy within infinity. As Francisco Varela, author of The Tree of Knowledge, says: ‘Once you appreciate that the nature of our world, our universe, is nonsubstantial, yet exists, then you immediately open up to the possibility of change. There is an enormous opening for possibilities—possibilities to create and to change’ (in a conversation between Joseph Jaworksi, David Bohm and Francisco Varela reported in Jaworski 1996: 177).

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Something to believe in is you and me, the planet and the universe as one. This truism can otherwise be thought of as John Donne’s ‘No man is an island’. With our new knowledge of explicate and implicate order comes optimism that we will be able to see Earth as a shared home for humanity. We will be able to re-engage with the planet by re-seeing our world for the first time as ourselves; part of a set of ongoing relationships with matter, energy and conviviality rather than as territory, boundaries and divisions. Hannah Arendt distinguished between ‘the conditions of human existence’ and ‘the human condition’. The former, she said, is ‘life itself, natality and mortality, worldliness, plurality, and the earth’ while the human condition is predicated on life on earth. As she pointed out, ‘The most radical change in the human condition we can imagine would be an emigration of men from the earth to some other planet . . . Such an event would imply that man would have to live under manmade conditions’ (Arendt 1958: 10-11). I believe in planethome. My mind can wander where it likes, and my spirit may fly, but, in the words of Rachel Carson, I am part of ‘a web of life in which there are intimate and essential relations between plants and the earth, between plants and other plants, between plants and animals’ (Carson 1962: 69). I am an animal with some intelligence, and a free spirit.

References Arendt, H. (1958) The Human Condition (Chicago: University of Chicago Press). Bateson, G. (1972) Steps to an Ecology of the Mind (San Francisco: Chandler). Beck, U. (1991) Ecological Enlightenment (Atlantic Highlands, NJ: Humanities Press; trans. Mark Ritter 1995). Blackwell, T., and J. Seabrook (1988) The Politics of Hope (London: Faber & Faber). Bohm, D. (1980) Wholeness and the Implicate Order (London: Routledge & Kegan Paul). Bok, S. (1986) Secrets: Concealment and Revelation (Oxford, UK/Melbourne: Oxford University Press). Brown, P., and H. Lauder (2001) Capitalism and Social Progress (London/New York: Palgrave). Carson, R. (1962) Silent Spring (Boston, MA: Houghton Mifflin) Esteva, G. (1992) ‘Development’, in W. Sachs (ed.), The Development Dictionary (London: Zed Books): 6. Illich, I. (1992) ‘Needs’, in W. Sachs (ed.), The Development Dictionary (London: Zed Books): 88. Jaworski, J. (1996) Synchronicity: The Inner Path of Leadership (San Francisco: Berrett-Koehler). Krog, A. (1998) Country of My Skull (London/Sydney/Parktown, South Africa: Random House): 152. Lemonick, M.D. (2003) ‘Cosmic Fingerprint’, Time, 24 February 2003: 49. Murray Macbain, J. (ed.) (1994) The Book of 1,000 Poems (London: HarperCollins). Ward, B. (1979) Progress for a Small Planet (London: Penguin).

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I am a writer and teacher on corporate responsibility and sustainability and a Visiting Professor at the universities of Bath and Nottingham (UK) and Waikato (NZ). I also teach at the universities of Stellenbosch (SA) and Bristol (UK). In 2003 I was appointed a Special Advisor to the UN Global Compact. I am Founding Editor of The Journal of Corporate Citizenship, Editor of Visions of Ethical Business 1998–2002 (FT Management/PricewaterhouseCoopers) and author and co-author of many books and articles on corporate citizenship. My latest book is Raising a Ladder to the Moon: The Complexities of Corporate Responsibility (Palgrave Macmillan, 2003). I am currently working on a new book, Learning To Talk: The Early Years of the UN Global Compact (Greenleaf Publishing, 2004) with Sandra Waddock and Georg Kell with a Foreword by Kofi Annan. I am most interested in the possibility of a new metalanguage which reaches across professional and intellectual divides. This requires the development of cultures of humility and conviviality. [email protected]

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a a From terrorism to trust 3_

Trusting our nature? Mary-Jayne Rust Jungian Analyst (Society of Analytical Psychology) and Art Therapist

What does it really mean to trust someone or something? Faith, belief, hope, dependence, reliance, confidence and solidity are words that come to mind in relation to the notion of trust. Being able to trust another person, situation, group, animal or object is a very precious thing in today’s modern world. The crumbling of deep trust can be a disturbing, and even visceral, experience, as if the rug is pulled from beneath one’s feet. One’s stomach lurches, as if the solid matter on which one stood, on which one depends without thinking, is suddenly gone. The disappearance of ground is, indeed, terrifying. In this chapter I will be exploring the decline of trust within our society, how this has happened, and how trust might be rebuilt. I will start by drawing on my experience as a psychotherapist, where I have witnessed deep transformations in clients who are able to regain trust in their bodies and in themselves. I will ask whether we might recover trust within our society in a similar way.

Trusting our bodies and ourselves As a psychotherapist I work with people on a one-to-one basis. It is often the case that a client has had untrustworthy parents or guardians and finds it very hard to trust subsequent relationships. I work with the belief that these past patterns may begin to alter over time if we can together create a trustworthy therapeutic relationship, within which we can examine what it means to trust another person. There are many ways in which we could investigate trust within the inner world; here I have chosen one thread. As a therapist who specialises in the area of eating problems, I encounter people, mainly women, who cannot trust their own bodies.

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They feel that bodily instincts will lead them ‘into temptation’. The body must therefore be kept under control. Through years of mistrusting their own bodily and emotional signals, these women have learned to rely on information from outside themselves, such as diets or doctors, to tell them how, what and when to eat. They cannot trust themselves to know what they need, as if their very ‘inner ground’ has been eroded. Research shows that more and more women, and increasingly men, are suffering from eating problems; this is not just a medical problem for a few individuals. In fact, yo-yo dieting has become so widespread that it is thought of as normal for a woman to be worried about the size and shape of her body. In 1990 the Psychiatrist General of the USA said, ‘It is dangerous for a woman not to be on a diet.’ Such a statement reveals a tremendous fearfulness about our own nature, a terror that if we let go and give in to ourselves chaos will result. How has this situation come about? For many of these women it is the mother, in particular, who will have passed on a similar distrust of her own body (Eichenbaum and Orbach 1983). But we cannot blame just one part of a whole system. It is easy to see that we are surrounded by images within the media that make ordinary women feel bad about themselves. In addition, we are taught from an early age that sensual desire is something that leads one astray and needs to be kept under control. Such attitudes are very deep-rooted and can be traced back to the beginnings of patriarchal religions and found throughout Western philosophy. Although it is a completely revolutionary idea for most of my clients, the good news is that the body can be trusted. However, such relearning takes time. It means turning around and questioning family and cultural belief systems. It requires attentive listening to the cacophony of voices, feelings, instincts and desires that inhabit one’s inner world, in order to recognise, and get to know, the trustworthy parts of the self, including the body. What has happened for a woman with an eating problem is that she has learned to respond to many, if not all, of these signals with a food panacea, which acts as a quick fix but which is ultimately very unsatisfying. Often her deepest longings and hunger for life have been converted into physical hunger and plugged up with food, leaving her rudderless and unfamiliar with herself. To begin with, emotional and physical hungers need to be distinguished from one another. This requires a capacity to think about and feel, rather than rushing into action. When a woman can recognise and respond to physical hunger, she realises that the body gives clear signals about when, how much and what to eat. If she can truly give herself permission to eat whatever she likes when physically hungry, those denied or ‘bad’ foods soon lose their allure. In a similar way, emotional hunger must be unpacked and responded to. Frustration needs to be named and tolerated when a hunger cannot be satisfied instantly. Gradually, all kinds of hungers can be distinguished from one another, and responded to appropriately. Such yearnings can then be trusted to guide the individual through life, rather than feared as terrible desires that mislead. Learning to trust in oneself is not, then, a simple matter of trusting one’s instincts or intuition, and instantly following them. It is a negotiation between the different parts of oneself, between thinking, feeling, sensation, instinct and intuition, as if these aspects form an internal ‘committee’, giving one different pieces of

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information. This ‘committee’ needs to listen to and respect all points of view and work together in giving the ‘self’ guidance. This trust can only come about through moment-to-moment awareness, learning to discriminate between the myriad of voices, to find which are trustworthy. This is not about domination or colonisation, where one part of the self takes over and issues orders to another, for fear that this unruly or wild part of the self will take over. It is about mutual respect for all parts of the system, recognising that the body is not inferior to the mind. Such is the process of establishing one’s inner ground.

Trust in the wider sphere What of trust in our wider society? Research shows that it is breaking down1 and that as our industrial-growth society spreads throughout the world, we can witness the breakdown of trust spreading alongside it. A stark example of such a change can be seen in Ladakh, northern India, whose borders were closed until the mid1970s due to its proximity to China. In this traditional, sustainable culture, there was virtually no theft or crime. Nothing was locked up. Trust was possible because of the very tight interdependence that each person had on the other to survive. Because communities were small and not mobile, everybody would know instantly of any stealing, and who was the thief. In any case, there was little or no difference in wealth within the population. Possessions were at a minimum, so what would be the point in stealing? Such experiences of other cultures remind us of a kind of trust that has been forgotten. In the last 30 years there have been massive changes in Ladakhi society due to the influence of Western culture. Theft, violence and crime are on the increase, while trust is being eroded. This clearly reveals the social impact of economic change—the effects of globalisation (see Norberg-Hodge 1992). What are the indicators of this decline in trust in our society? Our institutions, such as the church, the state, the monarchy, the justice system and the police force, are increasingly being exposed as untrustworthy, as evidenced by, among other things, wrongful imprisonment, paedophile priests and corrupt politicians. The need to be security-conscious is increasing. Many of my readers can probably remember a time when security did not need to be so tight. When I was a child, we never locked up the house when we went out for the day. Even more astonishing to me now is the fact that it was possible to leave our car in the town marketplace, unlocked, with the keys in the ignition, and go shopping! Other indicators are harder to see, such as the breakdown of trust in objects, not just in people. We no longer know the origins of things. Take food, for example. What do we know of its source (apart from the country on the label)? What are its potentially harmful contents (e.g. pesticides)? Have the people involved in its 1

Research as cited in ‘The Foundations of Trust’ by Robert Wuthnow (www.puaf.umd. edu/IPPP/summer98/foundations_of_trust.htm).

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production been fairly treated? A recent scandal exposed chocolate manufacturers in Africa using cocoa grown on plantations employing slaves. Such a system was revealed to be driven by the world market, with cocoa growers having to compete with ever-falling prices and being unable to sustain a system with fairly paid employers. Likewise, we have little means of checking on sources of our clothes, furniture and most objects in daily use. We can no longer check for ourselves whether most of the things we use every day come from a reliable source. We may be harmed by these products and, just as importantly, we may be harming humans and/or the environment by supporting their manufacture. Just two generations ago many of the products we used would have been sourced locally. Now we have to rely on the word of others to know whether we can trust these products. It is a daunting thing to realise that others may lie about origins of things, making it extremely hard for the consumer to know what to trust. Most people rely on blind trust. How can we then feel good about our own integrity when we may be imbibing all kinds of things made and grown with such ill-treatment? There are other factors very basic to our survival. Can we trust the air we breathe, the water we drink? And what of our future? Such loss of trust in the assuredness of our very Earth is a very hard reality to live with. Until the late twentieth century, every generation throughout history lived with the tacit certainty that there would be generations to follow. Each assumed, without questioning, that its children and children’s children would walk the same earth, under the same sky. Hardships, failures, and personal death were encompassed in that vaster assurance of continuity. That certainty is now lost to us, whatever our politics. That loss, unmeasured and immeasurable, is the pivotal psychological reality of our time (Macy 2000: 241).

What is happening here? How can we understand such a decline in trust in so many areas of life? To some extent, we can place some of these difficulties within the context of our consumer society, which parallels these issues. We are taught that it is good to take more in and grow larger, to fuel the economy. Business has preyed on the vulnerability of individuals, cleverly finding ways to seduce people into consuming far more than they need, taking away their confidence in themselves to make them rely on others for guidance. A capitalist culture encourages the building of material wealth above all other values, and encourages individuals to compete against one another rather than to co-operate. Placing such a high value on profit has dismantled bonds of trust within society, within communities and between individuals. But the idea that the body, our instincts or ‘nature’, and even nature itself, are not to be trusted has been around for a very long time. Western philosophies and most of the major religions for the last two millennia have preached about the evils

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of the body. We must transcend sensuality and instinct and listen to the mind. We must control and dominate our nature. One reason why this might have come about is a simple one: humans were not content to live as hunter–gatherers but wished to have more control over their environment, to create a safe space, not at the mercy of fate or the gods. This shift, from being part of to having dominance over, was of major proportions and was the start of human colonisation of the earth. It has given permission to humans, believing they were the ‘crown of creation’, to massively exploit the earth and all its creatures. We can see this still continuing in our industrial-growth society and with the rapid and dramatic developments of modern science and medicine, on the verge of cloning and promising one day to discover the secret of immortality. We now seem to be under the illusion that we are totally in charge, wanting to become gods ourselves. I suppose the fantasy is that, by creating a safer place for ourselves, we will create a greater sense of trust in our society and environment. Ironically, the exact reverse has come about. We have created the most untrustworthy, unstable state our planet has experienced since the appearance of our species. This reminds me of the anorexic girl who achieves mastery over her hunger, dominating her bodily needs, only to find herself close to death in hospital. Colonisation, through domination of nature and our nature, does not achieve trust. It can only create a situation where a small part of the system is attempting to control the rest, perceived as wild, bad or evil. Far from generating trust, colonisation generates a terror of ‘the other’, that which we are trying to control. In so doing it creates terrorism and terrorists.

Can we recover trust in modern society? So what does create trust? Can we learn anything from the process of regaining trust in the body and the self that I have described earlier, which can be applied to our wider society? There appear to be several key factors in the process of regaining trust: ● Listening carefully to all the different parts of any system, whether it be

our internal world, an organisation, or a community ● Respecting all parts of that system ● Fostering co-operation between all parts of that system, so that they can

work together, rather than competing ● Trying to avoid domination as a means of controlling fear ● Cultivating the capacity to consider in the face of immediate action ● Being aware of the shadow side of that system: anything that is pushed to

the margins or pushed out, and what it might be telling us

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Trusting one’s fellow beings and the world around requires a change in perspective, from a place of omnipotence to a place of humility, in the realisation that we cannot completely control our fate, however scientifically advanced we are. Climbing down from the position of ‘crown of creation’ to take up an ordinary place in the web of life demonstrates this humility.

References Eichenbaum, L., and S. Orbach (1983) What Do Women Want? Exploring the Myth of Dependency (New York: HarperCollins). Macy, J. (2000) Widening Circles (Gabriola Island, BC, Canada: New Society Publishers). Norberg-Hodge, H. (1992) Ancient Futures (London: Rider).

Working as a therapist for many years at the Women’s Therapy Centre taught me about the impact of culture and politics on the psyche. Travels to Ladakh, India, and many other places, opened my eyes to the impact of globalisation on the psyche and on our relationships with our bodies. I am fascinated by our current paradigm shift, and what part psychotherapy might have to play in it. I swim in the Hampstead Ponds every day, I love walking by the sea and I paint when I feel like it. [email protected]

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India’s corporate social responsibility heritage Viraal B. Balsari Consultant, Energy Environment Corporate Responsibility, TERI (The Energy and Resources Institute) / TERI-Europe

Corporate social responsibility (CSR) has become the new buzzword in Indian business, in keeping with global trends. In practice, it is characterised by a somewhat nebulous relationship with society. The approach has been largely a ‘band aid’ one to deal with multiple barriers of socioeconomic mistrust at the business–community, industry–worker and company–civil society levels. The essential elements of relationship—that is, trust and participation—have often been at the fringes of corporate initiatives. However, many of the ingredients of CSR have actually been present in various forms of business activity in India, and the essential component here has been trust. Hence it would useful to examine this heritage. The precursors to CSR in India underscore the intricate nexus between business and society. Perhaps the starting point is the age-old bhagyadari system, a mercantile system of informal partnership based on trust, where each stakeholder— franchisee, distributor, vendor or buyer—believed in the value of individual business input as necessary for collective benefit. This system was widespread, informal and the accepted way of trading and doing business. However, it was also undocumented and hence unmeasured. At some level, even today, elements of this system continue to be a part of the informal business code, particularly with family-run and small businesses. By the early 20th century, this process of informal stakeholder engagement was pushed into the background by the advent of corporate philanthropy that evolved in the context of the freedom struggle. The typical pre-Independence business experience was characterised by an adversarial relationship between Indian industry (often identified with the forces of imperialism) and workers (who saw themselves as the forces of nationalism). Consequently, the freedom movement tried to invoke a nationalistic fervour in order to unite industrialists and workers alike in a

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common cause. More significantly, Mahatma Gandhi attempted to bridge the gap between industry and worker by professing ‘trusteeship’ as a way for owners of property—that is, companies and entrepreneurs—to voluntarily commit to manage their assets on behalf of the people and thereby to redistribute wealth. In effect, he was actually establishing a philanthropic model that was to become one of the tenets of corporate social responsibility in India. The Gandhian philosophy of trusteeship seemed to be obscured in the period immediately after Independence, when Prime Minister Jawaharlal Nehru’s perception was that India urgently needed to catch up with the modern, Western world; there was thus a flurry of industrialisation, marked by the euphoric Nehruvian mantra of factories as the new temples of India. It was in this climate that most of the public sector units (PSUs) and state institutions were created. As a result of this Fabian socialist model, industrialists became paternalistic figures who not only owned factories but also accepted the responsibility of employee welfare. However, an unforeseen consequence was that this model engendered a passive relationship with employees. One result of this unidirectional power structure was, predictably enough, the emergence of a strong trade union movement. Now the mistrust between industry and labour was viewed not only along traditional socioeconomic lines but also along cultural ones: thus the ‘new industrialists’ by virtue of their relatively Westernised lifestyles were seen as the ‘new imperialists’ whereas labour represented the ‘real India’. By way of placating these fears, companies evolved ways of reaching out to workers. The focus tended to be worker welfare: for example, providing facilities such as schools and local infirmaries, and extending life employment and, in many instances, generational employment. Once again in this essentially paternalistic model there was little active engagement between industry and labour. It took the horrifying Union Carbide Gas tragedy at Bhopal in 1984 to jolt the limited outlook of Indian industry. As the Chairman and Board of Directors of Union Carbide faced the prospect of prosecution and prison, Indian companies realised that the implications of responsibility, accountability and culpability go beyond boardrooms and balance sheets. Thus the need for corporate introspection, responsible business practices and a broad vision began to emerge, and the stage was set for the introduction of the Western notion of CSR in India. Over the last two decades since Bhopal (coincidentally, 1984 was the very year in which the idea of stakeholder engagement was first propounded by R. Edward Freeman [Freeman 1984]), there has been a distinct change in corporate attitudes to CSR. Simultaneously, there has been a revival of the Gandhian ideals of trust and empowerment through participatory models of engagement, and these notions are filtering into contemporary CSR thinking in the country. In effect, India is witnessing the evolution of indigenous approaches that combine a tradition of social relationships and ‘stakes’ with the Western focus on stakeholding. It is perhaps no coincidence that with the increasing emphasis on stakeholder engagement and co-existence, as well as communication, measurement and documentation of CSR outreach, the areas for conventional ideological conflict are diminishing. Effective CSR involves negotiating as well as harnessing existing mind-sets and practices, while formulating expanding visions. Hence, Indian industry must acknowledge its heritage of traditional approaches and emphasise trust as the

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cornerstone of business activity. The thrust should be to embed CSR concerns in the larger competitive context to create a common destiny based on trust and partnership.

Reference Freeman, R.E. (1984) Strategic Management: A Stakeholder Approach (Boston, MA: Pitman).

My background is an MSc in Energy Management from the Norwegian School of Management and several years of consulting experience in Scandinavia. From my beginnings in energy (particularly renewables), my work now extends to issues in environment, development, corporate social responsibility, strategic management, leadership and business ethics. While I can appreciate each of these ideas, I am equally fascinated by their interconnectedness. A major influence has been Joseph Jaworski and Peter Senge’s Synchronicity: The Inner Path of Leadership (Berrett-Koehler, 1996), and its underlying principle, enunciated by Lao Tzu, that ‘the way to do is to be’. Ultimately, this chapter is all about ‘be-ing’ trustworthy. [email protected]

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5_

*

E.M. Forster

Everybody is talking about reconstruction. Our enemies have their schemes for a new order in Europe, maintained by their secret police, and we on our side talk of rebuilding London or England, or Western civilisation, and we make plans how this is to be done. Which is all very well, but when I hear such talk, and see the architects sharpening their pencils and the contractors getting out their estimates, and the statesmen marking out their spheres of influence, and everyone getting down to the job, a very famous text occurs to me: ‘Except the Lord build the house they labour in vain who build it.’ Beneath the poetic imagery of these words lies a hard scientific truth, namely, unless you have a sound attitude of mind, a right psychology, you cannot construct or reconstruct anything that will endure. The text is true, not only for religious people, but for workers whatever their outlook, and it is significant that one of our historians, Dr Arnold Toynbee, should have chosen it to preface his great study of the growth and decay of civilisations. Surely the only sound foundation for a civilisation is a sound state of mind. Architects, contractors, international commissioners, marketing boards, broadcasting corporations will never, by themselves, build a new world. They must be inspired by the proper spirit, and there must be the proper spirit in the people for whom they are working. For instance, we shall never have a beautiful new London until people refuse to live in ugly houses. At present, they don’t mind; they demand comfort, but are indifferent to civic beauty; indeed they have no taste. I live myself in a hideous block of flats, but I can’t say it worries me, and until we are worried, all schemes for reconstructing London beautifully must automatically fail. What though is the proper spirit? We agree that the basic problem is psychological, that the Lord must build if the work is to stand, that there must be a sound *

Originally a 1941 BBC radio broadcast, which later appeared in a set of essays entitled Two Cheers for Democracy (Edward Arnold, 1951; Penguin, 1965). World excluding USA: reprinted with permission by The Provost and Scholars of King’s College, Cambridge, and the Society of Authors as the Literary Representative of the E.M. Foster estate; USA: copyright 1951 by E.M Forster and renewed 1979 by Donald Parry, reprinted by permission of Harcourt, Inc.

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state of mind before diplomacy or economics or trade-conferences can function. But what state of mind is sound? Here we may differ. Most people, when asked what spiritual quality is needed to rebuild civilisation, will reply ‘Love’. Men must love one another, they say; nations must do likewise, and then the series of cataclysms which is threatening to destroy us will be checked. Respectfully but firmly, I disagree. Love is a great force in private life; it is indeed the greatest of all things: but love in public affairs does not work. It has been tried again and again: by the Christian civilisations of the Middle Ages, and also by the French Revolution, a secular movement which reasserted the Brotherhood of Man. And it has always failed. The idea that nations should love one another, or that business concerns or marketing boards should love one another, or that a man in Portugal should love a man in Peru of whom he has never heard—it is absurd, unreal, dangerous. It leads us into perilous and vague sentimentalism. ‘Love is what is needed,’ we chant, and then sit back and the world goes on as before. The fact is we can only love what we know personally. And we cannot know much. In public affairs, in the rebuilding of civilisation, something much less dramatic and emotional is needed, namely, tolerance. Tolerance is a very dull virtue. It is boring. Unlike love, it has always had a bad press. It is negative. It merely means putting up with people, being able to stand things. No one has ever written an ode to tolerance, or raised a statue to her. Yet this is the quality which will be most needed after the war. This is the sound state of mind which we are looking for. This is the only force which will enable different races and classes and interests to settle down together to the work of reconstruction. The world is very full of people—appallingly full; it has never been so full before, and they are all tumbling over each other. Most of these people one doesn’t know and some of them one doesn’t like; doesn’t like the colour of their skins, say, or the shapes of their noses, or the way they blow them or don’t blow them, or the way they talk, or their smell, or their clothes, or their fondness for jazz or their dislike of jazz, and so on. Well, what is one to do? There are two solutions. One of them is the Nazi solution. If you don’t like people, kill them, banish them, segregate them, and then strut up and down proclaiming that you are the salt of the earth. The other way is much less thrilling, but it is on the whole the way of the democracies, and I prefer it. If you don’t like people, put up with them as well as you can. Don’t try to love them; you can’t, you’ll only strain yourself. But try to tolerate them. On the basis of that tolerance a civilised future may be built. Certainly I can see no other foundation for the post-war world. For what it will most need is the negative virtues: not being huffy, touchy, irritable, revengeful. I have lost all faith in positive militant ideals; they can so seldom be carried out without thousands of human beings getting maimed or imprisoned. Phrases like ‘I will purge this nation’, ‘I will clean up this city’, terrify and disgust me. They might not have mattered when the world was emptier: they are horrifying now, when one nation is mixed up with another, when one city cannot be organically separated from its neighbours. And, another point: reconstruction is unlikely to be rapid. I do not believe that we are psychologically fit for it, plan the architects never so wisely. In the long run, yes, perhaps: the history of our race justifies that hope. But civilisation has its mysterious regressions, and it seems to me that we are fated now to be in one of them, and must recognise this

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and behave accordingly. Tolerance, I believe, will be imperative after the establishment of peace. It’s always useful to take a concrete instance: and I have been asking myself how I should behave if, after peace was signed, I met Germans who had been fighting against us. I shouldn’t try to love them: I shouldn’t feel inclined. They have broken a window in my little ugly flat for one thing. But I shall try to tolerate them, because it is common sense, because in the post-war world we shall have to live with Germans. We can’t exterminate them, any more that they succeeded in exterminating the Jews. We shall have to put up with them, not for any lofty reasons, but because it is the next thing that will have to be done. I don’t then regard tolerance as a great eternally established divine principle, though I might perhaps quote ‘In my Father’s house are many mansions’ in support of such a view. It is just a makeshift, suitable for an overcrowded and overheated planet. It carries on when love gives out, and love generally gives out as soon as we move away from our home and our friends and stand amongst strangers in a queue for potatoes. Tolerance is wanted in the queue; otherwise we think, ‘Why will people be so slow?’; it is wanted in the tube, or ‘Why will people be so fat?’; it is wanted at the telephone, or ‘Why are they so deaf?’ or conversely, ‘Why do they mumble?’ It is wanted in the street, in the office, at the factory, and it is wanted above all between classes, races, and nations. It’s dull. And yet it entails imagination. For you have all the time to be putting yourself in someone else’s place. Which is a desirable spiritual exercise. This ceaseless effort to put up with another people seems tame, almost ignoble, so that it sometimes repels generous natures, and I don’t recall many great men who have recommended tolerance. St Paul certainly did not. Nor did Dante. However, a few names occur. Going back over two thousand years, and to India, there is a great Buddhist Emperor Asoka, who set up inscriptions recording not only his own exploits but the need for mercy and mutual understanding and peace. Going back about four hundred years, to Holland, there is a Dutch scholar, Erasmus, who stood apart from the religious fanaticism of the Reformation and was abused by both parties in consequence. In the same century there was a Frenchman Montaigne, subtle, intelligent, witty, who lived in his quiet country house and wrote essays which still delight and confirm the civilised. And England: there was John Locke, the philosopher; there was Sydney Smith, the Liberal and liberalising divine; there was Lowes Dickinson, writer of A Modern Symposium, which might be called the Bible of Tolerance. And Germany—yes, Germany: there was Goethe. All these men testify to the creed which I have been trying to express: a negative creed, but necessary for the salvation of this crowded jostling modern world. Two more remarks. First it is very easy to see fanaticism in other people, but difficult to spot in oneself. Take the evil of racial prejudice. We can easily detect it in the Nazis; their conduct has been infamous ever since they rose to power. But we ourselves—are we guiltless? We are far less guilty than they are. Yet is there no racial prejudice in the British Empire? Is there no colour question? I ask you to consider that, those of you to whom tolerance is more than a pious word. My other remark is to forestall a criticism. Tolerance is not the same as weakness. Putting up with people does not mean giving in to them. This complicates the problem. But the rebuilding of civilisation is bound to be complicated. I only feel certain that unless

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the Lord builds the house, they will labour in vain who build it. Perhaps, when the house is completed, love will enter it, and the greatest force in our private lives will also rule in public life.

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Part 2 How could it be possible to believe in our corporations?

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responsibility is the key The creation of a movement for corporate responsibility in Ghana* Joseph Yaw Boateng United Nations Volunteer, Association of Ghana Industries, Ghana

The Corporate Social Responsibility Movement’s profile The Corporate Social Responsibility Movement (CSRM) is the title given to a coalition of youth groups in Tema, Ghana. Inaugurated on 9 February 2002, the active membership strength has grown from 21 to over 300. The mission shared by all *

This case study has been developed from work conducted with the assistance of the Association of Ghana Industries (AGI) as part of the ‘Enhancing Business Community Relations’ project. Between April 2001 and May 2003 a joint initiative between United Nations Volunteers (UNV) and the New Academy of Business aimed to explore the engagement between business and communities in seven Southern countries: Brazil, India, Ghana, Lebanon, Nigeria, the Philippines and South Africa. This project was undertaken through a combination of collaborative research, partnership-building and promotion, with a local researcher/relations specialist in each country. Joseph Boateng was hosted by AGI. The case study is based on a detailed inquiry including a series of oneto-one interviews and focus-group discussions with various stakeholders (employees and community members), as well as collection of documentation through secondary sources. The findings and recommendations reflected in the document are those of the author and do not necessarily reflect those of United Nations Development Programme (UNDP)/UNV, New Academy of Business or AGI. A similar version of this case study appears on the website of the United Nations Volunteers (www.unv.org) and an earlier, abridged, version was published in New Academy Review 2.2 (Summer 2003): 104-12.

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members and associates is to encourage the private sector to complement the efforts of government in addressing social problems through the promotion of corporate social and environmental responsibility ideals. The objectives of CSRM are to motivate companies operating in Tema community to: ● Contribute meaningfully to the social and economic development of

Tema community ● Employ environmental practices that do not compromise the well-being

of residents ● Engage in workplace practices that do not compromise the health and

safety of community members A clearly defined four-pronged strategy guides CSRM in its effort to achieve these objectives. The first strategy is to engage the local media as a strategic ally in the process of corporate responsibility advocacy. This is because the Ghanaian media wields a powerful influence on people, politicians and companies. The second involves strengthening the mechanisms available and the willingness and ability of civil society to utilise these mechanisms to ensure corporate compliance. Raising public awareness of the responsibilities of business constitutes the third strategy. It is hoped that increased public attention on the responsibility of companies will result in new solutions eventually emerging. The activities of CSRM are intended not as an end in themselves but as catalysts for increasing public awareness on corporate responsibility and fostering eventual societal change. Finally, CSRM intends to lead the way, typically by acting as an incubator for responsibility-related issues to be picked up by the media and other communities hosting businesses.

The drivers of CSRM’s formation On the eastern coast of the Greater Accra region is Tema cosmopolitan town, with a population of nearly 300,000. Tema comprises four main communities: Ashaiman, Tema Main, Kpone and Tema Newtown. The town is known as the heavy industrial hub of Ghana, with approximately 20% of the country’s industrial activities. The community hosts well-known multinational companies such as Nestlé, Unilever, VALCO, Alcatel Nexan Cable Metal, GHACEM, PZ Industries Limited and GAFCO and local giants such as Cocoa Processing Company Limited, Irani Brothers, Ghana Textile Products (GTP) and Aluworks. There is also a very active international harbour and an oil refinery. People are attracted to the town because of the promise of jobs in the industrial sector. Although companies have been attracted to the region, the impact of their activities on the local community has not been entirely positive. For example, in the Tema area the appallingly low level of corporate responsibility manifests itself in, among others, the poor environmental, sanitary and healthcare conditions.

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There is also widespread incidence of workplace health and safety abuses. Meanwhile, another indicator of the poor social development in the area is the under-resourced first- and second-cycle educational institutions in the community. The underlying causes of the dismal status of corporate responsibility in Tema can be analysed from a supply-and-demand perspective. On the supply side, local analysts and researchers attribute the slow or stagnated social development in the community to the failure of corporate enterprises operating in Tema Municipality to be socially and environmentally responsible. The demand-side perspective ascribes the poor corporate responsibility status to civil society’s failure to elicit responsiveness and accountability from corporate enterprises. The most widely accepted reason for this failure is the lack of knowledge within the community on how it is affected by the exploits of companies operating in it or how the community can affect the operations of these companies.

CSRM’s foundation The CSRM was founded as a result of a sensitisation programme in the first half of 2002. The goal of the programme was to build the capacity of the youth groups and community and opinion leaders to demand corporate responsibility and accountability from corporate enterprises operating within the community. Central to the programme was the depiction of corporate irresponsibility as a credible risk. That is, youth groups and opinion and community leaders were brought together and made aware that low-level corporate responsibility in the community had reached crisis point, with far-reaching and negative societal implications if it was not resolved. In the course of the awareness programme, it became apparent that most of the people were profoundly irritated by the irresponsible behaviour of the companies operating in the Tema community. People were assured that their irritation was legitimate and that it was shared. In all, eight youth groups and at least 40 opinion and community leaders were identified and sensitised in Tema Municipality. Community members later suggested ways in which the corporate responsibility status in Tema could be improved. There was a general consensus that the most effective way to address irresponsible corporate behaviour was to form a movement to demand corporate compliance and accountability.

Accountability and awareness-creation initiatives To ensure that the demand for corporate accountability and awareness creation reach far and wide, CSRM embarked on a number of activities. These included a

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media attraction event, outreach and advocacy campaigns (a news conference, a television documentary and a seminar), as well as grass-roots mobilisation activities (e.g. sensitisation through word-of-mouth; brochures; and identity cards).

Media attraction event The media event was held in Tema on 16 March 2002. It involved cloth-to-cloth knot-tying in an unbroken chain stretched over a distance of about 2 km, with the participation of nearly 500 youths. At each knot a youth with a placard was responsible for maintaining the unbroken cloth chain. The event was intended not as an end in itself but, by attracting the interest of the media, as a catalyst for increasing public awareness of the responsibilities of business and the relationship between business and community. By using the media to place the issue of corporate responsibility on the public agenda the event was designed to stimulate people and companies to action in the hope that new solutions would gradually emerge. After a three-hour human and cloth chain, nearly a third of the people who participated in the exercise converged on the Tema community centre for a press conference. It was attended by the president of the Tema traditional Council, the Tema East Member of Parliament, the chief executive of the Tema Municipal Assembly, the country director of the Friedrich Ebert Stiftung (FES) and representatives from the Trade Unions Congress and employers’ association. Other external groups mobilised for the media attraction event included the associations of tailors and dressmakers, hairdressers, and market-women sellers.

Media coverage Although the media coverage was not very encouraging, the event featured prominently as a news item in 6 out of 14 FM radio stations in the country. The leading paper in the country (The Daily Graphic) also featured the event in the Easter Monday (1 April) edition of the paper, under the heading ‘Tema Youth Want Responsible Companies’.

Event organisation The youth groups formed an 11-member planning committee to oversee the planning of the media attraction event. The objective of the committee was to mobilise the youth groups to take part. Members of the committee were well sensitised to business–community relations (BCR) issues and tasked with the responsibility of filling the entire route of the cloth and human chain by identifying schools along the route and enlisting their support. The planning committee met every Wednesday and Friday for two months to deliberate on new ideas and share mobilisation experiences.

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Outreach and advocacy campaigns The focus of the outreach and advocacy campaigns was to inform and educate community members about the level and impact of corporate responsibility in the community. It also served as a channel for obtaining suggestions for enhancing business–community relations. The activities involved a television documentary, a news conference and a seminar.

CSR television documentary A 12-minute documentary on CSR issues was made with the help of the technical crew of Ghana Television (GTV) breakfast show. It captured scenes of social problems in Tema, Ashaiman, Manhia and Kpone. The documentary was shown on the GTV breakfast show on 27 May 2002.

News conference CSRM’s demand for a corporate responsibility culture was further energised in Tema on 3 July 2002 with a news conference. The conference, organised by the CSR Movement in collaboration with the Tema traditional council and Eastern Naval Command, had a dual objective. The first was to draw the attention of the media specifically to the nature and extent to which companies operating in Tema have polluted the Chemu lagoon. The second was to use the conference as a platform to provide greater visibility to CSRM. The premises of the lagoon served as the venue for the news conference.

Seminar Chemu lagoon is the most polluted body of water in the Tema region. On 10 September 2002 CSRM organised its maiden seminar to educate community residents about the nature and extent of the lagoon’s pollution. Participating organisations included the Environmental Protection Agency (EPA) and other environmental non-governmental organisations (NGOs). The seminar was used to gather hard data, evidence and facts, as well as perceptions, about the effects of corporate irresponsibility. The seminar was not viewed as the end-goal in itself but rather as a way of finding out how big the problem of corporate irresponsibility was in the community, its causes, and how it was impacting on society, among other things. The seminar has made a substantial contribution to the efforts of CSRM. First, the seminar provided a baseline measurement of the Chemu lagoon’s problem. It clarified how bad the problem was and how costly it was for society. Second, the seminar provided direction for the development of business–community relations strategies. It identified areas where corporate irresponsibility impacts negatively on community and the priority areas where companies needed to address these issues. Third, the seminar helped to mobilise and motivate community members and develop cohesive constituencies for reform. The data provided by resource persons established irrefutable information about the nature and extent of industrial pollution in the community. It helped people

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understand the root causes of the problem and understand the real costs it imposes on the community in terms of reduced quality of air, destruction of aquatic life and inappropriate waste disposal methods. This information strengthened the conviction of individuals and interest groups that something really had to be done to change irresponsible corporate behaviour and helped to mobilise people in all sectors of the community to be more concerned and turn their words into deeds.

Grass-roots mobilisation campaigns A group can have the best cause in the world to champion, but without the support of other people it may not achieve the desired objective. In other words, there is strength in numbers and therefore engaging in activities aimed at increasing the numerical strength of CSRM was considered a critical success factor. The mobilisation team conducted 27 field visits in its mobilisation campaign. The aim of the campaign was to seek out and inform those who had not heard about CSRM’s mission and objectives and to solicit their support and commitment. The first step in developing a realistic mobilisation strategy involved upgrading the skills of CSRM’s leaders to be able to mobilise community members effectively and efficiently. A programme of training in advocacy and presentation, sponsored by the Friedrich Ebert Stiftung, was organised for the leaders. To influence the public to express support for CSRM and to facilitate the expansion of the membership base a number of mobilisation tools were developed. These consisted of a brochure and an identification card. The purpose of the brochure is primarily to inform, educate and communicate to businesses and the general public about the existence of CSRM. The brochure is also intended to help the general public to make sense of what CSR is and why companies should be socially and environmentally responsible. It also outlines strategies that CSRM is employing to achieve its objectives. The brochure includes a CSRM membership form for the registration of new members. To become a member, a person is asked to complete the form, detach and submit it personally or by post to CSRM. When the form is received a member of CSRM’s recruitment team is dispatched to contact and issue the applicant CSRM’s identity card (see Fig. 6.1). No registration fee is required.

CORPORATE SOCIAL RESPONSIBILITY MOVEMENT (CSRM) P.O. Box CO 846 Tema Main Name: Membership No:

Figure 6.1 CSRM identity card

Tel: 022-212950

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Support from Friedrich Ebert Stiftung FES is a German not-for-profit organisation with offices in numerous developing

countries. The organisation supports activities and programmes that promote social and economic welfare and has thus developed a partnership with CSRM. To date, FES has borne the sponsorship cost of all the activities organised by CSRM (i.e. media attraction event, news conference, seminar, brochure, advocacy training). Prior to partnership, the major concern of FES was the ability of CSRM to sustain its outreach and advocacy activities. The FES Country Director, Jörg Bergsterman, made it clear to the leaders of CSRM that he would support them on condition that the demand for corporate responsibility would not be a nine-day wonder. FES requested the leaders of CSRM to present a plan of action for the rest of the year. According to Bergsterman, this would give a strong indication that the media attraction event was not a one-off exercise. CSRM’s leaders and initiators presented an activity plan that was overwhelmingly approved by FES.

Key issues Effects of CSRM’s activities So where did these activities to create accountability and awareness of responsibility lead CSRM? They were motivational tools providing the hard evidence that served as a catalyst in mobilising constituencies in media, non-governmental circles and society to act. The essential lesson is that there are clear links between conducting outreach and advocacy campaigns and developing effective constituencies to fight corporate irresponsibility. The campaigns provided a common foundation of information and understanding about the nature, extent and impacts of irresponsible corporate acts. In so doing, these campaigns had the power to transform tolerance for corporate irresponsibility into outrage and mobilise the political will in society to demand corporate accountability. These demand-creation activities provided the data that helped motivate these changes and continue to help build coalitions of interest groups inside and outside the community to fight corporate irresponsibility. Overall, CSRM’s activities have contributed significantly in improving business– community relations in the country as a whole. Specifically the achievements have expression in the following: ● Appreciable increase in media coverage of BCR issues (but room for im-

provement) ● Improved public awareness on BCR issues ● Increase in demand for corporate responsibility ● BCR initiatives on the increase

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Youth volunteering culture So far the youth groups have contributed a great deal of their time in planning and implementing CSRM’s activities. The youths undertook these activities by donating their own time, energy and efforts without demanding financial reward or compensation. Initially some of the youths who were actively involved in the activities of CSRM considered volunteering as selfless activity. One year into CSRM’s activities, the youths no longer regard volunteering as a purely unselfish activity. They have publicly admitted that volunteering has filled a need in their lives as well as making a valuable contribution to their community. The Vice President of CSRM, Richster Nii Amarfio, has expressed personal satisfaction about his volunteering activities. He stressed that ‘volunteerism has offered me the chance to grow both personally and professionally. It has broadened my horizon and enabled me to learn new skills as well as meeting new people and building social networks.’ The consensus is that the creation of this movement has contributed immensely to the promotion of volunteering among youth groups in Tema. This has resulted in widespread ‘volunteer-friendly’ youth groups.

What’s next? Registering CSRM as an NGO To formalise the operation of CSRM, members have taken steps to register it as an NGO. FES has pledged to provide office equipment and furniture as soon as CSRM is registered. To facilitate the registration process, a constitution for CSRM has been drafted. The registered organisation would be expected to undertake activities that would promote positive/healthy business–community relations in the country. These activities would include, but are not limited to, the following: ● Sanction irresponsible companies by organising boycotts to ensure corpo-

rate compliance ● Reward socially responsible companies by organising ‘buycotts’ and/or

award schemes ● Conduct opinion surveys and identify trends on CSR issues and practices

in the country ● Develop tools to monitor and measure the social and environmental

performance of companies. This would serve as input in award schemes ● Organise training for companies on how to create, develop and initiate

programmes for increasing corporate responsibility ● Produce newsletters to inform and educate the general public as well as

international audience about the social and environmental performance of companies in the country

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Activities for 2003 The next stage of CSRM’s strategy is to attack the problem of corporate irresponsibility from all perspectives—including law enforcement, preventative actions and public education campaigns. This will involve the mobilisation of all interested sectors—government reformers, NGOs, business and the media—to brainstorm what can be done in a non-confrontational way. CSRM activities that have been approved by FES for 2003 are: ● ‘Demand walk’ (an organised walk to ‘demand’ corporate social responsi-

bility) ● Workshop for Assembly members ● Photo exhibition on corporate environmental concerns ● Public forum on companies’ CSR practices ● Stakeholders dialogue ● Workshop for multinational companies and trade unions congress ● National conference on corporate responsibility practices in Ghana ● Workshop for selected members of parliament and district councillors

I have recently completed my assignment as the Ghana UNV Specialist in Business–Community Relations based at the Association of Ghana Industries. I received a BA in Economics from the University of Ghana in 1992 and a master’s degree in business administration (MBA) from the East London Business School in 1999. I spent three years working in the non-banking financial institution and consultancy sectors. I was also a member of a UNDPsponsored Programme Implementation Team for nearly three years. Before joining the UNV project, I was an associate consultant at a management consultancy firm. [email protected]

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a a Corporate responsibility 7_

The emerging South Asian agenda* Ritu Kumar TERI-Europe, UK

A hundred years of corporate responsibility ‘We started on sound and straightforward business principles’, declared the chief executive at the opening of his new textile factory, ‘considering the interests of the shareholders our own, and the health and welfare of the employees the sure foundation of our prosperity.’ Speaking in 1895, Jamshetji Tata was not only one of the pioneers of industrial development in South Asia, but its first proponent of corporate responsibility. From the beginning, workers at Tata iron and steel complex at Jamshedpur, opened in 1911, worked an eight-hour day, when factories in Europe and North America still had a minimum of 10- or 12-hour days. Tata also commissioned social audits of the company’s community impacts long before they became fashionable in the West (Lala 1981). Clearly, the Tata experience fits neatly with the broader global tradition of corporate philanthropy. But South Asia has also made its own unique contributions to the century-old agenda concerning corporations’ social roles and responsibilities—Gandhi’s ‘trusteeship’ model offering a distinctive approach to vexed questions of ownership and duty. Today, the full spectrum of corporate responsibility strategies are on display—from world-class practices at some of the large business houses, through generalised caution within the mass of medium and small-scale enterprise to ever-present instances of raw exploitation of human and natural resources.

*

This chapter is based on current research being undertaken across South Asia in Bangladesh, India and Sri Lanka by TERI-Europe and the New Academy of Business.

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Globalisation in one continent Corporate responsibility is thus not something new or somehow foreign for South Asian business culture. What makes the current response unique in a global context is the spread of sectoral challenges being encountered. Whereas the corporate responsibility debate in North America and Europe is shifting increasingly to the scrutiny of global operations of companies—the practices of their subsidiaries in emerging economies and the standards applied to their sourcing policies—South Asia experiences ‘globalisation in one continent’. Thus, the ‘first generation’ corporate responsibility agenda concerning conflicts between companies and communities over control of natural resources is widespread. Examples include struggles between rice growers and shrimp farms in Bangladesh, land disputes between plantation owners and indigenous communities, and resistance from communities to mining projects. Yet South Asia also faces the range of ‘second generation’ issues relating to the hazards of industrial production, exemplified by the 1984 Bhopal tragedy, but now encompassing a growing number of incidents across the subcontinent where industrial air and water pollution and the dumping of waste are going beyond the limits of social and environmental tolerance. And, finally, as the pace of urbanisation continues and liberalisation opens up South Asia to global consumption patterns, so many of South Asia’s cities are simultaneously confronting ‘third generation’ responsibility issues related to products and services, whether autopollution norms or pesticide residues in mineral water. What gives an added twist to this threefold challenge of corporate responsibility is the extent to which local and global dimensions are deeply interpenetrated. Thus, community campaigns against intensive shrimp cultivation in Bangladesh have been joined by quality pressures from European Union (EU) health regulators and consumer boycotts in Europe—all pushing for a shift in corporate practice away from extractive short-termism. Supply-chain pressures from international buyers to ensure high standards of labour practices have also been high on the agenda of business leaders in the T-shirt city of Tirupur in south India. But it is the question of access to clean water for textile processing that has been the core sustainability issue facing this successful, but highly polluting business cluster over the past five years—a local ‘resource crunch’ now exacerbated by growing concerns over continuing supplies of fuelwood from increasingly depleted forests for the industry’s boilers. Furthermore, while the image of Bangladeshi business is linked in external minds to questions of child labour in the export garment sector, the real issues on the ground relate to more widespread but less telegenic issues of inadequate compensation for overtime and failure to pay the minimum wage to adult workers. A survey conducted by TERI-Europe and the New Academy of Business also reveals that despite the publicity over child labour in Bangladesh not enough is being done to educate and train children employed in factories. For the subsidiaries of multinationals operating in South Asia, an active press combined with assertive NGOs often means that malpractice can reverberate back to metropolitan audiences far faster than from other developing regions of the

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world. Long before the revelations of accountancy fraud, Enron’s reputation had already been tarnished in the corporate responsibility world by the extensive criticisms of its deeply flawed power station project in Dabhol, for infringements of community rights and corrupt contracting practices. The exposure of dumping of mercury-contaminated waste at Hindustan Lever’s Kodaikanal thermometer factory in 2001 also called into question the effectiveness of policies at Unilever, a generally well-regarded European multinational. These and other incidents in South Asia have served to provide vivid new case material for the long-standing assertion that international business pursues double standards in its overseas operations.

The best of worlds, the worst of worlds An appreciation of the importance of world-class corporate responsibility is now spreading. Over 90 South Asian businesses have now signalled their support to the United Nations (UN) Global Compact, 13% of the total, with India having the third-highest number of supporters apart from Spain and the Philippines. In addition, over 15% of certifications for the social accountability standard Social Accountability (SA) 8000 are in South Asia. Alongside this, a new generation of dynamic companies are emerging as pioneers (see Box 7.1). Overall, however, the majority of companies in Bangladesh, India and Sri Lanka have a limited approach to corporate responsibility as a strategic issue. Local traditions of philanthropy dominate the agenda of South Asian companies. Most large industrial houses on the subcontinent still restrict themselves to philanthropic activities such as establishing foundations and supporting social projects, such as hospitals and schools. These companies have yet to make the leap to incorporating environmental and ethical issues as part of their business strategy. Export-oriented companies have certainly adopted programmes relating to environmental management and labour conditions, but almost entirely at the insistence of European and North American buyers. Though the three countries share a number of common features and trends relating to the status of corporate responsibility, there are also notable differences between them. The civil war in Sri Lanka, for example, has consumed the minds and time of civil-society groups, the government and the corporate sector. This raw reality has focused attention on immediate issues, leading to low awareness of the responsible business agenda among all stakeholder groups. Most firms in Sri Lanka generally understand responsibility as sponsorships of sporting events, donations to charities and general social service activities. Issues relating to gender equality, environment and human rights are not perceived as being part of a company’s responsibility—indeed are seen as potentially subversive. In India, the level of awareness of the corporate sector and civil-society groups is much higher, with extensive debate and discussion on how corporate responsibility could become part of mainstream business practice. Numerous corporate responsibility initiatives have blossomed in the past few years, often involving

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Rajah Bannerji, owner of Makaibari tea estate in Darjeeling switched to organic production in 1984, and has combined this with fair-trade practices. Though the switch to organic production led initially to escalating costs and declining yields, such teething problems have since been offset by a stronger position in export markets, closer relations with customers and premium prices. The workers are healthier—no longer poisoned by pesticides—and there are more jobs as organic production requires double the labour input. The soil is also more fertile and resilient. Beximco Textiles in Bangladesh is part of a leading industrial corporation and a greenfield technology partnership. By early integration of sustainability into innovation and corporate strategy, it has achieved global competence in environmental and technological standards. It has also successfully demonstrated the market benefits of vertical integration. Beximco is now leading the Bangladeshi Textile and Mills Association efforts at establishing a home-grown code of conduct comparable to international standards. Slimline Ltd in Sri Lanka was incorporated in 1993 as a joint venture between MAS Holdings, a premier apparel manufacturer in Sri Lanka, Mast Inc. (USA) and Sara Lee Courtaulds (UK). Its major achievements have been to successfully combine productivity improvements and increased profits with high standards of working conditions and local community welfare. Work and safety conditions have been upgraded and are among the best in Sri Lanka, and significant capital expenditure has been incurred in bringing in the latest technology and machinery. The company has also invested in the local community: land for farming has been donated by Slimline; local hospitals have been given financial aid to upgrade their facilities; scholarships awarded to students; libraries and schools built; and subsidised new bus routes provided for the community.

Box 7.1 Business leaders in South Asia external partners and funding from UN agencies and other donors, such as TERIEurope’s own programme of work. Beyond the CSR conference circuit, however, one of the more positive developments for the future is the increasing desire of India’s educational institutes and business schools to introduce corporate responsibility in their curricula. The situation in Bangladesh lies somewhere in between Sri Lanka and India, and presents something of a paradox. Bangladeshi civil society is strong, with a number of influential and effective non-governmental organisations (NGOs). Some of these do work with the corporate sector, for example, to bring about change in factory working conditions. However, there is no concerted effort as yet by the NGOs to work together with companies to bring about the change needed to move from philanthropy to true stakeholder engagement. The reasons for this hesitant adoption of social responsibility among South Asia’s business communities lie in the absence of effective driving forces. Liberalisation and privatisation are powerful factors in the region, but the state still has a critical role in economic life. The imperative for business to take up wider social responsibilities as the state withdraws is certainly growing, but is perhaps yet to achieve a critical mass. As a result, civil society is still predominantly focused on influencing government policy and development programmes. The shift in focus that has taken place in Europe to give almost equal weight to public and corporate advocacy among certain NGOs has yet to occur in South Asia. A number of innovative examples of civil-society and corporate engagement are now starting to

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emerge. These include the Green Rating programme of the Centre for Science and Environment, India, the Corporate Responsibility for the Environment (CoRE) network at TERI, and the collaborative childcare programmes of the NGO Phulki in Bangladesh. But these examples are still few and far between, and there is a need for far greater creativity among business leaders, NGOs, trade unions and researchers to develop integrated corporate strategies appropriate to local conditions.

Into the future The challenges faced by the corporate sector in South Asia present an opportunity for change. The time is ripe for developing a responsible business agenda that is tailored to the ground realities in these countries and not imported from the Western world and multinationals. Whereas each country would need to develop its own criteria and practices for the corporate sector to follow, some common elements can be identified. At the company level, there is a clear need to develop a new set of skills and awareness among the rising generation of business leaders. Already there are signs of a greater appreciation of the need for ‘triple bottom line’ thinking in the up-andcoming technology and pharmaceutical sectors. The task is to deepen and broaden this awareness across the whole spectrum of industries, including the traditional and extractive industries. An effective way to do this is through management training programmes and business education. There is a pressing need for company executives and top management to receive targeted training on how corporate responsibility practices can be made a part of their business strategy. A few management schools in India are planning to conduct short executive courses on the subject. But an equally important need is to introduce responsibility issues into regular business school curricula. South Asian companies clearly face consumer pressures for better practices, indirectly mediated along the supply chain by foreign buyers. But local consumers and citizen groups need to become more assertive in what they expect of companies. At present, there is almost no consumer pressure on companies to change: the failure of India’s eco-labelling programme in the 1990s highlighted the need for a new type of consumer pressure. A TERI-Europe opinion poll in India (see Kumar et al. 2001) found that the public has rising expectations of company practice. Indians feel that the business sector must play a wider and more expansive societal role. In addition to providing good-quality products at reasonable prices, companies should strive to make their operations environmentally sound, adhere to high labour standards, reduce human rights abuses and mitigate poverty. But the poll also revealed that people are not yet judging companies in the marketplace according to these criteria. Developing such market-oriented pressures could become a powerful lever for change. With the retreat of the state in business activity and the increasing trends towards privatisation and liberalisation, the role of NGOs and civil society becomes

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crucial in bringing about a change in corporate practices. NGOs and the business sector need to find creative ways to work together and enhance corporate image. Engagement and dialogue with opinion-forming NGOs, research institutes and independent rating agencies can greatly enhance and protect corporate reputation. Bangladesh, India and Sri Lanka have a large, diverse, trusted and vibrant NGO sector. It is logical that they should take on the mantle of change agents by shaping, monitoring and playing a constructive role in the field of corporate responsibility. Bringing these elements together—forging a new ethic in the rising generation of business leaders, stimulating consumer pressure and driving civil-society engagement—could help to drive a corporate responsibility agenda unique to the region, one that is open to wider trends at the global level but not, as Gandhi warned, mistaking the ‘glamour’ of Western CSR for the ‘true light’.

References Kumar, R., D. Murphy and V. Balsari (2001) Altered Images: The 2001 State of Corporate Responsibility in India (New Delhi: TERI). Lala, R.M. (1981) The Creation of Wealth (Bombay: IBH Publishers).

I am a professional economist and a certified social auditor, with 20 years’ experience in environment and development. I have worked in Europe, Asia and Africa, with governmental and non-governmental institutions, with the United Nations and with TERI-Europe (of which I am a director). I was cofounder of the Sustainable Trade and Innovation Centre, an initiative to set up sustainable trade and innovation centres in different regions of the world, assisting developing-country producers to meet environmental and social requirements in export markets and gain market access for sustainably produced products. I have recently acted as Environmental Consultant to the Commonwealth Science Council and South Asia Adviser to Social Accountability International. From 1990–98 I was Industrial Development Officer for UNIDO in Austria. I have also worked for UNDP Liberia, the Indian Economic Service, and the Indian Council for Research on International Economic Relations. [email protected]

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a a Corporate governance, 8_

shareholder interests and managerial accountability in turbulent times Scott Bourke and Neil E. Béchervaise Australian Graduate School of Entrepreneurship, Australia

Corporate governance can be viewed as a ‘system by which corporations are directed and controlled’ (OECD 1999). A corporate governance regime should be designed to legally and commercially regulate, inter alia, the activities of an organisation’s managers to preclude acts of malfeasance. Where malfeasance occurs, it becomes important to consider the contribution of both systemic and corporatelevel factors to better understand the reason for the failure. Where corporate collapses show signs of commonality and pervasiveness, as they have, for example, in the US and Australia recently, it increases the likelihood that a country’s corporate governance regime should share a greater proportion of the blame. Following on from the spate of high-profile corporate performance failures both pre- and post-Enron in countries including the US and Australia, recommendations for corporate governance reform have been advanced. They are, in our opinion, quite narrow in their focus and have largely concentrated on issues of transparency and monitoring. Examples include calls for greater general commercial and financial information through regulated disclosure, increasing board independence, increasing audit independence and improving the uniformity of international audit standards. What we find more interesting is the possibility that managerial compensation arrangements have compromised or undermined the governance of the firms that have collapsed. In this chapter we propose that a fundamental organisational conflict of interest—between shareholders and management—and the way it has traditionally been addressed through incentive compensation schemes, particu-

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larly in Australia and the US, should be a primary consideration in any corporate governance reform debate. We make the argument in this chapter that, despite its contrary intentions, the Anglo-American model of corporate governance,1 in seeking to align managerial and shareholder interests has legitimised incentive compensation arrangements that may not, and possibly cannot, promote effective corporate governance. Further, the complex and often unpublished structuring of these compensation arrangements provides the opportunity and, in the face of declining shareholder value, even the encouragement for senior executives to engage in excessive risktaking and malfeasance. In turbulent economic periods, senior executives may be motivated to create the illusion of performance through a variety of unethical, unprincipled, legally questionable and even overtly illegal means to maintain or advance their own vested interests. The financial collapse in March 2001 of HIH Insurance Limited, a major Australian public company, provides a case study for discussion and exposition of this argument. Rather than casting HIH and other notable examples of corporate failure such as Enron and WorldCom as isolated examples of managerial corruption and errant behaviour by senior executives, however, in this chapter we propose that these recent corporate performance failures are symptomatic of a much deeper and more fundamental crisis in the Anglo-American model of corporate governance. We develop our argument in five sections. Initially, the chapter outlines the facts and circumstances surrounding the collapse of HIH Insurance Limited, which is proving to be the equivalent for Australian corporate governance that Enron has proved to be for the US system. We establish that, on the evidence available to date, it appears that it was excessive risk-taking and a series of corporate governance failures that caused the collapse of HIH. We suggest that there is clear evidence of managerial malfeasance that can be broadly linked to senior-executive-incentive compensation arrangements that bore no relationship to the performance of the company. Following Zingales (1997), we then explore the essential relationship that exists between the Anglo-American model and the economic theory of managerial incentive-based compensation that derives from Jensen and Meckling’s (1976) theory of the firm and agency theory (Fama and Jensen 1983; Eisenhardt 1989). From this basis, managerial malfeasance is identified as a natural, even an expected, consequence of the misalignment of managerial and shareholder interests. A review of the developing literature on managerial incentive compensation arrangements highlights the theoretical limitations and lack of empirical validity underpinning the use of these schemes. We use this analysis to contest the integrity of proposed reforms to the Australian corporate governance regime and similar proposals mooted internationally in other Anglo-American model countries. In closing, following Turnbull (2000), the chapter invokes the sociological perspectives of Kuhn (1970) and critiques deriving from market-based ideology (Lazonick and O’Sullivan 2000) to explain the resilience of the Anglo-American model in the face of mounting evidence that both challenges and undermines its theoretical integrity and empirical validity. 1

We explore our understanding of this term later in the chapter.

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The collapse of HIH Insurance Limited HIH Insurance Limited was the principal holding company for an Australian-based insurance services group that was, until its financial collapse and insolvency in March 2001, Australia’s second-largest general insurance provider. The A$5.3 billion collapse of HIH,2 which actually predated Enron’s bankruptcy in the US by more than six months, sent shockwaves through the Australian business community. A Royal Commission was established to inquire into and investigate the factors that caused the failure of HIH. Its preliminary findings summarised the immediate consequences of the collapse of HIH as: ‘profound in terms of the hardship which [it] occasioned to policyholders and others affected by [it]. The repercussions of the collapse are continuing and will likely continue for some years to come.’3 The business history and chronology of events leading up to the insolvency of HIH are well documented in material posted to the website4 of the HIH Royal Commission.5 Notwithstanding that the findings of the Commission have yet to be formally handed down,6 the final submissions of the counsel assisting, Wayne Martin QC, are as comprehensive and, we would suggest, objective an assessment of the circumstances that led to the collapse of HIH as is presently available. We will selectively review and then consider a number of what can reasonably be regarded as the more salient of these preliminary findings in the next section.

Reasons for the HIH collapse Large-scale corporate collapses are almost invariably complex affairs to analyse for a wide variety of reasons including the availability of uniform accounts of those events leading up to the collapse. Conflicting witness accounts and the availability of crucial evidence are practical manifestations of this problem. In consequence, it is difficult to draw strong and universally applicable conclusions on the specific act or acts that caused the particular collapse under consideration. More generic or tentative conclusions, unhelpful as they often are perceived to be by adversely affected parties, tend to be more common. Nevertheless, Royal Commission counsel Wayne Martin QC’s overall conclusion was ‘clear beyond all argument’ that HIH failed as an insurer because it ‘consistently provided cover to policyholders in return for premiums which were not properly priced to cover the risks

2 3 4 5

6

HIH liquidator’s assessment of the expected deficiency of assets at the conclusion of the

liquidation tendered to the Royal Commission. See www.hihroyalcom.gov.au. Sourced from the transcript of Submissions 13/01/03, available from www.hihroyalcom. gov.au. See www.hihroyalcom.gov.au/Documents/CIV/001/011_012.pdf. The Commission was established to investigate the events and circumstances surrounding the collapse of the HIH group. Its mandate was specifically to determine ‘whether decisions or actions of directors, officers or associated advisers contributed to the failure or were involved in any undesirable corporate governance practices’. See www. hihroyalcom.gov.au. The final report of the Commission was not available at the time the original draft of this chapter was authored and accepted for publication.

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being assumed’ (HIH 2002). HIH through its Board and management operated on, Martin asserts, the basis of ‘a fundamentally flawed business methodology’. As Martin goes on to acknowledge, there is nothing revelatory in this assessment. With some variation, most businesses fail because they can’t generate a profit: it is in many respects a statement of the obvious. Clearly of greater interest are the circumstances surrounding the myriad decisions that led HIH’s management and Board to arguably underestimate and underprice those insurance risks that were taken on by the company. In addition to this ‘under-provisioning’, Martin identifies three other aspects of HIH’s business that contributed substantively to its failure. They were the ‘unprofitably of the group’s business in the United Kingdom . . . the unprofitability of the group’s business in the United States and . . . HIH’s acquisition of FAI Insurance Limited’. Martin QC then highlights the importance of corporate governance at HIH, and, it is argued, in any large public corporation, as fundamental to reducing ‘the likelihood of collapse’. Those governance mechanisms crucial to the avoidance of failure at an insurer such as HIH included the ‘senior management, the board of directors, the auditors, the professional advisers in the form of actuaries, lawyers and financial advisors, and the prudential regulator’. On the governance failures of HIH’s senior management, Martin concluded that they (a) intentionally ‘misled and lied to the company’s auditors from time to time’, (b) engaged in acts of ‘corporate expenditure and executive self-indulgence’ that were imprudent if not self-interested and (c) engaged in accounting, audit and reinsurance practices that suggested substantial breaches of the law. On the basis of Martin QC’s conclusions, and in common with Enron (Bratton 2002), it is quite clear that HIH’s management engaged in intentional and systematic under-provisioning of the group’s liabilities with the objective of overstating the listed entity’s reported profitability and its net asset position. Although, as noted earlier, the Royal Commission has not as yet handed down its findings, Martin QC’s closing submissions and the conclusions he draws in those submissions identify corporate governance failure as the primary cause of HIH’s collapse. On Martin QC’s assessment, it is clear that the various governance failures that existed at HIH made it possible for senior executives to develop ‘a fundamentally flawed business model’ and then perpetuate the myth of success and performance from this through malfeasance.

Senior executive compensation and its relationship to the financial performance of HIH In the context of our argument and HIH’s collapse, the nature and circumstances pertaining to HIH’s managerial compensation arrangements and its financial performance warrant examination. Over the course of the financial period 1995–2000, HIH’s official consolidated group financial statements showed profitability (before extraordinary items) as ranging from approximately A$50–90 million per annum. In the following year, HIH declared one of the largest losses in Australian corporate history at the time of

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A$5.3 billion. Martin observes that HIH’s official financial accounts substantially overstated the profitability and net asset position of the company over this period. Anything other than a selective review of the history, quantum and structure of senior executive remuneration arrangements at HIH is difficult given the lack of publicly available information. From the information that is available we know that in 1992, as HIH was about to become a listed public company, the then Managing Director Ray Williams received a A$4.7 million lump-sum payment authorised by the Board. In submissions to the Royal Commission, Mr Williams testified that this payment was designed to compensate him for an unexpected fall in his salary package after the company floated. In other evidence tendered to the Commission, it was revealed that in 1995 a A$1 million ‘golden hello’ payment was made to a new finance director Dominic Fodera. The precise terms of contractual incentive compensation arrangements have not been revealed. However, it is clear that over the period 1995–2000 and before, Mr Williams, Mr Fedora and other senior executives and directors of HIH received significant ‘at-risk’ bonus payments and other ‘soft dollar’ fringe benefits from the company. In addition to these ‘at-risk’ payments, substantial ‘no-risk’ base compensation (salary and benefits) packages were also paid for both the HIH directors and senior executives. These ‘no-risk’ salary and benefits packages were widely recognised at the time to have been at the upper end of the market range.

Corporate failure, corporate governance and managerial malfeasance The case histories of, and circumstances leading up to, the collapses of HIH, Enron and many of the other corporate failures present a number of areas of commonality. Two areas of particular interest in the context of the argument we develop in this chapter were the orchestration by senior executives of corporate earnings misstatements and the payment of excessive ‘performance’-based payments to many of those senior executives. The early evidence that is emerging from many of the investigations into these corporate collapses strongly suggests the possibility that incentive compensation schemes may have exacerbated the natural misalignment between the interests of management and shareholders. It is this misalignment that carries with it the motive for excessive risk-taking and malfeasance on the part of senior executives and directors. To the extent that governance reform does not address the need for a better understanding of these schemes, their rationale and their governance consequences, it will arguably not address the real cause of malfeasance-based corporate governance failure that has led to these corporate collapses. The foundational work of Berle and Means (1932), the theory of the firm advanced by Jensen and Meckling (1976) and agency theory (Fama and Jensen 1983; Eisenhardt 1989) individually and collectively acknowledge and deal with the issue of agency risk in the corporate context. In one view, the primary rationale

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for corporate governance is the resolution of those conflicts of interest that exist between management and shareholders (at least in economic theory) (Zingales 1997). When grouped together, these theories are very much constitutive of the AngloAmerican model of corporate governance (Zingales 1997). A point that we propose to address in detail later is that agency theory actually mandates, inter alia, the adoption of incentive-based compensation contracts as one mechanism that can reduce the prospect of management engaging in behaviour, both inappropriate risk-taking and malfeasance, that is inconsistent with shareholder interests (Jensen and Meckling 1976; Fama and Jensen 1983; Eisenhardt 1989). In spite of the media and academic interest that it has attracted, corporate governance remains a concept that is not well understood or analysed. Turnbull (2000: 4) has recently observed that ‘no agreed definitions or boundaries for defining or investigating corporate governance’ have, as yet, been established. This is not altogether surprising; the concept of corporate governance has been established as determinedly social and cultural in character (Hampden-Turner and Trompenaars 2002). Nevertheless, the term itself is relatively new to the commercial lexicon (Zingales 1997), though questions concerning issues of agency that are central to a more contemporary understanding of corporate governance may have predated even Berle and Means (1932).7 The lack of consensus on a definition of corporate governance (Turnbull 2000; Pound 1993) is similarly unsurprising given the complexity of the phenomenon and the range of perspectives, economic through to sociological, from which it has been conceptualised. Economists tend to frame corporate governance narrowly as ‘the complex set of constraints that shape the ex post bargaining over the quasi rents generated in the course of a relationship’ (Zingales 2000). Other disciplines offer broader perspectives. Turnbull (2000) defines corporate governance as ‘the influences affecting the processes for appointing those who decide how operational control is exercised to produce goods and services and all external influences affecting operations or the controllers’. In contrast, the Organisation for Economic Co-operation and Development (OECD) has framed corporate governance as ‘the distribution of rights and responsibilities among different participants in the corporation, the board, managers, shareholders and other stakeholders’.8 The exhaustive process of international transdisciplinary consultation, leading to its formulation including obviously sensitive efforts to reconcile disparate economic and sociological conceptions of corporate governance, leads us to prefer the OECD definition as a more useful platform on which to advance our argument. It is well acknowledged that corporations can fail for a variety of reasons ranging from honest but inept or negligent managerial decision-making to excessive risktaking and, less frequently, to circumstances beyond managerial control (Moldoveanu and Martin 2001). We understand malfeasance, in this context, to be ‘a

7 8

See, for example, Adam Smith’s reference to these issues in his 1776 treatise, The Wealth of Nations: An Inquiry into the Nature and Causes. See OECD, ‘Corporate Governance Principles’ at www.oecd.org.

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wrongful act that the actor had no right to do; (or) improper and illegal professional misconduct’.9 Following Moldoveanu and Martin 2001, our concern lies with corporate governance breakdowns resulting from ‘failures of managerial integrity (lies, fabrications, embezzlement and self-dealing) that reveal ‘wilful behaviours of the part of managers’ that substantively adversely impact ‘the value of the firm’s assets’ (Moldoveanu and Martin 2001: 2). Our assertion is that on the basis of the conclusions of Martin QC (referenced earlier) HIH provides a clear case-study example of insolvency that falls within this definition. Enron is another (Bratton 2002). One plausible motivation for managerial malfeasance stems from excessive incentive compensation schemes that exacerbate rather than reduce the misalignment of managerial and shareholders’ interests. Schemes that present the possibility of compensation for senior executives and directors substantially in excess of what those senior executives would expect to earn in the absence of the scheme arguably provide the motivation for both excessive risk-taking and malfeasance. It could be argued that these scheme incentives provide the motivation to engage in malfeasance in circumstances where it is unlikely that performance hurdles on which their performance-linked compensation is based can be achieved through excessive but legal risk-taking.

Establishing key linkages between the AngloAmerican model, agency theory, malfeasance and incentive compensation schemes In this section we establish and link three propositions. First, in clarifying our definition and understanding of the Anglo-American model, we establish that its principles are reflected in US and Australian corporate governance systems. We then show how corporate profitability and stock market returns (in the form of both dividends and capital appreciation) or ‘shareholder value’ and ‘agency’ (the competing interests of shareholders and managers) are key characteristics of the Anglo-American model. Finally, we identify the role and function of managerial incentive compensation schemes as an adjunct to agency theory (Fama and Jensen 1983; Jensen and Meckling 1976), then show how incentives are also embedded in the Anglo-American model.

Corporate governance and the Anglo-American model Across the juncture of the 20th and 21st centuries, comparative corporate governance research has become a substantial academic and governmental interest with culture being strongly identified as an explanatory mechanism for complex organisational behaviour (Turnbull 2000; Hampden-Turner and Trompenaars 2002). 9

See www.dictionary.com.

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Licht, Goldschmidt and Schwartz (2001) provide further evidence of the importance of culture in a country model of corporate governance. Culture alone, however, provides only limited access to the economic and sociological assumptions underpinning the corporate governance paradigms on which most large organisations are operated. There are deeper ideological influences of a transcultural nature that have been influential in establishing and entrenching particular corporate governance regimes among the Western democracies. The literatures identify three essentially distinct models of corporate governance: the Anglo-American or US model, the European or German model (Jürgens et al. 2000) and the Japanese model (Gilson 2000; Hamilton 2000). The AngloAmerican model is, in the Berle and Means (1932) world, a market-based construct predicated on the absence of a dominant shareholder, in contrast to the European bank-centred model (Turnbull 2000). At its simplest, the Anglo-American model is concerned with ‘the relationships among the professional managers of a publicly held corporation, its board of directors and its shareholders’ (Hamilton 2000). It reflects a collection of theories that are essentially economic in origin but seen as predominantly legal in manifestation (Bratton 2002; Westphal and Zajac 1998). Berle and Means’ (1932) work, The Modern Corporation and Private Property, is generally accepted as providing the theoretical foundation underpinning the modern conception of ‘the firm as public corporation’ (Milstein 2002; Hamilton 2000; Gilson 2000). Jensen and Meckling’s (1976) theory of the firm, extended by Fama and Jensen’s (1983) work on agency theory, together with Berle and Means’ (1932) basic theory on the separation of ‘ownership and control’ in firms constitutes the foundation of the Anglo-American model of corporate governance (Hamilton 2000). In fact, as Jensen and Meckling (1976: 6) point out, ‘the issues associated with the separation of ownership and control in the modern diffuse ownership corporation are intimately associated with the general problem of agency’. The literature supports the view that the Anglo-American or ‘outsider/arm’slength’ model (Cheffins 2002) reflects the corporate governance regime that regulates the US and Australian systems of commerce (Dunlop 2000; Hamilton 2000; Turnbull 2000). The OECD’s analysis also supports this conclusion. The similarities between the US and Australian governance regimes are quite obvious. Australia’s system of corporate governance ‘consists of a “matrix” of legislation, accounting standards which have the force of law, Australian Stock Exchange (ASX) Listing Rules and voluntary self-regulatory codes of practice’ (Commonwealth Department of the Treasury—Australia 1999). The fact that the Australian and US systems of corporate governance are quite similar is not surprising. As Cheffins (2002) notes, Australian ‘policymakers and academics have drawn upon work done in the US and the UK when they have analysed key corporate governance issues, such as the functioning of the board of directors and the structure of executive pay’. Leaving aside issues around the dispersion of share ownership (Cheffins 2002), there are compelling legal and capital market-based arguments to support the proposition that the Australian and US models or systems of corporate governance have common foundations. Our analysis of the Anglo-American model therefore has equal application in and relevance for both countries’ systems of governance.

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Shareholder value, agency theory and the Anglo-American model The economic ‘theory of the firm’ (Jensen and Meckling 1976) and its later variations and extensions (e.g. agency theory—see Fama and Jensen 1983; Jensen 1994) ascribes certain roles, rights, responsibilities and entitlements to, inter alia, the providers of equity capital, managers and the board of directors. Shareholders as providers of equity (as distinct from debt) capital are the firm’s owners and enjoy a residual entitlement to the assets of firm (Jensen and Meckling 1976; Jensen and Smith 1985). Shareholders have a legally pre-eminent, but non-contractual, residual claim on the corporation’s assets. All other interested corporate stakeholders or constituencies in contrast have, at best, a limited contractual relationship with the corporation (Jensen and Meckling 1976). The need for managers and, in turn, boards arises primarily because of the legal risks that are associated with the separation of ‘ownership and control’ (Berle and Means 1932; Jensen and Smith 1985). An agency relationship arises in the corporate context between managers and (through the board) shareholders. The agency relationship is defined by ‘a contract under which one or more persons (the principal[s]) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent’ (Jensen and Meckling 1976: 5). Here, shareholders (as principals), through a delegation to the board, establish a contract that specifies the work to be undertaken by the managers (as agents) who then perform the contractually specified work (Eisenhardt 1989). Managers, as the agents of shareholders (who are the principals), are therefore charged with applying the assets of the corporation to further the exclusive interests of shareholders. The main function of a board (and other third-party agents on behalf of the board) is to monitor the firm’s management to ensure that it complies with its contractual undertakings and the law. At an operational level, the board ratifies and monitors the decisions of the chief executive officer (CEO) and other senior executives and the hiring, firing and compensating of those same senior executives (Jensen and Smith 1985). We have referred earlier to the centrality of agency conflicts in understanding corporate governance. In whose interest the board should act is a separate but related corporate governance concern (Zingales 1997). Under Australian statutory and common law, directors at all times must act and make decisions in the best interests of the corporation ‘as a whole’. This means effectively that the board must act in the interests of shareholders and only in very limited circumstances (such as the verge of insolvency or bankruptcy) take account of the interests of other stakeholders (e.g. creditors in the insolvency example). Under the economic theory of the firm, it is clear that the board’s role is to act in the exclusive best interests of shareholders (Zingales 1997; Hamilton 2000). It follows that a fundamental principle of the corporate agency relationship must be that the agent (management) should at all times act in the best interests of the principal (shareholders) (Fama and Jensen 1983; Jensen and Smith 1985).

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The term ‘shareholder value’ was originally coined to refer to and reflect the obligation (and, in most Anglo-American jurisdictions, the legal duty) of the board and senior executives to pursue and ideally exceed the expected return to shareholders (Lazonick and O’Sullivan 2000). In this sense, shareholder value means something slightly more sophisticated than the simple pursuit of shareholder interests: to create shareholder value, senior executives must generate a return to shareholders that exceeds their expected rate of return (Fernandez 2001).

Agency, incentives and the Anglo-American model In all agency situations, there are ‘good reason(s) to believe that the agent will not always act in the best interests of the principal’ (Jensen and Meckling 1976: 5). The problems of agency and corporate governance overlap here because managers will not act in the best interests of shareholders unless the governance system motivates them to do so through its system of rewards (Zingales 1997). Under situations involving incomplete information and uncertainty concerning future events and outcomes, two primary agency problems are posed: moral hazard and adverse selection (Eisenhardt 1989). Adverse selection refers to the problematic nature of agent recruitment and evaluation: how can the principal assess the agent’s competence to perform the assigned task. Moral hazard refers to the difficulty principals face in ascertaining if their agent has applied maximum effort in furtherance of the contractual objective (Eisenhardt 1989). The problem of adverse selection can to some extent be dealt with through diligence. Incentive compensation schemes, in addition to internal and external monitoring, have been proposed as a mechanism that can align shareholder and managerial interests and address the risk of moral hazard. As we have previously noted, at least in economic theories of the firm, conflicts are presumed to exist between the interests of management and the ‘providers of finance’, which includes shareholders. Further, the literature establishes that it is the resolution of these ‘agency’ conflicts that represents the primary rationale for corporate governance under economic conceptions of the firm (Shleifer and Vishny 1996). Berle and Means (1932), Jensen and Meckling (1976) and Fama and Jensen (1983) all acknowledge either explicitly or implicitly the issue of agency risk in firm-level interrelationships that arises through the separation of the firm’s ownership and its management or control. Such concerns with the problems of agency probably date from Adam Smith. Collectively, these theories are constitutive of the ‘AngloAmerican’ model of corporate governance (Zingales 1997; Aglietta 2000). Agency theory (Fama and Jensen 1983; Eisenhardt 1985; Ross 1973) and its emphasis on the resolution of managerial/shareholder conflicts are central to the modern Anglo-American conception of both the firm and firm governance. Agency theory recognises, even mandates, inter alia, the adoption of incentive-based compensation contracts as one mechanism to reduce management’s engaging in excessive risk-taking and malfeasance, both of which are obviously inconsistent with shareholder interests (Fama and Jensen 1983; Eisenhardt 1989). The other mechanisms that reduce agency risk are monitoring (Eisenhardt 1989) and the market for corporate control (Fama and Jensen 1983; Lazonick and

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O’Sullivan 2000). There are two types of monitoring under agency theory: internal monitoring provided by directors and external monitoring provided by auditors, accounting firms and, in certain circumstances, regulatory bodies. The principal role of directors and other ‘third party’ agents such as auditors and accountants is to ensure that a firm’s management is acting in accordance with its agency contractual commitments and with the law. On the premise or assumption that ‘fixed-wage’ contracts may not be the optimal method of aligning the divergent interests of principal and agent (Jensen and Meckling 1976), a significant literature has developed around the agent-based incentive compensation schemes and their capacity to serve this purpose (Prendergast 1999; Murphy 1999; Mehran 1995). Incentive compensation schemes are in theory designed to induce and motivate the agent to act in the best interests of the principal and overcome the problems of agent self-interest (Fama and Jensen 1983). The term ‘incentive compensation’ encompasses a fairly broad range of incentive mechanisms including ‘piece rates, options, discretionary bonuses, promotions, profit sharing, efficiency wages and deferred compensation’ (Prendergast 1999: 7).

Testing the economic theory of managerial incentives A great deal of reliance is placed on agency theory to explain how incentive compensation schemes should work and that it is possible to achieve alignment between managerial and shareholder interests (Abowd and Kaplan 1999; Jensen 1994). It is therefore not surprising that the role of incentive compensation schemes in aligning managerial and shareholder interests has been the focus of extensive academic research and commentary in economics (Abowd and Kaplan 1999; Murphy 1999; Prendergast 1999; Mehran 1995) and organisational science (Westphal and Zajac 1998; Milstein 2002). In this section we will overview the literature on incentive compensation schemes. Our objective is to establish if there is compelling empirical evidence that incentive compensation schemes have historically aligned shareholder and managerial interests. The relevant literature is quite extensive and we only intend to make mention of some of the more recent or seminal and oft-cited studies. Studies frequently cited in support of the proposition include Jensen and Murphy 1990, Aggarwal and Samwick 1999 and Hall and Leibman 1997. Jensen and Murphy (1990) assessed salaries and bonuses against corporate performance for 2,505 CEOs in 1,400 US public corporations over the period 1974–88. In framing their conclusions as being at odds with the conventional wisdom regarding CEO compensation prevalent at the time, Jensen and Murphy (1990) found that CEO compensation did not reflect changes in corporate performance. However, they went on to argue that the independence of pay and performance was a function of the absence of aggressive ‘pay for performance’ systems in the surveyed corporations.

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Hall and Leibman (1997), employing a 15-year panel data set of CEO compensation involving large US public firms and a variety of pay-to-performance measures that included changes in the value of CEO stock and stock option holdings, found that CEO compensation is highly responsive to firm performance. Aggarwal and Samwick (1999) explain the failure of previous studies to uncover convincing evidence of a relationship between high-powered incentives and relative performance evaluation with reference to strategic interactions among firms. Their findings suggest evidence of the positive sensitivity of compensation to rival firm performance increasing with the degree of competition in the firm’s industry sector. The literature suggesting a weak relationship between managerial compensation and shareholder performance includes Core et al. 2002, Talmor and Wallace 2001, Elayan et al. 2001, Abowd and Kaplan 1999, Himmelberg and Hubbard 2002 and Boyle et al. 2002. Boyle et al. (2002) analyse the cross-sectional variation in New Zealand executive compensation during the first year of public disclosure and find no evidence of a positive relationship between pay and performance, regardless of firm size, risk, leverage or board structure. Himmelberg and Hubbard (2002) observe that the empirical evidence supporting relative performance evaluation is at best mixed. Citing Antle and Smith 1986 and Bertrand and Mullainthan 1999 they suggest that the empirical research is consistent with CEOs being rewarded for luck and that ‘the rise in CEO compensation in the aggregate good times is evidence of pure rent extraction’ (Himmelberg and Hubbard 2002: 1). The argument in favour of incentive compensation schemes linking managerial and shareholder returns is difficult to substantiate based on the weight of empirical evidence. In fact, it appears to support the opposite conclusion. The position is well summarised by Westphal and Zajac (1998: 5) who report that ‘research on executive compensation has led many observers to conclude that traditional management incentive practices are inadequate to reduce agency costs significantly’. The research literature has established a wide range of explanations as to why the linkage between organisational performance and managerial incentives may not be evident. These explanations range from concerns with the limitations of agency theory (e.g. Hall and Leibman 1997; Westphal and Zajac 1998; Abowd and Kaplan 1999; Bratton 2002; Bebchuk et al. 2002) to proposals for alternative theories of corporate agency (e.g. stewardship theory—see Donaldson and Davis 1991). One particular area of concern with the dominant theories of agency and in turn incentive-based compensation relates to the apparent lack of attention they pay to risk and, in particular, the risk aversion of CEOs (Hall and Leibman 1997). Westphal and Zajac (1998: 2) define the ‘risk paradox’ in this context as being that: the economic and behavioral literatures on executive compensation suggest that, ceteris paribus, chief executive officers will prefer a pay package with a small pay-for-performance component. From a normative agency theory perspective, CEOs, as risk-averse agents, prefer less risk in their compensation contracts, and incentives add uncertainty to a CEO’s compensation.

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Bebchuk et al. (2002) provide a more comprehensive deconstruction and critique of the ‘optimal bargaining’ thesis of executive contracting and compensation. Their review of the ‘optimal contracting’ literature suggests quite serious limitations or weaknesses in many of the central propositions that underpin the dominant academic theories of agency and executive compensation. They also discuss and substantiate through reference to earlier work an alternative theory—‘the managerial power approach’—to explain the emerging empirical picture on executive compensation. The ‘managerial power approach’ positions executive compensation as a function of the fact that: compensation arrangements approved by boards often deviate from optimal contracting because directors are captured or subject to influence by management, sympathetic to management, or simply ineffectual in over-seeing compensation. As a result of such deviations from optimal contracting, executives can receive pay in excess of the level that would be optimal for shareholders; this excess pay constitutes rents (Bebchuk et al. 2002: 754).

Proposals for corporate governance reform in Anglo-American regimes The Australian community should not be asked to bear any significant risk of repetition of a collapse of this magnitude. No doubt this is the reason why the government appointed this Commission to inquire into the reasons for and circumstances surrounding that collapse so that steps can be taken to reduce the likelihood of a recurrence of those reasons or those circumstances’.10

Following the collapse of HIH in mid-2001, concern has heightened over the adequacy of the existing Australian corporate governance system and, in particular, its capacity to protect against a repetition of the HIH failure. A similar mood is perceived to exist in the US post-Enron. In response to these concerns, the Australian government has signalled its intention to contemplate reforms similar in principle to those being considered in the context of US corporate governance reform. Key governance areas being examined as part of the reform agenda in Australia concentrate on matters of technical regulatory disclosure and increasing the independence of directors, auditors and investment bankers (or ‘agents of agents’ as Turnbull [2000] refers to them). The Securities and Exchange Commission (SEC) and other relevant governmental agencies investigating and shaping US corporate governance reform are also concentrating on issues of board independence and 10

See Wayne Martin QC, Counsel Assisting the HIH Royal Commission in his closing submission; available at www.hihroyalcom.gov.au.

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disclosure. The Higgs (2003) and Smith (2003) reviews in the UK have a similar focus. It would appear on this evidence that reform in relation to the role incentive compensation arrangements play in maintaining a sound corporate governance system is being given little if any attention. This assessment should be of concern for a number of reasons. First, there are clearly doubts that exist as to whether incentive-based compensation schemes have produced and can ever produce alignment between the interests of senior executives and shareholders. It is reasonably well accepted in Anglo-American scholarship that excessive risk-taking and managerial malfeasance are a function of the misalignment of shareholder interests and managerial self-interest. When downward financial and general industry economic ‘market’ pressures are applied to managements running large public organisations, this can have the effect of exacerbating the misalignment. Second, the evidence of HIH, Enron, WorldCom and other recent corporate collapses provide evidence that where short-term performance hurdles are included in managerial incentive compensation schemes, the integrity of managerial decision-making can be compromised, with the manipulation of earnings and malfeasance as a natural consequence (Murphy 1999). This appears to be precisely what occurred with Enron in the last three years of its existence (Gillan and Martin 2002; Bratton 2002). There is also emerging evidence that similar compensation compromises in conjunction with malfeasance and excessive risk-taking characterised the failure of HIH. A more careful and considered review of the theoretical and empirical literature on executive compensation in the context of corporate governance raises a number of implications for reform of the Anglo-American model-based governance regimes as are operational in the US and Australia. It becomes clear that to reduce the risk of managerial malfeasance, governance reforms need to directly target—and desirably reduce—the extent of misalignment between managerial incentives and shareholder interests. This is quite a fundamental point, the recognition of which has been lacking in the reform debate so far, at least in Australia. The assumption that shareholder and managerial interests can be aligned through contractual arrangements is not only important to the validity of the firm and agency theory, it is also critical to the integrity of the Anglo-American model. One obvious implication of this assumption is that the process of setting, tracking and, potentially, adjusting senior-executive-incentive compensation arrangements should be less opaque to shareholders. Full disclosure of senior executive contracts and the nature and structure of any incentive compensation schemes is pivotal to ensure that, ex ante, shareholders are aware of and can assess the risks of malfeasance that might arise through misalignment. Media reporting on the rapid escalation in base rates and performance pay achieved by CEOs relative to ordinary employees (James and Heathcote 2003; Mintzberg et al. 2002) exemplifies a significant historical shift in the public perception that corporations, directors, shareholders and corporate performance are beyond general comprehension. The extent of minority shareholder ownership since the approach of buying off dissenting minority shareholders in Holly-

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wood style with a ‘Solid Gold Cadillac’ supports an argument that the separation of interest between shareholders and management, on which the theory of the firm (Jensen and Meckling 1976) is predicated and for which boards are responsible, has broken down. Our assessment casts some doubt on the prospect that current proposals for reform of Anglo-American governance regimes can be expected to reduce the likelihood of managerial malfeasance on the scale of Enron and HIH recurring where they do not deal with the issue of executive incentive compensation schemes. The possibility that the Anglo-American model of corporate governance possesses an inherent ‘self-correction’ mechanism, as Milstein (2002) has suggested, is difficult to support. To the contrary, the weight of logic and evidence favours the opposite conclusion (Turnbull 2000). The fact that little more than a decade ago corporate governance failures occurred in Australia with disturbingly similar themes (e.g. Bond Corporation) is a testimony to this assessment. As Turnbull (2000: 12) has noted: Even in Anglo countries with a well-developed system of property rights, law and regulatory agencies, major failures in corporate control frequently occur. These failures commonly occur with clean audit reports which has created an academic literature on the ‘audit expectation gap’. As responses to major failures, committees of inquiry are established and codes of ‘best practice’ recommended as a political palliative and attempt to patch up an inherently flawed system. However, all such codes for unitary boards are ‘misguided, misleading and so misnamed’.

Current proposals for governance reform seem to be attacking the symptoms (e.g. audit malpractice) rather than the causa causans or ‘the real cause’ (managerial malfeasance motivated by excessive compensation schemes that do not and possibly cannot align managerial and shareholder interests) of corporate performance failures such as Enron and HIH. It is, in consequence, highly unlikely that they will achieve the purpose for which they have been designed and were intended. There is an emerging view in the US that the Sarbanes–Oxley Act (2002) reforms have focused far too heavily on audit and independence issues, with too little emphasis on executive compensation. Writing in his annual Berkshire Hathaway review for 2002, Warren Buffett has pointed out the limitations of ‘independence’ per se of directors and auditors. He has called for directors with greater ownership interests in the firms they govern and for the renegotiation of CEO incentive compensation arrangements to make them more sensible.11 The causes of the recent corporate collapses in the US such as Enron have yet to be formally resolved in the US legal system. However, even commentators who attribute the Enron collapse primarily to independence and audit issues would acknowledge that Enron’s compensation policies focused employee attention on earnings and stock price, with a resultant short-term focus contributing to Enron’s problems (Gillan and Martin 2002). 11

Letter from Warren Buffett to Berkshire Hathaway shareholders 2002, 21 February 2003: 16.

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In Australia, pending the final report of the HIH Royal Commission, the government has confirmed that it will enhance disclosure of executive remuneration and otherwise press on with the later stages of its Corporate Law Economic Reform Program (CLERP). However, the Federal Opposition has gone further, suggesting that tax deductibility should be denied to ‘excessive executive golden handshakes’. The latter measure, if applied, would go some way to inhibiting excessive CEO compensation, and addressing our concerns about the focus of these reforms.12

A way forward Incentive compensation schemes represent one of the two important mechanisms for aligning principal and agent interests under agency theory (Jensen and Meckling 1976; Fama and Jensen 1983; Eisenhardt 1989) and the Anglo-American model of corporate governance (Jensen and Murphy 1990; Fama and Jensen 1983; Jensen and Smith 1985). The alignment of managerial and shareholder returns should be a central concern of corporate governance (Shleifer and Vishny 1996; Zingales 1997) under the Anglo-American model (Jensen and Murphy 1990), with the effectiveness of incentive compensation schemes representing a particularly important measure of the quality of the governance system. Concerns with the potential weaknesses of agency theory have arguably been around since the time of Adam Smith (1776). The empirical literature raises serious questions as to whether incentive compensation schemes have produced alignment between managerial and shareholder returns over the past 30 years (Jensen and Murphy 1990; Abowd and Kaplan 1999; Bebchuk et al. 2002). The theoretical limitations of the Anglo-American model and agency theory reflected in the ‘optimal contracting’ thesis of executive compensation are significant (Bebchuk et al. 2002). Our submission is that they can no longer be ignored in the debate on Australian corporate governance reform. The likelihood is that they will be. As Turnbull (2000: 11) laments, ‘faith by political ideologues in replicating the dominant, but flawed US governance model has so far been little inhibited by scholarly research, empirical evidence or the competitive success of other approaches (models)’. The problematic nature of having the serious questions concerning executive compensation incorporated into the debate on corporate governance reform in Australia is consistent with the nature of normative science. As Turnbull (2000: 9), following Thomas Kuhn (1970), has noted on the problem of ‘normal science’ in the context of the Anglo-American corporate governance debate: This denial of reality can be explained by the observation of Kuhn in considering research into what he described as ‘normal science’. Kuhn (1970: 24) observed that this type of research does not ‘call

12

Media Release, Bob McMullan MP, ‘Costello admits excessive benefits can be capped’, 6 March 2003.

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forth new sorts of phenomena: indeed those that will not fit the box are often not seen at all’.

The Anglo-American model of governance, as has been noted, is inextricably tied to the hegemony of laissez-faire market-based economic thinking (Lazonick and O’Sullivan 2000). To question the fallibility of the Anglo-American model of corporate governance is to call into question the integrity of the market economy that is at the heart of the Anglo-American business model. Enron and HIH may not represent a few rotten apples in an otherwise healthy fruit basket: their passing should therefore not be interpreted as an endorsement of the success of laissez-faire market efficiency (Lazonick and O’Sullivan 2000). To the contrary, the more compelling assessment appears to be that the recent spate of corporate collapses are a reflection of broader systemic problems with the Anglo-American model and the dominant economic paradigm. As Bratton (2002: 4) has observed, ‘Enron in collapse was wrought into the fabric of our corporate governance system every bit as much as Jack Welch’s General Electric was in success’. So how do we move forward? Is it possible to overcome the normative pragmatism that maintains the uncritical acceptance and flawed reform of the AngloAmerican model of corporate governance? How do we approach the reform of this corporate governance model in the wake of HIH and Enron? Greater managerial and directorial transparency is clearly a necessary condition, though it has been shown as insufficient to overcome normative pragmatism in the past. Corporate performance failures of the 1980s brought changes to the corporate governance systems of Australia and the US that increased corporate disclosure (Turnbull 2000). Nevertheless, pervasive malfeasance recurred in the recessive period of the late 1990s. The unchallenged assumptions that underpin the mental models of senior executives, directors, regulators and institutional investors in relation to the theory and practice of corporate governance need to be exposed, explored and opened up to the possibility of constructive contest and corrigibility. Few would regard such an exercise—with its unpalatable intention of reforming the AngloAmerican model—as anything but a complex and problematic affair. As Gilson (2000: 9) observes with regard to the problematic nature of targeted solutions to inherently systemic, pervasive and interconnected problems: A complementary system is difficult to change piecemeal; like leverage, complementarity has an ominous downside. When external economic changes counsel altering one institutional attribute, the change may cause the productivity of the entire system to decline dramatically because other attributes were selected to make good use of the now altered attribute.

If, however, we are to produce a system of governance in Australia that will reduce the risk of future corporate collapses of the magnitude of HIH, as counsel assisting the HIH Royal Commission has implied is a desired objective of such inquiries, a more expansive reform debate is required. This debate must involve a greater critical consideration of the role of incentive compensation schemes as a principle mechanism of corporate governance.

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Perhaps it must also include a reassessment of the risk levels accepted by shareholders, both in terms of their faith in corporate governance and of their expectation of return on investment. More fundamentally, however, we argue that it must address the need to regenerate a socially demanding business culture within which sound governance is a moral requirement rather than a moral hazard; where the expectation of the agent is realised with the interest of the shareholder and other stakeholders. In this regeneration, it may be necessary for shareholders to reassess the level of risk they contract when they undertake the responsibility of becoming part-owners of a company whose management is beyond their knowledge and, until it fails, beyond their care.

References Abowd, J., and D. Kaplan (1999) ‘Executive Compensation: Six Questions that Need Answering’, Journal of Economic Perspectives 13: 145-68. Aggarwal, R., and A. Samwick (1999) ‘The Other Side of the Trade-off: The Impact of Risk on Executive Compensation’, Journal of Political Economy 107: 65-105. Aglietta, M. (2000) ‘Shareholder Value and Corporate Governance: Some Tricky Questions’, Economy and Society 29.1: 146-59. Antle, R., and A. Smith (1986) ‘An Empirical Investigation of the Relative Performance Evaluation of Corporate Executives’, Journal of Accounting Research 24.1: 1-39. Bebchuk, L., J. Fried and D. Walker (2002) ‘Managerial Power and Rent Extraction in the Design of Executive Compensation’, University of Chicago Law Review 69: 751-846. Berle, A.A., Jr, and G.C. Means (1932) The Modern Corporation and Private Property (New York: Macmillan). Bertrand, M., and S. Mullainathan (1999) ‘Are CEOs Rewarded for Luck? A Test of Performance Filtering’ (mimeograph; Princeton, NJ: Princeton University). Boyle, G., S. Andjelkovic and W. McNoe (2002) ‘Public Disclosure of Executive Compensation: Do Shareholders Need to Know?’, Pacific-Basin Finance Journal 10: 97-117. Bratton, W. (2002) Enron and the Dark Side of Shareholder Value (Public Law and Legal Theory Working Paper 35; Washington, DC: George Washington Law School). Cheffins, B. (2002) ‘Comparative Corporate Governance and the Australian Experience: A Research Agenda’, in I. Ramsay (ed.), Key Developments in Corporate Law and Equity: Essays in Honour of Professor Harold Ford (Australia: LexisNexis Butterworths): 13-38. Commonwealth Department of the Treasury—Australia (1999) Making Transparency Transparent: An Australian Assessment (Canberra: Commonwealth Department of the Treasury—Australia). Core, J.E., W. Guay and D.F. Larcker (2002) ‘Executive Equity Compensation and Incentives: A Survey’, draft available at www.ssrn.com. Donaldson, L., and J. Davis (1991) ‘Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns’, Australian Journal of Management 16.1: 49-65. Dunlap, A., and B. Andelman (1997) Mean Business: How I Save Bad Companies and Make Good Companies Great (New York: Simon & Schuster). Dunlop, I. (2000) ‘Corporate Governance: Global Directions’, speech to Australian Institute of Company Directors, 29 June 2000, www.companydirectors.com.au. Eisenhardt, K.M. (1985) ‘Control: Organizational and Economic Approaches’, Management Science 31: 134-49.

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—— (1989) ‘Agency Theory: An Assessment and Review’, Academy of Management Review 14.1: 57-74. Elayan, F.A., J.S. Lau and T.O. Meyer (2001) ‘Executive Incentive Compensation Schemes and their Impact on Corporate Performance: Evidence from New Zealand Since Legal Disclosure Requirements became Effective’ (Albany, New Zealand: Massey University, Department of Commerce, draft available at www.ssrn.com). Fama, E.F., and M.C. Jensen (1983) ‘The Separation of Ownership and Control’, Journal of Law and Economics 26: 301-25. Fernandez, P. (2001) ‘A Definition of Shareholder Value Creation’, SSRN Working Papers, http://papers.ssrn.com, Gillan, S.L., and J.D. Martin (2002) Financial Engineering, Corporate Governance and the Collapse of Enron (WP2002-001; Newark, DE: University of Delaware, Center for Corporate Governance). Gilson, R. (2000) ‘The Globalisation of Corporate Governance: Convergence of Form or Function?’, draft available at www.ssrn.com. Hall, B., and J. Leibman (1997) ‘Are CEOs Really Paid Like Bureaucrats?’, draft available at www.ssrn.com. Hamilton, R.W. (2000) ‘Corporate Governance in America 1950–2000: Major Changes but Uncertain Benefits’, Journal of Corporation Law 25.2 (Winter 2000): 349-74. Hampden-Turner, C., and F. Trompenaars (2002) Did the Pedestrian Die?: Insights from the Greatest Culture Guru (London: Capstone Publishing). Higgs, D. (2003) The Role and Effectiveness of Non-Executive Directors (London: The Stationery Office, January 2003). HIH (2002) HIH Royal Commission Official Transcripts, January 2002, available online at www.hihroyalcom.gov.au. Himmelberg, C., and G. Hubbard (2002) ‘Incentive Pay and the Market for CEOs: An Analysis of Pay for Performance Sensitivity’, working draft available from www.ssrn.com. James, D., A. and Heathcote (2003) ‘Land of Diminishing Returns’, Business Review Weekly, 3 February 2003 (Sydney: John Fairfax Press). Jensen, M.C. (1994) ‘Self-interest, Altruism, Incentives and Agency Theory’, Journal of Applied Corporate Finance 7.2: 40-45. —— and W.H. Meckling (1976) ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’, Journal of Financial Economics 3: 305-50. —— and K. Murphy (1990) ‘Performance Pay and Top-Management Incentives’, Journal of Political Economy 98: 225-64. —— and C.W. Smith, Jr (1985) ‘Stockholder, Manager and Creditor Interests: Applications of Agency Theory’, in E. Altman and M. Subrahmanyam (eds.), Recent Advances in Corporate Finance (Homewood, IL: Dow Jones–Irwin). Jürgens, U., K. Naumann and J. Rupp (2000) ‘Shareholder Value in an Adverse Environment: The German Case’, Economy and Society 29.1: 54-79. Kuhn, T.S. (1970) The Structure of Scientific Revolutions (Chicago: Chicago University Press). Lazonick, W., and M. O’Sullivan (2000) ‘Maximising Shareholder Value: A New Ideology for Corporate Governance’, Economy and Society 29.1: 13-35. Licht, A.N., C. Goldschmidt and S.H. Schwartz (2001) Culture, Law and Finance: Cultural Dimensions of Corporate Governance (Spring Law and Economics Workshop; Berkeley, CA: University of California, School of Law). Mehran, H. (1995) ‘Executive Compensation Structure, Ownership and Firm Performance’, Journal of Financial Economics 38.2: 163-84. Milstein, I. (2002) ‘Greed, Governance and Self-correction’, Company Director, April 2002: 913. Mintzberg, H., R. Simmons and K. Basu (2002) ‘Beyond Selfishness’, draft available at www.henrymintzberg.com.

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Moldoveanu, M., and R. Martin (2001) ‘Agency Theory and the Design of Efficient Governance Mechanisms’, paper prepared for and submitted to the Joint Committee on Corporate Governance, Rotman School of Management; Toronto: University of Toronto). Murphy, K. (1999) ‘Executive Compensation’, in O. Ashenfelter and D. Card (eds.), Handbook of Labor Economics. Vol. 3 (Amsterdam: North-Holland) OECD (Organisation for Economic Co-operation and Development) (1999) Principles of Corporate Governance (Paris: OECD) . Pound, J. (1993) ‘The Rise of the Political Model of Corporate Governance and Corporate Control’, New York University Law Review 68.5: 1,003–71. Prendergast, C. (1999) ‘The Provision of Incentives in Firms’, Journal of Economic Literature 37: 7-63. Ross, S. (1973) ‘The Economic Theory of Agency: The Principal’s Problem’, American Economic Review 63: 134-39. Shleifer, A., and R.W. Vishny (1996) A Survey of Corporate Governance (NBER Working Paper 5554; Cambridge, MA: National Bureau of Economic Research). Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations (ed. E. Cannan; Chicago: University of Chicago Press, 1977 edn). Smith, R. (2003) Combined Code Guidance for Audit Committees (London: Financial Reporting Council, January 2003). Talmor, E., and J. Wallace (2001) ‘A Unified Analysis of Executive Pay: The Case of the Financial Sector’, draft available at www.ssrn.com. Turnbull, S. (2000) ‘Corporate Governance: Theories, Challenges and Paradigms’, Macquarie Graduate School of Management, draft available at www.ssrn.com. Westphal, J.D., and E.J. Zajac (1998) ‘Symbolic Management of Stockholders: Corporate Governance Reforms and Shareholder Reactions’, Administrative Science Quarterly 43: 12753. Zingales, L. (1997) Corporate Governance (NBER Working Paper; Cambridge, MA: National Bureau of Economic Research). —— (2000)’ In Search of New Foundations’, Journal of Finance 55: 1,623-53.

After a career spanning law, investment banking and investment management, I’m currently employed as a Director and Principal of my own consulting firm, where my advice to clients addresses a wide range of organisational concerns including change, strategy, operational management, knowledge management, communication and corporate governance. My doctoral research, which I am undertaking through the Australian Graduate School of Entrepreneurship (AGSE), examines power relationships and the role commuScott Bourke nication plays in transformational change. In addition to my doctoral research, I have published articles on various aspects of corporate governance, organisational communication, leadership and organisational culture. [email protected]

I am Principal of NB Consulting (Australasia) and Managing Director of Global Research Business Pty Ltd, which develops global research access for postgraduate business researchers. I am a professor in the Australian Graduate School of Entrepreneurship and former Director of Research, my research interests including leadership, knowledge management, change implementation, communications and multiculturalism. Neil Béchervaise

[email protected]

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a a Strange bedfellows make 9_

for democratic deficits The rise and challenges of private corporate social responsibility engagement Matthew J. Hirschland Department of Political Science, University of Colorado at Boulder, USA

The legitimacy of any system of decision making—any government, any market—depends not only upon the success of that system in its actual performance—its effectiveness in satisfying the desires of citizens—but also upon the congruence of the system’s rules of decision making with the values of the citizens—their belief in the righteousness of the process itself (Dye 1990: 3).

Prying open the ‘black box’ of CSR practice Increasingly, the pressures on transnational businesses, and business in general, to behave in a more ‘responsible’ manner come less from protestors in the streets and more from formalised, private institutions specialising in the management of corporate social responsibility (CSR).1 These institutions have come to dominate 1 I have purposely chosen to use the term ‘corporate social responsibility’ herein. This comes in recognition of the fact that the terminology describing the business role in society has seen a slow evolution from the 1950s to the present day. Like CSR, terms such as ‘corporate social performance’, ‘corporate citizenship’, ‘corporate social investment’ and simply ‘corporate responsibility’ have come in and out of vogue (Carroll 1999). As for common meaning, all terms speak to some basic notion of a business role in the provision of some ‘good’ to society. The differences between terms are sometimes (but not always) suggestive of the types of goods to be provided and how discretionary this provision should be. The choice of terms often reflects where one stands on the issues

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the framing, negotiation and monitoring of what it means to be a good ‘corporate citizen’, especially in those areas of the globe where the more traditional statebased governance of business behaviour is absent, poorly formed, or simply not engaged. Many of the groups that seek to manage CSR today rely heavily on privately framed and voluntary agreements between civil-society NGOs (non-governmental organisations) and business organisations to govern the provision of those public goods (human rights standards, basic wage and labour minimums, environmentally sustainable practices) that form the foundation of contemporary CSR practice.2 This chapter traces the ascendancy of these new demands on business and their attendant challenges in terms of the increased need for transparency and democratic accountability. This is particularly crucial today as firms and these civilsociety groups together negotiate and implement de facto public policy, divvying up responsibility when it comes to the provision of many public goods in places around the world. The enquiry here begins by examining both the historical and often counterintuitive factors that are driving this change. Second, it identifies examples of the more formalised civil-society institutions that have risen up to define, negotiate and manage these corporate responsibilities. Finally, it weighs what this increasingly private and voluntary regulation of company behaviour means in terms of the overall transparency and democratic legitimacy of such a process from which important public policies emerge as a result of a growing flurry of CSR initiatives. Now more than ever, a greater in-depth examination of exactly how the work of CSR gets done is critical in order to better evaluate its utility, impact and overall desirability. The pressing nature of this is made real when faced with two facts. The first is the continued resistance and intransigence by governments when it comes to instituting universal and effective rules governing business behaviour as it impacts on social and environmental concerns. The second is the increased promotion at the United Nation’s 2002 Johannesburg World Summit on Sustainable Development of CSR partnership initiatives (often, civil society–firm pairings) as the answer to many of the world’s developmental ills. In the light of these developments, there seems to be little doubt that the contributions of private and voluntary CSR institutions will play an important role going forward. Our task is to evaluate this role, its successes and shortcomings, and the processes that drive it. Failure to shine greater light on CSR practice in order to assess its promise and shortcomings calls into question its very legitimacy and sustainability as a practice going forward. This jeopardises it as a powerful tool for global change and improveinvolved and the degree to which the duties are viewed as obligatory as well as their scope. I select the term CSR in recognition of the fact that most business leaders now realise that they have very real and binding responsibilities to the communities their operations impact that are not required by law but cannot be simply overlooked. Using the term CSR pushes us to transcend the crucial but minimalist conception of the business role in society as only providing jobs, goods and services, and basic law abidance, and toward a greater role when governments do not act in the provision of crucial public goods. 2 Examples of CSR institutions under consideration here include: the Prince of Wales Business Leaders’ Forum, Financial Times Stock Exchange Index FTSE4Good, Business for Social Responsibility, AccountAbility, SA8000 and a myriad of private initiatives that bring firms and civil-society actors together.

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ment. In sum, what is being raised here is a call for the greater scrutiny of, and openness in, the way CSR institutions conduct themselves. We must seek to pry open wide the often private and guarded ‘black box’ that is CSR practice today. Doing so will allow us to better assess CSR institutions, their methods and overall promise as a way to govern business contributions in the provision of critical public goods for a world that is in desperate need of them.3

The prelude to contemporary CSR: ‘great transformations’ then and now In his 1944 work, The Great Transformation, Karl Polanyi traces the historical double movement of two of modern society’s central organising principles. The first of these is the rise to power of modern economic liberalism. This economic liberalism with its fantastic wealth-creation capabilities, in turn, gives rise to the second principle which is one of social protection whose aim is ‘the conservation of man and nature . . . affected by the deleterious action of the market’ (Polanyi 1944: 132). For Polanyi, the changes wrought by the industrialisation of the 19th century had dire consequences for both the cohesion of society and the sanctity of nature. Conditions during early periods of industrialisation that exploited man and nature gave rise to the reassertion of society in an effort to make things right again. This reassertion or ‘social protection’, to use Polanyi’s words, entailed the spread of more widespread voting rights in an effort to engender more democratic accountability, a myriad of work and environmental laws, and other measures implemented by the governments of nation-states to help ease the dislocation caused by the rise of powerful markets. Much of the talk concerning globalisation today continues the Polanyi-like line of reasoning as, once again, economic liberalisation changes in form and scope to become the de facto policy prescription for the global economy (Blythe 2002). A quick consultation of International Monetary Fund (IMF) or World Bank policies, not to mention the foreign policies of the world’s most powerful nations, all lend considerable weight to this fact. This dynamic economic liberalism, paired with the spread of markets, poses challenges to societies in and outside the developed world with the benefits and shortcomings they possess. However, unlike the earlier period that gave birth to economic liberalism, something is quite different. During Polanyi’s ‘first’ great transformation, it was the power concentrated in the hands of governments that was brought to bear in an effort to transform domestic and nascent international market forces in greater service of society. In 3

By public goods I draw on Olson who defines them as ‘any good such that, if any person . . . consumes it, it cannot feasibly be withheld from the others in that group. In other words, those who do not purchase or pay for any of the collective or public good cannot be excluded or kept from sharing in the consumption of the good’ (Olson 1965: 14). Specific examples of public goods include clean air, human rights, widespread, free public education, basic labour laws, universal suffrage, and other goods that are not easily excludable.

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America and Europe of the mid-19th to early 20th centuries, progressives carried their agendas of wage and hour legislation, social safety nets, provisions for organised labour and trust-busting through appeals directly to governments. However, today the nation-state, in many places where large portions of global production occur, often lacks effective governance systems and/or the will to effectively manage market impacts. While this is certainly true of many parts of the developing world, even efforts to temper the impact of markets undertaken by the governments of developed countries simply do not always have the ability to effectively address the conditions surrounding the complex and extensive supply chains that many firms employ and rely on today. This, however, is not to suggest that governments are utterly impotent and global markets all-powerful. Rather, it is to highlight the fact that seeking effective responses to the deleterious impact of today’s global markets by simply petitioning individual governments for redress is a thing of the past. Additionally, recourse to multilateral or supranational authority also has its shortcomings, as recent efforts such as the failed attempt of developed nations (the so-called OECD countries) to create a multilateral agreement on trade and investment and the UN’s promising but slow-going Global Compact demonstrate (Ruggie 2002). Much of this can be attributed to the conditions of global anarchy—or what is the lack of any accepted, overarching institution at the international level with the authority, capability and legitimacy to make and enforce decisions (Waltz 1959, 1979). This anarchy and its attendant collective-action problems necessarily limit unilateral action undertaken by governments to temper markets for fear that others will not follow suit, thereby leaving one at a competitive disadvantage. It also complicates multilateral action by governments that might soften the impact of markets in meaningful ways because multilateral institutions lack the requisite enforcement mechanisms to assure compliance.4 As a result of the ongoing liberalisation of both trade and capital flows and the systemic anarchy that frustrates efforts to secure societal protection from freer markets, it appears that a second great, and this time global, transformation is now well under way. However, this time, because of the limited efficacy, capacity and interest of many governments around the globe to effectively exercise social protection in the face of dynamic markets, society has turned its attention for redress elsewhere. Instead of governments, attention and energy is being specifically targeted at the very agents of global capital in an effort to bring about fundamental protection from markets. In what can best be described as globalisation’s catch-22, the front-line beneficiaries and drivers of global economic liberalisation, that is, global firms, now find themselves as the focal point of new demands. Many are being asked to embrace policy-making and public goods management roles that have traditionally been the domain of governments. This is increasingly the case even in places where no such legal requirements exist to perform these functions (Haufler 2001). Instead of 4

While negotiated agreements complete with sanctioning mechanisms can help to address this, international experience with sanctions even as part of widely agreed-upon agreements (e.g. the World Trade Organisation [WTO]) is mixed at best, with nations often going their own way when need suits them.

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simply enjoying the fruits of economic liberalisation, firms must now deal directly with much of its messy fallout as well. While much talk today concerns itself with the important questions of reforming internal corporate governance, the issues raised here focus on the changing role of firms now increasingly saddled with providing external corporate governance. That is, firms are being asked to assume a leading role in areas of societal life where heretofore governments have reigned—a form of societal governance without government.5 As these demands on firms grow, the challenge becomes to answer them in an open, responsive and democratic manner. Before taking up the nature of current CSR practice and its challenges, a brief view of the path leading to the elevated demands on firms is in order.

The Washington Consensus and how we got here With the end of the Cold War in the early 1990s, we have seen the solidification of what has come to be called the ‘Washington Consensus.’ Former UN and World Bank official John Williamson, who coined the term, describes the Consensus as ‘the intellectual convergence’ and ‘technocratic policy agenda’ whose focus has been ‘policy reforms that reduced the role of government, such as privatisation and the liberalisation of trade, finance, foreign direct investment, and entry and exit’ (Williamson 2000: 255). The conventional wisdom behind the Consensus is the promise of economic growth and prosperity for those in the post-communist and developing worlds in exchange for fundamental, market-friendly reform measures that would attract the global capital crucial for their development. In lockstep progression with the rise of this brand of development orthodoxy found in Consensus prescriptions is the fact that levels of official development assistance (ODA) from wealthy to poorer countries have been falling precipitously over the last decade. Aid flow levels in 2000 were 10% below those in 1990 (World Bank 2002: 90). World Bank estimates suggest that, to meet the Millennium Development Goals for the alleviation of poverty by one-half, as laid out at the September 2000 United Nations Millennium Summit, development aid needs to be augmented by $35–76 billion above current levels (World Bank 2002: 90). Yet global ODA is down nearly 13% from 1992 levels totalling only $53.1 billion in 2000. Alternatively, private global foreign direct investment (FDI) is up to $1.1 trillion from only $209 billion in 1992—a fivefold increase. These numbers provide very real evidence that at the heart of the Consensus is the sentiment that unfettered markets and not development aid holds the hope for many in the developing world. Yet, according to the UN, the stark fact is that the developing world’s share of these growing FDI funds has dropped precipitously (35% to 17% from 1997 to 5

As framed by Rosenau, ‘governance without government’ refers to those ‘regulatory mechanisms in a sphere of activity which function effectively even though they are not endowed with formal [governmental] authority’, and specifically focusing on ‘intentional activities designed to regularise the arrangements that sustain world affairs . . . [and] shape the nature of the prevailing global order’ (Rosenau 1992: 5-8).

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2000 alone). Of this remaining FDI pool, only a small handful of the developing countries garner most of these funds. For example, between 1993 and 1998, 20 of the 138 developing countries took 70% of the funds (United Nations 2001). Thus, marginal benefits accrue only to some in the developing world as a result of Consensus changes. Many of the changes demanded by the Consensus are built into the conditionality and policy prescriptions that are typical of the development and financial community’s extension of capital. These demands have often left governments in the developing world unsure and hesitant about what is appropriate action in terms of market interference and what is not. This has helped to make implementation of societal protections against market externalities in many regions spotty at best. In some cases, the pressures of capital conditionality agreements limiting state intervention are further frustrated by purely selfish, rent-seeking behaviour by governmental officials who are charged with the oversight of heightened and sometimes enormous FDI and capital inflows. This type of moneyed corruption contributes to limits on action that would bolster basic labour or environmental standards and other collective goods that are taken for granted in the developed world. Evidence for this comes from the extensive and country-specific reports provided by groups such as Transparency International (TI) which chronicle the abuses and impact of corruption on public goods provision around the globe.6 As noted in his introduction to their Global Corruption Report 2001, TI’s Chairman Peter Eigen points to the fact that ‘public institutions need to be strong, effective and the right size to ensure that opening up to the global market does not allow the state to be captured by private interests’ (Hodess et al. 2001: 3). Examples of institutions ill-equipped to deal with the power of contemporary markets come from many regions. In the case of the former Soviet Union, the so-called Commonwealth of Independent States (CIS), the same TI report finds that corruption has imposed one constant across the region: most people are cut off from the economic benefits of their country’s resources. Corruption has contributed to stagnating or plummeting standards of living for the majority, while a small class of insiders has amassed enormous wealth (Hodess et al. 2001: 110).

Regions in South-East Asia have seen their environment suffer as a result of the moneyed corruption of officials by the seductions of international markets. TI reports that most of the logging occurring in Cambodia today is illegal under the 1988 Forest Practice Rule and subsidiary laws passed there since. Often, ‘[i]llegal deals between government officials and logging companies have led to companies using armed soldiers to terrorise local villagers into selling their trees’ (Hodess et al. 2001: 25). In one case, unable to get relief by petitioning the government, ‘desperate villagers turned to a Cambodian NGO for help. They said that a Taiwaneseowned company was attempting to “steal” their resin trees. [The company] had 6

It is important to note that TI’s reports chronicle the existence and impact of corruption in all nations, not just that which occurs in the developing world.

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hired soldiers to stop them collecting the resin in the forest and tried to force the villagers to sell their trees’ (Hodess et al. 2001: 26). These are but a few examples lifted from TI’s reporting that chronicle the negative impact of corruption that often accompanies greater market activity in the developing and post-communist worlds. With the heightened inflows of capital ushered by Consensus exuberance also come great responsibilities. Both states and businesses alike have a stake in assuring that the investment flows arising from Consensus openness are deployed in a manner that garners widespread support and legitimacy. Failure to build these runs a risk that imperils not just human and environmental well-being but promises to call into question the long-term sustainability of the Consensus itself. Avoiding this outcome means building up the legitimacy of both the political and the economic institutions that liberalising markets do not always carry with them, but certainly require. In the light of such facts, critics of the Consensus assert that many of the liberalising reforms it seeks lack fundamental components of ‘justice, responsible or accountable government, or democracy’, and that ‘there is still a reluctance in the economic policy community to recognise the manner in which markets are sociopolitical constructions whose functioning (and legitimacy) depends on their possessing wide and deep support within civil society’ (Higgott 2001: 142-43). This sentiment has been gaining in attention and adherents. One example is Peruvian economist Hernando de Soto, who notes that: There are about six billion human beings in total, and five billion are in developing and former communist nations. At the time of the fall of the Berlin Wall, we all decided to take the capitalist route. Right now it’s quite obvious that about 80 percent of the people in developing and former communist nations have not benefited from the system . . . The test is, can the system actually work for the majority of the people?7

Thus, everyday markets and the firms that populate them must prove themselves when it comes to their legitimacy as forces for doing constructive good in people’s lives in both economic and in social terms. Yet in light of this seemingly negative information, measures of growth in absolute global wealth seem to bode well for the Consensus even in developing countries. The World Bank reports that, ‘per capita private consumption growth in developing countries has averaged about 1.4 percent a year between 1980 and 1990 and 2.4 percent between 1990 and 1999’.8 Additionally, ‘the proportion of the developing world’s population living in extreme economic poverty—defined as living on less than $1 per day . . . has fallen from 28 percent in 1987 to 23 percent in 1998’ (World Bank 2001). While certainly representing progress, such numbers are still disconcerting and demonstrate the need to do much more to increase the 7

8

Peruvian Economist Hernando de Soto, Founder and Director of Peru’s Institute for Liberty and Democracy, from complete interview transcript for US Public Broadcasting Service television series Commanding Heights based on the book of the same title; available at www.pbs.org/wgbh/commandingheights/lo/index.html. See www.worldbank.org/poverty/mission/up3.htm.

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well-being of many of the globe’s inhabitants. The increasing income disparities between the developed and developing world also frustrate claims of Consensus success, as ‘the ratio between average income of the world’s top 5% and the world’s bottom 5% [has gone] from 78 to 1 in 1988, to 114 to 1 in 1993’ (Milanovic 2002: 8889). With global poverty stubbornly hanging on and income disparities growing, the pressures on Consensus performance are great. Environmental and social abuses are still lingering fixtures of the global economy, and a growing number are insistent that the policy prescriptions of the Consensus severely lack a more compassionate face. To adapt a phrase from the American and European right, what is increasingly in demand is a more ‘compassionate globalisation’. Behind the Consensus, however, are over two decades of powerful ideological and material support. Dominant doctrines such as this do not fade or change easily. This, when taken with the presence of systemic anarchy and powerful insulating norms of state sovereignty that slow any type of quick policy reversal, proves to be a high hurdle to short-circuit the more sinister aspects of the global development orthodoxy as it now stands. In response to these realities, private CSR institutions rooted in civil society have formed. These CSR institutions now come to demand more of the very markets and firms that operate globally and promise great things. Their efforts are focused on how to facilitate the good that markets can bring while minimising their bad effects on societies. This often must be done without the benefit of government authority and its monopoly of force that are both lacking in many parts of the world. It is precisely this chain of events that has placed the most visible corporate actors at the point of a very sharp arrow that seeks greater contributions from them on behalf of societal protection in the form of deliberate public goods provision. Few foresaw that the end of the Cold War and the freeing of global markets would lead to cries for greater corporate social responsibility. Those that are most surprised by this turn of events are usually global firms that find themselves at the receiving end of a campaign against them and their business practices.

Civilising markets and strange bedfellows As a result of the global anarchy described above and the mixed successes of the current development orthodoxy found in the Washington Consensus, an already rich network of civil-society organisations and institutions has grown.9 Many of 9

While not all of these NGO groups focus exclusively on CSR, figures show that the growth in the number of overall NGOs with international reach has grown at a stunning rate from only about 200 in 1900 (Boli and Thomas 1999) to somewhere in the neighbourhood of 25,000 today according to the Union of International Associations, which tracks these activities (www.uia.org/uiastats/ytb199.htm). Of these organisations, currently there are 2,143 NGOs in consultative status with the Economic and Social Council (ECOSOC) giving them increased input into global public policy decision-making (www. un.org/esa/coordination/ngo).

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these groups daily engage with business as both adversaries and partners in efforts to carry out society’s desire for protection against the more dislocating effects of markets. Yet when one thinks of the interaction between businesses and NGOs, visions of contestation, disagreement and, most notably, protest come to mind. The relationship between these two important non-state actors has indeed been contentious—often a David versus Goliath struggle that helps to expose the seedier side of contemporary capitalism (Korten 2001; Wapner 1996; Spar 1998; Klein 1999). In fact, the ‘gotcha’ politics of numerous corporate watchdogs has proven invaluable in identifying and correcting questionable practices for a very long time from the Factory Movement in England to the contemporary global campaigns of today. Samuel Kydd’s History of the Factory Movement (1857), Upton Sinclair’s The Jungle (1906), Nader’s Unsafe at any Speed (1965) and today’s campaigns against Nike are all part of this tradition. In the experience of the more developed OECD nations, from both good and bad corporate practices have come governmental actions on behalf of greater public goods provision for many. Food safety laws, labour rights legislation and environmental protections have all been the domestic legacy of experiences with the interaction between society and business. And, while initially resisted, many business leaders indicate through their actions that a society with such provisions is one in which they prefer to operate and live (nearly 85% of all FDI still remains in the most developed countries according to the World Bank [2002]). However, many parts of the globe experiencing the impact of global capital today do not possess the strong governmental institutions or the well-developed civil-society groups with the will or authority to counterbalance the less desirable effects of markets. In response, transnational NGOs have stepped into this void. The most visible organisations are typically NGOs from the developed (so-called Northern) countries whose very firms have been the engines, beneficiaries and sometimes transgressors in the process of opening up the developing world to greater market engagement. Many of these Northern NGOs increasingly network in effective ways with their Southern counterparts, facilitated by mutual concerns and improved communication that have come to form a powerful transnational advocacy force (see Cleaver 1998; Keck and Sikkink 1998; Utting 2002).10 This type of transnational advocacy has been spurred on by innovations in communication technologies that allow for unprecedented information flows and co-ordination. When it comes to CSR, these are the groups that chronicle corporate and market shortcomings impacting many of the more fragile and under-developed areas of the globe and then facilitate reactions and remedies to them (Wapner 1996; Lipschutz and Mayer 1996). What is emerging as a result of these NGO efforts is an engagement model that often pairs NGOs with the very businesses they target in an effort to achieve solutions—strange bedfellows indeed. The balance of the discussion here focuses on the nature and significance of this type of NGO–firm interaction. Special attention will be paid to the challenges raised by these private, and virtually always voluntary, deals that are brokered between firms and NGOs on behalf of public 10

The Utting reference was pointed out to me by David Murphy.

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goods provision in those places lacking more formal governmental efforts to accomplish this important task.

Let’s make a deal Examples abound of private CSR engagement and the agreements to which they give rise. With numerous NGOs and firms working in partnership on CSR issues and, as yet, no systematic accounting of all of them, it is hard to gauge the overall scope of this activity. However, an ever-deepening literature continues to document the progress and power of the partnership form (Murphy and Bendell 1997; Nelson 1998; Davies 1999; Tesner and Kell 2000; Bendell 2000; Nelson and Zadek 2000). Yet, even with an eye to only the most visible engagements, we can assemble a typology of private CSR activities that present themselves for greater scrutiny. These engagements tend to fall into three specific yet overlapping categories: partnership and convening arrangements; socially responsible investment initiatives; and code-making, reporting and monitoring regimes. The first of these are those convening and partnership arrangements that bring firms and NGOs together to negotiate solutions where the two are at loggerheads. Convening and the more formalised partnership agreements are one of the most interesting aspects of CSR today.11 The idea that NGOs and businesses can meet face-to-face in a non-threatening forum to discuss issues is promising. The idea that accommodation can be reached without long, costly legal battles or great demands on taxpayer resources is also appealing. Examples of convening institutions include Business for Social Responsibility (BSR) and the Prince of Wales Business Leaders’ Forum (PWBLF), which bring together firms and NGOs for private engagements to discuss and negotiate acceptable business practices. Partnership examples include NGO–firm pairings such as those between Amnesty International and Norsk Hydro, one of Norway’s largest industrial groups, which has Amnesty conducting the internal human rights awareness training for the firm; and WWF’s multi-year partnership with ChevronTexaco, which sought to manage the ecological impact of extraction activities in Papua New Guinea. The second category of private CSR activities is one that employs the mechanisms of the market itself to bring about change in corporate behaviour and practice. This is the realm of socially responsible investment (SRI) initiatives. SRI encompasses formalised market indexes such as the Dow Jones Sustainability Indexes and the FTSE4Good, and includes those investment firms specialising in vetting investments on a number of CSR and sustainability measures.12 These 11

12

The World Business Council for Sustainable Development maintains a database of these partnership efforts between business and civil society as does the ‘best practice’ model, or what the UN calls its learning forum model, the UN Global Compact: www.wbcsd.org and www.unglobalcompact.org respectively. In the USA alone, ‘nearly one out of eight dollars under professional management . . . is involved in socially responsible investing’, amounting to over $2 trillion in overall funds

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efforts are also complemented by increased pressure brought by shareholder activism, especially NGO-co-ordinated shareholder initiatives and engagements. Examples of SRI activity include large investment groups such as the Association of British Insurers (ABI) and American mutual fund brokerage house TIAA-CREF (Teachers Insurance and Annuity Association College Retirement Equities Fund) who now put pressure on, and consult with, businesses to help them behave in a socially responsible manner to reduce risk and secure continued investment favour. Also among SRI activities are the shareholder resolutions brought by individuals, NGOs and institutional investors that call for change in business behaviour and are put to the direct vote of shareholders. Many of these, while not successful, do lead to private consultations with senior firm management for discussion of potential accommodation.13 The third category of private CSR activity are those code-making, reporting and monitoring regimes that seek first to establish, then to document and finally to audit the results and delivery of voluntary CSR agreements between firms and NGOs. A rich competition among these standards has emerged. Many of these have already been placed into action. Examples of this include the Global Reporting Initiative, Social Accountability 8000, the Ethical Trading Initiative, the Forest Stewardship Council, nascent exploration of the same by the International Organisation for Standardisation (ISO), and traditional consultancies that provide social and environmental audits for their client firms. The rise of this type of activity is evidenced by the inclusion of these statements and measures in the annual reports of some companies. For some, the existence of these privately negotiated and voluntary agreements that bring business and NGOs together to frame and oversee the provision of various public goods constitutes prima facie evidence of conspiratorial malfeasance on behalf of those involved. Visions of smoky rooms and brokered deals abound. Sceptics brand NGOs that choose to engage with firms in efforts to solve problems as sell-outs to their more activist roots. Writer and campaigner George Monbiot plainly states that ‘[e]nvironmental groups should not take money off companies and should not allow themselves to be used as an extension of the corporate, public-relations effort’, continuing that ‘the dangers are that by co-operating with the corporations on their terms, environmentalists help to justify the company’s more devious practices’ (quoted in Rowell 2001). As a result of the increasing tendency toward NGO–firm collaboration, especially by some of the largest advocacy groups—Greenpeace, WWF and Oxfam—much internal debate within

13

according to the Social Investment Forum (www.socialinvest.org). In the UK, ‘SRI is equivalent to 5% of funds under management’, but has seen a dramatic rise over the last decade. This has come as a result of greater institutional demands for non-financial risk reporting including new London Stock Exchange listing requirements, UK pension law requirements on disclosure and increased pressure from institutional investors for SRI reporting from firms (Oxford Analytica 2002). The creation of new SRI indexes such as the Dow Jones Sustainability Index (USA) and the FTSE4Good (UK) are representative of this ongoing shift. Friends of the Earth’s Corporate Accountability Programme is a prime example of these efforts targeting all aspects of corporate finance and governance structures.

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the NGO community itself continues over the appropriateness of this type of CSR engagement. Alternatively, firms that engage with NGOs or make efforts at reform are often accused of ‘greenwashing’ their records for public relations gain. The group CorpWatch has been active in setting its sights on firms that ‘put more money, time and energy into slick PR campaigns aimed at promoting their eco-friendly images, than they do to actually protecting the environment’.14 The group bestows the dubious honour of bi-monthly Greenwash Awards to the firms they identify as guilty of such practices. Added to accusations of ‘greenwash’ have come campaigns critical of so-called ‘bluewash’ that use similar tactics to tout business contributions on humanitarian fronts, and ‘sweatwash’ that do the same in the realm of labour relations. Even within the business community, parties to such agreements, or those pursuing them, find themselves under pressure from industry colleagues to stop such engagements for fear of raising the expectations of everyone. The private and not always transparent nature of these dealings surely contributes to the fears and rhetoric surrounding contemporary CSR engagement. One group of scholars has gone so far as to suggest the emergence of an ‘NGO–Industrial Complex’ (Gereffi et al. 2001) ripe with pitfalls. The International Council on Human Rights Policy is now pressing NGO–firm relations to move ‘beyond voluntarism’, insisting that such an approach by itself is insufficient (ICHRP 2002). Alternatively, however, the advent of direct NGO–firm engagement of this type seems to hold great promise for constructive engagement, especially when governmental action on important environmental and human rights fronts is not forthcoming. Either way, this type of engagement raises a number of red flags of concern. The last section lays out in greater detail the shortcomings current CSR approaches must overcome in order to be perceived as a legitimate and long-term public policy formation tool going forward.

Improving societal protection through private, voluntary action As private and voluntary CSR arrangements grow, giving rise to ever more partnerships, SRI initiatives and competition among code-making, reporting and monitoring regimes, important concerns must be allayed. This type of interaction ultimately raises the bar higher when it comes to demands for transparency and accountability for both firm and NGO policy-making and engagement. At bottom, the growing popularity of this more private CSR-engagement model opens it up to criticism that it falls short in terms of its overall democratic responsiveness. The charge that there exists a fundamental ‘democratic deficit’ in these more private decision-making processes becomes real as the gulf between the decision-makers and the decision-takers expands (see Bhagwati 1997; Cerny 1999; Nye 2001). Closing this rift when it comes to CSR practice is crucial to assure the legitimacy of 14

Available at www.corpwatch.org/campaigns/PCC.jsp?topicid=102, 23 November 2002.

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these often well-intended and varied initiatives. Doing so requires that both firms and NGOs carefully assess the way this work is carried out and focus on issues of transparency, democratic accountability and the overall governance capacity of private CSR initiatives to solve tensions between business and society in the first place.

Transparency Transparency has lately become one of the more popular buzzwords. Typically rearing its head when lack of information has led to some kind of problem (financial crisis, efforts to stop bribery, etc.), it calls for the disclosure of information in a public, timely and straightforward manner. In the context of greater economic globalisation, transparency is touted as crucial for the efficient and fair operation of the global economy at both the macro- and micro-economic levels and now increasingly when it comes to CSR practice. Yet finding solid sources of this information particularly when it comes to CSR proves difficult. This is of special concern as more of the engagements between civil-society groups and business occur privately. Convening organisations such as BSR and PWBLF which might be considered ‘honest brokers’ retain this important status precisely because of their discreet methods for bringing NGOs and firms together for discussion and engagement in a ‘safe’ environment. As a result, we simply don’t know which parties meet in the offices of BSR or PWBLF or what is said during these encounters. Similarly, SRI shareholder resolutions that lead to consultations between the groups bringing them and company management also go undocumented. By themselves private meetings are not problematic. Surely, some discussions need to take place in private to create the initial momentum and establish trust and dialogue between the parties. But, as the engagement model for creating CSR practice grows to form more of the public policies that affect ever more people, the practice itself is not sustainable or desirable. The contestation, trade-offs and clear statement of positions that are part and parcel of any democratic political process get washed away as CSR ‘goes private’. Instead, what we end up with are the final agreements that emerge from these negotiations; a deluge of ‘best practice’ findings; finger-pointing and criticism between the parties involved if discussions fail. Yet we still know little about the process behind these discussions. It is as if the democratically elected parliaments or congresses of the world were to close off all their deliberations to public scrutiny and simply agreed to share the results of their legislating activities ex post facto. Doing so leaves us without the proper information to determine who actually said what, stood where on what issues, was prepared to engage or compromise, and whom to hold accountable for inaction or praise for action. At this time we often do not know what goes on between even the most wellintentioned groups seeking to solve important questions of socially responsible business practice and the impact of this on public policies and goods in the places affected. If this is the model for the future, and governments continue to eschew engagement on important issues of this kind, then real and meaningful transparency must be forthcoming to give this process credibility. Achieving results

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when it comes to CSR is admirable, but the process behind these results matters greatly as well. The time has come for those involved in the development of CSR practice today to adopt and demonstrate the same transparent and democratic practices that are in short supply around the globe. This becomes increasingly critical as firms and NGOs continue to design the policies and practices governing transnational business behaviour and its impact on public policy everywhere. The tremendous power that this private engagement imbues these two actors with in the short term may prove intoxicating for both. Yet, if not made more open, this same power will also come to diminish the very legitimacy of their actions over the long haul.

Democratic accountability The shift from public mandate to private voluntarism and management of public goods provision necessarily raises questions of democratic accountability and responsiveness that must be taken up as well. Though some CSR initiatives do, in fact, take a tri-sector approach to include civil society, business and government working in conjunction with one another (Warhurst 2001), many do not.15 Taking on the responsibility to solve deficiencies in the provision of public goods through private efforts alone is inherently undemocratic and lacks crucial elements of accountability. In this arena there are no referenda and few elections that reach out to those truly affected by these decisions. This assertion might be contested on the grounds that civil society (and some would even say firms) approximate models of democratic accountability as much as or more than do the activities of appointed or elected officials due to their supposed responsiveness to donors and shareholders respectively. At face value, action taken by NGOs may appear to represent direct democracy in action, or at least a close proxy for it. It is certainly true that many NGOs are dependent on funding from a wide variety of sources and must remain in favour to receive these funds. Also, like the corporations with which they are engaged, some of the larger NGOs have elected boards that can alter policy direction or replace management. Yet it is rare that either the boards of NGOs or the firms with which they are engaged take the latter step. Second, with many negotiations between these entities (civil society, business and sometimes government) taking place privately, we are simply missing a crucial component to democratic discourse—this is the openness and information to assess for ourselves the performance of leadership. Finally, unlike representative democratic institutions that must answer to citizens in the places where their decisions impact, the communities that are often impacted by the decisions taken by both NGOs and firms typically have little say. Very few citizens

15

Examples of tri-sector partnerships do exist where government plays a crucial role in framing an agreement in partnership with industry and civil-society NGOs. These tend to be most effective for the local management of specific projects but have met with mixed results in longer-term, monitored study. See the recent (and forthcoming) World Bank ‘Business Partners for Development’ pilot reports for greater documentation of such efforts: www.bpdweb.org/products.htm.

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in the developing world are direct stockholders, have pension funds or donate to advocacy organisations that might amplify their voices. In light of these facts, efforts to involve local communities from the developing world who are actually affected by overarching CSR arrangements (SRI, partnerships, monitoring, code-making, etc.) brokered between firms and NGOs need to be redoubled (Bhagwati 2001). Examples of this type of local consultation do exist and come largely as a result of the work carried out by the transnational NGO advocacy networks described earlier (Cleaver 1998; Keck and Sikkink 1998; Utting 2002). For example, groups such as the Rainforest Action Network (RAN) have been able to help in articulating the plight and fight carried out by local peoples faced with what RAN identifies as the destructive products of Citibank-financed projects worldwide. A pulp mill in the small town of Nacimiento south of Santiago, Chile; oil extraction in Venezuela’s Orinoco Delta; the Chad–Cameroon pipeline; and many other projects that reportedly benefit from Citibank funds have come under fire. Through RAN campaigns, efforts are made to include local voices in this opposition and subsequent negotiations.16 Yet, like NGO–firm partnerships, the relationships between groups such as RAN and the local constituencies they seek to represent in such fights are often not transparent either. This is not to suggest that the activities of groups such as RAN are necessarily always suspect. Rather, we often simply do not know how, or how well, local issues are represented by even well-intentioned advocates far away from the epicentre of the problems they seek to address. Greater openness and documentation of these accountability questions are necessary to dispel these concerns and move us beyond the private-leaning CSR action of today. In some cases we may be surprised by what local communities actually want once we ask and involve them more intimately in these processes rather than projecting our desires on them as is often the case.

Governance capacity Ultimately, discussions of transparency and democratic accountability lead us back to questions associated with the proper and most desirable type of governance when it comes to public goods provided on behalf of society. As private actors take on more of the responsibilities associated with the management of public goods necessary to shield people and nature from markets, questions about their capacity to do so come to the fore. The growth of private CSR authority also calls into question the appropriate role and capacity of governments themselves (in both the developed and developing worlds) to function effectively in this era of dynamic political, economic and social globalisation. Many business leaders are now feeling encumbered with unexpected social roles. Some are joining many in civil society to call for greater action from governments in all parts of the world to play a bigger role in determining and enforcing basic 16

For a complete listing and details of the current status of RAN’s Citibank project, see www.ran.org/ran_campaigns/newsroom. Information also taken from an interview with RAN’s Ilyse Hogue, Director of the RAN Campaign for a Sane Economy, 10 June 2002.

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human rights and environmental standards in order to lighten their burden. Many, however, remain simultaneously resistant to anything approaching binding international standards.17 Yet, in the interim, heightened private action taken by firms and NGOs in concert with one another holds the very real possibility of forestalling governmental action on crucial issues, thereby diminishing governmental incentive and capacity to act. What might be even worse are the long-term effects of the private exercise of contemporary CSR practice detailed here. While certainly better than no action at all on behalf of public goods provision, the precedent now being established for less-than-democratic and unaccountable CSR may well set the tone for all subsequent action. This moves us further away from those institutional forms that could be more transparent, accountable and possibly more effective when it comes to the contestation and management of global or local public policy management. Optimists might see the flurry of private action that currently shapes CSR as an efficient means for governments to pass the time on the sidelines with little cost to themselves, or as an equally good reason for no government meddling at all. Governments can then, at their discretion, choose to step in to embrace those CSR standards and regimes that emerge as the least objectionable to both business and society, or they can choose to stay on the sidelines permanently letting private actors do all the heavy lifting. Either of these sanguine hopes might actually be realised, but the costs of waiting to see when and if government becomes interested in a more active CSR role could prove costly. Expertise as well as the normative high ground regarding the appropriate role governments should play in monitoring transnational business and providing public goods is being ceded to private actors by waiting. This scenario will leave us in the same situation that we find ourselves in today, with little in the way of powerful, meaningful enforcement mechanisms for bad actors as CSR standards are formalised ever so slowly. While markets may deal blows to the largest, visible and most flagrant offenders of our sensibilities, many lesser-known offenders will continue to fall through the cracks as they do today.18 Finally, we must ask if it is even desirable to make demands for the governance of public goods on business and civil-society groups in the first place? Many firms and NGOs, even the largest, are simply not equipped to assume the responsibilities that this requires. Though both are endowed with many core competences, governance of public goods is not necessarily one of them. As one businessman at the recent World Congress of the International Chamber of Commerce noted, ‘we aren’t development agents, nor are we human rights watchdogs’.19 To force businesses and NGOs into the governance and policy-making role that private and voluntary CSR initiatives seem to encourage, takes them each (especially business) 17

18 19

See comments of International Chamber of Commerce (ICC) President Richard D. McCormick at www.iccwbo.org/home/denver/denver_rep/opening.asp. The ICC seeks greater local governmental guidance but stands opposed to codes of conduct or standards that are anything but voluntary (ICC 2002). Small and medium-sized enterprises (SMEs) are often less the target of NGO attention and find it easier to skirt many of the nascent CSR norms that are emerging. Comments overheard at the 34th Annual ICC World Conference, Denver, CO, 6–8 May 2002.

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far from what they do best. This ultimately runs the risk of making conditions worse in the long term.

Conclusion Many governments today are simply uninterested or unable to address the dislocating impacts of global economic liberalism espoused by the dominant Washington Consensus. As a result, more and more it is privately negotiated agreements for voluntary action crafted between NGOs and firms that define the acceptable limits of market activity and its impact on society. The rise of this phenomenon is particularly apparent in the developing world where more traditional government institutions and the creation of law lags behind in their ability and/or interest to cope with the challenges raised by today’s dynamic markets. The work here has described how global anarchy and the contemporary global development orthodoxy both propels and complicates the CSR phenomenon. It has also described some of the CSR institutions that are at the forefront of this private, voluntary policy formation, and raised questions about the heightened demands that this type of policy creation has on transparency, democratic accountability and overall governance structures. In the end, we must answer whether we can realistically expect business in partnership with civil society to preserve the health and safety of the very societies they both seek to serve. We must also be honest about whether the promise of strictly private action on this front is merely a false promise that delays more meaningful and powerful action from governments. The task ahead is to explore the strengths and shortcomings of the contemporary CSR movement to understand better its limits and possibilities, and to provide greater guidance as societies everywhere react to the impacts of global capital. One thing does seem certain: regardless of the success of current or future government-led efforts to balance the competing demands of markets and society, the private CSR machinery being built up today will surely play a role in defining the path of all subsequent actions. The question that remains unanswered is how democratic and accountable will, and should, this evolution be?

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Polanyi, K. (1944) The Great Transformation (Boston, MA: Beacon Press). Rosenau, J.N. (1992) ‘Governance, Order, and Change in World Politics’, in J.N. Rosenau and E.O. Czempiel (eds.), Governance without Government: Order and Change in World Politics (Cambridge, UK/New York: Cambridge University Press). Rowell, A. (2001) ‘Sleeping with the Enemy’, BBC Wildlife Magazine, August 2001. Ruggie, J.G. (2002) ‘The Theory and Practice of Learning Networks: Corporate Social Responsibility and the Global Compact’, Journal of Corporate Citizenship 5 (Spring 2002): 27-36. Sinclair, U. (1906) The Jungle (New York: Doubleday, Page & Co.). Spar, D.L. (1998) ‘The Spotlight and the Bottom Line: How Multinationals Export Human Rights’, Foreign Affairs 77.2 (March/April 1998): 7-12. Tesner, S., and G. Kell (2000) The United Nations and Business: A Partnership Recovered (New York: St Martin’s Press). United Nations (2001) ‘Report of the High-Level Panel on Financing for Development’, www.un.org/reports/financing/profile.htm. Utting, P. (2002) The Greening of Business in Developing Countries: Rhetoric, Reality and Prospects (London: Zed Books). Waltz, K.N. (1959) Man, the State, and War: A Theoretical Analysis (New York: Columbia University Press). —— (1979) Theory of International Politics (Reading, MA: Addison-Wesley). Wapner, P. (1996) Environmental Activism and World Civic Politics (Albany, NY: SUNY Press). Warhurst, A. (2001) ‘Corporate Citizenship and Corporate Social Investment: Drivers of TriSector Partnerships’, Journal of Corporate Citizenship 1 (Spring 2001): 57-73. Williamson, J. (2000) ‘What Should the World Bank Think about the Washington Consensus?’, The World Bank Research Observer 15 (2 August 2000): 251-64. World Bank (2001) ‘Global Economic Prospects and the Developing Countries 2001’, www. worldbank.org/prospects/gep2001. —— (2002) ‘Global Development Finance Report 2002’, www.worldbank.org/prospects/ gdf2002.

I am a PhD candidate in the Department of Political Science at the University of Colorado at Boulder, USA, and a Fellow in the Social Science Research Council’s programme for the study of ‘The Corporation as a Social Institution’. The work herein is representative of my larger project assessing the ongoing move away from governmental regulation of business toward the private regulation of the same. My aim is to assess the capacity, democratic accountability and transparency of these private efforts that often craft what are essentially public policies. This is absolutely crucial in deciding just how desirable this type of governance is going forward and what role we wish to demand of the state when it comes to the oversight of market actors. [email protected]

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Roger Warren Evans Company director, barrister-at-law, UK

October 1856 was a key moment in world history. For during that month, the seeds of the modern cult of artificial personality were sown, when the foundations of modern corporations were laid down. Every society is now, in 2002, interpenetrated by the phenomenon of artificial personality at every level and in every function. And it all started in October 1856. As Parliament assembled in London for the new 1856 session, all the political talk was of ‘companies’. It was widely reported that, in both New York and Paris, legislatures were preparing to pass new laws to allow the business community to use artificial personality (‘limited liability companies’) as a means of organising major business projects. England, it was said, would lose its pre-eminent commercial position if it did not co-operate with the business community to permit limited personal liability, coupled with the other legal and commercial advantages of artificial personality. British businesses, it was said, would migrate to New York or Paris if they could not get these advantages at home. Parliament had already put a toe in this particular pond with the Companies Act 1845, but its procedures had been so cumbersome that very few businessmen had availed themselves of the facilities. The whole process, it was said, had to be made far easier, if British firms were to compete internationally, and if London was not to lose its international commercial role. The political debate was poorly reported during these few autumn weeks because there was a strike of Parliamentary reporters, with three companies (including *

Every ‘corporation’ is an ‘abdroid’. The common feature of abdroids is that they are treated by law as ‘persons’ in their own right, possessing most of the legal capacities of natural persons. Some ‘abdroids’ are the subject of unfettered private ownership, some are not. The sci-fi term ‘droid’ was devised by authors to describe a slave mechanism, a robot devoid of reasoning powers, wholly subordinate to the beck and call of natural persons, or human beings. An ‘abdroid’ is merely an abstract droid, a corporation, a company, an abstraction, a figment of the legal imagination, a non-physical entity, a concept, a nothing.

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Hansard) vying for the right to produce the official parliamentary record. Reporters from The Times were not on strike, however, and the short House of Commons debate was briefly reported there. Some members of parliament (MPs) were concerned with the obvious risk of fraud and deception, but their concerns were brushed aside. The Bill quickly passed to become the seminal Companies Act 1856. Its principles have not changed, in any fundamental particular, since then. In the intervening 150 years, artificial personality has spread throughout the world, generating both advantages and grave disadvantages throughout society. The process was at first very gradual because companies were suspected as vehicles for fraud, unsuitable for gentlemanly deployment, the last refuge of the trickster and the rogue. ‘Company director’ was a term of suspicion, if not contempt. The Victorians, who in 1852 had already granted artificial personality rights to workers’ co-operatives, went on to grant the same privileges to friendly and benevolent societies, building societies, trade unions and credit unions, all by way of different legal codes. And, given Britain’s dominant imperial position, British institutions were widely copied throughout the world. Towards the end of the 19th century other models of incorporation developed, notably the German model, which was copied lock, stock and barrel by Japan, well before the First World War. Before the First World War, the progress of incorporation was slow and patchy, inhibited by social convention. After the great Wall Street Crash of 1929, there was an accelerated flight of the business community into the thicket of artificial personality. Personal liabilities had to be limited and new defences constructed against personal financial disaster. Contemporary society is now riddled with the phenomenon of artificial personality. It tentacles have spread far beyond the business world throughout the voluntary and charitable sectors, and many new forms of ‘abdroid’ have been created by the legislature (e.g. the UK quangos). In many sectors, artificial personality has become a cancer eating away at the body politic, negating personal responsibility, facilitating tax evasion, undermining moral imperatives. ‘Abdroids’ are the first choice of terrorists, tax evaders, money launderers, criminals of every calibre and kind, drug traffickers and smugglers. And, closely related to criminality, there is the seedy fringe of all legitimate business communities, peopled by rogues adept at the manipulation of artificial personality. A further complication is the global proliferation of legislatures, of territorial jurisdictions asserting the right to permit the adoption of artificial personality. It must be evident that there can be no ‘common law’ or ‘customary law’ of companies: every jot and every tittle of company law is the emanation of statute, the express decision by some legislature, somewhere. In the USA, every state claims the right to regulate its own distinctive form of company—there are Californian companies, New York companies, Arkansas companies, Maryland companies, Delaware companies—and their laws are all different. Many of the former component countries of the Soviet Bloc have their own company law. An independent Scotland would certainly develop its own law of incorporation. There may be as many as 250 different company law jurisdictions throughout the world. And the deployment of artificial personality is accelerating: in the UK alone, corporations are now being formed (under the Companies Act alone, disregarding all the other incorporation systems) at the rate of 5,000 every week.

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The effect of this development has been to enable the fixers and managers of the world, in both the public and private sectors, to operate in secret, to break laws with impunity, to evade taxes without detection, to operate criminal networks where the godfathers are never caught, and to oppress and deceive the hapless majority of humankind. On the one hand, the discovery and development of artificial personality was one of the greatest inventions of human society, just as the discovery of zero transformed mathematics. On the other hand, the corruption and oppression facilitated by artificial personality threatens to engulf the world in its own venality. The time has come for governments, acting in concert by way of international treaty, to clean up company law globally, particularly in its business applications. The UK government is about to embark on a new round of company law reform (following a four-year Department of Trade and Industry [DTI] review process), and the impact of American corporate scandals is bound to be reflected in that. But a far more radical approach is needed, embracing artificial personality as a generic social institution, with new provisions made for social enterprises of all kinds. The principal problems, it is true, lie in the private-profit trading sector, and that is where the UK legislation will principally focus. But the Al-Qaeda investigations have also demonstrated the extent of corruption within the charitable or not-forprofit corporate sectors, often considered to be above suspicion. Artificial personality has penetrated every aspect of our lives, and any reform strategy must take that systemic penetration fully into account. In practice, each national system of company law would have to be cleaned up by specific national legislation tailor-made for its own purposes. There could be no international statute. But there are, nevertheless, broad reforming principles upon which international agreement should be sought. Given such agreement, reached by international concordat, it would be for each signatory state to go away and reform its own laws within an agreed period: say, five years. The starting point is the proposition that the power of trading corporations has increased to unacceptable levels, and ought to be constrained by governments. The abuse of corporate power takes the form of workforce exploitation, trade union repression, environmental pollution, money laundering, destructive relocation, market manipulation, monopolistic exploitation, corporate fraud, bribery, tax evasion, excessive executive remuneration and the deception of investors. These abuses of power touch every corner of every contemporary society. And they call for a radical programme of legal reform, not to prevent the use of corporations for trading purposes but to limit the damage caused by the abuse and exploitation of the processes of incorporation. It should be acknowledged from the outset that the deployment of corporations (artificial legal persons, ‘abdroids’) has proved advantageous to the modern world, in the development of both political and commercial institutions. The statutory device of limited liability, the mobilisation of multiple shareholders in support of trading enterprise, the emergence of stock markets, and the facilitation of business succession and transfer—these are all key systemic gains that could not have been achieved without the use of incorporated forms of trading. The treaty objective should be to strengthen and improve that process, not to obstruct it.

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Reforms should seek to secure the implementation of five key reforming principles. Minor tinkering, the mere modification of the duties of directors or auditors will not address the underlying faults of system. These five principles are conceived essentially as applying to major corporations, or ‘abdroids’: sole traders and partners, who trade without incorporation, accepting personal responsibility for their actions, their commitments and their debts, would not in any event be affected by these reforms, nor would their requirements apply to small local companies. It is contended that the opportunity to use ‘abdroids’ for private trading purposes should be considered a privilege to be granted to the business community only upon terms, and those terms should have regard for the public interests of the wider society. Properly understood, there is an underlying deal between society and its business communities. The treaty negotiations should seek to redefine and renew that deal.

I. Greater transparency Trading corporations now enjoy far greater rights of secrecy and confidentiality than governments and public agencies. Corporations are treated as private organisations as a matter of law, subject only to the regulatory principles of private affairs, and private property. Their operations are, however, of the greatest national and international importance, and should be open to far greater prior scrutiny, by both public and the investigative media. These legally protected ‘private’ rights of secrecy should be curtailed, while retaining confidentiality for matters of high competitive significance, as directed by the board of the company. All general meetings of shareholders should be open to the public and the media, and public access should be given to corporate records.

II. Better checks and balances Modern management has taken exclusive control of corporations, through the domination of their boards of directors. The 19th-century checks and balances, between shareholder and board, between auditor and shareholder, between board and management, have completely broken down, atrophied. Executive management dominates every corporation, with CEOs enjoying unprecedented concentrations of power. These autocratic systems, without effective checks or balances, are dangerous. The remedy is to enable shareholders to share power with the management, in particular with the right to a prior vote on key issues facing the company, including executive remuneration. Managers must be shorn of the autocratic powers that they have acquired by default and legal loophole.

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III. Regulated company formation The right to use an artificial person for trading purposes represents a privilege, a key advantage granted to the business community. Yet company formation is effectively accorded ‘on demand’ in the UK, and in most other jurisdictions. No prior checks are made before the creation of a new corporation is authorised, nor are the identities of the promoters or their purposes scrutinised. Before authority is given for the creation of any new ‘abdroid’, the applicants should be required to satisfy the Companies Registrar that its formation is for a legitimate purpose, that there is no element of tax avoidance, and that the tax affairs of the promoters are in good order; other considerations should also be taken into account, such as possible terrorist links and smuggling connections. The formation of off-the-shelf ‘shell’ companies should be prohibited. And registration charges should be significantly increased so as to deter the frivolous use of incorporation procedures.

IV. Liability for subsidiaries When the concept of limited liability was developed in the 19th century, the object was to protect wealthy individual investors against the risks of financial ruin, in the event of a firm’s collapse. No shareholder could under any circumstances be called upon to pay more to the company than he had personally pledged to invest. That protection has proved a key advantage in the development of modern economies and should not be displaced or qualified; such considerations remain valid. There was, however, no suggestion that a corporate shareholder (i.e. an investor that was itself a corporation) should be able to create another artificial person, and hide behind its own subsidiary. The extension of limited liability to artificial persons themselves, to ‘holding’ or ‘parent’ companies, has now become a vehicle for deceit and fraud, and should be discontinued. Every company should be required to bear its due share of the indebtedness of any failed subsidiary.

V. Qualified property rights Corporations have succeeded to all the property rights accessible to natural persons, as a matter of general legal reasoning. ‘Abdroids’ are entitled to enjoy all the relevant rights of a natural person. In Anglo-American legal systems, this means that corporations can take advantage of the very powerful ‘absolute’ property rights enjoyed by natural persons. These include the right to exercise property rights arbitrarily, without assigning any reason for their exercise, and without any requirement to act reasonably in using them: such property laws even accord to a natural person the right to destroy his own property at whim. This presumption should be changed: all corporations should, as a condition of enjoy-

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ing the advantage of artificial personality itself, be placed under a general legal duty to act reasonably in the exercise of their powers. Corporations should expect to be subject to judicial scrutiny for acting arbitrarily, unreasonably, negligently or destructively. This principle would act as a powerful constraint on the abuse of power, throughout the entire corporate sector. It should be recognised from the outset that, given the international character of modern trading systems, these radical measures would require for their implementation an extensive measure of agreement between the principal trading jurisdictions. Significant diplomatic negotiation will be required, by way of an extended process of negotiation. The process will take at least ten years. But it is time to make a start.1

I suspect I should have been a psychologist. For I am preoccupied, both in my scrutiny of my fellow creatures and in my legal studies, with the phenomenon of personality—both natural and artificial. By education I am a linguist, a historian, an economist, and a lawyer. By trade I am a general manager and company director, one of the puppet-masters of the trading system, manipulating a bewildering array of imaginary corporate puppets. As a history student at Cambridge, I was always deeply affected by the impact of personalities, both ancient and modern: they interpenetrated my world of ‘systems’, in both historic and economic analysis. The conduct of all our daily lives is profoundly conditioned, at every stage, by the ramifications of personality. Democratic ‘politics’ is conditioned by personality, however strong the protestations may be to the contrary. Great religions turn crucially upon great personalities. And, as a near-professional linguist, I recognise that human language has a key part to play in humankind's manipulation of abstract concepts. [email protected]

1

Check out www.tamethecorporations.net and state your views.

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A business school for sustainable development Juliet Roper, Eva Collins and Mike Pratt University of Waikato Management School, New Zealand

A new paradigm How many business schools does it take to change a light bulb? None: they don’t bother until they are sure electricity is not just a fad. Most business schools are not known for taking risks. Business schools serve a traditionally conservative customer who commonly finds little profit in revolution. At the same time, business schools cannot risk being caught behind the times—any more than business itself can. Our customers may be conservative, but they demand that we be perceptive enough to see the changing future and bold enough to train graduates who can make a profit from it. Successful businesses take risks—successful business schools must be ready to do the same. By most measures the University of Waikato Management School has been successful. We are leaders in management education in New Zealand, pioneering four-year degrees in line with North American benchmarks. Our staff has an average per capita research output that exceeds that of other business schools in the country. Part of our success comes from a willingness to regularly re-evaluate who we are and what we stand for. We do not change for the sake of change. But we are flexible enough to recognise the approach of a new paradigm shift. This may be partly due to the fact that we are a relatively new school that has had to create its success in competition with older, established universities. Of course, it is often hard to tell when the world is changing. There is usually no single, seminal event. When Thomas Edison threw his first switch, business schools did not immediately take ‘Gas Light Management 101’ off the curriculum. The business school that moves too quickly, or in the wrong direction, soon discovers that its graduates cannot find jobs.

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Nevertheless, the Waikato Management School recognises there is a fundamental change building in what the world wants from business, and so in what business will want from us. There is, we believe, a growing expectation that commercial activity should not be conducted without regard for the well-being of the community. Simply put, we think the public wants businesses to be good neighbours— trustworthy, considerate of workers and their families, environmentally friendly, and accountable for their actions. Companies that fail to meet these standards risk being penalised in the market, not to mention prosecuted in the courts. In the aftermath of corporate scandals such as Enron and WorldCom, US law now requires that every publicly traded company has an internal audit division. CEOs must pledge personal accountability by signing their companies’ financial reports. Similar trends are emerging in the way the public views companies’ environmental and social behaviour. Public concern about the vanishing tropical rainforest has led major wood products companies to adopt sustainable harvest policies. In Europe, automobile manufacturers are taking responsibility for recycling their cars when they are ready for the scrapheap. Companies such as Toyota and Procter & Gamble now have sustainability as a core business strategy. Clearly, the rhetoric of sustainability must be matched with action. All over the world, business is being asked to demonstrate a commitment to a fairer, more sustainable future. Businesses are, in turn, looking for managers who meet that expectation and produce a healthy bottom line. Naturally enough, business schools are exploring a variety of ways to supply those graduates. New Zealand is historically well positioned to participate in this experiment. Founded, in part, on a utopian ideal, it was the first country to give women the vote, was a pioneer in social security, and its current government has a commitment to social justice. New Zealand enjoys an international reputation of being ‘clean and green’ and has developed some innovative environmental management laws. New Zealanders consider themselves entrepreneurial innovators.

The Waikato Management School In October 2002, Mike Pratt, Dean of the Waikato Management School, announced the school’s intention to make sustainability the core focus of its teaching and research. ‘Education will be key to enabling New Zealand to become a sustainable nation,’ he told the New Zealand Sustainable Business Conference in Auckland. He argued that sustainability is not just about environmental, social and economic development but that it has a cultural dimension as well. ‘In the face of globalisation, societies want to preserve their cultural values and community identity, but still participate in the global economy.’ Pratt’s remarks reflected decisions made by the Management School staff earlier that year. The University of Waikato has a long history of commitment to social issues and the Waikato Management School shares this tradition. We had decided that we wanted to be at the forefront of sustainable business education. Members of the school determined that we wanted to make a positive difference to the way

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business is conducted in New Zealand and elsewhere. We also felt that it would be a positive way to differentiate Waikato from other schools. This determination was based on a lengthy process of consultation involving a broadly representative allday meeting, followed by meetings between the Dean and all work groups. Extensive e-mail conversations took place between the meetings. The notion of sustainable business emerged from these deep strategic conversations rather than being predetermined. The timing seemed right for such a move, especially given the recent highprofile stories of international business corruption. However, the concept of sustainable business is still very new in New Zealand. We were aware that our students responded very positively to ideas about sustainable business but we were less sure about how the broader business community would respond. We did know that New Zealand had not grasped the full potential of sustainability to drive economic growth. We saw an opportunity to help cement our ‘clean and green’ competitive advantage. It is early days yet, but there is widespread agreement within the school that we want to be known as ‘citizens’ who are sensitive to the ethical and moral issues of the business and management community. We are well aware that implementing these lofty aspirations will not be easy or instantaneous. Fortunately, many of the academic staff have been researching and teaching in the area of sustainable development for several years. This established record of work in economic, social, environmental and cultural development meant that we could build on what we already had, while refining our core focus to concentrate on sustainability. Once we had made the fundamental decision to transform the school’s focus, actual change came quickly. We considered establishing a centre of sustainability within the Management School, but rejected that idea fairly early on because we did not want the issue to be sidelined in any way. We have opted instead for a school-wide approach that better reflects the holistic attitude that underlies sustainability. On the teaching front, we have drawn together existing courses that deal with one or more aspects of sustainability. Courses such as ‘Environmental and Natural Resource Economics’ will be realigned to emphasise sustainability. We also plan several new courses, such as ‘Dimensions of Sustainability’ and ‘Management and Spirituality’. The specifics of these courses are still evolving, and we are reorienting our existing Environmental Management qualifications towards sustainability. To fully assess how our research programmes fit within our new focus, the academic staff undertook to document our research interests and current projects and categorise these into broad themes. We were pleasantly surprised to find that issues of sustainability already featured across five broad themes: organising for performance; international competitiveness and development; social and sustainable development; e-commerce and ICT (information and communications technology) innovation; and wealth creation for New Zealand. This exercise was useful for several reasons. One was that it brought together people with common interests in a way that had not been done before. Another was that it has helped us demonstrate our existing commitment to sustainability. As part of that commitment, we have reviewed the sustainability of our own policies. For example, we are reviewing our level of services to students, in the form

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of administrative assistance, orientation programmes and, for international students, language assistance. This is particularly important, as our number of international students has risen sharply. We have also revised our environmental policies. Since the announcement of our new focus, the Waikato Management School has become a founding member of a new organisation called the Sustainable Business Network. We hope the communication and collaboration fostered by this group will have a real impact on how businesses operate in New Zealand.

What next? The Waikato Management School believes that, although the current educational process is focused on the bottom line, the dimensions of successful management are changing. Call it triple bottom line or sustainability, it requires an ability to see the big picture—how all the pieces fit together. It is not a picture that Waikato can paint alone. We have begun a consultation process with our internal and external stakeholders. We are seeking guidance from business, feedback from our students and assistance from our colleagues around the world. In the final analysis, we do not just want to be aware of the changing world; we want to help make it happen—through business consultancy, through research influencing policy, and through the knowledge and values our graduates take into the workforce.

Juliet Roper

Eva Collins

Mike Pratt

We are all faculty members of the Waikato Management School where Mike is the Dean. We and several other colleagues have been working together over the past year to change the core focus of the School to one of sustainability. We are all passionate about doing this. As described above, we are aiming to have the concept of sustainability woven throughout our teaching curriculum as well as to have it underpin our own practices. Each of us is also actively involved in research in the area of sustainability and corporate responsibility. [email protected] [email protected] [email protected]

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Part 3 Auditing for whom?

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The corporate discipline of compassion Adrian Henriques Middlesex University, UK

Love, peace and chocolate ‘Love, peace and chocolate’—these are the words of a ten-year-old describing heaven on earth. It is true that chocolate appears to have a special connection with heaven. Central American peoples used chocolate in religious ceremonies. The Quakers established chocolate factories to replace gin-drinking in early Victorian England. It is used as a token of love. It is claimed that it stimulates serotonin production in the human brain, which causes feelings of well-being. It is even capable of calming children in supermarkets. It does seem to be a universal drug for the human condition. Chocolate is also the paradigm consumable commodity. It has many lessons for the world of ethics. Consider first of all its special relationship to dieting. For many people on diets, chocolate represents temptation and all that is both desirable and forbidden. And this is simply its effect on those who consume it. What about its effect on those who produce it? Does its farming and cultivation lead to wealth and prosperity for poor people?

Slavery to commodity markets Every day on average some 8,000 tonnes of cocoa beans are shipped around the world. Cocoa requires a specific tropical climate and can only be produced in certain regions of the world. The major producing countries are Indonesia, Ghana and, the largest producer, Ivory Coast. The nature of the global markets means that

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buyers do not always specify where a particular order of cocoa should come from, or An early explorer visiting Central America found that: how it has been produced—but all cocoa ● 4 cocoa beans could buy a pumpkin beans are the same, aren’t they? ● 10 could buy a rabbit The huge world demand for chocolate ● 100 were needed to buy a slave! and the scale of its production mean that cocoa is a commodity product. Few produ- Source Cadbury’s website: www.cadbury.co.uk. cers or purchasers can have an effect on its price which is subject to world markets. Like many commodities, the price of cocoa has declined over recent years. This often means that producers receive less income than is needed to sustain a decent life. To make matters worse, civil war is now emerging in the Ivory Coast, the world’s largest producer of cocoa. This has led to a rise in prices, but a corresponding increase in violence for those working with Aly Diabate was almost 12 when a slave trader promised him a bicycle and $150 a chocolate. In fact in West Africa it has meant that year to help support his poor parents in people have been enslaved to make working Mali. He worked for a year and a half for a cocoa farmer who is known as ‘Le Gros’ the crop more economically viable. The (‘the Big Man’), but he said his only NGO Anti-Slavery estimates that 700,000 rewards were the rare days when Le people are enslaved each year, of which Gros’s overseers or older slaves didn’t many are sold for seasonal work such as har- flog him with a bicycle chain or branches vesting cocoa and other cash crops. So it from a cacao tree. turns out that not all beans are the same— Source Raghavan and Chatterjee 2001 some are the fruit of slavery.

CSR and the ethics of chocolate Slavery is but one issue for companies to face up to. How can companies conduct themselves in a world characterised by slavery, war, corruption and environmental degradation? What is a legitimate response to these issues from companies making chocolate? And which companies should respond? Manufacturers? Importers? Advertisers? The first, panic, reaction from most companies on initially confronting an ethical crisis is often denial, then an argument that they cannot go ‘all soft’ without losing money. If the issue will not go away, then there may be a growing realisation that there must be a compassionate response, and that this must be based on some kind of systematic approach to the issues. Any such approach has to enable moral issues to sit side by side with business issues. CSR is a term increasingly used to cover many aspects of this kind of broader approach to business. So CSR may be thought of as the corporate discipline of compassion. A number of techniques have been suggested as part of companies’ corporate social responsibility toolkit. Social auditing is one such technique. Social auditing requires a systematic appraisal of relationships with each stakeholder group a company has. This would highlight issues and entail a methodical attempt to manage the organisation’s impacts over time. This is summarised in Figure 12.1.

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Policy review

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Figure 12.1 The systematic approach to social auditing

This approach seems fine—but hardly adequate to the challenge of slavery. It might seem more appropriate to label each bar of chocolate with an ethics warning saying that ‘this product may seriously damage your soul’. Social auditing appears to be a technique suited to companies whose problems may be real, but which are not faced with dramatic violations of human rights such as slavery. Does that mean that responses to serious social abuses cannot be tackled systematically? They can, but they must also be tackled with great care, not subject to a tick list. What can go wrong with social auditing and CSR? There are four principle pitfalls which are briefly discussed below: ● Violence ● Ignorance ● A limited boundary of responsibility ● Poor implementation

Attempts to engage stakeholders who are in fear of beating, or of their lives, cannot work. If someone is frightened of what the government, their employer or their owner will do, they can hardly be expected to respond to strangers. Or, if they do, they cannot be expected to reveal the truth. Companies do not deliberately set out to use violence, slavery or to abuse children as part of their strategy. In common with many chocolate manufacturers, Ben & Jerry’s, the maker of ethical ice cream, did not appear to know in early 2001 that slavery was involved in the production of chocolate used in its products.1 A globalised market is not the same as a perfect free market, in which full information about products is available to all market participants. It is actually quite hard to know what the issues are that affect your products. However, this does suggest 1

See www.radicalthought.org.

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that a systematic approach to reviewing all the issues that face a company and its stakeholders could be fruitful and repay the effort. Most approaches to CSR go as far as considering a predefined set of issues or a rather short list of stakeholders to determine what company responsibilities are. And very often the issues or stakeholders are prioritised in a counter-intuitive way. Perhaps the most pressing need is to extend the concept of stakeholder. The World Business Council for Sustainable Development has defined CSR as ‘the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life’ (Holliday et al. 2002: 103). It is not obvious that this will entail working with the supply chain or chocolate slaves. A commonly used wider definition of stakeholder is ‘any person, group or organisation that affects or is affected by an organisation’. But an actual willingness to extend responsibility is necessary, not just a definition. Each company must examine its stakeholder relationships to determine whether it is appropriate to respond to issues such as slavery. Yet, of course, while companies must be part of the solution to such problems, they cannot be the solution on their own. Organisations of many kinds, particularly governments, must work together to solve the problem. Social auditing, or any tool of CSR, should be implemented wholeheartedly. If CSR is the corporate discipline of compassion, then poor implementation is a manifestation of mean-spiritedness. Surprisingly, it is often hard to discover exactly who a company thinks its stakeholders are or how it has identified them. Many social reports, for example, cover only a selection of the stakeholders that a company obviously has. No tool can be effective if you do not use it properly.

An aftertaste Perhaps ironically, love in a time of chocolate looks very different from the cosy, melt-in-the-mouth world of chocolate box seduction. In July 2002, the International Cocoa Initiative was established to work systematically towards a verifiable system for monitoring chocolate production that will exclude the worst forms of labour abuse. This brings together NGOs, companies and labour organisations to address these issues. Cadbury’s supports it.

References Holliday, C.O., Jr, S. Schmidheiny and P. Watts (2002) Walking the Talk: The Business Case for Sustainable Development (Sheffield, UK: Greenleaf Publishing). Raghavan, S., and S. Chatterjee (2001) ‘Slaves feed world’s taste for chocolate’, Knight Ridder News Service, June 2001.

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The International Cocoa Initiative will: ●

Support field projects and act as a clearinghouse for best practices that help eliminate abusive child and forced labour in the growing of cocoa

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Develop a joint action programme of research, information exchange and action against abusive child and forced labour practices through the enforcement of internationally recognised standards in the growing of cocoa

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Help determine the most appropriate, practical and independent means of monitoring and public reporting in compliance with these labour standards

The stakeholders who participated in the establishment of the International Cocoa Initiative include: ●

Association of the Chocolate, Biscuit and Confectionery Industries (CAOBISCO) of the EU

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Child Labour Coalition

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Chocolate Manufacturers’ Association (CMA) of the USA and the National Confectioners’ Association

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Cocoa Merchants’ Association of America (CMAA)

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Confectionery Manufacturers’ Association of Canada (CMAC)

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European Cocoa Association (ECA)

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Federation of Cocoa Commerce Ltd (FCC)

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Free the Slaves

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Global March Against Child Labour

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International Confectionery Association (ICA)

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International Labour Organisation (ILO)

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International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers’ Associations (IUF)

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National Consumers League

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World Cocoa Foundation (WCF)

I am a Director of Just Assurance, an organisation dedicated to social auditing. In addition I advise on reporting and transparency for companies and other organisations and also teach and research on sustainability. I have been Head of Accountability at the New Economics Foundation and prior to that was a management consultant at Coopers & Lybrand. I am currently also Professor of Accountability and Corporate Social Responsibility at Middlesex University Business School, UK. I have been very involved in the development of the Global Reporting Initiative Guidelines and also serve on the Council of AccountAbility. [email protected] www.henriques.co.uk

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a a Trouble at the Hard Rock Café Diamonds and corporate social responsibility Ian Smillie and Ralph Hazleton Partnership Africa Canada

Corporate social responsibility and the diamond industry are two concepts—if one can think of the diamond industry as a concept—that have historically related to one another only tangentially. This is, in part, because the diamond industry itself in reality is little more than a concept. At one end of the scale is the Tiffany showroom, where the diamond is a glittering symbol: of love, of purity, of wealth, of eternity—here diamonds are forever. At the other end of the scale are diamonds that come and go with lightning speed. In Africa where 75% of the world’s diamonds (by value) are mined, the industry is characterised on the one hand by a few gigantic, well-fenced holes in the ground, and on the other by hundreds of thousands of diggers, known variously as garimpeiros in Angola and Brazil, creuseurs in the Congo and Central African Republic, and san-san boys in Sierra Leone. The most productive and profitable diamond mines in the world are those in Botswana, where the diamond mining giant, De Beers, in a 50–50 partnership with the Government of Botswana, digs straight down into volcanic kimberlite pipes and pulls up huge amounts of sparkling stones—almost 25 million carats in 2000—producing a gross profit for the government-owned Debswana of US$1.67 billion, and as much or more for De Beers. This is a capital-intensive, high-technology operation which employs barely 6,000 people, less than 3% of the formal labour force. Over the years, however, many of Africa’s kimberlite pipes have been eroded by millions of rainy seasons, and the diamonds they contained have been washed away by countless rivers whose course has altered and changed, and changed again. The result is alluvial diamonds, often scattered over hundreds of square miles—along riverbeds, in valleys where rivers once flowed, on beaches and on the seabed where rivers eventually deposited them. Alluvial diamonds have been discovered in many countries—the Democratic Republic of Congo, Sierra Leone, South Africa, Namibia and Angola. Unlike diamonds found in kimberlite, which

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require massive investment, alluvial diamonds are close to the surface, often available to individual diggers with little more than shovels, sieves and a source of water for straining gravel. This is where hundreds of thousands of garimpeiros, creuseurs and san-san boys dig, often illegally, always under unhealthy, unsafe and frequently unprofitable circumstances. Here the industry is essentially unregulated, unwatched and nameless. Here, the concept of corporate social responsibility exists only in its absence. Corporations as conceived in industrialised countries, even governments, barely exist in the diamond fields. The middlemen to whom the diggers sell pass the diamonds on to other middlemen and still others. If and when the diamonds are noticed by government, they may be taxed, but few of the benefits filter back to those who dig, or to those on whose land the diamonds were found.

Prosperity diamonds A report written for Oxfam America by political scientist Michael Ross (2001) examines the correlation between poverty and the oil, gas and mineral extraction industries in developing countries. The report finds that oil and mineral dependence are strongly associated with bad conditions for the poor. Overall living standards are exceptionally low, given per capita income levels. Higher standards of mineral dependence are strongly correlated with higher poverty rates and income inequality. Oil- and mineral-dependent states tend also to suffer from unusually high rates of corruption, authoritarian government, military spending and government ineffectiveness and civil war. These findings certainly pertain to the states afflicted by today’s diamond wars, which will be discussed below. But do they hold in Botswana, Namibia and South Africa, where there are no ‘conflict’ diamonds, where the diamond industry speaks proudly of ‘prosperity diamonds’, and where the industry operates largely within the formal economy? In its research on diamonds, the Canadian NGO, Partnership Africa Canada (PAC), set out to discover the extent to which diamonds contribute to development in countries at peace. The answer is important, because concern about possible economic damage to these countries had caused NGOs campaigning against conflict diamonds to be less aggressive where consumers are concerned, than might otherwise have been the case. The answer is ambiguous. Diamonds are extremely important to the economy of Botswana, less so to Namibia, and much less so to South Africa. Because the population of Botswana is small and government revenue—mainly from diamonds—is high, some statistics there take on different proportions. For example, Botswana spends less as a percentage of its gross domestic product (GDP) on healthcare than Senegal. But, because the GDP–population ratios of the two countries are so different, the actual per capita expenditure in Botswana is more than four times higher than in Senegal. That said, overall development statistics tell a mixed story. While most healthrelated statistics in the region are better than elsewhere on the continent, adult

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literacy is not appreciably better, and overall poverty rates in Botswana and Namibia are actually higher than in many other African countries. The only place where diamonds might be considered a significant plus or minus factor in development statistics is Botswana, where the diamond contribution to GDP, total exports and tax revenue is high. Diamonds have allowed Botswana to build its infrastructure and to provide better facilities for its people. Poverty declined in Botswana by 12% between 1985 and 1994. But diamonds have so far led to ‘prosperity’ for a limited number. Over 60% of the population still live on less than $2 a day, a figure that looks odd compared with the huge volume of diamonds that leaves the country in a year. Another way of looking at it is to compare the country’s 1999 gross national product (GNP) per capita of $3,240 with the fact that more than 60% of the people live on less than $730 a year. With the exception of Botswana, diamonds contribute little to total government revenue in the region, and their contribution to employment in all three countries is small and declining. This means that diamonds cannot be identified very directly either with good development or its absence. The characteristics of the diamond industry and its socioeconomic role in the societies of Botswana, Namibia and South Africa have been defined by each country’s unique history. The fact that South Africa was colonised from within and did not become ‘independent’ until 1994, helps to explain a tax structure that favours the industry, why there is such a dearth of black-owned mining enterprises, and why black communities have received little benefit from diamond mining. The history helps explain South Africa’s new Diamond Act and the Minerals Development Act. Until recently, mining legislation has been an anachronism, tied to a past that favoured a minority, exploited the majority and resulted in policies that were the antithesis of what is understood by the term ‘social and economic development’. The diamond industry in Namibia is also tied to history. Nothing demonstrates this more clearly than the fact that it took until 2000 to create a Diamond Act that was appropriately detached from the private sector. The opening of the first Namibian diamond cutting and polishing plant in 2000 was not just the development of a new manufacturing initiative; it represented a break with a past that had been based only on the extraction of resources and the adding of value elsewhere. Until 1994, Namibia was at the receiving end of classic, 19th-century capitalism, with a strong overlay of apartheid. A PAC Report (Smillie et al. 2000) said that De Beers and its partner conglomerate, Anglo-American, had to accept much of the responsibility for the lack of meaningful social and economic development in both South Africa and Namibia. They helped to perfect the contract labour system, participated in holding back social development, and subjected labour to inhumane living conditions. The Oppenheimer family, which has controlled De Beers since the 1920s, were consistent critics of apartheid, and Harry Oppenheimer sat as an opposition Member of the South African Parliament for many years. But De Beers, if nothing else, has historically been very successful in its pragmatism. In reaction to the PAC Report, De Beers wrote a lengthy rebuttal, detailing its positive labour record in South Africa and listing the many schools and colleges established through its charitable De Beers Fund. When Harry Oppenheimer,

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father of current De Beers Chairman Nicky Oppenheimer, died in 2000, Nelson Mandela said: The preamble to our founding constitution speaks of honouring those who suffered for justice and freedom in our country and respecting those who have worked to build and develop our country. Chief among the latter must stand Harry Oppenheimer and his family . . . His support for democratic and philanthropic causes was in my experience always without hesitation and reserve.1

President Thabo Mbeki recalled that Harry Oppenheimer ‘supported and funded the organisations that sought to end white supremacy . . . Abroad, all too often, he was ignorantly damned for his association with South Africa’s apartheid policies.’2 It is hard to know where to come down on this debate. In the historical context of the day, De Beers was probably well ahead of the South African corporate sector on direct corporate social responsibility. While labour conditions at its mines in the middle of the last century may have been poor, they were better at De Beers mines than elsewhere. Wages, too, were better than elsewhere. And while its opposition to apartheid may in retrospect today seem tepid, it has to be seen in historical context. De Beers did oppose apartheid openly, in a country where this was rarely done within the corporate sector. In basic CSR terms—labour, environment, contributions to the community—De Beers today actually looks like a model citizen in the countries where it is a prominent player.3 De Beers, of course, attracts attention. Because it is big, and because it dominates much of the diamond industry, it is a lightning rod for activists. Diamonds, however, are mined by many companies; they are bought and sold by many companies. And many of these companies are not public. Few, in fact, of the hundreds of companies that buy and sell rough diamonds are public-traded companies. Little, and often nothing, is known about their labour and environmental practices, or about whether they give anything at all back to society. There is a darker side to the diamond business. In its efforts to control the industry, De Beers historically took every step it could to thwart its competitors. Undoubtedly such actions would have had an immediate impact—sometimes positive, sometimes negative—on workers, on national governments and on society. During the 1970s, for example, there was glut of diamonds on the world market, and De Beers was building up a stockpile that earned it no interest whatsoever. The company’s geologists in various countries were instructed not to find new sources of diamonds. And, if a country attempted to step outside the De Beers cartel, it could find the punishment swift and severe. In 1981, Zaire’s President, Mobutu Sese Seko, attempted to find an alternative buying source to De 1 Letter from Nicky Oppenheimer to PAC, undated, c. 1 June 2002. 2 Ibid. 3 As this chapter was being written, De Beers was under attack from a British NGO, Survival, for its alleged part in the eviction by the government of Botswana of several hundred Basarawa people from land that was said to be diamondiferous. While De Beers never threatened action against NGOs campaigning on conflict diamonds, it did issue public warnings on the Basarawa issue, claiming that the NGO charges were completely unfounded.

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Beers, hoping to get a better price for diamonds. He invited three Belgian dealers to consider a new arrangement that would sidestep De Beers. De Beers retaliated by dumping Zaire-grade diamonds on the open market, and within three months the price had dropped by two-thirds. The Belgian dealers were cut out, and Zaire had to return to the De Beers fold. While few tears may be shed for President Mobutu’s efforts to make more money—mostly for himself—or for three Antwerp dealers attempting to muscle in on De Beers territory, the broader implications for ‘prosperity diamonds’ are clear enough. The diamond industry is as cut-throat as any other, if not more, and the primacy of prices, profit and control will always top the corporate agenda. More important, as will be seen in the next section, CSR initiatives dealing with labour and the environment are no guarantee against conflict. Without risk management that goes beyond profit maximisation, companies may well contribute to conflict.

Conflict diamonds Between the mines and diamond pits of Africa and the showrooms of Cartier, Tiffany and Harry Winston, there are other diamond worlds. Diamonds, for example, have always lent themselves to theft and smuggling, and they have served a wide variety of interests as a ready alternative to both soft and hard currency. They are small; they have a high value-to-weight ratio; they hold their price; and they are completely unregulated. Most governments gave up long ago trying to tax diamond exports and imports in any meaningful way because diamonds have been virtually impossible to trace and to police. The value of gem diamonds is completely artificial. Diamonds, once rare, are now almost common. The world’s diamond production multiplied ten times in the decade following the South African discoveries of the 1860s, and has multiplied 40 times again since then. Over 500 tons of diamonds have been mined altogether, one-third of them in the 1990s (Krajick 2001: 13). The value of diamonds, established when they were rare, has been sustained by the influence exercised over the worldwide industry by De Beers. De Beers established its control in the 19th century, and has never let go. Today, about 55% of global diamond production goes through De Beers offices—from mines owned, or jointly owned, by De Beers, or via direct arrangements with mining firms such as BHP-Billiton, which sells 35% of its Canadian mine production to De Beers. Traditionally, De Beers has mopped up loose supplies and withheld diamonds from the market during recessions and whenever prices were set to fall. It maintains its control and its prices in other ways. It sells only to 120 selected buyers, or ‘sightholders’, on a preferential basis.4 These sightholders are made offers that cannot be refused. De Beers also creates demand. It spends $200 million a year on advertising, and it expects its sightholders to advertise as well. And it cultivates new markets. Japan has in recent years provided a lucrative outlet for the growing supply. 4

In June 2003, De Beers cut the number of sightholders in half.

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The diamond trade is secretive, perhaps more secretive than any other. Multimillion-dollar deals are made on a handshake, in closely guarded rooms and in crowded diamond bourses, where men gather with scales, tweezers and loupes. Until 2003, tens of millions of dollars’ worth of diamonds were sent across borders and across continents on approval, with little or no paperwork. Some of this is traditional—a way of doing business in a trade that is heavily populated by small (and a few very large) family-run businesses, and by people who have known each other for generations. Some of it has to do with a trading and cutting industry heavily populated by Jewish families who, for generations, were persecuted and driven from one place to another, and for whom diamonds themselves—rather than the industry—were often a primary form of security. Some of it has to do with security and the transportation of high-value goods from one place to another. But there have been other reasons for secrets. In order to keep its control over the market, De Beers had to deal in the 1950s and onward with a wide array of strange and incompatible bedfellows. Apartheid South Africa, the home of De Beers, was an inappropriate partner for newly independent diamond-producing nations elsewhere in Africa—Congo, Sierra Leone and Guinea. And it was an even more inappropriate partner for the Soviet Union after its discovery of diamonds in the 1950s. In addition, having dealt with the Portuguese colonists of Angola until the mid-1970s, and the apartheid regime of south-west Africa until the late 1980s, De Beers had some fancy and confidential footwork to do in making friends with the new management. It did all of this very successfully, because it avoided the spotlight of public attention. As some African diamond-producing countries slipped into corruption and chaos during the 1960s and 1970s, diamond buyers remained on the scene but began to conduct their business in new ways. Formal diamond production in Mobutu’s Zaire, for example, fell from 18 million carats in 1961 to 6.5 million carats by the late 1990s. The drop reflected not so much a fall in actual production, as a drop in what was being recorded in the national accounts. The difference, and a lot of informal production as well, was being siphoned off by Mobutu and his cronies, at last free of De Beers after the mid-1980s. And as the government’s hold on institutions slipped, other players became involved. The same was true of Sierra Leone where the 2 million carats produced officially in 1970 had fallen to only 48,000 carats by 1988, courtesy of one of the most corrupt regimes on the continent’s west coast. There was no drop, however, in the overall supply of diamonds reaching the world’s trading centres, of which Antwerp had become the most important. All that was required was a degree of secrecy, and few questions would be asked when the diamonds were declared on arrival at Belgian customs. Between the 1950s and the mid-1980s, the diamond scene in Africa changed. A significant proportion of the production of countries such as the Congo, Sierra Leone, Angola and others was being hidden under a veil of secrecy, which cloaked a vast network of corruption, theft and smuggling. Diamonds were also being used for money laundering—as a means of moving cash in cashless societies, or in economies where currency no longer had value. The stage was thus set for a new phenomenon, one that came to be known as ‘conflict diamonds’ or ‘blood diamonds’. Diamonds had been used to pay for war efforts earlier. The Portuguese fuelled their anti-independence wars in Africa with

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Angolan diamonds. The Amal faction in Lebanon’s civil war was funded in part by subscriptions raised among Sierra Leone’s diamond-trading Lebanese community. But it was the Angolan rebel movement, União Nacional para la Independência Total de Angola (UNITA), that developed the concept with a vengeance, taking it to spectacular heights in the 1980s and 1990s. Between 1992 and 1998, UNITA controlled between 60 and 70% of Angola’s diamond production, generating an estimated $3.7 billion to pay for its war effort (Global Witness 1998: 3). Half a million Angolans died, many more were displaced, their lives ruined. Charles Taylor, the Liberian warlord, financed the early stages of his rampage to power by selling timber. The market for tropical hardwood is lucrative, but diamonds would be even more lucrative. Taylor backed Sierra Leone’s fledgling Revolutionary United Front (RUF), giving it a base, weapons, and an outlet for whatever it could steal in Sierra Leone. The RUF hallmark was chopping the hands and feet off civilians, often small children. As a terror technique it was extremely effective in clearing the alluvial diamond fields, providing the RUF and Taylor with a highly rewarding money machine. In the Democratic Republic of Congo (DRC), another kind of conflict diamond was being invented. The conflict there was a silent conflict, fuelled by greed, apathy and corruption at the top, and sustained by the rapacious appetite of foreign firms for anything the Congo had to offer, including diamonds. When Mobutu’s regime collapsed under the weight of its own depravity, it was succeeded by something that was little better. Laurent Kabila’s foreign allies, however, fell to squabbling over the spoils, and, by the turn of the century, the DRC barely existed as a country, the armies of Zimbabwe, Uganda and Rwanda picking over the spoils and exporting copper, cobalt, coltan and diamonds back to their capitals. Conflict diamonds were first brought to public attention by the British NGO, Global Witness, in a December 1998 report on Angola (Global Witness 1998). A year later PAC produced a larger report on Sierra Leone (Smillie et al. 2000). By then, the United Nations Security Council had become aware of the diamond issue and had appointed an Expert Panel to study the problem. Its report, issued in March 2000, added to the weight of the two NGO reports. The conflict diamond issue was now in the public domain. The diamond industry at first denied the problem, saying it had nothing to do with conflict diamonds. This was, if anything, it said, just an issue of African corruption. NGOs were told that they should focus on the arms trade, or oil, or something else. Global Witness was accused of being in league with De Beers, while PAC was accused in Belgium of being a Canadian government stooge, out to damage Antwerp as Canadian diamonds began to come on stream. Some governments were understandably defensive, while others worried that their diamond industries were about to suffer something like the fur boycott of earlier years. Once engaged on the issue, the media thought so too, developing a considerable appetite for the story, with conflict diamonds becoming an item on virtually every major television news magazine from Melbourne and Tokyo, to New York and London. In the middle of 2000, the diamond industry changed tactics, moving from denial to engagement. This happened, in part, because of growing media attention and the sticking power of NGOs. It also reflected a growing recognition that there

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A businessman, his bodyguard and his lawyer discuss a diamond project in Sierra Leone. The bodyguard recalls the conversation: ‘It was early in March 1997, and I was walking through an impressive shopping mall located in downtown Vancouver, Canada. It was midday and the mall was busy with the office crowd rushing about on lunch-hour errands. I was accompanying my client, a Mr Rakesh Saxena, who had just wrapped up a long lunchhour meeting at the hotel restaurant. Walking with us on this day was Bob L., one of Saxena’s many lawyers. As we wove through the daytime crowds, I kept station at my client’s right shoulder and let my eyes wander over the people as they passed. As Saxena’s bodyguard and security adviser, that was what I was paid for. ‘As we descended an escalator on our way to the car park, Saxena turned to me and said, “Jim, I want to go after a mining project in Sierra Leone. We’ll need a big security force, five hundred men, vehicles, helicopters . . . everything.” ‘ “You’ll want to set up a new company to handle the project,” he continued, “Bob here will go over the details with you,” motioning to the young and eager lawyer at his left shoulder. ‘Around us, the people of Vancouver went on about their daily tasks—shopping, browsing, and sipping gourmet coffees—entirely unaware that a major international mercenary contract with far-reaching consequences for several nations had just begun within their midst. In the days ahead a major war would result from our conversation, governments would be toppled, and prestigious international figures would face condemnation and criticism around the globe.’

Box 13.1 Dirty business Source: Davis 2000: 1-2

actually was a problem, and that the industry had to take some responsibility for it. In March 2000, Martin Rapaport, an outspoken American diamond dealer, visited Sierra Leone. He was not only appalled at what he saw, he posted the PAC report, The Heart of the Matter (Smillie et al. 2000), on his website5 and wrote a widely circulated article entitled ‘Guilt Trip’ (Rapaport 2000). Among other things, he observed that: Hundreds of millions of dollars of Sierra Leone diamonds are being traded on the world markets without any benefit going to the government or people of Sierra Leone. The real problem facing Sierra Leone is not merely how to share diamond resources among warring factions, but how to stop the illegal diamond industry from stealing the country’s resources. But it goes beyond that. The bastards are not just stealing Sierra Leone’s diamonds, they are trading them for guns. Guns which are used to kill people to keep the war going . . . The real challenge facing Sierra Leone and the world diamond trade, is how to stop this horrific murderous cycle of illegal diamond activity (Rapaport 2000).

5

www.diamonds.net

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At the triennial World Diamond Congress held in Antwerp that July, most of the discussion was about conflict diamonds. The outcome was the creation of a World Diamond Council to deal with the matter from an industry perspective. Governments, too, had begun to act. The government of South Africa, concerned that the issue might get out of hand and affect its own diamond industry, called a meeting of interested governments, industry leaders and NGOs to discuss what might be done. This was of special interest to Botswana and Namibia, both more dependent on diamonds for tax revenue and job creation than South Africa.6 The meeting was held in Kimberley, the town where De Beers got its start. Government participation at the first meeting was limited—governments from the Southern Africa Development Co-ordination Conference (SADCC) region,7 Britain, Belgium, Canada, the USA and a few others concerned either about their diamond industries or about the conflicts that were being fuelled by diamonds. This became the first in a series that would be held over the next two years, gradually coming to be known as the ‘Kimberley Process’.

The Kimberley Process In all, there were a dozen meetings of the Kimberley Process in Africa, Europe and Canada before the preparatory round finally ended at Interlaken in November 2002.8 At the outset, there was no thought of such a long process, but with each meeting, the issues became more complex, and more countries had to be brought into the process. The challenges were, in fact, enormous. If any kind of system was to be developed, it had to be comprehensive, bringing in all the major diamondproducing countries, as well as those that trade, cut and polish diamonds. Russia produces 20% of the world’s diamonds, and could not be left out. Smaller producers include Ghana, the Central African Republic, Tanzania, China, Venezuela, Brazil and Guyana. By weight, Australia is perhaps the world’s biggest producer, and, although the bulk of its production is industrial diamonds, at 4% of global production a year by value it is an important player. Switzerland was a major transit point for diamonds from Africa. Hundreds of millions of dollars’ worth of diamonds passed briefly through free-trade areas at Zurich and Geneva airports each year, emerging as ‘Swiss’ diamonds—conveniently anonymous as they moved on to London, Antwerp and Tel Aviv. In addition to Switzerland, a large volume of rough diamonds also flows through London— mainly De Beers goods on their way to other places such as Antwerp, where more than 80% of all rough diamonds stop for sorting, resale and export. Dubai and Hong Kong are becoming transit stops as well, with sudden large increases in traffic 6 7 8

For a discussion of diamonds in Southern Africa, see Hazleton 2002. SADDC countries are Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, Swaziland, Tanzania, Zambia and Zimbabwe. Most of the meetings were open to governments, the industry and NGOs, although one was a purely intergovernmental meeting, and one or two were referred to as ‘technical meetings’. In essence, however, there were 12 in the series.

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in recent years. Hong Kong exported four times more rough diamonds to Belgium in 2001 than it did in 1998. Dubai’s rough diamond exports to Belgium increased from $4.2 million in 1998 to $149.5 million in 2001. And then there were the African countries with no production of their own, that had mysteriously become diamond exporters: Liberia, Gambia, Uganda, Rwanda, Zambia. One in this category, the Republic of the Congo, had a wildly fluctuating diamond export trade, related directly to the fortunes of the diamond industries in Angola and the DRC. In 1999, Belgium imported $14.4 million in rough diamonds from Brazzaville; in 2001 it imported a quarter of a billion dollars’ worth. The world’s most prolific cutting and polishing industry is in India, where more than half of all diamonds, by value, are turned from rough into polished gems. One-quarter of all rough diamonds, by value, find their way to Israel, and there are smaller cutting and polishing operations in Belgium, Thailand, South Africa and the USA. Fledgling industries also exist in Botswana, Namibia, Canada and a dozen other countries. Many of the statistics mentioned above relate to the trade between various countries and Belgium. This is partly because, as noted, more than 80% of the world’s rough diamonds pass through Antwerp in a year. But the main reason is that Belgium has, until recently, kept and published very good statistics on its diamond trade. Most other countries have not. In addition, there is little reliable information on what a particular mining country is capable of producing in a year, so anomalies between actual production and exports may be difficult to track. Liberia, for example, was stated as the origin of an astonishing $2.2 billion in rough diamonds arriving in Antwerp between 1994 and 1999. Until this ‘anomaly’ was pointed out by PAC, however, the industry appeared not to notice. (The UN Security Council finally banned all trade in ‘Liberian’ diamonds 18 months later, in May 2001.) There is a convenient subterfuge in the diamond trade, which distinguishes between country of origin and country of provenance. ‘Country of origin’ means the country in which a diamond was mined. ‘Country of provenance’ means the country from which it was last shipped. Customs departments are usually only interested in the latter, which means that origin can be obscured simply by moving diamonds through a third country such as Liberia or Dubai. India says that it imports no diamonds directly from Africa, so it is not receiving any conflict diamonds. Given that India buys more than half the world’s annual diamond production for cutting and polishing, it is inconceivable that a high proportion would not originate in Africa, and that some would not be conflict diamonds. Getting beyond these fictions was a primary challenge in early Kimberley Process meetings. At each meeting, new countries arrived at the table, and old arguments had to be rehearsed again. The process was given a boost in December 2000 by the adoption of a resolution in the UN General Assembly (UNGA) on the role of diamonds in fuelling conflict. The resolution acknowledged the work done to that point by the Kimberley Process, by various individual countries, as well as by the diamond industry and civil society. It called for measures to address the problem of conflict diamonds,

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emphasising that these measures should be effective and pragmatic, consistent with international law, including relevant trade provisions and commitments, and should not impede the current legitimate trade in diamonds or impose an undue burden on governments or industry, particularly smaller producers, and not hinder the development of the diamond industry.9

It further stated that elements of such measures should: ● Be based primarily on national certification schemes ● Ensure that national practices meet international agreed minimum stan-

dards ● Secure the widest possible participation ● Include appropriate arrangements to help ensure compliance, acting

with respect for the sovereignty of states ● Be transparent

The UNGA also asked for a progress report a year hence. The UNGA resolution gave the Kimberley Process added legitimacy, but it would take a further six months of debate before anything concrete began to emerge. Issues of contention included: the cost of a regulatory scheme and who might pay for it; commercial confidentiality in the matter of statistics; ensuring WTO compatibility; co-ordination; membership criteria for the scheme; and the need for independent monitoring. On this last issue, the debate was long and heated. In the end, however, while all other major issues were resolved, the NGO argument for regular independent monitoring was defeated. The final text essentially left monitoring to the discretion of the entire membership of the Kimberley Process at plenary meetings, to be triggered only by extraordinary need and carried out in ‘strict confidentiality’: Participants at Plenary meetings, upon recommendation by the Chair, can decide on additional verification measures . . . These could include . . . review missions by other Participants or their representatives where there are credible indications of significant non-compliance with the Certification scheme . . . review missions are to be conducted in an analytical, expert and impartial manner with the consent of the Participant concerned. The size, composition, terms of reference and time-frame of these mission should be based on the circumstances and be established by the Chair with the consent of the Participant concerned and in consultation with all Participants.10

The wording, in fact, is so full of caveats, hesitancy and the need for full plenary approval of all details that it is virtually meaningless. As the assembled governments agreed on this wording, there were already ‘credible indications’ that a wide variety of countries would be in ‘significant non-compliance with the inter9 10

UN General Assembly Resolution, 1 December 2000, A/RES/55/56.

‘Kimberley Process Certification Scheme’, 5 November 2002, section VI, paragraphs 13 and 14.

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national certification scheme’ if permitted to join. Membership is open to ‘all applicants willing and able to fulfil the requirements of the scheme’ but there is no mechanism—short of a full plenary debate on ‘credible indications of [possible] significant non-compliance’ to determine whether an applicant actually is able ‘to fulfil the requirements of the scheme’. There is a remarkably circular lack of logic in the provisions. The US General Accounting Office, which is the investigative arm of the US Congress, reviewed the plan and found it seriously deficient in the area of monitoring (General Accounting Office 2002: 21-22): Even acknowledging sovereignty and data sensitivity constraints, the Kimberley Process scheme’s monitoring mechanisms still lack rigor . . . The scheme risks the appearance of control while still allowing conflict diamonds to enter the legitimate diamond trade and, as a result, continue to fuel conflict. NGO participants in the Kimberley Process vowed to keep up pressure on the issue until regular, independent monitoring of all national control mechanisms had been agreed by all countries participating in the Kimberley Process. One NGO target was the G8, which two years earlier at its 2000 meeting in Okinawa had stated in its final communiqué, inter alia, that ‘we have agreed to . . . implement measures to prevent conflict, including by addressing the issue of illicit trade in diamonds’. Considerable NGO effort went into lobbying the G8 on the monitoring issue, prior to its June 2002 meeting at Kananaskis in Canada. Despite early assurances that the G8 would not address such a low-level issue, its G8 Africa Action Plan actually did:

We are determined to make conflict prevention and resolution a top priority, and therefore we commit to . . . working with African governments, civil society and others to address the linkage between armed conflict and the exploitation of natural resources—including by . . . supporting voluntary control efforts such as the Kimberley Process for diamonds, and . . . working to ensure better accountability and greater transparency with respect to those involved in the import or export of Africa’s natural resources from areas of conflict (Kananaskis Summit 2002: 4).

This provided, if nothing else, a signal that the issue remained alive, important and unresolved. In the meantime, however, the Kimberley Process arrangements actually nullify these resolutions on monitoring and transparency. In fact the Kimberley Process wording on transparency is as follows: ‘Participants and observers should make every effort to observe strict confidentiality regarding the issue and the discussions relating to any compliance matter.’11

11

‘Kimberley Process Certification Scheme’, 5 November 2002, section VI, paragraph 15.

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Industry undertakings There are currently two codes or sets of guidelines internal to the diamond industry, both created after the issue of conflict diamonds came to public attention. De Beers developed a set of principles through its sales and marketing arm, the Diamond Trading Company (DTC). The DTC Diamond Best Practice Principles are designed to ensure that best practice is observed in the gem diamond industry.12 The DTC states a clear commitment to exclude from the diamond industry: ● The trading of rough diamonds from areas where this would encourage or

support conflict and human suffering ● The use of child labour ● Practices that intentionally or recklessly endanger the health or welfare of

individuals The Best Practice Principles also seek to encourage: ● The provision of proper working conditions, including health, safety and

well-being of workers ● Respect for the dignity of individuals and assurances of their fair treat-

ment ● Full compliance with international best practices and the related regu-

latory frameworks with respect to the environment The DTC Best Practice Principles attempt to combine standard CSR principles with an element of conflict prevention, and they reach beyond De Beers in the sense that adherence to the Principles is a condition of supplying De Beers sightholders with rough diamonds. Gary Ralfe, De Beers Managing Director, said, ‘Let me repeat what we in the industry have said many times before. The diamond industry has clear moral commercial reasons for wanting to rid the world of the trade in conflict diamonds.’13 The second set of guiding principles was drawn up by the World Diamond Council (WDC). As noted above, the WDC was formed in July 2000 at a joint meeting of the World Federation of Diamond Bourses (WFDB) and the International Diamond Manufacturers’ Association (IDMA). In a joint resolution the WFDB and the IDMA stated that: Amid growing concern over human rights violations and atrocities committed against innocent victims in diamond producing countries of war-torn Africa, the WDFB and the IDMA passed a resolution at their Antwerp meeting in July 2000, creating the WDC. And, that the ultimate mandate for the WDC is the development, implementation and oversight of a tracking system for the export and import of rough diamonds to prevent the exploitation of diamonds for illicit pur12 13

For the complete DTC Best Practice Principles see the De Beers website: www. debeersgroup.com. www.debeersgroup.com/hotTopics/cdIntroduction.asp

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Something To Believe In poses such as war and inhumane acts (World Diamond Council 2002: 1).

Within the WDC Joint Resolution are nine ‘proposals’, most of which were subsequently incorporated into the Kimberley Process agreement. However, several go beyond the Kimberley Process and are important for the present discussion. Principle number 5 states: ‘Each and every diamond organisation adopts an ethical code of conduct as regards conflict diamonds, labour practices and good business practices in general, the failure to adhere to which would lead to expulsion from WFDB, IDMA and all other relevant organisations.’ WDC Principle number 6 states, ‘We enlist the support of the banks, insurance, shipping companies and other pertinent providers of goods and services to our industry to expose and cease business relations with any entity that is found knowingly to violate these principles.’ Most important is Principle number 9, stating ‘that compliance with the above principles be monitored and controlled by an International Diamond Council comprised of producers, manufacturers, traders, governments and relevant international organisations. That this process be fully verified and audited’, and that ‘a joint committee of both organisations has been formed in order to ensure rapid implementation of the above [all WDC Principles]’ (WDC 2002: 3-4). These provisions proposed a sweeping change in the diamond industry. Two years later, the WDC stated that all of the provisions were in place,14 although the drafting process was still going on at the end of 2002. During the Kimberley Process, the WDC had offered to establish a voluntary system of industry selfregulation: ‘a system of warranties underpinned through verification by independent auditors of individual companies and supported by internal penalties set by industry, which will help to facilitate the full traceability of rough diamond transactions by government authorities’.15 The offer of an auditable paper trail, as rough diamonds move from dealer to dealer, made it possible for several governments, notably the USA, Britain and Canada, to agree to the overall Kimberley scheme. These countries and others feared the complexity and cost of a control mechanism managed exclusively by government; an auditable, industry-managed system made considerably more sense. There are caveats, however. The WDC does not represent the entire diamond industry. Many if not most junior mining companies and most of the fly-by-night middlemen who buy and sell illicit diamonds are not members. And what the WDC proposed was a voluntary mechanism. In other words, its members, and certainly those companies that are not its members, will be under no obligation to join the warranty programme. As governments worked through 2002 on their own responsibilities for the issuance of certificates of origin, most WDC members remained ignorant of what might (or might not) lie ahead for them in terms of an auditable paper trail, and details of the warranty scheme remained vague. Further, although diamond bourses around the world had threatened to expel members who traded in conflict diamonds, nothing happened in the two years after such pronounce-

14 15

Communication to authors from Cecilia Gardner, General Council, WDC, 19 June 2002. ‘Kimberley Process Certification Scheme’, 5 November 2002, section IV.

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ments were made. Companies named in UN Expert Panel reports continued to trade, purportedly because no law could be found that they had broken. In October 2001, the Angola Expert Panel reported on continued massive smuggling of UNITA diamonds out of the country: To date, not a single parcel of illicit Angolan gems has been intercepted anywhere . . . beyond one suspect parcel in Belgium . . . No diamond dealer has claimed to have witnessed Angolan gems being traded on any diamond bourse. These diamonds seem to vanish into thin air after leaving Angola. How is this even possible, given the magnitude of the trade, which is close to the output of Australia or Namibia? Perhaps more importantly, why is it possible for diamonds to vanish?16

As Christian Dietrich put it in a study of the criminalised diamond economy of Central Africa: It is hard to identify more than a handful of diamond dealers arrested anywhere in Europe or North America in the past two years for smuggling diamonds or evading taxes. None has been arrested for breaking United Nations sanctions. Dealers committing these crimes are not spurned by the diamond industry, unlike those who cheat fellow diamantaires or diamond banks—crimes that are taken very seriously by the entire industry. And yet hundreds of millions of dollars worth of diamonds from Central Africa evade borders, taxes and oversight every year on their way to the world’s cutting, polishing and trading centres (Dietrich 2002: 14).

After March 2002, governments worked to ensure that the required regulations, and, if necessary, legislation, would be in place to enable a launch of the Kimberley Process in January 2003. And in November 2002 they came together at Interlaken in Switzerland to review progress and tie up whatever loose ends might remain. There were a few holdouts—Japan and Thailand said they might be ready ‘later’, not seeming to understand that, if they were not in the system, their diamonds would be banned from world trade. Cyprus, Malta and Ukraine said they were working towards compliance as quickly as possible. Most of the other countries present were, they said, ready, willing and able. A few problems remained. The system for gathering and monitoring statistics had still not been worked out, although this was in place by the middle of 2003. Some governments continued to talk about the WTO and their desire to be in full compliance with General Agreement on Tariffs and Trade (GATT) obligations, as though they had considered the GATT just as religiously when it came to steel, softwood lumber or farm subsidies. And the major NGO concern remained regarding the lack of regular independent monitoring of all national control mechanisms.17 16 17

UN Security Council Document S/2001/966, 12 October 2001, paragraph 146. The loose NGO coalition on conflict diamonds was led by the two pioneers, Global

Witness and Partnership Africa Canada. By the end of 2002 it included more than 200 organisations worldwide, with the active participation of both development and human rights NGOs: World Vision, Oxfam, Amnesty International, ActionAid and others. It was the conflict diamond issue that convinced Amnesty International to become involved for the first time in economic issues.

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These issues notwithstanding, several important changes were expected to take place in the diamond world on 1 January 2003. First, several countries that had been laundering diamonds would be forced to stop immediately. These include Gambia, Zambia, Rwanda, Uganda and others. These countries, all entrepôts for conflict diamonds as well as the wider trade in illicit goods, represent millions of dollars’ worth of rough diamonds. Secondly, all Kimberley Process participating governments would have to issue certificates of legitimacy for rough diamonds leaving their borders. Even if there was no clear monitoring process, they would be on record as authenticating their exports. In due course, inspection will come. If it is not formally agreed in the Kimberley Process, it will be done by NGOs, by journalists, and by the Security Council in the form of continued Expert Panels. One way or the other, governments will be obliged to deal with the demand for public scrutiny on their diamond control systems. And, third, diamond shipments that are not accompanied by the proper, standardised Kimberley Process documentation will be refused entry or seized. The diamond industry is relatively small; word travels fast. Many of those who bought conflict diamonds in the past did so out of ignorance or greed. Ignorance will no longer be an excuse. And greed will have to be weighed against possible consequences. Before 2003, there were none. After 1 January, the possibility of losing a million-dollar shipment entirely would have to be weighed against the $20,000 or $30,000 that might be gained by taking the risk.

Conclusions This chapter was written at a time of great change for the diamond industry, at a point where the overall impact of the Kimberley agreement could not be foreseen. A deeply secretive industry, comprising some of the world’s most modern, as well as its most primitive, mining technologies, was facing the first bright lights in its history. A giant, 19th-century-style cartel and diamond bourses rooted in 16thcentury commercial traditions were facing the spotlights of the 21st century. Some parts of the industry, notably the larger mining firms, may well have adopted some of the best CSR standards, although this is by no means widespread in this variegated industry. Most importantly, basic CSR principles—even if applied—have done nothing in large parts of Africa to prevent conflict. In allowing the industry to become infected with illicit diamonds, its captains tacitly condoned a climate that fostered conflict diamonds. This, in turn, brought down the wrath of outraged public opinion and media attention. Other issues, more common to debates about corporate social responsibility—labour standards, environmental considerations, investments in health, education and social welfare—seemed far from the centre of these debates, but, as African civil-society organisations became more involved, these issues too were placed on the table for discussion. The challenge for the diamond industry, and for the governments participating in the Kimberley Process, will be to get beyond the notion of voluntary controls,

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beyond promises, beyond high-sounding principles, and beyond the future conditional tense in their pronouncements. The challenge is to end the corruption, theft and smuggling that created space for conflict diamonds and war in some of the world’s poorest countries. The challenge after that will be to ensure that diamonds, a luxury product consumed mainly by the citizens of wealthy countries, provide jobs, security and development in the much poorer countries where they are mined.

References Davis, J.R. (2000) Fortune’s Warriors (Toronto: Douglas & McIntyre). Dietrich, C. (2002) Hard Currency: The Criminalized Diamond Economy of the Democratic Republic of the Congo and Its Neighbours (Ottawa: Partnership Africa Canada). General Accounting Office (2002) International Trade: Critical Issues Remain in Deterring Conflict Diamond Trade (GAO-02-678; Washington, DC: General Accounting Office, June 2002): 21-22. Global Witness (1998) A Rough Trade: The Role of Diamond Companies and Governments in the Angolan Conflict (London: Global Witness). Hazleton, R. (2002) Diamonds: Forever or for Good? The Economic Impact of Diamonds in Southern Africa (Ottawa: Partnership Africa Canada). Kananaskis Summit (2002) G8 Africa Action Plan (Ottawa: Government of Canada, 27 June 2002). Krajick, K. (2001) Barren Lands (New York: Times Books). Rapaport, M. (2000) ‘Guilt Trip’, Rapaport Diamond Report 23.1 (7 April 2000). Ross, M. (2001) Extractive Industries and the Poor (Washington, DC: Oxfam America). Smillie, I., R. Hazleton and L. Gberie (2000) The Heart of the Matter: Sierra Leone, Diamonds and Human Security (Ottawa: Partnership Africa Canada). WDC (World Diamond Council) (2002) ‘Joint Resolution forming the World Diamond Council’, council.com/aboutwdc.shtml.

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I was a founder of the Canadian NGO, Inter Pares, and a long time ago I was Executive Director of CUSO. I have lived and worked in Sierra Leone, Nigeria and Bangladesh. During 2000 I served on a UN Security Council Panel investigating the links between illicit weapons and the diamond trade in West Africa. Currently I am Research Co-ordinator on Partnership Africa Canada’s ‘Diamonds and Human Security Project’ and participate in the intergovernmental ‘Kimberley Process’ which is developing a global certification system for Ian Smillie rough diamonds. I am also studying the political economy of humanitarian assistance under the auspices of the Humanitarianism and War Project at Tufts University in Boston. Recent books are Patronage or Partnership: Local Capacity Building in Humanitarian Crises (Kumarian Press, 2001) and Managing for Change: Leadership, Strategy and Management in Asian NGOs (with John Hailey; Earthscan Publications, 2001). [email protected]

I hold a PhD in economics and taught in Canadian universities for 14 years. From 1980 through 1995 I worked and lived in Africa as a senior manager of both development and emergency relief efforts. I have worked in most countries of west, east, central and southern Africa including emergency response work in Burundi, Democratic Republic of Congo, Liberia, Sierra Leone, Angola and Mozambique. Most recently I have been a Research Associate on Partnership Africa Canada’s ‘Diamonds and Human Security Project’. I have Ralph Hazleton been awarded the Meritorious Service Medal by the Governor General of Canada for my work with Rwandan refugees in 1994–95. [email protected]

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a a In search of transparency Corporate codes of conduct and women workers in Central America Marina Prieto-Carron School for Policy Studies, University of Bristol; Associate of the New Academy of Business

In recent years, consumers in the ‘North’ have been asking for proof of ethical sourcing and have focused public campaigns on the rights and welfare of workers who supply mainly US brand names and retailers. This demand can be seen as part of a more generalised global trend emphasising corporate social responsibility. Widespread exploitation of workers has been reported by local and international activists and researchers calling on companies to respond. Companies have responded by adopting company codes of conduct and associated monitoring and reporting practices. These codes of conduct are understood here as documents that establish a company’s values and intended performance on matters relating to how it operates in the area of labour rights. However, to date, there is little documented evidence of improvements in working conditions resulting from such workplace codes. A large proportion of workers in Southern workplaces producing for multinational companies are young women, many single mothers with children and other family members to support with their salaries. The views of women workers and women’s organisations tend to be marginalised (CAWN 1999; Bickham Mendez and Köpke 2001; Prieto et al. 2002). It is also the case that the specific concerns of women about workplace practices are absent in the debates and practices around codes (Barrientos et al. 2001; Pearson and Seyfang 2002). We have to listen to them; they are the supposed beneficiaries of the development of codes of conduct. This chapter aims to use the voices of women workers and representatives of their organisations to assess whether codes of conduct can act as mechanisms of corporate governance that can bring benefits to workers. Through my involvement in a London-based women’s organisation, the Central America Women’s Network

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(CAWN), I have been working with women workers and their organisations for the last six years. From this experience I argue that there is little reason to be optimistic when looking from below—that is, from the perspective of women workers and their organisations. Mainly making use of data from a recent research project in Nicaragua with women workers from banana plantations and maquila (garment assembly) factories1 (Prieto and Bendell 2002), the first part will look at some of the problems with transparency that makes codes of conduct ineffective in practice (codes and their monitoring and reporting). I will then compare some practices concerning workplace codes and their monitoring, assessing their level of transparency, and conclude by giving some advice to companies on how to proceed if they are serious in making corporate social responsibility (CSR) claims a reality for workers in the South.

The lack of transparency in codes, monitoring, reporting and implementation I have considered the level of transparency regarding codes of conduct in three interrelated areas of implementation. First, I look at the codes of conduct themselves as written documents and how they are understood by women workers. Second, I consider transparency or openness in terms of the process of monitoring and auditing of workplace conditions. Finally, an assessment of reporting about the entire social auditing process (from, for example, the development of codes, to monitoring and auditing, engagement with workers and how non-compliance is dealt with) will also tell us about the transparency of the codes of conduct.

Codes of conduct: the unknown and the inaccessible Some key issues around the transparency of codes of conduct were reported by women workers in focus groups and interviews conducted in Managua between July and August 2001. First, although most of the codes are available on companies’ web pages, available to all who have access to the Internet and, of course, a good understanding of the English language, the majority of workers had never heard of codes of conduct and had no idea, therefore, whether the company employing them had signed a code. In the few cases where factory workers knew that one or various codes of conduct existed, workers reported that the codes of conduct were pinned up on the wall 1

This chapter partly makes use of research findings from an ongoing collaborative project. Since March 2001, I have been working with co-researcher Jem Bendell in an action research project with women workers employed in factories and banana plantations in Nicaragua. In this work, funded by the UK Department for International Development (DFID), the New Academy of Business has been collaborating with the Central America Women’s Network (CAWN).

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with no explanation of their purpose. Sometimes the codes were only to be found in management offices. ‘A worker normally only goes to the office if she is going to be punished, so how are we going to stop to read the code?’ asked one. When they were in visible places they were difficult to read, and in some factories they were in such a high position on the wall it was impossible to read them. Moreover, some of the women said they did not feel comfortable stopping to read what the code said during work. Some women workers were more proactive in obtaining information about the codes: ‘I copy the codes with my pen and pencil’, said one, while another has ‘asked everybody about the code—even the man who cleans the manager’s offices’. However, they agreed that, as individuals taking such action they ran risks of being victimised by management. The codes are often in Spanish, but sometimes only in English or a language ‘like’ Chinese. As one woman asked, ‘Don’t they know that we speak Spanish?’ Another reason why women workers have problems with codes is because the codes are very brief, with some broad statements, and often written in vague language. For example, freedom of association is defined in Sears’ code as: ‘suppliers should allow workers to exercise their right to establish and be part of legal organisations that they choose, without being penalised for the non-violent exercise of this right’, which leaves many issues open to interpretation. Another example is how Kohls deals with discrimination: ‘we recognise that we respect cultural differences and believe that workers should be employed because of their abilities rather than gender, race or culture or religion’. In this way, the language used in the codes frequently allows issues such as sexual harassment, age discrimination, maternity discrimination and opportunities for promotion to be left unaddressed.2 For these reasons, codes as documents stating rights for workers do not seem to be clearly understood by workers. The result is that, where they are present, workers are not able to undertake action based on them. My interpretation is that this demonstrates the lack of transparency of these company practices for their beneficiaries: that is, the workers. The picture offered by women workers when it comes to the monitoring of these codes is also one of non-transparency.

Monitoring and the hidden stories behind it Women workers believe current monitoring practices are non-transparent and are failing for a number of reasons. Simply having a code of conduct is not enough unless there are mechanisms in place to ensure its implementation. How monitoring is done, by whom and how, and specifically the transparency in the monitoring process, are key in determining the value and authenticity of the exercise and in bringing about change.

2

Women workers who participated in the research requested codes from the factories in which they worked. This is how the codes of conduct of Sears, Kohls and Wal-Mart among others were collected. It does not appear easy to access to some of these codes on the companies’ websites (see, for example, www.sears.com).

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First, since workplace visits by monitors or auditors, who are normally commercial auditors, are not unannounced, management is able to prepare for them. As one woman commented: there are lots of people coming to visit the factory. When a delegation from the transnational is about to arrive, the employers put everything in order, everything is clean, they do not shout at us, or demand that we work harder and harder . . . The employers behave completely different.

A simple example of this is that toilet paper and soap appear in the toilets only when there are foreign visitors to the factory. Second, those visiting the factories rarely talk to workers, and, when they do, it is in the company of officials such as the human resources manager of the factory or the banana plantation. One woman said that she felt some workers were supportive of the management and were always given ‘a signal to talk to the auditors so then the other workers do not get the opportunity to talk’. Other women concurred that model workers were usually chosen in advance by the management, and they were always the younger and more shy women. I have never participated in an audit but, when I asked my colleagues after one, they told me that they could not say anything bad about the working conditions in front of the representative of the employers, so they did not.

Third, even in cases where the women were interviewed in private, they felt uncomfortable. For example, in one factory, they chose the women they wanted, took them upstairs and put them in front of a TV camera and asked them about overtime being compulsory, how they felt about working in the company . . . when they came down one by one, they were asked [by the managers] what they had said.

Thus, most auditors do not know how, or are unable, to monitor labour conditions openly, do not involve workers as they should and cannot give an adequate and transparent report on them that is in the interests of the women workers themselves. The above reasons show clearly how the whole process is non-transparent. The failure of commercial auditors to provide quality audits has also been extensively documented (for example, O’Rourke 2000). What is more, women believe that supervisors and managers have an interest in keeping the process nontransparent because, as one worker reported, when a few of them have asked for copies of the codes that apply in the factory, they are normally ignored or told that these do not exist. One woman described how she was offered a document detailing her own obligations when she asked for the code of conduct that she saw near the toilet. Others described how difficult it is to get permission to talk to human resources in order to find out this information. Various women workers in banana plantations recounted stories of inspectors coming to have lunch with the management and then leaving without being allowed even to speak to the workers. The research could not find evidence of management attempting to make the process transparent.

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And, after the monitoring, what is left is a report to the client company which also normally happens to be confidential.

Reporting and confidentiality: what changes? Most social auditing is done confidentially, with the results going only to the company or organisation requesting the assessment. The reports are rarely given back to the workers or their organisations. Thus, one of the major misgivings about codes expressed by women workers is that they can be manipulated by companies to give them a clean public image when, in reality, nothing has changed. Companies consider confidentiality to be important. Dara O’Rourke argues with reference to the flawed monitoring methods employed by PricewaterhouseCoopers (PwC) to inspect factory labour practices around the world, ‘the confidential nature of PwC’s audits allows the company to produce reports that exclude many sources of information, cannot be verified by other researchers or NGOs, and fail to support broader public efforts to improve factory conditions’ (O’Rourke 2000: 7). Other stakeholders, including consumers, cannot make choices because of lack of public information. Moreover, it makes it difficult for workers and workers’ organisations to know what is being claimed about their working lives, and to enter into related debates and processes. Therefore, the recourse to confidentiality allows auditors to carry on making audits that are flawed for all the diverse reasons given above by the Nicaraguan women workers. Confidentiality further perpetuates poor working conditions because it also allows client companies to make decisions based on those private reports that came from questionable auditing processes. More importantly, how those decisions are taken in the light of the audit report and on the basis of codes is unknown to all except the client company. With this lack of transparency it is not surprising that management can carry on with many unfair practices that are hidden to auditors but which are well known by workers and their organisations. Nor is it unexpected that some companies make false claims to be socially responsible while nothing changes on the ground!

More and less transparent practices There are a range of practices concerning workplace codes and their monitoring, some more, some less transparent. Below I describe two working examples of such work with codes of conduct in Southern workplaces and show what aspects and properties contribute to the level of transparency. The four independent monitoring groups in the Central American region, which are not-for-profit civil-society organisations—Grupo de Monitoreo Independiente de El Salvador (GMIES), Grupo de Monitoreo Independiente de Honduras (EMIH), Comisión de Verificación de Códigos de Conducta (COVERCO) in Guatemala and Profesionales para la Auditoria Social Empresarial (PASE) in Nica-

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ragua—believe that transparency and openness are key to the legitimacy of their auditing work.3 For them this legitimacy implies that relevant information that is discovered about the situation in workplaces through monitoring processes must be disseminated to wider audiences, and not just held within the companies. Whether negotiating with the brands or with Northern initiatives such as the Fair Labor Association (FLA),4 they always insist on transparency. At the same time, they are aware that efforts must move beyond mere criticism and those efforts must be put into enabling improvements to be made. So, for example, although the monitoring groups in the region allow some time for companies to make improvements, they always publish their final report (such as COVERCO 2000 and GMIES 2002). Some of the groups are very specific in giving advice to factory management about how, in their view, the factory might comply with labour law and applicable codes of conduct. The work of such monitoring groups is transparent because: first, it emphasises the importance of maintaining a regular presence at the factory, with regular visits and various channels for workers to contact the monitors; second, it stresses the need for workers to get to know and trust the monitors, and to learn what their role is; and, third, it insists on the right to publish at least some of their monitoring reports and to share information that includes situations such as forced overtime, harassment or lack of employer co-operation. In contrast, a clear example of lack of transparency is the US-certified programme, Worldwide Responsible Apparel Production (WRAP), with 700 member companies responsible for 85% of clothing sales in the USA. WRAP was launched in 2000.5 Its website claims that, as of January 2003, WRAP has over 500 international manufacturers with over 1,000 participating factories in the programme and has certified 400 factories. The WRAP website, presented in English, seems to be the organisation’s only window to the outside world while its engagement with other stakeholders (apart from its accredited commercial auditing firms and government and trade representatives) has been almost non-existent to date. Attempts by activists and researchers to engage with WRAP in a constructive way have so far been unsuccessful. From an outside perspective, and given the lack of access to information, it is easy to agree with the criticisms made by activist groups such as the Maquila Solidarity Network (2002) and the Clean Clothes Campaign,6 among others. Some of their criticisms are: public disclosure is not considered; there is the lack of a multi-stakeholder supervisory board (it does not include organisational representation of trade unions and labour NGOs); monitoring appears to be carried 3

For more information on the monitoring groups see www.gmies.org.sv and www. coverco.org. 4 The FLA is a non-profit organisation combining the efforts of industry, non-governmental organisations (NGOs), colleges and universities to promote adherence to international labour standards and improve working conditions worldwide. The FLA was established as an independent monitoring system that holds its participating companies accountable for the conditions under which their products are produced. Companies include Adidas, Liz Claiborne and Nike. See www.fairlabor.org. 5 See www.wrapapparel.org. 6 Clean Clothes Campaign letter (2003) to WRAP concerning the Gina Form case in Thailand; accessed at www.cleanclothes.org/urgent/03-03-07.htm.

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out only by private firms; and the company that is to be monitored selects and hires its own monitoring organisation, establishing a business relationship that makes the veracity of the monitor’s findings highly questionable. What is more, the interview process for workers is unclear, visits are pre-arranged and factories can ‘clean up’ in advance. The secrecy of WRAP is worrying given the level of uptake of this initiative among companies in the USA. However, it is necessary to take into account that, from observations of the arguments on both sides, there is a tension between openness and transparency and the need to encourage companies with enough leverage, time, information and ‘free space’ from pure criticism. This space can allow them to improve their workplaces. Contrary to models such as WRAP, the independent monitoring groups in Central America recognise this tension and are making efforts to work on this together with the companies. Using non-transparent certification programmes such as the current WRAP system is a risk for companies because it fails to uncover significant violations of labour rights. It also involves costs for the supplier but it does not provide any significant benefit in return. Buying from WRAP-certified suppliers does not offer a proper guarantee that there are not gross violations, and a company remains open to criticism from the press and campaigning groups. Therefore, companies should compare the risks involved in being transparent in contrast to the risks of noncompliance and consider the involvement of civil society in the South and North in code monitoring and verification schemes. They need ‘to recognise the added credibility that can be gained by involving Southern NGOs in external monitoring of selected supply factories’ (Yanz and Jeffcott 2001) and also how the transparency and accountability of civil-society organisations can help in the implementation of codes of conduct. Companies also need to involve workers in the whole process. This will make it transparent because workers are the best monitors a company can have. For this to happen, there is a need for workers to develop their understanding of codes as instruments and processes, to know how the process works, who is behind the codes, for whom they are drawn up, and how the process can be used to improve their situation. Two important areas in which to involve workers are the way in which the code is or is not implemented and the complaint mechanisms under situations of non-compliance. Different options are open to make these processes more transparent. For example, Chiquita Brands International has incorporated the monitoring groups GMIES and COVERCO as independent observers in its own recent internal monitoring audits in banana plantations.7 Another example is the training of workers and employers that is part of the strategy of the monitoring groups in the region. Other groups such as women organisations and trade unions are involved in training workers and research on workplace conditions. Different successful experiences could provide a model for the region and beyond. 7

Speech by George Jaksch, Director of Corporate Responsibility and Public Affairs, Chiquita International Services Group at the Ethical Trading Initiative Members’ Roundtable on The Importance of Local Knowledge in Monitoring, London, 20 March 2003. The summary of the roundtable is available to ETI members on the ETI website (www.eti. org.uk).

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Towards transparency Actual practices of codes of conduct, their monitoring and reporting are nontransparent. Decisions are often taken in offices in New York and London and whether any changes are implemented is unknown. There are examples of good practice regarding transparency in the Central American region but they are not given the credibility they deserve, nor do they enjoy the popularity of non-transparent initiatives such as WRAP. Companies must learn that there is a need for transparency and that this cannot be built around actual practices based only on commercial interests. They can learn from the experiences of companies that are already promoting transparency by working with civil-society organisations. Very importantly, listening to the beneficiaries of codes of conduct, the workers, will help companies to take the right decisions. Only then can the claims of companies to be socially responsible be taken seriously. Only then can change happen and improve people’s lives.

References Barrientos, S., C. Dolan and A. Tallontire (2001) ‘Gender and Ethical Trade: A Mapping of the Issues in African Horticulture’, www.nri.org/NRET/genderet.pdf. Bickham Mendez, J., and R. Köpke (2001) Mujeres y maquila. Respuestas a la globalización: Organizaciones de mujeres centroamericanas en medio de la competencia y cooperación transnacional en la industria maquilera (San Salvador: Ediciones Heinrich Böll; 2nd edn). CAWN (Central America Women’s Network) (1999) Women Workers and Codes of Conduct: A Central American Workshop Report (Managua, Nicaragua: CAWN). COVERCO (Comisión para la Verificación de Códigos de Conducta) (2000) Second Public Report: Independent Monitoring Pilot Project with Liz Claiborne Inc. (Guatemala: COVERCO, June 2000; www.coverco.org/media/media-2195.pdf). GMIES (Grupo de Monitoreo Independiente de El Salvador) (2002) ‘Verification of Compliance with Salvadoran Labour Law and the Gap Inc. Code of Conduct in Four Companies in El Salvador’, www.gmies.org.sv/gmies/gappublicoinglesjulio2002.doc. Maquila Solidarity Network (2002) ‘Are Apparel Manufacturers Getting a Bad WRAP?’, www.maquilasolidarity.org/resources/codes/memo12.htm. Pearson, R., and G. Seyfang (2002) ‘I’ll Tell you What I Want: Women Workers and Codes of Conduct’, in R. Jenkins, R. Pearson and G. Seyfang (eds.), Corporate Responsibility and Labour Rights: Codes of Conduct in the Global Economy (London: Earthscan Publications). Prieto, M., and J. Bendell (2002) ‘If you Want to Help us then Start Listening to us! From Factories and Plantations Women Speak out about Corporate Responsibility’, www.newacademy.ac.uk/research/gendercodesauditing/report.pdf. ——, A. Hadjipateras and J. Turner (2002) ‘The Potential of Codes as Part of Women’s Organisations’ Strategies for Promoting the Rights of Women Workers: A Central America Perspective’, in R. Jenkins, R. Pearson and G. Seyfang (eds.), Corporate Responsibility and Labour Rights: Codes of Conduct in the Global Economy (London: Earthscan Publications). O’Rourke, D. (2000) ‘Monitoring the Monitors: A Critique of PricewaterhouseCoopers (PwC) Labor Monitoring’, http://web.mit.edu/dorourke/www/PDF/pwc.pdf. Yanz, L., and B. Jeffcott (2001) ‘Bringing Codes Down to Earth’, International Union Rights 8.3 (www.maquilasolidarity.org/resources/codes/downtoearth.htm).

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I was born in Spain but have lived in England for the last ten years. My initial training in Madrid was a degree in Marketing and Business and I subsequently took up a research executive position in London from 1995–97 in the area of market research. One day I decided I wanted to do something different, while dreaming of a better world. First, I joined the Central America Women’s Network (CAWN) in 1997, where at present I am a co-director. Second, I completed a degree in Development Studies and Politics at the School of Oriental and African Studies (SOAS) in 2000. Third, I took a doctorate position in 2000 at the University of Bristol, specialising in women workers and corporate social responsibility in Central America, and have since become an Associate of the New Academy of Business. Today, I think of myself as a researcher and advocate, always seeking to make a difference. My chapter in this book is dedicated to women workers in factories and banana plantations in Central America and their struggles to improve their lives. [email protected] [email protected]

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a a Voluntary governance or 15_

a contradiction in terms? Are voluntary codes accountable and transparent governance tools? Simon B. Archer

S. Tina Piper

Torys LLP, Canada

Balliol College, University of Oxford, UK

The aftermath of the Enron, WorldCom, Vivendi and other scandals has focused attention on both a forensic question (how they could have occurred?) and a governance question (how can we prevent their repetition?). ‘Self-regulation’ answers both questions in part, and one solution that will certainly be mooted is the development of stricter corporate or voluntary codes of conduct. What promise do these instruments hold for effective regulation? For the past 30 years,1 the growth of corporate influence and financial power coincided with the decline of both the welfare state and the command-andcontrol model of state regulation (Richter 2001: 10). Rule-making by administrative bodies and the scope of their discretion was described as wasteful, ossified, dominated by special interests and corporatist (Harter 1982; Beattie 1999; Freeman 1997; McGarity 1991). It has been superseded by neoliberal economic policy and market fundamentalism, often termed the ‘Washington Consensus’.2 Thus, gover1 2

Industry self-regulation has a long history (Pitt and Groskaufmanis 1990: 1,575) but corporate codes of conduct are mainly a product of the past 30 years. Although Williamson (1990) claims that the Washington Consensus is not quite synonymous with ‘free market fundamentalism’ and ‘neoliberalism’ and ‘Victorian virtues of small government and free markets’, most mainstream economists include such policies under its rubric. The ten main characteristics of the Washington Consensus are: fiscal discipline; a redirection of public expenditure priorities towards fields offering both high economic returns and the potential to improve income distribution, such as primary healthcare, primary education and infrastructure [debated]; tax reform (to lower marginal rates and broaden the tax base); interest rate liberalisation; a competitive exchange rate; trade liberalisation; liberalisation of FDI inflows; privatisation; deregulation (in the sense of abolishing barriers to entry and exit); and secure property rights.

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nance functions were distributed away from the state, creating a disjunction between formal models of strong centralised governance and its practical manifestation. This process of privatisation has two main forms: privatisation of operations and privatisation of regulation, or self-regulation. The WorldCom, Enron and other scandals are among several indications that the ‘weak state’ is still strong enough to produce regulatory inefficiencies, and raises questions in particular about effective corporate governance. What standards can and will apply to new governance initiatives? What role does the state have in promoting and enforcing them? How will stakeholders, and especially consumer-citizens, understand, characterise and enforce their ‘rights’ under these new regimes? More theoretically, to what extent is private self-regulation considered law, and ought we to analyse it as such? Do we need to develop a new hybrid vocabulary to describe events and measure outcomes? In partial answer to these questions, primary goals of suggested reforms have been to improve corporate governance through increasing transparency and accountability. One of the mechanisms suggested to achieve these goals is through improving, altering or implementing voluntary corporate codes of conduct.3 By examining the nature of voluntary codes of conduct, evaluating their legacy and considering their enforcement, particularly in traditional legal venues, we will determine whether voluntary codes can in fact serve these goals. The conceptual issues that will be explored include the definition of regulation, the role of the state and the relationship of voluntary codes to other forms of law. For over 30 years’ proliferation nationally and internationally, there is a dearth of evidence as to their actual effectiveness. Voluntary codes have, however, evolved and, in part, the trends in the development of voluntary codes are ones of improvement on their lack of accountability, transparency and, ultimately, efficacy. However, the most effective or enforceable voluntary codes are likely to be those that are backed by the threat or reality of state intervention, or codes that are otherwise enforceable through some legal, arbitral or dispute resolution process. Thus the most effective voluntary codes lose the key characteristic: voluntariness.

3

For example, Nasdaq recently submitted suggested corporate governance reforms to the US SEC to attempt to deal with the fall-out from Enron and other scandals. A key reform was to increase the use of corporate codes of conduct and compliance methods to support them (M2 Presswire, ‘Nasdaq submits first round of corporate governance rule changes to the SEC; Announces plan for additional issues for review this month’, New York, 6 June 2002). Also, the Chair of the SEC, Harvey Pitt, recently recommended a review of corporate codes to increase investor confidence, commending organisations that re-emphasised their members’ code of ethics and asked whether some might need to be updated in light of recent developments (‘Pitt seeks review of corporate governance, conduct codes’, 13 February 2002, WL 220122 [SEC]).

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Voluntary codes in the spectrum of regulatory initiatives To properly understand the potential of voluntary codes, we must understand how they fit into state regulatory initiatives. Current thinking holds that the traditional binary model of state versus individual, the administrative framework and legal protections built up around that model are no longer useful, if they ever were.4 Several possible forms of regulation are available to policy-makers and stakeholders on a spectrum from state to fully private regulation. The traditional model envisions state regulation by statute. Further along the spectrum lie industry- or firm-specific particularisation of standards mandated by statute, a clear example of which are workplace health and safety codes.5 Next are delegated self-regulatory codes, such as the rules governing most professional bodies (e.g. a law society). These bodies often face criticisms of professional monopoly6 and a lack of a principled reason, other than tradition, to self-govern. Further along lies permissive voluntary particularisation of otherwise non-binding statutory norms. This has become an important policy tool in the weak state, employing the sermon instead of the carrot or the stick. Finally, there are voluntary codes of conduct that are characterised as self-regulatory norms.7

Reasons for codes Over the past 30 years corporate codes of conduct have proliferated and have become both a focus of policy development, support at the state level and a sophisticated corporate management tool. Several reasons for their adoption have emerged. From the state perspective, the contracting state administrative presence has left a ‘normative vacuum’, which has been filled by self-regulation. Voluntary codes can thus be used as adjuncts to existing legal schemes, as substitutes for statutory law, or as a source of interstitial detail in a legal regime (Industry Canada 2000). Self-regulators are seen as ideal because of their high levels of knowledge and expertise and familiarity with the industry involved (Baldwin and Cave 1999: 126). 4

5

6 7

Several definitions of regulation have been canvassed in an attempt to clarify thinking about what is regulated and who regulates (Black 2001: 103). Priest (1997) has provided five models of self-regulation, graded according to the public interest content in each. Standard-setting in general has been the subject of commentary, especially in conditions of globalisation, as facilitating technical and corporate practices across borders and legal cultures (Salter 1993: 3). Calls for a return (or a turn) to a rule of law have also been characterised as a ‘politics of nostalgia’ seeking to reassert an old colonial order on the world. This is not as speculative as it might first sound: see Sir R. Cooper (Cooper 2002). See especially the debate over multidisciplinary partnerships. An important question that ought to be kept in mind is whether in a weak state with transnational corporate actors, private or self-regulation may be the only hope for regulation.

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Their proximity to the industry has the potential for the positive use of peer pressure, and intervention is less formal. Further, self-regulators have lower information, monitoring and enforcement costs than the state and can flexibly adapt rules to changing conditions (Baldwin and Cave 1999: 127).8 These features counter criticisms of state regulation as too formal, expensive to operate, fostering adversarial relationships, of limited jurisdiction and difficult to amend (Baldwin and Cave 1999).9 Five predominant overlapping reasons for code development from both the corporate and state perspective can be identified.10 First, they are often developed as a reaction to a specific regulatory failure or to poor corporate conduct (Pitt and Groskaufmanis 1990; ILO 2000).11 Second, voluntary codes are a means to ensure that a problem is addressed specifically.12 Third, codes may be developed either in advance of an impending state regulatory scheme to avoid further regulation or to ‘take the field’ (Industry Canada 2000; OECD 2001b).13 Fourth, codes may be adopted to improve the public image of a corporation and to avoid lost profits due to negative publicity (Gordon 2000; Arthur Andersen and London Business School 2000; Liubicic 1998; Shaughnessy 2001; OECD 2001b).14 Corporations may also adopt codes to act as a ‘good corporate citizen’ and gain a competitive advan8 9

10 11

12

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14

For further discussion of self-regulation and regulation generally, see Ogus 1994; Ayres and Braithwaite 1992; Baldwin et al. 1998. However, the traditional state regulatory presence has visibility, credibility and accountability and is compulsory in its application to all. This, in theory, results in a greater likelihood of rigorous standards being developed, cost spreading and a wider range of sanctions. Other important issues in this area are the different perspectives between North and South, where Northern standards are seen as transnational protectionism by the South. This was, in fact, the impetus for much corporations law since its embryonic forms in the 18th century. The Corporations Acts (e.g. see Canada Corporations Act RS 1970, c. C32 and the UK) of the mid-1800s were in response to abuses of investors, and subsequent securities legislation reacted to major collapses such as that of 1929. Pitt and Groskaufmanis (1990) argue that the development of voluntary codes of corporate conduct in the USA was fuelled by a series of corporate scandals such as the 1960s’ ‘electrical cases’, which led to the development of anti-trust compliance regimes; questionable corporate payments to foreign governments led to the Foreign Corrupt Practices Act 1977 and corporate codes; the insider trading scandals of the 1980s and repeated scandals involving defence contractors led both fields to strengthen their codes. From the corporate perspective, the behaviour is addressed specifically in a code and ‘ensured’ not to happen again. From the state perspective, there has been a response that has not required an exercise in state intervention. For example, the UK advertising standards private initiative to promote truth in advertising was designed to eliminate the need for government regulation and has been quite effective. Responsible Care, an influential private initiative for promoting safety in the chemicals industry, was designed in part to deflect growing political momentum to tighten government regulation (OECD 1997). Codes may also be developed in response to stakeholder submissions. However, this only realistically applies to companies with a public image to preserve, such as Nike, the Gap or Walt Disney. Lower-profile companies who produce end-use goods that derive little value from corporate or brand image and who spend little money cultivating consumer goodwill are less influenced by this concern. See also Bencivenga 1995: 5; Lehrer 1998: 21.

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tage (Industry Canada 2000). Finally, corporations may create codes to develop standards in an industry (useful for due diligence defences to negligence claims) and thus manage their litigation costs (Gordon 2000; Industry Canada 2000; OECD 2001b).15

The scope and structure of voluntary codes There are three main parties in the development and promulgation of a corporate code: corporations, unions and NGOs, particularly those associated with a social movement.16 A wide range of parties issue voluntary corporate codes: corporations, business associations, NGOs, trade unions and international organisations with by far the majority of codes issued by companies and business associations (OECD 2001d).17 Voluntary corporate codes are ubiquitous within industry: a recent KPMG report found that about 85% of 1,000 Canadian companies surveyed had some form of ethics code (KPMG 2000).18 The dominant subjects covered by voluntary codes are environmental and labour issues, followed by consumer protection, bribery and corruption and competition (OECD 2001d, 2001b).19 The main scope of coverage of voluntary codes involves business practices,20 treatment of workers, relations with public officials, environmental issues and impacts and human rights issues (Gordon and Miyake 2000; OECD 2001d). 15 16

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19 20

Other reasons promoted in the literature are to improve the morale and motivation of employees and to promote a culture of integrity within corporations (OECD 2001b). A fourth actor, the state, is not involved in the voluntary code by definition, but is often implicated either through promotion of self-regulation and/or by abstaining from statutory regulation. NGO participation was originally minimal, but has now been raised to an institutional level at the United Nations. Most NGOs are part of social movements concerning an issue: for example, environmental protection, labour or human rights. NGOs have traditionally had limited resources and ability to participate in systemic changes in corporate behaviour. Voluntary codes engage NGOs on their (perhaps only) strength in this area: monitoring and compliance initiatives. Voluntary codes provide two structured opportunities for direct input into corporate policy, at the development stage and in the monitoring phase. Companies issued 48% of the codes in the inventory, business associations accounted for 37%, ‘partnerships of stakeholders’ (mainly NGOs, but also trade unions) issued 13%, and international organisations 2%. The OECD reports that most large OECD-based multinational enterprises have some form of voluntary code of conduct (OECD 2001b). That same study reports that while voluntary codes are a global phenomenon they are subject to a high degree of intra-regional variation (OECD 2001b). Note that there are hundreds of kinds of voluntary code that vary with the legal system within which they operate and the industry or business to which they apply. Some examples of codes that address business practices: International Code of Ethics for Canadian Business, US Model Business Principles, OECD Guidelines for Multinational Enterprises, Caux Round Table Principles for Business, Principles for Global Corporate Responsibility, and Social Venture Network Standards of Corporate Social Responsibility.

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Some codes may apply to a single company, some to entire industries and some may deal with only an aspect of an industry’s operations (e.g. labelling applied by the garment industry) (Industry Canada 2000). Codes of conduct can constitute elements of international law drafted by organisations external to the drafters21 or merely exist internally within the drafter’s organisation. The involvement of NGOs and other civil-society stakeholders is a direct response to two early criticisms: first, that codes were merely a top-down process for ‘giving accounts’, without ensuring substantive compliance or norm generation by the organisation; second, increased involvement was also a response to broader demands from consumers for ethical consumerism, such as campaigns against child labour. The broader involvement by NGOs and civil society has exposed issues that create dilemmas for code developers: are Northern labour standards exported to Southern economies tantamount to market protectionism, because they restrict the comparative advantage of Southern economies (as sources of cheap labour)? Do codes promote or contribute to real or perceived capital flight from North to South, as businesses seek to exploit ‘flexible’ labour standards? How are wider social and environmental effects (cf. Bhopal) to be accounted for in effective local code development and monitoring (Elwell 1995; Bronson and Rousseau 1995)? A final aspect of the democratisation of codes is the presence (or absence) of the ‘rule of law’ in the (usually Southern) country in which the code is to be enforced. This is of primary importance because, as we discuss below, the threat of enforcement of codes via existing legal structures is probably the best method of enforcement. Where this threat is absent, because the existing legal structure is weak, code development and particularly monitoring is a precarious undertaking. A good illustration of this tension is the NGO Commission for the Verification of Corporate Codes of Conduct (COVERCO) operating in Guatemala City, Guatemala. There, COVERCO monitors voluntary labour and human rights code compliance for several maquiladora textile production factories. It is staffed by former union members and NGO workers experienced in local labour practices. It is funded by producers. The labour standards in Guatemala are, on the face of its Labour Code, comparable or better than most Northern countries. However, these standards are rarely, if ever, enforced and as a result labour standards are actually very low. COVERCO’s monitoring role is precarious: it must maintain objectivity between the employer-funders and the employee-complainants in order to retain credibility with both. It cannot counsel employees if their complaints are not dealt with fairly other than to refer them to whatever services the official legal system can provide, which are next to none. There is no effective union organising in the maquiladoras, and the relationship between NGOs such as COVERCO and unions is sometimes conflictual, when each perceives the other as encroaching on its own domain. Coinciding with these institutional and structural tensions is the issue of 21

The UN, for example, has produced two codes aimed at securing voluntary compliance by manufacturers marketing their products worldwide: the International Code of Practice for the Marketing of Infant Formulas and the International Code of Conduct for the Distribution and Use of Pesticides. In addition, the OECD has recently issued a Draft Principles of Corporate Governance for comment. For a more detailed discussion, see Richter 2001.

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what level of labour standard is appropriate (and possible) for the workers and organisers. On the one hand, these workplaces have never collectively bargained, and the highest priorities are health and safety and a living wage (by this we mean something more than subsistence wages). At the same time, the main enforcement mechanism is bad publicity in Northern markets, and the pressures of ethical consumerism, whose standards are much higher.

Typical features of voluntary codes There are three defining characteristics of voluntary codes. First, the key characteristic of voluntary codes (as compared to other forms of regulation) is voluntariness,22 or the absence of state compulsion in its production and enforcement.23 Second, voluntary codes are normative documents that purport to create standards of behaviour and to influence behaviour in those subject to it.24 Thus the enforcement of voluntary codes and their measurable outcomes are key indicators of their success. However, the third major feature of voluntary codes has traditionally been the absence of enforcement (Herrnstadt 2001; Lu 2000). More sophisticated, usually more recent, voluntary codes do have enforcement mechanisms, but the balance of experience with voluntary codes indicates that they either lack enforcement mechanisms, or remain unenforced if they do provide for enforcement (Compa and Darricarrere 1995).25 22

23 24

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The Office of Consumer Affairs of the Canadian federal government defines voluntary codes as ‘a set of non-legislatively required commitments that are agreed to by one or more individuals or corporations; are designed to influence, shape, control or benchmark behaviour; and are applied in a consistent manner and/or reach a consistent outcome by all participants’ (Industry Canada 1998: 2). Different companies face varying degrees of pressure to develop voluntary codes—those with low public visibility, no brand capital and few regulatory or legal pressures may participate less voluntarily than others (OECD 2001b). This has important implications for its treatment in law. The relationship between declaratory documents and behavioural outcomes is debated in the sociology of law: the focus in critical discussion is generally on the enforcement of voluntary codes, and, to a limited extent, on measurable outcomes, which we discuss in the next section. The most common strategies for implementation and enforcement consisted of a commitment by top executives, creation of a compliance office, training, employee signatures, internal audits, external audits, threats of punitive action, whistle-blowing facilities and record-keeping (OECD 2001d). Industry Canada has also developed a set of guidelines to examine structural issues in forming and testing a code, as well as an ongoing project examining the problems of code creation and enforcement in Canada. The most effective voluntary codes reviewed contained very detailed actions plans to implement each of these main features. In general, good voluntary codes will contain all or most of the following features: a clear statement of objectives; a statement of obligations and parties to those obligations; a range of behaviour that complies or discharges those obligations; a minimum threshold of disclosure or information relating to obligations; penalties or remedies for noncompliance; dispute-resolution procedures, sometimes including arm’s-length or inde-

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Evaluating voluntary codes Three primary indicators are critical to evaluating the past experience and future utility of voluntary codes of conduct. These are their accountability and efficacy, transparency and finally role in national and international governance.

Accountability If the primary purpose of regulation is to modify behaviour (Baldwin and Cave 1999), then a key indicator of a code’s success should be its efficiency in generating desired outcomes. The measurement of a code’s success in meeting its goals allows its creators and supporters to be accountable to key stakeholders. There is surprisingly little empirical data on the efficacy of voluntary codes on target group behaviour, given over 30 years of study. The most current reviews of voluntary codes of conduct admit that voluntary codes have had little direct influence on corporate behaviour (Schwartz 1998).26 In fact, a more traditional outcomes-based analysis of the US Chemical Producers’ Code of Conduct found that codes did not create positive outcomes at all, and posed risks for worse outcomes than the control group (King and Lennox 2000). A comprehensive review of the evidence in 1990 was optimistic, but again admitted that no strong evidence existed of positive outcomes (Pitt and Groskaufmanis 1990).27 In the absence of comprehensive quantitative data demonstrating the efficacy of voluntary codes of conduct, the current literature has polarised, arguing that

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pendent decision-making panels; provisions for review and amendment by stakeholder groups; and provisions for lead agents or officers and funding sources. Schwartz suggests optimistically that there are eight possible indirect influences on corporate behaviour (Schwartz 1998). See also Trevino et al. 1999: 131-51; Macek 2002: 101-24; Rich et al. 1990: 34-35; Pouncy 2002: 263-380. Badaracco and Webb (1995: 8-28) found in a small-scale study that organisational culture played a much more important role than codes of conduct, which were ignored. However, Singhapakdi and Vitell (1999: 1, 3) did find that the perception of ethical problems by sales professionals was not significantly influenced by gender, business experiences, or Machiavellianism—instead, the existence of a corporate code of conduct enforced by management tended to sensitise the subjects to ethical problems. These findings are in keeping with much analysis of socio-legal problems where strong normative statements, no matter where generated, are not always robustly linked to effective outcomes in human behaviour. The World Bank has recently addressed this lacuna by attempting to quantify governance outcomes and link them to economic growth. Their research suggests that there is a positive correlation but these studies are vulnerable to methodological critiques. Thus this area is ripe for more robust studies of the outcomes of voluntary codes. Note that other attempts to study the efficacy of voluntary codes have divided the recent history of the development of corporate codes into five distinct phases, tracing an increasing scope in subject matter and sophistication in their development and use (Mendes and Clark 1996). The five phases are defined by the substantive coverage of codes. They range in increasing sophistication from conflict of interest, commercial conduct, employee/third-party concerns, community/environmental concerns to accountability and social justice concerns.

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voluntary codes of conduct either do or do not work, and has mobilised normative arguments in support of both perspectives. See, for example, Gordon 2001, OECD 2001b; Hutchinson 2001; OECD 2001e; Gunningham 2000. Those who remain sceptical of codes cite further concerns about the accountability of voluntary codes. First, the drafting of regulatory standards by private associations and corporations lacks democratic legitimacy; it is difficult to justify imposing those standards on parties outside the association or to argue that a public interest is being served (Baldwin and Cave 1999; Ogus 1994). Second, selfregulators are not accountable through normal democratic channels (Baldwin and Cave 1999). Third, self-regulators are required to serve conflicting interests (i.e. profit versus ethics or the public interest). Finally, the lack of effective implementation and enforcement mechanisms limits the impact of voluntary codes and ensures they remain as declaratory documents of principle not practice (Gordon 2000; Pitt and Groskaufmanis 1990; Lu 2000).28 When enforcement mechanisms are in place, the independence of the monitor is often questionable (Gordon 2000; OECD 2001c; Lu 2000).29 Those who advocate the use of codes draw on the reasons discussed above to argue that voluntary code creators possess higher levels of relevant knowledge and expertise, have lower costs of acquiring information, monitoring and enforcement (Baldwin and Cave 1999), and finally can more smoothly adapt the regulatory regime to changes in industrial conditions since they enjoy the trust of the regulated group (Gordon 2000; Ayres and Braithwaite 1992). Ultimately, many commentators conclude that neither voluntary codes nor legally binding rules offer a complete solution to the dilemma; each has distinctive shortcomings and an appropriate solution will consist of a combination of the two (Gordon 2000; Ogus 1994; generally Sinclair 1997).

Transparency The development and implementation of voluntary codes of conduct raise three primary concerns about transparency. First, there are concerns that the terms of voluntary codes are unclear and ambiguous and that the expression of similar norms varies from code to code (OECD 2001d; Gordon 2000). Second, the promulgation of voluntary codes may lead to unfair procedures where non-members may be subject to regulatory decisions to which they have poor or no access (e.g. through mechanisms such as interpretation bulletins) (Baldwin and Cave 1999; 28

29

Note that, although the text and form of codes has evolved to become more legalistic than declaratory, the efficacy of their enforcement has not improved. The significance of their effect may often depend on more than the mere existence of a well-drafted code (as argued by some commentators such as Baker [1993]). A recent OECD review of codes concluded that codes were effective only within a ‘management, sectoral and social context’ and that they must be implemented with proper supports, procedures and budgets (Gordon and Miyake 2000). Several commentators have also concluded that voluntary codes are probably enforced only as effectively as the underlying regulatory norms they reflect or improve upon. See, for example, Bennet 2001. In particular, the OECD report questions the independence of the evaluation by external auditors who have a continuing relationship with the corporation.

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Ayres and Braithwaite 1992). Non-members may further be unaware of the routes available to enforce those codes. Finally, commentators dispute whether voluntary codes have some force or effect in current legal categories, such as contract, tort and competition law (see discussion below).

Governance Concerns have been voiced about the impact of voluntary codes on national and international governance. On the national level, there is concern that voluntary codes may pre-empt valid state regulation and laws. The voluntary code may act merely as a symbolic political gesture without actually making a serious commitment in public law. There is uncertainty surrounding the interaction between state law and voluntary codes and whether and what impact codes have on state law. The lack of transparency and accountability of voluntary codes may undermine the rule of law; their voluntary nature may limit consistency in the application of law. Their industry- or sector-specific implementation lacks the uniformity and consistency one would expect of public law (Gordon 2000). Further, voluntary code development may cover creation, interpretation, enforcement and adjudication and thus breach the standard state separation of powers (Ogus 1994). On both the national and international level, questions arise as to the actual and appropriate location of norm generation (Blackett 2001) and the interaction between international and national norms (particularly where international norms are grafted onto local codes) (Blackett 2001: 415). Nationally and internationally tension may also arise between the roles of various stakeholders (such as NGOs and trade unions), particularly when their interests collide and their roles are not clearly defined.

Responses to concerns The development of codes has been improved by better drafting and clearer articulation of obligations and compliance; they have evolved from reactive solutions to tools that attempt to pre-empt crises (Mendes and Clark 1996). Their accountability has been improved through involving stakeholders in the development and monitoring of codes. Governments and supra-national government organisations have become very involved in the research and promotion of codes, as well as providing incentives to create them (Macek 2002; OECD 2001b; Industry Canada 2000).30

30

The three primary international organisations involved in developing model codes are the International Labour Organisation, the OECD and the UN. The predominant global instruments for corporate responsibility are: Caux Principles for Business (issued in 1994), Global Reporting Initiative (GRI) (issued in 1999, but development is ongoing), Global Sullivan Principles (issued in 1999), OECD Guidelines for Multinational Enterprises (revised in 2000), Principles for Global Corporate Responsibility—Benchmarks (revised in 1998), Social Accountability 8000 (SA 8000) (issued in 1998) and the UN Global Compact (issued in 1999).

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Summary of ‘best practices’ Few voluntary codes contain all or even most of the following features, which form a set of ‘best practices’ in designing voluntary codes of conduct.31 Adopting ‘best practices’ may maximise the acceptance of a voluntary code and the chances of positive outcomes of corporate behaviour, increasing their efficacy. See generally: Gordon and Miyake 2000; Industry Canada 2000, 1998; Compa and Darricarrere 1995. The features are: 1. Clear statements of the objects of the voluntary code principles 2. A mechanism for administration of the code with some form of outside representation 3. Membership by a substantial proportion of the relevant industry 4. An independent complaints-handling body 5. Commercially significant sanctions for breaches of the code 6. Ensuring knowledge of the existence of the code and its complaintshandling provisions among relevant groups 7. Training of employees and association members 8. Data collection on what practices or members are giving cause for concern, and to give an indication of how practices may have changed over time 9. Ongoing monitoring for compliance with standards of practice 10. Transparency provisions such as the production of annual reports on the operation of the code which allow for a periodic assessment of the scheme’s effectiveness by industry members, its customers and the public at large 11. Regular review to ensure that the standard is meeting current community expectations Various solutions such as improving drafting, increasing involvement and adhering to best practices have been suggested to resolve transparency, accountability and governance problems. Ultimately, though, a lack of good data as to efficacy, limited accountability and enforcement, lack of transparency, and governance problems have the potential to defeat the purpose of a code. While ‘best practices’ mark the development of codes in response to criticism about their efficacy, they have not to date produced robust behavioural outcomes.

31

‘Best practices’ is an unlovely and inexact term at best, and at worst a litany of reasons for regulatory failures.

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Issues and innovations in enforcement of voluntary codes A further solution to problems of transparency and accountability of enforcement has been to consider the enforcement of voluntary codes in existing legal categories of tort, contract, criminal law, competition, administrative law, misrepresentation and human rights. Although there is potential for the enforcement of voluntary codes through these means, there is little or no case law available to properly determine the importance of these avenues; and, we may conclude that voluntary codes are not enforceable via existing legal routes. However, it is customary to be mindful of the linkages to other legal norms, especially in the development of voluntary codes.

Effective sermonising? Voluntary corporate codes are voluntary and intended in part at least to entice its subjects to good corporate behaviour. They have the advantage of being flexible and responsive to firm and industry configurations and needs.32 That is the carrot of voluntary codes. As we have maintained, and will explore below, there is effectively no stick: there is no evidence of their enforceability in traditional legal forums, the courts, arbitrations, mediation or other dispute-resolution procedures. What is clear is that voluntary codes can be used to generate points of information for NGOs, unions and other monitors in the weak state to expose, reproach or condemn corporate bad behaviour. However, the inherent disadvantages of heavy reliance on the corporate media are its short attention span, superficial treatment of subjects, sensationalism, quest for newsworthiness not regulatory monitoring, arbitrariness and indirect nature (Macek 2002: 115; Granatino 1999: 214-15; Richter 2001). Further disadvantages are the implications for resource allocation in NGOs, unions and corporations where disproportionate funds may be spent on manipulating media exposure as opposed to worthier causes. Voluntary codes of conduct may act as incentives to ethical behaviour because of their voluntary nature, flexibility, adaptability to individual business concerns and the low level of affirmative commitment required from drafters. They may further act as incentives because of the abstention from regulation by the state. However, to be justifiable as incentives their effect in producing the desired outcome should be determined empirically. This is particularly daunting given the unclear relationship between incentive effects and behavioural outcomes. Further issues that need to be addressed are whether codes are the correct incentive from the perspective of NGOs, corporations and government and whether they are incentives to the desired outcome (good behaviour) not others (more confident rule-breaking). 32

This in a sense captures one of the essential conflicts of voluntary codes: they take the form of rights documents and rights talk, but are made at least partly in the service of corporate ‘needs’, such as profit, which may in fact be in direct conflict with the rights and obligations articulated by a particular code. We might see voluntary codes as one aspect of trade-related human rights (see Baxi 2000).

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The existing law and voluntary codes One response to the problems of enforcing voluntary codes has been to argue that they complement or supplement existing formal legal standards applicable to corporations through either private party litigation or the application of public or administrative law (Webb 1999). Our analysis suggests that this argument is not vindicated by the case law. The applicable private law already encompasses most arguments that voluntary codes could bring to a cause of action in tort or contract. Administrative standards do not apply to voluntary codes, and private and public law would require some judicial innovation to make codes significantly enforceable. There are six ways in which a voluntary code may have broader legal effect in private and public law, five of which will be dealt with in detail below. First, codes can be used in the common law of contract and tort as proxies for ‘standards’ that meet legal tests.33 Second, in a regulatory enforcement under statute voluntary codes can act as ‘evidence’ to help obtain convictions or avoid penal liability. Third, a voluntary code may elaborate, refine or otherwise operationalise a legislated standard. Fourth, voluntary codes may have implications for competition law. Fifth, a voluntary code is a precursor or replacement for regulation by legislation that would have been promulgated absent the voluntary code and, finally, it may incorporate other law by reference to it.

Tort The law of torts allocates liability for wrongs between parties and does not directly involve the state (unlike criminal law). The most commonly alleged tort is negligence. To be negligent the defendant(s) must owe a duty of care to the plaintiff(s). The defendant(s) can defeat the claim of negligence if they show that their actions met the requisite standard of care towards the plaintiff(s). Where a tort is alleged, it has been argued that the standard of care required to discharge the duty of care can be established by reasonable ‘custom’ or ‘industry standards’.34 It is possible to argue a code contains such a standard. However, it is important to note that evidence of adherence (or not) to industry standards does not decide that there has been negligence, but can be one factor of many in the decision.35 Associations promulgating codes may themselves be liable in tort for breaches of the code

33

34

35

For instance, employment manuals are sometimes considered terms of a contract of employment, in filling ‘due diligence’ with meaning as a business or industry standard or the ‘standard of care’ in tort litigation. Clark v. McLennan (1983) 1 All ER 416 (QB); Visp Construction v. Scepter Manufacturing Co. [1991] OJ No. 356 (Ont. CJ Gen. Div.); Meisel v. Tolko Industries Ltd. [1991] BCJ 105 (BCSC). Such a standard limits the ‘foreseeability’ the defendant will be held to in discharging his or her duty of care. See Reed v. McDermid St Lawrence (1991), 52 BCLR. (2d) 265 (BCCA); but see Benton v. Tea Tree Plaza (1995), No. SCGRG 94/417, Judgement No. 5144 (SC of South Australia) and in Canada, see Murphy et al. v. Atlantic Speedy Propane Ltd (1979), 1013 DLR (3d) 545 (NSSC).

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unless protected by statute, which is often the case.36 They may also be liable where the codes developed are inadequate for the intended purpose.37 There are three major problems with using tort law to enforce voluntary codes. First, an industry standard that becomes a standard of care in tort essentially renders codes of conduct ‘non-voluntary’.38 Second, the industry standard could be considered anti-competitive if it is costly or difficult to meet for small businesses. Third, voluntary codes have been enforced primarily with regard to focused aspects of industry practice, such as health and safety. The enforcement of normative standards such as human rights would likely be precluded by the presence of human rights legislation that commonly takes the field in common-law jurisdictions.39 This legislation precludes the development of new torts (e.g. a tort of discrimination) while providing an administrative law route to their resolution.40

Contract Contract law monitors private agreements between parties. The various contractual relationships that may involve a voluntary code are between industry associations and members, firms and suppliers, consumers and retail firms, consumers and manufacturers, and communities and firms. The common law of contracts could be used to impose existing norms of due process, good faith and nonarbitrariness on codes in some circumstances.41 More specifically, voluntary codes could be enforced as negotiated or implied terms of contracts with consumers, purchasers and/or employees if they have relied on terms of the code.42 However, documents such as codes or manuals are 36 37 38 39

40 41

42

See, for instance, the provincial legislation protecting securities exchanges, and, e.g., Brink Forest Products Ltd v. Madrigga [1989] BCJ No. 2371 (BCSC). See, e.g., King v. National Spa and Pool Institute (1990), 570 So 2d 612 (Ala. 1990). Since it imposes liability on any organisations that do not adopt the standard. This is not an insignificant consideration: in Canada in the 1980s, the presence of federal and provincial human rights legislation precluded private law development of a tort of discrimination (Seneca College of Applied Arts and Technology v. Bhadhuria, [1981] 2 SCR 181). Most recently, privacy law relating to private distribution of personal information has developed through a weak statutory framework (which encourages voluntary codes but provides for limited enforcement), and forestalled a constitutional right of privacy as well as a more robust human rights framework (Piper 2001: 1). Administrative remedies are generally lengthy, pursued by the agency not the complainant, and limited in the damage awards (if any) made to the complainant. The law merchant or lex mercatoria was originally a body of largely equitable doctrine applicable to trans-jurisdictional disputes; it was vastly enlarged in the latter half of the 20th century in response to the needs of transnational private actors. A term of a contract held out to the public, such as an advertised term, has long been considered part of the contract where reliance is placed on that term (Carlill v. Carbolic Smoke Ball Co. [1893] 1 QB 356 [CA]). The contract may also arise between consumers and a manufacturer or provider of a good or service that was sold to the consumer through a vendor or retailer through the doctrine of collateral contracts (see, for example, Murray v. Sperry Rand Corporation [1979], 23 OR 456 [Ont. HC]). The defence to this argument is that, if such a ‘term’ of a contract was not negotiated or drawn to the attention of the contracting parties, does not form part of the written contract, or for some other reason is sufficiently remote from the basic matter of the contract, then that term is ‘unconscionable’. There is a long history of employment case law attempting to decide whether

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generally not considered terms of a contract unless they are specifically negotiated.43 In the context of the provision of services to consumers, there is arguably less likelihood that codes are terms of a contract, because they are often shorter or standard form exchanges at ‘arm’s length’. The case law does support an industry’s right to discipline members for breach of standards based on the law of contract.44 Generally there has been little judicial consideration of the use of contract law to enforce codes against firms.45

Penal liability The usual standard of compliance to a regulatory norm charging criminal corporate conduct is ‘strict liability’. To find strict liability the prosecuting party must prove facts beyond a reasonable doubt. The accused can be relieved of liability if he or she proves on a balance of probabilities that every reasonable action was taken to avoid the negligence or offence (the due diligence defence). The due diligence defence is also a significant defence to tort claims. A voluntary code can speak to (but is not determinative of) what the reasonable action is or ought to be in any given context.46 Although most of the case law in this area focuses on standards in health and safety legislation,47 it might be extended to penal liability under trade practices legislation where representations are made about a product or service that are not met in practice.48 A modified due diligence defence may develop where the drafter of the code defends his or her conduct by claiming that the government implicitly sanctioned the code by allowing or encouraging its development.

Competition law In common law jurisdictions there have been some cases in which voluntary code arrangements have been found to hurt competition and have thus been enjoined

43 44

45 46 47 48

various employer manuals and policies are terms of employment contracts. This is partly influenced by the special ‘personal’ nature of employment contracts, which are usually long-term and involve significant modifications to the scope of the contract itself during its life. This is particularly true of codes containing penalties or remedies. Most recently this principle was re-stated in Ceccol v. Ontario Gymnastic Federation [2002] OJ No. 3488 (CA). Ripley v. Investment Dealers Association [1990], NSR (2d) 338, aff’d [1991] 108 NSR (2d) 38 (CA) dealt with businesses that were part of an industry association. Ripley, a member, had breached the standards of the association, applicable by virtue of membership. He argued that the industry association should not penalise him because it breached sections 7 and 11 Charter rights. The Nova Scotia Court of Appeal upheld the discipline on contractual terms. The case supports an industry’s right to discipline members for breach of standards. For a reconceptualisation of contract and administrative law in the context of privatised service provision, see Freeman 2000b: 101. Note that this defence will be very useful to those currently alleged to have violated accounting regulations. See R. v. Domtar, [1993] OJ No. 3415 (Ont. Ct. Gen. Div.). There is no case law in Canada but see Re: Robert George Quinn and Brian Alexander Given (1980), 41 FLR 416 (Australia); Re: Evaline Jill Hamlyn and Moppet Grange Property Ltd (1983), Nos. G375-377 of 1983 (Fed. Ct. of Aus.).

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(Webb and Morrison 1999a). Specifically, industry codes may be implicated in improper concentration or co-ordination of competitors, resulting in distortion of a functioning market, blocking others from entry or other damage to consumers.49 An important point to note is that there may be a reduced likelihood of prosecution for unfair competition where more stakeholders have been part of the consultation and development process (Industry Canada 1995).

Administrative law Administrative law is the legal regulation of public administrative bodies in their myriad roles. It developed both to constrain the state’s discretionary power and to legitimise the exercise of government authority among other reasons. It achieves these two goals by policing two areas: whether the right decision has been made and whether the procedures used by administrative agencies to reach decisions are fair by reference to the organisation’s governing statute (see generally Evans et al. 1995). Administrative law has therefore developed many of the core principles that are applied to public bodies, including openness, fairness, impartiality, reasonableness or rationality and due process or participation (Beattie 1999; Freeman 2000a). These values are negatively defined, individual freedoms and are consistent with a laissez-faire liberal philosophy. Self-regulation is entirely consistent with this position.50 Thus administrative law could be used to ensure procedural fairness and due process to monitor the enforcement of voluntary codes so as to increase accountability and transparency. Exactly how far administrative law will stretch to apply to private and privatised bodies is an open question in the weak state, particularly since the application of administrative law principles is determined on a case-by-case basis in light of the circumstances.51 Principles of fairness have applied to members of a group vis-à-vis the group, such as churches, investment dealers, unions and co-operative housing corporations when they have been acting as self-regulating bodies (Evans et al. 1995). However, administrative law does not generally apply to private arrange-

49

50

51

In Canada, the area is regulated by the Competition Act (Competition Act, RSC 1985, c. C34). The defence to unfair competition is contained in sections 45(3) and 45(4), which themselves have exceptions. That is, if the ‘strategic alliance’ can be brought under one of those two provisions, they will not be investigated unless one of the exceptions to those defence provisions applies. To date these have not been judicially considered in the context of voluntary codes of conduct. The Competition Bureau has issued a paper on strategic alliances in which the scheme, as we have very generally laid out, is suggested. Albert Venn Dicey thought that the ‘rule of law’ means that public authorities ought not to have wide powers: that is, that the ‘socialism which has infused the policies of all governments since Disraeli’s is an undesirable principle’, as quoted in W. Jennings, The Law and the Constitution (5th edn). Dicey’s definition of the rule of law was unhelpfully narrow. Lakeside Colony of Hutterian Brethren v. Hofer, [1992] 3 SCR 165 per Gonthier J.

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ments52 and several commentators suggest that the application of public law to private voluntary codes is unlikely at this time (Arthurs and Craig 1997: 200).53 Where traditionally private and public agents, bodies and functions mix and become interdependent, the old tests for a private agency acting publicly require greater analysis and sophistication if that distinction is to continue to be relevant.54 Administrative law could be used indirectly to police the exercise of power under voluntary codes in two ways. First, the relationship of private selfregulatory bodies could conceivably be related to otherwise public regulatory standards if they receive immunity (officially or practically) from the public body in return for self-regulation. This could be construed as a ‘government function’ rather than a contractual, and therefore private, arrangement.55 Second, in grappling with the hybrid nature of self-regulated norms, administrative law has other accountability and compliance mechanisms. These can range from direct (government ombudspersons, auditors and commissioners, and other legislative and executive oversight) to indirect (public participation and monitoring through public interest groups) (Priest 1998; Freeman 2000a; Lu 2000: 615).56 Ultimately, doctrinal innovation in administrative law to create a ‘private due process’ may be stifled by the entrenched public–private dichotomy. No matter how great the impact is of private ordering and power over the individual, the claim that the state is menacing and intrusive, and private power benign and at worst, understandably self-interested, dominates popular discourse and policy debates (Freeman 1997).

Misrepresentation One possible avenue to enforce a corporate code of conduct that has been ignored, or otherwise abused, by its drafter could be to construe its terms or promises as false 52

53

54

55

56

But see Freeman 2000b for an account of the ‘pervasive role’ of private bodies in public regulation, policy, service provision and implementation. Freeman has also provided some examples of UK and US courts applying administrative law doctrine to private parties, but these are only a handful of cases. But see Webb 1999 for a contrary view. Evans (1996) cites three major reasons why administrative law will not expand to cover private initiatives: (i) traditional administrative law is used to protect against public abuse, not to further the public interest; (ii) prosecutorial discretion; (iii) legislation is usually interpreted narrowly so as not to interfere with freedom of contract. Freeman argues that the current situation ‘demands a search for accountability mechanisms that are largely unrecognised in administrative law and that might supplement, or supplant more traditional forms of oversight . . . [A] mix of formal and informal mechanisms emanating not just from government supervision, but from independent third parties and regulated entities themselves’ (Freeman 2000a: 549). Difficulties quickly arise, however. First, a complainant may have problems gaining legal standing where he or she is not a member but a ‘private citizen’ seeking to review a group’s self-regulation. The degree of ‘public interest’ in the organisation in question will significantly affect the answer to this question. Second, even if it could apply, the only remedy available to the complainant would be procedural not substantive. However, self-regulation is considered desirable and those advocating self-regulation are reluctant to ‘burden’ it with ministerial responsibility, transparency, and oversight by an ombudsperson.

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advertising, misrepresentations or as a type of collateral warranty. It could then be prosecuted through the established remedies available for those wrongs (Lu 2000).57 The various legal tests involved in a tort of misrepresentation or breach of collateral warranty raise individual difficulties for the broad enforcement of a code, notably the requirements of individual reliance and damages. Pursuing class proceedings, where available, of common issues might be one solution, but as far as we have been able to determine, none of these routes of liability has been pursued.58 At the very least, a class proceeding dealing with common issues in a collateral warranty, which is also a voluntary code, is a very indirect and inefficient method of enforcement of private, ‘flexible’ governance regimes.

Human rights law Voluntary codes of conduct have a mixed effect on human rights law. On the one hand, human rights are often the subject of voluntary codes. On the other hand, voluntary corporate codes often dilute or misrepresent human rights norms and fail to properly reference international (e.g. UN, International Labour Organisation) standards (Herrnstadt 2001). The rights defined tend to be vague and inconsistent between codes: this is inappropriate for fundamental norms of human rights. Further, codes that address human rights may in fact be superfluous since corporations are bound, regardless of a code, to respect human rights (Stephens 2002).59 Often human rights are adequately protected under domestic regimes that take the field so that the legal effect of a voluntary code is unclear. 57

58

59

Lu focuses on the US Federal Trade Commission deceptive advertising laws, but a wider scope of remedies could apply. Some corporate codes could be characterised as containing the various elements of these remedies—a representation, one specifically made for commercial purposes, or statements made to induce commercial relations or otherwise related to a contract. On 26 June 2003, the US Supreme Court rejected Nike’s argument that publishing statements about overseas labour policies were protected by the First Amendment as free speech, and Nike could, therefore, be sued under Californian consumer fraud and unfair trade practices laws. Nike argued that, if such statements were merely ‘commercial speech’, they would be open to legal liability for misstatements and this would discourage voluntarism. The advertising, public relations, AFL–CIO, ACLU and Bush administration all intervened on Nike’s behalf, and 17 other states and consumer groups filed on Kasky’s behalf. The case has returned to California for trial. See Nike v. Kasky, No. 02-575 (US SC). However, Raday (2000: 103) argues that there may be more ‘private law’ human rights doctrine than is usually admitted. She also argues that the ‘privatisation’ of human rights is constitutionally sound, and depending on one’s view of the role of the executive, legislative and court branches, democratic. It is fair to say that the recent and current priorities in state economic and social policy have led to what is termed ‘creeping privatisation’ of human rights disputes. Clapham (1993) argues that this is a trend in Europe, in such areas as criminal liability, rights of association against private persons, although not yet to discrimination. Raday (2000: 103) notes cases with aspects of similar trends in Israel, Germany, the Netherlands, the UK and Japan. In combination with (or in reaction to) the trends in legislated anti-discrimination laws, private law may have an expanded role to play in providing remedies. This development also provides an opportunity for the creation of non-court and non-state sources of norms, such as corporate codes of conduct, which can provide similar remedies.

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Some commentators argue that establishing and defining the human rights applicable to corporations should rest solely with international organisations, with little or no role for voluntary codes of conduct (Macek 2002). Thus, to date, the effect of voluntary codes of conduct on other legal proceedings (and the effect of established legal regimes on voluntary codes) has largely remained untested; the effect of codes, especially voluntary codes, is still potential more than actual. Some ‘hybrid’ forms of state sanction of voluntary codes could emerge to address their hybrid nature.

Implications Having examined the advantages and perils of voluntary corporate codes of conduct, recommendations can be made to help ensure they enhance the accountability and transparency of corporate conduct: Citizens and consumers: ● Pressure governments and corporations (e.g. through shareholder actions

and campaigns) to ensure adoption of best practices and appropriate enforcement regimes Monitors: ● Clarify roles and obligations vis-à-vis other stakeholders, monitors and

participants ● Gather empirical data about codes and their outcomes to ensure that a

voluntary code is the appropriate mechanism to address the potential mischief involved ● Devise model codes of conduct to provide an example of what a voluntary

code of conduct could contain ● Share experience of codes and their pitfalls with drafters ● Collect information and create databases monitoring and comparing the

content and enforcement of voluntary codes ● Participate in developing standards to judge behaviour, auditing and

reporting Drafters: ● Adopt best practices (including, but not limited to, those outlined above)

to ensure both the long-term relevance of the code and some protection from legal liability ● Consult widely in the development of the code to limit exposure to legal

liability

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● Enhance the legitimacy of the code through consensus ● Enhance the transparency of the code through building consensus about

definitions and terms with other organisations and government ● Ensure that internal expertise with codes is developed and used effec-

tively Corporate governance: ● Ensures truly independent monitoring or auditing of code implementa-

tion ● Should provide sufficient funds to actually monitor compliance with

periodic audits and ongoing case-by-case investigations ● Provides sufficiently diversified funding sources so that no single source

dominates, or entirely independent funding sources from the organisations that the code will cover in order to ensure independence of the monitoring and compliance body Governments: ● Clarify the role of self-regulatory initiatives in the regulatory state ● Identify areas where the adoption of a voluntary code precluded state

regulation ● Continue to influence voluntary code development through the promul-

gation of legislative standards of behaviour, auditing and reporting ● Formalise and protect the status of effective non-governmental monitor-

ing agencies (e.g. through favourable tax treatment) ● Develop or continue to develop management and reporting standards ● Collect and disseminate objective and reliable data on best practices,

efficacy and how best to ensure compliance ● Fund and encourage educational programmes that address corporate

ethics and compliance ● Incorporate private compliance strategies into public law enforcement

strategies (e.g. competition law)

Conclusions Voluntary codes of conduct perform a function in the weak state, helping to fill the ‘normative vacuum’ left by a retreating administrative state. Rules are still required for the normal and now trustworthy functioning of markets, and disputes still arise. Voluntary codes will undoubtedly form part of recommendations for

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improving corporate conduct in response to present scandals. A new vocabulary is being developed to characterise the hybrid public–private relationships, and particularly the legal or behavioural expectations and norms generated by these new relationships. Several theoretical questions are raised; but to date the debate over the key question, the actual effect of codes, is still unresolved. This lack of resolution is not due to a dearth of experience or a paucity of debate over the conceptual and analytical questions: it is due in large part to limited or no comprehensive empirical study. Little is said beyond assertions that they do or do not work. Most agree that voluntary codes might affect behaviour indirectly, and that effectiveness improves in correspondence with the integration into more direct state regulation. However and consequently, key problems with accountability, transparency and conflicts with national and international governance are likely to continue to characterise code development and operation.60

References Arthur Andersen and London Business School (2000) Ethical Concerns and Reputation Risk Management: A Study of Leading UK Companies (London: Arthur Andersen). Arthurs, H., and P. Craig (1997) ‘Public Law and Control over Private Power’, in M. Taggart (ed.), The Province of Administrative Law (Oxford, UK: Hart Publishing). Ayres, I., and J. Braithwaite (1992) Responsive Regulation: Transcending the Deregulation Debate (Oxford, UK: Oxford University Press): 120-28. Badaracco, J.L., and A.P. Webb (1995) ‘Business Ethics: A View from the Trenches’, California Management Review 37 (Winter 1995): 8-28. Baker, F. (1993) ‘Private Codes of Conduct: Should the Fox Guard the Henhouse?’, University of Miami Inter-American Law Review 24 (Spring/Summer 1993): 399-418. Baldwin, R., and M. Cave (1999) Understanding Regulation: Theory, Strategy and Practice (Oxford, UK: Oxford University Press): 126-33. ——, C. Scott and C. Hood (1998) A Reader on Regulation (Oxford, UK: Oxford University Press). Baxi, U. (2000) The Future of Human Rights (Oxford, UK: Oxford University Press). Beattie, K. (1999) ‘Fairness, Openness and Self-Regulation: An Examination of Administrative Law Values and the Use of Voluntary and Self-Regulatory Measures for Environmental Protection’, Canadian Journal of Administrative Law and Practice 14: 1. Bencivenga, D. (1995) ‘Corporations Weigh Benefits of Voluntary Plans’, New York Law Journal, 13 July 1995: 5. Bennet, C. (2001) ‘The Protection of Personal Financial Information: An Evaluation of the Privacy Codes of the Canadian Bankers’ Association and the Canadian Standards Association’, Industry Canada, http://strategis.ic.gc.ca/SSG/ca00783e.html, 19 October 2001. Black, J. (2001) ‘Decentring Regulation: Understanding the Role of Regulation and Selfregulation in a “Post-regulatory” World’, Current Legal Problems 24: 147.

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Useful websites: COVERCO, www.coverco.org; Industry Canada, Strategis, http:// strategis.ic.gc.ca; International Labour Organisation, www.ilo.org; OECD, www.oecd. org; World Bank, www.worldbank.org.

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Blackett, A. (2001) ‘Global Governance, Legal Pluralism and the Decentered State: A Labor Law Critique of Codes of Corporate Conduct’, Indiana Journal of Global Legal Studies 8: 401-47. Bronson, D., and S. Rousseau (1995) Working Paper on Globalisation and Workers’ Human Rights in the APEC Region (Ottawa: International Centre for Human Rights and Democratic Development [now Rights and Democracy]). Clapham, A. (1993) Human Rights in the Private Sphere (Oxford, UK: Clarendon Press). Compa, L., and T.H. Darricarrere (1995) ‘Enforcing International Labour Rights through Corporate Codes of Conduct’, Columbia Journal of Transnational Law 33: 663-89. Cooper, R. (2002) ‘Why We Still Need Empires’, The Observer, 7 April 2002. Elwell, C. (1995) ‘Human Rights, Labour Standards, and the New WTO: Opportunities for a Linkage’, in Essays on Human Rights and Democratic Development 4 (Ottawa: International Centre for Human Rights and Democratic Development). Evans, J.M. (1996) ‘Judicial Review and Deregulation: The Death of Administrative Law?’, paper presented at the Deregulation, Self-regulation and Compliance in Administrative Law Conference, York University, Toronto, Canada, March 1996. ——, H.N. Janisch, D. Mullan and R.C.B. Risk (1995) Administrative Law: Cases, Text and Materials (Toronto: Emond-Montgomery). Freeman, J. (1997) ‘Collaborative Governance in the Administrative State’, University of California at Los Angeles Law Review 45: 1. —— (2000a) ‘Private Parties, Public Functions and the New Administrative Law’, Administrative Law Review 52.3: 1-98. —— (2000b) ‘The Private Role In Public Governance’, New York University Law Review 75: 101. Gordon, K. (2000) Rules for the Global Economy: Synergies between Voluntary and Binding Approaches (Paris: OECD). —— (2001) The OECD Guidelines for Multinational Enterprises and Global Instruments for Corporate Responsibility (Paris: OECD). —— and M. Miyake (2000) Deciphering Codes of Corporate Conduct: A Review of their Contents (Paris: OECD). Granatino, K.G. (1999) ‘Corporate Responsibility Now: Profit at the Expense of Human Rights with Exemption from Liability?’, Suffolk Transnational Law Review 23: 191-99. Gunningham, N. (2000) Codes of Practice: The Australasian Experience (Ottawa: Industry Canada). Harter, P. (1982) ‘Negotiating Regulations: A Cure for Malaise’, Georgetown Law Journal 71: 1. Herrnstadt, O.E. (2001) ‘Voluntary Corporate Codes of Conduct: What’s Missing?’, Labor Lawyer 16 (Winter/Spring 2000/2001): 339-71. Hutchinson, M. (2001) Canadian NGO Policy Views on Corporate Responsibility and Corporate Accountability (Ottawa: Canadian Council for International Co-operation). ILO (International Labour Organisation) (2002) ‘Corporate Codes of Conduct’, www.itcilo. it/english/actrav/telearn/global/ilo/code/main.htm, 5 July 2002. Industry Canada (1995) Highlights, Strategic Alliances under the Competition Act (Ottawa: Industry Canada). —— (1998) Voluntary Codes: A Guide for Their Development and Use (Ottawa: Office of Consumer Affairs, Industry Canada). —— (2000) An Evaluative Framework for Voluntary Codes (Ottawa: Office of Consumer Affairs, Industry Canada). Jennings, W.I. (1943) The Law and the Constitution (London : University of London Press, 3rd edn). King, A., and M. Lennox (2000) ‘Industry Self-regulation without Sanctions: The Chemical Industry’s Responsible Care Program’, Academy of Management Journal 43.4: 698-717. KPMG (2000) ‘KPMG Ethics Survey 2000: A Review of a Questionnaire Sent to 1,000 CEOs of the Largest Canadian Corporations’, www.kpmg.ca/english/services/fas/publications/ ethicssurvey2000.html, 5 July 2002. Lehrer, J. (1998) ‘Trading Profits for Change’, Human Rights 25: 21.

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Liubicic, R.J. (1998) ‘Corporate Codes of Conduct and Product Labeling Schemes: The Limits and Possibilities of Promoting International Labor Rights through Private Initiatives’, Law and Policy in International Business 30: 114-15. Lu, S.P. (2000) ‘Corporate Codes of Conduct and the FTC: Advancing Human Rights through Deceptive Advertising Law’, Columbia Journal of Transnational Law 38: 603-29. Macek, E.E. (2002) ‘Scratching the Corporate Back: Why Corporations Have no Incentive to Define Human Rights’, Minnesota Journal of Global Trade 11 (Winter 2002): 101-24. McGarity, T. (1991) Reinventing Rationality: The Role of Regulatory Analysis in the Federal Bureaucracy (New York: Cambridge University Press). Mendes, E., and J. Clark (1996) The Five Generations of Corporate Codes of Conduct and their Impact on Corporate Social Responsibility (Ottawa: Human Rights Research and Education Centre, www.uottawa.ca/hrrec/publicat/five.html, 5 July 2002). OECD (Organisation for Economic Co-operation and Development) (1997) Co-operative Approaches to Regulation (PUMA Occasional Papers 18; Paris: OECD). —— (2001a) The OECD Guidelines for Multinational Enterprises and Global Instruments for Corporate Responsibility (Background Issues Paper; Paris: OECD). —— (2001b) Private Initiatives for Corporate Responsibility: An Analysis (Paris: OECD). —— (2001c) Making Codes of Corporate Conduct Work: Management Control Systems and Corporate Responsibility (Paris: OECD). —— (2001d) Corporate Responsibility: Results of a Fact-finding Mission on Private Initiative (Paris: OECD). —— (2001e) Public Policy and Voluntary Initiatives: What Role Have Governments Played? (Paris: OECD). Ogus, A.I. (1994) Regulation: Legal Form and Economic Theory (Oxford, UK: Oxford University Press). Piper, S.T. (2001) ‘Bill C-6: A Lost Opportunity to Democratise Canada’s Technological Society’, Dalhousie Law Journal 23.2: 253-300. Pitt, H.L., and K.A. Groskaufmanis (1990) ‘Minimising Corporate Civil and Criminal Liability: A Second Look at Corporate Codes of Conduct’, Georgetown Law Journal 78: 1,559-654. Pouncy, C.R.P. (2002) ‘The Rational Rogue: Neoclassical Economic Ideology in the Regulation of the Financial Professional’, Vermont Law Review 26: 263-380. Priest, M. (1997) The Scope and Limits of Self-regulatory Theory and Case Studies (Toronto: University of Toronto, Centre for Study of the State of the Market). —— (1998) ‘The Privatisation of Regulation: Five Models of Self-regulation’, Ottawa Law Review 29 (1997/98): 233. Raday, F. (2000) ‘Privatising Human Rights and the Abuse of Power’, Canadian Journal of Law and Jurisprudence 13: 103. Reichman, A. (2001) ‘Professional Status and the Freedom to Contract: Toward a Common Law Duty of Non-discrimination’, Canadian Journal of Law and Jurisprudence 14: 79. Rich, A.J., P.H. Mihalek and C.S. Smith (1990) ‘Are Corporate Codes of Conduct Effective?’, Management Accountant, September 1990: 34-35. Richter, J. (2001) Holding Corporations Accountable: Corporate Conduct, International Codes and Citizen Action (London: Zed Books). Salter, L. (1993) ‘Housework of Capitalism: Setting Standards for the New Communication and Information Technologies’, International Journal of Political Economy 23.4 (1993/94): 105-34. Schwartz, M. (1998) ‘The Relationship between Corporate Codes of Ethics and Behaviour: A Descriptive Exploration and Normative Evaluation’ (unpublished doctoral thesis; Toronto: York University). Shaughnessy, M. (2001) ‘The United Nations Global Compact and the Continuing Debate about the Effectiveness of Corporate Voluntary Codes of Conduct’, Colorado Journal of International Environmental Law and Policy 159: 162-72. Sinclair, D. (1997) ‘Self-regulation and Command and Control: Beyond False Dichotomies’, Law and Policy 19.4: 529-60.

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Singhapakdi, A., and S.J. Vitell (1999) ‘Analyzing the Ethical Decision Making of Sales Professionals’, Journal of Personal Selling and Sales Management 11.4 (Fall 1999): 1-12. Stephens, B. (2002) ‘The Amorality of Profit: Transnational Corporations and Human Rights’, Berkeley Journal of International Law 20: 45. Trevino, L., G.R. Weaver, D.G. Gibson and B.L.Toffler (1999) ‘Managing Ethics and Legal Compliance: What Works and What Hurts’, California Management Review 41: 131-51. Waddams, S.M. (1999) The Law of Contracts (Toronto: Canada Law Book). Webb, K. (1999) ‘Voluntary Initiatives and the Law’, in R. Gibson (ed.), The New Politics of Corporate Greening (Peterborough, Canada: Broadview Press). —— and A. Morrison (1999a) ‘Legal Aspects of Voluntary Codes’, in D. Cohen (ed.), Exploring Voluntary Codes in the Marketplace (Ottawa: Industry Canada). —— and —— (1999b) ‘Voluntary Approaches to Environment and Law: A Canadian Perspective’, in C. Carraro and F. Leveque (eds.), Voluntary Approaches in Environmental Policy (London: Kluwer Press). Williamson, J. (1990) ‘What Washington Means by Policy Reform’, in J. Williamson (ed.), Latin American Adjustment: How Much Has Happened? (Washington: Institute for International Economics).

Simon B. Archer

S. Tina Piper

I am a Barrister and Solicitor at Torys LLP, where I practise corporate law with emphases on energy and power and pensions law. I am a former Clerk to Justices of the Court of Appeal for Ontario, and have worked with the Law Commission of Canada, Roeher Institute, Derechos en Acción and Osgoode Hall Law School. I publish and present work on corporate law, international financial institutions and issues in law-and-development, and do extensive work in Central America. [email protected]

I am a Canadian lawyer pursuing a doctorate at the University of Oxford, Balliol College, as a Rhodes scholar. My research is a mix of history, sociology and law, and considers the role that the growth of medical professionalisation played in the development of the patent law. I have worked in a range of legal areas such as immigration, domestic and international human rights, intellectual property, corporate and trade law, and also do extensive work in Central America. [email protected] [email protected]

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a a The auditor has no clothes 16_

Challenging the pursuit of objectivity in auditing Rupesh A. Shah New Academy of Business, UK

There is no pure place outside of power by which the question of validity might be raised, and where validity is raised, it is also always an activity of power (Butler 1995 cited in Lather 1997).

In the flickering light of corporate irregularities that have become apparent since the collapse of the energy trading firm Enron,1 attention has turned towards the relationship of accounting and auditing practice to responsible corporate behaviour. Enron’s auditors in the USA, Arthur Andersen, were blamed for contributing to the huge losses incurred by shareholders and workers. The suggestion was that Andersen turned a blind eye to some of the practices of Enron that led to the firm’s eventual collapse. For some commentators, the need for Andersen to fulfil the two roles of auditor and consultant meant that an underlying, although perhaps covert, message within the firm was an indication that it would carry out its auditing practices with a view to its interests in securing further, more lucrative consulting work (Hamilton 2001). Critics as well as regulators such as those of America’s Securities and Exchange Commission wondered how ‘objective Andersen’s audit work could have been’ (Kemeny 2001) when these other interests were involved. While the financial auditing community is coming under pressure for the potential conflicts of interest and their resultant lack of objectivity, the related field of social auditing continues to be pushed up the corporate agenda by those seeking greater corporate responsibility and accountability for the social impacts of business activity. The challenge to Andersen has resulted in increased attention towards the accuracy and validity of current social and financial auditing practice. 1

The Enron situation seems to gaining the kind of talismanic status within a movement for corporate responsibility that Shell was bestowed with following its escapades in Nigeria and the North Sea in 1995.

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The solutions to improve the legitimacy of auditing firms have focused on attempts to decrease the potential for conflict of interest and the threat to the independence or objectivity of auditors. However, this pivotal notion of objectivity is problematic. The notion has come under increasing scrutiny in the light of the postmodern and linguistic developments in the social sciences and the direct experience of many groups and communities who have been disempowered and oppressed by its reifying effects. The attempts of an individual or group to cast a pure eye of objectivity across actions of others have been labelled as a particular socially constructed practice that has no ultimate reference point or validity. The purpose of this chapter is to reveal how the widely assumed notion of objectivity affects the practice of auditing. I explore how recourse to being objective is no longer useful in a search for legitimacy (or validity) and corporate accountability. I suggest that, instead of looking for a technical solution to this problem, a more appropriate, just and sustainable option would be attempts to develop ‘critical subjectivity’ in the auditing process. I start by describing my view of the roles that auditing plays in the process of late capitalism. I suggest that primary roles relate to the signification of truthfulness and the demonstration of legitimacy. I then go on to paint a picture of the backdrop of these roles by exploring some of the assumptions about what is considered truthful and accurate in the context of the auditing process.2 I explore implications for the practice of auditing by discussing the similarities between the assumptions made by auditors with those made by positivist scientists, with particular reference to the desire for demonstrating objectivity in their respective practices. I go on to suggest why, in the light of postmodernism and post-structuralism, the validity of objectivity itself has come under attack and then conclude by describing the practice of critical subjectivity as one alternative option for the auditing profession.

What roles do auditors play? Following the collapse of Enron, concern has been raised over the conflict within Arthur Andersen over its ability to provide an auditing service given its consulting work for Enron (Economist 2002b; Kemeny 2001; Maull 2002). The desire within Andersen to conduct consulting work for Enron in order, ostensibly, to make money for partners through this more lucrative service was seen to have had an effect on the way the company conducted its auditing work. The implication was that, instead of acting in the disinterested and neutral manner that would be expected of an auditor, the company had an interest in securing a specific type of outcome from its audit that was based on a desire for revenue and profit accumulation. Clients felt that the company could no longer fulfil its role as an auditor 2

By the ‘auditing process’ I refer to the total sum of activities from provision of accounting information by clients, to various roles of the auditors and to the reading and usage of audits, and not merely the actual activity of conducting an audit by the auditor.

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of financial information. In order to understand what roles the auditor might play, it is useful to consider what role financial information plays in the late capitalist system. The financial information that a company produces has roles for both those within a company and those that are outside of the firm. Such figures allow those within the organisation to develop their understanding of the situation with regard to the context and environment in which the company operates; financial figures enable decision-makers to gain some understanding of recent performance, make strategies for future activity and proceed with according decisions. Other financial data provides a similar sense-making function to those outside the organisation in that it allows external parties to understand, plan and strategise based on their ‘reading’ of the reported financial performance. A simple example of this inside–outside function would be the use of financial information by internal managers to help with operational decision-making processes, by investors to plan investment decisions and by governments to levy taxes. In addition to the practice of giving account of the financial status of a company, the last 30 years have seen the emergence of a range of practices that attempt to account for the social and environmental impact of business activity. In many ways this is not particularly surprising, since, as Power (1997) has suggested, it is ‘through the giving and monitoring of the accounts that we and others provide of ourselves and our actions, that the fabric of normal human exchange is sustained’ (Power 1997: 1). For a company the external stakeholders and shareholders can be seen as prime (albeit varied) audiences for these various reporting activities. As interested parties they seek to understand the performance of the company in relation to a broad range of impacts that they deem as important and relevant. In reading this information, the external party—an individual, group or community of practice— make some simple assumptions about the nature of the information that they are viewing. In particular they make assumptions about the truth and the validity of the information that they interpret. Within the late capitalist economy, this is true at the individual level as well as at the institutional level, since ‘accurate company accounts are a keystone for any proper capital market’(Economist 2002a). It is here that the practice of auditing enters the frame. Alongside the emergence of social and environmental impact assessments the last 30 years has also seen a concomitant demand for explicit checking of the data that is presented and communicated by powerful organisations, such as companies and government. In terms of financial audit this might be regarded as the examination of the financial statements of a company accompanied by a statement about the truth and fairness of the accounts. A similar definition can be made for the formalised and professionalised practices of social and environmental auditing, whereby ‘one of the major reasons for subjecting corporate social accounts to external scrutiny is to enhance the transparency and credibility of information contained in the report’ (Swift and Owen 1999). The reasons for employing auditors can be related to the information asymmetries and the moral hazard involved in the provision of information to external stakeholders. In this respect auditors and the auditing process provide a seal of approval on the figures that are reported by a client company. As one group of

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practitioners suggests, a company needs its external auditors to offer ‘firm standards and the legitimacy that comes with them’ (Raynard et al. 2001). Power (1997: 28) remarks, ‘in simple terms the output of an audit is an opinion. The presumed effect of this opinion is to enhance the credibility of the audited object.’ An important role played by an auditing firm and the auditing process in the late capitalist system thus seems to be the ability to signify the truthfulness of the accounting statements made by the company.

Truth’s new clothes So what might truthfulness in this context mean? Accountants and auditors conduct their practice on the basis of a set of assumptions about the nature of what they are seeking to signify through their output. Those who make use of the outputs of accountants and auditors also make assumptions. To a large extent a definition of truth depends on the assumptions about reality that are accepted. These assumptions relate in part to beliefs about the nature of the reality in which these various parties are operating and their ways of understanding and looking at the world. These then are assumptions underlying the world-view or paradigm that auditors and users of audited information hold. Such assumptions about the nature of reality tend generally to remain hidden from our everyday awareness (Harman 1988).3 Although they may not enter our discursive consciousness (Giddens 1984), these assumptions are crucial ingredients for the way in which we undertake all of our everyday activities, from the way we relate with each other in our families, to how we choose to work together and organise our professional and political lives. In interpersonal or inter-group processes it is usually the unquestioned and taken-for-granted nature of our assumptions about reality that allow us to ‘go on’. However, the hidden nature of these assumptions can also lead to significant problems when the kinds of activity and resource circulating in a society change. In order to explore these assumptions I look at recent problems in accounting and auditing, drawing on Simms’s (1999) analogy of ‘a collapsed building, [where] failure exposes a system’s hidden structure’. Even before the situation of Enron and Arthur Andersen, questions had been raised in the USA about the ability of auditing process to carry out its role successfully (Jonas and Blanchet 2000; Parfet 2000; Wahlen 2000). Part of the conversation has centred on the benefits and problems of opting for a rules-based system for accounting over one based on principles. One of the reasons for this debate revolves around how, representative of the health of a firm, financial statements are given the increasing importance of intangible assets in corporate value (Economist 2002b). Brand identity, intellectual property and company relationships are recognised as providing considerable and increasing amounts of ‘value’ in most large corporations (Bendell and Lake 2000; Gilmore 1997; Wheeler and Elkington 2001). This situation has been coupled with 3

And, as I write this, I notice how I am nervous about being challenged for elitism in attempting to write about philosophy.

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the speed of change in corporate performance that has been facilitated through the greater importance of technology in business processes. The result is that analysts have had their attention drawn to the fact that a set of audited accounts that conform to current ‘standards’ of accuracy may well miss out considerable sources of relevant information regarding the present and potential performance of a company (Economist 2002b). In this way attention has been drawn to the gaps between what financial statements measure and what is considered to be valuable. Most responses to these gaps have tended to be technical in nature as people seek to find ways to map and measure these new realities This is opposed to adopting a different set of assumptions which would work from an understanding that reality is at least in part constructed through the interaction between people in society. The chairperson of the Securities and Exchange Commission in the US, Harvey Pitt, recently recognised this alternative viewpoint when he suggested that there is still a need to end the assumption that there is one correct version of accounts (Economist 2002b). The dominant assumptions combined with the acceptance that an audit can verify a set of accounts imply that there is only one real performance of a company, that this financial performance is a real phenomenon and that given sufficient resource, time, access and the right process this ‘reality’ can be revealed to the human mind in its entirety. With these assumptions the auditor’s task is constituted as one of assessing the extent to which the accounts presented by a company match up with or conform to the singular reality of that company’s existence.

Objectivity in science and auditing These assumptions parallel very closely the assumptions about the nature of reality and knowledge that are made by positivist scientists as they have been inherited through the Cartesian world-view. In order to explore how these assumptions might affect the practice of auditing, in the next section I briefly explore how the assumptions of positivist science have affected the role and practice of scientists. At the time of the Enlightenment in 17th-century Europe the positivist scientific method was being developed on the basis of new ways of looking at the world and the place of humans within it. Emerging from the ancient world-view was a dualistic rationality in which physical matter was suggested to give rise to the conscious mind (Harman 1988). This view of the world also suggested that reality was singular and tangible and was supplemented with the acceptance that this reality could be fully known by the human mind. This full knowledge could be gained because reality was considered to be fully fragmentable; like a machine, the ‘whole’ could be separated into constituent ‘parts’ so that knowledge of these distinct parts would yield complete knowledge of the whole (Lincoln and Guba 1985; Reason and Bradbury 2001).4 4

This separation of the parts from the whole and the separation of mind and matter are two of many attempts from the Cartesian world-view that define reality as a series of

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With such assumptions of a singular and fully knowable reality, the existence of many individual scientists opened up the possibility that they would effect unique influences on the factual knowledge that was gained about the world. Moreover, given the particular political and religious conditions of the time in Europe it was considered that these influences would potentially be the subject of restrictive forces (Toulmin 1990). Thus, as Richard Tarnas (1991) explains, ‘modern science [was] founded on the conviction that if you are to know the world as it is in itself, then you need to cleanse your mind of all human projections, such as meaning and purpose, onto the world’. In order to achieve this the scientist needed to be ‘distanced’ from the subject the scientist was seeking to explore so that the level of personal, individual ‘interference’ in the knowledge determination process could be controlled and minimised (Harding 1990; Lincoln and Guba 1985). This liberation from individual traits, emotions and characteristics and from the burden of affecting the subject of research—labelled ‘objectivity’—could then, it is claimed, mark out the scientific process as ‘value-free’ (Harman 1996), with pure fact being its only output. The logic suggested that once science had produced the facts about how things work it would be up to society to decide how to use this knowledge; it would only be at this stage that value judgements needed to be made. In accordance with these assumptions, positivists have developed a number of approaches or tools to try to prevent personal values from interfering in the conduct of enquiry and ‘ensure’ objectivity in the process of knowledge discovery. For instance, the ritual of method, the barring of certain types of knowledge from the enquiry process and the search for natural laws that do not have a value structure (Lincoln and Guba 1985) are all used to try to restrict the amount of interference an individual person has on the discovery of knowledge. These ‘sleight of mind’ tricks of value-neutrality and objectivity have also been used within the world of accounting. Following the deepening crisis surrounding Andersen and Enron, a number of other companies were also threatened with similar problems. Companies such as Tyco and General Electric were singled out by investors as having suspect accounting practices underpinning their reported performance; shares in Elan (an Irish-based pharmaceutical) fell dramatically, while Global Crossing, a telecommunications company, collapsed when question marks were placed against the accounts of the two companies (Economist 2002a). The fact that such challenges were made in the light of concerns over Andersen’s independence seems to suggest that the importance of maintaining an air of objectivity in the practice of auditing is an integral aspect of the late capitalist process: perhaps as central as the air of objectivity that scientists must portray in their work for it to have legitimacy and validity among the scientific community.

dualities, such as the separation of human from nature, theory from practice, ‘Western self’ from the ‘other’, and masculine from feminine.

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Objectivity in trouble The similarities between the practices of positivists in seeking to display objectivity and those of auditors should not be too surprising. The culture of the Enlightenment has had a massive influence on the shapes and processes that constitute our social activities today. Our language, culture, practices and our ways of understanding and organising have come to be soaked in the assumptions that the world of experience—our reality—has a form that is singular and tangible and that it is fully knowable through fragmentation. As we swim about in this cool epistemological water, the idea of pure objectivity tends to be unquestioningly accepted as the only valid and useful stance to adopt to find out the truth about the world. However, according to Tarnas, the sacredness of scientific objectivism has been called into question by the realisation that emerged, in the wake of relativity theory, that because induction can never render certain general laws, and because scientific knowledge is a product of human interpretive structures that are themselves relative, variable and creatively employed, and finally because an act of observation in some sense produces the objective reality science attempts to explicate, the truths of science are neither absolute nor unequivocally objective (Tarnas 1991: 359).

From within this post-structuralist and postmodern frame it has been suggested (or remembered)5 that our experience of reality (and hence the notion of reality itself) arises from local and specific cultural interaction in society (Lincoln and Guba 2000). Truth is constructed in social relations (Gergen 1999) and is therefore rendered plural. As a result the recourse of positivism towards objectively attaining the single, value-free truth—whether it be through the activity of scientists or of auditors—is revealed as at least not very useful and maybe even just an impossible dream. Such a form of enquiry based on universal truth claims by disinterested, objective scientists and auditors has been revealed variously as political, powerserving and oppressive. Vandana Shiva, writing about the effects of positivist science on nature and gender, said: The fact–value dichotomy is a creation of modern reductionist science which, while being an epistemic response to a particular set of values, posits itself as independent of values. By splitting the world into facts vs. values, it conceals the real difference between two kinds of value-laden facts (Shiva 1989: 27).

Similarly, Nancy Hartsock commented:

5

The postmodern assertion of multiple realities in the West has precursors in Eastern philosophy and practice (and might not be considered only as postmodern). For example, some 2,000 years ago Jain philosophers and monks from India helped develop the practice of lay Jains around the notion of anekant, or the theory of manifold aspects (Jain Center of Northern California 2001).

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the studied object becomes another being with regard to whom the studying subject becomes transcendent . . . what we see is the construction of the social relations, the power relations, which form the basis of the transcendent subject . . . who can persuade himself that he exists outside time and space and power relations (Hartsock 1990: 162-63).

The denial of individual subjectivity (which to be effective requires a shared assumption within society that it is possible for individuals to be purely objective providers of truth) means that scientists and auditors can offer a particular set of facts as being value-free. Given the frame of positivist knowledge, what determines ‘good auditing’ or ‘good science’ is therefore regarded as adherence to the predetermined methodological rules of the game and the attempt to exclude any sense of ‘external influence’. However, the critique of objectivity and the recent examples demonstrate that simply making a claim to being objective may no longer be sufficient to demonstrate legitimacy. As former editor of the New Scientist, Michael Shaw Bond, suggests, the purveyors of objectivity are as valuedriven as anyone, ‘are as accountable to others as anyone else . . . and should not be above judgement’ (Shaw Bond 1999: 38).

Legitimacy is not a place This notion of a value-free science also constructed the powerful, objective auditor/researcher/government official as a transcendent subject whose experiences were the benchmark against which to measure all others (Shah 2001). As challenges to the neoliberal form of globalisation are increasingly voiced and heard, so voices, previously unchallenged as authoritative and definitive, are faced with dilemmas about how to engage with these plural and uncertain worlds. Lather (1993) remarks that the question of whether ‘to celebrate or lament the felt loss of found worlds depends on how one reads the political possibilities that open up when “truth” is positioned as made by humans via very specific material practices’. For those institutions that hold money, political power and influence over discourse the political possibilities seem either to ‘threaten’ or to ‘challenge’ learned patterns of behaviour and sense-making. Power comments that the knowledge base of the financial audit process is fundamentally obscure. It is this obscurity which sustains the expectations gap, an obscurity which practitioners overcome by appealing in the end to the authority of their own judgement in determining what is reasonable practice . . . auditing remains at the level of folk art or craft (Power 1997: 30).

In the halcyon days of ‘found worlds’ and dead certainties those in positions of power—such as government, scientists and researchers writing in journals—were able to construct their legitimacy of their knowledge and their ‘licence to operate’

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from their positional or physical power and remain largely unchallenged.6 However, the challenge laid at the doors of the purveyors of objectivity is that the default position of legitimacy has been eroded; it is no longer sufficient to stick one’s flag in the sand and claim authority over the territory on behalf of some greater, more knowing truth. So, then, the corollary to the suggestions that notions of rightness, truth and objectivity are socially constructed icebergs, rather than firm lands on which to stand, is that legitimacy, or the validity to act, is socially constructed through our relations with others. In seeking to ‘rupture validity’ as a ‘regime of truth’, Lather discusses counterpractices of authority and alternative discourse-practices of validity (Lather 1993, 1995, 1997). She posits the possibility of ‘ironic validity’ that ‘foregrounds the insufficiency of language’ and makes gestures towards the problems of representation (Lather 1993). Another of these counter-practices she labels ‘voluptuous validity’ or ‘situated validity’ in which ‘authority . . . comes from engagement in self-reflexivity, not distanced “objectivity” ’ (Lather 1993: 682). And in this she seems to be daring me to explore why I choose to act in the ways I do, the reasons why I should be listened to or to explore and discuss how I have come to my conclusions. For me, this represents a challenge to move away from pure objectivity in such a way that ‘we do not suppress our primary subjective experience but accept that it is our experiential articulation of being in a world, and as such is the ground of all our knowing’ (Heron and Reason 1997: 283). Heron and Reason suggest that, if naïvety is merely accepted, it is likely to be open to distortions of defensive processes. The injunction is that the powerful individual, in order to become a ‘thinking-feeling person’ (Fals Borda 2001), must conduct continual internal reflection and learning to know his or her own practice as an individual in a society (organisation or institution).7 In some ways I have attempted to engage in such a form of reflexive practice or critical subjectivity as a way to demonstrate legitimacy. As I conducted my doctoral research on the relationship between an environmental NGO and a large multinational oil company I often found myself looking around me and wondering 6

7

An interesting connection between the technologies of accounting, discourses of objectivity and repression is made by Neu (2000) in a study of the colonial government in the 1800s in Canada. He suggests that accounting discourse and accounting techniques were a mode of government that rationalised colonial relations and contained indigenous people in settler society. While there were attempts at resistance by the first nations, they were eventually subjugated by the colonial power; and today problems of accounting for land ownership continue. The skills and tools required to practice such critical subjectivity or consciousness ‘in the midst of action’ are numerous. They encourage us to go from noticing our role-bound alienation to enabling us to learn new ways of acting, seeing and enquiring (Rudolph et al. 2001) through reflective enquiry (Marshall 1999). As Torbert (2000) suggests, it is something that ‘each of us can only do by and for ourselves by dividing and otherwise stretching our attention’. Practices include self-reflective journal writing and autoethnography (Ellis and Bochner 2000; Richardson 2000), personal mastery (Senge et al. 1994), ‘indwelling’ (Polanyi 1967: 17, cited in Douglass and Moustakas 1985) and meditation, while t’ai-chi, Gurdjieff work and other ritual-type activities offer online gateways into ‘self-observation-among-others’ (Fisher and Torbert 1995; Torbert 2000).

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what my role as a powerful academic was in perpetuating a situation that smacked of injustice (Shah 2001). I sought to engage with what I noticed rather than turn away from my experiences by maintaining a reflexive journal. In my thesis I explored this reflexivity and presented my journal writing as a way to open up to others my reflections on this power/knowledge. Since completing that piece of research I have looked back and noticed that to some extent I did what Lenzo has cautioned against, when he suggests, ‘we “fool ourselves” if we believe that we can come clean “under the confessing redemptive self reflexive gaze” ’ (cited in Lather 1997). At the time I told a story about this reflective practice being a valuable way of engaging with my particular subjectivity and demonstrating some situated sense of legitimacy. It now appears to me that in doing this I thought I could ‘come clean’ and guarantee the legitimation of my knowledge. The experience—from writing the journal pieces to presenting them under the illusion of confession, to this recent noticing of its incompleteness— resonates with Lather’s warning that such practices are ‘situated, multiple, partial and endlessly deferred, a reflexive validity interested in how discourse does its work’ (Lather 1997).8

Constructing new numbers Is there any evidence that those involved in business are beginning to recognise the plural and socially constructed nature of truth and reality? Perhaps the emergence of environmental and social auditing over the past 20–30 years and its use by a substantial number of global businesses9 indicates that the late capitalist system is beginning to recognise that non-financial impacts are important in ensuring the legitimacy of business to undertake its role in society. Similarly, the rise in prominence of the United Nations Development Programme’s Human Development Index suggests complementary, multifaceted ways of knowing about human well-being are influencing no longer fertile obsessions with understandings of progress centred on continual growth of GDP. Both The Economist and Harvey Pitt, chairperson of the Securities Exchange Commission in the US, seem to have recognised the socially constructed nature of what we measure and seek to call wealth or profit. The Economist has stated, ‘accounting will always be as much art as science’ (Economist 2002b). Pitt has said that ‘there is no true number in 8

9

In writing this my mind keeps turning towards how this work might be taken by the academic powers that be, whoever they are. Am I really making my point clearly enough? Am I talking in a completely unintelligible way and is this useful for anyone other than me? I guess I can’t get to grips with this without engaging in a conversation— so I’m going to let it go. But I notice that even choosing to present this here I am engaged in believing my own beliefs about validity. Perhaps I am also spreading some forensic dust on the fingerprints of power relations between myself and the reader. A report by CSR Network suggested that over half of the Global 100 companies taken from Fortune magazine’s Global 500 produced global environmental reports and 54% of the Global 100 also reported on corporate social responsibility or corporate citizenship programmes (CSR Network 2001).

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accounting and if there were auditors would be the last people to find it’. Both of these comments suggest that the idea of trying to represent the single real performance of a company (or country) through a set of financial (or national) accounts is impossible—but not because of a technical inability to do so. Instead they seem to be suggesting that there are multiple ways to respond to the question ‘how is this company performing?’ and that any response will only be a partial and particular representation of multiple experiences of reality. What are the implications of positing that there is ‘no true number’ in accounting? Power suggests that the certification of ‘quality’ that comes from the auditing process as ‘truth and fairness’ ‘only work as unambiguous signals of fitness for purpose if there are clear public standards of what quality is’ (Power 1997). In a climate of increasing mistrust of large corporations, corporate globalisation and the ‘money-must-grow imperative’ (Robertson 2001) there is greater awareness of the neoliberal water that we are swimming in. Meanwhile, the audit process expands to the social audit of factories and farms all over the world.10 As a result, the implied recourse to clear public standards fails to recognise that there are groups and individuals who do not believe in the paradigm of global governance, let alone accept that different individuals and groups may place different subjective valuations on, for example, the future value of a network of business relationships, the goodwill value of a brand or the ecological and spiritual value of a potential mining location. If truth and reality are multiply and socially constructed, then we need to address the questions of ‘whose reality counts?’ (Chambers 1997), ‘who counts reality?’ (Gaventa and Blauert 2000; Estrella and Gaventa 1998) and ‘how do we do this counting?’ Since the ‘effort to answer the problem of validity is always partial, situated and temporary’ (Lather 1997: 9), it seems that powerful corporations need to open up radically to the stakeholders who have an interest in the performance of the organisation. They would have to admit to having only a partial answer that is the basis for dialogue. And they would have to engage in this practice on an ongoing basis. Yet the ship of late capitalism with Economic Man at its helm does not have the systemic flexibility or open space for trust that can allow this to happen. It is based on a very singular and fragmented picture of reality that requires certainty, completeness, control and permanence in the answers it is willing to work from. If the public role of most audits ‘tends to be to stabilise the institutional image of the practice in question’ (Power 1997: 126) and these institutional images are being fundamentally challenged: ● How can those professions open themselves up in such a way that they

begin to question, reflect on and reinvent the institutional image and reality of financial reporting that maintains a form of capitalism that is unjust, ecologically devastating and ultimately unsustainable?

10

There are some very interesting examples of experiments in participatory workplace appraisal or participatory social auditing in the global South that draw on some of the principles of participatory action research. See, for example, Bendell 2000, the work led by Stephanie Barrientos at the Institute of Development Studies (IDS), Sussex, and research by Marina Prieto at Bristol University.

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● How is it possible for those people in the accounting and auditing profes-

sions to open up their practices to an upward form of accountability that is in the service of others?

References Bendell, J. (2000) ‘Talking for Change? Reflections on Effective Stakeholder Dialogue’ (working paper; Bath, UK: New Academy of Business). —— and R. Lake (2000) ‘New Frontiers: Emerging NGO Activities to Strengthen Transparency and Accountability in Business’, in J. Bendell (ed.), Terms for Endearment: Business, NGOs and Sustainable Development (Sheffield, UK: Greenleaf Publishing): 226-38. Butler, J. (1995) ‘For a Careful Reading’, in S. Benhabib, J. Butler, D. Cornell and N. Fraser (eds.), Feminist Contentions: A Philosophical Exchange (New York: Routledge): 127-44. Chambers, R. (1997) Whose Reality Counts? Putting the First Last (London: Intermediate Technology Publications). CSR Network (2001) The State of Global Environmental and Social Reporting: the 2001 Benchmark Survey (Shrewsbury, UK: CSR Network). Douglass, B., and C. Moustakas (1985) ‘Heuristic Inquiry: The Internal Search to Know’, Journal of Humanistic Psychology 252: 39-55. Economist (2002a) ‘The Lessons from Enron’, The Economist 362.8259 (9 February 2002): 9-10. —— (2002b) ‘When the Numbers Don’t Add Up: Special Report on the Trouble with Accounting’, The Economist 362.8259 (9 February 2002): 67-70. Ellis, C., and A.P. Bochner (2000) ‘Autoethnography, Personal Narrative and Reflexivity’, in N. Denzin and Y.S. Lincoln (eds.), The Handbook of Qualitative Research (London: Sage, 2nd edn): 733-68. Estrella, M., and J. Gaventa (1998) Who Counts Reality? Participatory Monitoring and Evaluation: a Literature Review (IDS working paper 70; Brighton, UK: Institute of Development Studies). Fals Borda, O. (2001) ‘Participatory (Action) Research in Social Theory: Origins and Challenges’, in P. Reason and H. Bradbury (eds.), Handbook of Action Research (London: Sage). Fisher, D., and W.R. Torbert (1995) Personal and Organisational Transformations: The True Challenge of Continual Quality Improvement (London: McGraw–Hill). Gaventa, J., and J. Blauert (2000) ‘Learning to Change by Learning from Change: Going to Scale with Participatory Monitoring and Evaluation’, in M. Estrella (ed.), Learning from Change: Issues and Experiences in Participatory Monitoring and Evaluation (Ottawa: International Development Research Centre): 229-43. Gergen, K. (1999) An Invitation to Social Construction (London: Sage). Giddens, A. (1984) The Constitution of Society: Outline of the Theory Structuration (Cambridge, UK: Polity Press). Gilmore, F. (ed.) (1997) Brand Warriors: Corporate Leaders Share their Winning Strategies (London: HarperCollins). Hamilton, K. (2001) ‘Advisers or Lenders? Banks Face Conflict’, The Sunday Times, 16 December 2001: 8. Harding, S. (1990) ‘Feminism, Science and the Anti-Enlightenment Critiques’, in L. Nicholson (ed.), Feminism/Postmodernism (London: Routledge): 83-106. Harman, W. (1988) Global Mind Change: The New Age Revolution in the Way we Think (New York: Warner). —— (1996) ‘The Shortcomings of Western Science’, Qualitative Inquiry 2.1: 30-38.

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Hartsock, N. (1990) ‘Foucault on Power: A Theory for Women’, in L. Nicholson (ed.), Feminism/Postmodernism (London: Routledge): 157-75. Heron, J., and P. Reason (1997) ‘A Participatory Inquiry Paradigm’, Qualitative Inquiry 3.3: 27494. Jain Center of Northern California (2001) ‘Universe, God, Jainism, Multifold Aspects and Substance’, www.jcnc.org/jainism/ppoj/6.htm. Jonas, G.J., and J. Blanchet (2000) ‘Assessing Quality Financial Reporting’, Accounting Horizons 14.3: 353-63. Kemeny, L. (2001) ‘Mid-sized accountants cash in on Enron fiasco’, The Sunday Times, 16 December 2001: 8. Lather, P. (1993) ‘Fertile Obsessions: Validity after Poststructuralism’, The Sociological Quarterly 34.4: 673-93. —— (1995) ‘The Validity of Angels: Interpretive and Textual Strategies in Researching the Lives of Women with HIV/AIDS’, Qualitative Inquiry 1.1: 41-68. —— (1997) ‘Validity as an Incitement to Discourse: Qualitative Research and the Crisis of Legitimation’, in V. Richardson (ed.), Handbook of Research on Teaching (Washington, DC: American Education Research Organization, 4th edn). Lincoln, Y.S., and E. Guba (1985) Naturalistic Inquiry (Beverley Hills, CA: Sage). —— and —— (2000) ‘Paradigmatic Controversies, Contradictions and Emerging Confluences’, in N. Denzin and Y.S. Lincoln (eds.), The Handbook of Qualitative Research (London: Sage, 2nd edn): 163-88. Marshall, J. (1999) ‘Living Life as Inquiry’, Systemic Practice and Action Research 12.2: 155-71. Maull, S. (2002) ‘Judge orders reforms at Merrill Lynch’, The Pioneer, 10 April 2002: 11. Neu, D. (2000) ‘ “Presents” for the “Indians”: Land, Colonialism and Accounting in Canada’, Accounting Organisations and Society 25: 163-84. Parfet, W. (2000) ‘Accounting Subjectivity and Earnings Management: A Preparer Perspective’, Accounting Horizons 14.4 : 418-88. Polanyi, M. (1967) The Tacit Dimension (Garden City, NY: Doubleday). Power, M. (1997) The Audit Society: Rituals of Verification (Oxford, UK: Oxford University Press). Raynard, P., M. Sillanpää and C. Gonella (2001) ‘From Little Things Big Things Grow’, Tomorrow, March/April 2001: 26-28. Reason, P., and H. Bradbury (2001) ‘Introduction: Inquiry and Participation in Search for a World Worth of Human Aspiration’, in P. Reason and H. Bradbury (eds.), The Handbook of Action Research (London: Sage): 1-14. Richardson, L. (2000) ‘Writing: A Method of Inquiry’, in N. Denzin and Y.S. Lincoln (eds.), The Handbook of Qualitative Research (London: Sage, 2nd edn): 923-48. Robertson, J. (2001) ‘Free Lunches, Yes; Free Markets, No’, ReVision 23.4: 25-30. Rudolph, J.W., S.S. Taylor and E.G. Foldy (2001) ‘Collaborative Off-line Reflection: A Way to Develop Skill in Action and Action Inquiry’, in P. Reason and H. Bradbury (eds.), Handbook of Action Research (London: Sage): 405-12. Senge, P., A. Kleiner, C. Roberts, G. Ross and B. Smith (1994) The Fifth Discipline Fieldbook (New York: Doubleday Currency). Shah, R.A. (2001) ‘Relational Praxis in Transition towards Sustainability: Business–NGO Collaboration and Participatory Action Research’ (unpublished PhD; University of Bath, UK, www.bath.ac.uk/carpp). Shaw Bond, M. (1999), ‘The Values of Science’, Resurgence 194 (May/June 1999): 36-38. Shiva, V. (1989) Staying Alive: Women, Ecology and Development (London: Zed Books). Simms, A. (1999) ‘New Colonialism’, Resurgence 194: 40-43. Swift, T., and D. Owen (1999) ‘AccountAbility 1000: How a Leading Edge Reporter Measures up’, AccountAbility Quarterly 11 (4th quarter 1999): 8-10. Tarnas, R. (1991) The Passion of the Western Mind: Understanding the Ideas that have Shaped our World View (New York: Ballantine Books).

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Torbert, W.R. (2000) ‘Transforming Social Science to Integrate Quantitative, Qualitative and Action Research’, in F. Sherman and W.R. Torbert (eds.), Transforming Social Inquiry, Transforming Social Action (Boston, MA: Kluwer). Toulmin, S. (1990) Cosmopolis: The Hidden Agenda of Modernity (Chicago: University of Chicago Press). Wahlen, J.M. (2000) ‘American Accounting Association’s Financial Accounting Standards Committee’, Accounting Horizons 14.4: 489-99. Wheeler, D., and J. Elkington (2001) ‘The End of the Corporate Environmental Report?’, Business Strategy and the Environment 10.1: 1-14.

Since starting work with the New Academy of Business in November 2001, I have been supporting our research and educational activities through a focus on action research. I have been involved in collaboration with United Nations Volunteers (UNV), aimed at both exploring and enhancing the relations between communities and business in seven countries from the South. I have also supported the New Academy’s educational work with universities and begun a stream of work on responsible business education in schools. In my PhD, from the School of Management, Centre for Action Research in Professional Practice at the University of Bath, I explored the links between personal change, organisational learning and sustainable development. I did this through a double lens of the collaboration between an NGO and business alongside my own attempts at engaging in collaborative research. When I need to nurture the parts of me that research doesn’t quite reach, I can be found in a community-owned, organic garden, near where I live in Bath. [email protected]

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Part 4 New initiatives

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a a In the business of making peace 17_

La Frutera and Paglas in the Philippines* Charmaine Nuguid-Anden United Nations Volunteer, Philippine Business for Social Progress

Peace and development go together. We cannot keep on waiting for peace to come first. The reason why there is no peace is that there is no development. Fact is, if there is no livelihood, people can do anything as there is nothing to lose on their end. Now that we have given the Datu Paglas townsfolk gainful employment, they do not even want to lose even a few days’ wages (Senen Bacani, Chairman, La Frutera Inc.).1

In the Autonomous Region of Muslim Mindanao, La Frutera Inc. is the investor in a banana plantation located on 1,500 ha of land owned and represented by the Paglas Corporation. Remarkably, these ‘twin’ companies are a veritable ‘United Nations of Bananas’ in the heart of insurrection-torn and poverty-stricken Maguindanao, on the Philippine island of Mindanao. The collaboration was made possible by a partnership between the Saudi trading company Abdullah Abbar and Ahmed Zainy Co., Israeli farming experts, the Italian De Nadai Family, Chiquita *

1

This case study has been developed from work conducted with the assistance of Philippine Business for Social Progress (PBSP) as part of the ‘Enhancing Business Community Relations’ project. Between April 2001 and May 2003, a joint initiative between UNV and the New Academy of Business aimed to explore the engagement between business and communities in seven Southern countries: Brazil, India, Ghana, Lebanon, Nigeria, the Philippines and South Africa. This project was undertaken through a combination of collaborative research, partnership building and promotion, with a local researcher/ relations specialist in each country. Charmaine Nuguid-Anden was hosted by PBSP. The case study is based on a detailed inquiry including a series of one-on-one interviews and focus group discussions with various stakeholders (employees and community members), as well as collection of documentation through secondary sources. The findings and recommendations reflected in the document are those of the author and do not necessarily reflect those of UNDP/UNV, New Academy of Business or PBSP. Quoted in Manuzon 2002.

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Brands International and members of the separatist army Moro Islamic Liberation Front (MILF). Behind this partnership, the stalwart local leadership of Datu2 Toto Paglas promoted the development of the surrounding communities and raised the self-esteem of Muslim Mindanaoans. The story of these two companies cannot be separated from the violent land that gave it birth.

In violence and carnage Mindanao was never conquered. As the rest of the Philippine islands were under colonial rule first by the Spaniards and then the Americans, Mindanao was under the nearly unchallenged control of Muslim noble families. The migration of Christians from the north became the match for secessionist guerrilla fighting in the 1950s, and various groups, such as the Moro National Liberation Front (MNLF) and the MILF, emerged claiming to fight to protect Muslim interests. Known as the Bangsamoro nation, Muslim families represented by their respective Datus at various points supported these secessionists, often resulting in warfare between families vying for leadership in the ‘Moro nation’. These conflicts were taken advantage of by mercenary groups and kidnap gangs, giving the whole of Mindanao, and Muslims in particular, a reputation for merciless bloodlust. In 1988 Datu Ibrahim III ‘Toto’ Paglas became mayor of Datu Paglas and became witness to the violence that resulted in the murder of his brother and eventual death of his father. Breaking traditional retaliatory action, the 25 year-old Datu made it very clear that all criminal and terrorist activities would not be tolerated. His family ties to the MNLF and MILF led to direct appeals to MILF Chairman Hashim Salamat, and by the 1990s Datu Paglas and neighbouring areas were on the road to becoming an oasis of peace.

The mighty and the small united Datu Toto was able to convince the neighbouring leaders to form a consortium known as the Paglas Corporation (Pagcorp) and, in addition to his substantial landholdings, a further 1,300 ha of land were made available. In 1994, Datu Toto contacted a foreign investment group, represented in the country by Oribanex, which managed several existing plantations in nearby Catholic Davao. The group was apprehensive because of the volatile situation in Maguindanao, yet its studies showed that the land was fertile, the water more than adequate and the weather ideal. In late 1997, the foreign investment group offered to lease the land for an

2

Datu (or Datuk) is an honorific title for Muslim chieftain or leader. It is commonly used in the Philippines, Malaysia and Indonesia. The municipality of Datu Paglas was named after the family.

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equivalent of US$70 a hectare a year—a trifle compared to the US$160 being demanded by landowners in other areas of Mindanao. A total of 1,500 ha was leased and ultimately the Oribanex group made an investment of US$27 million, making it the largest foreign direct investment in Muslim Mindanao. The plantation became known as La Frutera Inc., managed by the Ultrex Group (springing from Oribanex) from Manila and the Unifrutti group (Chiquita International). Datu Toto convinced MILF soldiers and sympathisers to work on the land instead of taking up arms, thus providing the labour. The plantation was started up with Israeli technology and Ultrex brought in management know-how from the Christian North. The rising apprehension that began to emerge from the mixing of new cultures was largely calmed by the charismatic presence of Toto Paglas. Datu Toto Paglas served as mayor for three more terms and currently runs Pagcorp full-time.3 Pagcorp handles labour relations and offers trucking and security support services to La Frutera. A rural bank now operates in the area (supported by Paglas) and small commerce now lines the streets of Datu Paglas and the nearby municipality of Buluan.

To be a testament of progress La Frutera promoted cultural understanding among all employees, and the startup Christian management, but the approach used was traditional Muslim. This was essential, because it was discovered that certain traditional practices were not religious in nature but were cultural conventions unique to Muslim Mindanaoans. About 2,000 workers—90% of employees—were hired from local communities, of which over 1,000 are regular employees. Promoting cultural sensitivity became the priority concern during the first years. Workers were still toting guns, mostly out of habit, and the management was challenged to provide policies and practices that would bridge the gap between not only Muslim and Christian but also rebel and pacifist, and men and women. Values-training and capability-building were prioritised, and nearly all of Datu Paglas and Buluan were employed by the company. These ‘new’ values therefore began to filter down to the rest of the community. As more Muslims moved up the ranks, it showed management commitment that La Frutera would be managed both by Muslims and Christians. The La Frutera Community Development Foundation was established in 2000 to implement specific social responsibility initiatives of La Frutera. This was an offshoot of La Frutera’s efforts to practise sustainable development through environmental and health management. The Socio-Cultural Section of La Frutera’s Human Resources Development (HRD) department runs the Foundation in collaboration with Datu Toto. One of its main projects is the establishment of a 3

Datu Toto Paglas III was nominated by Jaycees International (Sapporo, Japan) as one the ‘World’s Ten Outstanding People’ in 1999.

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training centre providing livelihood prospects to the community. Most projects need to be approved by the board as presented by the HRD manager; however, some projects go directly to Datu Toto for his approval. The HRD supervises values education and related training activities. Regarding direct community assistance, the La Frutera Foundation prioritises education and livelihood programmes. The company also responds to direct requests from the community. All community relations officers assume primary responsibility for project co-ordination, but all staff members are involved in various projects. The company also responds to requests made by the Mindanao Co-ordinating Council, which is co-chaired by Datu Toto. The company is also demonstrating leadership in environmental and quality management. La Frutera is currently undergoing the process of becoming ISO 14001- and 9002-certified. In 2001, the company obtained its certification from Better Banana Project, a Conservation Agriculture Network programme of the Rainforest Alliance. This means that La Frutera is committed to principles of: conservation of natural ecosystems; wildlife protection; good working conditions; community relations; minimisation and maintenance of strict control on the use of agro-chemicals; integrated waste management; and water and soil conservation, planning and monitoring. Pagcorp also became a member of PBSP and acts as a showcase for responsible business in Mindanao. Datu Toto stands as co-chairperson of the Mindanao Coordinating Council, which is the overall body co-ordinating all activities related to the rehabilitation of Mindanao. Community relations activities have included information campaigns on concepts such as the 5S Philosophy4 and sanitation; preparation of proposals for capability-building and non-formal education; scholarships; and financing for Hajj pilgrimages, etc. The company also conducts research and networking for livelihood partnerships with the community. Pagcorp and La Frutera also recently launched information campaigns on savings and setting up an emergency savings fund for workers at the local rural bank.

In values and leadership According to Ed Bullecer, interim General Manager of Pagcorp and current Senior Adviser for UN and Special Projects, cross-cultural harmony is a priority in Pagcorp and La Frutera. More importantly, a resolute faith that ‘change is for the better’ characterises management. ‘Some people still can’t adjust,’ says Rose Sira, HRD manager of La Frutera, but management understands Philippine Muslim culture, wherein an underlying sense of inferiority still exists. She says that the transformation of the local culture has been dramatic over the past five years. The leadership of Toto Paglas is one of the key factors in the success of the whole 4

Based on five Japanese words that begin with ‘S’, the 5S Philosophy focuses on effective workplace organisation and standardised work procedures. 5S aims to simplify the work environment, reduce waste and non-value activity while improving quality efficiency and safety.

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Mission To produce competitive quality bananas at the lowest possible cost through motivated human resources and environment-friendly technology. Vision La Frutera envisions a continuous and sustainable growth that will contribute to employment, livelihood and business opportunities thereby promoting employees and community well-being as well as regional peace and prosperity. Values ●

Results focus

●

Countryside development orientation

●

Cross-cultural consciousness

●

Customer focus

●

Existence of organisational pride

●

High regard for cultural dimensions

●

Change orientation

Box 17.1 La Frutera mission

enterprise. But the combined experience of other business leaders has given the company the background and expertise it needed to become a showcase. For example, La Frutera President Pedro Changco Jr was formerly one of the landowners of the Dole Philippines plantation. Rose Sira explains that La Frutera is a testament to true volunteerism, where even the investors agreed that business should be an instrument of peace instead of peace being a precursor to business. Ed Bullecer believes that Pagcorp embodies the spirit of the Bangsamoro, which is essentially not to think of personal gain. Belonging formerly to the Oribanex group, he recalls the investors’ depiction of the fateful meeting in 1997 as ‘God’s appointment’. Corporate citizenship is achieved through paying the right taxes, being responsible for all actions, advocating for ethical competition and not damaging the company’s reputation in local communities. Bullecer adds that volunteerism is doing something without being asked. Sira believes that quality management is another key value that is also imparted to everyone in the company. The Paglas experience has been shared in various forums, and some businessmen are becoming responsive to the idea. However, many point out that they do not have a Datu Toto to help them. Originally, Datu Toto was not responsive to the idea of self-promotion (as promoting the plantation meant promoting himself and the family) but his business partners convinced him that spreading the success story would give others hope—and that this could enable the experience to be replicated elsewhere. The local partners acknowledge that countryside development might seem more a political agenda than a business one, yet the investors felt

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it was also a company responsibility. The company believes that ‘peace and order is everyone’s responsibility’.

And the people say . . . Community representatives indicated that they highly respect La Frutera and support all its activities. However, political colour also can be found: some community members expressed concerns about dealing with the Paglas Corporation because of Datu Toto. In particular, community people suggested that Paglas acted as a manpower agency, getting a cut from the salaries of La Frutera workers as part of their ‘fee’. They also claimed that workers could not form unions because of Datu Toto rather than because of Islamic teaching. Unionism and some other aspects of Western worker rights are considered un-Islamic by local Islamic authorities. They indicated that the other communities now offer an alternative for La Frutera workers, even though there is only the promise of development and no actual enterprise already in place. Sira denied that additional fees were paid to Pagcorp for sourcing labour.

That peace was good (more or less) La Frutera and Paglas benefited from ‘Datuism’5 in the early stages. La Frutera would not exist without the combined faith of Datu Toto and various local and foreign investors to develop a productive enterprise in the face of such adversity. However, as the company moves into its next five years, the investors and business managers realise that apart from social leadership, La Frutera and Pagcorp must also provide an environment for business leadership. One of the goals of the La Frutera consortium is to pass on the management of the plantation to Pagcorp after 20 years, as Sira admitted that the plantation is under a build–operate– transfer (BOT) arrangement with Datu Toto. Anecdotes of former MILF leaders moving up the ranks as managers indicate that Muslims have business acumen if given the opportunity. However, it is also important to note that the current management acknowledges that most of its business concepts are Western, and, as the eyes of the world focus more on Islamic practice, the leadership is aware that the company is an emergent experiment in combined Western and Islamic management. 5

Datuism is a system of traditional government, introduced in Cotabato in the later part of the 15th century by Shariff Kabunsuan, a Muslim missionary who later ruled Cotabato and with his descendants established the Sultanate of Mindanao. Under Datuism, the datu (or chief) is deemed to be the ‘dispenser and lawgiver of death’. This system developed Muslim Mindanao culture and kept Muslims united in their struggles against foreigners (see Notre Dame University 1995).

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Measurement and reporting in corporate social responsibility (CSR) is also becoming a priority concern for La Frutera. In line with its bid to obtain ISO 14001 and 9002 certification, strict monitoring and reporting is being conducted in all areas. The HRD manager acts as the environmental impact assessment auditor, and the plantation also operates under the Philippine environmental impact assessment law. The Paglas/La Frutera banana plantation was the first to be certified in Asia by the Rainforest Alliance, a global certifying body that monitors the social and environmental impacts of the banana industry.

So they took a hard look in the mirror Benchmarking the company’s social and environmental expectations and accomplishments, Rose Sira suggested that marketing advantage (brand equity and product patronage) was not applicable to them as the company had a captive market with its exclusive buyer, Chiquita Brands International. She noted that the company’s approach to social and environmental responsibility had led to gains in government incentives, public issue advocacy and in reaching out to untargeted stakeholders. There were no apparent gains or losses in the trust of the community and in obtaining community support, public perceptions of the company and its social and environmental profile. Expectations were higher than actual results in a number of areas: the value chain, decision-making processes, corporate planning and issues management, product design, (local) government support, and replication by other entities. In some areas, there were minor losses in staff and line functions and employee and external party support. Sira explained that many of these losses were due to the ongoing transition in La Frutera from rule by ‘Datuism’ to a Western corporate management style. Hiring and personnel decisions made by La Frutera were at times questioned by staff, especially those that had been personally selected by Datu Toto, or are his relatives. Neighbouring communities became eager to develop their own enterprises, but in the process began pirating workers with ‘get-rich-quick schemes’. Local governments, though supportive of La Frutera, are at times politically opposed to the Paglas clan and therefore are unsupportive of some projects by the current mayor of Datu Paglas (Datu Toto’s brother). These conditions pose unique challenges to La Frutera management and shareholders, who are active in the affairs of the plantation. Based on these results, Sira insists that the formation of La Frutera is still an act of volunteerism and not just an investment.

And continued to strive It is evident that early leadership (as well as Datuism) has engendered a sense of advocacy in each employee. The company has been successful in promoting busi-

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ness in the area, but it must also strive to meet the challenges arising not merely from the Christian/Muslim management dichotomy, but rather that of Western/ Islamic principles. As far as business strategy is concerned, the foreign consortium’s direction towards developing true Muslim business leadership shows that peacetime business can be as challenging as business in times of conflict. What is more important is that the company is addressing the underlying factors that allowed conflict to fester in the area and it is here that business creativity and problem-solving will be most useful. The business case for social and environmental responsibility is very strong in Maguindanao, for the Datu Paglas experience shows that business acting as a leading advocate is the most effective way of creating peace.

References Asian Social Issues Programme (2001) ‘The Role of Business in Promoting Peace in Mindanao’, www.asiasource.org/asip/mindanao2001.cfm, 18 July 2001. Davis, J.R. (2000) Fortune’s Warriors (Toronto: Douglas & McIntyre): 1-2. Manuzon, M.T. (2002) ‘Fruits of Farming’, Philippine Business Magazine 9.3, www. philippinebusiness.com.ph/archives/magazine/vol9-2002/9-3/cover.htm. Notre Dame University (1995) Profile of the Province of Cotabato, Region XII, Philippines (Cotabato City, Philippines: University Research Center Databank). RCSDP (Resource Centre for the Social Dimensions of Business Practice) (2002) Promoting Peace through Investments in Mindanao: Paglas Corporation (Good Practice Profile; London: RCSDP, www.rc-sdbp.org/library/documents/resourcecentre/organisations/initiatives/ doc1152403.doc). Rimando, L. (2003) ‘The Good Earth’, Newsbreak, Special Issue, January–June 2003, www. inq7.net/nwsbrk/2002/dec/23/nbk_14-1.htm. Sira, R. (1999) La Frutera Employee Manual (Mindanao, Philippines: La Frutera). —— (2002) La Frutera HRD Social Action Reports (Mindanao, Philippines La Frutera). Solomon, J. (2002) ‘Plantations bring peace to violence-weary Philippine region’, The Salt Lake Tribune, 24 March 2002. —— (2002) ‘In this Philippine town, Muslims, Jews, rebels set aside differences for bananas’, The Asian Wall Street Journal, 21 March 2002.

I have recently completed my assignment as the Philippines UNV Specialist in business–community relations based at Philippine Business for Social Progress (PBSP). Following a BSc in economics from the University of the Philippines, I have worked in investment incentives and industrial policy, health research, customer services and business–community relations. I have worked in government, civil society and the private sector (in a dot.com to be exact). Out of this diverse experience I feel compelled to better understand how sectors that obviously need each other to survive and grow act antagonistically and in competition with each other. The miracle of partnerships and the roles of government are areas I currently pursue in my graduate studies at the Asian Institute of Management in Manila. I am also a chocoholic. [email protected]

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a a Corporate responsibility 18_

in New Zealand A case study Bob Frame, Richard Gordon and Ian Whitehouse Landcare Research, New Zealand

The relevance of corporate responsibility (CR) in New Zealand is reviewed, and in particular its development within two groups of organisation: one a Redesigning Resources (RR) Group formed in 2000 to bring the principles of natural capitalism to the core of their operations, and the other, a group that pursued Sustainable Development Reporting (SDR) individually with support from the New Zealand Business Council for Sustainable Development (NZBCSD). From this a framework model is developed based on Landcare Research’s experiences as champion, practitioner and facilitator, with an indication of progress to date. Although the organisations accept they are still in the early stages of a long process, CR thinking is slowly becoming more embedded within the corporate mind-set.1 However, a variety of approaches are being adopted and it is useful to see these as part of an overall journey in order that key learning points can be used to influence others. To achieve this it is important to: ● Understand the New Zealand context ● Examine experiences to date ● Classify the common elements of the organisations taking up the CR

agenda

1

In the context of this chapter we define CR to be a generic term covering sustainable development, corporate social responsibility, corporate citizenship and overall corporate performance in its widest context including development of triple-bottom-line (TBL) reporting.

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● Present a framework of CR experiences to date, which shows activities that

demonstrate shifts from the ‘business as usual’ situation, and then ● Assess progress to date, and if possible ● Assess what key drivers and inhibitors will influence uptake of the CR

agenda Our study excludes, at this stage, the public sector. Such organisations are influenced by current government thinking, as articulated in the development of the new Local Government Act in December 2002, which includes many aspects of sustainable development as its driving philosophy and is supported by the Government’s Approach to Sustainable Development (MfE 2002, 2003).

The New Zealand context New Zealand has a small population (about 4 million) and low population density, and its major export earners—agricultural products and tourism (about 20% and 9% of GDP respectively)—have strong associations with the natural environment. It has one of the highest rates of renewable energy (mostly hydro and geothermal) supply in the developed countries (30% of consumer energy, compared with 6% for Australia and the USA) and 63% of electricity generation was from renewable sources in 2000. However it is unclear whether or not this ‘clean, green’ image of New Zealand has extended to corporate responsibility. Legislation has not been a significant driver for corporate responsibility. Instead New Zealand was perceived as a pioneer of deregulation, and its public-service reforms in the 1980s were monitored with keen interest overseas (Kelsey 1995). A typical viewpoint from the business community is that ‘the business of business is business’ and there has been criticism of corporate social responsibility as a ‘doctrine’ (Henderson 2001). Environmental quality, by this call, is the realm of government and legislation, not the responsibility of business. However, other commentators have been critical of the dominance of such economic thinking and suggest that it ‘precluded consideration of sustainable development as a way of future growth for New Zealand’ (PCE 2002: 79). New Zealand also has a high reliance on small and medium-sized enterprises (SMEs), with 66% of the workforce working in local units with fewer than 50 employees (Statistics New Zealand 2002). Small companies, with their limited resources, have not had the natural environment ‘on the radar’ even (at least beyond legal compliance), far less social responsibility. It also appears that corporate New Zealand is responding slowly to the new global wave of CR reforms that have developed over recent years (Milne et al. 2003). There has been criticism from differing interests that much of the activity to date has been either misguided (Henderson 2001) or ‘tokenism’ rather than true sustainability (Gray and Milne 2002). However, New Zealand is noted for its flexibility, lack of bureaucratic inertia, and willingness to innovate. It is also accepted as having very low levels of corruption

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at the governance level (Transparency International 2003). These attributes should be conducive for rapid uptake of CR assuming the concept is fully understood and accepted. Support is gaining momentum as awareness of the environmental, social and cultural issues improves and the complexity of adequate governance responses becomes better understood (Bebbington and Gray 2001). This support arises, in part, from the robust, though mostly traditional, corporate governance models that have proved successful in responding quickly to the deregulated environment following the economic reforms of the 1980s. The New Zealand response to the global trend in corporate social responsibility and the possibility of achieving paradigm shifts due to the relative ease with which it can adapt to change should provide learning points of wider relevance.

Case study: New Zealand companies Government and business in partnership, through facilitated working groups, have supported experiments with triple-bottom-line (TBL) reporting (Higgins 2001). Landcare Research’s experience as champion, participant and facilitator within two such groups, the RR programme, and the NZBCSD’s SDR Group, is examined with a view to determining both the drivers and process of uptake of CR in a strongly deregulated corporate environment, dominated by SMEs. The RR programme involves a group of New Zealand companies that aim at ‘growing the economy while healing the environment’. The group has been largely self-funding with some government support and includes the five companies that are part of this study plus three others. Together they represent a broad crosssection of the economy, including manufacturing, retail, utilities and professional services.2 The companies were initially motivated by ‘natural capitalism’ principles (Hawken et al. 1999) to redesign their organisations, services and products. Some also found The Natural Step3 to be a valuable agent for change. Well-articulated statements of buy-in from top management supported all of the companies as they undertook the two-year programme. This was an essential success criterion for change. There was also a prospect of market advantage nationally in being an early adopter. The NZBCSD is a coalition of about 40 leading businesses united by a shared commitment to sustainable development and is a partner organisation to the World Business Council for Sustainable Development.4 Its SDR project in 2001–02 2 3

4

More information on the RR Group conferences, bulletins and activities is at www. redesigningresources.org. The Natural Step (TNS) is an international non-profit environmental education organisation working to build an ecologically, economically and socially sustainable society. TNS offers a planning framework that is grounded in rigorous scientific principles and serves as a compass for businesses, communities, government organisations and individuals undertaking the path of sustainable development (www.naturalstep.org). More information on the NZBCSD, including its business guide to sustainable development reporting is at www.nzbcsd.org.nz.

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to develop a business guide for sustainable development reporting in ten member companies has included companies ranging from Telecom (New Zealand’s largest listed company) and BP Oil to Interface Agencies, a business with only eight employees. A further project, to form an SDR Learning Group of companies, was established in February 2003 around Auckland.

The companies Of the private-sector companies in these two groups, four (The Warehouse, Hubbard Foods, Snowy Peak/Untouched World, Macpac) started as director-owned companies and so change could come relatively easily from the board level to management. One company, The Warehouse, has become New Zealand’s fourthlargest publicly listed company. Successes on the road to sustainability have been significant: The Warehouse’s energy management programme declared savings of US$1.5 million per year, which enabled it to reduce its greenhouse gas emissions. One other owner-director company, Hubbard Foods, a producer of breakfast cereals, has achieved a niche through marketing of a ‘wholesome, home-made’ product, and the company took a full-page spread in the main daily newspapers to publish its first TBL report in 2001. Landcare Research, on the other hand, is a government-owned, tax-paying company, which provides science ‘to make a difference for a truly clean, green New Zealand’. Because sustainability is its core business, it has become a leader of CR issues nationally.5 Its first formal TBL report (2000) was ranked 14th in the world for quality, and the 2001 Annual Report was ranked 22nd by Global Reporters, the international benchmark survey of corporate sustainability reporting. Landcare Research sensed the time was right to adopt the CR mandate and that it was strategically important for its credibility to be seen to be doing so. Indeed, for Landcare Research, travel on the path towards sustainability has been a long one (more than ten years) and one at the very heart of its corporate mission (‘research . . . specialising in sustainable management of resources for production, conservation, business and community’). Aspects of this have been documented (Bebbington and Gray 2001), showing that practical attempts to develop a sustainable-costcalculation methodology within the company failed initially. Only when it was understood that ‘if business and society are to undertake a sustainable development path, it will not be business as usual’ was it possible to conceptualise the model to provide meaningful results. Other public-sector organisations have CR objectives as part of their overall mission. For example, Orion New Zealand is a local-government-owned electricity network operator that actively encourages renewable energy and has reduced peak electricity demand on the network. This is part of the company’s ten-year drive to implement energy-efficiency programmes to reduce the need to construct new power distribution facilities, thus creating environmental and financial benefits. The Recovered Materials Foundation, a not-for-profit organisation owned by local 5

Landcare Research Annual Reports (2001 and 2002 reports were ranked first in various categories at the Institute of Chartered Accountants, New Zealand Annual Report Awards) are available from www.landcareresearch.co.nz.

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government, has goals based on a fundamental change in resource use at the ‘end of the pipe’ by recovering materials from the waste-stream and processing them to add value and become marketable products. Together the RR and SDR groups can be differentiated from many other organisations in that they are driven by some form of governance agenda committed to sustainable development and, as such, all are termed as ‘early adopters of CR’ in the New Zealand context. At the start of the programmes, transparency, accountability and governance mechanisms reflected the ownership of the companies and their principal stakeholder expectations. The privately owned companies had no public reporting requirements, while the state-owned companies had a combination of financial and some non-financial reporting (e.g. accidents, staff productivity). The Warehouse, for example, produced a conventional annual report with minimal CR reporting until 1999. Corporate accountability was to shareholders in all cases, and few if any board and management roles explicitly focused on CR issues. All the organisations produced financial accounts to owners (either public or private) and to shareholders. TBL reporting did not exist and there were no explicit CR roles for board or management and no CR policies. Only one organisation had a written guiding philosophy and an environmental policy. Since 1999, considerable national interest has developed in corporate responsibility, driven in part by the political agenda surrounding the Kyoto Protocol and other ‘green’ issues and partly by an increasing sense that this is an important global agenda. Initial responses therefore focused on matters such as fossil fuels, greenhouse gas emissions, solid waste, recycling and hazardous chemicals. The RR programme focus expanded to cover the wider issues of accountability, governance and transparency, in a climate polarised between accepting the challenges of redefining CR and defending the status quo. Interest focused both on TBL reporting and on aspects of sustainable development as a tool for: ● Increasing public transparency ● Discharging accountability to stakeholders ● Driving review and enhancement of corporate governance and non-

financial performance

Drivers and facilitating factors All the companies have a brand image as forward-thinking and as early adopters of change. They are in marked contrast to many other organisations that are much more conservative in their management culture. The willingness to lead change and therefore expose their companies to risk came in all cases from the chief executives or managing directors. Key drivers for subsequent change included: ● CEO and board support for CR both as a commercial opportunity and a

public duty ● Consideration of key stakeholder interests that were not previously

articulated

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● The goal of TBL reporting, which created a focal point and time-frame for

action ● The ability to derive practical measures and initiatives based on global

and local issues ● Increasing the level of accountability for activities through transparent

measures (e.g. energy usage, travel per employee, etc.) as a practical means of embedding understanding and practice Although they all experienced blockages in progress, a key catalyst for CR was external facilitation of internal developments and migration of ideas across organisational boundaries. Facilitation of opportunities for the organisations to learn collaboratively was equally valuable. By establishing high levels of trust on top of existing corporate commitment, the facilitators were able to develop the companies’ reputations as sustainable development leaders and create an environment conducive to change. However, this change took time to overcome the inertia of existing structures. Often organisational strategies had remained static either through repeated measurement of traditional, mostly financial parameters, or through lack of any meaningful measurement at all. For corporate responsibility to be increasingly incorporated into the business paradigm, an organisation must also be seen to improve performance. This required organisations to derive parameters to measure new aspects of performance that demonstrated these changes. In some cases, as with energy, this relied on existing data presented in new ways. In other cases, such as distance travelled per employee, it required finding data and presenting it in ways that had not been part of a traditional financial accounting approach. One company, Landcare Research, recorded a scientist’s annual footprint including, among other things, the fact that an average scientist used 6,900 kWh of energy for heating, lighting and operating equipment; got through 1.7 kg of coffee; used 6,300 sheets of paper and recycled an equal weight of paper; and also contributed more than seven full days in socially responsible activities to science societies, students and the public (Landcare Research 2002). Initial changes in the companies were through top-down mandates. This was easier in cases of owner-directors (The Warehouse, Snowy Peak/Untouched World, Macpac and Hubbard Foods). But a loosening of this is taking place over time in most companies, with the emergence of management-level practices that are embedding an acknowledgement of CR at all levels in the organisation (though not yet universally). As this becomes more part of accepted practice, there is also an acknowledgement by managers of the increasing complexity of the issues and the need to involve staff, suppliers and other stakeholders in the decision-making processes around CR. This includes the understanding that it is indeed a journey (and not a specific destination) and with that comes both a sense of excitement about new possibilities and the realisation that it is an unending task. This is further tempered by the increasing complexity that accompanies every decision. Or as one CEO put it: ‘I can’t even eat raspberries without feeling guilty about the plastic wrapping.’

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What changes were implemented? As a result of the programme, in which the companies worked together, all the organisations have produced public TBL reports. Each has increased its perception of stakeholder accountability, though the level of interaction with stakeholders varies considerably among the group—from frequent and formal in some cases to much less prescriptive norms for the smaller companies. All provide speakers on CR at a range of public events. The implementation of CR programmes has also been varied, with no particular pattern emerging. However, since their second conference in 2002, the RR companies have identified the importance of identifying and championing specific causes as a group in order to gain more momentum. The single issue most likely to be pursued is ethical purchasing through both guidelines and in action (e.g. a common fuel-purchasing policy, something likely to gain considerable publicity in New Zealand’s small marketplace). All have begun the governance process of implementing policies for environmental and social issues. Some have developed explicit board and senior management responsibilities for CR issues. The measures adopted by the RR companies are summarised in Table 18.1. These are viewed as important steps on the sustainability pathway. The initial positive results show there is a momentum towards change with a range of key drivers and change agents. It is also noted that the bulk of these changes are largely concerned with natural capital, which perhaps underpins each company’s focus on a ‘clean, green’ image, though this appears to be becoming more inclusive of social and cultural issues with time, such as the adoption of a purchasing policy by the RR Group.

What was our role? Throughout this period we have been a mix of facilitator/co-learner/participant/ access point to international best practice. This has given us a unique vantage point and, through our networks, we have drawn together learning points from our experiences and distilled these into the framework given below. As with our other human-dimensions work, this is loosely based on action-research/participatory methods. As noted earlier, this facilitation role was seen as a key factor in progression beyond ‘business as usual’. Because of the commercial aspects of the businesses involved, it has not been possible to witness the processes behind governance issues, but the level of interaction has been such that key learning points have been drawn out. This has required a high level of trust and feedback, which should enable us to continue to monitor developments.

Generic framework A framework for CR has been developed from our experiences with the RR and SDR programmes and other companies, and our understanding of the literature. The

Table 18.1 Key measures adopted by RR companies

The owner recognises sustainability is now ‘part of the DNA of the company’. Company culture grew as a result of SD with increased synergies. Declaration of hard issues; potential for collaborative learning. Initial advocacy from company founder strongly committed to SD. Whole board and senior management have adopted SD approach.

A high-profile product line redesigned to be based on sustainable materials. Staff loans for energy efficiency measures. Supply chain issues examined. All stores have achieved zero waste-tolandfill. Supplier sustainability guidelines and packaging guidelines. Substantial energy savings and target of average power consumption of 1,000kWh/m2 retail space. Commitment to purchase timber only from sustainable forests. Redefinition of company values to include ‘where the environment matters’.

Snowy Peak/ First TBL report produced 2002 and first-ever survey of staff concerns and attitudes. Untouched World†

Annual TBL reports since 2001. Staff surveys every six months. Introduced sustainability to schools through a partnerships programme.

* Landcare Research 2002 † Prain 2002 ‡ The Warehouse Group 2002a, 2002b

The Warehouse Group‡

No specific changes to the governance structure were adopted.

Staff creating company culture based on values for themselves and community not just corporate level. Owners committed to strong environmental values. Owners leading environmental activities and awareness.

Greater dialogue with ‘green energy’ pressure groups. Energy savings achieved and actively promoted with users to avoid major capital investment

First TBL report produced 2002. Increased dialogue with stakeholder; corporate culture receptive to sustainability issues. Greater stakeholder involvement.

Orion†

Waste audits; energy savings, increased recycling. Carbon offsetting through tree planting (Macpac Forest). Strong emphasis on individual freedoms and responsibilities.

Sustainable development (SD) recognised as the company’s core business. Entire board is involved in developing SD. Board meetings include presentations by key clients or staff on aspects of the company’s business. Strong performance management and reporting cascades from the board.

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Adopted The Natural Step process to be specific to the company. Key supplier sustainability assessments including new suppliers. Regular sustainability news to staff.

●

●

Monthly sustainability groups in regional offices. Internal audits. Increased recycling, energy- and waste-reduction initiatives. Mitigation of carbon dioxide (CO2) emissions through tree planting. Air travel targets for senior managers reduced domestic air travel 16%. Targets agreed annually with the owners cover environmental, financial, good employer and leadership dimensions of performance.

reporting with strong stakeholder involvement. Union and key customers contribute to TBL reporting. Quality of TBL has been recognised through domestic and international awards for TBL reporting.

● TBL

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Landcare Research*

Accountability and responsibility

Transparency

Measures adopted

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New Zealand Framework relates changes in governance, transparency, and accountability to stages in the ‘sustainable development journey’ (Table 18.2). Although derived for the New Zealand situation, which is relatively deregulated and dominated by SMEs, the model complements experiences reported elsewhere (Holliday et al. 2002). The framework describes different business paradigms, from ‘business as usual’, through to ‘restoration of capital’, as stages in the CR journey. At each stage we describe observed levels of sustainability practice, governance approach, transparency and accountability. Through lack of external imperatives, or lack of resources, many smaller companies operate towards the left of the spectrum. In the absence of regulatory or market pressures, corporate movement towards the right of the spectrum is likely to result from a search for innovation and market renewal, a desire to improve relationships with key stakeholders, and an ethical viewpoint taken at a senior level in the company. The framework serves the purpose of orienting a company within its sustainable development journey. A company may chart its position and direction within the framework and use it to set goals. Our framework complements, at a practical level, a number of current initiatives and models (see Fig. 18.1): ● The LEADER model developed by Nelson et al. (2001), which proposes six

principles for high-performing boards and a diagnostic framework to address TBL issues more effectively6 ● The systemic approach to sustainability presented by Robèrt et al. (2002),

which relates commonly implemented sustainability activities to an underlying framework of natural system conditions ● The Global Reporting Initiative 2002 guidelines (GRI 2002), which

encourage reporters to engage with stakeholders and review governance mechanisms ● The AccountAbility AA 1000 process (AccountAbility 2002), which inte-

grates stakeholders into the processes of governance and transparency ● The Social Venture Network Standards of corporate social responsibility (SVN 1999), which creates generic practices and measures from a set of

principles It is recognised that, while they may proceed at different speeds, the processes of transparency, accountability and governance are clearly interrelated. The contention, at the outset of both the RR and SDR programmes, was that TBL reporting and transparency would drive changes in accountability and governance. We observed that: 6

The LEADER model (Nelson et al. 2001) proposes a diagnostic framework to make TBL issues more effective and six principles for high-performing boards: leadership, taking ownership of the TBL agenda; engagement, bringing the outside in; alignment, achieving coherence between policy and practice; diversity, fostering independent thought and creativity; evaluation, measuring and rewarding TBL performance; and responsibility, ensuring that the buck stops at the board.

Governance

Sustainability approach

Table 18.2 The New Zealand Framework for Corporate Responsibility

Shareholders/owners

Stakeholder focus

Financial Accountability focus performance/share price

Annual report dominated by financial statements. Usually glossy, with goodnews stories.

Financial focus

Reporting style

Focus and framework ‘End-of-pipe’ solutions Legislative compliance: – Health and safety – Toxic emissions – Product safety, etc.

Shareholders/owners Stakeholders ‘at risk’ Regulators

Financial performance/compliance

●

●

●

Annual report and standalone environment report (may include health and safety)

●

●

Stakeholder engagement/ efficiency gains

●

●

Stakeholder integrated/ effectiveness gains Eco-design

Previous plus suppliers, customers, unions

‘Front-of-pipe’ solutions Framework of social and environmental principles Resource substitution Product/service redesign Social capital investment

Previous plus staff, staff families, community

●

●

●

●

●

Integrated annual report covering all dimensions of performance (TBL) with strong stakeholder engagement

‘Better-pipe’ solutions Eco-efficiency in some products and processes Staff development Community donations

Whole board is SD-focused

‘SD/CSR embedded’

Strong sustainability

Annual report and standalone SD or CSR report; stakeholder engagement.

●

●

●

●

Director of SD/CSR

‘Doing well by doing good’

Weak sustainability

Increasing corporate responsibility

Risk and audit committee

‘Not doing badly’

‘Maximise financial return to shareholders’. Very competitor-focused.

SD penetra- Audit committee tion at board level

Business paradigm

Risk management

Business as usual

‘No-pipe’ solutions Business redesign Restoring nature; biomimicry Restoring social, human and cultural capital

●

●

Radical redesign Design for sustainability

Previous plus government policy-makers and NGOs and community-based organisations

Continuous, stakeholderspecific dialogue through various channels of communication

●

●

●

●

Whole company is SDfocused

Doing better/holistic/CSR

Restoration

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Transparency

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Accountability

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Social Venture Network, Standards of social responsibility (SVN 1999)

AccountAbility (2002) AA 1000 Accountability

Transparency

Governance/ sustainability model

Restorative

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Global Reporting Initiative 2002 guidelines (GRI 2002)

Business as usual Risk management Sustainability weak/strong

New Zealand Framework

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LEADER governance model (Nelson et al. 2001)

Sustainability approaches (Robèrt et al. 2002)

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Figure 18.1 The New Zealand Framework of Corporate Responsibility

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● Commitment to transparency necessitated a consideration of account-

ability, by identifying key stakeholders and assessing their information needs. ● Transparency and accountability together necessitated changes in gover-

nance, to implement and embed in the company, new policies, responsibilities and measures. ● Commitment to changing governance (e.g. towards the goals of natural

capitalism, or The Natural Step) can translate into greater accountability or transparency that may take years to deliver. Interviews were held with each CEO two years after the start of the RR programme (Prain 2002) to determine the learning from the programme. Responses included the following: ● Government and companies need to give responsibility and opportunity

for people to resolve issues within a common, consistent framework that is minimalist in nature—the principle of subsidiarity. ● Collaborative learning does work for organisations tackling CR from

within; formulaic corporate statements do not. ● In New Zealand’s deregulated regime, early adopters take risks but can

create a market niche through claiming benefits of sustainability approaches. ● Ability of SMEs to make progress is compromised by resource availability

and a focus on short-term survival. Structural impediments to change, however, have been only partially recognised as a requirement at this stage and this may well prove to be a barrier for transition to strong sustainability. At a practical level, tools are needed to support the change process and these include: ● Self-assessment methods for businesses to chart their sustainable devel-

opment journey and decide which actions to take ● Guides through the process of transparency: TBL reporting and other CR

mechanisms ● Support in the facilitation processes to engage stakeholders, determine

strategy and embed organisational change ● Linkages to international initiatives (GRI, AA 1000, The Natural Step, SVN,

etc.) At present most of the companies in this study are spread around the weak sustainability stage with some making faster or more consolidated progress than others. Progress beyond this is likely to take time, though some companies from within the group are providing leadership. However, while ‘early adopters’ may be progressing, it is not yet clear how long, or by what means, there will be a shift in

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the ‘laggards’ or ‘resisters’. We believe that New Zealand will advance this agenda with increasing speed following its ratification of the Kyoto Protocol in December 2002 and the announcement of a government Sustainable Development Programme of Action (MfE 2002). These declarations of national intent are raising the profile of sustainable development issues within the private sector.

Observations as facilitators The case of one company best illustrates the CR issue in New Zealand. The Warehouse was founded by Stephen Tindall in 1982, with one store and US$20,000 capital and is now New Zealand’s largest merchandise retail chain offering value for money and a product range that is both accessible and affordable. It has over 11,500 staff and last year had sales of almost US$1,000 million, which comprised 45% of the department-store sector with over 825,000 customers weekly. Stephen Tindall notes that sustainable development reporting has been a valuable learning process leading to [our] first triple bottom line report in 2001. As a result of this report (and the reported activities) The Warehouse was selected as a FTSE4 Good Developed Index Constituent. This means that a number of large ethical index funds now must purchase Warehouse shares. As a direct result The Warehouse share price increased by about 5% (NZBCSD 2002).

He also acknowledges ‘the most important aspect of The Warehouse’s success has, unquestionably, been its “people first” philosophy’. This excellent economic performance is coupled with the development of packaging policies, a strong emphasis on recycling and increasing social awareness. In terms of our framework, The Warehouse can be placed in the middle of ‘weak sustainability’, though progress from here is likely to require more radical changes in consumer behaviour. This is recognised by Stephen Tindall as likely to be both very long and difficult, though likely to be assisted by The Warehouse’s people focus and development as a learning organisation, as highlighted in their Annual Report 2002 and TBL Report 2002 (The Warehouse Group 2002a, 2002b).

Future directions To date much of the method of inquiry has been subjective and no attempts have been made to include formal assessment either of progress or the model proposed. With more organisations becoming involved and with national strategies being proposed, there is a need to develop baseline data of perceptions and attitudes to CR. Also needed is for CR to feature in training for senior managers and directors and to become more part of the overall governance agenda.

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We developed a set of indicators of CR activities as highlights on the CR journey, to provide a vision for progress (Table 18.3). While it provides a draft for the future, it sets neither a time-frame nor a quantitative set of indicators for progress. Indeed the practical specification of ‘restoration’ remains unclear at the practical level and is likely to be some years distant. At this stage it is also unclear what will increase the uptake of CR in organisations that do not see themselves as early adopters. Although there is increasing inclusion of sustainable development principles in government legislation and a sense that more companies are switching on to the need to be seen to be involved in CR, there is little formal documentation or review of the process. It is our belief that, just as facilitation proved to be a critical factor in initial development of business reporting, participatory evaluation of progress will be essential. We anticipate more ‘conversation and demonstration’-type projects to be adopted within corporate sectors and within local government. Also while progress to the ‘weak sustainability’ stage could be fast, progress beyond that will be slow until organisations seize on redesigning as a means of delivering strong sustainability. We also anticipate that progress will rarely be smooth even if triggered by some, unforeseen, external event to precipitate a shift in attitudes.

References AccountAbility (2002) Assurance Standard Guiding Principles Consultation Document (London: AccountAbility). Bebbington, J., and R. Gray (2001) ‘An Account of Sustainability: Failure, Success and a Reconceptualisation’, Critical Perspectives on Accounting 12: 557-87. Gray, R., and M.J. Milne (2002) Sustainability Reporting: Who’s Kidding Whom? (Accounting and Business Law Working Paper Series; Dunedin, New Zealand: University of Otago). GRI (Global Reporting Initiative) (2002) Sustainability Reporting Guidelines (Boston, MA: GRI, www.globalreporting.org). Hawken, P., A. Lovins and L.H. Lovins (1999) Natural Capitalism (Boston, MA: Back Bay Books). Henderson, D. (2001) Misguided Virtue: False Notions of Corporate Social Responsibility (Wellington, New Zealand: New Zealand Business Roundtable). Higgins C. (2001) ‘Triple Bottom Line Reporting: Public Relations or Committed Change?’, Future Times 4: 8-16. Holliday, C.O., Jr, S. Schmidheiny, and P. Watts (2002) Walking the Talk: The Business Case for Sustainable Development (Sheffield, UK: Greenleaf Publishing). Kelsey, J. (1995) The New Zealand Experiment: A World Model for Structural Adjustment? (Auckland, New Zealand: Auckland University Press). Landcare Research (2002) Annual Report 2002 (Lincoln, New Zealand: Landcare Research New Zealand Limited [Manaaki Whenua]). MfE (Ministry for the Environment) (2002) The Government’s Approach to Sustainable Development (Wellington, New Zealand: MfE). —— (2003) Sustainable Development for New Zealand: Programme of Action (Wellington, New Zealand: MfE).

Petrochemical-free products; brand strongly supports sustainability

Energy efficiency; externally audited environmental management systems

Environmental management systems compliance-based

Supplier and clients; competition- Stakeholder advisory groups; focused supply chain influence

Money back on faulty products. Recall of products for health and safety risks.

Environmental protection

Business relationships

Products and services

Internal

Reporting indicators

Health and safety statistics; compliance with environmental consents. No targets.

Community Sponsorship and donations to improve company profile involvement

Supply chain partnerships with customers and suppliers

Company-funded healthcare, childcare, other work/life initiatives; employment of disadvantaged in local community

Staff profit share based on financial performance; employee health checks

Employment practices

Resource efficiency, CO2 footprint, donations, staff survey. Targets provided though not historical trends

Community group mentoring; and sponsorship reflect CR strategy

Zero solid waste product takeback; environmental and CR labels on products; recyclable packaging

Performance evaluated by external stakeholders/third-party organisations

TBL report produced in-house

Media management (good-news stories)

Accountability

Measures to manage key performance of importance to company and stakeholders

Joint ventures with community groups to promote socially progressive causes

Zero waste; zero emissions with CO2 offsets; energy selfsufficiency

Progress to achieving redesign. Measures of positive influence in sector, supply chain, etc.

Capacity-building for community groups

Biologically based processing

Supply chain redesign

Biodiversity restoration; zero emissions and enhanced absorption of pollutants

Redistribution schemes; reducing redundancy through skills for life

Stakeholders involved in strategy and decision-making

Ethical education for stakeholders and shareholders

Integrative management; redesign to eliminate ‘the pipe’ learning organisations

Redesign

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Re-training; re-employment schemes for redundant staff

Ethics committee; ethical purchasing

Code of ethics; green purchasing

Anti-bribery policies

Ethics

Managing outcomes; manage adverse effects at ‘top of pipe’; continuous improvement

‘Doing well’

Managing inputs; managing adverse effects through ‘a better pipe’

‘Not doing badly’

Managing outputs; manage adverse effects at ‘end of pipe’

Risk management

Strong sustainability

Governance

Principles

Weak sustainability

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Table 18.3 Indicative corporate responsibility activities to progress from business as usual

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Milne, M., H. Tregida, and S. Walton (2003) The Triple-Bottom-Line: Benchmarking New Zealand’s Early Reporters (Working Paper 01_02/03; Dunedin, New Zealand: University of Otago). Nelson, J., P. Zollinger and A. Singh (2001) The Power to Change: Mobilising Board Leadership to Deliver Sustainable Value to Markets and Society (London: SustainAbility and Prince of Wales Business Leaders’ Forum). NZBCSD (New Zealand Business Council for Sustainable Development) (2002) Business Guide to Sustainable Development Reporting (Auckland, New Zealand: NZBCSD, www.nzbcsd.org. nz). PCE (Parliamentary Commissioner for the Environment) (2002) Creating Our Future: Sustainable Development for New Zealand (Wellington, New Zealand: Parliamentary Commissioner for the Environment, www.pce.govt.nz). Prain M. (2002) The Redesigning Resources Story: Eight Companies Creating New Value (Christchurch, New Zealand: Redesigning Resources Group). Robèrt, K.-H., F. Schmidt-Bleek, J. Aloisi de Larderel, G. Basile, J.L. Jansen, R. Kuehr, P. Price Thomas, M. Suzuki, P. Hawken and M. Wackernagel (2002) ‘Strategies for Sustainable Development: Selection, Design and Synergies of Applied Tools’, Journal of Cleaner Production 10: 197-214. Statistics New Zealand (2002) New Zealand Business Demographic Statistics as at February 2002 (Wellington, New Zealand: Statistics New Zealand, www.stats.govt.nz). SVN (Social Venture Network) (1999) SVN Standards of Corporate Social Responsibility (San Francisco: SVN, www.svn.org). The Warehouse Group Limited (2002a) Annual Report: Twenty Years of Bargains (Auckland, New Zealand: The Warehouse Limited, www.thewarehouse.co.nz). —— (2002b) What Ought One to Do? 2002 Triple Bottom Line Report (Auckland, New Zealand: The Warehouse Limited, www.thewarehouse.co.nz). Transparency International (2003) Global Corruption Report (Berlin: Transparency International, www.globalcorruptionreport.org).

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I am a consultant and researcher in institutional development and corporate social responsibility for central and local government and private-sector organisations for Landcare Research and for international donors. Following research training in physics and engineering, I worked with international aid donors for 20 years in Asia and enjoyed the challenge of living and working at grass roots and policy levels in China, India, Nepal and Bhutan. Moving to New Zealand, I became fascinated with the challenge of genuine sustainable Bob Frame development and committed to its progress in a country claiming clean and green credentials. This enables me to draw on the richness of earlier experiences and make a longer-term contribution in one place. [email protected]

I lead research and product development at Landcare Research in corporate and government sustainable development. My group aims to lower the barriers to uptake of values, strategies, processes and measures that improve corporate performance in the environmental, social, cultural and economic dimensions through pragmatic tools and processes, leading by example, peer pressure, supportive research and demystifying the jargon of sustainability. I was lead author of our first sustainability report in 1999, and feel privileged to Richard Gordon work with New Zealand organisations on their ‘sustainability journey’. I am a member of the Global Reporting Initiative Stakeholder Council. Prior to New Zealand, I worked in private-sector research and development with Zeneca plc in the UK and Japan. [email protected]

I am the Chief Operating Officer–Research at Landcare Research, responsible for the company’s research business. I have helped more than 20 organisations prepare their first sustainable development or triple-bottom-line reports, including some of New Zealand’s biggest companies. I produced Landcare Research’s Annual (triple-bottom-line) reports (2001 and 2002), considered by many external parties to be world-leading sustainability reports. The 2001 Annual Report won three awards from the Institute of CharIan Whitehouse tered Accountants of New Zealand (the premier award; the Sustainability/ Environmental reporting award and the Human Resources Reporting award) and was ranked 22nd in a survey of leading SD reports from around the world. The 2002 Report won the Sustainability Reporting Award. [email protected]

We all work for Landcare Research, a New Zealand government-owned research institute of around 400 staff dedicated to science that makes a difference for a truly clean and green New Zealand. The Institute’s business is sustainable development, with a particular focus on terrestrial ecosystems and the impacts on them of urban and rural economic activity. The Sustainable Business and Government group’s research spans ecological economics, corporate sustainability strategy and management of change, social and participatory research, environmental accounting and sustainability reporting. More information at www.landcareresearch.co.nz.

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a a Reforming government; 19_

working with business The Office of the Minister of State for Administrative Reform in Lebanon* Lubna Forzley United Nations Volunteer, UNDP Lebanon

The success of any governmental program is contingent upon the existence of a modern and developed administration that exhibits a high degree of competency and efficiency (Fouad El Saad, Minister of State for Administrative Reform1). In Lebanon, the interaction between the private individual and the state administration, or within the administration itself, is a highly bureaucratic procedure. Most citizens interacting with the state administration seem to experience frustration and a lack of trust and confidence in the state’s capability to administer governance effectively (OMSAR 2002b: 13-14).

*

1

This case study has been developed from work conducted with the assistance of UNDP Lebanon as part of the ‘Enhancing Business Community Relations’ project. Between April 2001 and May 2003 a joint initiative between UNV and the New Academy of Business aimed to both explore and enhance the engagement between business and communities in seven Southern countries: Brazil, India, Ghana, Lebanon, Nigeria, the Philippines and South Africa. This project was undertaken through a combination of collaborative research, partnership building and promotion, with a local researcher/ relations specialist in each country. Lubna Forzley was hosted by UNDP in Lebanon. The case study is based on a detailed enquiry including a series of one-to-one interviews and focus group discussions with various stakeholders (employees and community members), as well as collection of documentation through secondary sources. The findings and recommendations reflected in the document are those of the author and do not necessarily reflect those of UNDP/UNV or the New Academy of Business. Personal conversation, Beirut, July 2002.

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Meanwhile, the development of an efficient and transparent government administration remains essential to the development of the country as a whole in the continuing post-war rebuilding effort. In this light, the Office of the Minister of State for Administrative Reform (OMSAR) was established in 1994 to help combat the problematic aspects of government costs, co-ordination, legislation and size.2 Since then, OMSAR has worked to achieve its mission statement: Bringing the Lebanese post-war public administration into the 21st century through an optimal and coherent introduction of Institutional Development (rehabilitation and reform) and Information Technology (systems and communications) measures that render streamlined, transparent and traceable processes fulfilled by productive civil servants for the benefit of both the general public and government.3

In 2001 the Council of Ministers in Lebanon approved the text of a Citizen’s Charter (see the appendix on page 213). One of the strategies that has been implemented has been the development of partnership between government, business and community aimed at contributing to the task of administrative reform. This chapter describes some examples of the kinds of partnership that the Ministry of State for Administrative Reform has been putting into place so that the state administration can respond to governance tasks more positively.

Working with others for change The relationship between government, business and the community has been a focal point for discussion worldwide. Nations and their leaders are realising the importance of having all three sectors working very closely together. For example, in the UK a total of 60 projects related to corporate social responsibility (CSR) have been introduced across the British government, all with the objective of enhancing public–private relationships.4 During 2000/2001 the former minister Dr Kim ❛A campaign that promotes private– Howells in collaboration with the British public relations is essential in a millennium that sees the world as a global Prime Minister, Tony Blair, launched an village. A country must enhance its ‘Active Communities Challenge’ to encourstrength to survive, and one necessary age businesses to allow their employees strategy is social partnership.❜ time off work for community volunteering.5 Mr Fouad El-Saad, Minister of State In other Northern countries, such as for Administrative Reform Canada, private enterprises are offered tax Source: personal conversation, July 2002 cuts for their community initiatives. This has been a great incentive for companies; 2 3 4 5

Office of the Minister of State for Administrative Reform website: www.omsar.gov.lb www.omsar.gov.lb/english/emission.asp www.societyandbusiness.gov.uk/government/gov_does.htm Ibid.

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however, this practice remains non-existent and a challenge in Lebanon. While the Lebanese nation has now reached the point of realisation that private–public partnerships are a necessity, a major obstacle in enhancing the relations between the public and private sector comes from the administrative capacity of the public sector. As noted by Minister Fouad El-Saad, It is impossible to give incentives, before fixing the taxation system itself. Currently, the Ministry of Finance is working on this issue, and, with its success, the Office of State for Administrative Reform [OMSAR] will be able to take the second step and offer tax incentives. (Fouad El Saad, Minister of State for Administrative Reform6).

From one side, the challenge for the state, wishing to work through the ability of the private sector to contribute to development, was to make working with communities a less bureaucratic and administrative procedure. Yet, at the same time, the private sector had always worked in isolation and engaged in very little communication with the government. One of the strategies adopted by OMSAR has been to work with the private sector in the process of reforming the administration itself. They have begun to establish partnerships with the private sector that will look at harnessing the knowledge and experience of businesses to improve the administrative effectiveness and capacity of the state. As a result, the ‘Citizen Enterprise’ project, which is described later in this chapter, was developed in December 2001. As appropriately stated by Minister Fouad El Saad, ‘Lebanon will not overcome obstacles and meet challenges with dispersed efforts. Private success of enterprises is not enough alone. We are all in the same boat and we face the same perils. Either we sink together or survive together’ (OMSAR 2002b: 18).

OMSAR’s profile Since its establishment in 1994 OMSAR has worked on institutional development with an emphasis on administrative reform. As a result various initiatives in collaboration with ‘partners of the State’—these include the private sector, NGOs, municipalities, etc.—were implemented. The Citizen Enterprise initiative is a prime example of the work OMSAR has done in partnership with the private sector. OMSAR works with NGOs, especially outside Beirut, to assist them in capacity-building and staff training. The NGOs outside the capital are less exposed to modern trends and strategies. OMSAR works to reduce this gap and teaches strategies such as how to fund-raise more effectively. This in turn helps in reducing the gap between the private sector and NGOs. OMSAR works with municipalities, mainly outside Beirut, by providing one-day workshops on laws and proper customer service. The workshops concentrate on financial planning, urban planning, administrative procedures and human rights (how to apply laws). 6

Personal conversation, Beirut, July 2002.

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❛I wanted to strengthen OMSAR’s role with its partners—NGOs, municipalities and especially private-sector institutions. As a result, the ‘Citizen Enterprise’ was the most suitable initiative—one that would add to the creditability of the State by laying the basis for a fruitful collaboration with the private sector. ❜

At the public-sector level, OMSAR has assisted with civil service reform by enhancing policy-making and management capacity and the creation of the central office for administrative information offering both a website and a telephone hotline to assist easy access of information by citizens.7

Dr Leila Barakat, Adviser to the Minister Source: personal conversation, July 2002

The Citizen Enterprise initiative In December 2001, the Minister of State for Administrative Reform announced the launch of a new project called ‘Citizen Enterprise’. With the objective of sustainable development, the idea behind this project is for various private-sector entities to partner and work together with OMSAR in allocating resources for development projects. El-Saad considers Citizen Enterprise to be a new sociopolitical movement that changes existing relations between various sectors, and promotes the idea among the private sector that the community should also be a priority. Citizen Enterprise kicked off to a good start in Lebanon. It was introduced and championed by Dr Leila Barakat, Adviser to the Minister, who actively seeks partners, oversees the implementation of the programme, negotiates the deals, and handles the execution of all projects. Initially Dr Barakat approached various organisations to sign on; because of the programme’s popularity, companies are now approaching OMSAR to participate. To date, four organisations have been labelled ‘Citizen Enterprises’: Pikasso, TEAM International, Raidy Publishers and Chemaly Printing Press. These companies were chosen based on their offers of inkind donations of services and expertise rather some form of specific assessment mechanism.

Affichage Pikasso As soon as the Citizen Enterprise campaign was launched, Pikasso, a billboard advertising company, was the first company to offer its services to social develop7

OMSAR is currently working on a project to implement strategic alliances between the

public and private sector in the area of e-government such as the development of e-applications, including HealthNet, SchoolNet, TourismNet, etc. This project started with UNDP’s assistance in the establishment of key pillars to help operationalise OMSAR’s objectives. The project’s strategy focuses on institutional development, co-ordination, legislation, and information and communications technologies (ICT). Its objectives include: modern management capacities developed and established in key administrations; reduction of the size and cost of public administration; modernisation of legislation, and citizen-oriented legislation.

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ment. Director and founder of the company, Antonio Vincenti, approached OMSAR himself to offer his services. Since the Lebanese government does not allocate a budget to publicity, OMSAR found that one method by which the private sector could contribute was through in-kind donations.8 Pikasso was the first to become a ‘Citizen Enterprise’. Pikasso offered 5,000 of its billboards, worth US$500,000, to promote the citizen ❛Our panels share the daily life of the concept, citizen–state relations and the Lebanese population. Our commitment of relation between the state and private sec- solidarity to the community is to put our billboards at the disposal of great causes tor and civil-society enterprises. Although and public awareness campaigns.❜ Pikasso had provided many in-kind donaMr Antonio Vincenti, Director of Pikasso tions in the past to support various social Source: personal conversation, July 2002 issues, this was the biggest campaign ever donated. Distributed on three different occasions within a three-week period, the first set of billboards began with OMSAR’s ‘INFORMS’ campaign followed by the Citizen’s Charter (see the appendix on page 213) and the National Employment Agency.

TEAM International In March 2002, a new partnership was formed between OMSAR and multidisciplinary consulting agency TEAM International to improve administrative efficiency. Established in Beirut in 1975, TEAM International is renowned for its expertise in management consulting, human resource development, engineering consulting and information technology studies. Having worked with the government before, between 1993 and 1996, in development studies for the rehabilitation of the public administration in Lebanon, TEAM now offered its services free of charge to help train government employees on vocational and technical issues such as total quality management and computer skills. The strategy used by TEAM was to actively reform one public institution, study the outcomes of the initiative and use the results to modernise other institutions. These courses were all piloted as a trial, which allowed TEAM also to benefit from this initiative by learning from participants about the effectiveness of such courses.

Raidy Publishers The idea that ‘the responsibility of the government and public administration for rendering efficient services to the citizens is one of the essential features of democratic systems’ (OMSAR 2002a: 20) has become increasingly emphasised over the past decade. The issue of ethics in the public service has become a high priority in many countries, including Lebanon. In April 2002, Raidy Publishers worked in partnership with OMSAR to publish The Code of Conduct for Civil Servants. This code 8

Contributions from businesses need not be in the form of cash, but rather products and services.

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tries to reinforce personal ethical values as well as professional responsibilities of the civil service. To date, 18,000 free copies of the booklet have been distributed to civil servants and 2,000 posters to raise awareness displayed throughout the administration. Although not enforceable by law, this code ‘is a necessary tool for improving the performance of any citizen-oriented and modern public administration. It constitutes an ethical framework for job behaviour and sets the pace of sound daily activities and self-control’ (OMSAR 2002a: 20). It is also expected to ‘boost the morale and improve the image of the employees themselves, which in turn will help build respect for them and their administration by their fellow citizens’ (OMSAR 2002a: 21). The emphasised characteristics include justice, equality, transparency, fairness, accountability, rule of law, integrity, impartiality, public interest and human rights.

Chemaly Printing Press Chemaly Printing Press, which was established 50 years ago, started as a family business by its founder Chaker Chemaly. It has now grown tenfold and become one of Lebanon’s leading printing presses. ❛This was but a simple step towards the This organisation became OMSAR’s fourth information highway and the “one-stop ‘Citizen Enterprise’ following its partnershop”, which would save the citizen time ship with the INFORMS project. and effort and fruitless tracing of The INFORMS project is the Central formalities. It also eliminates waste and Office for Administrative Information, establoopholes through which both employees lished at the request of Minister El-Saad. He and citizens can filtrate to reap personal benefits at the expense of the law and the considered as top priorities: safeguarding time of other citizens.❜ citizen interests, provision of quality serFouad El Saad, Minister of State for vices, ensuring access to information on Administrative Reform formalities and defining citizen–public administration relations. The office offers Source: personal conversation, July 2002 both a website9 and a telephone hotline number (local access 1700) as new means by which citizens can access necessary information about administrative formalities and information such as forms, supporting documents, filing instructions and fees (OMSAR 2001: 40). Chemaly offered its services with an in-kind donation of printing 10,000 information leaflets that covered both the INFORMS project and the rights and obligations of civil servants.

Conclusion OMSAR has adopted a strategy that at once develops the ability of the state to

partner with the private sector and offers the private sector a reason to engage with 9

www.informs.gov.lb

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the state. By offering businesses the opportunity to work in their communities, the partnerships have allowed companies to earn valuable respect. The Ministry seems to have been seeking to improve the administrative capacity of the state and enhance the relationship between the private sector and the administration by drawing on the interests of businesses to show involvement in their communities. The positive feedback of this is that, through administrative reform, the private sector is able to have a more efficient and effective partner to work with in the development of Lebanese people and society. With careful planning OMSAR can sustain and continue building its relationship with its ‘partners of the State’ and set a leading example for other government institutions to follow. To date, the Citizen Enterprise and other OMSAR initiatives that ultimately improve public administration and services have started slowly enhancing the environment through which the private sector operates. As a result, OMSAR is applauded for its great initiative.10

Appendix: Citizen’s Charter11 The attempts of administrative reform have witnessed during the past decade, especially in advanced countries, an important change represented by giving priority to the public administration–citizen relationship and by focusing on the problem of improving the relation between the state and the citizens through meeting their needs and offering them optimum services. In all, serving the citizen remains the main concern of every democratic system basically since the citizen finances the state’s functions and expects, in return, efficient, high-quality and non-discriminatory services. As a result the Citizen’s Charter was developed to achieve the following main goals: ● Consolidate the administration’s democratic trend and to comply with

the system of the rule of law ● Achieve the principle of transparency and the responsibility of the public

administration towards the citizen ● Protect the citizen from the administration’s abuse of power ● Reinforce the relations between the state and the citizens and restore trust

in the state ● Improve the quality of services provided by the state

10 11

Other website sources: Utopies, www.utopies.com/english/index.html; Business in the Community, www.bitc.org.uk; International Business Leaders’ Forum, www.iblf.org. On 15 November 2001 the Council of Ministers approved the text of a ‘Citizen’s Charter’. It was published in the OMSAR Newsletter, December 2001. The text above is a summary taken from the Newsletter.

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The need for such a charter was more insistent in a country such as Lebanon because of the deterioration of the administration’s condition and the large gap between the public administration and the citizen as a result of many factors, most important of which are: ● The mentality that has prevailed since the period of the French mandate,

and to a large extent during the independence period, was that of a ‘ruling administration’, rather than a ‘serving administration’. It is high time for the administration to reconsider its role, from an administration whose responsibilities are limited to commanding and preventing, to an administration that strives to serve citizens and to facilitate their interaction with the state. ● The illegal political interference, often marked by a sectarian aspect,

which has, to some extent, subsided for a short while during the independence period, has intensified after the incidents that afflicted the country. The politicians have hard-handedly seized the administration and abused it for their personal interests. ● The outdated, arduous and complicated work styles and procedures are,

as all admit, one of the main complaints of the citizen and subsequently one of the main reasons for the lack of confidence in the administration’s capability or willingness to serve this citizen and to improve his relations with the state and administration. ● The ineffectiveness of the system of calling the politicians and the civil

servant to account constitutes a major reason for the disappointment of citizens and the decline of their trust. Besides, the poor control of the parliament over the executive power responsible for the workflow in the public administration/agencies augments the indifference and disregard of many civil servants towards the citizen without fear of retribution.

References Daily Star (2002) ‘Saad announces private sector reform initiatives’, Daily Star, 15 March 2002. OMSAR (Office of the Minister of State for Administrative Reform) (2001) Annual Report 2001 (Beirut: OMSAR). —— (2002a) The Code of Conduct for Civil Servants (Beirut: Raidy Publishers). —— (2002b) OMSAR Newsletter, February 2002.

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‘Do not go where the path leads, but go where there is no path and leave a trail.’ This quote means a lot to me, because I value community development, which takes courage to stand up for beliefs. Living through the war in Lebanon instilled passion, caring and a community spirit in me, which was further strengthened in Canada where I studied and worked. Canada taught me to value differences, co-operation and volunteerism. My experience with public, private and non-governmental organisations and extensive travel worldwide taught me that it is only through trust that sincere ‘giving’ can take place, and real progress be made! I am thankful that I lived this experience recently by working with UNV. [email protected]

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in Stellenbosch, South Africa Mark Swilling and Eve Annecke Sustainability Institute, University of Stellenbosch, South Africa

Close your eyes and imagine, for just a moment, building a community around a learning precinct. And imagine that this is a community made up of people from all backgrounds, and that it has been designed using state-of-the-art ecological design technologies. But also imagine that you are surrounded by towering majestic mountain ranges, cultivated vineyards, and the occasional whiff of the sea. When you open your eyes, you will be in the Lynedoch EcoVillage, which is the first ecologically designed, socially mixed intentional community in South Africa. Lynedoch is not just a dream, it has started to happen. What used to be a huge ugly corrugated iron shed built for student raves has been renovated to accommodate the Lynedoch Primary School for 300 children, a large all-purpose hall, and the offices and classrooms of the Sustainability Institute. There is also a Montessori pre-school which, like the primary school, is attended mainly by the children from families who live on the surrounding farms. Although Lynedoch Primary is a government school, the pre-school is private.

Vision and goals The development of the Lynedoch EcoVillage is managed by a non-profit company called the Lynedoch Development Company (LyneDev). The board comprises a mixed group of local community leaders and professionals, and includes Grantham Jansen (principal of Lynedoch Primary), Ross Van Niekerk (pre-school teacher), Gerrit Hendricks (leader of the organic farming project), Sharifa Ismael (financial director), Robert Davids (managing director), Tom Darlington (archi-

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tect), Eve Annecke (director of the Sustainability Institute) and Mark Swilling (academic). Set up in 2000, this board was inspired by the possibility of building an inclusive living and learning community that would demonstrate in practice what it means to live in sustainable ways. Inspired by this commitment, three goals were formulated to guide the various aspects of the planning and implementation of the project. The goals are that the Lynedoch EcoVillage: ● Must be a mixed community organised around a child-centred learning

precinct ● Should strive to be a working example of a liveable, ecologically designed

urban system ● Will be a financially and economically viable community that will not

require external funding to sustain itself The key features of the Lynedoch EcoVillage will be: ● A primary school for 350 children drawn mainly from the families of local

farmworkers (completed in December 2001) ● A pre-school for 40 children (completed in February 2002) ● A large multi-purpose hall (completed in December 2001) ● Offices and classrooms for the Sustainability Institute (completed in

December 2001) ● 40 residences that will provide accommodation for participants in the

programmes of the Sustainability Institute ● 110 housing units ranging in price from R90,000 to R480,000 per unit ● Commercial space for offices or small manufacturers and crafters ● A village green and landscaped areas laid out in accordance with perma-

culture principles ● A limited-traffic and secure environment for children and pedestrians

Above all else, the Lynedoch EcoVillage must provide a safe space where South Africans from all backgrounds can live in peace with each other and in harmony with nature. It must also be a place where people from all over the world can come and share in the life of the community while they learn, think and create works of art and knowledge that will contribute to the making of a better world. It must, above all else, be a place where all life is celebrated and beauty in all its forms treasured for this and future generations.

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History and background Stellenbosch is a small university town some 35 minutes’ drive inland from Cape Town. Surrounded by the Helderberg, Simonsig and Stellenbosch mountain ranges, it has also been the historic commercial centre of a wealthy white-owned agricultural community dominated by the winemaking industry. Black people have suffered from exclusion not only from economic ownership in this region since agriculture began in the late 1600s, but also from housing, education and higher learning. The infamous ‘dop system’ (payment in alcohol to farm workers) has caused profound social damage that will take at least a generation to heal, with children as the key to a better safer future for this region. LyneDev submitted a development application to the authorities for approval in June 2000. Approval was finally secured in May 2002. The delay was caused by objections from neighbours, which made it necessary to obtain approval from the Western Cape Provincial Government. The approval that was obtained was for 150 housing units. During the participatory planning process, it became clear that a more mixed community with a diverse range of activities and incomes had a greater chance of being economically self-sustaining than a community that was entirely dependent on returns from workers earning very low wages. Finally, whereas the initial development plan presumed that deals would be made with farmers to relocate entire groups of workers off the farms and into Lynedoch, the board decided that it would not like to be party to this because the end result would be another dumping ground for disgruntled workers who might have preferred to remain living where they have lived for generations. Funding of various kinds (grant and low-cost loans) have been secured from a range of parties, including the Spier Estate, Danish Government Aid, the Winemakers’ Guild, Enthoven Family Trust, United States Agency for International Development (USAID) and the Ford Foundation. A commercial loan at prime rates was secured from a local bank. It is worth noting that the work done to date has already won recognition for Lynedoch. The South African government, with funding from USAID, ran a national competition for best-practice projects in order to select model projects for display at the World Summit on Sustainable Development (WSSD). The Lynedoch Development was one of 18 projects selected from well over 100 applicants. The development was also given the award of Best Environmental Project for 2002 by the South African Planning Institution.

The Sustainability Institute The Sustainability Institute is a non-profit trust1 that works in close partnership with LyneDev. Directed by Eve Annecke, it aims to promote a wide range of educa-

1

For details see the website at www.sustainabilityinstitute.net.

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tional programmes, projects and writing initiatives that relate to the spectrum of issues affected by the sustainability agenda. The main projects are as follows: ● Master’s programme in the Practice of Sustainable Development.

Designed and delivered in partnership with the School of Public Management and Planning at the University of Stellenbosch, this programme is aimed at people from all over the world, with special emphasis on participants from African countries. It comprises eight core modules delivered in a block release format for maximum flexibility, plus a thesis. The core modules are ‘Sustainable development’, ‘Complexity theory and systems thinking’, ‘Leadership and ethics’, ‘Globalisation, governance and civil society’, ‘Sustainable cities’, ‘Biodiversity and sustainable agriculture’, ‘Ecological design’ and ‘Corporate citizenship’. There are options for those who want to register as development planners. ● Land reform and organic farming. Gerrit Hendricks, a member of the

LyneDev Board and resident at Lynedoch, heads a large land reform project immediately across the road from the Lynedoch Village. He heads a group of 20 emerging farmers who have managed to secure 100 hectares on long-term lease from the Stellenbosch Municipality. As they gradually rebuild the health of the soils, they are putting in place the foundations for independent sustainable livelihoods through agricultural practices that are not dependent on increasingly costly oil-based chemical treatments or genetically modified seeds that bring local farmers under the control of global monopolies via patent systems. A second land reform and organic farming project will be initiated next year in the Transkei in partnership with a new trust initiated by Mpumelelo Ncwadi, a trained environmental engineer. ● Building the Lynedoch Village. This refers to the role that the Institute

plays in the co-ordination of the design of the Lynedoch EcoVillage under contract from LyneDev. ● Ecological and non-violent education in schools. Starting with the

Lynedoch Primary School, the gradual process of building a culture of non-violence has begun, beginning with work with children who handle domestic violence and the threat of rape on a daily basis. ● Africa Human Genome Initiative. During the course of 2002, the Sus-

tainability Institute, the Human Sciences Research Council and the Academy of Sciences of Southern Africa launched the Africa Human Genome Initiative, which aims to foster debate and discussion about the impact of genomic science on an understanding of African history and the future of African development strategies (especially health and agriculture). The projects of the Sustainability Institute are initiated by people who share in the vision and who feel comfortable working in an unstructured creative environment. People tend to find the Institute and then, if they want to stay, projects are developed and employment created, not the other way round.

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Development context at the global, national and local levels The WSSD that was held in Johannesburg in 2002 was motivated by the realisation that, in order to restore the balance between the environment and human society, the following four things would need to happen to reduce the human footprint: ● The total quantity of materials and energy extracted from the natural

system for use by society must be drastically reduced, including replacement of non-renewable resources (e.g. fossil fuels) with renewable resources (e.g. solar or hydrogen power). ● The total quantity of waste deposited by human society into the environ-

ment needs to be reduced to zero by converting wastes into productive inputs. ● A massive redistribution of resources needs to take place in order to

eliminate worldwide poverty. ● The vast but rapidly disappearing natural systems that sustain life (e.g.

forests and living seas) must be protected. When reference is made to reducing the ‘footprint’ of development, what is meant is defining and implementing development in a way that is consistent with these four dimensions of sustainability. Out of a total world population of six billion, two billion live in absolute poverty, three billion enjoy the basic necessities of life in various forms, and the remainder live in relatively industrialised urban conditions. Small minorities enjoy excessive lifestyles that depend on the unsustainable consumption of resources and related destructive wastage. Although there is still no evidence of a worldwide commitment to sustainable living, small projects around the world are leading the way. These projects can be initiated by many different types of actor, including governments, businesses and NGOs. The Lynedoch EcoVillage development is one of these pioneering initiatives. The South African government has committed itself to sustainable development. By this it means combining the need for economic development with a commitment to social equity (poverty elimination) and environmental protection (via measures such as increased use of renewable energy and decreased use of waste outputs). Although there is much that is moving in an unsustainable direction (e.g. rising unemployment, service cut-offs, promotion of genetically modified organisms [GMOs], and pollution), there are policy frameworks in place in South Africa that support and encourage developments such as Lynedoch EcoVillage. The National Environmental Management Act and policies on water conservation, waste reduction, housing provision for the poor and poverty elimination are the main examples. Under the leadership of the old Winelands District Council and more recently the Stellenbosch Municipality, an Integrated Development Plan for the local region has been formulated that is based on sustainable development principles. It

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is this plan that makes provision for the establishment of contained high-density ‘hamlets’ across the Winelands region as a means of managing urban growth over the next 25 years without triggering massive urban sprawl and related environmental destruction. This plan refers specifically to the Lynedoch Hamlet as a pilot development that could lead the way. Inspired by this, the board of Lynedoch Development has decided that its greatest contribution to realising the aims of the plan would be to demonstrate that it is possible to build a socially mixed community that has a much reduced ecological footprint and contributes significantly to poverty elimination.

Programmes and projects LyneDev has committed itself to the following projects for the three-year period starting August 2002: ● Finalisation of the design and acquisition of final approvals for the

Lynedoch housing project ● Commencement of construction by March 2003 ● Ongoing strengthening of the Lynedoch Primary School, including

teacher training and curriculum development ● Support for the extension of the pre-primary school and further training

in Montessori educational practices ● Establishment of a performing arts project in partnership with the South

African Performing Arts Academy

Ecological design The work on existing buildings that resulted in the renovation of the old rave hall, plus all future construction work, will reduce the footprint of the development by integrating the following ecological design approaches: ● Building materials selection will be based not just on financial cost

reduction, but also on footprint reduction. Examples include using unfired clay brick made on site using a low-skill rammed-earth machine supplied by Hydraform, long-life and low-maintenance materials for roofing and window/door frames, etc. ● Reduction of coal-generated Eskom2 energy by 60% via the replacement

of electric geysers with a centralised solar water-heating system for each street 2

The national state-owned energy supplier.

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● On-site vermiculture-based waste-treatment system supplied by Biolytix

that makes it possible to treat on-site all liquid and organic wastes so that they can be beneficially re-used for irrigating gardens and food lots ● Use of gas-fired stoves ● Installation of passive heating and cooling systems via north-facing

perspectives, carefully planned roof overhangs related to window sizes, and the use of wind chimneys and under-floor rock storage systems for channelling and managing wind and heat for summer cooling and winter warming ● Use of non-toxic products for painting, wood treatments and cleansing ● Landscaping using permaculture principles ● Strong connections to the organic farm across the road for local low-cost

food supplies

Governance The Lynedoch Development Company acts as the developer. This means that it applied for the development rights, raised the funding and will manage the housing construction and community-building aspects of the development. When the local authorities approved the development, this approval was granted on condition that a landowners’ association is established. Every property owner, including the Lynedoch Development Company, will be a member of this association. The association will be responsible for ensuring that the community has the services it requires, such as water provision, refuse collection, sewerage treatment, cleansing, gardens and grounds maintenance. These services will be paid for from service charges paid by landowners to the association. The association will pay the bulk service providers such as Eskom, Stellenbosch Municipality and various private contractors (e.g. for waste recycling and removal). It follows that the association will need to employ a full-time manager and it will require a local site office. The association will have an annual general meeting where landowners can vote for an executive, which will meet monthly. Although a final decision still needs to be taken on the matter, it is likely that the association will be a non-profit company. In addition to the developer (Lynedoch Development Company) and the landowners’ association, there will also be a code of conduct that will define the way the community would like to live on a daily basis. This code of conduct will relate to matters such as litter and waste disposal, how many pets each owner is allowed, noise pollution, traffic control, building extensions, use of energy and water, use of common areas, planting of vegetation and food gardens, disposal of compostable organic waste, safety and security matters (especially for children), use of the community hall, conflict resolution, air pollution, external appearance

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of buildings, procedures for managing community events (e.g. parties, marriages, funerals), behaviour of temporary residents (e.g. students), and the right to privacy when we know that many visitors will be coming through. Many people want a secure, beautiful and peaceful place to live where they can feel comfortable and part of a supportive and lively community. The successful operation of the landowners’ association and the code of conduct will make this possible.

I am Division Head: Sustainable Development in the School of Public Management and Planning at the University of Stellenbosch and Academic Director of the Sustainability Institute. I was co-founder, former Director and Professor of the Graduate School of Public and Development Management (P&DM), University of the Witwatersrand, 1993–97. Prior to joining the Graduate School of Public and Development, I worked for PLANACT—an urban development NGO which I helped establish in 1985. I have published Mark Swilling several edited and co-authored books, over 60 academic articles and contributed extensively to public debate in the popular press on issues related to development, democratisation, governance and social movements. I hold my PhD from the University of Warwick, UK, and have a BA and a BA (Honours) obtained through the Department of Political Studies at the University of the Witwatersrand where I was also a lecturer from 1982–87. [email protected]

I live in Stellenbosch, South Africa, where I am Director of the Sustainability Institute. I have a master’s in Management Learning from the University of Lancaster and trained in Italy and the United States as a Montessori educator. I have taught on leadership courses in recent years at the Warwick Business School (UK), Kennedy School of Government at Harvard, and various South African Universities. I am currently working with the University of Stellenbosch to develop a new master’s-level programme in leadership. I am Eve Annecke responsible for the Sustainability Institute’s partnership with the Lynedoch Primary School, with the emphasis on non-violence and peace-building within the school. During the mid-1990s I was the Programme Manager of the Leadership Development and Facilitation Programme at the Graduate School of Public and Development Management at the University of the Witwatersrand which provided courses for a wide range of groups, including top leadership of the South African Police Service, politicians and senior managers of Gauteng, Mpumalanga and North West Provincial governments and the senior management of the Greater Johannesburg Transitional Metropolitan Council. My work in organisational learning focuses on dialogue, strategy, community building and self-renewal.

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not the photo Good governance in development co-operation* David F. Murphy New Academy of Business, UK

When institutions function badly, poor and vulnerable people suffer most. But just as human development requires much more than raising incomes, governance for human development requires much more than having effective public institutions. Good governance also requires fostering fair, accountable institutions that protect human rights and basic freedoms. It is not only about whether judges are trained, but whether they observe due process and are blind to differences of race and class (Human Development Report [UNDP 2002b]). Good governance is perhaps the single most important factor in eradicating poverty and promoting development (UN SecretaryGeneral Kofi Annan [Annan 1998]).

The quality of governance is increasingly gaining recognition as both a precondition and foundation for sustainable development. Governance-related issues such as equality of opportunity, democratic processes, the fight against corruption, peace-building and conflict prevention all enhance opportunities for political and economic participation by disadvantaged people. Strengthening democratic *

This chapter is based on emerging findings from a New Academy of Business study on EU member state and other donor approaches to good governance. Commissioned by the European Community Poverty Reduction Effectiveness Programme (EC-PREP), the study is expected to make a contribution to the definition of an EU policy framework on governance. The New Academy of Business study team comprises David F. Murphy, Susan Barrett and Eva Hansen.

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systems also helps to create conditions for greater equity and participation by the poorest in the development process. From the World Bank and the UNDP to the European Union (EU) and its member states, good governance has emerged in recent years as a new donor criterion for selecting partner developing countries. Many donors now see good governance as a precondition for successful poverty reduction and as a development goal in its own right. There is also evidence of growing recognition of the importance of good governance at the regional and inter-governmental levels. For example, African heads of state and government lead the New Partnership for Africa’s Development (NEPAD) to address poverty in the continent through sustainable development, based on conflict prevention, sound economic governance and accountable political democracy. There are also numerous governance-related initiatives being promoted and developed by NGOs, businesses and other non-state actors worldwide to improve public- and private-sector transparency, fight corruption and promote more inclusive models of decision-making. This chapter explores the growing importance of good governance in development policy and action.

Good governance, poverty and development Good governance, human rights, democracy and the rule of law are all integral to development co-operation programmes that aim to reduce and eventually eradicate poverty. If poverty is influenced by the interplay of economic, political, social and psychological factors, then poor people need systems and processes of governance that respond to their needs holistically. The new World Bank definition of poverty sees it as a multi-dimensional phenomenon, which combines the inability to satisfy elementary needs, the lack of control over resources, shortcomings as regards education and capacity, poor health, the absence of housing, malnutrition, difficult access to water and sanitary installations, vulnerability in the face of shocks, violence and criminality, and the absence of political freedom and political participation.1 Poor governance gives rise to and reinforces poverty, and impedes action to reduce it. The essence of good governance is a commitment by those with political power to principles of participation, inclusion and sustainability. Good governance can enable poor people to have greater control over their lives and to live in a healthy and safe environment. On one level, governance is about the rules, processes and behaviour by which interests are articulated, resources are managed and power is exercised in society. But governance is about much more than state administrative control and compliance. The growing importance of non-state actors such as business and NGOs in governance-related policy development and implementation means that deci1

Andrew Shepherd (1999: 4) describes poverty reduction as ‘a complex, multi-dimensional, inter-organisational project’. His evaluation work on poverty reduction for the UK Department for International Development (DFID) suggests that poverty is ‘clearly a contested concept’ with ‘no one definition . . . thought to be sufficiently consensual’ even within DFID itself (Shepherd 1999: 6).

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sions and actions taken outside formal government processes have the potential to pre-empt, influence or alter official government policy. At the same time, governments continue to set many of the socioeconomic and environmental policy parameters (through laws and regulations), albeit increasingly in partnership with non-state actors. The widespread participation of all stakeholders at all levels provides a basis for good governance at local, national, regional and global levels. Good governance encourages social cohesion, the protection of human rights and sustainable development where: ● Relations between state and non-state actors are governed by the rule of

law. ● Civil society is free to organise and articulate public interests. ● State institutions are transparent, democratically accountable and cap-

able of ensuring effective implementation of laws and policies. ● Respect for internationally recognised human rights is reflected in legis-

lation and in the behaviour of state officials. For UNDP, good governance depends on public participation to ensure that political, social and economic priorities are based on broad societal consensus and that the poorest and most vulnerable populations can directly influence political decision-making, particularly with respect to the allocation of development resources (CAPWIP 2002: 31).

The involvement of all actors—the state (including all political and public-sector institutions), the private sector and civil society—is also considered to be essential for good governance. In a related vein, the key conditions for effective dialogue and co-operation between the EU and partner developing countries encompass institutional capacity-building and good governance in partner countries, as a means of helping to ensure that development resources are managed transparently and responsibly. These parameters guide the distribution of EU development aid ‘in order to allocate it to where it has the greatest chance of reducing poverty efficiently and sustainably’ (European Commission 2000). For a civil-society perspective on the link between good governance and development, the efforts of Transparency International to ensure an effective and comprehensive UN Convention against Corruption suggest that there is a need to globalise anti-corruption action across a broad agenda with active civil-society participation. Transparency International sees the new convention as a means of providing developing countries with ‘meaningful and effective measures for the recovery of assets looted by their corrupt leaders’.2

2

Jeremy Pope, Executive Director of Transparency International’s Centre for Innovation and Research (Transparency International 2003).

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Good governance as an emergent process One of the key questions arising from this growing attention to good governance in development co-operation is whether good governance should be seen as an absolute norm or an emergent process. The Netherlands’ approach to development co-operation attempts to answer this question. In July 1999, the Lower House of Parliament agreed to give priority to 20 countries for Dutch development aid,3 making them eligible for a wide range of long-term structural-development co-operation. Good governance was identified as one of the major screening criteria for country selection. The key features of good governance in this case included: ‘integrity, anti-corruption, transparency, control of public finances, participation, division of powers in a system of checks and balances (“trias politica”),4 rule of law, democratisation and respect for human rights’ (Ministry of Foreign Affairs 2003: 3). Other criteria included good socioeconomic policy, military expenses in proportion to the national budget, quality of national development programmes and the country’s geopolitical role in relation to peace and stability. In parallel with other donor countries and multilateral organisations, Dutch policy has broadened its earlier governance focus on economic processes and administrative efficiency to encompass greater concern for issues of democracy, justice and participation, encapsulated in four subheadings: participatory governance; legitimate governance; efficient and effective governance; and transparent governance. In practice, the Netherlands maintains a long-term structural bilateral partnership with the recipient ‘good governance’ country based on a sector-wide approach. This means that greater attention is given to long-term co-operation aimed at the institutional environment of and within a whole sector. In addition, the Netherlands provides bilateral assistance to other countries where there is a pressing need to strengthen governance systems and processes and to promote human rights and peace-building.5 When selecting priority partner countries, the Netherlands does not consider good governance to be an absolute norm but rather as an emergent process. To become a partner country, its ‘governance has to show signs of being or becoming 3

4

5

Later increased to 23. In April 2003 the list included: Bangladesh, Benin, Bolivia, Burkina Faso, Egypt, Eritrea, Ethiopia, Ghana, India, Indonesia, Macedonia, Mali, Mozambique, Nicaragua, Rwanda, South Africa, Sri Lanka, Surinam, Tanzania, Uganda, Vietnam, Yemen and Zambia. Trias politica refers to the separation of state power between legislative, executive and judicial authorities. By limiting the power of each of these authorities and by developing a system of countervailing powers between the authorities, the abuse of the powers of the state can be prevented. The French philosopher and jurist Charles de Montesquieu introduced the concept in his 1752 book L’Esprit des Lois. For further information on trias politica, see www.triaspolitica.com. These so-called transitional countries do not qualify for long-term multi-sectoral assistance, and have a post-conflict status or a previous history of close ties with the Netherlands. As of April 2003, this group included: Albania, Armenia, Bosnia, Cambodia, China, Colombia, El Salvador, Georgia, Guatemala, Guinea-Bissau, Honduras, Kenya, Moldova, Namibia, Nepal, Pakistan, Palestinian Territories and Zimbabwe.

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more participatory, legitimate, efficient and transparent’ (Ministry of Foreign Affairs 2003: 3). It’s the film that matters, not the photo. Good governance cannot be measured by viewing an isolated snapshot in time. How the many facets of good governance develop and emerge in a particular context is much more important. Viewing good governance as an emergent process may also mean that some facets improve faster than others. For example, there may initially be greater scope for progress in fighting corruption than in promoting popular participation in decision-making. Experience to date suggests that the link between poverty reduction and good governance is not always a causal one. Undemocratic states such as China have been among the world’s best economic performers in recent years. Likewise governance improvements may not necessarily bring immediate, widespread economic benefits or poverty reduction (e.g. South Africa). Of course, this also depends on how one defines poverty. ‘If poverty is seen as a greater voice for the poor and the right to control their own lives’, as Dutch development policy advocates, then ‘political governance will be vital for poverty reduction’ (Ministry of Foreign Affairs 2003: 5). The key lesson from the Dutch experience is that support for good governance in development co-operation requires an attentive and nurturing touch. By working primarily with partner countries ‘distinguished by their good governance and sound macroeconomic and social policies’ (Ministry of Foreign Affairs 2000: 7), the Netherlands is rewarding its partners’ efforts in this regard. By offering focused bilateral support to other countries where good governance, promoting human rights and peace-building require urgent attention, the Netherlands is giving hope to disenfranchised, dehumanised and disempowered groups and communities. In both cases, good governance is seen as an emergent process that is essential for poverty eradication and sustainable development and not something that can be uniformly prescribed.

Good governance and beyond If sustainable development and poverty reduction were two of the big development policy ideas of the 1990s, then good governance is fast becoming a key focus for development policy in the first decade of the 21st century. At the international level, there seems to be growing consensus between bilateral donors, multilateral agencies and other regional and international organisations that good governance has become an essential ingredient of development co-operation. There is also evidence of growing donor attention to developing enhanced governance assessment criteria for selecting partner countries and for monitoring and evaluating governance aspects of development co-operation programmes. Despite the current impetus for enhancing and strengthening governance through development co-operation, the struggle to eradicate poverty, injustice and inequality throughout the world continues. If good governance is really about processes that are more participatory, legitimate and transparent as well as more

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efficient and effective, then perhaps positive change for poor and oppressed people is possible. The pessimist would say that good governance is likely to become yet another fading photo in the long history of development. This optimist says let us wait to see the many different images and stories that emerge as the film develops. It’s the film that matters, not the photo.

References Annan, K. (1998) Annual Report of the Secretary-General on the Work of the Organization, New York (UN Department of Public Information, 27 August 1998; www.un.org/Docs/SG/ Report98/con98.htm). CAPWIP (Centre for Asia Pacific Women in Politics) (2002) Making Governance Gender-Responsive: A Basic Course (Facilitator’s Kit; Paranaque City, Philippines: CAPWIP). European Commission (2000) ‘The European Community’s Development Policy: Statement by the Council and the Commission’, http://europa.eu.int/comm/development/ development_old/lex/en/council20001110_en.htm. Ministry of Foreign Affairs (2000) The Sectoral Approach (The Hague: Sectoral Approach Support Group, Ministry of Foreign Affairs, June 2000). —— (2003) Poverty Reduction and Good Governance (The Hague: DMV/VG): 3. Shepherd, A. (1999) ‘Evaluation of DFID Support to Poverty Reduction: Lessons from the Evaluation of a Bi-lateral Aid Programme’, Draft Working Paper 5, presented to World Bank Conference on Evaluation and Poverty Reduction, Washington, DC, 14–15 June 1999. Transparency International (2003) ‘Unaccountable governments are threatening to derail UN Anti-Corruption Convention’ (press release, Berlin: Transparency International, 21 March 2003). UNDP (United Nations Development Programme) (2002a) ‘Excerpts from UNDP and Governance: Experience and Lessons Learned’, in CAPWIP (Centre for Asia Pacific Women in Politics), Making Governance Gender-Responsive: A Basic Course (Facilitator’s Kit; Paranaque City, Philippines: CAPWIP). —— (2002b) Human Development Report (New York: UNDP, http://hdr.undp.org/reports/ global/2002/en).

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Since September 2002, I have been the Director of the New Academy of Business, an independent business school that provides entrepreneurs, managers and organisational leaders with the insights and capacities necessary to respond progressively to the emerging challenges of sustainability and organisational responsibility. Since joining the organisation in 1998, I have facilitated the development of the New Academy’s international network of partners working together on various education and research initiatives on global corporate responsibility. This work has included a two-year international action research project on business–community relations with United Nations Volunteers (UNV) in seven countries. Other recent projects include good governance in development co-operation with the European Commission, corporate responsibility practices in South Asia with TERI-Europe, and a feasibility study on the social marketing of job quality in micro and small enterprises with the International Labour Organisation. Since 2000, I have been a member of the Amnesty International (UK) Business Group on Human Rights. From 1993–97, I undertook research at the University of Bristol on the implementation of corporate social responsibility policies and completed my PhD on business–NGO relations and sustainable development. Prior to my arrival in the UK in 1993, I co-ordinated various community development programmes for the Canadian NGO CUSO in West Africa and Canada, where I also managed volunteer programmes for a Canadian AIDS organisation. Together with Jem Bendell, I co-wrote In the Company of Partners: Business, Environmental Groups and Sustainable Development Post-Rio (The Policy Press, 1997). [email protected]

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Part 5 Conclusion

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a a Under the trumpet flower

*

Abdul Cader Riswana, Ismael Ashraff, Jinutheen Rasmina, Kanathan Dinojit, Stepan Sampath The Butterfly Garden of Batticaloa, Sri Lanka

*

This story is taken from The Children and Animators of the Butterfly Garden, Blood of the Mango and Other Tales from the Butterfly Garden of Batticaloa (Colombo, Sri Lanka: The Butterfly Garden, 1997; with illustrations by Thuraisamy Naguleshwaren; as collected and retold in English by Paul Hogan).

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Some elephants of rare and exceptional lineage can fly, and Azaraf was one of them. Azaraf the Imperturbable seemed to be able to rise above dark clouds and troublesome times whenever they occurred. The trials and tribulations of everyday life were fuel for his rocket. He was a natural-born flyer. The people of Bottomless Lagoon, where he lived, admired this quality and often came to him for advice. Just as there was no bottom to the lake so there seemed to be no fathoming Azaraf’s wisdom and kindness. He could easily have been king of the jungle, but he was too busy enjoying himself, flying the length and breadth of Mattakalappu, getting to know better the land he called home. Ever since he was a child, Azaraf loved flying. Even as a babe he was able to fly above the treetops using his ears for wings, but that did not last long. There came a day when his ears could no longer lift his immense bulk off the ground no matter how furiously he flapped. From that day forward, the whole purpose of his life was to be able to fly again. When he became a successful businessman, the first thing he did was buy a plane, a small four-seater cargo craft. Then he started an air transportation company, Elephant Air, and flying became his life and livelihood. Azaraf married a beautiful white duck named Tara and she was the love of his life. They lived happily on the marshy shore of Bottomless Lagoon with their son Kutti who looked a bit like both of them, the front half like appa and the back half like amma. The rest was Kutti—pure Kutti—a one-of-a-kind kid. When Kutti was born, Azaraf hoped he would fly on his own—after all, Kutti had both good duck blood and enormous elephant ears for wings—but this did not happen. He was top-heavy and he crashed, spectacularly and often, usually head-first, while attempting short sprints from the ground to a neighbour’s rooftop, or over the garden wall. After a particularly nasty incident where Kutti ditched into the lagoon and very nearly drowned, his mother grounded him. No more solo flights! If Kutti wanted to fly he would have to do it under his father’s supervision. Tara took to flight naturally, so the thought of Azaraf and Kutti flying made her nervous. Flying was one thing for a duck, but for an elephant? And her son? With all the bumps and scars on his big bonehead she did not think so. For that matter, she would not even fly with Azaraf. Never! She had done it, once, before they were married, and that was it. Aeroplane fuel intoxicated and nauseated her, while the engine racket left her vibrating with an uneasy feeling that her own wings were about to disassemble and drop off. She felt trapped in a flying cage—the up-drafts and down-drafts, the thunder, the lightning and turbulence—no thanks! She preferred to swim and fly about in a leisurely way through the tall reeds and endless water paths of the maze-like lagoon. Let the boys have their great adventures! She didn’t mind staying home alone. It was the one time she felt truly at peace with herself.

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There were hunters on the lagoon and when they saw ducks, they saw dinner— and that was what happened one terrible afternoon. A volley of shotgun fire tore through the soft summer breeze and Tara fell to earth, her world dispersed in a cloud of feathers and a sigh. The hunter took a leather thong and, trussing her up with the other unlucky ducks, slung her over his shoulder and carried her home. As twilight fell, the urgent whining of a small silver plane descended across the vacant sky. Skirling down from the cloud towers of Mattakalappu, Azaraf and Kutti came home to an open door and an empty house. It took only a moment for them to realise Tara was gone, and was never coming back. It took years to recover. Azaraf and Kutti closed the office and they packed up their belongings, loaded them on the plane and left the Bottomless Lagoon. So great was their sadness that day that their tears filled the lagoon to flooding. They left the land and wandered in the empty sky. Was there a chance that Tara was alive somewhere? Could they ever be re-united? Would they ever find another home? Though their eyes roamed far from Mattakalappu their hearts remained there with Tara. One day, as they drifted aimlessly in flight, a luminous white duck appeared on the starboard side of the aircraft. Azaraf’s heart skipped a beat. It was Tara! He and Kutti waved and called her name but she just kept right on flying into the sun. They followed her until a red light flashed on the instrument panel telling them the reserve tank was empty. The duck disappeared into a thick bolster of clouds. Azaraf and Kutti gave pursuit. When they emerged on the other side, the duck was gone. Whay lay below them was a mysterious emerald atoll, serpentine in shape, the serpent circled into the position of Ouroboros, head eating tail, tucked away in a lapis blue sea. It beckoned like a golden bangle long ago misplaced in some other story. It drew them like the Star of Destiny. ‘This is where we’ll gas up, Kutti’, said Azaraf, as he banked the plane into sudden spiral descent, ‘this will be our new home.’ Loudspeakers were a curious feature of this island paradise. There may have been many or there may have been only one but it seemed unduly loud and persistent and it followed them from the time they landed. They walked faster and faster trying to out-distance the loudspeaker with its frantic music but it pursued them down to the beach and along the shore. It was everywhere. It surrounded them. They ducked into the jungle, breaking a new trail through the bush, running along the undulating twist of a path up-hill to the brink of a precipice. The loudspeaker followed them the whole way. They were ready to jump in suicidal desperation when Kutti spotted the opening to a cave in the cleft of a rocky ledge just below their feet. They scrambled into the shadows and disappeared. It was silent—perfectly silent—there. What a relief! Then they realised it was also dark—perfectly dark. As their eyes slowly adjusted to the darkness, it seemed to sparkle and glow. A warm, mellow voice, a female voice flowing like honey, wel-

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comed them. ‘You boys must be famished!’ she said. ‘Have some idi apam. They’re supposed to be good for you . . . and mine are the best!’ Mid-air hoppers1 appeared, one by one, spinning and luminescent. They hovered in the darkness like a gathering fleet of flying saucers as Kutti and Azaraf plucked them out of the air with their trunks. One by one the hoppers disappeared. The fleet along with its luminescence vanished into their bellies. Suddenly they could see! They were no longer hungry and there she was, plain as day, a big bejewelled snake stirring the currie pot using a boat paddle as her stir spoon. She wore a golden crown and had a gold ring set with rubies, sapphires and tourmalines fixed in her upper lip. She was spicing the currie with margosa leaves and spinach. ‘I am Rasmiah, Queen of this island and Mistress of the Currie Pot. You boys are in for a real treat.’ Some say she was praying, others said Rasmiah was an inveterate spell-caster. Even if she didn’t want to, she cast spells that flew out of her like beams from her jewels. Azaraf and Kutti moved into the cave. They roved the archipelago by day, and by night her currie pot was very handy for their hearty appetites. There was no petrol on the island so they didn’t fly much. Their new mission in life was to find the loudspeaker and silence it. No one before had ever been able to trace the source of the music that haunted the land. It was a man whence this music came, not troll or elf or angel or anyone like that. Granted, this man was very tiny, about the size of a child’s thumb and very skinny, about as thin as a needle. He travelled with the loudspeaker strapped to his back painted in camouflage colours so it was hard to make out in the jungle. Elephants, however, have extraordinary eyesight. One scorching Saturday afternoon after market, Kutti caught the loudspeaker man napping under a fallen kitul husk. He summoned his father. Azaraf silenced the loudspeaker with a swipe of his trunk. ‘So you are the little bumpkin who’s causing all the commotion! Why must you play your music so loud? You are driving everyone crazy! Why do you do this?’ ‘Yana Annan’, said the little black burnt-crisp of a man, ‘we are so hungry . . . we are confused . . . we play this music to distance ourselves from the voices of hunger. It is not to hurt you. It is to distract ourselves.’ Rasmiah said another prayer and the loudspeaker was transformed into a trumpet flower. She prepared food for the little man and sent it to him every day with Kutti so he didn’t need the loudspeaker anymore. He needed the silence instead to hear his own song. He sat under the trumpet flower listening. And there was great rejoicing throughout the land for the long-awaited peace and quiet.

1

Hoppers, or idi apam, are savoury pancakes made of rice flour and coconut milk, which are eaten with curry throughout Sri Lanka.

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Abbreviations

A$ ABI AA ACLU AFL–CIO AGI AGSE AIDS ASX BBC BCR BOT BSR CAOBISCO CAPWIP CAWN CEO CIS CLERP CMA CMAA CMAC CO2 CoRE COVERCO CR CSR

Australian dollar Association of British Insurers AccountAbility American Civil Liberties Union American Federation of Labor–Congress of Industrial Organisations Association of Ghana Industries Australian Graduate School of Entrepreneurship acquired immuno-deficiency syndrome Australian Stock Exchange British Broadcasting Corporation business–community relations build–operate–transfer Business for Social Responsibility Association of the Chocolate, Biscuit and Confectionery Industries Centre for Asia Pacific Women in Politics Central America Women’s Network chief executive officer Commonwealth of Independent States Corporate Law Economic Reform Program (Australia) Chocolate Manufacturers’ Association Cocoa Merchants’ Association of America Confectionery Manufacturers’ Association of Canada carbon dioxide Corporate Responsibility for the Environment (TERI) Comisión de Verificación de Códigos de Conducta (Commission for the Verification of Corporate Codes of Conduct, Guatemala) corporate responsibility corporate social responsibility

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Abbreviations CSRM DFID DRC DTC DTI ECA ECOSOC EMIH EPA ETI EU FCC FDI FES FLA GATT GDP GHACEM GMIES GMO GNP GRI GTP GTV HRD ICA ICC ICHRP ICT IDMA IDS ILO IMF ISO IUF LEADER MfE MILF MNLF MP Nasdaq NEPAD NGO NZBCSD

237

Corporate Social Responsibility Movement (Ghana) Department for International Development (UK) Democratic Republic of Congo Diamond Trading Company (De Beers) Department of Trade and Industry (UK) European Cocoa Association Economic and Social Council Grupo de Monitoreo Independiente de Honduras (Independent Monitoring Group of Honduras) Environmental Protection Agency Ethical Trading Initiative European Union Federation of Cocoa Commerce Ltd foreign direct investment Friedrich Ebert Stiftung Fair Labor Association General Agreement on Tariffs and Trade gross domestic product Ghana Cement Grupo de Monitoreo Independiente de El Salvador (Independent Monitoring Group of El Salvador) genetically modified organism gross national product Global Reporting Initiative Ghana Textile Products Ghana Television human resources department International Confectionery Association International Chamber of Commerce International Council on Human Rights Policy information and communications technology International Diamond Manufacturers’ Association Institute of Development Studies (UK) International Labour Organisation International Monetary Fund International Organisation for Standardisation International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers’ Associations leadership; engagement; alignment; diversity; evaluation; responsibility Ministry for the Environment (New Zealand) Moro Islamic Liberation Front (Philippines) Moro National Liberation Front (Philippines) member of parliament National Association of Securities Dealers Automated Quotations New Partnership for Africa’s Development non-governmental organisation New Zealand Business Council for Sustainable Development

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ODA OECD OMSAR PAC PASE PBSP PCE PR PSU PWBLF PwC QC quango R RAN RR RUF SA SADCC SD SDR SEC SME SOAS SRI SVN TBL TERI TI TIAA-CREF TNS UN UNDP UNGA UNIDO UNITA UNV USAID WCF WDC WFDB WRAP WSSD WTO

official development assistance Organisation for Economic Co-operation and Development Office of the Minister of State for Administrative Reform (Lebanon) Partnership Africa Canada Profesionales para la Auditoria Social Empresarial (Professionals for the Social Auditing of Business, Nicaragua) Philippine Business for Social Progress Parliamentary Commissioner for the Environment (New Zealand) public relations public sector unit Prince of Wales Business Leaders’ Forum PricewaterhouseCoopers Queen’s Counsel quasi-autonomous non-governmental organisation South African rand Rainforest Action Network Redesigning Resources (New Zealand) Revolutionary United Front (Sierra Leone) Social Accountability Southern Africa Development Co-ordination Conference sustainable development Sustainable Development Reporting Securities and Exchange Commission (USA) small or medium-sized enterprise School of Oriental and African Studies socially responsible investment Social Venture Network triple bottom line The Energy and Resources Institute Transparency International Teachers’ Insurance and Annuity Association College Retirement Equities Fund The Natural Step United Nations United Nations Development Programme UN General Assembly United Nations Industrial Development Organisation União Nacional para la Independência Total de Angola (National Union for the Total Independence of Angola) United Nations Volunteers United States Agency for International Development World Cocoa Foundation World Diamond Council World Federation of Diamond Bourses Worldwide Responsible Apparel Production World Summit on Sustainable Development World Trade Organisation

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Index

Abdroids 15, 98-103 description 98n Abuse of corporate power 100 Accountability, voluntary codes 149-50 Administrative law, and voluntary codes 157-58 Affichage Pikasso 210-11 Agency adverse selection 68 moral hazard 68 Agency relationship, definition 67 Agency risk, reducing 68-69 Agency theory 63, 64, 66, 67-68, 69, 74 Agriculture, use of chemicals 24 Aid 83 Amnesty International 88 Anglo-American model of corporate governance 60, 64, 65-66, 75 agency and incentive compensation schemes 68-69 and agency theory 67-68, 74 description 66 and shareholder value 67-68 Angola diamond industry 121, 129 UNITA 121, 129 Annecke, Eve 17, 216-23 Archer, Simon B. 16, 142-65 Arendt, H. 28

Arthur Andersen 166, 167-68 Artificial personality 15, 98-103 Asia, South see South Asia Association of British Insurers 89 Auditors, role 167-69 Australia corporate governance 66 proposals for reform 71, 74-75 diamond industry 123

Balsari, Viraal B. 14, 36-38 Banana plantations 134, 139 Bangladesh 54, 56 child labour 54 childcare programmes of NGO Phulki 57 inadequate compensation for overtime and low wages 54 see also South Asia Bannerji, R. 56 Bateson, G. 27 Bebchuk, L.J. 71 Béchervaise, Neil E. 15, 59-78 Beck, U. 26 Belgium, diamonds 123-24 Berle, A.A., Jr 63, 66, 68 Best practices, voluntary codes 152

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Beximco Textiles 56 Bhagyadari system 14, 36 Bhopal 37, 54 Blackwell, T. 26 Boateng, J.Y. 14, 44-52 Bohm, D. 27 Bok, S. 25 Botswana, diamond industry 115, 116, 117, 123 Bourke, Scott 15, 59-78 Boyle, G. 70 Bratton, W. 75 Buffet, W. 73 Business schools 15, 104-107 for sustainable development see Waikato Management School Business for Social Responsibility 88

Cambodia, illegal logging 84-85 Canada, tax cuts for community initiatives 208-209 Carson, R. 24, 28 Central America see Women workers in Central America Central America Women’s Network (CAWN) 133-34 Cheffins, B. 66 Chemaly Printing Press, partnership with OMSAR (Lebanon) 212 Chemicals, use in agriculture 24 Chemicals industry, Responsible Care 145 ChevronTexaco, partnership with WWF 88 Child labour, Bangladesh 54 Chiquita Brands International 139 Cocoa trade 16, 33, 110-14 International Cocoa Initiative 113-14 slavery 111, 112 Code-making, reporting and monitoring regimes 89 Collins, Eva 15, 103-107 Commonwealth of Independent States (CIS), corruption 84 Companies Act 1856 98-99 Companies/corporations liability for subsidiaries 102 need for better checks and balances 101 need for greater transparency 101 need for qualified property rights 102103 Company formation, need for regulated 102 Compensation for senior executives, relationship to financial performance of HIH 62-63

Competition law, and voluntary codes 156-57 Confidentiality 137 Conflicts of interest between management and shareholders 63-76 Congo, diamond industry 121, 124 Contract law, and voluntary codes 155-56 Convening and partnership arrangements 88 Corporate codes of conduct see Women workers in Central America Corporate failure, corporate governance and managerial misfeasance 63-65 Corporate governance 15, 59-76 Anglo-American model 60, 64, 65-66, 67-68 Anglo-American regimes, proposals for reform 71-74 and corporate failure 63-65 definitions 64 Corporate responsibility New Zealand see under New Zealand predominant global instruments 151n South Asia, future changes 57-58 Corporate Responsibility for the Environment (CoRE) at TERI 57 Corporate social responsibility 79-97, 111-13 definitions, WBCSD 113 India 14, 36-38 Corporate Social Responsibility Movement (CSRM) (Ghana) 44-52 accountability and awareness-creation initiatives 46-50 CSR television documentary 48 grass-roots mobilisation campaign 49 media attraction event 47 news conference 48 outreach and advocacy campaigns 48-49 seminar on Chemu lagoon 48-49 support from Friedrich Ebert Stiftung 50 activities for 2003 52 brochure 49 effects of activities 50 formation, drivers 45-46 foundation 46 local media as strategic ally 45 membership application 49 mission 44-45 objectives 45 registration as NGO 51 strategy 45 youth volunteering culture 51

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Index CorpWatch 90 Corruption CIS 84 diamond industry 120-21 government officials 84 South-East Asia 84-85 COVERCO 137-38, 139, 147 CSRM

see Corporate Social Responsibility Movement Culture, and corporate governance 65-66

Dabhol 55 Davies, W.H. 25 De Beers 117-19, 120, 123 DTC Diamond Best Practice Principles 127 Democratic accountability 92-93 De Soto, H. 85 Developing countries, per capita private consumption 85 Development co-operation, good governance in 17-18, 224-29 Diamond industry 16, 115-31 alluvial diamonds 115-16 Angola 121, 129 blood diamonds see conflict diamonds below Botswana 115, 116, 117, 123 conflict diamonds 120-23, 128-29, 130 measures to address problem— Kimberley Process 124-26 Congo 121, 124 and corruption 120-21 country of origin 124 country of provenance 124 Dubia 124 G8 126 India 124 industry undertakings 127-30 DTC Diamond Best Practice Principles 127 World Diamond Council 128-29 Kimberley Process 123-26, 128, 130 Namibia 116, 117, 123 research by Partnership Africa Canada 116, 117 Sierra Leone 120, 122 socioeconomic role 116-18 South Africa 116, 117-18, 123 use of diamonds for money laundering 120 Zaire 118-19, 120 Directors, function of board 67 Donne, J. 28

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DTC Diamond Best Practice Principles

127 Dubia, diamond industry 124 Due diligence defence 156 Eating disorders 30-32 Ecological enlightenment 26 Eisenhardt, K.M. 63 EMIH 137-38 Enron 55, 65, 72, 73, 166 Evans, Roger W. 15, 98-103 Fair Labor Association 138 Fama, E.F. 63, 66, 68 Foreign direct investment 83-84 distribution 83 Forster, E.M. 14, 26, 39-42 Forzley, Lubna 17, 207-15 Frame, Bob 18, 190-206 Freeman, R.E. 37 Friedrich Ebert Stiftung (FES) 50

G8, diamond industry 126 Gandhi, Mahatma 14, 37 Ghana, Tema CSRM

see Corporate Social Responsibility Movement description 45-46 Global anarchy 82 Global economic liberalisation 81-83 Global Witness, report on conflict diamonds 121 GMIES 137-38, 139 Gordon, Richard 18, 190-206 Government officials, corruption 84 Governance capacity 93-95 Governance, good as donor criterion for selecting partner developing countries 225 emergent process 227-28 and poverty and development 225-26, 228 as precondition and foundation for sustainable development 17-18, 224-29 Governments relationship with business and the community 208-209 role in monitoring transnational business 94 Greenwashing 90 Guatemala, COVERCO 147

Hall, B. 70 Hartsock, N.

172-73

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Hazleton, Ralph 16, 115-32 Henriques, Adrian 16, 110-14 HIH Insurance Limited, collapse of 60, 61-63, 65, 71, 72 compensation for senior executives and relationship to financial performance 62-63 reasons for 61-62 Himmelberg, C. 70 Hirschland, Matthew J. 15, 79-97 Hong Kong, diamonds 123-24 Hubbard Foods 193 Hubbard, G. 70 Human rights, International Council on Human Rights Policy 90 Human rights law, and voluntary codes 159-60

Illich, I. 25 Incentive compensation schemes 15, 5976, 60 and Anglo-American model of corporate governance 68-69 and managerial misfeasance 63, 64, 65 relationship with firm’s performance, overview of literature 69-71 and risk aversion 70 testing economic theory of 69-71 India 55-56 bhagyadari system 14, 36 corporate social responsibility (CSR) 14, 36-38 diamond industry 124 Green Rating programme 57 history of business development 36-37 Ladakh 32 trade unions 37 see also South Asia Industry Canada 148-49n Institutions, trust in 32 International Cocoa Initiative 113-14 International Council on Human Rights Policy 90

Jensen, M.C.

63, 66, 67, 68, 69

Keynes, J.M. 24-25 Kimberley Process 123-26, 128, 130 Kuhn, T. 74-75 Kumar, Ritu 14, 53-58

La Frutera Inc. see Philippines, La Frutera and Paglas joint venture Landcare Research 193, 195, 197 Lather, P. 173, 174 Lebanon Citizen’s Charter 208, 213-14 Code of Conduct for Civil Servants 211-12 Lebanon, Office of the Minister of State for Administrative Reform 17, 207-14 Citizen Enterprise initiative 209, 210-12 Affichage Pikasso 210-11 mission statement 208 partnerships Chemaly Printing Press 212 Raidy Publishers 211-12 TEAM International 211 profile 209-10 strategic alliances 210n Leibman, J. 70 Lynedoch EcoVillage, South Africa 17, 216 code of conduct 222-23 development context 220 ecological design 221-22 goals 217 governance 222-23 history and background 218 key features 217 landowners’ association 222 Lynedoch Development Company composition of board 216-17 programmes and projects 221 Sustainability Institute, main projects 218-19

McIntosh, Malcolm 13, 24-29 Macpac 197 Makaibari tea estate, Darjeeling 56 Malfeasance, definition 64-65 Managerial incentives see Incentive compensation schemes Managerial malfeasance 59, 60 and corporate failure 63-65 and incentive compensation schemes 63, 64, 65 Maquila (garment assembly) factories 134 Maquiladora textile production factories 147-48 Martin, R. 65 Mbeki, Thabo 11, 13 Means, G.C. 63, 66, 68 Meckling, W.H. 63, 66, 67, 68 Media 45, 47

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Index Minimum wage, failure to pay (Bangladesh) 54 Misrepresentation, and voluntary codes 158-59 Mobutu, President (Zaire) 118-19 Modernist reconstruction 24 Moldoveanu, M. 65 Monbiot, G. 89 Money, love of 25 Monitoring transnational business, governments’ role 94 Murphy, David F. 17-18, 224-30 Murphy, K. 69

Namibia, diamond industry 116, 117, 123 Nasdaq 143 Natural Step, The 192 Negligence 154 Nehru, J. 37 Netherlands, development cooperation approach 227-28 New Academy of Business, joint initiative with United Nations Volunteers 14, 44 New Partnership for Africa’s Development 225 New Zealand corporate responsibility 18, 190-205 future directions 202-203 generic framework 196-202 observations as facilitators 202 triple-bottom-line (TBL) reporting 192 corporate responsibility—case study 192-96 changes implemented 196 the companies 193-94 drivers and facilitating factors 19495 population 191 Redesigning Resources programme 190 description 192 small and medium-sized enterprises 191 Waikato Management School 104-107 New Zealand Business Council for Sustainable Development 190 description 192-93 NGOs 86-90 relationship with business 87-90 code-making, reporting and monitoring regimes 89 convening and partnership arrangements 88 socially responsible investment 8889

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role in South Asia 57-58 transnational 87 and voluntary codes 146n, 147 Nicaragua, women workers 134 Nike 159n Norsk Hydro 88 Nuguid-Anden, Charmaine 17, 182-89

Objectivity in auditing

17, 166-79

OECD, definition of corporate governance

64 Official development assistance 83 Oppenheimer, H. 117-18 Orion New Zealand 193, 197 O’Rourke, D. 137 Overtime payments, Bangladesh 54 Ownership, separation from control 66, 67

Paglas Corporation see Philippines, La Frutera and Paglas joint venture Partnership Africa Canada, research on diamond industry 116, 117 PASE 137-38 Penal liability, and voluntary codes 156 Philippines Mindanao Datu Toto 183 violent history 183 Philippines, La Frutera and Paglas joint venture on Mindanao Island 17, 18289 cross-cultural harmony 185 cultural sensitivity 184 Datu Toto 184, 185, 186 Datuism 187 La Frutera Community Development Foundation 184-85 Datu Toto 184, 185 education and livelihood programmes 185 measurement and reporting corporate social responsibility 188 origins 183-84 views of the community 187 Piper, S. Tina 16, 142-65 Polanyi, K. 81 Positivism, and objectivity 171, 172 Poverty definition 225 and good governance 225-26, 228 Power, M. 173 Pratt, Mike 15, 103-107 Prieto-Carron, Marina 16, 133-41

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Prince of Wales Business Leaders’ Forum 88 Private consumption in developing countries 85 Public image 145

Racial prejudice 41 Raidy Publishers, partnership with OMSAR (Lebanon) 211-12 Rainforest Action Network 93 Rapaport, M. 122 Recovered Materials Foundation 193-94 Redesigning Resources Group 190 Regulation, forms available to policymakers and stakeholders 144 Responsible Care, chemicals industry 145 Risk aversion of CEOs 70 and incentive compensation schemes 70 Roper, Juliet 15, 103-107 Ross, M. 116 Russia, diamonds 123 Rust, Mary-Jayne 13-14, 30-35

Scruton, R. 27 Seabrook, J. 26 Self-regulation 142 see also Voluntary codes Self-regulators 144-45 Shah, Rupesh A. 17, 166-79 Shareholder value, and Anglo-American model of corporate governance 67-68 Shareholders, position in company 67 Shiva, V. 172 Sierra Leone, diamond industry 120, 122 Silent Spring 24, 28 Slavery, cocoa trade 111, 112 Slimline Ltd 56 Smillie, Ian 16, 115-32 Snowy Peak/Untouched World 197 Social auditing 111-13 Social deception 24 Social and environmental impact assessments 168 Social protection 81 Socially responsible investment 88-89 South Africa diamond industry 116, 117-18, 123 King Commission report 26-27 sustainable development 220 see also Lynedoch EcoVillage, South Africa

South Asia corporate responsibility 14-15, 53-58 future changes 57-58 globalisation in one continent 14, 5455 philanthropy of companies 55 role of NGOs 57-58 see also Bangladesh; India; Sri Lanka South-East Asia, corruption 84-85 Sri Lanka effects of civil war 55 see also South Asia Stakeholders definition 113 relationships 112-13 Strict liability 156 Subsidiaries 102 Supply-chain pressures 54 Sustainability Institute see Lynedoch EcoVillage, South Africa Sustainable development business schools see Waikato Management School and quality of governance 17-18, 224-29 see also Lynedoch EcoVillage, South Africa Swilling, Mark 17, 216-23 Switzerland, diamonds 123

T-shirts 54 Tarnas, R. 171, 172 Tata, J. 53 Tax cuts for community initiatives, Canada 208-209 Tea production 56 TEAM International, partnership with OMSAR (Lebanon) 211 TERI-Europe 56 Theory of the firm 56, 63, 66 TIAA-CREF 89 Tolerance 14, 39-42 Tort, and voluntary codes 154-55 Trade unions, India 37 Transparency 90, 91-92, 101 voluntary codes 150-51 Transparency International 84, 226 Triple-bottom-line (TBL) reporting 192 Trust 13-14, 30-35 indicators in society 32 in institutions 32 key factors in process of regaining 34 in objects 32-33 of one’s own body 30-34 Trusteeship, Gandhian philosophy 14, 37 Truth 172, 174, 175 in financial statements 169-70

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Index Turnbull, S. 64, 72, 74-75 Tutu, Archbishop Desmond

Ubuntu

25

26

UK

Active Communities Challenge 208 advertising standards private initiative 145n company law reform 100 corporate governance, proposals for reform 72 Unilever 55 Union Carbide Gas, Bhopal tragedy 37 United Nations, Johannesburg World Summit (2002) 80 United Nations Development Programme, Human Development Index 175 United Nations Volunteers, joint initiative with New Academy of Business 14, 44 USA

corporate governance, proposals for reform 71, 73 Sarbanes–Oxley Act (2002) 73

Varela, F. 27 Voluntary codes 16, 142-65 definition 148n evaluation 149-52 accountability 149-50 governance 151 responses to concerns 151 summary of ‘best practices’ 152 transparency 150-51 implementation and enforcement 14849n as incentives for ethical behaviour 153 legal effect in private and public law 154-60 administrative law 157-58 competition law 156-57 contract law 155-56 human rights law 159-60 misrepresentation 158-59 penal liability 156 tort 154-55 and NGOs 146n, 147

245

reasons for adoption 144-46 recommendations to enhance accountability and transparency of corporate conduct 160-61 scope and structure 146-48 typical features 148

Waikato Management School 104-107 Ward, B. 27 Warehouse, The 193, 194, 197, 202 Washington Consensus 83-86, 142 description 83 WBCSD 192 definition of CSR 113 Westphal, J.D. 70 Whitehouse, Ian 18, 190-206 Williamson, J. 83 Women workers in Central America 16, 133-41 corporate codes of conduct independent monitoring groups— need for transparency 137-39 lack of knowledge and inaccessibility 134-35 lack of transparency 135-37 monitoring 135-37 reporting and confidentiality 137 risks of non-transparent certification programmes 139 World Bank, definition of poverty 225 World Diamond Council 123, 128-29 World Summit on Sustainable Development (2002) 80 Worldwide Responsible Apparel Production (WRAP) 138-39 WWF, partnership with ChevronTexaco 88

Youth see Corporate Social Responsibility Movement (CSRM) (Ghana)

Zaire, diamond industry Zajac, E.J. 70 Zingales, L. 64

118-19, 120

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