Treading the Sacred Ground

With mounting pressures from all sides, multinational companies can no longer ignore calls to improve human rights conditions in host countries.

by Louisa Wah

Indeed, a number of progressive multinationals have even started to inject the much-stigmatized term of human rights into their corporate ethical blueprints. This move is a "groundbreaking" one, says Sir Geoffrey Chandler, chair of Amnesty International U.K. Business Group, London. "The code of conduct covering employees' health and safety and so on [is nothing new]. What's new is the intrusion of the responsibility for human rights," he remarks.

But recognizing this responsibility is one thing. Finding ways to enforce human rights standards in a competitive global market is quite another. And with so many sets of standards out there, how does a company decide which one to follow? For multinationals that are determined to tread the ethical path, most are at a crossroads right now, pondering, "How do we make ourselves ethically credible?"

A Fuzzy Boundary

One of the basic challenges today is to define human rights and the degree to which a business can influence its various components. Interpretations of human rights vary greatly. Some limit it to the economic and social conditions of workers in directly owned facilities. Others believe that human rights should include the civil and political rights, such as freedom of speech, of everyone in the host country.

Here is where the argument starts: How far should corporations go? Which yardstick should they measure themselves against?

These questions form the core of the heated discussions on human rights occurring in the corporate world today. Michael Santoro, assistant professor of international business ethics at the Graduate School of Management at Rutgers University, Newark, N.J., is attempting to address the complex issue in a forthcoming book. He proposes a "fair share" theory in which companies' responsibility for human rights is restricted to business-related areas.

"People ask [multinationals] to do everything," Santoro says. "Corporations then throw up their hands and say they can't do that. We should ask corporations to do that which is reasonable. Corporations can become a very important force to promote human rights, but unless the demands are reasonable, [they] won't become partners in promoting human rights. They would only see human rights as contradictory to their interests."

No matter how companies feel about their obligations in human rights, they must face up to the matter in one way or another. "Human rights is an issue and it's not going to go away," says John Drummond, managing director of Integrity Works, a Berkshire, UK-based consulting company that helps companies address ethical issues.

Drummond says that even though people in the West have a growing mistrust of major institutions--governments, religious institutions and business enterprises--they believe the responsibility for improving human rights conditions should fall on corporations because they are seen, unlike the others, to have the capacity to fix problems.

Pressure Points

Increasingly, people expect businesses to pick up the slack in governmental efforts to enforce human rights principles. The voices of consumers, investors and nongovernmental organizations (NGOs), such as human rights groups and labor unions, have a growing influence on multinationals' decisions about how they will do business in the world.

Consumers are, by far, the most demanding of these voices. An increasing number of people prefer to buy products and services from companies that are socially responsible, and they are willing to pay a premium for them. A study by the Center for Ethical Concerns at Marymount University, Arlington, Va., shows that 84 percent of U.S. consumers would be willing to pay an additional $1 on a $20 clothing item if they knew it was guaranteed to be made in a legitimate shop instead of a sweatshop. On the other hand, companies that get bad press about human rights violations may see their products boycotted. In the long run, the bottom line suffers.

David Smith, president of the Council for Ethics in Economics, a nonprofit organization based in Columbus, Ohio, says that human rights performance, which gets translated into "image" by the media, has become a differentiating factor among businesses. "If people don't have the confidence [that companies are] going to maintain a good image, then the share values may suffer," he says.

NGOs also are pressing hard for change by explicitly asking for support of human rights in corporate codes of conduct. And companies are responding to such pressures. Chandler cites Shell, British Petroleum and Rio Tinto as companies that explicitly recognize their human rights responsibilities for employees in their codes of conduct.

Another pressure point comes from shareholders of multinational corporations. To date, as much as $1.2 trillion has been invested in mutual funds that have social screens in the United States, according the Social Investment Forum in Washington, D.C.

In the past, investors didn't respond well to social investing because of the common believe that it carried unnecessary costs, says Lloyd Kurtz, analyst at Harris Bretall, a San Francisco-based investment firm. But since the Domini Social Index was created in 1989, investors' perceptions have changed.

The index, which tracks the stock performance of socially responsible companies, has outperformed the S&P 500 in absolute terms in the past seven years. Even after adjusting for risk and diversification factors, there is no real difference in performance, Kurtz says. The stock performance of these companies is the same as or better than that of others. "It's a very powerful argument that you can assemble a portfolio that's competitive in the market but still be consistent with your values," he notes.

Shareholders also influence companies' decisions by issuing conscientious proxy statements. A recent example of a successful shareholder campaign was PepsiCo Inc.'s pullout of its business in Myanmar, formerly known as Burma, one of the world's most repressive regimes. Franklin Research & Development Corp., a socially responsible investment firm in Boston, studied the opinions of PepsiCo shareholders and found a unanimous belief that doing business in Myanmar was immoral.

These shareholders also decided that it did not make business sense for PepsiCo to remain in Myanmar because U.S. consumers were boycotting Pepsi beverages, costing the company more business than it was earning from its franchise in the country. Shareholders eventually printed their resolution in the proxy statement and PepsiCo finally pulled out.

Simon Billenness, senior analyst at Franklin Research & Development, says that investor activism wouldn't have worked in this case if there hadn't been a consumer boycott in the first place. But, he says, shareholders often have an advantageous position in negotiations.

"As investors, we are able to demonstrate how much damage to sales and brand image it is incurring," says Billenness. "We have more access to top management than activists. We can use that access to pose questions to a company, and we can use that access to start the spark of a dialogue between activists and corporate management."

Guiding Principles

International human rights and labor standards have existed for some time, but the need to unify various standards and devise ways to implement them has become more urgent than ever before.

Michael Hoffman, executive director of the Center for Business Ethics at Bentley College, Waltham, Mass., says there are several "splinter groups" currently working independently to set standards. What's needed is to get these groups working together on a unified set of principles so that companies would not be so confused about which one to follow. "The guidelines for international business ethics are more desperately needed today than ever before," he says.

Suppliers that work with a number of multinational companies have an even more acute need for guidance. Jennifer Porges, staff member at the Asia Monitor Resource Centre based in Hong Kong, says: "It can be quite confusing given that one factory is often producing for many transnationals, which all have their own codes of conduct. How can you expect a supplier to follow a dozen different sets of labor standards in the same factory?"

It would be much easier, Porges says, if all companies were to adopt a code based on internationally accepted standards, such as those set by the International Labour Organization, a United Nations agency based in Geneva. The ILO has drafted numerous labor conventions that are voluntarily ratified by countries all over the world and established minimum workplace standards for corporations to follow. In addition to ILO standards, Porges says, companies should adhere to the national laws in the host countries.

The problem with ILO standards and government or industrywide initiatives, such as the Apparel Industry Partnership initiated by the Clinton administration, is that compliance is voluntary. The contentious issue of whether to use internal auditors or third-party monitors also leads to doubts about whether companies are living up to their promises.

One way to standardize human rights principles is through social accountability auditing, in which auditors certify that a workplace complies with human rights standards. According to the European Institute for Business Ethics in the Netherlands, social and ethical accounting, auditing and reporting are on the rise. The United Kingdom and Denmark, in particular, have well-defined methodologies for such auditing purposes. The European Forum of the Council for Ethics in Economics also has started to develop unified voluntary standards for European companies.

In the United States, the most significant development in the effort to unify standards is the Social Accountability 8000, or SA8000, established by the Council on Economic Priorities Accreditation Agency (CEPAA), a nonprofit organization based in New York. The SA8000, which works like the ISO certification system, is the first auditable social standard in the world. It was established early last year to address the lack of consensus on which codes of conduct to adopt and on how to monitor their implementation. The standard covers issues not addressed in many corporate codes of conduct, such as establishing wages that meet workers' basic needs. It also creates an effective, independent monitoring mechanism.

Ideally, many believe there should be an international body that has the economic clout to monitor and penalize violators of human rights. "Any kind of free-rider in this is going to be successful if there's not going to be a penalty," says Hoffman of the Center for Business Ethics.

Incentives for Good Deeds

In an environment that may let free-riders off the hook, what is the best way to ensure that companies implement their codes of conduct?

Mark Goyder, director of Centre for Tomorrow's Company, a London-based nonprofit organization, says companies can create a win-win situation for themselves and all their stakeholders by taking a proactive approach to human rights. It is a "positive sum game" rather than a "zero sum game," he says.

"The old idea--which is still prevalent on Wall Street--is that companies which talk a lot about stakeholders and accountability are actually betraying their shareholders," Goyder says. "I'd say that's a 20th century view of the 21st century problem."

To succeed in the 21st century, he says, companies need to build long-term trust with shareholders and stakeholders by reporting on their progress in the human rights area. He envisions annual meetings and annual reports in which companies explicitly communicate their values and invite shareholders and stakeholders to monitor their ethical performance. Such communications would spark a dialogue with the public and require companies to make humble statements, such as, "We believe in what we're doing, but we are not perfect."

An interesting example of this new approach to corporate communication is the letter Starbucks Coffee Co. wrote to its shareholders and the public in 1995, when the Seattle-based company established a "statement of beliefs" on ethics. The letter, written by Dave Olsen, senior vice president, coffee, reads: "Progress on some long-term goals will require years of consistent effort for results to appear. We are still doing research to allow us to measure our progress. We expect to make some mistakes. But with steady perseverance...we intend to make a difference."

Early this year, Starbucks also released a Framework for Action for Improving the Lives of People Who Grow, Harvest and Process Coffee at its annual meeting. The document outlines the steps Starbucks will take over the next two years to assume responsibility for improving the lives of coffee farm workers and their families. It specifies various community projects in Guatemala and Costa Rica, such as building a health clinic and offering scholarships for farm children. Starbucks' participation in these projects will exceed $500,000 in 1998.

Although Starbucks' coffee purchases represent only 0.5 percent of the world's coffee market, it has taken a leadership role in the industry. "It's the right thing to do. Starbucks truly believes in giving back to the community in which it does business," says Alan Gulick, spokesperson for the company. "While we are proud of our leadership in this area, we know real progress will require others to pitch in."

Another way to achieve a win-win situation is to obtain a social accountability certification. When a multinational's worldwide suppliers are certified under SA8000, both parties would experience a positive marketing effect, says CEPAA's program director, Eileen Kaufman. "Retail customers wish to be confident the goods they're buying are not produced by children....Similarly, wholesale customers want the same kind of reassurance that the goods they source are being made under ethical conditions," she says. Better still, she adds, proof of ethical practices can help suppliers seek new clients.

A number of companies on the advisory board of SA8000, such as Toys "R" Us and Avon Products, have made commitments to enforce the standards among their business partners. Avon, for example, intends to certify its 19 factories and will ask its suppliers to follow suit.

Human Rights as Usual

In the future, concerns for human rights will become an "ante" to compete rather than a distinguishing factor. "Businesses may find themselves in the forefront of [moral] discussions, not just because of pressure groups, but because you want to continue doing business," says Integrity Works' Drummond.

Arvind Ganesan, a researcher at Human Rights Watch, New York, concurs: "In the future, human rights considerations by corporations are going to be necessarily a part of their overall operation. They'll have to account for this in a more systematic way."

Indeed, more and more companies will feel obliged to police their human rights performance and live up to public expectations. "The company that gets itself on a conveyor belt of public trust cannot get off," says Goyder of the Centre for Tomorrow's Company.