There are serious failures in the frameworks of law, regulations and agreements which frustrate many efforts to deal with some of the global issues both companies and societies face. Fiscal systems often do not drive the market in sustainable directions and subsidies are frequently perverse.
In many cases, major issues can be addressed through international agreements. These subsequently need to be translated into national regulation that is then rigorously and uniformly enforced. Effective self-regulation, in its many forms, is often the first step.
We believe tomorrow’s global company must take the time and commitment required to be proactive and work jointly with other companies, NGOs, governments and international organisations to ensure that better frameworks are created.
Market and political failures
There are serious failures in the frameworks of law, regulations and agreements which frustrate many efforts to deal with some of the global issues both companies and societies face, particularly climate change, areas of persistent poverty and abuses of human rights. Fiscal systems often do not drive the market in sustainable directions and subsidies are frequently perverse.
The main difficulty in designing these frameworks is that while the problems are global, governments are not. This is where global companies have a distinct role to play because they are truly global in their operation and outlook. They can help to strengthen the workings of governments and to create global frameworks.
Even if international agreements can be reached, there is then the challenge of ensuring that those who sign up actually implement these agreements at national level.
In the absence of effective frameworks, at global and sometimes national levels, companies are faced with questions such as: “How do we operate globally in a way that is consistent both with our values and with a diverse set of regulatory frameworks?” “Should we invest in this country given the lack of assurance about future confiscation of assets?” “How can we fill gaps in global governance by setting our own frameworks to deliver urgently needed social and environmental gains when this may increase the costs and place us at a competitive disadvantage?”
How the failures can be addressed
“From the top down…”
Major issues faced both by companies and society can in many cases be addressed through international agreements. These subsequently need to be translated into national regulation that is then rigorously and uniformly enforced.
If this occurs, it increases the likelihood that business activity will avoid negative consequences and promote various benefits, including social and environmental progress. It helps ensure that laggard companies are required to meet minimum standards. It also enhances opportunities for companies to innovate, using their distinctive capabilities to find solutions to environmental and social problems in line with their business interests.
This is why many companies are actively engaged in advocacy, pressing governments to create frameworks which will bring order and predictability in the interests of both society and global industries.
This proactive approach to regulation will be a hallmark of tomorrow’s global company.
Until robust international and national frameworks are in place, companies can help fill the gaps by working with others to create voluntary frameworks that are rigorously enforced.
Self-regulation is not new. The Hippocratic Oath for physicians dates back to the 4th century B.C.
However, over the last few decades, many more voluntary codes, principles, standards and other forms of self-regulation, often prompted by civil society, have been developed at industry level by groups of competitor global companies, working together. Multi-stakeholder agreements are among the more robust forms of such codes.
Voluntary agreements work best when those responsible for the frameworks act decisively to enforce them.
The creation of voluntary frameworks has a number of advantages:
- They enable business leaders to put their values into practice collectively.
- They provide companies with a measure of consistency and security in managing diverse global operations and provide quality controls that help deliver products that consumers want. This enhances trust and reputation.
- They provide benchmarks for industries, which can shame laggards into complying - or highlight breaches in the standards.
- They can help share the costs of managing social and environmental risks.
- They reduce the chances of unacceptable behaviour in an industry, such as ‘sweatshop’ labour conditions, fraud, pollution or human rights abuses, which will damage the reputation of the sector and of global companies generally.
Voluntary agreements work well where market forces do not necessarily lead to the most responsible outcomes - for example when many consumers buy fish or timber products without inquiring into the sustainability of their sources - then companies seeking to act responsibly may join together to set standards through self-regulation.
However, they are not always the appropriate route. Sometimes competition is the best way to raise standards across an industry. In situations when customers, governments, investors or other stakeholders are motivated to make ethical or sustainable choices, then market forces will lead businesses to compete to offer the most attractive solutions. This can be particularly seen in markets where companies compete to offer ‘environment-friendly’ goods to consumers.
An important advantage of self-regulation is that it can act as the springboard from which national regulation can be created and international agreements reached. Many lessons can be learnt through the creation and rigorous implementation of such voluntary agreements that are useful to those who later have the job of designing future regulation. They also demonstrate that even in a highly competitive environment global consensus and action can be achieved if it is grounded in the common interests of both companies and society.