The Corporate Rationale for Civil Regulation

We believe there is a strong business case for welcoming the emergence of civil regulation. Many managers, campaigners or governmental officials following social and environmental issues in the world today would recognize that there is a global race to the bottom of environmental and social regulation. While profitability may rise in the short term as a result of lax regulation, this is not a stable social climate for business in the longer term. Civil unrest in the South can be understood as a reaction to the inadequacy of the state and to corporate malfeasance.

Individual companies cannot respond to this emerging social and environmental crisis alone. To do so, for example by unilaterally pulling out of a gas development project in Peru, might affect investor confidence in the competitiveness of the company. If companies collaborate to improve environmental and social standards, they may succeed in creating a more favourable business climate in the long term. To achieve this, business requires an external force that can push reluctant companies forward. In the twenty-first century, it does not appear that governments will have sufficient capacity to play this role. Instead, inter-governmental bodies and civil society organizations must take on greater responsibility for maintaining a level playing field. This is the business case for new global governance mechanisms, and consequently, civil regulation.

Managers are beginning to recognize this need for an external force to drive all companies toward improved environmental and social management. For example, BP’s Chris Marsden has said that if Greenpeace did not exist, BP would need to create it - and that, overall, “there is a major part to be played by NGOs, interest groups, local communities and public sector bodies in helping companies to make their best possible contribution to the well-being of society as well as to their shareholders” (Marsden, 1997, personal communication). This “help” can take the form of protest or partnership.

Given that the costs of confrontation are so high, especially when boycotts are involved, a number of companies are seeking constructive engagement with NGOs. There are many reasons why partnerships with NGOs are becoming an increasingly popular strategy for companies in the North. Understanding these reasons may give some indication of whether there will be new opportunities for partnership in the South. The reasons for working with Northern NGOs broadly relate to environmental public relations, eco-efficiency and organizational learning. We cover each in turn.

For reasons of marketing, recruitment, employee motivation and risk management (preventing store boycotts and protecting share prices), it is prudent to cultivate the public impression of a socially and environmentally responsible business in a society with established consumer politics. The need for credibility is one factor. A recent study by the Investor Responsibility Research Centre (IRRC) for the Global Environmental Management Initiative (GEMI), Environmental Reporting and Third Party Statements, outlines how environmental reports and claims by companies continue to suffer from a credibility gap in the eyes of a variety of stakeholders (SustainAbility et al., 1996). “Faced with this credibility challenge, active dialogue and stakeholder partnerships assume unprecedented importance” (Sustainability, 1996:21).

Northern retailers of products from Southern countries are particularly in need of credible information to reassure consumers. Credibility comes from independent standards and assessment. Government or NGO involvement is therefore required. The case study of retailers of tropical timber products presented in part 1 illustrates this point clearly. Companies such as B&Q faced a crisis of credibility over their environmental performance as consumers became aware both of rainforest destruction and the early attempts at greenwash by a number of retailers. Both the British and Dutch governments were unable to provide suitable policy alternatives to empower retailers to respond to consumer concerns.

By working with NGOs, some companies are generating a level of interest in their environmental policies which hitherto has only been experienced by the likes of the eco-conscious Body Shop. The experience of many companies in the WWF-UK 1995 Group was that partnership with one NGO helped to reduce the attention of other NGOs. This has not been the experience of BP, which continues to face direct action from Greenpeace even while it engages development NGOs on other fronts. For the most part, however, collaboration with NGOs helps business to promote an environmentally responsible public image.

In addition to these benefits there are the more “non-political” benefits which should not be overlooked. Financial and natural resource savings - or eco-efficiencies - can be achieved through partnership with NGOs. Companies in the 1995 Group saved on expensive consultancy fees by working with WWF-UK. With complex supply chains and often strained buyer-supplier relations, the DIY retailers have benefited (and continue to benefit) greatly from WWF-UK’s free advice in implementing their forest product sourcing and certification programmes. Similarly various sporting goods companies and their trade association, WFSGI, are learning from child welfare and labour standards experts with SCF-UK and ILO. Despite its ongoing problems with Greenpeace in the United Kingdom, BP is no doubt gaining a much needed critical perspective on its role in Colombia via the Interagency Group of British NGOs.

The Shell case referred to earlier reminds us that huge TNCs with a variety of subsidiaries have a major internal governance challenge. Newly adopted or revised policies relating to environmental protection, stakeholder management and social capital will take time to be implemented at the operational level. The global network of NGOs may be able to help with introducing managers of subsidiaries to new ideas and ways of working.

This brings us to another important benefit of partnership for participating companies, which relates to organizational learning. If profit-making organizations are to meet growing social and environmental demands, they will need to undergo profound organizational change. Corporate strategies need to consider fundamental questions such as “who really needs this product?” and “will the community be healthy and prosperous enough to produce and to buy our products in the future?” In order to address such concerns, business needs to work with other sectors of society. A collaborative approach to solving the social and environmental problems caused by business may be the most progressive and relevant organizational learning strategy of all. By embracing partnership strategies, business and NGOs have the potential to define the future of private enterprise.

For companies based in the South, the benefits of partnership and proactive support for civil regulation are less clear. Further research is needed on the potential benefits of working collaboratively with local community groups, national and international NGOs. In addition, research could focus on the success of privately owned companies as opposed to worker co-operatives founded upon partnership principles. In the absence of this research, we can only speculate on the potential benefits for Southern companies.

First, there is a very real possibility that governments faced with illegal enterprise will license more foreign companies to exploit national resources. This is already happening in Latin America, where faced with illegal logging and mining governments are turning to international corporations to exploit resources and police the concessions licensed to them. The governments concerned anticipate that these corporations will have better environmental management policies than national companies - due in part to pressure from Northern NGOs. Southern companies may, nevertheless, be better placed to understand local communities and to develop more appropriate sustainability management policies than their Northern counterparts.

Second, growing numbers of Southern companies export to Northern countries. With increased market awareness in the North about the social and environmental performance of Southern suppliers, there are new commercial threats and opportunities. If Southern suppliers fail to adopt environmental management policies or to improve factory conditions, for example, they may lose major contracts. On the other hand, if Southern companies work with local and international NGOs on improving performance, they may secure longer term contracts and higher or more stable prices.

Third, by collaborating with NGOs companies may be able to access new sources of finance. The recent commitment of the World Bank to lend millions of dollars to forestry companies that seek independent certification suggests that, in the future, sources of finance may be tied to demonstrable sustainable development management policies. Partnerships with civil society are one way of proving this commitment.

Fourth, local communities have a lot to offer global and national business. Local resources, both human and natural, are essential ingredients in a long-term commercial strategy. Companies have much to gain by encouraging the active participation of local people as company employees, suppliers, sub-contractors, customers and other beneficiaries. Despite the limited development of consumer politics in the South, there are also considerable business benefits in maintaining good community relations. To earn a reputation as a good corporate citizen, companies are expected to provide financial and material assistance to community development projects. As the experience of Shell in Ogoniland aptly illustrates, poor corporate community relations can lead local people and activist groups to obstruct and sabotage business activities.

It would be unwise to give the impression that the emergence of civil regulation provides only opportunities for the companies that respond positively. However, the business pitfalls with civil regulation are less easy to identify at present. The main problem for management in adopting a principle of complying with civil society is that it is difficult to know what the full implications may be. Business may find itself restricted by the often commercially unaware nature of campaigning groups, as illustrated by certain companies’ frustration with the slow, cumbersome nature of the FSC decision-making process. Major soccer brands, such as Umbro and Mitre, and their Pakistani suppliers may eventually become impatient with the potentially bureaucratic nature of the monitoring and verification programme, particularly if it becomes too expensive and difficult to implement.

One of the major problems facing business is that NGOs have widely different campaign strategies and priorities. As the impetus for civil regulation grows, there will no doubt be competing or contradictory schemes emerging from a growing list of potential NGO partners. Even if the end result is a long list of schemes on different themes, difficult choices lie ahead. In the future, Company X may find itself fully complying with Scheme A, while failing to making the grade on Scheme B. A related problem is that some civil regulation schemes may have uncompromising demands which would likely be incompatible with the commercial objectives of most companies.

Even if a company manages to collaborate successfully with NGOs, it risks being undercut by other companies that are not pursuing the same management agenda. The benefits of civil regulation will only be realized if NGOs and activist groups are able to organize, obstruct and protest when a company fails to perform. In political systems where civil liberties are not ensured, companies can silence their critics and externalize more costs than companies pursuing civil regulation strategies. In practice, the same is often the case with regulation. Companies that choose to obey the law while other companies evade it may face a commercial disadvantage. In some contexts and countries, it makes better commercial sense to pay a small fine in order to realize a larger financial gain. However, in principle, legislation applies to all companies whereas civil regulation remains voluntary and seems unlikely to achieve universal commitment.