The Corporate Ethics Crusade

Ethan B. Kapstein

From Foreign Affairs, September/October 2001

Article preview: first 500 of 5,018 words total.

Summary:  Nongovernmental organizations, activist shareholders, and "socially responsible" investment funds have launched a corporate ethics crusade that has pushed executives to consider more than just the bottom line. Goaded by media interest, however, NGOs prefer to shout solutions rather than engage in objective research. Worse, the symbiotic relationship they are forging with firms could backfire and harm the world's poor.

Ethan B. Kapstein is Professor of Economics and Political Science at INSEAD Business School in Fontainebleau, France, and Research Associate at the French Institute for International Relations. His most recent book is Sharing the Wealth: Workers and the World Economy.

THE BEST INTENTIONS

Are multinational enterprises getting religion? So it seems. Around the world, corporate codes of conduct on human rights, labor standards, and environmental performance are proliferating. These codes reflect the growing pressure being placed on firms by nongovernmental organizations (NGOs), activist shareholders, and the portfolio managers of "socially responsible" investment funds. A veritable corporate ethics crusade has been launched, and it has been surprisingly successful in forcing executives to take its concerns into account.

But ample reason exists for raising some red flags about this movement. The major parties involved -- multinational firms and NGOs in industrialized nations -- are beginning to forge a symbiotic relationship that could actually harm the least powerful actors in the world economy, including developing countries, small and medium-sized enterprises, and the poor everywhere.

Consider the linkage of labor and environmental standards to multilateral trade agreements. Improving working conditions and air and water quality are laudable goals, and firms should do so whenever it is economically and technically feasible. NGOs can usefully contribute to that process by providing governments and firms with information, advice, and policy alternatives. But forcing the standards of industrialized nations on developing countries and the firms that operate in them could backfire by reducing investment and job creation. More workers would be chased into the informal economy, which has even lower standards, if any at all.

Activists who wish to establish ethical codes need to reconcile their aspirations with the fact that most nations do not generally share common laws or regulations on labor rights and the environment. Differing levels of wealth explain much of this divergence, but the peculiarities of political systems and social organizations have also left their normative footprint. The ethics crusade represents, in effect, an attempt by one group to impose its values on other groups. Far from making economic relations more harmonious, that effort could lead to greater conflict.

Consider the International Labor Organization's core labor standard that recognizes freedom of association. What does that imply as a universal rule? National laws regulating unionization vary enormously from country to country. Even among advanced industrialized democracies, the relative political and economic standing of unions differs significantly; in Germany, for example, they are much more powerful than in the United States. Furthermore, outside intervention to promote unionization in developing countries could have the perverse effect of increasing existing levels of income inequality, as those outside the collective bargaining framework get left behind.

The global debate over corporate ethics therefore needs some rules of engagement. The obvious starting point is that companies ought to abide by the laws of the land where they do business. But these laws are often too weak to protect workers and the environment, and this weakness opens the door to legitimate disputes over interpretation and enforcement. When profound differences arise over corporate social responsibility in such areas, the parties involved should set out the advantages and disadvantages associated with adopting higher standards before declaring any proposed policy solution to be the ...

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