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Which Companies Benefit Most from UN Global Compact Membership?

November 24, 2011 • Global Business, OPERATION, Social Impact, STRATEGY & MANAGEMENT, SUSTAINABILITY & ETHICS

By Jette Steen Knudsen

In this article I examine a key business question: which kinds of companies are most likely to benefit from joining international corporate social responsibility (CSR) initiatives and how should they proceed?

In this article I examine a key business question: which kinds of companies are most likely to benefit from joining international corporate social responsibility (CSR) initiatives and how should they proceed?

This question has become increasingly pertinent as more and more firms join international CSR initiatives such as the UN Global Compact, yet many of these firms fail to live up to even basic reporting requirements and are subsequently delisted. I argue that the UN Global Compact is primarily suitable for larger firms that can use the Compact to fill a governance void as they operate in less developed countries. Many smaller firms don’t have the resources to meet UN Global Compact requirements and the firms that produce and sell their goods and services in countries with efficient government regulation benefit little from UN Global Compact membership.

I argue that the UN Global Compact is primarily suitable for larger firms that can use the Compact to fill a governance void as they operate in less developed countries.

The UN Global Compact is the largest CSR initiative in the world with more than 9,000 business and non-business participants in more than 130 countries. The UN Global Compact started out as a speech by then-UN Secretary-General Kofi Annan at the World Economic Forum in Davos in 1999. Mr. Annan challenged business leaders that they should do their part to fill the governance voids that had been brought about by globalization as more and more firms were moving production to low wage countries with inadequate regulation. The UN Global Compact quickly became very successful. However, during the first six months of 2008 the UN Global Compact had no choice but to delist for the first time 630 firms for failing to submit the required Communication on Progress (COP), in which a member must explain what it has done in order to improve its performance in four areas including human rights, labour rights, the environment and anti-corruption. Today more than 2,000 firms have been delisted, which is equivalent to about 15 % of UN Global Compact members.

The UN Global Compact is an example of a CSR initiative that is not suitable for all companies. The high number of delistings underlines a key problem with CSR reporting schemes for some companies: the perceived value-added to companies is simply not worth the effort. Yet CSR reporting is on the rise fuelled by demands from institutional investors and large business customers. Even some governments such as Denmark and Spain now require that large firms file an annual report describing their CSR initiatives. In short, while reporting requirements are growing, more and more firms are discouraged with reporting. In this article I argue that CSR reporting should reflect a company’s CSR needs and not the other way around. The real CSR needs of certain kinds of firms are not being addressed by the UN Global Compact principles. I subsequently make two recommendations about how to improve the value to companies of a UN Global Compact membership.

 

Reporting requirements


It is a simple procedure to become a member of the UN Global Compact. A company must prepare a Letter of Commitment signed by the Chief Executive Officer to the Secretary-General of the United Nations. The letter should express a commitment to the UN Global Compact and its ten principles including implementation of changes such that the principles of the Compact become part of business practice. Furthermore, the company must emphasize a willingness to engage in partnerships to advance broad UN goals, publicize its participation in the Compact and agree to submit an annual COP. In announcing adherence to these human rights, environmental and anti-corruption principles, the company creates a set of standards that can be used by others to monitor its conduct.

The UN Global Compact is not a regulatory instrument but a voluntary initiative that relies on public accountability, transparency and disclosure to complement regulation. Critics of the UN Global Compact state that it is too easy to become a member and companies sometimes join without undertaking any preparations. Second, the principles are broad and rather vague and the Compact has no binding mechanism to hold corporations accountable. Companies can therefore engage in so-called blue-washing with UN approval. Critics point out that some members of the Compact are responsible for massive rights violations including the French oil company Total, which has continued to operate in Burma. Finally, performance standards are unclear.

On the other hand supporters of the UN Global Compact argue that the ease of membership is a key strength. The UN Global Compact is the world’s largest corporate citizenship organization. The corporate sector is the leader in globalization and therefore can help with the huge challenges of governance including civil wars, corruption and failed states. The UN Global Compact sets out a single global standard that transcends national, sectoral and regional standards. This common set of goals is positive in and of itself as it starts the communication process. Second, it was never meant as a review mechanism and the UN Global Compact does not have the capacity to review Compact members’ many activities. Third, voluntary initiatives such as the UN Global Compact do not get in the way of other future initiatives but on the contrary stimulate discussion.

 

Characteristics of firms than benefit from membership

Firms that benefit from UN Global Compact membership are primarily (large) firms that have business engagements in countries with inadequate regulation. Starting with the demonstrations in Seattle in 1999 against the World Trade Organization negotiations, public protests against globalization and foot-loose capitalism have grown. These popular protests are seen by many as the driver of the CSR movement. As production has become more international, securing legitimacy under conditions of complexity has become more challenging. By entering a foreign market through local production, a firm necessarily makes foreign employees, foreign customers, and foreign regulators and other government bodies, among others, salient stakeholder groups. Corporate legitimacy in the home country is increasingly questioned when a company extends its global supply chain production to countries such as India, Bangladesh or Vietnam. Customers in the home market will often demand that the corporation also acts in a socially responsible manner in host countries. One illustration of this is Nike, which faced strong criticism in the global media for its labour practices in Indonesia.

For companies that primarily operate at home, a UN Global Compact membership may be perceived as less valuable. For example in 2008 the UN Global Compact delisted 98 companies or more than 85 % of the members of the UN Global Compact in the Philippines. Most Philippine companies are domestically oriented which means that Philippine businesses are not very likely to face requirements from large customers to comply with international CSR requirements such as the UN Global Compact. Philippine businesses are, however, very engaged in CSR initiatives with a domestic focus. Businesses typically establish foundations that focus on charity or education programs. Examples of CSR initiatives include the Phinmar Corporation, which sold off its cement business and with the proceeds has bought private universities in order to contribute to improving the quality of management skills in the Philippines. The Phinmar Corporation has also invested in good quality housing at affordable prices.

CSR initiatives must first and foremost take their starting point in the CSR needs of the company and not in some pre-defined reporting scheme or CSR initiative.

Company needs should come before reporting

The UN Global Compact is not a standard to measure corporations’ compliance against some predefined indicators. It is a principles-based initiative, and companies are allowed great flexibility in how they report on their progress. They must communicate openly about this but no standard exists regarding how this is best done. The challenge for many firms is that the UN Global Compact offers a “one size fits all” solution regarding CSR reporting. This is a problem because many firms therefore undertake CSR initiatives that fit the UN Global Compact rather than focus on the kinds of initiatives that could best benefit the company and the society in which it operates. In other words, CSR initiatives must first and foremost take their starting point in the CSR needs of the company and not in some pre-defined reporting scheme or CSR initiative. If a company starts working on a CSR program before it has defined its purpose, the result will often be frustration and wasted resources. In contrast, a thorough evaluation of a company’s needs and desires concerning CSR can result in the company critically evaluating the kinds of initiatives it wants to be a part of and the kind of reporting it wants to engage in. It is even possible that the company may decide not to be a part of certain initiatives and reporting schemes.

 

Small and Medium-sized Enterprises


Many small and medium-sized enterprises (SMEs) do not see an advantage of UN Global Compact membership. One reason is that many SMEs do not have the economic resources to ensure proper documentation and to follow up with each of their suppliers or license holders.

Second, many large buyers and retailers now demand that western SME suppliers document that they adequately control the social and environmental performance of their own suppliers in less developed countries. However, SMEs often lack political clout vis-à-vis their suppliers. They may be just one of many buyers, and the incentive for the supplier to improve the social and environmental performance can therefore be limited. Certainly large firms also complain about not having enough leverage to change supplier practices, especially when they have only a small share of a factory’s overall production. However, large firms have more resources than SMEs to follow up with suppliers, to influence local political actors and to obtain information and advice.

Third, in recent years many MNCs have been consolidating their supply chain so that they work with fewer and larger suppliers and some experts have therefore concluded that SMEs are being excluded from global supply chains.

From a managerial perspective SMEs are becoming more integrated into global supply chains, and responding to demands for private regulation is turning into an increasingly important competitive parameter that SME managers must consider in order to live up to buyer requirements. From a societal perspective the international competitiveness of SMEs is a key issue. If large international suppliers increasingly avoid western SMEs, then many western economies could be negatively affected since SMEs account for a significant proportion of the economy. In fact, 99 percent of all European businesses are SMEs, SMEs provide two out of three private sector jobs and they contribute to more than half of the total value-added created by businesses in the EU.

While many western governments recommend that domestic companies report according to UN Global Compact principles, this solution may not be of value to all companies and governments should address this point.

Recommendation #1

Assisting SMEs in improving their management of global supply chain production is a key challenge as well as a key opportunity for the UN Global Compact. In 2011 the Compact launched a self-assessment tool for supply chain management aimed at SMEs. This is a start but it is inadequate for meeting large buyer requirements because it is not precise enough. Nor does it offer advice to SMEs about how they should meet the code of conduct requirements from large buyers that are often even more demanding that the UN Global Compact principles.


 

Domestically oriented firms

Western firms are less likely to benefit from UN Global Compact membership if they primarily produce or sell in their well-regulated home markets or in other countries with equally efficient regulation. For example many UN Global Compact firms that produce and sell products and services in Northern Europe often complain that the reporting requirements are frustrating. This is not surprising. A Scandinavian head-hunter, consultancy or advertising agency do not see much value-added in reporting about initiatives to improve human rights or labour rights – these rights are already guaranteed by Scandinavian legislation. Often companies therefore decide not to report on progress concerning human rights or labour rights since they have no need for such initiatives.

 

Recommendation #2

Firms that primarily operate in countries with well-developed and efficient regulation may be better off not joining the UN Global Compact because reporting does not add value to the business and may even cause frustration.

 

Conclusion


In 2011 the UN Global Compact proposed a new approach to reporting. The Global Compact Differentiation Program categorizes business participants based on their level of disclosure on progress made in integrating the Global Compact principles and contributing to broader UN goals. The Differentiation Program includes a less demanding process for SMEs. While this is an improvement, SMEs are still left to their own devices in terms of reporting. What is needed is that large buyers agree to work with their smaller suppliers and to assist them in meeting requirements. Furthermore, domestically oriented firms are not going to benefit from less demanding reporting requirements – the UN Global Compact principles are simply not relevant to these firms. However, the UN Global Compact is an excellent initiative for international firms that wish to work with CSR programs as a substitute for missing regulation. The UN Global Compact should focus on these types of companies rather than seek to recruit all types of companies many of whom end up disappointed. Finally, while many western governments recommend that domestic companies report according to UN Global Compact principles, this solution may not be of value to all companies and governments should address this point.

This article is partly based on Jette Steen Knudsen 2011. “Company Delistings from the UN Global Compact: Limited Business Demand or Domestic Governance Failure?”, Journal of Business Ethics. DOI: 10.1007/s10551-011-0875-0.

About the author

Jette Steen Knudsen holds a PhD from MIT. She is an Associate Professor at the Department of Business and Politics at the Copenhagen Business School. Professor Steen Knudsen has worked for the past ten years on CSR and sustainability issues as an academic and consultant. She is currently doing research on CSR in the pharmaceutical sector focusing on Novo Nordisk.

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