Business and Society Review

109:1

107–113

© 2004 Center for Business Ethics at Bentley College. Published by Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

Blackwell Publishing LtdOxford, UKBASRBusiness and Society Review0045-3609© 2004 Center for Business Ethics at Bentley College200410911000Book ReviewBook ReviewDavid Lowry

A Review of

Setting Global Standards: Guidelines for

Creating Codes of Conduct in Multinational Corporations

by S. Prakash Sethi (New York: John Wiley & Sons, 2003; 298 pages)

DAVID LOWRY

S

everal years ago while flying from Los Angeles to Singapore, Isat next to a young man who headed up a small chip-makingcompany on the West Coast. He told me he was going to

Malaysia to dismiss 250 workers at a manufacturing plant so hecould transfer the manufacturing of the chips to a less expensivefacility in Sri Lanka.

“How much will you save?” I enquired. “About 20 cents perworker hour,” he replied. “Is it worth closing the facility for 20 centsa worker per hour?” I asked. “Yes,” he said. “With tax incentivesfrom the Sri Lankan government, deferred capital costs and the20 cents per worker hour, it will be more than worth it.” “But the250 workers,” I protested, “what will happen to them?” The conversa-tion ended.

Since the end of the Second World War economic growth hasincreasingly been a function of the activities of globalization andmultinational corporations. There is no doubt that there has beenunprecedented economic growth over the past 50 years. However,there is increasing doubt whether the economic growth has broughtreal benefits to much of the developing world. Moreover, manyobservers are concerned that workers in the developing world toil in

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“sweatshop conditions” to produce high-end consumer goods for anincreasingly wealthy consumer society in the developed world.Further, they complain that multinational corporations have madeunprecedented profits on the backs of workers in developingcountries.

Increased global communications and the lessening of controlson information throughout the world has led to numerous attackson multinational corporations that are seen as exploiting workersand communities in the developing world. Multinational corpora-tions are both more wealthy and more powerful than ever before.They are also suffering from “reputational crisis” at alarming rates.And multinational corporations are concerned about the latteralmost as much as they are pleased with the former. Many voicesare calling for reform within multinational corporations to makethem more sensitive and responsive to the concept of fairness forworkers and communities in the developing world.

Over the past few years a number of instruments have beendeveloped to enhance “corporate social responsibility.” These includemulti-party agreements between governments, corporations andNGOs (The Voluntary Principles for Human Rights and Securityand the Fair Labor Association); agreements among multilateralagencies, NGOs and multinational corporations (the UN GlobalCompact); codes of conduct for industries (lumber, paper andmining industries) and codes of conduct for individual companies.In addition, there is a call from within the United Nations andfrom the International Council on Human Rights Policy for a legallybinding code for international business activities (see

BeyondVoluntarism: Human rights and the developing international legalobligations of companies

).S. Prakash Sethi, University Distinguished Professor at Baruch

College, City University of New York, has boldly moved into thisimportant area of discussion and debate in his new book

SettingGlobal Standards: Guidelines for Creating Codes of Conduct in Multi-national Corporations

. His conclusion is (1) that it is virtuallyimpossible (and probably undesirable) at the present time to have alegally binding code for multinational corporations, (2) that bothmulti-party agreements and industry codes have been ineffective,and (3) that individual company codes of conduct, while not totallyineffective, have suffered from the lack of effective validation ofperformance.

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Professor Sethi’s solution is for companies to create codes ofconduct and to allow the companies’ codes to be externally andindependently verified. Thus far, he notes, even companies thathave good codes of conduct on paper have been reluctant to openthemselves to external monitoring on those codes. Only the toy manu-facturer Mattel has agreed to such a far-reaching auditing of itsmanufacturing facilities. But, without good alternatives for com-panies and critics alike, he believes other companies will need tofollow Mattel’s lead.

Although Sethi focuses exclusively on manufacturing of low-end goods (toys, clothes, and footwear) in developing countries, hissuggestions for a way forward for MNCs is applicable for extractiveindustries and possibly the pharmaceutical industry as well,although the areas of specific concern will be different.

To be fair to the readers of this review, I must disclose that thisreviewer has worked extensively and intensively with Sethi over thepast two years on such a code, the first in the extractive industries,for Freeport-McMoRan Copper and Gold Inc. The process has beena fascinating one because in preparing for an independent audit,good intentions are challenged by the prospect (or, all too often, thelack of prospect) that an audit will find little evidence of realquantifiable deliverables based on the code of conduct. My experi-ence suggests that preparation for an audit will positively affectcorporate social responsibility; the audit will sustain what the pre-paration process begins.

The first part of Professor Sethi’s book focuses on the generalissues surrounding corporate social responsibility: globalization,the emergence of the multinational corporations as an economicand social force, the critics of globalization in general, and the manu-facturing MNCs more specifically, and the ability of nongovern-mental organizations to hurt corporate reputations.

The second part of the book focuses on the various initiativestaken by corporations to restore their reputations. In this area,Professor Sethi is most perceptive and biting, noting that MNCsall too often use a “public affairs” strategy based on attacking theiraccusers—usually a local or international NGO—of having incor-rect information about the company and putting out to the publicincomplete and self-serving information. He makes the case thatsuch strategies invariably fail and, in the end, further damage corpor-ate reputation. As Professor Sethi accurately points out, corporate

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reputations can be lost in no time at all, and rebuilt only over a longperiod, with pain and at a great cost.

Although the public affairs approach to criticism of the socialperformance of MNCs is still prominent, an increasing number ofcorporations are trying several different approaches. One approachis hiring corporate social responsibility officers and the creation ofvoluntary codes of conduct to govern their behavior. The other isto join with other companies in an industry grouping to create anindustry-wide code of conduct. Sethi believes the former is a betterway forward than the latter, pointing out that industry groups tendto protect the worst performing companies by noting the good per-formance of the best of the companies in the group. He sees this asunfair and unwise.

Voluntary codes of conduct within a single MNC work better,Sethi believes, because there is no good place to hide when a com-pany has a publicly available, transparent code that can be scrutin-ized by the company’s employees, governmental agencies, NGOs,and stakeholders (including shareholders). However, Sethi does notbelieve that a code of conduct goes far enough, because most codesare filled with aspirations and generalities and are short of specificsand “deliverables.” This leads to the main recommendation of thebook—the necessity to have external, independent monitoring of allcodes of conduct.

In the third part of his book, Sethi looks at several “group-based”approaches to corporate social responsibility. He has chosen threesuch attempts, all of which, he believes, have fallen short of themark: The Sullivan Principles for South Africa, the UN Global Com-pact, and the Fair Labor Association. All three of these “group-based” attempts at increased corporate social responsibility startedwith an “outside force”: the Sullivan Principles with the Rev’d LeonSullivan, the Global Compact with Kofi Annan, and the Fair LaborAssociation with President Bill Clinton. Sethi sees in all three onecommon defect: the lack of any effective, outside entity that assurescompliance with the group code. In the specific area of his analysis(low-end manufacturing) there have been no attempts by industriesto have their own group come up with an industry-wide code of con-duct, as has been done by the logging and paper industries and isnow being tried by the mining industry. One suspects that Sethiwould find both of these efforts lacking as well, for many of the samereasons.

DAVID LOWRY 111

The fourth part of the book is devoted to two case studies, oneabout Nike and the other about Disney. Sethi is especially harshon Nike, seeing its record as especially poor in the area of holdingsub-contractors, many of which he says do virtually all their workfor Nike, to any reasonable standard of behavior toward employees.Nike, he believes, has every opportunity to hold these contractors tofull compliance with Nike’s code of corporate conduct, but Nikedoesn’t, citing the contractors’ independence from Nike. Sethi doesn’tbuy that. Sethi believes Disney has done a better job, but not yetgood enough.

This leads to the conclusion of his book—the story of Mattel’scode of conduct and the auditing of that code, which has beenundertaken by Sethi’s organization, MIMCO and its successororganization, the International Center for Corporate Accountability(ICCA). Both MIMCO and ICCA work in association with the ZicklinSchool of Business at Baruch College, the City University of NewYork. Mattel created their code of conduct. Sethi and MIMCO devel-oped guiding principles for Mattel based on Mattel’s code. From thecode and the guiding principles, Sethi created standards for alloperations that could be objectively audited. His reports aboutMattel’s operations, he says, are fully independent. They are posted,unedited by Mattel, on both Mattel’s website and MIMCO’s. Mattelhas the opportunity to correct factual errors but not the findingsof the MIMCO team. Mattel can write their own report disputingthe MIMCO findings and/or reporting on how Mattel will respond tothe MIMCO findings. This response will be posted on Mattel’s andMIMCO’s websites.

Sethi believes this is the immediate future of corporate socialresponsibility. He may well be right. With the United Nations unableto get consensus among nations about many important issues,there is little hope of getting something through the United Nationsabout an international code of corporate behavior. With attempts atvoluntary group codes consistently falling short of expectations,there are few options. If Sethi is right about where MNCs shouldgo to assure an increasingly skeptical public that they are “doinggood,” Sethi may well be on the ground floor of the next growthindustry—corporate social auditor!

A few bones are worth picking at, nonetheless: clearly ProfessorSethi is right about how easily the reputation of corporations can bedamaged. A recent Gallup poll discovered that MNCs were among

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the most distrusted institutions worldwide. But MNCs depend moreon the financial bottom line than they do corporate reputation.Hence, the question: What is the relationship between corporatesocial responsibility, corporate reputation, and the financial bottomline (and by implication, stock price)? The answer is by no meansstraightforward. Take the case of Nike. Sethi shows that the attackson Nike have been relentless since the early 1990s. Their corporatereputation is far worse than that of their competitors. But hasNike’s reputation affected its sales and stock price? The answerseems to be no better than “maybe.”

From 1994 to 1996, over 90% of “negative news mentions” for thefootwear industry had to do with Nike. From 1997 through 1999 thepercentage went down to 70% and then from 2000 through 2002it returned to over 90%. By the mid-90s Nike was also seriouslyinto clothes manufacturing. In 1996 and 1997 Nike’s percentageof “negative news mentions” within the apparel industry went from8% to 36%. It has remained approximately at that point ever since.Hence, from the mid-1990s to today Nike has been a major recipi-ent of negative reporting. How has their stock fared during thatperiod? In 1997 Nike’s stock price peaked at $70 a share. In 1999the price of a share of Nike stock was down to $35 a share. It hasgone back over $60 a share in early 2002 and is now trading in thelower $50s. The tumble the stock took between 1997 and 1999

might

be attributable to reputation problems. But Nike’s stock climbedwithout interruption in 1996 and into early 1997, when news reportsand corporate reputation were just as bad. Going to other newsreports from the period when Nike’s stock tumbled, one notes prob-lems with design and inventory controls. Clearly, all these factorsweighed heavily on Nike’s bottom line from 1997 through 1999.Today Nike is again considered stylish and inventory is under con-trol; but their problems with reputation continue. Nike’s stock hasrecovered—as has its “bottom-line.”

Comparison with Reebok, a competitor with a much bettercorporate reputation, is instructive. Like Nike, Reebok’s stock hit aten-year high in early 1997, only to fall more precipitously and for alonger period than did Nike (from a high of $40 to a low of $10with recovery coming in late 2000). A recent

New York Times

article chronicled Reebok’s decline and recent recovery, noting themany factors, including management personalities, that affectedperformance.

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Therefore, one must be cautious when assigning too muchimportance to corporate reputation as a determinate of revenuesand profits. Consumers are driven to buy or not buy a product by manyfactors, of which corporate reputation is not the most important.

One more quibble: Sethi notes the decline in “negative news men-tions” in the toy industry from 1996 through 2002. Mattel, whichhis group audits, has seen a decline from above 40% from 1996through 1999 to less than 30% from 2000 through 2002. That is agood record. However, Hasbro, which has lagged behind Mattel andDisney in creating codes of conduct, has had an even better recordthan Mattel (going from 25% from 1994 to 1996 to 6% from 1997 to1999 and then back up to 16% in the latest period, while Disneywent from 29% to 39% through the same period). That raises thepossibility that “negative news mentions” and actual performancein corporate social responsibility may not always match up.

Quibbles and bone-picking aside, Sethi’s book is perceptive,stimulating, challenging, and well written. Every corporate officershould read it. Much in it will anger corporate readers the first timethrough. Yet on reflection, it will make increasingly good sense tothose who treasure “doing right,” which in the end is even moreimportant than protecting the reputation of their companies.