The Multinational Monitor

JUNE 1990 - VOLUME 11 - NUMBER 6

C O D E   O F   C O N D U C T

Codifying Corporate Accountability

by Jennifer Collins

After more than a decade of negotiations, the fate of the United Nations Code of Conduct for multinational corporations is closer than ever to being decided. The United States, however, is the main obstacle to reaching an agreement. Even though the United States proposed an international agreement on foreign investment as early as 1948, and Henry Kissinger advocated rules on foreign investment in the 1970s, today it is qualifying its support and reneging on prior commitments.

The United Nations Code of Conduct for Transnational Corporations is a set of guidelines which defines the rights and responsibilities of transnational corporations (TNCs) in their international operations. The Code also contains guidelines for the treatment of corporations by host countries. It covers all aspects of transnational business activities, including political, economic, financial and social affairs. In addition, the Code provides protection for corporations and enables them to carry out their activities with minimum dislocation and interference from host country governments.

The idea for a Code of Conduct was broached in 1972, when the U.N. Economic and Social Council (ECOSOC) asked the U.N. Secretary-General to appoint a group to study the impact of multinational corporate activity on the development process. Three years later, U.S. Secretary of State Henry Kissinger addressed the General Assembly saying, "The United States ... believes that the time has come for the international community to articulate standards for conduct for both enterprises and governments ... We must reach agreement on balanced principles."

But agreement has been very elusive, with negotiations persisting for more than a decade. A final draft of the Code was sent by the U.N. Commission on TNCs without recommendation to ECOSOC for a vote this July, the outcome of which is very much up in the air. Despite the lack of a recommendation, the chairman of the code negotiations, Miguel Marin-Bosch, believes that the "text ... will receive the support of the overwhelming majority of countries from all regional groups." Code proponents hoped that the Bush administration would urge a change in U.S. policy toward the Code, but the U.S. delegation came to the negotiating table at a meeting in April 1990 with new objections, most of which are insurmountable in the time remaining.

Despite the disagreements, more than 80 percent of the provisions of the Code have already been agreed upon. Among these are TNC responsibilities relating to the environment, consumer protection, respect for national sovereignty, respect for human rights, adherence to national economic goals and development objectives, non-interference in the internal affairs of host countries, abstention from corrupt practices and transfer-pricing protection. More specifically, TNCs are proscribed from offering bribes to public officials and from implementing pricing policies not based on relevant market forces. In addition, the Code calls on TNCs to disclose to the host countries full and comprehensible information on company structure and policies. Such requirements may seem standard for TNCs operating in the United States, but they are sorely needed in those countries which do not have even limited laws governing TNCs.

As Senator Claiborne Pell, D-R.I., recently told Senate colleagues, the environmental provisions of the Code "would make an invaluable contribution to international environmental protection, an issue that should be a priority for the United States and the international community." Paragraphs 43, 44, and 45 of the Code discuss environmental cleanup, disclosure of harmful effects and international cooperation respectively. Paragraph 43 says that TNCs should take steps to protect the environment "and where damaged to rehabilitate it." Paragraph 44 mandates that corporations disclose information about the content and potential dangers of their products to host country authorities. For example, if a product has been banned elsewhere for environmental reasons, that information must be made available to host-country authorities. Such a disclosure provision could help prevent TNCs from dumping the industrialized world's toxic wastes in the Third World.

The consumer protection clauses contain similar requirements pertaining to prohibitions and disclosure. One provision stipulates that corporations should produce and market their products according to international safety and quality standards. This is intended to reduce injuries and lessen the likelihood of low-quality goods being dumped in markets which lack regulatory systems. Corporations would also be encouraged to supply information on prohibitions or warnings imposed in other countries, the contents of products and possible hazardous effects.

The Code also includes guidelines governing the treatment of TNCs by host countries. Among the most significant of these is that TNCs should receive fair and equitable treatment in foreign countries. Such provisions will help gain U.S. support for the code.

Although there is agreement on much of the Code, the United States and its business allies remain intransigent on a few elements. The most significant unresolved issues relate to international law, nationalizations and third-party settlement of disputes.

Much of the disagreement that exists between the Western countries and the Third World countries is rooted in the colonialist legacy. The developing countries are suspicious of submitting to legal and institutional structures created by, and for the benefit of, the industrialized nations.

The semantics of a reference in the Code to international law is a case in point. The latest version of the Code defers to Western interests by using the language that "States shall fulfil, in good faith, their obligations under international law." The wording of this provision is vigorously opposed by the G-77, a representative body of about 130 developing countries. These countries prefer the term international obligation instead of law because they perceive the international legal structure as a product of Western interests. The less-defined "international obligations," according to the G-77, takes into account the inequities which exist in economic relations between North and South. Some observers, however, consider the linguistic debate overblown. Seymour J. Rubin, the first U.S. Representative to the U.N. Commission on TNCs and a noted expert on international law, says, "While it would be useful to have explicit reference in the Code to 'international law' rather than 'international obligations' as a standard, I believe that the difference is neither clear nor vital."

The debate over nationalization also involves intricate semantics. While it is generally accepted that countries have a right to expropriate the assets of TNCs, governments disagree about the stipulated levels of compensation. The developing countries have accepted the terms "appropriate" and "just and fair" to describe compensation while the industrialized nations prefer the international legal standard of "prompt, adequate and effective" compensation. As Peter Hansen, Executive Director of the U.N. Centre on Transnational Corporations (CTC), pointed out in a recent interview, the issue is "increasingly esoteric and irrelevant at the time when the frequency of nationalizations has been dropping off. He noted that "nationalizations reached their peak in 1975, when there were 83 expropriations [involving] foreign direct investment in 28 developing countries. In 1985, by contrast, there was only one expropriation."

Less esoteric and of more immediate concern to the developed countries are the rules pertaining to dispute resolution. The present text holds that disputes should be submitted to competent national authorities, but the United States wants disputes to be submitted to binding international mediation. The G-77 has reservations about submitting disputes to international institutions dominated by Western interests. The provision as it now stands leaves host countries a slightly greater degree of control in the event of a conflict.

Some observers of the Code negotiations are critical of what they consider unfounded and outdated concerns. Dr. John Kline of the International Business Diplomacy program at Georgetown University, for instance, testified to Congress in November 1989, that "these international negotiations are in real danger of being called off due to a lack of political interest, largely because the major crisis points have past. If that happens, we will all be losers."

He characterizes these outstanding issues as "troubling ghosts of the past" and points to the political context in which the origins of the Code emerged in the early 1970s. Kline cited such controversial items as the New International Economic Order, ITT's involvement in the 1973 overthrow of Chile's democratically elected President, Salvador Allende and the collapse of the Bretton Woods monetary system.

The era of greater East-West tension spawned a debate over the definition of a TNC, which also has haunted negotiations for more than eight years. The debate centered around whether a state-owned enterprise of a socialist country could be put in the same category as a TNC from a free market economy. Right- wing critics of the Code were quick to take advantage of the confusion to discredit the whole endeavor. Juliana Pilon, senior policy analyst at the Heritage Foundation's U.N. Assessment Program, wrote in 1987, "The West opposes the double standard built into how the Code defines a TNC. Under its definition, only Western and Third World firms will be covered by the Code; giant communist-bloc enterprises will be exempt." The problem was solved by an agreement to apply the widest possible definition, making the Code "universally applicable to enterprises, irrespective of their country of origin and their ownership, including private, public or mixed."

When and if adopted, the Code will be the first multilaterally approved framework governing all aspects of the relations between nations and TNCs. Critics of the Code oppose its comprehensiveness. The U.S. International Business Council (USIBC), for example, would prefer that the CTC leave issues that the Code addresses to other multinational agencies. In testimony before Congress in November 1989, the chairman of the USIBC, David Gill, said that since "the World Bank, the International Monetary Fund and the Multinational Investment Guaranty Agency [are] all intimately involved in the development process, it would seem logical for the Commission to turn over to those agencies the task of further elaboration of the International law principles governing foreign investment."

Countering this view, Sam Asante, Chief Legal Advisor to the U.N.C.T.C, explains that "the traditional preoccupation of customary international law and the network of bilateral investment treaties and regional regulatory arrangements initiated by member countries of the Organization for Economic Cooperation and Development (OECD) has been the protection of foreign investment." According to Asante, "While other international instruments dealing with relations between governments and enterprises are confined to specialized aspects of corporate activity or to a particular region, the U.N. Code of Conduct labors under no such limitations. It is the most comprehensive both as to the subject matter of regulations and geographical scope of application."

Despite the footdragging alliance between the United States and business interests, some members of the business community acknowledge the value of the Code. Sidney H. Willner, former Vice Chairman of Hilton International Co., says, "Many times in the course of my corporate career I was confronted by urgent requests from our people in the field to bend our principles because our competitors did not abide by such principles and therefore [had] an important advantage. While we were able to resist these appeals and remain successful," he continues, "this experience brought forcibly home to me the value of having a commonly accepted set of principles of conduct consistent with what we have developed in our own country and which we regard as necessary for the protection of our people and our institutions.... Adoption of the Code will, of course, not eliminate the possibility of abuse but should represent a significant advance."

But Willner's opinion is not widely shared within the business community, and there is open debate as to the value and efficacy of the Code. Seymour Rubin told a Congressional committee that the Code "is [not] going to make a tremendous amount of difference. I am sorry ... but I do not think that it is going to revolutionize anything one way or the other. But I think that it would be useful and I think that with a small amount of modification and a certain amount of good will that a perfectly acceptable code lies very much within our grasp."

According to Esther Peterson, representative of the International Organization of Consumers Unions to the U.N., "The Code will benefit the public in every country by setting up standards of decency, fair competition, fair market prices and greater honesty in the operation of businesses worldwide."

Proponents view the Code as an instrument which activists, especially in the Third World, will be able to use against corporate wrongdoing. As Peterson told Multinational Monitor, "even though the Code will be voluntary, it will have great credibility and moral authority because it will be based on international consensus." In a letter to President Bush which reflects this optimistic spirit, Gus Yatron, D-Pa., chairman of the House Subcommittee on Human Rights and International Organizations and Representative Wayne Owens, D-Utah, urged the President to support the Code because "it is important to American business and the world's consumers that international trade now be subject to comprehensive fairness and scrutiny. The U.N. Code of Conduct, we believe, could accomplish this objective. It would not be a binding set of laws, but an internationally desirable set of standards which could carry the imprimatur of the U.N. as representing good practices and good conscience in the world's marketplaces."

Jennifer Collins is a legal consultant for the International Organization of Consumer Unions (IOCU).

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