A nudge or a shove? What will it take to push responsible business conduct?

On the occasion of the release of the OECD Due Diligence Guidance on Responsible Business Conduct, the OECD’s Tyler Gillard looks at how governments can encourage international standards of responsible business conduct in business activities and supply chains.

Business is clearer today about both its development responsibilities (i.e. the Sustainable Development Goals) and the need to address the negative impacts of its activities (i.e. by conducting due diligence for responsible business conduct) than at any point in history. The great debate ahead, and one which evolves from day to day, is whether governments should gently nudge business into conformance with international standards of responsible business conduct (RBC), or give them a forceful shove.

Some newfound clarity

Clarity is good. Indeed, a lack of clarity regarding business responsibilities can be a major barrier to change. The OECD Guidelines for Multinational Enterprises provide recommendations for companies across all areas of business ethics, such as human rights, labour, environment, anti-corruption, disclosure, taxation, and consumer protection, amongst others. They do not, however, offer much detailed guidance to business on how to implement these recommendations. How deeply should a company delve into its supply chains to identify and address harms? How to address challenges such as company size, the lack of transparency of supply chain partners or a lack of leverage over them? How should companies prioritise risks? How far should a company go in supporting remediation of harms done? What should be reported and when?

OECD-Due-Diligence-Guidance-for-Responsible-Business-Conduct-250These questions and many others are now settled with the OECD’s release of a new standard for business in all sectors of the economy. The OECD Due Diligence Guidance for Responsible Business Conduct was adopted by 48 countries on 31 May 2018 with the support of business, unions and civil society. Doing nothing can no longer be blamed on a lack of clarity.

A nudge to action

Because of uneven action to date, broad government commitments to “promote” responsible business conduct are often seen as an escape clause to do nothing (or the bare minimum). Activists instead tend to favour stronger “stick-based” commitments.

But, as behavioural science shows, the so-called “nudge”, which can involve simply reminding people of their expected responsibilities, can be a powerful driver of change.[1] Sadly, it’s under-utilised in the RBC field, as opposed to say public health where proactive awareness-raising campaigns are widespread. Governments can remind companies of their responsibilities through existing channels of communications: investment promotion agencies, National Contact Points, engagement with national or sectoral business associations, and local embassies. Licensing, oversight and procurement processes are also avenues.

Market levers can create significant incentives to nudge companies towards responsible conduct. Corruption as well as human rights and environmental harms caused by business activities are linked to a range of market, legal and reputational risks. Some market-makers, such as exchanges and financial institutions, have started thinking about how they can use RBC and supply chain due diligence requirements to protect the integrity of their markets and build long term resilience to legal and other risks.

Consider the trend in commodities markets. Across the globe, most major over the counter gold markets and exchanges now require gold refiners to undergo regular “responsible gold” audits in line with the OECD Due Diligence Guidance for responsible mineral supply chains. Today, this industry-driven requirement covers over 90% of gold production. The London Metal Exchange, which supports pricing and hedging services for around 75% of metal trading and is the crucial market of “last resort” for metal producers, recently announced that they intend to introduce OECD-based requirements for producers across all their metals.

Disclosure of non-financial risk is increasingly included in securities market requirements. Will stock exchanges – often private companies themselves with their own responsibilities – take this further and adopt conditions of conduct for listing companies on their exchanges? Or could they too do with a nudge?

The nudge?…

Policy makers and lawmakers in favour of the “nudge” approach can:

  • allocate budgets to build capacity in developing countries to both regulate business behaviour and better enforce their own environmental, labour, anti-corruption laws;
  • designate agencies to monitor implementation of international standards by companies operating within their jurisdiction;
  • require those agencies to compile public registries of company due diligence reports;
  • set new rules for public procurement and government-backed funding that require implementation of RBC standards, including the new OECD Due Diligence Guidance.

Germany, Canada, the Netherlands, the United States and other countries are already introducing many of these measures.

Lawmakers can further clarify existing laws to nudge business in the right direction. For example, they can resolve potential legal and policy conflicts:

  • by addressing those aspects of competition law that discourage companies from collaborating with peers on common supply chain challenges.[2]
  • by definining fiduciary duties to make sure investors and senior management of companies are able to consider environmental, social, human rights and governance issues without fearing litigation.
  • by exploring how companies that disclose human rights, environmental or bribery risks in good faith and in line with international standards can benefit from better legal defenses against spurious civil or consumer suits.

Lawmakers may also find opportunities to develop fiscal or tax incentives for companies implementing due diligence, in line with OECD Guidance, or to clarify longstanding questions on parent liability for harms caused or contributed by their subsidiaries, or to provide further guidance to judges on how to use international standards of responsible business conduct in evaluating exsiting duties of care, e.g. for certain forms of civil liability.

…or the shove?

Another trend has emerged that advocates a shove into compliance through sweeping regulations establishing new standards of care for business, often with attendant liabilities. This trend is driven by frustration with the slow pace of change and continued reports of human rights and environmental harms attributed to global business. France’s “Duty of Vigiliance” Law has gone down this route (but without the initially built-in laibilities). Last week, the Swiss National Council approved a proposal for mandatory human rights due diligence for companies, which will go for a final vote to the Swiss Council of States in the fall.

The “shove” advocates often don’t provide much nuance on the types of regulation that could be most effective. Policy makers are regularly presented with a false dichotomy – to regulate more or not at all. But not all regulations are equal – some can integrate readily into business practice and drive change at the point where the harms are occurring. Others just create more red tape, pushing company resources into costly “tick box” compliance systems and into the arms of third party auditors.

Tempering the push

For those advocating that governments should favour shove over nudge, I share the following three lessons:

  • Due diligence is a process, and rules should allow for some flexibility and progressive improvement when good faith is demonstrated. Due diligence requirements that provide a shield against liability or favour a “comply or explain” model would be consistent with this approach.
  • Use international standards benefiting from multi-stakeholder support – like the new OECD Due Diligence Guidance – to define what is expected of companies. This can help companies to streamline cross-border processes, avoid conflicting laws and unnecessary compliance costs. On this basis, countries can seek to establish mutual-recognition regimes with other like-minded countries.
  • Build on and integrate existing industry or multi-stakeholder initatives that have proven their credibility and effectiveness.

It’s understandable that some countries are reluctant to take a more aggressive approach to encouraging compliance with due diligence standards in the current economic climate. Yet, with an increasing public backlash against globalisation, and trust in government and business eroding, governments must push due diligence now, whether through a concerted nudge, a hefty shove, or a smart mix of both.


Notes
[1] See for example, OECD report on Behavioural Insights for Public Integrity.
[2] See Competition Law & Responsible Business Conduct for further details.

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