Codes of Conduct for Multinational Corporations: An Overview

Codes of Conduct for Multinational
Corporations: An Overview
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade
Summary
The U.S. economy is growing increasingly interconnected with other economies
around the world, a phenomenon often referred to as globalization. As U.S. businesses
expand globally, however, various groups across the social and economic spectrum are
growing concerned over the economic, social, and political impact of this activity. Over
the past 15 years, multinational corporations and nations have adopted voluntary, legally
enforceable, and industry-specific codes of conduct to address many of these concerns.
Congress will continue to play a pivotal role in addressing the large number of issues
regarding internationally applied corporate codes of conduct that remain to be
negotiated. This report will be updated as events warrant.
Background
Over the last decade, international flows of capital have skyrocketed. International
flows in dollars, for instance, now total over $1.9 trillion per day, or nearly as much as
the total annual amount of U.S. exports and imports of goods and services. These flows
are the prime mover behind exchange rates and global flows of goods and services. One
part of these flows is foreign direct investment, or investment in businesses and real
estate. On a cumulative basis, direct investment now totals over $10 trillion world-wide,
about 20% of which is associated with the overseas investment of U.S. firms, the largest
share held by the firms of any nation. This type of investment spans all countries,
industrial sectors, industries, and economic activities and has become a major conduit for
goods, capital, and technology between the developed and the developing economies.
Foreign direct investment has become a much needed source of funds for capital
formation in developing countries and foreign investment accounts for important shares
of employment, sales, income, and R&D spending in developing countries.¹
The United States is the largest recipient of foreign direct investment and is the
largest overseas investor in the world, owning over $2.1 trillion in direct investment

¹ World Investment Report 2006, New York, United Nations, 2006. pp. 1-38.

abroad, or almost twice as much abroad as British investors, the next most active overseas
investors. This international expansion of business activity and overseas presence,
however, often leads to a clash of cultures and values. In addition, conflicts are rising
within the United States and within other developed countries over what role these global
corporations should play in their respective home countries and over whose interests the
corporations should serve. Traditionally, corporations have served the economic interests
of a narrow group of shareholders by maximizing the return to the shareholders, or by
maximizing the overall profits of the firm. Now, a broader group of “stakeholders,”
including customers, employees, financiers, suppliers, communities, and society at large,
is pressing for comprehensive codes of conduct that recognize their interests.
Defining codes of conduct is difficult, because such codes encompass a broad range
of issues and myriad types of official and corporate activities that have defied attempts
to reach a common agreement on the composition and nature of the codes. One way to
view codes of conduct is by grouping them into three main categories: (1) externally
generated codes of conduct that are developed by governments or international
organizations, (2) corporate codes of conduct that represent an individual companies’
ethical standards, and (3) industry-specific codes. These categories often overlap and
some codes that initially were adopted voluntarily by companies or industries have been
incorporated into law by governments. Since Congressional activities relate most
specifically to the first type of codes, or externally generated codes of conduct, they
receive the greatest emphasis in this report. Congress has periodically considered issues
related to corporate codes of conduct. In the 106^th Congress, for instance, the House
considered a measure (H.R. 4596) that would have required U.S. firms to adopt a
Corporate Code of Conduct that covered a wide range of workers rights and
environmental issues, similar to the set of “model business practices” the Clinton
Administration proposed in March 1995.² Similarly, the Senate approved and the
President signed on December 2, 1999, the Convention on Child Labor,³ which addresses
various issues related to children in the workforce.⁴ The 106^th Congress also considered
a number of measures that addressed issues of child labor and the importation of goods
produced with child, sweatshop, and prison labor. In the 108^th and 109^th Congresses,
Congress considered various measures to protect children affected by poverty and natural
disasters from trafficking and to protect children and minors from abusive labor practices.
External Codes of Conduct
Since the 1970s, public and private expectations of multinational corporate behavior
have grown commensurate with the boom in foreign investment. This change in
expectations, however, has not resulted in a clear-cut set of directions for governments
or businesses to follow to develop codes of conduct. At times, purely voluntary codes
have evolved into codes that were adopted as national legislation. For instance, in 1977,
the United States adopted the Sullivan Principles and the Foreign Corrupt Practices Act

² Administration’s Draft Business Principles. Inside U.S. Trade, March 31, 1995.
³ Convention (No. 182) Concerning the Prohibition and Immediate Action for the Elimination of
the Worst Forms of Child Labor, Geneva, June 17, 1999, entered into force November 19, 2000.
⁴ For additional information, see CRS Report RS20445, Child Labor and the International Labor
Organization (ILO), by Lois McHugh.

(FCPA).⁵ Initially, the Sullivan Principles provided a voluntary set of standards for firms
to follow to pressure the apartheid government of South Africa to improve the living
conditions of black workers, their families, and their communities. In 1986, Congress
adopted the Sullivan Principles as law.⁶ The FCPA followed a series of congressional
hearings and legal actions against numerous U.S. corporations,⁷ and specified legal
standards and penalties that were meant to prevent U.S. firms from bribing foreign
officials in order to gain economic advantages.
While there appears to be a general consensus in the United States and abroad that
favors international standards governing corporate businesses practices, attempts to reach
an agreement on specific standards have proven to be less promising. In some cases,
these efforts have fostered competition among countries for investment projects, have
highlighted the remaining differences in national policies regarding foreign investment,
and have created differences in the goals and objectives of negotiations between the
developed and the developing nations. Most developed economies favor international
rules, or codes of conduct, that could promote a “level playing field,” or an environment
in which investment decisions are based solely on competitive market factors.
Developing economies, however, often view such efforts as attempts by the developed
countries to promote rules and codes of conduct that effectively allow them to hoard
foreign investments for themselves and to deny the developing countries the means to
compete internationally for new investment projects.
These and other differences have spurred nations and international organizations to
adopt various approaches in order to promote international rules on foreign investment.
One approach has been to negotiate legally binding agreements, whether they are narrowly
or broadly cast, that impose a set of standards on multinational firms and that bring a large
number of countries into compliance simultaneously. For example, after the United States
adopted the FCPA, it supported efforts within the OECD to adopt the Convention on
Bribery, which focuses on a narrow set of issues related to bribing public officials. Since
the Convention entered into force on February 15, 1999, 34 countries⁸, including the
United States,⁹ have passed national legislation implementing the Convention.
A similar approach that failed to gain agreement was a comprehensive agreement on
foreign investment, known as the Multilateral Agreement on Investment (MAI). The MAI
was expected to be a broad, legally binding, multi-faceted agreement that would have
established an international set of rules on a wide range of foreign investment issues.
Support for the agreement eroded over the course of the negotiations, which focused on
provisions that proved to be too divisive to resolve. In addition, citizen and consumer
groups opposed the proposed agreement, in part because they viewed it as too favorable

⁵ P.L. 95-213, Title I; 91 Stat. 1494, December 19, 1977. See also CRS Report RL30079,
Foreign Corrupt Practices Act, by Michael V. Seitzinger.
⁶ Although adopted informally in 1977, the Principles were incorporated as Sec. 208, Title II of
the Comprehensive Anti-Apartheid Act of 1986 (P.L. 99-440, October 2, 1986) as amended.
⁷ CRS Report RL30079, Foreign Corrupt Practices Act, by Michael V Seitzinger.
⁸ See [http://www.oecd.org/pdf/M00017000/M00017037.pdf].
⁹ P.L. 105-366, November 10, 1998.

to multinational corporations, and because of their concerns regarding what they believed
would be the social, economic, and political impact of the agreement.¹⁰
In lieu of negotiating comprehensive multilateral agreements, many countries have
resorted to adopting narrowly focused bilateral investment treaties that contain codes of
conduct. Often, these codes resemble a general set of investment-related provisions and
corporate “best practices,” rather than a legally binding agreement. According to the
United Nations, 174 countries had concluded about 2,100 bilateral investment treaties by
2001. Nearly as many of these treaties were concluded among developing countries as
between developed and developing countries.¹¹ Often these treaties are accompanied by
some form of codes of conduct that are negotiated to cover a particular investment and
tend to be highly specific to a company, project, or location.
Other Agreements. Some nations have used other types of multilateral treaties
to promote codes of conduct for multinational firms. One type of agreement attempts to
bring greater conformity in the treatment of foreign investment by prescribing changes in
national laws governing foreign investment as one component of a broader arrangement
that is geared toward economic cooperation and integration, such as the treaties that
established the European Community and the North American Free Trade Agreement.
There are other, legally non-binding, arrangements which cover only foreign investment,
the most prominent of which are the OECD Code of Liberalization of Capital Movements
(covering both long-and short-term capital movements) and the Code of Liberalization
of Current Invisible Operations (covering cross-border trade in services). In addition, the
OECD has issued a basic statement on foreign investment, The Declaration on
International Investment and Multinational Enterprises, which is a general statement of
policy regarding the rights and responsibilities of foreign investors. The World Trade
Organization (WTO) also supports the concept of a common set of rules on international
corporate investment.
As part of the 1994 Uruguay Round on multilateral trade negotiations, the WTO
adopted the agreement on Trade-Related Investment Measures (TRIMs) which:
recognized that certain investment measures restrict and distort trade; required signatory
countries to apply national treatment; and required countries to provide a framework for
reducing restrictions on foreign investment. In 1996, the WTO established a working
group on investment, which has been studying the issue of investment rules, including
technical regulations and standards that govern trade and investment. The Doha
Declaration set out the goal of addressing foreign investment issues following the
conclusion of the Fifth Ministerial in Cancun in September 2003. So far, these efforts
have not succeeded in achieving the stated goal of developing a “multilateral framework
to secure transparent, stable and predictable conditions for long-term cross-border¹²

investment, particularly foreign direct investment.”
¹⁰ For additional information, see CRS Report 98-569, The Multilateral Agreement on
Investment: A Brief Analysis of the Current Status, by James K. Jackson.
¹¹ World Investment Report, 2002, p. 8.
¹² [http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm#tradeinvestment]

Corporate and Industry-Specific Codes of Conduct
A broad range of factors are influencing firms to adopt codes of conduct. Some
firms see it as enlightened self-interest, while others see it as a necessary part of risk
management.¹³ Corporate codes of conduct and industry-specific codes now exist in one
form or another among most large multinational corporations and among most of the
developed countries. A recent study by the OECD concluded that most corporate codes
tend to be highly specific and to deal with the idiosyncracies of a particular company,
project, or location.¹⁴ Industry-specific corporate codes dealing with environment and
labor issues appear to be the most common and most U.S. manufacturers and retailers in
the apparel industry have adopted corporate codes that prohibit using child, sweatshop,
or prison labor. U.S. companies in such diverse industries as footwear, personal care
products, photographic equipment and supplies, stationary products, hardware products,
restaurants, and electronics and computers have adopted corporate codes of conduct.
Multinational corporations generally support the concept of codes of conduct that
standardize rules of corporate behavior across a broad range of countries and industries.
While the motivation behind adopting corporate codes of conduct can be quite complex,
multinational firms generally adopt codes of conduct because they believe they represent
good businesses practices. Generally, multinational corporations desire national treatment
as a basis for any investment agreement, but are concerned that standards negotiated in
one agreement could be applied to their worldwide operations, regardless of the disparity
in economic conditions between locations, local customs, jurisprudence, or differences
in local business practices. Some firms also argue that codes which allow foreign groups
to submit complaints to U.S. regulatory bodies concerning the overseas operations of the
subsidiaries of U.S. firms could be used as a competitive tool to damage the worldwide
reputations of U.S. firms.
Industry-specific codes of conduct are as varied and as extensive as the multitude of
industries they cover. Labor and environmental issues, however, are the two most
frequently covered areas in the codes, regardless of industry. Environmental standards
often comprise commitments from firms to be open to the concerns of the communities
in which they locate. The most common labor codes include commitments for firms to
provide a reasonable working environment, provisions against discrimination and a
commitment to obey laws regarding child labor and compensation. Concerns over child
and sweatshop labor, in particular, have spurred some public groups to take action on their
own. The Workers Rights Coalition,¹⁵ an alliance of 67 universities and colleges,
pressured Nike and Reebok to investigate allegations of sweatshop labor conditions in a
Mexican apparel factory.

¹³ A Stitch in Time, The Economist, Special Report on Corporate Social Responsibility, January

19, 2008. P. 12.

¹⁴ Gordon, Kathryn, and Maiko Miyake. Deciphering Codes of Corporate Conduct: A Review
of Their Contents, OECD Working Papers on International Investment, Number 992. OECD,
October 1999. pp. 5-7.
¹⁵ For additional information see the organization’s website, [http://www.workersrights.org/].

Concerns of Stakeholders
While traditional economic theory holds that corporations strive to maximize their
profits to benefit the stockholders, a broad group of “stakeholders” is pressing to have
their interests represented as well. These stakeholders argue that corporations have
responsibilities beyond the narrow scope of their legal charters, or that they should abide
by a “social contract” that reflects society’s changing social and cultural mores. The size
of the group of stakeholders and the social responsibilities they expect vary with the size
of the firm, the industrial sector it is involved in, and its products and operations. This
group of stakeholders and the associated social responsibilities also become vastly larger
for firms that operate in more than one country and can include issues beyond the
common areas of workers rights, environmental concerns, and business production or
financing operations. At times, the issues sought by stakeholders in one country can clash
with those sought by stakeholders in another country, for instance when workers in
developed countries push for job security, health care and other benefits, and
environmental issues, while workers in developing countries push for more local jobs and
local managers, worker training and education, technology transfers, and higher levels of
local production.
Issues for Congress
Governments, corporations, and the public generally support the concept of corporate
codes of conduct. The complexity of the issue and the diversity of foreign investments,
however, make it difficult in practice to negotiate international agreements with legally
binding codes of conduct and likely will present Congress with at least two large,
competing groups of interests. These groups basically represent the difference between
economic efficiency as represented by corporations and equity, or social justice, as
represented by a broad coalition of social and public groups. Generally, economic
analysis indicates that legally binding codes of conduct that eliminate market-distorting
activities promote market efficiency and, thereby, provide positive net benefits to
consumers and to the economy as a whole. In most cases, however, there is a mismatch
between those who benefit from greater market efficiency and those who bare the costs
of economic adjustment. As a result, those who bare the highest costs are likely to be the
most vocally opposed and to voice that opposition to Congress, whereas those who benefit
are less likely to be motivated to express their support due to the perceived limited value
of the benefits.
There is no clear cut method for determining the most equitable distribution within
the economy of the costs and benefits associated with international investment. A broad
coalition of public and social groups increasingly have come to view negatively the global
spread of economic activity and to argue that voluntary corporate codes of conduct
accomplish little. Beyond a narrow set of issues, there is less agreement on how Congress
should proceed. Numerous labor and environment-related measures that garner support
within the United States are opposed abroad, often by the very countries and groups the
measures are intended to help. Moreover, if consumer and labor groups grow uneasy
about their own economic well-being as a result of a slow-down in the rate of growth of
the U.S. economy, they may well urge Congress to adopt more restrictive measures
concerning the labor and environmental impact associated with imports and foreign
investment as a means of protecting domestic U.S. jobs.