Codes of Conduct for Multinational
Corporations: An Overview
James K. Jackson
Specialist in International Trade and Finance
February 14, 2011
Congressional Research Service
7-5700
www.crs.gov
RS20803
CRS Report for Congress
P
repared for Members and Committees of Congress
Codes of Conduct for Multinational Corporations: An Overview
Summary
The U.S. economy has grown 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 have expressed their concerns
over the economic, social, and political impact of this activity. Over the past 20 years,
multinational corporations and nations have adopted voluntary, legally enforceable, and industry-
specific codes of conduct to address many of these concerns. For instance, the 2008-2009
financial crisis spurred Congress and governments in Europe to increase regulation of financial
firms, and the European Union has adopted directives to govern executive pay and bonuses.
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.
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Codes of Conduct for Multinational Corporations: An Overview
Contents
Background ................................................................................................................................ 1
External Codes of Conduct.......................................................................................................... 2
Other Agreements ....................................................................................................................... 3
Corporate and Industry-Specific Codes of Conduct ..................................................................... 4
Concerns of Stakeholders ............................................................................................................ 5
Issues for Congress ..................................................................................................................... 5
Contacts
Author Contact Information ........................................................................................................ 6
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Codes of Conduct for Multinational Corporations: An Overview
Background
Over the last decade, international flows of capital have skyrocketed. International flows in
dollars, for instance, now total over $4 trillion per day, or more than 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 $18 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 about $4.3 trillion in direct investment abroad, or more than 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 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 106th 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
1 World Investment Report 2010, United Nations, 2010. pp. 1-38.
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.
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Codes of Conduct for Multinational Corporations: An Overview
addresses various issues related to children in the workforce.4 The 106th 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 108th, 109th and 110th Congresses, Congress
considered various measures to protect children affected by poverty and natural disasters from
trafficking, to protect children and minors from abusive labor practices, and to advance women’s
rights in developing countries. In the 111th Congress, Representative Maloney and Senator Boxer
introduced companion pieces of legislation (H.R. 606 and S. 230, respectively) that would have
promoted the international protection of women’s rights. In the 112th Congress, Representative
Maloney has introduced H.R. 418 to promote the international protection of women’s rights.
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 (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. Following the financial crisis of 2008-2009, the United States adopted the
Dodd-Frank Wall Street Reform and Consumer Protection Act to address issues of governance
and regulation of the financial sector, and the European Union has similarly adopted wide-
ranging directives to improve oversight of the financial sector and to provide guidance on
executive compensation.
While there appears to be a general consensus in the United States and abroad that favors
international standards governing corporate business 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
4 For additional information, see CRS Report RS20445, Child Labor and the International Labor Organization (ILO),
by Lois B. McHugh.
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.
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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 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
8 See http://www.oecd.org/pdf/M00017000/M00017037.pdf.
9 P.L. 105-366, November 10, 1998.
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.
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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-border
investment, particularly foreign direct investment.”12
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
idiosyncrasies 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 business 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
12 http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm#tradeinvestment
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.
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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.
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 varies 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 bear the costs
of economic adjustment. As a result, those who bear the highest costs are likely to be the most
15 For additional information see the organization’s website, http://www.workersrights.org/.
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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, consumer
and labor groups have grown uneasy about their own economic well-being as a result of the
recent slow-down in the rate of growth of the U.S. economy. As a result, they are arguing for
including labor and environmental provisions in free trade agreements that are under
consideration, and 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.
Author Contact Information
James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
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