Winand Quaedvlieg provides insight into how the OECD Guidelines for Multinational Enterprises were revised and what the changes mean for business

In May, the Organisation for Economic Co-operation and Development adopted an update of its Guidelines for Multinational Enterprises. This took place during the ministerial conference to mark the 50th anniversary of the OECD’s existence, with US secretary of state Hillary Clinton in the chair, in order to underline the political importance.

The update has led to important changes. The text has been very carefully formulated, so the Guidelines will probably remain workable for MNEs. In this way, the Guidelines can continue to be an international reference document for corporate social responsibility.

It is more important than ever that the standards set out in the Guidelines are also respected in non-OECD countries. At present, a large number of emerging markets are not yet members of the OECD. MNEs from those countries are not committed to the Guidelines’ responsibility  standards, and this presents a problem for creating an international level playing field.

The Guidelines

The OECD Guidelines for Multinational Enterprises were drafted in the 1970s as a component of the OECD investment declaration. Then, as now, there was a great deal of discussion about economic internationalisation and the perceived great power exercised by transnational businesses. The OECD therefore decided to couple its objective of promoting an open international investment climate with the establishment of behaviour standards for large multinational investors in their activities outside OECD countries.

The aim was to achieve a balance between openness and responsibility. The behaviour standards take the legal form of non-binding recommendations from OECD governments to their multinational enterprises (MNEs). They call on these businesses, for example:

• to be transparent in the provision of information;
• to respect workers’ rights to be represented;
• to take account of the need to protect the environment, public health and safety, and to contribute to sustainable development;
• not to engage in corruption;
• to ensure that their products meet consumer health and safety standards;
• to stimulate technology transfer;
• to respect competition;
• to make tax payments in a timely manner.

The Guidelines do not give a definition of what exactly constitutes a multinational enterprise. Generally speaking, the Guidelines reflect the standards that many OECD MNEs are already used to in their domestic markets. The added value of the Guidelines is that they formulate recommendations for the behaviour that MNEs should adopt also in third countries. In many cases, MNEs have committed to do this already in their own codes of conduct. The Guidelines are a recognised benchmark in debates on international corporate social responsibility.

The Guidelines were last revised in 2000. Since then, there have been many developments in the field of corporate responsibility. The first key figure who openly said the Guidelines needed refreshing was UN human rights special representative John Ruggie in his 2008 report on human rights and business to the UN Human Rights Council. This was the direct impetus for the update in the OECD.

The discussion within the OECD on the human rights chapter in turn provided important refinements for the final version of the UN guiding principles. It is a good illustration of how adroitly Ruggie managed to mobilise structures and institutions around the world in order to go forward with the UN project in the area of human rights and business.

Update, not review 

In mid-2010 the OECD reached agreement on the terms of reference (ToR) for the update. It was expressly decided to use the term “update” instead of “review” so as to underline that this would be a codification of developments that had already taken place in other broadly supported bodies and instruments in the corporate responsibility field, and not a review of fundamental concepts.

However, the elastic formulation of the ToR ultimately helped to give the update a wider reach. Hence, the main restraint in the exercise came not from the ToR but from the political wish to present the final new text as a concrete deliverable at the celebration ceremony of the OECD’s 50th anniversary. This meant in practice that a tight timeframe of less than a year was available.

In formal terms, the negotiations on the Guidelines were conducted by representatives of the signatory countries, known as the adhering countries[1], in a working group of the OECD’s investment committee. In addition, the Dutch working group chairman Prof Roel Nieuwenkamp also set up an informal advisory group (IAG). Alongside a limited group of adhering countries, three representatives of the stakeholders – business, trade unions and NGOs[2]– also took part in the IAG brainstorming sessions. The IAG played a decisive role in the process. In the end, the three stakeholders and the working group chairman drew up a compromise text on the three remaining sensitive issues, which was submitted to the countries and adopted unchanged.

The update was a complex international multi-stakeholder negotiation. There were a considerable number of players and just as many potential flash points. Each stakeholder had a difficult task to keep radicals and moderates in their own ranks in line. There were sometimes also large differences of opinion on the direction of travel and the desired final result within the national administrations of certain countries.

From the outset, both the NGOs and the trade unions had a strong conviction that this update should bring an end to the voluntary character of the Guidelines and that irreversible steps must be taken to move progressively to a more binding instrument. There was also sympathy for this idea in many adhering countries. The same groups wanted to include considerable new and detailed recommendations in the Guidelines.

In this regard, their sights were trained mainly on the creation of a comprehensive system of rules, with little thought for what this might mean for businesses in practice. Input from the business community was shaped by two considerations: on the one hand the wish to resist too far-reaching fundamental changes, and on the other hand a recognition that a modernisation of the Guidelines was necessary to safeguard their position as reference document on corporate responsibility with broad international acceptance.

Result of the update

The update finally went clearly beyond a simple codification: it has led to the incorporation of a number of fundamental new elements in the guidelines. The most important of these are as follows.

• A general provision has been introduced whereby MNEs must avoid causing or contributing to an adverse impact on the societal interests (social, environmental and other) for which the Guidelines are relevant, not only in the framework of investments but also in other activities. The expectation that they should work to avoid such adverse impacts extends to the activities of the MNE itself, as well as to the direct involvement of MNEs in activities in the supply chain. When an adverse impact occurs to which the MNE did not contribute, the MNE is expected to examine possibilities to avoid such impact if there is a direct linkage between the impact and the activities of the MNE as a consequence of a business relationship[3].
• MNEs should generally exercise due diligence in their operations in order to prevent adverse impacts on these same interests[4].
• A completely new human rights chapter has been included, based on the UN Guiding Principles. At its heart is a due diligence provision specifically tailored to the prevention of human rights violations. A number of procedural requirements are also included.
• The coverage of the chapter on employment and industrial relations has been expanded. The concept of “employee” has been widened so that the Guidelines relate to more types of work relationship. The provisions on child labour and forced labour have been tightened up. MNEs are expected to pay an adequate wage which is sufficient to keep a family.
• The chapter on corruption has been expanded. It now includes the “demand side” of bribery, and extortion. And it describes in more detail what internal preventive measures companies are expected to take. This therefore rounds off the recent OECD agreements on this issue.
• Generally, a number of provisions are now drafted in greater detail than in the past.
• The procedures of the National Contact Points (NCPs) have been modified in an important way. The Guidelines specify that governments must set up NCPs, among other things to spread information about the Guidelines and to help to deal with issues arising in connection with the Guidelines, eg via mediation. Previously, the Guidelines gave OECD countries wide freedom to shape the NCP at national level. This sometimes led to situations in which an NCP could not in fact function due to a shortage of resources. That is now no longer possible. The new Guidelines also include indicative timetables for the procedures. At the same time, countries are expected to make sufficient resources available.
• The OECD’s Investment Committee has been assigned a greater role in stimulating and supervising implementation.

Taken together, this means that trade unions and NGOs have managed to realise a substantial part of their wishes[5]. On the other side, there is an expectation that the result will also be workable in practice for businesses. It also fits in broadly with what those MNEs that are in the vanguard of corporate responsibility developments are already doing. The OECD’s business representation has therefore declared that it accepts the new text.[6]

There were a number of important considerations in this respect:

• The new elements set out above are carefully drafted and come with conditions and in-built flexibility, and in most cases tie in with existing developments in other bodies such as the UN, International Labour Organisation or the OECD itself. A good example of a major innovation in the Guidelines that is made acceptable to business by careful wording and the introduction of flexibility is the adverse impact provision.
• The non-binding character of the Guidelines is explicitly reconfirmed. This is also important in connection with an international trend in jurisprudence to take into consideration in court rulings what society deems to be appropriate behaviour.
• It is also stipulated that the Guidelines can never compel companies to act in contradiction with local laws and regulations.
• The general due diligence provision is not accompanied by any formal requirements, is flexible and hence does not lead to unmanageable administrative burdens. It does not apply to the chapters on science and technology, competition and taxes.
• The responsibility for preventing abuses in the supply chain is limited to situations where MNEs are directly involved.
• The new human rights chapter ties in closely with the UN Guiding Principles on Business and Human Rights.
• Many proposals for far-reaching new provisions failed to reach the finishing line[7]. Nevertheless, a new and somewhat atypical inclusion is the provision calling for companies to support internet freedom.
• The updated Guidelines for NCPs lead to better procedures but have not changed their nature: they do not go so far as to stipulate that an NCP can pass judgment on the behaviour of a business (“determination”). Neither can NCP reports form a valid basis for sanctions under national administrative law, for instance in the case of a subsidy decision. This is correct because the design of the NCP procedures is such that there are insufficient legal guarantees to allow such effect. In addition, at the start of a procedure the NCP should make an initial assessment of the bona fide character of a claim, so that companies are protected against frivolous campaigns and unmeritorious claims.

Assessment 

They say that the proof of the pudding is in the eating, and this is the case with the update. The new text of the Guidelines is a compromise in which a number of substantial new expectations are placed on MNEs in terms of corporate responsibility, while unduly revolutionary changes have been headed off. Thus, recent developments in the field of corporate responsibility are incorporated in an even-handed way.

As a result, the Guidelines can maintain their position as a reference document for governments, social partners and NGOs in the years ahead. The text raises the bar for companies in a number of respects. But it also protects them against unrealistic expectations from society on businesses. This will shift the corporate responsibility debate in a number of ways. And there can be no doubt that new pressure will progressively build up on other aspects of corporate behaviour in the societal debate.

The first step is now to implement the new Guidelines. The unwritten rule within the OECD is that this type of instrument comes into force after a transition period of six months. In the meantime, the OECD, governments, NCPs, business and societal organisations must make companies aware of the Guidelines. In addition, the Guidelines have introduced a “pro-active agenda” which needs to be fleshed out in order to promote compliance on the ground and to identify risks of adverse impact at an early stage.

One remaining question is what the effect of the Guidelines will be on the international level playing field. Compliance with the Guidelines can lead to a stronger competitive position of MNEs in the long term. But in the short term it also generates costs and imposes restraints.

The Guidelines will establish a level playing field within the OECD. But the world has changed. In 2000, when the Guidelines were last overhauled, the OECD still covered the relevant parts of the global economy and there was no realistic expectation that free riders from outside the OECD would appear.

That situation has changed completely. MNEs from OECD countries are confronted with fierce competition from the large emerging markets in particular. The Guidelines assign a mission to the OECD Investment Committee to engage in dialogue with non-members in order to promote responsible behaviour by their companies, in the spirit of the Guidelines, and thus to create a level playing field. It is essential that the OECD takes up this assignment with determination. Only in this way can the new subtitle of the Guidelines, “Recommendations for responsible business conduct in a global context”, become a reality.

Winand L E Quaedvlieg is deputy director for international economic affairs at the Confederation of Netherlands’ Industry and Employers VNO-NCW and vice-chair of the International Relations Committee of Business Europe. As chairman of the BIAC Committee on MNEs and International Investment, he was the OECD business community’s representative in the negotiations on the update of the Guidelines. This essay is written in a personal capacity.