U.S. Companies Drag Their Feet on UN Global Compact

[Ed. note: The Global Reporting Initiative and UNGC announced a new commitment to partner today, with the hopes of alleviating some of the challenges referenced in this article]

By Cristina Garza

Since its launch in July 2000, the UN Global Compact (UNGC) has grown to more than 10,000 participants from 145 countries. Its current base of more than 7,000 signatory businesses, as of October 2012, makes it the largest transnational organization in the world. However, it lacks the power to globally convene and influence relevant social actors including companies, governments, labor, and civil society organizations, especially in the U.S., despite the fact that it specifically seeks to influence these parties.

The number of U.S. companies adhering to the UN´s call for corporate responsibility is noticeably behind the total number of signatories of other nations. This is even more evident in relative terms, when we consider the percentage of signatories out of the total number of a country's companies. Why are U.S. companies not compelled to participate? Do they not perceive value in adhering to the Global Compact?

Why companies are getting delisted

A number U.S. companies are being delisted from the Global Compact because they do not meet the Communication on Progress (COP) requirements.  As of this May, out of 499 U.S. participants, 6 percent (19 out of 277) large companies have been delisted. This number seems low compared to the 23 percent of small and medium-seized enterprises or SMEs (62 out of 268 registered companies) that have been delisted. In other words, it seems that smaller firms, which outnumber large companies by a wide margin, do not perceive sufficient value in allocating resources to comply with the Global Compact´s requirements. This is in part because small-to- medium sized enterprises (SMEs) do not have the necessity to fill the governability gaps that result from operating in less developed countries. Corporate legitimacy is usually questioned when a company extends its supply chain and manufacturing into countries lacking appropriate regulations regarding labor, human rights, the environment and anti-corruption.  Hence, companies operating abroad (which usually translate into large companies) seek to regulate their operations through adherence to the UNGC´s principles and subsequently report on their CSR activities. This pattern also occurs with domestically oriented firms, which perceive no real benefit from a membership to the UN Global Compact as they operate in their well regulated homeland.

Still, CSR initiatives are increasingly being required by institutional investors and large business customers, and it appears that U.S.-based companies are opting for other frameworks, such as the Global Reporting Initiative (read a summary of the new guidelines here). More than 53 percent of S&P 500 companies reported according to this framework in 2012. In Steen Knudsen's words, “the UN Global Compact offers a ´one seize fits all solution regarding CSR reporting.” It is a principles-based, flexible initiative with no specific compliance indicators.

Why firms avoid signing up in the first place

The flexibility of the standard has meant that companies have been opting to shift towards other reporting standards that better fit their needs,  usually  those providing specific, measurable indicators that adapt to the seize of the company and its sector, and that provide the possibility to select the most suitable reporting parameters.

In the case of larger firms, some argue that it is the nature of the UNGC’s principles that is preventing them from becoming members, especially because, even though it is non-binding, it is presented to legally-oriented firms. For example, Principle 3 states that: “Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining.” Dow Chemicals resisted becoming a member because they considered this principle would cast them as pro-union, thus setting up the possibility of lawsuits from activists. Also, General Electric avoided becoming a member because they faced pressures from activists in relation to their anti-discriminatory pledges. GE and other U.S. firms have been working in advancing human rights through specific business initiatives and have helped the UN reassign responsibility of human rights to national governments, while keeping businesses a partner in implementing such principles into their practices.

There is no doubt that the UNGC has proven its success in becoming the world’s largest transnational initiative, its challenge lies now not in attracting more participants, but to retain them. There are a small number of U.S. based companies now signing up, and signatories keep being delisted. Continuation of this pattern will create a rigorous reporting paradigm, and make it easier for organizations to report their commitments. Despite new guidance on how to meet COP requirements by way of a GRI-based Sustainability Report and the Global Compact Differentiation Program, many organizations still don’t have the resources to meet COP requirements UNGC is a great instrument to compensate regulation voids for companies operating abroad, and should focus on these types of companies instead of seeking to recruit all types of members who not always perceive value in adhering to its principles. It may be that the value of adherence provides a launching pad for strategic sustainability that is to follow.

[Image credit: mattsabo17, Flickr]