2014 Kellogg School of Management/Aspen Institute Business and Society Leadership Summit
Filling the Governance Gap: Aligning Enterprise and Advocacy #CorpGovGap
Can Private Politics Effectively Replace Government Regulation?
By Brayden King
Over the past decade, public regulation of corporate behavior has waned considerably, with government lacking the political will and funding to carry out its traditional regulatory role. In addition, the global nature of commerce often puts effective regulation beyond the reach of an individual country or region. Emerging to fill this void, private politics—voluntary participation in corporate regulation—has been gaining the favor of politicians and activists alike. This approach seeks to avoid the costs and clumsiness of government action by relying on the threat of reputational damage as a deterrent to corporate misbehavior.
Recent events—the 2013 factory collapse in Bangladesh and the 2010 British Petroleum oil rig explosion—suggest the limits of voluntary regulation and raise fundamental issues: Can privately regulated corporations that are under tremendous pressure to cut costs and expand revenues always be expected to act in ways that safeguard society and the environment? And in the absence of a government regulatory authority that can levy penalties and fines, does the threat of reputational damage trump the pursuit of profits?
Our research findings suggest that the answer is often no.1 Though private regulation is a necessary and valuable part of society’s struggle to compel corporations to be good citizens, it does not appear to be an effective replacement for government regulation. Corporations seem to have figured out how to manage their reputational risk without significantly altering their behavior. Activist stakeholders and nongovernmental organizations (NGOs) must therefore reevaluate their strategies.
The Tantalizing Promise
Private regulation has emerged as a common tool used by nongovernmental citizens and groups to prod corporations into changing their behavior. Rather than relying on governments to regulate, investigate, and sanction corporate wrongdoers, reformers organize coordinated campaigns to encourage corporations to be socially responsible. They create public rating systems, certifications, and social responsibility labels and urge companies to pledge voluntary adherence to high standards.
In a typical effort, various stakeholders—ranging from citizen associations to unions, community groups, and affected firms—collaborate on desired standards. In the Forest Stewardship Council, for example, activist groups and industry representatives have worked together to craft a set of guidelines that raise the environmental bar for the forest products companies.
Many companies have embraced these privately regulated standards to avoid the ire of activist groups—which often comes in the form of boycotts or other types of public shaming—that can lead to tarnished reputations. Companies that are susceptible to reputational threats are the most likely to respond to activist demands, showing that in some instances reputation is a powerful motivation for aligning corporate behavior with high standards.2
The Limits of Voluntary Standards
Despite the popularity and some successes on the part of private regulatory efforts, their impact appears to be faltering due to several factors.
Competition among ratings systems propels a race to the bottom and a steady dilution of standards. Ratings systems have proliferated as a result of private regulation: EcolabelIndex, which tracks all national and transnational environmental rating systems and labels, currently lists 437 such certifications in 197 countries and 25 industry sectors. The ratings systems with looser standards are ever more widely adopted—unsurprising given that many are now being fashioned by businesses themselves. Citizen activists have good reason to be skeptical about ratings into which they have little or no input.
Corporations are learning to game voluntary ratings efforts. Companies have strong incentives to respond to activist campaigns by making superficial changes that have little substantive impact on their organization’s practices. According to one study, companies commonly respond to boycotts by launching philanthropic or social actions in unrelated domains. For example, companies criticized for using sweatshop labor may avoid reputational damage by donating money to domestic charities or making surface-level changes in employment policies, while doing little to change actual working conditions.
Activists may become overly focused on large firms and ignore the most egregious offenders. Activist groups rely on the media to publicize abuses, and for that reason they tend to target firms that they know will draw the interest of journalists. Large, prestigious, and highly visible organizations make the best targets. But the Nikes and Apples of the corporate world may not be the companies committing the most egregious abuses. If the true goal is to reduce overall corporate misbehavior, the majority of activist outrage seems to be misdirected at the highest-profile targets rather than the worst offenders.
Public relations strategies can hollow out the monitoring capacities of activist groups. Some activists have shifted their focus away from monitoring corporate operations and toward generating media coverage. Contrary to enforcing private regulations, this coverage raises an organization’s profile and supports fund-raising efforts, which can give it more clout in the public arena. And the resulting lack of a well-coordinated, grassroots monitoring effort has allowed companies to get away with superficial commitments to standards while altering behavior little or not at all.
A Better ApproachIn sum, the best evidence suggests skepticism that purely voluntary regulation is a permanent solution to limiting corporate malfeasance. Private efforts should supplement rather than replace government enforcement of basic rules. In addition, activists that ignore governments’ vital role may be eroding the public sector’s long-term capacity to limit corporate abuses that threaten society and the environment. To ensure that activists achieve their mission of reining in corporate behavior, they should pursue three strategies:
- Focus on collaboration with key stakeholders. NGOs should proactively work with businesses and government agencies to deepen their relationships with firms and take more ownership over the implementation of private standards. Although far from perfect, Starbucks has improved its standards of coffee production by maintaining a collaborative relationship with fair-trade certifiers and inviting third-party auditors to evaluate how standards are implemented.
- Strengthen monitoring capabilities. As noted earlier, many NGOs have focused too much of their energies on public relations at the expense of maintaining their grassroots strength. While traditional and social media offer extended reach, the impact of these efforts can be superficial and short term if not paired with the building of strong networks of committed activists. Organizations should shift more resources to working at a community level, boosting membership, and instructing local chapters on effective grassroots monitoring, in addition to pressuring local governments to be involved in enforcement of existing laws. The NGO Earthrights International, for example, has developed rich ties to local activist groups in countries such as Burma that monitor corporate and government abuses of human rights.
- Validate ratings systems and labels. NGOs need to better police the sea of ratings systems and ensure that standards actually drive socially responsible corporate behavior. The Leadership in Energy and Environmental Design (LEED) program, developed by the U.S. Green Building Council, is a perfect example of a well-coordinated effort that has slowed the growth of ratings systems and even rendered many other certifications irrelevant.
For private regulation to reach its tremendous potential and raise the bar of corporate social responsibility, NGOs must resist the temptation to engage in quick media strikes that yield favorable public attention but weak implementation of higher standards. Developing stronger relationships with corporations, investing in local monitoring, and policing emerging global rating systems will help ensure that private regulation has a lasting impact.
1For a summary of recent research on private regulation, see Brayden G. King, "Reputational Dynamics of Private Regulation." Socio-Economic Review. Vol. 12 (2014): 200–206.
2About a quarter of boycotts that get any national media attention lead to some sort of public concession. For more on boycotts, see Brayden King and Mary-Hunter McDonnell, "Keeping Up Appearances: Reputation Threat and Prosocial Responses to Social Movement Boycotts." Administrative Science Quarterly 58,No. 3 (2013): 387–419; and Brayden King, "A Political Mediation Model of Corporate Response to Social Movement Activism." Administrative Science Quarterly 53 No. 3 (2008): 395–421.