By Mallen Baker
There are business opportunities all over the world. But some bring higher risks than others. How does a company best navigate dilemmas in countries where governments are unwilling or unable to fulfil their responsibilities in relation to some fairly basic, accepted norms? In an attempt to answer this question, the OECD has produced a tool for multinational enterprises operating in what it describes as 'weak governance zones'.

The Risk Awareness Tool (nobody has suggested it revert to its acronym - RAT) has been developed as a follow-up to the OECD Guidelines for Multinational Enterprises, a voluntary code of conduct for international business. It has therefore been designed to be consistent with the guidelines.

It is no fun doing business in a weak governance zone. Government failures lead to broader failures across political, economic and civic institutions that can create the conditions for endemic violence, crime and corruption. About 15 percent of the world's population are said to live in such areas.

The Tool consists of a series of questions for companies to ask of themselves when looking at investments in such zones. The questions cover a number of areas.

The first is that of obeying the law and observing international instruments.

Companies are, of course, expected to observe the law in these areas as much as any other. But in knowledge that international instruments covering areas such as human rights, corruption, labour standards and environmental protection may define acceptable behaviours far in advance of the local laws, companies need to reflect carefully on their position.

So, for instance, the company should ask how it can best inform itself about the positive and negative impacts of its investment in the host country. Does the company involve stakeholders in this process? Does it take steps to avoid situations where it might unwittingly aggravate existing problems? What steps can it take to mitigate any negative impacts?

Of course, being able to answer such questions positively is no guarantee of support and understanding. Companies that have operated in Myanmar have long argued that their presence, because of their commitment to community investment and ethical operating practices, benefits local people more than it would if they withdraw and allow their place to be taken by companies that care little for such things. These arguments have not prevented, one by one, those companies eventually being pressured so heavily that they have had to withdraw anyway. Think Talisman Energy. Think British American Tobacco. Think PwC.

The second section covers what is described as 'heightened managerial care'. Because of the greater risks in weak governance zones, management needs to accept a greater need for information intelligence, robust internal procedures, and use of external legal, auditing and consulting services in order to ensure compliance with legal obligations and international standards.

The questions in this section are focused on internal governance. For instance, do company policies adequately communicate the implications of relevant laws and international instruments for the company's business practices? Is there detailed guidance for employees that may be confronted by difficult dilemmas?

The third section focuses on political activities. The Tool acknowledges the legitimate and useful role that business can play in the political process, whilst noting that weak governance zones present special dangers that business may be tempted to use political activities to gain access to anti-competitive or improper advantage.

These temptations can be exacerbated by some of the features of a weak governance zone. These can include the absence of workable systems for promoting public and private sector ethics, excessive discretionary powers for public officials and the lack of robust tendering procedures.

In addition, there is the well worn scenario where companies are forced to forge political alliances with governmental figures - or even the family members of powerful leaders - in order to protect their investments.

Questions asked in this section include for instance: what steps can the company take to ensure it refuses improper involvement in political activities, including illegal contributions to candidates or parties? How can it make sure that its contributions comply with public disclosure requirements? What steps can it take to ensure that its political contributions don't aid criminal or corrupt activities?

The next section covers clients and business partners. In particular, there is a heightened risk that potential employees, clients or business partners may damage the company's reputation or put it at risk of being complicit in law breaking.

Questions here include whether the company has used heightened care in identifying whether prospective partners or clients have had roles in criminality, corruption or violent conflict? How does the company ensure that its dealings don't lead to funds being channelled through off-shore financial centres?

The penultimate section talks about how the company relays information on wrongdoing, such as crimes, human rights violations and corruption. Weak governance zones often have few institutions that may be able to collect and channel information. In the course of their business, companies sometimes are able to acquire such information and share it with home or host governments, international organisaitons or the media. Of course, such activity carries real and serious risks, in the form of threats to the security of employees and assets. Many businesses, for purely pragmatic reasons, will see this as a step too far.

However, there are questions that the company can ask. What channels exist for sharing information or speaking out? Does the host government have a whistle-blowing facility? Could the company use such channels, or enter into discussions with other host country actors?

The final section involves a very thorny question indeed - how much should businesses involve themselves in seeking to influence the development of better governance. After all, the ideal scenario is that nobody expects businesses to bother themselves about issues of corruption and human rights because sound frameworks of law are in place wherever they operate. How much legitimacy does business have in actually playing a role in seeking to bring this about?

The OECD has carried out some consultations on possible roles for companies in promoting institutional reform. Unsurprisingly, it received reportedly mixed views. Some said they would welcome such involvement, seeing business as a powerful and important player. Others were strongly opposed, fearing that such activity would simply legitimise inappropriate involvement by companies in the business of government.

Questions for this section include: does the company use its influence positively to avert conflict and promote broader reform? Does the company use its partnerships with host governments through joint ventures etc. to advocate respect for good policy practices? If large tax payments are made into weak fiscal systems, what possible risks are there that the money will be diverted or channelled into areas that will lead to greater damage?

So the question is - how useful is the tool for businesses that find themselves operating in weak governance zones?

On the one hand, it provides a useful, fairly comprehensive checklist of questions that a company should check against to ensure they haven't missed important implications. However many companies - especially bearing in mind that the OECD says that the Tool should also be relevant to small to medium sized enterprises (SMEs) - will find that there is not a great deal of guidance to help themselves to find answers to some of these questions.

Some businesses will certainly fear that the comprehensive nature of the Tool now raises expectations beyond where anyone is really sure they should be raised. Should companies really be encouraged to undertake energetic whistle-blowing in situations that may put their people in danger? Should they really be seeking to tell host governments that they should be reforming their governance in areas such as human rights and environmental protection? At what line does the company cross over into assuming responsibilities that are the sole responsibility of governments?

This starter for ten from the OECD asks useful and interesting questions for the company to consider, but there is a lot more work to be done before some of these fundamental issues are resolved. To some extent, that is understandable. This is not the definitive statement of OECD view of how to resolve issues in weak governance zones. It is advice to those socially responsible businesses that want to do the right thing when operating within those zones.

It does not deal with the primary role that host governments have to play. It does not examine the fact that some of the businesses attracted to weak governance zones are so attracted precisely because they have no interest in playing by the rules, and have identified an opportunity to get away with this. It does not deal with the commercial disadvantage to socially responsible businesses created when such others are better able to compete because of the unfair advantage they buy.

The Tool is useful for companies aiming to find their way. More work now needs to be done at addressing some of these more difficult questions.

You can download a copy of the OECD Risk Assessment Tool for Multinational Enterprises in Weak Governance Zones from the Resources section of the website.

About the author:
Mallen Baker is the Development Director of Business in the Community. He is currently responsible for developing BITC's approach to marketplace issues, which includes how companies manage issues that arise around their core products and services. He initiated the Business Impact Review Group: the group of 20 companies who developed a common approach to CSR reporting, and was responsible for the work of the Business Impact Taskforce which produced the landmark "Winning with Integrity" report. He was also responsible for the production of the current Business in the Community website, bringing together content from across 30 different web presences and providing a customer-focused entrance point to a growing wealth of content on responsible business practice. Get more info at www.mallenbaker.net.

© 2006 Mallen Baker

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