Contracts, Compacts and Covenants Integrative Social Contracts Theory, the United Nations Global Compact and the World Economic Forum’s New Social Covenant Daniel Malan Senior Lecturer, University of Stellenbosch Business School, South Africa Normative Business Ethics in a Global Economy: New Directions in Donaldsonian Themes, organised by the Legal Studies and Business Ethics Department, The Wharton School, University of Pennsylvania Philadelphia, 17 & 18 October 2014 Firstly, I would like to thank the organisers for accommodating me on the programme, it is a great honour to be here. By way of background – I studied philosophy in South Africa in the late 80s and early 90s and then enrolled for an MBA a few years later, where I developed an interest in business ethics. One day I read an article on ethics in international business written by Tom Donaldson, and it dawned on me that there could be a way to combine academic work and practical involvement in the field. I joined KPMG as a business ethics consultant in 1999, and since 2005 I have been a senior lecturer in ethics and governance at the University of Stellenbosch Business School in South Africa. On a personal level Tom has had a profound impact on my life and I would like to thank him for that. My first attempt at combining theory and practice was the development of a global code of conduct for KPMG, where I had the opportunity to work with Tom, and Integrative Social Contracts Theory (ISCT) informed certain parts of the development process as well as the final content. I am currently working on a PhD where I am applying ISCT to the UN Global Compact with a particular focus on South Africa, and I am also involved in a project of the World Economic Forum on a New Social Covenant (as a member of the Forum’s Global Agenda Council on Values), where we have tried to incorporate elements of ISCT into the process. In the few minutes I have I would like to share a few more thoughts on these two initiatives. This conference is celebrating the fact that Tom has inspired business ethics scholars around the world. I would like to add that he has also inspired business people, but in terms of the impact that his work could – or perhaps should – have in the practical world of business, we have only scratched the surface. 1 The United Nations Global Compact (UNGC) can be traced back to a speech made by Kofi Annan at the World Economic Forum in January 1999, where he lamented the fact that the spread of markets had outpaced the ability of societies and their political systems to adjust to them or guide the course they take. He called on business to embrace, support and enact a set of core values, which led to the establishment of the UNGC. Today, the UNGC is the world'ʹs largest corporate citizenship and sustainability initiative and has more than 8 000 business participants from 145 countries, who have signed up to the 10 principles that cover the areas of human rights, labour, the environment and anti-­‐‑corruption. At the annual meeting of the World Economic Forum in 2013, its Global Agenda Council on Values released a discussion document entitled A New Social Covenant. The document describes how former assumptions and shared notions about fairness, reciprocity, mutual benefits and social values have all but disappeared. Proposing the establishment of a New Social Covenant, the Council called for a period of global reflection and dialogue on this concept. In brief, the New Social Covenant document puts forward a compelling argument. There is growing distrust in the way the global economy operates and how decisions are made. The historic social contract between business, government and society seems to be broken. Many economies are seen as unsustainable, unfair, unstable and deeply unfulfilling. It is proposed that a new social covenant between citizens, businesses and government urgently needs to be designed. By definition, this will require the engagement and collaboration of all stakeholders – governments, business and civil society groups. Although these two initiatives use different terms – covenant and compact – essentially they are about social contracts. The Merriam-­‐‑Webster dictionary defines a social contract as “an actual or hypothetical agreement among the members of an organized society or between a community and its ruler that defines and limits the rights and duties of each”. I support the UNGC and was involved in the development of the New Social Covenant initiative. The New Social Covenant project is in its infancy and it is argued that careful planning and implementation can make a real impact, and can also support and complement the work of the UNGC. The basic message of ISCT (developed by Tom Donaldson and Tom Dunfee) is that “implicit agreements constitute part of the basic software of business ethics”. As opposed to traditional social contract theory that investigates the contracts between citizens and governments, ISCT focuses on how economic participants will define business ethics. Donaldson and Dunfee argue that a hypothetical global congress for business ethics will not be able to agree on a detailed set of ethical rules and guidelines, but rather will agree on a process or broad framework. This framework is what they call the Global ISCT Macrosocial Contract for Economic Ethics, and stipulates that local economic communities have moral free space in which they may generate ethical norms through microsocial contracts which must bet grounded in consent and buttressed by the rights of individual members to exercise voice and exit. In order to become obligatory, a microsocial contract norm must be 2 compatible with hypernorms, which are described as “principles so fundamental that they constitute norms by which all others are to be judged”. ISCT and the UNGC Despite its detractors, the Global Compact is uniquely positioned to play a key role in changing beliefs about the purpose of business, and by extension to have a positive impact on the way in which corporations behave around the world. As has been pointed out by various scholars such as Williams, Rasche and Waddock, the UN is uniquely positioned because of its moral authority, convening power, global reach and neutrality. The risk of free riders is well-­‐‑known and accepted by the Global Compact, since the alternative of extensive scrutiny and verification, as proposed by Sethi and Schepers, is neither feasible nor part of the mission of the Global Compact. Donaldson has not written extensively about the Global Compact. In a very brief article entitled “De-­‐‑compacting the Global Compact” (2003) Donaldson examines the ethical rationale that is required to make the Global Compact a success1. His argument is that companies must take three steps to satisfy all conditions of the UN Global Compact: egoism, cooperative egoism and corporate citizenship. Implicit in his argument is a distinction between being a signatory of the Compact, and “to support the Compact adequately2”. According to Donaldson: “[t]o justify the full Global Compact, companies must somehow be capable of reaching the third, and most difficult rung”. Following Williams and the implicit position of Donaldson, I argue that the 10 principles of the Global Compact can be regarded as substantive hypernorms. To qualify as hypernorms there are certain conditions that must be met, and broadly relate to general consensus, alignment with existing standards, support by major stakeholder groups, consistency with major religions and philosophies and incorporation into existing legal frameworks. It is clear that all 10 Global Compact principles are supported by the majority of these types of evidence, although for the sake of this argument one has to exclude the fact that the Principles are part of a well-­‐‑known international standard (the Global Compact), since that would constitute a circular argument. It is further argued that the way in which hypernorms limit moral free space can provide practical guidance to companies that have subscribed to the Global Compact, not only in how they need to adhere to the 10 principles, but how they can structure and implement their broader corporate responsibility programmes. The following statement by Donaldson and Dunfee supports this position: “Since such principles [hypernorms] are designed to impose limiting conditions on all micro contracts, they cannot be derived from a single micro contract, but must emanate from a source that speaks with univocal authority for all micro contracts”. 1
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It is important to note that this article was written before the addition of the 10 principle on anti-­‐
corruption. 2
According to the current structures of the Compact it is therefore possible to be a signatory without having reached the third rung of the ladder. This type of differentiation might also be behind the introduction of the LEAD programme within the Global Compact structures. 3 One important constraint in the application of ISCT is that Donaldson and Dunfee developed the theory as a guide for practical decision-­‐‑making. In their very detailed examples of the application of ISCT, they always start with “recognize the ethical problem”. In other words, once faced by a practical decision, the decision maker proceeds to identify the appropriate hypernorms. Within the context of ISCT I am suggesting a reversal of this process. In the words of one of the South African wine pioneers when he defended the practice to place wooden chips inside a barrel of wine to obtain a wooded aroma: “If you can put the wine in the wood (i.e. the barrel), you can put the wood in the wine”. Viewing the UN Global Compact as a (non-­‐‑exhaustive) set of substantive hypernorms, I suggest that decision makers can determine appropriate actions and programmes from these norms, and explore appropriate moral free space within them. This interpretation gives the UN Global Compact a certain dynamic power which is not present if it is merely seen as a voluntary code that confirms a set of static principles. Understood in this way it could become a driving force for the design and implementation of effective corporate responsibility programmes. Although Dunfee is circumspect in acknowledging that hypernorms alone may provide guidance to solve ethical dilemmas, I think it should be acknowledged that this could happen if the hypernorm is merely seen as a point of departure to explore moral free space. Out of this activity a practical guideline or solution (micro contract) could then be developed, which will apply at the level of the local community. Within the context of the Global Compact three different levels where micro contracts can occur can be identified: local networks, collective action initiatives, and company initiatives. It should be emphasised that – with the exception of local networks – these micro contracts are not specific to the Global Compact. The issue of causality is often used as a critique of the Global Compact but in essence only points to the difficulty of measurement. Critics ask the following question: how can you prove that the behaviour of a Global Compact signatory can be linked to the fact that it is a signatory? This is a valid question, and of course there are countless examples of best practice that come from corporations who are not signatories. But this question misses the point in terms of the bigger debate, that is to shift the mindset about the purpose of business. Although the Global Compact can facilitate this process and has many advantages that have already been mentioned (e.g. convening power, legitimacy), nothing prevents companies from achieving wonderful results without being a part of the initiative. ISCT and the New Social Covenant The New Social Covenant document calls for a dialogue between citizens, corporations and governments to address some of the fundamental challenges of our time. An extract from the document reinforces the emphasis on the moral purpose of the corporation: “The historic social contract between business, government and society seems to be broken, and the legitimacy of corporations has reached a new low point, with business running the risk of losing its license to operate. We see a growing public indignation at the perceived disconnect between perks for a few and the rights of many. Citizens are demanding more collaborative, sustainable and inclusive methods of value(s) co-­‐‑creation”. 4 The implicit reference to ISCT is clear. It is envisaged – and clearly stated in the document – that there will be multiple covenants (micro contracts) that will vary between countries and industries, and acknowledged that it is not possible to be prescriptive about either content or process. It is expected, though, that certain universal values (the macro contract), such as the dignity of the individual, the primacy of promoting the common good, and the responsibility for stewardship of the planet will feature in all of them. The actual covenants will make the difference between lip service and real impact. I mentioned at the beginning that we have only scratched the surface in terms of the business impact of Donaldson’s work. Perhaps the fact that there is a need for an abbreviation of his theoretical contribution has something to with it. “Integrative Social Contracts Theory” does not roll off the tongue as easily as “Creating Shared Value”. There is a real opportunity for ISCT to be taken to scale and to have a real impact around the world. In this way it will make an important contribution to achieve something we all want: improving the state of the world. Thank you very much. 5