The Institute’s Challenge
Commentary, 15 December 2009
By Chris Marsden, Patron, IHRB
The idea behind the Institute for Human Rights and Business is that impacts by companies on human rights need, firstly, to be much more widely understood and publicised. Secondly, we need to find mechanisms that can integrate the process of identifying and addressing these impacts into the incentives and accountability structures of companies.
Think tanks are about ideas and how they might be put into practice. Our Institute is about several fundamental ideas. They include:
The current economic crisis has exposed fundamental flaws in the free market system. Although powerful, short-sighted vested interest may be urging that we return to the market system as it was, this cannot be allowed to happen. Among other failures the crisis has exposed is the disconnect between selfish pursuance of individual value and the creation or destruction of public value or value for society as a whole; what economists call ‘externalities’.
No longer can we rely on Adam Smith’s assertion that:
'Every individual necessarily labours to render the annual revenue of society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it...He intends only his own gain, and he is, in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention.'
The idea of an ‘invisible hand’ connecting the selfish pursuits of individual economic actors to the public good has had enormous impact on economic thinking and policy for over 200 years. With the collapse of communism in 1989 it seemed initially to have ‘ended history’; ended the argument over the best way of managing our system of production and distribution of goods and services. And, indeed, a system based on freeing the ‘animal spirits’ of entrepreneurs and capitalists to create the products and services their customers need and want has many advantages over systems overburdened by central planning, regulation and bureaucracy, however well-intentioned. Nevertheless, there must be limits to that freedom.
It may have been that in Adam Smith’s day, markets were relatively small, were served by numerous small businesses and both buyers and sellers were well informed about prices and the nature of the goods and services being traded - in other words that the conditions of economic competition theory, which Smith’s work inspired, were largely fulfilled.
Also the social interrelationship between buyers and sellers may have been sufficiently close and communities sufficiently intimate to ensure that many of the ‘externalities’ (value creation and destruction not accounted for within normal business contracts) were naturally ‘internalised’. If that was the case, are there ways in which ‘natural internalisation’ of wider societal value creation could be re-engendered in today’s globalised market place, dominated by large organisations, often with no obvious community base?
That manifestly was not the case regarding the behaviour of many of the financial institutions caught up in the current financial crisis. Their decisions paid no heed to wider societal implications. Their liability was limited while that of society was not. Their incentive and reward systems only considered financial returns to their company and the individual bonuses attached to those returns. Indeed, their systems didn’t even take into account the long term implications of their actions on the possible collapse of the system as a whole – thereby destroying at a stroke the ‘rational expectations’ and ‘efficient markets’ hypotheses on which economists had so long based their support for the free market system.
To many of us concerned with the promotion of corporate responsibility, this did not come as a surprise. We have long argued that market forces and internal company and external governance processes do not take account of all aspects of value that a company both creates and destroys. The unequivocal, public demonstration of this by the behaviour of our leading financial institutions provides us with a unique window of opportunity to articulate the scope and implications of our argument and propose ways in which companies can be held to account for the total value they create and destroy.
The increased emphasis on environmental issues over the last ten years or so has brought about some welcome changes in this regard. This has been achieved through a mixture of sound research based information, market mechanisms, government regulations and incentives and civil society pressure. There is much more to be done but lessons for getting companies to internalise other societal impacts into their management systems can be learnt.
Company impact on human rights is still poorly understood and even more poorly managed. Newsworthy negative impacts such as child labour, sweatshops and company involvement in conflict zones are better known and effectively campaigned against by human rights NGOs and these have led, in some circumstances, to improved outcomes. There are still many negative impacts and, as importantly, opportunities for positive impact, which are not understood.
The idea behind the Institute for Human Rights and Business is that these impacts need, firstly, to be much more widely understood and publicised. Secondly, we need to find mechanisms that can integrate the process of identifying and addressing these impacts into the incentives and accountability structures of companies.
As this website Commentary section alone demonstrates, the Institute is already making good progress on the first task. The real challenge, however, comes with the second. How can better knowledge of company impact on human rights be translated into improved human rights performance? What connections can be made between existing drivers of company performance and those which will bring about sustained wider societal value, so that companies can take on this wider agenda without undermining their ability to produce the goods and services and provide the incomes and pay the taxes, which underpin much of our material well being?
As noted above, the current crisis has given us a unique opportunity to address this challenge. It can only be moved forward by the coming together of leading expertise from all the relevant sectors (public, private, not for profit, civil society, and academia) to hammer out realistic expectations of company performance and incentive and accountability processes to bring that about. The arguments and proposed solutions must be so persuasive that they are acted on. That, in collaboration with its ever widening network of expert helpers and other human rights and business initiatives, is the daunting task the Institute has set itself.
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