Global governance: the case of global nongovernmental regimes.
As more corporations span the globe, they run into problems of ethics and conduct with the same dimension. How can these problems be addressed when no country has jurisdiction? In many cases, industries are forming self-regulating regimes that adopt operational guidelines, codes of conduct, reporting, and perhaps certification schemes. Among numerous examples, the authors concentrate on two: the Kimberley. Process, a U.N.-mandated program to certify rough diamonds as "conflict-free," and the Equator Principles, involving the social environmental challenges faced by' banks engaged in project financing. These regimes help illustrate the strengths and weakness of various organizational and operational challenges faced by such regimes regarding codes of conduct, ethical values, accountability mechanisms, administrative structures, decisions-making, and governance.
Partly in response to pressure from activist stakeholder groups and perhaps industry recognition of the imperatives of global corporate citizenship, global corporations continue to devise collective governance mechanisms in the form of codes of conduct and industry guidelines for regulating their behavior. Such collective action has been manifested in the formation of voluntary, nongovernmental regulatory associations or regimes constituted by firms seeking to control their collective action or regulate member behavior in specific issue-areas. Industry self-regulation has been defined as a regulatory process whereby an industry-level, as opposed to government- or firm-level, organization sets and enforces rules and standards relating to the conduct of firms in the industry (Gupta and Lad, 1983). Self-regulation can be effected through initiatives such as codes of conduct, reporting activities, and certification schemes (Albadera, 2008). Unlike industry self-regulation by firms in a specific country, global self-regulatory regimes are transnational and involve firms from different countries agreeing to a global code of conduct in all the markets in which they do business.
Compared to global industry regimes, industry self-regulation has a longer history at the national level. In the U.S. for example, there has long been self-regulation in the advertising industry (Neelankavil and Stridsberg, 1980). What has changed in the last decade or so is the extension of industry self-regulation to the global level and the birth of global nongovernmental industry based regimes. For example, the global chemical industry adopted guidelines after the Bhopal chemical disaster in India. Building on the awareness that emerged out of that crisis, the chemical industry's voluntary initiative called Responsible Care has been embraced by chemical associations in 46 countries manufacturing 85% of the world chemicals (ICCA, 2002; King and Lenox, 2000). The Montreal Protocol is another example of corporate response to environmental issues. Its core provisions are aimed at reducing or eliminating chlorofluorocarbons that are said to damage the earth's ozone layer. More recent nongovernmental regulatory regimes include the Equator Principles, a voluntary set of guidelines developed by banks engaged in project financing for managing the social and environmental issues related to development projects they finance internationally (IFC, 2003). In addition, the Kimberley Process, a U.N.-mandated program of collaboration between industry and government aims to create a certification system for rough diamonds to exclude "conflict diamonds" from the legitimate diamond trade. Despite their attractiveness, self-regulatory regimes are notoriously difficult to manage. The normative literature on collective action (Olson, 1965; Ostrom, 1990) predicts that self-organized attempts at collective action are not easy. This paper presents a framework for structuring global self-regulatory regimes to increase their effectiveness.
Collective action at the global level is important because issues such as the environment and sustainability are often linked on a global scale (Brundtland, 1986). Global corporate response is needed because it signifies stakeholder ownership of the problems associated with business activities. Collective industry action may be well intentioned, but its effectiveness has been questioned, mainly because of the voluntary nature of such arrangements (Gereffi, Garcia-Johnson and Sasser, 2001; Gupta and Lad, 1983; Finer, 2003). Although there are some documented accounts of successful self-regulation-at least at the national level-in such resource management areas as fisheries and forestry (Stevenson, 1991, Ostrom, 1990), the evidence generally points to a weak success record of industry self-regulation, even at the national level. The challenges of achieving effective self-regulation at the global level are even greater. Indeed, the diversity of actors and issues means that problems of domestic self-regulation may become exponentially magnified in global settings In fact, unraveling the complex issues of effective global regimes would require broadening the scope of our understanding to include pertinent issues related to the structuring of global industry regimes to ensure their effectiveness. For example, we need to understand what effects, if any, the scope of such agreements have on their effectiveness. As a transnational regime, issues of administration and the nature of individual firm commitment and how that affects the success or failure of the regime require examination.
These issues and conflicting perspectives on the preconditions for effective self-regulation raise one key imperative that we address in this paper: How can voluntary global self-regulatory regimes be structured for stability? First, the nature of self-regulation is briefly examined, including the motivations for formation. Second, we examine the nature of global self-regulatory regimes and the likely challenges they will face. Third, we present a framework for structuring global industry regimes for their effectiveness. The arguments are explored drawing on two recent examples of nongovernmental regulatory regimes: the Equator Principles and the Kimberley Process. Finally, some suggestions for practice are offered. This research makes an important contribution to our understanding of global regimes by presenting a framework for structuring regimes for stability and performance. In so doing, it fills an important gap in the sparse literature on global regimes.
Nature of Self-Regulation
According to Wotruba (1997), self-regulation, in its broadest sense, involves planning and policy-making regarding organizational issues and activities not covered by public regulation. Hemphill (2002) suggests that self-regulation exists when a firm or industry establishes its own standards of behavior where no such statutory or regulatory requirements exist, or when such standards assist in complying with or exceeding statutory or regulatory requirements. Self-regulation can be mandatory when it is initiated by the government (Ashby et al., 2004), or voluntary when it covers behavior that is discretionary. In its broadest sense, self-regulation makes clear what standards of behavior are sanctioned. Since voluntary codes often have no enforcement mechanisms, they can be unstable and subject to idiosyncratic interpretations by members (Grose, 1992), and the cooperation of members is important if the arrangement is to be effective. Hemphill (2004) observes that self-regulation at the industry level usually takes place under the administration of an industry or professional association sharing a common product, service, or method of business. Hemphill notes that sometimes a "dedicated" nonprofit organization is formed by the industry to implement and monitor a code of conduct.
Industry actors may design self-regulatory regimes for both proactive and reactive reasons. Self-regulatory regimes may emerge as a means for avoiding costly government regulation (Lenox and Nash, 2003), as well as to counter a negative public image and protect the reputation of an industry (Haufler, 2001). Wotruba (1997) cites the example of the direct selling industry in the U.S. as an example of a self-regulatory regime set up to improve its negative image and forestall government intervention. Industry actors may also use self-regulatory regimes as strategic tools by setting high conduct standards to discourage potential industry entrants or proactively use codes of conduct associated with industry regimes as a way to control the behavior of company employees whose dealings with customers offer tempting opportunities for ethically questionable actions.
Global Self-Regulatory Regimes
Wotruba (1997) was one of the first to extend the concept of self-regulation from the national level to the global domain using the U.S. Direct Selling Association (DSA) and its European regional groups as an example of a global self-regulatory regime. The DSA developed a code of conduct as part of its self-regulatory regime in response to public outrage at some of the industry's practices. The European regional DSAs also had codes of conduct until unified world codes were approved for the industry in May 1994. Although the global code allows each national DSA to modify the provisions of the code to meet the requirements of national law, the general provisions of the code were made supralegal (World Federation of Direct Selling Associations, 1994). Supralegal codes are those containing statements stipulating behavior above and beyond the minimal standards required by law.
The DSA industry regime is an example of global regimes that emerged in the U.S. and spread globally. However, global industry regimes can emerge from their inception at the supranational level. Such global regimes can occur when firms in global industries, such as international banking, engage in collective action around an issue. Sui generis global industry regimes can be conceptualized as institutions that emerge among those interested in specific issue areas with global dimensions. Global political and social regimes have a long history in political science where nations have often come together to address specific issues (Young, 1982). Regimes arise because participants share a common understanding of a particular issue. Global regimes often arise because of the realization that individual, narrow, self-interested behavior by actors in an issue area will lead to undesirable outcomes. They may also emerge for some of the same reasons mentioned earlier. For example, the Kimberley Process responded to stakeholder criticisms of the international diamond trade and its contributions to civil wars across Africa.
Much like domestic regulatory regimes, the success of global industry regimes cannot be taken for granted for a number of reasons. First, all regimes face the possibility that some firms will shirk their responsibility under the regime when it is in their self-interest (King and Lenox, 2000). This is especially the case in the absence of mechanisms to ensure compliance. Second, there is always the possibility of opportunistic behavior because some firms may adopt regime standards symbolically to gain social legitimacy without making any attempts to adopt or implement the norms expressed in the code (Abrahamson and Rosenkopf, 1993; King and Lenox, 2000). This sort of opportunism is consistent with the well-known free-rider issue in industry collective action (Shiell and Chapman, 2000; Ashby et al., 2004). Free-riders benefit from the compliance of other firms in the regime regardless of their own behavior. Indeed, in King and Lenox's (2000) study of the Responsible Care Program, the chemical industry regime showed that opportunism is always a threat in regimes. Third, self-regulatory regimes face the challenge of enforcement, or making sure that regime actors respect the provisions of the code.
Recent Examples of Global Regimes
The Kimberley Process Certification Scheme (KPCS). (See appendix). Launched in January 2003 and currently counting close to 70 member countries, the KPCS is an international certification scheme that requires any shipment of rough diamonds to or from a participating state be accompanied by a Kimberley Process certificate guaranteeing that the rough diamonds are "conflict-free." The regime is made up of governments and the global diamond industry. To support the KPCS system, the diamond industry committed to a system of self-regulation including the following: establishing a code of conduct to prevent trade in conflict diamonds; implementing a system of warranties requiring that all invoices for sales of diamonds warrant in writing that the diamonds are conflict-free; keeping records of warranty invoices and having these audited; and informing company employees of government regulations and industry policies to prevent the trade in conflict diamonds. The KPCS requires each participant to pass enabling legislation to effect procedures and to prevent the entry of conflict diamonds into legal shipments (http:///www.Kimberleyprocess.com).
The Equator Principles (EP). (See appendix). Started in December 2003 and revised in December 2006, the Equator Principles are a voluntary set of guidelines for managing environmental and social issues in project finance lending. Initially applied to investments with capital costs above U.S. $50 million, they have just been revised ($10 million is now the threshold) to ensure that more projects are subject to these baseline environmental and social standards. Adopting institutions are required to conform to the Principles, including: (1) Categorizing projects in terms of the magnitude of social and environmental effects; (2) Undertaking a full social and environmental assessment; and (3) Developing and implementing an environmental management plan based on each assessment. The Principles were developed with the International Finance Corporation's advice and guidance and reflecting its environmental and social standards. As of December 2008, 64 banks had adopted the Principles, and they now cover an estimated 80% of global project lending (http:///www.equatorprinciples.com).
While both regimes have recorded impressive results, both are plagued by some of the well-known problems associated with industry regimes, including some already mentioned.
Structuring Global Self-Regulatory Regimes for Performance
The framework presented here includes key structural, operational, and behavioral mechanisms that are hypothesized to affect regime stability and performance. They include (1) the character dimensions of the regime, (2) the strength of the regime measured by the degree of commitment to the principles and the code of conduct that guides actors in the regime, (3) the accountability mechanisms associated with the regime, (4) administrative and decision-making structures of the regime, and (5) the regime governance mechanism.
Character dimensions of a regime
The guidelines and behavioral norms associated with a global regime are often expressed in its code of conduct. How an industry code is articulated reflects its character, and the code of conduct that regulates member behavior in a global regime may be an important determinant of its stability. Character as used here refers to the scope, clarity, and coherence of the regime.
An important character dimension of a code of conduct is the scope of issues that it covers. Manley (1991) noted that the scope of a regime can vary from very narrow and selective to broad and comprehensive. A comprehensive code of conduct covers a wide range of issues while a narrow and selective code focuses on a few issues. It may be more difficult for regime actors to agree on a broader code than a narrow one (Wotruba, 1997), because finding agreement on common language and behavioral dimensions may prove more contentious the broader the scope of the regime and its code of conduct. Wotruba (1997) also suggests that regimes and codes that are proactively motivated tend to be broader while reactive codes tend to produce more specific and narrow codes of conduct.
A narrow and specific code has one primary advantage: It may be easier to get actor acceptance and, therefore, increase the potential for success. Its primary disadvantage is that it may become increasingly more difficult to broaden the scope of such a regime once it becomes operational. Yet regimes as social institutions are by their nature dynamic, and their stability may depend on their capacity to change (Young, 1982). Change in regimes come about as new issues emerge and are linked to existing ones, thereby broadening the scope. The normative research on regimes suggests that narrow scopes may be self-defeating, because it is more difficult for actors to link emergent issues with existing ones after the regime has become operational (Haggard and Simmons, 1987). Worse yet, narrow codes may end up generating behaviors at variance with the original codes, perhaps because their limited scope leaves too much room for those seeking to manipulate or evade them. Haggard and Simon (1987) cite the case of the General Agreement on Trade and Tariffs (GATT) as a form of regime with a narrow scope that succeeded in virtually eliminating trade barriers in the 1950s and 1960s, only to expose, and even encourage, nontariff barriers. The key insight here is that regimes and their codes of conduct need to be broad enough to allow for bargaining and creating linkages that will help them to be effective in the long term. Regimes are dynamic and often need to change, and making them too narrow from the beginning unduly constrains them.
The Kimberley Process has a selective and narrow scope, as described. One of its notable features has been its ability to engage in issue-linkages in response to changing political momentum and consensus. A 2006 study of the KP by Wexler (2006) noted that, at its inception, actors in the KP regime were unable to agree on a system to review national implementation, but less than 10 months into operations, participants reached a deal on peer review monitoring system. The report noted that soon after the deal on peer monitoring, key countries in each region immediately requested visits, and their experiences helped legitimize the approach (Wexler, 2006). The Equator Principles, while also fairly narrow in scope, have a broader framework for promoting environmental and social responsibility at project finance institutions.
A second character dimension of a regime is its specificity. Wotruba (1997) observes that codes of conduct can be specific or general. A code is specific if it stipulates clearly what activities or behaviors are required of actors. Wotruba (1997) suggests that specific code statements provide clearer standards for desired behavior including the nature of sanctions-if the regime has sanctions. Vague statements do not give a clear indication of acceptable and unacceptable behavior. For example, compared with the Kimberley Process, the Equator Principles are much less specific. KP clearly stipulates what the parties' responsibilities, including such details as the need for transporting diamonds in tamper-resistant containers.
The Kimberley Process and the Equator Principles illustrate how the character dimensions of regime codes may affect their performance. In terms of scope, both seem to be narrow and may in fact be described as single-issue regimes. The Equator Principles in particular have been sharply criticized for their very narrow scope, which is limited to project finance defined in a very strict sense with provisions applying to only portions of the activities of lending banks. The Equator Principles have also been criticized for excluding corporate loans and bonds and neglecting human rights. Missbach (2004) observes that because the Principles only apply to direct lending in project finance, other financial transactions with environmental and social impacts are ignored. Indeed subsequent revisions of the Principles in May 2003 further limited the scope of the EP to "direct lending." This means that the Principles were not applied to project finance deals where a bank may be a financial advisor, underwriter, arranger, or lead manager -all important ways in which a bank may be involved in financing. Missbach (2004) also noted the lack of indications that the EP regime was committed to developing policies governing other financial vehicles in the future.
Critics of the narrow scope of the Kimberley Process argue that the agreed-upon elements of the program fail to ensure that the link between diamonds and human rights abuses will be severed because of the limited scope of the certification scheme. The argument is that since trade in conflict diamonds potentially affects all diamonds, the exclusion of polished diamonds, diamond jewelry, and rough diamonds meant that some aspects of the diamond trade were effectively excluded (Duke, 2001). Also, the KP's exclusion of diamond trading within a participants' territory opened up the possibility of illegal transfers and that packages of diamonds will contain a mixture of conflict and legitimate diamonds (Schefer, 2007). Unlike the EP, the KP seems to have broadened its scope since its inception. For example, the Diamond Development Initiative, an offshoot of the KP, aims to find sustainable methods of ensuring that diamonds are mined and distributed for the benefit of local communities and local government (www.diamonddevelopmentinitiative.org), a significant widening of the original KP scope.
A final consideration is the coherence of the code, measured by the extent to which all parts of the regime operate together as a smoothly functioning system. Donnelly (1986) suggests that coherence has three important dimensions. First, there is normative incoherence arising from inconsistencies between the individual values of firms in the regime and the regime's norms. Such inconsistency may reflect an incompatibility between individual actors' organizational norms or values, or may be caused by a regime code of conduct that is so vague individual firms can assign interpretations that may clash with the norms of the regime. For example, the participants in the Equator Principles revised some of their original principles, substituting the reference to "human rights" with the term "socially responsible"-a very broad term with multiple meanings. Sometimes the ontological assumptions of actors affect how they define and apply the term "social responsibility." This sort of incoherence makes it difficult for regime actors to apply a uniform understanding to the norms that guide the regime. Second, there is procedural incoherence, arising from incomplete decision-making procedures or structures associated with the regime. Finally, incoherence may arise when actors use established decision-making procedures to undermine the substantive norms of the regime because of inconsistencies between the regime's own norms and procedures.
A good example of actors using established procedures to undermine regime norms may be found in the reaction of some banks in the EP to findings of the "Extractive Industries Review" -an independent study of oil, mining, and gas projects financed by World Bank. It is reported that on April 14, 2004, then World Bank President Paul Wolfensohn received a letter signed by 11 EP Banks, acting as a lobbying group, urging him to reject most of the report. The banks opposed the proposal that the World Bank Group withdraw from lending to coal immediately and oil by 2008, arguing that these extractive activities provide developing countries with revenues necessary to alleviate poverty. Simon McRae of the Friends of the Earth U.K. is quoted as saying, "One of the most distressing things we have seen this year is how Equator banks have formed themselves into a lobby group to block pro-poor reforms at the World Bank. Certainly Equator banks have a right to express their own opinion, but when they band together to become obstructionists it deals a blow to their integrity" (Baue, 2004). By applying lobbying tactics, the banks were effectively using established decision-making procedures to undermine some of the very norms of the EP regime. The same sort of lobbying strategy was adopted by the jewelry industry in key states within the Kimberley Process to exclude polished diamonds and diamond jewelry from the scope of the Kimberley Process (Duke, 2001). What a lack of coherence does is to weaken the regime and the chances for its stability and success.
Regime strength and participant commitment
The strength of a regime is indicated by the extent to which participants comply with its provisions. A regime is strong when participants comply with the provisions even if they are detrimental to their short-term self-interest. The literature uses the concept of regime strength to describe the degree to which regime actors accept and comply with the governing code of conduct (see e.g., Donnelly, 1986, Hass, 1983), and we borrow from that literature. According to Donnelly (1986), the strength of a regime may best be understood by looking at two dimensions: (1) the degree to which members of the regime abide by its provisions and make use of the norms, procedures, and codes of conduct to which they have committed themselves as members, and (2) the extent to which the underlying values of the code are clearly articulated.
First, regime actors must abide by the provisions of the code for it to work. It was reported that soon after the adoption of the Equator Principles, some major banks financed the Baku-Tibilissi-Ceyhan oil pipeline, which, when completed, will run from Azerbaijan to Turkey via Georgia. This project has been sharply criticized for numerous violations of environmental and human rights laws (Missbach, 2004), thereby violating one key rule of regime strength and stability.
Second, the strength of a regime is determined by how well the ethical values underlying the code of conduct are articulated. For example, the basic ethical values underlying the Equator Principles' code of conduct include respect for the environment, sustainable principles, and corporate stewardship of economic and social issues associated with their activities. A clear articulation of the underlying ethical values strengthens a regime because it makes it easier for individual actors to integrate the code into their organizational ethics. The preliminary evidence on the Equator Principles shows that the code that guides the regime has failed to clearly articulate the underlying values. In fact, an exemplar of what the Equator Principles failed to do can be seen in the 2002 Collevecchio Declaration by some civil society groups as a roadmap to sustainability for the financial sector (Missbach, 2004). For example, the Declaration has put forth the principle that actors in the regime subscribe to "doing no harm." They suggest that financial institutions commit to do no harm by "preventing and minimizing the environmental and/or socially detrimental impacts of their portfolios and their operations."
At a deeper level, the ethical values underlying these norms are a fundamental commitment to social good and a commitment to social responsibility and sustainable development. Other ethical values inherent in the general norms of the regime include a commitment to honesty, fairness and a commitment to be a good corporate citizen. The Kimberley Process also seems to have failed on this score. Underlying the regime is the value of protecting human rights, a value that ironically seems antagonistic to the Kimberley Process at the moment. A failure to clearly articulate the fundamental ethical values underlying the codes of conduct in regimes may make it more difficult for regime actors to internalize the code provisions. Clearly articulated core values can serve as guides for developing individual codes of ethics in member organizations. Since ethical codes guide behavior of internal stakeholders (Trevino and Brown, 2004), core values expressed in codes will help regime actors develop greater commitment to a regime's codes of conduct. Usually, the preamble to the regime codes gives some indication of the underlying ethical values. The basic values underlying both the KP and the EP are vague.
It is not surprising that both the KP and EP regimes fail to clearly articulate fundamental values because one of the difficulties in regime formation is agreement on fundamental issues. The literature on institutional bargaining and regime formation shows that actors often engage in bargaining to reach consensus. The normative literature indicates that regime actors anxious to reach agreement often focus on a few key issues and try to arrive at outcomes that will be broadly acceptable. In the process, they avoid or ignore controversial issues (Raifa, 1982; Young, 1991). Therefore, it is not surprising that regime actors may try to ignore the contentious issues such as articulating fundamental values for fear of jeopardizing regime acceptance. However, any such failure may come back to hurt the regime in the long term.
Stakeholders, advocacy groups, governments, and publics assume that those engaged in collective action will realize the basic expectations they set for themselves. Indeed, Keohane suggests that the emergence of global regimes such as the U.N. Global Compact, and, one might add, regimes such as the Equator Principles and the Kimberley Process, are in some ways responses to demands that corporations be accountable for their actions. Although accountability is important for regimes to be effective, it is not always clear what constitutes accountability. Keohane (2008) discusses three elements that must be present for accountability to be effective: (1) standards that those who are held accountable are expected to meet (regarding the Kimberley Process and the Equator Principles, the codes of conduct that guide each regime become the standards of expectation), (2) the availability of information to accountability-holders so that they can evaluate the performance of those who are held to account, and (3) the ability of accountability-holders to impose sanctions by attaching costs to the failure to meet the standards.
These three elements can only be effectively deployed when at least three conditions exist: transparency in performance, some form of monitoring of the regime actors, and a way to control the behavior of the agents. Transparency refers to the degree to which information is disclosed and stakeholders are consulted by the agents in the regime. Monitoring implies oversight of activities, so accountability-holders can determine whether the agents are fulfilling their performance obligations. Internal control is necessary to ensure that members of the regime are meeting the standards they set themselves.
Although both the Kimberley Process and the Equator Principles have very clear mandates both regimes have been criticized for their lack of transparency and accountability. For example, the Equator Principles has no formal mechanism for ensuring accountability, since actors essentially police themselves (Missbach, 2001). Indeed, the Kimberley Process subverts the norm of transparency when it states: "Participants and observers should make every effort to observe strict confidentiality regarding the issue and the discussions relating to any compliance matter" (Kimberley Process Working Document, 2002). Similarly, actors in the Equator regime have not supported public disclosure of information on their transactions. For example, while borrowers are required to prepare environmental assessments before project appraisals and loans are granted, no provisions compel borrowers to release the environmental reports. Keohane (2008) suggests that people often equate accountability with power, and speculation suggests that regime actors may equate secrecy with power, while equating transparency with yielding power to accountability-holders. However, without transparency, it is impossible for stakeholders to assess whether banks are in compliance with the code of conduct, and the accountability mechanism of the regime may be weakened. Yet, unless accountability-holders have a say on how the regime is performing, the very reason for a regime's existence will be subverted. As Hemphill (2004) observes, the "final arbiter of the effectiveness of industry self-regulation is the consumer of the respective industry's products and services."
Another element of accountability is monitoring. In its review of the Kimberley Process in 2002, the U.S. General Accounting Office, an investigative arm of the United States Congress defines a monitoring mechanism as one that "consists of continuous monitoring and evaluation to assess the quality of performance over time in achieving the objectives and ensuring that the findings of audits and other views are promptly resolved." Here again, both the KP and EP have been criticized for a lack of regular, independent monitoring of their operations. It has been suggested that actors in the Kimberley Process regime have balked at greater monitoring for fear of giving out information that may compromise commercial confidentiality of industry members, and national sovereignty in the case of governments (Smillie, 2002). The author notes that the cost of monitoring has also been cited as a reason for the reluctance of regime actors in the Kimberley Process to move further on monitoring. One result is that actors in the Kimberley Process have refused to permit outside controller's access to their trade regulation mechanism. Instead, the regime calls for the Chair of the Process to establish "review missions" if there are questions about a participant's compliance with regime rules. Such review missions are to be called upon "where there are credible indications of significant noncompliance with the Certification Scheme, and the affected regime actor consents (the KP Certification Scheme Document, Section VI. 14). In general, monitoring proposals in the KP remain vague. Indeed, the General Accounting Office review of the Kimberley Process agreement in June 2002 and found it seriously deficient in monitoring. It noted that "even acknowledging sovereignty and sensitivity constraints, the Kimberley Process scheme's monitoring mechanisms lack rigor." The scheme risks the appearance of control while still allowing conflict diamonds to enter the legitimate diamond trade and, as a result, continue to fuel conflict." As Smillie (2002) observes, this absence of effective monitoring in the KP provisions compromises an otherwise significant regime and weakens it.
The final requirement for accountability is a system of controls that ensures compliance with the regime's core provisions. The Kimberley Process has been criticized for a lack of such internal controls. For example, each country in the KP was expected to develop and implement a system of internal controls to track the origin of diamonds and ensure that conflict diamonds do not enter the legitimate diamond trade. The KP does not specify any mandatory controls, and this has contributed to weak measures adopted by many countries (Wexler, 2006).
Keohane's (2008) observation that accountability involves a power relationship between accountability-holders and agents is important. As he puts it, anyone who can hold you accountable has power over you-"a situation which you naturally resist and would like to reverse." Regarding the Equator Principles, for example, accountability viewed within the lens of a power play may mean that local communities where projects are sited should be actively consulted and have a say in the final decision. The banks, on the other hand, may resist this if they believe that stakeholders are trying to unduly influence the process. No matter who wins or loses the power play, it is in the common interest of all actors in a regime, both the accountability-holders and the agents, to accept that accountability is important for a viable and sustainable regime.
Administrative structures and decision-making procedures
An important prerequisite for the implementation of any industry self-regulatory regime is an organization for its administration. Industry codes at the domestic level are typically administered under the auspices of trade associations (Wotruba, 1997). In the case of global regimes, there are serious administrative challenges, and the existence of some administrative structure should help the implementation processes. However, a lack of formal administrative structures need not be a reason for a regime's failure as long as there are clear procedures to guide actor decision-making. Indeed, a loose administrative structure may confer a certain amount of flexibility on the regime, while formal structures may promote bureaucracy and could lead to the reification of structure at the expense of efficiency in bargaining and decision-making.
The Kimberley Process has shown that a lack of formal structure need not necessarily hamper collaboration in a regime. The Kimberley Process operates more like what Mintzberg (1979) calls an ad-hocracy-largely temporary organizations formed around a common shared purpose whose success depends on tightly coordinated activities. A distinguishing feature of ad-hocracy is that members often lack the formal tools for coordination. The Kimberley Process operates wholly as an ad-hoc organization. There is no permanent secretariat and all labor is voluntary. The regime is overseen by a chair who is elected annually, while the business of the regime is conducted through various working groups and committees whose membership is settled through informal negotiation. Maintenance of the KP web site rotates with the chair, and the on-line statistics are managed by the Canadian Department of Natural Resources, which collects data and generates reports. The KP has relied heavily on sharing information and experience, using consensus and diplomatic pressure and the threat of expulsion for noncompliance. The latter involves a ban on trading in diamonds with other members. These are the main incentives for ensuring collaboration (Wexler, 2006). The Equator Principles, on the other hand, has evolved since its formation in December 2003 from a temporary structure to a fairly formal administrative structure. The EQ currently has a chair assisted by a steering committee with direct links to the International Finance Corporation (a branch of the World Bank). In addition, there are seven working groups with specific responsibilities for the different items related to the scope of the Principles.
Although flexible administrative structures have benefits, there are some weaknesses to excessive informality and adhocracy as a form of governance and administration. First, ad-hoc administrative structures tend to depend on experts and volunteers who may never meet again once their particular project disbands or their tenure lapses. This means little continuity. However, since one important characteristic of regimes is their dynamism and need for change, it may not always be easy to build on past achievements, and a certain amount of inefficiency may be inevitable as each group of experts and volunteers takes over regime affairs. At a minimum, a permanent professional secretariat with a skeletal staff to maintain regime records should help continuity and promote efficiency. Also, standardizing decision-making procedures can be helpful and limit time spent agreeing on how to resolve issues.
How a regime is governed in terms of the private institutional arrangements (Williamson, 1985) the actors put in place has an important bearing on the regime's stability and success. There are two opposing views on the nature of institutional governance mechanisms most suitable for self-regulatory regimes: one is that regimes need sanctions in the case of violations of the norms, and the other is that self-regulatory regimes can function without sanctions.
It has been suggested that self-regulatory regimes are more likely to fail without the "iron fist of sanctions" (King and Lenox, 2000). The argument is that without mechanisms to ensure that firms who violate the codes of behavior are sanctioned, violations may persist (Grief, 1997). Indeed, one study of the Responsible Care Program, the self-regulatory industry regime in the chemical industry, casts doubt on the strength of social control (i.e., the absence of sanctions and the use of peer pressure) and confirms that regimes without explicit sanctions are less likely to succeed (King and Lenox, 2000). The authors concluded that the potential for opportunistic behavior was so great that effective self-regulation was difficult to maintain without explicit sanctions and that the isomorphic pressures expected to engender compliance were weak at best. King and Lenox (2000) also suggest that some actors may use the regime standards as a smokescreen so that it becomes impossible to differentiate those that are genuinely adhering to the standards and those that are not. Other researchers have argued that some actors may adopt the regime standards only symbolically because of the social and political legitimacy that membership confers on participants (Abrahamson and Rosenkopf, 1993). King and Lenox (2000) observe that although it's difficult to determine whether such actors fail to adhere to the standards as a matter of deception or because they are naive, the fact is they fail to make the required changes in behavior. The viability of sanctions in cooperative systems has also been studied. For example, research has shown that sanctioning systems in social dilemmas or situations requiring cooperation promotes trust and cooperation (Robbins, 1995; De Cremer et al., 2001). The fact is a sanctioning system creates an incentive for actors, who fear the penalty. In game-theoretic terms, sanctions also alter the pay-off structure by making it costly for actors to violate the norms of the regime. Arguments for explicit sanctions echo those made by institutional theorists, namely that relationships are best governed with formal contracts and not trust and goodwill (Williamson, 1985). What is important, though, is to examine how feasible the sanctioning mechanisms are in a global regime that involves cross-jurisdictional domains.
First, sanctions are only useful when violators are discovered and punished. Unless there is an effective monitoring system to catch violators, the effectiveness of any sanctioning system will be in doubt. In global regimes where the actors may be spread across several jurisdictions and geographical areas, it may not be easy to discover who is violating the code. Second, even if violations are known, there is no reason to suggest that all actors will agree on the severity of the violation. Indeed, some violations may be forgiven by some actors because of the circumstances. Not all violations of group norms are equal, as context and inferences may determine how people perceive them (Ramseyer, 1991). Finally, in cases where global regimes rely on national chapters or governments to enforce sanctions, there are additional issues such as the adequacy of legal institutions and the vigor with which national chapters or governments enforce the law. Therefore, while sanctions may help regime stability in principle; their value in global regimes is by no means assured.
The second view, and one that seems more sustainable in the end, is that self-regulation can succeed in the absence of explicit sanctions and that member behavior can be controlled through such informal mechanisms as coercion, the transfer of norms, and the diffusion of best practices (Nash and Ehrenfeld, 1997). Proponents of this perspective draw on institutional theory (DiMaggio and Powell, 1991) to suggest that institutional forces can act as indirect control mechanisms to ensure compliance. The argument is that actors can use coercive forces such as publicizing the names of nonconforming members (Braithwaite, 1989).
The mechanism through which such coercive forces are supposed to work is the fear of the loss of reputation by violators or nonconformists. But that in itself presupposes that people care enough about their reputation or that violations of standards will become known. National industry regimes may be able to deploy institutional forces effectively to secure regime compliance, but in global regimes neither explicit sanctions nor institutional forces seem strong enough, unless constraints discussed earlier are addressed.
There is reason to believe that the absence of sanctions, coupled with the presence of internal actor commitment, would help regime stability in the long run for at least three reasons. First, although sanctions may enforce cooperation and trust temporarily, sanctions may ultimately, in a perverse way, reduce the incentives for actors to be self-motivated to comply with norms (Mulder et al., 2006). Mulder et al. make the argument that the presence of a sanctioning system could be interpreted as a signal of distrust toward group members, and the sanctioning system might indicate to members that they are not trusted to cooperate voluntarily. More important, everyone in the group may assume that the only reason people in the group cooperate is the presence of a sanctioning system (Tenbrunsel, 1999). Mulder et al. (2006) found that the presence of a sanctioning system actually encouraged dependence on it to the extent that participants in a social dilemma situation actually defected when the sanction was removed. They also found that sanctions reduced self-activated cooperation and trust. Their findings are consistent with those of Yamagishi (1986), who reported from his study of trust in Japan and the U.S. that long-term sanctioning systems undermined trust because people tended to be less trustworthy as soon as the sanctioning system was removed. Organizational research has also shown that trust among actors is more likely to endure when it emerges voluntarily (Luhman, 1988). The point here is that trust and cooperation, and by extension adherence to the norms of a global regime, are more likely to endure in the long run when they are voluntary and not because there are sanctions.
Second, there is reason to suggest that self-activated compliance (intrinsic motivation) is likely to be more effective than compliance that is externally imposed (extrinsic motivation). Intrinsic motivation here means that firms who are part of the global regime adhere to the norms of the regime, not so much because of the sanctioning system but because they see this as part of their social and ethical responsibility. The presumption is that when participants see their membership in the regime as an ethical responsibility and benchmark of global corporate citizenship, their commitment is more likely to be sustainable. Indeed, some organizational scientists have questioned the effectiveness of ethics programs that are based on punishing violations of the law (compliance programs) compared with those based primarily on organizational values (values-based approaches). According to Paine (1994), the latter approach should be more effective than the former because it is rooted in personal self-governance. She argues that compliance programs define ethics in legal terms rather than ethical aspirations, thereby implicitly endorsing what she calls a "code of moral mediocrity." Trevino et al. (1999) similarly concluded that a values-based approach to ethics works best because it motivates employees to aspire to ethical conduct. This same argument can be made for sanction-free regimes.
Finally, one needs to look at the practicality and effectiveness of any sanctioning system in a global regime. The underpinning for an effective system is the ability to first prevent violations. Compliance is assured either through the penalty that comes with any violation as well as the sanctioning system's ability to prevent violations in the first place. However, unless a self-regulatory system is transparent enough for violations to be known, and unless actors care about the penalties in the form of a loss of reputation, the sanctioning system will not be effective. For example, before it was reinstated in 2007, Congo-Brazzaville was removed from the scheme in 2004 because it was unable to prove the origin of its gems, most of which were believed to have come from neighboring Congo-Kinshasa. For countries economically dependent on diamond exports, this can be a substantial punishment, since it disallows trade with much of the rest of the world.
The emergence of global regimes marks an important movement toward global governance, a situation in which advocacy groups and businesses act without the direct government dictates, even as governments remain important actors (Keohane, 2008). Globalization has contributed to the emergence of nongovernmental actors in global governance, leading ultimately to rule-making by global corporations and nongovernmental entities in areas that had hitherto been the exclusive domain of governments (Rosenau, 1995; Hall and Biersteker, 2002). How such nongovernmental regimes operate is important, and this research sought to fill some of the gaps in our understanding by providing a framework for that analysis.
As a form of collective action, global regimes face many challenges, and structuring them for effectiveness is crucial. Although this research draws upon two recent global regimes, the Equator Principles and the Kimberley Process, to illustrate some key arguments, the research is not strictly an evaluation of both regimes. Nevertheless, both regimes may be important examples of the nature of global regimes in the future, and both regimes have recorded some important successes. Wexler (2006) observes that within three years of its inception, the Kimberley Process is credited with exponential growth in legitimate diamond exports. In 2005, for example, Sierra Leone exported $142 million of diamonds, up from $26 million in 2001. By 2003 the Democratic Republic of Congo had its best diamond export year in history, and the vast majority of international trade and production is now moved through official channels sanctioned by the Kimberley regime (Wexler, 2006). The Kimberley Process has also enjoyed excellent cooperation among its members, with many countries involved in the decision-making processes. Despite weaknesses, the Equator Principles has made some important preliminary progress. Its membership has expanded from 10 banks in 2003 to 64 banks by December 2008. Today, over 70% of all global project finance is channeled through the regime. Participating banks have committed themselves to applying the principles outlined in the regime to all industry sectors, including mining, oil and gas, and forestry. Progress on implementation has led to the revision of the initial principles (2006 Equator Principles II). The revised principles commit project finance banks to funding only projects that comply with the scheme and to implementing the scheme in their internal business and risk management processes (Thomas, 2007). We should recognize that both the Kimberley Process and the Equator Principles are still evolving and this analysis is by no means the final story on these two institutions.
Implications for practice
Notwithstanding their weaknesses, both the EP and KP regimes have demonstrated that global regimes can work. Besides the issues discussed in the framework, global regimes can do more to increase their effectiveness. First, regimes must have transparency, which is important for accountability to be effective. Vital communications relating to the regime should be centralized, and access to these made easy so that the accountability-holders can have the data required to decide whether the actors are complying with the code or guidelines of the regime. For example, the Kimberley Process can increase its transparency by publicizing detailed statistical data on diamond production and trade. Such data then becomes an important way to determine whether the regime is working or not. Similar recommendations on transparency have been made to the Equator Principles regime. A group of NGOs that work on finance and sustainability met in Collevecchio to assess the Equator Principles and issue recommendations that have come to be known as the Cellevecchio Declaration. It urged the Equator Principles to commit to transparency, noting that "financial institutions must be transparent to stakeholders, not only through robust, regular and standardized disclosure, but also by being responsive to stakeholder needs for specialized information on financial institutions policies, procedures, and transactions (http://www.banktrac.org/index.php?id=53).
Second, because regime effectiveness depends on the extent to which the actors fulfill the mandate, the effectiveness of the monitoring mechanisms is important. Monitoring determines the degree of compliance and may be one of the best ways to determine norm violations as well as isolate and hold violators accountable. Two options are available: peer or third-party monitoring. Although a certain degree of self-monitoring is essential for regime effectiveness, the legitimacy of any monitoring system will be enhanced when it is done by outsiders, either peers or independent third parties. Indeed, one important criticism of the Kimberley Process is its lack of any regular, independent monitoring of the participants' implementation of the certification schemes (Schefer, 2007). Similarly, calls have been made for the establishment of an independent accountability mechanism for the Equator Principles (Missbach, 2001). More important, sanctions need to be applied when violations are discovered. Lenox and Nash (2003) found that failure to expel members for noncompliance invited under-performing firms to join but fail to comply with the regime norms.
Peer monitoring seems attractive in the sense that all actors understand the evaluation criteria and what is expected. What is open to question may be the legitimacy of the results of such peer reviews by stakeholders and publics. Where peer review is voluntary, its effectiveness may be further weakened by the fact that those who comply will be the very people who would do so anyway while violators will be less enthusiastic and likely avoid it altogether. The Kimberley Process has this sort of quasi-voluntary peer review. This regime calls for the chair, with the affected actor's consent, to establish a peer review process if there are credible indications of "significant noncompliance" (Section VI. 14 of KPC Document).
Third-party monitoring mechanisms may be more effective but be more difficult to put in place because actors in a regime may see it as surrendering their independence. Also, the information asymmetries between outside stakeholders and regime firms means that unless regime actors are truly transparent, it may be difficult to evaluate compliance accurately. Nevertheless, third-party verification is preferable to peer monitoring. What firms surrender in independence will be more than offset by the legitimacy they gain in the eyes of outside stakeholders and the public. The greater legitimacy arises from the perceived independence and neutrality of the third party. Missbach (2004) suggests that exemplars for third-party verification may be found in existing accountability mechanisms of the World Bank Group and the Asian Development Bank. Another important example of third-party monitoring is the case of the Responsible Care regime of the global chemical industry. The International Council of Chemical Associations monitors and coordinates Responsible Care programs implemented throughout the world. An independent third party certifies that each Responsible Care company has a Responsible Care management system in place (Hemphill, 2004).
Fourth, although often not a subject of extensive exploration, a regime's leadership may be important to its success, primarily in its formation. Young (1991) observed that individual leadership is often relegated to the background in regime analysis. Young defines regime leadership in terms of "the actions of individuals who endeavor to solve or circumvent the collective action problems that plague the efforts of parties seeking to reap joint gains in the process of institutional bargaining." Leadership need not be limited to individuals, since organizations within the regime can play a critical role. Powerful companies in industry regimes are in the best position to offer leadership because they will invariably have more resources. At the same time, larger actors stand to benefit the most from a positive industry image and suffer the most in the case of a negative image. In the diamond industry, De Beers of South Africa will be a candidate for leadership in the Kimberley Process. The 10 convening banks of the Equator Principle are in the best position to offer leadership. Indeed, zealous activity by regime leaders can play a key role in promoting cohesion in the regime. The normative literature in game theory suggests that zealous activity by some actors in a cooperative situation can overcome some of the problems of collective action (Olson, 1965).
Fifth, as mentioned in relation to regime strength, actors in a regime need to make internal commitments to the regime for it to be effective. Indeed, Ashby et al. (2004) suggest that the ability of an industry regime to overcome free-riding is contingent on the individual firms' compliance motives. One important approach to making this internal commitment is for participants to make the code part of their internal ethical values. As mentioned, a clear articulation of the fundamental ethical values underlying the regime's code will help the process of developing internal commitment to it. In addition, organizational leaders must actively support the core ethical values that underpin the regime's code. The role of leadership in building an ethical organization is well known (Trevino and Brown, 2004).
Finally, the loss of reputation remains perhaps the best mechanism for holding actors in a voluntary regime accountable and compliant. In this respect, stakeholders, the general public, and peers are in the best position to deploy this mechanism. Although the fear of loss of reputation can be used as a hostage for performance, it has limits. For example, Lipson (1991) has shown that individual actors who have no intentions of dealing with others in the future care little about loss of reputation. In other cases, some violations can be forgiven or viewed as not so important. Therefore, enhancing the mechanisms by which a loss of reputation can have the desired impact will be important. This can be done by publicizing membership and activities of the regime widely, and by incorporating active stakeholder participation. Both the Equator Principles and the Kimberley Process can co-opt environmentalists and activist organizations such as those who put up the Collevecchio Declaration and Global Witness-groups committed to advancing sustainability and human rights, respectively. This argument is consistent with institutional theorists who suggest that publicizing the names of nonconforming members in a regime can lead to public scrutiny and the deployment of social sanctions (Braithwaite, 1989; O'Hare, 1982).
Nongovernmental regulatory regimes will continue to be an important part of global governance. Both the Equator Principles and the Kimberley Process have shown that in spite of challenges, global regimes can perform credibly if they are structured to enhance their effectiveness. This research has provided some preliminary ideas on the major issues related to strengthening such nongovernmental regimes. This and additional research should further enhance our understanding of these emerging, global organizational issues.
The Kimberley Process (www.Kimberleyprocess.com)
The Kimberley Process and System of Warranties is a U.N.-mandated system that came into effect in November 2002. Conflict diamonds came to the attention of the world media during the civil war in Liberia and Sierra Leone. The U.N., governments, the diamond industry, and NGOs (e.g., Global Witness, Amnesty International, and Partnership Africa Canada) came to realize the need for a global system to prevent conflict diamonds from entering the legitimate diamond supply chain. They developed an agreement called the Kimberley Process which requires participating governments to ensure that each shipment of rough diamonds be exported and imported in secure containers, accompanied by a uniquely numbered, government-validated certificate stating that the diamonds are from sources free of conflict. Under the Kimberley Process, diamond shipments can be exported and imported only within co-participant countries in the Kimberley Process. No uncertified shipments of rough diamonds will be permitted to enter or leave a participant's country. In November 2002, 52 governments ratified and adopted the Kimberley Process Certification System, which was fully implemented in August of 2003. Today, 71 governments, in partnership with the diamond industry and NGOs, are committed and legally bound to the U.N.-mandated process. Kimberley Process participants undergo periodic previews, along with peer monitoring, to ensure compliance. All countries that are participants of the Kimberley Process are closely monitored. The Kimberley Process covers the following areas:
After rough diamonds are mined, they are transported to government diamond offices.
Export (Kimberley Process)
After arriving at the government diamond offices, the source of the diamonds is checked to ensure it is conflict free. The diamonds are then sealed and placed into tamper-resistant containers and issued a government-validated Kimberley Process Certificate bearing a unique serial number. Seventy-four countries have implemented the principles of the Kimberley Process and have it enshrined in their national law. Only these countries may legitimately export rough diamonds
Import (Kimberley Process)
Diamonds can be legally imported only into one of the 74 Kimberley process countries. Once diamonds are imported, the government customs office, in conformance with its national procedures, checks the certificate and seals on the container. Any rough diamonds without a government-validated Kimberley Certificate or that are unsealed are turned back or impounded by customs.
Manufacturing/trading (system of warranties)
Once a diamond has been legitimately imported it is ready to be traded, cut and polished, and set into jewelry. Several companies may be involved in this process. Each time the diamond changes hands it must be accompanied by a warranty on invoices stating that the diamond is not from a conflict source. This is called the system of warranties. Manufacturers and traders are required to audit these systems of warranties statements on their invoices as part of their annual audit process and to keep records for five years.
Retail (system of warranties)
Retailers are responsible for ensuring that the diamonds they stock and sell carry a warranty that they are conflict free. Retailers are required to audit these systems of warranties statements on their invoices as part of their annual audit process and to keep records for five years. The warranty does have to appear on the consumer's receipt. But by implementing measures for greater supervision, compliance, and accountability within the diamond trade, consumers can be assured that the diamonds they buy are from conflict-free sources. Consumers can ask for assurances from their retailers in this regard.
The Equator Principles I and II (www.equatorprinciples.com)
The Equator Principles I (2003)
* Projects with a total capital cost of $50 million or more will be screened for their social and environmental risk and ranked as A (high), B (medium), or C (low), in accordance with IFC guidelines.
* Borrowers for category A and B projects must complete an environmental assessment (EA). Borrowers for category A projects must also prepare an environmental management plan (EMP).
* The EA report must address 17 different issues, including: land acquisition and land use; involuntary resettlement; and consideration of feasible environmentally and socially preferable alternatives.
* Borrowers for A and B projects must consult groups affected by the project, including indigenous peoples and local NGOs. The EA must be available to the public.
* The borrower is covenanted to comply with its EMP, provide regular compliance reports, and, if necessary, decommission facilities in accordance with an agreed decommissioning plan. If the borrower does not comply, it could be deemed to have defaulted on the loan.
* "As necessary," lenders will appoint an independent environmental expert to provide additional monitoring and reporting services.
Equator Principles II (2006)
* The Principles now apply to costs above $10 million (previously $50 million).
* The Principles now also apply to project finance advisory activities.
* The revised Principles now cover upgrades or expansions of existing projects where the additional environmental or social effects are significant.
* The approach in applying the Principles to countries with existing high standards for environmental and social issues has been streamlined.
* Each participating bank is now required to report annually on the progress and performance of implementing the Equator Principles.
* The Principles apply stronger and better social and environmental standards, including more robust public consultation standards.
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Henry Adobor, Quinnipiac University Ronald S. McMullen, Quinnipiac University
Dr. Adobor conducts research and has published in the areas of strategic alliances, ethical leadership, and inter-firm collaboration. Dr. McMullen focuses his research and writing on entrepreneurship, especially the development and training of entrepreneurs, supplier relationships, leadership, and small business development.
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|Author:||Adobor, Henry; McMullen, Ronald S.|
|Publication:||SAM Advanced Management Journal|
|Date:||Jan 1, 2013|
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