6.3 The reasons behind the emergence of private regulation

Transnational corporate conduct is increasingly being guided by private regulation, particularly by international codes of conduct such as the UN Global Compact Principles and the OECD MNE Guidelines. Globalisation can be cited as one prime reason for this growing influence of private regulation. The rapid expansion of the global market has created governance gaps in a number of policy domains, in particular between the scope of economic activities of private actors and the capacity of governments to manage their negative externalities on society and the environment.1 Moreover, national legislators face significant challenges in trying to regulate corporate transactions transcending the borders of multiple national legal systems. Difficulties arise when enforcing formal norms on transnational corporate activities, especially in weak governance zones, in so-called Failed States',orin developing countries where some governments have been reluctant to adopt and/or enforce norms that they fear might compromise the competitiveness of their economy.2

As stressed by Francis Fukuyama, another cause for the increased influence of private regulation is the absence of a leading political power or international institution that can initiate (new) ethical norms. He explained:3

This absence of a world leader that aligns all States to approve a supranational authority providing for measures and mechanisms to fill in these governance and regulatory gaps has led to the present situation. In an attempt to address the existing gaps, various private initiatives have emerged around the globe. Some initiatives offer practical solutions to existing legal and financial transnational issues for international business partners;4 others strive to 'control' the impact and consequences of economic globalisation.5 Some have resulted in a form of public regulation,6 but most involve private regulation, as illustrated in section 6.2.

A growing private regulatory regime, especially in the field of CSR, also reflects the increased legitimate authority of private actors in the global economy. This phenomenon is a result of the initiatives from companies, partly in response to global social activism by international organisations, States and NGOs.7 Another underlying reason for the increase in self-regulatory regimes is the trend of deregulation which started in the 1980s, fed by the belief that too much regulation causes a disturbance of markets. For some authors, these developments also imply the recognition of a form of global complementary governance', a concept which promotes the shared responsibility of civil society and business, together with governments, for the well-being of society and the environment.8

Along the same lines, John Ruggie,9 the Special Representative of the UN Secretary-General on the issue of human rights and transnational corporations and other business enterprises, indicated in his report released in April 2008 (the Ruggie Report):10

The Ruggie Report highlights the fact that the legal rights of transnational companies have been expanded significantly over the past generation. It explains that while encouraging foreign investment and international trade flows, this has also created instances of imbalances between firms and states that may be detrimental to human rights'. To reduce these adverse human rights consequences, the Ruggie Report draws up a principle-based framework based on the concept of 'differentiated but complementary responsibilities'- well known in the field of international environmental law - for the social actors, ie States, companies and civil society. It focuses on three foundational principles:

(1) the State's duty to protect against human right abuses by third parties, includingcompanies, affecting persons within their territory or jurisdiction;

(2) the corporate responsibility to respect human rights and (3) the need for more effective access to remedies. These three principles - Protect, Respect and Remedy - are stated in the Ruggie Report to form a complementary whole in that each actor supports the others in achieving progress.11 The Ruggie Report also points to relevant CSR private regulations including remedy mechanisms, e.g. the NCP mechanism to support the OECD MNE Guidelines (see section 6.12 below).

In sum, for the reasons explained in this section 6.3, public legislation alone does not seem fully capable of governing responsible corporate conduct at the international level, hence opening the door for many initiatives of private regulation.

The following four sections of this chapter will address the interplay between public legislation and private regulation with respect to (i) sustain-ability reporting and (ii) responsible transnational corporate conduct. In regard of both themes, firstly public legislation will be examined, following which the question of how private regulation has complemented sustainability reporting and responsible transnational corporate conduct will be examined.