This article was originally published on OECDONTHELEVEL on 29 July 2018.
In the fourth post of his Legacy Blog Series, Roel Nieuwenkamp encourages the responsible business conduct community to start planning for the next update of the OECD Guidelines for Multinational Enterprises.
We know already that the OECD Guidelines for Multinational Enterprises are considered to be the world’s leading instrument on corporate responsibility. But, after 42 years in existence and 5 updates, the question is: are they still fit for purpose? Are they still on the cutting edge of business ethics?
My previous blog covered three of the topics that I think need to be included in the next update of the OECD Guidelines. This blog covers three further topics: rights of indigenous peoples, taxation and disclosure.
Unfinished business: Indigenous peoples’ rights
The lack of attention to indigenous peoples’ rights is a ‘moral hole’ in the OECD Guidelines. At the time of the 2011 revision, we could not fill that hole as some countries did not support the translation of the relevant UN and ILO conventions into this corporate responsibility agreement. Much has changed since then. It is now considered international good practice to consult with local communities and indigenous peoples prior to operations and to seek their consent.
For example, ILO Convention No. 169 concerning Indigenous and Tribal Peoples in Independent Countries requires that: indigenous peoples are consulted prior to exploration or mining activities on their land and that they are able to participate in the benefits of such activities and are compensated fairly for damages they sustain. Another prominent concept is Free, Prior and Informed Consent (FPIC), which is contained in the United Nations Declaration on the Rights of Indigenous Peoples. While these instruments address the responsibilities of States, it is increasingly expected that the private sector does business in a way that upholds these rights and does not interfere with States’ obligations under these instruments. Businesses are subject to growing expectations to foster full respect for the human rights, dignity, aspirations, cultures, and customary livelihoods of indigenous peoples.
This is why the International Finance Corporation (IFC) has included indigenous peoples’ rights in its Environmental and Social Performance Standards. The International Council for Mining & Metals (ICMM) an influential group of mining companies, has committed to Free Prior and Informed Consent for Indigenous Peoples. The Chinese Guidelines for Social Responsibility in Outbound Mining Investments endorsed by the Chinese Government have also embedded FPIC. Another example is the Canadian government which has changed its position and now fully supports FPIC. This is significant as a large number of mining companies in the world are listed on the Toronto Stock Exchange.
Let’s not reinvent the wheel at the OECD with respect to these issues. Inspiration can be found in all the above-mentioned international instruments. The guiding language on indigenous peoples most relevant for updating the OECD Guidelines can be found in the IFC Performance Standards, in particular with respect to identifying, avoiding and addressing impacts on Indigenous Peoples’ identity, natural resource-based livelihoods, food security and cultural survival.
Taxation as a core corporate responsibility issue
“I don’t care if it’s legal, it’s wrong.” This quote from former US President Obama about tax avoidance illustrates the shift in thinking about tax from issues from a strictly legal perspective, to the domain of corporate responsibility. Global tax avoidance has been attracting increasing attention and ire over the past years. Public outrage over tax avoidance has been very visible. Nowadays company executives of the world’s largest MNEs are publicly taken to task over tax avoidance issues. In the midst of the financial crisis, citizens of EU countries like Greece and Portugal were furious to learn that their multinational enterprises paid almost no taxes because of fiscal arrangements involving the same jurisdictions that had put pressure on them to implement severe austerity packages. Likewise, tax base erosion and profit shifting (BEPs) has been the cause of outrage in developing countries and is increasingly viewed as an impediment to development. The Luxleaks, SwissLeaks and Panama Papers scandals exposed instances of tax avoidance that shocked the general public. They have demonstrated that corporate tax responsibility is not just a legal issue but also an ethical one.
In response, the OECD has been active in in developing creative solutions to curb these practices. It elaborated a comprehensive action plan on Base Erosion and Profit Shifting (BEPS) which has been endorsed by the G20.
Responsible tax planning as an expectation of corporate responsibility is not a new concept. Indeed the OECD Guidelines have long included a chapter on taxation. Under the OECD Guidelines, enterprises are already encouraged to design their tax governance and tax compliance in a responsible manner. Furthermore, enterprises are called on to comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate.
To date, only one tax related complaint has been filed under the complaint mechanism for the OECD Guidelines, known as the National Contact Points (NCP). In 2012, the Swiss NCP considered a submission based on a leaked report from an auditing firm that suggested that commodities giant Glencore was avoiding paying taxes in Zambia. The Swiss NCP undertook mediation with the parties which resulted in constructive engagement and ultimate agreement between the parties. Governments should be actively promoting responsible tax planning as a corporate ethics issue.
The OECD/G20 BEPS project has already been a game changer in regards to addressing tax avoidance strategies and increasing transparency of fiscal policies. Leaks will continue to expose companies’ fiscal conduct in practice. In times of ‘radical transparency’, companies have to take a critical look at their tax policies and verify whether their policies are not only legally compliant but also ethically sound. It therefore would make sense to update the taxation chapter in a future revision of the OECD Guidelines to align with the latest developments of the BEPS project and the many follow up actions.
The chapter on disclosure of the OECD Guidelines call for timely and accurate disclosure on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company. The OECD Guidelines also encourage a second set of disclosure or communication practices in areas where reporting standards are still evolving such as, for example, social, environmental and governance (ESG) risk reporting. However, the disclosure chapter no longer reflects good practice and is becoming outdated in the light of recent developments. The demand for more transparency and information on how companies deal with human rights, environmental, social and other “non-financial” issues has rapidly grown. Reporting in conformity with the standard of the Global Reporting Initiative is now standard practice and Integrated Reporting is an established concept.
In the EU, a ground breaking directive issued in 2014 made sustainability reporting mandatory (Directive 2014/95/EU). In 2017, the EU Guidelines on non-financial reporting to enhance business transparency on social and environmental matters. The EU Guidelines supplement the existing EU rules on non-financial reporting. They are based on and reference both the OECD Guidelines and the sector-specific OECD due diligence guidance instruments throughout.
A particular trend is increasing demand for information on how companies are identifying and addressing impacts in their supply chains. Reporting on due diligence is an integral step of the due diligence process and has been recognised in legislation introduced in the UK and France, as well as under the EU Guidelines. For example, EU importers of tin, tungsten, tantalum and gold covered by Regulation (EU) 2017/821 will have to publicly report on their supply chain due diligence policies and practices for responsible sourcing for these metals and minerals.
These developments are generating a shift from traditional, voluntary and sometimes “PR-oriented” corporate reporting towards more meaningful and user-oriented disclosure. The next revision of the OECD Guidelines should take into account these developments and update the chapter on disclosure accordingly.
Staying ahead of the curve 42 years on
As mentioned in the two blogs on whether the OECD Guidelines are still fit for purpose there is a lot of food for thought for a future revision of the instrument. I have addressed some of these issues more in depth; however there are several further elements also merit attention in the context of a future revision:
- The language used in the OECD Guidelines needs to be modernised.
- The link to the Sustainable Development Goals should be made explicit and elaborated on.
- The wording on value chain responsibility should be made more accessible, in line with the recently-adopted OECD Due Diligence Guidance for Responsible Business Conduct.