Directorate for Financial, Fiscal and Enterprise Affairs

This paper explores the differences, similarities and synergies between voluntary and binding approaches to international rules. Voluntary efforts to ensure that firms adhere to appropriate standards of business conduct have been an important recent development in international business. These efforts have included the publication of codes of conduct describing the nature of a firm’s commitments in such areas as environment, labour, product safety and bribery as well as implementation of specialised management systems designed to help firms honour these commitments. Yet, some NGOs and labour unions question the credibility of these efforts and wonder whether initiatives that do not have the force of law can ever be effective. This paper notes that all approaches to the social control of business organisations -voluntary and legally binding -have distinctive shortcomings. These include problems of: credibility arising from imperfect monitoring and enforcement; capture of the control machinery by vested interests; inertia and inflexibility. For this reason, the problem facing would-be designers of global rules is not to choose between voluntary and binding approaches, but to find a judicious combination of the two approaches that is well adapted to the control problem at hand. The paper also emphasises the strong similarities and synergies that exist between firms’ voluntary efforts and any system of binding rules that might eventually emerge. The similarities arise because the effectiveness of both voluntary and binding systems depends on the same intangible resources -consensus and expertise. Businesses’ voluntary efforts to observe appropriate standards have strong synergies with attempts to build binding systems of rules because they provide a mechanism by which the necessary intangible resources can be accumulated. In this sense, the voluntary efforts currently being undertaken by firms, in collaboration with NGOs and governments, may serve as precursors to more formal systems of rules. In most cases, however, the accumulation of these intangible assets is necessarily a slow and painstaking process. The creation of global rules that are not underpinned by the global intangible resources that will make these rules effective are not likely to be successful.