In October 2015, the UN Global Compact, the UN’s flagship initiative for corporate responsibility and sustainability, has expelled 130 firms for failure to report on implementation progress. During this month only 116 new businesses joined the initiative. This is third month in 2015 that the initiative had to expel more participants than new participants joined (after January and September). Participation in the Global Compact is voluntary and firms commit to ten broad principles in the areas of human and labor rights, the environment, and anti-corruption. Every participant has to report annually on progress made against these ten principles. Non-communicating participants are expelled from the initiative.
The Global Compact seems to grow much slower than anticipated. From January until October 2015, 1,072 new participants joined the initiative, while 984 companies were expelled for failure to meet the basic reporting requirement. This suggests that the total number of business participants may stagnate soon (or even decline). Some years back, UN Secretary-General, Mr. Ban Ki-moon, set the ambitious target of 20,000 participants by 2020. This vision seems to be out of reach.
The high number of expelled companies also calls into the question the current “business model” of the Compact. How useful is it to have around 100 new business participants each month, while, at the same time, having to delist an almost equal number of companies? The mandatory reporting requirement is a basic commitment that firms enter into once they join the initiative. Many firms do not seem to be able (or willing) to even meet this requirement. Since it inception, the Compact had to expel more than 5,800 businesses from the initiative!
One reason for the high turnover of participants is the Compact’s low entry barrier. Companies willing to join just need to write a letter stating their intention to work towards the ten principles and other UN Goals (such as the recently launched Sustainable Development Goals). As we all know, letters are written quickly, while substantive actions usually require significant resource commitments. Higher entry barriers would attract fewer companies. But isn’t it more desirable to have a small pool of a few highly committed firms, than a large pool of businesses with rather low ambitions, or no ambitions at all?
Without doubt, the Global Compact includes some of the world’s sustainability champions, and we should not lump together all participants. Some firms are highly committed leaders; others are in the process of integrating relevant practices into their operations and strategies; and yet others have just started their journey. There is nothing wrong with having such a diverse participant base and to offer guidance to those who want to ratchet up their commitment. But a voluntary initiative that has to expel around 1,000 participants each year, while at the same time accepting 1,000 new companies, may miss the point.
To delist those firms that do not play by the rules is not a bad thing per se. One could argue that the Global Compact is being “cleaned up.” However, delisting turns into a problem when it is not a temporary development but a constant state of affairs. There are many things that could be done to restructure the Compact. However, I believe three issues are particularly important:
- Higher Entry Barriers: Reporting should not be an outcome of participation in the Compact but a precondition for entering the initiative. Instead of allowing all interested businesses to join, it would make sense to require new participants to submit a report that outlines how the ten principles are currently addressed in the organization and what plans exist for the future. Such a policy change would ensure that new participants have some experience with reporting before entering the initiative (e.g. become aware of resources that are necessary to issue a report).
- Strengthen Value Proposition for SMEs: The vast majority of delisted firms are small or medium-sized enterprises (SMEs) – i.e. firms with less than 250 employees. Either these companies do not have sufficient resources to launch relevant activities and then report on them, or they do not see enough value in the initiative and hence do not assign relevant resources in the first place. Contrary to larger firms, SMEs do not profit much from “legitimacy gains” that are created by being associated with a UN-driven initiative. SMEs are usually strongly embedded in the local communities that surround them. The Compact’s numerous Local Networks should explicitly engage SMEs into smaller regional clusters. Such clusters are more likely to be of value to SMEs than larger, “nation-wide”, networks in which sustainability issues are discussed at a quite general level. This would require more resources to Local Networks, also to directly assist SMEs in writing sustainability reports instead of just sending them reminders.
- Reform Governance: The Compact’s governance framework consists of several entities (e.g. the Local Networks and the tri-annual Leaders Summit). In practice, however, the Board of Directors plays the most significant role, as it needs to endorse all major changes to the initiative. Although the Compact takes much pride in being a multi-stakeholder initiative, the current structure of the Board does not necessarily reflect this: there are 17 business representatives, 4 representatives from civil society organizations, 2 representatives from business associations, and 2 representatives from labor organizations. A more balanced representation of stakeholder groups is needed, especially as the Compact works under the umbrella of the United Nations, an organization that promotes inclusiveness. Without changes to the Compact’s governance framework, it will be hard to reform the initiative (e.g. to install higher entry barriers). As a UN entity, the Global Compact is ultimately accountable to the General Assembly (GA). The GA could take the lead in strengthening the Compact’s mandate, while, at the same time, calling for a more balanced representation of stakeholders.
So, what is the bottom line? The Global Compact needs to find ways to balance quantitative growth with qualitative commitment to the ten principles. The current turnover rate of new participants and delisted participants is not sustainable, and this seems to be an important lesson for an initiative focused on sustainability…
The Compact is too good of an idea to give up on. But, it won’t be this version of the Global Compact that changes the practice of corporate sustainability.