The report maintains that voluntary measures have thus far failed to bring about the changes their framers had in mind, particularly due to problems associated with self-enforcement and self-reporting. The report concludes that if voluntary codes of conduct do not begin to show results, the nongovernmental organizations (NGOs) that pressed for their adoption will turn away from voluntary codes and toward legal mechanisms.

The Human Rights Watch report was intended as a shot across the bow of industries that are signatories to various codes of conduct. First, it tells these companies that if they do not start abiding by these codes, NGO pressure will return -- and direct lobbying for changes in the law may result. Second, it points out the degree to which this style of regulation has taken root and shows Human Rights Watch's recognition of the evolving role of corporate agreements as a response to free trade agreements.

The Human Rights Watch argument is instructive for a number of reasons. It presents an update on the development of this new sphere of regulation, and it also suggests that the group underappreciates (or finds it advantageous to downplay) the degree to which these measures are changing business. Also, in calling 2007 a decisive year, it suggests that the forces bringing about these changes will lose patience with an approach that is, in fact, working.

The year 2007 will indeed be relatively quiet as far as the development of new corporate codes of conduct goes, but it still will be a critical year. First, over the next 12 months, the web of voluntary agreements coming into effect will reach critical mass and the broader public will come to see that commercial interests are adjusting to them. Once the public becomes familiar with the web of agreements governing global commerce, the way these agreements are made will change dramatically. This process will likely last through 2007 and into 2008, where a confluence of factors -- particularly the U.S. election and the Beijing Olympics -- will challenge Westerners' views of how the world works and should work.

The web of de facto regulation

The past decade has seen the simultaneous growth of multinational corporations' activity in developing countries and increased Western interest in international labor rights and international environmental protection. Western NGOs are increasingly concerned with ensuring that the protections and regulations Westerners have put in place for themselves through labor laws, environmental regulation, consumer protection and fair business practices also are put in place in developing and emerging countries.

For example, most supermajor oil companies:

• are committed to the Voluntary Principles on Security and Human Rights, which address how they guard their facilities;
  
  
• have a human rights code of conduct based on the U.N. Universal Declaration of Human Rights, which addresses how they treat local communities;
  
  
• belong to the U.N. Global Compact, which addresses broader corporate responsibility;
  
  
• complete surveys for the Carbon Disclosure Project regarding their impact on climate change;
  
  
• are committed to International Labor Organization labor standards;
  
  
• publish their payments under the Extractive Industries Transparency Initiative, which guards against corruption in developing countries;
  
  
• and find it necessary to comply with the International Finance Corp.'s guidelines when working on large projects with World Bank support.

And when the supermajors apply for loans to support exploration and production in developing countries, their bankers are committed to the Equator Principles, which guard against lending to projects that would result in human rights violations.

The project of embedding regulations in international commerce has focused on voluntary codes of conduct primarily because it has been the only effective mechanism for changing corporate behavior. But all involved agree this process has flaws.

For example, few NGOs consider voluntary codes the best route to placing restrictions on companies, while governments regret seeing their prerogatives seized and their power reduced. Meanwhile, corporations agree to adhere to such codes, but they chafe at being hemmed in by agreements that carry a downside risk to their brands if things go wrong, and they dislike the idea of becoming vehicles for achieving larger social goals. And many people are troubled that self-appointed activists are determining de facto international regulation. Still, corporations and governments have found the alternatives -- doing nothing or drafting binding national regulations and/or international conventions on corporate activity -- unworkable, and so the number and scope of voluntary codes of conduct mounts.

Moreover, the time these codes have been in force is increasing. Over the next two years, sufficient evidence will emerge allowing observers to determine whether voluntary codes are working -- i.e., solving the problems they were created to solve. Evidence from some of the older codes of conduct -- such as the 1983 code on infant formula marketing and even the 2001 Kimberley Process (which is winning significant attention in discussions surrounding the movie "Blood Diamond") -- found these initiatives are achieving their stated objectives. Even though they succeed unevenly and without universal adherence, they generally result in major adjustments in the target industry.

From de Facto to de Jure?

Success has bred success as NGOs concerned about one issue, sphere or industry sector have learned from the successes of NGOs concerned about others. As a result, most international campaigns dedicated to bringing regulation to international affairs now have made developing a code of conduct a significant strategic objective. Even so, most NGOs involved in campaigns to change corporate practices do not believe these codes of conduct will stand up over the long term. Most campaigners see codes of conduct as a strategic means to set a bar for an industry to meet.

For once an industry has shifted toward a voluntary code's requirements, corporations adhering to the code will fight to have the requirements of the code of conduct codified into actual regulation. The NGOs reason that while it is difficult to win large-scale lobbying efforts against industry, if the major players in an industry are already meeting codes' requirements, they have an incentive to level the playing field by imposing the previously voluntary restrictions on their less brand-sensitive competitors.

So the threat from Human Rights Watch is not an idle one. At some point, some of these codes will bring about regulatory changes, but most codes of conduct are not easily turned into law. The Equator Principles guiding international project finance, for instance, would be completely unworkable as laws, as the lending portfolios of major banks are (and must remain) confidential.

Also, corporations are growing more aware of the power (and sometimes lack thereof) of these voluntary agreements, and businesses are taking a very careful, measured approach to these campaigns. Many companies are seeking ways to draft the codes in a way that provides them competitive advantages against their rivals, while industries are growing more careful in drafting the final language of the code.

Finally, throughout 2007 -- and particularly in the United States -- activist organizations will again confront the limits of federal government action. While a significant piece of energy legislation will likely pass and labor probably will win a few small prizes from the Democrats, liberal interest groups will spend the bulk of the year learning that Democratic electoral success does not necessarily result in meaningful policy change. Important to this process, the Democratic Party does not intend 2007 to be a landmark year for progressive changes. Rather, it will be a political year in which the Democrats draw clear distinctions between themselves and the Republicans. This likely will frustrate groups dedicated to bringing about de jure policy change, again causing them to see the marketplace as their most profitable avenue for change.

Change in 2008

The following year, however, could see significant change. The web of codes of conduct will have shown its force. In addition, two major catalysts -- the 2008 U.S. presidential election campaign and the Beijing Olympics -- will help change how people view corporations, globalization and corporate obligations.

Andy Stern, president of the Service Employees International Union (SEIU), predicts that the 2008 Olympics will serve as a "Sputnik moment" for the United States. The Soviet Union's successful satellite launch convinced America to change its view of itself in the world, and consequently to alter its approach to education -- particularly math and science -- radically. Similarly, Stern says that when Americans see what China has become economically and industrially, they will begin to look at their own country differently. Among the questions Stern envisions Americans asking during and after the Olympics will be many that strike at the heart of the project of bringing regulation to international trade. Among them, questions about the responsibility of governments to people -- particularly regarding protections from the ill effects of globalization -- will loom large.

Simultaneously, the U.S. presidential campaign will be heating up. The Democratic Party has embarked on a project to alter what it is seen as standing for dramatically, namely, the view of it as the party of big and active governments. The Democrats have sought to flee that moniker, but many of the party's leaders have concluded that in the process of running away from this image, the party has sacrificed its ability to promote its ideals effectively.

To rebuild, the party is trying to define issues in terms of what people want a government to do, to remind Americans that there are spheres in which they want an active government. As issues like health care and job security rise in the public's mind, the link between these issues and globalization will become easier to make. Concurrently, China's relevance rises, primarily as a negative model -- but also through its five-year plan, showing how governments can act positively to address inequality, pollution and globalization's other negative impacts. Ultimately, Democrats will seek to juxtapose seven years of Republican rule with American ideals, asking whether government is doing what it should be doing to help people in a period of rapid change.

Only then will the environment be right for activists, who have spent years trying to achieve massive changes in China and elsewhere through market transformation, to turn to the de jure public policy sphere.