Carrie Hall

The past decade has seen a rapid increase in the number, size and scope of transnational companies (TNCs) based in emerging markets – growing from 3,000 in 1990 to 13,000 within ten years.¹  Only a small number of these TNCs have become global competitors able to square off with traditional Western business leaders. Yet, this limited occurrence – in combination with the notion that multitudes of lesser-known emerging market TNCs are expanding into foreign markets – has been enough to garner significant attention from almost every constituency – government, business, civil society, media and investors.

For the United Nations Global Compact, the world’s largest voluntary corporate citizenship initiative, questions abound related to the business practices of emerging market TNCs; practices that have been cultivated in areas renowned for deficient economic, political and social frameworks that often lead to low thresholds for ethical behavior and accountability for business. Currently, there is no clear indication of the prevalence of basic corporate citizenship tenets – namely human rights, labour rights, environmental protection and anti-corruption – within emerging market TNCs.

On one hand, the corporate responsibility actions of leading emerging market TNCs can be as sophisticated as those taken by the most advanced Western companies. And there are signs that corporate citizenship is becoming a global phenomenon. The Global Compact – through its participants and local networks – can be found in approximately 100 countries, a majority of them in the developing world. From Chile to China and South Africa to Sri Lanka, corporate responsibility seminars and summits are teeming with local participants wanting to learn about the value of implementing universal principles into business practices. On the other hand, new examples of human rights violations, worker exploitation and corruption being carried out by emerging market TNCs – as well as developed country TNCs – are frequently revealed. It is no secret that companies devoid of responsible practices are winning contracts and making profits in developing countries despite their unsavory behavior.

If emerging market TNCs can profit from unprincipled – or simply un-evolved – behavior in markets that do not demand higher standards, then why are so many voluntarily committing to implement the Global Compact’s ten principles on human rights, labour, environment and anti-corruption?² And why are a number of these businesses rallying together to take collective action against corruption and for environmental protection? The growing interest in corporate citizenship exhibited by leading emerging market TNCs around the world suggests that these companies are in fact deriving strategic value from responsible business practices, and in some cases even finding that principled behavior is essential to business survival and success.

Emerging market TNCs have a particular stake in the corporate responsibility movement. Many of the “emerging giants”³  are engaged in the Global Compact, including Cemex, Infosys, Eskom, Haier, Embraco, Koç and several key Tata Group companies.⁴ Beyond this small but growing group of world-class emerging market TNCs, the Global Compact counts over half of its 2,900 participating companies from developing countries – with participant representation along the spectrum of developing economies from the weakest to the most advanced emerging markets. The initiative has experienced particularly strong engagement in Brazil, India, Mexico, South Africa, China, Turkey and Egypt, as well as growing participation in countries including Thailand, Singapore and Pakistan in Asia; Malawi, Zambia and Nigeria in Africa; and Panama, Argentina, Chile and Peru in Latin America.

Global Compact experience shows that some of the most effective and comprehensive examples of corporate responsibility are provided by the leading emerging market TNCs. What is remarkable about such behavior by these companies is the underlying motivation for action, not necessarily the actual corporate citizenship practices. In fact, the approaches taken by world-class emerging market TNCs to implement human rights, labour, environment and anti-corruption principles into day-to-day operations and business strategy are not wholly dissimilar to those taken by leading Western corporate citizens – for example, in regard to environmental, health and safety systems or the production of sophisticated reports with advanced social performance indicators.

However, for emerging market TNCs, often the earliest driving force for corporate citizenship is the highly challenging societal and economic framework found in the home country. This is a core distinction from Western TNCs, which typically are first able to cultivate their business operations under more stable socio-economic circumstances before expanding abroad. Arguably, corporate responsibility practices take on a heightened significance for emerging market TNCs and, ultimately, can be a matter of survival.

Socio-Economic Challenges Necessitate Innovative Action by Emerging Market TNCs

Business simply cannot thrive if society fails. For emerging market companies with ambitions of a strong domestic or international presence, socio-economic issues can become most pressing. In environments that lack adequate economic, political and social institutions for development, achieving success can demand innovative business approaches that serve both corporate and societal interests. Even more, society may need to become a key consideration in business mission and strategy. The experiences of many leading emerging market TNCs demonstrate how responsible corporate practices can play a strategic role in managing a variety of risks endemic to developing countries – including a weak state, ineffective regulations, faulty tax structures, lack of skilled labour, social unrest, and generally poor living and health conditions.

India’s Tata Steel and Turkey’s Koç Group each operate on founding missions that identify the overall development of the home country and its people of paramount importance. Vehbi Koç, founder of Koç Group, instituted the following code for the company, “I live and prosper with my country…We shall do our utmost to strengthen our economy. As our economy prospers, so will democracy and our standing in the world”. 

Remarks by Ratan Tata, Chairman of Tata Group, echo the founding mission of the company and provide insight into Tata’s continued social investment: India is still a developing country burdened with enormous disparities. It’s our duty to play whatever role we can, in whichever way we can, to diminish those disparities. These are the guiding principles for all of us in the Tata Group. We are in it for the satisfaction gained from knowing that we have achieved something meaningful, that we have put our shoulder to the wheel of nation building, that we are serving the country that provides us sustenance.

BOX 1: Tata Steel – Pioneering approach puts focus on employees and community From its founding in 1907, Tata Steel has operated on the belief that the success of the business was tied to the well-being of society. The company took early and decisive steps to act on this decree. In 1912, the founders of the London School of Economics were invited to India to prepare a Memorandum of Health for the company. In the same year, an eight-hour workday was instituted. Other milestones include: free medical aid in 1915, a Welfare Department in 1917, leave with pay, Workers Provident Fund and Workmen’s Compensation in 1920 and maternity benefits for women in 1928. Labour welfare practices were established before these were made statutory laws across the world. Nearly a century after its founding, Tata Steel is engaged in nearly every angle of socio-economic development in and around the areas where it has operations. A sample of the company’s activities include: health care facilities that can treat thousands of people; educational support from pre-school to post-graduate levels involving the management of hundreds of schools; employment training; promoting entrepreneurship through supporting local suppliers and micro-finance programs; and development and maintenance of civic amenities including roads, water, emergency services and parks. The company undertakes many of these activities in rural areas near its operations to ensure that rural communities are not left out of the wealth generated in urban centers. Tata Steel’s extensive activities related to HIV/AIDS awareness are notable – the company is a founding member of the Global Business Coalition on HIV/AIDS. Today, Tata Steel spends 30% of its profits after tax on community development based on the philosophy that “no success in material terms is worthwhile unless it serves the interest of the nation and is achieved by fair and honest means”.  While the company’s extensive efforts not only help to improve the quality of life for many people in India, they also help to build sustainable communities capable of producing qualified and healthy workers for the company’s operations.

Community development efforts – both at home and in other emerging markets – can have strategic significance for emerging market TNCs. The deep and broad commitment exhibited in areas such as education, health, job creation, disaster relief, arts, culture, and sports serves as far more than “philanthropy”. Tendencies to view such activities as peripheral – not “true” corporate responsibility – should be reconsidered, as community investment can address aspects of the societal context which are lacking or insufficient – voids which can greatly impact a company’s ability to operate, compete and thrive.

Consider that for over 100 years the Tata Group has embedded its mission for societal development throughout its business strategy. The group’s companies are renowned for their unwavering, acute focus on “society” wherever they operate – whether in India, Bangladesh or Africa. In so doing, the Tata Group has grown to be India’s largest conglomerate with annual revenues of US$ 21 billion and it is now a global player in many industries – “the world's second largest tea business (Tata Tea); Asia's largest software firm (Tata Consultancy Services); a steel giant (Tata Steel); a worldwide hotel chain (Indian Hotels); and a sprawling vehicle-manufacturing arm (Tata Motors)”.⁵   

Enlightened emerging market TNCs recognize that “businesses that .... proactively understand and engage with social issues will benefit most. They will be better able to shape the social contract and to identify ways of creating value from the opportunities and risks arising from sociopolitical issues”.⁶  Consider the decision of CEMEX, the global building company based in Mexico, to develop a micro-lending program for poor customers in the 1990s when the devaluation of the Mexican peso resulted in rises of unemployment and a weakening of the currency – a situation that caused both society and business to suffer. Now, approximately 123,000 families across Mexico live in decent homes and CEMEX has a new customer base, along with a large amount of accumulated good will.

Socio-economic deficiencies found in emerging markets can have even more grave implications for the success of native companies, as they are increasingly confronted with tough international competition in home markets due to the globalization of trade and investment flows. In many cases, a widespread shift toward market liberalization is causing strong “local” companies to turn to the global marketplace for the financing, technology or talent needed to compete domestically, and in some cases internationally, with more advanced companies.⁷ Arguably, this growing need for emerging market companies to “adopt an international vision”⁸ relatively early in business strategy – even just to thrive domestically – must extend to environmental, social and governance issues.

With a home base in a high risk or less enabling environment, an emerging market TNC must take special efforts to ensure transparency in business dealings, maintain or improve the quality and health of workforce, and manage social and environmental risks – whether to attract trade and investment, take part in a supply chain, build a brand or export products. Finding systematic methods for addressing “institutional voids” has not just allowed leading emerging market TNCs “to compete effectively against [foreign] multinationals. Further, as a result of their distinguished track record, they have been able to develop a corporate brand name that signifies quality, trust and transparency.”⁹ 

Actions taken by leading emerging market TNCs to reach high global standards for human and labour rights, environmental protection and anti-corruption within their operations is an important aspect of applying “international” thinking. A 2005 McKinsey study of global leaders from emerging markets found that “all brought their key processes up to or above global benchmarks before globalizing”.¹⁰  Meeting international standards for environment, health and safety systems or implementing widespread policies concerning bribery and extortion can help allay concerns of international investors, partners or customers related to the stability and integrity of an emerging market TNC’s operations.¹¹

The sustainability reporting practices of leading emerging market TNCs support this position. Thailand’s Charoen Pokphand Group, one the country’s key conglomerates, lists the dozens of awards its companies have won related to occupational health and safety and environment, proclaiming that its seeks to meet world-class standards in these areas. Brazil’s Embraco, a producer of compressors, reports on efforts throughout its plants in China, Slovakia, Italy and Brazil to maintain key certifications including ISO 14001, ISO 9001 and OHSAS18001, and uses thorough methods for quantitatively reporting on social, labour and environmental performance. In South Africa, leading companies including SASOL, Eskom and Barloworld all use Global Reporting Initiative indicators to report on social performance.   

BOX 2: Esquel – Redefining expectations for textile supply chain partners Though not a household name, Esquel is a supplier to some of the Western world’s best known clothing companies including Marks & Spencer, Hugo Boss, Nike and Tommy Hilfiger. The nearly 30 year-old textile company is based in China and has expanded operations to Malaysia, Sri Lanka, Vietnam and Mauritius. Of the company’s 45,000 employees, roughly 95% work in factories weaving, dyeing and sewing cotton shirts for its leading Western clients. Esquel is determined to be seen as a reformer in the textile industry. Esquel’s corporate responsibility approach is wide-ranging – fair wages and benefits, extensive employee training, codes of conduct tied to international labour standards, comprehensive efforts to reduce the company’s environmental footprint across its production process. Its factories are each audited up to 30 times per year on ethical compliance issues. When the company needed to close a factory in Mauritius in 2003, it set up a support program which helped a majority of employees find new jobs, and in the meantime suffered no disruption to production until closing. In Malaysia, the company saw production time decrease and quality – and worker morale – increase as a result of employee skills training. In China, HIV/AIDS education was provided to over 30,000 employees once it became clear that many were not properly aware of the disease. In addition to all factories being ISO 14000 and 9000 certified, Esquel’s work in the area of environmental sustainability is thorough: tracking water and energy consumption in garment manufacturing for each process (e.g. spinning, weaving); wastewater pollution; air emissions in the factories; exhaust of vehicles transporting goods; and packaging materials. Esquel has won accolades from clients, media and industry for its enlightened approach to business, suggesting that the company is making progress toward its goal of dispelling broad generalizations of the conditions and standards found in Asian textile factories.

From Leading Examples to Widespread Action

Despite the heightened sensitivity of emerging market TNCs to socio-economic issues, general awareness and active interest in corporate responsibility by the majority of these 13,000 companies is lacking. Examples of enlightened and innovative practices implemented by some of the leaders in this pack cannot and should not obscure the fact that there are still many shortcomings related to the behavior of emerging market TNCs both at home and abroad. However, good-practice examples showing why and how the best emerging market TNCs seek to balance corporate and social interests do serve an important purpose.

The decision of a seemingly small number of emerging market TNCs to actively implement corporate responsibility into business – despite the current ability to profit with less evolved behavior – is noteworthy and precedent-setting. Leading emerging market companies are rapidly making history and setting benchmarks for others to meet. Not only are these companies dispelling traditional notions that business is only driven by the West, but world-class emerging TNCs are also showing that in order to break this mold they are addressing issues of human rights, labour standards, the environment, corruption and community development.

Leading emerging market TNCs are proving that low thresholds for corporate behavior and insufficient socio-economic frameworks are no excuse for ignoring societal well-being. Further, they are making the case for why companies with a home base in such environments need to take the earliest possible opportunity to address the pressing socio-economic obstacles in order to succeed and compete in a globalized world.

Many societal actors have a role in taking this call to the thousands of emerging market TNCs yet to engage in corporate citizenship. It is critical that media and civil society, among others, continue to bring to light the unethical behavior of such companies, as well as report on the good practices being carried out by leaders. In addition, more widespread research must be conducted to understand how the majority of TNCs based in emerging markets are behaving in relation to human and workplace rights, environmental protection and corruption. While the likely hypothesis is that the lion’s share of progress remains to be made in these areas, it is critical to have a more comprehensive understanding of the situation so that it can be addressed effectively – for example by region or industry.

Leading emerging market TNCs have an important role to play. Not only through continuing to improve their business and societal practices, but also by acting as champions in the corporate responsibility movement and as mentors to emerging market peers at home and abroad. Because many leading emerging market TNCs have been forced to reconcile business objectives with social limitations from a nascent stage, these companies are in excellent position to be multipliers of corporate citizenship in areas where they operate under similar challenging conditions.

Finally, the Global Compact is committed to providing a platform for dialogue and learning among all societal actors on corporate responsibility in emerging markets. Education, awareness raising and advocacy of the business case for responsible practices by emerging market TNCs is one way that the Global Compact can help to achieve serious changes in the business practices of these companies.

Leading emerging market TNCs are defining expectations for responsible practices by companies based in developing economies. If these good-practice examples are not enough to convince less-evolved peers to engage in principled behavior now, then the continued integration of economies and societies should serve as an important indicator. Today’s globalized society is engaged in a race to better standards for corporate behavior, not worse. As more companies like Tata Steel, Cemex, Haier, Koç and SAB Miller emerge as global players, it will become evident that principled corporate behavior is essential to a winning business strategy for emerging market TNCs.

BOX 3: Petrobras – Helping communities face the effects of violence and conflict Petróleo Brasileiro S.A. (Petrobras), a global petroleum company involved in exploration, production, refining, trading and transportation, is the largest company in Brazil. The company’s roots are in Brazil – where it actively seeks to contribute to the development of the country – but its operations span 21 countries, many of which have unstable social or political climates. Today, Petrobras is investing US$ 200 million per year on corporate social responsibility and environmental programs that span 1,200 related projects. At home, Petrobras recognizes the importance of community investment and has extensive programs underway related to poverty reduction across Brazil (“Zero Hunger”), education, child labour and child sexual abuse, and fundamental rights for people with special needs, among many other issues. The company also has corporate responsibility programs ongoing in foreign countries where it operates – such efforts take on a special meaning in countries or communities emerging from or still suffering from conflict and violence. In Angola, Petrobras is involved in reconstruction projects through humanitarian programs related to schools, day care centers, hospitals, rural communities, as well as support of Angolan socio-cultural organizations, including the National Historic Archives and Agostinho Neto University. In addition, Petrobras supports management training programs to develop skilled labourers for the country’s oil industry. In Colombia, the company works to build capacity of Junta leaders near its operations and to train community health agents. Examples of Petrobras’ initiatives in Nigeria include donation of supplies to schools that educate 12,000 pupils, provision of food and blankets to orphanages in the Lagos region, and an HIV/AIDS prevention campaign in 40 secondary schools in coordination with a local civil society organization.

Carrie Hall is a Communications and Public Affairs officer at the United Nations Global Compact. Carrie joined the Global Compact in 2004 and has served as Editor of the Compact Quarterly since it was launched in January 2005. Prior to joining the United Nations, she worked in the private sector in a variety of communications positions. Most recently, Carrie was a Vice President at Hill & Knowlton, an international public relations/public affairs agency, where she specialized in crisis communications.

Endnotes: 1. United Nations Conference on Trade and Development, World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development (United Nations publication, Sales No. E.06.II.D.11). 2. Information on the United Nations Global Compact and the ten principles in the areas of human rights, labour, environment and anti-corruption can be found at www.unglobalcompant.org.  3. Several recent articles point to the emergence of global business players from emerging markets and assess business strategies undertaken by such companies to compete globally, including Boston Consulting Group’s May 2006 report “The New Global Challengers” and “Emerging Giants: Building World Class Companies in Developing Countries” by T. Khanna and K. Palepu in the October 2006 issue of Harvard Business Review. 4. All companies referenced in this paper – including through case examples – are UN Global Compact participants. 5. Alex Perry, “How Ratan Tata turned the country's oldest conglomerate into a global force”, TIME Asia Magazine, June 19, 2006. 6. S. Bonini, L. Mendonca, and J. Oppenheim, “When social issues become strategic”, The McKinsey Quarterly, 2006 Number 2. 7. T. Khanna and K. Palepu, “Emerging Giants: Building World Class Companies in Developing Countries”, Harvard Business School Note No. 9-703-431, September 15, 2005. 8. United Nations Conference on Trade and Development, World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development (United Nations publication, Sales No. E.06.II.D.11). 9. T. Khanna and K. Palepu, “Emerging Giants: Building World Class Companies in Developing Countries”, Harvard Business School Note No. 9-703-431, September 15, 2005. 10. Jayant Sinha, “Global champions from emerging markets”, The McKinsey Quarterly, 2005 Number 2 11. The “World investment prospects to 2010: Boom or backlash?”, an Economist Intelligence Unit report written with the Columbia Program on International Investment, notes on page 75 that: “Emerging market MNCs are sometimes (rightly or wrongly) seen as having an unfair advantage (explicit backing and support from their governments) or being more prone than their developed-country counterparts to undesirable behaviour).”