There are few phenomena more transformative than entrepreneurial capitalism. It empowers people, produces wealth, creates technological revolutions, and rewards and therefore encourages risk taking and sacrifice from people of all backgrounds and walks of life. Even the U.N. -- not normally the most forward thinking organization on the planet -- has begun to realize the power of business enterprise to change societies for the better.
In early July, over 1,000 people -- including 600 top corporate executives from around the globe -- gathered in Geneva for the leadership summit, Facing Realities: Getting Down to Business. The invitation-only meeting brought together chief executives, "C-suite" officers, board members, and presidents of country or regional subsidiaries with government and labor leaders, NGOs, and academics. It was convened by the United Nations to build "the markets of tomorrow."
For those wondering when the United Nations got into the business of "building markets," it began in 1999 when then-secretary-general Kofi Annan issued a challenge to business leaders. He urged them to join an international initiative to bring them together with U.N. agencies, labor organizations, and NGOs in support of universal environmental and social principles. The answer to Annan's challenge came in 2000 in the form of the Global Compact.
The Global Compact is an agreement on the part of its signatories to advance 10 principles -- two on human rights, four on labor standards, three on the environment, and one anti-corruption standard. It shifts the debate from "corporate social responsibility," and concentrates instead on Environmental, Social, and Governance issues (ESG). ESG replaces often ambiguous, sometimes "feel-good" concepts associated with corporate social responsibility with clear business concepts. It also switches the debate from what a company will do with its resources to how it accumulates resources. The Global Compact network has grown from only a few hundred in 2000 to include over 4,000 business leaders and business associations, academics, NGOs, and even nations. It spans 100 countries and includes 108 of the Financial Times' Global 500, including many familiar household names like Coca-Cola, Nestle, Microsoft, and eBay.
The importance of the Global Compact should not be downplayed. It is changing the United Nations' relationship with the business community -- a relationship that was heavily strained throughout the 1980s and 90s. American companies, which have had a particularly frosty relationship with the United Nations, were slow to sign on at first. However, now more than 100 U.S. companies have come on board.
The Global Compact is very far from perfect. For one thing, it should contain at least a preamble recognizing the importance of entrepreneurial activity to any society. It is time for the U.N. to recognize what everyone else around the world realized a generation ago: that private property and free enterprise are indispensable to opportunity and quality of life in every society. No company should sign the Global Compact out of a sense that it has to apologize for doing business.
At the same time, the Compact has real potential for enhancing a company's reputation in the markets where it does business and at the same time, the Compact helps align a company's business objectives with a societal need.
First, the standards are voluntary. This is an absolute precondition for participation. American business is already regulated, often in vague or contradictory ways, by three levels of government domestically. The last thing any company needs is to be subject to an international government -- especially one as unaccountable and inefficient as the U.N. Still, flawed as the U.N. may be, the Global Compact as a voluntary standard is an attempt to encourage companies to address societal problems that may even transcend national borders.
Second, the standards require only what many companies are doing anyway and should be proud to talk about. In my last column, I argued that business should think of social responsibility positively rather than defensively. It is no longer possible for large companies to fly below the radar of the public, and there is no reason why most businesses should want to do so. They simply have to engage the public affirmatively and define themselves in terms broader than their line of business. In addition to producing jobs and goods or services which benefit the larger society, many businesses have made it a practice to conduct themselves with high standards of ethics and accountability -- often higher standards than those followed by many of the world's governments. Signing the Global Compact is one way to inform the public about those positive aspects of corporate culture and behavior.
That turns out to be good for business. In a study released last month, Goldman Sachs found that companies that are considered leaders in implementing the Compact's ESG Principles have outperformed the general stock market by 25 percent since August 2005. And 72 percent of those companies outperformed their peers. Being aggressive about adopting and promoting the Compact's ESG principles as part of a company's image delivers long-term business value; is rewarded by continued access to markets; and, engages the private sector to help solve pressing societal issues in the countries in which they do business. "Fundamentally, for companies and investors, this is about managing risks and opportunities presented by globalization," explained George Kell, executive director of the Global Compact.
The Global Compact isn't for every business. But in the right situation it is a tool for companies to enhance business practices and their global reputation at the same time.