Transparency Watch (TW): As the Global Compact nears its 10th anniversary in 2010, has it catalysed demonstrable change, and, if so, in which specific areas?

Georg Kell (GK): In some ways definitely, but many gaps remain. On the positive side, awareness about the four issue areas that we are advocating for: human rights, a decent work place, the environment and anti-corruption, has increased significantly all around the world. Just a few years ago it was unthinkable that human rights would be taken seriously in a number of countries where the Global Compact is not firmly established. Also, on the positive side, there is partial progress in some very tricky areas where not so long ago it was inconceivable that this would happen. For example, I would include transparency as a principle for doing business and disclosing information.

Another positive example is clearly that investors, thanks to the financial crisis, are now taking non-financial issues in evaluating and integrating them into decision- making more seriously. Environmental, societal and governmental issues are now seen as being carriers to long-term performance and that obviously opens up new opportunities for building drivers from the investment side. Of course philanthropy and related activities are being cut down, but as we always advocated, it is the core performance that matters – it’s how you make your money that is key, not necessarily how you spend it.

On the negative side, there remain huge gaps on implementation at several levels. One is between headquarter commitment and performance in some countries and the corresponding performance and implementation levels at subsidiary levels around the world. Clearly there is a huge gap, not only on the supply side, but even at the subsidiary level of wholly owned or fully controlled entities. We’re working really hard to bridge that gap. I think it’s also true to say that anti-corruption and human rights remain the most challenging issue areas because of their connectivity to deeper societal cultural characteristics, and change there is by definition more challenging.

TW:How do you see the importance of the Global Compact evolving in the context of the financial crisis?

GK: Well we have, if I can say this so optimistically, adapted to the changing environment. The basic premise 10 years ago was the legitimacy to operate a multi-stake holder model – global business but local governance. This agenda is still very important, but there has been a complete re-shifting of what I would call external drivers in the past couple of years. This stems from the food crisis, the extreme price volatility in natural resources and, now of course, the breakdown of the unregulated financial markets, the apparent inefficiency of non-regulated financial markets, an enormous spill over into the real economy and the subsequent intervention by governments on a scale not seen probably ever before in history. Governments are back as major players with state-owned companies and nationalisation. The public-private interface has become more important, which also suggests that the importance of anti-corruption, for example, is increasing. I also believe we are seeing an unprecedented revival in the whole natural resources issue, so sustainability is having a huge new impetus on the agenda. We have repositioned the Global Compact systematically in caring for the climate and building an interface with governments and the private sector, promoting the soft law notions. Denmark and Norway, for example, have come forward with new models on how to move ahead, so these are exciting new developments.

TW: The global economic landscape is shifting. What is your experience with emerging economic power centres, such as companies from BRIC countries? Are they engaging sufficiently with the Global Compact?

GK: From the start we have emphasised engagement with emerging markets. China, India and others have been from the early days quite eager to engage because companies there are on the modernisation path. In many ways they are ahead of governments – they want to integrate in the global market and they understand that management of non-financial issues is important. So from the beginning we have sort of betted on the BRIC countries, before the term was even coined.

More than half our participants come from the non-OECD world. I’m just returning from Beijing, for example. We have an independent organisation there now and 200 companies are seriously engaged. I’m quite encouraged by the developments; the pace of learning is very fast. It’s impressive to see year to year how fast they embrace the agenda, but challenges remain enormous at all levels. Increasingly drivers are coming from these parts of the world, in particular Asia. We have to realise that the centre of gravity is becoming more multi-polar, more dispersed, broadly reflecting geo-political and economical long-term trends.

TW: What do you see are the next steps? Will the Global Compact grow in terms of buy-in or move towards mandatory reporting?

GK: We have two big challenges ahead. Every month 150 new participants join, so we have an issue of managing scale and quality. Our country networks - we have 80 country networks now – are very important and a growing number of them have full capacity to convene, organise and mobilise, but not all of them are there yet . We have to re-enforce our country capacity building efforts.

Second, is what we would call differentiation. When you have a big global movement you want to make sure that two things happen. On the front end of the movement you need incentives so that the pace and direction of change is sustained . But as a UN initiative you need to be open at the back end, because we want to be inclusive. We don’t want to create an exclusive club and that means we need to build incentives for more participants to join.

The interface with the law remains an ambiguous one. In some countries, soft law is being experimented with and disclosure of non-financial issues is coming on to the agenda. We will convene another meeting with stock exchanges soon to promote market based approaches. Some countries and stock exchanges are moving in that direction. We hope that investors are taking more note of engagement in non-financial issues. We also hope that civil society and the professional community will develop more tools and have more comparable performance oriented concepts. It’s a huge challenge, so I don’t think there is one silver bullet answer. This remains a complex societal process where all incentives and dis-incentives, so to speak, have to kick in.

We are also refining our disclosure policies, or Communications on Progress. We have just issued a further qualitative improvement, where we define our minimum criteria, and we offer advanced disclosure on specific applications. We are currently field-testing, in partnership with Transparency International , advanced disclosure on the 10th Principle on anti-corruption, which remains one of the most challenging. There is no short answer – different societies have different historical compositions of public and private constellations and, as a global initiative, we need to be open and flexible.

TW: You have stated that it is time for companies to implement all Global Compact principles “beyond the headquarters, into subsidiaries and the supply chain.” How can this be achieved?

GK: We have our summit coming up next year in New York, 24-25 June, where we convene the CEOs and we will make it a major issue. In our annual review we highlight this as the priority, and whenever we interact with business or host events, we put as much pressure on this area as possible. We also incentivise subsidiaries’ to do their own Communication on Progress together with the local networks, so not everything is headquarter engineered. At the end, of course, this is up to companies and how they are organised, but we want the maximum amount of engagement.

So we’re working both through the networks, bottom-up, but also top-down, by putting the power of persuasion, if not pressure, on headquarters to ensure that their commitment is implemented everywhere, irrespective of location. This remains an ongoing challenge no doubt, but there are a couple of work streams underway on supply and value chains. The good news is that because of the financial crisis and some major incidences where subsidiary miss-steps or gross mistakes have led to larger brand damage, there is a momentum in this direction. Corporations are re-examining sustainability and it’s meaning, and recognising that in an integrated, globally cooperative world you can not afford to have ten different ethical standards, in ten countries. It neither makes sense for business, nor for the sustainability of operations.

On the negative side, we are seeing some cases of inward orientation and doors being closed. This is sometimes motivated by governments, who redefine specific national interests in a narrow sense. Hiding behind national doors is not a good environment for promoting universal principles though, as it creates additional barriers, making it more difficult to diffuse universal principles around the world.

TW: How does the Global Compact avoid being co-opted by companies as a PR-tool rather than a vehicle of reform?

GK: While the Global Compact is a voluntary commitment, the accountability of our participants and our initiative is of the highest priority. Companies that join the Global Compact are required to communicate annually to their stakeholders on progress made in implementing the ten principles. Called the Communication on Progress, this annual disclosure requirement has resulted in over 5,000 being posted to our website for public vetting. It helps ensure that participating companies are taking real actions and not merely seeking reputation enhancement. We take this very seriously, and have removed almost 1,000 companies from the Global Compact for failure to submit a Communication on Progress.

TW: What role can governments play in encouraging business to implement the Global Compact?

GK: Governments have a fundamentally important role. They can set a vital example in how they interact with the private sector, for instance with procurement, and the operation of all the state owned corporations around the world. That’s probably the most important way and in some countries that is happening now. Governments also have an important signal effect, by indicating to the market players what they expect business to do. That doesn’t necessarily mean the regulatory machinery, but just by sending the signals of what is expected governments can be extremely powerful. I think governments also have problem solving role to play, and we encourage them to pay attention to certain dilemmas to which there are no simple answers. If governments engage constructively and continue to focus, then breakthroughs are possible.

Finally, governments hold the key for the effectiveness of conventions, and the UN Convention against Corruption will be a great test to see how serious governments are. Will they be able to build an effective review mechanism? Will they be willing to sacrifice a little bit of sovereignty in exchange for greater effectiveness and transparency? These are very important questions I think. The world should pay attention to the upcoming meeting of the Conference of State Parties in Qatar. We have launched a lobbying campaign on the need for an effective review mechanism to put pressure on governments to do so.

TW: You mentioned that business respondents have identified the 10th Principle on anti-corruption as the most difficult issue to implement, why do you think this is and what is the Global Compact doing about it?

GK: We have learnt a lot from Transparency International about the systemic nature of corruption. Corruption is everywhere; it’s in the south, the north, east and west, and the public and private sectors. So the question is: how do you cut through and make real change?

Transparent disclosure is certainly the best overall concept, that’s why we insist on disclosure of progress meetings and failure to do so leads to delisting. The hope is that collective action with the public and private sectors can actually lead to gradual improvement.

There are a multitude of approaches and the working group on anti-corruption has developed several concepts, some of which are currently being tested around the world. It looks good, but my own experience tells me that ultimately it is about power and how the public is geared towards insisting on disclosure of relevant information. Ultimately we are dealing with bigger societal issues that partly have to do with capacities, but also the recognition of the importance of transparency.

TW: How do you see the 10th Principle in relation to the other nine?

GK: Without a doubt, corruption is a cross-cutting issue. It deeply affects the other 9 principles. For example, the abuse of entrusted power is a root cause for human rights violations and can be associated with serious environmental damages. Also, many workplace and supply chain dilemmas are directly connected to corruption. Corruption is at the heart of ineffective public policy frameworks, which in turn is arguably the root cause of most business-society dilemmas. The tenth principle has given enormous impetus to the UN Global Compact, and, I hope, also to efforts around the world to stamp out corruption.

TW: Do you think facilitation payments, which TI’s Business Principles recognise as bribes, can undermine corporate anti-corruption efforts?

GK: I have no doubt. The Global Compact firmly believes that corruption needs to be defined in a robust manner. We ask companies to work against corruption in all of its forms – which includes facilitation payments. Of course, there is much work to be done. Still too often, companies make such payments based on short-term, efficiency needs. But, if we are serious about the issue and we are promoting systemic long-term change, then I think, without a doubt, we need a robust approach that addresses all forms of corruption.