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Just because a country is broken doesn't give multinational corporations the freedom to violate international laws within its borders, indulge in bribery or exploit the local people and resources, says the Paris-based Organization for Economic Cooperation and Development.

Companies still must follow the same code of conduct as they would in their North American operations--no matter how much extortion, violence and corruption is taking place around them.

Weak governance zones are places where governments cannot or will not protect property and civil rights, support the infrastructure, or provide basic services. Imagine Myanmar in Southeast Asia (the country formerly known as Burma), or the Democratic Republic of Congo. They represent the most challenging investment environments on the planet.

Extractive, utility and construction firms are examples of companies that frequently work in such places, says Kathryn Gordon, senior economist in the OECD Investment Division, but any company involved in a public-private partnership with a weak government may be familiar with the exposures they represent.

"The problems that companies face when they invest in these areas are immense, as you can imagine," says Gordon.

With these heightened risks, advises the OECD tool, companies should take "heightened care" to negotiate them. If local legal codes are nonexistent, then companies can lean on international standards to guide their conduct.

The tool also recommends that companies exercise "heightened managerial care." Companies need leadership to guide behavior, and keep it on the up-and-up, when dealing with business partners and working with outside auditors and consultants.

The tool also poses questions that companies ought to ask themselves when investing in weak governance zones. The questions raise red flags on human rights violations, money laundering and extortion, interference in local politics and conflicts of interest among clients and partners.

Veterans of weak governance zones may be skeptical about the tool's benefit. Gordon relates the story of a company executive working in the DRC who contacted her when the tool was opened to outside comment last autumn. The company executive's main concern was what happens when you answer "no" to most of the questions?

"What he was basically saying," Gordon says, "is the situation in the Democratic Republic of Congo is so bad, the implication was that you can't conduct business there without recourse to bribery."

Gordon explains the tool isn't meant to bind a company to certain actions in such situations, but merely to highlight risks and recommend how companies ought to manage them. But she adds that the tool is meant to be one of several recourses that a company has.

"There is a clear recognition that companies can't do this on their own," she says. "It's indeed dangerous for companies to do this on their own. So they need to be actively seeking partners." These can be international bodies, nongovernmental organizations and even local chambers of commerce.

The tool is set for adoption by all 30 OECD countries in June 2006, says Gordon, after the Investment Committee weighs outside comments and submits a revised draft. It will then be passed to the G8 for review and marketed to private-sector trade organizations.

February 1, 2006

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