Annex 1

Corporate codes of conduct

Globalization, liberalization and economic concentration in the forest sector are strengthening the role of private corporations. Although forest resources in many countries are still owned or controlled by the state, forest management, timber harvesting and trade and investments in the forest sector are mostly undertaken by private and commercial groups. Because corporations have increasing economic and political power, their activities have the potential to cause enormous damage. On the other hand, progressive forest companies can instill principles of ethical business in the sector.

The development of norms of behaviour or "codes of corporate conduct" is one of the tools used by companies to promote better forest law compliance. These codes of conduct may go beyond the legal requirements of the countries in which the companies operate. There are two different types (see Box):

codes of conduct developed by individual corporations;
codes of conduct designed by an industry group, to be followed by all members.

Other tools used by companies to foster responsible business include:

Private-public cooperation to develop joint targets (for instance involving the environmental government agency or the public forest administration and individual corporations and industry associations). This type of cooperation has not been established widely in the forest sector but it may occur with increasing frequency in the future.
Negotiated agreement between a public agency and the industry to achieve certain targets deemed desirable for society. This has not yet occurred in the forest sector.

MOTIVATIONS

Public pressure for more corporate accountability in the forest sector is increasing. Surveys show that a great majority of company executives believe that corporate responsibility is a vital component of their company operations (Dickson, 2002).

Many NGOs, activist and consumers groups and politicians believe that corporations need to play a greater role in reducing the incidence of illegal activities, securing sustainable forest management and fulfilling the environmental and social aspirations of society. NGOs are increasingly analysing and exposing illegal corporate activity and mobilizing the general public. This in turn has a direct impact on the forest industry's image and operations, and sometimes leads to violent confrontations (for example the highly visible cases of Greenpeace in the Amazon and the reaction against Vigilancia Verde in Ecuador and against Global Witness in Cambodia).

Pressure also comes from company shareholders. Some investment funds are demanding that the companies in which they invest confirm that operations follow the law and are socially and environmentally responsible. For example, in 2001, ABN AMRO led four Dutch banks in developing a new far-reaching forest policy in response to a campaign against Dutch funding of palm oil plantations in endangered orangutan habitats in Indonesia.

A strong brand is an intangible corporate asset, which might determine as much as 65 percent of the share value of a firm (Jenkins, 2001). Image holds most importance for retailers but a host of other companies may be affected indirectly by the propagation of these market preferences up the "value chains" or "supply chains". Several major European and North American wood products retailers already impose strict requirements on their chain suppliers such as compliance with minimum environmental standards and with the law of the country in which they operate.

EXPERIENCES

Corporate initiatives for better governance in the forest sector are relatively recent, designed mainly in an ad hoc fashion and therefore very varied. Some enterprises have adopted company-specific codes while others are part of an industry association's code covering hundreds of members. Some codes are focused exclusively on a particular legal aspect while others also include social and environmental aspects.

Developing and following codes of conduct which promote law compliance may increase efficiency and therefore strengthen a firm's comparative advantage in the long term. Lawfulness will also promote a better corporate image. The corporation may be able to obtain financing and insurance more easily and perhaps at cheaper rates. Relations with customers, suppliers and government agencies may be smoother when mutual trust is high. By operating legally, a company will also avoid the costs of bribes and litigation. Recent research in other sectors is proving that responsible companies ultimately make more money (Schnatterly, 2003, Dickson, 2002).

In order to be effective, codes of conduct should:

include clauses establishing penalties for non-compliance in order to avoid free riders (most codes do not have strict enforcement mechanisms);
include external assessments, monitoring and verification and public reporting in order to increase corporate transparency;
ensure that small companies can join.

Codes of conduct are likely to be less effective if markets do not sharply discriminate between those that comply with the codes and those that do not. However, when these initiatives are supported by third-party monitoring, they can take some of the weight from government institutions in charge of monitoring and enforcing law compliance. Governments wishing to improve forest law compliance should welcome and support such private sector initiatives if they comply with the conditions mentioned above.

Private initiatives to promote forest law compliance

IKEA has developed a "Staircase Model Approach" to promote legal and sustainable forestry among its suppliers. Requirements include that wood products should be legally sourced and that a set of environmental and social standards be respected in the production process. IKEA, in partnership with WWF, has developed a wood tracking system to ensure that there are no leakages along the chain of custody. The partnership has also established producer groups (i.e. cooperatives of timber producers), committed to legal timber harvest.

There are also many examples of industry-wide codes. The Forest Products Association of Canada, the Pan European Forest Certification Council and the American Forest and Paper Association have all published codes of conduct. Other groups who have issued similar declarations include the Confederation of European Paper Industries and the International Council of Forest and Paper Associations. The Interafrican Forest Industries Association (IFIA) has developed a code of conduct for its members operating in the Congo Basin and humid West Africa. In 2002, the Japanese Federation of Wood Industry Associations, the only organization representing the country's wood industries, issued a statement on illegal logging which urged its members not to use illegally sourced wood and promised to support initiatives to verify legal compliance (JFW, 2002). Also in 2002, the Timber Trade Federation (TTF) established a code of conduct to ensure their members' timber supplies are legal and originate from well-managed forests. Forest and chain of custody certification were recognized as the preferred tools to ensure legal origin. TTF has also prepared a ten-point plan of action to ensure that Indonesian timber is legally sourced (Guertin, 2003). The TTF code has been used as a model for similar initiatives in Italy, Japan and the Netherlands. These companies and industrial groups together comprise the vast majority of the world's large forest corporations.