Challenges
The past 10 years of experience with codes of conduct reveal progress towards increased implementation of social and environmental standards, but there is an emerging consensus among companies in developing countries around several key challenges. Similarly, while CSR may offer opportunities for advancing development priorities, there are areas where current practice may have a negative effect on development as an unintended consequence.

Adoption Challenges
The plethora of code initiatives serves as a barrier to entry for companies in developing countries who are forced to decipher the multitude of CSR requirements of their business partners and stakeholders.  Firms that are less experienced with codes of conduct do not always grasp the overlapping requirements of their buyers or the cost and management implications of bringing their companies into compliance.  The consequence can be a failure to engage, particularly among companies in the developing world who are often struggling to compete in other areas including the fundamentals of price, quality, and delivery.  Even for those companies wishing to be proactive in addressing CSR it is not always clear how they can best pursue or demonstrate compliance to meet the demands of their various stakeholders, including existing business partners, potential clients, and civil society groups. The result may be that the gap between less experienced companies and their advanced competitors grows wider.  Unfortunately, the advanced competitors are often foreign invested companies operating in developing countries, large domestic firms, or state-owned enterprises whose capacity and experience dwarfs those found within emerging SMEs or local businesses.

Implementation Challenges
Once companies realize that most codes contain overlapping content and compliance with one code brings them close to compliance with the vast majority of codes, they are then faced with the multitude of activities associated with code implementation.  So, despite increasing convergence in the content of codes of conduct, discrepancies in the details of implementation remain, revealed through variation in the quality and content of monitoring and auditing processes and personnel and remedial action.

Most CSR-sensitive companies or stakeholders issue thick manuals – frequently over 80 pages – that serve as practical interpretations of the codes in the context of daily business practice. These manuals often serve as a guideline for monitoring visits, yet there appears to be greater inconsistency at this level of CSR implementation.  This is said to be true within companies, within industries, within multi-stakeholder initiatives, across multi-stakeholder initiatives and certification programs.  Meanwhile, as CSR grows, the magnitude of overlap grows simultaneously. Examples abound of suppliers hosting over 40 different external monitors per month.

Some buyers suggest that supplier complaints over conflicts among the implementation guidelines is a red herring and does not pose a challenge to those suppliers with a genuine commitment to compliance and decent working conditions.  Greater coordination and standardization has been resisted on the grounds that it will stifle innovation.  However, efforts to standardize or harmonize elements of these initiatives should be quite straightforward: As one executive of a major apparel company put it, fake books are fake books.  This trend indicates growing inefficiency in the practice of CSR in developing countries which is imposing unnecessary costs for firms in developing countries and their business partners in the wealthier nations.

Tensions in the Business Model
Many of the industries with the greatest CSR challenges are those with business models that create tensions between CSR and meeting other business requirements that are frequently difficult to reconcile. For example, industries with mobile supply chains  are often defined by the following characteristics:

• shifting contractual relationships between suppliers and buyers and short-term business commitments
• large numbers of buyers with varied commitments to CSR
• continuous downward pressure on price
• strict delivery requirements with cyclical demand

In this context, many factories find themselves violating wage or overtime requirements to meet the other competitive requirements, e.g. those related to price or delivery deadlines. Oversupply in the industry, due to the low barrier to entry in certain labor intensive industries, can enhance the bargaining power of buyers who are able to shift production with little notice. Conversely, the varied CSR commitment of buyers may decrease the incentive of suppliers to invest in CSR compliance – particularly if they are able to evade monitors effectively.

Limits of Top-down Enforcement
Companies and civil society groups are realizing the limits of traditional top-down approaches to CSR in achieving improved CSR implementation among companies in developing countries. The challenge is to identify best practice from the many pilot initiatives that acknowledge the importance of stakeholder participation, empowerment, and capacity building.  Anecdotal evidence suggests that a top-down policing approach to CSR compliance is insufficient or even inappropriate: a company who is only implementing CSR standards at the insistence of its business partners or stakeholders often revert to evasion tactics and face little risk of detection.  MNCs are slowly shifting to approaches that increase or share ownership for the implementation of CSR standards with business partners. New strategies have included:

• A focus on clarifying the business rationale to generate bottom-up demand for CSR implementation, including development, dissemination and promotion of frameworks to analyze the costs and benefits of implementing CSR (revealing productivity and quality gains, and potential increased market share).
• Capacity-building support for businesses in developing countries, for management, workers and stakeholders alike.  Many developing country firms lack the management expertise to address challenges associated with bringing their workplace into compliance with CSR codes of conduct. These skills include operations management, knowledge of environmental practices, human resource management/ industrial relations, health and safety, and knowledge of other systems that ensure sustainable production through a fundamental change in business systems.
• An emphasis on the role of workers or other key stakeholders as guarantors of CSR implementation. Trade unions have long argued that empowered workers are key to ensuring implementation of CSR standards because of their continuous presence at the worksite and their stake in the outcome. Similar arguments have been made about local communities and environmental protection.  A small number of MNCs are undertaking experiments to increase the involvement of workers in their CSR implementation strategies.  Some focus on NGO-style participatory techniques as a means of improved communication.  Less common, but important experiments include supporting an active role for trade unions.

CSR Support Institutions and Expertise in Developing Countries
The top-down approach to CSR code implementation has been accompanied by the establishment of an industry in external inspection and audit services, usually provided by global auditing firms. It is likely that a capacity-building approach to CSR code implementation will require the growth of CSR support institutions and expertise to provide services of equivalent quality at a competitive or affordable price to local companies in developing countries, e.g. such as those provided by properly trained auditors, empowered workers, well functioning and independent trade unions, and multi-stakeholder organizations.  In many countries, these services are not currently available beyond relatively small-scale experimentation, and it is likely that the lack of widespread availability results in relatively high market prices and inconsistent implementation.  Despite the growing practice of consultancy (capacity building) services by some commercial CSR auditing agencies, who currently constitute a large portion of the small community of private sector experts experienced in CSR management systems, this is likely to present a conflict of interest with their external verification and auditing services. A related challenge for developing countries will be establishing local institutions and experts that have the credibility to provide sufficient assurance to the global business partners and various stakeholders of local firms.

It is likely that the local organizations best positioned to lead implementation of emerging good practice in CSR, e.g. empowerment strategies for local stakeholders and firms, capacity building and/or training services would be unions (e.g. for labor issues) or multi-stakeholder organizations using participatory techniques.

Resources on Stakeholder Roles in Implementing CSR
Companies, in both developing countries and wealthy nations, are finding themselves playing roles or providing services traditionally provided by the public sector; providing public goods.  Frequently, the unit cost to a company of filling this vacuum is either not cost effective or, in the worst case scenario, not feasible.  It is likely that the cost and effectiveness of many activities associated with CSR would be best shared by industry as a whole, or at least industry sectors.  Sharing the burden of CSR among a variety of stakeholders, including governments, could easily reduce the unit cost of CSR implementation and therefore increase the financial viability of participation for many companies, in particular SMEs.

Insufficient Understanding of the Business Case
The reticence of some companies to undertake CSR compliance suggests that there may be insufficient understanding of the business rationale for making the required investments. And it is true that for some companies in developing countries, the business case may not exist, i.e. in the absence of legal enforcement, the risk of market sanction and the benefits of CSR implementation are not sufficient to motivate suppliers to engage in CSR.

Consolidated Supply Chain vs. Small and Medium-Sized Producers
The trend in many industries that rely on a compliance-based system of CSR has been towards consolidation of the supply base. While this can be partially attributed to liberalization of trade rules, the desire to gain greater control over CSR implementation among suppliers is also a factor.  Some companies have consolidated their supply base by granting larger contracts to fewer companies. This makes it easier to monitor compliance with codes of conduct, but it may also have the unintended effect of reducing the participation or viability of smaller and medium sized local suppliers in favor of large, often foreign owned, manufacturers.

Monitoring Informal Workers vs. Dangerous Employment
Another objective of consolidated manufacturing has been to eliminate informal workers (e.g. homeworkers) from the supply chain because of the difficulty of ensuring decent working conditions for such a decentralized group of workers.  This may have the unintended consequence of reducing women’s access to employment.  A similar outcome has been seen from efforts to enforce prohibitions on child labor where children are forced into more dangerous activities to earn money.

Conflicting Stakeholder Demands
There are frequently differences in the issues highlighted by pressure groups and the media, who are often based in industrialized companies, and the priorities of stakeholders in the developing world. The desire of companies to respond to the demands of pressure groups may results in the adoption of codes that are either irrelevant or cause unintended harm to workers. Where codes diverge from the priorities articulated by workers, there is a need to develop supplementary solutions.  Similarly, this may require companies to develop more effective communication with and among diverse pressure groups.

Standardization vs. Local Context
Despite the increased relevance of codes that are developed through participatory processes, this practice tends to contribute to the further proliferation of codes which reduces comparability across firms.  Lack of standardization among codes also makes it more difficult for suppliers of several companies to comply with the multiple initiatives.  Furthermore, firms are unlikely to adopt multiple processes due to the logistics challenges of managing and scaling up tailored approaches.

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