Canada’s Office of Consumer Affairs - Summary of the Symposium on Voluntary Codes

The symposium on voluntary codes was held in Ottawa on September 12-13, 1996.

Introduction

The purpose of the Symposium was:

to develop a better understanding of where, if at all, voluntary codes can work as effective supplements or alternatives to regulations;
to review the case studies and horizontal research conducted under the joint Industry Canada/Treasury Board Secretariat project over the past ten months;
to share views on the role, strengths and limitations of voluntary codes; and
to develop consensus around the next steps, including the possible development of a Voluntary Codes Guide, akin to that in place in Australasia.

The Symposium was attended by more than 150 representatives from industry, consumer groups, other NGOs, the academic community and interested federal and provincial government departments. Symposium participants were active at both the case study presentations and the plenary sessions. Informal feedback to date from the Symposium has been positive.

This summary is intended to highlight some of the key points raised during the course of the two days. The emphasis is on those comments and insights of presenters and participants which added value to the case studies and horizontal research. The summary consists of three main components. The first is a brief description of the research program and materials which became the basis of discussion at the Symposium. The second component of the summary is organized around the four questions which were used to guide the discussion at the case study presentations. The third, much smaller section summarizes some of the next steps.

Readers who want further information on the project, symposium or research to date, please contact:

Kernaghan Webb
Senior Legal Policy Analyst
Office of Consumer Affairs
Industry Canada
235 Queen Street
Room 681F, West Tower
Ottawa ON K1A 0H5
Tel.: (613) 952-2534
Fax: (613) 952-6927
E-mail: webb.kernaghan@ic.gc.ca

Description of Research Program

For the purposes of the Project, a voluntary code was defined as:

a set of standardized, written commitments agreed to by one or more individuals or organizations not drafted as a direct part of a legislative or regulatory regime designed to influence, shape, control or benchmark behaviour applied in a consistent manner by all signatories.

Thus, as used by the Project, a voluntary code could encompass a wide range of non-legislated approaches, including use of standards such as those prepared by standards development organizations, guidelines initiated by government for application by non-governmental parties, policies agreed to by one or more firms, governmental or non-governmental organizations, and contract-based programs.

Research papers prepared in advance of the Symposium demonstrated that voluntary codes exist for a range of products and services, take many forms, and address many aspects of behaviour, including consumer and environmental information and protection, labour standards and human rights, and advertising and public standards of decency.

Case studies and horizontal research papers were selected on the basis of advice from private sector, academic, standards organization, public interest group (e.g., environment and consumer) and government advisors. The papers distributed at the Symposium were in draft form. Following an editing process, selected papers will be published in final form.

A key question underlying research undertaken by the Voluntary Codes Project was whether the Canadian federal government should produce a Guide to the use of voluntary codes akin to those developed in Australia and New Zealand.

Highlights From Plenary Sessions and Case Study Presentations

All papers prepared in advance of the Symposium were intended to answer, to one extent or another, the following questions:

1. What are the external conditions under which voluntary approaches tend to be most and least successful?

The external conditions vary depending on the code and include actual or implied legal threats, market pressures, and peer group pressure within an industry. From a government perspective, the interest in voluntary codes is motivated by government cutbacks and a growing recognition of the limitations of conventional command and control regulatory approaches. The watchword for government is to regulate smarter with diminishing resources. As well, some issues such as taste and public decency in advertising may be more easily addressed through voluntary codes than through law.

From an industry perspective, when there is more than one of legal, market and peer pressures present, the likelihood of a voluntary approach being successfully adopted may increase. In addition, for risk averse investors and law abiding businesses, legal and market threats (such as boycotts) need only be credible - even if remote - not necessarily of high probability. For many codes, consumer pressure through product markets and public pressures may be critical to code development and implementation.

The effectiveness of consumer and public pressures will vary depending on the type of product (e.g. whether it is a final consumer product or intermediate good), the type of market (e.g. the number of players, their size, import/domestic considerations, stability), the extent of public concern or "outrage," and whether there is some natural affinity between consumer and industry interests.

The effectiveness of codes in areas such as advertising, cable television, clothing and hockey and bicycle helmets are linked in part to the fact that these are final consumer goods which are important to Canadians and whose characteristics in terms of safety, availability, choice, quality, and/or public taste and decency are quite evident to the average consumer. In contrast, Responsible Care and ARET generally address intermediate products, but this is compensated for by the high degree of public concern and interest with respect to the effects of the industry's activities on the environment. With respect to the Sustainable Forestry Management system developed under the aegis of the Canadian Standards Association, the threat of a consumer boycott in Europe against Canadian forestry products is heightened by the fact that European consumers and forestry producers hold some interests in common.

The chances for success may also be enhanced when a code holds the potential to achieve public interest goals as well as generate private sector benefits. As stated by one participant, voluntary codes work because they bring value to industry, customers and others. An effective voluntary code can enhance industry competitiveness and help to maintain or enhance market share in the face of public and media pressures and potential boycotts. They can facilitate diffusion within an industry of new technologies and best management practices. They can help an industry to improve its public image and thus attract the "best and the brightest" in recruiting employees.

Economic analysis suggested that in certain circumstances a voluntary code can achieve public interest goals such as lowering pollution while at the same time enhancing industry revenues, profits and market share, by inspiring consumer confidence and expanding consumer demand. These results point to the potential for "win-win" solutions for all stakeholders from the effective application of voluntary codes in the right market circumstances and with strong commitment from industry leaders.

It is also important that the interests of various stakeholders be well aligned and mutually understood. For example, it is important that consumer groups, industry and government have a good appreciation of the attitudes of consumers/citizens towards voluntary codes and the role of government in their development and implementation. As part of this project, the Consumers Council of Canada conducted a survey of knowledgeable consumers regarding their views on this matter. Preliminary results from this survey suggested that respondents were favourably disposed towards voluntary codes, particularly when consumers are equal stakeholders with business, the codes are well publicized, an entire industry is covered, and sanctions have real teeth. The two concerns rated most highly by the consumer respondents were:

Will a seller be available to deal with complaints?
Does a product with hidden qualities meet the appropriate standards?

At the same time, the survey respondents clearly indicated that they would be more comfortable with a code when there was some government involvement and support. Other horizontal papers indicate this can take many different forms --as catalyst, facilitator, broker, etc. (see below), endorser, provider of framework rules and regulatory support, direct participant etc. --depending on the circumstances. Government can help as well by eliminating statutory impediments and sharing information and expertise on code development, implementation and experience on an ongoing basis.

A strong industry association is seen by many as an important prerequisite for a successful code. Some industries lack the infrastructure for self-management. At the same time, in some cases there may be value in separating the rule-making and adjudication functions of associations from the advocacy functions, such as with the cable TV sector.

The number of players in the industry may also be important. The chances of success are less when there are a large number of companies; free-riding is thus more likely. At the same time, it was stressed that traditional regulation is also less successful in such an industry. A third situation which is prevalent in many Canadian industries is one with a few major players and a competitive fringe of some number of smaller companies.

Inducements to participate in voluntary codes and adhere to their terms range from the threat of invocation of a law through to industry imposed sanctions for non-involvement and non-compliance, to use of institutionalized incentives (e.g., access to valuable information, use of logo), and market-based inducements (e.g., failure to participate may reduce market share).

A wide number of private sector inducements/sanctions exist to encourage firms to participate in voluntary code initiatives, and comply with them, particularly where there is an association playing an oversight role to promote compliance by member firms. An association may:

require adherence to the code as a condition of membership;
offer certain privileges in exchange for compliance (e.g., provision of information, training);
issue a press release regarding non-compliance;
fine its members; establish peer group pressure sub-committees;
compel firms to publicly report their third party audited compliance records;
require that firms engage in dispute resolution; require that compensation be provided; and
inspect facilities and test products.

Possible sanctions are discussed further below.

The effectiveness of the inducements to participate in and comply with code initiatives is an important factor in gauging the future success of a code. The maintenance of effective inducements may be important to maintaining a code's success over time. There is some suggestion that the threat of legislation should never be fully removed, and that this is important to the continued success of voluntary initiatives. It also emerged that some form of government support should be considered to make voluntary codes more effective.

Voluntary codes can be particularly useful as an extension of framework law. Firms may decide to develop and adhere to a voluntary code in the hopes of demonstrating that they are exercising due diligence, for the purposes of penal or tort legal actions. Codes backed up by framework law may be especially effective for a sector with a few major producers, a multitude of smaller firms, and easy entry and exit. Framework laws may help to keep the smaller players and new entrants in line and therefore minimizes the free-rider problem.

International forces can also be important. Preliminary discussions suggest that consultations for voluntary code initiatives with known international implications should include international players (e.g., NGOs from the country which is receiving the imports bearing the logo indicating the product or service meets certain standards). The need for this appears to be evident in the CSA Sustainable Forestry Management code, since it is non-Canadian (e.g., German) consumers who will buy or not buy Canadian forestry products, depending on the existence of perceived acceptable environmental harvesting standards.

2. What are the processes for development of effective voluntary codes (including, e.g., the roles of NGOs, the private sector, and government)?: The financial costs of creation and implementation of voluntary codes are limited to the immediate parties involved (e.g., firms, associations, participating NGOs, governments to the extent of their involvement, and consumers) whereas the financial costs of law development and implementation are spread across society. This can be viewed as both a strength and a weakness of voluntary code initiatives. It is a weakness in the sense that associations may decide against voluntary initiatives if the costs cannot be spread beyond its members and their customers. It could be a strength where a particular sector engages in a voluntary initiative so that costs of the program are defrayed by only that sector and its customers without any additional expense to the general taxpayer.; Adoption of voluntary codes can lead to an internalization of responsibilities within an industry sector (including use of peer pressure through formalized sub-committees) which may be absent from externally imposed legal initiatives.; One of the most important points of consensus from the Symposium is that processes for developing voluntary codes must be open, transparent and inclusive. In particular, many stressed the importance of consumer groups and/or other NGOs being well informed and fully involved from the outset. Meaningful involvement by consumer and other public interest groups is often what sets apart the successful codes from those which have received less support from government and the general public. At a time when citizens are better informed, more demanding and more sceptical of so-called "elites" (government, industry, the academic and scientific communities etc.), it is difficult to imagine a situation where a voluntary arrangement could succeed without meaningful community, consumer and/or other third-party involvement. The case study presentations provided strong evidence of this.; The penultimate question for consumer groups and other NGOs is who pays for their contributions. Few non-government groups have the resources to contribute to every voluntary code now coming down the pike. Since code initiators are usually the primary beneficiaries of such programs, a strong argument can be made that they should pay for the time and expertise of public interest group participants. This in fact is already occurring e.g. in the development by the forestry industry of its sustainable management code.; Proponent funding of consumer and other groups would appear to be justified in light of the important contributions and services which consumer and other NGO groups provide, and the benefits codes often provide to their industry participants. In determining their contributions and negotiating funding, consumer and other NGO groups need to recognize that they are often negotiating from positions of strength, not weakness. Concerns were expressed that private funding could be manipulated to buy-off NGOs. However, this funding should be seen not as a subsidy or gift, but as a "fee-for-service" to pay for the important experience, insights, information and credibility that NGOs bring to the voluntary code process.; Government's role, stake and objectives also need to be well identified and thought out. Government's contributions can take many different forms - as catalyst, facilitator, broker (to ensure that all of the relevant parties are involved), endorser, provider of framework rules and regulatory support, direct participant etc. - depending on the circumstances. Government can help as well by eliminating statutory impediments and sharing information and expertise on code development, implementation and experience on an ongoing basis.; Industry associations can act as catalysts, information brokers and representatives of the broader industry and economic interest. Peer groups pressure and the development of relationships of trust among the participants can be pivotal at each stage of the process.

3. What are the integral components of effective voluntary codes (e.g., the nature of the obligations, the incentives and sanctions for compliance, dispute resolution procedures, review and reporting provisions)?: Transparency is important in terms of the design and components of the code. The need for transparency is heightened by the fact that voluntary codes can often be found nested in a complex scheme which encompasses overlapping statutes, regulations, policies and non-governmental "voluntary" arrangements. These overlapping instruments offer the benefit of different sanctions and remedies which can be mutually reinforcing. The costs may be too much complexity and too little transparency and public understanding which particularly hurt consumers and small business.; It is important therefore that the code itself be in plain language and that the rights and obligations, and perhaps even the links to existing statutory and/or regulatory systems, be clearly spelled out. It is also necessary that code development and design include resources to publicize the code to the general public and for industry and other participants to fully inform and educate all of their members and member employees.; That having been said, it may not be necessary that a code have a high public profile if the the code's complaint handling and redress procedures are easily found when a problem does arise.; Some of the discussion focused on the need to track results and impacts through establishing an evaluative framework from the outset and using this to guide and economize on data collection and interpretation during the life of the code. (The theme was - if you cannot afford to track the code, perhaps you cannot afford to develop it - with the implication, or implied threat depending on your perspective, that government should perhaps re-consider more traditional regulatory interventions.) Tracking should identify not only the overall consequences but as well the distribution of benefits and costs among different groups (the winners and losers).; The results of the tracking should be published and code members should be held publicly accountable for making the necessary changes. Many of the tools developed to evaluate programs, measure the impacts of proposed or actual regulatory schemes, and analyse the private sector benefits from strategic alliances and other corporate arrangements, could be readily adapted to the evaluation of voluntary codes.; The effectiveness of monitoring and credibility of evaluation is often enhanced when third parties are involved, be they members of the community, interest groups or accredited auditors.; The effective implementation of a code also requires credible and effective sanctions. One insight from the case study presentations is that a mix of sanctions and disciplines - which reinforce each other - may be better than just one, particularly to reduce the free-rider effect. These can include legal sanctions and threats, consumer and/or competitor complaints to the code administrators, potential loss of a license or industry association membership, market discipline - credible threat of boycott or loss of market share for non-compliance, and third-party monitoring and publicizing of non-complying.; Free riders who are not participating in voluntary programs can undermine such initiatives. In this type of circumstance, reinforcement of a voluntary program's goals through regulatory action can be useful.; Questions were raised about the effectiveness of a regulatory system - whether voluntary or mandatory - where the standards are enforced only against domestic producers and vendors, not imports or American vendors across the border. The potential exists however that voluntary codes, which can potentially apply accross borders (e.g., the GAP clothing store labour standards which apply to third world suppliers), may have a better chance of regulating some cross-border transactions than government regimes which are constrained to operate within national jurisdictions.

4. What are the necessary components for effective implementation (e.g., consistent application of rules, role of third parties, transparency)?: There may be value in institutionally separating key implementation functions. Thus, for example, dispute resolution and inspection could take place by different bodies than code development. See the cable television case study for an example of this.; While voluntary codes move some aspects of the achievement of public policy objectives, rule making, consensus building, accountability, and enforcement from the state to non-government groups and private parties, they may not mean less bureaucracy and lower costs in total for the economy. Voluntary codes may not be "regulation on the cheap." Proponents should ensure that the code implementers have sufficient technical and financial resources and sufficient clout to effectively enforce the code and track results (see below).; A code should have the flexibility and capacity to mature, respond to new developments and new learning, and make mid-course corrections to remedy mistakes in the original design. An incremental approach which builds step-by-step on a successful but modest beginning may be better than aiming too high and failing gloriously.; Accordingly, the effectiveness of a voluntary code initiative may be an incremental, evolving proposition. For example, rules might be promulgated in year one, effective compliance monitoring and reporting in year five, rule "tightening" in year eight, and expanded application in year ten, etc. The GAP clothing standard might be an example of this, since it started as an unmonitored code, and now has become a third party inspected instrument. This suggests the importance of "designing in" continued inducements to review, improve and comply as part of voluntary code arrangements.; Following from this, while there may be an initial stimulus to put a code in place, we also need to understand the conditions which will drive continuous compliance and improvement after that. It may be possible to design continuous improvement directly into voluntary codes. Examples: through sunset review clauses; advisory committees may meet regularly to review progress; it may be that market pressure might drive continuous improvement. The continued threat of legislation may drive improvement. Negative publicity that would result from reported non-compliance may be sufficient to stimulate continued vigilance.; To be successful, voluntary codes may need to be supported by other instruments - e.g., adherence to codes can be made a term and condition of inter-firm contracts (or in government procurement contracts), compliance with voluntary codes can be the basis of tort and penal liability determinations of reasonableness and due diligence, codes may be cross-referenced with other voluntary and legal regimes, compliance (and non-compliance) with codes can be the subject of regular media and NGO reports, etc.. Voluntary codes often operate in the shadow (and the glare) of the law - and we could add in the shadow and glare of markets, private sector institutions, public attitudes and other aspects of the external environment. By "shadow of the law," we are referring to the fact that the exact connections to legal regimes may not be fully understood, articularted or developed - but the stadow is still there.; Effective implementation may require that the code have similar effects regardless of the type and location of the company member, the type of product, and whether the product is imported or domestic. A totally level playing field may be impossible to achieve but should be approached to ensure adequate fairness across participants.

5. Broader observations which cut across two or more of the previous questions

Voluntary codes should not necessarily be seen as discrete policy instruments but rather as part of a continuum moving from detailed law and command and control regulation through various forms of co-and self-regulation, ending in individual compliance with societal norms and "letting the market do it." Voluntary codes draw on features from both ends of the spectrum, and frequently work in conjunction with other instruments and factors.

Concerns were raised about the competition effects of voluntary codes, and that proponents should check with the Competition Bureau during code development. It was noted that the methods used by the Competition Bureau to assess the competition issues raised by mergers, joint ventures and strategic alliances, could be applied with some modification to voluntary arrangements. It was noted as well that very few mergers and similar corporate arrangements raise issues under the Competition Act.

One approach is that the proposed Guide should contain a section on the circumstances under which a voluntary arrangement may raise an issue under the Competition Act. One point stressed during the Symposium is that involvement by final consumers and/or other customers can minimize the danger of collusion, but only if these groups have access to the technical information and expertise needed to allow them to contribute effectively to code development and implementation.

One presenter brought an American perspective to the debate. He noted that voluntary approaches in the U.S. are more closely tied to regulatory schemes (e.g. self-regulation is specifically authorized by regulation in the securities industry and comprehensive permitting under environmental law) and the proponents/demandeurs are more often government that the private sector or some other non-governmental group. This is consistent with other evidence that the regulatory environment in the U.S. is more law based and potentially adversarial, than the Canadian system.

Particularly in the areas of consumer protection and environmental standards where voluntary arrangements are most evident, government should be alert to attempts to delay needed legislative action. The regulatory process cannot be fully privatized - a successful code often operates against a backdrop of regulatory inititatives and enforcement. Voluntary codes can be viewed as small pools of voluntarism in large pools of regulation, another tool in addition to regulatory instruments which are neither a regulatory substitute nor a panacea. The Symposium and project are not about deregulation but rather a different way of regulating.

In his closing remarks, the Academic Advisor and General Editor for the project and publication, David Cohen, Dean of Law, University of Victoria, indicated his view that there is room for a guide on voluntary codes which among other matters would cover:

the appropriate background conditions for developing and implementing a code, including industry leadership and a strong industry association willing to capitalize on or provide that leadership and manage the code;
a clear articulation of objectives;
identification of appropriate and effective decision rules - in his view unanimity will not work in many cases;
clear identification of the core elements of a code, and of its anticipated direct and indirect impacts on participants and non-participants alike;
a vehicle to assess the effectiveness of the code itself - in terms of its impacts on and success in achieving both public and private sector goals.

Next Steps

In his remarks, Industry Canada's Deputy Minister, Kevin Lynch, threw out the challenge to build on this research in order to move forward the voluntary codes agenda over the next six months by means of the completion of some important project deliverables. These would include the preparation of a Voluntary Codes Guide to assist industry, government, consumer groups and other stakeholders in developing codes in the future. There was general support for this from other participants.

Based on the research including some of the points raised in this document, the Guide would set out the criteria to be used by government, consumer groups and other stakeholders to decide whether and how to contribute to a code initiative promoted by the private sector or other group. The hope is that a Guide would:

facilitate the development of more effective voluntary arrangements in the future;
better ensure that future codes are consistent with the "best practices" developed in Canada and elsewhere;
alleviate some of the pressures to create new regulatory regimes where voluntary approaches would suffice; and
assist in the development of multi-stakeholder support for voluntary codes, other self-regulatory instruments, and regulatory reform more generally, in particular from consumer associations and other NGOs which in the past have displayed some support in principle but some scepticism in practice.

One participant stressed that while the Australian and New Zealand Guides can provide useful points of departure, the developers of a guide for Canada should use the results from this research and the Symposium to place a Canadian stamp on the resulting document and perhaps to set a new standard for guide preparation elsewhere.

Very soon, the results from the Symposium and selected papers and summaries will be available on Consumer Connection, the Office's product on Strategis. As well, all of the research will be published in the coming months. In the meantime, interested readers are welcome to contact the project leader, Kernaghan Webb, at the phone and fax numbers provided below, in order to join the "virtual community" of interested people on voluntary codes now emerging from the research program and Symposium.

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Summary of the Symposium on Voluntary Codes - September 1996

Contents

Introduction

Description of Research Program

Highlights From Plenary Sessions and Case Study Presentations

Next Steps