When labour standards vanish in global supply chains

It’s unclear who is legally responsible for the exploitation

In April 2013, an eight-storey commercial building in the Bangladesh capital of Dhaka collapsed.

The building contained clothing factories producing for export, a bank and several shops. The day before the collapse, cracks started appearing in the building and the shops and the bank on the lower floors were immediately evacuated.

Garment workers, however, were ordered to return to work the following day, resulting in the death of 1129 and the injury of 2500 more.

The disaster exposed the lack of building and labour standards in the garment industry, including the association of leading international brands with production in sub-standard factories. This put the issue of global supply chains firmly on the news agenda.

Global supply chains coordinated by multinational corporations account for some 80% of world trade and, according to the International Labour Organisation, more than 450 million people work in supply chain-related jobs, in sectors such as clothing, electronics and food.

These jobs can offer important opportunities for economic and social development, but they can also lead to exploitation of workers in developing nations, through forced labour, unstable work, very low pay, including underpayment of wages, and employment in unsafe factories.

It is a difficult problem to overcome because it is not clear who is legally responsible for the exploitation. Furthermore, work is often subcontracted out to smaller sweatshops which lie beneath the radar of lead firms – big brand marketers and retailers located mainly in Western countries.

Reputational threat

Stephen Frenkel, a professor at UNSW Business School, and co-authors Elke Schuessler from Freie Universitat Berlin, and Chris Wright from the University of Sydney, describe the Rana Plaza collapse as a "catastrophic focusing event".

In their paper, Focusing Events and Changes in the Regulation of Labour Standards in Australian and German Garment Supply, the researchers examine how firms reacted to this human tragedy.

Changes in behaviour by companies were driven by the perceived threat to corporate reputation arising mainly from critical examination and pressure from NGOs, the media, unions, consumers and investors.

Frenkel and colleagues discovered "firms subjected to pressure from external stakeholders made more and deeper changes and that stakeholder pressure varied across national contexts, with Australian firms being more broadly targeted and responding more vigorously than German firms".

This finding surprised the researchers, as they had expected stakeholder pressure to be stronger in Germany. The result may be because large clothing companies in that country had been targeted in the past and had already revised their procurement policies before the Rana Plaza collapse.

‘They might say they do but the reality is that [there’s] little empirical evidence that consumers actually act on their beliefs’

- MANS CARLSSON-SWEENY

Proxy for management quality

Mans Carlsson-Sweeny, head of environmental, social and governance (ESG) research at fund manager Ausbil Investment Management, says investors in Australia are becoming more interested in supply chain issues, as a proxy for management quality:

"The way a company deals with the supply chain, I think can be quite indicative of how it deals with other stakeholders – whether that's regulators or consumers."

Likewise, a company's reaction to the Rana Plaza disaster is also telling: "If a company is paying lip service to labour issues in Bangladesh three years afterwards, I think that's saying something about management quality."

According to Carlsson-Sweeny, there are also good business reasons to improve the supply chain. Companies that ensure their suppliers pay a higher wage end up with better product quality, shorter lead times, and even a lower cost of goods sold.

Reducing costs by paying more is counterintuitive, but Carlsson-Sweeny explains that where wages are very low, staff turnover is high, adding risk to a company's supply chain. Workers who stay at the same factory are more productive.

"If a company is not paying attention to labour standards, they might end up with supply chain disruption and it can also have an impact on earning sustainability," he says.

"What's changed today is retailers probably have made a much bigger effort in terms of understanding and getting visibility over their supply chain and their disclosure is also improving. As an example, you can see companies such as Kmart and Woolworths and Target actually publishing the list of factories they're using."

While investors are increasingly interested in supply chain issues, consumers are less so, Carlsson-Sweeny says. Many don't trust what companies say about where their goods come from and feedback from companies suggests that very few consumers act on their concerns.

"They might say they do but the reality is that [there's] little empirical evidence that consumers actually act on their beliefs," he says.

‘If people along the chain had more conversations they would realise that each was a critical link on which all depend’

STEPHEN FRENKEL

Driving a hard bargain

In another paper, Towards Shared Responsibility: Theory and Practice in Regulating Labour Standards in Global Supply Chains, Frenkel and fellow researchers Ivanka Mamic and Laura Greene looked into who should bear responsibility for upholding labour standards in supply chains.

The main basis for regulating labour standards in factories in developing nations is through codes of conduct developed and implemented by lead firms – usually located in first-world nations, the authors write.

But there are flaws in this model. Lead firms often do not invest in enough resources to ensure that suppliers comply with international standards. Occasional audits may reveal little of the reality of shop-floor life. And lead firms can claim legal immunity on the grounds that they operate outside the jurisdiction of local law where transgressions are occurring.

The authors maintain that lead firms may contribute to low labour standards by setting tight purchasing contracts that preclude factories from improving wages and conditions.

They argue that a shared responsibility model, where participants all along the supply chain adopt a form of collective responsibility, coupled with stronger international law, will be the way forward for more effective regulation of global labour standards.

"If people along the chain have more conversations they would realise that each was a critical link on which all depend. One failure to deliver on labour standards affects everyone's reputation," Frenkel says.

Participants also need to share the profits more. Frenkel says factories in Bangladesh could argue that at the same time as Western companies insist on high labour standards they are driving a hard bargain on the price of the garments. Some flexibility and more trust would help factories to uphold sustainable labour standards.

He argues that this means that consumers need to play a role by being more aware of the origin of their clothing and the conditions under which it is manufactured.

Accepting less than rock-bottom prices can have beneficial consequences for factory workers as long as standards are transparent and implemented effectively. Ethical consumption can come at a very small cost.  

Sustainable procurement

 Jean-Louis Haie is a sustainable supply chain consultant and managing director at Planet Procurement in Sydney. Australian companies and governments have been somewhat slow to adopt sustainable supply chain practices in the past, but Haie says this is slowly changing.

One reason is that Australia is among the 50 countries that will soon adopt an International Standards Organisation standard on sustainable procurement. The standards will outline key principles that should apply if companies want to be taken seriously in terms of sustainable procurement, says Haie, who represented Australia in the negotiations.

The standard requires organisations to exercise due diligence in terms of the sustainability risks that happen throughout the extended supply chain.

"It means that, as a buying organisation, I have to understand what's happening in the external supply chain. It means tier one, two, three, four, five, six, seven, eight, nine, 10," Haie says.

"Because it doesn't matter where the problem happens. If you're buying from the supply chain, you are responsible and accountable."

The second factor is the large amount of infrastructure building taking place, especially in NSW, and governments are starting to include requirements about how supply chains are managed, because large engineering firms often outsource much of their work and they also procure a large amount of materials from overseas.

"When you have a multibillion dollar infrastructure project that requires the suppliers, [and] the contractors to manage sustainability or human rights, environmental issues, labour issues, then it becomes something very important for the supplier," Haie says.