This is Part 1 of the content series STEEP: Five Drivers of Change in Supply Chain. The series analyzes Social, Technological, Environmental, Economic and Political issues in the supply chain industry to gain a deeper insight. To see an overview of the series, click here.
Western society’s expectation that corporations focus on socially responsible practices has grown in the wake of repeated exposure to reports of poor working conditions, human rights abuses and deaths at factories in developing nations that produce goods for some of the world’s leading brands.
Lacking a corporate social responsibility infrastructure can prove costly to multi-national companies regarding reputation and the bottom line, though to date, it hasn’t caused a major market player to collapse entirely.
In recent years, there have been few events that illustrate the need for CSR in supply chain operations more than the 2013 Rana Plaza disaster in Bangladesh, where a ready-made garment factory collapsed, killing 1,134 people and injuring another 2,500. The goods manufactured at Rana Plaza were linked to some North American and European retailers, including Wal-Mart, J.C. Penney and Britain’s famously cheap-yet-chic fashion chain Primark.
The effect of Rana Plaza rippled out into all of Bangladesh’s garment manufacturing sectors, an industry that comprises 80% of the country’s exports. Exports make up 20% of Bangladesh’s economy according to Bloomberg, making Bangladesh the second-largest exporter of garments in the world behind China.
Following the disaster, companies receiving goods from Bangladesh were viewed as a potential contributor to human rights violations. Protests were waged against companies like Gap, despite the fact that Gap didn’t actually receive garments from Rana Plaza. The incident sparked a sudden surge of consciousness surrounding the working conditions in Bangladesh, where Gap was one of the largest producers of ready-made garments.
The Fallout of Corruption and Neglect
Garment manufacturing in Bangladesh proliferated over the last 35 years, as companies moved there to capitalize on cheap labor costs. A by-product of such rapid growth is a lack of regulations when it comes to construction standards and working conditions. Factory fires have claimed thousands of lives over the decades, as corruption in local government and regulatory agencies allowed factory owners to cut corners in regards to safety and push employees into working long hours in conditions that would never be allowed in the West.
From the time of its construction, Rana Plaza was a disaster waiting to happen. The building, originally designed as a four-story retail center, was misappropriated when it became an eight-story garment factory. The load-bearing columns that supported the floors of the building were never intended to house heavy machinery and materials for the multiple ready-made garment factories it housed.
The fallout from the disaster wasn’t limited to a public relations nightmare for firms sourcing goods in Bangladesh; companies experienced fluctuations in both stock value and overall revenue for a time surrounding the disaster.
CSR Reaction Proves Important
The reaction of companies is important to note. Before the disaster, CSR plans concerning the Bangladesh factories were discussed but rarely monitored. In the aftermath, companies that manufactured goods in Bangladesh, whether at Rana Plaza or other factories, had to react. This led many major retailers, from Abercrombie & Fitch to British retailer Tesco PLC, to sign an accord aimed at compensating the families of workers who died at Rana Plaza and increasing safety inspections and standards at factories around the country.
In all, more than 260 companies signed the Bangladesh Accord on Fire and Building Safety, formed within weeks after the disaster. It is sometimes referred to as the “European” initiative, as its members include several top European brands.
But several companies delayed, including Wal-Mart, Target, Kohl’s, J.C. Penney and 22 other prominent North American retailers. Their lack of commitment was perceived as an attempt to duck responsibility, according to a Stanford University report on the effect of Rana Plaza. Within two months, the remaining companies that had not signed the accord formed a separate task force, the “Alliance for Bangladesh Worker Safety,” with a goal to improve working conditions.
The two reactions are notable as the effect on stock returns varied by group. According to the Stanford report, companies associated with the collapse experienced large fluctuations in stock returns. Firms that signed on to the accord experienced “significant, negative cumulative stock returns” the more times their names were mentioned in news reports about the disaster. Alliance firms, however, experienced negative stock returns in the quarter following the collapse, whereas the firms that signed the accord did not.
One explanation of this is that firms that signed the accord were considered socially responsive, whereas alliance firms were thought to be “eluding responsibility.”
The Stanford report concluded that in all, CSR initiatives put in place by companies include benefits that outweigh the costs.
Changing the Retail Supply Chain
Questions persist today about what has actually changed in Bangladesh after the disaster.
The accord set in place a five-year agreement to inspect Bangladeshi factories and correct any safety violations. According to a 2016 article from National Public Radio, 50% of the problems from subsequent inspections had been fixed, and 23 factories that refused to comply with new standards were deemed unsuitable for doing business with western retailers.
In the first two years after the collapse, teams of engineers closed or evacuated 17 factory buildings deemed unsafe. Normally, the Bangladesh Accord on Fire and Building Safety is scheduled to conduct 200 inspections per month, but according to The Guardian, the group was only able to achieve 50 in the first few months of 2015.
Despite the two initiatives, many families affected by the disaster have yet to be compensated, and little has changed in other factories around the country. Wages remain among the lowest in the world, safety inspections remain behind schedule, and despite laws passed by Western governments demanding companies clean up their supply chains, regulation on the ground in leading garment producing countries is shoddy at best.
“No one’s watching them,” said Brad Loewen, chief inspector for the Bangladesh Accord on Fire and Building Safety in an interview with The Guardian in 2015. “There’s no government regulator, no overall project management. They’re just building whatever they want.”
Two questions persist. First: if major companies merely see fluctuations in their stock returns, but are never seen approaching bankruptcy due to these social obligations, how important is CSR to the consumer?
Second: is it possible to monitor clothing producers around the world?
Is It Possible to Guarantee Ethical Clothing?
Guaranteeing ethical clothing is an ideal people can get behind. The inclination to hold Western retailers accountable for spending money on “clean clothes” is understandable, but the reality for retailers looking to ensure clean supply chains is much different.
In an article for The Huffington Post, “The Myth of the Ethical Shopper,” writer and human rights consultant Michael Hobbes discusses the challenges facing multinational corporations in guaranteeing the regulatory standards of foreign governments. As evidence, he offers up the 2012 Tazreen garment factory fire that claimed the lives of 112 people while injuring hundreds more in Bangladesh.
In the months that followed the disaster, Wal-Mart’s name was mentioned in numerous news reports. The finger of public scrutiny was pointed at the retailer for being responsible for 60% of garments produced at Tazreen at the time of the disaster. However, the ire directed at Wal-Mart fails to consider the system Wal-Mart is trying to work with in Bangladesh.
Wal-Mart offers clothing at a particular price point due to the method of production used to create it, which the retailer does not own or regulate. The company instead outsources production and all the responsibilities and tactics that go along with it to mega-suppliers, a common practice among major western brands.
These brands all have codes of conduct in place for their suppliers, and in the case of the Tazreen factory, Wal-Mart had conducted an inspection of the facility a year before and told suppliers that they were banned from using it. So how were its products found there following the disaster?
The contractor Wal-Mart hired for the production of the clothing was a mega-supplier named Success Apparel, who then subcontracted the work out to another company called Simco. Simco then – without consent from either Success Apparel or Wal-Mart – subcontracted a percentage of the work to the parent company of the Tazreen factory, which then assigned the work to be done at that facility.
As these levels of subcontracting are common, tracing where goods come from is often impossible for Western brands unless they insource production and essentially become their own mega-suppliers. That may be possible for a company the size of Wal-Mart, and following some of these disasters, the company has actually done just that to some extent, but it’s harder for smaller brands.
Even with insourcing, however, there are still problems surrounding the practice of subcontracting, because Wal-Mart, or any other company for that matter, will never completely control every element of its supply chains. Subcontracting keeps prices at Wal-Mart and fast fashion stores like J.C. Penney competitive because those companies don’t have to regulate and maintain all levels of production when it comes to the merchandise they sell.
As long as subcontractors work in corrupt environments where deceiving auditors and farming out orders is standard practice, consumers’ efforts to punish the big brands and those brands’ power to implement change will fall short of being able to push for truly ethically sourced clothes.
There is another factor to consider. As Hobbes notes in the article, the worst conditions are probably not at factories producing clothes for Western retailers, but at ones producing clothes for other large markets such as India and China, nations which have different social responsibility standards. Western exports count for less than half of what these mega-suppliers are producing in some cases, meaning the power of the Western consumer isn’t what it once was.
It seems then, consumers and the companies they buy from have a limited amount of power when it comes to buying ethical clothing unless international regulatory bodies and local officials in countries like Bangladesh are put in place to guarantee worker safety, fair compensation and proper construction of factories. Additional expenses would be required from all parties, many of which may not view it as being worthwhile, which leads to another question: Is ethically sourced clothing all that important to consumers anyhow?
How Consumers View CSR
Given the results of the Stanford research, which showed that stock returns for brands associated with Rana Plaza simply fluctuated before eventually stabilizing, and considering that no company to date has gone out of business due to a poor social responsibility record, it’s worth asking how much consumers care about CSR. The research in this area shows a dichotomy between what people say they want and what they actually seek out.
A 2013 Ipsos MORI survey released a little more than two months after the Rana Plaza incident interviewed 18,500 consumers in 16 countries, and revealed that three-quarters of respondents said they were willing to pay more for ethically-sourced clothing. Additionally, 38% stated that they were boycotting brands for ethical reasons related to working conditions for employees at factories.
However, two-thirds of respondents also said that they placed the blame at the foot of local authorities and not the western brands in cases like Rana Plaza. Around half said that the price of a product is the most important thing they consider when shopping.
A year later, Software Advice took the research a bit further, finding consumers claimed they were willing to spend up to $27.60 more for products made by workers in good conditions.
It appears to be an easy choice for companies marketing themselves to a consumer base growing in consciousness. But a 2014 study from Nielsen revealed that only 32% of North American consumers surveyed took the time to check the labeling of a product to ensure that a brand is committed to a positive social impact.
So while CSR is indeed important and growing in relevance, whether in times of crisis or not, it appears it is perhaps the most superficial of the five factors which drive change in business today. It may temporarily affect a bottom line, improve or tarnish reputations or make for some nasty headlines with a company’s name in it, but as history shows, it’s generally not enough to bring down an entire organization.
Infographic Sources:
http://www.softwareadvice.com/scm/industryview/key-ethical-priorities-2014/
http://www.triplepundit.com/2016/05/4-key-steps-to-increasing-strategic-value-of-your-csr-programs/
