Research

What business can do to strengthen labour standards

Businesses are not only held accountable for their own actions, but also those of their suppliers.

Media investigations have found evidence that connects China's forced detention of Uighurs to the supply chains of fashion retailers including Adidas and Lacoste. Both these brands have agreed to cease all activity with suppliers and subcontractors in China's Xinjiang province.

Recently, the UK-based apparel firm, Boohoo, was found to source from a factory in Leicester, England, that was alleged to have paid workers below the minimum wage and failed to protect them during the Covid-19 outbreak.

Boohoo’s share prices promptly dropped by 23%, major investors walked away, and retailers suspended selling their merchandise. The company said it was 'shocked and appalled' and launched an independent review. Such stories seem to arise constantly in a range of industries, including food, electronics, and furniture.  

What can businesses do?  The most common responses involve a set of supply chain responsibility policies, or private regulation, by which companies set standards for their suppliers and regulate compliance with those standards.  Some companies, such as Levi’s and Nike, established these systems over twenty years ago.  Now they have diffused widely.  Nearly all major companies in consumer facing industries have social and environmental standards for their suppliers.  

How well do these systems work?  A network of researchers has been investigating these questions over the past decade.  In new research, we found that supply chain compliance programs often fail to solve the problems that they were designed to address.  Supplier sustainability performance and working conditions remain far from businesses’ own minimum standards of acceptable conduct.

Why?  The barriers to making private regulation work are many.  Businesses often fail to integrate their sourcing departments and their supply chain responsibility departments.  One firm we studied, that has a strong reputation for sustainability, was unable to coordinate purchasing and social compliance.  We found that when social compliance managers would discover violations and communicate that these practices were unacceptable, sourcing managers who were unaware of the poor social performance would give those factories more business.  And when factories made efforts to remediate violations, sourcing managers would reduce orders.

Lack of coordination between sourcing and compliance sent the wrong signals to factories.  In addition, researchers have found that the variety of standards and lack of consistency in auditing creates opacity in supply chain compliance programs.  Managers are unable to reliably understand how they are performing or to connect new practices to improvements.  And often political conditions in countries where production takes place frustrate efforts by companies to collaborate with unions and other civil society groups to implement lasting solutions.  For example, after the 2013 Rana Plaza garment factory collapse, unions and businesses created the Accord on Fire and Building Safety, which has been credited with dramatic improvements in factory safety.  Notwithstanding the support from leading global businesses for this programme, local government and industry actors in Bangladesh worked to undermine the Accord to prevent it from empowering workers. 

Yet, progress can be made.  Clearly, businesses need to avoid some of the practices described above—they should not reward suppliers with more business when compliance levels drop.  Going beyond fixing these problems, research shows that businesses can help train their suppliers to adopt better practices.  For example, one study of thousands of audits showed promising results when experienced auditors took a cooperative approach to engaging with suppliers to solve problems.  Businesses are also working with unions in new ways to address seemingly intractable challenges.  One such program, the Action Collaboration Transformation Living Wages Initiative (ACT), has helped establish industry-wide collective bargaining agreements in some garment-exporting countries with the aim of achieving living wages.  Interestingly, this initiative did not come in response to a scandal, but was built based on personal relationships that formed between managers and labor leaders over years of working together.

Notwithstanding these opportunities, more needs to be done.  Research suggests that businesses will only have just and sustainable supply chains when two major obstacles are overcome.  One is that business models need to be aligned with improvements in social and environmental practices among suppliers.  That is, businesses cannot build supply chains that rely on buyer power pushing down prices and demanding that suppliers respond to ever increasing demands of speed and quality.  The second is that the countries where production takes place need to develop viable institutions that protect citizens and workers’ rights.  Without these two enabling conditions, greater progress will be hard to come by.

The upshot is that businesses can contribute to these outcomes by combining the everyday tasks of working with suppliers to improve with efforts to solve these structural barriers.   Businesses need to not only adopt codes of conduct, but they need to work towards new business models that allow for greater partnership with suppliers. They also need to support political change in countries where their production takes place. For example, in response to the Covid-19 crisis, many businesses joined unions and the International Labour Organization to call for action to support workers, including income support.  And many businesses that source from Cambodia recently sent a joint letter to the government urging greater legal protections for unions.  By aligning their political actions with their supply chain governance, these businesses help create the conditions under which they can improve supplier working conditions and sustainability.