Who’s responsible for factory conditions in poor countries? Has CSR gone too far?

garment-factoryJust who is responsible for the fire in a garment factory in Bangladesh that killed more than 100 workers in November?

The factory owner? The government of Bangladesh? US and European brands and retailers who bought the clothes made there? Shoppers who demand the latest styles at low prices?

And who deserves credit for the improvements in working conditions at Foxconn, China’s largest employer and Apple’s biggest supplier?

Apple? The Chinese labor market? Journalists at The New York Times?

Similar questions could be asked about paint factories that discharge pollution into rivers, toy factories that use dangerous chemicals or factories everywhere that run inefficient equipment or burn dirty fuels.

For nearly two decades, a core belief of the social-responsibility movement  has been that western brands and retailers must take responsibility for the social and environmental performance of the factories in their supply chain. This has created an immense infrastructure–an industry, really, of consultants who write codes of conduct for those factories, inspect the factories, report on them and deploy a combination of carrots and sticks that, at least in theory, bring about improved performance.

In essence, US and European brands have become quasi-governmental, undemocratic standards setters and enforcers of social and environmental norms.

So how’s it working? The year just past put a spotlight on a glaring failure of that system–the fire in Bangladesh, where factory conditions in the garment industry are widely deemed to remain unsafe–and on what has been cited as one of its successes–the new transparency of Apple’s supply chain, and the improved conditions at Foxconn, which supplies HP, Sony, Dell and other electronics companies, as well as Apple.

I’ve thought about these questions since 2005, when I wrote a FORTUNE story headlined Cops of the Global Village, and argued that globalization was not, as critics maintained, a “race to the bottom,” but a more complex phenomenon that actually drove a “race to the top” as US companies exported their health and safety standards to developing countries. The Fortune story ran not long after 80 people died when a garment factory collapsed in, yes, Dhaka, Bangladesh. Cynics might say that the more things change, the more they stay the same….

But things are, in fact, changing, and mostly, though not entirely, for the better. These days, western brands and retailers understand that they are expected to go to reasonable lengths insure that the factories where their goods are made are safe, whether they own them or not. That wasn’t so ten, or certainly 20 years ago.

The New York Times, which produced first-rate reporting on both the Apple and Bangladesh stories in 2012, ran a story last month under the headline As Walmart Makes Safety Vows, It’s Seen as Obstacle to Change that takes the issue of responsibility a step further, all but laying blame for the Bangladesh fire at the doorstep of the giant Bentonville retailer.

The story says that Walmart

has become the world’s largest retailer by demanding the lowest costs from suppliers and delivering the lowest prices to consumers — while promising its customers that the billions of dollars of goods it buys from Bangladesh, China and other countries are produced in safe, nonsweatshop factories. Walmart buys more than $1 billion in garments from Bangladesh each year, attracted by the country’s $37-a-month minimum wage, the lowest in the world.

Reporters Steven Greenhouse and Jim Yardley write that “Walmart led an effort to block a plan to have global retailers underwrite safety improvements at factories in Bangladesh,” citing a 2011 meeting of brands, retailers, factory owners, government officials and labor leaders. During the meeting, executives from Walmart and Gap reportedly argued that it would not be financially feasible for the brands and retailers to pay for costly fire-safety improvements at as many as 4,500 factories.

But–can we really expect Walmart, Gap and other retailers to pay many millions of dollars to upgrade factories they don’t own? Or is this taking corporate social responsibility (CSR) too far?  Isn’t it fundamentally the job of governments and plant owners to insure safety?

Dan Viederman

Dan Viederman

For insight, I turned to a pair of knowledgeable people whose judgment I trust. Dan Viederman is CEO of Verite, a nonprofit group that aims to ensure that globalization works for poor and vulnerable people around the world,  in part by working with big companies on their supply chains. My other source, who I’ll call Aaron, works on supply chain issues for a well-known global brand; he can’t be identified here because he’s not authorized to speak for the company.

Interestingly, they agreed that western brands and retailers should be held at least partly responsible for the Bangladesh fire, which took place in a factory owned by a supplier called Tazreen Fashion.

Dan, who has advised both Walmart and Apple on their supply chains, said that “it is fundamentally the responsibility of the owner of the unsafe facility in which people work to improve fire safety.”

But he went on to say: “It’s the responsibility of a company not to place orders in a factory that they know is unsafe.” Walmart, Sears and a European retailer called C&A all had clothes made in the factory, according to The Times.

Aaron, too, holds the view that the failure of the Bangladeshi government to exercise its responsibility to regulate labor markets does not excuse western brands.

“If you have a joint responsibility for a problem, and other people aren’t doing their share, does that absolve you from doing yours?” Aaron asked. In fact, he said, it may place a higher burden on corporates to do better, particularly in a place like Bangladesh where “the problems were so clear and the remedies were well-known.”

Anyone paying the least bit of attention know about the fire hazards in Bangladesh garment factories. Remarkably, Gap has written policy on Bangladesh fire risks and a dedicated fire safety team based there.

imagesIn its latest Global Responsibility Report, Walmart identified fire safety in Bangladesh as a “key focus” and said it “ceased working with 49 factories in Bangladesh due to fire safety issues.” Dropping a factory, of course, doesn’t help its workers. It just allows Walmart to walk away with clean hands.

So what should be done? It seems clear that the current system of codes, audits, and inspections isn’t working as well as it should. On its website, Walmart says that its monitors did 9,737 inspections at 8,713 factories last year. That didn’t help the workers at Tazreen.

If you need further evidence that the codes-and-inspections system is terribly flawed, consider that a fire in Pakistan last year that killed at least 262 garment workers happened at a factory that had been given a clean bill of health by Alice Tepper Marlin’s Social Accountability International, again, according to The Times.

Of course, companies could simply walk away from countries like Bangladesh and China, which do a poor job of regulating labor markets and repress workers who try to organize. But they won’t and probably ought not to because, on balance, the globalization of industries like clothing, shoes, toys and electronics has been good for workers, lifting many millions of them out of poverty.

“If you stay away from countries that are not going to be code compliant, you stay away from countries where jobs and income are most needed,” Aaron said.

And, of course, the companies are driven by price competition to seek out suppliers in low-wage countries. The minimum wage in desperately poor Bangladesh is $36 month.

(To make matters worse, the US imposes a tariff on most of the $4 billion in clothing that comes in from Bangladesh, adding to the cost squeeze on factories.)

One problem with the current system of codes and audits, Dan told me, is that companies typically make their sourcing decisions first and only then bring in their CSR compliance people. It would make more sense to merge these functions, and to source only from factories that meet safety and environmental standards from the get-go.

“The Bangladesh example points out yet again the weakness and, in some sense, the danger of the after-the-fact social responsibility model,” Dan said. “In almost every company we deal with, there’s an inadequate integration of social responsibility into the buying decisions. Workers are suffering from the fact that they are an afterthought, for the most part.”

Incentives could be deployed differently. If buyers were compensated, or penalized, based on the social and environmental performance of their suppliers, they’d pay more attention. Walmart is moving in this direction with its new supplier sustainability index.

Naive as this may sound, it seems to me that big corporates also could lobby governments in China and Bangladesh, urging them to protect their own people. That’s assuming, of course, that the big companies actually care about the workers in their supply chains, and would be willing to absorb the higher cost of safer factories.

apple-logo1The Apple story of 2012 suggests that companies do care, if only because their reputations matter. After a wave of negative publicity, and a change at the top of the company, Apple under CEO Tim Cook has stepped up efforts by the company to improve the social and environmental conditions in its supply chain. Last month, The Times reported:

Foxconn, China’s largest private employer, pledged to sharply curtail workers’ hours and significantly increase wages — reforms that, if fully carried out next year as planned, could create a ripple effect that benefits tens of millions of workers across the electronics industry, employment experts say.

Apple has also begin working with environmental activist Ma Jun to try to curb pollution on its supply chain, according to The Times.

“Without a doubt, Apple has demonstrated that they take these issues seriously,” said Dan, who has worked with the company.

The Times story about reforms had a self-congratulatory tone, as econonomics blogger Tyler Cowen noted, arguing that the bigger driver of improved factory conditions–more than negative publicity, more even than Apple’s role–is supply and demand. Workers are expecting and demanding better conditions, and getting them because as more factories open and the rate of migration from the countryside to cities as slowed. Manufacturing wages in China have been rising for more than a decade.

Dan said: “The current generation of migrant workers is in some ways unwilling to put up with what their parents’ generation put up with.”

What’s more, Apple is able to command premium prices for its products and therefore able to pay suppliers more–unlike, say, Walmart, whose entire business model is built around being the low cost seller.

Talking with Dan and Aaron persuaded me of a couple of things. First, if companies accept responsibility for their supply chains, as nearly all do, they need to be more vigilant about factory conditions, even if that means spending more money. Second, the influence of western companies is limited by a host of forces–labor market conditions, price competition, the demands of consumers for the latest gadget or clothing style (and right now, please!), the quality of governance in poor countries and the like. Those aren’t simple answers but the question of how to protect the lives of people half a world away isn’t simple, either.

Comments

  1. “That’s assuming, of course, that the big companies actually care about the workers in their supply chains, and would be willing to absorb the higher cost of safer factories.”

    Companies will not “absorb the higher cost of safer factories”. They will pass those costs on to their customers through higher prices. CSR is not altruism.

  2. It ate my comment! Crap.

    As I said in my now-eaten comment, it is odd that there aren’t NGOs running around giving that kind of pre-certification to image-conscious multinational corporations looking to set up production there. Do they exist, and I just haven’t heard of them?

    Companies will not “absorb the higher cost of safer factories”. They will pass those costs on to their customers through higher prices. CSR is not altruism.

    Companies like Walmart are loathe to do that, since they compete on price. They will if there’s no other option, but otherwise they’ll try to get around it with smaller sizes of product and some “eating it”.

    • Walmart might be loathe to increase prices, but it would do so to remain profitable, since it would be even more loathe to go out of business. Losing money on every sale and making it up on the volume just doesn’t work. :-)

  3. Thank you for laying out the question, but I fear you are skirting some substantive issues. As I wrote in my CSRwire post on the subject [http://www.csrwire.com/blog/posts/641-from-triangle-to-tazreen-a-century-of-lessons] “You may ask: why shouldn’t the factory owner be responsible for worker safety? The answer lies in globalization. Wal-Mart is primus inter pares for pressuring suppliers to the wall to cut costs. The factory owners in Bangladesh operate on the tightest profit margins. If they increase the price of their goods, they fear their buyers will go elsewhere — like Pakistan. It’s easy for Wal-Mart to claim “plausible deniability,” but the fact is, only the buyers have the wherewithal to pay for worker safety.” In fact, it was reported in the NYT and elsewhere that Walmart pressured other buyers to nix an agreement to improve fire safety because it would be too costly — cost that translated into about 25 cents worth of extra price per unit at the retail end.
    Until Walmart can demonstrate real commitment to worker health and safety along the lines that Dan Viederman lays out, I am not convinced that “Walmart is moving in this direction with its new supplier sustainability index.” That index could merely be greenwashing. For a real example of moving in the needed direction, see PVH Corp. and German company Tchibo, which have signed an agreement with labor advocates and unions to develop a fire safety program, which is more likely to be effective than the program Walmart touts. That’s because it “includes independent inspections, public reporting, mandatory repairs and renovations, a central role for workers and unions in both oversight and implementation, supplier contracts with sufficient financing and adequate pricing, and a binding contract to make these commitments enforceable.” As I wrote:
    That’s a program with teeth – and so far, Wal-Mart and the Gap have refused to sign on to it.

    • Ultimately, it is the individual consumer who pays all of the costs of production, including worker safety, etc.

    • Marc Gunther says:

      Thanks, Francesca, I wish I had seen your post before I wrote mine. You’re right that the PVH and Tchibo agreement looks impressive, and it’s the kind of thing Walmart and Gap could embrace–presuming they can afford to. It’s easy to forget that Walmart can’t unilaterally raise prices. It has competitors too, and consumers (partly trained by Walmart) have become incredibly price sensitive.

      What I’m asking here is whether the system of codes-and-audits needs rethinking, perhaps along the lines that Dan Viederman suggests. It seems to me to be expensive, extensive and not as effective as it should be.

      And I’m gently pushing back on the argument that this is solely Walmart or Gap’s responsibility. Do you really think that a factory owner who went to Walmart or Gap and said I need to charge you 25 cents more per garment in order to install fire safety equipment would be told no? I don’t know the answer to that question. I’d like to see some empirical evidence or hear about a factory owner who tried to do the right thing but was discouraged by the western brands or retailers.

      • This really seems like something the Bangladeshi government ought to be doing. If all the manufacturers there said, “We need to charge this extra 25 cents for fire safety”, Walmart would either have to acquiesce, or try their luck elsewhere (which isn’t as easy as it sounds – it helps a lot that Bangladesh has really become a center for textile manufacturing).

        Even if they don’t enforce the law that well, it’s still political cover for the manufacturers to ask for it.

  4. “..Naive as this may sound, it seems to me that big corporates also could lobby governments in China and Bangladesh, urging them to protect their own people…”

    I’m shocked at reading the above statement in this article. Did Marc Gunther really write that? No, I’m beyond shocked.

    Either the author operates a shockingly poor analytical level or this is corporate greenwashing/deflection disguised as “naivete”.

    “Big corporates” are also known as the companies in America who complain the most about “excessive regulation”, “overzealous work protections”, “excessive jury compensation” etc. They donate massive amounts to the American Chamber of Commerce basically as a means to anonymously engineer ugly anti-consumer and anti-worker legislation.

    And these are the people March Gunther is telling us are to be expected to lobby foreign governments to “protect their own people”.

    No, “big corporate” is of course not going to lobby dictators to “protect their own people”- the companies are in fact present in these hellholes precisely BECAUSE those locations offer them cover and opportunity to exploit said people.

  5. Let’s not bleeding-heart ourselves to a standstill here, folks.

    If Apple has a supplier with poor social & environmental performance, it is Apple who will be held to account by activists. If you say they should do nothing because it is undemocratic, then it completely undermines the whole concept of CSR, taking us back to the world of ‘compliance and no more’.

    Globalisation is a powerful force. It can be used for good or left to do what it wants. Let’s harness it for the benefit of all, rather than standing aside holding our noses!

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