Private Regulation of Labor Standards in Global Supply Chains

Problems, Progress, and Prospects

Sarosh Kuruvilla

• Publisher: ILR Press
• Year: 2021
• Print ISBN: 9781501754524, 9781501754517
• eBook ISBN: 9781501754531
• Topic: Economics
• Subtopic: Business Ethics
• Index: Economics

Private Regulation of Labor Standards in Global Supply Chains examines the effectiveness of corporate social responsibility on improving labor standards in global supply chains.

Sarosh Kuruvilla charts the development and effectiveness of corporate codes of conduct to ameliorate "sweatshop" conditions in global supply chains. This form of private voluntary regulation, spearheaded by Nike and Reebok, became necessary given the inability of third world countries to enforce their own laws and the absence of a global regulatory system for labor standards. Although private regulation programs have been adopted by other companies in many different industries, we know relatively little regarding the effectiveness of these programs because companies don't disclose information about their efforts and outcomes in regulating labor conditions in their supply chains.

Private Regulation of Labor Standards in Global Supply Chains presents data from companies, multi-stakeholder institutions, and auditing firms in a comprehensive, investigative dive into the world of private voluntary regulation of labor conditions. The picture he paints is wholistic and raw, but it considers several ways in which this private voluntary system can be improved to improve the lives of workers in global supply chains.

Part 1

OVERVIEW

Problems

Has private regulation brought about meaningful improvements in working conditions in the global supply chain over the past twenty-five years? The large and burgeoning body of research on the impact of private regulation with respect to labor standards suggests limited effect.¹ As one group of researchers has noted regarding the apparel and footwear industries, “Existing evidence suggests that they have had some meaningful but narrow effects on working conditions and the management of human resources, but the rights of workers have been less affected, and even on the issues where codes tend to be most meaningful, standards in many parts of the (apparel) industry remain criminally low in an absolute sense.”²

Research shows unstable and limited improvements in working conditions (e.g., health and safety) and no improvement in freedom of association and collective bargaining rights, as well as a general absence of steady improvement in compliance over time.³ Supplier factories “cycle in and out of compliance”; even Nike, a leading firm that pioneered adoption of the private regulation model, has shown no clear evidence of improvement.⁴ This result suggests a discernible plateauing effect in compliance.

A case study of New Balance Athletics shows the remarkable variation in factory assessment scores on compliance over time.⁵ One factory assessed thirteen times in three years had compliance scores that varied from as low as 5 to as high as 87 on a scale of 100. The researchers conclude that the code of conduct approach is “not producing the large and sustained improvements in workplace conditions that many have hoped it would.”⁶

Factory disasters in Bangladesh and Pakistan are a continuing testament to the ineffectiveness of private regulation efforts. “Every one of the apparel factories where dozens or 100s of workers have died have been repeatedly inspected under the brands and retailers monitoring regimes.… All were covered by one or more of the multi-stakeholder organizations and all were producing for brands and retailers that claim to be operating robust inspection programs,” write researchers.⁷ And others suggest that “when it comes to rights and empowerment of workers, Codes of Conduct have scattered and short-lived impacts at best.”⁸

What explains the lack of sustainable progress in improving working conditions? The answers can be found in conceptual problems with the design of the private regulation model and in a variety of problems in the model’s implementation by global corporations. Getting to those answers requires posing several other questions.

First, is private regulation model “fit for its purpose”? Some argue it is the wrong solution, that companies developed a highly sophisticated corporate model when what was really needed was stronger government intervention and enforcement of legislation in supplier countries. The voluntary private model likely displaces government and trade union interventions and is designed not to protect labor rights but to limit legal liability and protect brand value.⁹ This is a powerful criticism, to be sure, but clearly actors in the ecosystem have already adopted this “wrong solution,” while governments have yet to actively enforce legislation in supplier countries.

Then there is the question of faulty assumptions underlying the model’s design. There are suggestions that the assumption of asymmetric power relations between global buyers and first-tier suppliers—so that powerful global buyers have “leverage” to force suppliers to comply with buyers’ codes of conduct or otherwise change suppliers’ practices to improve labor conditions—may be unwarranted.¹⁰ Some suppliers may have tremendous influence over buyers.¹¹ Further, each factory may produce for several brands, which allows them to spread their risk and insure themselves against an unforeseen change in consumer demand for any single brand’s product. These possibilities reduce brand leverage over factories.

Another faulty assumption concerns aligning the interests of the different actors in the supply chain responsible for increased compliance through a system of incentives. Typically, though, relationships between buyers and suppliers are antagonistic rather than collaborative. Buyers and suppliers often have different interests that “provoke mixed and often contradictory behaviors.”¹² Buyers want suppliers to invest to improve labor standards but consistently “squeeze” suppliers with lower prices for their products, thus prompting suppliers to hide or falsify compliance data.

Private regulation’s audit methodology grew out of “quality control thinking”—the idea being that pointing out problems to suppliers will motivate them to fix these problems. But those differing interests militate against improvements that impose a significant cost on suppliers. It is not even clear that global buyers’ sourcing departments, which are often evaluated on price, and compliance departments, evaluated on whether private regulation is driving improvements in supplier behavior, share similar interests. And then there is the question of whether it is even possible to get accurate and reliable information as a base for strategic decisions, given problems with the data auditors are provided and the process generally followed in auditing.

Empirical investigations suggest a second set of explanations for the lack of sustainable progress in improving working conditions. Empirical investigations have identified problems with each of the three components of the private regulation model presented in the introduction, consistent with some of these unwarranted assumptions.

• Codes of conduct: There is a multiplicity of codes across companies and multi-stakeholder initiatives. Codes vary in how they deal with different standards. The result is a multiplicity of auditing protocols that make it difficult for factories supplying multiple companies to meet differing standards.

To some extent, as more global companies join multi-stakeholder institutions and adopt the common MSI code, the problem of standards multiplicity has diminished. Standards in most codes are remarkably similar now, except when it comes to wages. As it turns out, the inability of private regulation to improve working conditions in supplier factories has more to do with implementation.

• Auditing (“social auditing”): This has attracted the most researcher attention to explain the failure of private regulation.¹³ Well-worn criticisms include that audits are too short to uncover violations, so auditors “satisfice” through cursory document checks, quick walk-throughs, and “check the box” exercises without focusing on root causes of problems found. Findings suggest most auditors are not well trained and that auditing has become “commoditized” and outsourced to large third-party generalist firms that charge too little to do a good job. Worker interviews are also problematic: most of those conducted at the factory site are “staged,” and workers are “coached” to provide “desirable” answers; workers are not interviewed at their homes, where they might provide more frank assessments of whether the factory engages in discrimination or union suppression. There is also considerable fraud and bribery, with auditors “willing to turn a blind eye when necessary to please factory managers,”¹⁴ and increasing evidence that a large number of factory records are falsified to “pass”—which is easy to do because most audits are announced in advance. Suppliers also evade audits by subcontracting production to factories not subjected to brand auditing.

These problems also lend support to questioning the assumption that factory audits produce the high-quality, reliable information that global buyers are supposed to use to make sourcing decisions and that consumers need to make informed buying choices.¹⁵ In sum, the myriad problems in auditing are an important part of explaining the failure of private regulation.

As with codes of conduct, there is also a multiplicity of auditing methodologies. There is a tendency among the actors in the private regulation ecosystem to fixate on standardizing audit tools and methodologies, rather than asking the bigger questions: Is standardization the right approach given the context-specificity of causes regarding compliance?¹⁶ Is the model really producing improvements in working conditions?

• Incentivizing suppliers to improve compliance: When originally conceived, the model’s intent was that global buyers would reward factories that showed steady improvement in compliance with more orders and perhaps longer-term relationships, while factories that did not remediate compliance violations adequately would be “punished” with fewer orders or would be completely axed from the buyer supply chains. Putting this element into practice requires that global buyers integrate their sourcing practices with their compliance practices. However, we know little about whether global buyers have done so, as empirical investigations of this third element of private regulation are rare; companies have not reported on their efforts to integrate sourcing and compliance, and the number of companies that have shared their data with researchers can be counted on the fingers of one hand.

The alignment of auditing and sourcing practices is necessary if auditing is to result in increased compliance with codes of conduct. But there are two problems. First, it is not at all clear that corporations have modified their business models to integrate rewarding more compliant factories.¹⁷ Second, sourcing practices are often the root cause of noncompliance. A steady “squeezing” of the price paid induces suppliers to find noncompliant ways to cut labor costs, while orders sent late force suppliers to increase overtime beyond acceptable limits to meet the orders.¹⁸ An ILO global sur...

Table of contents

• Preface
• Acknowledgments
• Introduction
• Part 1: Overview
• Part 2: Overview
• Part 3: Overview
• Conclusion
• Appendix A
• Appendix B
• Notes
• Bibliography
• Index