There has been much debate in the period since the Rana Plaza factory collapse, but what change of real substance has there been?
One year on from the Rana Plaza tragedy in Bangladesh, professor of management and commentator Dr Prakash Sethi talks to Ethical Corporation about what progress has been made and why making reform attractive in supply chains is the necessary solution.
EC: What is wrong with current approaches to supply chain social compliance?
PS: All measures of social compliance that are being currently worked are based on negative incentives, ie the emphasis is on meeting standards at the lowest cost possible. Take the case of fixing the factories in Bangladesh following the Rana Plaza tragedy in 2013. The investment to improve standards does not increase production – for example by adding new machines. Nor does it increase the margin on the product. So it ultimately becomes a cost both from the foreign buyer’s viewpoint and the factory’s viewpoint. The current approach to social compliance says, ‘I want you to do everything right, but I won’t pay you to do it’. That is the crux of the problem.
EC: Do you think the traditional audit approach is still relevant?
PS: If it continues in the way it’s currently being handled, it will never work. You cannot have enough people to monitor 2,000 factories. If you monitor once, how often do you need to go back and monitor again? On paper the current system looks very good but in reality it’s based on a policing approach that doesn’t address the problems or incentivise the factories to improve. By the time one audit-cycle is done, you’ve spent two years doing it.
EC: How do you determine the right price to pay factories?
PS: Companies have to pay a real return on the local manufacturer’s capital and investment, plus the cost of labour that meets legal standards created by the Bangladesh government. Consider the model factory that does everything you expect it to do in order to produce goods under the right working conditions. How much does it cost to produce that shirt or pair of jeans? What’s the real unit price, and are the foreign buyers presently paying that price? If the unit cost is higher than you are currently paying, it simply will not work. Factories in your supply chain will never come up to your standards. This approach would eliminate all obfuscation and excuses.
The factory owner in this case is both a culprit and victim. A culprit because he or she does everything possible to minimise costs, and a victim because, if the factory doesn’t minimise cost, the buyer can always go to another that is even less scrupulous. The system doesn’t work because there is every incentive to minimise cost and no incentive to improve factories.
EC: Do developing country governments and factories shoulder some of the responsibility?
PS: Supplier countries are afraid to accept legal conditions that they perceive would make buying companies move to another country, despite the fact that’s very unrealistic. If Bangladesh said tomorrow that every worker would have to be paid the same as workers are being paid in Vietnam, where would the buyers and the production go? No country in the world right now would have the capacity to substitute Bangladesh and to absorb that level of production.
If all producer countries said the exploitation of labour is no longer acceptable and applied a minimum wage that, first, provides a reasonable wage to the worker, and, second, provides a reasonable return to the factory owners for their investment, it would work. Unfortunately companies have the bargaining leverage because they control the market. Unless the companies can be persuaded to change, nothing will happen.
EC: What’s the solution?
PS: The US government has a law which says that if a country violates human rights, the US can impose sanctions. Most other developed countries have similar laws. Why aren’t those laws applied to private sector corporations when they are abusing human rights? To say that consumers should be the watchdog is just not realistic. The consumer buys hundreds of products. Why should the consumer who is buying a pair of jeans be the watchdog for the companies that know what needs to be done, but aren’t willing to do it?
EC: So is the voluntary approach to corporate social compliance failing?
PS: We have to provide the incentive for factories to change. They will change only once improvements lead to increased business and a reasonable return on investment. Factories will then be afraid to drop their performance because this would lead to a loss in contracts and business. Right now there is no incentive for factories to make changes because those changes push costs up while failing to deliver any market reward.
EC: Some companies have begun to introduce incentive-based approaches to corporate social compliance. Could these lead to change over time?
PS: They certainly could lead to change, but I would need to see evidence that this is being done on a sustained basis. Some companies have started looking at this – Nike for example. But it’s important to note that Nike is a unique case. Firstly, most if not all factories that operate for Nike, especially its shoe production, are dedicated factories. That means they make nothing else but Nike products. Secondly, these factory owners have relations with Nike that go back decades. So Nike has strong relationships with its factory owners. Control and incentivisation should, in theory, be much easier. This is not necessarily the same for other companies.
EC: It’s nearly a year since the Rana Plaza tragedy in Bangladesh. How do you rate progress?
PS: It’s very slow and at the rate they’re going it will be a number of years before we see any results. The process is rather cumbersome because it is a multi-stakeholder approach. But at the end of the day, regardless of all the initiatives, it’s still a question of whether the price that is being paid to the Bangladeshi factory owners is reasonable enough to justify the added expenses that we are trying to impose on them. If that cost is not being paid, all the monitoring in the world won’t achieve anything.
EC: Has the response been the same across the board?
PS: The response of European companies – notably [taking the lead on] the Accord on Fire and Safety in Bangladesh – has been very innovative and I am quite encouraged. Even if it doesn’t succeed, it has shown a desire to do something. This means European companies have recognised the problem and that monitoring alone won’t solve the problem.
EC: What’s different about the Bangladesh Accord. Isn’t it just more of the same?
PS: No. It’s a different order of magnitude. The companies involved have committed capital to get the factories up to standard. They are saying “we will pay the factory owners to improve the safety standards”. This goes beyond monitoring.
EC: But does it address the long-term pricing and incentives issues that you have talked about?
PS: It is true that there appears to be no long-term maintenance payments. So yes, they will fix the factories now – this is tremendous progress no matter how you look at it – but to say that this will become a self-sustained system, I have my doubts.
EC: Not all companies have signed up to the Accord. Is there a free-rider effect here?
PS: Certainly. Factories can’t develop separate production lines for those buyers that expect a higher standard than others. The problem is even worse when some of the biggest buyers – for example Wal-Mart – are not signed up. If companies such as Wal-Mart refuse to share the cost burden but benefit from the improved factory conditions, they become the biggest free riders, and that is not sustainable.
EC: What more needs to be done in Bangladesh?
PS: The same as everywhere else. What’s absolutely critical is that a system of purchasing is created that makes it highly desirable for the factory owners to be in compliance with worker safety and wage standards. It is important to note that the current Accord does not address the worker wage issue. Improvements must result in a positive reward rather than a negative cost. If a factory is performing well, you get preference. But if all those things would cost the factory owner money, then you also have to recognise that someone has to pay that cost.
Policing cost is always more than you can afford and always less efficient than you would want it to be, because you cannot police everything all the time. But if you make a lack of crime desirable, people won’t do it. If the factories felt that doing the right thing would deliver more business and make more profit, they would do it. You wouldn’t need that many auditors. Auditing would be about rooting out the bad apples. Unfortunately, the whole system is still based on negative incentives: you do it or else. This means increased policing costs and it means people will continue to find ways to cut corners.
Dr S Prakash Sethi is a university distinguished professor of management at the Zicklin school of business, Baruch College, the City University of New York. He is also Forrest Mars senior visiting professor of ethics, politics and economics at Yale University. He has previously held professorial rank tenured positions at the University of California, Berkeley, and University of Texas, Dallas.
Rana Plaza tragedy
The Rana Plaza tragedy occurred on April 24 2013. It was one of the deadliest garment-factory accidents in history. An eight-storey commercial building collapsed in Dhaka, the capital of Bangladesh, killing 1,129 garment factory workers. The building – containing clothing factories, a bank, apartments, and several other shops – collapsed due to structural failures.
Cracks in the building had been discovered by inspectors the day before and evacuation and closure were ordered. While the shops and the bank on the lower floors were immediately closed, garment workers were forced to return to work upstairs the following day by their supervisors.
Accord on Fire and Safety in Bangladesh
The Accord on Fire and Building Safety in Bangladesh was a corporate response to the Rana Plaza tragedy. It is a five-year legally binding agreement between international labour organisations, non-governmental organisations and textile retailers to maintain minimum safety standards in the Bangladesh textile industry.
The agreement includes safety inspections at Bangladesh factories and the public reporting of the results of these inspections. Inspection reports for the first 10 companies were released in early 2014.Bangladesh ethical supply chains interview Prakash Sethi Rana Plaza social compliance