Private Social Compliance Initiative: What’s in the Name?

For more than two decades, private social compliance initiatives have been a significant part of global business. In the current years, the implementation of social compliance system is very much embedded in the soucing practices of labor-intensive consumer goods companies such as apparel and footwear. As such, it has become the norm of the industries.

The concept of social compliance stemmed from the Corporate Social Responsibility idea that has evolved since the Industrial Revolution in the 19th century, which amongst others, highlighting poor working conditions and unfair treatment at the workplace. At the earlier stage of CSR development, the State had not yet regulated or established a comprehensive and detailed regulatory strategy on labor and working conditions. Thus, in the earlier era, corporations and industries were likely the primary directors, if not at the very least the primary player, of labor and social progress.

With the continuous expansion of the State’s interference on labor compliance, cross-cutting between statutory and private approaches on the subject matter is inevitable. Due to global corporations’ financial power and economic influence throughout the supply chain, their initiatives’ efficacy is perceived higher than State policy. Nevertheless, State statutory instruments encompass the principle of rule of law, as well as justice and fairness. As such, in -depth discussions and perhaps research are still needed to determine whether or not private social compliance initiatives compete or complement the existing State labor policy.

A. Development of Corporate Social Responsibility Concept

The origin of the concept of Corporate Social Responsibility (CSR) can be traced back to the industrial revolution in the late 19th century, the time when the proliferation of business and manufacturing was conspicuous. The emergence of various business sectors raises concerns and criticisms about working conditions, especially of women workers and children. At that time, reformers in Britain and America perceived processing processes or manufacturing as the primary source of various social problems, including labor unrest, poverty, child labor, as well as unfair treatment of women in the workplace. Business and industry at that time were not familiar with social concepts. In the industrial revolution, even today, employers sometimes find it difficult to determine what is the reason and objective of establishing business, that is, to make workers more productive or of social reasoning such as to meet the needs of workers, make their lives better and increase the number of individuals who can contribute in society (Carroll, 2008).

According to Daniel A. Wren, CSR during the industrial revolution was an unbalanced mixture of humanitarianism, philanthropy, and business intelligence (Carroll, 2008). Wren also argues that since philanthropic concepts were known earlier than the CSR concept, it is hard to tell whether the philanthropic activities committed by famous entrepreneurs of the time were personal philanthropy or business philanthropy. Nevertheless, entrepreneurs’ financial or charitable contributions with social objectives such as giving charity to an orphanage can essentially be considered as socially responsible activities.

Since the industrial revolution up to the 1950s, the concept of CSR varies according to organizational needs. It focuses more on actions and activities that benefit the company or shareholders with minimal consideration of the interests of (external and internal) stakeholders. In this period, the existing two concepts of CSR are known as profit-maximizing management. CSR action is a way that companies maximize profits by concentrating donations or financial aid on specific communities or charities that support the company’s business progress. The second concept, named trustee management, emerged in the 1920s to 1930s. In this concept, the company is responsible for maximizing shareholder wealth and creating and maintaining a fair balance for other stakeholders such as customers, workers, and the community.

The idea of business philanthropy from the industrial revolution period until the late 1940s spearheaded the development of modern CSR. According to H.R. Bowen in his book Social Responsibilities of the Businessman published in 1953, which later became the label of the CSR concept in the 1950s, CSR is the obligation of employers to pursue policies, to make decisions, or follow the desired line of action in the sense of as (end) goal and (obey) the values of society. The definition of this concept is also explained by K. Davis and William C. Frederick, who define CSR as a business contribution to the community (UN ESCAP, 2012). When carrying out its operations to achieve the economic objectives of corporate profits, a company has an obligation or responsibility to pay back to the community. In other words, within the economic goal, there are social goals that fulfilment becomes the company’s responsibility as part of the community. William C. Frederik summarized the development of CSR in the 1950s into three core ideas: corporate managers as a public trust through shareholding systems, balanced claims from stakeholders for corporate resources, and the acceptance of business philanthropy within CSR (UN ESCAP, 2012).

The development of CSR in the 1960s and 1970s is distinguished by the rapid growth of the labor advocacy movement, consumer protection, and environmental conservation. During this period, labor issues transitioned from special interest status to the object of formal government regulation (Carroll, 2008). The concept of CSR became more comprehensive by incorporating ideas on corporate responsibility, stakeholder interests, social issues in business conduct, and legal rules and ethical values. In 1979, Archie B. Carroll proposed a three-dimensional conceptual CSR model consisting of corporate responsibility, social business issues, and corporate action. Furthermore, corporate responsibility is manifested into four types of economics, law, ethics, and philanthropic, where the order of the four types of responsibility indicates the relative importance of each type (Carroll, 2008). Meanwhile, according to H. L. Johnson, instead of only striving for greater returns to shareholders, corporations are also responsible for calculating the interests of their employees, suppliers, dealers, local communities, and the nation as a whole (UN ESCAP, 2012).

The development of CSR in the 1980s and 1990s adopted the previous concept related to the principles and practical processes in social performance, which is in line with industry demands and challenges faced by stakeholders. For example, S.L Wartick and P.L. Cochran adopted the three-dimensional concept of CSR proposed by Archie B. Carroll in 1979 with a focus point on the process by taking more action to address various social problems and simultaneously responding to changes in the community’s challenges (UN ESCAP, 2012). D.J. Wood then continued the three-dimensional concept of CSR in 1991 with an emphasis on the results or performance of CSR initiatives. Wood introduced the concept of four types of corporate responsibility: economics, law, ethics, and philanthropy related to the three institutional levels of legal, organizational and individual, while at the same time extended corporate actions for assessment, shareholder management, and implementation management (UN ESCAP, 2012). This CSR concept is known as the institutional framework and extended corporate activities.

CSR idea development in the 2000s was dominated not by a new idea but by the empirical research linking CSR to other relevant variables and implementing CSR initiatives (Carroll, 2008). In 2003, M. S. and A.B. Carroll introduced the concept of three domain approaches: economics, law, and ethics (UN ESCAP, 2012). This concept is a subtraction of Carroll’s earlier vision of introducing four domains of approaches: economics, law, ethics, and philanthropy. In this period, the definition of CSR is simplified, but the processes and implementation of CSR initiatives are expanded. The European Commission (2011) defines CSR as a process to integrate social, environmental, ethical, human rights, and consumer concerns in business operations and core strategies through close collaboration with stakeholders.

B. Private Social Compliance Initiatives

Economic globalization has led to the shift of supply chains to less developed countries where lower prices and cheap labor are abundant. In the past 30 years, the garment industry, for example, significantly expanded its production and distribution to less developed countries such as China, Bangladesh, and Turkey (Turker and Altuntas, 2014). This has its own risks associated with weak regulation and labor inspection in the supply countries, primarily of issues such as working conditions and human rights violations.

The Social Compliance Initiative of the global garment supply chain was fueled by the emergence of media campaigns and the demands of non-governmental organizations, trade unions, and customers towards unethical sourcing practices in the supply chains. External stakeholders argued that numerous successful global apparel and fashion corporations had exploited workers by hiding behind the absence of national regulations and weak State control over labor compliance. They also argued that multinational corporations are responsible for ensuring that workers who make their products are protected and that their fundamental rights are recognized even if they were other companies within a specific corporation’s supply chains.

In essence, private social compliance initiatives aim to encourage ethical sourcing, transparency, and compliance across the supply chain (Mayer and Pickles, 2010). Efforts outside these state institutions are voluntary to extend corporate responsibility to the global supply chain. Due to pressure from stakeholders significantly affecting the company’s image that impacts customer confidence and sales volume (O’Rourke, 2003), international garment companies establish an integrated corporate responsibility system in their global sourcing practice and cover all production chains. Opponents of the system argued that numerous initiatives were established only to protect the corporation’s image and alleviate the pressure of the external stakeholders. However, the proponents asserted that the system encourages compliance to the state regulation and fosters a socially responsible market on which sometimes state regulation falls short.

At the beginning of the formation of the social compliance system, international apparel companies based their design on the concept of three-dimensional model principles, policies, and processes that evolved as the idea developed. A private social compliance system generally consists of assessment standards, audits/assessments, and remediation. In general, the assessment standard or better known as Code of Conduct (CoC), is a summary of the International Labor Organization’s international core labor standards comprising values of child labor protection, recognition of workers’ right to freedom of association, anti-discrimination, anti-forced labor, working time and rest periods, compensation and safe and healthy working conditions (Esbenshade, 2004). Environmental protection is also one of the main concerns of some international garment buyers and is covered by their CoCs. The CoCs also include a norm of respecting the National Labour and Environment Regulations.

CoC becomes the primary reference in conducting audits or assessments. Assessment can be done by an external party that is an independent audit company or internally by the corporation employees (Welford and Frost, 2006). Assessors and auditors use the triangulation method when conducting their work. The method includes document and records checks, interviews with workers and management, and production floor observation. The data obtained during the assessment process are then construed and synchronized with the CoC and concerned National Regulations to determine the compliance level of a specific supplier within the supply chain. The auditees use assessment reports to determine remedial measures. In comparison, their buyers use the reports to weigh their current and future orders, as well as their production strategies at the assessed suppliers or sourcing country.

The management of garment suppliers generally undertakes corrective action actions under the supervision of international buyers’ representatives. In other words, the plan and implementation of remedial measures are solely the employer’s responsibility, without the involvement of their stakeholders. In this improvement stage, the buyer establishes the time standard of corrective action, provides essential information about acceptable corrective action, and monitors and periodically measures the improvement results. Nike, for example, has teams in countries where the production of goods is conducted that monitors compliance levels and improves working conditions (Carroll, et al., 2013). In a certain period, audit or assessment will be conducted again to measure compliance levels and the latest working conditions improvement at the suppliers.

C. Private Initiatives vs. State Labor Regulatory Regime

The highly acclaimed impact of the business approach to working conditions improvement is a debatable topic. Some argue that private approaches ensure sufficient progress of regulatory compliance because the leading player is taking responsibility for its practices through a voluntary corporate social responsibility system. However, others argue that although positive results should be acknowledged, the liberal approach to regulated labor could not replace the State Regulatory measures because of the objective division. Also, as more and more drawbacks are noted in the private established system and its implementation over time, some argue that the impact on working conditions in the supply chains is insignificant.

Reliance on state regulations is undoubtedly superior compared to the voluntary Corporate Social Responsibility system because of interests and objective disparities. A private system’s objective is anchored by the corporation’s business interests and market perception of its products.  The decision to adopt a voluntary private compliance system is likely influenced by economic interests such as brand image, mitigation of business risks, increased competitiveness, or merely share value. In contrast, State regulatory instruments are established to create order in the society based on the argument that all citizens are equal in the eye of law. For instance, the State Regulations ensure a level playing field for all by protecting disadvantaged groups in society. Another example is that State Law regulates corporation conduct, assuring that pervasive corporation practices do not outplay citizens’ fundamental human rights.

The criticism on private approaches to regulates labor does not end on the objective divergent only. It also comes in full force on the system mechanism itself. Critics argue that reports on the impact of private compliance initiatives are negligible because compliance monitors only capture isolated issues of poor labor practice instead of endemic and structural problems. As a result, it limits the ability of the supply chains to comprehend deeper processes necessary to create a sustainable improvement strategy to achieve significant impact (Locke, 2007; Posthuma, 2010). Further, the system agency overlooks direct and indirect contributing factors when quantifying the level of improvement in the supply chains. In terms of conducting a comparative study on the level of compliance amongst their suppliers, international brands often disregard country effects, factory characteristics, and business relations between them and each particular supplier (Locke et al., 2007).

The opponents of private labor compliance monitoring also argue that global corporations should improve their private compliance monitoring methods. The long-standing practices have created monitoring fatigue, leading suppliers to cheat the system instead of improving working conditions and enhancing their compliance motives. Suppliers are overwhelmed with constant monitoring; thus, they take shortcuts and falsify records to be perceived as complying with the codes to maintain the business. They have to adhere to several standards and host frequent monitoring depending on the number of customers. At the same time, numerous private labor initiatives and measures have different focal points and methods that lead to uncertainty in the improvement priority (Kok et al., 2001). Moreover, monitoring is costly – this cost could be funneled to finance genuine improvement instead of merely hosting visits and passing audits. Apparel suppliers in Asia reported that the less expensive cost of one-day monitoring is at least US$ 300 per person day, and they host more than 50 visits per annum (Welford and Forst, 2006).

Numerous studies conducted by the proponents of the private sector compliance initiatives show that the private sector approaches may significantly improve working conditions in the supply chains. However, the system has its drawbacks. The methods adopted omits several direct and indirect contributing factors in the research and data analysis. Numerous audits are costly in terms of finance and resources. Also, it creates system circumvention and habitual cheating that damages genuine improvement.

Furthermore, corporations’ primary rationale behind establishing and implementing social and labor standards compliance likely focus on economic interests alone. Thus, it is questionable to push the idea that a voluntary private system could replace the concept of a robust State Labor Regulatory regime in totality.  Instead, private compliance initiatives may complement the State regulatory approaches to enhance State actions in improving working conditions.  Private compliance initiatives could also fill in the gaps, at situations when sourcing countries are either have no specific labor policy or the State compliance agency cannot improve supply chain compliance due to lack of capacity and resources

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