Chapter 13: Differences in Culture and Social Risk in International Trade
13.4 Identifying and Mitigating Social Risk in International Business
Did You Know? Disaster at Rana Plaza
Rana Plaza was an eight-storey commercial building in Dhaka, Bangladesh, where five garment factories made clothes for major brands across the world, including the U.S., UK, Spain, Italy, Germany, and Denmark.
In April 2013, the Rana Plaza building collapsed, killing 1,132 people and leaving over 2500 others injured, many of them for the rest of their lives. It was the deadliest disaster in the history of the clothing manufacturing industry. People all around the world were in shock watching the images of the collapse as media reports poured into revealing the true extent of the human toll.
On Tuesday, April 23, large structural cracks were discovered in the Rana Plaza building. The shops and the bank on the lower floors immediately closed. However, warnings to avoid using the building after the cracks appeared were ignored by the garment factory owners on the upper floors.
Garment workers were ordered to return to work the following day. Due to management pressure, on Wednesday, April 24, thousands of workers went to work again at their garment factories located in the cracked Rana Plaza building. Only hours later, the entire building collapsed.
Dhaka, Bangladesh, is one of the largest clothing producing cities in the world, host to around 5000 factories, where 85% of the workers are women who support their families with an average $50 per month. Five months earlier, the factory Tarzeen collapsed, killing 110 people. Still, the scale of the Rana Plaza collapse brought worker safety in the fashion industry to headlines around the world, from The New York Times to The Washington Post and BBC (Goodwin, 2021).
The retailers involved in the Bangladesh factory disaster were: the Canadian fast fashion brand Joe Fresh, owned by Loblaw Companies Ltd.; J.C. Penney, the Plano, Texas-based mall chain; British fashion chain Matalan; Italian fashion brand Benetton; Walmart; The Children’s Place; UK fast-fashion chain Primark; and other large chains, such as Zara from Madrid.
Sources: Clean Clothes Campaign, 2021; Doorey, 2017; Goodwin, 2021; McCombs School of Business, n.d.; Perkel, 2019.
What Is Social Risk?
Traditionally, companies considered compliance with local laws in a target market to be sufficient due diligence. However, as many companies now produce their products or source their services in one country and then sell them to customers in another, they are increasingly under public scrutiny and face social risks to their reputation.
Social risk refers to the negative perceptions of an organization’s impact on a broad range of issues related to human welfare:
- working conditions
- environmental pollution
- hazards to human health, safety, and security
- threats to the region’s biodiversity and cultural heritage
The consequences may include the following:
- brand and reputation damage
- heightened regulatory pressure
- legal actions
- consumer boycotts and operational stoppage can jeopardize short and long-term shareholder value
Exposure to Social Risk
Social risk can arise in numerous ways. In some instances, organizations may intentionally or unintentionally contribute to social or environmental problems and provoke stakeholders to take action through whatever means they possess. In other instances, organizations may be considered guilty by association, simply operating directly in areas with social problems.
The emergence of social risk is characterized by four components (Bekefi et al., 2006):
- Issue – social or environmental issues specific to the organization, the target market, and the planned venture.
- Stakeholders – a broad group that includes any person or group who may have an interest in the issue or are affected by it. Stakeholders could be traditional, such as shareholders, employees, customers, and suppliers or nontraditional, such as environmental organizations, human rights groups, students, colleges, trade unions, socially responsible investor groups, and academia.
- Perception – stakeholder perceptions are based on various information sources, including official news media, word of mouth, the internet, and the company. Negative perceptions may arise from anti-corporate or anti-capitalist sentiment. Negative perception is more likely to arise in the absence of regular communication and information from the organization itself. It can be accurate or inaccurate; both can lead to challenges for the company.
- Means – a stakeholder may possess a variety of means to affect organizational conduct. Small grassroots non-profit organizations may be able to mobilize large networks of allies very quickly.
Did You Know? Loblaw Companies After the Rana Plaza Disaster
Let’s consider an example of how these four components apply to a real-world example.
Between 2007 and 2013, Loblaw Companies Ltd. imported over 13 million garments from 73 factories in Bangladesh, where workers are paid some of the lowest wages in the world. One of their main suppliers in Bangladesh was Pearl Global, a company that subcontracted work to a company called New Wave, which was located in Rana Plaza.
New Wave employed many garment workers, young girls (under the age of 18), who were severely underpaid (as little as CDN 0.37/hour) and who created clothing for the company’s Joe Fresh brand. The contract between Loblaw Companies and Pearl Global required goods to be produced in compliance with Loblaw’s Corporate Social Responsibility (CSR) Standards. So, in 2011, Loblaw Companies hired Bureau Veritas (BV) to conduct social audits of New Wave’s factory at Rana Plaza.
BV undertook two audits reporting 21 instances of non-compliance, including 11 health and safety violations in the first audit and 9 in the second audit. BV also reported that the facility did not have a factory license which would have been required to operate legally. Unfortunately, none of the deficiencies were followed up on by Loblaw and in 2013 the Rana Plaza factory (which was poorly and inadequately constructed), collapsed.
A lawsuit was launched against Loblaw Companies seeking compensation for victims and their families. The plaintiffs alleged that Loblaw Companies knew the workplace was dangerous and had responsibility for worker safety. However, both the Ontario Superior Court and Ontario Court of Appeal denied the class action certification, with Superior Court Justice Paul Perell stating that Bangladesh’s laws applied, that Loblaw Companies owed no “duty of care” to the proposed class members, and that “the imposition of liability [on Loblaws] is unfair given that the defendants are not responsible for the vulnerability of the plaintiffs. Loblaws did not create the dangerous workplace, had no control over the employers or employees or other occupants of Rana Plaza” (Perkel, 2019).
Loblaw won the legal action; however, Joe Fresh customers, horrified by scenes of carnage and destruction after the deadly factory collapse, warned they would boycott the Toronto fashion label until there was proof of change.
Loblaw and more than 200 other clothing companies joined a new, binding agreement called the “Accord on Fire and Building Safety in Bangladesh,” which closely tracks factory safety. Inspectors now regularly audit factories, and reports are shared with factory owners, unions/workers, and clothing companies. Although CSR is a step toward enforcing standards, suppliers are not held to reasonable standards. While it may still be possible to avoid legal liability for unsafe working conditions in the supply chain, companies that seek out low-wage suppliers must remain wary of unsafe working conditions and be proactive in the implementation of CSR standards if they genuinely intend to improve the working conditions of those who are most vulnerable.
This is a typical example of the social risk associated with international trade, where Loblaw Companies unintentionally contributed to a social problem and provoked stakeholders to take action. The case also explains the four components of social risk:
- Issue – hazards to human health, safety, and security
- Stakeholders – employees of garment factories and the community
- Perception – accurate negative perception that led to challenges for Loblaw Companies Ltd.
- Means – when legal action did not work, Loblaw was held accountable by the customers to address the situation
Sources: Clean Clothes Campaign, 2021; Doorey, 2017; Goodwin, 2021; McCombs School of Business, n.d.
Strategies to Mitigate Social Risk
Social risk is formed by how people react to an event or an idea, and so it is always evolving. Unlike traditional risks that manifest themselves because of specific events or incidents, social risk is built on who we are as human beings and what our circumstances are, our economic status, our social mobility, our community, our environment, etc. Therefore, when developing strategies for mitigating social risk, companies ought to respect human emotions and responses and act with humanity.
To mitigate social risk, organizations must look at its causes from a systematic standpoint, not on an event-by-event basis. As the Rana Plaza case has proven, following the target market’s laws is not enough due diligence. Organizations should also perform their due diligence by looking at their customer base and the business practices of their suppliers, not just immediate ones but all suppliers along the supply chain. Organizations can incorporate a range of strategies and activities to help reduce social risk into their business concepts. They are the triple bottom line (TBL) framework, responsible business conduct (RBC), corporate social responsibility (CSR), and environmental, social, and governance (ESG) standards.
Triple Bottom Line (TBL) framework
TBL is an accounting framework that incorporates three dimensions of performance: social, environmental, and financial. It can be broken into “three Ps”: profit, people, and planet. By incorporating this framework into their business concept, firms can determine if they are contributing to activities that have a negative impact on these three categories (Miller, 2020).
Responsible Business Conduct (RBC)
RBC consists of expectations and guidelines set by all governments that are members of the Organization for Economic Cooperation and Development (OECD) (Government of Canada, 2022). All organizations conducting business internationally are required to support economic, social, and environmental sustainability and respect human rights.
Corporate Social Responsibility (CSR)
A business model that helps organizations to determine how their practices impact various aspects of society such as economic, social, and environmental. It is a self-regulated model implemented by companies to be socially accountable to both their stakeholders and the public (BDC, n.d.a.).
Environmental, Social, and Governance (ESG)
The term ESG refers collectively to the ways in which a company can be evaluated beyond its financial statements — specifically, how it handles environmental, social, and governance issues. ESG recognizes that a company’s financial statements do not tell all the facts about the business. For example, what type of energy sources is the company using, how much water does the company consume, and how much does the company contribute to pollution and greenhouse gases (BDC, n.d.b).
Let’s Explore: Mitigating Social Risk
To learn more about the different approaches used to mitigate social risk, visit the following websites.
References
BDC. (n.d. a). Corporate social responsibility (CSR). https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/corporate-social-responsibility
BDC. (n.d. b). What is ESG and what does it mean for your business? https://www.bdc.ca/en/articles-tools/sustainability/environment/what-esg-and-what-does-mean-business
Bekefi, T., Jenkins, B. & Beth Kytle, B. (2006). Social risk as strategic risk. Corporate Social Responsibility Initiative, Working Paper No. 30. John F. Kennedy School of Government, Harvard University.
Clean Clothes Campaign. (2021, June 16). Rana Plaza. https://cleanclothes.org/campaigns/past/rana-plaza
Doorey, D.J. (2017) Lost in translation: Rana Plaza, Loblaw, and the disconnect between legal formality and corporate social [PDF]. Labour Law Research Network. http://www.labourlawresearch.net/sites/default/files/papers/DooreyLostinTranslation.pdf
Goodwin, J. (2021, April 20). The Rana Plaza collapse: What happened & what it means for the fashion industry. Grow Ensemble. https://growensemble.com/rana-plaza/
Government of Canada. (2022, April 28). Responsible business conduct abroad. https://www.international.gc.ca/trade-commerce/rbc-cre/index.aspx?lang=eng
McCombs School of Business (n.d.). Ethics unwrapped: Collapse at Rana Plaza. University of Texas at Austin. https://ethicsunwrapped.utexas.edu/video/collapse-at-rana-plaza
Miller, K. (2020, December 8). The triple bottom line: What it is & why it’s important. (2020, December 8). Business Insights Blog. Harvard Business School Online. https://online.hbs.edu/blog/post/what-is-the-triple-bottom-line
Perkel, C. (2019, August 8). Loblaws off the hook for Rana Plaza disaster; Bangladeshi lawsuit fails. CBC. https://www.cbc.ca/news/politics/rana-plaza-disaster-loblaws-supreme-court-1.5240493
reasonable steps taken by a person or an organization in order to satisfy a legal requirement
