Last Thursday, Apple and its main manufacturing contractor, Foxconn, agreed to significantly improve labor conditions at Chinese factories. This decision followed months of controversy over allegedly illegal overtime, inadequate safety conditions and poor workers’ housing, as well as a string of reported suicides. The controversy was further fueled by a performance of actor and author Mike Daisey that was broadcast on National Public Radio but later turned out to be partially fabricated. Foxconn’s decision to make improvements followed an investigation by the Fair Labor Association (FLA) which found multiple violations of labor law, including extreme hours and unpaid overtime. For more details see this Reuters article on the subject.
Much of the existing media coverage on the story has focused on the crisis management aspect of the story. My own views can be found here and here. I had argued that Apple will have to take a leadership position on this issue due to their brand exposure and global impact, a position similar to Walmart’s embrace of sustainable supply chains a few years ago.
But this case illustrates a broader, more important phenomenon: the rise of private regulation of global commerce. Everywhere in the world, business activity is both enabled and constrained by formal and informal norms and regulations that structure market competition. These “rules of the game” vary significantly across countries and are subject to change, but significantly impact competitive positioning as well as firm and industry profitability.
Public institutions such as legislatures, agencies, and courts have traditionally been viewed as the dominant creator and enforcer of such structures, but increasingly companies and observers realize that new organization forms (NGOs and advocacy groups, non-profits, public-private partnerships etc.) have started to play an important role. Examples include global health, sustainability, human rights, labor conditions, fair trade and supply chain safety. The outrage over the labor conditions at Apple supplier Foxconn is simply the most recent example of this trend.
Not that this regulatory activity is entirely driven by private entities, but public entities play little to no role. Even though Foxxconn’s compliance to new standards is not mandated by a new law but rather by its main customer’s desire to contain reputational damage, the practical effect is the same as if a new law had been passed.
As I have argued in other writings, (Strategic Activism and NonMarket Strategy, Private Politics- A Research Agenda, Private Politics: Public Activism as an Alternative Regulatory Mechanism?, and Chapter 3 in Reputation Rules) the rise of private regulation is due to three mutually reinforcing factors:
- The dramatic rise in media coverage (both traditional and social).
Companies now live in an ever-faster-moving news cycle, driven by intense competition between 24-hour news channels, wire services, and online news providers. Concerns over business practices in distant areas of the world are spread in minutes. - The globalization of value and supply chains has limited the regulatory reach of individual companies.
Yet, the globalization of business has been matched by the globalization of activists that look at companies as the main engine of social and political change. - A change in values and expectations.
Customers and the public (especially the younger segments) expect more and more from companies. Complying with local law and maximizing shareholder value is not enough. Companies are now expected to have a positive social impact from animal welfare to sustainable business practices.
These trends suggest that the factors that led to the Apple-Foxconn story will grow in importance. They also raise normative questions of legitimacy and social impact. Stay tuned…
Reputation Rules 