1. Challenges Of Corporate Social Responsibility Within The Apparel Industry: Implications on IHRM Practices Prepared by Jennifer Kesik 15th November 2013 1

2. Abbreviations CSR: Corporate Social Responsibility ESCAP: Economic and Social Commission for Asia and Pacific IHRM: International Human Resource Management ILO: International Labour Standards ISO: International Organization for Standardisation OECD: Organisation for Economic Co-operation and Development SMT: Stakeholder Management Theory UN: United Nations 2

3. TABLE OF CONTENTS Abbreviations.. 2 Table of Contents.. 3 List of Figures. ... 4 List of Tables.. 4 1. INTRODUCTION......................... 5 1.1Background .. 5 1.2 Purpose and Outline of the Report............... 5 2. THE CONCEPT OF CSR................. 6 2.1 Theoretical Context of CSR 6 2.2 Carrolls Pyramid Of Corporate Social Responsibility .. 7 3. CSR CHALLENGES.... 9 3.1 Introduction 9 3.2 Economical Challenges.. 9 3.2.1Profit Maximasation 9 3.2.2 Conflict of Interest 10 3.3 Legal and Ethical Challenges.. 12 3.3.1 Local and International Legislation.. 12 3.3.2 Challenges in Application of Codes of Conduct.... 13 4. CONCLUSION. 17 4.1 Purpose Revisited 17 4.2 Conclusions.. 17 5. IMPLICATIONS FORIHRM PRACTICES.. 18 3

4. List of Figures Figure 1 The Pyramid of Corporate Social Responsibility7 Figure 2 Stakeholder Groups 11 List of Tables Table 1 Concerns regarding labour law12 Table 2 Suppliers and employees are not convinced of CSR Table 3 Suppliers are confused by the expectations16 14 4

5. 1. INTRODUCTION 1.1 BACKGROUND Since the mid 1990s a number of global clothing apparel retailers started to be criticized by the press for not fulfilling their societal obligations (Mujtaba et al. 2005). It came to the publics attention that a number of well-known companies engaged in unethical practices of IHRMin either their own factories or those of their suppliers. Over the years, global retailers started to be concerned with how their businesses impact society in which they operate (Bartley 2007). Corporate social responsibility (CSR)- the concept whereby companies decide voluntarilyto contribute to the better society (COM 2001 cited by Weber 2008) has been given increased amount of attention (Crane et al. 2008) and clothing retailers received a lot pressure to become serious about CSR issues, especially with regards to labour standards within the supply chains (Cooke and He 2010). Subsequently, the clothing sector has observed the extensive adoption of codes of conducts (Robers 2003). However,despite increased awareness and commitment to CSR,multinational co-operations still face many difficulties when trying to implement CSR policies within their supply chains. 1.2PURPOSE AND OUTLINE OF THE REPORT Theprinciple purpose of this report is to critically discuss the concept CSR focusing on key challenges associated with the implementation of CSR policies in the supply chain within the apparel industry. This paper will provide a brief introduction to the concept of CSR. Next, drawing upon several relevant theoretical models and using the examples of two global clothing companies: H&M and Gap this report will illustrate difficulties in reinforcing CSR in practice. Finally, different ways in which businesses can tackle the obstacles that prevent them from effective implementation of CSR will be proposed. 5

6. 2. THE CONCEPT OF CSR 2.1 THEORITICAL CONTEXT OF CSR Before discussing the main challenges associated with the implementation of CSR, it is crucial to develop a clear understanding of the meaning of corporate social responsibility. In the past, a number of different criteria have been used to define the concept of CSR. Unfortunately, due to significant differences in the interpretation of the meaning of CSR amongst researchers and practitioners, one universal definition of CSR has never been established (Mc Williams et al. 2006 cited by Crane et al. 2008). Nevertheless, two distinctive views have been formed (Schwarz and Carroll 2003): The efficiency theory- this view postulates that businesses have a duty to generate profits complying with the minimal legal requirements (Friedman and Friedman 1962, Davis and Blomstrom 1966). Social responsibility theory- thisview argues that organisations have broader social obligations to the society than just profit maximizationand should be concerned with how their operations impact the whole society and environment(Baker 2003 cited by Kakabadse et al. 2005). 6

7. 2.2 CARROLLS PIRAMID OF CORPORATE RESPONSIBILITY Carroll (1991) combines those two perspectives, suggesting that CSR activities of any company should consist of 4 distinctive elements: economic, legal, ethical and philanthropic responsibilities (Figure 1). Figure 1:The Pyramid of Corporate Social Responsibility (Carroll 1991, p.42) Carroll indicates that businesses should focus on satisfying expectations of shareholders and delivering profits, obeying the law, being ethical and engaging in the philanthropic responsibilities,which create a positive value for the society (1991). These responsibilities however, should be fulfilled simultaneously rather than in a sequence(Cooke and He 2010, p.356). 7

8. As a result, CSR could be expressed in the following equation: Economic Responsibilities + Legal Responsibilities + Ethical Responsibilities + Philanthropic Responsibilities = CSR (Authors own) However, despite the fact that Carrolls model clearly illustrates what responsibilities need to be met by a business wanting to be considered CSR friendly, integrating the entire range of expectations happens to be difficult to be implemented in practice (Szegedi and Kerekes 2012). Several difficulties appear to exist in relation to various responsibilities and attempting to conform to all responsibilities creates many internal and external challenges, which will be further discussed in the next section of this report. 8

9. 3. CRSIMPLEMENTATION CHALLENGES 3.1 INTRODUCTION As recognized earlier within this report, one of the biggest challenges associated with being socially responsible lies around the difficulty in turning CSR into practice (Szegedi and Kerekes 2012).Ensuring that CSR is appropriately implemented is even more complex for multinational apparel companies that operate extended and complicated supply chains. Traditionally, this was not a case as companies owned their own supply bases. However, over the years companies have moved away from the vertical integration and started to outsource their products from a variety of suppliers who are often located in different regions across the globe (Lummus and Vokurka 1999).This brings many challenges for companies to manage. 3.2ECONOMICAL CHALLENGES 3.2.1 PROFIT MAXIMASATION Referring to Carrolls model,maximizing profits and achieving economic prosperity is a fundamental responsibility of any business (Carroll 1998). Shareholder Management Theory (SMT) and the concept of fiduciary capitalism recognize that businesses have only one responsibility and this is to use resources and engage in activities designed to increase its profits for shareholders (Friedman and Friedman 1962, p.133). This view has its origins inthe traditional neoclassical theory of economics, which is concerned with the survival and success of organisations. The clothing industry is not different from any other sectors in business in terms of profit generation. Both H&M and Gap operate in ahighly competitive apparel industry and as a result are on a constant search for less costly methods of manufacture (Frenkel 2001). For the purpose ofminimizing their costs, H&M does not own any factories (Carlie 2009). Instead, the company sources its products from more than 700 factories in Asia (Muso and Riso 2006). Similarly, Gap locatesits factories in the less developed 9

10. countries such as Bangladesh where the cost of production is significantly lower (Gap 2012).In the light of theSMTit is normal forbusinesses to focus their attention merely on the profit creation. With this conception in mind, it could be debated that having an agenda beyond profit maximization, in this case implementation of CSR is outside the scope of the business operations. 3.2.2 CONFLICT OF INTEREST However, in recent years an increasingly well articulated view on the relationship between businesses and the society started to emerge. In the new globalized environment, where organisations are more transparent due to existence of Internet and social media, customersdemand a new meaning of responsibility from the businesses (ISO 2006, p.10). According to the CSR study conducted by Cone Communications Global (2013, p.7) nine out of ten consumers want companies to go beyond the minimum standards required by law to operate responsibly and address social and environmental issues. In regards to H&M and Gap, the author of this report supposes that pressure received from consumers is further amplified by the fact that both of those companies were found to be involved in socially irresponsible activities in the past.However, Bhandarkar and Rivero (2008) recognize that although consumers demand companies to behave in a socially responsible manner, it is the value for money and price of a product that determinescustomers purchasing decision. This behavior is especially predominant in the current economic climate. According to Willard (2002 cited by Bhandarkar and Rivero 2008) only 3 per cent of consumers actually base their buying decisions purely on companies attitude towardsCSR. Apart from the difficulty in meeting demands of consumers, both H&M and Gapreceive significantexternal pressure to engage in CSR practices from otherdifferent stakeholdergroups (Figure 2) including authorisers, business partners and external influences (Roberts 2003). 10

11. Figure 2: Stakeholder Groups COMPANY (Adapted from Roberts 2003, p.162) It is therefore clear thatone of the main challenges that businesses such as H&M and Gap need to manage is balancing the expectations of different stakeholders. 11

12. 3.3 LEGALAND ETHICAL CHALLENGES 3.3.1 LOCAL AND INTERNATIONAL LEGISLATION Additionally, global apparel organisations are in a challenging position as they often deal with stakeholders from different countries where differences in culture, norms and legal standards are common (Kolk and Tulder 2010). The apparel production of H&M and Gap takes place in less developed countries across Asia where legal requirements, especially with regards to human rights, child labor, working time, and health and safety conditions are often inadequate, outdated or insufficiently enforced by the local government (Gap 2012, p.28). ESCAP (2005) highlights 6 main concerns related to problems regarding labour law looking specifically at countries in Asia (Table 1). Table 1: Concerns regarding labour law Concern 1Law is conflicting and can be questionable Concern 2 Law does not extend to everyone Concern 3 Some governmental policies may cancel labour law Concern 4 Existing labour law are criticized Concern 5 There is no enforcement from the government Concern 6 Historical agreements of labour law reject workers rights (Adapted from ESCAP 2005) According to Carrolls Pyramid of Corporate Responsibly, businesses should comply with law when performing their activities (Carroll 1991).However, it could be argued that Carrolls model does not provide guidelines to what and which law specifically companies should follow. This could be interpreted that if companies operate in the countries where legal requirements are minimal or workers rights are not recognised, corporations should not go further beyond those requirements. However, an important question could be posed: What if the local legislation allows businesses to be socially irresponsible? 12

13. It could be debated that MNCs should comply with the internationally recognized conventions such as OECD Guidelines, UN GlobalCompact, ISO26000 and ILOLabourStandards.The problem however, is that majority of managers treat those conventions as standards to aspire to but most are skeptical whether they can be fully endorsed (ESCAP 2005). As a result, global clothing organisations such as H&M and Gap respect fundamental standardsonly within their own sphere of influence (Gap 2012, p.7). 3.3.2 CHALLLENGES IN APPLICATION OF CODES OF CONDUCT In an attempt to accommodate the differences between the local and global regulations and with intention to influence working conditions in the overseas factories, both H&M and Gap implement business codes of conducts (Wright and Sage 2006) and are dedicated to self regulating their business activities (Wotruba 1997 cited by Hemphill 2004). Codes of conduct are referred to as commitments voluntarily made by companies, associations and other entities, which put forth standards and principles for the conduct of business activities in the market place(OECD 1999, p.5). At Gap alone, there isa team of 100 full time employees working on the implementation of companys code of conduct (Yperen 2006). H&M also operates a code of conduct and CSR is an integral part of the company strategy (H&M 2012). However, neither H&M nor Gap can forcefully order their suppliers to comply with code of conducts. Due to the fact, that, both H&M and Gap do not have any ownership over factories from which they source, the companies can only suggest how the business should or should not be conducted. Therefore, it is clear that having a code of conduct in place does not automatically ensure that suppliers fully adhere to the set guidelines. It is of no surprise that one of the key difficulties for H&M and Gap is conformity to corporate codes of conducts by the overseas suppliers (Gap 2012, H&M 2012). According to scholars (Cook and He 2010) there are several reasons on why this is may be challenging: 13

14. SUPPLIERS AND EMPLOYEES ARE NOT CONVINCED OF CSR CSR activities usually incur some extra cost to the suppliers and require extra effort from everyone involved in the process (Cooke and He 2010). Therefore, in order for suppliers to implement CSR practices within their factories, they need to feel convinced by the concept of CSR and see how CSR can contribute to their overall profits or their own situations(Bhandarkar and Rivero2007). H&M and Gap notice that persuading suppliers and employees to adhere to CSR policies and implementation of codes of conduct is difficult, therefore both of those companies take steps to overcome this challenge (Table 2). Table 2:Suppliers and employees are not convinced of CSR Challenge 1.Communicate importance of CSR to suppliers and employees 2.Deepen relationships with suppliers and employees to build trust, transparency and develop the feeling of belonging (Robert s 2003) 3.Highlight potential and tangible benefits in implementing CSR in practice (Cooke and He 2010) 4.Recognise progress by providing incentives for desired behavior IHRMPractices IHRM Practices already in place Suppliers and employees are not convinced of CSR IHRM Best Practices already in place - In 2012 CEO of H&M visited the Prime Minister of Bangladesh, Sheikh Hasina, to emphasise H&Ms support for higher minimum wages and regular wage adjustments in the country - Global learning and training system for employees are in place - H&M conducts regular surveys to obtain the view on the problems from suppliers - The Speak Up! initiative encourages employees and suppliers to report issues in a confidential way - 24/7 hotline with multilingual operators is available to all employees worldwide - Fisher Award for Integrity has been established to honor employees who have demonstrated commitment towards integration of Gap values (Adapted from H&M 2012 and Gap 2012) 14

15. SUPPLIERS ARE CONFUSED BYTHE EXPECTATIONS Secondly, suppliers are often confused with what is expected from them. Suppliers are required to conform to the internally set codes of conductand at the same time they are asked to meet the demand of supply. It is also crucial to notice that managers of the factories often have several codes of conduct to conform to, depending on the number of companies they work with (ESCAP 2005). Overall, this creates a great deal of pressure as well as confusion in regards to what activities should be prioritized by suppliers: ensuring the compliance with codes of conducts or meeting the requested demands even if that means not following the set guidelines. In order to make companys expectations easy to understand for staff and suppliers, H&M and Gap have several practices in place. As demonstrated in Table 2 overleaf, both H&M and Gap incorporate specific training and provide help on how to implement code of conducts within the operations. Nevertheless, the author of this paper believes that involvement from H&M and Gap should go further and both companies should be working with other companies who source from the same factories in order to develop a single homogeneous set of standards (See Best Practice 4 in Table 3). 15

16. Table 3:Suppliers are confused by the expectations Challenge IHRM Best Practice Suppliers are confused by the expectations 1.Provide appropriate training and advice 2.Implement CSR Guidebooks/ Help Resources 3.Provide training specific to the industry in which the company operates 4.Work on partnering with other companies who source from the same factories to develop a single homogeneous set of standards IHRM Practices already in place - 100% of suppliers receive training on code of conduct - Induction training covering Code of Conduct is mandatory for all employees - Global learning and training system for employees are in place - H&M plans to set up model factories with some of the best suppliers to more easily showcase correct practices to others IHRM Practices already in place - All employees worldwide are required to participate in an overview course within 30 days of the employment date - Online self-help tools are in place, links to variety of important contacts and policies are provided - The company provides a specific training on non discrimination, fair wages, working hours and anti corruption (Adapted from H&M 2012 and Gap 2012) 16

17. 4. CONCLUSION 4.1 PURPOSE REVISITED The objective of this report was to critically analyze the challenges faced by global organisations in implementing CSR policies. Throughout this paper, the complexity of challenges associated with the implementation of CSR by global apparel companies in their supply chains has been explored in detail. 4.2 CONCLUSIONS It has been recognised that MNCs such as H&M and Gap face numerous economical, legal and ethical challenges when implementing CSR. Primary obstacles in applying CSR throughout the tiers of the supply chain relate to balancing the interests of various stakeholders with generating profits, dealing with differences in legal standards between countries, problems with implementation of codes of conduct as well as deciding on what is right and wrong in terms of moral obligations. 17

18. 5. IMPLICATIONS FORIHRM PRACTICES In the light of the above conclusions and from the examples generated throughout this report, the author has made several recommendations, which could be particularly useful for global apparel companies such as H&M and Gap (Table 4). Table 4: Recommendations Recommendation 1 Given the fact that balancing stakeholders interests is one of the major difficulties faced by organisations, the author recommends that organisations pay attention to stakeholders expectations andassess them on a continuous basis. Recommendation 2 If suppliers are not convinced of the concept of CSR and are often confused with what is expected from them, it is not adequate for companies to simply hand over a copy of code of conduct to their suppliers to follow. Instead, MNCs need to continue to persuade and educate suppliers about the importance of CSR and implementation of codes of conduct in their factories. Moreover, the organisations need to ensure two-way communication between them and suppliers so that all of those employed in the overseas factories feel confortable to openly discuss the problems they encounter. Recommendation 3 Recognizing that suppliers often struggle with complying to a number of codes of conduct from different companies, the author recommends that H&M and Gap apart from continuing to provide training and advice, work in partnership with other businesses who source their products from the same factories. This could foster an agreement on one standardized code of conduct and reduce the confusion amongst the suppliers. Recommendation 4 Finally, H&M and Gap might consider that implementing CSR is an ongoing process, which needs to be monitored and reviewed regularly. Unless CSR is given appropriate care and the concept is embedded within the company strategy, socially responsible slogans will be worthless. 18

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