In the wake of the proposed Accountable Capitalism Act in the US, ETI's Martin Buttle reflects on what responsible business should look like and how business models can impact on workers in global supply chains.
Last week, Elizabeth Warren, the Massachusetts Senator who is expected to run as a Democratic presidential candidate in 2020, introduced a bill dubbed the Accountable Capitalism Act, which aims to redistribute wealth and ensure American corporations consider wider stakeholders in their decision-making.
Under the proposed Act, US corporates of over 1billion US$ turnover would need to apply for a federal corporate charter, which would require corporate directors to consider the interests of all major corporate stakeholders – not just shareholders – in company decisions.
The bill also gives workers a stronger voice in corporate decision-making. Employees could elect at least 40% of directors, which would make corporate directors more accountable to the workers in their businesses. Of course, this isn’t a new idea. It’s already a feature of German corporate governance, where a third of the supervisory board of large companies must be elected. Similar ideas have been floated here in the UK. But it is a bold proposition given the political climate in the US.
Who benefits from business?
Warren has argued that under the 30-year-old ‘shareholder value maximisation’ ideology, shareholders have been the main beneficiary of corporate wealth creation to the detriment of workers and communities.
She points out that since this ideology became dominant, the link between wage growth and productivity has been broken. Overall wages have stagnated whilst American corporates have enjoyed huge profits.
For example, CEO pay in both the UK and the US has far outstripped workers’ pay. In the US, the average CEO of a big company now makes 361 times what the average worker makes, up from 42 times in 1980.
As my colleague, Ben Rutledge, has pointed out, the proposed legislation is not anti-capitalist (although it will surely be painted this way) but about more responsible capitalism that benefits workers as well as shareholders.
Human rights due diligence
In the 20 years since ETI’s creation, the idea that companies should be responsible for the human rights of workers in their supply chains has moved from being a marginal concern to a central area of international policy making, with organisations like the ILO proposing a roadmap to Decent work in Global Supply Chains and the OECD developing policies and guidance on Business and Human Rights Due Diligence.
Broadly speaking, the Act can be thought of as legislation that fits with the thrust of human rights due diligence policy, although it only focuses on US corporate workers and not the workers who labour in their supply chains, which is perhaps a missed opportunity.
Purchasing and business models
ETI has long had a focus on responsible purchasing - the notion that buyers should consider the impact of their decision-making processes on suppliers and workers in the supply chain. However, this year we have started to look at the bigger picture on business models.
We are living in an era of unprecedented change, which is putting many business models under stress. Changes in consumer buying habits, technology and automation, the rise of social media and expectations around transparency are putting industries under more scrutiny than ever.
Many stakeholders point to the prevailing model in the apparel and textile sector, which has shifted sourcing to low cost/low wage countries. Brands/retailers have the power to dictate prices and production runs, as well as specification and quality, and tend to pass competitive pressure from customers on down the supply chain without much consideration for the impact of their buying practices on suppliers.
Too often this has resulted in poorly capitalised manufacturers; poor quality factories using production technology that has not evolved in decades; long working hours at low wages, illegal sub-contracting and externalised costs.
That’s why ETI has commissioned Kings College Business School to undertake a study of the evidence linking business models to the ability of companies to support or undermine labour standards in their supply chains.
We’ll be hosting a discussion on this topic at our 20th Anniversary conference at the end of October.
Drawing the strands together
There is a need to experiment with business models and to create new approaches that lead to more socially responsible and equitable outcomes, and legislation like the Accountable Capitalism Act could help support this.
Warren herself references B Corps, which give businesses fiduciary responsibilities beyond their shareholders. As she notes, successful companies such as Patagonia and Kickstarter have already embraced this model.
In much of our work, responsible companies complain that it’s not a level playing field, and that irresponsible companies can derive short-term benefits from not supporting better labour standards or acting in ways that undermine collective efforts. This is where strong regulation backed by government can support and encourage responsible business.
We’ll be watching developments in the US closely. It will be tough for the bill to survive given the current political environment, but if it does, I hope it won’t just be workers in America who benefit.