Human rights disclosures and RMG sector

The readymade garment sector (RMG) has been the backbone of the country's economy for a considerable period of time. The garment manufacturers in Bangladesh have time and again proved their entrepreneurial capabilities and innovative management skills. Consequently, the sector has flourished despite frequent political turbulences and natural calamities. Bangladesh is currently the second largest exporter of readymade garment products in the world. If the trend continues, the country is expected to take over the leading manufacturer's mantle from China in due course of time. However, to sustain this phenomenal success, the RMG sector has to respond to concerns raised by foreign buyers regarding supply chain management.
Arguably, Bangladesh has the capacity to produce the cheapest RMG products among its competitors. However, this competitive advantage is sometimes potentially offset by a few shattering incidents that are capable of creating negative perceptions in the minds of the foreign buyers. Perceptions are important, especially for the big multinational companies which use Bangladesh as an important supply chain.
Investors, who provide the capital for the large multinationals, are often wary of ethical trading norms, especially when it comes to dealing with manufacturers from developing countries. From the buyers' point of view, therefore, it is important to be able to assure their investors that their supply chains are managed ethically, and this is where incidents such as Rana Plaza collapse certainly do not help. If the foreign buyers perceive the risks of buying products from Bangladesh to be higher than the benefits received from cheap outsourcing, they may simply go elsewhere. The onus, therefore, is on the Bangladeshi manufacturers of RMG products to address the concerns about ethical issues so that the buyers are more confident of a sustainable supply chain. This is where extended financial reporting can make an important contribution.
Admittedly, the quality of financial reporting has never been one of the strongest features of the Bangladeshi corporate sector. The highly concentrated family-ownership structure prevailing in many Bangladeshi companies has led to the development of a corporate culture where the role of important corporate governance mechanisms, such as external auditing, is usually undermined. The investors in the capital market rarely use company financial reports as an important basis for their investment decisions, and share prices do not appear to have much relationship with the accounting figures being reported, making such reports somewhat symbolic. Due to the absence of such 'direct' benefits, the company management is reluctant to pay high audit fees or to make effective use of other corporate governance mechanisms.
The case of extended reporting relating to human rights issues, however, is different, and has special relevance for the RMG sector. When the main users of audited financial statements in Bangladesh are family owners and the company managements do not depend on the capital market for their finances, in case of the RMG sector, the foreign buyers are the more powerful stakeholder group. Although these buyers have no concerns as far as the financial health of the manufacturing companies are concerned, they would need to be assured that ethical practices are being followed in the local RMG companies so that the lenders of their (foreign buyers) capital continue to provide financial support. Therefore, the local RMG companies have sufficient incentives to provide additional financial reporting disclosures relating to human rights issues.
Human right reporting is a relatively recent development in the area of financial reporting. The reporting landscape is driven by guiding principles issued by the International Labour Organisation (ILO) and the Organisation for Economic Cooperation and Development (OECD). However, guiding principles of both the ILO and the OECD relating to reporting on corporate human rights issues were aimed at multinational companies only. In 2011, the United Nations issued a set of guiding principles relating to corporate human rights reporting. These guiding principles, embedded in a framework referred to as 'protect-respect-remedy', are applicable for all businesses.
According to the UN guiding principles (2011), all businesses should make disclosures regarding a human rights policy, incorporating elements such as non-discrimination in the workplaces, use of child labour, presence of collective bargaining agents (CBA) for workers, working conditions and the payment of fair wages to the workers. In accordance with the guiding principles, major multinational companies in the world have already produced human rights policies and have disclosed these either in their annual reports or on their websites. For example, companies such as Walmart and Primark, both important buyers of Bangladeshi RMG products, have designated web pages regarding ethical trading in Bangladesh. Such disclosures are made with a view to allaying concerns of important stakeholder groups, and there is no reason why companies operating in the RMG sector in Bangladesh cannot do so, especially as some of the elements in the human rights policy could actually be used to portray a more positive image about the sector.
The RMG sector in Bangladesh has managed to change the lives of an astonishing number of women workers. However, this rarely attracts the attention of the important global media, whereas incidents such as the Rana Plaza collapse easily hit the headlines. Providing disclosures relating to such 'positive' discrimination in the RMG sector, therefore, could be beneficial for the sector.
Also, disclosing the fact that the labour law in Bangladesh explicitly prohibits the use of child labour, and actually requires the presence of collective bargaining agents for protecting workers' rights (except in EPZs) can provide important assurance to the buyers. It is true that many of the elements of the UN guiding principles are embedded in western values, and the socio-cultural environment in many developing nations can be significantly different. For example, in western countries, if a worker is a member or a leader of a CBA, it is deemed to be more ethical and responsible, as he has voluntarily opted for working on issues that help protect the rights of their fellow members.
Unfortunately, in the case of Bangladesh, many CBAs do not have a positive image. This is mainly due to the political culture of the country where CBA leaders are expected to have a political affiliation, and consequently, end up being partisans. Interestingly, the UN guiding principles do not actually require such presence. Rather, it actually gives companies the opportunity to use such disclosures to explain legitimate reasons for the non-existence of CBAs in some cases.
Overall, making disclosures relating to human rights issues can go a long way towards   mitigating some of the concerns of the foreign buyers and maintaining the competitive advantage created by the low-cost structure that Bangladesh suppliers are able to offer. However, for any such disclosures to be effective, it is important to ensure that any disclosures being made by RMG manufactures are authentic and not just mere claims. Therefore, such disclosures would need to be certified by an independent assurance provider. In many countries, such services are provided by audit firms as well as other non-audit assurance suppliers. Bangladesh has a good number of audit firms and this may become an important source of revenue for these firms. However, for providing these types of assurance services, the audit firms also need to be trained in aspects of human rights disclosures.
The RMG sector is crucial for the country's economic success and we cannot afford any stagnancy or negative growth in this sector. Bangladesh already has the advantage of being able to offer the lowest-cost RMG products in the world. It is important to ensure that we can cash in on such competitive advantage, and it is not offset by concerns regarding ethical supply chains, which can be avoided. This is where extended disclosures relating to corporate human rights policies can certainly make a contribution.
The writer teaches auditing, corporate governance and CSR at the Manchester Business School, University of Manchester, the UK.  javed.siddiqui@mbs.ac.uk