Putting human rights on the balance sheetsby
Professor Muhammad Azizul Islam speaks with Neil Cutting about modern slavery and how CFOs and finance directors can make their income statements and balance sheets human rights friendly.
Growing up in Dhaka City in Bangladesh during the early 90s, Muhammad Azizul Islam (pictured below) was surrounded by clothes factories and poor working conditions.
He carried thoughts of the workers and their lifestyles with him when he started studying accounting as an undergraduate subject in Dhaka University. Here, he was struck that the subject didn’t talk about the workers, working conditions or their livelihoods. “It was all about profit maximisation and cost per unit,” said Prof Islam.
From studying accountancy close to the garment factory, he just couldn’t get his head around why workers who were the key cost in making these garments were not addressed on the balance sheet or income statement.
Now as the chair in accountancy and professor in sustainability accounting and transparency at the University of Aberdeen Business School, Prof Islam is feeling the need for chief financial officers (CFOs), finance directors and finance leaders to consider workers and their working conditions and make sure there is no slavery in the entire production/service chains.
While the term “modern slavery” has become normalised in the global North, problems still remain in the global South (countries such as Bangladesh, India amd China) – and this poses problems for both companies that source products from the global South and their suppliers based in there.
Assess the gaps
Prof Islam said when companies move their production location for the sake of cheap capital and labour in order to maximise profits, they don’t consider human rights in these decisions.
“I’ve often heard these conversations. A company will make a decision to take production overseas – whether it’s in India or Poland – only for the rates to go up and then they switch location to Vietnam or the Philippines. It’s much easier to make decisions about picking up and moving the supply chain around the world, but there’s other issues that come with this, like human rights.”
Recently, Prof Islam led a survey of 1,000 factories in Bangladesh that supply garments to fashion brands in the European Union, the UK and North America and found that 90% of the larger high-street brands (as buyers) engaged in unfair purchasing practices. These included sudden cancelling of orders, then seeking a discounted price and delaying payment up to 120 days.
If you go to a big fashion shop in London to buy a T-shirt made in Bangladesh, the shop is likely to be full of “unpaid” garments (that is, payment to suppliers has not yet been made).
“These unfair practices put huge pressures on suppliers, which in turn impact on workers, who as a result are paid less and are forced to do more overtime and meet unrealistic production targets,” said Prof Islam.
As a result, many of the factories were unable to pay the £2.30 a day minimum wage in Bangladesh.
Meeting the desired state
However, as explored with the ongoing transition from Industry 4.0 to Industry 5.0, the broader stakeholder beyond the shareholders will be much more interested in the whole environment, social and governance (ESG) agenda – in particular the social aspect. This means modern slavery in the supply chain is only going to become more important in the future.
Prof Islam said that there are currently no big consequences for directors in the UK for human rights violations in their supply chain. However, he pointed to Germany, where a new supply chain law will fine companies with 1,000 workers up to €8m or 2% of the German firms’ global sales (whichever is higher) if their suppliers around the world fail to meet human rights and environmental standards.
If it’s happening in one country in the G7 it’s only likely to spread further. Prof Islam called for similar regulation to be applied in the UK and America to ensure that wherever companies move their production location they still have to follow certain human rights standards.
“For example, if the UK introduces a Fashion Watchdog (Fashion Watchdog MP Pledge — Transform Trade (transform-trade.org) as a mechanism to monitor the companies’ unfair practices, it means wherever they go they have to follow fair practices and cannot move their production location easily from Bangladesh to an African country and exploit those African suppliers instead,” said Prof Islam.
What do I do in the next three months?
While companies can’t enact regulatory change, CFOs and other finance leaders can start to influence change within their organisations and as Prof Islam said, “put human rights on the balance sheet”.
But where should CFOs start? The Business School professor suggested three ways finance leaders can make a difference in three months and have a more responsible balance sheet.
- Production channel: Be transparent about where your production location actually is.
- Social audit: Look at getting an independent social audit done on their operations overseas.
- Review your contracts: Look at your payment terms against best practice and understand where your gaps are for renegotiations.
Despite the significant challenge, the holistic practice, as Prof Islam insists, would be “make sure your income statement and balance sheet are human rights friendly”.
Prof Islam’s research into Bangladesh suppliers found high-street brands paid suppliers less than than the cost of production, which had a knock-on effect on the wages of the workers.
The research report, alongside the role of journalism in uncovering unfair working conditions and practices, should act as a wake-up call to companies. Those that don’t take action risk similar investigations damaging their brand and therefore the share price of the company.
If you don’t take care of your supply chain, it’s a lot easier for disgruntled employees or undercover journalists to take videos and share on social media channels. This is where the value of an independent social auditor comes in.
Even CFOs of professional services firms should be aware of exploitation. As Prof Islam observed, trainee accountants for accounting firms (including Big Four firms) in Bangladesh are subject to exploitation and overworked.
As with any transformation project, CFOs should adopt a continuous improvement mindset and it should be no different here, with finance leaders striving to continuously improve working conditions. However, there are organisations out there that are already pressing companies to adopt this approach.
Prof Islam said there are already a number of civil society organisations that are ranking companies based on their working conditions in the supply chain and how transparent they are in disclosing their working conditions. This also means companies can track if they’re improving or not.
“CFOs and CEOs don’t even need to go to the factory locations, if they actually maintain their fair purchasing practices,” said Prof Islam, explaining they can make the decision sitting in the UK on how much they need to pay the suppliers.
Evaluate and improve
From a ruthless finance perspective, the best way to look at putting human rights on the balance sheet is as a cost-benefit analysis. There is a cost to doing best practice – your cashflow is going to be worse because you’re going to pay suppliers quicker and your cost per unit might be slightly worse, but the benefit is that risk mitigation.
In the best case, you can let the world know your practices and that will make your brand more attractive. And in the worst case, a journalist comes in and finds out that you’re not operating to those practices, and they write a story that destroys your brand and your share price.
As Prof Islam said: “Human rights should not be compromised in securing profit. Over the next 10 years, regulators need to create a situation where everyone can pay fair and human rights can prevail everywhere.’’ CEOs and CFOs need to consider human rights whether they secure profits or not.
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Neil Cutting is a transformation director at Oracle. Over the course of his career, he has held many CFO and transformation leadership roles with complex global organisations.
Most recently he was vice-president of finance at Jacobs Solutions Incorporated, a $15bn Fortune 250 organisation. He is also a member of ICAEW’s Business Committee...