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The New Regulators of Global Commerce

Bangladeshi people and garments workers march in the street demanding justice following the  collapse of Rana Plaza.

Photograph by Munir Uz Zaman/AFP via Getty Images

Bangladeshi people and garments workers march in the street demanding justice following the collapse of Rana Plaza.

Last April, Rana Plaza, an eight-story garment factory in Bangladesh, collapsed, killing more than 1,100 workers, most of whom were women. The tragedy hit just months after 112 workers lost their lives in a fire at another Bangladesh garment factory. In both cases, building safety and fire standards were lacking, leading to global outrage fanned by extensive media coverage. Advocacy groups pressured large Western garment buyers—mostly retailers such as Gap (GPS), Wal-Mart Stores (WMT), and Swedish fashion retailer H&M (HMB:SS), but also Disney (DIS)—into paying for needed safety improvements. Disney pulled out of Bangladesh altogether.

The fallout from Rana Plaza is not an isolated case. Apple (AAPL) and its main manufacturing contractor, Foxconn Technology (2354:TT), agreed to improve labor conditions in Chinese factories. This decision followed months of controversy regarding alleged illegal overtime and poor-quality housing for workers, as well as a string of reported suicides.

These examples illustrate a broader, more complex challenge facing business leaders: the rise of private politics in global commerce. What do I mean by private politics? Any action by private stakeholders, such as activists and nongovernmental organizations (NGOs), that stoke public sentiment (usually outrage) against a private enterprise to force socially responsible change—essentially regulating global commerce without government intervention.

Until recently, many multinational companies operated with little fear of being held accountable for their global network of vendors and suppliers. The public typically didn’t care nor had little visibility into a corporation’s far-flung operations. And when something bad did happen, news might never reach consumers in other markets. No more, thanks to three key developments:

The dramatic rise in media coverage, traditional and social. Companies now live in an ever-faster news cycle where activists have become adept at using social media to disseminate information and organize protests against companies. Even an isolated incident in a remote area can go viral in minutes.

The globalization of supply chains. As executives reduce costs and improve efficiency by working with foreign suppliers, the ability of individual governments to regulate commerce has evaporated. Each country has its own laws and guidelines, resulting in a regulatory patchwork that can vary dramatically between developed and emerging nations.

A change in values and expectations. It used to be simple for companies: Obey the local laws, maximize profits, and shareholders were content. In today’s business climate, consumers and the public—particularly members of younger generations—expect companies not only to do no harm but also to have a positive social impact in a range of areas, from animal welfare to sustainable business practices. Activists and NGOs now view companies as the main engine of social and political change—not politicians and government regulators.

The Rana Plaza tragedy underscores how dramatically the regulatory environment has changed. Public institutions—that is, Western governments or the United Nations—played virtually no role. Companies changed their business practices in response to activist pressure and hostile media coverage.

When tragedy strikes, the first reaction of management is typically to monitor events and then react. But given the potential volatility of a single event—and its potential to upend current business strategies—executives are better served by taking concrete actions to mitigate the risks in private politics and to resolve issues preemptively.

Be proactive. Get in front of potential issues by setting new guidelines. Wal-Mart, for example, has transformed its supplier base—and by extension, entire industries—by embracing sustainable practices throughout the supply chain. Good targets for activists are companies that generate extensive media coverage, which may lead to public outrage. Executives must assess such reputational risk and take proactive steps.

Consider industrywide solutions. Often activists attempt to regulate entire industries, as in the case of global retailers after the Rana Plaza disaster. To address these efforts, companies should consider implementing industrywide codes of conduct, which avoid imposing competitive disadvantages on isolated companies and ensure a level playing field.

Reassess supply-chain risk. Executives can ill afford to wait until disaster ensues to reexamine their supplier base. Companies should conduct regular vendor reviews and confirm that suppliers meet or exceed all applicable workforce, safety, and environmental regulations.

Like any form of regulation, private regulation can burden companies, their suppliers, and customers. But it can also provide opportunities and at least partial solutions to social problems that otherwise would remain unaddressed. In a world of expanded media coverage, globalization, and the public’s rising expectations of companies, private regulation will only grow. Executives need to be ready for this challenge; simply ignoring this phenomenon will not make it go away.

On Feb. 27, Northwestern University’s Kellogg School of Management will co-sponsor, with the Aspen Institute, a two-day conference, “Filling the Governance Gap: Aligning Enterprise and Advocacy,” focusing on the growing influence of nongovernmental organizations over global corporate policies.

Diermeier is the IBM Professor of Regulation and Competitive Practice in the Department of Managerial Economics and Decision Sciences and the Director of the Ford Motor Company Center for Global Citizenship at the Kellogg School of Management. Professor Diermeier is the author of Reputation Rules: Strategies for Building Your Company’s Most Valuable Asset. The issues discussed in this commentary will be among the topics at the 2014 Corporate Governance Conference to be held at Kellogg May 19-20.

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