The Rise of Private Regulation in Global Commerce
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Social Impact Policy Feb 3, 2014

The Rise of Pri­vate Reg­u­la­tion in Glob­al Commerce

Here’s how busi­ness lead­ers can address the result­ing risks

Yevgenia Nayberg

On April 24, 2013 an eight-sto­ry gar­ment fac­to­ry build­ing in Bangladesh col­lapsed, killing more than 1,100 work­ers, most of whom were women. The tragedy came just months after 112 work­ers lost their lives due to a fire at anoth­er Bangladesh gar­ment factory. 

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In both cas­es, build­ing safe­ty and fire stan­dards were sore­ly lack­ing, lead­ing to glob­al out­rage fanned by exten­sive media cov­er­age. Advo­ca­cy groups used coor­di­nat­ed cam­paigns to call for inde­pen­dent inspec­tions of Bangladesh fac­to­ries and pres­sure large West­ern gar­ment buy­ers — most­ly retail­ers such as Gap, Wal­mart, and Swedish fash­ion retail­er H&M, but also Dis­ney — into pay­ing for need­ed safe­ty improve­ments. In response to the pres­sure, some com­pa­nies, such as H&M, com­mit­ted to improv­ing safe­ty stan­dards, while oth­ers, such as Dis­ney, with­drew their accounts from Bangladesh altogether.

The fall­out from Rana Plaza is not an iso­lat­ed case. This year Apple and its main man­u­fac­tur­ing con­trac­tor, Fox­conn, 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 instances illus­trate a broad­er, more impor­tant phe­nom­e­non: the rise of pri­vate pol­i­tics in glob­al com­merce. Pri­vate pol­i­tics refers to actions by pri­vate stake­hold­ers, such as activists and NGOs, that har­ness pub­lic sen­ti­ment to tar­get pri­vate agents, typ­i­cal­ly com­pa­nies. This new real­i­ty cre­ates com­plex chal­lenges for busi­ness lead­ers. Of course, busi­ness activ­i­ty has always been both enabled and con­strained by for­mal and infor­mal norms and reg­u­la­tions. These rules of the game” vary across coun­tries, are sub­ject to change, and sig­nif­i­cant­ly affect com­pet­i­tive posi­tion­ing, as well as the prof­itabil­i­ty of com­pa­nies and entire industries. 

Tra­di­tion­al­ly, such rules are deter­mined by pub­lic enti­ties such as leg­is­la­tures, exec­u­tive agen­cies, courts, and the like. But the rise of pri­vate pol­i­tics has intro­duced new options for the reg­u­la­tion of glob­al commerce.

Three Fac­tors Have Trans­formed the Glob­al Busi­ness Land­scape

Until recent­ly, many multi­na­tion­al com­pa­nies con­duct­ed busi­ness with lit­tle fear that they might be held direct­ly account­able for their glob­al net­work of ven­dors and sup­pli­ers. The pub­lic typ­i­cal­ly had lit­tle vis­i­bil­i­ty into a corporation’s far-flung oper­a­tions, and when a dis­rup­tive event occurred, news might nev­er reach con­sumers in oth­er mar­kets. In the past few years, how­ev­er, three key devel­op­ments have com­bined to present exec­u­tives with a host of new challenges.

1. The dra­mat­ic rise in media cov­er­age (both tra­di­tion­al and social). Com­pa­nies now live in an ever-faster news cycle, dri­ven by intense com­pe­ti­tion between 24-hour news chan­nels, wire ser­vices, and online news providers. Even an iso­lat­ed inci­dent or con­cerns over busi­ness prac­tices in dis­tant areas of the world can go viral in min­utes. Activists are well posi­tioned to take advan­tage of this dynam­ic and have become increas­ing­ly adept at using social media to dis­sem­i­nate infor­ma­tion and orga­nize protests against companies.

2. The glob­al­iza­tion of sup­ply chains. As exec­u­tives have sought to reduce costs and improve effi­cien­cy by work­ing with for­eign providers, the abil­i­ty of indi­vid­ual gov­ern­ments to reg­u­late com­merce has fall­en. Absent an inter­na­tion­al gov­ern­ing body, each coun­try has imple­ment­ed its own laws and guide­lines, result­ing in a reg­u­la­to­ry patch­work that can vary dra­mat­i­cal­ly between devel­oped and emerg­ing nations.

3. A change in val­ues and expec­ta­tions. In years past, com­pa­nies could ful­fill their oblig­a­tion to share­hold­ers and soci­ety sim­ply by max­i­miz­ing prof­its while com­ply­ing with local laws. In today’s busi­ness cli­mate, the base­line is much high­er. Mod­ern con­sumers and the pub­lic — par­tic­u­lar­ly mem­bers of the younger gen­er­a­tions — expect com­pa­nies to not only do no harm but also 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. (For more on how chang­ing expec­ta­tions might affect the strate­gies of activist stake­hold­ers and NGOs, read Bray­den King’s arti­cle, Can Pri­vate Pol­i­tics Effec­tive­ly Replace Gov­ern­ment Reg­u­la­tion?”)

The Shift­ing Role of Pub­lic Pol­i­tics

The impe­tus for change to reg­u­la­to­ry regimes fre­quent­ly orig­i­nates with con­cerned cit­i­zens moti­vat­ed by social or eth­i­cal con­cerns, such as safe­ty issues for gar­ment work­ers. Tra­di­tion­al­ly, con­cerned cit­i­zens have used pub­lic insti­tu­tions such as leg­is­la­tures, exec­u­tive agen­cies, and courts to advance their agenda. 

Com­pa­nies were more respon­sive to pub­lic opin­ion than cer­tain leg­is­la­tures were. We felt we could cre­ate more democ­ra­cy in the mar­ket­place than in the government.”

The Rana Plaza tragedy illus­trates how dra­mat­i­cal­ly the reg­u­la­to­ry envi­ron­ment has changed. Pub­lic insti­tu­tions — that is, West­ern gov­ern­ments or the Unit­ed Nations — played vir­tu­al­ly no role in the case of Bangladesh. Rather, com­pa­nies changed their busi­ness prac­tices in response to activist pres­sure and hos­tile media cov­er­age. (To read about the con­trast­ing North Amer­i­can and Euro­pean respons­es to — and the legal risks pre­sent­ed by — the Rana Plaza tragedy, see Car­o­line Kaeb’s arti­cle, Going Beyond the Let­ter of the Law: Lessons from Europe on Cor­po­rate Account­abil­i­ty.”)

These devel­op­ments are not unusu­al. In recent years many activists have con­clud­ed that pub­lic process­es respond too slow­ly and can be blocked too eas­i­ly by spe­cial inter­ests. In response, they have turned to pri­vate pol­i­tics instead to address key issues such as envi­ron­men­tal pro­tec­tion, human rights, dis­crim­i­na­tion, pri­va­cy, safe­ty of employ­ees and cus­tomers, endan­gered species, and ani­mal-wel­fare test­ing. As Michael Brune, exec­u­tive direc­tor of the Rain­for­est Action Net­work, a lead­ing glob­al activist group, com­ment­ed, Com­pa­nies were more respon­sive to pub­lic opin­ion than cer­tain leg­is­la­tures were. We felt we could cre­ate more democ­ra­cy in the mar­ket­place than in the government.”

How Com­pa­nies Can Address the Risks of Pri­vate Pol­i­tics

In such a flu­id envi­ron­ment, com­pa­nies may be tempt­ed to mon­i­tor events and assume a reac­tive stance. How­ev­er, 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 risk from pri­vate pol­i­tics and resolve emerg­ing issues preemptively.

Be proac­tive. In pri­vate pol­i­tics, the explic­it or implic­it goal of activists is the corporation’s vol­un­tary adop­tion of rules that con­strain com­pa­ny con­duct with­out the involve­ment of pub­lic agents. Rather than wait­ing for activists and NGOs to set the ground rules, com­pa­nies can get in front of poten­tial issues by imple­ment­ing self-imposed guide­lines. Wal­mart, for exam­ple, has trans­formed its sup­pli­er base — and by exten­sion entire indus­tries — by embrac­ing sus­tain­able prac­tices through­out the sup­ply chains. Such proac­tive mea­sures need to be com­men­su­rate with the company’s risk pro­file and its com­pet­i­tive posi­tion­ing in the mar­ket­place. A com­mon activist strat­e­gy is to tar­get a spe­cif­ic, high-pro­file com­pa­ny through a cor­po­rate cam­paign. Good tar­gets are com­pa­nies that gen­er­ate exten­sive media cov­er­age, which may lead to pub­lic out­rage. Exec­u­tives must assess such rep­u­ta­tion­al risk and take proac­tive steps.

Con­sid­er indus­try-wide solu­tions. The rise of pri­vate pol­i­tics does not only affect iso­lat­ed com­pa­nies. 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 indus­try-wide codes of con­duct, which avoid impos­ing com­pet­i­tive dis­ad­van­tages for iso­lat­ed com­pa­nies and ensure a lev­el play­ing field. Often, NGOs can play an impor­tant role in design­ing and imple­ment­ing such pri­vate standards.

Reassess sup­ply-chain risk. As these recent high-pro­file exam­ples of sup­pli­er fail­ures demon­strate, com­pa­nies are now held account­able for the actions of ven­dors through­out their sup­ply chain. Exec­u­tives can ill afford to wait until dis­as­ter ensues to reex­am­ine their sup­pli­er base. The rep­u­ta­tion­al risk asso­ci­at­ed with sup­ply chains must be incor­po­rat­ed into the design and mon­i­tor­ing of sup­ply-chain oper­a­tions. Com­pa­nies should con­duct reg­u­lar ven­dor reviews and con­firm that sup­pli­ers meet or exceed all applic­a­ble work­force, safe­ty, and envi­ron­men­tal reg­u­la­tions. (For more on elim­i­nat­ing sup­ply-chain risks, read Sunil Chopra’s arti­cle, Pro­tect Your Glob­al Sup­ply Chain from Cost­ly Dis­rup­tions.”)

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As with 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.

Editor’s Note: For more insights from Daniel Dier­meier, check out the upcom­ing Kel­logg School / Aspen Insti­tute Busi­ness and Soci­ety Lead­er­ship Sum­mit.

Featured Faculty

Daniel Diermeier

Faculty member in the Department of Managerial Economics & Decision Sciences until 2014

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