ESG: Learnings from the Foxconn debacle

The ‘social’ part of ESG needs some regulatory intervention and non-compliance must be severely punished, says Ravi Srinivasan.
By Morningstar | Jan 14, 2022

The shutdown at key Apple devices contract manufacturer Foxconn’s Sriperumbudur (near Chennai) facility shows up the gap that exists between the shiny and feel-good commitments made by corporates under the ESG (environment, social and governance) part of their shareholder reports and the harsh reality of chasing ever-reducing manufacturing costs in a hyper-competitive world.

The Foxconn unit was shut after the predominantly female workforce staged a flash strike against poor food and accommodation after a food poisoning incident at the plant sent 159 workers to hospital and left more than a hundred others requiring medical attention, according to an investigation by a team of Reuters journalists. According to media reports, the facility was likely to stay closed at least till January 7, as Foxconn worked to restructure its local management and work on improving worker facilities.

(The above date was given when the article was written on January 5. Update: Foxconn reopens its plant near Chennai with 100 workers after mass food poisoning incident. Apple said its supplier’s factory in Sriperumbudur will continue to be on probation.)

Apple, meanwhile, said that it has put Foxconn on “probation” till such time Foxconn’s facilities come up to standard. While it is not clear what probation actually entails, Apple had done the same with another contract manufacturer Wistron earlier, after workers had gone on strike protesting poor work conditions and unpaid wages.

In both cases, shadowy “labour contractors” were unofficially blamed for the mess, even as Apple wrung metaphorical hands and pointed to its “Supplier Code of ethics and supplier responsibility standards” as proof that its heart is in the right place.

Contractors’ role.

These “labour contractors” — ubiquitous in all large-scale manufacturing sectors in India, particularly electronics, automobiles etc — perform a vital but dirty task on the supply chain — ensuring availability of large numbers of skilled labour at the lowest possible price.

These contractors have been described as modern-day equivalents of slave traders, but that’s unfair. Rather, they fill a necessary space in the gap left by the huge information asymmetry between employers and workers in the Indian labour market. While those who are seeking work do not know where to look, those looking to hire large numbers do not know where to find the requisite workers. The contractors meet this need, sourcing and bringing in workers from the hinterland. They often take responsibility of providing housing and food (at a considerable cut of the wages the worker earns).

Both in Wistron and at Sriperumbudur, these facilities were found to be horribly inadequate and not meeting even the low Indian official standards. There is also a strong political nexus, which means the full might of the state machinery is often used to silence the victims, not bring perpetrators to book. In the Foxconn case, for instance, the Reuters investigation found that local police had confiscated the phones of many women workers and called the parents of many of the young women workers warning them to keep their wards in line or else!

All this, of course, emerges into the open after something blows up badly, as happened, for instance, in the serial strikes which gripped the auto-manufacturing hub around the NCR about a decade ago leading to the lynching of some managers and life sentences handed out to some workers. Till that time, the rule of “plausible deniability” prevails — don’t tell me what I don’t want to know and I won’t ask you questions you don’t want to answer.

The point is, no company wants to be seen as a vicious, exploitative, capitalist villain. In fact, most do adhere to the letter of the law, at least when it comes to their direct employees. But these so-called “contract workers” are a different story. The never-ending pressure on costs leads to “cost management” exercises which tell on the weakest link — the contract worker.

Is there a way to change this? On the “E” (Environment) and “G” (Governance) parts of the ESG matrix, a lot of work has been done.

Environmental impact is now strictly monitored and regulated in most parts of the world. Where there is a real or perceived failure, there can be catastrophic impact on business — as happened, for instance, with the Sterlite copper plant in Tamil Nadu, which was forced to shut by popular protest even though it was technically found to be compliant with environmental regulations.

On the governance part, between the amended Companies Act and the compliance requirements for publicly listed companies, there is considerable control and oversight (at least on paper, since powerful promoters/CEOs can bend those tasked with overseeing their conduct to their will, as evinced by the repeated corporate governance scandals which have rocked some mega enterprises in the recent past).

On the “S” part — social, which involves all direct stakeholders like investors, workers, suppliers and customers as well as indirect stakeholders in society at large, a lot is often left to voluntary action. When moves were made to change this — like when failure to comply with CSR requirements under the Companies Act was made a criminal offence through an amendment in 2019, industry lobbies have quickly ensured that such moves are nipped in the bud. The above mentioned amendment, for instance, was never operationalised following industry protests.

The stick works better.

By and large, Indian experience — from tax compliance to observing Covid protocols — has shown that carrots are of limited use. Sticks work much better. Leaving large parts of ESG, particularly in the “S” pillar, to voluntary compliance, is not going to get us anywhere.

What we need are pragmatic amendments to our existing laws to ensure that the reality of actual business practices are recognised (such as contract labour use). Punishment for non-compliance should also be sharply enhanced to ensure that the punishment for non-compliance is a genuine deterrent, not a mere slap on the wrists.

This article has been written by Ravi Srinivasan and originally appeared in Business Line

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