Comment: David Grayson of the Cranfield School of Management draws some wider lessons from what was described as 'one of the worst ESG scandals in modern UK history' during the recent House of Commons debate, in which Labour MP Liz Kendall criticised investors for failing to hold Boohoo to account

A surge in Covid-19 cases during the summer in the city of Leicester, in England's East Midlands, focused attention on long-standing allegations of sweatshop conditions in the city’s textile sector, and specifically in the supply chain of ultra-fast fashion house Boohoo, a company that just weeks previously had been given a double A rating by MSCI’s ESG index.

During a House of Commons debate on worker exploitation in the Leicester textile industry recently, Liz Kendall, Labour MP for Leicester West, reminded MPs of the “damning” findings of the independent review commissioned by Boohoo, carried out by Alison Levitt QC, that by December 2019 “senior members of the Boohoo board knew for a fact that there were some serious examples of unacceptable working conditions and poor treatment of workers (including illegally low pay)”, but had failed to act.

Instead, she said, they unveiled a plan in June to pay bonuses of up to £100m to Boohoo's two co-founders and £50m to its other senior executives as rewards for the surge in sales during Covid-19, when Boohoo’s local sourcing put it at an advantage to retailers whose more far-flung supply chains were disrupted by the pandemic.

We need a shift from one-off, transactional deals to longer-term, shared destiny relationships

“It beggars belief that the very people who denied and brushed aside this appalling exploitation are still in place and, far from suffering any penalties as a result of their failures, have instead given themselves a huge pay cheque,” Kendall said.

The situation in Leicester may be extreme, but it illustrates some of the tough ethical challenges that UK plc and society needs to address: how to run businesses ethically and for the benefit of all stakeholders, particularly when the global economy is in dire straits.

For the avoidance of doubt: ethical businesses pay, at least, the minimum wage and preferably the living wage. They commit to “living hours” so that agency workers have some predictability about their hours, and encourage their suppliers to do the same. They ensure safe and healthy workplaces. They know their suppliers. They understand their businesses and cost structures well enough to know if the goods and services they are buying can be produced ethically.

The surge in Covid-19 cases in Leicester in the summer focused attention on its textile sector. (Credit: Phil Noble/Reuters)

While each firm and industry sector have important differences, there is a common approach to getting this right. Be clear what behaviours are right and acceptable among your own staff and business partners. Codify that into a statement of ethical business principles that you publicise – make it short, simple, and very clear. Put in place systems to monitor adherence and, crucially, facilitate a “speak up” culture to get early warning when anything is about to go wrong. Work with an appropriate expert organisation to share experience and learn from others'' best practice. This won't insulate you from all reputational damage, but it will rebuild trust more rapidly as people see any lapses as unintentional mistakes and not hard-wired into an unethical business model.  

Big business customers are clearly in pole position to act. They need a shift of mindset from “is this the lowest unit price we can possibly negotiate?” to “can we be reasonably assured that this is a fair and competitive price for us, whilst ensuring our suppliers can manufacture legally and responsibly, with a fair margin?”

In turn, this will need a shift from one-off, transactional deals to longer-term, shared destiny relationships, where the big business customers invest in helping their suppliers to become more productive and efficient. That may also require proactive marketing to consumers to make fairly priced clothing fashionable. Here is a great opportunity for young creatives in marketing and advertising to make clothes produced in sweatshop conditions the height of unfashion. If the price seems too good to be true, then it almost certainly is.

Over the last decade the very bodies responsible for tackling worker exploitation and enforcing workers’ rights have faced considerable budget cuts

In the House of Commons debate last week, Kendell was most damning about the failure of Boohoo’s major shareholders, with the exception of Standard Life Aberdeen, failed to hold the company to account, including by voting against this year’s bonus. She describes it as “one of the worst ESG scandals in modern UK history.”

Institutional investors need to press clothes retailers in terms of their knowledge about conditions in suppliers’ factories. Are these suppliers, for example, operating parallel books: real ones and a separate sanitised set to show their big business customers and intermediaries such as the Ethical Trading Initiative and SEDEX, which audit suppliers for adherence to agreed labour and health and safety standards?

In turn, this reinforces the growing clamour for streamlining of ESG standards – and ensuring that they are rigorously verified.

Pendragon Stuart of sustainability consultancy Sancroft, explored the importance of ESG ratings, the risk of greenwashing, and what to do about it, in an excellent commentary back in September.

Leicester West MP Liz Kendall. (Credit: Neil Hall/Reuters)

Employees and customers of fashion retailers also need to push for higher standards and more transparency in the supply chains.

Investigations by the Financial Times and others into the Leicester textile industry have revealed that there are ethical small and medium enterprise (SME) suppliers in places like Leicester who have invested in modern machinery, upskilled and play by the rules. They have to feel that this pays over the longer term.

The various agencies responsible for policing modern slavery, minimum wage, health and safety, and fire legislation have to be properly funded and backed-up with inter-operable databases so they can do their jobs. “Over the last decade the very bodies responsible for tackling worker exploitation and enforcing workers’ rights have faced considerable budget cuts from this government, which has significantly reduced their capacity for inspection and enforcement”. Significantly, the Health and Safety Executive was “explicitly told by the government to reduce its proactive inspections in the textile industry by a third, because ministers wrongly considered this sector low risk,” Kendall said.

It feels like much of the political debate about “levelling up” has focused on physical infrastructure, yet to be effective. Levelling up also requires investment in people and social infrastructure. For example, what about a public-private partnership to help the SME manufacturers to upskill and become competitive, within the law?

Whilst it is fast fashion that has recently been in the spotlight, it will be other sectors, other supply chains tomorrow

Highly focused, involving local FE colleges to help with technical and language skills and engaging fashion retailers as well as the local BAME business community. It should harness the latest technologies like predictive analytics, trace and tracking, physical automation etc that can remove cost/waste from the whole supply chain thereby leaving both sensible remuneration structures and viable profitability. This could build on some of the successful public-private-community partnerships that helped drive economic and social regeneration during the massive restructuring of the British economy in the 1980s.

More controversially, might it be worth examining the pros and cons of a time-limited and conditional amnesty for regulatory infringements, for small businesses and their workers, providing they work with this skills and enterprise partnership? Rather like, if you're caught speeding for the first time, you could be offered to attend a speed awareness course instead of being fined and getting points on your licence.

Whilst it is fast fashion that has recently been in the spotlight, it will be other sectors, other supply chains tomorrow. We urgently need to change the unethical business behaviours that are out of date, out of favour and out of time. This requires collaboration across the sectors.

Inevitably, attention right now is on the lockdown and support for businesses that cannot operate during the lockdown. It is important, however, that just as the post-Covid-19 regeneration of the economy must advance the transition to a Green Economy, so it must simultaneously build a fairer economy for all.

David Grayson is Emeritus Professor of Corporate Responsibility at Cranfield School of Management. Twitter: @DavidGrayson_

Main pictue credit: Dado Ruvic/Reuters


fast fashion  boohoo  liz kendall  ESG investors  Coronavirus  Human rights  supply chain  MSCI 

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