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Governance

Shifts in global economic and governance power

Business Climate

The role of the International Monetary Fund (IMF) in international financial affairs has reemerged in the wake of the recent financial crisis. The world is looking for a strong, legitimate international financial institution to help coordinate efforts among major global economic players, to offer support to countries in crisis, and to provide an impartial voice in assessing the need for corrective action when countries fall into financial, fiscal or foreign exchange misalignment. The scandal surrounding its previous director, Dominique Strauss-Kahn, and his subsequent resignation, has led to questioning the selection process to fill these prestigious and influential positions.

 

While Strauss-Kahn was replaced without much controversy by France's former Finance Minister, Christine Lagarde, as head of the IMF, many felt that the time had come for a non-European leader to reflect the change in global power and economic relevance. Her appointment was supported by India, China and Russia, but many observers cite her ability to handle the IMF's bailout of weak eurozone countries as one reason why an EU-based leader is appropriate at this time. With this said, many are watching to see if she follows up on her promises to remove nationality-based approaches to key appointments that have traditionally been made by the EU or the U.S. She added that this "should also [be] reflect[ed] in our employment policies, in our training policies, in the way in which we build teams, in the way in which we organize recruitment so that people are not clones of each other."

 

Many emerging economies are sitting on stockpiles of cash and have become forces of financial stability, while rich countries have become weighted down by debt. With the rise of the BRIC countries, the assumed leadership positions of the U.S. and Europe are in question. If new, less traditional countries enter the international stage of global economic and trade policy and regulations, the long-term implications could be substantial.

 

While investors and economists may be focused on how such changes could affect trade and economic stability - in the short- and long-term - I am most interested in seeing how this debate may affect the structuring and implementing of governance within global organizations such as IMF. Given the inability of these organizations to prevent or effectively respond to the recent collapse of the financial markets, combined with the lack of progress towards an enforceable and effective regulatory framework, we can ask if the current governance and organizational structure of these organizations will be effective today or into the future as economic power shifts.

Questions to consider

How will shifts in global economic power affect global governance leadership?

How will this shift affect global trade?



World Economic Forum’s Risk Response Network

Risk Protection

The World Economic Forum launched its Risk Response Network in Davos, Switzerland at the end of January 2011 to convene leading experts in managing risk from various sectors of society. The Network's first Global Risks Meeting included more than 80 experts and decision-makers who gathered to discuss ways to better manage, respond to, prepare for and seize opportunities related to global risks. Some issues and trends covered during the meeting included:

Natural disasters - The earthquake and subsequent tsunami in Japan were front and center. Japan's preparation of its citizens led to an effective and immediate evacuation that spared numerous additional lives and illustrated the need for all governments to properly prepare for natural disasters.

Most governments have crisis management procedures under various scenarios, but some may lack the capacity to react in the moment. Proper planning for a nimble and quick response that includes assessing a situation, identifying required resources, and developing appropriate actions will prove to be invaluable when disaster strikes.

The need for transparency and for clear and scientifically based communication was also evident when the nuclear power plant was damaged. This level of disaster preparedness requires a framework and a process to evaluate and communicate data in a timely manner.

After initial response and recovery are complete, the community or country must then rebuild. The Risk Response Network recognizes the importance of emotional rebuilding that must be adequately addressed and supported along with the physical and economic rebuilding.

Supply chain and transport risk - Global trade depends on a reliable web of interrelated transportation and supply chain systems. However, most supply chains are more of a compilation of smaller supply chains that may intersect at various points and times. Regardless, the effects in one region of the world can have a ripple effect across the global web of supply chains.

Risk is a shared responsibility and collaboration between governments and industries - and across regions - is needed. More effective coordination of communication pathways and knowledge sharing could help improve response mechanisms if a major disaster or disruption occurs. Two questions that should be addressed are: where are risks most vulnerable? How can we make systems more resilient?

Resource scarcity - Expert members of the Risk Response Network believe the availability of natural resources is possibly the most critical factor in world markets and trade issues. We have seen political riots over food shortages - and related trade actions - in recent years. As competition for increasingly limited resources heightens, we will likely see more geopolitical conflict and social migration.

Resource scarcity is linked to numerous issues including: geopolitics, climate change, urbanization, waste and technology. Developing multi-stakeholder partnerships through strong governance frameworks will be important in adapting to and managing resource constraints.

Cyberspace - Recent phenomena like the emergence of WikiLeaks as a source for sensitive information, worm attacks such as the Stuxnet virus and the role of the internet in political uprisings and regime changes in the Middle East demonstrate both the power and vulnerability of information technology. Information is pervasive, uncontrollable and scantly protected. These conditions warrant comprehensive and effective risk identification and mitigation measures and strategies.

Users and operators will benefit from continuing education on cyber risks (and ways to protect against them as four megatrends advance: big data, cloud computing, pervasive devices and the personalization of IT.

Risk Response Network also discussed reputational risk and organizational risk. The experts agreed that risk management approaches must be aligned with an organization's strategic missions. The organization must also create a culture of risk awareness that would include allowing decision makers to have reliable access to real-time data.

Above all of these risks and factors are concerns about U.S.-China relations, cyber warfare, debt and sovereign risk, and weaknesses in the international monetary system. These concerns could pose significant risks if people's confidence in the system is minimized. The recent collapse of the financial market and commodity volatility illustrate the need for stronger and more effective global governance. Bodies such as the International Monetary Fund and development banks should operate under a framework of rules, policies, systems and enforcement mechanisms.

 

Question to consider

Does the global cotton industry have frameworks, processes and systems in place to respond to the risks mentioned above?


OECD's "Guiding Principles for Regulatory Quality and Performance"

Regulatory Policy

OECD's "Guiding Principles for Regulatory Quality and Performance" states, "the goal of regulatory reform is to improve national economies and enhance their ability to adapt to change." Given the state of the cotton market, climate change impacts, growing populations, political unrest and the recent collapse of global financial markets the need for national economies to adapt to change has never been greater.

OECD guidance focuses in part on helping countries improve their regulatory policies and tools, open markets and fair competition, and reduce regulatory burdens. They present the values of dynamic, ongoing and multi-agency approach to implementing regulatory reforms.

The seven principles OECD suggests governments follow when undertaking regulatory reform are:

1.     Adopt broad programs that establish clear objectives and frameworks for implementation. This should be done at the highest political level possible and include key elements of regulatory policy -policies, institutions and tools- applied across all levels of government. They should have a sound legal basis and align with identified goals, focus on minimizing costs and market distortion, create benefits that justify any costs, be compatible and consistent with other regulations or competition, as well as trade and investment principles.

2.     Assess impacts and review regulations systematically to ensure that they meet their intended objectives efficiently and effectively in a complex and ever changing landscape.  A system to review the effectiveness of policies and regulation on a routine basis should be implemented. is the focus of this principle. The review should be based on performance-based assessments, target regulations that present the highest potential benefits, and include new regulations.

3.     Ensure that regulations, regulatory institutions charged with implementation, and regulatory processes are transparent and non-discriminatory. This includes the need to consult with significantly affected stakeholders at the earliest stage of the process. The consultation should be open, transparent and include an appeals process that does not unduly delay business decisions.

4.     Review and strengthen where necessary the scope, effectiveness and enforcement of competition policy. Vigorous enforcement of competition law should be applied where collusive behavior, abuse, monopolization or anticompetitive mergers pose risks to constructive progress.  Governments should provide enforcement agencies with the proper authority and capacity needed to enforce competition policy. Governments should also raise public awareness of the role and benefits of healthy competition that is void of corruption and collusion.

5.     Design economic regulations in all sectors to stimulate competition and efficiency, and eliminate them except where clear evidences demonstrates that they are the best way to serve broad public interests. Governments should ensure that regulatory restrictions on competition are limited and in line with public interest.  OECD promotes efficient means to address areas of potential market abuse. This can be true when competition increases due to privatization and market reform. They promote non-discriminatory access to essential network resources, inter-connected geographic networks, and considers price caps and price monitoring where warranted.

6.     Eliminate unnecessary regulatory barriers to trade and investment through continued liberalization and enhance the consideration and better integration of market openness throughout the regulatory process, thus strengthening economic efficiency and competition.  OECD encourages governments to work with other countries with a focus on transparency, non-discrimination, harmonization towards international standards, and streamlining of conformity assessment procedures and application of competition principles.

7.     Identify important linkages with other policy objectives and develop policies to achieve those objectives in ways that support reform. Governments should apply principles of good regulation, review and policy adaptation. This is especially true in areas of safety, health, consumer protection and energy security.

The cotton industry operates in a wide range of countries that have varying degrees of governance. Strong governance is essential for any fair and open market. The above principles provide solid guidance on how to improve all governments' governance programs and should be promoted.

Questions

Can the cotton industry take actions to promote stronger and more effective governance programs in OECD countries? If so, should it take such action?


OECD Competition Assessment Toolkit

Protocols

Governments are charged with establishing and enforcing laws and regulations that promote and protect fair public policies. These obligations can be fulfilled by several means and policy options including laws and regulations that increase competition.  This increased competition can benefit a country's - or industry's - economy through overall economic performance, which leads to new business opportunities, and reduces the cost of goods and services to consumers.

The Organization for Economic Co-operation and Development (OECD), - an excellent source of governance related guidance documents, toolkits or other resources- created the  OECD's Competition Assessment Toolkit to assist governments in fulfilling their charge of promoting and protecting fair public policies .

The toolkit is designed to help governments identify unnecessary regulatory restraints and develop less restrictive alternatives that achieve given objectives without limiting constructive competition. It can be used to evaluate existing or new laws and regulations - across a country's economy or in a sector such as the cotton industry.

A full competition assessment includes: 1) clearly identifying policy objectives, 2) identifying alternative regulations that would achieve the same objectives, 3) evaluating the competitive effects of each alternative, and 4) comparing the impacts of each alternative. Within the toolkit there is also a Competition Checklist that serves as a strong starting place as it helps entities to screen for laws and regulations that have the potential to restrain competition so they can focus on areas of most concern. The checklist and toolkit focus on identifying laws or regulations that could potentially have one of the following three effects: 

1.     Limit the number of suppliers by:

  • Granting exclusive rights to a supplier
  • Establishing license, permit or authorization processes that are stricter than necessary for consumer protection
  • Limiting the ability of certain types of suppliers to engage in the business, often due to geographic relevance or supplier size
  • Creating high entry costs thus limiting entry of small or medium sized companies
  • Creating geographic barriers for suppliers to provide goods or services, invest capital or supply labor such as limiting the flow of goods or services across jurisdictions

 

2.     Limit the ability of suppliers to compete by:

  • Controlling or significantly influencing the prices for goods or services - minimum prices prevent low-cost suppliers from providing better value to consumers while maximum prices can reduce incentives for suppliers to innovate or improve quality
  • Limiting freedom of suppliers to advertise or market themselves that can lead to false or misleading advertising or are so broad they unduly restrict competition
  • Setting quality standards above what consumers require and that advantage certain suppliers such as requiring specific technologies that are only available or affordable to certain suppliers
  • Raising costs of production for some suppliers relative to others such as "grandfather clauses" that exempt existing suppliers from certain regulatory or technology requirements

 

3.     Reduce the incentive of suppliers to compete vigorously by:

  • Creating a system of self-regulation or co-regulation as this can often result in the creation of anti-competitive impacts
  • Requiring information on supplier outputs, prices, sales or costs to be published which could be improperly used by large suppliers to monitor - and possibly undercut - competitors' market behavior
  • Exempting the activities of a particular group of suppliers from general competition law
  • Reducing mobility of customers between suppliers through "switching costs"

While this toolkit is intended for governments' use, it can be applied by other entities that have a vested interest in government trade policies, such as the cotton industry or some of its members. Alternatively, industry members that feel they are disadvantaged by conditions of anti-competition, especially in OECD countries, can use the toolkit as a framework to work with a government to address their concerns.

Question

Is the toolkit useful in the context of the cotton industry? If so, should its use be encouraged?


Harmonizing and selecting certification schemes

Business Climate

Ecolabels and certification schemes can be very useful in helping consumers choose products that are healthier for them, the earth or otherwise benefit farmers and supply chain actors. That said, despite the over 300 ecolabels worldwide, their overall impacts are relatively small when looking at the scale of global trade. Additionally, if ecolables and certification schemes are not done under a strong governance and compliance structure they can have unanticipated consequences including false claims, overburdening certain segments of the chain).

ISEAL Alliance, the global association that develops guidance and helps strengthen social and environmental standards, recently published The ISEAL 100 Survey - A Survey of Thought Leader Views on Sustainability Standards 2010 that summarizes responses from thought leaders across the spectrum of business (80 per cent of respondents), government and civil society (together making 20 per cent) about their views on product certification.

ISEAL makes four general conclusions from the report. Firstly, social and environmental standards (certifications) are becoming a widely used tool to implement corporate social and environmental responsibility. Secondly, credibility is a critical factor in deciding whether or not to use a standard system. Thirdly, standards drive operational improvements stem from the shared language and agreed processes to deliver sustainable results. Finally, standards should strive to build a coherent landscape by minimizing overlap and confusion over claims.

I commend ISEAL for conducting and sharing the results of the survey and support their conclusions. However, I came away with additional - perhaps equally relevant - conclusions. When you consider the survey was of companies that have taken a leadership role in sustainability, I would have expected a much higher level of standards support (only 73% of businesses would use more standards in the future) and rate of adoption (8% of these leading businesses don't use standards at all). But more surprising yet was that only 1 in 3 respondents mentioned the ultimate purpose of standards - to improve livelihoods, human rights, environmental protection - as a benefit of their use.

Many businesses cited the high cost of using standards, limited relevance to business, and the complexity and overlap in the standards landscape as areas of frustration. In addition, 48% of businesses said they needed to do more work within their organizations before committing to the strategic use of standards.

Ecolabels work well for specialty products that have a high-end value (buffering the price premium) and short supply chain (no or limited processing). Safety focused certifications in the food and drug industries make a lot of sense and can be easily understood by the average consumer.

However, certification schemes aimed at making social, environmental and economic impacts that require tracking through a complex supply chain (commodities) are cumbersome, costly and less understood (and valued) by the average consumer.

In order for the cotton industry to adopt a standard a clear business benefit must be demonstrated. Yet, only 21 percent and 15 percent of businesses evaluated financial benefits and farm-level impact assessments respectively, when considering the use of a standard. I feel that more attention should be given to building capacity at the ground level and the business benefits to the supply chain actors. This along with truthful and understandable communication of challenges and measured improvements will increase the credibility of standards - not only in the eyes of consumers but the industry and non-governmental organization as well.

Use of certifications, standards and ecolabels will likely increase over time. But if the goal is to make measurable improvements at ground level and engage and build trust among all members of the cotton industry than strong governance and industry collaboration is required.

BCI is a leading option but its success depends on full adoption by the industry. With this said, there are other certifications schemes operating in the cotton industry, namely Fairtrade, organic and Cotton made in Africa.

Questions

Will the cotton industry benefit from certification schemes? If so, would be it beneficial to consolidate existing schemes into one?

 


Negative impacts of labor conditions improvement efforts

Risk Protection

I recently read Competition and convergence in private governance: a political-institutional analysis of transnational labor standards regulation, a thought provoking paper on how disparate private sectors efforts to improve labor conditions can lead to unintended negative consequences such as increased complexity of policy requirements, confusion among stakeholders and increased regulatory risks.

The author indicates that the garment industry has been trying to converge various, individual labor standards into one clear and effective standard in recent years. However, despite working towards this goal, little has been implemented. He then presents the following alternative approaches to the development of private governance in the context of establishing a common code within an industry:

  • Economic-institutional approach views private governance as a response to a collective action problem. Private firms work in a collective manner or take collective action towards a program to deal with the identified problem.
  • Idealistic-institutional approach is an optimistic approach that emphasizes process dynamics that may lead to desired collective outcomes. It is thought that an interactive process will bring social interaction benefits such as knowledge sharing and a stronger common understanding of each others' perspectives and needs.
  • Political-institutional approach shapes private governance politically by groups with different and counter problem definitions, views on solutions and organizational agendas. Organizations built using this model are a product of political negotiations, their functioning is often based on the power among interest groups which can have political consequences.

Though each approach has its strengths and weaknesses the greater challenge may lie in the differing views stakeholder or industry groups have on the intent of private governance. While some may view it as an end in itself, others may see it as a stepping stone to regulation or a barrier to it. Gaining consensus amongst groups with such differing opinions can jeopardize the creation of effective outcomes. Furthermore, the control of the implementation and enforcement aspects of a code that must be determined can suffer from divergent political, practical and ideological agendas.

Addressing labor issues in manufacturing remains a challenge for the garment industry. Perhaps if industry players were more engaged in the code developed process some of the conditions noted above - differing political and ideological agendas, opposing endpoints, implementation and enforcement power - could be alleviated. While I believe these challenges can be overcome, and common codes and solutions created to have a positive impact, it will require true and sincere leadership from the players most affected - regardless of the approach taken.

Question

Do you agree that engagement by the industry would be productive? Why / why not?


Improving labor conditions through factory disclosure

Risk Protection

We all know the adage "manage what you measure" but as we increasingly hear about transparency in supply chains we can also expect companies to manage what they disclose. David Doorey's 2008 study "Can Factory List Disclosure Improve Labor Practices in the Apparel Industry? A Case Study of Nike and Levi Strauss" assessed whether brands managed what they disclosed and if this in turn lead to improved labor practices.

Doorey found that brands; factory disclosure does lead to improved stakeholder collaboration that in turn leads to improved labor conditions.

While I believe increased transparency in the supply chain could have a positive impact on labor standards as well as costs, resource utilization, and other benefits including factory product quality. Meaningful transparency is not a simple endeavor and must be done in consideration of the high degree of complexity along the apparel industry's supply chain and the fluid nature of shifting suppliers in response to changes in fashion trends.

Improving labor conditions will be difficult and will take sincere efforts by all parties over a long period of time. The ability to measure conditions in a consistent manner over an extended period will lead to more telling, accurate and correlate-able data; however, engaging select suppliers and obtaining such data will be extremely challenging in much of the apparel supply chain.

As in most commodity supply chains actors treat their suppliers' identification as confidential in an effort to keep this from their competitors. The apparel supply chain has an extra challenge over other commodities as brands can shift from one supplier to another on a seasonal basis that can produce the current fashion. These two conditions create a challenge to disclosing suppliers in a consistent and meaningful way over the time it takes to make lasting changes.

Retailers have strong relationships with key suppliers and data management systems as they are very involved in ensuring the details of the product - stitching, fabric, washes - meet stringent requirements as well as managing costs, timely delivery and other logistical information. With this said there appears to be a shift to more vertical supply chains that remain consistent over time, this would enable a higher degree of supplier-buyer partnership and lead to meaningful and impactful disclosure and hopefully positive change.

For this very reason disclosure is warranted because poor labor conditions exist - abundantly throughout the industry. The solutions are complicated -a brand cannot condone poor labor conditions nor can they "cut and run" from factories without having potentially more harmful impacts. Brands that disclose factories when others don't may be the target of criticism, negative campaigns, or worse -legal action.  One can see that brands have much at risk by disclosing their suppliers. These risks are likely a key reason why brands make more direct and significant efforts to improve labor conditions in factories they disclose.

One conclusion that Doorey makes in his study is that factory disclosure appears to result in more collaboration within an industry and between industry and external organizations. His opinion is that such collaboration will lead to more efficient and longer-lasting solutions. While I agree that collaboration within an industry would be very efficient and effective (assuming it is sincere and constructive), I fear there is an unrealistic expectation by external organizations as to what and how much a brand can or should disclose. Doorey mentions a move towards factory disclosure regulation and discounts the importance of confidential information - factory names and locations and capabilities. The names of suppliers are often the most highly protected data in an competitive supply chain like apparel. If a movement for disclosure is to have a positive impact, the industry's concerns and needs to keep certain information from their competitors must be taken seriously.

I believe there is a balance between what external organizations would ideally like to see and what information the industry is open to sharing. If we don't strike this balance, the risks to the industry may be too great and motivate secrecy and corruption.

 

Questions:

Does factory disclosure lead to sustained improvements of labor conditions (even after disclosure is no longer done)?

Will brands be able to scale up efforts to reach factories that are not publicly disclosed?


Voluntary standards versus regulations

Protocols

 

I would like to revisit the topic of voluntary standards. In my August 17th blog, I discussed the proliferation of voluntary standards and shared a bit of insight into cotton standards.

 

Voluntary standards aim to promote and reward behaviors that have positive social, environmental and economic impacts. These standards can be created to address limited compliance where government enforcement is inadequate or bolster the minimum standards established in more robust regulations and, in some cases, they eventually become incorporated into law, sanctions or subsidy eligibility requirements established by governmental bodies (e.g. EU's REACH).

As brands increasingly attempt to advance their corporate social responsibility programs, sustainability leaders are using voluntary standards as a stipulation for doing business with them. These market-based drivers can have a powerful impact on the global cotton industry.

I believe in what the standards aim to achieve and feel this change will benefit the cotton industry but the scale to which they can be applied is still in question. I have worked with voluntary standards in a multitude of capacities:  leading sustainability functions for Gap Inc., chairing the Better Cotton Initiative (BCI), designing and evaluating supply chain systems, consulting on the practical application of voluntary standards, and linking government efforts with standard expansion. Based on input from cotton industry members, I am not convinced that certification and full traceability throughout the supply chain is the only - or the best - approach. Existing traceability systems in particular are cumbersome, costly and can disturb or distract from normal business operations.

With this said, the voluntary standards have created a new expectation of businesses and industries -understand your impact and act responsibly. I value this and other contributions of voluntary standards (e.g. transparency and credibility) and feel production and processing practices must be improved for the sustained health of the industry. I simply want to help the industry move further faster than what I think can be done under voluntary standards with full traceability. In a period when cotton prices are at an all time high, the industry cannot afford to invest in any measures that don't result in direct improvements to their business and bottom line. Direct investments that improve profitability or the production of cotton - e.g. farming practices or processing efficiencies -would be of greater benefit to the industry and ensure funds are directly linked with measurable change (rather than indirect expenses related to certification and traceability efforts). Once the connection between these efforts and business benefits is made, the industry will likely take it upon itself to expand efforts that align with the voluntary standards and in a manner that is efficient, impactful and aligns with their current business and supply chain models.

One model that provides an option valuing verification of practices and improved impacts over strict certification and allows for less than full traceability is BCI.  BCI appeals to brands because it allows them to trace Better Cotton into their supply chains. Spinners appreciate BCI's promotion of contamination reductions. Ginners benefit from higher yields. These benefits must be realized - and if they are, the industry will lead the charge.

 

Questions

Are voluntary standards necessary or benefiical to the industry?

Are there different approaches that would work best in the cotton supply chain?

 


Agriculture Policies in OECD Countries

Regulatory Policy
OECD's recent paper on Agricultural Policies in OECD Countries (2010) presents some key trends from OECD countries with respect to agricultural policy shifts. Much of the findings are from 2009 when economic growth was low or negative in most OECD countries due to the global recession. Decreases in food demand were balanced with increased demand for biofuels (and policy incentives).

Total support to the agricultural sector (including producer support) was USD 375 billion in 2007-09 (0.9% of OECD GDP). This is down 2.3% from 1986-88. In all but one OECD countries, the agricultural support had declined when compared to the overall economy.  High world commodity prices and lower food stocks contributed to food security becoming central to agricultural policy debate.

Many countries implemented previously agreed reforms, others took ad hoc measures in prompt response to price volatility. Some trends in policy reforms include: delinking of support from commodity production, and increasingly linking support to better practices. Some countries adjusted the form of subsidies paid to producers because rising prices negated the need for them.

Food security was the focus of discussions when Ministers for Agriculture from the OECD countries met in early 2010.  The Ministers agreed to build on and complement policy principles agreed in 1998 and recognized:

  • An integrated approach to food security is needed
  • ‘Green growth' offers opportunities
  • Climate change presents challenges and opportunities.

The Ministers also agreed that governments should meet many basic responsibilities that include ensuring that:

1.     appropriate institutional, regulatory and policy frameworks are in place to enable markets to function properly

2.     appropriate policies are developed to manage risk

3.     policies are coherent with general macroeconomic, trade and other policies

4.     policies support responsible management of natural resources

5.     the total costs and benefits to society are considered

6.     there is a supportive investment climate

7.     innovation is encouraged, including transfer of technologies that enhance  productivity and product quality

Some recommendations for governments to consider when shifting support from production levels to adoption of better practices include:

  • State clear objectives, use evidence-based evaluations of progress, and improve transparency,
  • Target support to lower income farmers and include risk management tools to protect them from price variability and crop damage.
  • Encourage payment schemes that cost polluters and benefit ecosystem services providers.
  • Promote climate change adaptation and natural resource conservation.
  • Invest in needed infrastructure.
  • Promote innovation that builds efficiency across the sector.

A stronger and more transparent global market that can reduce price variability and lead to more consistent policies that take a long-term approach which could further stabilize and strengthen the overall industry.


Benefits of industry self-governance

Business Climate
There are times when the actions of one company (or its contactors) can lead to long-term consequences on the entire industry. In my July 26th blog I discussed how the BP Deepwater Horizon spill will likely lead to more restrictive permitting of new deep sea drilling and increased regulations and engineering control requirements.

Tighter regulations can also result from an industry's inaction such as not acknowledging corruption or human rights violations associated with raw material production. For example, The Dodd-Frank Wall Street Reform and Consumer Protection Act signed by President Obama on July 21, 2010 mandates new auditing and disclosure requirements for companies that use certain minerals in their products originating in areas known to be mined under conditions of armed conflict and human rights abuses. On December 15, 2010, the U.S. Securities and Exchange Commission proposed rules to implement the provisions of this Act. Its focus is to ban the use of metals from the Democratic Republic of the Congo due to human rights violations that are occurring in that country.

Although the regulations don't ban the use of conflict minerals, many industries, such as the electronics and airline industries, are responding to the regulations by developing programs to rid their supply chains of conflict minerals. These programs that rely heavily on audits to confirm the origin of a given metal, are resource intensive, expensive and create new reputational and legal risks to the companies should the audits not satisfy all interested stakeholders. It could also lead to a more restrictive number of qualified suppliers (those who don't purchase any conflict minerals) and more limited source of materials that could, in turn, lead to higher prices if demand outstrips qualifying supply.

The cotton industry can learn from these events and proactively mitigate the risk of reputational damage or increased and burdensome regulations. The industry faces several challenges: 1) cotton is often perceived as being pesticide and water intensive, 2) the Uzbek government's use or acceptance of child labor during cotton harvest is gaining more public attention and action by the U.S. government, and 3) WTO rulings shifting the landscape of cotton production. The cotton industry could avoid negative reputational impacts or the risk of future regulations by addressing the areas of concern (e.g. pesticide use, child labor) as well as communicating all of the positive aspects of cotton (e.g. natural fiber, creates income to rural, poor farmers). This may become more beneficial and important as cotton prices soar and faces competition from synthetic fibers.

Question

Is there a role the cotton industry could take to minimize the risks to the industry's public perception associated with the most egregious environmentally and socially conditions?


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