Forcing the hand of Private politics
Public pressure is driving retail companies and other Private firms to self-regulate, says Daniel Diermeier

Workers saw the warning signs. They even pointed them out — cracks running along the walls and pillars of Rana Plaza, an eightstory garment factory near Dhaka, Bangladesh. And yet, factory owners closed the building only briefly before ordering workers to return to their posts.

Then, on April 24, 2013, the factory collapsed, killing more than 1,100 people. It was the deadliest disaster in the history of the garment industry.

In the days following the factory collapse, labor activists erupted, blaming the building’s owners and retailers for failing to regulate safety conditions. And that sparked “private politics,” says Daniel Diermeier, IBM professor of regulation and competitive practice, a phenomenon in which private entities — as opposed to governmental entities — take steps to impose regulation.

Retailers whose supply chain were connected to Rana Plaza responded to public pressure and agreed to new rules to protect worker safety. Nearly 20 North American companies, including Wal-Mart Stores Inc. and Gap Inc., announced a five-year safety plan for garment factories in Bangladesh. Several well-known European retailers, such as H&M, signed on to a separate safety accord with legally binding rules.

Private politics is on the rise, says Diermeier. It can affect entire industries or individual companies.

Earlier this year, Apple adopted measures to improve labor practices in China after facing harsh criticism over the conditions at its main manufacturing contractor, Foxconn Technology Group. Previously, controversies over Wal-Mart’s environmental standards drove the company to invest in sustainable supply chains.

A number of factors — including the globalization of companies, the advent of the Internet and increased activity among advocacy groups — have contributed to this shift.

“What the Internet has done is made it easier for news to spread and for advocacy groups to get organized,” says Diermeier. “What that means is the risk for globally operating companies has increased, which is one reason why we’ve seen more examples of this — and why senior executives are more concerned about it.”

In these scenarios, high-profile companies are the most at risk, he says. Activists understand that protesting big-name businesses generates the most public attention, greatest media coverage and fastest response to issues — even though these companies aren’t the only ones at fault.

“The more high-profile you are, the bigger your brand is, the more visibility you have, and the higher the risk to be negatively affected by these activities or be targeted by an advocacy group,” Diermeier explains.

But that doesn’t mean that lesser-known brands can necessarily ignore new regulations adopted by larger companies. Once a company like Wal-Mart complies with new regulations, Diermeier says, it has an incentive to work on industrywide solutions to limit competitive disadvantages.

These solutions can also have broader implications. “Sometimes, private solutions become public and are codified into law,” he explains. “That affects everyone in the industry.