709-031-1 Social Innovation Centre Hayleys PLC (B1): Hayleys MTG Knitting Mills PLC Winner of the 2009 EFMD Case Writing Competition in the category “Corporate Social Responsibility” 05/2010-5601 This case was written by Mark Hunter, Adjunct Professor, and Luk Van Wassenhove, Professor of Operations Management, the Henry Ford Chaired Professor of Manufacturing, and Academic Director of INSEAD Social Innovation Centre. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Opinions, facts and commentary not attributed to Hayleys PLC or its employees are the sole responsibility of the authors. Copyright © 2009 INSEAD TO ORDER COPIES OF INSEAD CASES, SEE DETAILS ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION. ecch the case for learning Distributed by ecch, UK and USA www.ecch.com All rights reserved Printed in UK and USA North America t +1 781 239 5884 f +1 781 239 5885 e ecchusa@ecch.com Rest of the world t +44 (0)1234 750903 f +44 (0)1234 751125 e ecch@ecch.com 709-031-1 Social Innovation Centre Hayleys’ textile business was launched as a joint venture in 1993 between the holding (the majority shareholder) and an Australian manufacturer seeking to relocate operations. The plant was located in Neboda, south-east of Colombo, a site chosen for its proximity by road to the capital and a deep, swift river. Textiles require large quantities of water at different stages in manufacturing. A prominent feature of the grounds was a biological water treatment system that resembled a massive water slide. Water from the plant containing used dyes and other effluents (or waste) went into a gravity feed. As it flowed downhill, oxygenated bacteria broke down the effluents (a similar system was in place at DPL’s rubber factory). Villagers were invited by management to watch the construction, to show that the company would not pollute the river. The location was also chosen for access to a highly educated workforce (with a 90% literacy rate). Joint Managing Director, Sam Spezza, an Australian of Italian descent, said: “In the old days, 40 years ago, a machine would produce 20kg of fabric a day. Now, they produce 500kg.” A poorly adjusted machine rapidly could destroy expensive thread or crease a roll of fabric and make it worthless. Workers, said Spezza, “have to be more skilful. Fabric is all about precision.” Spezza lived on the plant grounds and began every day by touring the facility to greet his workers. He said: “I’ve been in this business more than 30 years. I started from nothing to be the owner. What I got in life was not from my father or grandfather. I had to work for it. When people pay you well, and in good conditions, you work because you want to. You get treated like rubbish, you produce rubbish. There are factories where people are extremely unethical, and all you can get is problems. I’ve been in such places. I like to be in a place where there is happiness.” Analysing dyes at the Neboda plant Photo: Courtesy Hayleys In contrast, Sri Lanka’s expanding free trade zones, that harboured Hayleys’ principal domestic low-cost textile competitors, were notoriously unhappy places to work. In a 2007 survey, the International Trade Union Confederation denounced their abuses of workers’ rights: “In many cases, union members or officials are suspended, demoted or dismissed, and many have been assaulted. New workers are warned not to join unions[.] The government labour inspectors are not allowed to carry out unannounced visits to factories in the [zones]. When complaints are received by the competent government body, employers… frequently flout the rulings with total impunity. Copyright © 2009 INSEAD 1 05/2010-5601 709-031-1 Social Innovation Centre The government has proved incapable of forcing employers to respect the decisions of the authorities.”1 Such practices had embarrassed the Joint Apparel Association Forum, a government-initiated trade association, into creating a unique selling proposition, “Garments without Guilt”, for Sri Lankan textiles in 2006. Hayleys MGT Knitting Mills PLC was not a member. The charter of the JAAF’s programme included a pledge to “protect workers’ rights.”2 Anton Lodwick, Deputy Secretary General of the National Workers Congress, commented: “There are good factories [in the JAAF]. But there are worse factories.”3 The official label of the JAAF and governmental “Garments Without Guilt” initiative The Neboda plant had a good reputation for labour practices but conditions in the country at large had radicalised Sri Lanka’s unions and the plant was unionised. Management were aware that a strike would be “very damaging” to their business, having observed a strike at a competing plant that dragged on for months. Delays in delivery meant lost customers, said Spezza: “At the beginning of November, they say what they need in December, and that prediction has to be met – no excuses. If you perform, you’re a reliable supplier, if not, next year you’re not there.” Management already had a policy of multiplying points of contact with workers via joint committees with the unions and monthly general meetings. The meetings served to air grievances and also gave management access to workers’ ideas for improved production and efficiency. A key advantage in management’s favour was that the plant paid the highest wages 1 2 3 See http://survey08.ituc-csi.org/survey.php?IDContinent=3&IDCountry=LKA&Lang=EN. See http://www.garmentswithoutguilt.com/default.cfm. See http://www.lankabusinessonline.com/fullstory.php?newsID=1625076867. There is also evidence that Garments Without Guilt contributed to improving conditions for workers in some plants. One direct competitor of Hayleys MGT Knitting Mills PLC was condemned for unfair labour practices in a landmark 2001 court decision, but in 2007 obtained Fair Trade certification, meaning that its labour practices now meet international standards. Copyright © 2009 INSEAD 2 05/2010-5601 709-031-1 Social Innovation Centre among local plants for skilled workers. The other joint Managing Director, Bandula Weerasinghe, commented: “You can’t stop the unions. If you do the right thing, they’re no problem. You give good working conditions to people and reward them. If a person works here and gets paid 10,000 rupees [per month, about US$88],4 and someone down the road gets 20,000, it’s a problem.” The firm realised that its declarations of social responsibility could not protect its reputation abroad, and thus sought internationally recognised certification. Hayleys MGT Knitting Mills PLC was the first Sri Lankan textile firm to be certified compliant with the SA8000 Social Accountability Standard, which was based on standards of the International Labour Organisation and is designed to ensure ethical production of goods and services. Certification required proof that management not only complied with ethical employment and environmental standards but had also integrated them into its operational systems. The parent organisation, Social Accountability International, claimed that adoption of SA8000 could lead to “improved staff morale, more reliable business partnerships, enhanced competitiveness, less staff turnover and better worker-manager communication”.5 However, although some studies showed positive impacts in the agricultural sector, there was no conclusive evidence that the SA8000 standard, created in 1997, had had a measurable impact on industrial workers’ lives.6 The firm also obtained Fair Trade certification, which “guarantees consumers that strict economic, social and environmental criteria were met in the production and trade” of products including textiles.7 These certifications were a key step in building relationships with multinational customers such as Oxylane (the French firm that owned the Decathlon retail sporting goods chain), Nike and Marks & Spencer. An even more crucial step was onsite inspection by customers (For a full list of the company’s customer certifications, see Exhibit 2), as Weerasinghe explained: “The big customers, like Decathlon, audit you. They come for two, three days, or a week, and they can talk to whoever they want. They talk to the workers. When they come, if the workers are doing more than 60 hours per month overtime, you’re not good enough to work for them. Then they go around the place to see the facilities, and if the right facilities are not there – a canteen, toilets, health, etc. – you can’t work for them. They have to be satisfied.” Such ethical markets were critical to Hayleys MGT Knitting Mills PLC. Marks & Spencer alone accounted for 30% of the firm’s US$59.7 million of turnover in 2008.8 Since Hayleys’ textile unit accounted for 12% of the group’s turnover,9 Marks & Spencer provided nearly 4% of the total. Also in 2008, Decathlon ordered 1 million square metres of fabric, equivalent to a full week of the plant’s production. Turnover and profits had grown rapidly over the past five 4 5 6 7 8 9 According to Sri Lanka labour unions, workers in non-union shops are frequently paid under US$2 per day. See http://www.sa-intl.org/index.cfm?fuseaction=Page.viewPage&pageId=617&parentID=473. See Michael J. Hiscox, Claire Schwartz, Michael W. Toffel, “Evaluating the Impact of SA 8000 Certification”. Harvard University Working Paper, May 28, 2008. See http://www.transfairusa.org/content/about/index.php. Hayleys MGT Knitting Mills PLC Annual Report 2008, p. 5. Hayleys PLC Annual Report 2007-8, p. 34. Copyright © 2009 INSEAD 3 05/2010-5601 709-031-1 Social Innovation Centre years (see Exhibit 1). Continuous investment in facilities (about US$4 million in both 2007 and 2008)10 to serve bigger accounts was a key reason, but management also believed that it was imperative to maintain its “close and professional relationship” with clients like Marks & Spencer.11 Thus it adopted Marks & Spencer’s “Marks and Start”, an employment training programme for the disabled and disadvantaged12 (For a full list of the firm’s corporate responsibility practices, see Exhibit 2). Spezza observed: “With people like Decathlon [and Marks & Spencer], it’s not typical to move [business from one supplier to another], because it’s not easy to find a place that’s big enough and meets their conditions. They’re keen on prices, but once you’ve agreed, you deliver, there’s no problem. They’re very loyal unless you do the wrong thing.” 10 11 12 Hayleys MGT Knitting Mills PLC Annual Report 2008, p. 24. Ibid. pp. 3, 5. Reported by Article 13, self-described as “the responsible business experts.” See http://www.article13.com/A13_ContentList.asp?strAction=GetPublication&PNID=1344. Copyright © 2009 INSEAD 4 05/2010-5601 709-031-1 Social Innovation Centre Exhibit 1 Hayleys MGT Knitting Mills PLC Results, 2000-2008 Source: Company document. Copyright © 2009 INSEAD 5 05/2010-5601 709-031-1 Social Innovation Centre Exhibit 2 Corporate Responsibility Practices at Hayleys MGT Knitting Mills PLC Environment Social/community Certification Awards Partners – Biological waste (water and solids) treatment – “Garments Without Guilt” – ISO 9001 – National Quality Award 2003 Sri Lanka government, customers (Marks & Spencer) – Water use/energy reduction – Conversion to biomass for energy – Worker training – Healthcare: worker programs and US$25,000 to refurbish local hospital – SA 8000 – Customer certifications: M&S, Bhs, Tesco, Adams, – Worker/Union participation Mothercare, – Local infrastructure (drinking water, telecoms tower, bridge) Decathlon, – Education: industrial training (20 students/yr), loans of resource personnel to universities, leadership training for schoolchildren, US$15,000 in scholarships. Copyright © 2009 INSEAD – ISO 14001 Woolworth, Sainsbury, Next, Nike – Oekotex – Organic Cotton – National Industrial Safety Award 2004 – Asia Pacific Quality Award 2005 – National Business Excellence Award 2006 (2nd place) – National Productivity Award 2007 – Fair Trade Cotton 6 05/2010-5601 709-031-1 To order INSEAD case studies please contact one of the three distributors below: ecch, UK and USA ecch UK Registered Office: www.ecch.com Tel: +44 (0)1234 750903 Fax: +44 (0)1234 751125 E-mail: ecch@ecch.com ecch USA Registered Office: www.ecch.com Tel: +1 781 239 5884 Fax: +1 781 239 5885 E-mail: ecchusa@ecch.com Boulevard de Constance, 77305 Fontainebleau Cedex, France. Tel: 33 (0)1 60 72 40 00 Fax: 33 (0)1 60 74 55 00/01 www.insead.edu Printed by INSEAD Centrale de Cas et de Médias Pédagogiques www.ccmp-publishing.com Tel: 33 (0) 1.49.23.57.25 Fax: 33 (0) 1.49.23.57.41 E-mail: ccmp@ccip.fr 1 Ayer Rajah Avenue, Singapore 138676 Tel: 65 6799 5388 Fax: 65 6799 5399