Giving workers employment rights increases productivity and profitability

By Boni Sones, University of Cambridge

Image by Stuart Miles. FreeDigitalPhotos.net

We live in a globalised world and buy products produced by workers’ from all over the World. Increasingly consumers are demanding that those who produce our goods are employed on decent terms and conditions whether they work in Europe, Africa, India, Russia, China or South America. Sweatshop labour used in one continent is often named and shamed in another and these reputational effects can affect demand for goods. But as consumers ask for more fairtrade goods from the developing world, workers in the so called global North are finding that their employment is more insecure, as greater numbers are employed on zero hour contracts, while all workers are finding it harder to access employment tribunals to enforce their employment rights.

The Centre for Business Research at the University of Cambridge has turned conventional wisdom on its head, and through a series of quantitative research projects over a number of recent years, has constructed a new database that reveals how improvements in labour rights can lead to increased productivity and employment as well as greater equality in society. These datasets are now online for others to access and use.

International organisations are taking note of these findings and national governments would do well to consider them. Globalisation, rather than inducing a so called ‘race to the bottom’ as many commentators predicted, is making governments more aware of the need for improved protections for workers, and of the importance of enforcement. Better informed and discerning consumers who are switched on to the web and social media where they can check the sourcing of the products they buy, along with campaigning civil society groups and NGOs, are helping to enforce these values.

The statistical studies carried out by the CBR complement qualitative research carried out by the Global Development Institute at The University of Manchester.

In a recent CBR workshop held in Cambridge in September 2016 researchers from both Universities discussed the findings from ESRC-funded research on labour law reforms, labour standards and corporate social responsibility (CSR) practices in Rising Powers, including China, India, South Africa and Brazil.

Many commentators have doubted that worker-protective labour laws can be made effective in developing countries with high levels of informal work and weak states. This has led to interest in alternative modes of regulation including codes of practice and consumer boycotts focused on global supply chains. But this focus neglects important changes on the ground in low- and middle-income countries in Africa and Asia which over the past decade have been implementing systematic reforms to their labour laws and codes, sometimes after much publicised strikes.

Admittedly the aims of these reforms are diverse: they include promoting industrial peace, encouraging employers to invest in training, and cushioning the effects of labour migration. Often these interventions have had the effect of encouraging formalisation of work and building state capacity. They have also operated in conjunction with, rather than in opposition to, voluntary measures and soft-law initiatives aimed at improving labour governance in value chains.

Encouragingly, while there are still many difficulties associated with the operation of labour standards in emerging markets, empirical work is revealing a more complex and differentiated picture than that frequently presented. There is good reason to be optimistic about these trends.

The two day workshop presented findings of two main types:

• Results from quantitative research analysing a unique dataset of labour laws around the world, constructed at the CBR in Cambridge. 
• Research from fieldwork conducted in case study countries, including China, Brazil, India, and South Africa, by teams based respectively at the Universities of Cambridge (Simon Deakin and colleagues) and Manchester (Khalid Nadvi and colleagues). 

The research undertaken by the Cambridge team deploys a unique dataset, the CBR Labour Regulation Index, which codes for labour laws in 117 countries over the period 1970 to 2013 (43 years). It is the first time that the laws of so many countries have been coded in this way and the dataset will be of very considerable interest to research users and policy makers.

The fieldwork research also breaks new ground in offering in-depth analyses of the implementation of labour law reforms in such contexts as Guangdong province in China, and on the interaction of labour laws with private labour standards operating in global supply chains.

The qualitative case studies undertaken by the Manchester team explore how lead firms in the rising powers engage with labour standards and CSR practices in their now increasingly global supply chains, and investigate the influence of civil society actors as well as the state in the development of private regulatory initiatives and in framing the discourse on labour standards.

For more details:

Listen to our CBR podcast series that features interviews with speakers at the workshop on Labour Standards and Labour Law Reforms in the Rising Powers, held in Cambridge on 5-6 September 2016.

Publications from the two projects are also available here:

• output from the Manchester project on the Rising Powers website 
• output from the Cambridge project on the Rising Powers website and on the University of Cambridge website

Corporate governance in China: Podcast interview with Boya Wang

At a workshop on Law and Finance in Rising Powers, held at the Centre for Business Research, University of Cambridge, Boya Wang, Research Fellow at the Centre for Business Research, presented his research on corporate governance in China. In this podcast interview, he summarizes his findings on corporate governance and institutional factors of firm valuation during the financial crisis of cross provincial data of Chinese companies.

Wang said: “I have done some field work trips in China interviewing business people and that is where my business research hypothesis developed from. There is a divergence between the central and local government, their roles, and their incentives in corporate governance practices. The western media generally hold a monolithic view of the Chinese state as a unified entity, but actually it is not. Marketization and political reform have led to a divergence of interests across the local bureaucracies.

“The financial crisis provides the ideal test ground to test my hypothesis. During the financial crisis Chinese business was suffering from one of the worst economic situations and in this case the appropriation incentives will be strong. I think that this will expose many existing and neglected weaknesses in the corporate governance system.

“The political reforms and crack- down on corruption that is happening now are a reflection of what is happening in the economic sector and where we can see the rise of large non-state firms such as Alibaba and Tencent. These private businesses constitute a new constituency. For the Chinese party state, this will counter balance the conservative or entrenched interests and their power. I don’t think China will morph into the political situation that we find now in Russia.”

Listen to the full interview with Boya Wang

More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014

Law and finance in Russia: interview with Rilka Dragneva-Lewers, Larry King, and Sveta Borodina

At a workshop on Law and Finance in Rising Powers, held at the Centre for Business Research, University of Cambridge, Rilka Dragneva-Lewers (University of Birmingham), Larry King (University of Cambridge), and Sveta Borodina (University of Cambridge) presented their work on law and finance in Russia. In this podcast interview, they summarize their findings.

Rilka Dragneva-Lewers presented on the EUs influence on Company Law Reform in the Eastern Neighbourhood: 
“My main area of interest is the Ukraine, which stands out amongst the rest of the eastern European states in that it was probably the last country to reform its law on the books and it is of course in a state of very serious turmoil at the moment.

“The main approach of the EU has been to insist on legal approximation so it has pursued both integration and stimulating economic development through reform of the laws. But as we have seen this is definitely not enough and this external pressure has not been a critical factor, for legal change. Businesses manage to protect their property rights through various extra-legal ways through access to political power for example and protection.

“The difficultly with large businesses in Ukraine is that there are often run by holding companies and they are owned by oligarchs. This has meant that there has been a very strong business effort to keep transparency low and maintain the privacy of dealings. Transparency remains a critical issue in business dealings.

“At the EU level the economics is quite complex. The EU despite having had a very strong response to Russia’s policy in Ukraine with sanctions still suffers from a lot of disagreement with its member states because Russia’s approach of subsequently imposing its own sanctions against the EU has been divisive.”

Larry King, Professor of Sociology and Political Economy University of Cambridge spoke about 'The Governance Grenade, the Effect of Mass privatisation on Corporate Governance in Russia':
“There are many different ways to privatise and we looked whether how you privatise makes a big difference, for example how do you allow state owned enterprises to compete with other private firms? How do you allow domestic owners to emerge which then go on to privatise firms and which will probably have much better outcomes? This happened in Poland and much of Central and Eastern Europe, and here there is a big role for foreign investors. However, when you try to privatise everything at once, without waiting for domestic owners to emerge, or without inviting in competitive auctions involving foreigners, you have to embark on artificial privatisation.

“Rather than that being a corrupt process in itself, my argument was that it created corruption. It led to firm failure. Creating owners who had no capital, who had no expertise, who had no connections, and who couldn’t monitor firm insiders, created a perfect storm for firms to fail. Once they started to fail it created a fiscal crisis for the state as nobody was paying taxes.

“This led to a situation where firms were retreating from the market as state bureaucrats, who were already demoralised from the transition and were not being paid, were now ripe for corruption. What emerged in many of these countries, Russia or Ukraine, is a system of social property relations that were based on client type ties between political officers and captured businessmen who were what we call Oligarchs.

“Clearly these systems needed to change but Russia for example could have done what Poland did and it could have protected its domestic market and allowed competition to drive enterprise restructuring and reforms of the state but they tried to do everything at once and that led to disaster.

“In summary, you can’t really describe these countries as in transition from socialism to a market society, what you have is a new type of market society developing, one in which the relative separation of the political and the economic spheres is different. There is much less separation and to be in big business you also have to be in a political community in these countries.”

Sveta Borodina outlines her findings on law and finance in Russia:
“In Russia people tend to do business with their friends and acquaintances and there is also the concept of reputation so people know each other. They rely on law to formalise what they have agreed informally previously. Trust used to be the way of making deals but nowadays lawyers are getting involved at earlier stages and they look at the letter of the law before the signatures are put on the paper.

“People are starting to understand that if you lead your business according to the rules you are more secure you are safer and you will have more chances of keeping your business in case there is an attack from a hostile acquirer.

“I was very pleased to find that the micro side of the business is improving and that it has improved considerably and the technocrats are moving the country in the right direction but the trouble is that the political set up is in conflict with this forward movement. “

Listen to the full interview with Rilka Dragneva-Lewers, Larry King and Sveta Borodina

More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014

Shareholder rights in Rising Powers: podcast interview with Gregory James and Mathias Siems

At a workshop on Law and Finance in Rising Powers, held at the Centre for Business Research, University of Cambridge, Gregory James, Senior Lecturer in Economics at Loughborough University, and Mathias Siems, Professor of Commercial Law at Durham University, presented work on shareholder rights in developed and developing countries. In a podcast interview following the presentation, they summarize their findings.

James said: “We looked at 30 Countries, both developed and developing economies, and the convergence of legal rights in these economies. Does convergence in company law lead to some convergence in legal systems, towards best practice?

“Interestingly, we found that in countries where you wouldn’t really expect it like Russia and China shareholder protection is good, at least on the books, compared to somewhere like Germany.

“We are using the CBR shareholder protection index and other research methods, and the interesting finding we have from the legal data was that all the countries were keen on improvement for shareholder protection. There seems to be a global trend in terms of fads and fashions for global rules protecting shareholders – that is interesting from a political economy perspective. We also found that while similar legal rules may flow across borders the operation of those rules is often quite different in practice. “

Siems said: “Rather than shareholder protection always being a good thing, it could be the other way round, it could be that legal systems that are less protective maybe advantageous - because you don’t need to be bothered by too much red tape. We could ask, do we really need to protect shareholders to the maximum? Is shareholder protection always good or may it be counter-productive in some circumstances?

“We don’t have a global law maker, we don’t have the UN regulating corporate governance or company law so we have to look to country level. Do we need global rules or will we see national standards becoming more uniform?”

Listen to the full interview with Gregory James and Mathias Siems

More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014

Podcast interview with Simon Deakin: Law and Finance in Rising Powers

In a podcast interview, Simon Deakin, Director of the Centre for Business Research (CBR), and Professor of Law at the University of Cambridge, has said that he is optimistic that the developing economies in the BRICS will find new ways to facilitate how business is conducted and will over time reduce the role of corruption in their economies.

Following a CBR, University of Cambridge, Workshop on Law and Finance in Rising Powers, Professor Deakin said:

“I am trying to be both optimistic and realistic. It is of tremendous importance not just for the BRICS but for the West that we do not see a race to the bottom. In the West we have a social norm that we don’t bribe officials, but in countries where there is a social norm to bribe an official to get somewhere, that is a very different world. We take for granted that by and large there is a very low level of corruption in our society and when we see corruption in the west we try and stop it. We must continue to take that line and we must encourage campaigns against corruption in all relevant contexts. However, we have to realise that corruption arises where there isn’t a functioning rule of law, so we can’t afford to preach to the BRICS; we need to help them to establish the appropriate laws and processes.”

“We have to take the view that transitioning from a clan based system and an authoritarian based system, such as China and Russia had, to one based on democracy and the rule of law, is a very difficult process and admit that we don’t fully understand how that process works. We have great models which explain how the free market works but this is where it is already established, where there is already a rule of law. We don’t yet have a convincing model of moving from one system to another. We need social science to help inform us in our policy making.” 

Listen to the full interview with Simon Deakin

More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014