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BooHoo: Profiting from poverty?

There is a bitter irony to online fashion retailer BooHoo emerging as a pandemic beneficiary. BooHoo kept factories open during the March lockdown and prioritised scaling up production in their Leicester supply chain over workers’ safety and public health. Conditions in the garment sector were subsequently implicated in a spike of local infections. Workers in its UK supply chain have been victims of forced labour, illegally low wages and extremely poor working conditions. Last month the company bought high street giant Debenhams – overnight transforming a major British multinational into a website – and is currently in talks with Arcadia’s administrators over acquiring Burton, Dorothy Perkins and Wallis. As BooHoo will be not taking on any stores or concessions, the 13,000 strong Arcadia workforce face heavy losses. BooHoo is a clear pandemic winner, with profits for the first half of 2020 up by 51% and pre-tax profits of £68m helping to fuel a massive expansion, despite the firm’s failure to pay compensation to mistreated workers, its stubborn avoidance of transparency over its supply chain and a litany of other serious issues across its global operations.

Poor conditions in the UK garment sector were an open secret long before last year’s expose. A 2015 study by the Ethical Trading Initiative found “widespread and severe violations of work and employment laws” at Leicester garment factories. In 2017 workers making clothes for River Island and New Look were found to be paid between £3.00-£3.50 per hour. These revelations prompted a 2018 government review into exploitation in UK companies textile supply chains and the promise of a crackdown on exploitation. The resulting parliamentary report ‘Fixing fashion’ published in February 2019 painted a damning picture of the fashion industry both in the UK and overseas. Globally 90% of textile workers have no possibility to negotiate terms and conditions. The brunt of exploitation is borne by women and young girls, who live in poverty and face working conditions so intense that they face physical ‘burn-out’ that cripples their ability to work by their 30s. Meanwhile lead companies return billions in profit to executives and shareholders. The new UK garment sector is being built on the same zero accountability corporate production model that generates this exploitation in the global south.

Hollow-form corporation

In the early post-war period U.S statesman and legal theorist A. A. Berle famously argued that the modern corporation, with its widely dispersed shareholders had broken the relationship between ‘ownership and control’ in the capitalist firm, creating an autonomous managerial class freed from profit maximisation imperatives to pursue business for the maximum public good. This concept of the corporation as a social institution meant that, in Berle’s view, the legal privileges of incorporation – legal personality and limited liability – must further the interests of the ‘enterprise entity’ – the productive relations of the firm as a whole: “the enterprise, and not the incorporation papers” are the underlying reality to which the law should respond. Yet the legal history of the corporation suggests a very different trajectory. Contemporarily ‘the corporation’ is nothing more than a legal structuring device deployed to structure control around the firm’s assets and revenues in the interests of powerful managerial and investor class interests. The use of shell companies and disaggregated structures is prolific across corporate finance, tax, and production structures. Today’s corporations have instead broken the link between control and accountability. Through multiple layers of the ‘corporate veil’, powerful shareholders, fund managers and Directors operate under a de facto ‘no liability’ regime.

In this context exactly ‘what’ has been acquired through BooHoo’s recent purchases is of significance as part of a long-term redrawing of the legal boundaries of the firm, which goes far beyond the fashion industry. These acquisitions are composed of almost purely intangible ‘brand’ assets. Corporate law enables assets to be bundled up according to preferences of investors and corporate management at the top of firm authority structures in order to maximise leverage and enable tax and regulatory arbitrage. Patterns of corporate-to-corporate shareholding, and highly integrated subcontracting models (such as franchising and supply chain integration) enable arms-length control of the labour process. Lead firms and investors cash in on returns on neat bundles of assets whilst workers are squeezed at the labour-intensive end of the supply chain.

Corporate concentration, individualisation and social externalities

The contemporary global economy is marked by intense concentrations of corporate power. Over 80% of global trade happens internally to the supply chains of Multi-National Enterprises. At the level of financial markets shareholding is intensely concentrated. Over 80% of UK equities are held by institutional investors. Conversely the period of consolidation of corporate and financial control has been marked by a dramatic individualisation of labour regulation. Private sector collective bargaining coverage has dropped to 16% in the UK, the majority of which takes place at the workplace level. Yet sector-wide transformations such as the current crisis of the high street are naturalised in media and political discourses as the outcomes of market forces and shifts in consumer demand. This obscures the role of unequal power relations between capital and labour in the institutional reconfiguration of global production. Transformations of production and consumption patterns are naturalised without asking fundamental questions about the constitutive role of corporate power. Would online retailers have been able to so easily eviscerate the high street if delivery drivers had been able to resist the Amazonisation of logistics and demand a decent wage? Would fast fashion, with its enormous environmental and social externalities have reached these excesses without the pioneering work of global mega brands in building highly integrated production networks with institutionalised exploitation?

Shareholder value as endemic exploitation

This individualisation is built-in to UK corporate law and corporate governance regulation which constructs the twin poles of shareholder and consumer primacy. Regulation of takeovers, the composition and duties of boards Directors, voting rights in the company meeting, and corporate governance codes all empower shareholder decision making on fundamental matters of business. This was justified during the Thatcher years through the Friedmanite claim that profit maximisation ultimately serves the public good. More recently this abrasive doctrine has been augmented by friendlier notions that shareholder ‘stewardship’ can provide ‘good corporate governance’. The £2bn drop in BooHoo’s share price on the Monday following reporting about labour abuses in Leicester could be taken as validation of this. Yet within three days major institutional investors were weighing in with supportive notes, characterising the price hit caused by the “supply chain/low pay controversy” as an “isolated incident” and a “buying opportunity”. Hedge funds ended their short positions, and retail investors bought in rapidly at the new lower price. BooHoo’s largest stockholder – Merian Global Investors – increased its holding to 10%. BooHoo shares rebounded 30%, and have since reached its previous highs. This took only three days, and a token promise to invest in improving factory conditions in Leicester, suggesting investors rapidly ‘priced in’ the (very limited) damage of bad publicity on future profits.

Given the endemic nature of exploitative practices in fashion supply chains, the characterisation of this as an “isolated incident” is absurd. These practices are well known and widely publicised, periodically leading to short-lived scandals. As such financial markets have been pricing in the risks of bad publicity for years. Given the labour-intensive nature of the industry it is hardly a stretch to say that low pay and gross human rights abuses are a direct source of ‘shareholder value’ in fashion companies. Contra Freidman, these are enormous social externalities imposed by the legal and accountancy structure of corporate production. The packaging up of profits as returns on a handful of intangible assets obscures the true source of ‘value’ in the brutalisation of contractual and subcontracted labour. On this basis the Directors of BooHoo have been able to take control of even bigger supply chains, further consolidating their power to control conditions and pay.

Rebuilding corporate accountability, rebuilding workers power

The Levitt report concludes that from (at the very latest) December 2019, senior Boohoo Directors “knew for a fact that there were very serious issues in its Leicester garment suppliers”. BooHoo reportedly account for 75-80% of manufacturing in the notorious Leicester garment sector, which in turn accounts for up to 80% of BooHoo’s total production. Yet Mr Kamani and the other members of the BooHoo board have faced no criminal or civil penalties for the gross labour rights abuses from which they have profited. Despite lining themselves up for a £350m pay-day wage, claims remain unaddressed. Companies house lists more than 50 Directors of Leicester garment factories who have been banned from running companies, many of whom continue to own and control garment companies as shareholders instead. These bans exemplify both the problems of the multi-layered corporate veil and the ineffectiveness of tackling abuses at the lowest level of the firm authority structure.

The preference for transparency-based regulation, and enhancements to shareholder power under the alibi of ‘good corporate governance’ have failed to prevent exploitation. The assumption that shareholders and consumers will punish firms with poor practices has repeatedly been shown to be false. Indeed, why should anyone have to check whether systematic human rights violations have occurred before they buy a pair of socks?

Organising workers is necessary but not sufficient under conditions of fragmented production and concentrated ownership, as was made clear by billionaire BooHoo owner Mahmud Kamani’s threat to MP’s to “take the business offshore” if faced with further supply chain scrutiny.  Dealing with corporate power requires (re)establishing legal relationships between workers and those who wield power in firm authority structures. The existing framework of labour and employment law takes almost no account of the complex and ever more elaborate structures of firm authority which function above the notional ‘employer’. The concept of ‘joint employers’ liability would be a strong step towards rebuilding accountability in across these fragmented structures. Similarly, proposals for an enhanced ‘Duty of care‘ that beefs up reporting with active obligations to take measures to identify and prevent human rights abuses backed by fines and damages for violations can extend corporate responsibility. However, accountability needs to attach to those with control, and not merely the corporate entities deployed to limit exposure. Preventing exploitation, and rebalancing workers claims on value is both an economic and moral imperative. Regulation needs to be refocused towards empowering workers across corporate and financial structures and requires sustained engagement with the contradictory legal architecture of the shareholder corporation.

This article was originally published by the Institute of Employment Rights.

Ben Crawford is a PhD candidate at the University of Liverpool. Twitter: @crawford_ben

Image credit: A R on Unsplash