Labor Malpractice: The Critical Role of Operations

Abstract

Problem definition: The premise of this paper is that labor malpractice is not solely a corporate social responsibility and human resources issue; rather, its incidence is critically driven by operational decisions. We thus develop and test hypotheses to identify key operational drivers of labor malpractice. Academic/Practical Relevance: Well-intentioned efforts by governments, non-governmental organizations (NGOs) and companies to eliminate labor exploitation have failed to curb unjust labor practices: human rights violations, unfair wages, child labor, and the violation of workplace equity, health, and safety regulations are still common occurrences. Identifying key operational drivers of labor malpractice leads to actionable insights for managers of companies that have long pledged to end labor exploitation. Methodology: Using a dataset that consists of over 1,400 firms' controversy records from 2008 to 2018, we empirically investigate these key operational drivers. Results: We find that two important operational levers|volatility and inventory|have profound impacts on labor malpractice. Higher volatility and higher inventory turns lead to a higher incidence of labor controversy. We also find that firms take different approaches to making trade-offs between the upside and downside implications of their operational decisions, and these approaches influence the incidence of labor controversies. Managerial Implications: Both anecdotal evidence and empirical studies suggest that labor controversies can hurt a firm's financial performance. Our results show that the operations function of the firm needs to be at the center of efforts to reduce labor malpractice. Firms need to channel more resources to reduce volatility (a measure aligned with the profit motive) and reduce inventory turnover (a measure not immediately aligned with the profit motive). These reductions can be achieved through measures such as improving forecast accuracy and holding more buffer. Firms also need to make the downside risks of their operational decisions more salient. These measures will go a long way in improving labor welfare.