CORPORATE GOVERNANCE - Ethics, Risk and Fraud

 CORPORATE GOVERNANCE - Ethics, Risk and Fraud

ABSTRACT

The Corporate that is based on the shareholdings by the ownership. It has a complex governance since the owners are merely the shareholders which can be sold in tune of better profits or better options of investment. This complexity leads to ethical issues, risk and frauds in various forms through management strategies. This protects the interest of the corporation and its shareholders within the ambit of Capital Market. This dissertation will explore the corporate structure and the issues of risks and frauds which lead to the collapse of the corporate.

INTRODUCTION

The structure of the Capitalist economy which are mainly family owned private business houses and Corporate, which is 'economic-communism' are distinct. Their management approach, risk and fraud issues are also distinct. In the capitalist economy, i.e. private business that grows from the entrepreneur's vision and enterprising approach. However, in the corporate system since the investors are remote, they have their approach of outsource management to protect the interests of the shareholders and investors.

Elected by the shareholders, the board of directors is made up of two types of representatives. The first type involves ‘inside directors’ chosen from within the company. This can be a CEO, CFO, manager, or any other person who works for the company daily.  The other type of representative encompasses ‘outside directors’, chosen externally and considered independent of the company. The role of the board is to monitor a corporation's management team, acting as an advocate for stockholders. In essence, the board of directors tries to make sure that shareholders' interests are well served.

This makes corporations mainly an investment scheme of Wealth Managers rather than the economic interest or building economic structure of any country. Corporation is the platform of the capital market for the investors and not the generation of the economy. This creates uncertainty in the investment in the Corporation and has the risk of change of management based on the shareholding. Even though the Corporate structure is well managed with the three categories, i.e., Chair, Inside Directors and Outside Directors. Inside Directors are responsible for the operations, however, the outside directors are meant to be vigilant about the function of the corporation.

Chair: Technically the leader of the corporation, the board chair is responsible for running the board smoothly and effectively. Their duties typically include maintaining strong communication with the chief executive officer and high-level executives, formulating the company's business strategy, representing management and the board to the general public and shareholders, and maintaining corporate integrity. The chair is elected from the board of directors.

Inside directors: These directors are responsible for approving high-level budgets prepared by upper management, implementing and monitoring business strategy, and approving core corporate initiatives and projects. Inside directors are either shareholders or high-level managers from within the company. Inside directors help provide internal perspectives for other board members. These individuals are also referred to as executive directors if they are part of the company's management team.

Outside directors: While having the same responsibilities as the inside directors in determining strategic direction and corporate policy, outside directors are different in that they are not directly part of the management team. The purpose of having outside directors is to provide unbiased perspectives on issues brought to the board.

This indicates that the structure of the Corporate is mainly to focus on the share value. The rise in the share value is the economic status of the shareholders and attracts the retail investors primarily. This results in negligence in the operations in tune of production quality, fair economic relations amongst clients, vendor and employee. This leads to excessive chaos that becomes the factors of risks and fraud. However, the ethics in the corporate governance is towards transparency in the policies, which is mainly to protect the image of the share value. This overrides the interest of the corporation or the economy of any country.

Corporate Governance & Ethics

There are many aspects of Corporate Governance and its ethics that are in tune with the relationship with the shareholders, stakeholders, the board and the company management.  However, it is meta governance, the Corporate is to avoid economic warfare and information theft.  

The latter include: the structural definition from the Cadbury Report, which identifies corporate governance as "the system by which companies are directed and controlled" (Cadbury 1992, p. 15); and the relational-structural view adopted by the Organization for Economic Cooperation and Development (OECD) of "Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined" (OECD 2015, p. 9)

However, there is no mention of ethical behavior with its workforce.  Corporate Governance includes 4Ps in the system, which are people, process, performance, i.e. profit or purpose.  The people are not the indicator of the workforce.  The people are those who are the stakeholders of the Corporate in tune with the investment, vendor or clients, etc.  That is why the highest layoff of the employees are in the corporate when it is in decline as we have witnessed in the IT sector.  These larger layoffs were not in accordance with the ethical policies of Corporate where the livelihoods of the employees were dependent on the jobs in the sector.  This indicates that the employees are not part of 4Ps in the corporate governance. 

Ethical Corporate Governance refers to the processes and policies that a company has in place to deal with issues concerning how it is administered and conducts day to day business. It is important to remember that companies exist primarily to create a product or service, which is used to generate profit. However that intention must be balanced with controls that ensure a company pursues profit without crossing over the line into the realms of unethical behavior.  In the past many companies may have exploited their market positions to inhibit competition or even threaten local populations, ethical corporate governance exists to prevent this happening.  Corporate governance is a multi-faceted subject with many layers of complexity. An important part of corporate governance deals with accountability, fiduciary duty and mechanisms of auditing and control.  Investors may only be concerned with a company's performance and earnings, but bad corporate governance can be symptomatic of greater problems with the company. For example, before the collapse of Enron, the company and its associated traders are believed to have artificially inflated the price of energy in certain US states, thus increasing their profit margins. While this action alone was not enough to cause the company to collapse it was a clear indication that internal controls had failed, which of course meant that other much larger abuses were possible, which eventually lead to the downfall of the company.

The expansion and corporatism of the government policies should come under the ethical corporate behavior. The corporatism of the agriculture has led to the farmer suicides where the farming have become a corporate with the shareholding of the investors. Further policies with the intent to maintain the high value of the share are keeping the status of the share for which much manipulation is done. These manipulations are in tune with the policies, manipulating the balance sheet and marketing of the share value image instead of doing a productive activity of the organization. Thus, most of the corporate policies are the expansion to sustain the share value in the market instead of upgrading the internal policies which lead to draining or leakage. The change in the management is according to the change in the Board after the change in the shareholding. Shareholding plays a significant role in policy making. This is another form of regime based on the lobby of shareholding and its governance system parallel to parliamentary democracy. In parliamentary democracy, people are political capital, however, in the Corporate system, share holding based on investment is the governance in the board.

Business ethics are policies that guide the behavior of corporate entities, especially regarding controversial subjects.  Business ethics protect companies from legal liability and ensure that they treat their customers and team members with respect.  Corporate ethics codes often include subjects like social responsibility, insider trading, discrimination, corporate governance and bribery.

The complexity in the Corporate governance is mainly the perspective of the Corporate in tune of capitalist economy versus the factual of economic communism.  The Corporate has no accountability in tune of investment to the government or its liability of the tax payment.  However, corporations do have social responsibility and funds for the non-government organizations that take care of the social issues of women, children and the environment. Corporate is also engaged in the political funding to the political parties for the election fund.  This makes the corporate system distinct from any economy as it functions as a parallel state system.  Just the way the Constitution is a doctrine of political governance, similarly, Corporate ethics is the doctrine from the corporate governance. 

Enterprise Risks and Management

Business risk is any exposure a company or organization has to factor(s) that may lower its profits or cause it to go bankrupt.  The sources of business risk are varied but can range from changes in consumer taste and demand, the state of the overall economy, and government rules and regulations.

Most of the time the risk factors emerge in any organization whether the profit or the non-profit organization is the policies and the approach of governance.  Almost every crisis arises due to internal and external factors or policy inadequacies that bring challenges even to the survival of the business.  This influences the profit and financial crisis and gradually loses its grip in the market and the reputation with the vendors and other stakeholders.  Many times the disputes or violation of human rights and its legal consequences also create crisis in the business operation or it loses its stakes on the compensatory grounds.  

Most of the business risks threaten the financial goal. However, such risks have many influences such as political change, cybersecurity threats, threat to the reputation of the owners or shareholders, merger or acquisition, location hazards. The Nandigram agitation against the Tata Nano project in West Bengal is the indicator of the political resistance. This caused a big loss on the investments and credibility of the project. However, the Tata Nano project was relocated to Gujarat. In such a situation the expansion of the project is also a tool of the political rivalries that is witnessed in the Tata Nano project. This impacted a huge reputation fallout for the Tata Group.

A lack of data security could be an internal risk, as it opens an opportunity for employees to leak data. This lack of security can also be an external risk for data breaches from outside sources.

Data leak as an internal risk is one of the crucial concerns which may lead to corporate war or international disputes. Espionage through the placement as employees breaches the data security. It could be in the form of intellectual property or any form of input that could benefit the rivalries. The data leaks could lead to financial frauds risks.

Another enterprising risk is the fixed workforce that became a huge liability that has been witnessed recently.  Laying off 200,000 IT professionals in 696 tech companies is not a normal situation in tune with business risk.  This either indicates the incompetence in the workforce or some lapses in the policies to use the workforce in tune of the competence in the market.

“In recent times, Indian companies have been grappling with the challenge of effectively utilizing their workforce, resulting in a significant rise in layoffs. According to a report from layoff.fyi, as many as 696 tech companies laid off employees in 2023, leading to nearly 200,000 tech professionals losing their jobs. This challenge arises due to the burden of fixed workforce costs that companies struggle with, irrespective of actual utilization. A key factor contributing to this crisis is the lack of efficient workforce planning. In the recent resurgence of the economy in 2021 and early 2022, companies engaged in over-hiring and talent hoarding without considering the long-term consequences. This trend, driven by expansion plans, seasonal demands, or target pressures, has resulted in an excess of redundant positions. As a result, businesses are faced with cash burn and narrow profit margins. Challenges such as constant attrition, fixed upfront salaries, and unpredictable outcomes further exacerbate the issue, squeezing profit margins even further.’

The random infiltration in the job sectors in the IT companies is a channel of the shareholders and the Boards that put their loyalist in the company. Most of them are either recommended or facilitated. In such cases the competence is compromised that leads to the collapse of the function of the organization. The background of the shareholders or investors are responsible for facilitating the placement. The channel of investment remains opaque and therefore the intent of the investors on the Board of shareholders remains under the risk threat since they control the governance. However, the foremost motto of the Corporate is to sustain the high share value. This motto compels many manipulations to be in the market of Shares and not the competence of the organization.

Enterprise risk management (ERM) is a methodology that looks at risk management strategically from the perspective of the entire firm or organization. It is a top-down strategy that aims to identify, assess, and prepare for potential losses, dangers, hazards, and other potentials for harm that may interfere with an organization's operations and objectives and/or lead to losses.

Enterprise Risk Management plays a significant role in identifying the crisis and the consequences of the issues. Most of the time the internal manipulation and corruption are the consequences of the risk in total. However, it can be dealt with a holistic approach. Most of the shareholding in the Corporate is benami or barter. In tune of that the corruption is a channel from the top since there is an intent to maximum grab the liquidation in the organization.

RISK MANAGEMENT FRAMEWORK

Effective risk management can add value to any organization. In particular, companies operating in the investment industry rely heavily on risk management as the foundation that allows them to withstand market crashes.  

Here the risk is about the financial or investment risk. It is important to understand capital stability without hindering growth.  Risk Management techniques lower the borrowing cost, easy access to the capital and long-term performance.  In a way, the Risk Management Framework (RMF) allows the capital of the company to be less dependent on borrowing without the barricading performance and growth of the company.

There are five components in the Risk Management Framework, i.e. risk identification, risk measurement & assessment, risk mitigation, risk reporting & monitoring and risk governance.  Risk Identification deals with identifying the risk from the Risk universe, i.e. IT Risk, operational Risk, regulatory risk, legal risk, political risk, strategic risk or credit risk.  This is the diagnosis of the risk that the company is facing.  Sometimes ignoring the risk of any framework does cause a larger crisis in the long-term which sometimes becomes irreparable.

Thus, the role of risk measurement comes to understand the parameter of the risk arising from the various components of the risk universe either collectively or identically. The parameter of the risk is identified from the spectrum of the exposure of the risk. Risk Mitigation is about analyzing the framework of eliminating or reduction of risk through sale of assets and liabilities, buying insurance or looking for options of diversification or diversities.  Risk Mitigation can be said about finding solutions.  The solution should be based on the spectrum of risk.

Risk Reporting and monitoring is an approach of risk administration.  It is a regular feed that identifies the sources of risk on a regular basis.  Daily reports of every department take the preliminary measures towards risk management.  Risk governance is a complete human resources management that deals with the functioning of the organization.  Every employee is a part of the governance and are meant to be within the parameters of their responsibilities and skills.

The organizations that are engaged in dealing with the Risk Management Framework are NIST, COBIT and COSO.

NIST Risk Management Framework (RMF) provides a process that integrates security, privacy, and cyber supply chain risk management activities into the system development life cycle.

COBIT is an IT governance framework for businesses wanting to implement, monitor and improve IT management best practices.

The COSO Enterprise Risk Management framework was published in 2004 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). It defines Enterprise Risk Management as “ a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives

NIST and COBIT are specialized fields that deal with the risk in cybersecurity and IT management.  However, COSO deals with the overall risk management that starts from the Board in applying strategies and policies.

Corporate Fraud  

Corporate fraud consists of illegal or unethical and deceptive actions committed either by a company or an individual acting in their capacity as an employee of the company. Corporate fraud schemes are often extremely complicated and, therefore, difficult to identify. It often takes an office full of forensic accountants months to unravel a corporate fraud scheme in its entirety.

Every corporate fraud whether it is internally or externally happens since the law can be manipulated. The investor or the shareholders that are on the Board are either power players or close to power. Thus, it is easy to manipulate the legal process to have a bail out. Any corporation that gets into the clutches of law only due to the corporate war or dispute with the government. Corporations easily escape legal accountability since they do not pay tax. Corporate is a political economy of the political parties based on political sociology.

Most of the Corporate fraud is account misappropriation to project the high revenue status to maintain the share value in the market.  It is done mainly to sustain the retail investors or to attract investors in the company.  However, such misappropriation of accounting is distinct from the actual financial condition of the company.

Though it may be conducted in a variety of ways, corporate fraud frequently is performed by taking advantage of confidential information or access to sensitive assets and then leveraging those assets for gain. Fraud is often hidden behind legitimate business practices or exchanges to disguise illicit activity. Multiple stakeholders involved in corporate fraud also allow for elaborate fraud schemes to be protected by a group of complicit actors.

Corporate shares are mostly the barter system mainly by the misappropriation of the government policies and the corruption in the system. In tune with the alternate of the cash exchange, the allocation of the share through benami holders becomes the facilitation. In such cases, those who are into corruption using their positions in governance, are bound to misappropriate the corporation internally and externally. Most of the time the political influence uses the people to invest their money in the shares of other financial schemes. The trust of people in their political leaders makes their investment at stakes and subsequently they are controlled outside the board. Ponzi schemes are such examples of the financial misappropriation by the Corporate in the external frauds.

Another form of corporate fraud is espionage and stealing intellectual property towards the corporate war.

Corporate espionage can take one of two forms—by federal definitions—economic espionage and theft of trade secrets. Economic espionage is stealing trade secrets to benefit another country. This form of corporate espionage is very prevalent in modern times because of the advantages technological advancements bring to competing or struggling countries.  

For example, in January 2023, a General Electric employee was convicted of attempting to steal avionics and turbine technology trade secrets from the company to give to the Chinese government and other interested parties. The ex-employee was sentenced to 24 months in prison, one year of supervised post-imprisonment release, and fined $7,500.

These thefts are state sponsored and have an impact on international relations and international legal remedies.  Since communism is a global regime thus, it is not constrained in a country's domain.  However, there are laws that protect the interest of such fraudulent practices through espionage or theft of trade secrets.  

Bankruptcy fraud is a type of fraud that an entrepreneur commits by making their company go bankrupt, for example after they have deliberately incurred debts. Another example of bankruptcy fraud is that an entrepreneur deliberately disadvantages a creditor, for example by keeping certain assets or money secret in the event of bankruptcy. Fraudulent bankruptcy is punishable by law.

Another form of corporate fraud is bankruptcy. This could be either strategically or due to a false policy. However, it has been observed that the fall of corporate leads to the acquisition of the company and change in the management. These changes carry forward the total overhaul of policies and perspective of the organization. Since corporate is based on the shareholding, thus the bonding with the organization is only limited to the share value. This mainly leads to manipulation to either hold the value of the share or to attract the investors. Since investors are the public money, thus, the focus is on the sale of shares. However, the establishment of the company and its functioning towards economic alleviation of the region is generally neglected. Such manipulation becomes fraud in the definition of corporate governance.

But when bankruptcy results from corporate fraud, the message is troubling: If your company gains competitive advantage by deliberately misrepresenting its financial condition, it will effectively go unpunished in the capital markets.

Capital market is to compile the public money through the investment on share.  Once the investment is done on the share market, the money stays in the market though it change hands through buy and sell shares of different companies.  Thus, the capital market is the real control over the corporate governance and not the board. The board is under the influence of the strategies of the Capital Market and facilitates the policies such as financial frauds or accounting frauds to benefit the larger game plan.  That is why such policies do not get punished by the market.

The costs of the deception and of cleaning up the mess have also been staggeringly high to the industry as a whole. Unable to match WorldCom’s low cost structure and aggressive pricing, competitors were forced to drastically cut expenditures by sacking thousands of employees. Top managers are reported to have suffered the same fate because they couldn’t match WorldCom’s high reported profit margins. A crude estimate suggests that if WorldCom had priced so as to earn what it reported, the industry could have yielded an extra $40 billion in revenue and commensurate profit. And the bankruptcy itself has been litigious and costly. 

The collapse of any company that has public investment is at the risk of the investors and not the company.  Thus, to manipulate the policies towards the corporate war or the competitors has the least effect on the financial accountability to the investors. Such policies help the board or the management to negotiate with the competitors in different forms towards the new policies in the industries or clearing the existing industrial disputes.

WorldCom emerged from bankruptcy, restructured, and was purchased by Verizon.

Thus the corporate restructure and go through the process of acquisition and change of management with new policies.  Such acquisition is similar to the change of government in the political system.

OVERVIEW

The three main factors in Corporate governance are ethics, risk and fraud to be understood with the perspective of the formation of the Corporation.  Corporation is created by the capitalist market and allocation of the fund to the corporation in tune of shareholding.  The investment in the Capital Market through share trading is to circulate the money to benefit many business houses in tune with the financial support.  However, such business houses are to attract the public money through the allocation of shares to the public instead of investing their personal money.  This reduces the risk of investment for the private player and the onus goes to the public risk.

The ethic in corporate governance should be to keep the trust of the public investors or retail investors so that along with the company growth, investors can also grow accordingly.  However, the risk is that when the pressure of the shareholders on the Board or the Benami shareholders try to manipulate the organization through espionage, corruption and fraud.  Most of the projects by the Corporate are to deal with the secured business such as oil, electricity, water, transport, roads, etc.

Many times the risk in the corporate is faulty policies or incompetent workforce which are mainly the facilitation of the employment to its lobbyist by the shareholders on the Board. In such cases the holistic approach in governance is not able to reach the target of emancipation in the market since the workforce is divisive amongst the shareholders. This leads to excessive policy or strategy paralysis that subsequently become a risk for the operation. However, the intent of the corporation exclusive the share value is a narrow approach of corporate governance. Corporations are unable to create an economy for any domestic region, however, create strategies to attract investors through accounting manipulation and media propaganda.

Corporate is not the economy of any country. However, it is a forum to accumulate investment through the share market. In tune with that there are many corruptions or scams happening with public money, such as ponzi schemes. Share trading is based on the risk of the investors, there is no bailout for the investors who get stuck in the scam. The only way to punish the perpetrator, but the investor loses their money.

Many times, the investors' money are diversified in other projects that are possible to fall out for various reasons. This is a breach of trust to the investors that have invested in a particular project. Many times vendors' payments are blocked so that there can be diversified investment towards gain in the share market. In tune of that, the money flow gets affected and results in a blockage in the chain of procurement.

Ethics is not the behavior of the workforce or the operation technique here.  The ethics is about the credibility of the market so that the investors are assured of its investment.  Ethics is about the focus of the corporation where the public money has been invested.  However, the quick switch over through sale or purchase of shares by the investors do affect the financial capacity of the organization.

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Fast Fashion and its Global Impact

 Fast Fashion and its Global Impact 

Introduction

Clothing is a culture as identity and reflects the regional identity of the people.  However, the clothing has also conserved the heritage.  Many times the heritage clothing is preserved for the next generation as a legacy of the next generation.  Thus, clothing explains many things about the richness of the apparel along with customs and tradition.  

However, the new trend clothing business as Fast Fashion has changed the definition of clothing.  It is no more a cultural identity of the region or people.  It is more about the consumption as fashion and disposed of by the new fashion.  Thus, the change of fashion in tune of cloth material, design, etc. is so fast that such apparel conditions are termed as fast fashion.  The trend of fast fashion is global in tune with supply chains and stores.  It has defined and fixed customers for them the fashion designed and consumed.  Fast fashion is more a concept of lifestyle than clothing.

It is estimated that in 2023, the global industry is worth $1.7 trillion and more that 300 million people all over the world are engaged in the business in the form of supply chain.  Fast Fashion is based on the retail stores which have a presence in the clothing market as a brand.  Here, the brand is an identity of the fashion clothes or store however, it does not signifies the people.  Here, people are subordinate to the brands and carry the brand as their identity.  Clothing is no more a choice or comfort to carry however, it is a trend to be followed.  

Fast Fashion is a western concept and mainly for the branding of clothing.  Branding is a status and richness of class of clothing.  Thus, Western countries especially the UK and US have a larger customer count of 30%-40%.  Fast Fashion has Mall culture.  It is more about a shopping estate than the local markets.  However, such Mall culture has spread across the world and taken over the larger portion of land through and the branding clothing has their stores, such as Zara, H&M, Benetton, etc., and various other outlets such as food courts.  Thus, Malls are a complete concept of Brands to which fast fashion dominates and attracts the customers.  Malls are built through acquisition of land and such acquisition processes engage displacement of the local residents or occupant in their own homeland.

However, the supply chain of the fast fashions is dependent upon the country’s international relations with the countries that are engaged in the supply chain.  Zara is a Spanish Company, whereas H&M is a Swedish Group, and Benetton is an Italian company.  Thus, their operational mechanism is distinct from their respective country's political approach in domestic and international relations.  The fast fashion brands have the identical approach to attract the customer, however, brands such as H&M and Benetton have moved beyond the Mall and have retail stores in the prominent market.  The brands have their distinct approach of vertical, semi-vertical and horizontal approach in the operational systems.  Whereas, Li & Fung, which is a HongKong based brand, neither designs nor manufactures.  It gets the design from Europe and distributes it to the low cost manufacturers in the Asian countries.  In other words, they merely coordinate with the suppliers and the manufacturers which are less equipped with the other European brands.  The intricacy of the fast fashion operational management within the three brands of Zara, H&M and Benetton and its impact on the Global arena are explored in the following case study. 

Zara Supply Chain - a case study

Zara is the flagship brand of Spanish Apparel Fashion group of Inditex, which is the most dominant brand in the trend of fast fashion.  Zara was launched in 1975 by Amancio Ortega in Spain. Zara is a multinational company and it is the largest constituent company of the Index Group. Inditex has other brands such as Bershaka, Zara Home, Massimo Dutti, Oysho, Pull & Bear, Stradivarius, Uterque and Lefties. 

Inditex Group has as of 2023 is 5815 numbers of stores in 93 markets worldwide out of which the Zara brand has 2312 numbers of stores as retail outlets in the busy shopping districts or malls.  The majority of the stores are corporate owned otherwise the franchise system in tune of collaboration where the ownership could not be acquired.  The acquisition of property under the brands of clothing is the strategy of the Inditex group.  However, Zara has a presence in the online stores as well besides the physical stores in the Malls.

Apart from fashion brands, Amancio Ortega has also set up a global real estate investment fund, Pontegadea Inversiones, which manages corporate offices across nine countries including the United States (Seattle), Britain (London), France (Paris), Canada, Italy, South Korea. These corporate properties house large companies including Facebook, Amazon and Apple, and prestigious luxury and retail brands. (Martin Roll, 2021)  If  Zara's fast fashion made Amancio Orgetga the 2nd wealthiest man in the world in the clothing industry, it may not be from the Zara fast fashion business only; however, it is from the real estate business.  Zara is the face of consumable items in fashion through the Inditex holdings.  Zara Brand has turnover worldwide US$ 23 Billion, however, Inditex group has US $38.18 Billion.  The huge acquisition of estates and building commercial outlets in tune of Malls and Shopping Complexes and renting to big brands add to the Company’s strategy and growth.  

Since Zara has vertical integration and has a strategy of engaging the existing and prospective customer in the design making process.  This means that Zara incorporates the suggestion and criticism of the customers while creating products.  This just not includes the design perspective but also includes the concerns over wastage and the environmental issues such as green gas emission. Since Zara has an in-house manufacturing unit their policy and strategies are indigenous for a quick response in case of crisis.  Zara’s business model is vertical integration, which is primarily owned by Zara and Inditex group.  Supply chain of Zara is not outsourced; however, it has an internal mechanism.  Zara manufacturing material along with its production unit is in Spain.  

Thus, Zara has a close market of its suppliers, manufacturer, suppliers and including the customers. Zara’s vertically integrated business model is based on owning and controlling each of the elements of the supply chain from production to the finished product. This includes producing raw materials, manufacturing, warehousing, distribution, advertising, retailing, and logistics.  This makes Zara a complete indigenous system that is cost effective by reducing inventory costs and efficient production management.  Zara’s fashion brand is for a specific community of the Zion network. The base-support of the Zara fashion brand is the rents based on Ricardo’s rent theory from the estate for commercial use.  This is a new form of colonies that has the Spanish legacy historically.

Zara’s supplier list, therefore, includes twelve clusters that concentrate 92-97% of the production: Spain, Turkey, Morocco, Portugal, India, Bangladesh, China, Pakistan, Brazil, Vietnam, Cambodia, and Argentina.  The Zara supplier list also includes 1040 suppliers from Asia.  There are 459 in the European Union and 200 in the rest of Europe. Then, 145 were from Africa and 22 from the USA. (FASHiNZA).  The complete Zara supply is a Spanish neo-colonies in other continents besides Europe. If Zara's fast fashion made Amancio Orgetga the 2nd wealthiest man in the world, it may not be from the Zara fast fashion business only; however, it is from the real estate business.  Zara is the face of consumable items in fashion through the Inditex holdings.

Even though Zara is the richest brand in the Fashion industry, their employees are paid lowest wages even  in tune with the managerial level.  However, the growth of the employees stops in the middle-level management, i.e. local management.  The salary ranges from Rupees 1.2 lacs for the sales officer to Rupees 17.7 lacs to Regional Manager annually which includes perks and other benefits, which is very low as minimal livelihood.  This indicates that Zara pays much less wages than the minimum wage according to the national law. However, the managerial level of employees have the income inequalities in tune with the other sector such as Information Technology.  This indicates that Zara is a part of the SEZ economy where national law is not applicable or there is wage theft.

Zara has almost no budget for advertising and marketing since it has closed customers and provides clothing to its own members.  However, retail outlets are open for the common consumption however, it is very less in comparison to the total sale.  Since Zara has almost no publicity budget, thus it saves substantial money in the marketing.  The high window displays for the street visibility in the busy locality explains its presence in the market is one such expedition of the visibility of the brand.  This saves huge marketing overheads on advertisement in comparison to the other competitors. All the outlets have ownership and thus, there is no overheads of rent of the premises or stores, which is generally applicable to other businesses.

The delivery system of Zara is also integrated.  The customers are informed by the store of their items arriving and they can collect the goods from the store or either delivered with the specific QR code. In case the representative of the customer for pickup, has to show its identity card. This indicates that nothing goes out from the Zara integrated system.  Zara fashion is not for retail consumption and the customers are part of the supply chain.  Since Zara’s operational management is integrated, thus it pays a lower wage for engaging employees as caretakers than a professional engaged.  This makes the Zara or Inditex brand a colony instead of business partners in the foreign territories.  Even when it uses workforce besides using the resources and acquisition of lands and stores and malls. Inditex Group is a foreign territory in the national boundary. These stores and malls are not bought with the fair land or property prices.  Most of them are acquired through manipulation since Israel deals with the property and legal issues.  

Integrated supply chain is a part of the SEZ economy in tune of transportation and distribution.  The SEZ economy has its own indigenous mechanism of the delivery system.  SEZ itself is a large holding system where every aspect of the business is interlinked including workforce.  SEZ is a regime in itself across the globe under globalization and Fast Fashion or clothing is one of the requisites of the regime as consumable.

Global fashion brand Zara, has posted a growth of 40.42 per cent in its India revenue at Rs 2,562.50 crore for the Financial year 2023, according to the latest annual report of Trent Ltd. Inditex Trent Retail India Private Ltd (ITRIPL), a Joint Venture, which is engaged in the operation of Zara stores in India, in the Financial year 2022 reported a total income of Rs 1,824.82 crore and a profit of Rs 148.69 crore. "The incremental store openings for Zara continue to be calibrated with focus on presence only in very high-quality retail spaces," it said (PTI, India).  This indicates that even though the total income of the Financial year 2022 is 1824.82 crore from India, the net profit is only 148.69 crores.  This means that 1676.13 are part of the business overheads. These overheads are part of the property acquisition, which is not done through currencies. The majority of brands in the SEZ economy have a coupon system that saves the transaction of money.  However, such transactions are part of the total income which has no monetary exchange and is used as a barter system in most of the forms.  Such a transaction does not add to currency valuation even though the trades have taken place.

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The profit of the SEZ economy does not get into the national taxation.  However, it is re-invested in the SEZ economy.  Thus, the SEZ economy is a collective infrastructure for the global economy which has its own indigenous operation management that makes business cost-effective.  Zara is a part of global economic communism.

H&M Business Module - a case study

H&M, i.e. Hennes & Mauritz AB is a Swedish Multinational Group in the fast fashion apparel business.  It is the 2nd largest retailer in the fashion clothing industry after the Inditex group in terms of revenue generated through the clothing business.  Hennes & Mauritz group has H & M as the flagship brand along with the subsidiary brands such as Afound, Arket, COS, Monki Weekday and others.  H&M has multi-continental approach, which is in combination with the supply chains and the retail outlets. 

The H&M Group has 75 geographical markets where the group has 4369 stores, however, H&M has 3872 stores worldwide.  H&M have provision of online shopping in 33 countries. H&M outlets are owned by the group and also have the franchise system.  In the franchise system, instead of rent they gave the percentage of total sale to the extent of 4%, however, the 96% is with the group since it takes care of all the expenses of the store as brand, interiors and products.  However, the salaries of the store staff is a part of the franchise expenses. H&M Group amounted to about 21.67  billion US$. 

Unlike Zara, where customer input remained the priorities or suggestions are included in the designs, productions and deliveries however, the H&M approach of the designs are more experimental. The  marketing strategies of H&M are unique in terms of collaborative designs with the celebrities in fashion industries.  Such designs became a brand event in itself in tune with the celebrities engaging and reaching out to their fans & followers as customers of their outlets besides the regular outlet customers. The recent collaboration of H&M with Sabyasachi collection has created a new set of customers from Sabyasachi’s regular clients. However, the H&M outlet will allow those customers who could not afford Sabhyasachi’s clothes as it is too exclusive.  Such collaboration becomes an event and exposure and makes a new clientele for the future purchases.  Besides such celebrity experiments, H&M spends a budget of  281.6 million US$ on  marketing promotions, advertisement in digital and online towards its online presence.  H&M outlets are open market.

H&M fashion approach is on two sets of collection, i.e. Spring and one in the fall, i.e. Autumn.  H&M has almost 160 in-house designers and almost 100 pattern makers. It has two design processes, i.e. the long-term planning of collections and real-time design driven by customer trends in the market. The long-term planning is on the creative collection of the H&M, whereas the real-time design allows H&M to respond to the market in a faster way and be more flexible in the eyes of the customer and compete with the trends (Manrique Carolina 2015)

However, the manufacturing has the three phases, i.e. raw material, processing and manufacturing.  H&M directly coordinates with the manufacturing units.  From raw materials to finished items, H&M products pass through many different suppliers on their journey to the stores. These suppliers are arranged into several tiers to make the supply chain. Each tier does business with its immediately adjacent tiers.  Not all supply chains are the same and they can vary according to product type or materials used. Some of the supply chains are vertical – short with few tiers. Others can be horizontal and comprise several tiers.  Tier-1 are the companies H&M do business with directly and work with product manufacture or processing.  Companies working with component production and processing tend to fall into tiers-2 to 4.  Raw material production can cover tiers-4 to 6. 

H&M engage in business with over 605 commercial product suppliers who manufacture products for their brands in over 1183 tier-1 factories in Europe, Asia and Africa.  China and Bangladesh are the largest production markets for clothing.  The European Union is the largest production market for our beauty assortment.  H&M operate 15 local production offices, employing over 2,000 colleagues who work daily with their suppliers. The production offices create strong relationships with suppliers and maintain the existing ones.  The product development process end to end, which involves product risk assessment & best product from a customer & business perspective.

As the participant of the Transparency Pledge of H&M on the suppliers list discloses the details of their suppliers of Tier-1 amounting to the 99% of the production for sale.  This suppliers list also includes the details of Tier-2 mills that provide fabric, including spinning, tanneries and fabric dye and printing.  The supplier information is updated on a monthly basis.

H&M has approximately 150,000 employees.  They generate employment through the supplier chain of skilled, semi-skilled and unskilled workers.  However, there have been allegations of using and exploiting child labor in their supply chain.

Due to the complexity of the supply chain, the company relies on a very well developed IT system that integrates the headquarters, administrative offices, production offices and stores. This allows for real time communication. Through IT, the company has information about the fabrics that each supplier has and can make informed decisions as to where to place a specific order. There is a central inventory management software and all the stores are connected to corporate logistics and H&M warehouses which makes the process of ordering and restocking stores more efficient.  The head office can monitor the trends from sales in each store and use this information for the design and production choices oriented to the customer.

BENETTON’s Operational mechanism-a hybrid business module

Benetton's business approach is unifying the world through color.  This indicates in its name, i.e. United Colors of Benetton.  This means it is an empire beyond the racial discrimination. This is quite visible in the advertising campaign that destroys the barricade of racial hatred through apparels.  Their “Unhate campaign” was appreciated at the Cannes Ad Festival and won the Press Grand Prix in 2012.  Benertton is known for its sports sponsorship.

Benetton Group is a fast fashion brand from Italy with 5000 stores worldwide. It is the subsidiary of the Benetton family’s holding company Edizone.  Edizone is a group engaged in Clothing and Textile, Food and Beverages & Travel Retail, Financial Institutions, Real Estate and Agriculture, Digital Infrastructure and others.  Clothing and Textile holding only 2% of the Edizone holdings.  This indicates that the Benetton fast fashion is only a flagship company of the other major activities of Real Estate and Agriculture which are the major activities of the Group.  Agriculture requires agranian labors which is generally obtained from the periphery nations through trafficking.

During the 1970s Benetton established a global presence as strong brand equity. Benetton's other brands are Sisley, Playlife, Nordica, Prince, Rollerblade and Killer Loop. Benetton is also the largest consumer of wool in the garment industry. Benetton's supply chain has two seasons, i.e. spring/summer, i.e. February to July and the second is the fall/winter, i.e. September to December.

Benetton has a centralised designer centre which has three groups. The first group takes care of the commerce aspect of the product. The second group does research on fabric and the third group works on the graphics.

The production module of the Benetton is that partial production such as dye facilities are integrated, however, the others are contracted and subcontracted close to the Benetton factory. Company outsources labour intensive production such as tailoring, finishing, ironing and investment strategies. However, the technology oriented production, such as weaving, cutting, dying and quality control are kept integral. Benetton maintains a central pole to manage the logistics and distribution. The centralised distribution remains cost effective to the extent of 20%.

Even though the sophisticated technology is retained by the integrated production of the Benetton.  The labour oriented jobs goes to contractors, which is almost 200 in numbers and many subcontractors who engage in the production.  Benetton keeps a close relationship with their contractors and provides support in tune of technology or finance for the efficient employees to be the contractor or subcontractor (Pramudha, 2018).    

Benetton purchasing is centralised and one of the largest buyers of wool in the world.  There are 180 suppliers of raw material and Benetton keeps the purchasing in the vertical integrated form. 

Benetton has a dual system in the supply chain.  One is from Italy and the second is from the regional pole.  Benetton Italy is the centralised distribution center where the regional pole delivers the manufactured product and the centralised pole distributes it to the retail stores.  The centralized delivery system makes it flexible depending upon the demand arising besides regular deliveries of every two weeks.

Fast fashion Business Module - a comparative analysis

The three renowned brands that carry fast fashion as flagship brand by the European corporations have their distinct approach based on their historical legacy of their respective country, i.e. Spain, Sweden and Italy.  Every economy has cultural and historical legacy and so in the case of Zara, Benetton and H&M.

The case study of the three brands even though their business modules are different, but the common factor is their country's economic legacy.  Spain and Italy have colonial history, however, Sweden could not create a colony in the past even though it attempted.  That is why Zara has absolute ownership of properties, whereas Benetton has partial ownership of stores.  H&M depends upon the outsource system.

Benetton business approach towards the unifying colors and “unhate campaign” to dilute the racial hatred against blacks  and to unifying the Africans and brown Asians and Latin Americans population in the western world in tune with clothing. The Italian empire was mainly in Africa, Libya, Eritrea, Somalia and Ethiopia. These regions have an Italian population. Thus, it consolidates not only their fashion requirement, but aids their colonial legacy. However, the expansion of the Benetton over 5000 stores is based on their economic legacy of financial investment and property acquisition through Mall culture across the world. Malls are the landholding of urban development based on Ricardo's rent theory.

However, the Inditex in collaboration with the Tata Group, i.e. Trent is acquiring 100 acres of land for production. Whereas, Bangladesh remained a supply chain for Zara and could have developed a production house there however, West Bengal is not the part of their supply chain. In recent history Tata wanted to acquire land for Nano production, which failed due to Nandigram and Shingoor major resistance and shifted its Nano project to Gujarat 26/11 which was a mercenary activity. However, Tata through Inditex is acquiring a huge land in the tag of production of the apparel business. Inditex wanted to acquire the port of West Bengal since it has a logistic position in international trade. After so much pressure from all sides, the West Bengal government is deciding to give 100 acres of land to Inditex-Trent which was denied to the Tata Nano project. Thus, it is not the Nano project or Zara apparel, but the land for acquisition is the purpose. This acquisition of land will not benefit the economy of West Bengal. It will rather buy some peace in tune of political aggression and pressure as compromise or surrendering to the aggression from SEZ.  This will lead to the insurgency of Bangladesh labour in the Zara production house, i.e, 100 acres of land to be acquired indirectly by Bangladesh under the SEZ economy.  Bangladeshi insurgents aid Spanish mercenaries towards acquisition of properties.

In H&M's case, a Swedish business group, could not retain the colonial legacy and remained strategic in the global dominance by the European colonial power. On April 24, 2013, the Rana Plaza building collapsed in Bangladesh killing over 1,100 people and on May 19, 2013, a textile factory that produced apparel for H&M in Phnom Penh, Cambodia collapsed, injuring several people. The two incidents that happened within a month which were part of the supply chain of H&M fast fashion indicates that it was a part of the control system from remorse to pressurize H&M for some logistic reason. However, some more controversy in the international domain, which is boycotting China in the supply chain in tune with forced labour in Xinjiang. Another controversy of withdrawing outlets in Russia due to the war in Ukraine are some examples of the effort of H&M to remain in the apparel business.  H & M, which is a Swedish group had been treated in a similar way during the colonial era. It could not create an international trend for themselves under the European trade war.

The logistics behind the apparel business in the SEZ economy is that apparel business engage people in tune of labour, i.e. skilled, semi-skilled and unskilled labour. It also engages professionals in other forms, i.e., designers, coordinators and others such as transporter and other diversified vendors. Thus, apparel business is people's business since it is for the people, by the people and of the people. However, such a business does not make enough profits in tune of its expenditure and overheads. The business models have their own customers that keep making the target consumption and keep the business going.

Thus, fast fashion is only a consumable commodity that is a regime of the SEZ economy that keeps the security of the assets and boundaries as a matter of life-line of the people engaged or involved. That is why the three brands, i.e. Zara, Benetton and H&M have their distinct operational modules of integrated (Zara), semi-integrated (Benetton) and network of contractors and sub-contractors (H&M). However, the SEZ economy at all levels is protected by mercenaries through its network. The contractor and subcontractors labour including their family members unknowingly become a part of mercenaries network and activities such as espionage, human trading and violence. The network of mercenaries get remunerated through the truck system.

An Overview

Fast fashion is the concept that distracted the clothing culture of conservation and tradition in tune with outfits.  It has created many complexities due to the environment and the condition of the poor working practices.  One of the reasons for the Fast Fashion crisis in the environment is that it has excess wastage. The ultra low price to attract the customer in tune with the changing fashion that has a lot of wastage from all levels, i.e. from production to retail and the consumers’ wardrobe.  This wastage is mostly non-consumable since there is surplus availability.  Many times quick fashion trends do not suit the taste of the consumers and that either get stocked in the retail outlets or remain under circulation.  Further quick changing trends always compromise the quality and design just to add a new trend or stocks.  

The green gas emission from the textile industry is more intense  than international flights and maritime trade in combination.  Besides the wastage and green gas emission, fast fashion is more about the political complexities in tune with international human smuggling and organized crime.  The majority of the people engaged in the supply chain of the branded apparel are from the periphery nations.  In Asia, Bangladesh, India, China, Sri Lanka, Vietnam, Pakistan, etc., are part of the supply chain.  The poverty in the periphery nations are being exploited as a workforce, which is an unorganized labor controlled by the contractors.  In tune with that, the workers generally get low pay since these contractors do not follow the minimum wage laws or wage theft.  Further, it is not sure whether the money flow for the wages are being paid regularly since such a system has no accountability to the domestic laws.  The contractors of the unorganized workers are not monitored by the laws of the lands since they are into foreign contracts.

Most of the periphery nations are under the radar of human trafficking of women and children and also men get engaged in the mercenary activities.  Thus, fast fashion plays a significant role in the supply chain for human trafficking.  The channel by which the goods are transported are the tools of trafficking.  Human Trafficking is the world's third largest economy after drugs and arms smuggling.  

Thus, these smuggled populations work as bonded labor in the agrarian economy.  The economic benefits from the Fast Fashion in the periphery nation is comparatively very low that it aids to the economy of human trafficking. This indicates that fast fashion is the face of global human trading for the core countries towards the acquisition of lands, market assets as a neo-colonies. The supply chain is more for the supplies of human labor whose rights and legitimacy is not known to them.

Thus, in a concluding note, fast fashion is not an economic, environmental, cultural and politically viable approach to global trade.   Until the fashion industry assures to follow human rights in tune with the workplace and guarantee the security from human trading. Culturally, fast fashion is a mindset of use and throw  and reverse the conservation attitude.  Fast Fashion should come under national and international law when it engages laborers under labor law.  However, the G-7 has created an awareness or commitment towards reducing the impact of the environment and green gas emission. The initiative taken towards fashioning accountability in tune with the worker’s wages and the wages theft through the Fabric Act in the United States.  This will address certain issues in the fashion industry only in the United States.  However, the supply chain that engages the periphery nations has no law or accountability or any initiative towards appropriate wages and wage theft.

The concept of fast fashion exists on cheap labor and cheap labor generally makes exploitation of labors.  US $1.7 trillions of fast fashion economy is not exclusively from the sale of the products however, they aid in the economy of human trading. Such a collaborative economy is distributed through shares and investment in lieu of asset management. The majority of fast fashion functions on the truck system, i.e.coupon system.  Thus, if fast fashion comes under the bracket of international laws on human smuggling and labor laws, fast fashion will not be a viable economy. 

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