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Business and

management
extended essay
Title: To what extend has the poor labor conditions
of the company H&M affected its corporate image
and how can it be improved?

Abstract word count: 286 words

Word count: 3985 words

Candidate name: Ivanna Savinovich

Candidate code: 006391-0022

Session: November 2016

School name: Unidad Educativa Bilingüe Sagrados Corazones

IB school code: 6391


Abstract:

On the month of May, the Asia Floor Wage Allegiance released a report in which the
poor labor conditions of H&M suppliers’ factories from India and Cambodia were
exposed. With this problem, the aim of this extended essay is to answer the question: To
what extend has the poor labor conditions of the company H&M affected its corporate
image and how can it be improved?

In order to answer the research question, information obtained from the internet and IB
business management books was used. This information was analyzed with tools as the
PEST analysis and the stakeholder map that helped me know the position each
stakeholder group has in this situation. Also the data was compared with theories such
as Herzberg motivation-hygiene theory. At last, the sales and shares of the company
through the months of May and June where we could see how the problem they are
facing affected the value of their shares, and how their sales of those months dropped.

Based on the information of my research I could conclude that the corporate image of
the company was badly affected by the poor labor conditions of their suppliers, this can
be seen on the sales and the value of the shares of the company through those months,
which highly dropped.

To improve the labor conditions of their factories, they should follow Herzberg
motivation-hygiene theory and eliminate job dissatisfaction by: providing supporting
supervision, ensure that the pay is fair and making the factories more secure in case of
an emergency. Also they should create conditions for job satisfaction by: rewarding
employees that excel at their work. This will help improve the company’s corporate
image, and give more satisfaction to their workers and stakeholders group.

Word count: 286

2
Table of contents
Abstract ………………………………………………………………..…… 2

Introduction …………………………………………………….……….. 4

Background ……………………………………………………………….… 4

Methodology …………………………………………………………….….. 5

Analysis …………………………………………………………………...… 7

PEST analysis ………………………………………………………………. 7

Positioning map of H&M …………………………………..……….... 8

Stakeholder’s analysis of H&M ………………………………….…. 9

Herzberg motivation-hygiene theory ………………………….… 11

Marketing ethics ……………………………………………………...…. 12

Outsourcing ……………………………………………………………….. 13

Sales development report …………………………………………… 14

Shares ………………………………………………………………………... 15

Conclusion ………………………………………………………………….. 17

Bibliography……………………………………………………………….. 18

Appendix……………………………………………………………………... 20

3
Introduction

In this extended essay I will answer the research question To what extend has the poor
labor conditions of the company H&M affected its corporate image and how can it be
improved?

The aim of this extended essay is to explore the performance of the apparel retailer
company H&M (Hennes & Mauritz AB) after the presentation of reports from the Asia
Floor Wage Allegiance (AFWA) that said workers in factories from Cambodia and
India have been suffering from abuses at their workplace.

Companies with this kind of reports raise the attention of stakeholders, such as
international organizations, as is the case of H&M which case has drawn the attention of
the International Labor Organization, Jobs with Justice, Society for Labor and
Development, among others.

Corporate image is the way which a company is seen from outside of it, it is the
reputation, whether is good, bad or neutral, that a company has from their consumers or
possible clients, as well as shareholders.

Having a good image reputation is of great importance for a company because the
financial communities which are shareholders, and most importantly, clients consider
the social image of the business when making a decision about investing or doing
business.1

The bad reputation that the company acquires from this kind of controversies (if it does)
will certainly affect the development of the before named organism; it will make their
sales drop because people who care about this situation will stop buying at H&M as a
protest to make the company restore good labor conditions for workers; and it will also
make the financial community not consider the company as a choice to invest in.

Background
The company Hennes & Mauritz AB (H&M) is ranked as the second largest retailers in
the clothing business. It was founded in Sweden in 1947 and it is now a multinational
company, with more than 3900 stores in 61 countries. It is known for delivering fast-
fashion at low prices. It sells not only clothing but also accessories and shoes for
women, man, teenagers and kids.
This company does not own any factories abroad, but works with around 820
independent suppliers and has teamed up with famous designers such as: Stella
1
Encyclopedia of Small Business. Corporate image. 2/08/2016, from Encyclopedia of
Small Business Web site: http://www.referenceforbusiness.com/small/Co-Di/Corporate-
Image.html
4
McCartney, Viktor & Rolf, Madonna, Roberto Cavalli, Jimmy Choo, Sonia Rykiel, and
Lanvin. Actions that have helped H&M produce clothing for all ages and genders.

The company H&M has presented other cases in which their corporate image has been
damaged, for example, in 2013 there was a garment factory collapse in Bangladesh that
killed approximately 1133 people, the reason why many people dies was because the
factories were “dead traps” , there was no way of getting out of the building other than
the door. In that year H&M, along with other companies like Walmart, made a promise
to improve the safety of their workers, but these promises haven’t been fulfilled yet.

The International Labor Organization (ILO), which is an international organization that


promotes human and labor rights, in May had a conference in which the Asia Floor
Wage Allegiance (AFWA) revealed reports that exposed workplace abuses at H&M
suppliers factories in the countries of Cambodia and India, such as:
 Modified the duration of the contracts: despite the fact that is illegal the use of
short-term contracts, this is what H&M did on their factories.
 Female workers experience sexual harassment: 9 out of 12 factories have
employees who suffered harassment in work mostly by their superiors. Women
say this is common in apparel industries. Both in India and in Cambodia this is a
severe problem.
 Women are fired if they get pregnant: most of the factories in Cambodia and
India fired women of they were pregnant. In Cambodia, all women had
witnessed or experienced a fire of a pregnant woman.
 H&M doesn’t pay what they should: despite the fact that the company signed a
commitment of paying the wage, it does not pay their workers the living wage,
or even the basic minimum wage. This happens mostly in the factories of India.
 The supplier factories of H&M employed workers on fixed duration contracts
This information was collected from surveys made to 251 factory workers.

Methodology
Sources
All of my research will be based on secondary resources. I will obtain my information
from:
 Internet: I will search on the official page of the company, and will look for
reliable web pages in which I can extract important information.
 IB business management textbooks: In the textbooks I will look for definitions
or theories that help me answer my research question.
 Newspapers: from the articles I will get information about the current situation
of the company H&M.

Models and business tools

5
As business tools to help me analyze the company, I will use the PEST analysis,
positioning maps and key performance indicators such us stakeholders’ maps and force-
field analysis.

Limitations of research
 Newspapers often lean forward a certain point of view and don’t consider other.
Sometimes the information is blinded by the way of thinking of the author, or
because they want their readers to think the same as them.

6
Analysis
PEST analysis

The PEST analysis allows us to review the external forces that have an influence over
the company H&M and how this affects the problem that they are facing.

Political
 India has a stable democracy; it follows the dual political system. The
Government prefers domestic firms. Government reforms in 2015 had positives
results in India’s economy. The government of this country cares about this
country’s economy and this care can benefit international companies that work
there. This can mean that the laws in India are stable meaning that they won’t
change, and the fact that the government prefers national companies does not
represent a challenge for H&M because they want national factories from there
to provide them with the clothing that they need, they do not wish to stablish a
factory of their own in that country.
 In Cambodia there still exists corruption which avoids the economic and social
development.
Economical
 The economy of India is considered the seventh largest in the world and it will
continue growing in 2016-2017 at 7%.
 Also Cambodia has presented a fast economic progress in the last decade. The
largest industries of that country are textiles and tourism, which can be bad for
H&M because it has a lot of competition. It has also been integrating into the
system of global investments.
 The monthly average wage in India in 2015 was of 18727 INR (279.366 USD).
While in Cambodia it was of 1630045 Riel (397.06 USD).
Social
 The majority of people in India are Hindus, but it also has one of the largest
Muslim populations in the world.
 The growth rate in India (2016) is 7.56%, almost the same as the growth rate in
Cambodia (2016) which is 7.1%
Technological
 Nowadays, both India and Cambodia think science and technology are really
important, because they have realized that those are important for economic
growth, which is right because technology helps us get connected with the world
and it can help international companies to get informed of its different
headquarters from around the world.

Given the information above we can say that the company H&M should try to keep the
factories in India and Cambodia because the governments of these countries care about

7
having a good economy and they can achieve that by having more national factories
likes the ones that H&M get their product from.

But the company should be more aware of how their suppliers work, because if they
keep hiring suppliers that mistreat their workers, other countries are going to notice that
and for fear of having their citizens mistreated as well, they wont let H&M be
associated with any of their factories.

Positioning map of H&M

The positioning map of the company allows us to know where the company H&M is
positioned in the market, comparing to other apparel clothes and what place the
company takes in the consumer’s mind. The aspects to be analyzed on the positioning
map vary depending of the product. In the case of the company H&M we will be
analyzing the price and the quality of their clothing.

2
Moore, J. (2014). Complete Topshop presentation [Image].
 Retrieved from http://www.slideshare.net/JessicaMoore10/complete-topshop-
presentation

8
As we can observe on the positioning map, the company H&M sells clothes of good
styling at not so high prices. The company has one competitor that is almost in the same
position as it, this company is Topshop Basics, and they sell clothes with a few more
styling at the same prices as H&M.

Near H&M, it’s also New Look, but this company sells clothes at a lower prize and also
with a lower styling, their style is considered to be in the middle of poor and good.
Other competence which are in a different position of H&M, but that has been proven
that the customers prefer a lot are: Topshop, Urban Outfitters and Zara, because those
companies sell clothes with more styling than H&M, but they also sell their clothes
more expensive than them.

The position of H&M can be considered as good, because they sell their clients clothes
they may not be as stylish as other brands, but that they have a good prize for their
products, they do not overprice their products and that is something that really attracts
consumers.

Although, the company should try to have a better positioning, because customers do
not consider their clothes to be as stylish as other well-known brands, then people
would buy less in there, because that is something that most customers seek (mostly
women), not only the prize which is good, but also how in trend are their clothing.
The company should also consider the fact that the problem they have could affect the
clients’ mind about the company, so the position of H&M would change, they could
have a bad positioning in the consumers’ minds or they may even don’t consider H&M
as an option to buy their products.

Stakeholder’s analysis of H&M

In the following stakeholder analysis, the importance and influence of each stakeholder
group such as the customers, the International Labor Organization (ILO), the
government of India and Cambodia, and the shareholders will be evaluated, also this
analysis will show how each group was affected by the problem and how the company
should treat them in order to avoid more problems in the future.

9
Author: Ivanna Savinovich

As we can observe in the stakeholder positioning map the stakeholder group that is
more affected by this case are the employees because this situation revolves around
them, they are the ones affected by the workplace abuses the factories of H&M have
been giving them. The group of the employees is followed by the International Labor
Organization (ILO), considering that they are the ones that are going to control this
situation and given the fact that the purpose of the organization is to promote labor
rights, they are one of the most important stakeholders in this case.

A group with a high level of influence and high level of interest are the governments of
India and Cambodia, they are the ones with more power in this group, knowing that a
company that is not from their country are making their laborers (from that country)
work in poor conditions they can ban that company from the country because they
wouldn’t allow a foreign company treat their citizens badly. Another group that belongs
to this classification is the clients because of the influence they have on the company, if
they stop buying then H&M sales will drop and they can make that company go
bankrupt, but most of the times clients do not show much interest to this kind of
situations.

Finally, a group with high level of interest but that does not have a high level of
influence is the shareholders; because they establish their decision, of whether to invest
or not in a company, on the corporate image that it has, as well as their profits and sales.

So the stakeholder group that H&M has to worry the most about is the employees
because they are the ones who have the most influence and interest in this case. What

10
the company should do in order to keep this stakeholder group pleased is to improve
them labor conditions by paying them the salary that corresponds to their job; seek a
way to reduce the abuses in the workplace, and also respect their labor hours.

The company should keep shareholders informed about the situation when its solved,
it’s important that they know this because if they think that this situation hasn’t been
solved, or that it will happen again, they might not invest in the company in the future.
Besides solving the present problem, they have to find a way to ensure not only the
International Labor Organization (ILO), but every shareholder of the company those
things won’t happen again.

Herzberg motivation-hygiene theory:

Professor Frederick Herzberg created the Two Factor Theory in which through a series
of interview he met the factors that affect the level of motivation of the employees and
divided them in two categories: the hygiene factors and the motivators.
The hygiene factors are not expected to motivate employees, but without them there
would be dissatisfaction in the workplace making the employees work unpleasant and
that’s why the hygiene factors should be fulfilled. The hygiene factors include most of
people´s basic needs. These are:
 Organizational rules
 Regulations
 Quality of leadership
 Relations between supervisors and subordinates
 Working conditions
 Pay
 Job security

The supplier factories of H&M do not consider most of these points; they do not offer
their employees good working conditions, supervisors and subordinates don’t have a
good relationship, they don’t pay them the way they should, and they don’t have any job
security.3

The motivators are the factors that help increasing the satisfaction of the employees
improving their performance in the workplace. These motivators are:
 Achievement
 Recognition
 Responsibility
 Challenge

3
Workers in H&M Factories Suffer Human Rights and Labor Abuses, New Report
Details – Center for Alliance of Labor and Human Rights. (2016). Central-
cambodia.org. Retrieved 19 August 2016, from http://www.central-
cambodia.org/2016/05/20/1061/
11
 Promotion
 Growth

And in none of these factories mentioned before, workers can get any of what they
should to increase their motivation.

In order to have their employees more motivated, these factories should eliminate job
dissatisfaction by: providing supporting supervision, ensure that the pay is fair, provide
job security, and by making the factories more secure in case of an emergency. And
create conditions for job satisfaction by: rewarding employees that excel at their work,
and providing their employees opportunities to advance at work.

This will have their employees working in a more efficient, peaceful and relaxing ways,
and if they keep them motivated and working in a good workplace condition, then the
company won’t be affected by labor scandals related to problems about mistreating their
employees.

Marketing ethics:

Ethical marketing seeks to promote honesty in a company. Most of the times between
doing the right thing and gaining money, most companies don’t care about ethics; they
only seek to sell their products or services, no matter how. To define something as
“right” or “wrong” is something hard to do, because those meanings are subjective,
that’s why the Marketing Schools define the marketing ethnics as “not a hard and fast
list of rules, but a general set on guidelines to assist companies as they evaluate new
marketing strategies”4

H&M claims that they only work with factories that have signed their Code of Conduct
(Sustainability Commitment), this code of conduct has three major focuses which are:
 Clear expectations regarding fair living wages
 More detailed expectation regarding environmental performance
 Clear standards regarding animal welfare in H&M’s value chain5

However, it is clear that the company do not ensure that all their workers have good
labor conditions as they say on their Sustainability Commitment because, in the
factories of India and Cambodia these workers don’t often get paid, or if they do it the
money doesn’t cover even the minimum wage.

4
Nasser, M. (2014).Ethical Marketing.30/06/2016, from Academia Web site:
http://www.academia.edu/8724783/Ethical_Marketing
5
H&M. (2016). Sustainability Commitment. 30/07/2016, from H&M Web site:
http://sustainability.hm.com/en/sustainability/commitments/choose-and-reward-
responsible-partners/code-of-conduct.html
12
This kind of unethical marketing makes the clients (or people in general) sees the
company as careless of what happens with their employees if their sales are high, and
this kind of image makes people who care about social wellbeing go against the
company, or in this case start a campaign against H&M and as part of that stop buying
clothes until the problem is solved.

Outsourcing:
One strategy that the company H&M has applied in order to reduce their costs was the
outsourcing. Paul Hoang defines outsourcing as "the practice of transferring internal
business activities to an external firm as a method of reducing costs " 6, this is how
H&M manages to sell clothes with a good styling and an acceptable quality.
The company H&M has suppliers from countries all around the world, but mainly in
Europe and Asia, where producing big quantities of clothing is not expensive. Despite
of the fact that they have factories that they do not own, working for them in other
countries, H&M has a good control over their production phases.

Picture 1. Suppliers of H&M

In most case the suppliers of H&M own different factories or subcontract other factories
for certain tasks.

6
Hoang, P. (2014). Human resource management. In Business Management (pp. 134-
135). Australia: IBID Press.
 H&M. (2015). Supplier list [Image].
7

Retrieved from http://sustainability.hm.com/en/sustainability/downloads-


resources/resources/supplier-list.html

13
The company outsources to more experiences suppliers, so they don’t spend on
production costs and they take advantage of having to pay lower labor costs, energy and
in some cases legal barriers that so countries have.
Because of that the company does not produce their own clothing and has their suppliers
worry about the manufacturing, they can invest more time and effort in creating or
adopting new marketing strategies that help them being having the preference of the
consumers and beating their competition, as Forever 21, Topshop and Pull&Bear.

The company uses this strategy a lot and because of that, H&M should keep their
factories worldwide. And I order to do that, they have to treat their suppliers correctly,
so they don’t create a bad image of harassing the industries that help them. If they create
that image, the company could be left without suppliers because no one would want to
work with a company that makes their employees to be in danger.

If this happens, the company’s image would be badly affected because their production
cost would rise, making them raise the prize of their products, and they wouldn’t have
the same amount of customers. They would decrease, making the company staggers
because of low (or no) profits.

Sales development report:

In the following sales development report, we present whether the percentage of sales
have increased or decreasing compared to the previous year. The months to be analyzed
will be April, May and June of the year 2016.

s ales of H&m 2016


12

1010 10
9
peercentage of saes

8 8
7
6
5
4

2 2

0
Dec Jan Feb March April May June
month

As we can observe in the sales report of H&M, the company started the year 2016 with
a good percentage of sales, they had 10% on the month of December. From the months

14
of February until March we can see that the company experienced a meaningful drop on
their sales, going from 10% to only 2%.

In the month of April, the company began to recover from the sales drop of March,
having a 5% increase in sales. The month when the reports of the Asia Floor Wage
Allegiance (AFWA) were released was on May, where we can see that the percentage
of sales dropped to 9%; in this month we cannot perceive the influence that had the
negative news on corporate image.

In the month of May, we cannot see negative changes on the percentage of sales. But on
the month of June, the sales dropped again, even though not as much as in the month of
March; it went from 9% to 8% of sales, so is in this month when we can see the effect
of the case over the clients.

The Asia Floor Wage Allegiance (AFWA) released their report on May, but it didn’t
become public until the final days of that month.
So the problem with the factories from India and Cambodia had a certain influence over
the sales of H&M, which can be perceived mostly in the months of June because, as
said above, the news wasn’t known by the public until the end of May. For that, the
sales wouldn’t have been affected that month, because it was only for a couple of days
that they had known the news; and it was in June when they started being conscious of
the problem.

Shares of H&M:

8
Financial Times. (2016). H&M Hennes & Mauritz AB [Image].
Retrieved from http://markets.ft.com/data/equities/tearsheet/charts?s=HM
%20B:STO
15
Even though shares are in constant change, we can observe that from the beginning of
May and the final of June the shares of H&M dropped notably.

At the beginning of May the shares were 286.40 dollars, and at the ending of June the
shares were 246.53 dollars, having between them a lot of variations on the prices.

As in the sales of the company (that also presented a downfall), the dropping on the
price of the actions of the company could have been influenced by the problem that
H&M had at the beginnings of May. Given the fact that the shareholders are aware if
the situation that the companies they want to invest in are.

But also the dropping of the sales in those months could have influence the prices of the
shares. Because if the sales drop then company will not have the same profits as if they
have a successful month in sales, making the value of the shares drop.

The company H&M must be more conscious about these situations, because if they
keep having problems like this then the shares of the company will be also really
affected by this, because shareholders prefer to invest in companies that have a good
corporate image.

Conclusion:

16
In conclusion, the corporate image of H&M was seriously affected by the poor labor
conditions of their suppliers.

By having a bad corporate image, the company, didn’t have as much profit as the
previous moths, this is because their sales dropped and this made the shares also drop.
This could mean that most consumers were against H&M because of the problem that
the company had.

Though the company said that they do not work with factories that haven’t signed their
Sustainability Commitment, there have been other cases about H&M not having
suppliers that care about their employees’ wellbeing at the workplace. And the
customers created a bad image of the company for having suppliers that didn’t treat
their workers how it should have been.

Also, they should be aware of not having the same controversies again, because if it
keeps happening, sales could drop more than between the months of May and June
2016, causing their shares to also drop more, and causing its shareholders to worry.

By improving their working condition: as making their factories safer, and paying the
right salary to their employees. Also by rewarding their best workers, and giving them
more opportunities to get promotions.

While they are doing that, H&M, should keep the stakeholders informed about the
progress of the project, and when they are done, the company should assure that they
would not repeat the same mistake of hiring factories that have poor labor conditions,
and that they will have more control over their current suppliers.

Word count: 3985

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Appendix
Appendix 1:
Temporary contracts

19
20
Appendix 2:
Sexual harassment

21
22
23
24
25
26
Appendix 3:

27
Appendix 4:

28
Appendix 5:

29
Appendix 6:

30
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