Gap Inc. has always had a commitment to social responsibility. They are regularl
ID: 2742867 • Letter: G
Question
Gap Inc. has always had a commitment to social responsibility. They are regularly recognized by independent organizations as one of the most ethical retailers. They closely monitor things such as wages, treatment of women, and working conditions. This applies to their domestic operations and also extends to the suppliers in countries around the world to whom they contract the manufacture of their clothing. When they find practices in foreign suppliers’ firms that violate their own code of ethics, they attempt to remediate the situation through training and negotiation. This is due to the fact that there is a limited number of suppliers and demand for their services exceeds their production capacity. In other words, there are more apparel companies wanting to use those manufacturers than there are different manufacturers to contract with. As a result, Gap is reluctant to lose a supplier. However, Gap remains firm in their commitment to social responsibility. In fact, Gap has terminated contracts with more than 135 factories when remediation was either rejected or ineffective. Questions: 1. What are the potential risks to their shareholders for taking this approach to contract manufacturing? 2. What are the potential benefits of these policies to shareholders? 3. What possible impact do you believe these policies have on their share price? Defend your answer.
Explanation / Answer
1.
The company can be at risk that there will be no any quality contract manufacturer available in those countries to facilitate the manufacturing as they may not follow the same level of ethical conduct and corporate governance what that is followed by Gap Inc. It can result into the loss of business and market share can shrink. It can cause loss of value to the company and its shareholders.
2.
Continuation of the policy by Gap Inc. will create a very respectable brand image and value of the company will increase also. People and other market players would like to associate with the company to leverage the brand value of Gap Inc. it will increase the intangible as well as the tangible value of a company that will directly benefit the shareholders. Besides, there will be a niche segment created that would only like to purchase products made by Gap Inc.
3.
The share price will increase as good policies and its impact will outweigh the negative risk. To ascertain it, the company will offer value added incentives to contract manufacturers who will follow the policies adequately. Thus, the brand image of Gap Inc. will improve significantly and demand of shares in the capital market will lead to increase in its price.
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