Perspectives in Responsible Sourcing

Tackling Challenges in Global Human Resources Administration and Compliance

When a multinational’s headquarters launches a global code of conduct, often the first question is: “What’s our code going to say?” But what many don’t realize is that the question skips over key logistical issues that should be resolved before implementing something that is supposed to govern the behaviors of a diverse global workforce.

Indeed, too many global codes of conduct in place today were implemented without accounting for these logistical issues, subjecting many codes to attack and potentially giving rise to liabilities. So instead, the question that needs to be asked first is “How are we going to impose this on our employees overseas?”

There are five key logistical considerations to bear in mind before launching a global code of conduct, regardless of whether the code deals with global policies on ethics, business conduct, discrimination/harassment/diversity, Sarbanes-Oxley/Foreign Corrupt Practices Act or whistleblower hotlines.

1. Multiple versions

US-based multinationals rolling out global codes of conduct should decide whether:

(a) To use one global code worldwide – A single global code of conduct creates a uniform policy and is of course simplest. However, code provisions appropriate for US employees may need to be modified or reworded for use elsewhere.

(b) To create a “rest-of-the-world” version separate from the “US” version – Many US-based multinationals roll out a US code of conduct plus a separate “rest-of-the-world” version; this strategy accounts for issues from a non-US perspective, but neglects specific local-country issues; or

(c) To spin off distinct local codes for each affected country – Every country’s laws are unique. Tailoring an aligned local code of conduct for each country that accounts for local law and HR policy as well as headquarters issues should be the most effective strategy. But many versions of one code of conduct can get complicated and expensive to manage.

2. Dual employer

Most US-based multinationals’ overseas employees work for locally-incorporated subsidiaries or affiliates. To extend a headquarters code of conduct directly to employees of foreign affiliates raises the “dual employer” problem. By imposing rules directly on local foreign workers, the US headquarters may become a co-employer with the local subsidiary, leading to joint liability for employment claims. In Latin America, US multinationals regularly face these claims. A best practice is for headquarters to impose the conduct code on foreign affiliate entities only; each affiliate, in turn, imposes it on its own employees. This approach also cuts off the technical argument where an overseas employee claims the headquarters code is inapplicable because his local employer entity failed to implement it in the first place or else failed to take account of rules as to what is or is not a valid way to introduce a policy.

3. Consultation

Outside the US, employee representative groups such as “works councils” and trade union committees are common. Laws can impose a requirement like the US labor-law concept of “mandatory subject of bargaining”: an employer cannot change workplace rules until after it sits down and discusses the proposal with employee representatives. Since codes of conduct qualify as workplace rules, it means that any such code will need to be discussed with employee representatives and accepted before implementation. Unfortunately, outside the US, employee representatives can be skeptical of US codes of conduct. Therefore, from the inception headquarters needs to involve its overseas management. For example, give them a “heads-up” that a code of conduct will be coming and discuss consultation strategy and timing.

4. Translation

In Belgium, Chile, France, Poland, Portugal, Quebec and elsewhere, local law requires that work rules (such as in a code of conduct) be communicated in the local language. In these places, an English-language code will not only be unenforceable, it can cost money: last year a US multinational that distributed English-language papers to French workers paid a $689,920 penalty. Further, even in those countries without local-language laws, local courts are reluctant to enforce English-language policies; translations strengthen enforceability.

5. Distribution/acknowledgement

Multinationals need strategies for: (a) how to distribute the code of conduct to overseas employees; (b) how to train on the code overseas; and (c) how to adapt the code to local offerings (in Japan, for example, it will be necessary to amend the local work rules to reflect new code prohibitions). Also, multinationals need to develop some way to prove each employee actually received the code. This will aid enforcement against those claiming never to have seen it, so as to establish a defense against US Foreign Corrupt Practices Act and Sarbanes-Oxley enforcement actions.

The common US approach is to have employees sign acknowledgements, but that raises problems abroad:

• In Continental Europe and elsewhere, employee acknowledgments often are not binding; due to inequality of bargaining power between an employer and an employee, signed forms of this nature raise suspicions of coercion.
• A 100 percent return rate on acknowledgements may be impossible outside the US where codes of conduct often meet with skepticism. But away from the US employment-at-will environment there is no “good cause” to discipline an employee who openly refuses, or quietly neglects, to sign. How, then, to handle non-signers?
• Non-signers raise an “Achilles’ heel” problem: If they later violate the code, they will argue they were exempt because they never signed.

As an alternative to acknowledgements of receipt of the conduct code itself, local HR representatives might distribute the code personally in training sessions. Ideally, the HR representatives would collect signed attendance sheets from all employees that show they attended the sessions (and got the materials, including the code). If employees are likely to push back even on signing those acknowledgements, then as a fall-back the HR representatives themselves might sign forms stating the date and circumstances of transmission to each employee.

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Donald C. Dowling, Jr. (ddowling@whitecase.com) is International Employment Counsel at the New York office of the international law firm White & Case LLP, which has 35 offices in 23 countries. Don's law practice is dedicated to outbound international employment law, including: codes of conduct/CSR; global HR policies, HR data privacy, and expatriate "secondments." He chairs XBHR, a cross-border HR professionals' organization, and teaches International Employment Law and European Union Law as an adjunct law school professor.

CBP releases a C-TPAT Costs and Benefits study

On September 7th, Customs and Border Protection released the full report of the C-TPAT Cost Benefit Survey. This survey was conducted by the The Center for Survey Research (CSR) at the University of Virginia between January and April 2007.

According to the executive summary, a total of  1,756 partners took part in the survey, roughly one-third of the number of total members. Of this pool, 54.3% were importers, 20% carriers, 18% service provider and 7% were foreign manufacturers.

CBP identified the following questions as guidance for this survey:

1. What motivates a company to become a partner?
2. What are the costs of implementation?
3. What are the costs of maintenance?
4. What are the tangible benefits?
5. What are the intangible benefits?
6. How do cost/benefits differ among company types?
7. Do the benefits outweigh the costs?
8. What is the overall evaluation of the program?
9. What is the likelihood of a partner staying with the program?

Among the conclusions that the researchers came to is that just over half of members were of the opinion that the benefits of membership outweighed the costs. Despite almost a third of respondents reporting that the costs of being a partner were nearly equal to the benefits, 91.5% stated that they had not considered leaving the program. Results from this survey seem to indicate that many companies are members of the program for reasons that are not strictly related to tangible benefits.

The complete text of the report can be downloaded at the CBP website or by clicking on this link:

http://www.cbp.gov/linkhandler/cgov/import/commercial_enforcement/ctpat/ctpat_cost_survey.ctt/ctpat_cost_survey.pdf

Shareholder Resolutions Challenged by SEC

On July 25, 2007, the Securities and Exchange Commission (SEC) created deep concern among investors, when they presented for comment potential changes to rules governing investors’ ability to sponsor shareholder resolutions. It is not rhetorical flourish to describe the SEC’s proposed solutions as perilous for shareholder rights for a number of reasons, on which I will elaborate further in this post. 

Investors concerned about good corporate governance and social issues, have used the shareholder resolution process for over forty years to encourage positive corporate change on environmental, social and governance issues.  Resolutions have been a vitally important tool in communicating with directors, management and other investors on key issues such as climate change, workforce diversity, executive compensation, human rights in overseas factories and governance reforms.

There is a long history of positive results stemming from the use of shareholder resolutions, demonstrated by companies making specific reforms, changing policies and increasing transparency. Annually, approximately one-quarter to one-third of shareholder resolutions are withdrawn because constructive dialogue with companies leads to win-win agreements.

BACKGROUND TO SEC ACTION

Three suggested changes to the existing rules governing shareholder resolutions would eliminate or severely undermine the shareholder resolution process: the introduction of an opt-out process, the electronic petition model as the sole mechanism for shareholder concerns, and the increase of resubmission thresholds.

SEC Commissioner Paul Atkins,  who supports the changes, argues that advisory resolutions (most shareholder resolutions) detract management from primary business operations and represent “the tyranny of the minority… [using their] nominal economic interest to hijack the agenda of all investors.” (Money Management Executive, July 30, 2007).  Clearly, if you read Mr. Atkins comments , you aren’t always paranoid if you say they “are out to get you.”

THE THREE PROPOSED CHANGES AND THEIR AFFECT ON SHAREHOLDER RIGHTS

1. THE OPT-OUT OPTION
The SEC asks for comments on the right of a company to “opt-out” of the shareholder resolution process, either by obtaining approval from shareholders through a proxy vote, or, if sanctioned under state law, by having a Board vote authorizing the company to opt-out.

An opt-out option would have significant negative consequences. Unresponsive companies would be more likely to opt-out because resolutions are an important mechanism to strengthen corporate accountability.

Consider, for example, a company with an inferior governance record which had received a number of resolutions garnering strong shareholder votes. If the company opts-out of shareholder resolutions, it disenfranchises its shareowners by removing a right they had been successfully utilizing.

Far from an appropriate democratic process, this more accurately reflects the anti-democratic notion of one person, one vote, one time.  Future shareholders would have no such voice.

2. THE ELECTRONIC PETITION MODEL OR “CHAT ROOM”
The release also asks, “Should the Commission adopt a provision to enable companies to follow an electronic petition model for non-binding shareholder proposals in lieu of 14a-8?” This question builds on the SEC Roundtable discussion of “electronic chat rooms” and suggests that such a forum could substitute for the right to file shareholder resolutions.

This proposal ignores the ongoing success of the shareholder resolution process and attempts to create an untested option as a substitute. It is also fraught with logistical difficulties and unanswered questions. Presently, shareholder resolutions assure that management and the Board focus on the issue at hand since it is included in the proxy and debated at the annual stockholder meeting. Additionally, each and every investor receiving a proxy has the opportunity to consider the proxy item and cast a vote.

Chat rooms and electronic forums are welcome approaches for enhancing communication with investors. They are not a substitute for a shareholder’s right to file resolutions.

3. RESUBMISSION THRESHOLDS
In its release, the Commission also asks for comments on increasing the votes required for resubmitting resolutions to 10% after the first year, 15% after year two and 20% thereafter, compared to current thresholds of 3%, 6% and 10%, respectively.

Raising the thresholds as proposed would make it much more difficult for investors to resubmit resolutions for a vote, further insulating management from shareholder accountability. Over the last 40 years, many proxy topics initially received very modest levels of support. Yet support increased over time as shareholder awareness and knowledge increased.

In 2007, there were fewer than 1,400 shareholder resolutions at less than 1,000 companies, representing well under 20% of publicly traded companies in the United States. Overall, companies are not burdened by the resolution process. Adding more restrictive thresholds on resubmitting resolutions simply makes it more difficult for investors seeking constructive engagement with companies.

THE RESPONSE
The public has until October 2 to comment then the SEC states it will “study the comments for a month” and issue final rules.

Shareholders have been organizing urgently to challenge these new SEC test proposals. Letters are being sent to the SEC, appropriate Members of Congress contacted, companies urged to respect shareowner rights in their SEC comment letters.  And major pension funds are taking the lead in the campaign as well.

Individual investors, as well as institutions, are urged to visit a new web site www.saveshareholderrights.org to learn more about the issues and to send an electronic message to the SEC and Members of Congress.

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TIMOTHY SMITH, serves as Director of Socially Responsive Investing and Senior Vice President at Walden Asset Management.

Tim joined Walden in October 2000. His primary responsibilities include overseeing shareholder advocacy, public policy, client services and acting as the spokesperson for Walden on social issues. Walden Asset Management manages approximately $1.5 billion for individual and institutional clients. Walden has been a national leader in social investing for 35 years working on dozens of issues like the environment, sweatshops, Apartheid in South Africa, equal employment opportunity in the U.S., among others. Walden also provides professional social screening and a community investing service for clients who have invested $8 million in empowering poorer communities.

Tim is Chair of the Board of Social Investment Forum, the trade association for socially concerned investors and serves on the boards of Shared Interest, a South Africa Development Fund, World Neighbors, an international development organization.

Previously Tim served as Executive Director of the Interfaith Center on Corporate Responsibility (ICCR) for 24 years, and served on the Boards of Domini Social Equity Fund for 10 years and the Calvert New Africa Fund and chaired the Advisory Council for the Calvert Group’s social investment funds.

Tim has a Masters in Divinity from Union Theological Seminary and a BA from the University of Toronto.

Food Safety in China

Over the last several months, the international community—including the STR family (see “China’s Growing Counterfeit Dilemma” in CSCC blog article from July 13th)—has been keeping a close watch on the quality and food safety scandals emerging from China. Ranging from contamination of toothpaste to pet food to counterfeit drugs, it is becoming increasingly apparent that some of the bargains from China come with a price that can no longer be ignored.

The Response from China
In response to the scandals and increasing lack of confidence in the safety of products “Made in China”, there have been a number of varied responses from Chinese officials. Perhaps the most dramatic was the execution of Zheng Xiaoyu, the head of the State Food and Drug Administration, for receiving bribes to accept counterfeit drugs during his tenure. But the problems ran much deeper than the mistakes of one person at the top and as cases of tainted food continued to make headlines, it was evident that the problems were much more pervasive throughout the food and drug manufacturing industry. Further investigations revealed the systematic disregard that some manufacturing facilities in China had for the laws, regulations, and industry standards of importing countries (Xinhua News Service).

Consequently, the Chinese government finally had to acknowledge the extent of the problem and has since taken steps to improve the foundation of the food and drug quality and safety mechanisms in place throughout China. One such improvement will be by the National Standardization Management Commission that intends to update and speed up revisions to national and industry standards on farm produce and processed food products, many of which are 12 years old (China Daily). Another step will be undertaken by the Chinese State Council that plans to place new controls on food and drug imports and exports, including inspections of 90% of all food products by 2010 (NY times). It was unclear how the controls would be implemented and enforced as well as how the inspection process would work. Finally, as announced last week by Vice Premier Wu Yi, there will also be a four-month nation-wide campaign to address quality and food safety issues (Xinhua News Service). This campaign is expected to result in the establishment of an integrated quality monitoring network for the production of goods and products and will primarily target products with a close link to human safety and health, such as farm produce and processed food. Again, specific details and methods of implementation have not been revealed.

Although these steps show progress in the right direction, the Chinese government continues to exclude other stakeholders such as the suppliers, buyers and even service providers, which are all critical to the success of quality and food safety assurance. Combined with patchy implementation of rules and regulations, it will be difficult to transform the political culture to one of compliance and transparency (NY Times). What can these other stakeholders do to contribute?

The Role of Domestic Regulatory Agencies
The responsibility for ensuring food safety in the country of consumption tends to fall on regulatory agents such as the United States Department of Agriculture (USDA) and the Food and Drug Administration (FDA), with the latter responsible for actual food inspections. With 650 inspectors to cover 60, 000 domestic producers and 418 ports of entry, the FDA inspectors are only able to check less than 1 percent of regulated imports (NPR). This means that at the ports of entry where the Chinese exports enter the system, very few shipments actually get inspected. If the shipment is selected for inspection, the inspector will determine whether it complies with the required domestic standards. If the container meets the standards, it passes through into the US and contents are then distributed to retail outlets for purchase. If it fails inspection, the container is shipped back to the country of origin.

Even though such a low percentage of shipments are actually inspected, the rate of refusal for Chinese Shipments is relatively high. In April of 2007, for example, 257 shipments from China were refused and shipped back (NPR). With 99% of shipments passing through the border without inspection, the only surprise is that there haven’t been a lot more cases of tainted food and counterfeit drugs than already reported. What is more, the FDA plans on closing nearly half of its 13 food-testing labs which means that even fewer samples will now be tested (NPR). Basically, the FDA is reducing their role in food safety assurance, effectively transferring accountability to importing food companies. In a letter written by the agency and sent to food manufacturers earlier this month, manufacturers were told not to depend on FDA testing to assure safety but rather to assume legal responsibility and make sure all the ingredients used in their products were safe for consumers (NPR).

With the FDA at limited capacity and assurance practices still questionable in China, products unfit for human consumption will continue to enter the US, placing the burden on consumers and forcing them to determine who to depend on and trust that their food is safe to eat?

The Role of Suppliers and Buyers
The risks in food sourcing have always been there but the severity of the problem indicates that business-as-usual can no longer continue and that consumers need to be assured by all members of the supply chain that they are performing their due diligence and complying with laws and regulations at their point of production. In the past, buyers would have used a number of strategies to compel suppliers to comply with their standards, including the cancellation of contracts and returning of shipments at the supplier’s expense. In many commodity supply chains today, however, Chinese goods and products dominate supply to such an extent that importers have little choice but to buy from them. In fact, some supply chains are now almost completely dependant on China and would be crippled if Chinese suppliers sold their products elsewhere. For instance, China has become the leading supplier of many food ingredients, such as apple juice, a primary sweetener in many foods; garlic and garlic powder; sausage casings and cocoa butter (NPR). In addition, China now also dominates and controls China controls 80 percent of the world's production of ascorbic acid, a valuable preservative that is ubiquitous in processed and other foods (Washington Post).

Despite the shift in power from buyer to manufacturer, the fact remains that suppliers must meet some of the requirements established by the buyers as well as those required under various trade agreements such as the Sanitary and Phytosanitary (SPS) Measures established by the World Trade Organization (WTO). To accomplish this, government and private industry (suppliers and buyers) need to work together to establish compliance programs and meet the necessary standards. For suppliers, this means improved transparency and accountability for quality and safety; these values need to be instilled throughout the corporate culture if improvements in the system are to be made. For buyers, this means better communication of expectations as well as a variety of methods of support to help implement the necessary system.

The Role of Service Providers
As representatives of buyers and retailers, our most fundamental role in ensuring the compliance of manufacturing facilities with laws and regulations is that of an independent third party monitor. Monitoring is standard practice in many industries and helps to verify supplier compliance. However, as compliance programs mature, many buyers are now realizing that monitoring is not sufficient in and of itself to bring about compliance and that additional methods such as educational seminars and focused consultations may be more useful than continued monitoring.

Upcoming food safety seminars
In recognition of the need to elevate general awareness about building safety assurance programs, training professionals from Shuster—CSCC’s sister company—will be hosting general seminars on Food Safety in Shanghai (9/17/2007) and Shenzhen (9/20/2007). These seminars are intended for a range of participants from suppliers to exporters of food products and nutritional supplements with an aim to help provide the tools and strategies required to develop a comprehensive and safe-sourcing program. Please see our website for more information.

Information in article obtained from:
- Xinhua News Service. “China takes measures to enhance product quality, food safety”. August 27, 2007. Accessed Sept 4, 2007.
- China Daily. “China to dust off food safety standards”. June 20, 2007. Accessed Sept 4, 2007.
- NPR. “As Imports Increase, a Tense Dependence on China” By Richard Knox, May 25, 2007. Accessed Sept.5, 2007.
- NY times. “China to Revise Rules on Food and Drug Safety”. By David Barboza, June 7, 2007. Accessed Sept.4, 2007.
- The Economist. “Stoking protectionism”. August 16th, 2007. Economist Intelligence Unit ViewsWire. Accessed Sept.5, 2007.
- Washington Post. “Tainted Chinese Imports Common In Four Months, FDA Refused 298 Shipments”. By Rick Weiss Washington Post Staff Writer, May 20 2007 (A01). Accessed Sept.5, 2007.