Perspectives in Responsible Sourcing

Monitoring Misconceptions – The Role of Auditing in Supplier Code of Conduct Programs Part II

In my last blog submission, I shared my concerns about the misunderstanding, and misapplication, of Code of Conduct auditing. Part of this misunderstanding stems from the perception of a Code of Conduct assessment as a fix-everything panacea, versus a means of: a. Assessing the needs of the workforce; b. Assessing an employers’ impact on that workforce and the surrounding community, and c. Measuring continuous improvement and business impact. If it’s done correctly, there can also be room to lend guidance and begin to build capacity.

I promised to return with some suggestions for improving the system, so here are a few:

First, the design and communication related to responsible sourcing programs should reflect an intent that is less centered on passing audits, and more on the positive financial impact of continuously improving systems, and the business case for reducing workplace risk and improved relations with staff and business partners. The tone and message should reflect both the absolute necessity of supplier buy-in, and also the long-term collaborative nature of the brand/supplier relationship (And yes, if the brand is going to speak about building long-term relationships, their actions should obviously reflect that).

Secondly, brands should incorporate deeper assessments that identify gaps in systems, not simply the end results of those systems gaps. This becomes all the more possible (financially and administratively) as brands continue to collaborate and consolidate efforts related to their Code of Conduct programs. Redundant audits that simply identify findings will eventually be replaced by less frequent, deeper assessments that involve a greater percentage of the workforce, that communicate the impact of workplace risk and improved workplace systems, and that integrate the assessment deeply within the remediation process. These assessments will act as a jumping off point into a longer term, collaborative dialogue that recognizes the importance of the participation of the workforce in both the assessment process, as well as the ongoing remediation.

And yes, in many cases, that requires a tremendous shift in mindset. It also requires an improved understanding of Code of Conduct systems. That applies to:

• Factory management – They need to know how to develop and manage these systems, and what separates a corrective action (“Hang the extinguisher”) from a preventative action (“Why wasn’t it hung, and how do we keep it hung, and how do we ensure that everyone knows how to use it, etc?”)
• Agents/Vendors – They should be able to proactively identify effective or ineffective workplace systems during their subcontractor vetting process. They should also be in a position to drive improvement in those systems once issues have been identified during the audit process. If the value that an agent brings to a factory is the ability to take that business’ goods to market, that agent should recognize that effective workplace systems are part of meeting that market demand.
• Brands – Brands need to improve their understanding so that they are able to focus their efforts on managing an ongoing dialogue based around continuous improvement systems, and not passing audits. Brands can also provide support in the form of skills building and access to scalable systems that enable their partners to manage ongoing remediation and improvement of their own networks. And, of course, brands can make a massive impact through a critical self-assessment of their own purchasing practices.
• Service providers – In the spirit of humility, I will include myself and my colleagues in with this lot. We don’t know everything, and there are improvements that we can continue to make regarding building our own capacity in regards to systems assessment and remediation.

----------------

Ryan Lynch is the US East Coast Regional Manager for CSCC. Ryan has worked with various Fortune 1000 retailers, licensors, and manufacturers to develop responsible sourcing programs in order to assess and improve labor conditions throughout the supply chain.

Can Collaborative Auditing Become a Reality?

The big talk in Ethical Sourcing circles right now is collaboration.  Here's how it works.  The customers (or brands) of a factory get together to conduct an audit.  By collaborating, the brands minimize excessive audits in the same facility and better harmonize potentially conflicting demands.  After all, a factory may be audited by half a dozen brands per annum and asked repeatedly by multiple sources to improve the same infraction.  What a waste of time and money for the factory managers who must participate in each audit and for the brands to repeat each others work.

In addition to efficiency, collaboration in theory brings economies of scale.  One customer conducting 5% of a factory's business has limited leverage.  Six brands conducting 95% of the supplier's business has way more arm twisting force. 

The collaboration movement in North America hovers around four initiatives: Fair Factory Clearing House, Fair Labour Association, NIKE & Levi's.  There's a whole bunch of brand to brand (bilateral) projects but not at the attempted scale of the aforementioned.   MEC is participating in the all of these and a handful of bilateral projects.

We've gotten some good traction on sharing and coordinating audits, which hopefully reduced wasted time on everyone's side.  However, the big gain, to collaborate on making the factory better has not been that successful.  Simply because US Anti Trust laws prevent us from working collectively on issues like motivating a factory to control excessive over time.

It's not uncommon for factory workers to be hunched over an assembly line for 60 - 70 hours a week.  During high season (e.g., making Christmas merchandise), individuals may work even longer, up to 100 hours per week.  To break this cycle, a factory and its customers need to plan orders concertedly.  Brands need to realize their individual orders are not sacrosanct, transcending those of their peers or what's deemed reasonable working hours for workers.  Factories need to set limits and plan more efficiently.  Even assuming these somewhat "altruistic" feats are acceptable to the profit conscience parties involved, American anti-trust laws halt all of this from the get-go.  Simply because sharing strategic information to collectively moderate the production of a factory (and hence reduce excessive overtime) can be construed as limiting a factory's access to its customers/markets.  This is a big no-no to the "trust-busters" at DOJ.   

Violating anti-trust laws in the US is the last headache we need.  We can audit together to discover the infractions but we can't collaborate to remedy them.  Or as my good colleague Troy from REI insightfully summed "we can't close the loop".

Closing the loop by reducing unhealthy long hours is really Mountain Equipment Co-op's goal.  Co-auditing is the first step.  Co-remediation is the final.  Unfortunately, US Anti Trust laws have stymied the latter, even for a Canadian retailer like MEC. 

Brands setting aside their competitiveness to work on factory audits are a smart move.  We're reducing waste and achieving economies of scale.  Whether this actually leads to more humane working hours remains to be seen.

---------

Harvey Chan is the Director of Ethical Sourcing for Mountain Equipment Co-op, a Canadian co-operative retailer of outdoor activity gear and apparel.  Harvey's bio can be found here.

CSCC's Inaugural Podcast

Podcasts are audio blog entries that you can download to your computer or portable media player.  Podcasting has become very popular among bloggers and news organizations and now CSCC is getting in the game, filling the void in the blogosphere for comprehensive audio commentary on responsible sourcing issues.

This first podcast features Rachelle Jackson, Director of Research and Development at CSCC, summarizing the highlights and biggest news items in the responsible sourcing world from 2007, and providing some insight into what to expect in 2008.  She discusses the GAP child labor scandal in India, the new labor law in China, as well as the high profile campaign against Uzbekistan cotton (she also briefly discusses a session on Uzbekistan cotton that is on the agenda of our upcoming conference: Download cscc_g3_conference_brochure_2608.pdf ).

We hope to one day be able to offer you a direct podcast download from iTunes, but in the meantime click the link below to download the podcast to your desktop and/or portable media player: Download cscc_podcast_1_2008feb07.wav.  We'd love to hear any feedback you may have about this podcast at comments@intlcompliance.com.

Misconceptions on the Role of Supply Chain Monitoring - Part 1

A misconception has surfaced recently among some managers newer to Code of Conduct programs. The collective sentiment can be summed up as such:

“I hear that suppliers are suffering from audit fatigue, and that supplier audits don’t work, so I’m not going to audit.”

There is truth behind the issue of audit fatigue, but the interpretation above tosses the baby out with the bathwater.

First, despite multiple audits, some factories STILL continue to perform poorly. The knee-jerk proposition of simply reducing audit volume would result in these poorly performing factories being audited once per year, as opposed to multiple times per year. Neither scenario alone seems to solve anything. Sharing audits, in and of itself, doesn’t rectify workplace issues - collaboration and capacity building at multiple levels (not just the factory) is absolutely essential. This isn’t an endorsement for unnecessary redundancy, or for programs that set a factory audit as the end goal. I’ll offer suggestions in my next blog on effective program structure (I have to give you something to look forward to, don’t I?).

Regarding impact, the current system, as imperfect as it may be, has made changes. In reality, many of the more severe issues – child labor in formal factory settings, for example – have decreased with this increased scrutiny and awareness since monitoring programs have been established en masse. Yes, suppliers have learned to hide issues better, but the issues that are generally obscured by falsified records consist of hours/wages issues. The overall decrease in many of the critical issues is less attributable to a lack of transparency, and more to do with the attention placed by brands on Code of Conduct issues. (And yes, forced labor issues, in more cases than not, are not overt – the person chained to the sewing machine – but are more subtle forms of workplace coercion or intimidation. In order to uncover that, we need to incorporate deeper assessment approaches into Code of Conduct programs, but again, I’ll wait until my next blog before sharing too much …)

Finally, it is impossible to determine the effectiveness of any system if it does not include some form of measurement. Assessments should be utilized as a form of measurement, within a larger system of governance, skills building, integration within the businesses, and continuous improvement. The audit alone should not be expected to stand in for all of these functions. At the same time, it is very dangerous to develop a system without it.

Again, my critique isn’t an endorsement of the status quo. We can clearly do better in identifying issues and driving improvements. In my next blog entry, I’ll offer a few suggestions on what those improvements might look like.

-------

Ryan Lynch is the US East Coast Regional Manager for CSCC. Ryan has worked with various Fortune 1000 retailers, licensors, and manufacturers to develop responsible sourcing programs in order to assess and improve labor conditions throughout the supply chain.

WORLD CUSTOMS ORGANIZATION: SAFE FRAMEWORK OF STANDARDS CONFERENCE

BRUSSELS, BELGIUM. December 11-12, 2007.
Last month, the World Customs Organization (WCO) in conjunction with the Trusted Trade Alliance (TTA), organized a two day conference at the WCO headquarters in Brussels on the progress of the SAFE Framework of Standards. The WCO is an intergovernmental organization dedicated to customs issues, and is made up of 171 countries dedicated to the goal of developing “global standards, [and] the simplification and harmonisation of Customs procedures”.  Recently, however, as a result of the terrorist attacks on September 11, 2001, and the subsequent focus on risk from terrorism within the supply chain, there has been a general trend within the customs authorities around the world to focus on creating business/customs partnerships aimed at increasing the security of international trade. Much of this interest is due to the creation by the US government of the Customs Trade Partnership Against Terrorism (C-TPAT), the longest running and indisputably most successful supply chain security program in existence. In response, the WCO has attempted to create a multilateral initiative to create supply chain security standards that all countries can adopt, with the ultimate goal of allowing for mutual recognition by customs authorities of each other’s supply chain security programs. The SAFE standards were created two years ago, and were approved by nearly all the member countries. (for more information on the actual standards, visit the WCO website www.wco.org)

The recent WCO SAFE conference was organized in order to “review progress on the implementation of the SAFE Framework two years after its adoption with particular reference to the implementation of the AEO and mutual recognition concepts and their impact on business”.  The event was also intended to provide participants an opportunity to learn from the five years of experience of the C-TPAT program and hear comments on the roll out of the EU Authorized Economic Operator program, and to follow developments on mutual recognition of these programs. Speakers mostly came from customs authorities from around the world, including the US, China, Singapore, the EU, Sweden, Japan, New Zealand and Australia; from firms such as DHL, General Motors, Microsoft, and Nike; and from service providers such as Marsh Insurance, customs law firms, and Cal Safety Compliance Corporation.

The panel that I was able to speak on was titled “Third Party Validators: Partners in Protection or a Necessary Evil”. This panel was set up in a debate format, with Paul Ranta from Nike speaking against the idea of Third Party Validation, and Gary S. Lynch from Marsh USA and me speaking for the idea. The debate focused on the controversial pilot project mandated by the US Congress that US Customs and Border Protection (CBP) select a number of monitors to carry out third party inspections in facilities in China, in an effort to “validate” the security standards of C-TPAT members that source mostly or entirely there. Till recently, Chinese authorities have not permitted US Customs agents to conduct Validations in their territory, and as a result, roughly 300 C-TPAT members had not undergone Validation. As part of this pilot project, CBP contacted the 300 members that fell into this category, and alerted them to the possibility in undergoing Validation by third party monitoring firms. Concurrently, CBP communicated application standards for monitoring companies who wished to become official Validators. Initially it was communicated that there would be 3 or 4 monitors selected to be Validators, however, a total of 11 were finally chosen, among them CSCC. While the program has attracted much attention in the importing community, the program has been anything but a success. Out of the 300 companies, fewer than 15 have chosen to undergo Validation to date, due in large part to the fact that they would assume the cost of the monitoring, which is provided for free to other C-TPAT member that undergo Validation in any other country. Recently, CBP announced that talks had been held with Chinese customs authorities that would eventually allow CBP to conduct Validation visits in China, thus placing a large question mark as to the future progress of this project over the remaining months of its term. 

Mr. Ranta spoke about the role of the government and the importers in supply chain security initiatives, and the fact that liability for any terrorist activity would belong to the two, while the monitors would not share in this liability. He highlighted the cooperative nature of the C-TPAT program, and the fact that a third party monitor does not have a stake in the process, and does not understand the complexities of the importers supply chain as well as CBP does. While Mr. Lynch did not speak as a monitor, or in defense of third party monitoring per se, he did represent the role third party service providers in dealing with terrorist risk to the supply chain. As the only representative of a third party Validator present, I provided information on the process of becoming an official monitor, where the program stands now, and offered some considerations for future Validation programs using third party monitors.

While the C-TPAT third party monitoring program has not been particularly successful, there remains a strong argument for using accredited monitors for conducting Validation for other countries’ supply chain security programs, particularly where those country’s customs authorities are not able to send agents to inspect manufacturing and logistics service provider facilities in their own country, let alone in third countries. For those countries without the capacity to conduct their own Validations, there is a concern that this could lead to a country certifying their exporters in a supply chain security initiative without having validated that they in fact are meeting minimum security standards. This would end up creating a “trusted partner” status devoid of any effectiveness, which would create risk throughout the international supply chain. By using monitors with accreditation from an internationally recognized standard setting body, a wider range of countries may establish truly enforceable programs that can meet the standards of their trading partners. Without third party monitors, it is easy to envisage a future with a multitude of bilateral mutual recognition treaties. Ultimately, this scenario is not attractive to anyone.

Within the coming months the progress towards mutual recognition between the US C-TPAT and EU Authorized Economic Operator programs will no doubt remain a topic of much attention within customs compliance circles. It remains to be seen how the EU will deal with the issue of validation of its member security programs, however one thing is certain, the use of third party monitors will be revisited again.

The Day I Spent in Jail

     Ralitsa and I knew it would be a special audit.  CSCC had never done a prison audit before, so we scoured the web for laws and guidelines on prison labor, looking to the ILO and European, as well as Hungarian, standards. What we didn’t count on was just how different our perspective would be from that of the factory management.  Because of this difference, we almost ended up spending the night in prison!
     Our interpreter, Tamas, facilitated introductions to factory management, and the day began in a promising manner.  The factory contact had set aside documents for us to review, and we discussed how to interview the prisoners in a way that would ensure our safety while still allowing for confidentiality.  The factory seemed to be well prepared for the audit.  However, we were soon to find that due to the radically different interests of the assessment parties, this was not the case.
     The factory was located in the prison and used both civilian workers and prisoners in about equal proportions, so Ralitsa asked to interview half civilian and half prison workers. Although the factory manager initially agreed to allow the prisoner interviews, he changed his mind, citing a Hungarian law that requires permission from the national prison authority for such an undertaking.  He also sought to rely on the legal distinction in work status at the facility.  The civilian workers, he said, were employed directly by the factory.  The prison workers were “employees” of the prison service, effectively contracted by the factory, and were subject therefore to prison service rules, not the Hungarian labor laws covering the civilian employees.
     This complication was only one obstacle we faced.  It turned out that the documentation provided was grossly inadequate because the prisoner information was allegedly private.  The management used the Hungarian Data Privacy Act as a reason not to show us the requested civilian data, even though Ralitsa had a copy of the Act and pointed to the section allowing us to see the data.  When Ralitsa picked employees to be interviewed, the factory manager initially appeared to ignore her choices and picked other employees.  And so the day continued in this manner, obstacle after obstacle, refusal after refusal, until at 5pm, after completing as much of the assessment as we were allowed to, Ralitsa decided to call the closing meeting.    
     Although they agreed with most of the assessment observations, the factory managers kept saying that we were not accounting for this “special situation,” that our audit tool was ill-equipped to deal with the complexities of a factory in a prison.  We insisted it was not ok that there was no emergency evacuation drill for the prisoners.  But we can’t show them how to escape, they pointed out.  Well, couldn’t they reach some compromise, we asked?  After all, they’re not just prisoners, they’re human beings too.  At that point, the factory management said, “we will not reach an agreement here – we are coming at this from perspectives too different to reconcile.” 
     And there it was.  We saw the prisoners as human beings, murderers and thieves though they may be.  Factory management saw the prisoners exclusively as a threat to human beings.  All of the legal and social theory I have studied was of no use.  We could not reach a practical solution to bridge our perspectives.

     It is interesting to note that while the prison audit was a new experience, some of the legal issues that arose during the audit are fairly standard.  First, the prison director’s assertion that the prisoners were contracted from another entity (if not an employer) is a common method employers use to get around employment standards they do not want to uphold.  In the UK (among many other countries), for instance, many factory managers hire agency workers and then fail to maintain payroll information for these workers on the ground that they are employees of the agency, not the factory.  Second, like the prison director, these managers claim that for data privacy reasons, they are not allowed to maintain the workers’ information at the factory – it is doubtful that this is the case.  Finally, in both instances, one can see how easy it is to manipulate the law, especially in murky areas that the laws were not designed to target.  In both cases, it is highly unlikely that legislation was intended to cover third party social auditors’ access to employee information, either civilian or prisoner.  This omission leaves a great deal of room for ambiguity and interpretation.  Therefore, while the motivations and excuses for evading legal standards will differ in given situations, the means of evasion are often common.

If you have comments or questions about this piece, please contact Lara Blecher at lblecher@intlcompliance.com

A Look at Viet Nam’s Wildcat Strikes

Last week in Viet Nam, a Nike footwear supplier saw an end to a five-day 14,000 worker strike, after agreeing to increases in transportation stipends and improvement in canteen food quality.  The strike occurred at a Korean invested facility outside of Ho Chi Minh City.  For Viet Nam, this is nothing new.  Since 1995, the country has averaged over 100 strikes per year and the number has been increasing.  The strikes have come as a result of discontentment in low wages, quality of canteen food, and factory adherence to labor laws – violations in overtime and contract laws are frequently violated in the country.  But above all, the perception of low wages has been the primary cause of the strikes. 

After a wave of strikes in late 2005, the Viet Nam government hastily signed a minimum wage increase on January 6, 2006 for Foreign Direct Investment (FDI) enterprises.  The decree called for a minimum wage increase of 40%, effective February 1, 2006.  So the idea was if the minimum wage was increased workers would be happy, strikes would no longer occur, and factories would operate smoothly with no disruptions...  Right? 

Not-So-Fast

The business community complained.  Their complaints were essentially two-fold:  1) control the workers and 2) reconsider the time period for minimum wage implementation.  Recent strikes in Viet Nam caused not only operating losses, but property and equipment was damaged due to violent protests.  Of all the strikes that had occurred in Viet Nam from 1995 thru 2005, almost all of them did not go through the legal process and were therefore illegal.  The government, up to that point, had done little to enforce elements of the law on striking workers.  Secondly, businesses did not necessarily gripe about the increase to wages, but rather the short time span given to implement the changes.  After companies had created budgets and plans for year, the government decided to increase wages, basically on whim.

The government’s response to the complaints?  Delay implementation for another two months to April.  Now everyone’s happy.  Workers get a raise and employers have time to implement the increase. 

Not-So-Fast-Part-2

As a result of the delay in minimum wage implementation, Viet Nam suffered its worst case of labor unrest.  According to the Ministry of Labor Invalids and Social Affairs, 303 strikes occurred during the first half of 2006 – more than two times the number of strikes in 2005.  While companies were given time to implement the minimum wage increase, workers grew very impatient with their low wages.  Viet Nam has since revised the Labor Code to clarify procedures for legal strikes, improve the arbitration process, and shortened the length of time to resolve disputes. 

So far the changes have not stopped strike action.  In October 2007 alone, it was reported that 38 companies went on strike due to low wages, poor conditions, and poor food quality.  And yet, in a span of two years the government plans to increase wages again.  With inflation at 9.5% for the year, workers are saying that their purchasing power is quickly eroding.  As a response, the government is increasing the minimum wage by about 12% in 2008. 

If history serves as an indicator of future performance, then it doesn’t look like these increases will prove to stop the strikes.  This begs the question, whether Viet Nam is actually interested in having the illegal strikes stopped.  So far, Viet Nam seems content to placate its workers by incremental increases in minimum wages and inconsequential changes to legislation as issues arise.

-------

Paul Dinh has been a Research Associate with CSCC's Research and Development Department since 2005.

China Prepares for New Contract Law

As January 1, 2008 draws nearer, China is preparing for the implementation of the new Employment Contract Law, adopted last June. The government and individual companies are taking preparatory steps, but some may argue these steps are in opposite directions.

On the one hand, the government is preparing implementing regulations of the Employment Contract Law and has committed to issue these prior to the end of 2007. According to the Baker & McKenzie law firm, the Ministry of Labor and Social Security "has been informally soliciting comments as part of the process of drafting implementing regulations..."

Local governments are waiting with bated breath to amend their own regional contract laws once the implementing regulations are issued. We should see a flurry of related legislation over the next three months.

On the other hand, some companies are in the midst of dismissing and rehiring their entire work force in order to avoid having their workers move to open-ended contracts - arguably a less flexible and potentially more expensive form of employment.

In early November, telecom equipment maker Huawei Technologies asked 7,000 workers with 8 or more years of employment to voluntarily resign with the promise of re-hire and a newly revised employment contract. The move was widely viewed as an evasive tactic to avoid provisions of the new contract law that allow employees with 10 years of consecutive employment to move to an "open-ended" or permanent work contract that is difficult to terminate.

The All China Federation of Trade Unions (ACFTU) launched an investigation, but most of the workers had already stepped down. The ACFTU finally pushed Huawei to suspend the voluntary resignation scheme and is now calling for closer supervision of companies to prevent similar actions from other companies.

According to some media sources, the practice is widespread. There are reports that Wal-Mart recently laid off 100 workers in their Shanghai global procurement center and LG Electronics retrenched 11% of its China workforce.

Interestingly, and perhaps different from what's been seen in the past, the China government seems to be serious about enforcing this new law. "The national and local legislatures, the State Council and government agencies will soon issue judiciary interpretation and guidelines to stop employers from trying to dodge the law," Chang Kai, an official with the Legal Affairs Office of the State Council, told the China Daily. That would mean labor inspectors might enforce the strict penalties envisioned in the new law, including high monetary fines for non-compliance.

The "implementation question" has been debated since the law was passed in June. It has been hailed as a law that dramatically changes the employment landscape in China, if it is enforced. And that is a big "if." Or so we assumed.

Given these recent developments, it's time to re-examine the implementation question. If the current attitudes of officials in China are to be a gauge, we could all be in for a surprise next year as the ACFTU takes on a new prominent role in targeting non-compliant companies and the government provides a mandate to local labor bureaus to enforce the new law.

Of course, we must keep in mind that there are other ways for companies to evade compliance with the restrictive new law aside from the layoffs we are seeing now. Olympus, the Japanese camera maker, has announced it will consolidate its two China factories into one in an effort to reduce operating costs. They will then move one facility to Vietnam. They likely aren't the first - and won't be the last - to head to the greener, or less regulated, pastures.

The Gap Sweatshop Story: Child Labor in India. What happened?

By now you’ve seen it: newspapers all over the world are carrying the headline about Gap’s link to bonded child labor in an India sweatshop. The U.K.’s Sunday Observer broke the story on the child workers producing for Gap after a journalist captured video footage of the New Delhi slum.

So, what’s the deal?

Children, sold to the factory by their parents, were found laboring in squalid conditions to produce a line of Gap kids clothing intended for the Christmas season. The children were tattooed with the number of the sweatshop to which they were bonded. They have been told they must work off the debt of the payment made to their parents to provide them jobs but they earn no wages while they are still “learning.” They work 15-20 hours a day and are beaten regularly. They are hit with rubber pipes if they cry. The workplace is reportedly hot, filled with flies, and with raw sewage leaking from toilets into aisle ways.

One boy says he wants to work there so he has a place to sleep at night. He wants to earn money to buy a house for his mother. But he is not being paid for his work and his sleeping quarters are on the roof.

The reporter’s first hand accounts and video footage, available in the video feeds from the BBC and ABC News, are as depressing and appalling as the text descriptions.

How did this happen?

It appears that the Gap supplier in India subcontracted the work order to this unnamed operator without notifying the Gap. According to one article, the sweatshop manager “gloated as he explained to us how the child labour deal was arranged. He claimed one of the multi-national firm's Indian suppliers sub-contracted it to his bosses with a handshake, promising cash on delivery. ‘It's how we do business here in India," he told us. "You westerners are too quick to judge life here.’”

What was Gap’s response?

Gap responded by canceling the order, committing to destroy the goods that were produced by children, launching an investigation, and calling an emergency meeting with all regional suppliers.

Dan McDougall, the journalist that broke the story, said, “I’m satisfied with that response. I think they’re doing everything they can, but in terms of the broader issue, perhaps more money could be invested in auditing their suppliers and more monitoring on the ground. That’s the key because clearly the systems they have in place failed.”

What now?

This story has galvanized anti-poverty campaign group War on Want to push Prime Minister Gordon Brown for independent regulation of the clothing sector. According to War On Want spokesman Paul Collins, “This is the latest of a series of scandals that have emerged over almost a year … So long as retailers like Gap are allowed to regulate themselves, rather than have an independent regulator look at their factories and their subcontractors - then these scandals will continue to emerge."

Interestingly enough, the timing of this corresponds with a similar debate in the U.S. Just last week, a U.S. Senate panel heard testimony on sweatshops in the toy industry. U.S. Senator Byron Dorgan is “pushing legislation that would make it illegal to import or sell goods in the United States that are made abroad in sweatshops or by prisoners…” [see a related article for more details.] More on this testimony to follow in a later blog.

Don’t forget the subcontractors

Gap has a larger social compliance program than most companies. They employ 90 internal social compliance staff to work with their supply chain, including suppliers in India. They report having ceased relationships with 23 suppliers last year due to labor standards concerns.

If they have dedicated so many resources to this area, how can they still face such grave challenges in the supply chain? What about those companies concerned about labor conditions but have less resources available than the Gap?

I think one lesson for companies looking at this event is: don’t forget the subcontractors. [see a related article on this topic.] I don’t mean to suggest that Gap has forgotten them. I imagine that they have purchase order requirements that forbid unauthorized subcontractors and that this Indian supplier simply ignored the contractual agreements. However, many companies are not even considering the second and third tiers in their supply chain. As Dan McDougall notes, “This isn’t a problem for Gap; this is a problem for every High Street retailer. They all subcontract to the developing world.”

Spheres of Influence

John Ruggie, a Harvard professor, has been exploring the relationship between human rights and business for just over a year as the UN Secretary General’s special representative for Business and Human Rights.  In a recent interview with the Financial Express, Ruggie spoke about the latest focus of his work – what is the duty of the state to protect against corporate abuse?

From a business perspective, this focus on state obligation in upholding human rights is most likely a relief.  One of the main corporate criticisms of the now failed UN Norms for Transnational Corporations was that the Norms found too large a role in international law for businesses to ensure human rights are being upheld. 

More specifically, Ruggie points out in his report, The Evolving International Agenda, that the role defined for corporations under the Norms was essentially the same as that defined for States, an overlap that leads to much confusion, among other things.  He goes on to conclude in the Financial Express interview that it is “hard to contend that corporations have direct legal obligations under international human rights law.”

However, he also found “a growing potential for companies to be held liable for international crimes… under domestic law but reflecting international standards of individual responsibility.”  A current example of this latter case is Chiquita's liability not under international law but under Colombian law for contracting with a right-wing militia that committed internationally-recognized human rights abuses.

Part of the goal for Ruggie’s now extended mandate is to more clearly define the idea of a corporate sphere of influence in international law.  He believes that one means to achieving this goal is to “further clarify and progressively codify the duties of states to protect human rights against corporate violations” on both an individual state and multi-state level.

In a White Paper issued in April of this year, the American Bar Association (ABA) took a stab at roughly defining the corporate sphere of influence in corporate social responsibility (CSR) by saying that businesses should integrate “broader societal concerns into business strategy and business operations in ways that enhance reputation and sustainable business prospects.”  The ABA suggests that some ideas for embracing this approach include adopting relevant international conventions and industry best practices.

With regard to state responsibility, it says laws should be a minimum jumping off point for CSR but that, “local laws should not regulate corporate social behavior or impose exactions or taxes to enforce policies rooted more in political considerations and pet economic theories, than in the protection of social welfare and individual rights.”  The ABA proposes that the judiciary will play a role in resolving the jurisdictional no-man’s- land between corporate and governmental obligations in the area of CSR.

The ABA is coming at the dilemma more from the perspective of how it (as a group of lawyers rather than nation-states) can help to delineate the respective roles of corporations and governments, and with a focus on CSR in particular rather than human rights more generally.  Still, there is a fair amount of overlap between the ABA’s orientation and Ruggie’s.  Both are attempting to clarify the roles of states and corporations with regard to upholding social goals.  However, as a broad policy statement the ABA position leaves lots of gaps in the specifics of the sphere of influence framework.  For example, it does not elaborate on which corporate human rights practices should be legalized and which ones should remain voluntary.  It will be interesting to see if Ruggie can meet his goal and fill in some of those specifics.

If you have questions or comments on this blog, please contact me at: lblecher@intlcompliance.com