Perspectives in Responsible Sourcing

Podcast with Michael Kobori (Levi Strauss & Co.) and Carrie George (CSCC)

The responsible sourcing world has been abuzz this past year with talk of increased collaboration among brands and their supply chain partners, NGOs, and other industry associations in the monitoring and remediation of “sweatshops”.  In the era of new media, CSCC has turned to podcasting to explore the issue of brand collaboration with Michael Kobori, Vice President of Supply Chain Social and Environmental Sustainability at Levi Strauss & Co., and Carrie George, Client Service Manager at CSCC.  The podcast is a frank and open dialogue on the benefits and challenges of increased collaboration in fighting exploitative labor conditions.

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CSR: The Need for Proactive Management of Legal Risk

Multinational corporations have reason to pay close attention to current trends in the field of corporate social responsibility, especially given recent developments in U.S. courtrooms.   In cases under both the Alien Tort Claims Act (ATCA) and general tort law, companies are being held accountable to human rights standards established in international law.  Beyond the potential of ultimate liability, litigation can have significant costs in terms of legal defense fees and associated opportunity costs, but is also costly in terms of the reputational damage caused to companies both by initial allegations of poor human rights practices and by lingering perceptions that companies are indifferent to such accusations. Given the wide range of social and political contexts that surround their operations, companies should not hide from or cover up the unfortunate fact that human rights abuses may occur.  Rather, companies should develop business policies meant to leverage both their abilities to prevent such abuses and their capacities to respond proactively and responsibly when they do occur. 

CSR in Practice – Developing Policies

When developing human rights policies and associated codes of conduct or operational guidelines, companies should seek to close the gap between stated goals and commitments and actual business operations.  These statements, in addition to providing a set of operating principles that can guide company operations, also provide platforms for dialogue with both employees and external stakeholders.  They also provide for a consistency in approach that facilitates both daily operations and crisis management.  Therefore, companies should take the time to develop policies that work for them and that address the actual issues that come up in their business operations.  Boilerplate language can get in the way of developing effective guidelines that manage actual risk.  Companies should see the development of effective policy guidelines as key components to risk management and therefore should approach the task with seriousness of purpose and time for reflection.  It is a reality that not all companies will wish to be industry-leaders in terms of commitments to best practices and relevant voluntary standards. Corporate counsel can provide advice on the nature, scope and implications of specific commitments, standards and guidelines so that company executives can make informed internal determinations before making public statements. 

CSR in Practice – Implementing Policies

As companies draft policies, it is important to be mindful of the challenges of implementation.  Commitments should not be made by corporate social responsibility officers alone.  Moments of crisis are not the time to determine that senior executives don’t know or understand what statements the company has made -- everyone needs to speak the same language.

Companies should also take the time to benchmark their current practices against the relevant standards and guidelines reflected in their policies.  Benchmarking will add significant substance to the future analysis of the auditing and monitoring efforts that are required to ensure that company commitments are being met.  With regard to monitoring and auditing, companies should have dedicated personnel who are tasked with verifying the proper implementation of company policies.  Companies are well-advised to work with external monitors as well.

When entering into contractual relationships, companies should consult with counsel in determining to what extent company policies should be explicitly incorporated into standard contractual language.  Assessments should be made as to what should be specifically required of contractors and suppliers at each level of operation. Entering into these relationships involves difficult tradeoffs between maintaining the independence of third parties and ensuring that adequate oversight exists to ensure that company standards are being met.

Finally, in building business policies that incorporate human rights, companies should increasingly approach human rights risk management as they would any other type of risk management.  Potential projects and business relationships should be assessed for the manner in which they will challenge and possibly violate company values and policies.  In some cases, particular investments may be deemed too risky.  In other cases, specific risks will be identified and thoughtful planning as to how to manage those risks should begin. 

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Sarah A. Altschuller is a an associate at Foley Hoag LLP's Corporate Social Responsibility practice.  She can be contacted at saltschuller@foleyhoag.com.

Standardizing an audit day…It could be the start of a beautiful friendship between Collaboration and Continuous Improvement

While collaboration has been spoken of and hyped up for the past four years, the greater CSR community does a proportionately small amount of collaboration.  Collaboration is still a leading edge idea, rather than a normative practice.

While no single group (brands, factories, monitors, NGOs, initiatives, etc) is to blame, we all share some culpability in our delay to collaborate. Some of us are demanding high level improvement in terms of living wages and carbon foot printing, but have not laid the groundwork to ensure that factory start-ups in the Pearl River Delta, Los Angeles or Bangalore know the basics of calculating holiday overtime, legal requirements of basic sanitation or the benefits of recycling. Similarly, but on the other end of the supply chain, many brands and retailers want to get the same information from a one-day audit by two auditors with a really detailed checklist as they would from a week-long participatory training and remediation.

For the sake of simplicity, we will focus on collaboration of a basic assessment for now. Each brand, each report sharing initiative, each certification body, and each monitoring firm has their own unique approaches to the standard operating procedures, reporting and grading for a one-day audit. Having so many templates, procedures and grading approaches makes coordinating collaborative assessments  a drawn out process that includes a great deal of discussion, particularly if done on a large scale. 

If collaboration and report sharing are going to take hold industry wide, industry stakeholders are going to have to speak to one another and compromise. Who best to facilitate those conversations surrounding compromise? How about the monitors (non-profit and private) who have done hundreds of thousands of audits over the past 15 plus years? Monitors understand the complexity of the demands and scale of the industry.  Monitors understand the pros and cons of each template. Monitors understand the limitations of the audit day.  Monitors understand how to get the best data and what reduces audit quality. Monitors understand the technology used across multiple brands to load the various reports and data. Monitors deal with this every day. So, let’s start talking…anyone interested?

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Carrie George is a Client Service Representative at CSCC.  She studied Industrial Relations and International Development at Cornell and Brigham Young universities, and worked as a Research Analyst at Innovest Strategic Value Advisors before joining CSCC.  At CSCC, Carrie has been responsible for advising and helping clients build robust responsible sourcing programs, in addition to being a vocal proponent of greater stakeholder collaboration in monitoring and remediation.

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.

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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.

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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.

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.

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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.

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.

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.

China's Growing Counterfeit Dilemma

At CSCC, we have been watching the continuing saga on counterfeit foodstuffs coming out of China.  The country has always been known for counterfeit “Channel” and “LW” apparel and leather goods as well as pirated DVDs of American blockbuster movies.  But can you believe that even edible products have been given that same counterfeit treatment?

For years reports had come out of China about contaminated and/or counterfeit foodstuffs.  For example, in late 2003, soy sauce made out of human hair collected from the floors of barber shops and salons was discovered.  In April 2004, global news reports revealed a fake baby formula scandal that caused the deaths of as many as 200 babies.  But at the time, such incidents affected only consumers in China and those of us in developed countries just shrugged and said, “Gee, I’m glad those sorts of things don’t happen here.” 

After all, in the US, the Food and Drug Administration (FDA) screens products that enter our food supply, and presumably other developed nations had similar government agencies and procedures to keep these counterfeit products out.

How quickly our naïve notions crashed once American pets began to fall ill and die and counterfeit toothpaste forced American consumers to second guess the trust they had placed in some American brands.

So what can we do about this issue?

As consumers, we can embrace the idea of buying local.  This is a movement that has already taken root among environmentally conscious consumers eager to reduce the carbon emissions associated with transporting food from distant farms to local grocery outlets.  So in addition to the assurance we get from buying foodstuffs that we know have met minimum FDA standards in its handling, manufacture, and claims, we can get satisfaction in knowing we are supporting the local economy and doing our part for the environment also.

As businesses that source foodstuffs, drugs, and cosmetics from China or anywhere else, more rigorous monitoring of the supply chain is necessary, as well as educating supply chain partners about FDA standards and reducing price pressures on suppliers so they don’t feel the need to cut corners on ingredients and safe manufacturing processes (full disclosure: Shuster Laboratories, a provider of food safety and development services, is a sister company to CSCC).  The FDA cannot realistically inspect every container of foodstuffs that crosses the border into the US and the Chinese government has repeatedly shown it has limited enforcement capacity to control the many thousands of factories that exist in the country.  Therefore, much of the “policing” will have to be done by the brands and retailers that have their reputations on the line.

On the part of the US government, the FDA has asked for almost $500M in funding for its Foods Programs in 2008, which will include increased enforcement capacity relating to unsafe foods, drugs, and cosmetics.

As for the Chinese government’s response, purging officials from its food and drug agency is a start, although execution of the agency’s officials is not the most uncontroversial way to go about it.  But it will be interesting to see how the government will increase its enforcement capacity and prevent future incidents of corruption within the agency’s ranks.  Beijing needs to take more decisive action than laying about blame and executing people to keep food and cosmetics manufacturing investment within its borders.

Being in the auditing business, CSCC has seen an interesting trend in recent years where brands and retailers are again opting to source apparel and other consumer goods domestically.  We can only speculate as to the reasons, but quality control and the demand for faster concept-to-market pressures are likely the main impetus for this trend.  But unlike the apparel industry, counterfeit foodstuffs and drugs carry a very real risk of illness or death of American consumers --  simply too high a risk for American brands and retailers to bear.  The continuation of such uncertain circumstances in China for any length of time will force companies to bring the manufacture of such items back to American soil where quality can be controlled more closely and corruption is less rampant.

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June Ip is the Manager of Corporate Communications for CSCC.  She is an adventurous eater, having eaten such delicacies as chocolate-covered grasshoppers, fried ants, and snake soup during her travels.  She has not, however, knowingly consumed hair soy sauce nor would she be interested in doing so.

Not Only in China

As the first trip for my new role with CSCC, I was to go to France to learn how we audit and help with translating and employee interviews. To the average consumer, when you mention social compliance at best you receive a blank face. If you add the term ‘sweat shop labour’ then the reaction is altogether different. This is something most consumers have heard about and the main country they would think sweatshops exists is, of course, China.

So when I tell friends I will be auditing in France, they also give me a blank look. What do we expect to find there? This is Europe. We have human rights enshrined in treaties and courts and laws and besides, workers know their rights, can demand fair treatment and receive support from their union. Social compliance simply isn’t a concern for Western European production.

Or is it? First of all, what a lot of people may forget or not know, is that a key element of social compliance is the right to work in a safe and hygienic environment. Child labour and sweatshops receive the most media attention however, some of the more dramatic workers’ rights abuses have resulted from poor health and safety conditions in a facility. So, whereas we might not find children working to sew sequins onto apparel in Europe, we may find workers’ safety under threat.

Having said this, most of the trip did result in satisfactory audit results. Until, that is, we arrived at the capital. Having traveled to small towns in France, the last place we expected to find workers’ rights abuse, was in the centre of Paris. But Paris can be a city of paradoxes. Right next to the district’s fancy buildings was a little road down which we were to find the European version of a sweatshop. A tiny room packed full of imported Chinese workers, sewing apparel.

The work floor was awash with hazards. No documentation like labor contracts were kept by management.  The most challenging part, however, was that not one of the workers spoke French --what we needed was a Chinese interpreter, not a French one. One gentleman was able to write down where he was from and draw me a happy face.

During the closing meeting, the reception from management was either disinterest or disaccord. When we told him the fact that employees didn’t have labour contracts was a major non compliance, he simply asked us: if he gave workers contracts, how would he get rid of them when he had no work for them? That just about summed up this manager’s understanding of social compliance.

So, my France experience reinforced two things:
1) that social compliance isn’t just sweatshops and child labour and
2) that sweatshops aren’t only to be found in China.

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Hannah Shoesmith is a Client Development Manager with CSCC in the UK.