Chapter Fifteen: Compliance Issues

Overview

It is socially responsible to have kids at work in some of these communities . . . because if they are not in the workplace, they are on the streets . . .

” John Brookes, CEO of Manaxis

As the application of standards and this type of supplier monitoring process have become more widespread during the past two years , one of the central questions to arise has been what exactly should a company do when they find that one of their critical suppliers is in serious breach ” employing child labor, requiring excess working hours, dumping toxic wastes ” of key elements of the performance standards? There are several issues to consider.

First, companies need to realize that many developing-economy operations will in fact not meet the minimum requirements of these common performance standards, therefore leaving them in something of a difficult position. A recent ETI survey reveals the extent of the problem. Of the 6,763 suppliers monitored , nearly one-third were noncompliant, with health and safety issues leading the list of concerns, but there were also union restrictions, low wage, and long hour issues. Ten countries ” seven of which were in Asia ” accounted for 90 percent of these violations. ^{[1 ]}

A similar study by the Ethical Trading Initiative found that member companies found noncompliance in almost every area covered by the ETI code. The good news is that nearly half of the 2,472 compliance failures (1,144) were actually successfully resolved. Again health and safety issues topped the list of noncompliance failures (62 percent), with 15 percent of failures related to wage levels, and 10 percent reflecting excessive working hours. What is interesting to note is that, despite the tremendous amount of media attention that this issue attracts, fewer than 1 percent of all violations were for employing child labor.

The ETI found that health and safety violations were the most difficult-problems to overcome (nearly half of the 599 unresolved noncompliance violations), with only 5 cases of child labor still unresolved on the second audit (after all, employing children is quickly remedied, whereas fundamentally dangerous operations and policies are often difficult to alter). ^{[2 ]}

Gap Inc. provides a good example of what companies are up against. In December 2002, Gap employed 90 people on their vendor compliance team, responsible for covering 2,400 factories in 50 countries. Each of these vendors is subjected to an initial evaluation, where they are introduced to Gap s code of conduct and standards policies and assessed against those. Most suppliers fail initially, but are often given an opportunity to correct noncompliance issues before a second site visit by Gap inspectors. Even so, 20 percent of factories that were reviewed in 2002 failed to gain approval for contracts. ^{[3 ]}

For many companies, their first reaction to discovering that a key supplier is in breach of ethical codes is simply to break off the contract, make an announcement to the press, and flee. But as we have seen, though this may remove the immediate threat to a company s reputation, withdrawal doesn t really help any of the parties ” the company, the supplier, or the employees .

It is extremely challenging in terms of cost and culture, says John Brook, CEO of Manaxis and veteran assurance auditor . There are people knocking on the doors of facilities looking to get work and dying on the street because they don t get work. They would be happy to work for a sub-minimum wage just to give themselves some bread. There are children of 10 years old that would work just to keep their brothers and sisters fed ” so the noble morals of ˜no child labor and ˜a fair living wage are laudable in a strategic and global sense, and in setting a goal for an overarching target to aim for, but they are not going to be resolved by a code of conduct ” they are not going to be resolved by passing a law in the Guatemalan parliament tomorrow. ^{[4 ]}

Again, H&M s policies in this area are worth citing. At H&M [we] wish to work together with our suppliers, on a long- term basis, to improve the conditions in the factories, they insist. We are sometimes asked why we do not immediately terminate our cooperation with suppliers who do not comply with our Code of Conduct. Obviously, that would be a simple solution for us, but H&M also feels a responsibility towards the people working in the factories. If H&M leaves a factory due to poor management, the ones that are truly affected are the workers. Another buyer indifferent to workers rights might then replace H&M. However, when we encounter serious violations a strong statement must be made. If the factory management is faking documents or if a supplier has subcontracted production to a production site that is not known to us or in other ways refuses to cooperate, we are forced to cease the cooperation.

In our monitoring effort there is a strong element of consultation/ education to really make our suppliers understand the importance and the advantages of complying with our code. ^{[5 ]}

As we have seen, increasingly, rather than simply withdrawing from the contract, companies are focusing their efforts on improving the supplier s performance. Companies have been able to bring suppliers into standards compliance in many cases simply by explaining expectations clearly and helping finance improvements and reforms ” timecard systems, strict overtime reporting ” that are simple improvements but can be very effective (when applied appropriately) in countering labor and environmental abuse. And this type of policy seems usually to be met with strong support by NGOs, themselves, for the most part, very much aware of the dilemma of supplier noncompliance.

The objective we re working for is not to divide factories into those that are acceptable and not acceptable so that companies only do business with the companies that are doing well, says Alice Tepper Marlin, President of Social Accountability International, creators of the SA 8000 standard. The objective is to provide incentives and assistance to build capacity, to have good human relations and good working conditions in all factories and farms. ^{[6 ]}

David Croft, of CoOp agrees. We start with a postal questionnaire to help with risk planning, he says, then we can organize a site visit where we need to investigate further. This might be through our own team or with commercial auditors. We have been carrying out detailed assessments with up to three or four auditors over a two- to three-day period, and we have also been developing a shorter one-day assessment that highlights areas of risk.

Where we find breaches of the code, he explains, we aim to establish-an action plan with the supplier. If we get no cooperation, then we would reconsider our relationship with the supplier, but we prefer to work with suppliers to improve conditions. ^{[7 ]}

Moreover, the ETI has found that working with suppliers to improve weak areas often pays off. Companies were able to rectify much of what they found, says the ETI. Successes included raising wages to the legal minimum, the installation of fire prevention measures, recognition of trade unions, and enrolling under-age employees in education. These are real advances which can have a significant impact on the everyday lives of the workers . . . ^{[8 ]}

GEMI lists candidate EHS performance indicators. For most of these indicators, five different questions could be used to assess supplier performance:

• Is the supplier aware of this impact/issue?

• Does the supplier have goals or policies regarding this impact?

• Does the supplier have detailed plans in place to measure, manage, and improve this impact?

• What is the supplier s performance regarding this impact during the most recent year?

• Is the supplier s performance improving over time, and by how much?

Focusing solely on question 4 [the supplier s performance in the most recent year], warns GEMI, can be ill advised. Infrequent accidents can seriously depress performance statistics in the year they occur. It is wiser to augment the evaluation of single-year performance measures with an assessment of performance trends over several years, and/or management systems. ^{[9 ]}

^{[1 ]} The Ethical Trading Initiative s 2000 “ 2001 Annual Report at www.eti.org.uk/pub/ publications /ann-rep/2000_en/page04.shtml .

^{[2 ]} Ibid.

^{[3 ]} See GAP Inc. s Social Responsibility Ethical Sourcing Program at www.gapinc.com/social_resp/sourcing/program_body.shtm.

^{[4 ]} Interview, August 15, 2003.

^{[5 ]} H&M Social Responsibility Report, p. 7 at www.hm.com/corporate/pdf/social/csr_report_social.pdf .

^{[6 ]} David Drickhamer, SA 8000 Sets a Standard, Industry Week.com, June 1, 2002 at www.iwvaluechain.com/Features/articles.asp?ArticleId=1263.

^{[7 ]} The Ethical Trading Initiative s 2000 “ 2001 Annual Report, op. cit.

^{[8 ]} Ibid.

^{[9 ]} New Paths to Business Value, the Global Environmental Management Initiative at www.gemi.org/newpath.pdf, p. 42.