4
Employers

The business community perspective was provided by five company representatives (four from the apparel industry and one from the toy industry), an organization that promotes American business interests in various international bodies, and a nonprofit business membership organization. Gregg Nebel represented adidas-Salomon; Robert Zane represented Liz Claiborne, Inc.; Marcela Manubens, Phillips-Van Heusen; Anna Walker, United States Council for International Business; Roger McDivitt, Patagonia; Tom DeLuca, Toys “R” Us; and Debbie O’Brien, Business for Social Responsibility.

ADIDAS-SALOMON AG

Gregg Nebel, presenter

In 2001, the adidas-Salomon company (AS) had more than 13,000 employees and total net sales of 6.1 billion euros. It is a global leader in the sporting goods industry and offers a broad portfolio of products that are available in virtually every country.

Mr. Nebel asserted that AS is committed to ensuring that the factories throughout its supply chain provide acceptable employment conditions for their workforces. AS has a global team of 30 people from a wide variety of technical backgrounds who report to the Board of Directors on issues of employment and health and safety within its supply chain. The basis of this



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4 Employers The business community perspective was provided by five company representatives (four from the apparel industry and one from the toy industry), an organization that promotes American business interests in various international bodies, and a nonprofit business membership organization. Gregg Nebel represented adidas-Salomon; Robert Zane represented Liz Claiborne, Inc.; Marcela Manubens, Phillips-Van Heusen; Anna Walker, United States Council for International Business; Roger McDivitt, Patagonia; Tom DeLuca, Toys “R” Us; and Debbie O’Brien, Business for Social Responsibility. ADIDAS-SALOMON AG Gregg Nebel, presenter In 2001, the adidas-Salomon company (AS) had more than 13,000 employees and total net sales of 6.1 billion euros. It is a global leader in the sporting goods industry and offers a broad portfolio of products that are available in virtually every country. Mr. Nebel asserted that AS is committed to ensuring that the factories throughout its supply chain provide acceptable employment conditions for their workforces. AS has a global team of 30 people from a wide variety of technical backgrounds who report to the Board of Directors on issues of employment and health and safety within its supply chain. The basis of this

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KEY POINTS A global team of 30 people, reporting directly to the company’s board, conducts more than 1,000 plant visits annually and 400 training sessions for factory managers and workers. The company’s goal is to integrate labor standards compliance into all functions of its supply-chain management. An audit process is used to identify problems and to discover trends that will allow it to assess the risk of compliance violations at the factory and country levels. Different cultural backdrops, legal regimes, and the complexity of supply chains make assessment difficult. reporting is a monitoring system that involves more than 1,000 plant visits per year and 400 training sessions for factory workers and managers. AS has integrated into all the functional aspects of its supply-chain management the idea that labor standards are important; it supports the core labor standards of the International Labour Organization (ILO) and has employment guidelines to which its suppliers are required to conform. To achieve this goal, AS investigates and evaluates potential suppliers; after choosing a supplier, it jointly develops a plan for ensuring compliance, including reference guidelines. In an ideal world, all suppliers would build compliance with international labor standards (ILS) into their overall business plans, but because the reality is different, AS monitors its suppliers through a review process conducted by both internal and external auditors. When problems are found, an action plan is developed to correct any violations and regular follow-up is undertaken. Through these audits, AS also hopes to discover trends that will allow it to assess the risk of compliance violations occurring among different suppliers and countries; it then identifies mediumand high-risk environments and initiates a program of education and training in order to minimize the potential for violations. There are many challenges, not the least of which is the complexity of trying to assess compliance in many different countries with varying legal codes and cultural frameworks. A consistent approach is preferred, but at times this can encounter cultural and legal barriers, including the inadequacy of national labor law. For example, the assessment of freedom of association might vary depending on the country in which the factory is

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located, but this is not the case with respect to issues such as whether overtime work is compensated or how hours of work are calculated. Because complexity can result in the loss of focus, the monitoring process must prioritize the issues to be addressed, and certainly among the most important are child labor, forced labor, and freedom of association. Another difficult challenge concerns transparency, both with respect to guidelines for suppliers and the reporting of results of the monitoring process. For AS, a transparent reporting process, which includes an annual report on social and environmental affairs, and the higher level of expectations that it brings mean that it has no choice but to allocate scarce resources to remedial actions, and this opens the company to potential legal liabilities. Transparency can also highlight the fact that no large company can maintain 100 percent coverage of its supply chain, and this is an argument for shifting from an auditing framework to one that focuses on training people in the factories—workers and managers—to do the monitoring as part of their regular jobs. LIZ CLAIBORNE, INC. Robert Zane, presenter Liz Claiborne, Inc. (LC) was founded in 1976 as women were reentering the workforce. In 2000, the company had net sales of $3.1 billion. LC products are sold in major department and specialty stores. The company’s principal facilities are located in the New York area. LC employs more than 7,000 people worldwide. KEY POINTS A great deal of progress has been made in combating violations of ILS, and this trend will be accelerated with the repeal of apparel tariffs in 2005. The company uses both internal and external monitors of its supply chain. One key to ensuring compliance is to educate factory owners so that they understand that violations of labor standards do not make economic sense: The small increase in profit margin is far outweighed by the risk of losing LC’s business.

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Mr. Zane conceded that horrific working conditions certainly exist in some plants producing apparel for export to western countries. However, this is not the case for clothing sold by LC because it refuses to sacrifice human decency in order to get a more competitive price. The company sources products from 275 factories in 35 countries; like other apparel companies, it does not have a financial stake in these facilities and thus is not able to exert pressure through a direct ownership position. Instead, it makes sure that all of its suppliers and their employees, as well as its own employees, understand the company’s corporate values. LC does not accept violations of labor standards in the plants that produce its products, just as it does not accept poor quality or unrealistic prices in negotiating with suppliers. Suppliers must respect the company’s values on how workers should be treated. To ensure that its products are being produced under decent working conditions, LC uses a variety of internal and external monitoring mechanisms, including membership in the Fair Labor Association (FLA). Some factories have occasional problems, however, and when this occurs, it is important to educate factory owners so that they realize that violating labor rights does not make economic sense. Mr. Zane stressed the economic side of the issue: Because LC is such a large customer of practically any plant, the incremental increase of profit that might be derived from a labor rights violation (withholding a bonus payment, for example) is not worth the risk of losing a contract with the company. Along this line of reasoning, Mr. Zane said that ending the textile tariff/quota system in 2005 will lead to an improvement in working conditions in foreign factories because it will reduce the number of countries from which products are sourced. Under the current tariff system, countries are allowed to export to the United States only a set amount of apparel goods, and thus the supply from production facilities in any one country is artificially limited. Because of the level of demand in the United States and the large number of apparel companies, any single company tends to represent only a small proportion of the output of any particular factory. This limits the pressure that a company can bring to bear on a factory’s management. When the tariff system ends, companies like LC will consolidate the number of countries and factories from which they source products and thus increase their ability to influence not only management but also, presumably, governments and their labor legislation and enforcement mechanisms.

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PHILLIPS-VAN HEUSEN CORPORATION Marcela Manubens, presenter Phillips-Van Heusen Corporation (PVH) was founded more than a century ago. Today, it is one of the most recognized apparel and footwear companies in the world. PVH’s net sales in 2001 exceeded $1.4 billion; it has more than 8,000 employees. KEY POINTS Much progress has been made since the early 1990s, and the positions of various stakeholders are much closer. Company codes of conduct have played a positive role, but their usefulness may be coming to an end. There are too many, and the auditing process has become almost counterproductive because of the lack of training and standards. Codes in effect privatize labor rights enforcement. But a global economy requires global standards that are monitored and enforced. Ms. Manubens recalled that there has been great progress in improving the application of core labor standards in the apparel industry over the past decade. The process began with Levi Strauss’s code in 1991, and it was given great impetus in 1996 by the apparel industry compact formed at the behest of the Clinton Administration. There is much greater awareness of the issue among unions, nongovernmental organizations (NGOs), and companies, and the interests and viewpoints of these stakeholders have converged dramatically since the mid-1990s. The transparency of the process has also made great strides, but this transparency continues to reveal that much still needs to be done. Simply promulgating a code of conduct is not enough to change behavior; the key is to continually reinforce the message to factory owners that compliance is in their long-term economic interests. This approach is preferable to relying solely on monitoring compliance with codes of conduct; here, factory owners are the object of monitoring and seen as part of the problem, rather than as part of the solution. Company codes of conduct amount to the privatization of labor rights enforcement, but the proper

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institutions to enforce labor rights are national governments. A global economy requires that global standards be monitored and enforced. The task of monitoring should be the job of the ILO because it is a tripartite institution representing workers, employers, and governments, and thus elicits the most respect from all the stakeholders. Companies cannot and should not be expected to take on the task of enforcement—that properly rests with government. Furthermore, from a practical standpoint, it is evident that, despite the progress made, codes of conduct are failing to achieve the necessary level of compliance. There are too many codes being monitored by too many groups, and the lack of standards is reducing the effectiveness of both and leading to action-inhibiting confusion among factory managers. For example, at its inception, the FLA code was intended to be the only code for the apparel industry, but now the codes number in the thousands. Another problem is that the auditing process is in dire need of standardization in terms of methodologies, and the auditors themselves lack proper training. In addition, there are some very large retail companies that have not joined these efforts, and this also limits the pressure for change. As a result, monitoring is simply pointing out problems rather than working to effect change. UNITED STATES COUNCIL FOR INTERNATIONAL BUSINESS Anna Walker, presenter The United States Council for International Business (USCIB) promotes an open system of global commerce and represents the interests of American companies in various intergovernmental organizations. The Council is financed by the dues of its approximately 300 member companies, law firms, and trade associations. Ms. Walker maintains that it is very popular these days to blame multinational corporations (MNCs) for the problem of core labor rights violations in developing countries; this is not only factually incorrect but counterproductive. The vast majority of foreign direct investment takes place between industrialized countries. Investment going to developing countries, which is only 20 percent of the total (most of it going to China, Mexico, and Brazil), is typically not in industries associated with labor rights violations. Furthermore, where labor rights violations have been most egregious, there has not been much investment by MNCs.

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KEY POINTS It is counterproductive and incorrect to blame MNCs for violations of ILS. Governments are the proper institutions to enforce labor rights, and in situations where they have failed to do so, MNCs have done a great deal to improve compliance with labor standards. The ILO should take the lead in monitoring ILS and providing technical assistance to countries and companies to improve compliance with labor rights. Although governments are the proper institutions to take responsibility for improving compliance with core labor standards, Ms. Walker argued that MNCs have nonetheless done a great deal to improve working conditions in developing countries. Companies have made efforts to advance the legal environments in which they operate, including government enforcement mechanisms, and have sought to integrate social responsibility into their business plans at all levels. They have communicated to supplier firms the absolute necessity of complying with ILS and have worked with them to modernize their management systems. Extensive monitoring systems have been established, including the use of outside auditors, and where violations have occurred, MNCs have set up training programs and taken other steps to ensure compliance. These actions by MNCs are not inexpensive, however, and only the largest and most financially stable firms are able to accomplish the full range of tasks set forth above. Achieving compliance with ILS also requires the education of supplier firms so that they understand that providing good working conditions is in their own economic interest. Most important, however, national governments must take responsibility for passing and enforcing laws that uphold core labor standards. Companies can exert only so much pressure along their supply chains, and the effectiveness of the pressure is inversely related to the size and complexity of the supply chain. In addition, the overwhelming majority of workplaces with abysmal labor rights compliance records will not be affected by the efforts of MNCs, no matter how conscientious and successful. Governments must take the lead, and foremost among their actions should be fostering economic development (historically positively related to adherence to labor rights) and ratifying ILO conventions.

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The ILO Declaration on Fundamental Principles and Rights at Work is the basis upon which a strong international regime for monitoring and evaluating countries’ compliance with the core labor conventions should be built. In addition, the ILO is charged with providing technical assistance to those countries needing to improve their compliance record. Ms. Walker argued that this is the ILO’s most important work and that it should include not only help in the areas of administration and inspection, but also assistance in educating and training business in the details of labor laws and in the economic benefits that compliance offers. PATAGONIA, INC. Roger McDivitt, presenter Patagonia is a privately owned designer, marketer, and retail seller of apparel and climbing equipment. It sources its line of apparel from 50 factories located in 20 countries; it does not own any manufacturing facilities and thus outsources its entire production. KEY POINTS Patagonia’s focus on quality and integrity in product manufacture extends to labor rights. Compliance with ILS is incorporated into all aspects of its business. There are too many codes of conduct, and frequently they are geared to the lowest common denominator, local law. Patagonia will not source products from transitional plants (plants with minor problems that they are correcting) because it poses too great a reputational risk. Mr. McDivitt noted that Patagonia always has been very concerned with product quality. Patagonia started out by making climbing equipment, a product where the slightest error in the manufacturing process can result in a climber’s injury or death. This concern with product quality and standards continues today even though Patagonia is now predominantly an apparel marketing company. The corporate ethos is that Patagonia wants to sell high-quality products and it wants them to be produced under accept

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able working conditions. Patagonia’s owner is adamant that the company’s products not be made in sweatshops or under substandard working conditions. Unlike most other apparel companies, Patagonia does not have a separate department or individual responsible for assessing its subcontractors’ compliance with ILS; rather, adherence to ILS is incorporated into its corporate philosophy and all aspects of its business, including production, distribution, and purchasing. The addition of this subjective determination of acceptable working conditions to considerations of pricing, quality, and delivery has not always been easy. In the past, most reporting/monitoring systems in the apparel industry were structured to allow “plausible denial,” but this has now changed. Patagonia’s long-term relationships with its suppliers resulted in an informal and casual monitoring process, but this approach was found wanting, and the company now relies on internal and external monitoring. However, Mr. McDivitt would prefer an industry-wide or universal standard for two reasons: (1) the vast number of codes of conduct and their often slight differences present real problems for factory managers; and (2) Patagonia finds it difficult to impose its standards on factories because of the small production runs that it normally requires. Patagonia’s code of conduct is based on the FLA’s standards, but these are not sufficient in many instances because they are geared to the lowest denominator, that is, factories must comply with a country’s labor laws. On the positive side, the FLA’s standards are specific and easy to measure. In its sourcing decisions, Patagonia has tended to avoid “transitional” plants—those that have had problems (perhaps minor) in the past and are taking steps to address violations—and usually will source only from a factory that is currently being monitored. This is partly a function of size— Patagonia’s small production runs do not give it the same degree of leverage with factories as that of larger apparel and retail companies. With this limited leverage, the company cannot force a factory’s management to address ILS violations because the cost of losing Patagonia’s business is insignificant for any large manufacturing facility. Also included in the analysis is a calculation of the reputational risk involved in sourcing from a plant that may be outstanding in all but one area. For monitoring, Patagonia’s preference is to have an outside or third-party audit every other year, although if a potential problem exists, audits may be scheduled on an annual basis. Unlike most NGOs, Patagonia does not favor unannounced visits because it feels that this inserts a level of distrust into the relationship with factory management.

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TOYS “R” US, INC. Tom DeLuca, presenter Toys “R” Us (TRU) is a publicly traded company that designs and markets toys and operates a chain of 1,600 retail stores, 500 of which are outside the United States. TRU does not operate or own factories but outsources all of its manufacturing; it imports more than $1 billion of toy products each year. Sales for 2001 topped $11 billion. TRU has nearly 60,000 employees. KEY POINTS Complex supply chains make close monitoring almost impossible. Other difficulties include the multiplicity of codes, the cost of monitoring, and the pressure sometimes applied by local governments on factory managers to ignore labor law. TRU is trying to ensure that most product orders have 60-day or more lead times; this will help reduce pressure for excessive overtime at factories. Mr. DeLuca pointed out that the company’s buying and sourcing strategies, mirroring those in the retail industry in general, have shifted during the past 30 years. In the 1970s the most important factor was price; in the 1980s it was price plus quality; and in the 1990s social accountability was added to price and quality. This commitment to responsible management and the urge to be proactive in addressing issues of labor rights problems is made difficult by the fact that TRU’s supply chain is very large and complex; 30,000 different products are produced by 3,000 suppliers in 30 countries. And this includes only the first tier of the supply chain. As an example, Mr. DeLuca cited a single product that sourced inputs from 17 countries. Even though the majority of TRU’s primary suppliers are in China, the supply-chain system is still extremely difficult, if not impossible, to monitor effectively. Mr. DeLuca said that TRU has a corporate code of conduct for suppliers. When a new supplier is being considered or if there is a suspicion that a problem exists in a current supplier factory, an audit, based on TRU’s code

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of conduct, is performed to get a quick picture of the factory’s labor standards. TRU uses an external monitoring group for this type of audit. If TRU intends to establish a long-term and more financially significant relationship, the company requires that the supplier become SA8000 certified. From TRU’s perspective, the main problems with codes are the following: the logistical issues involved with monitoring the entire supply chain; the cost of monitoring, which can quickly spiral out of control when there is a lengthy supply chain; the need to make sure that factory owners understand and accept the standards in the codes; the multitude of codes—60 percent of Fortune 500 companies have codes—which confuses factory owners and results in inaction; and the fact that local and/or national labor law at times is different from the requirements set forth in the codes of conduct. Other challenges faced by TRU include the lack of proper enforcement of labor laws by local and national governments and the pressure from governments on factory managers to ignore or bend certain labor regulations (those on overtime, for example) in order to avoid negatively influencing the country as a destination for foreign direct investment. Finally, those within TRU who are responsible for placing orders from manufacturers are being asked to make sure their orders have a 60-day lead time or more (90 days is preferable). One of the major labor rights problems in toy and apparel factories is the excessive amount of overtime demanded by management. This is often the result of poor planning by factory management, but it is also caused by the ordering cycles of major retailers in the industrialized countries. BUSINESS FOR SOCIAL RESPONSIBILITY Debbie O’Brien, presenter Business for Social Responsibility (BSR) began in 1992 as an association of approximately 50 companies dedicated to helping businesses be both commercially successful and socially responsible. Over nearly a de

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cade, BSR has acquired extensive experience working with businesses and facilitating interaction with representatives of public- and nonprofit-sector organizations. BSR is a nonprofit organization funded by its member companies, which total more than 900 across all industries and sizes. BSR member companies have nearly $2 trillion in combined annual revenues and employ more than six million workers around the world. KEY POINTS Codes have become increasingly effective as companies have devoted more resources to them and have taken steps to integrate them into sourcing decisions. Numerous problems remain, including the fact that there are too many codes and they lack transparency and sanctions. The most serious violations that companies face in supply chains relate to freedom of association and wages and overtime. Companies’ efforts should be focused in part on improving the ability of governments to enforce labor laws and regulations and on encouraging the passage of trade agreements that include “positive” sanctions for compliance, as in the Cambodia–U.S. trade agreement. Ms. O’Brien noted that it has been 10 years since Levi Strauss drafted the first code of conduct covering labor standards, and now there are more than 250 such codes adopted by major brand companies in the footwear, toy, and apparel industries. Over time, the implementation of these codes, in all their detail, has intensified, and the financial resources allocated to monitoring compliance with them have also risen. Of significance is the fact that some companies are now taking steps to integrate compliance with ILS into all aspects of their sourcing decisions. The improved implementation of codes was in part driven by companies’ recognition—brought to the fore by press reports and NGOs—of the extent of violations of ILS in their supply chains. This in turn led to a greater willingness to engage external stakeholders and to collaborate in order to pressure suppliers. Since the early 1990s, the achievements in addressing the issue of labor rights violations have created both more challenges and, not surprisingly,

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more criticisms of the way companies are managing their monitoring and compliance efforts. An enormous number of codes, which tend to vary only slightly in most areas, are being monitored in many different ways. For some factory managers, the variance in monitoring programs is causing as much trouble as the proliferation of codes. The codes themselves have been criticized for what they don’t do: They are not transparent or democratic. They do not include sanctions. They do not extend far enough down the supply chain (that is, they ignore the commodity or raw material end). They do not improve the management systems of suppliers; the factories spend so much time focusing on passing the innumerable audits that they have no time to address systemic issues. They do not include workers and local governments in the process (including local governments would bolster the codes’ enforcement capabilities). Ms. O’Brien noted that among the most common and serious problems in supply chains are violations related to wages and freedom of association. To overcome these problems, companies should take part in improving the capacity of local and national governments to enforce labor laws and the ability of NGOs to monitor them. If companies would also collaborate, this could help surmount the problem for smaller companies, which are not large enough to exert any real influence on supplier factories. Finally, companies should pressure their home country governments to get involved, especially through trade agreements; one excellent example is the trade agreement between Cambodia and the United States, in which the United States has offered the incentive of increased trade if Cambodia respects internationally recognized workers’ rights.