By Adam Carrel
A minimum threshold of rights for all human beings is one of the great unrealized ambitions of the post-War era. Despite the enormous efforts of multilateral and grassroots institutions to make the United Nations Declaration of Human Rights a basic unifier across all nations, huge disparities still remain between populations, ethnicities and genders around the world.
It is a little surprising, then, that for many companies, there has been no shortage of certifiers willing to confirm that their developing country-based assets and contractors meet a minimum standard of human rights almost regardless of where they’re situated. This is not to suggest that certifying agencies have been willingly misrepresenting the effectiveness of corporate human rights programs but rather that the criteria on which human rights (or ‘social compliance’) is based has been overly simplistic.
In no instance has this been more apparent than that of the tragic collapse of the Rana Plaza Garment Factory last year, which cost more than 1,000 lives with many more injured. One striking aspect of the Rana Plaza collapse was that despite the factory and its management being demonstrably unaligned to even the most unambitious social compliance program, the factory had somehow survived the scrutiny of some of the leading social compliance policies in the apparel sector.
The global supply chain is vast, and one factory collapse, however tragic, does not itself confirm a systemic flaw in the mainstream approach to social compliance. However, Rana Plaza was only the worst in an escalating frequency of factory-based tragedies that has prompted widespread introspection within industry regarding the meaningfulness of prevailing approaches to social compliance. The effect of Rana Plaza was to push into the public domain the question of whether social compliance programs are achieving their stated objectives and, maybe more importantly, driving substantive improvements.
The effectiveness of social compliance programs will become an important consideration for corporate legal counsels and other officers managing the liabilities of corporations in the years ahead. We are quickly reaching a point where the production of a factory certification will no longer be indicative of an adequate effort to protect workers in company supply chains or to manage brand risk on behalf of shareholders.
Evaluating this risk is particularly important for those companies whose approach to social compliance draws on the standard supplier-funded, out-sourced model of social compliance as opposed to those (and there are several) who have looked to develop more innovative, hands-on relationships with producing factories. Many leading brands went back to the drawing board years ago to begin to remedy what, within industry, have been broadly shared concerns regarding the effectiveness of the mainstream approach. These concerns may be summarized as:
- A checklist approach to social compliance auditing that is skewed towards the detection of clerical errors and health and safety questions with ‘yes/no’ answers. Such approaches often fail to assess the actual health and safety culture within an operation or the root causes that underpin non-compliances.
- Too many criteria to allow companies the opportunity to meet a minimum standard of compliance.
- A limited appetite of auditors to look beyond their audit protocols to pursue suspicions of fraudulent or inaccurate representations on the part of factories and factory agents. These commonly include doctored books, undisclosed out-sourcing and coaching employees in their responses to auditor questions.
- Limited stakeholder engagement beyond factory walls to obtain an independent picture of factory conditions.
- Tolerance of agents and intermediaries providing incomplete factory listings to downstream companies.
- Social compliance standards that have not been updated to reflect the changing demographics of labor forces, i.e. Bangladesh vs. China.
- Procurements processes that may make it possible for company personnel to circumvent the social compliance standard and raise purchase orders for factories that have not had their human rights status assessed.
In terms of building off these acknowledged flaws, the following attributes are likely to be increasingly common within leading companies and those looking to reduce their exposure to future legal and reputational controversy:
1. Companies need to use third party certifiers and auditors more strategically.
One of the reasons why the social compliance industry has become so commoditized is that the cost of assessing every factory for some companies can be enormous. If the average code of conduct audit provided surety of compliance then this might still be worth it, however the fact that the present approach to certification has been shown to hide a multitude of sins means companies need to re-consider if this is money well spent.
While it is still important that every factory is assessed against uniform criteria, if the value currently added by outsourcing this to a verification agency is limited, companies could consider training their own quality assurance personnel to perform these assessments themselves. Quality assurance personnel are typically required to visit many producing factory locations anyway and typically also have a strong sense of what poor performance looks like.
Naturally the credibility of any company’s social compliance program is still predicated on third party validation, and with the money saved in internalizing the ‘check box’ component of social compliance, third parties can be engaged to perform more meaningful risk-based assessments. Such assessments should cover a large and representative sample of a company’s factory base, be executed by more experienced practitioners and their scope should be expanded to cover the root causes behind the physical indicators of non-compliance.
2. Procurement systems need to be tightened to escalate the approval process to management before orders can be placed with factories that have not had their social compliance status assessed.
Many companies already possess systems that disallow the generation of a purchase order without someone signing-off on the social compliance status of factories and this practice, if implemented broadly, could become a new minimum standard across industry.
3. Agents and intermediaries need to be brought in line with the social compliance expectations of retailers.
The rise of major — primarily South China-based — agents and intermediaries has removed much of the knowledge retailers had of the factories producing their goods. The representations of these intermediaries regarding social compliance should not be taken at face value given the growing evidence of undisclosed suppliers and subcontracting within intermediaries supply bases.
4. Corrective Action Plans (‘CAPs’) need to pursue cultural as well as visual change.
Improving health and safety outcomes is as much about driving behavioral change on the part of management and employees as it is improving the quality of physical apparatus. All too often CAPS are cleared on the basis of photographic evidence of a physical improvement (i.e. an unblocked exit or an illuminated exit sign) without any evidence of the development or enhancement of the management systems that should be pursuing continuous improvement in health and safety outcomes. Accordingly such physical improvements often lapse into non-compliance once manufacturing has actually commenced at that facility.
In all the soul searching that has followed Rana Plaza, two more obvious truths are finally receiving the appropriate acknowledgement:
1. Corporate commitments to human rights and vast and opaque supply-chains are mutually exclusive.
Once the tide of public and regulatory opinion mandates tangible improvements in the conditions of developing country supply chains one thing this will have to entail is consolidated factory bases with which retailers maintain more direct relationships. Only in this context will factories possess a sufficient incentive to invest in more than just cosmetic improvements and will retailers be in a position to see corrective action plans through to a sustainable conclusion.
2. Retailers are going to have to start a conversation with consumers regarding the price of human rights.
The economic models, particularly in the realm of ‘fast fashion’, are predicated on consumers buying higher volumes of lower priced items, and the relative low price of the goods themselves are predicated, often in large part, on the cheapest labor from the poorest of countries. As such, financing sustained improvements in human rights and working conditions may ultimately have to be financed by consumers paying a higher price for a higher standard of ethics. Articulating the merits of this premium to a presently under-informed consumer base will be a major challenge for industry as it tries to improve human rights issues in the global supply chain.
Image credit: Flickr/ setca_bbtk
Adam Carrel is a Senior Manager with EY’s Climate Change and Sustainability Services practice specializing in environmental, social and governance (ESG) concerns, in particular as they relate to multinational corporations. Carrel has a breadth of experience consulting on ESG matters in his native Australia and internationally with a recent focus on South East Asia and the Americas. His work commonly involves working with major international corporations in optimizing their approach to environmental management, community and government relations and corporate communications. Additionally Carrel has extensive experience supporting the sustainability reporting of Ernst & Young’s clients, either through assisting with the development of sustainability reports or by auditing their disclosures.