Professional Documents
Culture Documents
Detecting Unethical
Practices at Supplier
Factories: The Monitoring
and Cotnpliance Challenges
Arthur A. Thompson
The University of Alabama
C-462
Starting in the 1990s, companies began countering these criticisms by instituting elaborate codes of
conduct for suppliers and by periodically inspecting
supplier facilities to try to eliminate abuses and promote improved working conditions. A strong program
of auditing labor practices and working conditions in
supplier factories was a way for a company to cover
itself and negate accusations that it was unfairly
exploiting workers in less-developed countries. By
2008, hundreds of companies that sourced goods
from factories in less-developed parts of the world
had instituted strict codes for suppliers and either had
an internal staff to conduct audits of supplier factories
or used the services of recognized third parties with
auditing expertise to inspect supplier factories. Most
companies focused their efforts on improving working conditions at supplier factories, preferring to help
suppliers comply with the expected standards rather
than to impose penalties for violations and perhaps
abruptly and/or permanently cutting off purchases.
However, in November 2006, Business Week ran
a cover story detailing how shady foreign manufacturers were deliberately deceiving inspection
teams and concealing violations of suppIier codes
of conduct. I According to the BllsinessWeek speciaI
report, Ningbo Beifa Group-a top Chinese supplier of pens, mechanical pens, and high1ighters to
Wal-Mart, Staples, Woolworth, and some 400 other
retailers in 100 countries-was alerted in late 2005
that a Wal-Mart inspection team would soon be visiting the company's factory in the coastal city of
Ningbo. Wal-Mart was Beifa's largest customer, and
on three previous occasions Wal-Mart inspectors
Case 26
Detecting Unethical Practices at Supplier Factories: The Monitoring and Compliance Challenges
Exhibit 1
C-463
I
CO';lntry
Brazil
The primary problems in the manufacturing workplace are forced labor, inadequate occupational
safety (work accidents are common in several industries), and wage discrimination (wages paid to
females are 54% to 64% of those paid to males).
China
Factories are most prone to ,ignore minimum-wage requirements, underpay for overtime work,
subject workers to unsafe and unhealthy working conditions, and suppress worker attempts to join
independent unions.
India
The most common issues concern underpayment of minimum wages, overtime pay violations, use
of child labor (according to one estimate some 1'00 million children ages 5 to 14 work and at least
12.6 million work full-time), the use of forced labor (perhaps as many as 65 million people), and
inattention to occupational safety.
Indonesia
The stand-out issues concern weak enforcement of minimum-wage rules and work hours in
factories, overtime pay violations in factories, subpar occupational safety (especially in mining and
fishing), and use of underage labor (particularly in domestic service, mining, construction, and
fishing industries).
Mexico
Problem areas include sweatshop conditions in many assembly plants near U.S. border and
elsewhere, fierce opposition to unions, insistence on pregnancy tests for female job applicants of
Child-bearing age, and use of child labor in non-export economic sectors.
PerL!
The worst workplace conditions relate to lack of enforcement of wage and overtime provisions
in factories, mandatory overtime requirements for many workers, and inattention to occupational
safety.
South Africa
The most frequent offenses entail failure to observe minimum-wage and overtime pay rules
(particularl,y in the garment industry), use of child labor, occupational safety violations (especially in
non-export sectors where outside monitoring is nonexistent), and low pay for women.
The most frequent violations relate to underpayment of wages, forced overtime requirements,
compulsory work on Sundays and holidays, and iFiattention to worker health and safety (such as
excessive noise, blocked exits, and disregard for worker safety-one study found 60% of grain and
spice mill workers lost fingers in work-related accidents and/or contracted skin diseases).
Sri Lanka
Source: Compiled by the author from information in "How China's Labor Conditions Stack Up Against Those of Other Low-Cost Nations,"
BusinessWeek Online, November 27, 2006, www.businessweek.com (accessed January 26, 2007). The information was provided to
BusinessWeek by Verite, a Massachusetts-based nonprofit social auditing and research organization with expertise in human rights and
C-464
Part 2
GROWING USE OF
STRATEGIES TO
DELIBERATELY DECEIVE
PLANT INSPECTORS
The efforts of unscrupulous manufacturers in China
and otller parts of the world to game the plant-monitoring system and use whatever deceptive practices
it took to successfully pass plant audits had foW"
chief elements:
1.
Maintaining two sets of boob-Factories generated a set of bogus payroll records and time
sheets to show audit teams that their workers
were properly paid and received the appropriate overtime pay; the geJ1lline records were
kept secret. For example, at an onsite audit of
a Chinese maker of lamps for Home Depot,
Sears, and other retailers, plant managers provided inspectors with payroll records and time
sheets showing that employees worked a fiveday week from 8:00 a.m. to 5:30 p.m. with a
30-minute lunch break and no overtime hours ;
during interviews, managers at the plant said
the records were accurate. But other records
auditors found at the site, along with interviews
with workers, indicated that employees worked
an extra th.ree to five hours daily with one or
two days off per month during peak production periods; inspectors were unable to verify
whether workers at the plant received overtime
pay.9 According to a compliance manager at a
major multinational company who had overseen
many factory audits, the percentage of Chinese
employers submitting false payroll records had
Case 26
Detecting Unethical Practices at Supplier Factories: The Monitoring and Compliance Challenges
C-46S
C-466
Part 2
FOREIGN SUPPLIER
COMPLIANCE PROGRAMS
AT NIKE AND WAL-MART
Nike and Wal-Mart were two companies with supplier codes of conduct and rather extensive programs
to monitor whether suppliers in low-wage, low-cost
manufacturing locations across the world are complying with those codes. Both companies initiated
such efforts in the 1990s because they came under
fire from human rights activist groups for allegedly
sourcing goods from sweatshop factories in China
and elsewhere.
of C nduct
Case 26
Detecting Unethical Practices at Supplier Factories: The Monitoring and Compliance Challenges
Exhibit 2
C-467
Nike's Code of Conduct for Its Suppliers and Contract lVIanufacturers, 2006
Management practices that respect the rights of all employees, including the right to free association and collective
bargaining
2.
Contractors must recognize the dignity of each employee, and the right to a work place free of harassment, abuse or
corporal punishment. Decisions on hiring, salary, benefits, advancement, termination or retirement must be based solely
on the employee's ability to do the job. There shall be no discrimination 'based on race, creed , gender, marital or maternity
status, religious or political beliefs, age or sexual orientation.
Wherever NIKE operates around the globe we are guided by this Code of Conduct and we bind our contractors to these
principles. Contractors must post this Code in all major workspaces, translated into the language of the employee, and must
train employees on their rights and obligations as defined by this Code and applicable local laws.
While these principles establish the spirit of our partnerships, we also bind our partners to specific standards of conduct.
The core standards are set forth below.
Forced Labor
The contractor does not use forced labor in any form-prison, indentured, bonded or otherwise.
Child Labor
The contractor does not employ any person below the age of 18 to produce footwear. The contractor does not employ
any person below the age of 16 to produce apparel , accessories or equipment. If at the time Nike production begins, the
contractor employs people of the legal working age who are at least 15, that employment may continue, but the contractor
will not hire any person going forward who is younger than the Nike or legal age limit, whichever is higher. To further ensure
these age standards are complied with, the contractor does not use any form of homework for Nike production.
Compensation
The contractor provides each employee at least the minimum wage, or the prevailing industry wage, whichever is higher;
provides each employee a dear, written accounting for every pay period; and does not deduct from employee pay for
disciplinary infractions.
Benefits
The contractor provides each employee all legally mandated benefits.
Hours of Work/Overtime
T,he contractor complies with legally mandated work hours; uses overtime only when each employee ,is fully compensated
according to local law; informs each employee at the time of hiring if mandatory overtime is a condition of employment; and
on a regularly scheduled basis provides one day off in seven, and requires no more than 60 hours of work per week on a
regularly scheduled basis, or complies with local limits if they are lower.
Environment, Safety and Health (ES&H)
The contractor has written environmental, safety and health policies and standards, and implements a system to minimize
negative impacts on the environment, reduce work-related injury and illness, and promote the general heallh of employees.
Documentation and Inspection
The contractor maintains on file all documentation needed to demonstrate compliance with this Code of Conduct and
required laws; agrees to make these documents available for Nike or its designated' monitor; and agrees to submit to
inspections with or without prior notice.
Source: www.n ike .com (accessed January 25, 2007) .
C-468
Part 2
Nike's
factory ratings for SHAPE and M-Audits resulted
in numeric scores ranging from 0 to 100 (a score
Case 26
Detecting Unethical Practices at Supplier Factories: The Monitoring and Compliance Challenges
C-469
Criteria
Isolated violations of standards, but none considered serious or critical; no more than 5 minor
issues outstanding on a factory's master action plan (MAP) for improving working conditions
and achieving higher levels of compliance with Nike's code of conduct
Isolated violations of standards, but none considered serious or critical; more than 5 minor
issues outstanding on the MAP, but none considered serious or critical
Noncompliant with serious failures and making little progress in remedying them. Examples of
C-Ievel issues include:
Factory does not provide basic terms of employment (contracts, documented training on
terms, equal pay, discriminatory employment screening).
More than 10 percent of employees work between 60 and 72 hours each week.
More than 10 percent of employees work seven or more consecutive days without a break.
Noncompliant; general disregard for Nike's code of conduct; and evidence of deliberately
misleading auditors. Examples of D-Ievel issues and problems include:
Factory fails to provide verifiable timekeeping system to accurately record work hours.
More than 10 percent of employees work more than 72 hours each week.
More than 10 percent of employees work 14 or more consecutive days without a break.
C-470
Exhibit 3
Part 2
Summary of Nike's Audits of Supplier Factories, Fiscal Years 2003 and 2004
Geographic Region
Americas
Europe, Middle
East, Africa
Northern Asia
Southern Asia
Worldwide Total
Number of SHAPE*
audits in 2004
178
157
378
303
1,016
Number of M-Auditst
in 2003 and 2004
148
56
198
167
569
46
78
94
49
70
96
25
58
95
20
58
95
20
65
99
32
64
18
5
18
15
40
7
35
7
34
147
33
14
22
25
76
65
8
70
M-Audit numeric
scores in 2003-2004
Lowest score
Average score
Highest score
Compliance ratings
for contact factories
as of June 2004
Grade of A
Grade of B
Grade of C
Grade of 0
Grade of E
106 (15%)
327 (44%)
123 (17%)
62 (8%)
117(16%)
*SHAPE audits were a monitoring tool used by Nike since 1997 and provided a basic gauge of a factory's compliance performance.
tM-Audits, NiKe's main auditing tool in 2003-2004, provided a deeper assessment of a factory's management practices. Worker population in M-Audited factories was 375,000 in fiscal year 2003 and 213,000 in fiscal year 2004.
Source: Nike's 2004 Corporate Responsibility Report, pp. 20, 34, and 35.
Case 26
Detecting Unethical Practices at Supplier Factories: The Monitoring and Compliance Challenges
Exhibit 4
C-471
Summary Results of Nike's Audit Grades for Contract Factories, Fiscal Years
2005-2006
Factory Rating Trends FY2005
Jun 04
Jul 04
Aug 04
Sep 04
Oct 04
Nov 04
Dec 04
Jan 05
Feb 05
Mar 05
Apr 05
May 05
300
B
(\
"-
250
'-
~ -- ~
.0
""""
200
J'I.
150
100
C
A
><
I~
J\.
50
';!
-"' v
O.
-0-"'" ~
.r.
-' I
J\.
-"
~ .J
Jul05
Aug 05
Sep 05
Oct 05
Nov 05
Dec 05
Jan 06
Feb 06
Mar 06
Apr 06
May 06
300
-0
1\
250
B
200
150
._1'....- ~
~ I-'""'"
~v
..0
J>.
l)
0--1"""
0.-
J;
~
0-
-v
100
50
1 1-
r-o-
.J\
J' ,
v
Note: Of the 42 M-Audits that Nike conducted through fiscal year 2006, 7 supplier factories re.ceived a grade of A and 13 factories
received a D rating; Nike found the two big drivers of noncompliance were ignorance of the law or Nike standards and a lack of systems
to manage people and processes.
Source: Nike fiscal year 2005-2006 Corporate Responsibility Report, pp. 30 and 31 .
Part 2
C-472
oni
in
Case 26
Detecting Unethical Practices at Supplier Factories: The Monitoring and Compliance Challenges
C-473
C-474
Part 2
Exhibit 5
Opening Meeting-The Opening Meeting consisted of (1) confirmation of the factory and its information, (2) an
introduction by the Wal-Mart auditors to factory management and supplier representatives, (3) a presentation and
signing of the Wal-Mart Gifts & Gratuity Policy (which forbids any offer or receipt of gifts or bribes by the factory or
the auditor), and (4) a request by the auditors of factory documentation related to personnel, production, time and
pay records.
FactoryTour-The auditors conducted a factory walk-through to examine factory conditions. The walk-through
Ilad minimal factory managers present because auditors asked production employees questions about machinery
operation and other working conditions. Auditors also followed up with workers interviewed in previous audits
about conditions since the last audit. The tour lasted up to three hours, depending on the size of the factory.
Worker Interviews-During factory tours, auditors typically choose workers off the shop floor to interview,
although additional workers could be requested to verify factory records during the documentation review
process. Factory management had provide a private location for interviews, and under no circumstances were
interviews conducted with factory management or supplier representatives present. Workers were interviewed in
same-sex groups. The objectives of the interviews were to discover what interviewees had to say relevant to the
audit, verify findings and observations made by the auditors, and ensure that workers understood their rights. A
minimum of 15 workers were interv,iewed. The number of workers interviewed depended on the size of the factory.
Factory Documentation Review-Auditors conducted an on-site inspection of payroll records, time cards,
personnel files, and other pertinent production documents. For Initial and Annual audits, document review required
records dating back at least three months and up to one year. Follow-up audits not only included reviewing findings
from the previous audit, but also always included review of hours and compensation. Any factory that failed or
refused to comply with this requirement was subject to immediate cancellation of any and all outstanding orders.
Closing Meeting-Auditors summarized the audit findings, described any violations found, made
recommendations to remedy the violations, and gave factory management a chance to ask any questions
about the audit. Factory management and the auditor both signed the on-site audit report. Auditors left a
copy of the signed audit findings and recommendations. Factory management was expected to act on all the
recommendations in the on-site report and to present a completed action plan to the auditor during, the follow-up
audit opening meeting so auditors could validate that the actions were taken. Suppliers and factory management
were encouraged to contact the regional Wal-Mart Ethical Standards office to discuss any concerns or questions
about The on-site report and recommendations.
Starting in 2006 , Green-rated factories had re-audits every two years instead of annually. Yellow- and Orange-rated
factories had follow-up audits after 120 days to allow time for corrections and verification that corrective actions
had been implemented. Factories rated Orange with underage labor violations for only one or two workers were an
exception to the timeline for re-audits; such factories were re-audited within 30 days. If the follow-up audit for these
factories indicated that the use of underage labor had been corrected, the factory could continue production for WalMart; a failure on the follow-up 30-day audit resulted in a Red rating and a permanent order ban. A factory receiving
an Orange assessment four times in a two-year period was banned from producing for Wal-Mart for up to one year
(the ban on orders for such factories was extended from 90 days to one year starting January 1, 2005, in order to
strengthen the seriousness of program noncompliance) .
Use of Outside Auditors-When Wal-Mart sourced goods for its foreign stores from suppliers in the same country
in which the foreign stores were located, it used outside auditors to check supplier compliance. In 2005-2007, the
outside auditing firms performing audits for some supplier factories included Accordia, Bureau Veritas, Cal Safety
Compliance Corporation (CSCC), Global Social Compliance, Intertek Testing Services, and Societe Generale de
Surveillance.
Source: Wal-Mart's Report on Ethical Sourcing, 2005 and 2006, posted at www.walmart.com (accessed January 25, 2007, and
September 18, 2008).
Case 26
Detecting Unethical Practices at Supplier Factories: The Monitoring and Compliance Challenges
Exhibit 6
C-475
Comparison of Wal-Mart's Factory Audit Results for 2004, 2005, and 2006
I
Total number of factory audits
Number of factories audited
Audits resulting in Green ratings
(re-audited after 2 years)
Audits resulting in Yellow ratings
(re-audited after 120 days")
Audits resulting in Orange ratings
(re-audited after 120 days)
Audits resulting in Orange-Age
ratings (re-audited after 30 days)
Factories disapproved for
producing for one year-four
Orange assessments in a
two-year period
Audits resulting in Red ratingsfactories permanently banned
from receiving orders
2004
2005
2006
19.1%
9.6%
5.4%
38.8%
37.0%
51.6%
32 .5%
52.3%
40 .3%
0.8%
0.4%
0.1%
164 (141 of these
related to the use of
underage labor)
2.1%
8.8%
0.8%
0.2%
'In 2007. the re-audit period forYel/ow-rated factories was changed to 180 days.
Source:Wal-Mart's Report on Ethical Sourcing, 2005 and 2006. www.walmmt.com (accessed January 25.2007. and September 18,
2008).
COMPLIANCE EFFORTS OF
INDUSTRY GROUPS AND
NONGOVERNMENTAL
ORGANIZATIONS
Some companies, rather than conducting their own
supplier monitoring and compliance effort, had
banded together in industry groups or multi-industry
coalitions to establish a common code of supplier
C-476
Part 2
The F or Lab
A sociatioD
They often hide original documents and show monitors falsified books."26
In its 2006 public annual report, the FLA said
that accredited independent monitors conducted
unannounced audits of 99 factories in 18 countries
in 2005; the audited factories employed some 77 ,800
workers. 27 The audited factories were but a small
sample of the 3,753 factories employing some 2.9
million people from which the FLA's 35 affiliated
companies sourced goods in 2005; however, 34 of
the 99 audited factories involved facilities providing
goods to 2 or more of FLA's 35 affiliated companies. The 99 audits during 2005 revealed 1,587 violations, an average of 15.9 per audit. The greatest
incidence of violations was found in Southeast Asia
(chiefly factories located in China, Indonesia, Thailand, and India), where violations averaged about
22 violations per factory audit. As was the case with
the audits conducted in 2004, most of the violations
related to health and safety (45 percent); wages,
benefits, hours of work, and overtime compensation
(28 percent); and worker harassment and abuse
(7 percent). The FLA stated in its 2006 report that
the violations relating to compensation and benefits
were likely higher than those detected in its 2005
audits: "Factory personnel have become accustomed
to concealing real wage documentation and providing falsified records at the time of compliance audits,
making any noncompliances difficult to detect.,,28
In its 2007 public annual report, the FLA said
that accredited independent monitors conducted
unannounced audits of 147 factories in 30 countries
in 2006; the audited factories employed some
110,000 workers.29 The audited factories were but a
small sample of the 5,178 factories employing some
3.8 million people from which the FLA's affiliated
companies sourced goods in 2006; however, 24 of
the audited factories involved facilities providing
goods to 2 or more of FLA's affiliated companies.
The 147 audits during 2006 revealed 2,511 violations, an average of 17.1 per audit. Over 80 percent
of all the reported violations were in Asian countries;
there was an average of 37.4 violations per factory
visited in South Asia. Most of the 2006 violations
related to health and safety (46 percent); wages,
benefits, hours of work, and overtime compensation
(30 percent); and code awareness (9 percent). Once
again, the FLA stated in its report that the violations
relating to compensation and benefits were likely
Case 26
Detecting Unethical Practices at Supplier Factories : The Monitoring and Compliance Challenges
if
tori
ringh
C-477
THE OBSTACLES TO
ACHIEVING SUPPLIER
COMPLIANCE WITH
CODES OF CONDUCT IN
LOW-WAGE, LOW-COST
COUNTRIES
Factory managers subject to inspections and audits
of their plants and work practices complained that
strong pressures from their customers to keep prices
low gave them a big incentive to cheat on their compliance with labor standards. As the general manager
of a factory in China that supplied goods to Nike said,
"~y improvement you make costs more money. The
pnce [Nlke pays] never increases one penny but compliance with labor codes definitely raises costs.,,32
The pricing pressures from companies sourcing
components or finished goods from offshore factories in China, India, and other low-wage, low-cost
locations were acute. Since 1996, the prices paid for
men 's shirts and sweaters sourced in China were said
to have dropped by 14 percent, while the prices of
clocks and lamps had dropped 40 percent and the
prices of toys and games had fallen 30 percent. 33
Such downward pressure on prices made it financially difficult for foreign manufacturers to improve
worker compensation and benefits, make their workplaces safer and more pleasant, introduce more efficient production methods, and overhaul inefficient
plant layouts. Many factory managers believed that
if they paid workers a higher wage, incurred other
compliance costs, and then raised their prices to
cover the higher costs that their customers would
qU.ickly cut and run to other suppliers charging lower
pnces. Hence the penalties and disincentives for
compliance significantly outweighed any rewards.
The CEO of the Fair Labor Association, Auret
van Heerden, in a 2006 interview with Business Week
offered a number of reasons why underpayment of
wages and excessive overtime in supplier factories in
China were such difficult problems to resolve:
The brands book and confirm orders really late. And
they often change their orders after booking. The
brands want to order later and they don 't want to hold
C-47S
Endnotes
I. Dexter Roberts and Pete Engardio, "Secrets, lies, and Sweatshops;'
Business Week, November 27, 2006, pp. 50-58.
2. Ibid., p. 50.
3 lbid.
4. www.chinatownconnection.com(accessedSeptember 17, 2008).
5. Judith Bannister, "Manufacturing in China Today: Employment and
Labor Compensation," Conference Board, November 2007, p. 22.
6. Roberts and Engardio, "Secrets, lies, and Sweatshops," p. 54.
7. Ibid., p.54.
Blbid., p. 50.
9. Ibid., p. 55.
10lbid., p. 53.
II. Ibid., pp. 55-56.
12. Ibid., p. 53.
13. lisa Roner, "Wal-Marl's Ethical Sourcing: Green Does Not Mean
Ethical," October 19, 2007, www.ethica lcorp.com (accessed
September 22, 2008).
14. Nike FY2005-06 Corporate Responsibility Report, www.nike.com/
nikebiz (accessed September 19, 2008), p.28.
15' lnformation posted at www.nikebiz .com (accessed on January 26,
2007): Nike's 2004 Fiscal Year Corporate Responsibility Report,
pp.21-24.
16. Nike's 2004 Fiscal Year Corporate Responsibility Report, p. 28.
17lbid., p.29.
lB. Ibid., p. 20.