Global Front - May 2006

Best Practices in Supplier Codes of Conduct

Q: Our company is assessing the pros and cons of establishing a code of conduct for our supply chain in China and other foreign markets. Although our industry has been relatively slow in this effort, we are starting to feel pressure from certain stakeholders to move forward. But our management is concerned about publicly committing to such a code when we can’t be sure we can enforce it. Can you suggest some best practices in setting up and monitoring a supplier code? How can we ensure our factories will comply with it?
-C.S. in St. Louis

A: You’re right to recognize your company’s lateness to the field. No longer considered a leadership practice, supplier codes of conduct and monitoring have been de rigueur in many industries, notably footwear and apparel manufacturing, for well over a decade.

Moreover, the Internet now exposes the behavior of your suppliers more than ever, so the widespread denial of worker rights that we’re seeing in China and elsewhere these days will only cause stakeholders to become more vigilant.

That said, some industries, confused about how to approach it, have yet to engage. And of those already active, frankly, most still deploy code monitoring to defend their brands against outside criticism. Relatively few companies have actively pursued meaningful improvement of worker conditions.

There is no secret to the contents of supplier codes. Most are derived from relevant conventions of the International Labour Organization, and typically cover such issues as child and forced labor, wages, working hours, benefits, health and safety, etc. (Some codes, such as those offered by Social Accountability International (SAI) and Ethical Trading Initiative, also actively support more aggressive standards like living wages and freedom of association.) 

The much bigger challenge is aligning all of the departments and business practices of your company behind the standards you choose. Too often, companies’ sourcing practices, such as short lead times and the constant changing of suppliers, lead to the very problems of unpaid overtime and other unfair conditions that their compliance staffs are trying to correct at the factories, says Dan Viederman, executive director of Verité, a leading non-profit workplace auditing and remediation organization. The best companies, therefore, make sure their procurement policies – from design and production to staff compensation – support the code and don’t undermine it.

Continual Improvement

Unfortunately, there is no set of widely accepted standards in the supplier audit process. Violations, as well as the tools to improve conditions, vary in every industry and country. So create a system that’s relevant to your supply chain. Your sole guidepost in devising that system, Viederman advises, should be whether it leads to continual improvement in the workplace. One common best practice is the effective use of worker interviews to gather information on conditions. Key audit topics such as wages and hours, harassment and discrimination, and freedom of association depend heavily on candid worker input, and the most effective processes use various techniques to make workers feel safe to speak. So look for an interview process by trained auditors – whether conducted by internal or external resources – that produces meaningful results. Not all do. 

Another leading practice is collaboration within an industry to develop a standard code, audit process and remediation procedures relevant to a common pool of vendors. Standardization helps reduce company costs, but more importantly the “audit fatigue” and duplication for vendors who face many masters. One instructive model is the two-year-old Electronic Industry Code of Conduct, which provides a single end-to-end process and toolset for assessing risk, improving performance, reporting audit results and building supplier management capacity. “It just doesn’t make sense to audit the same factories over and over again,” says John Gabriel, manager of supply chain social responsibility at IBM, one of 16 EICC members. For consumer brands and retailers, both Fair Factories Clearinghouse and Sedex (for Suppliers Ethical Data Exchange) offer systems to manage and share non-competitive information about workplace conditions.

Social Compliance Management Systems

As the EICC model suggests, the best companies are moving away from a perfunctory “policing” approach to compliance toward a consultative engagement with suppliers. Most developing countries have appropriate laws on the books that simply aren’t enforced or understood by suppliers. So awareness programs, including guidebooks on labor and environmental laws, clear communications on code requirements, toolkits to help prepare vendors for audits – and then assistance to devise “management action plans” to correct specific violations – can go a long ways toward compliance.

Another key lesson from compliance veterans: Avoid the knee-jerk temptation to “cut and run” from contractors when they commit repeated violations. Their remediation will almost always be slower than you like. But as long as they are making progress, it usually outweighs the devastating loss of jobs by needy workers from a hasty departure.

Ultimately, compliance is only sustainable if you can help suppliers build management systems that inherently comply with standards and obviate the need for enforcement at all. For example, an effective grievance system that regularly arbitrates and resolves the causes of manager-worker disputes can greatly reduce post-audit remediation. A pioneer in the field, Levi Strauss & Co. often identifies model vendors demonstrating such best practices, and then convenes other suppliers to hear first-hand how to adopt them. Likewise, IBM sponsors country workshops to teach local suppliers how to improve their management of critical issues. “If you can teach management to operate more effectively, you shift their thinking about workers from disposable commodities to people worth investing in,” says Levis Strauss vice president Theresa Fay-Bustillos. “Then they start to take responsibility for their own behavior rather than be policed by auditors.”  The SAI’s SA8000 social standard is leading a nascent trend in certifying facilities that adhere to ethical management systems.

Beyond Enforcement

Finally, don’t rely only on enforcing your code of conduct to achieve good supplier behavior. Also consider the positive reinforcement of incentive-purchasing programs that reward suppliers for meeting social and environmental standards, such as one devised by Starbucks for its coffee growers. You may also want to tackle inequities at the civil level by advocating for local policies that address poverty, corruption, human rights and law enforcement. Other leaders like Levi Strauss and Timberland offer life-skills training, micro-finance opportunities and worker-rights training through NGO partners that imbue workers with greater confidence to stand up for themselves. “There’s no silver bullet to compliance – a whole series of things has to happen to make improvements sustainable,” says Fay-Bustillos. “You can’t do without code enforcement, but auditing alone will never change behavior. It only encourages vendors to do just enough to avoid getting caught.”