image: Zara

image: Zara

Of significant concern to those with an eye on liability issues is the standard industry practice (a term which does not indicate either a legally or morally correct one) of retailers implementing a home country ‘Code of Conduct’ stating that overseas suppliers must be in compliance with their local country health, safety, environmental and labour laws while being fully aware that many suppliers simply are not. This is the epitome of hypocrisy yet day in and day out brands who swear by the strength of their codes to critics at home follow this practice.

As those on the manufacturing side of the business will know social or labour audits (the terms are generally interchangeable) focus on a range of management practices and adherence to any combination of legal requirements, internationally adopted standards or those mandated by brand compliance. Most audit systems will then rank the results, referred to as findings in audit-speak, in terms of their risk or severity; low, medium and high for example or minor, medium, major and critical.

Typically major or critical risk findings are tied to clearly defined legal requirements in the country of production. Or at least they should be. Any resulting non-compliances, audit-speak for practices which break local law, are then summarized and provided to the factory and back to brand or retail clients with a recommended Corrective Action Plan or CAP.

A CAP will typically provide a calendar, against which the facility should or must, depending on the severity of the code of conduct, take corrective measures to become compliant. Again, this means the time by which they should commit to then becoming a facility operating with due regard to the laws of the country where they operate. To spell this out even more clearly, it is the time a brand or retailer accepts or allows that their vendor factory will continue operating illegally.

Minor issues say, an incomplete first aid kit, might be given a week to correct. More significant findings which may require time and money to improve, perhaps a missing fire escape or widening a stairwell, might take a month or more to address. Missing operating licenses or incomplete environmental impact assessments which are a common occurrence across many offshore production countries, take considerably longer.

As an example from the recent thousands of follow up audits at factories in Bangladesh following the tragic collapse of the Rana Plaza facility there in 2013, an overwhelming number of facilities were found to be operating without fire safety licenses, occupancy certificates or construction approval permits. All the while Western brands were churning out millions of dollars worth of apparel exports.

Policies vary from client to client as to when and whether orders may continue to be placed and produced while these ‘non-compliances’ are corrected before a re-audit takes place to verify the corrections. Having worked with, for and on behalf of some two dozen brands over the past eighteen years I can say without a doubt that most of them allow business to continue as usual in the majority of circumstances.

There are certainly at most buying organizations a short list of cardinal rules which would immediately halt orders or prohibit them from being placed. Typically these are out-and-out child labour, forced labour under slavery conditions or fully locked-down facilities which fail to ensure any ease of escape in case of fire, earthquake or other emergency situations. Short of these many brand and retail customers allow for ongoing orders within the timeframe of a corrective action plan. This may be news to the average consumer and those outside of the industry but it is no secret to those in sourcing, compliance or legal teams at retail HQs.

More nefarious is the realization that this practice allows brands and retailers to profit from ongoing illegalities throughout the CAP time line. To arrive at such an assumption one only has to examine the reasons behind why factories continue in their non-compliant ways. I say continue of course because the average offshore apparel facility is audited upwards of two dozen times per year, often by the very same auditing firm, for a variety of client codes and programmes. Chasing corrective action plans is a game with often tragic consequences.

By looking at the specifics of what type of legal and code infractions occur most frequently one quickly gets to the gist of the matter. A typical labour / social audit which examines a host of health, safety, human resource, environmental, payroll and business operational issues might run 300+ questions or data collection points. These are grouped into logical categories for tabulation and scorecarding. By far the two areas of most frequent non-conformity address;

1. Wages & working hours including mandatory deductions for benefits, and

2. Health & safety issues ranging from low to medium risk.

That is not to say that more significant issues are not common, simply that statistically speaking these have been the largest and most problematic areas for a number of reasons. The single largest driver of these issues is cost. Overtime pay, holiday pay, days off, social insurance benefits, medical benefits, maternity leave, etc all carry a direct cost to the factory which manufacturers in Europe or North America or countries with robust implementation of the law are fully obliged to pay. The same holds true for safety system expenses for proper fire sprinklers, extinguishers, firefighting equipment, escapes, stairs, fire doors, etc.

Thus, in order to remain competitive with a host of other developing countries in a brutally cut-throat industry where an overabundance of factories exist, suppliers simply fail to invest in proper systems and pay practices which would price them out of the market. Many brands and retailers know this and are fully aware of the deficiencies at factory level because the vast majority of them audit on an ongoing basis. They then put in place corrective action plans which allow for ongoing cycle of audit and re-audit all the while realizing financial benefits because of these gaps in health, safety, labour, environmental and business practices.

If, as is being proposed here, these gaps are legal infringements and these financial benefits are realized across international borders then the question might legitimately be raised, ‘is this not transnational crime?’ To date few labour or civil society groups have dared to take this issue on, in part because they lack the financial resources to do so. In part also because of the difficulty in gaining access to documentary evidence to support such claims and importantly, of finding legal jurisdictions willing to allow such cases to be tried.

In some retailer home country jurisdictions knowledge of supplier illegalities may well pose potential issues for publicly listed companies. An argument could be made in the Canadian province of Ontario for example that under Ontario Securities Commission rules for Continuous Disclosure obligations any undue risks to business operations should be publicly declared to markets and shareholders.

It is not a huge leap to assume that the use of supplier factories in foreign jurisdictions which are in breach of health, safety, environmental, labour or human rights laws may well pose significant undue risks to a business. If management is aware and being kept in the loop, why shouldn’t shareholders and investment funds be as well? This may well provide further justification for the public disclosure of factory audit findings. After all as the progressive jurist Justice Louis Brandeis of the U.S. Supreme Court has often been quoted as saying “sunlight is said to be the best of disinfectants”.

Michael Lavergne is a supply chain risk management professional with over 15 years of multinational apparel industry experience. He has worked in Asia, Latin America, The Middle East, EU and North American markets with Kellwood Brands, Bureau Veritas Hong Kong, Sara Lee/Champion, WRAP Compliance, Tabi Canada and Joe Fresh International. The preceding is an excerpt from his book ‘FIXING FASHION: Rethinking the way we make, market and buy our clothes.’