What Brands Can Do to Monitor Factory
Conditions of Suppliers
For better or for worse, it’s fallen to
multinational corporations to police the overseas factories of suppliers in
their supply chains—and perhaps make them better. Michael W.
Toffel examines how.
They keep on coming—corporate scandals
involving revelations of deplorable working conditions at overseas factories.
If it’s not the Foxconn factories that Apple employs in China, then it’s Gap’s
garment workers in Bangladesh.
When industrial accidents or poor working
conditions occur in the United States or Europe, usually there is a cry for
more regulatory enforcement—along with an ensuing debate about how much
government is enough (or too much). When such incidents happen overseas,
however, the blame—and responsibility for change—usually falls to the brand-name
multinationals that contract out the work.
“In a sense, global supply chains are serving
a regulatory function, with companies imposing an additional layer of rules and
investing resources to enforce them,” says Harvard Business School Professor
Michael W. Toffel, who researches health and environmental standards in the
United States and overseas. “I don’t think Nike or Levi’s relishes this role,
but in the context of weak government regulatory regimes, it’s these companies’
brand reputations that are on the line when problems are found in their
suppliers’ factories.”
Grudgingly or not, multinational brands have
taken up the mantle of responsibility, establishing codes of conduct that their
suppliers are—theoretically at least—obligated to adhere to. Often, the brands
also monitor their suppliers’ performance with periodic inspections by
third-party auditors. Beyond that function, however, it’s unclear what the
brands should be doing with the information. “There’s an ongoing debate as to
whether these audits are simply snapshots to figure out the facts on the ground
so multinationals can vote with their feet and choose factories with better
performance or whether the audit findings are meant to stimulate improvement,”
Toffel says.
Making matters more difficult, it is
oftentimes unclear to companies how to gauge the quality of an audit, or how to
find factories with better performance records before spending millions of
dollars in a country. On the other hand, if companies are committed to staying
with their suppliers and helping them improve, how can they know whether these
factories will follow through?
In a series of studies, Toffel and several
colleagues have strived to answer these questions—which carry enormous weight
for companies doing business overseas. Get them wrong and brands risk doing
business with suppliers that treat their workers terribly—and in the process,
risk damaging their own reputations. At the same time, by helping shine a light
in these areas, Toffel says he hopes this research might help overseas labor
conditions improve, either by rewarding the factories that treat workers
better, or by helping those with problems learn how to clean up their act.
Uncovering Bad Factories
All three studies were made possible by a
social auditing company providing Toffel with data on more than 40,000
inspections in 66 countries that its auditors had conducted over several years.
The first study, titledCodes
in Context: How States, Markets, and Civil Society Shape Adherence to Global
Labor Standards and published in the journal Regulation
& Governance, was authored by Toffel, UC Hastings Law Professor Jodi L. Short,
and former HBS research associate Melissa Ouellet. The study began by asking
what factors in a country were associated with better working conditions in its
factories. Many countries, for example, sign international labor treaties
promising to uphold certain workplace standards. Labor observers, however, have
long wondered whether those treaties represent better working conditions on the
ground, an aspiration to improve conditions, or an attempt to merely deflect
international criticism about the countries’ human rights records.
In fact, the researchers found that the
treaties corresponded to better factory conditions. For each international
labor treaty a country signed, its factories had 12 percent fewer violations,
on average. In other words, the more labor treaties a country signs, the more
likely it will live up to its promises.
Another factor that had a significant effect
on factory performance was the degree of freedom of the press in the country.
To measure this, the researchers used a scale of 0 to 100 as scored by the
nonpartisan press rights organization Reporters Without Borders. They found
that for every 10-point increase in the press rights score, countries averaged
nearly 10 percent fewer violations in their factories. The team attributes this
relationship to factories being more concerned about having their poor
conditions exposed. In other words, the more concerned they are, the more
likely they have more incentives to maintain better conditions.
“Press freedom empowers journalists and labor
activists to investigate and publicize poor working conditions at factories,”
says Professor Short. “This type of monitoring by private civil-society actors
can be particularly valuable in countries where government labor inspection
agencies are weak.”
That finding in particular may be helpful not
only to a company looking to choose a country for its overseas production,
Toffel says, but also for NGOs and governments interested in improving
conditions. “It suggests that development agencies looking to improve workplace
conditions should be thinking not only about training workers at particular
factories, but also [about how they] might invest in increasing press freedom
as an unexplored opportunity.”
While these general factors might help a
company decide in which country to invest its production, of course different
factories will have different track records—so it’s important to look at
individual audits. But how can a multinational brand be sure that it is getting
accurate information, and that the auditors aren’t themselves biased, corrupt,
or incompetent, leading them to miss or sweep violations under the rug during
inspections?
“We assume that most clients want the
auditors to tell them the unvarnished truth,” says Toffel. “Obtaining accurate
information from these auditors is critical to enable brands to manage this
risk.”
Toffel’s second study, Monitoring
Global Supply Chains with Short and Georgetown University
McDonough School of Business Professor (and former HBS doctoral student) Andrea
R. Hugill, looks at how audit teams may be best composed to get at that truth.
Published in this month’s issue of Strategic Management Journal, the
researchers examined data on how many violations different teams exposed at the
same factory—which, all things being equal, was an indication of a more
effective audit. They found three factors that seemed to cause more violations
to be found and reported.
First, there was the question of whether an
auditor on the team had previously audited the same factory. Teams consisting
of all new auditors unfamiliar with a factory tended to find more violations
than teams that included returnee auditors. While this might be due to
corruption between returnee auditors and factory managers or a desire by the
returnee auditor to show improvement over time, the coauthors contend that the
result is more likely due to there being more “fresh eyes” on the scene.
In other words, since individual auditors
tend to be fairly consistent in the items they investigate, they’ll most likely
look at the same issues upon returning to audit the same factory. Since
factories, meanwhile, tend to focus improvement efforts on problems identified
in the last audit, many of those items will be fixed. New auditors, meanwhile,
would be more likely to look at different issues, uncovering new violations.
“If there are a thousand things to look for at an inspection, one auditor might
have time to look at only 200,” Toffel says. “A new auditor might look at some
of the same things, but will also focus on different things.”
Second, perhaps predictably, was the
experience of the auditors on the job—with those who had a longer tenure
tending to find and report more violations. Surprisingly, however, level of
education had no effect on the findings, implying that learning in school is no
substitute for on-the-job experience.
Even more surprising was the third factor
that had bearing on the results: gender. The researchers found that auditing
teams with at least one woman reported, on average, 6.6 percent more violations
than male-only teams.
“None of the auditors we spoke with,
including the auditor whose data we used, said they considered gender
composition in forming teams,” says Toffel. “In fact, some said they
expressly didn’t consider gender, believing it inappropriate to do
so.”
Not considering gender when forming audit
teams makes sense in terms of fairness to employees, but as the data show, this
policy might be hurting the overall accuracy of audits. The authors note
several reasons why this might be the case: Sociology studies have found that
women tend to be better at both perceiving and integrating facts they observe,
lending them a greater ability to notice violations. Women also tend to be
rule-followers more than men do.
“That might make them more likely to cite
violations they perceive by the book, and less likely to give the benefit of
the doubt,” says Short.
Another reason, however, might result from
the fact that workers in many overseas factories are mainly women, who might be
more willing to divulge factory violations to auditors of the same
gender—thinking they may be more likely to be believed and less likely to be
punished. Significantly, mixed-gender teams did no better than all-female teams
in uncovering violations, meaning perhaps the male employees were not
especially forthcoming to male auditors.
Building
Capacity for Change
Both studies—considering factors in countries
where factories are located and at the makeup of the teams that audit them—may
be helpful in arriving at an accurate depiction of factory performance with the
most efficient use of time and resources. But what if a multinational brand
actually wants to help its supplier factories improve? Toffel’s third study,
also written with Short and Hugill, looks at exactly this question, examining
what factors make an audit team more effective at changing factories for the
better over time.
In this study, entitled Beyond Symbolic Responses to Private Politics:
Examining Labor Standards Improvement in Global Supply Chains,
the researchers compared the results of two consecutive audits, evaluating what
factors in the first audit might lead to fewer violations at the next audit.
They looked not only at the composition of the audit team, but also at how the
audit was conducted, as well as external factors in the country that might
influence company response. They found a number of factors that led to
improvements—and moreover, that some of their effects were multiplied when
several factors operated simultaneously.
The first set had to do with the audit team’s
training—as measured by the number of audit skill courses they’d taken—and
whether the audit was announced or a surprise. They found that the biggest
improvements came when a highly-trained team performed an announced audit.
While an unannounced audit might find more violations initially because the
factory would have less time to sweep things under the rug, Toffel cautions
that “an unannounced audit might also create a more contentious environment
where factory management might not be so receptive to hearing any best
practices the auditors might share.”
In other words, while an audit team is there
to police violations, there’s often another no less important task they are
performing: informally counseling the factory on how to improve conditions
based on their own experience in the audit field. “It seems to be a knowledge
transfer story,” says Toffel, “and for knowledge to be transferred effectively,
you have to have a knowledgeable auditor, but you also have to have a receptive
factory manager.”
The other factors that could impact change,
however, had less to do with receptivity and more to do with fear, based on and
the level of press freedom in the country where the factory was located.
Factories in countries with greater press freedom were substantially likelier
to improve. “Factories in countries with more press freedom might perceive more
pressure to act on audit reports that reveal poor performance, given the risk
of that news leaking outside the factory,” says Toffel.
This all indicates that improving working
conditions through social monitoring is a learning process that depends on both
the quality and the quantity of the knowledge transmitted and the factories’
willingness to learn. Well-trained auditors who spend significant time on-site
can maximize the value of the information conferred. But, as Short says, “no
matter how good the information is, it doesn’t help if factories don’t want to
learn.” Factories may have different motivations for learning. Structuring
audits to transfer knowledge in less confrontational ways may make factories
more receptive to learning because, according to Short, “they feel trusted,
like they’ve been brought into the process.” Other factories may be more
motivated to learn when they fear that their poor practices will be exposed.
“It’s like when you are studying for an exam you might fail—that fear helps you
study harder,” Toffel says.
However that learning occurs, Toffel and his
colleagues see hope in the potential for foreign factories to change and get
better over time. If multinational brands want to play an active role in that
learning process, then they have their own learning process to undergo first.
Looking at the factors behind what makes for a responsible factory, an
effective auditor, and a healthy chance for improvements over time may better
help them effect that change—and avoid future negative headlines.
by Michael Blanding
http://hbswk.hbs.edu/item/what-brands-can-do-to-monitor-factory-conditions-in-a-global-supply-chain?cid=spmailing-13437606-WK%20Newsletter%2009-14-2016%20(1)-September%2014,%202016
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