How companies fight sweatshops
Global brands are stepping in to monitor working conditions at factories --but producing real change isn't easy.
By Marc Gunther, FORTUNE senior writer

NEW YORK (FORTUNE) - When The Walt Disney Co. was accused of condoning sweatshop conditions in China, the story made headlines and the company swung into emergency-response mode.

Disney (Research) hired a non-profit group called Verite to investigate conditions in several factories operated by its suppliers in China's Shenzhen province. When two of the factory owners refused to cooperate, the company stopped doing business with them.

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Disney and Verite worked with managers and workers at the remaining factories to improve safety conditions, create a worker helpline and inform employees of their legal rights.

"Disney and the factories absolutely took the issue seriously," says Daniel Viederman, executive director of Verite, which seeks to promote safe, fair and legal working conditions.

Sweatshop accusations invariably get attention. The charges against Disney were made last August by an activist group called the National Labor Committee, which said the company's suppliers employed child labor under dangerous conditions. They were covered by CNN, The New York Times, Reuters and the BBC, among others.

Not nearly as well known is the rest of the story, which may be more surprising: Brand-name companies like Disney, Gap (Research) and Nike (Research) are expending considerable effort and money to try to improve working conditions along their supply chains.

This is noteworthy because, in an ideal world, they would not have to worry about how their suppliers conduct themselves in faraway lands. Governments, not U.S. companies, are supposed to enforce labor laws and protect their citizens. But the governments of countries ranging from China, India and Indonesia to Columbia, Mexico and Brazil have proven to be either uncaring, corrupt or inept, leaving workers vulnerable. The result is that global brands have stepped in to do the job.

Some turn for help to Verite, an 11-year-old NGO based in Amherst, Mass., which has become expert at auditing factories and consulting with companies to improve conditions. The organization has the equivalent of about 40 employees, offices in China, India, the Philippines, Bangladesh and Bolivia and relationships with local nonprofits.

Besides investigating suppliers for Disney, Verite has analyzed Gap's extensive system of factory monitoring, conducted audits for footwear firm New Balance and consulted with institutional investors, notably California's state pension funds. Its clients also include Timberland and Eileen Fisher, smaller firms with strong commitments to social responsibility.

Like Disney, Gap focused on labor conditions in its supply chain after activist campaigns. In recent years, the company built one of the most extensive and transparent factory-monitoring efforts of any U.S. brand. Gap has 92 full-time employees who work on factory compliance, and its annual Social Responsibility Report provides a lot of detail about what they find and how violations are handled. Gap revoked the approval of 70 factories for compliance violations in 2004, about 2.6 percent of its total.

Probably the single biggest reason that companies like Gap, Disney and Nike monitor working conditions is that they want to protect their brands from attack. When the National Labor Committee took on Disney, its director, Charles Kernaghan, stood outside a Disney store on Fifth Avenue, waving a Little Mermaid sticker book, and saying: "Would the American people ever associate this book with crushed fingers?"

But the companies have also found that improved working conditions in their supply chain can be good for business. Factories that treat workers fairly are more likely to be productive and to ship goods on time.

"To me, it's common sense," says Dan Henkle, senior vice president for social responsibility at Gap. "If people are treated better, with dignity and respect, they are going to be happier and more productive and less likely to leave the factory. If you can reduce turnover, you can really impact quality."

Gap and Nike, which was burned by sweatshop accusations in the mid-1990s, have become industry leaders when it comes to monitoring their supply chains. While the footwear and apparel industries have led the way, electronics and jewelry companies have also begun to tackle their supply-chain issues. In Turkey and Cambodia, U.S. brands, labor groups and nonprofits have formed coalitions to more effectively monitor labor conditions.

Other companies, however, have lagged behind. Wal-Mart (Research), Target (Research) and Federated Department Stores (Research), which owns Macy's, publish codes of conduct but critics say their auditing efforts are not as stringent, effective or transparent as those of the leading brands. Verite's audits, as an example, always include private interviews with workers away from the shop floor, where workers can speak more openly about conditions; most companies are not as rigorous.

Verite's Daniel Viederman, who lived in China for 10 years, says he has mixed feelings about the effectiveness of U.S. companies' factory-monitoring efforts.

"Awareness has been raised," he says. "You can't go around southern China and talk to factory owners and managers and find one who doesn't know what a code of conduct is."

On the other hand, he says, "It's very difficult to difficult to point to real change at the factory level, right now. There are endemic problems that are very difficult to crack."

In the long run, local governments and NGOs will have to step in. Meanwhile, next time you hear about third-world sweatshops, be aware that at least some U.S. firms are doing what they can to stamp them out. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.