The Nike Seminar

April 28, 1998

A surge in the adoption of Codes of Conduct by corporations in recent years has led to a lively conversation on how firms can ensure compliance with these Codes. The globalization of the economy and the widespread practice of subcontracting production in foreign nations has made compliance with Codes a daunting task. Nike has been an industry leader in the adoption and monitoring of its Code of Conduct, encouraging other companies in the apparel and footwear industries to take proactive steps to ensure the health and safety of its workforce, respect for the environment, and respect for human rights. However, problems of compliance remain, for companies new to the business of enforcing Codes of Conduct as well as for Nike. Now is an opportune time for Nike to continue its tradition as an industry leader by conducting a comprehensive reevaluation of its monitoring program.

"Monitoring" can take many forms. This paper will focus solely on issues related to external monitoring: monitoring undertaken by third parties, such as accounting firms, non-governmental organizations (NGOs), religious organizations, and labor and human rights groups. Internal monitoring, a process in which firms use their own employees to check compliance with its Code of Conduct, has been addressed elsewhere in our group's presentation. The limitations of internal monitoring, in terms of expertise, objectivity, legitimacy, and cost, make external monitoring a necessity. Internal monitors, who are likely to have more frequent contact with production facilities and their workers, will be effective as a way to ensure daily compliance with the findings of external monitors.

When establishing a system of external monitoring, companies seek, at minimum, the following characteristics:

1. Accurate information on how well the firm and its suppliers are meeting its Code of Conduct
2. A process by which to improve their performance over time
3. Some means for assuring external stakeholders that the company’s behavior meets agreed standards
4. Cost effectiveness

Many companies employ accounting firms to conduct external monitoring, such as Nike’s relationship with Ernst and Young. The accounting firms provide information on Code compliance to companies, who may then proceed as they see fit in addressing the problems identified by the monitor. Although the monitoring services provided by accounting firms are a step forward from the exclusive use of internal monitors, the process is fraught with problems, among them:

• Lack of independence. Nike funds Ernst and Young to perform its audits, and Nike mandates the monitoring procedures to be undertaken during the audit. In this sense, the monitor lacks autonomy, and is little more than an extension of the internal monitoring process.
• Lack of expertise on industrial hygiene issues. Ernst and Young’s audit of the Tae Kwang Vina plant in Vietnam relied entirely on secondary sources, including factory managers and Vietnamese government officials, to determine compliance with occupational health and safety. Ernst and Young "performed no environmental monitoring or air sampling of their own." Furthermore, Ernst and Young claimed that some areas of the plant have up to 177 times the standard level of toluene, a figure that a Nike executive said was scientifically impossible.
• Lack of proper investigation into wages and overtime. Ernst and Young failed to check employees’ pay stubs to determine compliance with minimum wage and forced overtime laws.
• Failure to create safe space for workers to address grievances. Worker satisfaction levels were determined by interviews on factory grounds, where workers are more likely to be apprehensive about expressing their concerns, due to the threat of repercussions from factory management.
• Lack of accountability. In the absence of public disclosure of the audits (with the exception of the one leaked audit of Tae Kwang Vina), Nike is not held accountable to address the violations of its Code of Conduct found by its monitors. Additionally, workers and worker representatives are not well informed about the findings of the audits.

Ernst and Young’s audits may be more properly referred to as "consultations" on production practices, rather than "monitoring." The services performed by Ernst and Young failed to meet external monitoring criteria (1), (2), and (3) above, and raise serious doubts as to Ernst and Young’s abilities to provide proper monitoring services to Nike.

Recommendation: Nike should reevaluate the monitoring services performed by Ernst and Young, and demand more comprehensive reviews of Code of Conduct compliance, performed by trained industrial hygienists, in future audits.

The Council on Economic Priorities conducts "social audits" of factories, through a process called SA 2000. CEP is currently developing SA 8000, a social audit performed by an officially approved certification company to ensure compliance with a set of universal standards. SA 8000 would require auditors to explain to auditees how to meet the requirements of SA 8000, and provide guidance to those firms found to have violations. The SA 8000 process, when it is developed, may provide a more independent and professional form of monitoring than that currently provided by Ernst and Young.

An alternative to contracting with accounting firms to perform external monitoring is the practice of independent monitoring, in which "a company requires its supplier factories to permit one or more selected non-governmental organizations – generally human rights groups, religious organizations or unions – to inspect the facilities and talk to workers." The requirements of an independent monitor are similar, but not identical, to those of external monitors more generally:

1. Capacity to monitor all of a company’s operations consistently
2. Ability to collect and report on both "hard" (e.g. industrial hygiene, wages, working hours) and "soft" information (worker attitudes and satisfaction)
3. Ability to facilitate improvements in working conditions over time
4. Legitimacy in the eyes of external stakeholders
5. Cost effectiveness

As local organizations with ties in the community, independent monitors can place their findings in a local context, and are more likely to have the trust of workers than US accounting firms. Utilizing their legitimacy in the eyes of workers, independent monitors can provide companies with more candid and detailed assessments of worker satisfaction, allowing companies to address grievances in a more immediate and direct fashion. NGOs have only recently begun to develop the capacity to monitor compliance with Codes of Conduct, and may not yet be able to meet all 5 criteria above. Outside organizations possessing the expertise that certain NGOs lack may supplement the work of NGOs in the monitoring process, as necessary.

Independent monitoring can also be performed in such a way as to empower workers to advocate for themselves, especially in countries such as Indonesia, where the prohibition of independent unions leaves workers without a viable channel to address grievances. When worker interviews are conducted off-site and reported anonymously, the grievance process is legitimized, creating an expectation in workers that their problems will be addressed. Liz Claiborne is attempting to establish an independent monitoring system in its Guatemalan plants in which telephone lines and locked drop-off boxes serve as vehicles for workers to anonymously make complaints. Assuming that the company uses such information to quickly rectify legitimate workplace problems, the workforce is more likely to feel satisfied with their treatment by management. This type of "worker-centered" monitoring arrangement ensures that workers, the intended beneficiaries of Codes of Conduct, are involved in Code enforcement.

The case of The Gap in El Salvador is an instructive example of the process of independent monitoring. Like Nike, The Gap’s Code of Conduct calls for high standards from its suppliers. Yet in spite of the daily presence of quality control managers conducting announced and unannounced visits at the Mandarin International factory in El Salvador, a Gap supplier, many violations of the Code persisted, including forced overtime (including some 22-hour workdays), clocked bathroom visits, and the firing of union organizers.

Faced with a loud public outcry, The Gap agreed in 1995 to allow independent monitoring at Mandarin. In 1996, The Gap joined the National Labor Committee, Businesses for Social Responsibility, and the Interfaith Center on Corporate Responsibility to form a working group on establishing independent monitoring at Mandarin. [See Appendix for the working group’s list of goals and characteristics for independent monitoring.] The working group resulted in the formation of the Independent Monitoring Group of El Salvador (IMGES), a group of Salvadoran NGOs charged with monitoring Mandarin. Before writing their reports, IMGES provides management with an opportunity to address any problems they have found, a process that led to the termination of pregnancy screening at the plant. Written summaries of IMGES reports, but not the entire reports themselves, are available to the public. This type of limited disclosure ensures accountability without forcing The Gap to disclose confidential information. David Schilling of the Interfaith Center said, "The Independent Monitoring Group of El Salvador has helped move Mandarin from a point of crisis to a place of harmony. Under difficult circumstances, it has been able to mediate and monitor at the same time." Workers now generally say that Mandarin is a good place to work.

With a global workforce of 500,000, finding an independent monitor sufficient to cover criterion (1) under "Independent Monitoring" above will be impossible. However, it is entirely feasible that groups of NGOs from each country where Nike produces shoes and apparel can come together to establish a process that can provide sufficient monitoring by region, or at least by factory. For example, a group of 9 Indonesian NGOs, allied as the Indonesian Sports-shoe Monitoring Network (ISMN), made a proposal in July 1996 to conduct monitoring for Nike in Indonesia. The proposal sought funding for a group of 80 surveyors (to work two days per week), a management team, accounting and administrative oversight, consultations with foreign NGOs, training in Alternative Dispute Resolution, and printing costs. As an industry leader with an exemplary Code of Conduct and a claim to have laudable conditions in its subcontracted factories, Nike ought to take such proposals seriously. "Companies professing to have model factories have no solid ground for refusing to cooperate in reliable confirmation interviews carried out by groups the workers trust," says Jeff Ballinger.

As a member of the Apparel Industry Partnership, Nike has indicated that it is interested in raising the bar for the entire shoe and apparel industries. Nike could play a role in encouraging others in the AIP to begin a fund for independent monitoring programs, thus pushing industry-wide change in avoiding conflicts of interest regarding funding for monitors.

No matter what manner Nike chooses to enforce compliance with its Code of Conduct, it should be concerned not only with the implementation, but also the impact that the Code has on human lives. In other words, Nike should be concerned not just with a set of objective criteria when determining compliance, but also with how the Code can translate into a decent standard of living for its subcontracted employees. For instance, the termination of employment of illegal child laborers ensures compliance with the law, but may be detrimental to the child and his or her family, in the absence of quality educational opportunities. Similarly, those laid off from a factory found to be in noncompliance with the Code are punished for the mistakes of their managers, and find themselves without employment. Nike must be sure to enforce its Code of Conduct in such a way as to always provide for the health, safety, and welfare of its workforce.

Consumers have a right to know the true picture of conditions in Nike’s subcontracted factories. The controversy over Nike’s labor practices in recent years has seen a flurry of misinformation and unsubstantiated claims turn up as truths in the media. In the interest of informing its consumers and reducing deceptive claims in the media, Nike should take the lead in requiring its monitors to provide the public with unfiltered information on Nike plants.

The Independent Monitoring Working Group, comprised of The Gap, National Labor Committee, Businesses for Social Responsibility, and the Interfaith Center on Corporate Responsibility, developed the following goals and characteristics of independent monitoring for Mandarin International, a Gap supplier in El Salvador, in February 1996:

• Detect violations of The Gap’s Sourcing Principles & Guidelines and applicable to local law.
• Encourage Mandarin to educate managers and workers about The Gap’s Sourcing Principles & Guidelines, applicable laws, their own responsibilities, and the rights of workers.
• Deter abuses against workers.
• Provide a safe, fair, credible and efficient mechanism for dispute resolution.
• Foster a safe, humane work environment.
• Promote utilization of existing processes within the factory to resolve problems as possible.

• On-site visits, including meetings with management and workers at a regular interval to be determined, and including review of appropriate records.
• Confidential means for workers and management to report grievances.
• Process to investigate issues and grievances that arise.
• Collaborative arrangement/mechanism for recourse to Salvadoran legal institutions if legal violations are found.
• Independent Monitors will provide immediate, written reports of patterns of violations of The Gap’s Sourcing Principles & Guidelines and local law, as well as individual violations, grievous in nature, such as violent intimidation, physical abuse and sexual harassment, to the contractor, Gap, the Independent Monitoring Group, and the workers.
• Independent monitors will also report to the Independent Monitoring Group on positive developments related to the independent monitoring process.
• The Independent Monitoring Group will distribute periodic reports to interested publics on noteworthy developments – both positive and negative.

Ballinger, Jeff. "Comments to Independent External Monitoring Subcommittee of Apparel Industry Partnership." July 1997.

Ballinger, Jeff. "Monitoring." Campaign for Labor Rights Newsletter. February 1998.

ESPN. "Made in Vietnam: The American Sneaker Controversy." April 2, 1998.

Forstater, Maya; Weinreb, Ellen; Zadek, Simon. "Ethical Trading: Effective Monitoring of Codes of Conduct." London: New Economics Foundation, 1997.

O’Rourke, Dara. "Smoke From a Hired Gun: A Critique of Nike’s Labor and Environmental Auditing in Vietnam As Performed by Ernst and Young." San Francisco: Transnational Resource and Action Center, 1997.

Varley, Pamela (Ed.). The Sweatshop Quandary. Washington DC: Investor Research Responsibility Center, 1998.