Governance and Supply Chains -
An Ethical Approach to Responsibility

By Mick Blowfield

Originally published in Corporate Governance International, December 2001
 

Governance and Supply Chains

Business can be divided between two types of supply chain - the producer driven and the buyer driven. The former are characterised by high degrees of integration and certain companies are able to exert control over backward and forward linkages within the chain. The latter are characterised by highly competitive and globally decentralised production units, with marketers (brand-name owners and retailers) exerting substantial control over how, when and where manufacturing will take place, and how much profit accrues at each stage of the chain (IDS 2001).

In the past, marketers have taken little interest in the behaviour of their suppliers beyond product price, specification, quality and availability. That has changed in recent years for a number of reasons ranging from competitive advantage (e.g. making sure that producers are responding to fashion signals from consumers) to legal liability (e.g. EU food safety laws which require retailers to exhibit due diligence throughout the supply chain). Ethical trading is a dimension of this expansion in corporate governance, requiring that marketers take responsibility for worker and human rights amongst their suppliers.

This is a significant change because in the past suppliers were only accountable to the State (i.e. for upholding national laws). However, concern in the major consumer markets about labour and human rights abuses began to pose a threat to marketers' own reputation, and it was no longer sufficient for them to say they had no responsibility for the behaviour of their suppliers. As yet, there are few legal requirements that marketers be responsible for supplier behaviour, but a mixture of consumer, media, lobbying organisation and investor pressure has led to a plethora of voluntary codes of labour/human rights practice claiming to measure company performance. The Ethical Trading Initiative was one of the first in this field, but as I will show it is much more than an approach to measuring performance: at its core is a desire to learn how companies can fulfil their new governance responsibility in relation to distant workers not on their own pay-rolls.

 

What ETI is and is not

The Ethical Trading Initiative is an alliance of companies, NGOs and trade union organisations committed to working together to change business behaviour by identifying and promoting good practice in the implementation of codes of labour practice. It is a membership organisation currently comprising 33 companies, four umbrella bodies from the trade union movement, and 19 NGOs. Corporate members agree to promote and observe international labour standards in their supply chains, and all members agree to collaborate to achieve this (Box 1). ETI's main focus is developing countries, but many members recognise that exploitation of workers is not unique to the South.

For ETI, good practice means a) acceptance of internationally-agreed standards; b) their incorporation into codes of practice used by ETI corporate members; and c) monitoring and verifying adherence to these codes in ways that are meaningful and credible. The emphasis placed here on internationally-agreed standards and their incorporation into codes of practice is important because when ETI was established in 1998, company codes tended to cherry-pick particular aspects of international standards that had resonance with consumers, the Western media or campaigning groups, and exclude those they disagreed with (Varley 1998, Ferguson 1998). Today, although some company codes continue to cherry-pick, incorporation of internationally-agreed standards is much more common. Indeed, anyone familiar with such proprietary standards as SA8000 will not be surprised by the content of the ETI Base Code (Box 2), and may even ask what is unique about ETI.

To an extent, we can understand the uniqueness of ETI is by understanding what it is not. ETI is not a solution to all of the challenges of corporate social and environmental responsibility - it deals with a particular but critical range of all the possible social issues companies are being asked to manage in their supply chains, i.e. internationally-agreed labour standards. Unlike accreditation agencies, it doesn't offer a proprietary code, and unlike certification or auditing bodies it doesn't pass or fail suppliers. ETI does not offer consultancy services, nor does it offer prizes or labels in recognition of good performance. What ETI does offer its members is a space where they can develop the skills and share the experience of trying to be a responsible company in an era of global supply chains. 

A second way of understanding ETI's distinctiveness is by reference to its history. Some current members of ETI were also active in developing other initiatives at the time ETI was being set up [1], and ETI's first chair was an early advocate of multi-stakeholder engagement: yet ETI was the first concrete example of an alliance where business, trade unions and NGOs worked together from the outset, placing internationally-agreed labour standards at the centre of their work.

Today, ETI could not claim uniqueness on this basis alone as other initiatives, both Northern and Southern, have adopted a similar approach. ETI's value today cannot be divorced from its history, but it is the experience of using a multi-stakeholder approach to promote good practice in implementing international labour standards which is the focus of this chapter.

 

The ETI approach

There are three key premises behind the ETI approach: first, that internationally-agreed standards (complementary to national and international regulations and frameworks) contribute to the well-being (i.e. the lives and rights) of workers and their families; second, that there may be difficulties in implementing these standards in supply chains; and third, that understanding how to overcome these difficulties can be achieved through a multi-stakeholder alliance of business and civil society. It is this last aspects which separates ETI from much of what is called a partnership approach to corporate social responsibility, because its structure and practices require companies to learn from and with their critics. 

ETI has a Base Code which draws on declarations and conventions of the International Labour Organisation and the United Nations (Box 2 [2]), and sets out the fundamental rights for workers. ETI companies must enforce this code somewhere in their supply chains, and make this known to other members so that they can verify company claims. It is important to note that although member companies commit to increasing the proportion of their supply chains where the code is applied over time, they are not expected to impose the code everywhere from day one.

The Base Code informs but does not explain ETI's tripartite approach. The tripartite alliance is reflected in the structure of the ETI Board and every pilot project (the main instruments for learning how to monitor supply chains) requires the three caucuses of the alliance to work together. Moreover, rather than have a large secretariat acting as an executive on behalf of the membership, members themselves take responsibility for much of the work (pilots, working groups, etc). Therefore, the concept of a multi-stakeholder alliance is not just a principle, it is central to the day-to-day functioning of ETI.

Although some may see consensus as a goal of this type of alliance (a view that accounts for some of the criticisms that such alliances can become dominated by one group or another [Zeldenrust & Ascoly 1998, Stichele & Pennartz 1996]), a more evident reality is that different groups have separate objectives, and that there is rarely consensus about what has been learned, only a commitment to learning together and sharing that learning within the membership. In this paper, I offer some of the early evidence of what differences a multi-stakeholder alliance can make.

 

MILESTONES AND INDICATORS

The separate caucuses of the alliance have different reasons for joining ETI: companies have observed market resistance to products produced under adverse labour conditions when this has been exposed by the media, and they are also concerned to protect their reputations and brand values; trade union members want to improve global labour standards by fostering the conditions for freedom of association and collective bargaining; and NGO members aim to promote a fairer form of economic development around the world. This is not an exclusive list, but it highlights why each caucus will assess ETI's impact in different ways. Moreover, international development agencies (including DFID which has helped fund ETI's work) ultimately regards impact on eradicating poverty amongst workers and their families as the key indicator.

However, at the present time, three years after being established, the benefits of the tripartite alliance are probably better seen in the learning and the changes in member behaviour. Although there is evidence on a case by case basis of suppliers improving their performance in areas intended to benefit workers, the simple truth is that we do not know how many workers are working less hours or how many fewer women are being sexually harassed because of ETI. As important, we do not know enough about the inter-relationships between the different criteria; for instance, whether any reduction in total hours is matched by increases in pay so that net incomes do not decline. 

What we do know is that more and more corporate members are looking seriously at these issues. Part evidence of this is that in 1999, members monitored over 1500 suppliers or 20% of their supply base: in 2000 that number had grown to over 6700 or 64%. This monitoring takes various forms, but typically includes a mix of desk-based questionnaires leading to factory visits by the buyer or independent auditors [3]. At present, it is not possible to conclude that one system is better at picking up breaches than another, although most observers are likely to be unconvinced by the results of supplier self-audits if they are not verified by other means.

Supply chain monitoring is part of a member company's commitment to ETI, and one area of real achievement in the last 12 months has been the demonstration of corporate commitment as judged by the growth in auditing programmes, the number of corrective actions vis a vis non-compliances with the Base Code, and the setting of priorities for future actions. In 1999, about one-third of member companies were judged by ETI criteria not to be demonstrating adequate commitment as this is defined in Box 1. Although these criteria are not easy to meet, other member companies as well as NGOs and trade unions applied pressure to ensure that overall performance improved, and now over 90% of member companies are demonstrating adequate commitment. Of course, all ETI members would like to be able to say that as monitoring increases, the number of non-compliances with the Base Code is on the decrease. However, unacceptable working conditions are a reality, and at ethical trading's current stage of development, it is perhaps a more positive indicator that more non-compliances are being identified rather than less. As Figure 1 shows, 23% of total members' suppliers (including unmonitored ones) had one or more instances of non-compliance in 2000, compared to 11% a year before. That may seem damaging for fragile corporate reputations, but if seen in the light of the number of additional suppliers monitored and, more significantly, the number of corrective actions generated, what we see is a picture of more and more companies identifying and then wrestling with the remediation of complicated issues. 

It is important to emphasise that company reports have not necessarily been independently verified, and any figures are those from corporate members. In 2000, these members as a whole reported on significant non-compliances, distinguishing between those where corrective action was and was not taken. The majority of corrective actions (62%) related to health and safety, followed by living wages (15%), working hours (10%) and other aspects of the Base Code (1-5%) [4]. Does this mean that health and safety non-compliances are more common than others? Maybe so, and certainly the diversity of health and safety issues makes this possible. But it could also be because it is easier for those carrying out monitoring to identify a missing first aid box or a locked fire exit than it is to recognise discrimination, forced overtime or child labour, for instance. This in turn may reflect the current skills and competencies of the social auditing industry which is still in its infancy, and needs to have best practice defined and agreed.

Some people will see the above statistics as confirmation that companies are imperfect; others will be impressed at the progress being made. Both interpretations are true and both are to miss the point. What the statistics seem to show is that monitoring is taking place and, moreover, it is detecting non-compliances: given the previous situation this itself is significant progress. The ETI alliance realises that it has learnt a lot and has a lot still to learn about how to recognise, correct and report on social performance. Consequently, ETI invests heavily in learning about monitoring, (i.e. understanding what is happening in the workplace), not least because the activity of monitoring is an acceptance of corporate responsibility for the supply chain. Individual members are trying their own approaches, ranging from in-house monitoring by technical advisors to the use of independent auditors, from repeat visits to one-day assessments. ETI runs its own pilot projects, each involving trade unions, NGOs and business, experimenting with different approaches in different countries and with different industries (Box 3). Eighteen new pilot projects will be established by 2004. There are many lessons from these pilots which there is not space to detail here, but there is growing recognition that the ways of monitoring labour practices will be affected by industrial, social, political, cultural, national and institutional contexts.

Learning how to implement core labour standards has led to changes in corporate behaviour, and the relationships between corporate and civil society members of ETI. For example, companies began with grave reservations about how sharing of learning would conflict with the imperative of commercial confidentiality, but now more and more companies realise that exchange of experience and disclosure of performance is a net benefit. Many ETI members and their suppliers have invested significantly in building the capacity to implement relevant management systems, and in some cases have changed the nature of the buyer-supplier relationship. There is evidence through the pilot projects, particularly in South Africa and Zimbabwe, that suppliers have changed their behaviour as a result of ETI's work, not only in relatively straightforward corrective actions such as health and safety, but in more difficult areas such as discrimination.

 

FUTURE CHALLENGES

Improving the instruments and techniques for managing, auditing, reporting and upgrading social performance in global supply chains has been and will remain at the heart of ETI's work. There are challenges here, both in terms of developing applicable, affordable and effective tools and systems, and in terms of understanding the strengths and limitations of a code-based approach. These are, however, challenges that face any organisation pursuing global justice through a unitary code of practice; the multi-stakeholder approach of ETI may prove more efficient in finding solutions, but is that the litmus test of its impact? Some members would argue that the long-term indicator of ETI achievement will be its success in rigorously promoting internationally-agreed labour standards wherever companies in the UK market can effect this. However, in the immediate future, the added value of this approach will be more evident in areas of process and relationships. Therefore, the interim indicators of success could be: a) fostering a constructive environment where organisations (not least companies) that in other circumstances may be at odds or in competition, are able to collaborate, share and build mutual respect and trust; b) an environment to catalyse thinking on the challenges of ethical trading; c) a haven where different types of organisation can enter into dialogue, allowing companies to meet with and learn from their civil society critics; and d) a place where both members and non-members are able to experiment and learn about the challenges of implementing core labour standards. Each of these roles will help companies come to grips with this new dimension of governance, hopefully in ways that are both robust and realistic.

Mick Blowfield
Research & Information Manager
Ethical Trading Initiative
Cromwell House
14 Fulwood Place
London WC1V 6HZ
UK
Email: eti@eti.org.uk

 

 

 

 

Notes: 

1. For example, Neil Kearney of the International Textile, Garment and Leather Workers' Federation was involved in establishing both ETI and SA8000, and J. Sainsbury which also advised on SA8000 was one of the first corporate members of ETI. The International Confederation of Free Trade Unions was similarly involved in helping to develop FIFA's code. [context] 
2. See full ETI Base Code. [context] 
3. More details on the types of monitoring will be published in the ETI 2000/2001 Annual Report. [context] 
4. The full figures will be published in the ETI 2000/2001 Annual Report. [context]

 

 

BIBLIOGRAPHY

Ferguson, C. A Review of UK Company Codes of Conduct; London, Department for International Development, 1998

IDS The Value of Value Chains; IDS Bulletin 32-3, Brighton, Institute of Development Studies, 2001

Stichele, M.V., Pennartz, P. Making it our Business: European NGO campaigns on transnational corporations; London, Catholic Institute for International Relations, 1996

Varley, P. The Sweatshop Quandary: corporate responsibility on the global frontier; Washington DC, Investor Responsibility Research Centre, 1998

Zeldenrust, I. Ascoly, N. Codes of Conduct for Transnational Corporations: an overview; Tilburg, International Restructuring in Industries and Services, 1998