For various reasons discussed below, it is not currently possible to form an effective social screen that would guarantee a portfolio free from sweatshops. Therefore, because we cannot avoid investing in these firms, we have made this issue an important focus of our shareholder advocacy work, directly engaging corporate management, and working with them to find solutions to this pervasive problem.

 

Why we can't exclude sweatshops from our portfolios
The use of sweatshop labor, unlike tobacco or gambling, does not lend itself to the "on-off switch" of social screening. Without widely available, systematic data on sweatshop conditions and wages, it is impossible to develop an effective social screen, and such information does not yet exist.

 

This is not to say that the problem does not exist - credible reports of inhumane conditions at factories producing for U.S. consumption abound. The problem is that information tends to be anecdotal, and generally does not offer enough to meaningfully distinguish one company's performance from another. In addition, the problem is pervasive, cutting across brand names, sectors and industries. A screen that excluded every company with exposure to this issue would omit entire sectors of our economy.

 

The complex system many U.S. corporations use to source their goods further complicates this problem. In many cases, U.S. corporations that participate in this global sourcing system do not own the factories that produce their goods. Rather, they source through a complex system of licensees and subcontractors around the world. At one time, for example, Disney sourced from more than 20,000 factories in more than 80 countries. The company's relationship with an individual factory, tenuous as it is, may also be short-lived - just long enough to get a particular order out, before their subcontractor moves on to a different factory.

 

When problems are uncovered at a factory and the stories hit the American press, names like Wal-Mart and Disney often loom large. The reality is that a number of other U.S. companies, that for one reason or another have had the good fortune to avoid the headlines, are often sourcing there as well. In addition, when companies like Disney or Wal-Mart source from a factory, it is often a fairly small percentage of that factory's production.

 

All of these factors combine to make the sweatshop issue one of the most daunting problems of our time, for investors, consumers and corporations. Rather than eliminate all companies from our portfolio that have potential exposure to this issue - a decision that would render entire sectors of our economy off-limits - we have worked to develop an effective response to the issue through our shareholder advocacy program, beginning with our first sweatshop-related shareholder proposals in 1996.

 

Only two companies have been removed from our portfolio because of their involvement in this issue: Nike in 1997, and Wal-Mart in 2001. Both were industry leaders that carried a greater responsibility than their peers to responsibly address this issue (Read more). NOTE: Nike was added back to the Index in 2005 in recognition of the real strides it has made to address these issues.

 

Direct Engagement
We file shareholder proposals addressing sweatshop conditions in order to inform management of our deep concern about the conditions under which their products are made, and to encourage companies to sit down and discuss solutions with us. A number of companies, including Disney, the Gap, McDonald's and Nordstrom have been willing to do so, and to commit substantial time and resources to these discussions.

 

All of our discussions with companies focus on four primary points:

 

• development of appropriate codes of conduct,
• the use of truly independent monitors to ensure enforcement of those codes,
• the payment of a sustainable living wage and
• public accountability, generally through the production of some form of report to shareholders.

 

It is easy to say that companies like Disney and Nordstrom should stop sourcing from sweatshops. The reality is far more complex. Activists are not asking these companies to pull out of the countries from which they source their products. We would prefer that they stay where they are, and use their significant influence to improve conditions. By sitting down and talking, sharing confidential information, we have come to understand that many of these corporations are struggling to produce solutions.

 

Working closely with other shareholder activists, and most frequently with the Interfaith Center on Corporate Responsibility (ICCR), we have sought to bring a different voice to the table, and to ensure that the rights and dignity of the workers are always paramount. We believe we can accomplish more through this form of direct engagement than by divesting.

 

The Need for Independent Monitoring
As the public concern over sweatshops arose, many large financial auditing firms developed services for companies to use to audit compliance with their code of conduct. However, these audits tend to miss ongoing violations and abusive behavior for a number of reasons. For example, financial auditing firms are not always adequately trained to spot violations of labor laws such as health and safety violations; workers are afraid to tell auditors hired by management about many problems for fear of losing their jobs and, although these reports are generated by third parties, the auditing firms are hired by the corporation and are not truly independent. In addition, and perhaps most importantly, these reports are not publicly disclosed.

 

We have been encouraging companies to consider the use of truly independent monitors, such as local religious or human rights organizations. In addition to a thorough knowledge of the local labor laws and a comprehensive understanding of the problems that are common to these factories, these groups have a unique advantage over traditional financial auditing firms: they have the trust of the workers. Workers are far more likely to be candid with representatives of religious and human rights groups who are a recognized part of their culture. In addition, these groups have a continuous presence in the region - they don't come in and out for a few days a year. Workers can contact them at any time, whenever there is a problem. Although it can be relatively easy for local factory management to hide poor conditions from an outside auditor who is only at the factory for a few days a year, it is far more difficult to mislead groups who are in the region all year long. Pilot projects done at the Gap, Liz Claiborne and a few other companies have shown that monitoring performed by these groups tends to reveal more problems and result in greater worker retention and job satisfaction.

 

The Gap was the first company to agree to experiment with independent monitoring at a contract supplier facility in El Salvador. The Gap's use of independent monitors has since been expanded to other areas in Central America, and abroad. In addition, Mattel, Liz Claiborne and Reebok have released independent audits or summaries of audits performed at a few of their contract supplier facilities. Most recently, Nike began releasing its auditors' findings on its web site; these, however, are audits performed by auditing firms, not independent monitors.

 

Paying a Sustainable Living Wage
Sweatshops may be characterized by a number of factors - long hours, unsafe working conditions, underage workers and abusive management practices - but a clean and safe factory with friendly management is still a sweatshop if its workers are not paid an adequate wage. We are concerned that current wage levels in many areas are inadequate to supply the basics of food, clothing and shelter. We are encouraging companies to consider adopting a sustainable living wage standard that would ensure that salaries cover these basic necessities of life, in addition to allowing workers to set aside a small amount of money for the future. In an area of myriad problems, this is perhaps the hardest one to solve.

 

1186 08171