CONFERENCE NOTES THEMES

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1 CONFERENCE NOTES Managing Human Capital in Global Supply Chains: Lessons and Applications for Today s Leaders Hosted by Cornell University ILR School and the International Labor Organization New York, NY March 7, 2013 Synopsis: On March 7 th, 2013 stakeholders from industry, multilateral organizations, organized labor, and academia came together to discuss key challenges facing organizations as they confront the logistical, political, financial and social complexities of managing the human capital component of their global supply chains. The dialogue identified advances, opportunities and gaps in current approaches to dealing with this especially challenging issue. Opening Comments: The group was welcomed by Dr. Harry Katz, Dean of Cornell University ILR School and Nancy Donaldson, Director of ILO Washington. Steve Miranda, Managing Director of the Center for Advanced Human Resource Studies at the Cornell University ILR School, presented expectations and set the tone of the conversation for the day. The Current Context: A globalized economy has resulted in significant changes in business and supply chains around the world. Better practices for ensuring the rights of workers and social responsibility have evolved, and especially in the last decade, have focused on compliance to international labor standards. Increased consumer awareness and third party involvement have resulted in international visibility and corporate accountability. Conversations and practice around global supply chain management have matured and the presence of individuals from a variety of organizations and functions within corporations are an indicator of the many ways individual corporations have addressed this concern. Partnerships and Collaboration: THEMES Successful collaboration The current trending of this field is toward collaboration across sectors for increased impact. Brands within sectors are joining forces to address mutual supply chains and engage multiple stakeholders in a more productive approach. The key to stakeholder engagement is targeting strategic partnerships for the long-term. This can be accomplished by committing to certain key suppliers and working with them or

2 investing in relationships with stakeholders including students, government, workers, and even environmental groups. There must be a willingness to listen to and learn from these groups. The IFC-ILO Better Work program is a model for how to collaborate and do capacity building with governments. Better Work is working on replicating it s approaches in other countries. Another example involves global compacts such as one that is happening in Beijing to open a conversation about business initiatives and human rights. Collaboration: challenges Human Rights groups can often have unrealistic expectations and in some cases ulterior motives in collaborating with multinationals. To be successful, partnerships should come with realistic expectations of possibilities and roles. Corporations with diverse brands and product offerings find it difficult to identify collaborations with organizations or confederations that address all of their multi-faceted business interests. Engaging in each individual industry represented within the company can be costly and time-consuming, and make best practices difficult to establish. Best Practices: Recruitment Cross border labor recruitment is a significant concern in this conversation. Ninety percent of migration is for work and 45% of exploitation occurs when there is cross border movement. Fragmentation in labor supply chains and brokers not communicating with each other can lead to exploitation and it is necessary to establish standards of ethical recruitment. Often it is not enough to guarantee safe and fair working conditions as a supplier, as many workers may owe debts or pay exorbitant fees to recruitment agents that find them employment. One practice that has been found to be successful is the recruitment of workers directly from their country of origin, rather than via recruitment agents. A list of 45 ethical standards has been developed by Manpower, Inc. and Verite as a resource for corporations and labor suppliers. These standards reflect international norms and best practices as determined by industries. A copy of the report is enclosed with these materials. Other best practices Procurement, partnering with organizations and supplier diversity programs have all contributed to better human rights practices, as do co-location of corporate offices and suppliers.

3 Some corporate participants suggested that companies should be selective in their supply chains and invest in capacity for key suppliers that are necessary to their value chains. Empowering workers and funding NGOs that build capacity in areas of life outside of work such as education and microfinance are also crucial to successfully implementing better working conditions. Addressing root causes, giving ownership to local organizations, and engaging workers using tools like help-lines make standards possible. There must be a holistic perspective on implementing core labor standards and workplace practices. If employees and suppliers are evaluated solely on profit, then they will continue to make decisions that exclude other company goals. All employees must be responsible and take ownership for things like safety, health, environment and human rights. Awareness and responsibility must become a part of the culture. Looking at data can also reveal issues within supply chains. For example, extremely low prices or bids in comparison to other suppliers can be a red flag. Polaris Project is working on a tool that maps hotspots for human rights violations that can be compared to expenditures as a starting point for addressing supply. Challenges Within the Current Context: Issues for corporations: Single employers or suppliers, when they act alone to enforce labor standards, risk losing competitive advantage. This risk can be mitigated by enforcing practices across sectors or countries, but it requires coordination and willingness for corporations to act together. Human rights can be perceived as one more layer added to regulatory scrutiny that is already overwhelming and costly. There is also a perception that corporations that actively work on supply chains and publicize this fact are more likely to be held to higher standards within the consumer market. Taking a step out to address supply chains can also mean a higher level of scrutiny and potential scandals in the media. However, global brands face scrutiny either way. Increasing transparency, and the risks that this entails, is an issue for all companies in global supply chains. Local government policies and non-enforcement of policies: Corporations can only do so much to ensure that labor conditions are enforced within a country because the pervasive practices within a country will be the default for business there. For supply chain better practices to be implemented, governments must meet corporations in the middle by enforcing laws. Systemic noncompliance with law around the world, variance of policies from region to region within a country, informal economies, and the fact that many manufactured goods

4 are consumed domestically affects the ability of multi-nationals to hold industries or individual plants accountable. Multi-lateral actions that can be taken against a country until it complies with human rights policies, such as revoking GSP status or World Bank funding, can bring more leverage but can also make the situation worse for the people of a country. Using FDI as an incentive for governments to comply with international standards is a possibility, but corruption within governments, NGOs, and/or monitoring agencies can also be a problem. An example of this is the recent fire in Bangladesh. There are 4500 manufacturing plants in the country. With this scale of manufacturing, it is a challenge for multinationals to enforce basic safety and human rights without a strong government partner. Pressure has been put on the government to enforce basic safety laws, but with slow progress to date. A new, major collaboration initiative on fire safety has been started by brands and others. Another example is Indonesia, where minimum wages were set at 40-60% higher than they previously had been, but companies were allowed to waive the minimum for financial reasons, which most chose to do. Even when laws are set, loopholes are found. How can we incentivize suppliers to adhere to local laws? When a government does choose to take a stand it makes a huge difference in cooperating to improve conditions in a supply chain. Consistent messages are key to establishing an ethical operating environment within a country. Engaging with government of a country can be a lengthy and frustrating process. To justify what you are asking for, a business case should be presented key leaders on how it will affect long-term profits. The appeal needs to be made to profit motive and presented as a win-win. Complexity of supply chains It is possible to authenticate whether suppliers are abiding by human rights standards, but subcontractors are a significant concern. In some examples subcontractors can be tracked several layers into the supply chain, which makes it difficult to decide how far sourcing should be tracked and monitored. High visibility and imposing legal liability at the end instead of the beginning of the chain Currently, legal liability is being imposed at the end of supply chains rather than the beginning. Legislation such as the Dodd Frank Act, which requires disclosure of the use of conflict minerals mined near the Democratic Republic of Congo, may completely eliminate all trade to an area because corporations are afraid of scandals. Rather than broker solutions, these types of laws can have perverse outcomes by exacerbating economic instability in a region.

5 Brands most targeted are those that are higher quality and present in certain consumer markets. Higher prices do not necessarily correlate with better working conditions, nor do lower priced items guarantee poor working standards. How can companies be incentivized to include human rights in their value proposition? Making the business case for incorporating socially responsible practices and the role that culture plays IFC-ILO Better Work current research & analysis on the business case The ILO/IFC Better Work program is analyzing 10+ years of data from work in the apparel industry and offered the preliminary findings: : Improved compliance attracts more and better customers and suppliers are 56% more likely to retain customers. Factories where workers perceive better working conditions are more profitable and have increased productivity and reduced turnover. Good employee, customer and labor relations lead to better results within a company, even if these cannot be easily quantified. If human capital and human resources are central to a company, the difference will be obvious. (See the attached power point from the presentation.) It is important to spend time on business alignment within the company and raising awareness and trust amongst management and employees. Culture plays a significant role. Values must be ingrained in the company and evident in actions and not merely words or company policy. Leadership at the top makes a huge difference in adaptation within company cultures. A focus on changing management systems for better working conditions is the key. A significant number of companies are now taking a system-wide approach that integrates awareness into operations, supply chain and leadership. Profits and social responsibility are not inconsistent, and there is a growing acceptance that business principles can be applied to human rights. Some service-oriented companies have evolved to a primary focus through the lens of human capital management. Their HR professionals are a part of the deal teams. Major regulatory change is underway in financial services - this sector is trending towards CSR as a commitment to the customer. Finding ways to support and encourage research in this area can result in data and a proven business case for the implementation of corporate social responsibility. Presenting the case to companies could result in broader change, though there is a debate regarding how strong any case can be, given that intangibles are being measured. In the end, competitiveness based on good practices is more sustainable. Deterrents from making the business case Companies that do not have these as core values resist because of cost sensitivity even when there is a champion within the company to advocate for them. Costs are very difficult to quantify and compare.

6 Investment and Corporate Social Responsibility The pressure on business leaders as well as incentive structures to make choices that are profitable in the short-term, rather than the long-term, contribute to the incidence of human rights exploitation and make the business case more difficult to argue. With institutional investors that prioritize socially responsible investing (SRIs), such as pension plans, a more long-term approach sets priorities of balancing profit, social and environmental standards. (The SRI sector was estimated to represent $400+ billion in investments) Environment, labor and human rights practices of a country can be looked at as risk factors for FDI. Some SRI investors do screen countries for CSR. Pension plans can hold corporations accountable and organize shareholders to remove leadership when they repeatedly ignore interests besides profit. SRI strategies are not to divest, but to engage corporate leadership for long term sustainability. Their priorities are transparency and disclosure. Monitoring, Auditing and Reporting Many participants have encountered significant weaknesses in monitoring and social audits. The quality of audits and monitoring is highly variable, the auditing community has not established best practices, and auditors are susceptible to conflicts of interest because they are paid by companies directly. The impact is too limited when the focus is passing audits for suppliers rather than really addressing what root causes of issues are. Impact should be the focus rather than an audit checklist. It is important to first get buy-in from suppliers by educating them about standards they are measured by and including them in performance matrices. Choose suppliers with the overall better quality of product and invest in capacity building for those partners. Work with medium-performing suppliers to increase their level of compliance and act as a consultant rather than an auditor. In audits, allow for worker input and go into the details of a company such as hiring and termination practices, as well as improvement of internal systems. Look for not only noncompliance, but where there might be risk of non-compliance. Change auditors frequently so that inspection routines cannot be predicted by suppliers. Developing tools for mitigation and engaging sector-wide strategies contributes to success. Companies are also moving toward targeted social investments: implementing programs that empower workers; leaving ownership to local organizations (e.g. in China.) Worker safety is a good subject to lead with to build capacity for better working conditions. Ideally these performance matrices will be brought into the core requirements of the company and be used in internal evaluation rather than less effective external auditing.