“Ethics is knowing the difference between what you have a right to do and what is right to do.”
These are the words of Potter Stewart (1915-1985), Former Associate Justice of the Supreme Court of the United States. They’re very fitting to today’s consumer interests and social compliance in manufacturing. Importers and retailers are often faced with the choice of using lower cost suppliers for manufacturing that follow poor labor practices or higher cost suppliers that are more socially responsible.
Social compliance involves issues such as the working conditions inside a factory, health insurance age of hired employees and more. We’ve talked in earlier articles about how social compliance can save more than just your image. We’ve even pointed out some examples of how carrying out a social compliance audit of your suppliers can save lives and prevent a tragedy.
But one question that has remained in the minds of importers is how to evaluate social compliance. What are the standards that need to be applied during an audit to decide if a supplier is compliant with a particular retailer?
Who Sets Social Compliance Standards?
Most large, international retailers have their own social compliance audit system, which is usually part of their global corporate responsibility program. Examples of companies that fall into this category include Walmart, Target, Disney, IKEA, Nike, etc.
The general rationale behind social compliance audit is the similar across most retailers, although each of them might emphasize different areas. Walmart and Target are good examples. Both have a well-developed and established social compliance auditing system.
Let’s take a look at their social compliance standards and some differences in their standards for supplier selection and auditing processes.
Walmart’s Standards for Social Compliance
Walmart has 13 principles in its Standards for Suppliers, which outline the expectations for its suppliers (including authorized subcontracting). These standards also make up the guideline of most social compliance audits for Walmart. These standards refer to the following areas:
- Compliance with laws: suppliers must be in compliance with all applicable national/local laws and regulations.
- Voluntary labor: no forced or slave labor is permitted.
- Labor hours: workers must have rest days and working hours that are meet local law.
- Hiring and employment practices: suppliers must verify workers’ age and legal right to work.
- Compensation: suppliers must compensate all workers legally.
- Freedom of association and collective bargaining: suppliers must respect the workers’ right of association and collective bargaining.
- Health and safety: suppliers must provide a safe and healthy working environment to workers.
- Dormitories and canteen: suppliers must provide these facilities in safe, healthy and sanitary conditions.
- Environment: the manufacturing facility must be in compliance with environmental laws.
- Gifts and entertainment: Suppliers must not offer gifts or entertainment to Walmart associates or those working on behalf of Walmart.
- Conflicts of interest: Suppliers must not enter into transactions with Walmart associates that create a conflict of interest.
- Anti-corruption: no tolerance of corruption.
- Financial integrity: all business records related to Walmart must be in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
In order to verify its suppliers are in compliance with these principles, Walmart will generally audit any major supplier before working with them. They will then re-audit them every 6 to 24 months depending on the results of the previous audits. Normally these audits are conducted by appointed independent and accredited auditing firms.
Target’s Standards for Social Compliance
Target has 9 principles in its Standards of Vendor Engagement. You’ll notice many of the following principles are quite similar to those standards set by Walmart:
- Suppliers must provide a safe and healthy workplace that complies with local laws.
- No forced or compulsory labor is allowed.
- No physical or mental punishment used against employees.
- Respect cultural differences, with no discrimination based on race, gender, personal characteristics or beliefs.
- Working hours should not exceed local laws and business customs.
- Fair wages and benefits must be provided in compliance with local laws.
- No child labor is allowed.
- Suppliers must comply with environmental laws.
- No offering of anything of value to influence audits or business decisions is allowed.
After the initial audit, the facility will be re-audited after 12 to 18 months. If the auditing result shows the facility is at risk then follow-up audits will typically be required. All of these audits will be either conducted by Target auditors or by trained and qualified third-party auditors.
How to Prepare for a Formal Audit from a Retailer
Many importers may be aware of the standards their suppliers must meet, but they aren’t aware of how to prepare for a possible audit from a retailer they distribute to. And if you find yourself in this category, consider yourself “ahead of the pack”. You’re in a much better position to interpret the results of a social compliance audit if you’re familiar with the standards that guide one.
The best way to protect yourself from the consequences of working with a supplier that doesn’t comply with retailer standards is to hire a qualified third-party to carry out an audit. Based on the results you can see in the audit report, you’ll be able to determine which areas you may need the supplier to improve in order to pass a formal audit from the retailer.
If your supplier is already meeting your retailer’s standards for social compliance, a passing audit will bring you peace of mind.
Most major retailers have their own set of standards for social compliance. But generally, you’ll see some overlap in areas of focus like local law, labor practices, working environment and others. With standards in hand, retailers will often carry out audits of their suppliers’ facilities to make sure they’re reputable.
Remember that you can prepare yourself for a formal audit from your retailer by:
- Becoming familiar with your retailer’s individual standards for social compliance and
- Carrying out an audit of your supplier’s factories to be sure they are meeting these standards.