Gap Opens a Window on Vendor Compliance

Sweatshops were back on the front page of the Wall Street Journal on May 12, 2004. But this time it was a company disclosing problems at its contract supplier facilities, not an activist group. For shareholders who have engaged publicly traded companies for years on labor rights concerns, the publication by Gap Inc. of its first Social Responsibility Report was a watershed event. For the first time, a U.S. clothing retailer publicly rated the way its supplier factories treat their employees.

The report confirmed the prevalence of significant code of vendor conduct violations at many Gap supplier facilities using a quantitative ranking system to rate factories and provided an unprecedented level of detail about code violations and an unusually frank discussion of the challenges faced in working toward code compliance.

The report is the direct result of two years of dialogue between the company and a coalition of socially responsible investors. It had been nearly a decade since apparel companies rushed to draw up codes of conduct designed to protect employees at contract supplier factories following a string of disclosures about abusive working conditions. As You Sow and its client Domini Social Investments were concerned that after so many years it was still virtually impossible to determine levels of compliance with codes because virtually no companies were disclosing the results of their audits of vendor code compliance.

The result was that social researchers, who consumers and investors turn to as authorities on corporate behavior, didn't have good data about which companies were seriously enforcing their codes of conduct. Social researchers really didn't know if Target or JC Penney was enforcing its code of vendor conduct better than Gap. Companies like Mattel and members of the Fair Labor Association have released summaries of factory compliance audits with fairly detailed narratives summarizing problems at suppler plants, but they lacked quantitative benchmarks so that total corporate supply chain performance could be fairly compared to a competitor.

Sweatwash

Worse, this situation created the potential for sweatwash (the corporate cousin of greenwash), an orchestrated illusion of humane treatment and fair wages by touting a code of conduct, but providing no public verification. Where was the beef?

Domini joined with other groups who had been in dialogue with Gap on labor rights issues-Calvert Group, Center for Reflection, Education and Action (CREA), and Interfaith Center on Corporate Responsibility (ICCR)-and asked the company commit to production of a detailed, substantive vendor standards report and to work with proponents to determine the kind of information that would be most valuable in helping stakeholders better understand the company's progress in achieving compliance at supplier facilities.

We believed Gap might be willing to issue a model vendor standards report when other companies had refused. Why? Gap had bucked its industry peers in 1996 when it agreed to independent monitoring of a supplier factory in El Salvador, the first major retailer to agree to genuine outside scrutiny. That experience had formed a level of trust between two key members of our group, Rev. David Schilling of ICCR and Sister Ruth Rosenbaum of CREA, who were instrumental in the success of the Independent Monitoring Working Group in El Salvador.

We also sensed a high level of frustration by the company. Gap believed it was doing more than most of its competitors to enforce its code but not getting credit for it. Why not disclose its performance and see if its competitors would disclose as well? We asked the company to work with us on a process to develop quantitative goals that demonstrate progress in compliance with the company's code of vendor conduct. Gap agreed to try.

Report Summary

The result is an admirable step in the direction of a model format that other companies can adapt and improve upon. The factory ratings cover about 10% of its 3000 supplier facilities worldwide, 324 factories in six countries. A five-level ranking system was used. Overall 13% of facilities featured in the report scored the worst Level 1 ranking of "Immediate Attention Required" and are in danger of termination; 18% scored "Needs Improvement" (Level 2); 32% were judged "Fair" (Level 3); 31% scored "Good' (Level 4); and just 5% were deemed "Excellent' (Level 5). There is evidence of considerable noncompliance with wage, hour and overtime rules and environmental health and safety violations. There is little to no evidence of forced labor or child labor. The company acknowledged that wage, benefit and freedom of association compliance were probably worse than its audit data suggested. It says its ability to discover violations increases "when we can conduct in-depth interviews with workers and engage unions and other organizations that have reliable sources in a factory."

The report is impressive in its acknowledgement of what many activists have been saying for years: many of its supplier facilities are not in compliance, it's a huge problem, there's no easy fix and the company needs to work with a variety of stakeholders to improve the situation. In the introduction to the report, Gap CEO Paul Pressler states "creating sustainable and scalable solutions across the retail apparel and garment manufacturing industries is immensely difficult" and adds that "collaborative multi-stakeholder engagement is the only way to create sustainable change industry wide."

The company is committed to improving and refining its evaluation and rating system in subsequent reports. Our shareholder group would like Gap to address the remaining 90% of its supply chain in future reports and to provide more factory-specific ranking data and specific disclosure of ranking methodology. We would also like to see the company develop tools to measure what actions bring about code compliance that can sustain itself over the long term. Confidence in the data would be strengthened by independent verification of the company's data.

We hope the report serves as a wakeup call to the rest of the apparel and retail sector. A Wal-Mart spokesman told the Wall Street Journal it is giving serious consideration to how it compiles information on factory conditions. Investors now plan to challenge other companies they are already in dialogue with to produce similar reports. ICCR and its colleagues also plan to push for similar accountability in the electronics sector.

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