Why ethical sourcing means show and tell

Financial Times

By Lauren Foster and Alexandra Harney

Factory managers in China are becoming increasingly sophisticated at

falsifying worker time cards and payroll documents to disguise

irregularities including underpayment, excessive hours and inadequate health

and safety provision. Auditors estimate that more than half of factories

they see in China are forging some of their records - meaning that many of

the international companies that source from China are learning less about

the actual working conditions in the factories they use, even as they step

up efforts to monitor them.

The practices also mean that some western groups' assurances that they are

abiding by China's labour laws and their own codes of conduct are based on

faulty information. The widespread forging of records threatens to undermine

the aims of the corporate social responsibility movement, a response by

multinationals to the concerns of customers, non-governmental organisations

and trades unions about issues including human rights and the environment.

Even the biggest companies that source from China say they are confronted

with falsified records at Chinese factories. Beth Keck, director of

international affairs at Wal-Mart, says the world's largest retailer is

aware of the problem. Nike's 2004 corporate responsibility report, released

by the footwear maker this month, says of Chinese factories: "Falsification

of information by factories often related to wages and hours of work is

common. This extends to the practice of coaching of workers by factory

managers trying to deceive compliance auditors."

Daryl Brown, vice-president for ethics and business practices at Liz

Claiborne, the New York fashion group, describes the difficulties: "A few

years ago, we were able to detect when records were altered by simply

interviewing workers. Now, workers are coached. Good auditors can usually

tell when the workers have been coached and we also make periodic

un-announced audits to combat this. However, there are times when we need to

resort to interviewing workers off premises or to surveillance to find out

the truth. We also have our direct contact information posted at the

factories, which allows workers to contact us confidentially, and on

occasion they do."

Compliance executives say the problem occurs elsewhere, citing cases from

India, but add that Chinese operations are smartest in their deception.

Getting evidence of forgery is therefore difficult. Factory managers are

reluctant to explain their methods, while western companies that are trying

to persuade them to come clean fear publicity that would damage their

reputation. However, the Financial Times has obtained access to a large

garment factory that forges some of its documents. The circumstances of the

visit require that the name of the factory is withheld, but it is located in

the southern province of Guangdong, the industrial hub just north of Hong

Kong that produces a big portion of China's exports.

The factory manager said he had assigned a team of six employees to create a

paper trail of fake documents for foreign buyers. Some of these workers

punched fake time cards to give the impression that the stipulations of

buyers were being met. One was charged with creating matching payroll

records on the computer. "This is a perfect match for (the buyers')

requirement," the manager said on a recent afternoon, gesturing at forged

time cards and payroll records arrayed on the table next to the genuine


Most foreign companies who buy from him see the fake records, he said. The

forged documents, nearly indistinguishable from genuine ones, showed shorter

working hours, allowing the manager to hide violations of Chinese labour law

and western buyers' codes of conduct. "This is a way of surviving," he said.

"This is the way of Chinese factories."

Big US and European companies, particularly in the footwear and apparel

industries, send staff and third-party auditors to determine whether their

Chinese suppliers are complying with the multinationals' codes of conduct

and national labour laws - which for China stipulate a 40-hour working week

with a maximum of 36 hours of overtime a month. Auditors talk to factory

managers and examine records to check for working hours longer than the

legal limit and sweatshop conditions. They tour the factory, looking for

everything from under-age workers to exit doors and fire extinguishers to

the number of workers sharing factory dormitory rooms.

These audits are a chilling prospect for many Chinese factories. Failing an

audit means a potentially crippling loss of business but compliance often

requires a costly overhaul. When audits began, "we'd go to the factory, we'd

see they did not meet lots of standards", says Steve Li, executive director

of Hong Kong-listed Yue Yuen Industrial, the world's largest manufacturer of

branded footwear, for customers including Nike, Reebok, Adidas and New

Balance. Mr Li adds that improving social compliance is a continuing effort

at his factories. "This is a pretty long journey. It's not ended. There's

lots of room to improve."

China's laws - which also require workers to be paid at least 1.5 times the

normal wage for overtime - are more stringent than in some countries. But

factory managers' often cozy relationships with local officials and the

rapidly rising number of plants make them easy to disregard. "We rarely find factories that can actually meet the local labour law in terms of hours,"

says Daniella Gould, China country director for Impactt, a London-based

consultancy that helps companies improve labour standards in their supply


Because of the long working hours, most workers do not receive the legal

minimum wage, according to auditors and non-governmental organisations that

inspect Chinese factories - although some staff want to work beyond legal

limits. "In China, it is common for the actual wage to amount to as little

as half the legal minimum wage, particularly in industries involving very

detailed work, such as handbags and beaded accessories, where workers are

paid piece rates," Sanchita Saxena and Franck Wiebe, respectively assistant

director and director of the Asia Foundation's economic reform and

development programme, wrote in a report published by the foundation in

January on the end of the Multi-Fibre Arrangement, the system that until

this year governed the textile trade.

Faced with a choice between losing the business from international buyers or

paying the cost of complying, many factories instead cook the books. Ms

Gould estimates that a majority of factories in southern China have prepared

some forged documents. Gary Beadell, managing director of Level Works, a

social compliance auditing group working in China, says that "over 90 per

cent" of the factories he sees falsify at least some of their records.

Double bookkeeping is common, say buyers and independent monitors. One Hong

Kong-owned toy factory even assigned workers to rubbing falsified time cards

in dirt to make them look genuine, according to Parry Leung, a researcher at

the Hong Kong Chris-tian Industrial Committee, a non- governmental

organisation. Workers who give auditors the impression that a facility is

compliant may be rewarded by managers with bonuses, he adds.

Some factories coach their employees ahead of auditors' visits on how to

answer their questions. One sign posted in a footwear factory in Guangzhou,

the capital of Guangdong province, and obtained by an auditor reminds

managers of the various weekly working hours required by different buyers.

"Please educate the workers well to avoid telling the client the truth," it


A document used in October 2003 to coach workers at a factory in Huizhou,

another city in Guangdong, warned staff that the factory had received notice

that Liz Claiborne representatives would be coming for an audit the

following Tuesday. "All departments and all work places should organise a

training for workers to prepare for this," it said, warning that "workers

should not be allowed to let the buyers know that we have given prior

training to workers based on the specifics of the workers' interview".

"The falsification of records is a problem, especially in China," says Liz

Claiborne's Mr Brown. "When conducting a payroll audit, we become suspicious

if the working hours are low. There still seem to be a few places where you

can get a feel for the true working hours, such as reviewing

production-related records. However, in some cases, the factory knows to

doctor them too. Just being aware of this practice gives us an advantage. We

do not necessarily find all of the problems, but we do find a lot." hile

persuading most auditors that his records were genuine was not hard, said

the Guangdong factory manager observed by the FT, workers were harder to

control. "I just stand outside the door and pray to God" during worker

interviews, the manager added.

In order to ensure a successful audit, some factories also offer auditors

bribes. Ms Keck, at Wal-Mart, says the retailer has fired several employees

in China in recent years for requesting or receiving bribes during an audit.

More auditing has not helped the problem. Big companies that buy a lot from

China rely on both internal and outside auditors, in order to inspect more

of the facilities they use and to show that independent observers had come

to their own conclusions about the factories. As the social compliance

auditing industry has grown in response to increased demand it has left many

auditors with less time to spend at each factory. "I tell auditors that I

cannot tell them the truth in relation to some of their questions. They

smile and move on to something else," a manager at one large garment factory

in Dongguan told CSR Asia, a Hong Kong-based research group. "They are

complicit in the deception."

There is no doubt that increased surveillance by foreign buyers has improved

working conditions at many factories in China. The best plants now have

basketball courts, libraries and internet access for workers. But factory

managers and compliance executives say privately that the increasing forgery

of records partly reflects the complexity of the challenge facing Chinese

plants that supply international companies: meet the customer's requirements

for social compliance, pricing and delivery time or lose the business.

"We are under enormous stress, customers place late orders, they change

their orders part way through manufacturing and they pay their bills late.

At the same time they ask us to provide better training for our staff,

better health and safety and better accommodation. We just cannot do it

all," the Dongguan manager told CSR Asia.

One executive at a European retailer says falsification of records is the

result of common interest between buyers and factories: guaranteeing

delivery of goods on tight schedules. "We are sometimes putting them in an

impossible situation," the executive says. But Wal-Mart's Ms Keck denies

that pressure on prices is a factor. "If we have this kind of contentious

relationship (with factories), they're not going to have stability in their

workforce to produce good quality goods. What we're looking for is cost

efficiency. We're not looking for the lowest cost."

As China continues to increase its share of global manufacturing, however,

some observers fear the evasion of labour standards will only get worse. The

elimination of the global quota system on textiles is expected to drive a

growing share of the world's clothing production to Chinese factories.

"We're rewarding factories that are falsifying records," says one compliance

executive. "We are creating a disincentive to really play by the rules and


Groups such as Nike, Levi Strauss, Wal-Mart and Gap are trying to build on

the auditing of labour standards at their supplier factories by introducing

programmes to train workers and managers - an initiative known as "capacity

building". Others have stationed full-time compliance executives in

important factories or are looking for alternatives to the cat-and-mouse

monitoring game.

Though they declined to be identified for fear of damage to their

reputation, some companies are trying to persuade Chinese factories to show

their real records and sign on to a programme of continuous improvement -

even if that means knowingly buying from factories that violate the labour

law and the company's compliance code.

"US businesses are more concerned about China's labour conditions because

they are sourcing there even more than before," says Mila Rosenthal,

director of Amnesty International USA's business and human rights programme.

"The lifting of (textile) quotas has raised the profile of the labour issue

and made companies more aware of risk in terms of potential reputational

damage. At the same time, they are also consolidating their supply chain."

Others are trying to work together. The National Retail Federation of the

US, the Retail Council of Canada and Reebok, the US shoe company, in January

created the Fair Factories Clearinghouse for companies to share information

on factory audits. The FFC is testing a centralised "ethical sourcing"

system based on software Reebok uses to monitor its own factories in Asia.

World Monitors, a human rights and business consultancy, obtained a grant

from the US State Department to help develop the FFC. Its goal, says Scott

Greathead, chief executive of World Monitors, is to "eliminate the

inefficiencies and duplication of effort that have made workplace monitoring

less effective".

Pilot FFC software is being tested ahead of a launch expected next week. "It

is necessary for us to collaborate with other companies if we are to make

the progress we want to make," says Peter Burrows, Reebok's chief

information officer. "If you care about protecting your brand and doing the

right thing for human rights, the FFC . . . isa very cost-effective


Elliot Schrage, a senior fellow at the Council on Foreign Relations and an

adjunct professor at Columbia Business School, says: "The frustration over

deceptive labour practices is fuelling greater collaboration between brands

... Instead of several companies spending relatively small sums for isolated

snapshots of factory conditions, co-operation lets them pool their resources

to fund a more comprehensive X-ray."

However, the FFC project has not yet gained the support of other industry

heavyweights such as Nike and Gap. The FFC "only assists brands in sharing

their snapshots of factory conditions; it does little to ensure the

snapshots are based on the same standards or have been taken with the level

of rigour necessary to uncover possible abuses", says Mr Schrage, who

oversaw Gap's factory monitoring programme in 2000 and 2001.

Auret van Heerden, president of the Fair Labor Association, a US-based

monitoring network, says the main issue is how companies address the root

causes of abuse. "Sharing the list of problems, while it helps and hopefully

reduces some duplication, only gives us a job list. That is when the real

work starts and where we need the collaboration."

Industry pressure has come from Nike, which in the 1990s endured withering

criticism of its labour practices. Last week Nike published its 2004

corporate responsibility report, which for the first time included a list of

more than 700 suppliers around the world. "We hope that full disclosure, if

also followed by other companies, will lead to more sharing of industry

monitoring," says Hannah Jones, Nike's vice-president of corporate

responsibility. "The current system has to evolve fundamentally to create

broad, sustainable change for factory workers. No one company can solve

these issues that are endemic to our industry."