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Monday, October 21, 2013

Supplier Codes of Conduct and Working Conditions in the Global Supply Chain

Please allow me this moment of shameless self-promotion.  I just posted a draft to SSRN titled "Corporate Codes of Conduct and Working Conditions in the Global Supply Chain: Accountability through Transparency in Private Ordering."  What began as a musing on whether the supplier codes of transnational corporations should be viewed through the lens of contract law evolved into a regulatory piece about transparency.  It has a little something for everyone: contract law, employment law, international law, human rights, corporate governance and securities regualtion.  All inspired by a summer abroad course I taught in Vietnam.  Here's the abstract:

In early 2012, Apple Inc. had its very own “Nike moment.” The mainstream news media raised issues concerning working conditions at a Foxconn factory in China that manufactures iPads. The press accounts described serious and sometimes deadly safety problems, excessive overtime, underage workers, and even a rash of suicides. More recently, massive and deadly tragedies in Bangladesh garment factories have captured United States media attention. This negative publicity has renewed questions about how to achieve humane conditions for workers at factories that supply goods to transnational companies (“TNCs”). 

Prompted by the negative media attention, Apple publicized its “Supplier Code of Conduct” and voluntarily joined the Fair Labor Association (“FLA”), a non-profit consortium of companies, universities and organizations committed to improving working conditions through accountability and transparency. These steps to voluntarily undertake higher standards can only be understood with reference to the greater context of international guiding principals and the setbacks in implementing them.

International labor standards have remained largely aspirational and the International Labor Organization (“ILO”) lacks meaningful enforcement power. Moreover, United States labor and employment laws generally do not apply extraterritorially. For these reasons, much of the more recent standard setting has been undertaken voluntarily by TNCs through their own codes of conduct or by joining a non-profit standard-setting organization. For example, through its “Supplier Code of Conduct” Apple has ostensibly committed itself to improving working conditions in the factories that manufacture its products. By joining the FLA, it has agreed to independent audits of its suppliers. 

Given the lack of mechanisms to enforce international standards and the presumption against extraterritorial application of United States law abroad, it is tempting to view the self-regulatory nature of supplier codes through the lens of contract law. Although the codes of conduct may be incorporated by reference in supply contracts, they do not bring any stronger enforcement mechanisms to workers in the international supply chain. While the codes use legalistic language, they are carefully written to avoid the risk of creating liability. The codes typically do not fix the TNCs to a firm commitment to monitor and audit suppliers and, therefore, often echo the aspirational nature of ILO standards. Even where promises of monitoring can be found in the code language, it is not likely that workers can enforce those promises as third party beneficiaries. 

Further, it would be misguided to treat the supplier codes of conduct as exposing TNCs to contractual liability. The codes are voluntarily enacted and self-imposed; once the codes potentially subject TNCs to contract claims, there is a disincentive to adopt the codes in the first place. Indeed, many TNCs that rely on global suppliers have yet to adopt a code of conduct or join an organization like the FLA.

Given these challenges, this paper shifts focus away from attempts to enforce global standards or apply contract principles to the private ordering of supplier codes of conduct. Instead, this paper argues that a model of transparency may be the most promising path to holding TNCs accountable for working conditions in the factories of their suppliers. The central normative claim of this paper is that the United States should require TNCs to disclose whether they have a supplier code of conduct, the terms of that code and who does the monitoring and auditing of suppliers. Disclosure requirements are more likely to encourage TNCs to voluntarily undertake standards that reflect best practices. The focus on transparency falls squarely within the recent push to require companies to report on more than strictly financial information.

Conditions for workers in the supply chain will only improve if required by the source of demand for the products they are employed to manufacture. Despite the fact that self-imposed codes have been criticized as platitudes or public relations stunts, some TNCs have made more concrete commitments to monitoring and auditing their suppliers. Adding transparency to the supply chain will make it relatively easy for interest groups to rate a TNC’s commitment to improving working conditions. A disclosure model that brings information to the United States marketplace and informs the demand for products may have the greatest potential to increase TNCs’ accountability and improve working conditions in factories across the globe.

You can download it here.  Comments, suggestions and wagging fingers are all welcomed.

[Meredith R. Miller]

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