// GAIL DUTTON

Providing jobs is no longer good enough, as Nike tries to improve lives as well as profits.

Although the company’s efforts are working, achieving sweeping changes is extremely difficult; it requires adjusting the mindsets of cultures that are thousands of years old.

Who would willingly work 70 or 80 hours every week, or send their young children to toil in a factory? For many people living in developing countries, the obvious answer is “people who want to eat.” That’s a reality Nike faced when it first started working with its suppliers in the third world.

When the company began contracting in these regions, providing jobs was good enough. By the end of the ‘90s that changed.The western world was outraged to learn of the sweatshop working conditions that seemed endemic in developing nations. Nike, an extremely recognizable brand using offshore manufacturing, became one of the major fall guys.

The company took immediate steps to correct the situation, implementing a code of social responsibility throughout its supply chain that improved working conditions for some 800,000 employees at 700 factories in 52 countries. Its goal was systemic change for both its suppliers and the entire industry.

However, improvements in working conditions are not always welcome. Suppliers want to see the direct benefits to their bottom lines. Without that, many aren’t willing to take any risks. Consequently, persuading suppliers to improve working conditions isn’t easy. The best approach, Nike discovered, combines education and leading by example.

“I truly believe Western firms have played a significant role in raising standards in [the developing world by demonstrating] how we think, how we do things and how we treat our people,” says Chris Robertson, associate professor of international business, and an expert on Latin America, at Northeastern University.

How did they do this?

Step One
The starting point for Nike was to develop a supplier code of conduct that extends the corporation’s values to its suppliers. “One of the reasons for the disconnect between a company’s code of ethics and what happens among its suppliers is that suppliers—and even boards of directors—often are seen as external to the company,” according to Mark Vickers, vice president of research for i4CP. “People are still very cost conscious and make decisions based on financial indicators.”

Top offshoring firms like Nike, though, have a different approach. They have seen that good corporate social responsibility (CSR) practices can bolster the bottom line.

Vickers agrees that with a solid social responsibility program companies can have some influence, but says gaining that influence is a long process that requires knowing exactly what you want, communicating it clearly to suppliers in ways they understand and getting their buy-in. Then there is auditing, best practices education, rewarding compliance and ensuring that variances from the standard are not ignored. Flexibility is important, too. It’s a highly collaborative process.

“When we first go into a factory, they ask why we ask so many questions about how they do things. Sometimes they’re a little hostile,” says Caitlin Morris, Nike’s director of compliance integration and collaboration. “As it becomes part of the business, though, the dialogue changes.” Nike begins to learn suppliers’ constraints, and they begin to understand the reasons behind Nike’s insistence on certain practices. A partnership gradually forms.

Nike’s 2006 CSR report shows that the number of its suppliers meeting its requirements is actually increasing, with about half earning an “A” or “B”, indicating they are making progress towards Nike’s CSR goals. But, there’s still a lot left to be done.

“It’s an uphill battle in some areas and the ebb and flow of investment into a country has major impacts on the standards and what can be done,” says Robertson.

Audits Aren’t the Answer
Of course, change doesn’t occur overnight. Instead, it’s a work in progress. When Nike began its CSR program, it knew it had to work incrementally. The first steps were to identify goals, conduct a supply chain audit to understand the actual practices and then to identify needed changes. Audits aren’t the answer, though. “Suppliers get audited to death,” says Auret van Heerden, president and CEO of the Fair Labor Association. “Some have 400 audits per year, and most are proforma, cookie cutter endeavors.”

Putting monitors on the factory floor is another approach, but those monitors have to be picked strategically. As Michael Soon Lee, author of Black Belt Negotiating, says, “If your monitors are from outside, things get by them. If they’re part of the culture, they’re more likely to really know what’s going on.”

Monitoring is valuable but, like an audit, it only points out discrepancies and resolves incidents. It doesn’t catalyze systemic change. Industry-wide, “monitoring and transparency efforts haven’t had the impact that was hoped for,” notes Steve Rochlin, head of Accountability in North America.

Every large company seems to have a CSR policy, and most would say they are effective. But are they really? Crafting an effective policy isn’t as simple as putting something down on paper.

An effective CSR policy must be simple and accessible to the workforce—linguistically as well as physically, insists Alexandra Wrage, president of TRA CE. Common mistakes are making the policy too vague or too complex. For example, she says, a single paragraph warning “don’t break the laws of the country,” is insufficient. Some laws are easy to break inadvertently, and employees need more guidance. (In Kuwait, for example, even paying for a cup of coffee for a government official is illegal.)

At the other extreme, Wrage recalls trying to read a 220-page tome on anti-bribery, written in legalese, aimed at employees. “Trying,” this attorney says, was the operative word. She says a company should be able to craft a meaningful policy in about two pages, in a language and reading level that employees can understand.

Developing a realistic corporate social responsibility policy or ethics policy is one of the first and most important things a company can do to extend its values throughout its supply chain. “But,” Wrage adds, “it needs real management commitment.”

“It’s too easy for suppliers to subvert those conditions.”

“Many of the major suppliers are working very, very hard on understanding what they need to do to comply with social responsibility codes, but many also feel that complying actually increases costs and decreases efficiency,” Rochlin says. So, they are reluctant to comply. “They don’t understand you can increase productivity by improving conditions.”

Root Cause Analysis
To address that perception, Nike combined audit results and best practices with root cause analysis and intense collaboration. “Only the top 100 or so companies are doing root cause analysis,” van Heerden says.

The greatest challenges among Nike’s suppliers, according to Nike’s own audits, are lack of freedom of association and collective bargaining, harassment, excessive working hours, inaccurate or non-payment of wages and health and safety issues.

Nike’s goal in addressing those issues, Morris says, is not to treat symptoms but to attack their root cause. That necessitates understanding the challenges at particular factories so they can be resolved.

When the American Management Association commissioned its 2007 survey linking ethics to business success, it found that the top driver of unethical behavior was the pressure to meet unrealistic business objectives. That pressure, in turn, contributed to many other problems, such as poorer quality, more accidents and increased overtime.

Elaborating in its 2006 CSR report, Nike notes that, “Building the links between traditional areas of measurement in contract factories, such as quality and delivery, and the human element—turnover rates, costs of recruiting and training, time lost due to incidents and accidents—is crucial in establishing a business case for eliminating excessive overtime. Without a clear business case, contract factories have a difficult time embracing investments in human resource management systems. External market pressures are simply too overwhelming and the rule of law is generally too weak to create a level playing field at the regulatory level.”

Take excessive overtime as an example. It’s a major problem throughout the apparel industry. Nike’s audit found the reasons for excessively long work hours among its suppliers were poor application of local laws, flawed factory management approaches and upstream business processes that caused extra work.

There are other issues, too, of course, such as delays from other suppliers, production bottlenecks or acts of nature— like the hurricanes that hit Mexico last September. These all increase overtime if the production schedule lacks the flexibility to absorb such delays.

Upstream business process— like product design and purchasing practices within Nike’s own organization—is something Nike could control directly. “Do we make design changes after the order is placed? Yes!” Morris says. “So,” she challenges Nike managers, “how can we change our purchasing behavior?”

By understanding how purchasing behaviors affect the other elements throughout the supply chain and taking personal responsibility for it, Nike managers can minimize suppliers’ need for overtime. Nike CEO Mark Parker considers this issue so important that he is chairing Nike’s Overtime Task Force himself and has tied CSR objectives to employee reviews. The suppliers, though, sometimes want the overtime. Watchdog NGOs say 60 or fewer hours of work per week are acceptable, but van Heerden admits he has often heard “a lot of countries say ‘we’re developing and need to work 70 to 80 hours per week to catch up.’”

Work Smarter , Not Harder
“I frequently have discussions about hours of work with facility managers,” van Heerden says, explaining that excessive overtime is inefficient. The plant manager generally counters that the factory and the employees are paid by the piece and need to maximize their incomes. Van Heerden advises suppliers to “work smarter, not harder,” and for buyers to “add incentives to finish work on time,” thereby increasing productivity and maximizing income.

Best practice research shows links between long hours, increased accidents and poor health, but plant managers need specific data from their own facilities showing when defects, accidents and even needle breakages occur, van Heerden explains. For example, do workers break more needles at the end of their shifts than at the beginning, or during long periods of frequent overtime? If so, it may mean they’re tired and not paying as much attention to their work and quality suffers. On top of that, potentially productive time is wasted with changing needles.

Likewise, if the lost time accident rate varies during periods of prolonged overtime, that trend can be used to help managers adjust work schedules to minimize accidents, which can affect downstream processes. If accidents are significant, they can affect a facility’s ability to deliver goods on time or at the agreed-upon quantity or quality. Once they have that data, they can see patterns.

Morris cites a great example from one of Nike’s Thai suppliers. “Three or four employees were trying to unionize the workforce,” Morris says. The factory manager insisted the other employees didn’t want the organizers there and that their intentions weren’t good. They were dismissed.

Nike sat out of the ensuing legal battle for reinstatement, preferring to let local authorities handle the situation. Nike did, however, persuade the supplier not to appeal if the court ruled in favor of reinstatement, which it did. “Now there are two unions in that factory, and the worker at the center of the debate was promoted for his leadership abilities,” Morris says. “Nothing played out the way the manager expected.”

Nike was criticized for not getting involved, Lee explains, but it knew that the rest of the world doesn’t always view things the way the United States does, and that the greatest progress can be made by educating rather than dictating. “Changing behaviors and then mindsets is a slow, laborious process,” Lee emphasizes.

Collaborate
Nike takes foreign timeframes and differing cultural norms into account by working with suppliers and their employees, other buyers and non-governmental organizations to design CSR endeavors. Nike helps them define the project goals, implementation and accountability components.

One of the first steps in crafting a successful CSR plan is defining what “good” looks like, Morris says. Key elements are designing upstream business processes that support good working conditions and efficient product flow. It’s also important to clearly define the rules and hold Nike employees accountable for compliance with Nike’s principles. This includes supporting sustainable business practices, encouraging suppliers to invest in worker training and by sharing best practices and the results other Nike suppliers have seen when they implemented some of those practices in their own facilities. Nike also employs suppliers’ human resources department as a strategic partner.

It’s vital, Lee says, to view these efforts from the suppliers’ perspective. “What’s in it for them?” he asks. While buyers need to be accountable for the performance of the extended supply chain (which includes the suppliers’ suppliers), Rochlin explains, they must understand the situations within their supply chain, the cost of compliance and, most importantly, how that cost will translate into long-term benefits. That’s where collaborative leadership can be an advantage.

Nike is definitely engaged in dialog and collaboration with its suppliers, van Heerden says. For example, Nike’s Vietnamese suppliers are developing and sharing their own best practices, as well as information gained from Nike’s Vietnamese training center, Morris says. With Nike’s help, they’ve established a corporate responsibility committee that shares best practices among themselves. “We seeded it. They own it,” Morris says. “We’re building trust with our suppliers there. They are seeing there are no repercussions for sharing that the buyer is part of the problem.” So, if a Nike process creates a problem for a supplier, it’s okay to talk to Nike about that problem and its ramifications. Then, the two may work together to find a mutually acceptable solution.

Additionally, Nike is collaborating with the International Labor Organization’s Factory Improvement Program in Vietnam to improve communication between management and trade unions. In China, it’s working with the Xiaochen Hotline Program to provide training on China’s labor laws and to improve Nike’s own worker grievance program and worker access to the hotline.

It’s important to note that collaboration only works when the parties all maintain their independence, van Heerden points out. Nike is a member of the Fair Labor Association (FLA) and other NGOs, but it and other corporate members are forbidden to provide funding. Membership criteria for the FLA require corporations to provide a list of all their suppliers, let third parties visit and audit those suppliers and to accept transparency. The FLA audits about five percent of Nike’s supply chain each year, conducting secret, unannounced audits and publishes the results.

Nike is on the FLA board, van Heerden notes, so questions sometimes arise regarding whether FLA is afraid to penalize a board member. “Look at our results,” he challenges. FLA has reported violations regarding freedom of association, sexual harassment and other issues among Nike’s suppliers.

Nike takes these issues seriously. As the first world countries become increasingly aware of working conditions throughout the world, corporate social responsibility has become increasingly important—to publicity and to the bottom line. Nike has become a business ambassador, teaching suppliers that regardless of their location or local operating environment it makes good business sense to treat their workers fairly. Suppliers, for their part, increasingly understand that the benefits of ethical practices can enhance their own bottom lines, through expanded markets, better quality, more business and increased revenues. Increased innovation through freedom of association, plus a more prosperous workforce and a more robust local economy are icing on the cake. By working with its suppliers rather than dictating to them, Nike really is changing the world, one factory at a time.