Apple, Inc, the FLA and the Governance of Supplier Labor Standards Beyond the State

 

 (From Apple discloses suppliers for the first time, KLEWTV.com, Jan. 13, 2012 ("Apple for the first time is disclosing the list of suppliers that produce the iPhone, iPad and other popular gadgets amid criticism of labor and environmental practices, especially in China."))

In 2006, in the wake of action by Apple, Inc., I suggested the value of voluntary codes of corporate social responsibility in the governance of the behavior of entities throughout the supply chain of the operations of a large multinational enterprise.

The last 30 years or so have seen a growing interest in voluntary corporate codes. These codes have been advanced as a means of regulating the behaviour of economic collectives—and especially multinational corporations—and those with whom these corporations interact in the global market. Voluntary codes have been crafted to regulate both internal corporate governance and corporate business ethics with a variety of stakeholders, including labour, suppliers, customers and nation-states.
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voluntary codes work best when they produce standards that can be monitored, when they are embraced by companies willing to investigate stakeholder claims of violation, and when stakeholders can affect the consumer markets for companies irrespective of the existence of the codes. Thus, ironically enough, the codes are merely a means through which stakeholder power is most effectively asserted—by affecting consumer markets. For proponents of free market globalization, this works very well indeed, even if it is uncomfortable for the affected companies; that is only business. For the stakeholders, including NGOs, this works well, too. They are able to skip the governmental middleman, so-to-speak, and directly affect corporate behaviour in a precise and targeted way. For NGOs weaned on the need for government intervention, this should serve as an assurance that the state is not a necessary predicate for effective action, even by those with no state power. Free market globalization was opened a great new market for consumer information; it is up to NGOs and other elements of civil society, as well as corporations and other economic actors, to get into the game.

Voluntary codes can work in the market, without formal bureaucratic structures or direct government intervention. All it seems to require are consumers, producers and taste-makers. Here is a very productive confluence of democracy and capitalism. But one in which there is very little room for the active participation of the state. (Larry Catá Backer, Corporate Social Responsibility and Voluntary Codes: Apple, its Stakeholders, and its Chinese Laborers, Law at the End of the Day, June 16, 2006)

By the middle of the first decade of the 21st century, it was possible to posit the existence of a self-contained and fully functional governance system, centered on the multinational enterprise and its supply chain, and dependent for its operation on the investor/consumer communities, non-governmental organizations (as monitors and norm suppliers) and the press.  Larry Catá Backer,  Multinational Corporations as Objects and Sources of Transnational Regulation. ILSA Journal of International & Comparative Law, Vol. 14, No. 2, 2008; Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator. University of Connecticut Law Review, Vol. 39, No. 4, 2007.

(From WORLDCOB - CSR, World Confederation of Business ("WORLDCOB-CSR:2011.1 is an international standard and certification in Corporate Social Responsibility developed by World Confederation of Businesses (WORLDCOB). Compliance with this standard requires the organization to adhere to a culture of ethical values, maintain and comply with a Corporate Social Responsibility Policy, and sustain a process of continuous improvement in the topics defined by the standard."))

The last six years has seen a dramatic growth in the depth and sophistication of governance systems beyond law that focus on the regulation of the labor policy of downstream enterprises in multinational supply chains. One of the markers of that growth is  the rise of enterprises the objects of which are to both develop normative governance frameworks and to provide a space for monitoring compliance.  Many of these are product or process certification programs managed by civil society elements.  

Third party certification can insure that green power products are meeting widely accepted consumer and environmental standards set through collaborative transparent stakeholder processes. Third party certification usually requires electricity providers and renewable energy certificate marketers to disclose information about their products in a standardized format. This disclosure helps customers make apples-to-apples comparisons of like products, informs purchasing decisions, supports providers’ marketing activities and builds consumer confidence in green power products. (From Information and Guidelines on Certification and Verification of Green Power Products: Resource for NGOs Considering a Green Power Purchase Prepared by the Green Power Working Group)

Related to product certification programs, these standards evaluators have become powerful mechanisms to enforce the private ordering governance derived from the adoption of voluntary codes of behavior by multinational enterprises.

In the not-for-profit field both accreditation and certification have been undertaken by self- regulatory organizations, which have promulgated standards and developed certification or accreditation mechanisms to evaluate compliance by other organizations with the standards. The standards are frequently developed through a participatory process in which many stakeholders are consulted. (Catherine Shea and Sandra Sitar, "Accreditation and Certification:  The Way Forward? An Evaluation of the Development Community's Experience," International Center for Not-For-Profit Law, Washington, D.C.)

Beyond product certification, process certification has provided NGOs with a new and more institutionalized role in the application of governance standards among communities of enterprises that have adopted them.  

 

One of these is the Fair Labor Association (FLA), which describes itself as:

a nonprofit organization dedicated to ending sweatshop conditions in factories worldwide. Since 1999, the FLA has helped improve the lives of thousands of workers around the globe. By bringing together multiple stakeholders, calling for greater accountability and transparency from manufacturers, factories and others involved in global supply chains, and creating lasting solutions to exploitative labor practices, we are making steady progress toward fulfilling our mission: protecting workers’ rights and improving working conditions worldwide.  With the active involvement of universities, civil society organizations and socially responsible corporations, the FLA has formed a unique and powerful alliance that is effecting positive change around the globe. We encourage you to read through our Web site to get a better understanding of how the FLA is working to achieve its goals. View the composition of the FLA Board and our constituent groups. Review our present and evolving methodology. Read our news releases and contribute to our blog. And get involved in one of the most challenging and complex issues of today. (Fair Labor Association, Home).

Key to the work of FLA is the collaborative development of standards and the enforcement of a system of monitoring and reporting (transparency) of compliance. "When joining the FLA, Participating Companies commit to promoting and complying with international labor standards throughout their supply chains, both in the U.S. and overseas. " (Ibid., Accreditation). 

Transparency and reporting is the key.

Companies that join the FLA commit to establishing internal systems for monitoring workplace conditions and maintaining Code standards, being part of a rigorous system of Independent External Monitoring (IEM), and public reporting on the conditions in their supplier factories. To ensure transparency, the results of the IEM audits are published on the FLA Web site in the form of tracking charts. (FLA. What We Do, Monitoring, Transparency and Public Reporting).

 

(From Apple, Supplier Responsibility, Labor and Human Rights ("An independent auditor checks identification and other documents to verify the age and status of workers at a facility in Shanghai. Suppliers are required to maintain all relevant documentation and to produce it during audits."))

Organizations like FLA institutionalize transparency mechanisms so that markets for information and disclosure can arise--producing similar disclosure products for consumption by investors and consumers to guide their purchase and investment decisions.   This system provides a viable approach to transnational governance without the need for states.  Effectively FLA contributes to making soft law functionally hard while it retains its character, within public law frameworks, as soft.  See, Larry Catá Backer,  From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations. Georgetown Journal of International Law, Vol. 39, 2008. 

While accredited companies lose autonomy in the construction and application of voluntary codes throughout their supply chain, they gain a certain legitimacy by adhering to the collaborative standard setting and transparency facilitating outside institutions.  Effectively, accredited companies can outsource enforcement while retaining a substantial stake in the development of both the standards to be applied and the monitoring systems applied.

The dynamics of these developments is nicely illustrated with the ongoing difficulties at the Foxconn plants in China, a facility operated by multinational interets for the purpose of supplying  parts and other goods to multinational enterprises in the production of a host of consumer products for sale worldwide.  See, Larry Catá Backer,  Corporate Governance and the Social License to Operate: Foxconn and the Limits of Legal Formalism in Corporate Governance, Law at the End of the Day, June 8, 2010.  One of the consumers of Foxconn products is Apple, Inc.

(Chloe Albanesius,  Foxconn Factories: How Bad Is It?, PC Magazine.com May 6, 2011 "Foxconn, a Taiwanese company that produces components for Apple products, has come under fire for harsh working conditions at its China facilities. Recently it was reported that Foxconn even forced employees to sign a pledge promising that they wouldn't commit suicide. But just how bad is it?")

Apple had long operated its own corporate social responsibility governance system through its supply chain.  The system had worked reasonably well.  But Apple, like other large multinational corporations, is vulnerable to reputation damage among consumers and investors in developed states.  Like other large multinational enterprises with well developed global supply chains, Apple governed behavior throughout its supply chain through a supplier code of conduct, that was regulatory oin character, that specified behavior standards and expectations in the areas of labor, human rights, worker health/safety, environmental impact, ethics and management. (Supplier Responsibility at Apple). Apple reported the results of its monitoring in an annual Apple Supplier Responsibility Progress Report (HERE for the 2012 Report), which included the results of its audits (a private regulatory function within voluntary code systems). Earlier reports can be accessed here: 2011 Progress Report (PDF); 2010 Progress Report (PDF).

 (From Apple sent COO Tim Cook to China after Foxconn suicides last year, Los Angeles Times, Feb. 15, 2011 ("Apple sent Chief Operating Officer Tim Cook to China in June to review the facilities at Foxconn, one of the company's main manufacturing partners, after nearly a dozen employee suicides there. "Like many of our customers and others around the world, we were disturbed and deeply saddened to learn that factory workers were taking their own lives at the Shenzhen facility of Foxconn," Apple said in its annual Supplier Responsibility report."))

But the recent suicides at Foxconn and its potential effects on enterprises like Apple appears to have moved Apple toward collaborative CSR systems.  It was recently reported that

Apple Inc. (APPL) agreed to let outside monitors into factories of partners, such as Foxconn Technology Group (2317), and listed suppliers for the first time to counter criticism about conditions of workers making its gadgets.

The iPhone maker becomes the first technology company to join the Fair Labor Association. The Washington-based FLA was set up in 1999 to monitor workplace environments globally in an initiative by former U.S. President Bill Clinton, and its participants include Nike Inc. (NKE) and Nestle SA. (NESN) Apple also released its annual suppliers’ audit yesterday.

Apple’s affiliation with the FLA highlights the risk to multinational companies’ brands due to difficulties in policing suppliers as they outsource manufacturing to cut costs. Nike became a founding member of the association after reports of low pay, abuses and poor conditions at sportswear factories in Asia sparked boycotts and protests in the 1990s.

“Most big corporations have their ‘Nike moment’ at some stage -- when they realize the difficulties of maintaining their standards, particularly in an increasingly global environment,” FLA President Auret van Heerden said. “The problem with the supply chain is that it’s a moving target.”

The move by Cupertino, California-based Apple will intensify scrutiny of its suppliers, including Seoul-based Samsung Electronics Co. (005930) and Inchon, South Korea-based Hynix Semiconductor Inc. (000660) The FLA makes unannounced checks on about 5 percent of its members’ supply chains each year, according to Van Heerden.
Underage Labor

Apple released a list of 156 companies that represent 97 percent of procurement costs, along with its annual report on factories where the iPhone, iPad and other products are made.

In the course of the 229 audits, Apple said it discovered several violations, including instances of underage labor at five facilities. Apple said it required the suppliers to support the young workers to return to school and to improve their management systems to add age-verification procedures. Apple also said it found instances of involuntary labor and stopped working with one of suppliers involved.

Apple also discovered at least 90 factories with records showing workers were exceeding its maximum of 60 hours a week and at least one day of rest per seven days of work. The company found violations of anti-discrimination rules for workers who were pregnant or had hepatitis B. Apple said it made the suppliers end the discriminatory screenings.

Van Heerden, of the FLA, said growing scrutiny of global companies by investors and consumers means they are more likely to insist suppliers introduce best practices in countries where governments are unable or unwilling to do so.

“If you’re a 16-year-old girl in a developing country, your best chance of enjoying proper rights is if you get to work at a multinational,” he said. “The power of their contract is more powerful than the power of law.”
Foxconn Scrutiny

Apple’s biggest supplier, Taiwan’s Foxconn, has been a subject of scrutiny after at least 12 workers have committed suicide at its plants in China. Three died last year and more than 70 were hurt in blasts at two iPad facilities, one of which was also owned by Foxconn. In response to pressure from Apple and the media, Foxconn more than doubled wages in 2010 for some workers in China and employed counselors.

Apple will now subject itself and its suppliers to the FLA’s membership criteria, including submitting to audits and enforcing a code of conduct based on standards approved by the United Nations’ International Labor Organization.

Taipei-based Hon Hai Precision Industry Co. (2317), Foxconn’s flagship listed unit, gets 22 percent of its revenue from Apple, data compiled by Bloomberg show. Pegatron Corp. (4938) earns 16 percent of sales from the U.S. company. (Stanley James and Adam Satariano, Apple Opens Suppliers’ Doors to Labor Group, Bloomberg, Jan. 13, 2012).

The result is interesting in several respects.  First it suggests the growing markets for CSR governance.  It also illustrates the increasingly important role of non-governmental organizations in the development of standards and their monitoring and enforcement--functions once thought central to the role of states.  Third, it evidences the economics of CSR enforcement, at least in some areas.  Apple became an accredited enterprise within the FLA family because it made economic sense to do so--that indicates both the lower costs of FLA overseen compliance and the benefits from belonging to a wider group of enterprises and NGOs that have developed and are adhering to common social norm (soft law voluntary) standards.  

 

 (From Apple, Supplier Code of Conduct ("Workers at an Apple supplier facility in Shanghai assemble parts for the MacBook Pro."))

Most important, though, it suggests the limited role of monitoring and process certification organizations like FLA.   Even as an FLA accredited company, Apple still retains control over its supplier governance systems in the areas beyond labor standards--significantly these include the areas of environmental standards, ethics, management systems and worker education rules in the case of Apple (Apple Supplier Responsibility 2012 Progress Report).  The result is the continued elaboration of hybrid governance systems, even in the purely private sphere.  And make no mistake--Apple has elaborated a complex and deep system of governance.  Its engine is legislation in the form of contract and practice--the supplier code of conduct. 

Apple requires that Suppliers implement this Code using the management systems described below. Apple may visit (and/or have external monitors visit) Supplier facilities, with or without notice, to assess compliance with this Code and to audit Supplier’s wage, hour, payroll, and other worker records and practices. Violations of this Code may result in immediate termination as an Apple Supplier and in legal action. (supplier code of conduct, page 1).

The Code itself is grounded in international hard and soft law, much of which has not been transposed into the domestic law of the United States, much less the domestic law of host states in which suppliers may be operating.  It is regulatory in function, providing Apple with a substantial authority not merely to monitor compliance, but also to train and socialize the members of suppliers.  Apple's enforcement is dependent on its ability to report its activities to its principal constituents--shareholders and consumers.  The conduct standards, thus, are directed toward investor and consumer taste, and not necessarily dependent on the needs or desires of the objects of the codes. Communication with shareholders and consumers is both direct and indirect.  In that respect, global media sources play a critical role--consider the role of the Bloomberg Press service in the context of Apple's regulatory joint venture with FLA.  NGOs play a critical role as authenticators, monitors and standards stakeholders.  Their participation ensures a certain legitimacy to the system and also makes it harder for enterprises to use the system solely for self serving purposes.  Together, these participants have built a system that is internally consistent and coherent, that draws on but does not depend on the action of states and other international public bodies.  Like others systems, it is imperfect, and subject to manipulation and abuse, but at least to some appreciable extent, it also  appears to work without the direct intervention of states.