Ethical Audits and the Supply Chains of Global Corporations

Abstract

Incidents such as the collapse of the Rana Plaza factory in Bangladesh in April 2013 and the exposé of slavery and human trafficking in the Thai shrimp industry in 2014 have focused attention on the supply chains of global corporations. The new Brief demonstrates that, despite increased ‘audits’ and inspections, labour abuses, poor working conditions and environmental degradation within global supply chains remain widespread. Ultimately, the Brief concludes that the auditing system for global supply chains is ‘working’ for corporations, but failing workers in developing countries and the planet.

Full text

SPERI Global Political Economy Brief No. 1
Ethical Audits and the
Supply Chains of Global
Corporations.

Jane Lister
Jane is Senior Research Fellow and Associate Director of the Centre
for Transportation Studies at the Sauder School of Business at the
University of British Columbia. She is a former sustainability auditor
with PriceWaterhouseCoopers.
About the authors
Genevieve LeBaron
Genevieve is Senior Lecturer attached to both the Department of
Politics and SPERI at the University of Sheeld. For 2015-2016, she
is also Yale University’s Human Tracking and Modern Day Slavery
Fellow. Genevieve holds a British Academy Rising Star Engagement
Award and a UK Economic and Social Research Council Future Re-
search Leaders Grant.

1No. 1 – Ethical Audits and the Supply Chains of Global Corporations
Introduction
In recent years incidents such as the collapse of the Rana Plaza garment factory
in Bangladesh in April 2013 and the exposé by The Guardian of slavery and human
tracking in the Thai shrimp industry in 2014 have focused attention on the
supply chains of global corporations. What has been reported less is that both of
these incidents, and many others, took place within ‘certied’ and audited supply
chains. The Thai shrimp in British supermarkets had been ‘ethically’ certied by
a Non-Governmental Organisation (NGO) that sets voluntary standards for the
certication of agricultural products and encourages producers to adopt ‘safe
and sustainable practices’. Similarly, in Bangladesh the Rana Plaza factory, which
made clothes for Matalan, Primark and Walmart amongst many others, passed a
compliance audit just months before it collapsed.
Many key questions and serious concerns hang over the ethical audit regime.
These include: are audits eective in identifying non-compliance and driving up
standards, what does the audit regime mean for governments and NGOs, where
does power lie within the audit regime and, ultimately, in whose interest is the
ethical audit regime working?
To explore these issues we conducted 25 interviews (in 2012-14) with ethical
auditors, business executives, NGOs and supplier rms in North America, the
United Kingdom and China, as well as visiting factories in the Pearl River Delta
region of China.
This new SPERI Global Political Economy Brief presents new evidence and key
ndings and argues that:
• Ultimately, the audit regime is ‘working’ for corporations, but failing workers
and the planet. Labour abuses, poor working conditions and environmental
degradation within global supply chains remain widespread.
• Audits are ineective tools for detecting, reporting, or correcting environmental
and labour problems in supply chains. They reinforce existing business models
and preserve the global production status quo.
• Audits reinforce the labour and environmental problems that civil society NGOs
are striving to improve.
• The audit regime, with the involvement and support of NGOs, is reducing
the role of states in regulating corporate behaviour and re-orientating global
corporate governance towards the interests of private business and away from
social goods.
Part One of the Brief looks at the rise of ethical audits; Part Two considers the
eectiveness of audits; and Part Three assesses the impact of the audit regime on
global corporate governance.

2No. 1 – Ethical Audits and the Supply Chains of Global Corporations
Part I - The move to ethical audits
• Beginning in the 1980s, a high proportion of global manufacturing has shifted
to emerging economies (particularly China). Large multinational companies
typically outsource and subcontract the production of their goods to smaller
low-cost, high-volume suppliers in developing countries. Walmart, for example,
sources its goods from over 100,000 global suppliers, who themselves source
from an extensive global production network.
• As oshore manufacturing has grown exponentially, exposés by NGOs and
journalists of rampant child and ‘sweatshop’ labour and environmental
malpractice in overseas production sites have led to calls for greater corporate
transparency and accountability within global supply chains. Prominent
examples include the use of sweatshop labour to make clothes for Gap and
exploitative work practices leading to multiple employee suicides at Foxconn,
one of Apple and HP’s main suppliers.
• Following such exposés, corporations, supported by governments and
international organisations, have launched Corporate Social Responsibility
(CSR) initiatives to position themselves as part of the solution to globalised
production challenges.
• Central to this has been the adoption of ethical auditing practices that purport
to identify, correct and ultimately solve environmental and social problems in
supply chains. Brands began to hire independent (but often for-prot) auditors
to monitor factories, develop codes of conduct for their suppliers and publish
transparency and ethical reports.
• Similarly, over the last decade, partly out of frustration with the failings of
international organisations and governments to adopt binding global business
regulations, NGOs have come to accept industry-led CSR programmes and
private audits as legitimate opportunities to detect abuses within supply chains,
improve factory conditions and hold corporations accountable. Governments
have also moved to force NGOs to work with corporations as a requirement for
receiving state funding.
• To monitor and verify standards, NGOs have developed transnational
‘sustainable production’ certication standards, such as the Rainforest Alliance
certication, Marine Stewardship Councils and Fair Labour programmes.
These certication standards are voluntary and rely on private audits, designed
and paid for by corporations, to assess standards. NGOs have also increasingly
partnered with rms to develop bespoke voluntary programmes: Greenpeace
has worked with Coca Cola to reduce greenhouse gas emissions and Oxfam
with Unilever to integrate smallholder farmers into its supply chains.
• As such, the contemporary governance of global supply chains is increasingly
reliant on an ethical and voluntary ‘benchmarking regime’ supported by
both corporations and civil society groups, which has audit inspections as
its cornerstone. This auditing regime comprises company codes of supplier

3No. 1 – Ethical Audits and the Supply Chains of Global Corporations
conduct, voluntary certications, standardised metrics (e.g. the Higg Index
for ‘ethical’ clothing) and aggregated indexes for comparing corporate
environmental and social performance (e.g. the Global Reporting Initiative).
• As such, audits have evolved from a management tool that multinational
corporations used to measure, track and enforce internal organisational
standards into a central mechanism of global state and non-state eorts to
monitor standards within corporate supply chains.
Part II - The eectiveness of audits
Audit deception and a lack of accountability beyond the factory gates
Our interviews highlight how deception in the audit regime is widespread and
known to corporations. As Nike stated in a 2012 sustainability report, “we have
learned that monitoring does not bring about sustainable change. Often, it only
reinforces a pattern of hiding problems.”
• Our interviewees explained how decisions on audit scheduling, such as the
time of year, frequency, and whether it is an announced or surprise audit,
signicantly aect ndings. Pre-announced audits enable producers to falsify
records and rid facilities of unauthorised agency contractors or exploited
workers during audits. As one informant noted, “there could always be another
group of people” not on the books.
• This incomplete picture is not only a result of deception, but is structurally
embedded within the audit regime. Corporations control how deep within the
supply chain audits are conducted; one auditor told us: “We will audit as far
down as the brand wants to go”.
• Many corporations design audit programmes that only inspect Tier 1 suppliers
where the nal assembly of products takes place. In 2012, for instance, US
clothing company REI stated that it had audited “a percentage of the Tier 1
factories in our supply chain”, but this only amounted to 27% of its total global
supply chain.
• By focusing on Tier 1 suppliers, most audits tend to exclude labour agencies
and subcontractors further down the supply chain in low-value activities such
as harvesting, processing, dyeing and mining. Evidence from food, clothing and
other industries indicates that the most exploited workers (e.g. forced and child
labour) tend to be found in sites with complex subcontracting arrangements.
Some evidence suggests audits have worsened conditions by shifting problems
further down the supply chain.
• One of our informants described how audits to certify ‘Fair Trade’ products
face this problem: “I’m going to go audit the crap out of your coop coee bean
company to make sure you’re actually paying the farmers. Who checks to see
if the farmer is paying the pickers? Nobody!”

4No. 1 – Ethical Audits and the Supply Chains of Global Corporations
• Audits often do not detect unauthorised subcontracting arrangements. As one
informant told us, following the Rana Plaza factory collapse, “many of the brands
that found themselves in the factory were as surprised as the next person to
nd their brand in there. And the immediate defense was, ‘We never gave work
to that factory and the people who gave them the work were in violation of the
contract’.”
‘A diagnostic tool; it doesn’t x things’
Our interviews suggest audits are: a) a weak tool at detecting non-compliance
with corporate codes of conduct; b) a means of fostering a ‘checklist’ compliance
approach to audits amongst suppliers; and c) are ineective at improving standards.
• Auditors can usually only inspect areas that suppliers choose to show them and
are often only able to speak to workers they happen to see. One auditor told
us that, because most audits are announced, or at least semi-announced, the
factory usually “has the opportunity to drill their people on what they need to
say”.
• Most audit rms have no investigative powers and so have limited capacity to
verify that information presented to them, whether about safety conditions,
contracts or environmental standards, is accurate. One interviewee remarked:
“you have no powers of search so you cannot open a locked drawer … you can
look at a record that says something but you wouldn’t be able to go and nd
out whether it’s actually true.”
• Our interviews also highlighted the existence of a ‘checklist’ audit-compliance
mentality. A Director of a UK audit rm told us that the majority of audits are
“not trying to nd things out, they’re trying to prove that something is not there”.
• Production for multiple retailers often takes place in the same factory, which
means throughout a year factories can face many dierent audit teams, all with
dierent standards and procedures. We were told that, as a result, suppliers
hire former auditors as consultants to help them meet and beat a system of
multiple audits.
• A growing number of sites have passed audits only to have major violations
discovered or catastrophes take place soon after. In 2008 60 forced labourers
were discovered at Emmetts UK – a large vegetable grower and supplier to
Tesco and Waitrose – only months after the farm had passed two successful
audits. In Bangladesh in 2012 the Tazreen Fashion factory was audited on behalf
of Walmart. Safety concerns were noted, but it was not recommended that the
plant be closed. Two months later, the factory burned down, killing over 100
people.
• The former Director of CSR for a major US retail company clearly emphasised
the limits of audits: “Within the social compliance world, it is now standard
operating understanding that audits don’t work to achieve change within
organizations”. Similarly, a London-based manager at a global audit rm told
us: “an audit is a diagnostic tool; it doesn’t x things. It doesn’t matter how
many times we audit a factory, it doesn’t mean they’re going to improve.”

5No. 1 – Ethical Audits and the Supply Chains of Global Corporations
The power lies with the corporation
Our interviews highlighted how audit contracts and the reporting of information
gathered from audits demonstrate that the power within the audit regime lies with
the corporation.
• Corporations can choose whether to use independent third-party auditors or
in-house auditors. Third-party auditors are generally deemed more neutral
and hence legitimate, but even third-party auditors are not impartial. Walmart,
for example, applies its own criteria for selecting a list of whom it deems
‘acceptable’ auditors.
• Auditors are bound by rigid condentiality clauses and clients exercise
full discretion over what audit information is reported. Auditors produce
standardised metrics and rankings that give the appearance of transparent
and neutral monitoring; yet the information audits provide is selective and
fundamentally shaped by the client. Information about abuses and non-
compliance is rarely made available to governments or consumers and, as such,
they are rarely resolved.
• Auditors typically oer advice to help factories prepare action plans to
address non-compliance ndings. However, auditors have no inuence over a
company’s eventual business decisions; their advice can be ignored; and there
is no external accountability for the action plans. One auditor told us: “We may
well go in there and think, we can see what you need to do. But people aren’t
going to do it just because we’ve said so.”
A sharp divide between labour and environmental standards
Audits typically treat social concerns separately from environmental concerns.
This divide allows companies to work towards, and highlight, improvements in one
sphere – typically the environmental – whilst allowing social standards to persist
or even worsen.
• A major 2012 study that evaluated 300 clothing brands on their eorts to address
child and forced labour in their supply chains highlighted this divide. Despite
of making improvements around renewable energy and waste, Walmart’s
traceability, transparency, and labour rights records ranked among the lowest
in protecting against child and forced labour.
• Similarly, the Lipton brand of tea has recently achieved the ‘green’ Rainforest
Alliance Certication, despite illegal labour practices in its supply chain being
widely reported.
• Our interviews with companies in the Pearl River region in China further
exposed this divide. We found that companies were investing in clean water
and eco-friendly technology to secure ‘eco’ certications and attract business,
but that this often came at the expense of social goals. Labour costs were being
reduced through greater use of overtime and agency workers (who tend to be

6No. 1 – Ethical Audits and the Supply Chains of Global Corporations
lower-paid and face severe restrictions on their ability to assert their rights)
and by replacing human labour with machinery.
Part Three – the impact of audits on global corporate governance
The growth of the audit regime is carving out an ever greater role for corporations
in global corporate governance and enforcing an ever smaller role for states. While
the drivers motivating industry, NGOs and states vary, increasing participation by
all three sets of actors reects an alignment of support for market-based global
governance. This Part of the Brief considers the drivers behind this trend.
Corporations have claimed supply chain monitoring for themselves
Corporations have embraced CSR goals and ethical audits as an opportunity to
preserve their business model and take responsibility for supply-chain monitoring
out of the hands of governments.
• Corporate adoption of CSR has brought the “supply chain ball” back into their
court, and away from governments. One informant described Walmart’s CSR
adoption: “By adopting the process that said ‘we got it, this is our ball, we’re
going to do something about supply chain’ … Walmart, on behalf of the entire
retail industry, said, ‘this is our problem. This isn’t a government regulatory
problem. This isn’t China’s problem, this isn’t Vietnam’s problem. This is our
problem. We have the power, resources, and ability to deal with it and we will’.”
• Through the presentation of active monitoring and ‘continuous improvement’,
corporations have been able to deect pressure for stricter state and
international regulation that might otherwise curb business growth. This
enables the preservation of existing business models and prots.
• Adopting ethical audits has also enabled corporations to position themselves
as responsible companies. This helps drive sales as retailers increasingly
recognise the importance of ‘eco’ and ‘ethical’ products for consumers. A 2013
study of 1000 brands found that 28% of brand value relates to corporate social
responsibility.
State support for corporate self-governance
In the face of scal restraints and jurisdictional constraints, states are increasingly
entrusting corporations to govern themselves, either by supplementing ocial
methods or by substituting their own inspection and monitoring responsibilities.
The International Labour Organisation (ILO) reports a steep downturn in labour
inspections in both the global South and North. This trend towards corporate self-
governance is illustrated by the increasing adoption of voluntary corporate codes
of conduct by states and international bodies:
• Central and local governments in China have signed memorandum of
understanding agreements with retailers such as Starbucks and IKEA to roll
out their sustainable supply chain commitments and ethical audit programs to

7No. 1 – Ethical Audits and the Supply Chains of Global Corporations
suppliers across China. The agreements, based on private audits, are used as a
supplementary policy instrument to help encourage domestic Chinese rms to
improve social and environmental practices.
• Regional and national governments in Europe and North and South America
have adopted forest certication audit programmes as a supplement and in
some cases as a replacement for state forestry inspections and enforcement.
The EU and the US are adopting private audit-enforcement mechanisms into
new laws to determine the legality of imported timber.
• There is also a growing adoption of audit-based initiatives at the global level.
The United Nations’ voluntary Global Compact – ‘the world’s largest corporate
sustainability initiative’ – is wholly based upon the use of audit-based initiatives.
The legitimising role of NGOs
Our interviews suggest that by working with corporations and governments NGOs
have served to deepen the credibility and legitimacy of audit-based industry-led
governance of corporations.
• Every NGO multi-stakeholder transnational certication programme, whether
for bananas, timber, sh or diamonds, relies on private audits to check and
verify standards.
• NGOs have worked with corporations and governments to develop such
initiatives and have co-operated bilaterally with corporations to design their
codes of conduct.
• As such, NGOs have arguably helped to codify and neutralise corporations’ poor
social and environmental records and, in so doing, have undermined the role of
states in global corporate governance.
Conclusion
The increasing use of private audits to monitor supply chains is serving to restructure
the global regulatory system to privilege the private interests of business growth,
prot and market advantage over the public interest and social goods of improving
labour standards, general wellbeing and ecological protection. In a nutshell, the
audit regime is ‘working’ for corporations, but failing workers and the planet.
• The increasing use of audits as a tool of governance is bolstering corporate
interests and inuence over consumers and policymakers and, ultimately,
deepens corporations’ power to make their own rules and norms and evaluate
and report on their own performance.
• Whilst audits give the impression of active supply-chain monitoring and
‘continuous improvement’, the regime actually reinforces endemic problems
in supply chains. It deects pressure for stricter, state-based regulation and

8No. 1 – Ethical Audits and the Supply Chains of Global Corporations
legitimises unsustainable global production models – in particular, a retail
economy that promotes consumption and environmental degradation.
• Through voluntary certication programmes, and with state support, the
structural problems within the audit regime – deception, failing to detect or
ignoring problems within supply chains, and a compliance mentality – are being
swiftly institutionalised within global governance mechanisms.

Sheeld Political Economy Research Institute
Interdisciplinary Centre of the Social Sciences
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January 2016
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