Problems with Inspections at Overseas Factories: is More Risk Disclosure Warranted?

By Cydney Posner

This article from The New York Times,  describes the results of an extensive examination by the NYT of audits of factories overseas. The study revealed "how the inspection system intended to protect workers and ensure manufacturing quality is riddled with flaws. " (Maybe time to bring some of that work back home?) These issues are worth considering in connection with risk disclosures for companies that use overseas factories, as problems that arise can quickly tarnish a company's reputation.

With so much manufacturing shifted offshore, the article observes, "factory inspections have become a vital link in the supply chain of overseas production." In the last two decades since a number of major companies "were tarnished by disclosures that their overseas factories employed underage workers and engaged in other abusive workplace practices," factory monitoring companies have flourished: "Each year, these monitoring companies assess more than 50,000 factories worldwide that employ millions of workers." Major Western companies rely on them "not just to check that production is on time and of adequate quality, but also to project a corporate image that aims to assure consumers that they do not use Dickensian sweatshops. Moreover, Western companies now depend on inspectors to uncover hazardous work conditions, like faulty electrical wiring or blocked stairways, that have exposed some corporations to charges of irresponsibility and exploitation after factory disasters that killed hundreds of workers." Unfortunately, however, subterfuge, bribery and even just perfunctory audits threaten to undermine companies' efforts to ensure humanitarian working conditions and quality manufacturing at factories overseas.

In one example cited in the article, an inspection at a factory in Asia, certified by a U.S. company for labor, worker safety and quality, turned out to be a sham; unknown to the inspectors, all of the items were actually manufactured at a "rogue factory" and transferred to the certified factory for the inspection. The items fell apart soon after sale. As reported, the deception was not particularly challenging. Not until the company received a tip, via its global ethics hotline, did it actually look into the ruse. This year, the company finally adopted a "zero tolerance" policy, providing that suppliers that used unapproved subcontractors would be dropped. Similarly, a knitwear factory in India "passed an inspection audit with high grades. A team of four monitors gave the factory hundreds of approving check marks. In all 12 major categories, including working hours, compensation, management practices and health and safety, the factory received the top grade of ‘good.' ‘Working Conditions — No complaints from the workers,' the auditors wrote. In February 2012, 10 months after that inspection, [the factory's] workers rampaged through the factory, vandalizing its machinery and accusing management of reneging on promised raises, bonuses and overtime pay. Some claimed that they had been sexually harassed or beaten by guards. Not a hint of those grievances was reported in the audit." <br> <br>The NYT examination showed that "inspections are often so superficial that they omit the most fundamental workplace safeguards like fire escapes. And even when inspectors are tough, factory managers find ways to trick them and hide serious violations, like child labor or locked exit doors. Dangerous conditions cited in the audits frequently take months to correct, often with little enforcement or follow-through to guarantee compliance." <br>One global supply chain expert observed that "little had improved in 20 years of factory monitoring, especially with increased use of the cheaper ‘check the box' inspections at thousands of factories. ‘The auditors are put under greater pressure on speed, and they're not able to keep up with what's really going on in the apparel industry….We see factories and brands passing audits but failing the factories' workers.'"

Although the factory collapse in Bangladesh, which killed 1,129 workers in April, led to greater scrutiny and "pressured the world's biggest retailers to sign on to agreements to tighten inspection standards and upgrade safety measures," some "voice skepticism that inspection systems alone can ensure a safe workplace. After all, they say, the number of audits at Bangladesh factories has steadily increased as the country has become one of the world's largest garment exporters, and still 1,800 workers there have died in workplace disasters in the last 10 years."

Because the inspections are important to factory owners in winning orders from Western companies, "factory managers have been known to try to trick or cheat the auditors. Bribery offers are not unheard-of. Often notified beforehand about an inspector's visit, factory managers will unlock fire exit doors, unblock cluttered stairwells or tell underage child laborers not to show up at work that week. Unauthorized subcontracting, or farming work out, to an unapproved factory… is ‘very, very common,' " even when these practices are expressly prohibited in contracts. <br> <br>Moreover, companies may seek different levels of audits, some rigorous and costly (e.g., Levi's), while others are "more limited, inexpensive audits that will not jeopardize relationships with favored suppliers." Some audits involve only six- to eight-hour inspections and may be conducted by inspectors with only five days of training. By contrast, OSHA inspectors are required to have "three years of training and experience assisting inspectors before employees can lead an inspection of a sizable factory in the United States." According to the article, a "retailer that uses 1,000 factories worldwide might want to pay no more than $1,000 an inspection — that could mean a one-day, check-the-box audit — instead of $5,000 for thorough, five-day inspections. That would cost $1 million instead of $5 million." The article describes instances where, after tragic events at companies that had passed "check-the-box" audits, those companies were then subjected to more rigorous audits that uncovered shocking instances of workplace violations.

The NYT also obtained a copy of a Q&A cheat sheet that was distributed to employees at one factory instructing them on how to respond to inspectors: "if an inspector ever asked, ‘Are there injury records?' they were to answer, ‘Have not heard of any work-related injuries.' And if an inspector asked, ‘Any corporal punishment in the factory?' the employees were to reply, ‘No.' If monitors inquired about underage workers at the plant, employees were coached to respond, ‘Employment for those less than 16 years old is prohibited.'" Playing these games is apparently not that uncommon because factory managers "are desperate to avoid a failing grade and the loss of a lucrative stream of orders. The experts provided real-life examples. To avoid appearing illegally overcrowded, one factory moved many machines into trucks parked outside during an inspection, a monitor said. Whenever inspectors showed up at certain plants…, the loudspeakers began playing a certain song to signal that underage workers should run out the back door, according to several monitors. During inspections, some factories displayed elaborate charts detailing health and safety procedures that, like stage props, were transferred from one factory to another, another monitor said."

Even with improvements, however, monitoring may just have inherent shortcomings. One approach that may be more successful is to require "that factories to set up a system of elected worker representatives who would be charged with speaking up about safety problems, wage violations or other issues….[According to one commentator,] ‘What really keeps factories compliant is when workers have a voice and they can speak out when something isn't right.'"

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