Scaling Up Living Wages in Global Supply Chains

woman pickingBy Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct and Marjoleine Hennis, Senior Advisor Permanent Representation of the Netherlands to OECD

Meet Ei Yin Mon, a factory worker in Myanmar. She came to Yangon after cyclone Nargis hit the country in 2008. The base wage she earns is extremely low, so she has to work many hours of overtime to compensate. “We are always being told to work faster. They think that we are like animals. I know I have no rights to make a complaint, so I have to bear it”[1].

Many workers globally face similar challenges and are trapped in poverty. They often have many mouths to feed, with too little revenue coming from regular working hours and must either compensate by working overtime or fall into debt. Sometimes workers don’t get paid at all and do not have access to grievance mechanisms to address this.

Treatment of living wage within international standards of responsible business conduct

According to the Universal Declaration of Human Rights, a living wage is a human right. The Declaration points out that everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.

The ILO recognizes living wage as a basic human right as laid out in the Universal Declaration of Human Rights, through the ILO Convention concerning the Protection of Wages of 1949 (95), and the ILO Convention on Minimum Wage Fixing of 1970 (131). It also refers to it in its Constitution and in the 2006 ILO Tripartite Declaration on MNE’s. These two pillars of international instruments (the Declaration of Human Rights and ILO standards) have formed the basis for the recommendations towards MNE’s concerning living wage as laid down in the OECD Guidelines for Multinational Enterprises since its revision in 2011.

The OECD Guidelines are the most comprehensive standard for Responsible Business Conduct (RBC) covering all areas of corporate responsibility, ranging from labor and human rights to environment and corruption. Currently, 46 countries adhere to the Guidelines. These governments made a legally binding commitment to set up National Contact Points to promote corporate responsibility and to handle complaints about corporate (mis)conduct.  Although the Guidelines are not legally binding for enterprises, they represent a “firm government expectation of company behavior” and have been endorsed by business and civil society.

The 2011 revision of the Guidelines has been important for the integration of the concept of living wages in various ways: firstly, it has resulted in the inclusion of a recommendation on living wages in Chapter V on Employment and Industrial Relations. The OECD Guidelines state that: “when multinational enterprises operate in developing countries, where comparable employers may not exist, (they should) provide the best possible wages, benefits and conditions of work, within the framework of government policies. These should be related to the economic position of the enterprise, but should be at least adequate to satisfy the basic needs of the workers and their families.”  Secondly, during the 2011 revision of the OECD Guidelines a chapter on human rights was added which, as noted, includes the concept of a right to a living wage.

Thirdly, the 2011 revision of the Guidelines introduced a concept of supply chain responsibility for companies. Among other things, this means that enterprises should avoid causing or contributing to the non-respect of living wages within their own operations as well as seek ways to prevent or mitigate adverse impacts with regard to insufficient wages linked to their operations, products or services by a business relationships,  even if they do not contribute to those impacts. In other words, enterprises are expected to make an effort vis-à-vis their suppliers to have living wages respected.

Living wage and risk-based due diligence

While the 2011 revision of the Guidelines introduced new expectations of enterprises it also equipped them with tools to respond to these expectations and manage risks by carrying out due diligence on their business operations and suppliers. The process of due diligence consists of three parts, identification of (potential) adverse impacts, prevention and mitigation, and accounting for how adverse impacts are addressed. Due diligence processes are meant to be reasonable, the appropriate response to living wage issues will thus vary according to a company’s relationship to adverse impacts.

living wage

Good practices and remaining challenges

The challenges for individual companies are numerous, especially in situations where, in the supply chain, payment of below living wages is pervasive and perceived as necessary to maintain competitiveness.  In such a context, how should enterprises apply leverage and take appropriate steps that are expected by internationally recognized standards?

First, a good understanding of responsibilities at the company level is needed. Companies should be aware of their individual responsibilities under internationally recognized standards of the ILO, the OECD and the UN concerning wages in their supply chains. With the help of OECD’s sector guidance on due diligence, for example, companies should carry out due diligence, use their leverage and take steps in their supply chain to promote living wages. These new responsibilities should also be reflected in sector codes of conduct, of which many currently ignore the tricky issue of living wage.

Better information about the business case for taking these actions with respect to risk management, reputation and productivity, would encourage enterprises to act more responsibly. Apart from ethical considerations, there are many reasons why it makes business sense to strive for payment of living wage throughout the value chain. Paying relatively low wages may lead to costs for businesses such as lower product quality, lower worker productivity and few investments in innovation due to high labor-turnover.[2]  Below-living wage payments also increase the risk of labor unrest and may lead to the disruption of operations and reputational damage to companies, particularly in the present age of mass communication.

Second, business and governments would gain from more coherence and fine-tuning of the methodologies and definitions concerning living wage. Currently a common methodology for calculating living wages does not exist. Ideally MNEs could rely upon one broadly accepted methodology which takes into account local conditions to determine what living wages should be, as well as the notion that wages should be regularly adjusted on the basis of negotiations with social partners.[3]

Third and most importantly, a sector-wide comprehensive approach is needed. Focusing on calculating the numbers and levels of wages alone will not do the trick. Even if a jump to provision of living wage levels could happen overnight, in many regions this might damage the competitiveness of factories or suppliers, potentially squeezing them out of the market and leaving many workers jobless. In order to achieve living wages in a sustainable manner a comprehensive approach is needed that brings together the largest number of possible of social partners and stakeholders so as to create a level-playing-field.

Most of the initiatives that have been successful in targeting living wage issues bring together several stakeholders. They are motivated by the need to act together and create a level playing field, not only among some enterprises and their suppliers, but in the whole sector. Some examples of these include ACT (Action, Collaboration, Transformation), a global framework on living wage that brings together all relevant stakeholders in the textile and apparel sector, as well as the Malawi Tea 2020 Revitalization Program under which tea producing companies, tea buying companies and retailers, standard and certification organizations, and tea trading companies have signed and MOU pledging to respect living wages.

These initiatives are to be praised for having paved the way forward in a new and challenging territory. However, to be really effective, these initiatives will need to be scaled up dramatically to reach other sectors and geographical areas to create a level playing field for sustainable living wages.

Ensuring the payment of living wages throughout global supply chains will be a significant challenge. However, doing so will be necessary to achieving the Sustainable Development Goals and responding to expectations of international standards of human rights and responsible business conduct.  Even if individual companies play a considerable role in this, they cannot solve this issue on their own. For one thing, (local) governments, who have the duty to protect and fulfill human rights, and ensure access to effective remedy, should be there to support them and contribute to creating the right conditions. Ideally, however, the way forward is to engage in sector-wide collaboration with suppliers, trade unions, governments, NGOs and employers’ organizations. Some promising initiatives have already been launched, such as the ACT process and the Malawi Tea MOU, or the Action Plan on Living Wages. The companies involved in these efforts deserve praise for their participation. But in order to achieve a true level playing field, the world’s remaining multinationals, some 80, 000 companies, will also need to take action and efforts will need to be scaled up and sped up dramatically.

Useful links

Resources: This blog is based on a Working Paper on Wages in Global Supply Chains, found here : https://friendsoftheoecdguidelines.wordpress.com/2016/04/27/scaling-up-living-wages-in-global-supply-chains/

Global Forum on Responsible Business Conduct, 8-9 June

Roel Nieuwenkamp maintains a blog where all of his articles are archived. Please visit https://friendsoftheoecdguidelines.wordpress.com/

[1] The worker’s name was changed to protect her anonymity.

[2] See Cascio W.F, The high cost of low wages, Harvard Business Review, December 2006;  and  Zeynep T., The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits– Amazon Publishing, 2014.

[3] Vaughan-Whitehead, Daniel, Introduction to the Living Wage, presented at NCP OECD Guidelines Conference-Ministry of Foreign Affairs, The Hague, 27 October 2015

Rethinking due diligence practices in the apparel supply chain

Human Rights Watch spoke to Rana Plaza survivors
Human Rights Watch spoke to Rana Plaza survivors

In the run-up to the Third Global Forum on Responsible Business Conduct in June, today’s post is by Jennifer Schappert of the OECD’s Responsible Business Conduct Unit (@J_Schappert).

Two years ago today, the Rana Plaza building in Bangladesh’s capital Dhaka collapsed, killing over 1,100 people and injuring another 2,500. The dead and injured were garment workers, ordered to go back to work even though shops and a bank in the same building had closed immediately the day before when cracks appeared. The garment factories were indirectly supplying international retailers, highlighting the debate on whether multinational enterprises (MNEs) can make the apparel supply chain safe and healthy. Ensuing recommendations to MNEs have often focused on MNEs strengthening existing compliance mechanisms with individual suppliers. However, to transform the sector, we need to question whether the current approach to supply chain due diligence is the right one to begin with.

In the absence of strong regulatory frameworks in many producing countries, the traditional approach to compliance is for enterprises themselves to take on the role of monitoring and assessing each supplier against international standards, developing corrective action plans, and then using their leverage (for example through the incentive of future contracts) to influence suppliers to mitigate risks. It sounds fine in theory, but in practice the system breaks down.

The OECD Guidelines for Multinational Enterprises advocate an approach where the nature and the extent of due diligence correspond to risk. However, the short-term nature of contracts between MNEs and their suppliers and the sheer size and complexity of apparel supply chains means that MNEs often struggle to know where to prioritise risk assessment and mitigation. Within this context an enterprise’s compliance system becomes reduced to ongoing assessments of (almost) all suppliers across all risk areas. This leaves few resources for tailoring risk assessments, identifying root causes of risks, and effectively managing risks when adverse impacts are identified.

Effective monitoring of individual suppliers is further complicated by the well-documented shortcomings of social audits, such as factory visits announced well in advance; fraud; inconsistent quality across audits and auditors; lack of alignment with international standards; audit duplication and resulting fatigue; and the limited scope of social audits which seek to identify adverse impacts but rarely root causes. Efforts to improve the system, for example through long-term contracts and close collaboration with suppliers have led to better results in certain cases and should be encouraged. However, this alone will not transform the sector because improvements are isolated to a few strategic suppliers and may fail to adequately address risks which cannot be tackled at the individual supplier level.

A multi-stakeholder project underway at the OECD is questioning current due diligence practices in the apparel supply chain on matters covered by the OECD Guidelines (human rights, employment and industrial relations, environment and bribery) and, among other questions, asking whether trade unions and other representative worker organisations could play a role in helping MNEs take a risk-based approach to due diligence.

Historically, unions and other worker organisations have helped government regulators direct inspections towards high-risk workplaces. For example, in the United States, trade unions helped regulators direct occupational safety and health inspections towards high-risk workplaces by requesting inspections as risks arose. This enabled limited government resources to appropriately target the most risky workplaces. By contributing to inspections, trade unions also ensured that inspections targeted the most salient risks at each individual workplace.

Within the apparel supply chain, workers’ representatives could act as an on-the-ground monitoring mechanism to trigger third-party inspections by multi-stakeholder initiatives. Such a process would potentially reduce the duplication of broad social audits and facilitate the targeting of technical assessments to specific risks. By contributing to the assessments, workers would likewise help to improve the quality and conformity of assessments and provide important context in identifying root causes of adverse impacts and corresponding solutions. Furthermore, unions and worker organisations have a role to play in promoting the long-term sustainability of solutions by increasing worker awareness of their rights, offering assistance in the actual exercise of individual rights, and protecting the rights of individual workers through collective bargaining.

The focus of an enterprise’s due diligence would then shift from the seemingly impossible task of monitoring suppliers for all risks to focusing on targeted assessments and risk remediation. The primary role of the MNE would be: to actively promote freedom of association amongst suppliers; create or participate in a system by which workers can request inspections; support timely and targeted technical assessments at the site level when requested or when operating in high-risk contexts (e.g. building integrity); and contribute to the mitigation of risks by addressing root causes (where feasible) in collaboration with suppliers, trade unions, and other buyers.

Freedom of association therefore becomes the enabler of risk-based due diligence across an entire supply chain. In countries where legal or political constraints prohibit or limit this fundamental right, the sector should use its leverage broadly, in collaboration with trade unions, government and international organisations, to influence government to reform the regulatory framework and its implementation in producing countries.

This broader approach to due diligence applies to other salient risks in the sector, low wages for example, that cannot be effectively addressed at the individual supplier level. The Bangladesh Accord on Fire and Building Safety and the Alliance for Bangladesh Worker Safety are demonstrating how a paradigm shift is feasible.

To date, supply chain due diligence in the apparel sector has predominantly focused on direct suppliers. However, according to the OECD Guidelines, it should be applied across the full length of the supply chain. Effective due diligence of risks linked to upstream production should build on the lessons of the last 20 years: an individual and bilateral approach to due diligence will not transform the sector. Due diligence is the responsibility of all enterprises in the sector. It should therefore be carried out by enterprises operating at each segment of the supply chain and be mutually reinforcing.

Based on the findings of the multi-stakeholder project, the OECD will develop a practical guidance to support the development of a common understanding of risk-based due diligence in the apparel and footwear sector supply chain. We welcome you to join us on 18-19 June 2015 as we carry this debate forward at the Global Forum on Responsible Business Conduct.

Useful links

Remembering Rana Plaza Institute for Human Rights and Business

OECD Guidelines for Multinational Enterprises

Global forum on Responsible Business Conduct

Responsible supply chains in the textile and garment sector

Corporate leaders: Your supply chain is your responsibility Roel Nieuwenkamp (@nieuwenkamp_csr) Chair of the OECD Working Party on Responsible Business Conduct, in the OECD Observer

Don’t supply chains: responsible business conduct in agriculture

You've read the book, now buy the banana
You’ve read the book, now buy the banana

Two questions today: which fictional character helped bring down a colonial empire and gave his name to a food label? If you’re Dutch, you probably know the answer, if not, I’ll save you an Internet search by telling you: Max Havelaar, eponymous protagonist of Multatuli’s Max Havelaar, of de koffi-veilingen der Nederlandsche Handel-Maatschappy, translated into English as Max Havelaar: Or the Coffee Auctions of the Dutch Trading Company. In the middle of the nineteenth century, the Dutch government ordered farmers in its East Indies, modern-day Indonesia, to grow quotas of export crops rather than food. The Dutch also reformed the tax system, creating a public-private partnership that allowed tax commissioners to keep a share of what they collected. The result was the misery and starvation the book denounces. Max Havelaar helped change attitudes to colonial exploitation in the Netherlands and was even described as “The book that killed colonialism” by Indonesian novelist Pramoedya Ananta Toer in the New York Times Magazine.

The name Max Havelaar was adopted by the Dutch Fairtrade organisation and other European members of their network. The movement describes itself as “an alternative approach to conventional trade and is based on a partnership between producers and consumers. When farmers can sell on Fairtrade terms, it provides them with a better deal and improved terms of trade”. The movement has its critics. For instance in this article on Fairtrade coffee in the Stanford Social Innovation Review, Colleen Haight argues that “strict certification requirements are resulting in uneven economic advantages for coffee growers and lower quality coffee for consumers” and that while some small farmers may benefit, farm workers may not.

Which brings us to the second question: what’s that got to do with the OECD? We’re asking for comments on the draft FAO-OECD Guidance for Responsible Agricultural Supply Chains. Government, business and civil society representatives, international organisations, and the general public are invited to send comments by email to coralie dot david squiggly sign oecd dot org by 20 February 2015. I’d like to say that winning entries will receive a guinea, but they won’t. We will however publish a compilation on this web page from the OECD division in charge of the Guidelines for Multinational Enterprises (MNEs).

The world’s population is increasing and, human biology being what it is, so is the demand for food. Agriculture is expected to attract more investment, especially in developing countries, and human nature being what it is, some rascals may be tempted not to trade fairly. Or as the call for comments puts it: “Enterprises operating along agricultural supply chains may be confronted with ethical dilemmas and face challenges in observing internationally agreed principles of responsible business conduct, notably in countries with weak governance and insecure land rights.”

Apart from the OECD MNE Guidelines, the guidance considers half a dozen other sets of standards and principles from the FAO, UN, and International Labour Organization among others, designed to encourage “responsible business conduct”. Intended users include everybody from farmers to financiers, in fact the whole supply chain from seed sellers to grocers. The guidance as it stands today was developed by an Advisory Group with members from OECD and non-OECD countries, institutional investors, agri-food companies, farmers’ organisations, and civil society organisations.

The aim is not to create new standards, but to help enterprises respect standards that already exist “by referring to them in order to undertake risk-based due diligence”. Some unfamiliar language/jargon/special terminology is inevitable in a document like this, but the authors of the guidance have taken care to explain it all. “Due diligence” here refers to the process through which “enterprises can identify, assess, mitigate, prevent, and account for how they address, the actual and potential adverse impacts of their activities” (and those of their business partners).

The draft proposes a five-step framework for risk-based due diligence, covering management systems, identifying risks, responding to them, auditing due diligence, and reporting on due diligence. Some of the concrete proposals will provoke little or no discussion I imagine, such as “respect human rights”. On the other hand, “promote the security of employment”  is likely to see a frank and open exchange of views. (The 2013 OECD Employment Outlook has a chapter on enhancing flexibility in labour markets.)

The human rights and labour sections could apply to any sector of the economy, as could most of the proposals on governance (we’re against corruption) and innovation (we’re for appropriate technologies), but there are a number of proposals targeting agriculture in particular, for example “promoting good agricultural practices, including to maintain or improve soil fertility and avoid soil erosion”. Again, some of the draft focusing on agriculture is uncontroversial (respect legitimate rights over natural resources), but I can’t imagine owners of factory farms agreeing to grant animals “the freedom to express normal patterns of behaviour”.

I’m sure you’ll find plenty to agree or disagree with, so let us know and we’ll rid the agricultural supply chain of, as Multatuli would say, all the “miserable spawn of dirty covetousness and blasphemous hypocrisy”.

Useful links

The OECD Cleangovbiz Initiative “supports governments to reinforce their fight against corruption and engage with civil society and the private sector to promote real change towards integrity”.

OECD Integrity Week, 23-26 March, brings together stakeholders from government, academia, business, trade and civil society to engage in dialogue on policy, best practices, and recent developments in the fields of integrity and anti-corruption.

OECD work on agriculture