In the context of labor-focused CSR, codes of conduct are used by companies to communicate their commitment to a set of labor standards and working conditions.  Codes first emerged in the mid-1970s when the OECD announced its Declaration and Decisions on International Investment and Multinational Enterprises and the ILO established its Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy.  The concept resurfaced as a result of heightened awareness of corporate social responsibility among various stakeholder groups in the early 1990s.  This developed into a broad movement involving companies, NGOs, and governmental organizations to establish – jointly and independently – codes of conduct.  The initial result was a proliferation in the number of codes representing a wide range of labor standards.  This practice has been largely confined to multinational corporations with business operations or suppliers in the developing world, although the practice is slowly expanding among local stakeholders located in the developing world.

Today, there are an estimated 1000 codes in place globally, although figures vary widely.  The plethora of codes reflects the multitude of actors involved in this movement, each of whom have distinct – and often competing – values and priorities.  The specific working conditions of individual industries also plays an important role in the issues highlighted by codes.  While codes do vary in scope and in coverage of issues or standards there is increasingly convergence around core labor standards as represented by the eight core conventions of the ILO.  These standards include: freedom of association and the right to bargain collectively; minimum age; discrimination; forced labor; and child labor.

Companies and advocates of corporate social responsibility have championed codes of conduct as a tool for addressing labor standards.  More specifically, among the many purposes that codes of conduct were designed to serve, three are of particular note:

• To establish a common set of standards for production facilitites frequently spanning multiple regulatory environments.  For example, Nike explains is decision to set a minimum age of 18 as an effort to be consistent in applying one standard in all the countries where it sources products, one of those countries is Italy with a higher minimum age than the other (mostly developing) countries where Nike’s products are sourced.
• For use as a communication tool with stakeholders regarding the standards that a company will strive to uphold regardless of what is enforced locally.  Local laws are usually quite good, with the exception of freedom of association, but countries tend to fall short in the area of enforcement due to underdeveloped capacity and challenges of corruption.
• To compensate for ambiguities or less stringent legislation.  Corporate codes of conduct can clarify standards in instances where local law is not clear on an issue or perhaps where its standard is below that which is demanded by stakeholders.

There are many different types of codes of conduct and associated compliance schemes.  Three of the most common forms of codes may be grouped as follows:

• Buyer Codes of Conduct
• Factory Certification Schemes
• Other Types of Codes

Buyer Codes of Conduct
These codes are adopted by an individual buyer (retailer or agent) for use in their global supply chain.  Buyers usually pay for internal monitors and independent auditors and are motivated by a desire to void violations of labor standards in their supply chain.  Supplier factories pay for any remedial action and infrastructure upgrades required, although buyers are increasingly providing varied forms of support for training and capacity building.  The process of identifying suppliers often begins with a pre-audit where buyers take labor standards into consideration. Once selected, suppliers are usually monitored to ensure continued compliance. If violations are uncovered in the course of these audits, buyers may choose to discontinue orders from that factory, but more frequently, they provide factories with an opportunity to correct their violations. Some violations are often considered “zero tolerance” areas such as forced or child labor, or persistent violation of occupational health and safety issues that put the worker’s health or well being in serious jeopardy.  Many buyers undertake third-party verification from external auditors.

Factory Certification Schemes
Individual factories or employers can seek CSR certification to demonstrate to potential suppliers that they are proactive in addressing labor standards. The cost of certification is usually borne by the factory, as are the costs of annual audits and any remedial action or required infrastructure upgrades. External verification of compliance is usually a requirement for certification. These schemes provide manufacturers with an opportunity to take the initiative in demonstrating their advanced level of commitment to labor standards; they are often adopted as a marketing and communications tool targeting potential buyers.  If the certification process results in more than cosmetic changes to the industrial systems, processes and infrastructure, factories may experience improvements in productivity and other sources of cost savings.  Similarly, while there are no guarantees that factory certification will lead to contracts, these programs enable factories to gain confidence in approaching CSR-sensitive buyers and anticipate their contract requirements or pass the pre-audit phase.

Other Types of Codes
The Base Code of the Ethical Trading Initiative (ETI), ILO, Clean Clothes Campaign, Campaign for Labor Rights, Guidelines for multinational enterprises, and codes from the OECD, ICFTU, FIFA, the Foreign Trade Association, and WFSG are all codes developed as guidelines to companies on appropriate standards.  These codes do not necessarily have associated monitoring or auditing programs, and their purpose is to provide guidance and shared learning about best practice.

The process of ensuring compliance, or the implementation of codes of conduct has become increasingly standardized and reflect the demands and relative bargaining power of the various involved stakeholders.  These steps include:

• Monitoring
• Remediation vs. Disengagement
• Third Party Verification

There are several challenges associated with the implementation aspects of codes of conduct that may be limiting effective implementation among companies in developing countries.

Monitoring (Internal)
Monitoring refers to the process used by a company to ensure adherence to its code of conduct.  This is usually involves internal staff of a corporation or certification program and frequently relies on a risk based approach to monitoring because of the inability to monitor all factories associated with a supply chain.  Disney, for example, has over 10,000 factories manufacturing its products.  Monitoring is usually paid for by the buyer or the supplier (factory certification programs) and serves as a mechanism for identifying areas in need of remediation or urgent correction – as in the case of child or forced labor.   Each company interprets the broad principles described in its code of conduct differently, whether it relates to the suggested location for the fire extinguisher or the definition of harassment.  Effective internal monitoring has posed a significant dilemma for buyers who have expressed frustration at their inability to catch all violations, and the reputational risk that this failure continues to pose.  The practice of monitoring has also been challenged on the grounds of its limited effectiveness and its “gotcha” culture.  Trade unions argue that the most effective monitors are those that are constantly at the worksite, i.e. workers themselves.

Remediation vs. Disengagement
Companies rank CSR violations according to the severity of the issue, usually in the eyes of sensitive consumers. Virtually all firms will immediately halt production if child labor or forced labor is discovered.  Dangerous health and safety violations are other issues that frequently lead to immediate contract reassessments.  Increasingly, however, factories, producers and business partners are provided with opportunities to improve their conditions before contracts are terminated. This trend has come about in response to criticism by stakeholders who held companies responsible for the effect that production shifts in response to CSR violations had on vulnerable workers.  Additionally, companies are realizing that harmful working conditions are more frequently the result of poor management, ignorance, and insufficient capacity leading to a greater focus on remediation plans and technical assistance.

Third Party or Independent Verification
Third party verification refers to the process used to assure, ostensibly through an objectives source, that the company’s internal CSR efforts are achieving the desired results of compliance with specific labor standards.  Currently, many first hire third parties to complete these services for them, leading to objections on the part of critics that the direct financial relationship undermines the independence of the audit.  A number of NGOs have offered to provide these services, and while the practice of independent verification is increasing, wide variation among the practices used by different auditors remains.  Other debates related to the issue of monitoring delves more deeply into the question of who should audit. Because social auditing is a new field of expertise, there is limited local capacity to perform these services in developing countries, however, foreign auditors have often found it difficult to grasp the context and subtleties of the local culture and language and often failed to identify serious compliance violations.

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