Quotes of the Day

Two rickety ceiling fans stir the stale air in a cramped room in New Delhi where 10 men hunch over bright fabrics, sewing shorts to be sold overseas. "I get paid 24 rupees [56 cents] for every piece I stitch," says 31-year-old Amjad Ali. "But I'm sure it's very expensive when it sells abroad." Ali works a lot of overtime at this garment subcontractor, with no holidays, yet he can still barely support his wife and son.

In another Delhi neighborhood, Sami Alam, 8, tells of escaping earlier in the week from a sweatshop where he'd worked as a cook for nine months. His parents had sent him to Delhi from his native Bihar, in exchange for cash. "I didn't know how to cook, so the owner would beat me," he says, showing scars on his frail arms.

Western multinationals have been trying for years, with mixed success, to stamp out such scenes. In the 1990s, a series of scandals showed the damage that could be wrought if a brand was linked to shoddy labor practices overseas. For example, in 1996, it was alleged that a Wal-Mart clothes label endorsed by American TV personality Kathie Lee Gifford had been produced using child labor in Honduran sweatshops. Gifford sobbed on air, saying she hadn't been aware of conditions at the factory. For corporations and consumers alike, it brought home the realization that globalized production comes at a price: the cheap labor that lured multinationals to developing countries often goes hand in hand with less appealing hallmarks of developing nations — harsh working conditions and unenforced labor laws. Governments in most developing nations weren't monitoring conditions, so Western firms found themselves "held responsible for problems they didn't really know existed," says Daniel Viederman, executive director of Verité, a U.S.-based NGO that investigates workplace conditions globally.

In response, companies scrambled to put together codes of conduct and teams of auditors. Bigger firms either set up their own monitoring departments or hired auditing firms to check up on their overseas factories. Gap, the U.S.-based retailing giant, now has a staff of about 90 overseeing working conditions in factories that supply its clothes, and last year it conducted 4,927 inspections in 1,879 factories worldwide. Such initiatives are part of a much broader effort by Western firms to embrace the tenets of corporate social responsibility (CSR). Annual reports today glow with descriptions of companies' attempts to be green, fair and transparent — partly because it's good p.r. and offers protection against reputational risk, partly because executives know it's the right thing to do. But even with the best of intentions, living up to CSR's high-minded ideals is proving extraordinarily hard in countries like China and India that are at the heart of global manufacturing.

Nowhere is the struggle more apparent than in China, where many factory owners and some less reputable audit consultants have figured out dodges to get around auditors. On one Chinese-language website, factory bosses swap tips and ask questions such as: "Is it really a must to bribe auditors in order to pass audits?" The response: "You must first raise the standards of your falsified documents. Otherwise, auditors might not dare to take money from you."

A shadowy industry has sprung up in China in recent years that caters to factory owners anxious to disguise breaches of clients' codes of conduct — illegal overtime, say, or a lack of fire extinguishers on the factory floor. Unscrupulous consultants offer quick fixes before a factory is audited; for a price, they can even pose as a fake management team to convince auditors that a sound leadership structure is in place. Factory owners can also buy computer software that presets the times when workers punch in and out, so no illegal overtime shows up on time cards. Lower-tech tactics, employed across Asia, include keeping double books, coaching workers on correct answers for auditors and paying bonuses to reward workers for passing audits. "It's like a nuclear arms race," says Ian Spaulding, managing director of Infact Global Partners, a compliance consultant and former director of global compliance for a large U.S. retailer. "The auditors do one thing, so the factory does another thing."

Comply or Die
It would be easy to cast these factory bosses as simply greedy and corrupt — until one looks at the pressures they face. Auditing came into vogue at the same time that Western firms were pushing harder than ever for lower prices and faster turnarounds. From the mid-1990s onwards, "many multinationals were telling factories, 'Give me this cheaply, give me this quickly — and, by the way, comply with your local labor law, or our code of conduct, whichever is higher,'" says Ayesha Khan, a manager with BSR, a CSR consultancy.

That's all but impossible to do under current market conditions. Competition between factories is fierce, and their profit margins have shrunk. There's a glut of Chinese and Indian factories competing for Western clients, so if a factory doesn't pass audits, multinationals can just walk across the street. With the Chinese workweek capped at about 50 hours (including overtime), strict new labor laws and growing competition for workers, it's getting tougher to comply with the law, pay the minimum wage, make order deadlines — and earn a profit. Says Rosey Hurst, founder of Impactt, an ethical trade NGO based in London: "I have a large deal of sympathy for the fakers."

Most big companies still operate what NGOS have called the "comply or die" model, in which factories are given a couple of months and little support to correct mistakes. "Historically, corporate social responsibility has been this top-down approach," says Khan. "The buyers are afraid, so they push down their ideas onto the factories." But it's often unrealistic to impose these Western CSR ideals overseas. "We've transferred the jobs to the developing world," says Hurst. "But we haven't transferred the skills or expertise needed to provide decent jobs." Many companies don't care (as long as the audits look good), but more progressive firms are working to develop creative new ways to improve factory conditions, moving far beyond mainstream tactics like auditing and standard codes of conduct.

They're smart to do so, because, in some ways, auditing is helping to promote the very practices it purports to detect. In The China Price, Alexandra Harney describes how Chinese suppliers set up "five-star factories" whose model working conditions impress auditors, while also creating "shadow" factories to meet actual order deadlines. With a minimum of paperwork or safety codes, staffed by migrant workers who often put in 12-hour days seven days a week, these shadow factories are unregulated, but common. The craze for auditing has, paradoxically, led factory owners to create such factories. It also sops up resources that could be channeled toward improving labor conditions. "If factories are getting monitored on average 25 times a year, that's every two weeks you have to check your records and talk to workers," says Michael Kobori, head of supply chain social and environmental sustainability at U.S. garment manufacturer Levi Strauss. "It's no wonder management is so occupied with these monitors that they have no time to make improvements."

Moreover, factory owners are frequently required to pay for their own audits — a fact that Auret Van Heerden of the Washington-based Fair Labor Association calls "something of a dirty little secret." One manufacturer with 15 factories in seven countries told Van Heerden that he had to deal with more than 250 audits a year, each costing an average of $1,600. Small wonder many factory managers see multinationals' codes of conduct as a plot to blunt their competitive edge. In a pre-audit pep talk to workers one Chinese factory manager railed: "Social responsibility is in essence trade barriers, uplifting our costs and slashing our competitiveness."

Conduct Becoming
Three years ago Nike, now among the most progressive companies on labor practices, took steps to curb what it saw as counterproductive auditing. In a daring move, it revealed its manufacturing sites — long seen as proprietary information — and suggested that companies manufacturing products in these same places collaborate on factory monitoring. Six months later Levi Strauss followed, and today is working with 15 other firms in 130 factories. Resources that once went to monitoring are now used on training overseas management, says Kobori, helping to create an environment in which factories have a bigger stake in how they are run. Even before that, Levi Strauss was moving away from its old monitoring system, taking what Kobori calls "a more anthropological, fieldwork" approach to gathering information. Rather than merely interviewing managers, or speaking with employees inside the factory, monitors would seek out workers at bus stops and cafés. The approach uncovered information on sensitive issues such as sexual harassment that standard audits would typically have missed.

Codes of conduct hammered out in corporate offices in the West can lose in translation when applied overseas. Mukhtarul Amin, managing director of Superhouse Ltd., an Indian clothes manufacturer that counts Esprit and Diesel among its clients, candidly admits that he can meet only 95% of his social responsibility commitments. Some, he says, are just too difficult, or aren't relevant to Indian society. French retailer Decathlon requires suppliers to have official documentation of workers' ages. "They don't know that a large number of Indians in rural areas have no such documents," says V. Srinivasan, a Superhouse manager. "So we have to make new workers get an affidavit from a magistrate. There's much running around to do, and it's all very time-consuming." As he speaks, the power cuts out and a private generator kicks in, raising the day's power costs. "Buyers come to developing countries to save," sighs Srinivasan. "But in the conditions we work under, our margins are tightly squeezed." So his firm controls costs in shrewd though legal ways: "Overtime pay is twice the regular pay. To cut costs, we don't make workers put in extra hours — we just employ more people."

Acute poverty makes it even harder to achieve CSR goals. Many migrants from northern China who come south for factory jobs want to earn as much as possible in a short time, then return home. Managers who refuse to let them work illegal overtime risk losing workers to less stringent factories. Likewise, in India, it's not possible to "create E.U.-like working conditions," says Anil Bhardwaj, of the New-Delhi based Federation of Indian Micro and Small & Medium Enterprises. "It might hurt our conscience to know that a child sold into slavery for 500 rupees [12 dollars] is making a shirt we might wear. But there are millions living on the fringes of society for whom 500 rupees is a lot of money. For them, it's a survive-or-perish choice."

Realists now accept that the "comply-or-die" model can actually hurt workers and damage the chances of building lasting partnerships with factories. "We thought monitoring was the answer, but we've learned the hard way that it isn't," Gap's then CEO Paul Pressler conceded in 2005. "Almost no factory is in compliance with our standards." As a result, the goal for many firms is no longer perfection, but more nuanced policies and a gradual raising of standards. Traditionally, Gap pulled out of factories in which it discovered child labor. Two years ago, it revised that policy. Now, if children are found in factories producing Gap clothes, the firm asks factory managers to remove them and find them schooling, for which Gap sometimes pays. The firm's new thinking, says Dan Henkle, Gap's senior vice-president for social responsibility, is not simply about monitoring, but about collaborating with factory staff so that they too feel responsible for conditions on the factory floor. It's messier, costlier and longer-term than a quick audit — and it's potentially riskier from a p.r. standpoint. But this is CSR for grown-ups. "The world is a complicated place," says Impactt's Hurst. "Try putting that on a label."

• Carla Power
• Executives love to talk about corporate social responsibility. But on the factory floor, living up to these lofty ideals is painfully difficult