Adidas Connection

8/2/2019 Adidas Connection

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ComplianCollaboration, andCodes of Labor Practice:T H E ADIDAS C O N N E C T I O N

Stephen J. FrenkelDuncan Scott

Driving international labor standards are three moral concerns.First, consumer surveys and the rapid growth of ethical invest-ment portfolios highlight a demand for "clean" productsgoodsand services untainted by exploitative labor or environmentalpractices.' Second, producers are anxious to avoid unfair international competi-tion that might force "a race to the bottom" in wages and conditions. Third, poli-cymakers wish to avoid any further decline in popu lar supp ort for the globaltrading system.

The labor standards problem arises from conflict between the interests ofmultinational corporations and those of social interest groups and non-govern-ment organizations (NGOs) seeking to counter global inequalities and upholdhuman rights at work.^ Seeking to resolve this conflict are international organi-zations such as the International Labour Organization (ILO) and the UnitedNations. ILO member states are required to uphold its four core labor standards:the right to bargain collectively and freedom of association; freedom from forcedor compulsory labor; freedom from exploitative child labor; and equality ofopportunity.^ In 1999, the ILO's core labor standards were included in the UN'sGlobal Compact initiative designed to encourage mu ltinationals to apply princi-ples of good corporate practice through consultation with labor and other orga-nizations concerned with human rights and the environment. More than 200compan ies have joined. In addition, the ILO has recently established a WorldW e wo uld like to thank the managers and employees of adidas-Salomon and of the Alpha and Beta


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Com pliance, Collaboration, and Codes of Labor Practice: Th

Commission to recommend proposals for dealing with the social effects of glob-alization and, in particular, the promotion of core labor standards.'*In contrast to what is essentially a voluntary approach, somegovernmentsespecially the U.S. and the EUfavor tying labor standa rds to

international trade agreements.^ Developing country governments generallyoppose this social clause approach, contending that it represen ts disguised pro-tectionismraising the labor cosis of developing country exports relative to theirdeveloped country competitors.'" Most economists also oppose trade sanctions ongovernments that fail to uphold labor

Corporate codes are filling standard s. This is because sanctions are likelyto reduce efficiency and economic growth anda regulatory vacuum and are may actually result in the worsening of the verymeasures

becoming an important means . 7 . f ! ^ are mtended to miprove. Eglm, a senior WTOof Upholding labor standards official, argues that combining trade and labor. ., . , , , . . standards within the WTO willintroduce con-m third world countrres. ^ . .j j i j . . . .u .flict and delay, damaging an mstitution thatdepends on international cooperation.^ Currentinternational lahor standards therefore remain voluntary. However, there aresome important exceptions. These include bilateral U.S. and EU tradeagreements with developing countries that receive trade preferences on condi-

tion that their governments uphold core lahor standards.* Less common, butof increasing importance, are multilateral arrangements. The EU's MaastrichtTreaty of 1992, for example, enables legislation that requires common laborstandards hy member countries. Another example is the North American Agree-ment on Lahor Cooperation (NAALC), which requires the U.S., Canada, andMexico to abide by their respective national labor laws.'"Apart from national legislation, which is often weakly enforced, workersin most developing countries remain outside the ILO's core labor standards. Thiseffectively means that multinationals are able to source products from sweat-shops. However, motivated by concerns about brand image and social responsi-bility, some firms attempt to uphold core labor standards among their maincontractors throu gh third-party quality assurance or by implementing codes oflahor practice." Corporate codes are filling

Stephen J. Frenkel is a Professor at the Australian a r eg u l a t o r y v acu u m and are b e c o m i n g anGraduate School of Management m Sydney. im p o rta n t me ans of u ph o l d i ng l abo r s tan - ^^^^^ .^ ^^.^^ ^ ^ ^ , j coun t r i es . The y haveDuncan Scott is currently ihe Head of Footv^ ear se ve ra l adv anta ge s but a lso some d raw-Sourcing for ad/das-Salomon Lim ited and was L I I 2 ^ I - - J J LIformerly the Head of Social and Environrr ental ^^"^^^^ O" ^^^ P"^" '^^ ^'^*^' '^"^es enableCompliance. Worldwide for ad/das-Salomon, fi rm s to t a i l o r l abor re la t i ons p rocedures to sui t the i r own needs; they a lso mot ivateemployees by improving wages and condi-tions and by introducing uniform rules; and they confer legitimacy on the global


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Compliance. Collaboration, and Codes o f Labor Practice: The adidas Connection

of global firms and they only regulate first-tier exporters in particular sectors indeveloping countries. Codes may be narrow in scope, excluding issues of impor-tance to workers. Furthermore, they can be merely public relations windowdressing unless supported by determined senior managers and by effective moni-toring systems that include periodic audits by specialist, accredited NGOs. Moni-toring and auditing, however, add to manufacturing costs. Aside from NGO andmedia reports of occasional violations of codes and ensuing problems, there islittle detailed information and dispassionate analysis of code implementation incontractor factories.

Code Development in Apparel and FootwearSince the late-1970s, interna tional codes have unsuccessfully attem pted

to voluntarily regulate multinational company activities." In 2000, the Organi-zation for Economic Cooperation and Development (OECD) thoroughly revisedit s Guidelines for Multinational Enterprises.^'^ Endorsed by more than 30 govern-m ents, this code includes a section on labor practices that includes provisions foremployee representatives and potential loss of employment that reaches beyondthe ILO's core labor standa rds, it can therefore be regarded as a progressiveframework for the future extension of existing corporate labor codes. These pro-visions arose in the 1990s in response to public press ure. They con tinue to beconfined to firms selling big-brand personal consumer goods manufacturedmainly in developing countries under labor-intensive methods of production."

The first code of labor practice appears to have been introduced by Levi-Strauss in 1992 following an expose of sweatshop conditions in a contractorworkplace on the island of Saipan. In the same year, Nike introduced its code.This was in response to allegations that its Indonesian contractors were payingbelow subsistence wages. In a bid to defuse public criticism, Nike hired Ernst andYoung to audit its overseas contractor factories. M eanw hile, The Gap succumbedto NGO pressure and publicly committed itself to independent monitoring by thesame accounting firm. The media's appetite for controversy was fed by furtherallegations of human rights violations in other Asian clothing and footwear fac-tories. Doonesbury cartoons and the documentary film "The Big One" damagedthe public image of industry leader Nike, which bore the brunt of public criti-cism. By 1996, leading apparel and athletic footwear companies were imple-menting codes in their Asian contractor factories. These continue to be quitesimilar, at least among the leading companies.'^ They endorse the ILO's four corelabor standards and include additional conditions regarding wages and benefits,the working environment, hours of work, and disciplinary practices. The codesrequire prime (first tier) manufacturing contractors to abide by the code provi-sions while remaining within the bounds of local labor law.'^ Failure to maintaincode conditions can ultimately lead to termination of the supply contract. Theglobal firms began to employ specialist local personnel to monitor the codes, a


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Connection

qualifications) and locating them in, or alongside, factory personneldepartments.

In 1998, Nike revised its code requirements: the minimum age of con-tractor factory workers was increased, factory environment standards wereraised, monitoring was expanded, and w orkers and managers were to receivemore training. President Clinton had meanwhile taken the initiative by encour-aging the formation of the Apparel Industry Partnership, composed of corporate,union, and religious organizations. The intention was to establish and enforce acommon code of labor practice that would be regularly monitored and audited.Differences between corporate and other members, mainly over monitoring andauditing, led to a split. The corporate mem bersN ike, adidas, Reebok, and sev-eral leading apparel companies, together with four NGOs, formed the Fair LaborAssociation (FLA). Since then, the FLA has only slightly increased its corporatemembership to 12 organizations. However, it has 28 NGO members and 170university and college affiliates. The FLA accredits and trains factory auditorsand is committed to regular monitoring and auditing of members' contrauorfactories.'*'

Reports of lapses in labor standards at Nike and other companies' facili-ties in Indonesia, Vietnam, and Cambodia reinforced student determination totackle the sweatshop issue." Inspired by involvement in tiew organizing strate-gies being pursued by some unions, the United Students Against Sweatshopsmovement became a powerful force promoting core labor standards in factoriesproducing apparel bearing university and college logos. This organization is affil-iated to the Worker Rights Consortium (WRC), an NGO dedicated to enforcingcodes that support core labor standards in factories manufacturing goods forU.S. universities and colleges. The WRC currently (March 2002) has 94 univer-sity and college member affiliates. In contrast to the FLA, the WRC favors unan-nou nced mo nitoring of contractor factories w hile choosing not to certify factorycompliance with any code.^"

Organizational competition has contributed to the complex business ofadministering codes and to the rectifying of associated problems in conflict situa-tions. This is illustrated by developments at the Korean-owned, Kuk Dong fac-tory producing Nike and Reebok apparel in Mexico. A dispute that led to astrike began in January 2001 . ' Reports by monitors acting for the FLA andWRC showed that management had failed to uphold key elements of the Nikecode relating to wages, hours of work, working conditions, supervisor behavior,freedom of association, and collective bargaining. This was in spite of a factoryauditor's report by Price Waterhouse Coopers some nine months earlier ihathad identified some of these issues. The dispute took a further nine months toresolve. It points to five general conclusions about codes in the apparel and ath-letic footwear industries at the present time.

First, in order to avoid costly future duplication of auditing and reporting ,


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Compliance, Collaboration, and Codes of Labor Practice: The adidas C onnec tion

global firms, and the NGOs and their associatesto engage in constructivedis-cussion that contributes to learning and relatively comprehensive settlements.Third, thedispute highlighted what is likely to bebecome a major issue in thefuture: theneed for factory procedures thatenable workers to elect their representatives . . . global firms need tO selectand bargain with management.^* Fourth,the dispute illustrated a trend toward trans- *"eir contractors more Carefullyparency, evidenced by Nike's recent policy and collaborate with them moreof placing the results of some factory auditsand action plans on the company's web closely in order to maintainsite.' Finally, although theworkers' won exemplary labor standards andsignificant concessions, Nike discontinuedsourcing from the factory in August of avoid public controversy.2001. Unstable labor relations appeared tobe a factor in reaching this decision. In short, like consumer boycotts, high-profile disputes can ultimately harm those that codes are intended to help anddeter firms from publicly committing to a code of practice. These problemssuggest that global firms need to select their contractors more carefully and col-laborate with them more closely in order to maintain exemplary labor standardsand avoid public controversy.

Global and Local:Compliance and Collaborative Type Relationships

Differences inglobal firm praaices lead to variations in the way contrac-tors implement the codes. ' The same global firm maydevelop very differenttypes of relationships with similar contractor factories and this will have a sig-nificant effect on performance and worker well-being. Two basic types of rela-tionship can be distinguished. The compliance pattern is characterized by globalfirm domination: theglobal firm develops and introduces thecode, communi-cates its importance to the contractors, and is responsihle for its enforcement.The contractor seeks to abide by the code provisions, seeing it as a necessarycondition (together with price, quality, and delivery targets) for continuing as amajor supplier. By contrast, thecollaboration pattern implies partnership (thoughnot power equality): thecode constitutes a basis for continual improvementof workplace performance andworker well-being. Its importance comes to betaken for granted and is jointly monitored andchanged by theglobal firm andthe contractor.

These differences recall distinctions in inter-firm contracting betweenlow-trust, specific, and short-term relationships (referred to as "arm's-length,""market," or "spot contract" ties) andselective, high-trust, diffuse, and enduringrelationships (variously referred to as "obligational," "relational," or "embedded"ties).' ^ Collaborative ties are more advantageous where firms have complemen-


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Compliance, Collaboration, and C ode s of Labor Practice: The adidas Connection

include faster and better decision making arising from access to privileged andtacit information, a flexible capacity to solve problems and coordinate action,and a higher rate of innovation through creating and sharing knowledge.^'However, collaborative relationships can lead to over-dependence and inertia,resulting in joint failure if firms do not remain open to market and technologicalchanges.

Compliance ties have some of the characteristics of arm's-Iength contract-ing while collaborative relationships resemble obligational type contracting. Theoperational context of the global athletic shoe industry favors the latter. Firmslike adidas are concerned about price andquality; it is costly to switch supplierswho lack the tacit knowledge, expertise, and problem-solving capacity thatcomes from working with the same global firm for an extended period. Frequentproduct changes provide plenty of opportunities for joint learning and innova-

tion. Particularly with regard to labor prac-. . . compl iance re lat ionships are tices, collaboration is Hkely to widen. . J . J , ^. , contractors' perspectives, pushing thembiased toward functional . ^ ,u A a \- , i

beyond the code s specifications. In hnespecial izat ion and the status q u o , with th e global firm's management view,, ,, , contractors come to see the code as an inte-Whereas collaborative-type g,^, p^^^ ( ^^e manufacturing system. Inrelat ionships support funct ional addition, where th e global firm is seekingto improve factory performance and workerintegration and innovat ion. well-being (as in adidas' case), th e system islikely to be dynamic, improving over time

and having the potential (through knowledge sharing) to contribute to innova-tive practices at other (non-competing) contractors' factories. In contrast, wherea compliance type relationship prevails, the code is more likely to be regardedas setting discrete funaional targets, which, once achieved, may simply be main-tained. Changes in labor practices are likely to occur only in response to changesin code requirements, which will in turn depend on the global firm. In short,compliance relationships are biased toward functional specialization and thestatus quo, whereas collaborative-type relationships support functional integra-tion and innovation.

Despite adidas' common labor practice requirements, conveyed throughthe code, two of its very similar contract manufacturershereafter referred toas "Alpha" and "Beta" for confidentiality reasonshave implemented the codedifferently and with substantially different results. Alpha's superior perform-ance arises from collaboration. Nevertheless, Beta's basically compliance-typerelationship with adidas also yields distinct benefits that are unlikely to haveoccurred in the absence of the code. This confirms that codes of labor practicecan be a valuable tool for implementing core labor standards among multina-tionals' contractors in developing countries.


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:nd Codes of Labor Practice; The ad/das C onnection

The Companies and the Research DesignIn the international footwear league, adidas ranks second afterThe firm accounts for 15 percent of world sales and employs 13,300 persons.Between 1995 and 2000, the company's share price increased by 110 percent.

In 2000, a new senior m anage me nt team launched th e G rowth and Efficiencyprogram, which was designed to refocus and streamline the company, making itmore agile and m ore responsive to m arket changes. Supply chain improv emen tis a major goal of the program. The aim is to increase efficiency within businessunits, achieve closer synchronization of supply with marketing and sales, andbuild stronger alliances with fewer partners across the supply chain.*" Leanmanufacturing is an essential enabler for attaining these goals.The two contractors (Alpha and Beta) are private companies controlled byTaiwanese managers. Beta is part of a Taiwanese firm that owns four additional

similar*sized footwear factories in China. Alpha, also located in China, is a sin-gle-plant company jointly owned hy Taiwanese owners, a community-ownedenterprise, and a state-owned leather company. However, the Taiwanese ow nersman age th e company. O ther relevant characteristics of the tw o workplaces aresummarized bi Table 1.Table 1 highlights similarities between the two workplaces. Both are situ-ated in Guangdong province within 100 kilometers of one another. The plantsproduce sports shoes that are similar in terms of product complexity, althoughBeta enjoys a longer average produaion run per item1285 pairs of shoes com-

pared to 832 at Alpha in 2000. Alpha has manufactured exclusively for adidasover the past several years. The Beta plant has been an exclusive supplier for asimilar period, how ever, its sister plants produ ce for o ther global firms (hencethe description "exclusive, qualified" in Table 1). In 1998, both contractors wererequired to introduce the adidas code of labor and environmental practice. Priorto this, contractors were only required to abide by existing labor legislation.Both workplaces are large in terms of production capacity and workforcesize. Alpha being slightly larger than Beta. The techno logy used is abo ut thesame age, and predominantly manually operated with some assembly line work.Workers are mainly employed on repetitive work using stand-alone stitchingmachines. Quantity and quality norms are set by contractor engineers in con-sultation with their adidas counterparts. There are approximately 20 adidas engi-neers in each workplace. Section performance is shown on boards in workshopsand is reported in the monthly magazines that are distributed to all employees.Supervisors are expected to train, care, and motivate workers in their section,including recom mending workers for merit aw ards. Supervisors at both work-places are formally appraised annually. Criteria for performance bonuses andpromotion include productivity, quality, and human resource indicators (suchas labor turnove r and the n um her of complaints lodged by work ers). In line

with government policy, there are no independent unions at either workplace."However, suggestion box arrangem ents are designed to ensure that workers


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Compliance, Collaboration, and Codes of Labor Practice: The adidas Connection

T A B L E I . Selected Characteristics of Contractor Workplaces Beta and Alpha, 2001CharacteristicsLocation (in Guangdong province, China)Main products

Relationship w fth adidas (type of supplier)Supplier relationship duration (in years)Mon thly capacity (in pairs of shoes)Number of employeesAge o f workplace (in years)Technology

BetaDongguanAdventure (e.g., hiking)and sports shoes(e.g., cycling)Exclusive, qualified4440,0007,6387Mainly m ^u al , stand-aloneand assembly line

AlphaGuangzhouTennis, basketball, andrunning shoesExclusive4600,0008.48310Similar to Beta

Average age of m achinery (in years): cutting stitching assembly

2.34.34.0

6.55.05,6

Work organization and pay system

Workforce features: % manual workers of total employees % manual w orkers, female

Close supervision o f sectionsin accordance w ith rules;base rate plus bonus mainlyaccording to individualperformance

7674

Similar to Beta

7773

Source: Documentary data.

productivity and quality above the norm . These performance-related elementsaccount for approximately 16 percen t of total average pay at both p lants. Mostworkers are young, unmarried, migrant women from poorer parts of Guang-dong province and the inland provinces of Hunan, Sezchuan, Henan, and Hubei.They either live in dormitories alongside the factory or share rooms in a nearbycity. These workers visit home once or twice every two years. The traditionalpattern is to work for three or four years before returning home to marry. This ischanging as work perm its become easier to extend and accomm odation becomesmore available.The above-mentioned similarities in workplace characteristics are inte-gral to our research design. The two workplaces have heen matched in regardto variables that might account for performance differences. On the basis of peri-

odic performance reviews (productivity, quality, delivery time, and code adher-ence), adidas managers regard Alpha as a better performer than Beta. Alpha is


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Compliance. Co llaboration , and Codes of Labor Practice: The adidas Connection

Documentary data on the characteristics and performance of the twoworkplaces was gathered ahead of visits to adidas offices and the two workplacesin April 200 1. Semi-structured interviews w ere conducted with a range of m an-agers, supervisors, and production workers." Where it was not possible to inter-view in English, translation was provided either by a workplace manager (wheninterviewing managers) or a labor practices staff member (when interviewingsupervisors and workers). Workers were interviewed In groups of three in ameeting room away from the shop-fioor. Additional documentary and statisticaldata were collected, analyzed, and, where necessary, clarified by workplacemanage rs or labor practices staff subsequ ently by e-m ail.

There are two caveats regarding the data: first, comp arable informationwas sometimes unavailable or difficult to interpret. Alpha provided more datathan Beta, and absent a common data format in the two workplaces, the degreeof confidence in comparing data varied. Some data was therefore omitted fromthe analysis. The second issue conce rns (he question of bias. The visits were p re-arranged through adidas management, interviewees were selected by a managerin each factory, and time constraints limited the number of employees that wereinterviewed. However, steps were taken to mitigate bias. We sought facts ratherthan opinions and in order to ensure a representative sample, criteria for select-ing employees for interview were stipulated in advance, hi addition, hy ushig avariety of sourcesadidas engineers working in the factories and docum entarydatait was possible to check the veracity of information. If bias exists, it isunlikely to vary very much between the two factories.a d i d a s : The Code of Practice and Labor Standards

The centerpiece of adidas' strategy for regulating contractor-employeerelationships is its code of labor practice (reproduced in part in th e A ppen dix).This document formalizes employee rights and defines acceptable managementbehavior. Prime contractors sign a terms of engagem ent ag reement that requiresthem to uphold the labor standards stated in the code. The company encouragescontractors to circulate the code by issuing company handhooks to all employeesand affixing posters to factory walls. About 25 adidas personnel, employed on aregional basis, provide labor and environmental practice monitoring and train-ing; and adidas has an eight-person team w ith five mem bers dedicated tofootwear and three focusing on apparel manufacturing. Members of the laborpractices and environmental teams are responsible for undertaking regular (typi-cally mo nthly) visits to contractor sites to check code adhe renc e and to assist insolving labor or environmental problems. Few labor practices staff membershave relevant degrees or long-term experience, but regular contact with adidasfactory engineers provides them with much useful independent information onfactory conditions and labor practices. The labor practices staff also enjoys strongsupport from adidas senior manage m ent. This contributes to high w ork com mit-ment and is underscored by firmly held beliefs in the moral value of fair labor


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Com pl iance. Col lab orat ion, and Codes o f Labor Practice: Th e adidas Co n n e c t i o n

practices team credibility with both their counterparts in the contractor compa-nies and the senior management of the contrartor companies.The adidas labor practices staff provides a bulwark against labor abuse,reinforcing standards for line manager-employee relations and helping to resolve

major lahor problems. Because of resource constraints and limited professionalexpertise, they less frequently (as stated in the adidas code) "encourage proaaivesystems that anticipate and prevent problems" and are only rarely involved in"implement lingl projects to research and propose solutions for complex prob-lems that may require, long term, multi-step solutions."Once a year, contractors are formally evaluated against a detailed check-list of labor practice and e nviro nm enta l items. The score forms part of a broaderevaluation (that includes output, price, quality, and delivery times) about thefuture status of the contractor as a supplier. Contractors are not informed about

the specific w eighting given to labor practices in this exercise. Whe re standa rdsare found to be below code requireme nts, an adidas labor practices manager willwork with the factory managers to draw up action plans for subsequent imple-mentation by the contractor.In effect, adidas transmits two messages regarding labor practices: thedominant one is conveyed in the language of compliance, the subsidiary onestresses collaboration. The formal organization of labor practices and the preoc-cupation of its staff encourage contractor compliance with rules set by the globalcompany. Thus, the code was devised by adidas in the light of norms set by its

competitors rather than in consultation with its contractors. The companycommunicates the code through documentation and through the monitoring,training, and support provided by its lahor practices team; and it is formallyresponsible for monitoring, sanctioning, and changing labor standards. Thecode's general guidelines state that adidas "has the right to investigate any alle-gations relating to [the code], including holding interviews with workers andhaving access to facilities and records relating to such allegations." Contractorsmust submit to auditing of labor practices by external organizations {e.g., NGOs)as required by adidas.^^The subsidiary message of collaboration encourages con tractors to workwith adidas to upgrade labor practices in order to contribute to higher produc-tivity and quality. Collaboration emphasizes a broader set of goals (continuallyupgrading labor practices for employee satisfaction and higher performance),means (dialogue between contractors and the global firm), and responsibilities(a division of labor with the global firm that assum es a m ore strategic and p rovi-sioning role; contractors taking responsibility for implementation, monitoring,and proposals for change).

The Labor Code in Practice: Compliance and CollaborationInterviews with adidas code team memhers indicated little difference in


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Comp liance. Collabioration, and Codes o f labor Practice: The odidas Connect ion

T A B L E 2 . Differences in Management and Organizat ion, Beta and Alpha, 2001Beta Alpha

Company objectives High manufacturing performanceand p rofrtability

W o r k e r well-being, and improvingthe local community

Management strategy an dimplementation

T Q M , systems application, laborpractice impnDvement withemphasis on cost reduction

Innovation based on TQMe.g . .lean production, emphasis o nfairness (worker discipline balancedby paternalism)

Organizational structure Com plex, mu fti-plant centralized Simple, single plant, centralizedManagement communication Senior managers no t accessible an dfragmented; infrequent contact with

middle m anagement an d workersHands-on, cohesive seniormanagement; frequentcomm unication wi th middlemanagers and w orke rs

Labor practices integration intocompany systems an d contr ibut ionto company goals

W ea k reactive, less stronglyintegrated employee relationssection; limited c ontr ibu tion tocomp any goals

More stnsngly integrated employeerelations section s upp orted bysenior management; mo resubstantial contribution t o companygoals

understandingand a more equal and harmonious relationshipwith theircounterparts at Alpha than with those at Beta. For example:

"We find it mo re difficult to com mu nicate with Beta. They saw us as interferingand could not understand why we wamed to improve labor practices. Now, theyres pe a us and are beginning to believe us, but they still don't really unde rstand.Their English isn't as good as at Alpha, but even when we try to explain in Man-darin, tbey don't seem to understand. They seem to follow whereas at Alpha theywill make improvem ents w ithout us asking tbem to."adidas regional labor prac-tices staff member"Alpha's attitude to improvement is different: when we visit, the code of practiceteam, which co-ordinates the action plan, get us to check that what tbey havedone is correct. At Beta, with the higb turno ver rate of people in the team , tb ereis little co ntinuity, so th ere is a lack of co ntinu ous comm itment."adidas regionalhealth, safety, and environment managerThe structural differences in the two contractor organizations are indi-cated in Table 2. Both contractors were trying to improve manufacturing pro-ductivity, quality, and th roug hpu t times. Senior m anagem ent was awa re of

adidas' intention to further reduce the num ber of contractors, so "customerresponsiveness" and profitability were also mentioned in interviews. Seniormanagement at Alpha supported the code more keenly than at Beta, in partbecause of their commitment to retaining their status as a sole supplier to adidas.


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Compliance, Collaboration, and Codes of Labor Practice: The odidas Connection

"Alpha is very positive [about labor practices]. They will try every thing to makeimprovements and to ensure the status of the factory as a supplier to us. Beta ismo re cautious. They w on't reje a things outright. In this area [labor practices],they don't seem to have the know-how."Beta's strategic focus was relatively narrow, with no reference to stake-holders other than the shareholde rs. Their strategy em phasized TQM, supportedby integrated software systems and code-related labor practices. These were thedevices used to reduce unit costs. Other efforts to help increase recent perfor-mance included monthly monitoring of machine usage and waste reduction,machine leasing and sharing across the five plants that constitute the group,and a more transparent purchasing system. In contrast, at Alpha, stakeholdersincluded employees and the notion of "repaying society." This took the form offinancial support for a nearby university student intern scheme and provision of

recreational facilities to elderly local residents. This accompanied recent success-ful efforts to restructure production lines and reduce unit costs while maintain-ing quality.^^ Alpha's prototy pe line using w orkers with increased responsibilityfor quality assurance was proceeding successfully, and a new production unitdedicated to experimenting with lean production was under construction.Whereas at Beta, developing new systems was a priority, at Alpha, these werealready in p lace. According to adidas' regional labor practices manager:"Management systems are better at Alphaeverything, from payroll, manufac-turing, qualitythey have documented all these processes; they track things likeperformance against incentive targets and they k now the relationships betweendifferent processes....Beta has very few systems. It's sort of ad hoc management.They don't have a sophisticated systems approach to management, although theyare now trying."Alpha's strategy emphasized rules, trusting workers to obey on the basisof rigorously enforced standards. This meant that Alpha could work with ahigher ratio of production workers to supervisors (17 to 1) compared to Beta's(U to 1). An indicator of Beta's less stringent approach to work rules was theabsence of any systematic records of awards and infringements. Details at Alpha

indicated a high ratio of penalties to awards. For example, in the first quarter of2001, Alpha recorded 84 awards compared to 475 warnings, 321 minor offences,and 4 major offences.'^ Senior managers stressed the importance of discipline,arguing that the rules embody principles:"We keep to the rules. Rules are a strong focus for us. These are dear. Workersand managers who obey the rules should be rewarded and those who don'tshould be punished. Everyone should be disciplined and follow principles. Forexample, we have a rule about identity badges. Pointing to his identity badge:everyone, including myself, has to wear one of these. So, that illustrates theprinciple that we treat everyone the same. Another example of a principle ishow supervisors are supposed to treat workers. They must follow the principleof teach rather than blame. Alpha supervisor must ask himself: 'Did I do enoug h


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Compliance. Collaboration, and Codes o f Labor Practice: The adidas Connection

The greater emphasis o n discipline at Alpha w as balaticed by a greatercomm itment to employee welfare and w ell-heing. For examp le, although bothworkplaces provided various am enities (e.g., a company shop, TV in the dininghall, a library, dance evenings, and sports competitions). Alpha's range was moreextensive. It included special banking facilities, access to regional newspapers, aroom for mothers to nurse their babies, and the construction of a large foodcourt that will include several restaurants catering to the various tastes of themigrant workforce. Alpha was also more innovative: Alpha's labor practicesteam had introduced an employee information help-desk in the canteen. Thesuccess of this venture led Beta to introduce a similar scheme some monthslater.

Organizational structures at the two workplaces differed: reporting rela-tions at Beta were less conducive to high performance than at Alpha. Beta waspart of a multi-plant complex whose two most senior managers the chairmanand a general managerwere rarely seen. The former visited the workplace onaverage once every two months and the latter once a month. Except for majorinvestment decisions, authority was vested in an execu tive m anager w ho wasbased at the workplace and was supported by a team of six (relatively new)senior managers. One of these managers held a dual role: he was the chairman'sassociate, in charge of auditing at Beta and at the other four plants owned by thefirm, and for the past six months had served as the HR manager at Beta and asister plant nearby. This included responsibility for implementing adidas' codeof labor practice. At Alpha (which, as noted earlier, consisted of a single work-place), the managing director (and major shareholder) was supported by fourlong-standing colleagues, one of whom was responsible for HR. These managerswere titled general managers or in some cases, vice-general managers. Decisionstended to be centralized in this cohesive team. The adidas' personnel who visitedthe workplaces claimed that their counterparts were more accessible at Alphathan at Beta. For example, the regional health and safety manager commented:

"At Alpha, management is more open and willing to accept our ideas and theyinvest a lot of resources in health and safety. They have a good labor practicesteam and their senior managers communicate with the workers. At Beta, thegeneral manager isn't there much of the time. I've been there four times and oneach occasion I didn't see him. They seem to be out of touch....And they don'tspeak English too well so maybe they don't understand us at adidas. And theyare not so willing to put resources into aspects relating to the code."Interviews confirmed that senior managers at Alpha communicated morecomprehensively with middle managers and workers than was the case at Beta.Meetings between senior and middle manag ers were held w eekly at both work-places, however, only at Alpha did the most senior manager address all employ-ees on a regular basis. This occurred each month on the firm's sports field. At

both workplaces, the meetings focused on current and anticipated prohlems andplans. However, at Alpha there was more emphasis on reinforcing corporate


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'Every week [the general manager] and I meet with ali the middle managers andsupervisors. We give out a lot of economic information about the market, whatour orders are like, profitability, et cetera. We give them concepts and principlesand try and open their minds to the need for change."Offering a vision of the company's future is also a stronger feature ofAlpha's monthly magazine, which highlights the four corporate valuesloyalty,practicality, quality, and diligenceon the cover.Compared to Beta, Alpha's stronger emphasis on managing hu m anresourcesevident in the objectives, strategy, organizational struaure, and com-munications was m ore aligned with adidas' approach. This evolved over time.At the inception of the relationship with adidas. Alpha's labor practices, likeBeta's, were sub-standard, involving long hours of work and unsafe workingconditions. Code compliance encouraged higher standards, but this evolvedmore rapidly into collaboration at Alpha, which led to further gains in work-place performance and labor practices.At Alpha, there is strong senior management support for informationsharing, worker involvement, and the code on which workers' rights are based.As noted by an adidas quality engineer based at Alpha:"At Alpha th ere is a strong effort to get support from eve ryo ne. The re is goodinformation exchange, feedback. . . .Manag eme nt gets things done , they areopen-minded, accept new ideas, from anyone who cares to offer them. ... AtAlpha, they [senior management] automatically think about the workers' well-beingthey are m otivated to look after their w orkers."m ember of adidas'regional labor practices staffThe more cautious, ambivalent, and reactive attitude of Beta's seniormanagement to the code stems from a less people-centered approach that viewsthe code as an externally imposed standard with major cost implications."According to Beta's HR m anage r:"We develop these labor praa ices because this is the adidas way. The workers geteducated in what their rights are, which is a positive thing. On the other hand , it'sWestern companies determining what their rights are, which I don't feel is rightthey are imposing certain standards in a different environ me nt. B ut over the longterm, the code of practice is good for the company. It encourages us to improveour produaivity and quality by having to work within certain limits Ishorterhours requirements and improved health and safety praaices]. Also it improvesthe company's reputation. We are producing for a famous brand and workers inthe area want to work for us because they know that we follow the labor law.But this is a big cost for us improving th e do rmitories, th e ca nteen , and facilitiesmore generallyeven though we are compensated for some of the cost byadidas."

The adidas labor practices staff enjoyed working with their counterpartsat Alpha and were more inclined to exchange information and include Alpha in


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Compliance. Collaboration, and Codes of Labor Practice: The adidas Connection

They do things well, so it's only natural that w hen we are thinking ab out som e-thing new we will talk to them about it, get their opinion."

In sum, differences in management and organization at the two work-places contributed to the more rapid development of collaborative relationsbetween adidas and Alpha. The three main differences are: Beta's approach is more pragmatic, not resisting the code but no t fullyendorsing it either. Alpha's management views the code as integral totheir vision and values and hence an important factor in helping toenhance employee commitment. Alpha management has thereforeenforced the code more strictly than at Beta and has been more effertivein building a stable labor practices team . Beta's mana gem ent tend s to see the code as a narro w set of responsibili-ties while Alpha's management shows more awareness of interdependen-cies with other functions and goals. Beta's managers regard the code as a set of targets where as Alpha m an -agement views the code as a platform on w hich to build further impro ve-ments. Accordingly, they have been prepared to invest more resources innew code-related initiatives and have been eager to work closely withtheir adidas counterparts to ensure success.

Comparative Workplace Performance and Other OutcomesAs shown in Table 3, Alpha performs better than Beta and has a superiorpay, health and safety, and labor turnover record. Despite having reduced workhours from an average of around 75 in 1999 to 55 hours a week in 200 1, bothworkplaces have been able to maintain productivity output levels. According to

adidas engineers at the two workplaces, quality has improved at both plants. Paywas 11 percent higher at Alpha than at Beta at the start of 2000 and hasincreased more rapidly (7 percent compared to4 percent annually ). Although both workplaces While implement ing the COdehave experienced substantial declines in labor b e n e f i t t e d m a n a g e m e n t a n dturno ver, the rate at Alpha has bee n aro un d a "half that at Beta. empioyees at both contractors'

The differences in workplace outcomes workplaces , the benef i t s havecan be explained by Alpha's manag em ent hav-ing successfully interpreted and implemented been greater at Alpha, where ath e adidas code of labor practice as a collabora- col laborative relat ionshiptive relationship. This has been reciprocated byadidas labor practices staff and has contributed preva i led .to a mo re dedicated and stable contractor m an-agement, a more effective labor practices team, and a more committed work-force. By contrast. Beta's management has merely progressed from skepticismtowards the code to a position of ambivalent acceptance.


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Com pliance. Collaboration, and Codes o f Labor Practice: Th e adidas Connect ion

T A B L E 3 . Compara t ive Perfo rmance, Beta and A lpha, 2001

Pnadu ctivity (average no , o f pairs o f shoespe r 8 hours per employee)Qualrty: Faa ory rejer t rate % Customer rejea rate %Average earnings: in RMB per month as at January 2000 average annu al increase in % ( i 998'2000)Health an d safety: Total record^le incident rate Lost t ime injury rateL ^ o r turnover (annual %): 1999 2000

Beta1.68

0,750.24

8844

250157

75.043.6

AlphaZ48

0.250,46

9837

1702

36.523.8

No te: Product iv i t ) ' and qual i ty data are for 12 months 2000.The factory re jec t ra le is the proport ion of shoes rejec ted by fac toryinspect ion as a pro po rt ion of tota l p roduct ion .The customer re/ect rate is the percentage of shoes returned by customers that havebeen sold. Eorningsexchange rate RMB 8.2794 = US$ 1,00. Health and safety a) and b) f igures are for 6 mon ths, June-December,2000.The total recordable inciden! rate is the number of working hours lost due to emplo>es suffering from fatal i t ies, injuries,occupat ional i l lness and doing rest r ic ted work d iv ided by I t ie tota l number of hours worked in the same per iod mul t ip l ied by1,000,000.The fosl time injury rate is the num ber o f hours lost aris ing f rom fatal i ties and " 'los t workday cases" d iv ided by the num berof hours w orke d ove r the same p er iod m ul t ip l ied by 1 ,000,000. Labor turnover is calcu lated as the sum o f the n umb er of voluntar i ly

and involuntar i ly dep artu res fnsm the workplace in that year as a prop ort io n o f the average total employm ent in the same pe nod .

collaborative relationship prevailed. Other advantages of collaboration includelower labor practices monitoring costs because of fewer code-related problemsand more innovation resulting from the richer interchanges (involving knowl-edge sharing and knowledge creation) between adidas labor practices staff andtheir counterparts at Alpha.

ConclusionThe application of codes of labor practice by global firms can u phold corelabor standards, improve w orkers' w ell-being, and enh ance workplace perfor-mance. When there is a collaborative partnership between a global firm and acontractor, there is the possibility of generating superior outcomes for both par-ties and for workers. It is not enough to have labor practice monitoring special-ists. These teams need to be more skilled in fostering organizational change and

building collaborative relationships in workplaces like Beta. However, the con-traaor must bring complementary assets to the relationship: senior management


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Com pl iance. Col lab orat ion, and Codes o f Labor Pract ice: Th e adidas Co nne ct ion

team to ensure that there is no gap between practice and policy and that work-ers' interests are taken into account.

A P P E N D I XExtract from the adidas Code of Labor Practices(Employment Standards)I. General Principle

Business partners shall comply fully with all legal requirements relevantto the conduct of their businesses.II. Em ployment StandardsWe will only do business with partners who treat their employees fairlyand legally with regard to wages, benefits, and working conditions. In particular,the following guidelines apply:

Forced Labor: Business partners shall not use forced labor, whether in theform of prison labor, indentured labor, bonded labor, or otherwise. Noemployee shall be compelled to work through force or intimidation of anyform.Child Labor: Business partners shall not employ children who are lessthan 15 years oid, or who are younger than the age for completing com-pulsory education in the country of manufacture where such age ishigher than 15.Discrimination: While we recognize and respect cultural differences, webelieve that workers should be employed on the basis of their ability to dothe job, rather than on the basis of personal characteristics or beliefs. Wewill seek business partners that share this value, and that do not discrimi-nate in hiring and employment practices on grounds of race, nationalorigin, gender, religion, age, disability, marital status, membership of asso-ciations, sexual orientation, or political opinion.Wages and Benefits: Business partners shall recognize that wages areessential to meeting employees' basic needs and some discretionary pay-ments. In all cases, wages must equal or exceed the minimum wage orthe prevailing industry wage, whichever is higher, and legally mandatedbenefits shall also be provided. Wages shall be paid directly to theemp loyee in cash or check or the equiva lent, and information relatingto wages shall be provided to employees in a form they understand.Advances and deductions from wages shall be carefully monitored, andshall comply with law.In addition to their compensation for regular wo rking hou rs, em ployeesshall be compensated for overtime hours at the premium rate legally


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Compliance, Collaboration, and Codes of I

Hours of Work: Employees shall not be required, except in extraordinarycircumstances, to work m ore th an sixty ho urs per week, including over-time, or the local legal requ irem ent, wh icheve r is less. Em ployees shall beallowed at least 24 consecutive hours off within every seven-day period,and shall receive paid annual leave.Freedom of Association and Collective Bargaining: Business partnersshall recognize and respect the right of workers to join and organizeassociations of their own choosing, and to bargain collectively. Wherelaw specifically restricts the right to freedom of association and collectivebargaining, the employer must not obstruct alternative and legal meansfor independent and free association and bargaining. In any case theemployer shall implement systems to ensure good com mu nication withemployees.Disciplinary Practices: Every employee shall be treated with respect anddignity. No employee shall be subject to any physical, sexual, psychologi-cal or verbal harassment or abuse.

/ / / . Health and SafetyA safe and hygienic working environment shall be provided, and occu-pational health and safety practices, which prevent accidents and injury in thecourse of work or as a result of the operation of employer facilities, shall be pro-moted. This includes protection from fire, accidents, and toxic substances. Light-ing, heating and ventilation systems should be adequate. Employees should

have access at all times to sanitary facilities, w hich should be adequ ate andclean. The factory must have safety and health policies that are clearly commu-nicated to the w orkers. These should apply to employee residential facilities,where provided by employers.IV. Environmental Requirements

Business partners should aim for progressive improvement in their envi-ronm ental performance, not only in their own operations, but also in their oper-ations with partners, suppliers, and sub contractors. This includes: integratingprinciples of sustainability into business decisions; responsible use of naturalresources, adoption of cleaner production and pollution prevention mea sures,and designing and developing produrts, materials and technologies according tothe principles of sustainability.V. Community Involvement

We will favor business partners who make effons to contribute to improv-ing conditions in the countries and comm unities in which they op erate.Source: adidas. "Standards of Engagement: Guidelines for the Employment Standards,"company document partly reproduced at ,2002.


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Compliance. Collaboration, and Codes of Labor Practice: The adidas Connection

Notes1. K. Cotirill, "Global Codes of Condua,'J(JMma/c"/BMS>iess5fr


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adidas includes a clause on community involvement, encouraging contractors to contributeio [he communities and countries in which they operate.17. Indepen dent unions are not perm itted in C hina. The relevanl clause from adidas' code ofpractice states inter alia: "Where law specificany restricts the right to freedom of associationand collective bargaining, the empioyer must not obstruct alternative and legal means forindependent and free association and bargaining. In any case the employer shall implementsystems to ensure good communication with employees." (See Appendix, adidas code,2001.) Note that independent unions may become inefficient bureaucracies so that auton-omy from the state does not guaran tee effective representation of wo rkers' interests.t8 . See Fair Labor Association, , March 21, 2001.19. T. Connor, "Still Waiting for Nike to Do It," Global Exchange, ,2001; Giddens, op. cit.; New York Times. 'M.I.T. Report Says Intemationai Accounting FirmOverlooks Faaory Abuses." New York Times. September 28, 2000, p. AI2.20. Accounting firms are considered to be too dependent on global firms to provide an objectiveassessment. They may also lack local knowledge and not be trusted by employees. Likeaccounting firms, NGOs have to develop the necessary expertise for factory auditing, butthey may lack the resources to do so. NGOs may also have limited geographical reach andthey need to have a diverse revenu e base to avoid dependence on income from factory

auditing. For a discussion see E. Burnett and J. Mahon, "Monitoring Compliance WithIntemationai Labor Standards," Challenge. 44/2 (2001): 51-72.21 . Details of the dispute and the terms of its resolution can by found at the Nike and FLA websites. A detailed, albeit partisan interpre tation of the dispute, which includes further refer-ences, is provided by David Boje al .22 . This is unlikely in the light of continuing differences between the FLA and WRC. In addi-tion, other organizations and systems are competing for attention, e.g., the U.S. Governmen tsupported Sociat Accountability International's SA8000 scheme and the Global ReportingInitiative whose guidelines are reported to be followed by 100 large companies. Burnettand Mahon, op. cit.; B. Gilley, "Sweating it Out,' Far Eastern Economic Review, 164/18 (2001):40-41; "The New Accountability: Trackmg the Social Costs,' New York Times. March 24,2002, p. BU4.23 . According to The Economist, several representatives of Western athletic footwear firmsapproached President Jiang Zemin to endorse the principle of freedom of association but herefused. "Getting Organised, with Western Help," The Economist, December I, 2001, pp. 57-58. Nevertheless, Reebok has organized an election for workers to choose their own repre-sentatives in a contractor factory in Southern China.24. See .25 . C. Denny. "Weighing in on the Side of Third World Workers," The Guardian Weekly. April 5-11.2001, p. 28.26 . S.J. Frenkei, "Globalization, Athletic Footwear Commodity Chains and Employment Rela-tions in China," Organization Studies. 221A (2001): 53 1-562.27 . M. Sako, Prices. Quality and Trust (Cambridge, UK: Cambridge University Press, 1992); S.R.Helper and M. Sako, "Supplier Relations in Japan and the United States: Are They Converg-

ing?" Sloan Management Review. 36/3 (Spring 1995): 77-84.28 . B. Uzzi, "Social Structure and Competition in Interfirm Networks: The Paradox of Embed-dedness." Administrative Science Quarterly. 42/1 (March 1997): 35-67; J.H. Dyer and H. Singh,"The Relational View: Cooperative Strategy and Sources of Interorganizational CompetitiveAdvantage," Academy ofManagement Review, 23/4 (1998): 660-679.29. Sporting Goods Intelligence 2000. "Intemationai Branded Athletic Footwear Market Estimates,*, June 12, 2001.30. The number of prime manufaauring contractors was reduced from 30 in 2000 to 26 in2001. A further reduction to 23 is planned by 2003.31. An official union existed at Alpha but not at Beta. Even so, its chairperson was a seniorlabor practices staff member and it did not process workers' grievances, which was the roleof the lahor practices department. It did have a liaison funaion: meeting occasionally with

union representatives from similar factories in the district and local government officials todiscuss emerging issues and new labor legislation.32 . According to labor practices staff at the workplaces, the most common problems include:


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Compl iance. Col laborat ion, and Cod es o f Labor Practice: Th e odidas Con nect ion

(e.g., a worker allegedly failing to repay a debt lo a colleague; a damaged relationshipbetween employees; and ihe occasional conflict with a supervisor). Noie that workers fromdifferent villages and provinces work and live together so that, in contrast to some SouthChina faaories, ethnic or language-based group tensions are rare. C.K. Lee, "From Orga-nized Dependence to Disorganized Despotism: Changing Labor Regimes in Chinese Facto-ries," The China Quarterly. 57 (March 1999): 45-71; P. Ngai, "Becoming Dagonmei (WorkingGirls): The Politics of Identity and Difference in Reform China." The China Journal. 42 (July1999): 1-18.

33. Discussions were held with six managers and staff based at adidas' Hong Kong andGuanzhou offices. Over the course of two days, interviews were held ai Beta with 17employees (consisting of one adidas engineer, two senior managers, two middle managers.Sour labor practices staff mem bers, tw o supervisors, an d six worke rs). At Alpha, over asimilar period, interviews were conducted with 20 employees (consisting of one adidasengineer, four senior man agers, four m iddle m anagers/technical staff, three labor practicesstaff members, two supervisors, and six workers).34 . Independent monitoring has been sporadic and conducted by Verite, an NGO accredited bythe Fair Labor Association whose code and monitoring arran gem ents are based on those ofits major corporate affiliates.35 . Alpha's January 2001 issue of its monthly magazine carried a feature story about companysuccess in making productivity improvements by reducing labor by 180 workers (achievedthrough natural attrition), reducing material consumption, and improving the work envi-ronment.36 . According to reports in the monthly magazine, the most common reasons for receivingawards (n=152) were: identifying machine defeas (35.5%); returning lost private items(23.7%); acting co-operatively and following instructions (15 .i% ); performing the best inwork or recreational activities (14.5%); and cost saving, including recycling left-over materi-als (11.2%). Regarding penalties, statistical data from the labor practices section show thatthe three most comm on warnings given to w orkers were for "being weakly engaged w iththe tasks and not doing their job well" (42% ); "disobeying factory policies/rules" (26 % ), and'disobeying dormitory rul es' (9% ). Minor offences were mainly for "not doing a good job

resulting in poor quality work" (33% ), "not doing a good job resulting in damage to m ateri-als ' (22%), and "not recording/incorrea punching in of overtim e' (8% ).37. This may be related to the more complex relations that Beta's corporate m anagers have withvarious global companies. Recall that Beta is a multi-plant company whose factories supplyseveral global companies. Management must therefore meet the requirements of differentcodes at different factories. This is probably m ore difficult and costly than in the case ofAlphaa singie plant company collaborating with adidas on the basis of a single code.


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Adidas Connection

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