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Workers hit with hammers and cursed by supervisors. Fourteen-year-olds toiling 10-hour days. Blocked exits. Rancid food. Below-minimum wages. These were just some of the accusations made by factory workers against the owners of a plant in Atlixco, Mexico, that stitches together sweatshirts for Nike and Reebok. Tension was ready to snap in the town 70 miles southeast of Mexico City that the North American Free Trade Agreement has turned into a manufacturing outpost for U.S. companies. Then in December workers started agitating. Five workers bold enough to lead protests were fired after the new year. So most of the 870 employees sat down on the job on January 9 and refused to budge. Forget a few fixes to factory conditions. What these workers want is much bigger. So big that it’s deemed a test case for labor in Mexico. Their demand: that the factory owners — Kukdong International Mexico, S.A. de C.V. — throw out a union the workers see as a management collaborator, and aligned with the Institutional Revolutionary Party (PRI), which just months earlier voters had rejected after 71 years of rule. Instead, the Kukdong workers want to elect a union of their own. And if they do, says human rights activist Leila Salazar, “it’s going to influence workers at other factories to think maybe they can do it, too.” In the age of globalization, when Mexico sneezes, U.S. corporate executives catch colds. Hanging over Kukdong like a cloud is the threat of lawsuits and bad publicity blowing back across the border and raining on U.S. companies. As anyone with a television or a teen-ager knows, both Nike Inc. and Reebok International Ltd. run high-profile, image-sensitive businesses aimed disproportionately at young consumers. And that makes them vulnerable to anti-sweatshop campaigns run by U.S. activists in the media, on college campuses, and, recently, in state and federal courts. In several pending cases, these groups have tried to use U.S. state and federal laws to punish American companies for their business partners’ unfair labor practices in foreign lands. If you think human rights issues aren’t a problem in your industry or for your company, think again. “Anybody who’s in a consumer products business truly needs to have this on their radar screen,” urges Barry Nagler, Reebok’s top lawyer from 1995 through 1999 and now general counsel at Hasbro Inc. “To ignore [human rights] is very shortsighted.” So far, activists have been focused on the footwear, garment, and energy industries, with some glances at toy makers and coffee merchants. But other sectors are sure to follow. Potential targets, say experts, include food growers and processors, automakers, and manufacturers of computer components. “A lot of companies are ducking their heads in the sand, thinking that if they just keep a low profile, it’ll go away,” says Michael Posner, executive director of the Lawyers Committee for Human Rights. “That’s not going to happen,” he warns. “If your company sources parts abroad, you need to have a plan. And it needs to be publicly credible.” That’s easier said than done. In Atlixco riot police broke the strike on the third day, pushing the protesters out of the factory compound. Fifteen workers reported injuries; a few, it’s said, were hospitalized. Kukdong general manager Hoon Park claims that this version of the events is “exaggerated” and that other complaints were “not verified.” But the bottom line for the American companies is this: Reebok emerged relatively unscathed, while Nike stayed on the human rights activists’ critical list. Why? A year before the strike, Nike had commissioned a report by PricewaterhouseCoopers that found no significant labor problems at the Kukdong factory in Atlixco. When the strike broke out, Nike hired a respected Mexican labor lawyer, one recommended by a worker rights group, to look into the dispute. And then the company called for yet another independent assessment before taking any major action. What the human rights activists saw: a longtime adversary determined to stall, delay, and avoid. Reebok behaved differently. Once the strike began, Reebok immediately sent its human rights program manager for Mexico — a full-time company employee — into the field to speak with the workers. Back at the headquarters in Canton, Mass., Reebok lawyers determined that the company could not be held liable for the factory fracas or conditions. Still, in-house lawyer Steven Scott says Reebok quickly reminded Kukdong management that Reebok’s code of conduct expressly recognizes all workers’ right to organize. And “if that’s not being respected,” Scott says, “then we have an obligation to uphold that.” Activists say they are impressed with Reebok’s response. Although experts now consider Nike’s social responsibility program one of the world’s best, the company got off on the wrong foot with human rights groups back in the early 1990s, and has been playing catch-up ever since. Corporate counsel looking to steer clear of scandal and suits should take directions instead from Reebok. So far the company has not been hit by sweatshop litigation. And activists often portray it as a corporate leader in human rights. That may be because, 13 years ago, the company almost lucked into a human rights program. And ever since, “we have tried to stay ahead of the curve, and we’re still trying to,” says Reebok general counsel David Pace. But, he adds, “both legal and public relations risks [are] much more heightened now.” No wonder, then, that “there’s often a fight over whether [human rights programs] should be in public affairs or run out of the general counsel’s office,” says Gare Smith, the Washington, D.C.-based head of the corporate social responsibility and risk management group at Boston’s Foley, Hoag & Eliot. “Companies vary a lot in terms of who is responsible,” he notes. At Liz Claiborne Inc., GC Roberta Karp is in charge. At adidas-Salomon AG and The Gap Inc., social responsibility committees (with members from such departments as communications, compliance, procurement, and operations) report to the general counsel. And at others, like Reebok, the human rights effort is born in the communications department, nurtured by Legal, and then encouraged to become a force on its own. Whatever the chain of command, though, certain principles apply. OUT OF THE GATE Not long after Paul Fireman bought Reebok in 1984, he seized upon an overture from Amnesty International — and has been running with a human rights program ever since. Amnesty was seeking corporate sponsors for its 1988 Human Rights Now concert tour to celebrate the 40th anniversary of the United Nations adoption of the Universal Declaration of Human Rights. For Reebok, it wasn’t that great a public relations opportunity. Although the music and cause would reach the sneaker company’s prime audience, Amnesty insisted on downplaying the company’s sponsorship. Still, CEO Fireman decided to bankroll the whole thing: $10 million to send rock stars Bruce Springsteen, Sting, Tracy Chapman and others to perform in 23 cities on four continents. Cutting that deal with the nonprofit made for some unusual anxieties, says then-general counsel John “Jack” Douglas III (now GC at Millennium Pharmaceuticals Inc.): “If they didn’t get those artists and pull off the logistics of the tour, what were we going to do, sue Amnesty International?” Douglas arranged for Reebok to minimize its financial risk by doling out the money in increments. Also on the table: acceptable uses of the logo that Reebok designed for the tour, a muscular silhouette pushing out from a shattered wall. Amnesty insisted that the logo be associated only with human rights, not the marketing of Reebok products. Reebok agreed to check with the group on all future uses. “Amnesty struck a chord with Fireman,” Douglas says. The Reebok chairman so liked the idea of having his company take a stand on human rights that he told his executives to come up with more ideas. That same year Reebok started what remains the only corporate-sponsored annual award recognizing young, nonviolent human rights activists. So that the award would resonate with Reebok’s core consumers, winners are all 30 years old or younger. They receive grants (in 2001 four got $50,000 each) to fund their work. This money comes from the company’s nonprofit foundation, which Douglas set up. The company itself covers the expense of selecting recipients and feting them at a big awards celebration. Douglas, as the company’s ethics adviser, helped shape the selection process. “So there was less room for people to criticize Reebok for only choosing commercially convenient recipients, we appointed a board for the awards that did not have a majority of Reebok employees,” he says. That 15-member advisory group now includes former president Jimmy Carter and Kerry Kennedy Cuomo (founder of the Robert F. Kennedy Memorial Center for Human Rights), as well as two rock musicians known for their human rights concerns, Peter Gabriel and R.E.M.’s Michael Stipe. The recipients they’ve selected seem to win the approval of the human rights community. But the honorees have sometimes taken Reebok to task. Julie Su, an attorney for the Asian Pacific American Legal Center, was honored in 1996 for her representation of 72 Thai laborers held in prisonlike conditions in a California factory. Su later founded the nonprofit Sweatshop Watch to spotlight and eradicate abusive working conditions here and abroad. She let Reebok know that workers in a California factory had not received wages due to them. Reebok spoke with factory management, and discrepancies were rectified. “I have seen them step up to the plate to make sure workers are paid lawful wages when violations are brought to their attention,” Su says. “But corporations such as Reebok have the power not only to take corrective action, but [also] to be proactive in setting a humane standard for apparel production.” For management, even the successes are mixed. Su is honored, then uses the platform to criticize Reebok. The awards ceremony itself draws protesters. Yet, despite any unplanned grief, Reebok’s problems are still preferable to Nike’s. Nike’s troubles with the human rights groups began in the early 1990s, when it denounced reports that its Indonesian contractors were paying illegally low wages and crushing workers’ efforts to organize. As the public shaming escalated, the company chastised critics and blamed its overseas suppliers. “As has been admitted by [Chief Executive Officer Philip Knight] himself, the company maybe did not respond quickly enough,” says Vada Manager, Nike’s designated spokesperson for human rights issues. The former Levi Strauss & Co. executive was brought on in 1997 to help Nike mend its ways. He and a handful of senior officers masterminded Knight’s now famous 1998 appearance at the Washington, D.C.-based National Press Club. Knight spoke to the media of “a moral, emotional partnership between us and our factories.” He acknowledged, “The employees that work in those factories … are our responsibility.” After painting Nike as an uplifter of impoverished populations, Knight made a series of announcements about all that his company had done to improve factory conditions, including raising the minimum age of workers in its contract factories, and devising a safer substitute for harmful solvents. But as soon as Knight went off script to answer questions from the press, recriminations and denials resurfaced. He accused critics of using Nike’s marketing rhetoric to “increase their own fund raising.” Minutes earlier, he’d admitted that there had been “incidents,” an inevitability with more than 500,000 workers making Nike products worldwide. But now he stated flatly, “We don’t have abusive labor conditions in our factories and really never have.” Nike’s latest motto for human rights is: “The right issue, but the wrong company.” While that projects a concern for human rights, the unfortunate wording also makes the company look like it is still trying to sidestep responsibility. Other PR missteps: Nike recently aborted sponsorship deals with universities that have signed on with the year-old Worker Rights Consortium, for which college students have been staging sit-ins. (“The WRC is not the model we would agree with — excluding the industry,” explains Manager.) And when the University of Oregon did sign up with the WRC last year, alumnus Phil Knight yanked a planned $30 million personal donation to the university. “Nike now is one of the most socially responsible companies on human rights issues,” says Gare Smith, who counts Reebok among his clients. “And yet it will take them many years to regain a clean image.” ONE DITHERS, THE OTHER COMMITS It wasn’t until early 1996 that Nike had the dedicated staff necessary to monitor working conditions at its supplier plants. Two years later that compliance department would be subsumed into a whole new corporate responsibility division. Today Nike has one of the largest compliance groups in Corporate America — with about 70 monitors. About a dozen are on-site — posted at some of Nike’s 755 contract factories in 58 countries. Others are stationed around the world, setting and implementing policies for the production of Nike apparel, footwear, and equipment. (Nike declined to say how much this effort costs.) Reebok, meanwhile, claims to have the private sector’s first in-house human rights department. Started in 1988, it has grown to about 20 staffers, with a budget of several million dollars a year. (Reebok refused to be more specific, claiming a company policy against revealing expenditures.) At first, the Reebok department’s mission was confined to philanthropy. But it quickly was forced into more politically sticky and legally dangerous territory. “Our work on human rights propelled us to take an inner look at how we were walking the talk,” explains Sharon Cohen, the Reebok public affairs executive who helped create the company’s program. Reebok claims this introspection predated any pressure from human rights advocates. But, while the issue had not yet exploded in the media, troubles in overseas factories were beginning to attract activists’ attention. And, given its position on human rights, Reebok could hardly react as its corporate brethren initially did when questioned about foreign suppliers’ labor practices. A shrug of the shoulders. It’s not my responsibility. We don’t own those facilities. We aren’t responsible for how they’re run. “There’s some disconnect” in such logic, says Cohen, when the U.S companies then “go out and put their names on the products and stand behind their quality.” In 1989 Reebok began requiring its contractors in China to certify that prison labor was not being used to make its products. Other Reebok demands followed. And consumer consciousness looks like it will keep pushing the company and its competitors further down this road. Both Reebok and Nike were among the first companies to join the Fair Labor Association (FLA), a Clinton administration initiative that has brought corporate players together with labor and human rights advocates to establish voluntary workplace standards and monitoring requirements for the footwear and apparel industries. But how far these manufacturers can go is hard to predict. The economics of apparel production keep them in foreign factories — where abuses are more likely to happen, and are harder to remedy. BY THE BOOK In 1992 Reebok was one of the first in the apparel industry to adopt a code of conduct regulating suppliers’ factory conditions. Such codes are becoming almost commonplace. But when Reebok company lawyers, communication specialists, and human rights workers sat down to create one, they had very few models. Levi Strauss had just become the first company to fashion such a code. Reebok and Nike — then getting hit with bad news about conditions in Indonesian shoe factories — soon followed. Reebok looked at Levi’s “Terms of Engagement” as well as International Labour Organization covenants for guidance when drafting its version. Douglas himself put every word under a microscope. Now Reebok pledges that it “will not work with business partners that use child labor.” A child is defined as anyone younger than 15, or 14 if local law allows. The company also forbids forced labor. But the language is, Douglas admits, “a bit looser” on such issues as employment discrimination, health and safety, freedom of association, and fair pay. The code hedges with such statements as “Reebok will seek business partners who share our commitment to the betterment of wage and benefit levels.” As Douglas puts it, “A pure avoidance of promises would be best, from a strictly legal point of view.” But, despite this lawyerly unease, he recognized the importance of establishing principles for suppliers to follow — and set about minimizing the potential damage. “Nothing would be worse than for Reebok to put in place a code of conduct that it couldn’t live up to 100 percent of the time. We were careful to make sure that each of the things we said in the code we were committed to do, and to do from day one.” Good thing Reebok was so cautious. Lawsuits filed in 1998 and 1999 under California’s Business and Professions Code seek to have courts decree that corporate codes of conduct are promotional pledges — and that companies can be held liable if the conditions under which their products are made do not meet these standards. “When companies create codes of conduct, those are more than words. Those commitments are legally enforceable,” argues Albert Meyerhoff Jr., a Los Angeles-based partner with the feared plaintiffs’ firm Milberg Weiss Bershad Hynes & Lerach. That is exactly what Meyerhoff is trying to prove in a suit against Nike, filed on behalf of the California populace by a San Francisco citizen named Marc Kasky. So far Nike has prevailed. Lower courts have agreed with the company’s claim that its statements about human rights are not commercial speech, but rather part of the public debate over globalization — and thus protected by the First Amendment. Briefs have been filed with the California Supreme Court, which at press time had yet to set a date for oral arguments. Reebok’s preventive medicine has helped it stay out of court so far. When the company introduced its code, in-house lawyers flexed Reebok’s economic muscles to get its contractors to sign on. Steven Scott now serves as the legal department’s point man for human rights. But in the early ’90s he was with Boston’s Ropes & Gray (Reebok’s primary outside counsel), working on special assignment in Reebok’s London office. “I remember sitting in a meeting in London, discussing how there would be a lot of resistance,” says Scott. “But I think [suppliers] realized that in order to keep Reebok’s business, they were going to have to make some changes.” When Reebok discovers a business partner is not complying, it gives a warning. Next, some orders might be shifted to other manufacturers. If these measures don’t work, the company may threaten to terminate contracts. But Reebok tries to avoid severing relations, a policy supported by human rights activists, who don’t want companies to try to save face by just walking away, leaving the workers without allies or jobs. Sometimes, however, Reebok execs have decided to walk. In the mid-1990s, the company pulled out of Saipan — and declined to even start sourcing from Myanmar (then called Burma) — because of oppressive conditions in those countries. “We didn’t think, realistically speaking, that our standards could be applied there,” explains Douglas Cahn, director of Reebok’s human rights programs. These retreats were fortuitous. The Reebok name is not getting sullied by a new campaign to shame companies that still do business in Myanmar — where the infamous military regime controls most factories and violently suppresses workers’ rights. Last December the National Labor Committee began publicly chastising U.S. retailers such as Kenneth Cole Productions Inc. and Montgomery Ward for buying products made there. The NLC is a formidable opponent. Its 1996 accusations that Honduran children were making Kathie Lee Gifford’s clothing line caused a headline-screaming scandal that left the talk show star crying on national television and pledging greater oversight of contractors. Reebok is also not a defendant in pending federal litigation that seeks to hold U.S. retailers and designers — such as J. Crew Group Inc., Levi, Sears, Roebuck and Co., and Tommy Hilfiger — responsible for labor practices in Saipan. Because Saipan is an American commonwealth, manufacturers there are able to offer a “Made in the U.S.A.” label and tariff breaks. While the federal minimum wage does not apply in Saipan, plaintiffs’ attorneys are arguing in the Hawaii federal court that other U.S. laws do — like the Thirteenth Amendment prohibition against involuntary servitude. A proposed class of Asian “guest workers” (they were lured to Saipan from China) is claiming under the Racketeer Influenced and Corrupt Organizations Act (RICO) that the U.S. companies and their contractors formed enterprises that violated not only the Thirteenth Amendment, but also the Federal Anti-Peonage Act. To further justify U.S. jurisdiction, the Chinese plaintiffs invoke the Alien Tort Claims Act, the recently revived 18th�century law permitting foreigners to bring federal suits for violations “of the law of nations or a treaty of the United States.” Whether such suits will succeed in court remains to be seen. But many of the American defendants aren’t waiting to find out. Nineteen U.S. apparel companies agreed to settle, reportedly ready to pay millions in compensation and improved monitoring, albeit without admitting wrongdoing. At press time the court had not yet approved the deals. And it looked like the defendants might get the litigation transferred to Saipan. A few were refusing to settle, including The Gap, J.C. Penney Company Inc., The Limited Inc., and Target Corporation. All of the corporations named in the RICO suit also have been fighting another Saipan-related claim — this one brought by a labor union and nongovernmental organizations under California’s statute on unfair business practices, the same law being used against Nike. Here, too, plaintiffs’ lawyers are pointing to the companies’ production standards and other assurances to consumers that products are made under humane and lawful conditions. “I hope that [lawsuits] will not deter companies in the future from establishing codes of conduct,” says Milberg Weiss’ Meyerhoff, who is co-counsel in the Saipan suits as well as in the Nike case. “But if they do, they should enforce them.” OVERSEEING THE OVERSEERS No corporate counsel wants to see — or worse yet, find out about — the company’s labor problems in the newspapers or on television. But both Nike and Reebok GCs have had that unpleasant experience. In the late 1980s Indonesian newspapers began reporting worker abuses and wage protests at the country’s shoe factories. By 1993 The New York Times, the International Herald Tribune, and CBS News had picked up the story. The following year, Nike and Reebok each hired Ernst & Young International to conduct their companies’ first “social audits” of Indonesian footwear factories. Today Reebok’s Cahn oversees a dozen staff human rights monitors, most stationed in East Asia, and one each in South Asia and Latin America. They help keep tabs on more than 75,000 workers making Reebok footwear, the majority laboring for independent contractors in China, Indonesia, and Thailand. As a general rule, Cahn directs his staff to check on the large shoe factories (often in excess of 5,000 workers) once a month, and smaller manufacturers in Asia up to three times a year. Annual visits are often deemed sufficient for U.S. factories, because federal oversight helps keep working conditions acceptable there. Reebok no longer hires accounting firms to help with monitoring. There’s been controversy about their methods. Specifically, the accounting firms have been criticized for letting factory management handpick the workers whom auditors question. Case in point: After allegedly using such methods, E&Y concluded in 1997 that laborers in a Vietnamese sneaker factory were mostly “satisfied with their salary,” overtime hours, and working conditions. The accounting firm did, however, note rampant respiratory ailments in areas with excessive concentrations of hazardous chemicals and lack of protective equipment. Nike had the E&Y audit reviewed in 1997 by a then newly created consulting firm, GoodWorks International. After a whirlwind tour of 12 factories, GoodWorks gave a glowing report. It found no “widespread or systematic abuse or mistreatment of workers.” And it was that report — not E&Y’s semicritical one — that Nike chose to make public. Nike’s fanfare celebrating GoodWorks’ good news soon turned into a fiasco. Worker rights advocates denounced the GoodWorks work — complete with color pictures of smiling workers — as shallow, even a sham. Even a Doonesbury comic strip lampooned GoodWorks’ use of Nike translators for worker interviews. Meanwhile, Dara O’Rourke (then a consultant to the United Nations Industrial Development Organization) got hold of E&Y’s confidential assessment and compared it to his own findings at the same plant. When O’Rourke had talked to workers away from the factory, they had complained about forced overtime, excessive heat, chemical exposures, poor ventilation, physical and verbal abuse, broken strikes, and low wages. His verdict on E&Y’s work was unforgiving: “Incompetent,” he declared, “biased.” Eventually, a chastened Nike agreed to look into O’Rourke’s allegations, and let him examine all the factory’s remediation efforts. In 1999 he confirmed that the facilities had been renovated, the use of harmful solvents dramatically reduced, and safety precautions implemented. Reebok avoided Nike’s mistake. It not only opened its doors to outsiders, but also made their critical report very public. In 1998 the company hired a Jakarta-based firm to look at two factories responsible for two-thirds of Reebok’s footwear production in Indonesia. Reebok paid PT Insan Hitawasana Sejahtera (roughly translated as Institute for Human Development) $35,000 for more than 1,400 hours’ work. That amount pales compared to the more than $250,000 the Indonesian employers then spent to improve ventilation, design saw guards, and bring in ergonomic chairs. IHS returned to the factories in April 1999, then issued a report saying that conditions still weren’t up to snuff. Reebok responded by reducing orders to penalize the factory owners. And in an op-ed for The Washington Post, Reebok CEO Fireman called attention to the “disturbing facts” revealed. Spin control? If so, it seems to have worked. And that’s probably because Fireman struck the right note. “We want to show that a detailed, critical report about factory conditions can be disclosed without the sky falling,” he wrote. Fireman then prodded competitors to follow Reebok’s lead. Nike is learning. In 1999 the company helped form the Global Alliance for Workers and Communities. This nonprofit coalition first conducted surveys of Nike workers in Vietnam and Thailand, publishing the results in September 2000. Then the Global Alliance canvassed 4,000 workers at Nike’s Indonesian contract factories. Global Alliance reported workers’ allegations of physical abuse and sexual harassment, and two employee work-related deaths. And this February, Nike made the report public. The company also retained outside legal counsel and local investigators to look into the charges, but said it could not substantiate them. Still, Nike promised independent monitoring plus harassment training for management and workers. Nike has adopted a similar approach, after what might be seen as a stumble or two, in Mexico at the Kukdong factory. Reebok and Nike together hired a nonprofit monitoring firm to look into workers’ allegations. And in March, Nike posted that group’s report on its Web site: www.nikebiz.com. Kukdong managers say that — at the urging of their U.S. clients — they are assuring workers there will be no reprisals for the January strike. “You have to follow all the regulations or [Nike and Reebok] won’t do business with you,” says Kukdong general manager Hoon Park. “Frankly, except the leading companies in the human rights area like Reebok and Nike, the other customers don’t mind really [about labor problems]. They just want the productivity and the low price, and the quality.” The Nike/Reebok monitors found that many, but not all, of the workers were back on the job. Labor advocates were allowed to train the Kukdong workers on collective bargaining and freedom of association. Nike and Reebok called upon the Korean owners of the Kukdong factory in Atlixco, Mexico, to support a free and fair union election. Nike, as the factory’s major client (responsible for up to 85 percent of its output), has the most leverage. And while at press time the company had not set deadlines for when the union vote must be held, Nike did demand that the owners have policies on abuse and harassment, as well as on worker discipline and termination, by early April. It’s a start. But that’s all it is. This is a “continuous process. It never ends,” says Foley Hoag’s Gare Smith. “The issue isn’t, ‘Is everything perfect?’ The issue is, ‘Do you have a system in place in case something goes wrong?’ ” Because, it’s safe to say, something always will.

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