Discussions about American firms that outsource inevitably turn to the loss of American jobs. But there's another side to the debate that's discussed less often: Namely, when you're expanding overseas, how sure can you be that your suppliers treat workers fairly?

"To credit the consumers, it's something that comes up fairly frequently," says Fan Bi says, the founder of Blank Label, a custom mens's shirt maker. Like many American retailers, Bi decided it was cheaper to set up his company in China, where manufacturing was cheaper, quality was high, and margins were fat. And while Bi travels to China three to four times a year to check in with his suppliers, he says recent media coverage, especially Wired's March 2011 cover story on the suicides at the Foxconn plant, where iPhone parts are made, has made consumers wary about the working conditions of workers abroad.

"People e-mail in," he says. "They want to know, like, what's your deal?"

One of the most extensive, privately-funded reports on the state of labor conditions worldwide comes from Impactt, a UK-based labor consulting with offices in London, India, China, and Bangladesh. Impactt helps companies improve labor standards in their supply chains—"in a way that makes business sense."

Impactt's report, released in December 2011, was the result of visits to some 567 factories worldwide which employ hundreds of thousands of workers. Its "Exploitation Index," a measure of overall exploitation of workers by country each year, is an indictment of the sub-par labor practices of suppliers around the world. For example, 18 percent of factories surveyed still employ children, 36 percent are not paying the minimum wage, and 89 percent of employees work more than 60 hours per week.

"Over the last 15 years brands and purchasers have tried valiantly to cajole, persuade, regulate, or instruct their suppliers and sub-contractors to comply with local law and international standards on decent work," the report reads. "Efforts by purchasers, suppliers, trade unions, governments, and NGOs have included contractual agreements, codes of conduct, auditing, monitoring, individual work, collective work, multi-stakeholder activities, projects, programs, and certification or labeling. However none of these have made a noticeable dent in the systemic abuse of workers' rights in global supply chains."

Dionne Harrison, the director of operations at Impactt, says companies need to be aware of these issues when choosing a manufacturer abroad.

"Suppliers are starting to realize they need to do more to look after the people who work for them, if only mainly because of market forces," she says.

Bi says that he's had to personally ensure the quality of life of the workers in China who create Blank Label clothing. In addition to inspecting factories himself to ensure there's adequate working space and air conditioning, Bi employs a full-time chef for his employees. ("It's not the Google meal plan," he jokes, "but they get three meals a day.")

"We care deeply about our employees," Bi says. "There's an ethical assurance by managing that process in-house. I'm confident."

But Bi is perhaps an anomaly. Part of the problem, it seems, is that while most companies have codes of conduct policies within their own companies that monitor their employees, those policies rarely extend to suppliers, and to their suppliers' suppliers. For example, a 2008 study conducted by Integrity Interactive Corporation, a compliance firm acquired by SAI Global in 2010, showed that 86 percent of firms concede that their primary ethics code did not address the conduct of suppliers. An additional 59 percent of respondents do not include suppliers in their analysis when assessing their company's own ethics and compliance risks.

"Being an ethical company isn't enough anymore," Richard Cellini, vice president of Integrity Interactive, told Industry Week. "Enterprises are being judged by the company they keep, which means the whole supply chain must be ethical. If a dishonest supplier 6,000 miles away disregards manufacturing standards to make more profit, it reflects on the U.S. company that hired the supplier. The public holds the supplier accountable— not the outsourced vendor."

So, what can you do? The first, and most obvious, is to check if your supplier or manufacturer has an internal code of conduct in place. To make sure these suppliers actually follow through on their codes of conduct, hoever, there are several independent, non-profit agencies—not auditors—that act as watchdogs to various factories.

One of the most well-regarded agencies is the Fair Labor Association, a nonprofit organization dedicated to ending sweatshop conditions in factories worldwide.

For example, the FLA offers its own list of participating suppliers that agree to uphold the FLA Workplace Code of Conduct in their facilities—and also submit to external monitoring. To see a list of participating factories, click here.

The Department of Labor also offers some useful guidelines on codes of conduct, available here, for the apparel industry.

If you're willing to spend the money on an external audit, there are hundreds, if not thousands of compliance companies that will investigate working conditions for a fee. Being able to tell your customers you've audited your suppliers is certainly good PR—and perhaps will clear your conscience—but unless you're invested in the process, it might not mean all that much.

T. A. Frank, an editor at the Washington Monthly, worked in 2002 as a compliance auditor for a Los Angeles-based firm that provided their services to suppliers and American businesses working with manufacturers abroad. In his fantastic essay "Confessions of a Sweatshop Inspector," Frank explains how auditing and ethical compliance measures often fail the system of actually creating better workplaces for unskilled workers—unless the company commissioning is actually invested in the process.

"It only works when the company that's commissioning it has a sincere interest in improving the situation," he writes. "Now, anyone in the business knows that when inspections uncover safety violations or wage underpayment more than once or twice—let alone five times—it's a sign that bigger problems are lurking beneath. Companies rarely get bamboozled about this sort of thing unless they want to."

He continues, "For the half-assed company there are also half-assed monitoring firms. These specialize in performing as many brief, understaffed inspections as they can fit in a day in order to maximize their own profits. That gives their clients plausible deniability: problems undiscovered are problems avoided, and any later trouble can be blamed on the compliance monitors. It is a cozy understanding between client, monitoring company, and supplier that manages to benefit everyone but the workers."

However, Frank is confident that when entrepreneurs work closely with these auditors, changes can be seen. 

"I've seen it,” he writes. "When companies make a genuine effort, the results can be impressive: safe factories that pay legal wages. That sounds modest, but it's actually hard to achieve in any country."

In the end, though, if you want to be totally assured that your company is working with ethical manufacturers, the only way to make sure is to visit yourself, says Bi, who spent 12 months in Shanghai, working with about production facilities until he settled on one he liked.

"Don't be afraid to spend time there," he says. "Ask questions."

Jan 25, 2012