August 2003

Heeding the Call

More and more, stakeholders are demanding that corporations live up to their social responsibilities and institute practices that value people, communities, and the environment.

Hans Nieuwlands, CIA, RA
Vice President, Audit Inspection
ABN AMRO

Increasingly, corporate governance stakeholders — including shareholders, employees, analysts, regulators, activists, and labor unions — are expressing their concern about the extent to which global enterprises practice their social responsibilities. The Business for Social Responsibility (BSR), a global nonprofit organization that provides businesses with information and training on corporate social responsibility (CSR), defines CSR as “achieving commercial success in ways that honor ethical values and respect people, communities, and the natural environment.” Failure to acknowledge the importance of CSR can create high reputation risk. In the past, several multinationals that have been accused of being socially irresponsible — for example, Shell International Ltd. for polluting the environment, The Coca-Cola Co. for food contamination, and Nike Inc. for unacceptable working conditions — have paid the price and have since established CSR plans.

Chief audit executives (CAEs) need to ensure that social responsibility is on the board’s agenda of corporate governance issues. They should be aware of existing standards and global initiatives as they relate to CSR and use them as yardsticks against which to measure their organization’s performance. Additionally, auditors should advise the board on identified best practices and determine whether the organization’s core values and code of conduct still reflect the desired position of the enterprise in today’s and tomorrow’s world.

Over the last decade, the field of CSR has grown significantly. Numerous governmental, non-governmental, and advocacy groups have entered the arena and have issued standards and reports to address CSR concerns. For example, in July 2002 the European Commission issued a white paper that calls for a new social and environmental role for businesses in the global economy. And on March 25, the Institute of Social and Ethical Accountability, an international, not-for-profit, professional institute, launched the AA1000 Assurance Standard to address the credibility and quality of reporting on social, environmental, and economic performance.

Three areas of CSR in which global organizations have achieved significant improvements are the environment, human rights, and the safety of food.

BUILDING A SUSTAINABLE ENVIRONMENT
In September 2002, the United Nations (U.N.) held a World Summit on Sustainable Development in Johannesburg, South Africa. Governments, businesses, and civil society from all over the world agreed on an action plan that, according to U.N. Secretary General Kofi Annan, “will put us on a path that reduces poverty while protecting the environment, a path that works for all peoples, rich and poor, today and tomorrow.”
Some targets set at the summit included:

• Cutting the proportion of people without access to basic sanitation in half by 2015.
• Using and producing chemicals by 2020 in ways that do not lead to significant adverse effects on human health and the environment.
• Achieving a significant reduction in the rate of loss of biological diversity by 2010.

On May 9, the leaders reconvened for a two-week meeting in New York where they established a program and work plan for the next 15 years. For the first two-year cycle (2004–2005), the U.N.’s Commission on Sustainable Development will focus on water, sanitation, and human settlements, followed by energy, climate change, atmosphere, and industrial development issues in the 2006–2007 cycle. Numerous issues will be addressed throughout the program, including poverty eradication, changing unsustainable patterns of production and consumption, health, and education.

One company that has emerged as a leader in the areas of sustainable development and social performance is Chiquita Brands International, an international marketer and distributor of fresh and processed food products. In 2001, the Rainforest Alliance, an international conservation organization based in New York, presented Chiquita with the first Sustainable Standard-setter Green Award. Companies, cooperatives, and landowners that participate in the Alliance’s programs meet rigorous standards for protecting the environment, wildlife, workers, and local communities.

Banana Standards and Indicators Ecosystem Conservation — Agriculture and the expansion of farms should promote conservation and recovery of ecosystems. Wildlife Conservation — Special steps should be taken for the protection and recovery of biodiversity, particularly with those species in danger of extinction. Fair Treatment and Good Conditions for Workers — Agriculture should improve the standard of living for workers and their families. Community Relations — Companies must demonstrate a commitment to the economic and social well-being of the communities in which they work. Minimal, Strictly Managed Use of Agrochemicals — Agricultural endeavors should limit the use of agrochemicals to the benefit of workers, local communities, soil quality, water resources, and natural ecosystems. Complete, Integrated Management of Wastes — All farms must have an integrated plan for the management of all waste products that promotes environmentally sound reduction, reuse, recycling, and disposal of inputs. Conservation of Water Resources — Agro industry should promote conservation and rehabilitation of water resources. Soil Conservation — Agriculture should promote the conservation and recuperation of soils so as to assure productivity for the long and short term. Farms should also reduce the negative effects of sedimentation of waterways. Environmental Planning and Monitoring — Agriculture should be planned, monitored, and evaluated on its technical, social, environmental, and economic impacts. Source: Conservation Agriculture Network Complete Standards for Banana Certification

In 2001, the Rainforest Alliance recertified 119 Chiquita farms in Latin America for compliance with the standards set by the alliance’s ECO-O.K./Better Banana Project. The Better Banana Project is managed by the Sustainable Agriculture Network (SAN) and a network of independent, non-profit conservation organizations, with the Rainforest Alliance acting as the secretariat. Their mission is to transform social and environmental conditions in tropical agriculture through conservation certification. Standards are available for the farming of bananas, coffee, and citrus fruit.

In 1998, Chiquita was looking for objective, concrete, and measurable performance standards. The company compared the Better Banana Project standards to a variety of other environmental standards and management systems around the world. Chiquita concluded that the nine principles and audit criteria of the Better Banana Project offered the most rigorous, objective, measurable, and best internal benchmarking standards for performance (see “Banana Standards and Indicators”).

In September 2002, Chiquita published its “Corporate Responsibility Report,” the second of its kind. The report includes standards, audits, noncompliance issues, and action plans to improve noncompliance situations. Additionally, the report includes the average scores the company has received from the SAN. The network audits the company’s Latin American farms annually and comments on the farms’ performance and reports about management’s action plans.

Another area of sustainable development covered by The Rainforest Alliance is forest management. The Alliance’s Forest Stewardship Council (FSC) certifies products that are harvested from the forest. The FSC’s Principles and Criteria for Forest Management serve as the global foundation for the development of region-specific forest-management standards.

Independent certification bodies accredited by the FSC conduct assessments of forest operations at the request of landowners. If the operations conform with FSC standards, a certificate is issued, enabling the landowner to use the FSC logo and sell the product as “certified wood.” Companies that sell certified wood products include The Home Depot Inc., Ikea, and Lowe’s Companies Inc.

RESPECTING HUMAN RIGHTS
Violations of labor rights are garnering increasing awareness from consumers, and many enterprises are finding their reputations at stake. As with environmental issues, global players in the supply chain need to set an auditable example and adhere to it.

In November 2000, SOMO, a Dutch independent center for research on multinational corporations, together with the international secretariat of the Clean Clothes Campaign (CCC) began the research project, “European Initiatives on Monitoring and Verification of Codes of Conduct in the Garment and Sportswear Industry.” Financed by the European Commission, the research includes examination of current practice on monitoring and verification of codes of conduct as they relate to working conditions for international suppliers of retailers based in the United Kingdom, The Netherlands, Sweden, France, and Switzerland.

Guaranteeing labor standards in large, complex supply chains is extremely difficult, and violations of basic labor rights continue to occur. In recent years, there is increasing recognition that to eliminate labor rights violations, cooperation among different stakeholders — retailers, suppliers, trade unions, nongovernmental organizations, and the workers concerned — is essential. Thus, multi-stakeholder partnerships in the garment and sportswear industry have been created in Europe. Parties that usually have no channels for cooperation have been brought together, ranging from large retailers such as H&M, Marks & Spencer’s, Migros, and Auchan to solidarity groups involved in the CCC. The aim of these parties is to gain experience and mutual understanding in the practical implementation of codes of conduct.

The CCC, whose mission is to improve working conditions for garment workers and to raise the level of corporate accountability to eradicate sweatshops, has launched pilot projects to test methods for auditing of workplace conditions at production sites of several retailers of all sizes in developing countries. The project’s goal is to increase cooperation between the national-level initiatives and improve mutual understanding of problems, bottlenecks, and best practices, which are the base to develop a common European framework for monitoring and verification.

Labor rights are also being violated in the food industry. According to a report by the International Labor Organization (ILO), a U.N. agency, tens of thousands of children around the world are being exploited, including many working on plantations in western and central Africa.

Forty-three percent of the world’s cocoa beans, the raw material in chocolate, come from small, scattered farms in these poor West African countries such as the Ivory Coast and Ghana. According to the ILO report, poverty-stricken parents are sending their children into forced labor. Those children, the agency says, often work up to 20 hours a day in difficult conditions. On some of the farms, boys as young as 9 years old, who were sold or tricked into slavery, do the hot, hard work of clearing the fields and harvesting the cocoa beans.

On Oct. 1, 2001, the global chocolate industry published a plan to combat these abusive practices. The plan was developed — with support from numerous governments, human rights and labor experts, organized labor, and other organizations — to better identify and address instances of abusive child labor in cocoa-growing industries. The industry said it would adhere to ILO Convention 182, which requires measures to be taken to prohibit and eliminate the worst forms of child labor.

On May 1, 2002, a memorandum of cooperation was signed by leading organizations of the cocoa and chocolate industry and groups such as the International Union of Food (IUF), Free The Slaves, Child Labor Coalition, and National Consumers League. Concurrent with finalizing the memorandum, industry representatives worked with governments and key stakeholders to develop a series of pilot programs to test different solutions to the problem of abusive child and forced labor in the cocoa industry. The pilot programs got under way in September 2002. New steps will be defined based upon the results of these programs.

Social Accountability International (SAI) is another human rights organization dedicated to improving workplaces and communities by developing and implementing socially responsible standards. Its first fully operational standard, Social Accountability 8000 (SA8000), is a workplace standard that covers all key labor rights and certifies compliance through independent, accredited auditors. It was published in 1997 and revised in 2001. SA8000 is based on international workplace norms in the ILO conventions and the U.N.’s Universal Declaration of Human Rights and the Convention on Rights of the Child (see “SA8000 Standard Elements”).

SA8000 Standard Elements Child Labor — No workers under the age of 15; minimum lowered to 14 for countries operating under the International Labor Organization Convention 138 developing-country exception; remediation of any child found to be working. Forced Labor — No forced labor, including prison or debt bondage labor; no lodging of deposits or identity papers by employers or outside recruiters. Health And Safety — Provide a safe and healthy work environment, steps to prevent injuries, regular health and safety worker training, a system to detect threats to health and safety, and access to bathrooms and potable water. Freedom of Association and Right to Collective Bargaining — Respect the right to form and join trade unions and bargain collectively; where law prohibits these freedoms, facilitate parallel means of association and bargaining. Discrimination — No discrimination based on race, caste, origin, religion, disability, gender, sexual orientation, union or political affiliation, or age; no sexual harassment. Discipline — No corporal punishment, mental or physical coercion, or verbal abuse. Working Hours — Comply with the applicable law but, in any event, no more than 48 hours per week with at least one day off for every seven-day period; voluntary overtime paid at a premium rate and not to exceed 12 hours per week on a regular basis; overtime may be mandatory if part of a collective bargaining agreement. Compensation — Wages paid for a standard work week must meet the legal and industry standards and be sufficient to meet the basic need of workers and their families; no disciplinary deductions. Management Systems — Facilities seeking to gain and maintain certification must go beyond simple compliance to integrate the standard into their management systems and practices. Source: Social Accountability International and SA8000

In addition to the Better Banana Project, Chiquita also adopted SA8000. A multidisciplinary team of Chiquita’s managers performs compliance audits at farms outside their area of responsibility. From time to time, an external auditor is hired to determine whether the internal audit reviews are in line with the external assessor. The results of both internal and external verifications are published in Chiquita’s “Corporate Responsibility Report.”

Although Nike’s code of corporate conduct does not refer to SA8000, the company generally follows the ILO conventions regarding child and forced labor. With respect to remuneration, Nike refers to local standards on minimum wages, where the ILO refers to a minimum living allowance. Nike’s external auditor performs compliance audits for Nike, and Nike publishes the review reports on its website.

Toy manufacturer Mattel Inc. defined its own basic responsibility standards and included these in its Global Manufacturing Policy. Remarkable are the right-to-audit clause and the statement that Mattel is allowed to terminate a business relationship if the supplier does not take corrective actions in a timely manner.

Mattel also created its own independent monitoring organization, the International Center for Corporate Accountability (ICCA), which comprises a broad spectrum of experience in academia, children’s rights, human rights, the religious community, government, non-governmental organizations, economics, business, and finance. The ICCA was involved in the creation of Mattel’s standards and is responsible for providing ongoing counsel to the company.

ENSURING FOOD SAFETY
After the destruction of tens of millions of animals in Europe in response to dioxin contamination, foot and mouth disease, salmonella infection, swine fever, and aviare influenza, consumers began to demand more assurance on the controls built into the food processing chain. As a result, the European Union set up inspection teams to investigate incidents reported by member states. The inspections revealed that the way food safety legislation is implemented and enforced within the member states varies greatly. Findings also indicated the need to strengthen controls on imports at European communities’ borders.

In early 2000, the European Commission issued a white paper on food safety and in 2003 established the European Food Safety Authority (EFSA). The EFSA covers the whole food chain, including animal feed production. This ability to trace products throughout the entire food chain is a key component of the EFSA’s mission.

The European Commission’s white paper refers to the Codex Alimentarius (food code) as one of the most important legitimate factors for health protection. The Codex Alimentarius is a joint effort of the Food and Agriculture Organization (FAO) of the United Nations and the World Health Organization (WHO). The code advises governments to consider the need of all consumers for food security and to support and, as far as possible, adopt its standards. The standards are continuously under revision to ensure they are consistent with current scientific knowledge.

In February 2002, the FAO and WHO held a Pan-European Food Safety Conference in Budapest, Hungary. Conclusions from the final report of FAO/WHO include:

• There is a need to increase the compatibility of food safety systems by implementing equivalence, transparency, and harmonization of regulations and control across Europe.
• Enhanced cooperation between the sectors of health and food production, agriculture, and fisheries is necessary for food safety.
• Better control of food safety and quality in the whole food chain, including internal checks of food and feed business operators, should be introduced.
• The primary responsibility of food and feed companies for the safety of their products should be legally established.
• Information on the results of all monitoring tests and the outcome of official food inspections and other control activities should be made public.

Both the Codex and European guidelines refer to the Hazard Analysis Critical Control Point (HACCP) as an important food protection tool. HACCP was developed in the 1960s to ensure the elimination of contamination of food to be consumed by NASA astronauts. HACCP system considerations include the factors causing food poisoning and risk assessment techniques to identify and prioritize hazards.

Due to the weakening of consumers’ confidence in the ability of regulators to adequately assure food safety, all stakeholders insist that the food industry accept this responsibility. Retailers are increasingly applying a third-party certification of suppliers’ management systems to ensure the integrity, tractability, safety, and quality of the foods purchased.

The Western Australian Department of Agriculture, in recognizing the need for Australian agriculture to adopt quality assurance systems as a way to maintain and increase market access, stresses the importance of recognizing that quality systems such as the HACCP are as much about international trade as they are about food safety. The absence of such systems increasingly constitutes a barrier to export markets.

THE ROLE OF INTERNAL AUDITING
Corporate governance is an essential element of CSR. The IIA’s Standard 2130 on Governance states that internal auditing “should contribute to the organization’s governance process by evaluating and improving the process through which 1) values and goals are established and communicated, 2) the accomplishment of goals is monitored, 3) accountability is ensured, and 4) values are preserved.” Additionally, IIA Practice Advisory 2130-1 states that internal auditors may also play a role in the ethical culture of an organization. Therefore, auditors should ensure that their companies are aware of the importance of CSR.

Auditors need to have a good understanding of standards such as those described in this article and coordinate external compliance reviews with independent specialized audit firms. Internal auditors should use the international standards and practices designed by independent organizations or competitors as benchmarks against which to measure their organization’s CSR performance.

Hans Nieuwlands, CIA, RA, is vice president, audit inspection, for ABN AMRO in Amsterdam.