At first glance, Patagonia and IOI Group might seem to have very little in common: The first is an American outdoor gear and apparel company with 2,300 employees and $1 billion in annual revenue that has won numerous corporate awards for its ethical approach to doing business. IOI Group, a Malaysian organisation with $1.8 billion (MYR 7.8 billion) in revenue and 28,000 employees, on the other hand, cultivates oil palm.
But both companies have struggled with the issue of forced labour. In 2014 and 2016, the human rights organisation Finnwatch found evidence of forced-labour practices on IOI Group plantations in Malaysia. And in 2019, Finnwatch approached Patagonia regarding exploitative recruitment fees for migrant workers at a Thai factory servicing one of the company's major wetsuit suppliers.
There is, however, an important distinction: Prior to being contacted by Finnwatch, Patagonia had already dedicated considerable internal resources to proactively identifying and putting forced-labour controls and policies into place, while the Finnwatch report caught IOI Group unprepared. This led to very different timelines and outcomes, as each company attempted to address the nongovernmental organisation's allegations. These two case studies also illustrate that how companies prepare for and choose to respond to initial allegations of forced labour and excessive recruitment fees can either do considerable damage to their reputation and bottom line, or — in the case of Patagonia — provide a reputational boost. And IOI demonstrates the evolution of how some companies come to detect and deal with forced labour.
"The issue of forced labour really needs to be handled strategically, and the CFO has to get involved," said Elrich Linde, ACMA, CGMA, support manager at AMOSCA, a management consultancy based in London. "CFOs sometimes think about sustainability issues as an extra, but as you can see, this really affected their bottom line."
That's why it's vital that companies actively look for forced labour in their supply chains. (For more on how to find the signs of forced labour in the supply chain, see "Rooting Out Forced Labour From Supply Chains", FM magazine, April 2020.) It's also crucial they have comprehensive protocols in place outlining how they will respond when forced labour is discovered.
These case studies can also provide important lessons for CFOs and other executives about how to craft substantive forced-labour mitigation and remediation policies, and how to avoid mistakes.
A growing challenge for every industry
Best practice dictates that companies have robust controls in place to prevent slave labour from entering their supply chains in the first place, but even the most conscientious corporations may encounter it if they look hard enough, according to Michael Rogerson, ACMA, CGMA, a researcher on modern slavery in the supply chain at the Centre for Business, Organisations and Society at the University of Bath in the UK.
"It's almost impossible to guarantee that there isn't any forced labour in your supply chain," Rogerson said. "Lots of companies don't find it. But that's not because it isn't there. It's because they aren't looking."
This is even truer today, when the COVID-19 pandemic has made the standard controls for detecting forced labour (such as in-person social audits) far more difficult. At the same time, supply chain disruptions and cancelled orders have led to widespread layoffs at the bottom of the supply chain, making workers even more vulnerable to exploitation and trafficking, according to the International Organization for Migration.
"As well as becoming more likely, forced labour has become harder to detect due to the COVID-19 pandemic," Rogerson said. "That's particularly in countries where social auditors and others tasked with uncovering abuses cannot currently work as normal."
The discovery process and different outcomes
Many companies have struggled with forced-labour allegations. What sets Patagonia and IOI apart from their peers, however, was not that indicators of forced labour (including excessive recruitment fees and problems in the way recruitment and migrant workers were handled) were found, but their response to its discovery, according to Duncan Jepson, the head of Liberty Shared, an anti-slavery nongovernmental organisation.
"What's unique about IOI and Patagonia's approach is that both companies appeared to have built controls for forced labour into their corporate governance," he said. "There's also real disclosure about how they address this issue and who is responsible. It's not perfect ... but their efforts appear to be substantial."
IOI's struggle with this issue began in 2014, when Finnwatch published a report accusing plantations run by IOI Group of paying migrant workers less than the statutory minimum wage and of retaining workers' passports.
Additionally, many of the workers interviewed for the Finnwatch report had taken out substantial loans to pay hefty recruitment fees to recruitment services contracted by IOI before travelling to Malaysia, which IOI deducted directly from workers' wages, according to Finnwatch. These are red flags for human trafficking, according to standards set out by the International Labour Organization.
Two years later, Finnwatch published a follow-up report, which found that while IOI had addressed some of these issues, high recruitment fees that forced workers into debt remained a problem.
Patagonia first dealt with the issue of forced labour in 2011, when an internal audit of its Tier 2 suppliers uncovered red flags in Taiwanese factories. Although Patagonia is a private company and thus not required to file quarterly financial statements or shareholder reports, it voluntarily went public with the issue in 2015 — four years after discovering it.
"The fact that Patagonia found forced labour from an internal audit really gave them the space to deal with this issue internally, out of the public eye," Linde said. "As a CFO, that's the position you want to be in."
So when Finnwatch approached the company in 2019 with reports that migrant workers in a Thai factory servicing one of its major suppliers had paid recruitment fees totalling more than two months' wages, the company was able to quickly activate its existing anti-slavery protocols. By March 2020, the supplier had reimbursed the recruitment fees owed to 177 workers. As a result, the Finnwatch press release announcing the discovery of indicators of forced labour in the factories highlighted how Patagonia's cooperation led to improvements in workers' conditions, rather than focusing on labour abuses.
Search for problems at their roots
For finance leaders serious about addressing the issue, the first step is deceptively simple, according to Linde: Companies need to identify exactly where in their supply chain forced labour exists and understand how it got there.
"Forced labour is generally found in two different ways," Linde explained. "Either the issue is brought to the company ... or the company can find it themselves. The second scenario is always better."
Both companies undertook efforts to find out where problems existed, engaging in dialogue with Finnwatch to investigate the organisation's allegations.
"When I came on board at IOI in 2016, the CEO made it clear that my two top priorities were the Finnwatch report and the RSPO suspension," said Surina Ismail, Ph.D., the group head of sustainability at IOI Group. (In a separate action unrelated to labour, the Roundtable on Sustainable Palm Oil (RSPO) had suspended IOI's certification because of deforestation allegations. That certification was later restored.)
In addition to engaging in dialogue with Finnwatch, both companies hired independent third parties to investigate the allegations.
"You really want to make sure that the third party who does the audits is independent and specialises in these issues," said Tu Rinsche, the vice-president of Strategic Engagement & Partnerships at the supply chain human rights organisation Transparentem.
For the assessments to be effective, the audits need to be unannounced, and the auditors need to be guaranteed full, unfettered access to workers, according to Rinsche. It's also critical that third-party investigators are able to conduct interviews with workers anonymously and off the premises.
"Also, do workers have a night shift? If so, there should be another audit at night, as that's usually where things get hidden," she said. "For example, if there are underage workers, that's often when you'll find them."
Escalate it to the top
Before beginning the investigation, it's critical to ensure full cooperation from the suppliers implicated in the allegations, according to Wendy Savage, Patagonia's director of Social Responsibility, Traceability and Animal Welfare.
"When we deal with this issue, we elevate it to the owners of the supply chain and not just the management," she said. "That's because we want to secure their commitment to remediation and to the investigation process."
Similarly, it's also a good idea for CFOs to get the executives of their own company involved and to bring the issue to the board. This is important because new policies and remediation can involve considerable upfront costs and require continuous monitoring and evaluation. All this requires an ongoing commitment at the highest levels of the company.
"They need to understand that addressing this issue properly is something that will be good for the company and will actually create value," IOI's Ismail said.
Look for gaps in internal policies and controls
The next step is to carefully analyse the results of the third-party reports to critically assess where internal controls went wrong and to consider what new policies might better address the roots of the problem.
"We were able to break the challenges with employment into three phases — issues with pre-employment, employment, and post-employment," Ismail said. "And we made a sort of checklist of the issues and tried to work through it systematically."
Some of the issues identified required fairly straightforward solutions; for example, improving living conditions, halting the retention of passports, and ensuring workers freedom of association primarily required educating plantation managers and renovating on-site accommodation.
"We realised that many of the plantations were inconsistently applying our standards and policies," Ismail said. "So educating them became a real priority."
The company also changed the payment structure so that all workers were paid a base daily salary that was not connected to performance, rather than based on piece-rate work — a practice that had led many of the workers to be paid less than the statutory minimum wage. Additionally, it compensated those workers whose pay slips indicated that they had been paid less than minimum wage.
Addressing more structural issues — particularly that of high recruitment fees — was far more complex for both companies.
"The issue of recruitment fees and how it links to debt bondage isn't very well understood by companies," Rinsche said. "They often see them as separate issues, when in reality recruitment fees are one of the key problems that make migrant labourers vulnerable to forced labour."
Ensuring that effective grievance mechanisms are in place is another critical piece of the puzzle that a lot of companies get wrong, according to Ismail.
"The issue of labour violations or social violations [is] very complex, and it's critical that you have the necessary framework in place to address them," she said. "That means a strong grievance mechanism and the necessary resources to support it."
Embed controls for forced labour into the company's corporate structure
The risk for forced labour doesn't end after better policies are put into place: How these policies are monitored, enforced, and reported is absolutely critical, according to Rinsche.
"Most companies have very strong corporate policies around human rights and forced labour," she said. "But the implementation of their policies and practice doesn't necessarily translate to their commitment."
Often, companies create a separate sustainability department that handles issues related to forced labour and the environment, among others. But unless the department has a reporting channel to top-level management, this approach can backfire, according to Anu Kultalahti, a researcher at Finnwatch.
"Integrating the sustainability into the operations of the company is really key," she said. "If you have a sustainability director but it's not something that the board or top management is monitoring, then it's often not effective."
Following the Finnwatch reports and the RSPO suspension, IOI Group created a variety of mechanisms to control and monitor for environmental and social issues. For example, migrant recruitment and remediation became the responsibility of Human Resources, which reports directly to the plantation director. Critically, the company also adopted a "no-recruitment-fee policy", assuming all the costs associated with the recruitment and placement of workers and guaranteeing remediation to workers found to have been charged fees.
IOI also embedded labour issues into routine internal social audits, as well as hiring an external social auditor (BSR, a global not-for-profit organisation focused on sustainability) to regularly review migrant labour conditions and recruiting practices.
"The fact that IOI embedded this issue into their risk management framework is key," Jepson said. "Putting this into corporate governance shows that it's something they are taking seriously and that there's a structure in place to support it."
Create reporting mechanisms to senior management
There should also be reporting mechanisms in place that feed information about forced labour risks, as well as any reports of forced labour or implementation issues, directly to responsible executives.
To this end, IOI Group created a Group Sustainability Steering Committee that oversees and reviews the management of policies, processes, and strategies to address the social, environmental, and reputational risks and that reports to the board. Members of the committee are drawn directly from executive management — including the CFO, CEO, heads of operating divisions, group head of sustainability, and senior management from group support functions (for example, HR).
"Having an internal committee on responsible labour is a good way to ensure the timely and accurate flow of information," Rogerson said. "That way when concerns come up about a new contract, no one has to pick up a phone. There's a built-in system to review it."
While such committees are not new, it's rare that companies make them the responsibility of senior management. However, having senior management on board is critical to their efficacy, according to Linde.
"Because of the risks involved, this is an issue that the CFO really needs to take ownership of," he said. "They need to monitor key performance indicators for social issues, the same way they do for financial."
Specifically, he recommends that management accountants help define and report on key performance indicators related to social issues. That might mean creating controls that ensure workers are getting paid at least the minimum wage or that flag tenders for supplier contracts that are offering below-market rates — a red flag for forced-labour practices — and include these metrics in the reports that go to the CFO.
"When you receive a tender for a contract, someone in finance will look it over and decide if it's a massive overpayment, but we rarely do it the other way," Rogerson added. "They also need to run the numbers to make sure that the price is not so low that it's going to lead to real human suffering."
Keep the supply chain manageable
To make audits more effective, Patagonia decided to keep its supply chain relatively small. (It has 73 Tier 1 suppliers and around 120 Tier 2 suppliers, according to Savage.) This allows the company to map and audit all the way through its Tier 2 suppliers. The company is working on mapping all the way through Tier 3.
Rogerson believes that the decision to stay small has real strategic advantages when it comes to controlling forced-labour risks. For example, there's a big difference between trying to annually audit 200 suppliers and dealing with 15,000.
"We have this ethos that growth is good, but growth for growth's sake is the ideology of a cancer cell," Rogerson said, referencing American writer and environmentalist Edward Abbey. "You don't need to be huge to be successful."
Pay suppliers to be socially responsible
It's also critical to educate suppliers about forced-labour expectations and to have suppliers sign binding contracts agreeing to abide by those expectations and to provide remediation to workers if labour violations take place. This often means paying high fees to suppliers so they can realistically meet those higher standards, according to Savage.
For example, Patagonia tries to structure sustainability into its supply chain from the very start. Prior to onboarding, potential suppliers are heavily vetted in four dimensions: business, quality, social responsibility, and environmental sustainability.
"Each of those lenses really [has] an equal say as to whether or not we bring them on," said Thuy Nguyen, senior manager, Social Responsibility and Special Programmes at Patagonia.
The company also ensures that teams from business, sourcing, and materials stay informed about what is going on in their supply chain, including any potential violations. That means that rather than pushing for the lowest possible price, procurement is trained to ask suppliers for a price that covers their costs to comply with Patagonia's code of conduct.
"We know that our policy means that our suppliers may have to absorb thousands of dollars to cover migrant recruitment fees," she said. "This means that the cost of our materials is going to be higher — but we expect that a responsibly made product will cost more."
This also gives the company leverage when violations are detected. So when Finnwatch told Patagonia that there was a risk of forced labour in a supplier's factories, Patagonia was able to push the supplier to take responsibility for remediation.
"The supplier and buyer relationship is important," Savage said. "We ask them to commit to transparency and responsible purchasing practices, and then we all work together to see how we can address the issue, when remediation is necessary." (See the sidebar, "Tackling Recruitment Costs", for advice on best practice.)
Make sure wronged workers are remediated
Finally, exploited workers must be compensated. While this may seem obvious, it's a piece of the puzzle that companies often neglect.
"It's very rare that companies actually reimburse workers," Kultalahti said. "More often, companies focus on taking measures to prevent the issue from reoccurring — but remedy is rarely even mentioned."
To guarantee that remediation takes place, it's important to make it clear in advance who is responsible for payment. In IOI's case, for example, where most plantations are run by IOI, the company's recruitment guidelines make it clear that HR will be responsible for remediating wronged workers. For Patagonia, which does not own the factories where the products it sells are made, the recruitment costs are paid by the supplier that is the legal employer. Ultimately that cost is shared with Patagonia, which will pay more for responsibly made products.
Even after workers are remediated, companies need to realise that addressing the issue of forced labour is a long-term challenge that will require ongoing attention.
"These issues are complex and require a commitment from both sides to see it through," Nguyen said. "Both companies and their suppliers need to devote resources, time, money, and energy to fixing the problem. They are not going to be resolved overnight."
Tackling recruitment costs
Recruiters frequently charge foreign workers exorbitant fees in exchange for placing them in jobs abroad. These fees — which can take years to pay off — are "the most significant contributor to the persistence of debt bondage, the manifestation of ... 'modern slavery' most frequently encountered in global supply chains today", according to Verité, a not-for-profit anti-slavery organisation based in Massachusetts in the US.
That's why companies serious about eradicating modern-day slavery should adopt "no-recruitment-fee policies" that include the following best practice, as outlined by Verité and the Institute for Human Rights and Business.
Assume all recruitment-related costs
Companies (or their suppliers) should assume all costs associated with workers' recruitment and placement, including brokers' fees, visa costs, medical exams, international flights, etc. This is not only ethical, but the initial upfront investment can also save money in the long run. Surina Ismail, the group head of sustainability at IOI Group, said that after the company adopted a no-recruitment-fee policy in 2017, worker retention and productivity both rose.
Be transparent, and embed a recruitment policy into the corporate governance structure
Establish a clear and transparent line of responsibility within the corporate structure for recruitment issues, advises Liberty Shared's Duncan Jepson. For example, IOI Group made Human Resources responsible for worker recruitment and remediation issues. And both IOI Group and Patagonia include the recruitment in auditing and due diligence processes.
Work only with ethical agencies
Companies should do due diligence and work only with recruitment agencies that meet certain standards, including having a long-standing and good reputation and legal registration in the countries of origin and destination.
Hold suppliers and recruitment agencies accountable
Have recruitment agencies and suppliers sign legally binding contracts agreeing to the company's ethical recruitment standards. Contracts should include clauses specifying that workers pay no fees and that agencies or suppliers will repay workers found to have paid fees at any stage of the recruitment process within a specified time span.
Patagonia's no-recruitment-fee contracts also require suppliers to periodically audit recruitment internally and to keep detailed records pertaining to the recruitment of workers (including receipts of all fees paid on their behalf) for five years for external auditing purposes.
Educate workers about their rights
Accurately inform workers during the job interview process (in their native language) about working conditions and details of work, wages, and benefits, and that they should not pay any costs associated with their recruitment or placement. Repeat the information upon the workers' arrival to verify that no fees were paid. Provide a confidential process for migrant workers to report exploitation.
- "Rooting Out Forced Labour From Supply Chains", FM magazine, April 2020
- "Good for the Planet, Suppliers, and Balance Sheet", FM magazine, August 2019
- "Improving Transparency in Emerging Markets", FM magazine, 8 November 2018
- "How to Encourage Ethical Corporate Behaviour", FM magazine, 12 February 2020
Malia Politzer is a freelance writer based in Spain. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.