In 2004, Human Rights Watch launched a high-profile documentary and international campaign accusing El Salvador’s sugar industry of condoning child labor. While many international buyers chose to pull out of the country, Coca-Cola opted to stay and join forces with the Sugar Association of El Salvador, the International Labour Organization, and others to face the challenge head on.

Fearing loss of market access for its crop, the Sugar Association created a strict code of conduct on child labor that was endorsed by all of the country’s refineries. Five years later, El Salvador’s Ministry of Education reported that the joint national strategy had resulted in a 72 percent reduction in the number of children under the age of 18 who work in sugar production.

As part of BSR’s DR-CAFTA Responsible Competitiveness Project, we documented this successful collaboration and created a manual based on the best practices for other agricultural industries to replicate.

In spite of this success, partnerships like this one are hard to come by. Often, international buyers are frustrated by suppliers who seem unwilling or unable to make efforts beyond the bare minimums of social and environmental requirements. The challenge is clear: How can buyers support their suppliers in taking true ownership of compliance, and in continuing their improvement efforts even after they achieve the minimums?

In 2007, BSR, together with a group of leading member companies, launched an initiative to make supply chains more socially and environmentally responsible by focusing on a common vision called “Beyond Monitoring.” This model promotes a shift away from supply chain compliance to continuous improvement of labor and environmental conditions.

As part of BSR’s DR-CAFTA project, we have been examining how this model’s four perspectives—internal alignment, supplier ownership, worker empowerment, and public policy frameworks—apply to responsible labor. Here, we focus on the second perspective and how buyers can encourage supplier ownership of responsible labor. We suggest that buyers can do so by making a strong business case for better working conditions, providing incentives for suppliers to proactively incorporate labor and environmental issues into their own business strategies and decision-making processes, and strategically sharing costs with suppliers when it makes sense.

Demonstrating the Business Case

BSR’s global experience suggests that when suppliers adopt responsible labor practices, they are rewarded with both short- and long-term returns on investment.

Recently, this has proven true as demonstrated by our 15 demonstration projects throughout Central America and the Dominican Republic that focus on the implementation of responsible labor practices to enhance competitiveness.

Consider the case of Finca Tropical, a large banana plantation in Honduras, where BSR helped strengthen worker empowerment by improving employee representation within the company and creating a platform for workers to identify potential productivity improvements. As a result, 2009 was the most productive of the farm’s 20 years in operation. Fruit quality also improved.

BSR similarly helped enhance dialogue between workers and managers at AgroAmérica’s banana farm in Guatemala, where the industry has long been plagued by labor conflicts. Our project in Guatemala contributed to a 20 percent reduction in work stoppage time, suggesting that simple techniques to improve worker-management dialogue can lead to overall improved productivity.

Another project helped the Costa Rican Chamber of Technologies of Information and Communication’s software-development firms lower employee turnover and associated costs by implementing tailored labor policies to improve the work environment and provide increased professional-development opportunities.

In each of these cases, the key to improvement was ownership, at the farm or supplier level, of these issues. These initiatives were successful not because they were designed in a distant boardroom, but because local suppliers recognized a business opportunity and had technical assistance to help them develop their own tailor-made responses. And the list of business benefits associated with responsible labor practices does not end with these examples; others include reductions in work-related injuries and related costs, lower product-defect rates, decreased absenteeism, and boosted employee morale.

Unfortunately, these benefits are not always obvious to suppliers, which may not see the cost-benefit ratio involved in incorporating these concepts into their core business strategies. Often, suppliers choose to focus solely on what will more likely increase their immediate profits, such as price, quality, delivery time, and meeting minimum social and environmental requirements to “pass the audit.”

International buyers can help their suppliers better understand the financial advantages and positive returns associated with better social and environmental practices by sharing stories such as the ones described here. Buyers can also discuss the business benefits of responsible practices in ongoing communications with suppliers and, more importantly, share their own best practices and success stories.

Providing the Right Incentives

To further encourage suppliers to take ownership of responsible labor programs, companies can provide positive incentives for continuous supplier improvement.

Over the past several years, buyers have driven supply chain compliance by presenting suppliers with punitive measures, such as termination, decreasing order sizes, or dropping suppliers altogether. In the short term, this approach may successfully stamp out issues such as child and forced labor that are considered “zero-tolerance” for brands, but it often stops there. The punitive model provides little incentive for suppliers to go beyond the minimum requirements and implement systems that allow them to continually improve their performance over time.

Positive incentives, on the other hand, can be powerful tools to motivate suppliers to go to the next level. Starbucks has taken this approach in the responsible sourcing of its coffee through its C.A.F.E. Practices program. The company rewards high-performing suppliers by paying them premium prices to enhance their coffee quality and the environmental and social practices of their supply chains.

We saw this practice in Costa Rica while working with the small-farmer cooperatives of the COOCAFE consortium to improve health and safety practices in coffee growing. Co-op managers continually referred to the positive financial incentives associated with Starbucks’ program. This was apparent all the way down to the farm level, where small farmers proactively improved their farms’ condition to gain access to higher international prices.

Buyers can provide incentives ranging from committing to long-term orders to maintaining preferred relationships with suppliers and giving them first dibs on new bids. Buyers should ensure that the framework promotes continuous improvement, which means incrementally increasing the rewards for high social and environmental performers. Some buyers choose to pay more, one way or another, for more responsibly produced goods and services.

Who Pays the Bill? When Sharing Costs Makes Business Sense

Emphasizing the business case for responsible practices and providing incentives are proven, effective ways to achieve supplier ownership of labor and environmental conditions. However, suppliers may deem certain investments in social programs too costly, especially if the benefits aren’t apparent until the distant future. For example, suppliers may be more inclined to provide transportation for their employees (which has the immediate return of ensuring that people show up to work on time), than to create social and economic alternatives in surrounding communities to reduce instances of child labor (which may result in the short term in labor shortages).

In these cases—when start-up costs are high and benefits not immediate—it may make sense for buyers to share the initial implementation costs with their suppliers and phase out involvement as the business benefits to suppliers become more tangible over time.

BSR is working with brands to do exactly that through our HERproject initiative. We have worked with eight multinational apparel companies to promote factory programs that link business value to women’s health. In this program, the companies cover the initial implementation costs associated with establishing peer-to-peer health-training services at the supplier factory level, and the factories provide access to workers and encourage worker participation and clinic improvements.

Not only have factories benefited from the reductions in health-related absenteeism rates, they also have seen increased employee loyalty and less difficulty in meeting production targets. One study by Extending Service Delivery at a site in Bangladesh showed that for every dollar invested in women’s health, the factory obtained a return of US$3. This was seen in the form of an 18 percent decrease in absenteeism and a 46 percent reduction in staff turnover.

The idea is that supplier factories will maintain the established investment in female workers’ health once they have can see the practical economic gains from such investments.

Companies should view these initial costs as part of a long-term strategy shared with their suppliers. As labor conditions improve at the supplier level, the investments will likely result in cost savings for the buyers as well, materializing through improved products and the increased production capacity of suppliers.

These demonstration projects and case studies were made possible by a grant from the U.S. Department of State to BSR for its DR-CAFTA Responsible Competitiveness Project. The project works with producers, labor, government, and international buyers to promote responsible labor practices in countries of the Dominican Republic-Central America-United States Free Trade Agreement (DR-CAFTA). For more information, visit www.drcafta.bsr.org.