Wal-Mart Shareholders to Vote on Sweatshop Issue

On May 21, Wal-Mart Stores Inc. celebrated the recovery of a missing toddler in Ada, Okla., and donated $150,000 to the National Center for Missing & Exploited Children.

A week earlier, the largest mutual fund aimed at social responsibility said it sold its shares of Wal-Mart stock on Feb. 1 and removed the retailer from its Domini 400 Social Index (DSI) because, among other reasons, some of its vendors exploited child labor in the past and others may be doing so now.

Wal-Mart says it follows labor laws of the countries where its 7,000 vendor factories are located. One shareholder and expert on Wal-Mart culture says that’s not enough. Wal-Mart is a “national icon,” the symbol of Main Street America, and the nation’s reputation is intrinsically tied to the actions of the world’s largest retailer.

“They are saying don’t judge us by our standards, judge us by the local standards,” said Johnnie Roebuck, dean of the graduate school at Henderson State University in Arkadelphia. “We need a Wal-Mart standard whether it’s in the United States or Bangladesh that brings us back to the Wal-Mart culture that we have grown to love and trust.”

With more than 1 million employees, 4,000 stores and sales of $191 billion, Wal-Mart is in a position to set an example, but it hasn’t, said KLD & Co. of Boston, which controls the $1.4 billion Domini Social Equity Fund and corresponding DSI.

“Wal-Mart’s market dominance puts it in a unique position to lead retailers in a clean up of sweatshop abuses,” said Peter D. Kinder, president of KLD, who collaborated with lead author Kyle J. Johnson on the report released May 17. “To date it has declined to do so. Wal-Mart has some real positives, but its failure to lead on issues such as this has made it unacceptable to social investors. KLD concluded that it had to remove the company from the DSI 400.”

As of Jan. 31, Wal-Mart was the third-largest holding in the DSI, comprising about 4 percent of the fund’s investments. Other companies currently in the DSI top 10 include Microsoft, AOL Time Warner and Coca-Cola. Since its inception in 1990, the DSI has outperformed the Standard & Poor’s 500 on a total return basis and on a risk-adjusted basis.

“We’re disappointed with their decision to do that,” said Rob Phillips, a spokesman for Wal-Mart. “We certainly disagree with the reasoning behind it.”

The sweatshop issue is scheduled to go before shareholders at Wal-Mart’s annual meeting June 1 in Fayetteville. One shareholder said it’s an issue nobody wants to hear about amidst the din of Wal-Mart cheers and positive earnings projections at the University of Arkansas’ Bud Walton Arena.

KLD Accusations

In its report, KLD cited two high-profile controversies involving Wal-Mart and sweatshops over the past decade. In 1992, NBC’s television news magazine “Dateline” reported that some of Wal-Mart’s clothing had been made by children in Bangladesh, despite being advertised as being “Made in the U.S.A.” In 1996, the National Labor Committee, a U.S. anti-sweatshop non-profit organization, discovered that some of Wal-Mart’s Kathie Lee Gifford clothing line had been made in Honduran sweatshops.

But KLD said the February action was based on three more recent events:

n In July 2000, the National Labor Committee reported that Wal-Mart Canada had purchased goods made in the military dictatorship of Myanmar, formerly known as Burma, at least through December 1999. Several companies — including Levi Strauss, Liz Claiborne and Walt Disney — had terminated their relationships with suppliers in Myanmar by 1997. These purchases seemed to contradict Wal-Mart’s stated policy to “favor vendors who have a social and political commitment to basic principles of human rights …” Wal-Mart Canada said it no longer purchases goods from Myanmar, but the company-wide policy is “unclear,” said KLD.

n An October 2000 article in BusinessWeek magazine reported that Wal-Mart lied about its involvement with the Chun Si Enterprise Handbag Factory, a sweatshop based in China. In early 2000, the National Labor Committee accused Wal-Mart of contracting with this factory, which subjected its workers to 90-hour work-weeks, beatings by factory guards, exceptionally low-wages and prison-like conditions. Wal-Mart adamantly denied that it had ever had a relationship with the factory until BusinessWeek confirmed the company’s involvement with Chun Si through December 1999, according to the KLD report.

n And Wal-Mart decided against using a third-party independent monitoring program at its vendors’ facilities in Central America.

KLD said Wal-Mart’s code of conduct for vendors doesn’t stipulate that its vendors permit workers to bargain collectively and doesn’t require them to pay laborers a “sustainable living wage.”

Using cheap labor in developing countries allows many U.S. retailers to make clothing at a fraction of what it would cost to manufacture it in this country. But U.S. labor laws don’t apply in other countries, and allegations of labor abuses have been widespread since overseas manufacturing became common in the 1970s and 1980s.

Wal-Mart doesn’t issue public reports on the working conditions at its vendors’ factories, KLD said. Other companies that have been embroiled in sweatshop and Myanmar controversies — including The Gap, Liz Claiborne, Nike, Timberland and Reebok — have taken steps to improve their records on these issues. In contrast, Wal-Mart’s progress has been minimal, the KLD report stated.

Wal-Mart is only the second company banished by KLD because of the actions of its vendors. In 1997, Nike, the athletic shoe and apparel company, was removed from the DSI after a controversy over conditions in its Indonesian factories.

In 1998, the DSI dumped railroad operator CSX for environmental and safety reasons. Two years earlier, Knight-Ridder and Gannett were struck from the list for anti-union activities at their newspapers in Detroit.

KLD didn’t go into detail on the reasons for removing Wal-Mart in February because the company said it wanted to put out a “comprehensive statement” concerning its actions and that took time to prepare.

KLD said it is “cautious about removing companies from the DSI for social reasons, preferring instead to communicate with companies to advocate for change and monitor companies’ efforts to improve.”

Although KLD’s Kinder said advisers and investors are shying away from Wal-Mart because of concerns over factory conditions, analysts say the KLD announcement will have little if any impact on Wal-Mart’s stock.

Requesting anonymity, one analyst said the KLD announcement was a “non-event,” adding that most investors aren’t concerned about social issues such as child labor: They’re concerned about profits.

Between May 17, the day the report was made public, and May 21, Wal-Mart’s stock went up about $1.50 per share to just over $53.

One shareholder said that people in Third World countries work at these factories voluntarily. If the factories didn’t exist, the only options might be prostitution or selling illegal drugs, she said.

Shareholder Issue

The General Board of Pension and Health Benefits of The United Methodist Church of Evanston, Ill., and other shareholders are asking Wal-Mart’s Board of Directors to prepare a document stating that the company won’t purchase goods from suppliers who “manufacture items using forced labor, convict labor or child labor, or who fail to comply with fundamental workplace rights …”

Wal-Mart is asking shareholders to vote against the proposal.

Citing BusinessWeek, the proposal said Wal-Mart’s auditors missed most of the “more serious abuses” at the Chun Si plant in China, including beatings and confiscated identity papers.

“Currently, Wal-Mart’s monitoring program is heavily dependent on auditors who do not have the trust of workers and miss serious labor rights violations,” said the proposal, which is included in Wal-Mart’s pre-meeting proxy statement.

Wal-Mart replied in the proxy, saying a third-party audit system is already in place to “ensure that suppliers’ factories meet and adhere to the Wal-Mart Factory Certification criteria.” The process includes on-site visits, accounting audits and personal interviews with workers.

Wal-Mart said audits of all factories producing goods sold in its stores are conducted at least once a year.

“During 2000, our agent, Pacific Resources Export Limited, conducted over 5,000 audits, while other third-party monitors conducted another 2,000 factory audits,” the proxy states.

“In the case of the Chun Si factory, the factory’s failure to correct those issues identified by the auditors led Wal-Mart to drop the factory well in advance of the negative publicity cited by the proponents,” the company said in the proxy. “We cancel all orders from factories where egregious issues are observed and advise the supplier involved in the cancellation.”

The proxy states that Wal-Mart is “proud of its factory inspection program and believes that much good has been accomplished through the program.”

Abiding by the Local Law

Roebuck, who wrote her doctoral dissertation on Wal-Mart culture, said the company’s official statement about sweatshops says it will follow “local workplace laws.” Those laws may not exist or may not be enforced in some Third World countries, she said.

As a shareholder, Roebuck is obviously passionate about the company.

“That’s not enough for me,” she said. “They’re more than a company: They’re a national icon. They’re a family. They’re my family. I want to know there’s a standard.

“I know it’s not popular with the shareholders. They want to hear we’re creating a product for less and beating the competition. When you set out to do that, you have to find the best buys. In the beginning of the Sam Walton culture, it was about a good product, period. His culture was built on hometown trust.”

Walton opened the first Wal-Mart store in Rogers in 1962. He died in 1992.

Roebuck said independent factory inspections may not be thorough. With as many vendors as Wal-Mart has, it would be difficult to police working conditions in all vendor factories around the world.

But KLD said other companies have made more of an effort.

“Wal-Mart’s vendor contracting policies and procedures have failed to meet the standards set by prominent human and labor rights activists or those attained by other prominent companies that are similarly exposed to sweatshop controversies,” the KLD report stated.

Official Statement

Wal-Mart’s official statement regarding sweatshop allegations can be found on its Internet Web page, walmartstores.com. In entirety, it states:

“Wal-Mart strives to do business only with factories run legally and ethically. We continue to commit extensive resources to making the Wal-Mart system one of the very best. We require suppliers to ensure that every factory conforms to local workplace laws and that there is no illegal child labor or forced labor. Wal-Mart also works with independent monitoring firms to randomly inspect these factories to help ensure compliance. In fact, we conduct more than 200 factory inspections each week to ensure these facilities are being run legally and ethically.”