Online Extra: Raising the Bar for Corporate Consciences

Increased focus on human-rights issues has more companies turning to social-audit firms, but Freeport-McMoRan has set a new standard

So what is a social, or labor, audit, anyway? It's a concept that has boomed in the past decade, as clothing and consumer-product companies have adopted so-called codes of conduct to fend off allegations of sweatshop manufacturing and other abuses. Roughly 60% of the 500 largest U.S. companies have such codes today, according to one 2004 survey. The codes spell out principles the company vows to follow -- everything from no child labor to respecting human rights and abiding by local labor laws.

Some companies, including Walt Disney (DIS ), Nike (NKE ), and Wal-Mart Stores (WMT ), have built up entire staffs to make sure the codes are being met. They monitor labor conditions in overseas factories that make each company's goods.

Many companies also tap a small army of social-audit outfits that has sprung up to fill the growing demand for such expertise. Some are units of giant factory-quality auditing companies such as Geneva's SGS. Others are small nonprofits such as Vérité in Amherst, Mass., which specializes in labor and human-rights inspections.


  No single definition covers what such audits should entail. They run the gamut from perfunctory factory walk-throughs by auditors who don't talk with workers to full-scale, months-long investigations such as that the International Center for Corporate Accountability (ICCA) undertook for Freeport-McMoRan Copper & Gold's giant Indonesian mine.

One reason for the variability is that most companies haven't really figured out why they're doing the audits. Most start by seeing the process as an internal inspection intended to catch problems that critics might pounce on. But that approach usually doesn't satisfy labor and human-rights critics, who argue that abuses just get buried unless companies agree to external accountability.

"Mere assertions of compliance, without external assessment and public disclosure, undermine an industry's entire effort," says S. Prakash Sethi, ICCA's founder and a management professor at Baruch College in New York who has written extensively on corporate codes of conduct.


  Such complaints have prompted companies to join several industry/human-rights oversight bodies, such as the Fair Labor Assn. (FLA) and Social Accountability International (SAI). In both cases, companies and auditors have designed industrywide codes of conduct and set up external inspection systems to police them. These joint associations have brought some improvements in overseas working conditions, experts on both sides say, easing attacks on companies such as Nike, Liz Claiborne (LIZ ), and Reebok International (RBK ), all members of the FLA.

Few of these audits are as thorough as the ICCA inspection of Freeport's mine, though. Nor do the FLA and the SAI require nearly as much disclosure. "Freeport seems to be breaking new ground here, and groups like Amnesty International will be watching closely to see what other companies do," says John O'Reilly, an Amnesty volunteer who until 2003 headed the human-rights program at BP (BP ).

Unprecedented as it is, the Freeport-ICCA collaboration took more than a year just to set up, as the two groups worked out what the audit would entail and how it would be done. The ICCA tapped five professors and two graduate students from Baruch, a part of the City University of New York. It also hired four professors and 10 grad students from the University of Papua New Guinea who speak the local languages to conduct interviews of employees and managers.

Then the group developed four questionnaires for different parts of the operation and used them to do 373 interviews individually -- with no Freeport managers present. ICCA took the results to New York for analysis without showing anything to Freeport management. The result: an unvarnished view of what really goes on. It remains to be seen whether other companies will subject themselves to similar scrutiny.

By Aaron Bernstein in Washington

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