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May 13, 2008

Disney and McDonald's Take Steps to Protect Global Labor
    by Anne Moore Odell

In partnership with prominent stakeholders, the two companies strive to improve working conditions in factories overseas while new data shows an uptick in companies monitoring suppliers' labor practices. -- In the worldwide conflict between demand for cheaply produced consumer goods and the desire to protect the rights of workers who produce these goods, more investors, consumers, and other stakeholders are demanding that companies commit to protecting workers who manufacture goods wherever the workers live.

Visit the
Prospectus Ordering CenterAccording to a new study by RiskMetrics Group, 20% of large cap companies have policies in place regarding their suppliers' observance of labor standards. Depending on where you stand in the labor divide, this number is either an encouraging start or a dismal showing, especially considering that only 14% of the large cap companies surveyed actually monitor their suppliers' compliance with labor standards.

"This was the third year we looked at the S&P 500 as a cohort, and the percentage of S&P 500 firms with supplier labor policies jumped from 13% in 2005 to 16% in 2006 and 22% in 2007," said Peter DeSimone, head of labor and human rights research at RiskMetrics Group. "The numbers point to an acceleration in the adoption of these types of codes by multinational firms and the prospect that we'll see much wider implementation of these types of standards in coming years."

In an effort to improve supply chain working conditions, two of the world's most ubiquitous companies, McDonald's Corporation and The Walt Disney Company, along with a group of stakeholders that includes investors and labor activists, started Project Kaleidoscope in 2002. The program encouraged sustained compliance with labor standards by manufacturers. The recently released final report of Project Kaleidoscope details a pilot program at ten supplier factories in China that make goods for Disney licensees and McDonald's.

Along with the two companies, the other groups involved with Project Kaleidoscope include the As You Sow Foundation; the Center for Reflection, Education and Action (CREA; the Connecticut State Treasurer's Office; Domini Social Investments; General Board of Pension and Health Benefits of the United Methodist Church; the Interfaith Center on Corporate Responsibility (ICCR); and Missionary Oblates of Mary Immaculate.

Unlike attempts by outside organizations to force factories into compliance with labor laws, Project K (as it was dubbed) worked to create internal systems within factories to create compliance with labor codes over time, an approach called Dynamic Social Compliance (DSC) because of the many dynamic inputs that influence compliance at the factory level. The DSC approach included training for managers and workers, as well as implementing compliance systems at factories.

"The project was an attempt to develop more effective ways to sustain compliance with labor standards over time," said Adam Kanzer, managing director and general counsel at Domini Social Investments. "It is designed to strengthen compliance generally. It was not focused on any one particular labor standard. If properly implemented, the DSC is designed to address the full range of labor standards found in corporate codes of conduct."

While the final Project K report documents many details of the process to create internal systems at the 10 factories and also includes specific notes from the factory workers themselves, the long-term success of the project, both within the pilot factories and as a model for other companies to emulate, is an open question.

"We are pleased this evaluation is complete," a McDonald's representative told "This was a collaborative effort with trusted organizations to review working conditions and opportunities in our suppliers' factories. We're committed to continuous progress. Our suppliers understand how seriously we take the welfare of workers and the conditions in which they work. We will remain ever vigilant and continue to identify areas for improvement and opportunities."

Conrad MacKerron is director of the Corporate Social Responsibility Program at the As You Sow Foundation, an investors' action group that has worked with Disney since the 1990's and was part of Project K. "We saw real improvement in compliance at most of the factories, especially on reducing excessive working hours and wage/benefit issues," said MacKerron. "We learned that developing internal compliance systems at factories seems to work in many circumstances."

MacKerron elaborated, "it doesn't happen overnight. It took a lot of time, resources and persistence. You are in a culture where it is often a totally new concept to do this type of internal monitoring." Still, said MacKerron, "there was also positive feedback from workers that they felt working conditions had improved since the system-based approach started."

The Project K experiment stands out, in part, because of McDonald's and Disney actively creating and paying for the development of internal labor monitoring systems. As RiskMetrics' data shows, however, this is not the norm even in light of increased stakeholder awareness of sweatshops, forced labor, and the dangerous working conditions found in many factories.

DeSimone of RiskMetrics commented on the Project K report, "The big takeaway from this report for me was that the participating factories saw value in actively managing the compliance process and improving conditions. If the factory owners do not see an economic advantage to tackling compliance issues, as we have all seen in the field, abuses persist, even with periodic monitoring. As the business case builds for better treatment of workers, I think you will see more corporations exploring these compliance models and better workplace conditions overall. However, I caution, we're a far way off from wide adoption of these basic business principles on the factory floors and the farms around the world."

One way investors can see if a company's compliance program is serious about monitoring supply chain labor DeSimone suggested is to see how a company reacts to a violation when it occurs. "Firms without serious programs in place will find themselves unprepared to deal with these types of situations and, in some ways, can expose shareholders to additional liabilities for possibly making false claims about their conduct," said DeSimone. "In sum, for a company, adopting a code is only the first step toward good practices in this area."

"We want to build on the good relationships we have at Disney and McDonald's to encourage them to issue public reports on global supply chain compliance on their whole supply chain as Gap and Nike have done," said MacKerron. "It's great that we were part of the process of improving compliance at 10 factories, but it is equally important for the companies to discuss and demonstrate relative levels of compliance across their entire supply chain. Given how advanced both companies are in some areas of supply chain monitoring, there needs to be a willingness to step up and improve transparency on a broader level'

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