Are You Profiting From Labor Rights Violations?

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In 2012, most of us like to think that slavery is a thing of the past. Sadly, it is alive and well, and modern slaves may have reduced the cost of the shrimp in your shopping basket and increased the profit margins of stocks in your portfolio. Do you have a problem with that? I sure do.

Supply chains and labor rights
As global supply chains lengthen, it becomes increasingly challenging for companies -- even those with the best of intentions -- to manage the risk of labor rights violations several steps removed from them in remote corners of the globe.

Consider Thailand. The United States is Thailand's primary shrimp buyer, consuming one-third of Thailand's gross shrimp output. Companies such as Wal-Mart (NYSE: WMT  ) , Whole Foods Market (NASDAQ: WFM  ) , Costco (NASDAQ: COST  ) , and Darden Restaurants (NYSE: DRI  ) are among Thailand's most significant shrimp purchasers.

Thailand's population dynamics reflect a classic story. As the country has enjoyed recent economic development, a shortage of unskilled labor has arisen, attracting migrant (and often illegal) laborers from Burma, Thailand's desperately poor neighbor. These laborers often work in horrific conditions, and typically have no recourse for any abuses they suffer. Rights groups operating in the region have documented widespread cases of child and forced labor in the local shrimp peeling sheds. Stories abound of factory managers locking workers in until they meet their quota, and of 12-year-old children working 16-hour days, despite repetitive stress injuries that ultimately compromise their mobility for life. Supervisors threaten girls with rape. Many migrants find themselves in a vicious cycle of debt bondage. 

Bad cocktail
I recently interviewed Jason Motlagh, a photojournalist who received a grant from the Pulitzer Center to document labor conditions in Thailand's shrimp processing plants. Motlagh observed two worlds that were as different from one another as night and day.

Motlagh visited the official processing plants, where conditions were so pristine that one might easily have consented to brain surgery right on the peeling tables. Peelers followed meticulous health and safety policies, and worked under safe and fair conditions. It was good work, if you could get it.

But behind the scenes, deliveries from smaller, anonymous peeling sheds where labor abuses are rampant are often mixed in with the larger factories' output, injecting slavery shrimp right into the same supply chain that had just received the official seal of approval. When Motlagh and his partner managed to use hidden cameras to get a closer look at the conditions under which this second, underground labor force operated, they were astonished. His pictures speak for themselves, and they tell a grim story indeed.

Responsible companies are up against institutionalized corruption on a monumental scale. Rights groups have long decried the close ties between the peeling sheds and the local police forces. Indeed, it is common for police officers' wives to own peeling sheds. Tip-offs of raids are the norm.

Third-party certification
There are third-party certifications in place for Thai shrimp processors. These certifications are supposed to provide confidence that no labor rights violations occurred, among other things. But as Motlagh observed, the certification schemes are not adequate. "I'm not aware of a single company that goes far enough in their monitoring to be sure that their shrimp is untainted by labor rights abuses," Motlagh said. When asked what Western companies should be doing, he said, "They have to look beyond the certification."

I asked Wal-mart, Costco, Whole Foods, and Darden for comments. I received no reply from Whole Foods or Wal-Mart.

Rich Jeffers, Darden's director of communications, confirmed the company's use of a third-party standard and a fourth-party certification process. Darden's suppliers are members of the Thai Frozen Food Association, which "has confirmed with us that they do not purchase raw materials from the 'peeling sheds'," Jeffers said.

Darden is headed in the right direction, but Jason Motlagh's observation of the co-mingling of slavery shrimp with certified shrimp demonstrates that Darden's efforts are not sufficient.

Bill Mardon, Assistant GMM of Costco's seafood and service deli, told me, "Costco has required annual social accountability audits for approximately 10 years now for all foreign suppliers and all suppliers both foreign and domestic of our private label items." The challenge here, though, is that Costco also prefers to give its suppliers notice of its inspections as a courtesy. Given the landscape I described above, notice of an inspection utterly defeats the purpose.

Wal-Mart and Whole Foods have both moved toward 100% certification of their seafood products, using such robust criteria as the Marine Stewardship Council's requirements. Whole Foods has long been a leader in working toward sustainable seafood sourcing, in many ways far ahead of its peers. Still, just like Darden and Costco, neither Whole Foods nor Wal-Mart is going behind the certification.

Getting the "hell" out of shellfish
Motlagh's work reveals how difficult -- though not impossible -- it is to establish a reliable chain of custody for shrimp. Companies, investors, and consumers have to decide that this situation is unacceptable, or it will continue. Momentum may finally be building. The U.S. Department of State lists Thailand on its Tier 2 Watch List for Human Trafficking, and is considering a further downgrade to Tier 3. The Thai government -- alarmed at the prospect of compromising a major export market -- has finally stopped denying the problem and is now actively working to combat its labor problems.

A new tool from the International Labour Organisation that will map all the peeling sheds  may provide the substantive support companies need to go beyond labels and establish shrimp supply chains that are truly free of slavery and labor rights abuses. Of course, this is only good business, because a reliable chain of custody is also critical to food safety.

So what's an investor to do? There is no magic bullet, but my approach is to tell companies that it matters to me, both directly and through my decisions about what stocks to hold. I may barely move the needle on my own, but I hope to add to a chorus of voices.

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