Due Diligence & Social Compliance

Chinese Factory Workers

Social compliance refers to a set of practices and policies designed to ensure that factories and suppliers operate ethically, treat workers fairly and humanely, and comply with relevant laws and regulations. This is particularly important with factories in countries that typically have lower labor standards or a history of labor abuses.

This article will discuss the importance of social compliance in factory and supply chain due diligence, and provide some tips on how to validate that your supply chain meets the highest standards of social responsibility.

Why Social Compliance Matters

Social compliance due diligence is critical to ensuring that factories and suppliers treat their workers fairly and with respect. This includes assurance that workers are compensated appropriately, have reasonable working hours, and work in safe and healthy conditions. Social compliance due diligence holds factories accountable to comply with local laws and regulations, including those related to labor and employment practices, environmental regulations, and other relevant standards. Failure to comply with these standards can result in legal and public relations risks for businesses, as well as negative impacts on workers and their communities.

In addition to the ethical concerns, there are also practical reasons why social compliance is important in supply chain due diligence. For example, companies that prioritize social compliance are more likely to have stable and reliable supply chains, as they are less likely to experience disruptions from labor disputes or other issues. Social compliance can also improve worker productivity and morale, leading to higher quality products and greater customer satisfaction.

Ensuring Social Compliance in Supply Chain

Pre-Merger Factory Due Diligence

Before entering into a business relationship with a brand, factory or supplier, it is important to conduct due diligence with boots on the ground to visibly confirm that they meet the highest standards of social compliance. This can include reviewing the factory’s policies and procedures, interviewing workers and management, and conducting on-site visits to assess working conditions and other relevant factors.

Two people make a business agreement by shaking hands
Verifying graph data on a document

Establish Clear  Standards

Businesses should establish clear standards for social compliance that they expect their suppliers to meet and communicate these standards clearly. These standards should be based on international labor standards and local laws and regulations, and should cover issues such as wages, working hours, health and safety, and human rights.

Monitor Supplier Compliance

Once a brand has established relationships with suppliers, it is important to schedule, at the very least, an annual visit to the factory. This can include conducting regular on-site visits, reviewing supplier reports and documentation, and engaging with workers and management to assess their satisfaction with working conditions. If factories know that their top clients are adamant on social compliance issues and regularly visit, they are much more likely to adhere to the requested standards and be held accountable for any deviations.

Meeting workers at a factory inspection
Man developing a Social non-compliance action plan on whiteboard

Address Non-Compliance Issues

If a business identifies non-compliance issues with a supplier, it is important to address these issues promptly and effectively. This may involve working with the supplier to develop a corrective action plan, or terminating the business relationship if non-compliance issues cannot be resolved. Having an action plan to deal with non-compliance is the best way to stay ahead of any pitfalls.

Encourage Social Compliance Through Incentives

Finally, businesses can encourage social compliance by offering incentives for suppliers who meet or exceed social compliance standards. This can include financial rewards, recognition, and other incentives that encourage suppliers to prioritize social compliance in their operations. Loyalty to a particular factory in terms of high order frequency and volume is generally incentive enough for a factory to adhere to standards, but it is extremely important to hinge a business partnership on clear values by setting expectations up front.

Two men discussing compliance at a factory

Social compliance is critical to ensuring that factories and suppliers operate ethically and treat their workers fairly and humanely. Businesses that prioritize these standards in their supply chain due diligence reduce legal and public relations risks and create a stable and reliable supply chain. By conducting due diligence, establishing clear standards, monitoring compliance, addressing non-compliance issues, and encouraging social compliance through incentives, businesses can ensure that their supply chain meets the highest standards of social responsibility.