Features, May 2001 Fund Management The world's largest retailer has been expelled from the most important socially responsible investment index in the US for allegedly failing to adequately address labour abuses by its suppliers. Mark Nicholls reports Sweatshop sees Wal-Mart leave index By its own confession, Kinder, Lydenberg, Domini (KLD) moves slowly. Nonetheless, by November last year, executives at the Boston-based corporate social research firm had had enough. In that month the decision was taken to remove Wal-Mart, the world's largest retailer, from the Domini 400 Social Index (DSI 400) which comprises 400 US companies that pass a series of social and environmental screens. After communicating the decision to Wal-Mart and the asset managers that license the DSI 400, KLD, which manages the index, removed the company in February. The move has resulted in socially responsible investors selling tens of millions of dollars worth of Wal-Mart shares (the firm made up 3.87% of the index). But more importantly, it sends a clear political signal to the firm that such investors no longer consider Wal-Mart an acceptable holding, says Peter Kinder, KLD's president. Wal-Mart had been under review for five years on a number of issues, he says, including its preference for greenfield, out-of-town developments and labour relations. But the primary reason for Wal-Mart's exclusion was a judgment by KLD that the retailer had not taken sufficient steps to ensure that its domestic and international suppliers operate factories that meet adequate labour and human rights standards. "This is a huge company and it is hugely profitable. It can afford to set standards by which other companies should be judged," he says. "As a company that's been so richly rewarded by consumers in North America and Europe, I expect more from Wal-Mart. With power and wealth comes responsibility." Wal-Mart is only the fifteenth company to be excluded from the index for 'qualitative' reasons since its launch in 1990. The index employs exclusionary screens which forbid the inclusion of companies that, for instance, manufacture tobacco products or own nuclear power plants. But it also uses qualitative screens to cover less-clear cut issues, such as environmental performance, ethnic and gender diversity and labour standards, where firms' records are often too mixed for a 'one-size fits all' approach. The final straw for KLD was an October 2000 report on Wal-Mart in Business Week. It confirmed that, until December 1999, Wal-Mart had sourced products from a factory in China that had been exposed in May 2000 by the National Labour Committee (NLC), a US non-governmental organisation, as operating under sweat-shop conditions. Wal-Mart had previously denied dealing with the factory. In the same report, a Wal-Mart representative said that the company was soon to begin an independent supplier monitoring programme with the Inter-faith Center on Corporate Responsibility, a US group which represents religious shareholders. However, in November, the firm cancelled the programme. Furthermore, the NLC also found that Wal-Mart had been receiving product shipments from a factory in Myanmar as late as December 1999 - despite many other US companies refusing to deal with Myanmar because of systematic human rights abuses by its military government. The reaction to the exclusion from Wal-Mart was mixed. Tom Williams, a spokesman with the firm says "Our only reaction is no reaction - people have a choice to make whatever investment decisions they choose." However, he goes on to say: "[our vendor standards are] something we take very seriously," adding that the firm has a "fully implemented third party auditing system, involving site visits, to ensure factories meet our standards." The firm also reviewed its auditing guidelines last year, he adds. He also says that Wal-Mart had ceased sourcing products from the Chinese factory before the issue had been highlighted in the press. "We will not buy goods produced in a factory that has been denied certification by our auditors," he adds. Similarly, the company no longer sources goods from Myanmar, he says. But such a response cuts little ice with David Schilling, the director of the corporate accountability programme at ICCR in New York. Schilling expresses disappointment that several years of discussions with the retailer on a number of corporate responsibility issues - including advanced plans to implement a pilot programme of independent auditing working alongside local human rights groups in Latin America - did not prove more fruitful. "Wal-Mart said that the pilot programme was not replicable, that they wanted a more system-wide approach," he says. But he argues that the auditing firm that Wal-Mart uses for most of its inspections - Pacific Resources Export Ltd (PREL) - is fundamentally unsuited to monitoring for human rights abuses. PREL's expertise lies in quality assurance monitoring, he says. "If you need someone to operate on your heart, you wouldn't go to a dentist. Companies need expert advice from groups that are closer to the workers, who aren't simply looking at the process from a quality point-of-view," he argues. Schilling does concede that, over recent years, Wal-Mart's internal monitoring has improved, although he says it still could benefit from further improvement. And discussions are continuing between ICCR and the company. Kinder concedes that it can be difficult to decide when to finally remove recalcitrant companies from the index, especially as they often claim to be improving their performance. "You're dealing in judgment calls - it's an art, not a science." But an internal report KLD is producing on Wal-Mart is unequivocal: despite years of pressure, the company is still not moving fast enough to resolve the controversies in which it has found itself. Even if Wal-Mart addressed the concerns of ICCR and other NGOs tomorrow, it would still pay a price for exhausting KLD's patience: the rules governing the index say that excluded firms cannot be considered for re-introduction for at least two years. 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