Supply Chain Accountability

JULIA KENNEDY: Welcome to Just Business. I'm Julia Taylor Kennedy.

When it comes to the ethics of labor and production overseas, responsibility and accountability can get slippery. Governments can try to force companies to behave through regulation and enforcement. Big corporations, which make large purchasing orders from overseas factories on short timelines, can also require certain labor standards. Factory owners themselves can make changes. And activist organizations and reporters can try to hold all other parties responsible and accountable through independent audits and publicity.

We'll spend the next two installments of Just Business talking to different actors to see how they view responsibility and accountability for ethical practices in manufacturing and other overseas business.

Let's start with New York Times reporter Charles Duhigg, who led the team that exposed poor treatment of workers at the Foxconn electronics plant in China. Duhigg recently published a book on organizational and personal habits, called The Power of Habit. He told me how habits can impact the ethical behavior of businesses.

CHARLES DUHIGG: Every single company has its own habits that emerge organically. So a CEO can come in and he can create incentive systems; he can order certain behaviors. But, for whatever reason, the company will essentially take those orders and digest them and come up with their own routines or habits.

When most people think about companies, they talk about them as if companies are places where everyone sits down and they make one decision and then everyone goes out and they abide by that decision.

But that's not how companies work at all. What actually happens is that the CEO makes a decision, and by the time it filters down to all the middle managers, everyone has whispered about what it really means and they have their own interpretation of it, and then there's all this, like, warfare going on inside the company. There are rivals for different positions and everyone is trying to make themselves look better and maybe make their rivals look worse.

When all of that is done, the way that a company actually operates is what its habits are. So what you have to do, if you are a good leader, is you have to look for the habits, diagnose the habits that exist within your company, and, more importantly, figure out what rewards those habits are providing. Why are people rivals for this post? Why are they working together in this particular situation but not in that situation?

You have to find routines, encourage methods inside that company that play to existing habits, rather than just coming in and ordering everyone what to do. If you can find one or two of the keystone habits, then you can change the culture of the organization.

JULIA KENNEDY: You break down a habit into three composite parts: cue, routine, reward. Can you explain how that works for an individual?

CHARLES DUHIGG: Sure, absolutely.

This is what we've learned in the last decade or so from neurology, is that every single habit has these three parts:

• There's the cue, which is like the trigger for the behavior to start; so, for instance, when you see a donut box on the counter at work, or when you wake up in the morning at a certain time of day.
  
  
• Then there's the routine, which is the behavior itself, what we think of as the habit.
  
  
• Then, finally, the reward. The reward is how your brain, your neurology, learns to store this particular pattern for future use.

Most people, when they think about habits, focus on the routine, the behavior. But what we've learned in the last decade is it's the cue and the reward that really influence and explain how habits happen. So if you want to create a habit or change a habit, that's where you have to focus, is on the cue and the reward.

JULIA KENNEDY: So it's almost Pavlovian?

CHARLES DUHIGG: A little bit. The difference being that when Pavlov was training dogs to slobber when they heard a bell, the traditional cue and response, the dogs didn't have the ability to intermediate that process, to decide not to slobber. It just happened automatically.

But one of the unique things about humans is that we actually have an ability to influence our habits by deciding at some point what we want the routine to be and by pairing it with certain cues and rewards. So, unlike the dogs, we get a choice.

JULIA KENNEDY: Keystone habits can have this enormous impact on how business culture is created. You used the example of Paul O'Neill at Alcoa. Can you tell us more of the story?

CHARLES DUHIGG: Absolutely, that's exactly right.

One of the most important insights of figuring out the habit loop—this cue, routine, and reward—is the recognition that it is more than just an individual pattern, that companies and organizations tend to operate in a very similar manner. There are a lot of economists who have written about this and a lot of CEOs who have taken those lessons into the field.

One of my favorites was Paul O'Neill, who was treasury secretary at one point. Before he was treasury secretary, he was the CEO of Alcoa, which was then the largest aluminum company in the world.

When he came into Alcoa, one of the first things that he did was—everyone expected him to say he was going to raise profits and focus on efficiency, but instead he said that he wanted to change worker safety habits. He wanted to get Alcoa to a place where there were zero accidents, which is a pretty audacious goal for a company that handles molten metal on a daily basis.

But what he recognized is that worker safety habits are keystone habits. They are these patterns that seem to have more influence, the ability to set off a chain reaction within an organization. He was exactly right. By focusing on worker safety habits, by taking advantage of the cues and rewards around this, he was able to transform Alcoa, and it ended up becoming the top performer in the Dow Jones Industrial Average within two years and becoming one of the safest companies on earth to work at.

JULIA KENNEDY: And you say one reason that he was able to push this through, after shocking investors with this move, saying, "I don't care about profits, I care about safety," or, "I'm not talking about profits, I'm talking about safety." But who's going to say, "We don't care about safety"?

CHARLES DUHIGG: That's exactly right. That's why worker safety for Alcoa was a keystone habit.

Everyone has keystone habits in their life. Companies have keystone habits. They differ from place to place and person to person. But one of the things that they always have in common is that it changes the concept of self; it changes the culture of an organization or a person.

So when Paul O'Neill said, "Alcoa is a place where no one will get injured, or we'll get as close to that as possible," it said to the company, "This is a place that values lives; it values you, the worker." It changed completely the relationship between management and workers.

The same thing happens in people's lives. We know that for a lot of people exercise is a keystone habit. If people start exercising habitually, they start using their credit cards less, they do their dishes earlier in the day.

The reason why is because what happens, we think subconsciously, is that when you start exercising habitually you start thinking of yourself as the type of person who exercises habitually. So when it comes time to pull out your credit card and buy something you don't need, part of your brain says: "Wait, I don't do that. I'm the kind of person who exercises habitually. I have lots of self-control." That's why it seems to set off this chain reaction.

JULIA KENNEDY: You said it became so ingrained in the Alcoa culture that people who worked for Alcoa would suddenly start calling out public electronics workers if they saw something unsafe going on in the street.

CHARLES DUHIGG: One of the guys, Jeff Shockey, told me this crazy story where he did this once and his colleague did this. His colleague was driving down the street and he saw some city workers doing digging in the street without a trench-box to protect them. So he stops the car. This is on a Saturday. He's got his kids in the backseat. He stops his car and he gets out and he gives this safety lecture to these city workers about how they should be using a trench-box and they're not using safety habits.

I said to Jeff, "That's crazy."

He said, "But that's what happens, is that once worker safety becomes a habit, you start being proactive on it. You start doing it without even thinking twice. That's why you get to a place where you automatically stop and tell other people who don't even work for you, whom you've never met, that they need to use better safety methods."

JULIA KENNEDY: Now, Alcoa owns its factories, right?

CHARLES DUHIGG: Right.

JULIA KENNEDY: So I'm wondering if you think that worker safety as a keystone habit can be implemented when your factories are owned by somebody else.

CHARLES DUHIGG: It's an interesting question. This ties into Apple. One of the things that we've written about regarding Apple is that they work with a company named Foxconn to manufacture all of their electronics. Foxconn is one of the largest electronics manufacturers in the world. It makes about 40 percent of all the gadgets that you touch every day.

It's an interesting question, because Foxconn is a separate company. They're not owned by Apple. But I think in the contemporary world a company like Apple is so powerful that they can go to Foxconn and they can say, "We demand that you change the culture. We've identified keystone habits."

But of course that only happens if Apple's habits itself lead to that decision. That's the interesting thing about habits, is that what you had for lunch today or what a company says to a supplier once in a contract, those isolated incidents have very little impact on the course of history. But what you eat every day or what a company says to its suppliers every single time they interface with them, the cumulative impact is huge there. That determines whether you are healthy or obese, or whether a supplier understands that to keep this business they need to keep the company happy by dealing with worker safety.

JULIA KENNEDY: As you mentioned, Foxconn touches 40 percent of the electronics we use. So they are dealing with a lot of different companies. So it's a dispersed impact on their behavior, right, among many different companies?

CHARLES DUHIGG: Right.

JULIA KENNEDY: Do you foresee something, or do your sources talk about something, that can happen among different companies to make an impact on Foxconn's behavior?

CHARLES DUHIGG: Absolutely. There has been a huge impact on Foxconn's behavior already. They have announced that they are essentially cutting hours and raising wages for every single Foxconn worker. They employ 1.2 million people in China alone. It's China's largest private employer.

But the question you ask is a really interesting one, which is: How does a company like Foxconn, or Apple for that matter, within an ecosystem change that ecosystem?

Apple has over 150 direct suppliers. Most of those suppliers send their product to Foxconn to get assembled. So when Foxconn says, "We are going to abide by this particular labor standard," and Apple says, "We won't work with anyone who doesn't match this labor standard," then, first of all, 150 companies change, right? But for those 150 companies to change, they also have to go to their suppliers and say, "You guys have to change too."

Once Apple has laid down this gauntlet, once Foxconn has changed, then all the other competitors essentially have to do the same thing because (a) they are competing for business and you don't want to be worse than the company Apple uses; but (b) they're competing for employees, and if everyone in China knows they can go to work for Foxconn and get paid more for fewer hours, then all the other companies have to keep up with that.

I think what's really important about this is that you can change industry-wide dynamics by targeting the leaders within that industry. Once they shift, we know from research everyone else has to shift to keep up.

JULIA KENNEDY: You mentioned the audit, that there has been an audit of Foxconn and that they have promised to up wages and reduce hours.

CHARLES DUHIGG: Right.

JULIA KENNEDY: They have said this in the past on a much smaller scale. There hasn't been nearly the attention that is on Foxconn right now.

CHARLES DUHIGG: Right.

JULIA KENNEDY: But I'm curious if you think that they'll stick to it this time, and what gives you confidence or less confidence around that?

CHARLES DUHIGG: I think they have to. What was interesting was in the past when Foxconn and Apple have made promises, the promises have sounded very large and haven't had a lot of specifics attached to them. This time Terry Gou, who's the head of Foxconn, made this very specific promise: No one inside a Foxconn factory will work more than, I believe it's 48 hours—48½ or 49 hours—per week, and they will not get paid any less. It's such an incredibly specific promise that it would be very, very hard for them to backpedal on it.

Now, there might be something at the periphery that they play with. They might start charging them more for their dorms so that offsets the raise that they're going to get.

But what was interesting is that Terry Gou could have just said, "We're going to go to 60 hours per week," which is what Apple's Code of Conduct requires. He went to the Chinese maximum, so he's actually obeying the Chinese law, which is almost never enforced, with this promise. So I don't think that they're going to be able to avoid it.

And on top of that, we're going to be watching. Not only us, but a number of other publications are going to be going into those factories.

I think one of the things that our coverage has shown is we are able to get inside the factory and to find out what's going on to such a degree that they can't hide what's actually occurring. And so we'll be writing about this for the next couple of years.

JULIA KENNEDY: In the book you give two cases, and these are of individuals, about justice. You talk about one guy who was a sleepwalker, and then you talk about a woman who had a gambling addiction and was coerced by casinos into gambling more and more.

CHARLES DUHIGG: Right.

JULIA KENNEDY: Was justice served in these cases?

CHARLES DUHIGG: The sleepwalker, who was in the UK, had this history of sleepwalking ever since he was a kid. Sometimes he would wake up in the morning and he would have cuts on his feet, he would have rocks in bed with him. He would go out every night and sleepwalk and was totally unconscious of it. Once he actually swam across a canal.

What people don't understand is that if you are a sleepwalker you can actually do these incredibly complicated things. You can drive cars, you can drive boats; there have been people who have operated heavy machinery while they are sleepwalking. But we know from scientific experiments that what's essentially happening is that the prefrontal cortex, where thought/cognition occurs, is completely dead to the world when you are asleep.

It's the interior of the brain, what are called automatic pattern generators, that are just plugging along. What they do is they just act by habit. They see some stimulus. While you're sleepwalking you can actually open your eyes and see. They'll see the car and they'll just do what you automatically do. They'll follow their habit in a car.

So this guy was asleep with his wife. He and his wife usually slept in separate bedrooms, but on this night they were traveling, they were in an RV, they're sleeping next to each other. While he's asleep, he sees this intruder enter their RV and start to attack his wife. So his habit takes over to defend his wife. He attacks the intruder back. Of course when he wakes up he realizes he has been strangling his wife rather than an intruder and he's killed her.

The woman who's a gambler—which seems like a completely different situation, right?—she was conscious the entire time she was gambling. She knew what she was doing. She was walking into the casinos.

But what we've actually learned is that some people—and we know this through brain studies—have this essentially automatic reaction to gambling cues, where even if they lose, if it's a near miss, they feel like they have won. They essentially start reacting habitually and just putting down bet after bet after bet, which is what she claimed happened. She says that this casino company took advantage of that, that they would send her enticements to get her to gamble more and more and more, and she lost about $1 million.

So they both go to court. The murderer and the gambler both say, "I did my crime"—in her case it was just debts that she couldn't pay; in his case murder—they say, "I did my crime automatically, habitually. I was not consciously participating." The murderer is set free. The gambler is held accountable for her debts.

I would submit that justice was actually served, because I think what happens is that once you know you have a habit, you have an obligation to try and fight it. Now, it's hard, right? There's lots of people who have habits that they struggle with. But we know from laboratory experiments—particularly in the last decade we have learned—that every single habit can be changed. There is no habit that is immovable to influence. It doesn't matter how old you are, how ingrained it is.

The gambler knew that she had this habit, and she did not try and change it. The sleepwalker never dreamed—"dreamed" is a bad word—but he never thought that he would kill someone. As a result, I don't think he bears the culpability that the gambler does. But there's also lots of other people who feel alternatively and think that the gambler was preyed upon by the casino.

JULIA KENNEDY: So if you take that conclusion that you just drew to, say, the private sector, would you say that then if the NGO community or the activist community or a team of reporters alerts a company that they have this bad habit, if an outsider alerts the company that it has a bad habit, then the responsibility lies with the company to fix it?

CHARLES DUHIGG: Absolutely. I think so. I think that's what accountability journalism always is. The first time we write a piece, if we found something out that literally no one inside the company even knew about, then okay, you can't really blame it on them. But once a company knows that something exists, they have to take action.

I think it's not just journalists who feel this way or NGOs. It's also shareholders. There are lots of situations where a CEO gets one pass—a mistake occurs, it wasn't his fault, he didn't know about it. But if it happens a second time, the question always is: Why didn't you change the system? It's your responsibility.

I think that's one of the best things about the democracy of capitalism, is that it allows that punishment to be levied by shareholders when companies do not act in the fact of obvious bad activity.

JULIA KENNEDY: We're lucky to have you. Thank you so much for coming on the podcast and talking with me.

CHARLES DUHIGG: Thank you. I really appreciate it.

JULIA KENNEDY: It's been a lot of fun.

Charles Duhigg is author of The Power of Habit. He's also an investigative reporter for The New York Times and covers the Foxconn factory in China.

Charles Duhigg takes his role as journalist very seriously, to hold corporations accountable for the practices of their suppliers overseas. Now we'll hear from a business leader who held his own company responsible and has started a coalition of international businesses to hold one another accountable.

Alan Hassenfeld is in the third generation of his family to head up the Vermont-based Hasbro Toys. It's the company that brings us Scrabble, GI Joe, and other big-name games and toys.

Alan Hassenfeld became CEO in 1989 and retired nearly 20 years later. Since then, he has focused on philanthropy and ethical supply chains, starting a coalition of businesses and nongovernmental organizations to establish a global toy industry code for factory safety and working conditions.

He started our conversation by telling me what it was like to grow up in a toy dynasty.

ALAN HASSENFELD: They never brought toys home.

JULIA KENNEDY: Oh, really?

ALAN HASSENFELD: Probably the only toy they would bring home would be Mr. Potato Head. Since the beginning, Mr. Potato Head and I have had a rivalry, since there is only four years' difference in our age. Potato Head believed that he should be CEO and chairman and not me.

JULIA KENNEDY: Oh, wow. You know, that's frustrating, to have someone nipping at your heels like that, like Mr. Potato Head.

Hasbro is a family business, and you took charge of Hasbro after the death of your brother. What was that transition like?

ALAN HASSENFELD: My brother's death was a very untimely death. The board worked very hard and long with me, whether I really was ready to step into the role of chairman and CEO, because I had spent a great deal of my career in the manufacturing side of the business, setting up all of our European businesses and setting up our supply chains in the Far East, but I had not spent that much time in the American marketplace and with Wall Street and things like that.

I was very fortunate. I had an incredibly good team around me, an incredibly wonderful board, and everyone sort of propped me up and made me look a little bit better than I was.

I missed not spending as much time in the Far East or not as much time crossing all the borders that I crossed on the international side, because maybe sometimes you're ahead of your time, like the pioneers going west. We were one of the first in India, we were one of the first in China, we were one of the first here and there, because what we had to realize was that at some point in time the world really was going to be global.

JULIA KENNEDY: With that background in manufacturing and global markets, when did you become passionate about the way workers are treated and factory conditions for Hasbro's supply chain?

ALAN HASSENFELD: First of all, I think Hasbro is unique in that, for many years, Hasbro had factories all over the world. They were part of our family. People working on the first shift, maybe they were getting up at 4 o'clock in the morning and maybe they were working until noon, and then the next shift came on. We always valued our people—not as workers, but almost as family members.

In the early days, I was child labor. I would be taken to the factory line when I was six years old, and I used to say, "When I run this business there won't be such long coffee breaks," and this and that.

It was evolutionary really, because our people were always so great. Why shouldn't you treat the workers in other places as you would want to be treated, no different than the golden rule?

But it was different. Once you are not in your own factories, you are sometimes at the mercy of the people that you are working with.

One of the things I personally am proudest about—we buy a great deal of product today from China. Seventy-five to 80 percent of what we buy in China, we buy from people that we have worked with for over 30 years.

One of the things I preach to my people, even today: Do not put your own value stream on other countries if you don't understand their culture, their history, and their religion. As Americans, we tend to preach to everybody, but we don't sometimes understand the context that we are living in. If you really want to systemically change, you must work insidethat culture and you must make change from the inside. Without the buy-in from the people, it doesn't last for long.

JULIA KENNEDY: When did you start working with others in the toy industry to set some standards for working conditions in supplier factories?

ALAN HASSENFELD: I guess maybe about 12 years ago. Normally all the articles about the toy industry are written maybe three weeks before Christmas.

My mother would pick up the phone and say, "My god, sweatshops in Santa's workshop, elves tied to injection-molding machines, debacle in South East Asia with toy manufacturers." My mother would say, "This isn't you, is it?"

I'd say, "No, Mom, it's really not us. We know better."

Then a group of us got together and we formed—there is already something called the International Council of Toy Industries, which would meet once a year. Then a group of us said, "Look"—we needed their permission—"why don't we create one global standard for our industry for the human rights for the factory workers?"

A group wrote the code and it was agreed upon, because we all wanted to have only work in good factories.

But Walmart, say, would audit, and maybe they'd want the fire extinguisher at seven feet, Mattel might want it at six-and-a-half feet, Hasbro might want it at six feet. So you'd see lines on the wall depending upon who was coming to audit. So we could save money and time for the factories if there was one overarching audit with one code.

So we put a board together. The board is made up of five what I call statesmen from the industry from around the world that are no longer involved in operating a business. Many other industries have done it, but on a localized basis.

People are competing. When you're trying to deal with a factory worker, you don't want to compete. You really don't want even to have to do this.

JULIA KENNEDY: Because, as you point out, a lot of these factories are producing products—I mean some folks might not know this—for several different buyers that have different standards. So it sounds like what you're saying is, in addition to understanding the culture of your supplier, you also have to coalesce with everyone else who is working with that supplier to have standards.

ALAN HASSENFELD: You have to coalesce with everyone to have a standard. But no parent and nobody wants to buy a toy that's made with blood, sweat, and tears.

It's not difficult to do it right. There is bribery. There is corruption. The bribery is in the audit system because a factory wants the seal.

But so much has changed. We work with many NGOs because we learn from the NGO community. And we must partner. Now, there are good NGOs and then there are other NGOs that, no matter what we do, it's not going to be good enough for them.

But one that criticizes us all the time is one that gave us the greatest idea that we implemented. Our code is, let's say, 10 points that the factory workers should know are part of their rights. In dummies [preliminary designs] we printed it in English. We're dealing in China. They said, "Why don't you get the workers to have on their ID cards the code in Chinese and in English? Why don't you set up a hotline?" We've done all of that. It's exciting because we do have a hotline for the workers to call.

Do we have a long way still to go? Yes. A lot of people talk. Talk is very cheap. There's a wonderful saying—I don't know where I got it—that I use in the toy industry: Problems are like ice cream cones. If you don't lick them quickly, they become very messy.

I like to explain to people: "Look, if there is an issue, don't lie. Let's face it, let's remediate, and let's move on."

Our biggest issue now is sometimes to get the retailers to contribute, because sometimes there's something called private label. In many cases, private label can be similar to the real product, but it's got to be made cheaper—let's say if I make a game and someone makes a copy of that game and they can make it cheaper because they're using bad factory standards or whatever.

We are working much harder. More and more people have bought in. It's very difficult. If the factories agreed and the brands—whether it was a Disney, whether it was a Mattel, whether it was a Hasbro—if they agreed but the retailer did not agree—one of my sayings, but I can't use it necessarily, is an Arab saying, where you want all the camels inside the tent because if you have one outside peeing in, it's very messy.

So once you have everybody within the tent—and now, all of a sudden, if you don't have a seal of compliance, Walmart won't buy from you, Carrefour won't buy from you. So what we have tried to do is to get everybody in.

Again, we know it's not perfect, but each day we get better. The most important thing is to know that we have really raised the bar.

JULIA KENNEDY: What's the process like for Hasbro when you're working with your suppliers to really make sure that you are understanding their cultural context and still bringing the values and culture of the company if it's a supplier that isn't wholly owned by Hasbro?

ALAN HASSENFELD: Again, having worked with many of these people for so long, it's much easier for Hasbro. Hasbro, because our greatest natural resource is our kids, whether it's Hasbro, whether it's Mattel, or whether it's Lego, the leaders in the industry are always the ones that people want—we become the deer in the headlights because we make news.

Most of the violations are going to be with many of the smaller people. Our job is to understand the violations and basically say: "Look, you can go into a remediation program. If you sign on to the remediation program, you can stay in the seal of compliance." To be a member of the Toy Association of America you have to basically sign the code.

JULIA KENNEDY: What can other industries learn from the toy industry? It does sound like you have been extremely effective, and maybe it is also because people are so concerned about what their children are playing with and the treatment of children in toy products. But how can other industries learn from this code that you've been able to establish?

ALAN HASSENFELD: I think every industry knows what's right and what's wrong. I mean the workers in textiles, the workers in electronics, they are people. Treat them well.

It's funny. The better you treat people, the more output you are going to end up getting. People are willing to work with you. The minute you abuse people, you have nothing but trouble.

JULIA KENNEDY: It's such a treat to have you here on Just Business. Thanks so much for joining me.

ALAN HASSENFELD: Julia, thanks, and thanks for smiling.

JULIA KENNEDY: My pleasure.

Alan Hassenfeld is the former chairman and CEO of Hasbro Toys. Now he serves on a variety of philanthropic committees and boards working to promote safe practices at factories around the globe.

That wraps up today's look at responsible supply chains. Come back next time for more thoughts on overseas practices, including those of Chinese companies in Africa.

I'm Julia Taylor Kennedy. Thanks to Terrence Hurley and Emil Chireno for their contributions to this week's podcast. Thanks to Tony Higgins and Bill Borman for this week's music.

And thanks to you, our listeners, for joining us. We are happy to hear from you. Please send questions and comments to jkennedy@cceia.org.