Include financial audits in supplier code of conduct?

Should brands now include regular financial audits of their suppliers? The answer should be yes if there is any learning from Nike's recent experience in Honduras.

Under pressure, Nike had to agree to pay $1.54 million after two of its suppliers in Honduras closed factories without paying severance compensation to workers.

A New York Times report says that "Nike agreed to the payment after several universities and a nationwide group, United Students Against Sweatshops, pressed it to pay some $2 million in severance that the two subcontractors had failed to pay."

The report says that the "the University of Wisconsin, Madison terminated its licensing agreement with Nike over the Honduran dispute, and Cornell warned that it would do the same unless Nike resolved the matter."

Nike however explains that the payment is for a "worker relief fund" and not for severance. But the point is that campaigners for the first time have succeeded in extracting a payment from a brand after a supplier has failed to pay to workers. This may the beginning of a new trend, no matter how unfair it may seem to some.

In recent years, incidents of sudden factory closures have significantly increased in the garment industry in what are called "shut and run" cases. In many cases, the factories were owned by foreign vendors who fled the country overnight leaving behind sewing machines in the closed factory. In most cases, workers are not paid even the legal severance.

So far brands have audited and monitored working conditions in their supplier factories. Now it may make sense that brands also evaluate the financial conditions of their suppliers to prevent such incidents. Brands may consider requiring their suppliers to maintain certain fund, enough to cover severance pay, in a separate account at all times. Or buy an appropriate insurance cover. This however will increase the cost of doing business and suppliers will not like it.

How else can they protect the rights of workers in the event a supplier shuts shop all of a sudden without any severance pay? Ideas welcome.