Avoiding a Human Trafficking Jam

How companies can address modern day slavery

Commentary by Molly Mahoney, Lead Sustainability Research Analyst, and Julie Fox Gorte, Ph.D., Senior Vice President, Sustainable Investing

A reputation, Benjamin Franklin once said, is like glass and china: it's easy to crack and never well mended. In the business world, a company's reputation is intimately tied to its brand, which is one of the key sources of long-term value.1

Brand, or corporate reputation, is a fundamentally asymmetric thing. A good brand takes years of diligent work to build, and yet can be lost in the blink of an eye. Corporate "goodness" is often greeted with skepticism whereas bad behavior is condemned much more readily.2 A recent survey by the Wall Street Journal disclosed that consumers of coffee and apparel were willing to pay only a small premium for ethically-produced products, but applied a much more serious discount to those produced unethically.3 The parable is simple: it pays to avoid reputational damage, and that is particularly so if the cost of avoidance is low. Bargain-priced insurance is a good deal.

So it may be a bit of a puzzle when we observe the small number of corporations that actually have policies or programs in place to avoid the potentially disastrous consequences to their brands of being involved in human trafficking. On behalf of the shareholders in the Pax World Women's Equity Fund, we propose to do something about it.

Human trafficking is defined by the United Nations as "the recruitment, transportation, transfer, harboring or receipt of persons, by means of the threat or use of force or other forms of coercion, of abduction, of fraud, of deception, of the abuse of power or of a position of vulnerability or of the giving or receiving of payments or benefits to achieve the consent of a person having control over another person, for the purpose of exploitation."4 Estimates suggest that there are 12.3 million people trapped in forced or bonded labor, forced child labor and sexual servitude at any given time and that 80% of people trafficked between countries are women.5 According to the 2004 U.S. Department of State's Trafficking in Persons Report, human trafficking generates an estimated 9.5 billion USD annually and is the world's third largest criminal enterprise,6 although other estimates suggest that it may be as high as U.S. $32 billion.7

Human trafficking is engaged in for many reasons, but almost always in the shadows; traffickers, like cockroaches, avoid the light. Trafficking for the sex trade, for other forms of slave or forced labor, or for any other reason is deeply repugnant—so repugnant, in fact, that many in the corporate world may prefer to pretend that it doesn't exist rather than take the fairly simple step adopting a policy that forbids it. Avoidance is a risky strategy, however, something like using one's current good health as an excuse to postpone obtaining health insurance. When something goes wrong, it may be too late to implement Plan B.

As investors, we are deeply aware of the implications of the unpleasant surprise. Once a company's name appears in an unflattering headline, if the market judges the transgression material, it's too late to bail out of the stock. There's no reason why companies should bear this risk, however, when there are relatively simple means to insure against it, and this is in fact the case with human trafficking. By undertaking modest measures, we believe companies can obtain some measure of risk against a reputational disaster. Although the risk of something happening may seem small, so was the risk of a magnitude 9.0 earthquake causing a tsunami in Indonesia. So was the risk that Marriott Corporation would be the subject of a news article alleging that its employees or assets were used in human trafficking. The risks may be small, but the impact can be huge.

Human trafficking is an ugly, deplorable phenomenon that probably sounds alien to us and that most of us probably don't associate with corporations. But even a cursory survey of news stories turns up many examples of companies we are familiar with having been linked to and perhaps damaged by allegations of human trafficking:

- In the late 1990s, receptionists at the San José Marriot8, 9 hotel in Costa Rica were discovered to be participating in a child sex tourism network that included "pimping" minors. In 2006, Marriot agreed to develop a policy and programs that would address human trafficking throughout its operations as a way to prevent future involvement.

- Signal International8, 10, a major marine construction company and subcontractor to Northrup Grumman8, 10, is alleged to have used trafficked workers from India to perform dangerous welding and pipe-fitting jobs in Mississippi and Louisiana. According to allegations made by the workers, the company kept the workers in substandard housing, charged for food and housing, and threatened deportation for dissidents. The workers were unable to leave, bonded under a ten-month H-2B visa. In March 2008, the workers filed an anti-racketeering lawsuit in federal court against the company.

- Throughout the 1990s, several U.S. retailers, including The Gap8, 11, Target (1.2% of Pax World Women's Equity Fund*), J.C. Penney8, 11, and Nordstrom11 (0.6% of Pax World Women's Equity Fund*), were alleged to be sourcing products from facilities in Saipan that utilized trafficked workers who were treated like slaves. A group of human rights workers joined together to file a lawsuit against the companies and in 2004 secured a $20 million settlement against all but one of the companies.

We believe that the best way to get out in front of this risk is to address it head on through policies, programs, and accountability. In an effort to limit the Pax World Women's Equity Fund's exposure to trafficking, we have contacted those companies that we believe are most at risk of involvement in human trafficking—those in the energy and industrial sectors with operations in high-risk countries—and have urged them to adopt a policy addressing the issue. The policy we are asking these companies to adopt clearly denounces employee involvement in human trafficking and encourages people to report suspected instances of trafficking without fear of retribution. These policies should be read and signed by every employee and hopefully by vendors and contractors as well.

We're not sure how our effort to raise awareness about human trafficking will be received, as trafficking is an issue that people don't often want to talk about. Our hope, though, is that our sustainability research and analysis helps us identify companies that can see past the here-and-now and take steps to mitigate real, uncomfortable risks before it's too late. Every time that a company takes up this issue with its employees, the shareholders of the Pax World Women's Equity Fund can take some satisfaction in knowing that we are doing our part, as investors, to mitigate risk to our shareholders, and as human beings, to protect the rights of those who cannot protect themselves.

Molly Mahoney is the Lead Sustainability Research Analyst at Pax World Management Corp. As such, she researches and evaluates the environmental, social and governance (ESG) performance of companies for inclusion in Pax World's portfolio. She is also involved with promoting sustainable business practices at portfolio companies, overseeing Pax World's proxy voting, and coordinating the shareholder advocacy efforts of the Pax World's Women's Equity Fund. Molly is a member of the New Hampshire Businesses for Social Responsibility Board of Directors.

Julie Fox Gorte is the Senior Vice President for Sustainable Investing at Pax World Management Corp. She oversees environmental, social, and governance-related research on prospective and current investments as well as Pax's shareholder advocacy and work on public policy advocacy. Dr. Gorte serves on the boards of Ceres, the Center for a New American Dream, and the Pinchot Institute. She has served as the co-chair of the Asset Management Working Group of the United Nations Environment Programme Finance Initiatives, and is a member of the Forest Economics and Policy Program's advisory panel.

*Portfolio holdings are as of 6/30/08 and are subject to change. The Gap and J.C. Penney are currently not held by any Pax World Fund.

1Sheila M. J. Bonini, Lenny T. Mendonca, and Jeremy M. Oppenheim, "When Social Issues Become Strategic," The McKinsey Quarterly, No. 2. 2006, p. 24.
2For a fascinating examination of why this might be so, we refer interested readers to Roger L. Martin, "The Virtue Matrix: Calculating the Return on Corporate Responsibility," Harvard Business Review, March 2002.
3Remi Trudel and June Cotte, "Corporate Reputation: Does Being Ethical Pay?" The Wall Street Journal, May 12, 2008, p. R1.
4United Nations Economic and Social Commission for Asia and the Pacific
5United States Department of State (2007), Victims of Trafficking and Violence Protection Act 2000: Trafficking in Persons Report, Washington, United States Department of State.
6United States Department of State (2004), Victims of Trafficking and Violence Protection Act 2000: Trafficking in Persons Report, Washington, United States Department of State.
7Sally Bolton , "Mini-Series Explores the Inhumanity of Human Trafficking." http://www.un.org/Pubs/chronicle/2005/webArticles/110905_Trafficking.html
8Marriot, Signal International, Northrup Grumman, The Gap, and J.C. Penney are not currently held by the Funds.
9Source: http://www.socialfunds.com/news/article.cgi/2179.html
10Source: http://timesofindia.indiatimes.com/Trafficking_racket_Indian_workers_file_case_against_US_
11Source: http://www.cleanclothes.org/legal/04-01-08.htm