Over the past decade, our approach to addressing sound working conditions in contract factories has evolved from one focused on monitoring compliance with legal and Nike requirements - and requiring action if shortcomings are found - to one supporting the capacity of contract factories to manage operations and meet requirements as a matter of course.
As we make this transition, we continue to monitor both management/labor items and environmental, safety and health (ESH) items (details below) at our focus factories. In addition to management and ESH audit visits, we make other factory compliance visits and meet on remediation and other issues. These visits might be sparked by a worker complaint, follow-up on an FLA audit or simply a Nike person being in the area of the factory. On average, we visit factories in our supply chain 1.77 times per year though the exact number of visits per individual factory depends on a factory's rating, its strategic importance and its performance history.
Our intention is that all Nike-contracted focus factories receive comprehensive management audits every one to three years depending on their compliance record. Factories earn letter grades based on the lowest result observed, reflecting all relevant information about a factory's compliance performance and progress achieved in resolving items identified for remediation, including audit results. If a factory receives a C or D rating, we work with them to improve their performance and rating through specific steps outlined in a master action plan we develop together. If they fail to make progress against that plan, we elevate these concerns as part of reassessing our business relationship.
Factories contracted to manufacture product for Nike receive letter-grade ratings on their management and environmental, health and safety practices. Factories rated C or D on any element develop an action plan and are assessed against their progress in implementing it. Most factories contracted to Nike received B ratings in FY07-09. Factories receiving an E rating had insufficient information to rate the factory.
In addition to periodic management audits, Nike conducts deeper studies called Management Audit Verifications (MAV), which are both an audit and verification built into one tool. MAV covers the full worker experience, delving deep into four core areas: hours of work, wages and benefits, labor relations and grievance systems. We developed the tool to help us better understand and address both root causes and impact analysis of areas of noncompliance in labor management. Following visits, Nike and contract factories create action plans to remediate noncompliance issues according to local law and Nike's Code Leadership Standards.
In FY07 we added the MAV tool to the various monitoring approaches and replaced some management audits. In that year we applied existing and revised tools and the total number of audits conducted was lower as we made the transition. In FY08, Nike conducted 82 MAV audits in 80 factories, with the increase in audits corresponding to an increase in manufacturing for the Olympic Games. In FY09 the number of MAV audits was 33. The majority of audits were conducted in North Asia and in apparel factories, reflecting the substantial number of apparel factories in the supply chain.
The MAV audits themselves reflect the highest level, most in-depth analyses we conduct with factories, executed based on issues identified. The outputs of MAV audits are identification of specific compliance issues and a qualitative analysis of root causes of compliance issues identified. A finding of noncompliance with Nike's Code Leadership Standards or local law requires development of an action plan and subsequent reviews to monitor progress against the plan.
These monitoring efforts are backed by ongoing interaction with factories, including capacity building visits, remediation work and other activities. It is worth noting that our data only reflects the activity of our compliance team and may understate the level of engagement we have with contract factories. For example, we have staff in many factories and other business functions are frequently on-site as well. These businesspeople work with factories and the dedicated compliance team to resolve issues.
Nike conducted 33 MAV audits in FY09. Audits cover the full worker experience, delving deep into four core areas: hours of work, wages and benefits, labor relations and grievance systems. Nike has made this tool available for download.
A finding of noncompliance with Nike's Code Leadership Standards or local law requires development of an action plan and subsequent reviews to monitor progress against the plan.
Countries with the highest number of noncompliance issues arising were China, Indonesia, Malaysia and Brazil in FY07; Malaysia, China, Indonesia and Turkey in FY08 and Indonesia, Turkey and Moldova in FY09. Overall, the top issues identified in MAV Audits were lack of systems, lack of knowledge and lack of commitment, with lack of systems surpassing lack of knowledge for the top spot.
Overall, the top issues identified in management audits of Nike-contracted factories were lack of systems, lack of knowledge and lack of commitment, with lack of systems around empowerment of compliance and HR staff the most often-cited issue in FY08.
We assess environment, safety and health management and compliance program performance to provide protection for workers, the surrounding community and the environment at contracted suppliers. These assessments are conducted on site by Nike-certified compliance teams that review all available information including the contract manufacturer's support of the 38 Nike Code Leadership Standards, as well as the local regulations and/or national laws.
In FY09, we conducted 267 reviews. Eight percent - 21 reviews - included in-depth audits. The majority were conducted in North Asia at apparel factories.
Nike implemented a new Environment, Safety and Health auditing methodology in FY07, conducting 48 audits in FY07, 302 in FY08, and 267 in FY09.
In FY05/06, we also used a Safety Health Attitude, People and Environment (SHAPE) audit, which we transitioned in FY07 to a factory self-evaluation to focus on finding ways to address areas of need rather than a numeric score.
Our audit protocol focuses on the areas of greatest risk to workers and the environment, assessing both relevance and overall performance on the most critical environment, safety and health issues.
Audits show that the top environment, safety and health issues within contract factories generally reflect those areas where there is a lack of local laws or regulations. In some cases, Nike's Code Leadership Standards introduce ESH management standards to contract factories where regulation or practice have been absent, thus improving the capacity of factories to manage these issues effectively. Three such issues are managing confined space with a task permit required by Nike that assures basic working conditions and established procedures to provide protection from hazards; controlling hazardous energy, such as is found in machines or equipment, where we require control procedures, employee training and periodic inspections; and incorporating contractor safety into factories' assessments and responsibility.
The lowest-scoring environmental, safety and health issues across all contract factories in FY07 included hazardous materials, control of hazardous energy and fall protection. In FY08 the top three were confined spaces, control of hazardous energy and hazardous materials. FY09 top issues were hazardous materials, hazardous waste and machine guarding. Some changes in the top areas identified from FY07 to FY09 reflect concentrated efforts by Nike with contract factories to address recurring issues, including hazardous materials and occupational exposure limits.
FY09 results show a significant improvement in the management of the chemical management issues. Chemical Management, after two straight years as the number-one noncompliance issue, has dropped to number five. Factories are spending more resources to communicate the hazards of chemicals to their employees. Additionally, they're educating these employees on how to best protect themselves from the hazards associated those chemicals. Among the successes, there is always room for improvement as is the case with wastewater noncompliance issues, which crept back onto the top-10 list in FY09 after falling off in FY08. Although factories generally are improving year after year, they must be vigilant in establishing sustainable systems to lose momentum in identifying and managing their risks. Many factories were audited for the first time in FY09, one reason for the reduction in performance in fire safety, emergency action, drinking water, sanitation and occupational health management. For many of these factories, this audit was the first customer audit of their ESH performance.
Chart represents the aggregate performance of all factories receiving a rating analysis over three years and identifies areas of capacity building opportunities and directs us in our capacity building endeavors.