How Gap Inc. marries corporate responsibility with better business: A conversation with Dan Henkle, Senior Vice President, Social Responsibility

If you stop into one of Gap’s U.S. retail stores in coming weeks, chances are you will—quite literally—see red. In fact, you’ll see an entire line of red clothing, part of (Product) Red, a venture in which Gap and other companies are funneling a percentage of sales or profits from red products to The Global Fund to Fight AIDS, Tuberculosis and Malaria in Africa. “This isn’t charity,” Gap declares on its website. “It’s a new way of doing business.”

Charting new ways of doing business around the globe is a key part of Gap’s social responsibility program. Founded as a single outlet in San Francisco in 1969, the company now has 150,000 employees worldwide, with revenue last year of $16 billion. Gap Inc. operates four brands—Gap, Banana Republic, Old Navy and Forth & Towne—and more than 3,000 stores throughout the United States, Canada, the United Kingdom, France and Japan.

Most of the apparel sold in Gap stores, however, is made by some 2,000 independent factory suppliers in countries all around the world—including China, India, Southeast Asia, Africa, and Central and South America—where labor standards are frequently an issue. As a result, Gap says, a corporate priority is “improving conditions in garment factories and the communities in which they operate.”

Leading that effort is Dan Henkle, Gap’s Senior Vice President, Social Responsibility. A 41-year-old Wisconsin native, Henkle joined Gap in 1992 and served as Vice President for Human Resources for the Gap division prior to his current post. He holds a BS degree in accounting and general management from Purdue University and an MBA with an emphasis in organizational behavior from the Haas School of Business at the University of California, Berkeley.

Among other duties, Henkle oversees the Gap’s factory monitoring, community investment, environmental affairs and external engagement efforts. CRO Editor Michael Connor spoke with Henkle just a few weeks before the U.S. launch of (Product) Red.

Michael Connor: What is (Product) Red? Why is Gap participating?

Dan Henkle: (Product) Red is an economic initiative that is trying to deliver a sustainable flow of private-sector money to the Global Fund. Companies participating in (Product) Red are offering products, and then a portion of the revenues and profits and proceeds are going back into the Global Fund. We’re going to be releasing our (Product) Red products globally in mid-October. Fifty percent of the profits from those products will go to help to fight HIV/AIDS and other diseases in Africa.

This is a pretty major commitment by Gap. What does the company expect to get from it?

First, we think this is a good extension to some of the work we’ve already been doing as a company. We’ve been sourcing product out of Africa for nearly a decade. If you’re doing business in Africa, you can see the impact that diseases such as HIV/AIDS are having on people who are working and living there. As a responsible company, you need to be responding to that. The other aspect here, that is equally important to us, is this really provides economic development to Africa as well. Not only are 50 percent of the profits going back into Africa, but some of the products are actually being produced in Africa as well.

What does this get your shareholders? How is it good for the company?

It’s good for the company because the product itself is incredible product. Customers are going to see the product and buy it just because it’s awesome product to begin with. But, secondly, our customers are telling us they want their dollars to do more. We see this in all sorts of different things: feedback we’re getting from our employees, feedback we’re getting from customers. We’re seeing what’s happening in the marketplace in general. The idea of buying products that you love, but also having that product do more, we think is going to resonate with our customers. How do our shareholders win? We have product that people love, that people are buying and, hopefully, buying a lot of. We have every intention that this is going to be a sustainable venture for us that will be a good source of revenue for the company in the long term.

Do you have any research or hard data that indicate that a socially responsible company like Gap is any more popular with consumers?

One of the things we’ve been looking at is the increase in everything from organic products…organic cotton, organic food…Fair Trade products, the backlog of demand on hybrid vehicles. You really don’t have to go very far now to see all of the activity in the marketplace. I think customers are saying they want their dollars to go further. I spend a lot of time talking to college classes, and one of the things that’s coming through loud and clear is that the new generation is increasingly asking for this kind of a thing. They don’t want to just buy a product that’s on a shelf. They would like that product to be just a little more meaningful. We’re seeing this from all different dynamics. The introduction of (Product) Red has been amazing from an employee morale standpoint. Our employees love the fact that we’re doing something like this. Everyone wants to be involved in some way, shape or form. This is something that really does resonate, and it’s going to resonate with our customers as well.

And your expectation, with half of the profits going to the Global Fund, is that this would be millions of dollars going to that cause?

A lot of it is going to depend on how the product sells. Because this is a multi-year commitment, [and] we see this extending in a sustainable fashion for years, this really has the potential for being a very significant source of funding. And, of course, from the (Product) Red side, it’s not just Gap participating but, obviously, other major brands [American Express, Motorola, Converse, Giorgio Armani] as well. So when you start to pool those kinds of product sales together, it can be really meaningful.

One of the big issues you confront in your job is labor standards worldwide. You have some 2,000 factories around the world. How do you go about the process of monitoring for fair labor standards?

I have a team right now of 94 people located in about 22 countries throughout the world. One of the things we have is a very extensive factory monitoring program. We have a Code of Vendor Conduct that looks at everything from labor issues, wage issues, health and safety issues, environmental issues, and we have a team of dedicated monitors that are monitoring all of our apparel factories that we do business with. We have a pre-approval process, so if you want to do business with Gap Inc., my team is going to need to visit that factory, see how you are doing against our Code of Vendor Conduct, then correct your key issues going on in that factory before we’ll actually place production in that factory. Once we’ve done that, then we have an ongoing monitoring approach. We are committed to getting to all of our apparel company suppliers that we’re doing business with on a yearly basis.

Do you use independent monitors?

The bulk of the monitoring that’s going on today is actually our own Gap Inc. employees, but we interface with outside organizations in a pretty extensive way. We do extensive engagement work with the NGO [non-governmental organization] community, with trade unions, with others that are interested in improving working conditions. With 2,000 factories, you’re not going to be there every day. When you have people in the community who are concerned about these issues as well, they can make you aware of things that are happening in factories when you’re not there.

How important is it for Gap to collaborate with others? What are the challenges involved in doing that?

It’s time intensive. One of the challenges is there are a lot of groups, out there doing this work…there are the trade unions, the NGOs, multi-lateral institutions. Who should you be interacting with? And how do you interface with such a broad group of stakeholders? One of the things we’ve done that we think is really important is we’ve gotten involved in a variety of initiatives with some terrific organizations. One is based in New York, Social Accountability International, another is based in London, the Ethical Trading Initiative, and we’re involved in several others. We have found that by going to organizations like this, that really bring together a variety of stakeholders from various constituency groups, that’s really a very, very good effective way of engaging with a variety of stakeholders at the same time.

One of the problems, as I understand it, is that your monitors spot problems as they arise, but there may be a whole variety of conditions, and the question becomes, how do you correct those problems?

In some cases, the Gap is not the only buyer of some of the products… Yeah. A lot of people don’t understand that when Gap is placing production into a supplier, there may be four or five other buyers, other brands, placing production into those suppliers. So what happens when a company like Gap is saying one thing, [and] perhaps they’re hearing other things from other companies? We think it is critically important that suppliers throughout the world get more common standards from brands such as ours. So we’re involved in a variety of efforts right now to try to say, OK, a lot of companies have a Code of Vendor Conduct, how do we begin to send similar messages to supplier companies so that it’s not as confusing? Beyond that, how are you enforcing those commitments and those standards and how do you do that in a bit more common way? Another aspect is what I would call capacity building, and we also call supplier ownership: how do you develop suppliers over time so that they really are managing a lot of these issues themselves and they don’t have so many different groups coming in and checking up on them? We have suppliers we have been working with for years and years and years that really understand what we care about, what we’re looking for, that have developed systems that really help them stay in compliance over time. That’s really what we want to see. There has to be training that’s done across the board, supervisory training, training on a variety of health and safety issues and so forth. But there also has to be a commitment at the supplier level. This has to be something they buy into and they take ownership over.

I’ve seen you quoted as saying that one of the reasons these labor conditions are important to the Gap, is that if people are treated better with “dignity and respect”—your words—they’re less likely to leave the factory, and you can reduce turnover and improve quality.

There’s absolutely no question in my mind that it’s good business for the company. In fact, we actually rate factories based on the audits we do, so they have a social responsibility rating. But we also rate top suppliers on other factors: quality, on-time delivery, those types of factors. We’re finding that there’s a positive correlation. If you’re running a good factory from a social responsibility standpoint, typically you’re running a good factory on all other elements that are important to us as well. And that makes sense to me. If you’re a good manager and you’re running a good operation, you’re probably running a good operation on all fronts.

Gap’s 2003 social responsibility report—which you’ve called your “warts and all report”—won a lot of praise for its candor in disclosing substandard labor conditions at some of your supplier factories. What are the risks involved in that kind of disclosure?

I’m going to back up and tell you why it took us until 2003 to report. Part of this was because, as a company, we are reluctant to take an issue like social responsibility and make it sort of a PR exercise. We really believe, first and foremost, you have to invest in the foundational program and, then, you’re in a position to communicate about it. So the question we had is how do you communicate something that doesn’t feel like public relations, that feels like it’s real, that feels like it’s authentic, that feels like it’s honest. That was what we were trying to accomplish. And in order to be real, authentic and honest, you need to tell the story—you need to put it out there. One of the things I was particularly pleased about was the page in our 2003 report that talks about the violations that we see by region, and by code item and so forth. That was obviously a fairly big step for us to take. We were basically putting out data on over 2,000 factories throughout the world on every single code item that we look at. You have no idea how that’s going to be responded to. How are people going to look at that? If they don’t have any other data points, are they going to assume you’re not a good company? I was truly amazed by the response to the report. Very honestly, those of us who were involved didn’t think it was going to have the reaction that it had, because we felt we were putting things together, and putting things on the table, that were pretty widely reported, and had been really out there.

Who do you report to? Where does the social responsibility function fit in the overall management structure?

I report to a member of our executive leadership team [Lauri Shanahan, Executive Vice President and Chief Compliance Officer] who reports to the CEO. She has a variety of functions that report to her, including corporate governance, public policy [and] government affairs. My function sits outside of the brands and outside of the supply chain. Part of the reason for that is that we look at our social responsibility program as absolutely enabling the company’s business objectives, but there might be times when you see a situation where the business wants to approve that supplier but we just can’t because they’re just not meeting our code of conduct. It’s helpful to have a little bit of a check and balance, so that I’m not reporting into the brand, I’m not reporting into the supply chain, I’m sitting outside of the organization. But philosophically, incredibly important to me is that I have to be integrated with the business. They should view me as a partner, because that’s in fact what I think I am. Because I’m helping them to, basically, sort out factories they should be working with and factories they should not be working with—and that is good for the company overall. But it’s good for us to be separate.

Are there lessons in what you’ve learned for other industries?

In the footwear and apparel industry, you have a situation where a lot of companies have their own code of vendor conduct, they have their own systems, their own processes, everything. When I look at other industries, if you’re in a situation where you haven’t even developed a code of vendor conduct and where no one in your industry has developed a code of vendor conduct, you have a unique opportunity to come together and actually say, “How do we want to structure this in a way where we are sending similar messages, where we are having enforcement mechanisms that are consistent across the industry?” The electronics industry did just that, and I think that’s really smart. So if other industries are going to set off on this, why not start in that collaborative place instead of company by company by company. Second lesson is that you cannot do this work alone. If a company feels like it can tackle all of these really challenging issues by themselves, they need to do a little bit more research. I really believe collaboration is key, and part of that collaboration is, perhaps, collaboration with other brands, but we have found we get tremendous insight from other stakeholders. We get insight from the NGO community, from the trade union community, from multi-stakeholder initiatives—and oftentimes you’re getting input then from people who are experts in whatever issue that you happen to be grappling with. If you can get that best thinking to the table, surface that up, help that to inform your program, your program is going to be a lot more successful. So collaboration is key.

By Michael Connor. Published in the Fall 2006 Issue of CRO Magazine.