Performance

We believe we have made strides in promoting responsible working conditions throughout our supply chain and among our licensees and their manufacturers in the years since the inception of our International Labor Standards program. For example, we have conducted approximately 60,000 assessments of factories since 1996 and forged productive relationships with some of our licensees to help them develop social compliance programs. These examples are a result of Disney's commitment of labor and financial resources toward a program we believe is vital for our brand and our commitment to socially responsible corporate policies and practices.

While our ILS team has consistently acted to address labor issues as they have been discovered in factories working on our behalf, we know there is more to be done to create systemic, lasting improvements. We are committed to continuing the evolution of our program to meet these ongoing challenges. Below is a collection of ILS indicators for 2008.

2008 Results

Factory Assessment Coverage

Assessment coverage indicates the percentage of factories we or our business partners are able to visit for the purposes of conducting a social compliance assessment. With approximately 23,000 factories active in the course of a single year, some for short periods of time, it is virtually impossible to assess every facility. Accordingly, our ILS program concentrates its resources in countries that we designate as high risk, which we describe under the "Targeted Assessments� discussion. Nonetheless, increasing assessment coverage is a critical goal we are currently evaluating.

The data below reflects on-site factory assessments conducted by Disney internal social compliance monitors and by the external monitoring firms that we retain directly, as well as assessments conducted by or contracted for by our licensees and vendors. During fiscal year 2008, approximately 3,500 factories were assessed by Disney or our licensees and vendors. These factory assessments add up to approximately 4,400 separate assessments.

To improve these factory assessment coverage ratios, we will begin implementing a requirement in 2009 for our licensees and vendors to submit factory assessment reports for their factory base prior to the start of production.

Findings of Compliance Assessments

The following data in Charts 29 and 30 reflect the percentage of assessments in our fiscal year 2008 in which we found noncompliance with elements of our Code of Conduct. As described earlier in this report, we attempt to target our factory assessments to areas we believe may be higher risk, or in other words, more likely to have a violation. Therefore, the data we are reporting for incidence are not representative of all factories related to Disney's chain of suppliers.

In aggregate, we have found that factories generally improve after the initial assessment, and it does appear that the act of monitoring and the identification of issues help facilitate some remediation. However, the degree of initial noncompliance, and the progress made after the first assessment, still fall short of our expectations.

We also categorize the data by priority (high, medium, low). We use these designations to prioritize our remediation strategy. Each violation identified during an assessment is expected to be corrected. High priority categories � generally those consistent with ILO core conventions � are deemed severe and need to be corrected immediately. Medium priority violations may require changes in payroll systems or other internal mechanisms which may take time to correct. Low-priority violations are important, but other issues should be prioritized first. Specific noncompliance findings within the categories of Health & Safety and Monitoring and Compliance are categorized as high, medium or low depending upon the particular issue.

Roll over to see initial and follow-up assessments

We have also broken down the findings from our compliance assessments into regions (see Chart 30) to provide additional detail about the results of the factory assessment program. The table does not include the findings of compliance assessments for Australia, New Zealand, Japan, and Africa as the low number of factory assessments in these countries resulted in an insignificant data sample. The table does not include the findings of follow-up assessments for Europe and USA & Canada, as the low number of assessments resulted in an insignificant data sample. The data reveals that compliance violations exist in every region but that there are some with a higher degree of non-compliance.

Roll over to see non-compliance by region

Ongoing Challenges and Opportunities

While we have made progress in implementing our ILS program, we face several ongoing challenges. The following represents possible approaches to these issues.

Size and scope of operations: Given the very large number of Disney licensees and vendors, the wide geographic spread of their factories and the diverse categories in which Disney-branded products are manufactured, we recognize the limits on our ability to be an expert in any one area as it relates to labor standards. Accordingly, we work with a wide range of organizations � other companies, nongovernmental organizations, monitoring firms, governments, industry and multi-stakeholder initiatives - to promote collaboration and convergence of standards and approaches. We'll focus increasingly on helping our licensees and vendors understand our expectations, and especially work to identify resources that already exist or can be developed to promote their success.
Limited influence: It is not unusual for Disney-branded product to be only a small portion of an individual factory's total annual production. The result can be that our company does not always, at a factory level, have meaningful influence to improve labor conditions. And given that we are sometimes not the entity issuing the purchase order to the factory, the factories may not have a direct relationship with us. Despite this, we work with our licensees and vendors to embed labor standards requirements into their contracts and help them create labor standards programs where they can exert their more direct influence. We also increasingly work with other companies to promote improvements in factories we have in common.
Inconsistent or absent industry standards: We are very often one brand or buyer among many in a factory. While our Code of Conduct and implementing practices are not on the surface substantially different from many others, there are variations in how we and others assess and evaluate compliance. Where local country law is silent on a particular topic, factory managers may have different understandings of what constitutes compliance. In addition, there is no universal approach to how a social compliance assessment should be undertaken. How many workers are interviewed? How many months of payroll records should be reviewed? What is a zero-tolerance issue? To address such issues, we have participated in an initiative to create standards for social compliance monitors, worked with other brands and buyers to create common approaches to shared factories and supported efforts, such as Better Factories Cambodia, where there is a single set of standards and monitoring approaches. In addition, we also accept the factory assessment output of many other programs that are consistent with our own Code of Conduct, thereby reducing confusion and duplicate monitoring activity. And as described above in the Collaboration section, we'll continue to work with government agencies and other parties to encourage the movement toward common standards.
Ineffective government enforcement: Many countries have sufficient labor laws but lack the resources or don't prioritize the resources they have to assess compliance and enforce labor laws. As such, we increasingly work with government agencies to share information, seek clarification on labor law application and support the strengthening of labor law enforcement abilities.
Noncompliance: Unfortunately, sustained compliance with local labor laws and our Code of Conduct remains a difficult goal for many of the factories making products for The Walt Disney Company. We are therefore exploring ways in which we and our licensees and vendors can encourage factories to demonstrate continuous improvement toward full compliance rather than full but unsustained compliance by an arbitrary deadline. We'll be reviewing our compliance policies going forward and redesigning those that inadvertently promote a �pass the audit" mentality rather than encouraging factories to evaluate and address root causes of noncompliance.

What We Are Doing About It

Our goal is to have a supply chain that mirrors Disney's own desire to operate as a responsible business. We have learned a tremendous amount since 1996, when we launched our International Labor Standards program, and have put forth a concerted effort to monitor factories, enforce expectations for compliance and work collaboratively with our licensees and vendors. We have also expanded our engagement with external stakeholders. However, this still has not resulted in a supply chain that meets our expectations.

As a result, we have committed additional resources to revising and updating the ILS program to meet the challenges of our global supply chain. In 2008, Disney's ILS program was reorganized to make it formally part of the Corporate Responsibility group, and we commenced a strategic review of how our people, processes and technology can better support our ambitions to improve factory labor standards. We look forward to sharing the results of this work in our next corporate responsibility report. For now, we can share a few central themes we're focused on.

Greater Supply Chain Ownership
To improve the social performance of our supply chain we will encourage our licensees and vendors to assume greater ownership of their monitoring and remediation work with the factories they select. This is a sizable task given that we had approximately 8,000 licensees and vendors over the course of 2008, but we believe that shared accountability and collaborative enforcement will promote improvements at the factory level. This will also allow us to shift some of our resources from factory assessment work to identifying root causes of noncompliance and working to build systemic solutions that can promote improvements. We believe that one of the ways we can utilize our size and brand is to support industry-level and multi-stakeholder approaches to labor standards issues. So we will shift more effort to these approaches relative to conducting factory assessments.

Stakeholder Engagement and Collaboration
We can best achieve our ILS goals through policies that focus on reduction of duplicative efforts, on collaborative efforts that result in positive outcomes, and a willingness to be transparent about our challenges and key successes. Going forward we expect to strengthen our efforts with industry associations, multi-stakeholder initiatives, governments, NGOs and other brands to identify and promote sustainable solutions to workplace improvement. We will also work with stakeholders to create common, consistent and understandable standards for this field of work.