updated 8/15/2007 7:07:04 PM ET 2007-08-15T23:07:04

Wal-Mart Stores Inc. found a decrease in the worst types of labor violations at foreign factories last year during inspections of nearly 8,900 plants where it buys clothes, toys, shoes and other products.

In an annual report released Wednesday, the world’s largest retailer said its inspection program found a smaller percentage of factories had severe violations of safety, labor and environmental standards.

It said challenges remain, including how to collaborate with other big companies and local governments in other countries, to make lasting improvements for workers.

Religious investors who have lobbied Wal-Mart for over a decade to improve foreign factory conditions said the report was more detailed than in past years but needs to disclose more about actual working conditions as well as the company’s goals for improvements.

“Our fund believes that Wal-Mart based on its size and scale has an important leadership role to play in establishing high standards for ethical sourcing,” the United Methodist Church’s General Board of Pension and Health Benefits said in a statement. The board holds 1.48 million Wal-Mart shares, a spokeswoman said.

Wal-Mart’s executive in charge of the inspection program, Rajan Kamalanathan, said Wal-Mart will have to collaborate with other companies that buy from foreign factories as well as with governments and activist groups to make permanent improvements.

“We believe there is lots more to be done,” Kamalanathan, vice president of ethical standards, told The Associated Press in an interview.

“We also recognize that we alone just can’t solve these complex issues we face out there and look forward to working with other brands and retailers to improve conditions in the factories that we all source from,” he said.

Wal-Mart is starting to consider how to do that, including talking with the United Nation’s International Labour Organization and a trade group called Business for Social Responsibility.

Union-backed group Wal-Mart Watch said the company’s 200-employee program staff is inadequate to improve conditions in thousands of foreign factories and that studies show factory managers will coach or coerce workers into lying to auditors.

Wal-Mart Watch spokesman Nu Wexler also noted that Wal-Mart had reduced a target of conducting 30 percent of inspections unannounced. Wal-Mart’s report said 26 percent were surprise audits last year, up from 20 percent the year before and just 8 percent in 2004.

Wal-Mart said in the report it had performed more than 25 percent surprise audits in some regions last year and found that the higher level brought added difficulties without added benefits.

What Wal-Mart calls “higher risk” violations includes failure to pay overtime, and were found in 40 percent of inspections in 2006. That is down from 52 percent the year before.

The rate for moderate violations, such as failing to document worker pay, rose to 52 percent from 37 percent in 2005.

About 5 percent of the inspected factories had only minor or no violations, down from 10 percent in 2005.

The percentage of factories barred permanently from selling to Wal-Mart for egregious violations, such as using prison labor or child workers, remained stable at 0.2 percent.

Wal-Mart’s Kamalanathan said the drop of the most severe violations reflected Wal-Mart’s stepped-up efforts to educate factory managers rather than just punish them by withdrawing orders.

“Orange rates have improved, which is a good sign,” Kamalanathan said. Orange is the color code Wal-Mart uses for high-risk violations.

“On the other side, we recognize that it is not significant enough of a change to talk about making a huge impact on the supplier factories,” Kamalanathan said.

The largest U.S. coalition of religious investors said Wal-Mart’s report showed progress but much remains to be done.

“It is beginning to help,” said the Rev. David Schilling, director of the global corporate accountability program of the Interfaith Center on Corporate Responsibility.

Schilling said Wal-Mart’s 2006 report acknowledges that factory inspections by big buyers are not enough to force lasting improvements for workers in mainly developing countries.

“Wal-Mart is recognizing this now and talking about the need to go beyond monitoring. What remains to be seen is what they will do,” Schilling said.

Wal-Mart does not own factories but instead buys from others who do.

Wal-Mart says it uses the inspections to encourage factory owners to improve conditions. If violations are found, inspectors give a list to the owners and return for a re-audit. Repeated violations, as well as some grave problems such as physical abuse, can lead to being banned from selling to Wal-Mart.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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