WHAT IS ACOMPANY’S
ROLE IN
SOCIETY?

GAP INC.
2005-2006
SOCIALRESPONSIBILITYREPORT

CAN
BUSINESSANDHUMAN RIGHTSGO HAND IN
HAND?

CAN
BUSINESSHAVE APOSITIVE
IMPACT ON
THE PLANET?

3

WHY SHOULD
COMPANIES CONSIDERHUMAN RIGHTS AND
THE ENVIRONMENT?

“I was elected to the first full-time Shop
Stewards committee, which formed thebasis of the present Industrial Relations
Committee. Although I believe there isroom for improvement on the pay side,
I have generally been satisfied with myprogress. The garment factories are thelargest employers and most workers are
women. We become very scared when
workers are temporarily laid off becauseof order shortages. Our concern is what
will happen to these women and theirfamilies if employment continues to beinterrupted and keeps going down. Mostof us are hard working and have improved
our skills in textile manufacturing. We hope
Gap continues to improve our lives throughplacement of more orders and encourages
other buyers to do the same.”
Marianna Mafike
Precious Garments factory worker,
LECAWU trade union member,and breadwinner for three children in Lesotho“Companies have made our world a global
village. Now they must help keep it livable.
Because if it can’t be made to work for all,in the end it will work for none.”
John Ruggie
Special Representative of the
UN Secretary General on
Business and Human Rights“Business has the potential to make adifference in its spheres of influence.
Its future success depends on making
responsible corporate decisions which
positively impact the creation of a moresustainable world.”
Mahesh Amalean
Chairman, MAS Holdings(manufacturer of intimates for GapBody)

“Acting in an ethical way is not only theright thing to do, but it also unlocks new
ways for us to do business better. Asa multinational corporation with strong
iconic brands, we have the potential torun a thriving business and have a lasting
positive impact on people around theworld and the environment.”
Dan Henkle
Senior Vice President,
Social Responsibility, Gap Inc.

“Climate change is a key business issue
that will affect all sectors of the economy,
including apparel companies such as
Gap Inc. In addition to evaluating business interruption and other risks thatclimate change could have, Gap should
consider shaping the public debate andinfluencing their customers on the needto tackle this pressing issue.”Andrea Moffat
Director of Corporate Programs,
Ceres“Human rights are the foundation of a justsociety and essential to sustainable business.
Although governments hold primary responsibility for ensuring rights, the Universal Declaration
charges “every individual and every organ ofsociety” with upholding them. Corporations,
often financially stronger than governments
today, directly impact some of the most fundamental human rights, especially freedom of
association and collective bargaining. Theserights enable workers to seek and shape adecent living for themselves and their families.”
Judy Gearhart
Program Director,
Social Accountability International

WE BELIEVE WE SHOULD GO BEYOND T
PRACTICES AND EMBRACE OUR RESPOWE BELIEVE THIS BRINGS A SUSTAINED,OUR SHAREHOLDERS, OUR EMPLOYEES,HE BASICS OF ETHICAL BUSINESSNSIBILITY TO PEOPLE AND THE PLANET.
COLLECTIVE VALUE TOOUR CUSTOMERS, AND SOCIETY.

FROM ROBERT FISHERCHAIRMAN OF THE BOARD,
INTERIM PRESIDENT AND CHIEF
EXECUTIVE OFFICER, GAP INC.

In my nearly three decades with Gap Inc. I’ve
seen many challenges and accomplishments
in how our company and our industry addresssocial responsibility issues.
And while I am encouraged by the progress
we’re making, we all recognize there is much
more work to be done.
At Gap Inc., we remain committed to delivering value to shareholders while conducting
business in a way that advances the rights ofgarment workers around the world, lessens our
impact on the environment, and provides a highquality of life for employees and those people
impacted by our business.
Why?
Simply put: it’s good business.
Our social responsibility program is critical forboth our reputation and commercial success.
It inspires our employees and supports retention and recruiting efforts. It mitigates risk
and strengthens our brands. It promotes
innovation and creativity as we find ways to
use resources more wisely. It motivates ourcustomers in today’s socially conscious
marketplace. And it helps minimize disruption
in our supply chain, which means we candevelop and deliver merchandise in a more
efficient and less costly manner.
In fact, we’ve noted an encouraging trend
which shows factories that run safe operations
and treat their workers well are delivering
higher-quality product on budget and on time.

8

The benefits of our social responsibility programs remain true even in difficult years. In
fiscal 2006, Gap and Old Navy faced challenges
as customers did not respond well to ourmerchandise. As a result, merchandise margins
suffered and net earnings came in at $778 million, compared with $1.1 billion in fiscal 2005.
But our brands still have tremendous potential,
and we’ve already started taking the decisive
actions necessary to stabilize and grow thebusiness going forward.
Our recent financial results have not hindered
our commitment to social responsibility. Evenin a time of tremendous change as we work toregain momentum, we are committed to doing
business in a socially responsible way.
We know that as a market leader and company
with a portfolio of well-recognized brands, wehave the potential to help make a lasting, positive impact on people around the world and on
the environment. This is an exciting opportunityand one that keeps us motivated as we work to
integrate social responsibility more seamlessly
into our organization. But we know we can’t
work in isolation.
In addition to holding ourselves to our own
standards, we partner with organizations suchas the Ethical Trading Initiative (ETI) and Social
Accountability International (SAI) to help us
better understand and approach the broad
scope of issues that encompass our business.
These organizations help us assess ourinternal processes and decision making, andcontinually challenge us to find new and betterways to manage our operations.
Outlined in this Report you will find performance data and results on our programs specific
to Gap Inc.’s 2005 and 2006 fiscal years, aswell as insights and discussion surrounding ourprogress, challenges and future goals. We’ve
made the decision to produce our Report ona biennial basis to allow for meaningful resultsthat can be presented to you in a comprehensive manner. In between our published reports,
we will update you through our website andother public forums.
We’ve designed this year’s Report aroundprovocative questions in order to underscorethe complex issues we face and illustrate ourcommitment to ongoing dialogue. These arequestions we get asked by you, our stakeholders, and they’re also the tough questions we
ask ourselves every day.
As you’ll see in the pages that follow, we’ve
continued to dedicate resources to support
our commitment to doing business in a socially
responsible way. And, unlike our past two
Reports, which focused primarily on the area of
ethical sourcing, we have expanded informationin this Report to cover other areas, including
employees, environment and community
investment. We’ve also added a new section
to reflect emerging trends in the marketplace.
For instance, we’ve outlined more thoroughly
the programs and policies that are in place forour 150,000 employees and provided ethnic
and gender breakdowns of our North American
employee population.
We’ve also expanded the discussion aroundour environmental footprint and how we areassessing our role as an environmental steward. We have aligned our priorities with thoseefforts that will produce the largest impact
for long-term environmental sustainability andour business, namely: energy conservation,
cotton/sustainable design, and output/waste
reduction. We made important progress in2006, including further reducing energy consumption in our U.S. stores.
This year, we are celebrating the 30th anniversary of Gap Foundation, which continues its
mission to create opportunities for people
to fulfill their personal promise. In 2006, wenarrowed our program to focus on two groups
in order to have a deeper and more lasting
impact. Today, our efforts are helping underserved youth in developed countries andwomen in developing countries.

world’s most iconic brands to help generate
funds toward the fight to eliminate AIDS in
Africa. Half of the profits from the sales of
the Gap (PRODUCT) RED collection go to
The Global Fund to finance programs that
help African women and children living with
HIV/AIDS. We’re thrilled to offer our customers
Gap clothing that can help make a differencein the lives of women and children in Africa.
Finally, our sourcing practices remain our mostmaterial social responsibility issue. In 2005 and2006 we continued to improve factory monitoring and how we measure performance. We also
increased collaboration efforts in areas where
our influence as a single company is more limited. We believe a uniform code of conduct will
be an important step to help level the industry
playing field and hold all brands to the same
set of standards. To move in that direction, weplan to publish a revised version of our Code ofVendor Conduct in 2007 to bring it into greateralignment with the codes of SAI and ETI.

Looking Ahead
By finding new ways to deliver great productand shopping experiences in a socially
responsible way, we strive to be a company
that is respected and trusted by customers,
employees, shareholders, and people in thecommunities where we do business aroundthe world. Critical to this is the dedicationof our people — and I want to give special
thanks to all our employees who make adifference every day.
We believe that talking about our challenges
is an important step toward resolving them.
Through our Social Responsibility Reports andongoing communication, we are dedicated tomaintaining an open dialogue.
We look forward to keeping you updated on
our progress.
Thank you,

Robert Fisher
Chairman of the Board,Interim President andChief Executive Officer,
Gap Inc.

With our deep experience in community giving,
we feel uniquely positioned to engage our customers through our brands by tapping into thesocial issues that are increasingly important to
consumers today.
Gap’s involvement in (PRODUCT) RED is an
example of how socially responsible products
can provide an innovative way to connect withcustomers. Founded by Bono and Bobby
Shriver, (PRODUCT) RED leverages some of theTM

9Contents

Page

From Robert Fisher

8

1.1, 3.3

About Gap Inc.

11

2.1

Financial Snapshot

11

2.2

Our Vision of Social Responsibility

11

1.2

UN Global
Compact
Principle(s)**Corporate Governance12

4.1, 4.2, 4.3, 4.4, 4.8, SO5, SO6

SustainAbility Materiality Assessment

14

1.2, 3.5, 4.16, 4.17

Business and Human Rights

16

1.2, 4.8, 4.12

1, 2, 3, 4, 5, 6, 10

Supply Chain

18

A Holistic Approach to Improve Garment Factory
Working Conditions

22

1.2

1, 2

Measuring Factory Performance

22

AF1, AF2, AF3, AF4, AF5, AF8, AF9,
AF10, AF12, AF13, AF14, AF15, AF16,
AF25, AF26, HR2, HR5, HR6, HR7

1, 2, 3, 4, 5, 6

Product Safety

23

PR2, PR4

Evaluating Our Business Practices

29

AF6, AF17

Building Partnerships at the Industry and Multi-Stakeholder Levels

34

AF5

1, 2, 3

Progress in Key Countries and Regions

34

AF5

1, 2, 3, 4, 5, 6

Promoting Action and Dialogue at the Global Level37

1.2, 4.12

Employees

38

1.2

Creating an Open, Inclusive Workplace

42

LA13

Employee Recognition

45

Providing Competitive Compensation and Benefits

45

EC3, LA3

Investing in Our Growth and Development

46

LA10

Supporting Our Employees

46

LA8

Workplace Safety and Health

49

LA7

Environment

52

1.2

Energy Conservation

56

EC2, EN4, EN5, EN6, EN7, EN18, EN26 8, 9

Cotton/Sustainable Design

59

AF20, EN26

8

Output/Waste Reduction

60

EN21, EN22, EN26

8, 9Community Investment

62

Our Community Investment Vision and Strategy

66

AF33

Our Target Causes

69

EC8

Our Grant Making Strategy

69

EC8, AF33

Employee Engagement

70

Special Events

70

Marketplace

72

A New Value Proposition

76

3, 4, 5, 6, 10

1, 2

1, 2, 3, 6

1, 2

1.2

Our Role in the New Marketplace

79

EC8

Global Social Responsibility Initiatives and Projects 2005-2006

84

AF7

Public Reporting Working Group Statement

86

4.16

Our Goals

87

Public Recognition

87

Glossary

88

About This Report

89

Endnotes

90* These indicators are drawn from the GRI’s G3 Guidelines and the draft Apparel andFootwear Sector Supplement. Please see page 89 for detail regarding our work with GRI.
** Please see page 89 for detail regarding our work with the UN Global Compact.

10

Global Reporting Initiative (GRI)
Indicator(s)*2.10

3.1, 3.4, 3.6, 3.7, 3.13, 4.16

3, 4, 5, 6, 8, 10

ABOUT GAP INC.

Gap Inc. is one of the world’s largest specialty
retailers, operating more than 3,100 storesin the United States, Canada, the United
Kingdom, France, Ireland and Japan. We
operate four of the most recognized apparelbrands in the world — Gap, Banana Republic,
Old Navy, and our newest brand, Piperlime.

reshaping our organization through simplifying
our work, and reducing our cost structure.
Fixing our business will take time, but webelieve that the steps we are taking, combinedwith our powerful brands, our proven trackrecord of success, and the passionate andcreative people on our teams, will help us torealize the great upside potential of Gap Inc.

Financial Snapshot
Fiscal 2005 and 2006 were difficult years forour business.
In fiscal 2006, our full-year net sales were
$15.9 billion, level with that of fiscal 2005, but
our merchandise margins suffered when customers did not respond well to our product.
As a result, net earnings came in at $778 million
in 2006, compared with $1.1 billion in 2005.
Earnings per share were $0.93 for 2006, compared with $1.24 a year earlier.
Despite some positive developments, such as
the launch of Piperlime and the expansion of
our Gap and Banana Republic brands into newmarkets through franchise relationships, werecognized that we needed to take immediate
action to address these business challenges.
We have emerged with a clear mandate to
make the necessary changes to get our businesses back on track.
Lettered endnotes in this Reportdesignated by X refer to websites
where additional information isavailable. Numbered endnotes cite
source information.

We are focused on three priorities to improve
our financial performance and deliver return toshareholders: fixing our core business at Gap
and Old Navy, rebuilding our management
strength with the best talent in the industry, andOur Vision ofSocial Responsibility
Our world is getting smaller every day. Theinternet and satellite television give people
new levels of access to information. Thanks
to e-mail and cellular phones, real-time conversations can now span continents. Ecologicaldisasters and social crises rarely remain
isolated to one country or region anymore.
Infectious diseases and climate change know
no political boundaries.
Gap Inc. plays a role in this new global reality.
In the apparel industry, like many others, itis the norm for a product to be made in one
country with fabric from another country, andthen shipped to a third country for sale. The
impacts of this product — whether on thepeople who made it or the planet’s natural
resources — easily have ramifications beyond
national borders.
How should we operate in this new world ofinterconnectedness? Can a company achieve
its business goals independent of the people

11About Gap Inc.

and the planet that make success possible?
We don’t think so. In fact, we believe that acompany only realizes its full potential — asa commercial enterprise, as an actor in local
communities, as a steward of the environment
and as a relevant brand in the marketplace —when it embraces its role as a global citizen.
Throughout time, business has had a tremendous impact on the world’s societies. Fromearly barter economies to the Industrial
Revolution, business has shaped and led
cultural transformations. Sometimes thesetransformations have led to extraordinary
economic development and astonishing socialchange. At other times, these transformations
have resulted in grave consequences. Often,
it has depended on how business has viewed
its role in society and whether or not it
accepted its responsibilities.
We believe that business has the potential
not only to mitigate its negative impacts but
also to serve as a catalyst for progress if
it fully assumes its place alongside governments and other civil society organizations
to find solutions to some of the world’s mostcomplex problems.
At Gap Inc., we not only recognize our responsibility to drive shareholder value through profits,
but we also embrace our role as a force for
economic and social development. We aspire
to become a company that utilizes the powerof our creative energy not just to sell products,
but to do so in a way that also benefits people
and the planet. We’re not there yet, but this iswhat we’re striving for. We believe in the fullpotential of our company and we are working
to realize it.

The Business Benefits ofSocial Responsibility
We know that social responsibility mitigatesrisk for us as well as for others. Because
we have visibility into our supply chain, we
often have advance warning about a factoryor country crisis. By working together with
our stakeholders, we can also collaborate
to find proactive solutions rather than spending the majority of our time and resources
reacting to crises.
But we’re beginning to realize that social
responsibility has the potential to do much
more for our business. When factories treat
workers well, they also tend to produce higherquality product and deliver it on time. The more
we respect and empower our own employees,
the more creative and innovative our products
and marketing tend to be. The more we strive
to conserve and use our resources wisely, themore likely we are to be creative in our productdesign, reduce our energy costs, and ensure
future access to necessary raw materials.
We’re increasingly seeing that consumers careabout the way companies behave in the global
economy. By acting responsibly as a business,
we can offer covetable products that respondto this growing consumer demand.

12

Throughout this Report, we explain how
we’re working to embed social responsibility
practices into our business operations. Fromexperimenting with sustainable fibers to examining the impact that our purchasing practices
have on garment factories, we know that social
responsibility presents us with innovative andcreative ways to do business better.

Management of Social
Responsibility at Gap Inc.
We have an organizational structure in placethat enables us to turn our vision of social
responsibility into action. Our commitment
to social responsibility starts at the top with
our Board of Directors. The Board of Directors’
Governance, Nominating and Social
Responsibility Committee assists the board in
fulfilling its oversight responsibilities relating to
the company’s corporate governance obligations and social and environmental practices.
Dan Henkle, Senior Vice President of Social
Responsibility, directs the implementationof Gap Inc.’s social responsibility strategy.
He is responsible for the company’s Global
Compliance function that monitors working
conditions in contract garment factories,
as well as the Environmental Affairs, Global
Partnerships, Social & Community Investment,
and Strategic Planning & Communications
teams. He works in partnership with Bobbi
Silten, Chief Foundation Officer, who directs
our community investment strategy. Bothreport directly to Lauri Shanahan, Chief Legal &Administrative Officer, who in turn reports to
the Chief Executive Officer.
None of Gap Inc.’s social responsibility
initiatives would be successful without thecommitment of our employees in departments
throughout the company and around theworld. The work described in this Reportreflects not only the work of the Social
Responsibility department and Gap Foundation, but also that of Human Resources
and Diversity & Inclusion. It also reflects thecommitment of all of our brands and business
units to bring these efforts to life.

Corporate GovernanceWe believe that strong corporate governancepractices reflect better management practices
in general. We strive for best practices in corporate governance because we believe that abetter-run company yields better results, andultimately, greater shareholder value.
For us, good governance starts with our Boardof Directors. A critical component of our governance model is an independent board. It’s
important for a majority of our board members
to be independent of the company and its
management. This helps us ensure diversityof thought in the boardroom, an independent
perspective on the business and oversight ofcompany management. At the close of fiscal
year 2006, our board had 12 directors, nineof whom were independent. At every board

Gap Inc. CSR Scholars Program
In 2005, we introduced a program
intended to encourage future business leaders to incorporate social
responsibility into their management
styles. We partnered with theHaas School of Business at the
University of California at Berkeley
and provided scholarships to threefull-time MBA students with the
expectation that they would takeelectives and conduct an independent
study focused on social responsibility
strategy. In 2006, we expanded
this program to include MBA students
at two additional partner schools:
Columbia University’s Graduate
School of Business and the
Kellogg School of Management
at Northwestern University.
One of the independent study projects undertaken by the first classof Gap Inc. CSR Scholars explored
how companies could turn their CSR
efforts into business opportunities.
Working with members of our Social
Responsibility department, two CSR
Scholars identified ways that Gap Inc.
could both mitigate risk and createbusiness opportunities based upon
our foundation of ethical sourcing,environmental affairs, and community
investment. This work complements
our ongoing exploration of how we
can further integrate social responsibility into the business.

About Gap Inc.

SocialResponsibility
Governance

Board of Directors
Governance, Nominating andSocial Responsibility Committee

Robert J. Fisher
Interim President andChief Executive Officer

Lauri Shanahan
Chief Legal and
Administrative Officer

Eva Sage-Gavin
Executive Vice President
Human Resources

Dan Henkle

Bobbi Silten

Michelle Banks

Senior Vice President
Social Responsibility

Chief Foundation
Officer

General Counsel

Daphne Sorro
Vice President,
Diversity, Learning &Recruiting

2006 Full-TimeSocial Responsibility andCommunity Investment
Employees
Global Compliance
Region72
Greater China

15

North Asia

3Southeast Asia

14

Indian subcontinent

13

Persian Gulf

0*

North Africa and the Middle East

2

Sub-Saharan Africa

3

Europe (including Russia)

7

United States and Canada

8

Mexico, Central America and the Caribbean

6South America

1Environmental Affairs

5

Social and Community Investment

3

Global Partnerships

5

Community Investment/Gap Foundation

10

Social Responsibility Strategic Planning
Total

8
103

* The Persian Gulf region is covered by the Europe
and North Africa and Middle East teams.

13About Gap Inc.

SustainAbility
Materiality
Assessment

We face a broad range of social
responsibility issues in our operations. Given our global scope andthe complexity of our businessmodel, we must constantly assess
our work to ensure that we areallocating resources in the areas
where we can have the greatest positive impact. In 2006, we engaged
SustainAbility, an international management consultancy and think tankspecializing in corporate responsibility, to help us conduct a “materiality
assessment.” Our goal was two-fold:to strategically prioritize our efforts
and to focus the scope of this reporton the social responsibility issues
most relevant to our company.
We asked SustainAbility to assess
how various social responsibility
issues could impact our businessperformance, how external stakeholders viewed these issues, andhow much control or influence wehave over the issues. SustainAbility
consultants interviewed Gap Inc.
executives and employees, conducted secondary research andconvened a group of stakeholders
for a half-day session to solicit
feedback on preliminary assessment
results. This feedback session took
place in January 2007 in New York,and included participants fromtrade unions, non-governmentalorganizations (NGOs), civil society
organizations, multi-stakeholder
organizations and academia.

Several major themes and opportunities emerged fromthis assessment and stakeholder feedback session:

ThemesInterconnectedness: It is clear that the issues we faceare inherently interconnected and not easy to disaggregate. We should continue working to understand how
they fit together, and how we can best have a positive
impact as a company.
Impact: Assessing the impact of our efforts may be
one way to “take stock” of our efforts. Impact may or
may not be measurable, but that shouldn’t stop us fromexamining indirect connections.
Integration into the Business: We must recognize theconnection between our business decisions and theimpact they can have on factories, the environment
and local communities. We should continue working
to assess our own business processes.
Business Value: We should look for opportunities tocreate value for the business through our social responsibility efforts.

Opportunities

Supply Chain Labor Conditions: Ethical sourcing remains
our most material social responsibility issue and weshould not waver in our commitment to ensure fair working conditions at factories that make the clothing we sell.
Employee Development: The success of our businessand our social responsibility efforts absolutely depends
on developing the best talent in the industry.
Environmental Issues: Climate change and sustainable
materials, in particular, present opportunities for
us to innovate, engage with customers and energize
employees.
Governance and Ethics: How we manage our businessis increasingly important to the company and our
stakeholders.
Public Policy: It is increasingly important that we examine our public policy positions — from lobbying activities
to trade agreements to industry associations.

14

Throughout this Report, we havesought to address the key issues
raised in SustainAbility’s findings
and by our stakeholders. For the
first time, we have clearly discussed
the ways in which social responsibility creates business value for us.
We have also provided insight into
how these efforts are increasinglyconnected to our core business
operations. We have addressed thefive opportunities outlined head-on:
public policy, governance andethics are discussed throughout
the narrative, while discussionsof environmental issues, employee
development and supply chain
labor conditions appear in therelevant sections. Finally, we haveapproached the overall design ofthis Report with the themes of interconnectedness and impact in mind.
We aim to show that each areaof our social responsibility work ispart of a greater integrated strategy
to help us fulfill our potential asa successful, profitable company
and as a responsible global citizen.
As our industry changes and ourbusiness evolves, we will continue
to consider the issue of “materiality”
to ensure that our work and ourreporting remains as relevant andcredible as possible.

About Gap Inc.

meeting, time is set aside for those independent directors to meet in executive session. In
addition, only independent directors sit on Gap
Inc.’s three board committees. Since 2003, theindependent directors have appointed annuallya Lead Independent Director.
We are continually evolving our corporate
governance practices and working to adopt
appropriate best practices. In 2005, theboard amended its corporate governanceguidelines to provide that any nominee fordirector receiving more votes “withheld” than“for” his or her election shall offer a letter ofresignation. The board must act on the letterin a reasonable period of time and publicly
disclose its decision.
Anyone may communicate governanceconcerns directly to the board by e-mailingboard@gap.com. All e-mails are reviewed by our
Chairman and our Lead Independent Director,
as well as our Corporate Secretary’s office.

Code of Business Conduct
The Gap Inc. Code of Business Conduct A
is the foundation of our efforts to promote a
responsible and ethical work environment.
Our Code is designed to help employees avoid
conflicts of interest, ensure compliance withlaws, and protect our company information
and assets. In addition to providing guidelines
for proper workplace behavior, it also directs
employees to specific persons to contact withquestions or concerns.
To measure employee awareness and understanding of our Code, we implemented an audit
schedule in 2003. Each year an internal audit
team conducts unannounced interviews of
employees to assess whether or not business
units are clear on our Code expectations andhow to report violations of the Code.
In 2005, we introduced the Code of BusinessConduct Overview training module, part of ourPrinciples of Integrity suite of training courses,
to ensure that our employees understand ourCode. This online training is mandatory for all
Gap Inc. employees.
We encourage employees to report all violations or suspected violations of the Code totheir supervisor or a Human Resources representative. Employees may also directly e-mailour Corporate Compliance department or callthe confidential Code Hotline. Our anti-retaliation policy protects individuals who reportsuspected violations. Categories of the different types of code violations that may arise
were reported on page 31 of our 2003 Social
Responsibility Report. B

The Code Hotline is staffed by a live operator
from an outside company, 24 hours a day,seven days a week. We take the enforcementof our Code of Business Conduct seriously
and every allegation submitted to the hotline
is investigated. Calls are free, confidential,
and may be made anonymously. Callers fromthe U.S., Canada, and Puerto Rico can call
866-GAP-CODE. International callers mustfirst dial their AT&T access code followed by
866-GAP-CODE.
More information about our Code of BusinessConduct is available on our website. C

Our Approach to Public Policy
Gap Inc. is a socially engaged company
that strives to ensure the best results forour customers, shareholders, employees,
and stakeholders. As we continue to have agreater presence around the world, we believe
it is important to participate in the political andregulatory processes that affect our business.
We work proactively to enable Gap Inc.’sstrategies through public policy and government advocacy. We also participate in politicalactivities and advocate for legislation when
there is a direct connection to our ability togrow our business and prosper in a way thatis consistent with our values, our legal obligations, and our Codes of Business Conduct
and Vendor Conduct.
In addition to our active political participationand policy advocacy, Gap Inc. maintains a
Political Action Committee (PAC). While our
PAC is not as robust as others in our industry,
we strive to maintain a balanced approach toits activities. In the 2005-06 U.S. election cycle,
the Gap Inc. PAC contributed approximately$51,100 to federal candidates from both theRepublican and the Democratic parties. The
Gap Inc. PAC supports candidates whose positions are in line with Gap Inc.’s purpose, values
and behaviors and overall business goals of
growth and stability. We recognize the importance of continuing transparency about ourpolitical activities and public policy positions,and are currently working to develop a process
for future communications to ensure that ouractivities are as open and effective as possible.
Specific examples of our public policy workon trade in Africa, the recent revisions to
Chinese labor law, and health care in the
U.S. are discussed in the Supply Chain and
Employees sections of this Report.

15

About Gap Inc.

Self-Assessment of
Human Rights in our
Policies and Practices

Business andHuman Rights

In 2004, Gap Inc. was invited to join the Business
Leaders Initiative on Human Rights (BLIHR),
a business-led group that seeks practical waysof applying the aspirations of the Universal
Declaration of Human Rights (UDHR) within abusiness context and to inspire other businesses
to do likewise.
In 2003, BLIHR members developed the first
Human Rights matrix, a practical tool designed tohelp businesses critically examine the impact of
their operations on human rights. The matrix was
based on the content of the draft United Nations
Norms on Business and Human Rights, which inturn reflected international standards such as the
UDHR, and the International Covenants on Civil
and Political Rights, and Economic, Social andCultural Rights. The matrix, which was introduced
in BLIHR’s Guide for Integrating Human Rights into
Business Management,* provides a mechanism forcompanies to self-assess their policies and practices against established human rights norms.
The matrix is an evolving tool, and we are currently
working with other BLIHR members to refine it.
In particular, it is important to note that the basic
rights contained in the UDHR and International
Covenants are not easily clustered into broad categories. Since the clustering of rights is important
to ensure that the matrix is user-friendly for business managers, BLIHR members are working withhuman rights experts to determine if these rights*

Download the guide fromwww.blihr.org/Pdfs/GIHRBM.pdf.
** To understand how we have clustered theindividual human rights defined by the UDHR andthe International Covenants, please see www.gapinc.com/public/documents/UDHR_breakdown.pdf.
*** Refers to all Gap Inc. owned and operated
facilities, including corporate offices, distribution
centers, stores, and sourcing and vendor
development offices.
**** Refers to contract manufacturers and factories
located around the world that produce branded
apparel for Gap, Banana Republic, Old Navy,and Forth & Towne.

16should be clustered, and if so, how. We anticipate
that BLIHR will be introducing a revised versionof the matrix soon, and we will update our selfassessment at that time.
The matrix shown to the right is in summary draft
form only. It represents our first attempt to assess
our policies and practices in our owned and operated facilities and across our supply chain againstinternationally-recognized human rights norms.
To color-code each category, we conducted adetailed analysis of our current policies, procedures, and practices. As a member of BLIHR,
we felt that it was important to conduct this initial
self-assessment, even though the matrix continues
to evolve. The exercise not only deepened ourunderstanding of human rights norms, but also
helped us identify areas in which we are doing welland areas where we may need to strengthen ourpolicies or practices in the future. We hope that byproviding transparency around our findings, wewill encourage other companies to consider undertaking the same process.
We welcome your feedback as we continue to
evolve our work on human rights. Send us ane-mail at social_responsibility@gap.com.

Civil and Political
RightsEconomic, Social andCultural Rights

Labor Rights

Other RelevantStandards*****

This matrix calls out specifically those humanrights over which Gap Inc. has some sphere of
influence. This category captures those humanrights which are generally outside of thatsphere (e.g., Access to the Judiciary, Right toHousing, Right to Property, etc.).
****** These definitions are based on the original
definitions of essential, expected, and desirable
protection as outlined in the BLIHR Guide.
BLIHR members recognize that these levels ofprotection, as currently defined, are not as clear
as they need to be, and are working to refinethem for the next version of the matrix.
******* BLIHR is currently working to define thisessential level of protection more clearly.
For more information, please see www.blihr.org.

About Gap Inc.

Fundamental Human Rights as defined by the
Universal Declaration of Human Rights, and theInternational Covenants on Civil and Political
Rights, and Economic, Social and Cultural Rights**

Owned andOperated Facilities***

Supply Chain****Freedom from Discrimination
Right to Life, Liberty and Security
Freedom from Slavery and Servitude
Freedom from Torture or Cruel, Inhuman or Degrading Treatment or Punishment
Freedom from Arbitrary Arrest, Detention or Exile
Right to Privacy
Freedom of Movement
Right to Marry or Form a Family
Freedom of Thought, Conscience and Religion
Freedom of Opinion and Expression
Right to Rest and Leisure
Right to an Adequate Standard of Living
Right to Education
Right to Participate in the Cultural Life of the Community
Right to Work, the Right to Equal Pay, the Right to Join and Form Trade Unions
Right to Peaceful Assembly and Association
Safe and Healthy Workplace
Obligations with Regard to Consumer Protection
Obligations with Regard to Environmental Protection
Other Human Rights*****Key to Chart ******
Policies and practices provide, at a minimum, a basic or essential level of protection of human rights
to ensure that the company is not complicit in human rights abuses and follows all relevant legal
standards, including international, national, and local laws.*******
Policies and practices not only provide the minimum or essential level of human rights protection,
but also provide additional protection that meets human rights obligations expected of companies
by stakeholders.
Policies and practices provide essential and expected protection of human rights, and also demonstrate desirable leadership and best practices in the protection of human rights.

17This thread is used in theGap (PRODUCT) RED TM denim jacket.

1

SUPPLY CHAIN

WHY DOWE STRIVETO IMPROVEFACTORY
WORKING
CONDITIONS?

SUPPLY CHAIN

We are sometimes asked why we dedicate timeand resources to improving working conditions
in garment factories. Put simply, we believe
it is not only the right thing to do, but that it
also creates tangible value for Gap Inc. For
example, we know that better working conditions improve the efficiency of our supply chain.
Workers who are paid fairly, work a reasonable
number of hours and operate in healthy andsafe environments tend to be more productive,
deliver higher-quality work, and choose to staywith factories longer than those who are mistreated. In addition, our firsthand knowledgeof events in factories helps us identify issues
and resolve them earlier. We’ve also heard
from our own employees that they are proudand inspired to work for a company that iscommitted to improving the lives of garment
workers. In our view, striving to improve working conditions in the supply chain is a win-win
endeavor — for the world’s garment workers
and for Gap Inc.

A Holistic Approach to
Improve Garment Factory
Working Conditions
The root causes of poor working conditions
in garment factories are varied and complex.
As we noted in our 2004 Social Responsibility
Report, inadequate labor standards are often
the result of a wide range of factors that canbe difficult to isolate and address. In someareas, such as our own buying practices, we

22

may have considerable ability to drive change.
We can also set standards for garment manufacturers and require through direct monitoringand enforcement that they achieve a certain
level of compliance in order to continue doing
business with us. In other areas, such aschanging common industry-wide practices
or addressing national- and global-level challenges, our influence is more limited and weneed to partner with others to work towardcollaborative solutions. The chart on page 24
provides an overview of these different areas
and our relative influence as a company. We
strive to address each of these areas in a
way that effectively leverages our strengths
and resources as a company and takes into
account stakeholder concern.

Measuring Factory
Performance
Factory monitoring remains an important partof our strategy to improve working conditionsin the apparel industry. As we noted in our
2004 Report, we believe that “what gets measured gets managed.” Monitoring provides us
with firsthand insight into factory conditions
and serves as an important tool to measurefactory progress against our standards.
Monitoring not only helps us leverage our influence with contract garment factories throughface-to-face interaction, but also provides
us with regular data about factory conditions
and a mechanism to assess the impact of ourefforts over time.

1 Supply Chain

Product Pipeline
Overview

Retail Sales▼

Distribution▼

Production andSourcing▼

Merchandising and
Planning▼

Inspiration and
DesignIn our industry, everything
begins with design. This is
the most creative phase of
our business. Designers gain
inspiration from all over theworld, and then translate
their ideas into sketches andsamples. These are eventually assembled into a seriesof sample collections thatare then presented to ourmerchandising teams.

Our merchants review
designers’ collections anduse their customer knowledge to decide what clothes
should be sold in our stores.
Merchants work with planners to determine how manystyles and colors are neededfor each season, and how
many units to manufacture ineach size. It isn’t always easy
to predict which products ourcustomers will want to buy,so merchants sometimes
make a decision and thenchange their minds. They
may discover new information that suggests an
updated color or style will sellbetter. Or they might realizethat a particular style has justbecome the latest fashion
trend. In such instances, they
may decide to change a color
or style, or order more units
quickly. Unfortunately, if
these changes take placelate in the pipeline process —and if the third-party
factories manufacturing the
product haven’t built enoughflexibility into their productionlines — compliance violations
may result.

Once our merchants andplanners have decided on
the store assortments, ourglobal production and sourcing teams place orders withapproved third-party factories
around the world. This
process is also very complex.
Before a garment can be
manufactured, a factory must
work with secondary suppliers to obtain all of thenecessary components, suchas fabric and trim (which
includes buttons, zippers,
threads, etc.). The factorymust also finalize the fit with
our sourcing teams. Once allof these steps have takenplace, the fabric can be cut,and the garments sewn
according to our specifications. The products are thenwashed, inspected, packed,
and shipped to our distribution centers around theworld.

In the distribution phase,
product is shipped to our
distribution centers locatedaround the world. Our staff
checks each box. Cartonsare counted, quantities are
confirmed and random audits
are performed. As merchandise is added to inventory,
it is designated for delivery
to a specific store according
to size, color and quantity.
The distribution centers thensend the merchandise to theappropriate stores.

Finally, it’s time for retailsale. Our sales associates
sell clothes and accessories
to our customers in Gap,
Banana Republic, and
Old Navy stores around theworld. Customers may also
buy directly from our e-commerce websites. As each unit
is sold, the transaction isregistered by our planners
and distribution analysts.
These analysts monitor
weekly sales trend reports
and determine which stores
need to be replenished withwhich products. Replenishment shipments typicallyoccur one to three times
per week.

At the end of each season, we assess our performance, gather customer feedback, look for
improvements and begin the cycle all over again. Because our pipeline is one of the longer onesin the industry, we are currently working to reduce the length of some aspects of this process.
We hope that our purchasing practices work will enable us to identify areas where we can
improve our process in ways that benefit both our business and factory workers.

Product Safety

SafetySafety is a top priority for Gap Inc. and we strive to designand sell clothing that does not pose any safety threat to ourcustomers. Our Product Safety team ensures that our clothes
are made to strict safety standards and we test our products
for a variety of potential safety issues including the following:• Flammability• Attachment strength — Ensuring attachments, such as

buttons, can withstand certain levels of force and do not
become small parts hazards• Durability

Regulatory — Chemicals
From fabric dyeing to creating unique garment finishes,chemicals are used throughout the entire production cycle ofmost garments. We know that certain chemicals can prove
harmful to people so we have developed a “Restricted
Substance List” that dictates which chemicals cannot be
used when producing our clothing. We based this list on
legislation, but because safety expectations are regulated bycountry governments, acceptable limits of chemical levels
in garments differ from one country to another. Our chemicals
testing procedures test for acceptable limits in thosecountries in which we sell product where accepted levels
are strictest.

• Toxicity of screen-printed graphics

We take customer safety very seriously and these testingprocedures will remain a critical part of our business.

23

1 Supply Chain

Factors Contributing toPoor Working Conditions
in Garment Factories

We first introduced this chart in our
2004 Social Responsibility Report. As
we noted then, one of the biggest challenges we face is that the root causesof poor working conditions in supply
chains are very complex. Inefficiencies
in our own buying practices—and thoseof other companies in our industry—
can have a negative downstream
impact on working conditions. Even
the most conscientious garment manufacturers may unwittingly contribute toproblems on the factory floor throughweak management skills, outdated
operations or equipment, or a tendency
to take on too many production orders.
In addition, systemic national and global
problems — such as corruption, economic underdevelopment, and weakor nonexistent law enforcement —chronically undermine efforts to protect
the rights of garment workers.
As we emphasized in our 2004 Report,
the magnitude and complexity of thechallenges we face are not an excuse
for inaction. We recognize and embrace
our responsibility to take a leadershiprole in improving the world’s garment
factories. We are constantly working
to ensure that our strategy takes into
account the realities of our industry
and broader operating environment
so that our efforts continue to drive
positive change.

Gap Inc. Level of Influence

24

Working Conditions▲
Brand orRetailer▲
Garment
Manufacturers▲
Industry
Conditions▲
Country
Conditions▲
International
Conditions• Lack of under-• Inefficient process-• Fragmented• Inadequate or• Global trading
requirements,
includingcomplex biand multi-lateral
restrictions.

standing of factory
conditions andhow purchasing
decisions canimpact them.
• Inefficient buying

practices.
• Insufficientemphasis on labor
standards insourcing decisions.
• Unreasonable

expectations
regarding costand speed.

es and operating
practices.

nature of garment
industry.

• Poor supervisory• Intense competi-

and management
skills.

tion and focus on
reducing costs.

• Acceptance of

production orders
without full assessment of capacity
and capabilities.
• Lack of modern

technology andequipment.
• Lack of regard• Conflicting

standards, lackof uniform codeof conduct, andlack of industry
coordination toresolve.

outdated laborlaws.
• Insufficient

enforcement bylocal government.
• Lack of under-

standing of rights
among workers.
• Poor economic,

financial and civic
infrastructure.

• Chronic pricedeflation.

for the rights ofworkers.

•Tariffs.
•Geographic shifts
in production
following expirationof quotas.
•Increasing
expectationsof consumers
regarding costand selection.

• Insufficient under-

standing oflabor laws andstandards.

Significant Influence Some Influence

Some Influence

Some Influence

Less Influence1 Supply Chain

Our Team
In 2006, we continued to employ a team of
more than 90 people around the world whoare dedicated to improving the lives of garment
workers. This team, which is truly one of ourgreatest assets, is wonderfully diverse, representing more than 25 nationalities and speaking
as many languages. The majority of team members are Vendor Compliance Officers (VCOs),
who are responsible for visiting factories, conducting inspections, documenting violations,and working with garment manufacturers andlocal stakeholders to improve factory compliance with our standards.
We believe strongly in the effectiveness of
our team. D Linked by a common passion to
improve the lives of garment workers, our teammembers are deeply experienced. Most of
our VCOs are SA8000-certified auditors, andmore than two-thirds have been with Gap Inc.
for three or more years. More information
about our team and their day-to-day work
can be found in our 2003 and 2004 Social
Responsibility Reports and on our website. E

Our Factory
Approval Process
A Change to Our Approval Process
In 2007, we will make a slight modification to our factory approval process
to bring needed flexibility to our product pipeline. All garment factories
seeking to produce internallydesigned and branded apparel for
Gap, Banana Republic and Old Navy
will continue to receive initial inspection visits prior to the placement ofany production orders. In certain narrowly-defined instances, however,garment factories that have resolved
all identified major issues may be
granted a one-time, conditional
approval to produce a special “rush”
or “chase” order, even though the factory may still have a few minor issues
to resolve. It is important to note that
this conditional approval will be shortterm, and the factory will not be able
to produce additional orders for any
Gap Inc. brands until all remaining
issues have been resolved to the satisfaction of the VCO.

In 2005 and 2006, we again required manufacturers and subcontractors that produce
internally-designed and branded apparel for
Gap, Banana Republic and Old Navy 1 to passthrough our approval process before we placed
any orders. This process, which is discussed indetail on our website F and in our 2003 Social
Responsibility Report, can take anywhere froma week to more than a year to complete.
We evaluated slightly more new factories in2006 than in 2005, but approved a lower
percentage for production. Of the 425 new garment factories that we evaluated, we rejected
18 percent, compared with 11 percent in 2005.
While we still face many challenges with ourapproved factories, we know that our approval
process helps screen out the worst garment
manufacturers, and has a positive impact on
factory compliance levels. As the chart on page
28 shows, the factories that we approved for
production prior to 2006 had fewer instancesof compliance violations than new factories that
had not gone through our process.2

The Art and Science ofFactory Monitoring

2006 Ongoing Monitoringof Approved Factories

Because there is no single standard
in the apparel industry, codes of conduct, frequency and scope ofmonitoring, and team training all vary
widely between companies. As aresult, monitoring data also varies
widely. In our 2004 Social
Responsibility Report, we discussed
some of the factors that contribute tothese variations, and provided guidance on how to understand ourmonitoring data. For further information, please see the discussion about
the “Art and Science of Factory
Monitoring” on our website. G

Once a garment factory is approved, we strive
to visit it at least once a year. Depending on thespecific needs of a factory, we may conduct
more visits. In 2006, our VCOs conducted
4,316 inspections in 2,053 garment factories
around the world, a decrease of about 122
inspections and 65 factories, respectively, as
compared with 2005. Because our factory basewas smaller, our frequency of inspections in2006 remained about the same as in 2005.
Approximately seven percent of our inspectionsin 2006 were conducted by teams of two or
more auditors. In addition, our VCOs held 1,498

formal and informal meetings with factory managers, an increase of nearly 500 meetings over2005. The rising prevalence of these meetings
reflects our increased focus on helping factories address the root causes of complianceissues, develop effective corrective action plansand provide worker or management training
sessions where needed.
In 2006, we conducted ongoing inspections in
99.4 percent of the garment factories approved
for the entire fiscal year, and 93.1 percent of
those approved for all or part of the year. This
was an increase of approximately 0.7 percent
and 4.8 percent, respectively, over 2005.
Evolving Our Monitoring Model
In 2004, we noted that the total number of ourfactory inspections would continue decreasingover time as we experienced ongoing consolidation of our manufacturing base and redefined
our monitoring protocol. 3 In 2006, we established a special internal team to examine ourmonitoring protocol and create a new model tofocus our resources more effectively.
This team, which will deliver its final recommendation in 2007, has suggested a modified
inspection model to tailor the length of ouraudits and the number of VCOs involved tothe size of each factory and its specific needs.
Once this new model is finalized, we intend topilot it in one or two regions in 2007. Based on
the results of the pilot, we hope to implement it
globally by the end of the year. Going forward,
we believe that this new approach will give us
more time and more rigorous data to identify
the root causes of compliance issues and partner more effectively with factory management
and workers to resolve them.

Factory Performance in 2006
As we have noted in our past Reports, few
factories, if any, are in full compliance all of thetime. Our goal is to work with factory managers
to fix problems where we find them and prevent
them from recurring. However, some factories
may be unable — or unwilling — to addresscompliance violations. In such cases, we may
have to make the difficult decision to terminate
our business relationship. In 2006, we revoked
our approval of 23 factories for complianceviolations, approximately 1.1 percent of ourbase. This is a significant decrease from the
62 factories terminated in 2005.
Although factory termination remains an important part of our program, we have increasingly
come to view it as a last-resort measure. Our
first choice is always to work with factory management to resolve issues, since this is in thebest interest of the workers as well as our own
business needs. We have learned that when
we work more closely with our sourcing colleagues and deliver a clear and consistentmessage as a company about the need for factories to resolve issues, factory managers are
more likely to take our requirements seriously.
Although this type of internal, cross-functional
partnership takes time and patience, we believe25

1 Supply Chainthat it is more effective, and efficient, in thelong run to try to work with our existing factories than to terminate our relationship and shift
production elsewhere.

Remediating Code Violations
We believe that it is important not just to identify compliance problems, but also to help fix
them. The remediation plans that we develop
in conjunction with factory management vary
greatly depending on the type and severity of
the issue identified. Sometimes, they may be
as simple as posting information in a public
place or stacking boxes in a different way. The
bigger and more complex the issue, the longer
it may take to resolve. For example, a factory
may need to build a new facility in order tostore chemicals more safely. Or it may need toprovide training for supervisors to help themunderstand why yelling is counterproductive
and an ineffective approach to management.
Because we prefer to verify in person thatissues have been addressed, there may also
be a time delay before we are able to visit thefactory again and confirm that a problem has
been resolved. 4 Although some factories may
take longer to address issues than we would
like, our goal is to continue working with themwhere reasonably possible to enable continuous improvement in their ability to resolve
issues quickly and effectively.
We recognize that, sometimes, a factory may
fix an issue and then experience the sameproblem again a few weeks or months later.
In many cases, this is because the violation isa symptom of a bigger problem. For example,
a factory may have repeated health and safety
violations because it has no system in place
to manage these issues on a regular basis.
If the factory takes the appropriate steps toestablish a system (such as forming a healthand safety committee with clear responsibilities to identify, assess and address problems
in different areas of the factory), we tend to
see the number of recurring violations in afactory decrease over time.
In 2006, we piloted new guidelines to help
our VCOs better analyze the root causes ofrecurring issues and build more effective
remediation plans. In 2007, we will integratethese guidelines into our new monitoring protocol as well as our broader initiative to help
factory managers take more responsibility forthe conditions on their own production floors.
This initiative, called the Vendor Ownership
Program, not only encourages factories toestablish management systems to integratecompliance into business processes, butalso provides factory managers with advice
on relevant training sessions, appropriate
consultants and other tools to manage compliance more effectively.
The Vendor Ownership Program complements
work we have done previously, such as with
Impactt and the Hong Kong Productivity
Council (HKPC) in China 5 and with Tufts
University in India. H

26

Evaluating Factory
Performance over Time

Freedom of Association and theRight to Collective Bargaining

One of the most important aspects of monitoring data is that it provides us with a way toassess factory performance over time. Our
factory rating tool assigns ratings based on
the number and type of violations documented
during inspections over a 12-month period,
as well as how often the violations recurredand how long it took factory management
to resolve them. Ratings range from Level 5,
which indicates an excellent compliancerecord, to Level 1, which means that urgent
attention is required to address serious compliance problems. Our website provides moredetail on how these ratings are calculated. I
As we noted in our 2003 and 2004 Social
Responsibility Reports, rating factories is noteasy. 6 It requires us to quantify the relative
importance and impact of different social
issues. In 2006, we worked with membersof the ETI to develop a common “grading” ofcore and non-core violations. 7 We will continue
to partner with the ETI and its members in2007 to refine this grading system. We believe
this is an important first step toward improving
the comparability of monitoring data fromcompany to company.

Factory Rating
Comparison Chart
Fiscal 2005 vs. 2006
450
400
350
300
250
200
150
100
50
0
Level 1

Level 2

UrgentNeeds
attention improverequiredment

Fiscal 2005

Level 3

Level 4

Level 5

Fair

Good

Excellent

Fiscal 2006

For a detailed breakdown of each level byregion, please see page 32. In 2006, we wereencouraged to see significant improvementin factory ratings in many regions aroundthe world. In Greater China, we experienced
a significant decrease in the number of thelowest-rated Level 1 factories as comparedwith 2005, and an increase in factories receiving the higher Level 4 and Level 5 ratings.
We also saw a similar positive trend in the
Sub-Saharan Africa, Europe and Mexico,Central America, and Caribbean regions.
Over the past year, our compliance teams
have instituted regular check-in meetings with

One of the most challenging issues weface in our supply chain is ensuring thatworkers’ rights to associate freely andbargain collectively are upheld. With help
from stakeholders in the labor rights community, we have begun to develop a more
integrated strategy to address this complex
issue with the goal of creating a better
space for improved industrial relations in
our supply chain.
In 2006, we partnered with the International
Textile, Garment and Leather Workers’
Federation (ITGLWF), the Global Union
Federation for the Apparel & Textiles
Sector, to train our internal monitoring teamon Freedom of Association and Collective
Bargaining issues. We also worked to facilitate greater understanding and dialogue
between our team members, trade unions,and suppliers at the regional and local
levels. In 2006, ITGLWF representatives
provided a detailed briefing for our entire
social responsibility team on the theory andpractice of freedom of association and how
collective bargaining can secure and maintain standards in line with national law andinternational practice. Later in the year,
we supplemented this training with joint
workshops for VCO team members on the
Indian subcontinent and in Southeast Asiawith the ITGLWF and local trade union representatives. The goal was to strengthen
stakeholder engagement between our
VCOs and key worker rights representatives at regional and local levels. J
The next phase of our strategy will address
the relationship between suppliers andtrade unions through national level workshops. The first workshop took place inCambodia in February 2007. In 2005 and2006, the Cambodian garment industry
experienced a significant increase in labor
strikes and disputes between factory
management and trade unions. To help
facilitate greater understanding on all sides,
we teamed up with the ITGLWF to hosta one and a half day training session
for our approved Cambodian suppliers.
The session brought together garment
manufacturers, global and local tradeunion representatives, International Labor
Organization (ILO) representatives, andU.S. government officials and created aforum in which everyone could raise anddiscuss issues of mutual concern and work
toward common solutions. Initial feedback
from participants has been encouraging,
and we are now working to develop a setof procedures and systems to promote
ongoing constructive dialogue within thefactory space.
“Mature systems of industrial relations andin-company social dialogue are increasingly seen as the best ways of ensuringongoing compliance with labor standards
and boosting competitiveness. Building
coalitions through bringing together compliance staff, suppliers and trade unions incountries such as Cambodia has propelled
Gap Inc. to the forefront in ensuring thatsustainable compliance and competitiveness are factory-grown and owned.”— Neil Kearney
General Secretary, ITGLWF

1 Supply Chain

2006 Factory
Approval Data

RegionNumber of
New Garment
Factories
Evaluated

Approved

Not
Approved

Pending

11%

Greater China

94

67%

22%

North Asia

9

100%

0%

0%

Southeast Asia

68

70%

15%

15%

Indian subcontinent

75

73%

12%

15%

Persian Gulf

2

50%

0%

50%

North Africa and the Middle East

33

79%

21%

0%

Sub-Saharan Africa

6

33%

17%

50%

Europe (including Russia)

43

70%

28%

2%

United States and Canada

28

75%

14%

11%

Mexico, Central America and the Caribbean

47

77%

17%

6%

South America

20

70%

25%

5%

Total

425

72%

18%

10%

2006 Factory
Monitoring Data Region

Approved for part or all of fiscal 2006

Approved for all of fiscal 2006

Number of
Garment
Factories

Percentage ofFactories
VisitedNumber of
Garment
Factories

Percentage ofFactories
VisitedGreater China

385

96.4%

267

100.0%

North Asia

75

92.0%

40

100.0%Southeast Asia

532

93.2%

396

99.2%

Indian subcontinent

441

95.0%

280

98.9%

Persian Gulf

17

100.0%

11

100.0%

North Africa and the Middle East

64

98.4%

25

100.0%

Sub-Saharan Africa

43

90.7%

33

97.0%

Europe (including Russia)

153

86.9%

76

100.0%

United States and Canada

113

83.2%

60

98.3%

Mexico, Central America and the Caribbean

171

90.6%

87

100.0%South America
Total

59

94.9%

28

100.0%

2,053

93.13%

1,303

99.39%

Average Number of Days
to Resolve Violationsin 2006
Greater China
North Asia
Southeast Asia
Indian subcontinent
Persian Gulf
North Africa and the Middle East
Sub-Saharan Africa
Europe (including Russia)
United States and Canada
Mexico, Central America and the Caribbean
South America
Number of Days

0.0

30.0

60.0

90.0

120.0

150.0

27

1 Supply Chain

2006 Code Violations
in New Factories vs.
Approved Factories

New Factories

Approved Factories

Discrimination

Forced Labor

Child Labor

Wages & Hours

Working Conditions

Freedom of Association

Environment

General Principle

Violation Categories

IIIA IIIBIVA IVBVA VB VC VD

VIA VIB VIC VID VIE VIF VIG

VIIA VIIB VIIC VIID VIIE VIIF VIIG VIIH VIII VIIJ VIIK VIIL VIIM VIIN VIIO VIIP VIIQ

VIIIA VIIIB

40%

35%

30%

25%

2015

%

10%

5%

0%
IA

IB

IIA

IIB

For a detailed explanation of each type of violation,please see pp. 30-31.

28

1 Supply Chain

their local sourcing colleagues to ensure thateveryone has visibility into how factories are
performing. In addition, our regional directors
have worked closely with the sourcing teams
to ensure that suppliers are receiving a clear
and consistent message that compliance isa prerequisite for doing business with thecompany. We are pleased to see that these
deepening cross-functional relationships haveresulted in improved factory performance inseveral regions.
We did experience an increase in the numberof Level 1 factories in the Indian subcontinent
region. We believe this is due, in part, tothe fact that the region experienced a sudden
increase in production and suppliers did nothave the capacity to handle the increased
workload. Our local VCO team has also beenworking to improve their identification ofviolations, so some of the increase is likely
the result of better audit detection methods
in that region.

Evaluating Our
Business Practices

New Social Responsibility
Data System
In 2007, we will implement a new
information technology system thatwill enhance our ability to captureand quantify social responsibility
data. This new system will enable
us to conduct more sophisticatedanalysis of our monitoring results andfurther refine our factory rating tool.
Because the system collects data ina different manner from our current
system, our 2007 data will not be
fully comparable to 2006. However,
we believe the benefits of the new
system will strongly outweigh thechallenges associated with the transition. We hope that our increased
capacity to analyze and report theroot causes of issues will help us
evolve our approach to monitoring
and capacity-building, and ultimately
bring about even more tangible andlong-term improvements in factory
working conditions.

As our social responsibility efforts have
evolved, we’ve come to see that some of theeveryday business practices in our industry —from decisions about where to source products, to last-minute changes to product orders,to poor production planning on the part offactories — can have a significant impact on
working conditions in factories.
We’ve been taking a close look at our own
practices to understand how we can makebetter decisions as a company. The more welearn, the more we believe that good businessand good working conditions are linked —and we’re constantly searching for new andinnovative ways to improve in both areas.

Improving Our Purchasing Practices
In 2003, Women Working Worldwide (WWW),a non-governmental organization (NGO), published a research report entitled “Bridging theGap,” that suggested that inefficient and poor
decision making by apparel companies could
have a negative impact on factory working
conditions. In 2004, the NGO Oxfam released
a report entitled “Trading Away Our Rights,” K
that also explored the impact of multinational
companies’ business practices on workers in
supply chains.
At the time these reports were published,
we had already begun to examine our productpipeline process. We need to maintain adiverse and efficient sourcing network to mitigate geographic risk, increase speed-to-market
and deliver the wide variety of products wesell in our stores. An inefficient product pipeline
can not only have a negative impact on factory
working conditions, as the WWW and Oxfam
reports showed, but can also result in lower
product quality, slower speed-to-market andincreased total cost.

Partnership with Women Working Worldwide
and the Ethical Trading Initiative
In 2004 and 2005, we partnered with WWW
under the umbrella of the ETI to deepen our
understanding of how our purchasing practices
can impact working conditions — and how
we can improve. L In 2006, WWW met with
employees in our sourcing offices in India and
Bangladesh as well as local factory managers
and workers to research our planning andproduction process and assess its impact on
factories. This research and its findings area work in progress and remain unpublished.
More information will be made public in 2008
after completion of this work.
“The challenges [of purchasing practices] are notunique to Gap Inc. but are industry-wide issues...
This research has highlighted areas that are, quite
honestly, complex issues.”— Women Working Worldwide,
2006 research report on purchasing practices

WWW’s preliminary report, completed in June
2006, showed that we face many of the samechallenges as other apparel companies. It
found that inefficient purchasing practices
are endemic throughout the garment industry,
and that the situation is not unique to Gap Inc.
WWW praised Gap Inc. for its commitment tocompliance, and the high priority we place on
longer-term relationships and good communication with supplier factories.
WWW’s research highlighted three main problems within our current pipeline process. The
following section summarizes these findings.
A more detailed overview is available on our
website. M
1. Delays can create situations in which factories do not have enough time to complete
production orders. For example, fabric may
arrive later than planned due to the use ofa problematic fabric mill or bottlenecks withlocal transportation or customs officials. If
a factory does not receive timely approvalon sample garments from our San Francisco
office or local labs that test for productsafety, it may also have to delay the startof production, which in turn can makeit difficult to complete an order on time. In
addition, factories cannot finish garments
until our quality assurance team hascompleted its final checks, and if the teamis not immediately available, shipments
may be delayed.
2. Changes that we make to production
orders — ranging from fit to aesthetic
details to the way garments are packaged
or shipped — can be difficult for factories
to manage if they occur immediately
prior to or after production has begun.
Significant changes to the desired quantityof the garments may also be challenging
to handle if they occur with little to noadvance warning.

29

1 Supply Chain

The size and scope of this chart preclude a thorough analysis of all issues
identified across regions. However,the following discussion highlights
some of our key findings in 2006.
To compare these results with previous
years, please see pp. 14-15 of our2003 Social Responsibility Report,
and pp. 22-23 of our 2004 Social
Responsibility Report.

Issue-Specific Trends—

No code violations found•Violations verified in less than 1%
of factories• Violations verified in 1-9.99%
of factories
verified in 10-24.99%• Violationsof factories•

Violations verified in 25-49.99%
of factories
In 2006, we did not find any
instances in which violations were
found in more than 50% of factories.
We believe that violations in theseareas are more widespread thanour data suggest.

Underage Labor *In 2006, we revised our remediation
policy for underage labor. Previously,
if VCOs uncovered instances in which
workers were below the legal minimum
working age, our policy was to terminate business with the factory. We
believed that this approach sent astrong message to suppliers that
underage labor was wholly unacceptable. However, we have learned fromour experience over the years andextensive consultations with stakeholders that such a policy of immediate
termination is not necessarily in thebest interest of children. Accordingly,
we have revised our policy, and now
require that any underage workers
found in a factory be immediately
removed from the workplace, given
access to schooling, paid an ongoingwage and guaranteed a job at thefactory as soon as they reach theappropriate age. We believe that thisnew approach is not only in the bestinterest of underage workers, but also
provides an effective deterrent to
suppliers not to use underage laborin the first place.
In 2006, we uncovered two instancesin China and one instance in Egypt inwhich workers were hired before theirsixteenth birthdays, the legal minimum
working age in both countries. In boththe Egyptian case and one of the cases
in China, the worker had already turned
16, so both remained employed, but
we required both factories to strengthen
their age verification policies. In theother Chinese case, we asked management to remove the underage worker
from the factory floor, continue to pay
her the same wage and extend an offer
of re-employment on her sixteenthbirthday. In this instance, the factoryrefused to comply, so we terminatedour business.
We also uncovered a case of underagelabor in Indonesia. We immediately
involved the parent supplier in the situation and asked factory management
to obtain permission from the worker’s
parents to send her to school and/or
vocational training. The factory agreed
to pay for her school expenses, continue paying her the minimum wage
and offer her re-employment once shereached the minimum age of 15.

2006 Code Region
Violations
Number of active factories for all or part of fiscal 2006

GeneralPrincipleIA

Lacks full compliance with local laws

IB

Restricted access of Gap Inc. representatives

Environment

IIA

Lack of environmental management system or plan

IIB

Insufficient notification procedures in case of environmental emergency

Child Labor*

Wages &
Hours

Working
Conditions

Greater China

North Asia

Southeast
Asia

385

75

532

••

•

•
•

•
•

—

••
••

•

—

•

Wages and benefits

—

—

•

IVA
IVB

Use of involuntary labor
For foreign contract workers, non-payment of agency recruitment fees
and/or requiring workers to remain in employment against their will

—

—

•

—

—

•

VA

Workers are not 14 years old or do not meet minimum legal age requirement

•

—

•

VB

Not in full compliance with child labor laws

•

—

•

VC

Failure to allow eligible workers to attend night classes and/or
participate in educational programs

—

—

—

VD

Poor age documentation

VIA

Pay is below minimum wage

•
•

VIB

Overtime rates are below legal minimum

VIC

Work week in excess of 60 hours

•
•
•
•

VID

Workers cannot refuse overtime without threat of penalty or punishment

VIE

Workers do not have at least 1 day off in 7

VIF

Violation of local laws on annual leave and/or holidays

VIG

Unclear wage statements

VIIA

Physical punishment or coercion

VIIB

Psychological coercion and/or verbal abuse

VIIC

Violation of local laws on working conditions

VIID

Insufficient lighting

VIIE

Poor ventilation

VIIF

Insufficient or poorly marked exits

VIIG

Obstructed aisles, exits or stairwells

VIIH

Locked or inaccessible doors and exits

VIII

Insufficient number of and/or inadequately maintained fire extinguishers

VIIJ

Insufficient number of fire alarms and/or emergency lights

VIIK

Not enough evacuation drills

VIIL

Machinery lacks some operational safety devices

VIIN

Insufficient access to potable water

VIIO Inadequate first-aid kits
VIIP

Unsanitary toilets and/or restricted access

VIIQ Inadequate storage of hazardous and combustible materials
VIIIA Workers are not free to choose whether or not to lawfully

•
•
•

•
•

•
—

•
•
•

•

•

••
•
•
•

••
•

•
•

•

•
•

•
•

••
•
•
•
•
•

—

•

•

•
•
•
•

••

•

•
•
•
••
•
•
•

••
•

••
•
—

••
•

—

—

—

—

* In most of the countries where we do business, the minimum legal age is 15 or higher. In the few cases
where the minimum age has been set at 14, we will be working as we revise our COVC to ensure that thecountries in question have fulfilled the requirements for an exception under ILO Convention 138.

•—

organize and join associations
VIIIB Penalization or interference with workers’ lawful efforts to organize

30

Physical Punishment
In 2006, interviews with workers conducted during a routine visit revealed
that a foreign supervisor had hurled apiece of clothing at a worker during adisagreement. The factory took disciplinary action against the supervisor,

Employment

VIIM Inadequate personal protective equipment

Freedom of
Association

In Peru, we uncovered one instancein which a supervisor retained workers’
identification cards to prevent themfrom leaving the factory at the end of
the work shift. We asked the factory
management to address the situation
immediately and verified that thesupervisor was disciplined. In addition,
the factory developed and implemented procedures to ensure that all
overtime work is voluntary, and also
provided specialized training to supervisors to reinforce factory policies andlegal standards.

IIIB

Discrimination IIIA
Forced Labor

Forced Labor
In 2006, we discovered that two factories in Vietnam required workers to signa contract requiring them to remain
employed for a certain period of timeor pay the factory a “training fee.”
We asked the factory to stop thispractice immediately, provide contracts
to workers that excluded this clauseand ensure that workers were awarethat they could leave at any time.
We verified that the practice ceased
in both factories.

•
•

••

••
•

1 Supply Chain

which included a transfer to a different
function to minimize the supervisor’s
contact with workers.

Freedom of Association and theRight to Collective Bargaining
In 2006, we saw a small global increasein violations related to Freedom of
Association and the Right to Collective
Bargaining. We continue to suspectthat freedom of association issues are
more widespread than we have beenable to uncover. We believe this year’s
increase was due largely to the factthat we partnered with the International
Textile Garment and Leather Workers
Federation (ITGLWF) to train our
regional teams to better understandand detect local freedom of association
issues. While we know that we still havework to do, we believe that as our team
becomes more knowledgeable about
freedom of association violations in factories, they should be increasingly able
to uncover and address these issues.

consistent way. Chinese law, however,stipulates that workers may organize
only under the umbrella of the government-sponsored trade union. We are
currently working to revise our Codeof Vendor Conduct to include a clausethat would help facilitate lawful“parallel means” to free associationin order to provide workers with theopportunity and means to raise concerns and seek solutions without fearof repercussions. In addition, we arecontinuing our efforts to help educate
Chinese workers about their rights
under Chinese law. For further details
on our work, please see pp. 26-27 ofour 2003 Social Responsibility Report.

cases in which piece-rate workers inPakistan and parts of India were notreceiving the appropriate overtime
wage. Finally, we also detected anincrease in excessive working hours
due to the significant growth in sourcing
volume in the region.

Persian Gulf
Although there is no minimum wage
defined by law in the Persian Gulf,
factories are bound by the wages
negotiated in workers’ contracts. In
2006, we identified several instancesin which factories did not abide bythese negotiated wages and requested
that they be corrected immediately.

North Africa
In 2006, we experienced both anincrease in sourcing volume in the
North Africa region and a change in
our VCO team. Due to better auditing
techniques, we noticed an increasein the number of identified instancesof management “coaching” of workers
prior to interviews. We asked the factories to immediately cease this practice.
In addition, many of the new factories
that went through our approval process
in this region lacked written disciplinary
procedures, as required by our COVC.
South America
We saw a significant decline in healthand safety violations in South America
in 2006. Over the past year, our team in
the region worked to educate factories
on the importance of effective healthand safety management systems.
In many factories, our VCOs helped
lead health and safety “expos” to help
management and workers better understand the risks of health and safetyissues, and the benefits of compliance.
We were pleased to see that this work
has had a significant positive impact
and that health and safety conditionsin the region have improved over the
past year.

China
Freedom of association is an especially complicated issue in the Chinese
legal context. We recognize that
Chinese workers, like all workers, havean important voice that needs to beheard by management in a regular andIndian Subcontinent
In 2006, we identified a greater numberof instances of false recordkeeping in
the Indian subcontinent region than inprevious years. We believe this was due
to better audit detection methods, risingproduction levels and a greater numberof new vendors. We also saw anincrease in minimum wage violations in
Sri Lanka and Bangladesh due to thefact that both countries increased theirlegal minimum wages in 2006, and factories did not adjust immediately. In
Bangladesh and parts of India, we also
discovered several instances in which
trainee workers were not granted thepermanent minimum wage in a timely
fashion. In addition, we discovered

In 2006, we also uncovered six cases inwhich Sri Lankan workers, recruited by
local agencies to work in factories in
the Gulf, were required to take contraceptive injections prior to their arrival —a violation of the discrimination clauseof our COVC. We asked factory management to request that the recruitment
agencies stop this practice immediately,
and obtain written confirmation thatthe practice had ceased from the agencies and/or medical clinics that had
been giving the injections on theagencies’ behalf. Our VCO team also
conducted interviews with workers toverify that the injections were no longer
being given.

Indiansubcontinent

Persian Gulf

North Africa andthe Middle East

Sub-SaharanAfricaEurope(including Russia)

United States
and Canada

Mexico,Central America
and the Caribbean

South America

441

17

64

43

153

113

171

59

•
•

•
•
•

—

•
•

•
•
•

—

•
•
•
•

•

•

•
•
•

•
•
•
•

Regional Trends

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•

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31

1 Supply Chain2005 Factory
Ratings

Country

Percentage of Factories
Per Level, by Region

Level 1

Level 2

Urgent attention Needs improvement
requiredLevel 3
Fair

Level 4Good

Excellent

Level 5

16%

Greater China

6%

15%

27%

36%

North Asia

2%

11%

13%

34%

40%

Southeast Asia

5%

10%

24%

36%

25%

Indian subcontinent

5%

12%

26%

37%

20%

Persian Gulf

0%

0%

31%

38%

31%

North Africa and the Middle East

26%

19%

19%

23%

13%

Sub-Saharan Africa

16%

19%

24%

27%

14%

Europe (including Russia)

9%

27%

21%

24%

19%

United States and Canada

0%

0%

6%

40%

54%

Mexico, Central America and the Caribbean

8%

19%

17%

23%

33%

South America

0%

28%

28%

28%

16%

Global

6%

14%

23%

34%

23%

Level 2

Level 3
Fair

Level 4Good

Excellent

15%

42%

35%

2006 Factory
Ratings

Country

Percentage of Factories
Per Level, by Region

Level 1

Urgent attention Needs improvement
required
Greater China

1%

7%

Level 5

North Asia

0%

4%

18%

37%

41%

Southeast Asia

3%

12%

32%

29%

24%

Indian subcontinent

14%

14%

30%

28%

14%

Persian Gulf

0%

28%

36%

27%

9%

North Africa and the Middle East

32%

11%

18%

11%

28%

Sub-Saharan Africa

9%

16%

22%

31%

22%

Europe (including Russia)

4%

10%

25%

30%

31%

United States and Canada

0%

0%

6%

16%

78%

Mexico, Central America and the Caribbean

5%

9%

17%

22%

47%

South America

2%

5%

24%

43%

26%

Global

5%

10%

24%

31%

30%

32

1 Supply Chain

3. Poor production planning at the factory level
can lead to quality problems, increased cost
and the use of unauthorized subcontracting
or temporary workers to meet production
demands. Factory compliance with our Codeof Vendor Conduct (COVC) can also be
strained by the need for increased overtimeand higher production targets, which may
correlate with higher incidents of underpayment or non-payment of overtime wages.
“The pressure to accept...orders [with changes
in volume], even when vendors do not haveenough capacity, is overwhelming. The result isillegal subcontracting, increased use of contract
workers, vastly increased overtime, no weekly
holiday, night working and under- or non-paymentof overtime wages.”— Women Working Worldwide,
2006 research report on purchasing practices

Responding to WWW’s Report
Our brands have responded positively to
WWW’s report. Toward the end of 2006, webegan to implement some initial changes basedon WWW’s recommendations. These included
the hiring of additional quality assurance staff
in South Asia to address capacity constraints,a reassessment of Service Level Agreements(SLAs) between San Francisco-based andregionally-based employees, and an ongoingrecalibration of our integrated supplier scorecard. N We’re also testing mill labs in the Hong
Kong region to help reduce testing lead times
and piloting a faster approval policy for rush
and/or chase orders. In addition, we’ve developed some internal educational tools, suchas case studies, to help educate entry level
employees on the impact of their decisions inthe supply chain.
We will be continuing this work throughout
2007. We are currently developing specialized
training materials that discuss the impact ofour decision making in the supply chain thatwill be piloted with employees in our GapKids
and babyGap divisions. We will continue torefine our integrated sourcing scorecard toenhance accuracy. Finally, WWW will also continue their research in 2007 by “shadowing”
San Francisco-based employees and conducting extensive interviews in our headquarter
offices. We look forward to their next report.
The problems identified in WWW’s report areendemic to our industry and will not be solved
by a quick fix. Decision making in our supply
chain is complex, and some aspects of global
garment production will always be unpredictable. Nevertheless, we are committed totaking ongoing steps to improve our performance. We’ve certainly learned the value ofbringing in an external perspective as well
as sharing the complexities of our productpipeline with our stakeholders. While we knowthat changing deeply-rooted behavior andlong-established practices is never easy, we
also know that the rewards of doing so arepotentially significant. In addition to helping
garment factories reduce compliance violations, we are likely to see greater businessefficiencies, such as higher-quality product andfaster speed-to-market, in our supply chain.

Evolving Our Processes
The competitive landscape for a company like
Gap Inc. is constantly changing. Many players
are vying for market share in the specialty
apparel arena, and we must continuously
innovate to stay competitive. For many years,
we sold only Gap Inc.-designed and produced
apparel in our stores. This business model
not only proved successful, but also provided
us with the opportunity to develop a deep
expertise and leadership position in theindustry. But our industry is not static. As ourcompetitors increasingly develop new products and sourcing models, we too must seize
new opportunities. In 2006, we began to
explore new products and business models
that would strengthen our competitive positionin the industry. We opened Gap franchise
stores in Malaysia and Singapore. We beganselling Converse shoes in Gap stores. We
announced that Banana Republic had enteredinto a new licensing agreement with Safilo to
produce eyewear.
These new business models are extremely
important to the future success of ourbusiness, but they also present new social
responsibility challenges. Unlike the apparelindustry, which has grappled with the conceptof sweatshops for more than a decade andwhere codes of conduct are generally thenorm, many non-apparel industries have had
little experience with these issues. As a muchsmaller player in these industries, we also haveless leverage to bring about change.
New Non-Apparel Policy
In 2005, we asked an internal, cross-functionalteam to grapple with this non-apparel issue
and create a policy that would support ourcompetitive need while continuing to upholdour values and principles. In an ideal world, wewould simply require all factories producing
our products to maintain exactly the same
standard at all times. But the reality of global
manufacturing is unfortunately more complicated, and we must work to improve factorylabor standards in a way that still allows us togrow our business. After months of thinking
about and debating these issues, our teampresented its recommendations for a new nonapparel policy in early 2006.
We continue to require that all prospective
non-apparel suppliers of company-branded
product sign compliance agreements stating
their commitment to abide by our COVC, justas we do with prospective apparel suppliers.
We believe this written commitment is an
important first step in the continuous improvement of labor standards. The enforcement
mechanism for non-apparel suppliers is then33

1 Supply Chain

based on our business leverage. While we
no longer conduct initial inspections of new
non-apparel suppliers, we begin auditing
as our business volume with each supplier
grows — and in many cases we will audit up
to a level consistent with apparel suppliers.
As with apparel suppliers, we may also makethe difficult decision to terminate our business
relationship with a non-apparel supplier if
we discover that it cannot, or will not, upholdour standards.

collaborate with other companies and stakeholders to better understand some of themost complex industry problems. For example,
we are researching the issue of homeworkers
in apparel supply chains and industry
purchasing practices under the umbrellaof ETI’s Working Groups on Homeworkers
and Purchasing Practices, respectively. Moreinformation about this work is available inour 2004 Social Responsibility Report andon the ETI’s website. Q

Building Partnerships
at the Industry andMulti-stakeholder Levels

Progress in Key Countries
and Regions

Because many of the factors contributing topoor factory working conditions are beyond
our immediate control, we are working to build
partnerships with other companies and stakeholders to address some of the most pressing
issues at the industry level.

Toward a Uniform
Code of Conduct
Today, companies and organizations throughout the apparel industry monitor factory
conditions according to their own standards.
The slight distinctions between these codes
often complicate factory efforts to improve
working conditions.
In our 2003 and 2004 Social Responsibility
Reports, we stated our desire for a uniform
industry code of conduct that is consistent
with the standards of the International Labor
Organization (ILO). O In 2005 and 2006, we
continued to support the efforts of the Joint
Initiative on Corporate Accountability andWorkers’ Rights (JO-IN), an alliance of six
multi-stakeholder organizations, to develop
a common industry code and consistentmethod of implementation. We remain an
active participant in this initiative and believe
it is one of our best opportunities to develop
an industry-wide solution. P
In the meantime, we are updating our current
COVC to bring it into greater alignment withthe codes of Social Accountability International(SAI) and ETI. We plan to publish a revised
version of our COVC in 2007.

Other Industry
Collaboration Examples
Our collaboration with other companies in
the apparel industry takes many forms, fromnational-level brand working groups to issuespecific research projects. In China, India,
Turkey, Cambodia and Bangladesh, our local
team members participate regularly in industrywide meetings to discuss issues of common
concern. At a global level, we are currently
exploring how we can share monitoring datawith other companies to reduce duplication
and audit “fatigue.” Through our membershipin multi-stakeholder organizations, we also

34

Cambodia
In 2005 and 2006, we continued to support
the ILO’s Better Factories Cambodia (BFC)
program. We worked closely with ILO staff on
the ground, and continued to review ILO monitoring reports of Gap Inc.-approved factories
regularly. We also partnered with the BFC’sremediation unit to follow up with factory
management on remediation plans. In the
future, we plan to minimize our own monitoringin Cambodia and rely on these ILO reports sothat we have more time to help factories build
effective remediation plans.8
In light of the BFC’s success, the ILO is working with the International Finance Corporation(IFC), the private sector arm of the World Bank,
to launch a global Better Work Program. We are
extremely supportive of the ILO’s plans to buildon the Cambodian experience and consider
expanding this highly innovative and successfulprogram into other countries.
Supervisory Skills Capacity Building
In 2005, we worked with the IFC and the
Mekong Private Sector Development Facility(MPDF) to deliver the Supervisory Skills
Capacity Building training program to 650
Cambodian and expatriate factory supervisors.
The program, which recognizes the link
between labor practices, productivity andfactory competitiveness, sought to change
the attitudes, behavior and skills of 650 supervisors in seven Gap Inc.-approved factories.
These factories employ nearly 20,000 workers,of whom 18,000 are female.
The results of the training, which wascompleted in January 2006, exceeded our
expectations. 97 percent of the participatingsupervisors who responded to an impact
assessment survey stated that the training
provided them with new knowledge on how
to be more effective. Importantly, they also
reported changing their behavior: 97 percent
said that they had made changes and 75 percent said that they had made significant
changes. These results were echoed by
Human Resources (HR) managers in all sevenfactories, who reported that the working environments had improved. In particular, the HR
managers cited better communication between
Chinese supervisors and Cambodian workers.

1 Supply Chain

The training also had a positive impact on
employee relations and production efficiency
in each of the seven factories. The chart below
illustrates some of these gains.

Results from Supervisory
Skills Capacity-Building
Pilot Program
Employee
Turnover &Absenteeism

HR Managers in participating
factories reported thattraining helped lower theemployee turnover rate.
The number of employee
warnings fell an averageof 12% in participating
factories.
Absenteeism across participating factories was reduced
by an average of 8.6%,
from 3.5% in 2004 to 3.2%
in 2005.

Rejection Rates

The average in-line rejection
and shipment rejection
rates of 5.7% and 1.3%,
respectively, in the participating factories were lower
than in 2004.
38% of supervisors in participating factories reported a
reduction in the reject rate.

Productivity

Productivity growth ratein participating factories
averaged 27%, an 11%
increase over 2004.
71% of trained supervisors
agreed that the training
helped increase productivity.

Production Levels

42% of participatingsupervisors said that thetraining helped increase
the number of orders.
The average production
growth rate across participating factories was 12.5%
higher than in 2004.
The total number of employees in participating factories
increased from 18,000
in 2004 to 25,000 in 2005.

Bangladesh
In Bangladesh, we continued our work throughthe MFA Forum to address some of the country’s most challenging issues. In 2006, thecollective efforts of many participants culminated in the decision of the government of
Bangladesh to raise the minimum wage forthe first time in many years. This increase wasapproximately 80 percent over the previous
wage rate. We are currently working to bring
Gap Inc.-approved suppliers into compliancewith these new wage provisions. As partof the MFA Forum, we are also working withother brands and retailers to explore theimplementation of a common code of conduct
in the Bangladesh garment industry.
We are also a member of the Multi-Stakeholder
Forum Bangladesh (MFB) Steering Committee,
which is developing a three-year proposal toaddress issues linked to productivity and social
compliance. Our MFB participation provides us
with an excellent opportunity to speak regularly
with government officials, local trade associations, trade unions and civil society groups
to encourage each to play a role in helping to
improve working conditions in Bangladesh.
Factory Safety
Many factories in Bangladesh are multi-story
buildings of questionable construction. In thewake of several tragic non-Gap Inc.-approved
factory accidents in 2005, including collapses
and factory fires, we instituted a new requirement that all approved suppliers must obtaincertification from an independent authority todemonstrate that their factories are structurallysound and there is no fire hazard. We havealso worked with other members of the local
industry-wide working group to develop a consistent health and safety checklist for factories
that includes building structure safety. In partnership with the Bangladesh University ofEngineering and Technology and others, we
continue to monitor this issue closely.

Central America
We remain focused on factory working conditions in Central America, both through factory
monitoring and capacity-building efforts.
Encouraged by these results, we are now working to evolve and expand the training program.
We continue to partner with the IFC/MPDF andare also collaborating with the ILO’s BFC program to offer the second phase of the training
program under the BFC umbrella. Participantsfrom the first phase of training noted that the
program is most effective when supported bysenior management, so we are exploring theopportunity to add a senior management
course as well. In addition, other brands haveshown an interest in the results of the pilot
phase and will be joining with us to support the
program’s evolution. For more information,please see the IFC’s report on the program. R

Independent Monitoring
We have been in discussions with independent
monitoring NGOs in the region to determine
how our partnerships should continue to
evolve in order to address ongoing compliancechallenges. S As we’ve noted in our Social
Responsibility Reports and elsewhere, thepreferred approach on the ground is increasingly moving from a strict monitoring model
to one that can identify root causes and build
the capacity of factories to address poor working conditions in a sustainable way. We hope
to continue leveraging the independent monitoring groups’ expertise, independence, local
knowledge, and credibility with workers in waysthat will help achieve this goal. In addition to35

1 Supply Chain

traditional monitoring and verification, thesegroups are partnering with us on labor rights
training for factory supervisors, verification offactory progress and remediation, and investigations into worker concerns.
Continuous Improvement in theCentral American Workplace (CIMCAW)
This evolution of independent monitoring
complements our investment in other multistakeholder efforts to build capacity in theCentral American region through initiatives
such as Continuous Improvement in theCentral American Workplace (CIMCAW). T
By developing training and fostering social dialogue, the project seeks to raise awarenessthat improved working conditions in Central
America are important for the region to remaincompetitive in the global apparel industry.
CIMCAW is unique in its inclusiveness.
Partners include key sectors concernedwith labor issues at the international andnational levels, including government, civilsociety, the private sector and trade unions.
CIMCAW partners include the United States
Agency for International Development(USAID), Social Accountability International(SAI), the International Textile, Garment &Leather Worker’s Federation (ITGLWF),
Development Alternatives Inc. (DAI) andother apparel brands.

CIMCAW Training Program(October 2004-February 2007)
Training for Workers and Managers
Country

Number of
Number ofWorkers and Participating
Managers
Factories

Dominican Republic
GuatemalaNicaragua

55
91
162

3
2
9

Training for Labor Inspectors
Country

Number of
Labor
Inspectors

Dominican Republic
El Salvador
GuatemalaHonduras
Nicaragua

74
148
21
62
31

Since its launch in October 2004, CIMCAW
has made significant advances in providing
innovative joint worker-manager labor rights
training, training government and other labor
inspectors, fostering social dialogue, andpromoting a vision of competitiveness basedon respect for labor rights. One of CIMCAW’s
major achievements has been its creationof functioning Consultative Committees withrepresentation from government, industry, andtrade unions in three countries. Despite historical conflict among some of these actors, theseCommittees are successfully functioning toadvise CIMCAW’s direction and create a space36

to address broader industry issues. To date,
308 workers and managers and 336 labor
inspectors have participated in CIMCAW’s solutions-oriented labor standards training basedon ILO principles. The chart below left provides
a breakdown of participants by country.
Though challenges remain, CIMCAW has
helped local participants and partners movebeyond historical prejudices to address challenging issues in the region in new ways, inparticular, freedom of association and theright to collective bargaining. It has brought
together factory owners and managers andlocal and international trade union representatives, and created a space where all actors
have a shared interest and are free to work
together without compromising the goals of
their respective organizations.
We are greatly encouraged by the successof this highly innovative program, and lookforward to our continued participation in 2007.

LesothoLesotho has taken significant steps in recent
years to improve labor standards in its
garment industry. In 2006, we were pleased
to see improving compliance levels in
Gap Inc.-approved factories in the country,
as evidenced by the significant increase infactory ratings in the region from 2005 to 2006.
While we continue to face many challenges in
the country, we are encouraged by Lesotho’s
maturing industrial relations, as well as ourconstructive engagement with many levels ofLesotho society, from the government and civilsociety organizations to trade unions and theindustry association.
To help Lesotho remain competitive in the postquota era, we are actively involved in the MFA
Forum’s working group on Lesotho, and continue to seek ways to help the apparel industry
enhance its technical capabilities and explore
opportunities for vertical integration. U
We also strongly advocated for the U.S. government to pass and enact the African Growthand Opportunities Act (AGOA), which provides
trade preferences for apparel products from
Lesotho and other less-developed Africancountries to the United States. Thanks tothe passage of AGOA, more U.S. and some
European companies have joined Gap Inc.
in sourcing production from these countries.
Through the MFA Forum, Gap Inc. is also working at various levels within the European Union
to help raise Lesotho’s visibility in the global
apparel industry. At the recently concluded
MFA Forum event in Toronto, V a delegationfrom Lesotho led by the Minister of Trade andIndustry reinforced the country’s commitment
to strengthen Lesotho as a kingdom of “decent
work” in partnership with the ILO and otherparticipants of the MFA Forum. W
For more information on our work in Lesotho,
including its connection to Gap (PRODUCT)
RED , please see pages 79-81 of this Report.
TM1 Supply Chain

China
In 2006, China remained one of our mostimportant sourcing markets. Last year, it represented 20 percent of our total merchandise
units purchased and 19 percent of total merchandise cost. While we face many compliancechallenges in the region, just as we do elsewhere, we have been encouraged by a steady
improvement in factory ratings and we continue
to monitor conditions closely.
We recognize our limitations as one company
to drive sustainable improvements in supply
chain working conditions in China. Given the
country’s size and importance, we are working
to develop partnerships with individual stakeholders, coalitions, and multi-stakeholder
forums to address issues of common concern.
As we strive to build coalitions, we are also
seeking to take a partnership approach with
the Chinese government to encourage longterm positive change. 9
We recognize that the capacity of local NGOs
in China is limited. More training is needed forcross-sector partnerships to develop fully, andwe intend to expand our capacity-building
efforts in China.
As a company growing its business and looking for potential retail opportunities in China,
we are encouraged by the openness shownby the National People’s Congress in soliciting
feedback from outside organizations and individuals during the recent revision of Chineselabor law. We welcome and look forward to thiscontinuing dialogue.

Promoting Action and
Dialogue at the Global Level
We recognize our responsibility as a large
multinational company to promote action anddialogue on social responsibility issues at theinternational level.

Global Frameworks
We have been a signatory to the United
Nations Global Compact (UNGC) since 2003
and actively support its principles and goals.
We recognize the power of the United Nations
to bring together the world’s most influential
actors, and participate in groundbreaking
initiatives. To ensure an appropriate levelof transparency about our own efforts, we
also provide an annual communication on our
progress to the UNGC. X

efforts as a business. Together with other
BLIHR members, we are working to understand
how we can respect and protect human rights
in our owned and operated facilities and supply
chain. An initial self-assessment of our policies
and practices against international humanrights norms, appears on pages 16-17.

Extending Our Sphere of Influence
We also work in specific instances to address
severe human rights abuses that occur in countries where we do business. In 2005 and 2006,
we reached out to political officials in Mexico,
the Philippines, Cambodia, and Bangladesh
to protest arbitrary arrests and violence, detainments, assassinations of labor rights and tradeunion leaders Y and loss of lives from factory
fires, accidents and building collapses. We sentletters independently and in collaboration
with other brands, Z met with a variety of government officials on a one-on-one basis andalso raised issues in multi-stakeholder forums.
Whether we reach out as a single company
or jointly with others, we hope that our actions
will motivate governments to address existing
problems and deter them from allowing such
violations to take place in the future.

International Trade Policy
Gap Inc. has both an opportunity and a
responsibility to participate in the global policy
process. We believe that, at its best, free
trade leads to healthy competition, innovation
and better products, higher-paying jobs, newmarkets, and improved economic opportunities
for people at all levels. We know that open
trade policies are vital to our own growthand success as well as the success of our
trading partners.
We support the elimination of trade barriers
and believe that, wherever possible, thisshould be done in a way that strengthens
developing countries and local communities.
We recognize that trade agreements canprovide significant incentives to improvelabor and environmental standards. Tradeagreements can also offer tangible economic
benefits in emerging markets that meet basic
labor and environmental norms and can reinforce efforts to improve these standards. We
believe that business can and should play arole in the international trade policy process
by working with governments, internationalorganizations, NGOs and trade unions to promote incentive-based approaches to raising
global labor and environmental standards.

Through our participation in BLIHR, we are also
seeking to better understand the relationshipbetween the international frameworks onhuman rights and our social responsibility

37

These technical sketches provide manufacturing
specifications for the Gap (PRODUCT) RED TM denim jacket.

2

EMPLOYEESHOW CANWE INSPIRE
150,000
EMPLOYEES?

EMPLOYEES

Since our last Social Responsibility Report in
2004, we’ve made progress in improving ourworkplaces for more than 150,000 employees
worldwide. Despite our business challenges,
we instituted and enhanced initiatives aimed
at making Gap Inc. a great place to work —from providing competitive health and lifestylebenefits, to encouraging open dialogue andintegrating diversity into our workplace practices. We know how important these elements
are in keeping our workforce engaged and inmoving our business forward.
We recognize that we have more work to do,particularly in the area of employee turnover,
and we’re committed to making improvements.
“Gap Inc. employees are passionate about what
we do...and that includes acting in a socially
responsible way. It shows up across the organization in how we treat one another with respect and
act with integrity.”—Eva Sage-Gavin, Executive Vice President,
Gap Inc. Human Resources

Creating an Open,
Inclusive Workplace
Each year we hire talented people for jobs inour stores, distribution centers and corporate
locations around the world. From their first day
on the job, we strive to provide employees with
an open, respectful environment where they
feel valued for their contributions.

42

We believe a strong culture starts with open
dialogue, which is why we invest in employee
opinion surveys and channels that promote
communication.
In 2004, we piloted an employee opinion
survey, which we expanded in 2005 and 2006.
Over the past three years, more than 54,000
employees have participated in the surveys,
providing their opinions and ideas. We learned
from the survey that we’ve done well in three
key areas: our customer focus, respect foreach other, and our satisfaction in the personal
accomplishments of our work. At the sametime, employees told us there’s room for
improvement in several areas, including careerdevelopment. We plan to continue surveying
our employees in 2007.
We also upgraded the capabilities of our company intranet — the primary communications
channel for our employees. Links throughout
the intranet allow employees to ask questions
or provide on-the-spot feedback. We’ll ask
a company leader to answer the most commonly-asked questions and then publish theiranswers on the intranet.
Employees also have opportunities to ask
questions of our leaders directly throughface-to-face meetings such as quarterly
business forums and an ongoing employee
discussion series hosted by senior management. These events often include a videoconference and/or conference call option toaccommodate employees in multiple locations.

2 Employees

Gender & Ethnic
Breakdownof Employee
Population

Gap Inc.
North America
Workforce

United States
Demographics
Census Data**

Female

72.4%

51%

Male

27.6%

49%

White

53.8%

73.0%

Black/African American

15.9%

12.0%

Hispanic/Latino

14.6%

5.5%

Asian/Pacific Islander

6.4%

4.0%

American Indian

0.4%

0.8%

Not specified/Unallocated*

8.9%

4.7%

North America Workforce Q4 2006

* Not Specified/Unallocated: Employee chose either[Not Specified] or no option in the Ethnicity section on
the Employee Profile form.
** Census 2000: Workforce population: age 18+. Results willvary within geographies. Does not include mixed races.

43

2 Employees

From Opinion
to Action

Banana Republic’s Modern Store
initiative, which began rolling out
to all stores in the first half of 2006,
is the brand’s model for organizing
jobs in each store. Developed
from employee feedback, Modern
Store clearly defines the roles andresponsibilities for all store positions,encourages career development andimproves store efficiency.
In the Modern Store labor model,
staff jobs are organized into threework centers: sales, sales supportand “non-sell,” which can include
restocking and creating product displays. Each employee focuses on
specific responsibilities, dependingon what they are hired for.
After piloting the Modern Storelabor model in April 2005, employee
satisfaction improved substantially.
Engagement measures in Modern
Store pilot locations were up
to 23 points higher than those
not working with the new model.
Turnover decreased five percent
for the same period across thebrand. Since the beginning of
the pilot, 83 percent of all open
leadership positions in stores with
the new labor model have been
filled internally.

44

Sales conversion in stores piloting
the new initiative increased byalmost three percent from April to
September 2005. Sales comps were
almost one percent higher for thesame timeframe, translating into
$2 million of additional revenue.
Customer satisfaction survey results
were also resoundingly positive,
with Modern Store locations outperforming the brand overall monthover month.

2 Employees

Underscoring all of these communication
efforts is our basic promise of trust. Throughour Open Door policy, any employee can ask
questions, raise concerns or make suggestions
to managers, supervisors or human resources
representatives without fear of retaliation.
Alternatively, employees can confidentiallycontact our Corporate Compliance department
or 24-hour hotline for assistance or to reporta potential violation.

Diversity and Inclusion
We continue to integrate principles of diversity
into our workplace. In 2003, we established a
Global Diversity Council, comprised of seniorbusiness leaders from across the company.
And, in 2006, we appointed a Vice President tooversee our Diversity & Inclusion team. Today,
this team works in partnership with the Council
to build awareness of the value of diversity inthe workplace and integrate diversity into business practices.
We currently sponsor two employee resourcegroups, the African-American Networking
Group (AANG) and Gay Employees andResources (GEAR) group, which are organized
and managed on a volunteer basis and areopen to all employees. These groups provide
networking, mentoring and development
opportunities, in addition to assisting diversity
awareness for the entire company.

Valuing Diversity
In 2005 and 2006, we wererecognized as one of the “Top 30
Companies for Executive Women”
by the National Association for
Female Executives (NAFE). This
prestigious list measures women’s
representation among the highestpaid and top-tier positions at
America’s largest companies.

We support groups that help promote diversity
in the communities where we live and work.
These include INROADS (the nation’s largest
minority internship provider), the United
Negro College Fund, the Hispanic Associationof Colleges and Universities, National
Association of Asian American Professionals,
and Out & Equal.
We’re proud of the recognition we’ve received
for our diversity efforts. For more details, pleasesee page 87.

Workplace Policies
Just as we hold approved garment manufacturers accountable for complying with allapplicable laws and treating workers with
dignity and respect, we do the same for ourown employees.
Our workplace policies and training programsreflect our commitment to creating an ethicaland respectful environment. We are an
equal-opportunity employer. All employment
decisions are made without regard to race,color, age, gender, gender identity, sexual
orientation, religion, marital status, pregnancy,
national origin/ancestry, citizenship, physical/mental disabilities, military status, or any
other basis prohibited by law.
We also have a zero-tolerance policy withregard to discrimination or harassment. Thismeans that we are committed to treating ourcustomers — and each other — with integrity
and respect, regardless of appearance, skincolor, gender or any other such distinction.

We have absolute respect for our employees’rights, including freedom of association andthe right to work in an environment freefrom harassment and discrimination. All new
employees are required to take the Code ofBusiness Conduct Overview module, part of acomprehensive suite of training courses called
Principles of Integrity (POI), which are based on
our workplace policies. In addition to providing
an overview of our Code of Business Conduct
policies, POI training modules help new andcurrent managers learn how to create a positive
work environment, prevent sexual harassment,
and manage pay and disability issues. For more
information about our Code and Principles ofIntegrity training, please see page 15.

Employee Recognition
We want employees to feel valued for theircontributions to our business and our culture.
One of the most important vehicles for thisis peer-to-peer recognition. To make it easy,
meaningful and fun to recognize employee
accomplishments, we launched our “Applause”
program in October 2005. Through theprogram, our employees in the United States,
Canada, Japan, France and the United
Kingdom can recognize each other for
embodying our purpose, values and behaviors
in ways that drive business results. Employees
simply fill out information online or on a
printed card with the name of the person
they’re recognizing and the action that inspired
the recognition.
Through fiscal year 2006, more than 300,000
online Applause cards have been sent,
95 percent of which came from our storeand distribution center employees.
In 2005, we also launched The Exceed Award,
Gap Inc.’s first formal, company-wide spot
bonus program, which allows managers to
reward employees in real-time who demonstrate superior performance and generate
results above and beyond what is expectedin their role.
Our brands also have programs in place toreward the contributions of their employees
at every level. These programs, which are bothpeer- and manager-based, recognize store
employees, and include cash rewards for sales
associates and certificates for outstanding
store design or superior performance.

Providing Competitive
Compensation and Benefits
We believe a great workplace is about
rewarding our employees with competitivecompensation and benefits to help them stayhealthy and support their families.
Our compensation is aligned with individual,
business and company performance. We
regularly track and analyze the industry, local
markets and other companies to ensure that
we continue to attract the best employees andoffer comparable rewards.

45

2 Employees

Our employee benefits program is one of ourmajor corporate investments. In 2006, we spentnearly $318 million on U.S. programs that arecompetitive with, if not better than, those ofmany of our peers.
Like many other companies, we are concerned
about the availability and cost of health care in
the United States. Last year we participated in
the Affordable Health Care Solution Coalition —along with more than 50 other Fortune 500
companies — to seek affordable solutions forworkers who don’t currently have health insurance coverage.
As a result of our involvement in the coalition,
we began providing part-time employees withaccess to a wide range of health care options
through National Health Access beginning inJuly 2006. The program, which offers accessto a variety of health care options ranging fromdiscounts on medical and health care costs
to major medical insurance, is available to parttime employees and their eligible spouses,
same-sex domestic partners and dependents
in the U.S. (excluding Hawaii and Puerto Rico)
who do not have access to Gap Inc.-sponsoredgroup health insurance. As of the end of 2006,
almost 2,000 employees had enrolled.
During 2006, we also undertook an extensive
review of our health care programs to findthe right balance between providing valuable
employee benefits while also managing our
expenses for the long-term health of our organization. As a result, we’ll be introducing some
additional consumer-driven health care options
starting in 2007. These options will have greater
cost transparency and allow employees to havemore control over their health care spending.

Investing in Our Growthand Development
Employee retention continues to be a challenge for us. While we’ve seen notable
improvement in retaining sales associates andstore leaders (we’re doing better than industry
benchmarks), employee turnover remains a
concern and focus area for the company. Duein part to our current business conditions, our
key retention challenges are presently in leadership and merchandising. These areas are
now among the company’s top priorities.
We’re focused on promoting from within,
encouraging our employees to grow by pursuing new opportunities within Gap Inc. Of thejob openings that became available in North
America during 2006, 45 percent were filled
by internal candidates. This was a slight dropfrom 2005, when we filled 47 percent of open
positions with internal candidates.
Internal hiring of executives at the Vice President
level and above increased to over 60 percent in2006 — up from 30 percent in 2003.

We believe that employees are more likely
to stay at companies where they see growthpotential. In 2005 and 2006, we provided

46

1.5 million hours of training to employees
worldwide. Ranging from leadership development for supervisors to specific training inmerchandising, production and planning for
employees on our product teams, the programs
are designed to address critical businessneeds in classrooms and most importantly,
on the job — where our store and corporate
employees tend to learn and retain the most.
These include:• A welcome program for all newly-hired

employees, providing the history of Gap Inc.
and an overview of our culture.
• Leadership development programs divided

into curriculums for first-time managers,
mid-level managers and executives.
• Specialized brand training programs formerchant, distribution and planning teams.
• A nine-month Retail Management Program(RMP) offers recent college graduates
exposure to the principal areas of our business through rotations in Merchandising,
Planning, and Production as well as special
projects that allow participants to directly
influence the business and interact withsenior management. After completing the
program’s on-the-job functional rotations
and classroom sessions, participants
have an opportunity to work full-time as
an Assistant Merchandiser, Planning Analyst,
or Assistant Production Manager.
• A three-week Product Team Onboarding

for new employees in Merchandising,
Planning, Production and Distribution
includes sessions on company businessprocesses and store visits to learn more
about products, customers and store
operations. Other classes cover retailfinance, sales trend reporting and training
to use specific software.
• An eight-week, in-store, Manager-in-Training

Program offers training and development
for college graduates interested in store
management. Upon successful completionof the program, participants are assigned
to manage an Old Navy store.
• Internships for talented undergraduate andMBA students in our headquarter offices
provide challenging, hands-on retail experience in a variety of functional areas. MBA
students have the opportunity to work on
strategy projects for senior leaders acrossthe organization.

Supporting
Our Employees
We strive to support employees who are facing
emergencies or crises by providing programsfor immediate relief.
Our Paid Time Off (PTO) Donation Fund is available to employees who have exhausted their
PTO but need to take paid time away becauseof a natural disaster, loss of residence ormedical emergency. Full-time and part-timeStudents Name Gap Inc.
an Ideal Employer
In 2006, Gap Inc. was named themost “Ideal Employer” among all
retailers for students interested
in careers in retail and fashion, in
an annual survey by Universum.
The study, which was reported in
Women’s Wear Daily, polled morethan 37,000 students at more than
200 leading colleges and universities
across the country.

2 Employees

2006 Employee
Benefit Programs

2006 Employee Benefits*

Program Descriptions and Coverage

Eligibility

Gap Inc. Investment

Health and Wellness
Benefits

Benefits include:

Available to all full-time employees
on date of hire or change in status
to full-time**

Gap Inc. pays approximately
80% of the costs of healthcare coverage for eligible U.S.
employees and 80% of costs
for eligible U.S. employees’
dependents, including theirsame sex domestic
companions.

• Medical• Dental• Vision• Health care & dependent care

Flexible Spending Accounts• Life, disability, accidental death anddismemberment and business travel
accident insurance
Wellness programs:• 24/7 NurseLine service• Health risk assessments• Cancer care support• Employee Assistance Program (EAP)Life Resources

Financial HealthWork-Life Balance andLifestyle Programs

New Parent Support

Community Investment
Benefits

National Health Access

Available to part-time employees

GapShare 401(k) Plan: Gap Inc. offers a401(k) plan featuring dollar-for-dollar company
matching contributions up to 4% of base pay,with 100% immediate vesting.

Minimum age of 21, eligible after
12 months of service, with at least
1,000 hours of service during 12months from date of hire

In 2006, Gap Inc. contributed$34 million in company match
contributions in the GapShare
401(k) Plan.

Employee Stock Purchase Plan (ESPP):
Employees can receive a 15% discount off
the fair market value of Gap Inc. stock on
the day of the stock purchase.

Regular full- and part-time
employees are eligible

In 2006, Gap Inc. recorded
a compensation expense of
approximately $6 million asa result of the ESPP.

Tuition reimbursement: Gap Inc. employees
can be reimbursed up to $5,000 per year for
approved, job-related academic courses.

Tuition reimbursement is available
to all full-time employees after one
year of service

Gap Inc. paid a total of$1.8 million for tuition
reimbursement in 2006.

Free financial planning/counseling

Available to all U.S. full-time employees

Access to home loans at reduced rates

Available to all U.S. full-time employees

Paid Time Off (PTO): One of the most generous PTO programs in the retail industry,
Gap Inc. provides 20 to 35 paid days to use
toward vacation, sickness or personal time,in addition to seven paid holidays per year.

All full-time employees begin accruing
PTO and are eligible for holiday pay
on date of hire

Generous merchandise discounts

Merchandise discounts available
on date of hire

Adoption Assistance
Reimbursement Program

Available to all U.S. full-time
employees

Gap Inc. paid $35,000 in
adoption assistance in 2006.

Child care support

Available to full-time
employees in New Yorkand San Francisco

In 2006, Gap Inc. contributed$565,000 to cover spaces forchild care and backup care.

Healthy Pregnancy Program pre-natal risk
assessment service

Available to all U.S.
full-time employees

Maternity leave

Available to all U.S.
full-time employees

Paternity/adoption leave

Available to all full-time employees with
12 months of service and 1,250 hours
of service prior to start date of leave

Phase Out/Phase Back Program
to assist new parents

Available to all U.S.
full-time employees

Gift Match: Contributions to all eligible
non-profits are matched, dollar for dollar.
Donations can be made as one-time gifts or
via payroll deduction.

All full- and part-time
employees, worldwide

In 2006, Gap Inc. contributed$2.1 million to Gift Match.

Money for Time: For every 15 hours an
employee volunteers in a calendar year with
one non-profit, Gap Inc. will donate $150.

All full- and part-time
employees in North America

In 2006, Gap Inc. contributed$325,000 to Money for Time.

Board Service Match: To support the leadership offered by our executives on non-profit
boards of directors, Gap Inc. will make adonation to the non-profit on whose boards
our leaders serve. This is in addition to these
individuals’ annual gift match allocations.

Regional directors, seniordirectors and above

In 2006, Gap Inc. contributed$92,500 for Board Service Match.

In 2006, Gap Inc. contributed$126 million toward PTO.

* The data in the chart above applies to U.S. only. Internationally, we align employee
needs with the health care and wellness options available in each country
to ensure we’re providing a comprehensive benefits package for our employees.
** Employees who are classified as full-time and scheduled to work at least
30 hours per week are eligible for benefits.

47

2 Employees

U.S. Workplace
Safety at a Glance
Retail Stores

All Other Locations

Total

2004

2005

2006

2004

2005

2006

2004

2005

2006

Number of Gap Inc. Employees

133,225

128,514

131,705

15,036

13,377

12,588148,261

141,891

144,293

Workers’ Compensation Claims*

2,577

1,989

1,661

316

175

261

2,893

2,164

1,922

502

338

261

102

67

62

604

405

323

107,193,309 103,664,123 124,699,307

16,297,716

16,434,059

Time Loss Claims*
Hours of Exposure

15,881,072 123,491,025 120,098,182 140,580,379

Rate of Injury per 200,000
Hours Worked

5.74

4.97

3.50

5.13

2.95

4.07

Occupational Injury-Related
Fatalities

0

0

0

0

0

0

Experience Modification Factor *** Claims data represent U.S. locations.
** The Experience Modification Factor is an assigned rate that compares
the number and cost of a company’s Workers’ Compensation claims withthose of peer companies in their industry. A rating of “1.0” represents
average performance for the industry. Gap Inc.’s rating of 0.75 in 2006 islower and, therefore, better than the industry average.

48

5.66

4.69

3.57

0

0

0

0.55

0.81

0.75

2 Employees

employees are eligible to apply for paymentsfrom the PTO Donation Fund, which is available
through the generosity of other employees who
donate a portion of their own PTO.
We also have a process administered throughour Global Employee Relations departmentthat permits employees to draw on their own
PTO in a lump sum when they are facing apersonal crisis.
For employees facing extreme financial hardship, we provide assistance through Individual
Disaster Relief Support. Full-time and part-time
employees who are having difficulty meeting
basic needs for themselves and/or their
immediate families may be eligible for cash
allowances or gift cards.
When the tsunami in Asia and Hurricanes
Katrina and Rita in the United States struck,
we supported the recovery of our colleagues
from those devastating disasters, providing
impacted employees with everything fromfinancial and relocation assistance to crisis
counseling. Our Large-Scale Disaster Relief
Support programs are based on the extent of
the disaster, and may include allowances for
home, food, housing and clothing. We alsooffered a PTO Donation Fund payout, continued pay for employees unable to work due toa building closure or quarantine, job relocation,
housing assistance/relocation, and employee
assistance program support.

Workplace Safety and HealthIn addition to instituting an injury and illness
prevention plan, our core health and safety
initiatives and programs include:• Three separate auditing processes to

identify opportunities to reduce injury
probability/severity.
• Monthly safety education for leadersand employees that focuses on injury
prevention/avoidance and Occupational
Safety and Health Agency (OSHA) compliance. Distribution center jobs incorporatetime for safety education to ensure that
employees receive the required information
they need to work safely.
• Safety training that covers everything fromemergency response/evacuation and use of
personal protective equipment.
• Regional Disaster Recovery Guides to ensurethat managers know how to respond quickly
to a variety of health and safety issues that
may result from a natural disaster.
Our workplace health and safety programs
are designed to ensure that our facilities aresafe for our employees and our customers.
We optimize air quality inside our facilities androutinely use low-emitting building materials
such as low-volatile organic compound paints.
We also have a program in place to prevent
mold from becoming a problem in our facilities
and stores. Following Hurricane Katrina, wewere quick to respond to mold remediationin our stores to ensure the health of ouremployees and customers.

We know how important it is to ensure thesafety of our employees in all of our locations,from distribution centers to stores to headquarter offices. Since 1999, on-the-job physicalinjuries to employees have decreased by
75 percent. Our 2006 injury frequency/severity
rates are more than 50 percent below thewarehouse and distribution industry rates.

49

HOW HAVE YOU HAD
AN IMPACT ON GAP INC.’S
SOCIAL RESPONSIBILITY
EFFORTS THROUGH YOUR JOB?

“I go home every day knowing I made areal difference simply by doing what I
love. It’s so amazing how something so
simple can have such an enormous andprofound effect on the world. That’s themagic about (PRODUCT) RED. ”
TM

Lily Nguyen
Sales Lead, Gap“We approach projects keeping in mind bothGap business goals and how our work canhave a positive impact on the world aroundus. With this perspective, we’re exploring
ways to change the composition of Gap’s
price tickets to 100 percent post-consumer
waste recycled paper.”John Hodges
Associate Manager,
Global Sourcing and Packaging, Gap
Jorge Perez-Olmo
Senior Global Marketing Sourcing Manager, Gap

50“As a volunteer at Abilities, Inc., I use theskills and experiences I’ve gained as a Gap
associate store manager to help provide
job training and coaching to people withdisabilities so that they can transition into
the workforce. The time and cash grantfrom winning the Founders’ Award willallow me to help update the retail training
program and help more people enter thejob market and achieve their goals.”
Constantina Petallides-Markou
Associate Manager, Gap
2006 Gap Inc. Founders’ Award Winner2 Employees“In my role, I source for factories that candeliver great and timely products. In myten years of experience, I see factory
operations and social responsibility connected in a circle. Factory management
who invest in people and treat theirworkers well and with respect tend to gain
in higher efficiency and product quality,
which allows them to grow the businessand in return allows the management tocontinue doing more for their people.”
Leng Leng Lee
Senior Director,
Sourcing & Vendor Development,
Gap Inc.

“The creative options that emerge fromembracing sustainable fibers — blends ofsilk and soy, hemp, organic cotton that isnaturally colored, green cotton that is softand safe with no chemical finishes, organic
wool — are exciting, and we have the opportunity to make a statement of respecting theenvironment with the appeal of our natural
heritage and sophisticated styles.”Damaris Botwick
Director of Textile Development,
Banana Republic“We’re constantly evaluating new business
opportunities that will yield a sustained profit
over time and that will inspire our employees
to be innovative and creative. New brand concepts, new partnerships or new sub-brands,
like Gap (PRODUCT) RED , have proven to be
incubators for successful ideas that can scale
to the rest of our business. When we can integrate our foundation of social responsibility
into new and exciting business opportunities,
it’s a win-win situation.”TM

Art Peck
Executive Vice President,
Corporate Strategy andBusiness Development, Gap Inc.
51

The Gap (PRODUCT) RED TM denim jacket
is made from distressed denim fabric.

3

ENVIRONMENTCANPROTECTINGTHE
ENVIRONMENT
BE GOOD
FOR BUSINESS?

ENVIRONMENT

Our business operations rely on our planet’s
natural resources. We believe that our
success should not come at the expenseof the environment, so we strive to operate
in a way that is mindful of long-term environmental sustainability.
Whether we’re saving costs by reducing energy
consumption or creating products throughinnovative, sustainable design, we believe that
reducing our impact on the environment canalso result in positive business benefits.
Through a careful analysis conducted withenvironmental consultancy CH2M HILL,
and our materiality analysis with SustainAbility(see page 14), we examined the environmental
challenges that our company faces and analyzed the potential impact to our business. We
considered the areas over which we have themost control and influence, and assessed thelevel of societal concern for each. Our environmental strategy is focused on three key areas
where we believe our work can have the greatest positive impact: Energy conservation,
Cotton/sustainable design, and Output/waste
reduction (ECO).

Energy Conservation
With operations in more than 50 countries,
we are acutely aware of the world’s environmental challenges, in particular, global climatechange. We are working to understandhow the implications of climate change may

56

impact our business and to reduce our own
negative contributions.
According to The Intergovernmental Panelon Climate Change, “Continued greenhousegas emissions at or above current rates would
cause further warming and induce manychanges in the global climate system during
the 21st century that would very likely be larger
than those observed during the 20th century.” 10
Businesses are beginning to respond to theadverse effects of climate change. GE’s bold
Ecomagination initiative includes a commitment
to reduce the company’s greenhouse gas emissions and to improve energy efficiency acrossits operations. Through its Virgin Fuels branch,
The Virgin Group will invest $400 million in
renewable energy projects worldwide through2009. Hybrid cars, like the Toyota Prius, areviable alternatives to conventional vehicles thatrun solely on petroleum-based fossil fuels.
We believe that businesses must take immediate action to address climate change. We arecommitted to reducing our own greenhousegas emissions, primarily through energy conservation efforts. In our 2003 Social Responsibility
Report, we noted that we had joined the
U.S. Environmental Protection Agency’s Climate
Leaders program and pledged to reduce our
U.S. greenhouse gas emissions by 11 percent
per square foot from 2003 to 2008. As illustrated in the chart on page 58, energy use
in our U.S. stores has decreased 8.7 percent
between 2003 and 2006.

3 Environment

Our Impact on
the Environment

Influence

InputsWater, pesticides,
fertilizers, dyes,
energyProcess

Raw Materials
and Textile
Production

Outputs

Emissions,waste, runoff(wastewater)▼▼

Direct Control

Fuel, water,
chemicals

Fuel, corrugate,
plastic

Energy, corrugate,
plastic▼▼▼

Transportation of
Goods

Store and Facility
Construction

Store Operations(including
packaging)▼
Garment
Production

Energy, wood,other construction
materials

Weak /No Control

Energy, water, drycleaning chemicals▼
Consumer Use
and Disposal

▼

▼

▼

▼

▼

Emissions, waste,
wastewater

Emissions, waste,
wastewater

Emissions, waste

Emissions, waste

Emissions, waste

In 2004, we worked with CH2M HILL to assess our environmental impact
throughout the product life cycle. We’ve confirmed that, in the shortterm, we should focus our efforts on the areas over which we have directcontrol and, therefore, the biggest opportunity to make a difference.

57

3 Environment

EnergyConservation

EnergyConsumption
by Location

Average U.S. Store
Energy Consumption

In percentages

In units: 1 unit = kWh/ft 229.93 29.21

5.2

28.38 27.34

21.1

73.7
2003 2004 2005 2006

2003: 29.93
2004: 29.21
2005: 28.38
2006: 27.34

Stores: 73.7%
Distribution Centers: 21.1%
Headquarters: 5.2%

Output/Waste
Reduction

Waste Managementin Stores

Paper and Corrugate
Cardboard Recycling
in Stores, Distribution
Centers and Headquarters(North America)

Beverage Container
Recycling in Stores,
Distribution Centersand Headquarters(North America)

In percentages

In thousands of tons

In tons44.9 49.5

35.8 36.6

38.0

33%

67%
2004 2005 2006

Third-party: 67%
Landlords or Developers: 33%

58

2004: 38,000 tons
2005: 44,920 tons
2006: 49,540 tons

2005 2006

2005: 35.8 tons
2006: 36.6 tons

3 Environment

While we are pleased to see this reduction in
our stores, we know that we have more opportunity to improve. We assessed our energy
consumption to better understand where ourefforts could have the most significant impact
and where we should focus our attention.
We learned that our fleet of stores is responsible for approximately 73.7 percent of our totalenergy consumption, our distribution center
campuses are responsible for roughly 21.1 percent and our headquarter offices account for
about 5.2 percent.

StoresSince the majority of our energy consumption
occurs at the store level, we introduced a number of initiatives in 2005 and 2006 to conserve
energy in our U.S. stores. In our Gap, Banana
Republic and Gap Inc. Outlet divisions, weoffered energy management training at store
managers’ conferences. These sessions sought
to build awareness of our commitment to
reduce energy and to reinforce, where applicable, proper usage of the computerized Energy
Management System (EMS) to control lighting,heating, ventilation and air conditioning.
In 2006, Old Navy also introduced its Timeto Shine program, an online resource thatprovides Old Navy stores with pertinent information regarding facilities and operations.
Included in this resource are specific practices
and examples of how Old Navy stores canconserve energy, such as ensuring that all
temperature sensors remain unblocked.
Concurrently, in our U.S. Gap, Banana
Republic, Old Navy and Gap Inc. Outlet
divisions, we introduced a pilot program to
examine how the computerized EMS locatedin each of our stores can more effectively
manage our energy consumption, while stillallowing store managers flexibility to customize
the lighting, heating, ventilation and air conditioning in their stores. This pilot program
includes examining approximately 30 stores
per division and aims to determine whichelements of the EMS should be controlled
centrally and which should remain under store
managers’ control. We expect this exploration
process to continue throughout 2007.

Distribution Centers
We are also looking at ways to reduce energy
usage at our distribution center campuses.
In 2006, we changed the lighting at our Fishkill,
N.Y. and Fresno, Calif. campuses. Throughthis effort, we replaced approximately 7,500
light fixtures with T8 fluorescent fixtures,
which use approximately half the energy
while providing the same level of lighting.
We estimate the new light fixtures will save us$947,000 annually. In 2007, we will retrofit our
distribution center campuses in Gallatin, Tenn.
and Brampton, Ontario.

Renewable Energy
When it launched in 2005, our Forth & Towne
brand made a commitment to support renewable energy. During the brand’s lifetime, itspurchase of renewable energy certificates —which represent the environmental attributesof power produced from renewable energy
sources but are sold separately from commodity electricity — offset 50 percent of its energy
consumption and prevented the emission of
more than 502 tons of greenhouse gasses,
the equivalent of removing 108 cars from U.S.
roadways each year. Consistent with our desire
to work with vendors who share our values,
these certificates supported a wind farm that
reserves a portion of its proceeds to support
orphanages in Southeast Asia.

Cotton/Sustainable Design
Most of our clothes are made of cotton, a cropthat can have significant environmental impact.
Although cotton covers only 2.4 percent of theplanet’s arable land, 11 percent of global pesticide sales and 24 percent of global insecticidesales go into cotton production. AA In 2005,
we joined the Better Cotton Initiative (BCI) BB
to help address the environmental impact ofcotton farming. This collaborative, multi-stakeholder effort was started by the World Wildlife
Fund (WWF) and aims to address not only
the environmental impacts of global cotton
cultivation practices, but social and economic
impacts as well.
Other groups involved in the early stages oflaunching this effort include the Interchurch
Organization for Development Co-operation,
Oxfam, Organic Exchange, and a range of otherwell-known brands and retailers.
One increasingly popular alternative to conventionally-farmed cotton is organic cotton, whichis grown without the use of synthetic pesticides
and fertilizers that can be harmful to the environment. Our brands have begun to explore
the use of organic cotton for some productofferings. In February 2007, select Gap stores
introduced men’s t-shirts and tanks made with
100 percent organic cotton. To preserve thenatural colors and qualities of the organic
cotton, these products are not chemicallydyed or bleached. Our Gap stores in the United
Kingdom and France will be launching additional organic cotton products in 2007.

Beyond Cotton
Our textile design team is always looking
for interesting fabrics that will distinguisha garment and make it special. By exploring
fabrics made of materials other than conventionally-grown cotton, the team can create
products that are fashionable and environmentally friendly at the same time.
For example, in the summer of 2006,
Banana Republic offered a skirt made ofa hemp/silk blend that produced a soft,59

3 Environment

satin-like fabrication. Not only did our customers respond well to the skirt, it was also
good for the environment, since hemp isa natural fiber that requires few pesticides
and fertilizers to grow.

Output/Waste Reduction
The U.S. Census Bureau estimates that the
global population will grow from 6.6 billion
in 2007 to more than 9.4 billion in 2050. This
rapid expansion will put a strain on our natural
resources and society’s ability to absorb waste.
We know that through our daily business
operations — from shipping garments in protective plastic wrap and boxes from factory tostore, to printing documents in our headquarter
offices — Gap Inc. is responsible for creating
waste. We are committed to reducing theamount of waste we produce and decreasing
our consumption of natural resources.
A number of our environmental initiatives arefocused on reusing and/or reducing the wastethat we produce as a company, and encouraging our suppliers to be mindful of their own
waste streams.

Waste and Recycling
In 2005 and 2006 we continued our solid
waste and recycling programs at our stores,
distribution centers and headquarter offices.
The charts on page 58 illustrate progress on
key initiatives.
At our headquarters, we also continued
to divert compostable waste from landfills.
Through this program, we divert an averageof 113 tons of waste annually.
StoresMuch of our waste stream comes from ourfleet of more than 3,100 stores worldwide.
While we are committed to reducing theamount of waste from our stores, waste
management at the store level continues
to be a challenge for us. A third-party waste
management company hauls waste fromapproximately 67 percent of our stores. We
have most control over waste and recyclingfrom this portion of our fleet, thanks to ourdirect relationship with these third-party waste
management companies. Waste from the other33 percent is hauled by companies that
contract with the landlords or developers who
manage the shopping structures in which ourstores are located. In these cases, we do
not have a direct relationship with the waste
management companies that haul our waste.
Furthermore, many of these shopping structures do not have the infrastructure to separate
recyclable materials from waste. We are currently working to develop a program to engage
landlords and developers on this issue. Our
hope is that we can partner with landlords anddevelopers to build the necessary infrastructure to facilitate recycling at the store level.

60

In the meantime, we look for creative ways todivert waste from landfills wherever possible.
For example, Old Navy store decorations
during the 2006 holiday season consisted ofartificial Christmas trees, artificial pine garlands
and decorative snowflakes. The Old Navy marketing team did not want to simply throw these
decorations away, so they worked with theorganization Gifts in Kind to reuse them. Gifts
in Kind identified approximately 750 local charities across the United States and Canada that
had use for these decorations, and we wereable to match each charity with a local store
to donate our holiday decorations. Throughthis effort, we diverted approximately 102,500
pounds of artificial trees and 150,500 feet ofgarland from landfills and gave the decorations
to charities for their use and enjoyment.
National Recovery Center
Our National Recovery Center (NRC) in
Kentucky receives defective and unsold garments and donates product that is still usable.
For clothing that is too damaged to donate,
we have partnered with Special Waste
Systems, Inc. to turn damaged or defective
clothing into rags for use at hospitals, or as
furniture stuffing or insulation. The NRC also
receives defective mannequins which areshredded and converted into pellets that canbe used in place of sandblasting materials.
In 2006, the NRC began working on an initiative
designed to convert materials classified
as hazardous waste into a usable resource.
Working with an organization called Parallel
Products, we began converting waste perfume(considered a hazardous material becauseof its flammability) into ethanol. Oil and gas
companies purchase the recycled ethanol
and add it to automobile gasoline to help meetclean air standards.
Supply Chain
We have less control over operations in ourmerchandise and non-merchandise supply
chains than in the facilities we own and operate. But we strongly encourage our business
partners to be mindful of their waste streams
and use of natural raw materials.
Wastewater Quality. In our 2004 Social Responsibility Report, we noted that our denim products go
through an extensive dyeing and treatment processthat often involves chemicals in order to create
the washes and rinses our customers desire. If left
untreated, wastewater discharged from these denim
laundries can impact the water system in the communities where the laundries operate.

To address this issue, we implemented awater quality program for all denim laundry
facilities that handle our products. We also
partnered with CH2M HILL to develop a program that measures denim laundries’ effluent
against Business for Social Responsibility’s(BSR) Water Quality Guidelines. CC If a facility’s
effluent fails to meet BSR’s strict standards,
we prescribe corrective action steps to help
it come into compliance.

3 Environment

As mentioned in our 2004 Report, we began apilot program in 2004 with 20 laundry facilities.
Since then, we have expanded the program in
two additional phases so that all of the denim
laundry facilities we work with have gone
through the program. The table below outlines
results from each phase of the program.

Denim Laundry
Wastewater Program
Number of
Denim
Laundries*

Pass

Fail

Pilot (2004)

18

14

4

Phase 1 (2005)

41

22

19

Phase 2 (2006)

90

44

46

Total

149

80

69

* These numbers differ from earlier reported numbers
because we stopped doing business with somedenim laundries during the course of the program.

For those laundries that failed to meet ourstandards in the Pilot and in Phase 1, we
have prescribed corrective action plans.
Twenty-two of these facilities have completed
remediation and are in compliance. We arecontinuing our work with one facility to bringit into compliance.
In early 2007, we communicated our expectations to the 46 facilities in Phase 2 that did notmeet our standards. We are working with themon corrective action plans to help bring theminto compliance by the end of 2007.

most commonly regulated by local, national
and international standards: pH, total suspended solids, biochemical oxygen demand(BOD), chemical oxygen demand (COD), color
and temperature.
As mentioned in our 2004 Report, municipal
or publicly-owned water treatment facilities
in some countries remain a challenge for us.
Our work with the BSR Apparel Water Quality
Working Group continues to explore ways toaddress this issue.
Environmental Procurement Guidelines. For our
non-merchandise suppliers, we incorporated environmental procurement guidelines into our Request
for Proposal (RFP) process in 2006. These
guidelines inform our suppliers of our company’s
preferred environmental attributes for non-merchandise materials. For example, we prefer to use paperwith recycled fiber content and unbleached, process
chlorine-free pulp. As a result, much of the paperand corrugate we purchase directly has a minimum
post-consumer recycled content of 15 percent,and some has post-consumer recycled content
as high as 68 percent.

We are also looking into ways to increase
partnerships with non-merchandise suppliers toincrease the environmentally-friendly attributesof items such as price tags, shopping bags
and other garment packaging materials. For
example, we are currently working with paper
mills to explore ways to increase the amountof recycled post-consumer waste pulp used
to create Gap’s price tags. We will continue
to explore opportunities throughout 2007, andhope to introduce additional environmentallyfriendly packaging options in the future.

We will launch a second round of wastewater
testing for denim laundries during the summerof 2007. All denim laundry facilities we workwith will again test wastewater effluent. We
will test for the six quality standards that are

61

These unique shanks add style to
the Gap (PRODUCT) RED TM denim jacket.

4

COMMUNITYINVESTMENTHOW DOWE CREATEPOSSIBILITIESIN OURCOMMUNITIES?

COMMUNITY INVESTMENT

The world of philanthropy is changing insignificant and exciting ways. It’s becoming
increasingly global and strategic, and calls
for greater collaboration among organizations.
What’s more, philanthropy is being influenced
by business, as non-profits increasingly adopt
business practices and companies makedeeper commitments to the community.
In this evolving landscape, we recognizedthat we also needed to change. In 2006, we
re-examined our purpose and established a
new course. This new direction stemmed froma shift in our thinking from being a social funder
to a social investor. Put simply, we’re being
creative and strategic about how our core business can support our goals around socialchange. And we’re developing a new businessmodel to help ensure the sustainability of ourcommunity commitments and the change we’retrying to create.

Our Community Investment
Vision and Strategy
Gap Foundation’s vision is to create opportunities for people to fulfill their personal promise.
We call it “Be What’s Possible.” In underserved
communities worldwide, we want to help
people change the course of their lives andtake personal ownership of their future andtheir potential.
As a global retailer, we believe it’s important
to work in communities where we do business66

and we recognize the need to take a focused
approach to have long-term impact. To achievethis, we’re emphasizing two key target groups
and causes. In developed countries, we focus
on underserved youth, and our cause is career
exploration and job readiness education.
In the developing world, our target is women,
and our cause is work and life skills education
to help women advance and break the cycleof poverty.
Because we want to make a deep and lasting
impact, we think beyond our capacity to write
checks to non-profits. We believe our greatest
opportunity to bring about social change isto leverage our corporate assets — our brands,
our stores, our vendor relationships, and mostimportantly, our employees. In fact, we believe
our employees are our biggest community
asset. With 150,000 employees around theworld with a host of professional skills, we
see enormous potential for them to makea difference through their talents and passion
for volunteering.
Finally, we believe that to sustain our efforts
as social investors, we need to ensure thatall stakeholders in our community benefit
from our work. This “Virtuous Cycle” includes
the neighborhoods and non-profits we serve
as well as our employees, customers andshareholders. Not only can our work help build
stronger communities, it engages our employees and attracts both consumers and investors.
We see this collective benefit as the best way
to create sustainable social change.

4 Community Investment

Providing Unique
Volunteer
Opportunities
Financial Donations

Volunteer Hours

Participation

Total Employee
Contribution

Participation

Total Employee
Contribution

In thousands of employees

In millions of dollars

In thousands of employees

In thousands of hours

8.88 8.92

2.99
2.75

30.76

31.87

219.3

2.63

7.13
154.1

72.9
7.76

2004 2005 2006

2004: 8,882 employees
2005: 8,926 employees
2006: 7,137 employees*

2004 2005 2006

2004: $2,752,972
2005: $2,991,717 (9% increase)
2006: $2,631,411* (12% decrease)2004 2005 2006

2004: 7,766 employees
2005: 30,769 employees
2006: 31,877 employees

2004 2005 2006

2004: 72,937 hours
2005: 154,131 hours (111% increase)
2006: 219,324 hours (42% increase)* We believe that the decrease in employee contributionsin 2006 was due to the unusually high rate of contributionsin 2005 as a result of several natural disasters.

67

4 Community Investment

Glide Memorial
ChurchMAS Go Beyond:
Empowering Womenin Sri Lanka

Glide is located in and serves theTenderloin neighborhood, home to
many of San Francisco’s homelesspopulation, shelters and low-income
weekly-rate hotels. The Tenderloin
has the highest concentrationof poverty in San Francisco andis the city’s most densely populated
neighborhood.
Glide’s network of services range
from free meals programs to GED
and high school diploma classes.
In 2005, Glide programs served
approximately 7,400 individuals and
726,000 meals (excluding holidays).
Since 1982 Glide has distributed
grocery bags of food to families in
its community during the holiday
season. In 2006, through funding
and volunteer support, Gap Inc.
and our employees partnered with
Glide to distribute over 5,000 bags
each containing enough food tofeed a family of four.
Volunteers are a major part of theservices that Glide provides andmany programs could not operate
without volunteers. Last year 6,826
volunteers worked in Glide programs
providing over 71,000 hours to
16 programs, two special eventsand four holiday events. Gap Inc.
also supports Glide’s general volunteer program to ensure they areable to continue to recruit andretain the many volunteers that
help keep their community service
programs up and running.

68

In 2005, MAS Holdings Ltd.’s
Go Beyond program received international recognition by winning the2005 American Apparel & Footwear
Association award for Excellencein Social Responsibility Women’sIssues. In 2006, the program wasrecognized by The Global Compact
Asia as a Best Practice in the manufacturing sector. With over 85 percent
of its 35,000-plus workforce consisting of women, MAS is especiallycommitted to recognizing andrewarding women employees who
have demonstrated a will to develop
and excel within the workplace andbeyond. The Go Beyond programsupports women employees through:• Career Advancement — programs

to help all employees advance intheir careers• Work Life Balance Programs —to encourage women to develop
other interests and talents• Rewarding Excellence — annual

awardsIn 2005, Gap Inc. partneredwith MAS to develop the Gap Inc.
“Women in the Community —Go Beyond” Program, modeled
after the award-winning program.
The Gap Inc. program is an initiative
to champion the empowerment of
women in the communities in which
MAS has manufacturing units. The
primary focus is to motivate womenin the target age group of 18-40
years by supporting and rewarding
them for their exceptional selfempowerment and achievement. The
program has two major components:• Supporting Women Entrepreneurs —by identifying women entrepreneursin the community who have overcome obstacles in their lives, theprogram offers support throughthe development of their skills andlearning to provide an opportunity
for strengthening their enterprises.
• Academic Achievement —supporting exceptional academic
achievement through the issuanceof student scholarships for youth
in the community whose only obstacle to higher learning is the lack offinancial resources.
To create and raise awarenessof the concept and practice of sustainable development, the program
includes an outreach component tolocal schools. The school program
focuses on educating and training
youth on sustainable development
and entrepreneurship. Connections
between youth and women entrepreneurs will also be made to ensure adeveloping community.

4 Community Investment

Our Target Causes
Youth in theDeveloped World
Many of today’s youth are not prepared forthe future, with only three-fourths graduatingfrom high school and two-thirds going on tocollege. DD Many will be unable to secure jobs
and make a successful transition to adulthood.
This trend hurts individuals, along with our
economy, social services and competitiveness.
Many young people from less advantaged
neighborhoods simply lack the opportunitiesof the more affluent. Our goal is to helpchange this disparity. We want to give youth
the chance to explore career opportunities,
learn job readiness skills, and in some cases,
receive paid internships.
We support many organizations and initiatives
that share our emphasis on reaching youth,
ranging from the Big Brothers Big Sisters
to Larkin Street Youth Services to Harlem
Children’s Zone. One of our key partnerships iswith the Boys and Girls Club of America; since
2002 Gap Foundation has been the sole funderof Career Launch, a national career explorationand job readiness program.11 We provide a job
shadowing day for Boys and Girls Club members called Camp Old Navy, which brings teens
into our stores for an introduction to the work
world and leverages the talent and insights ofour employees to inspire young people acrossNorth America.
In 2007, we embarked on two signature programs that exemplify our efforts to truly engage
our corporate assets in the community. This
Way Ahead is a youth program that launched
as a pilot in New York City in March 2007.
We’ve partnered with two long-standing
New York City organizations, The Door andGood Shepherd Services, which provide young
people with everything from health services
to legal advice to job readiness programs.
Together we’ve designed a new approach toproviding practical work skills training. Someof our core business assets are bringing thisprogram to life — course materials were written
by volunteers from our Learning & Development
department, and our store leadership volunteers do the teaching. In addition, youth who
receive paid internships will be hosted by our
Gap and Old Navy stores.
Our goal is to successfully pilot this program,further develop it, and expand to additional
cities in North America and the UK over the
next several years.

Women in the Developing WorldAs a company whose workforce is over 70 percent women and a consumer base that is over
60 percent women, we know that women areimportant to us. We also know that in many
parts of the developing world, a lack of opportunity and autonomy keeps many women fromadvancing in work and life. The well-being of
women has an impact not just on them, buton their children and entire communities. We
believe that access to education is crucial ingiving women the chance to change their lives.
Gap Inc. has invested in a variety of programs
to support scholarships and career advancement for women in the developing world.
These efforts also benefit our company, leading
to a more educated community of women who
enrich our vendor resources.
We’ve focused our second signature program
on women in the developing world, where
we see similar potential to use our corporate
assets in support of sustainable socialchange. The program, called P.A.C.E.
(Personal Advancement, Career Enhancement),
is being developed in partnership with theInternational Center for Research on Women(ICRW). P.A.C.E. takes a comprehensive
approach, offering education in such criticalareas as health care and legal rights, as wellas leadership and job training so that womencan move into management positions.
With the support of our partners, which
include a local NGO and one of our vendors,
Shahi Export House, the P.A.C.E. program
launched in Bangalore, India in June 2007.
We believe that this unique collaboration
benefits all partners and as a result will besustainable long term.
Our pilot will expand to Delhi, India later in2007 and then into China, Cambodia, andTurkey in upcoming years.
“We believe that leveraging our company assets is
the way to make a bigger positive impact on ourcommunity.”— Bobbi Silten,
Chief Foundation Officer, Gap Inc.

Our Grant Making
Strategy
We aim to be global social investors, committing money, time and resources to thecommunities where we do business. Whenit comes to making grants, we work closelywith our community partners to forge a strategy that will add real value to programs andservices and inspire our partners, employees,
and the community.
We continue to invest in a range of projects
in the places where we do business, from aneighborhood in New York City to a village inSoutheast Asia. In the past five years, we have
distributed about $60 million in grants worldwide to such programs as:• The Boys and Girls Club of America’s Career

Launch, a national career exploration and job
readiness program.
• Sri Lankan community groups dedicated tohelping women rebuild lost businesses after
the tsunami.
• Harlem Children’s Zone’s Employment andTechnology Center, a youth program focusedon education and employment.

69

4 Community Investment

As we move forward, our strategy is to create
an even deeper social impact by focusing
on fewer grantees and emphasizing grantsaligned with our target causes. In 2006,$4.3 million (or 60 percent) of our grants werealigned with our new target causes. In 2007,
more than 70 percent of our grants will be toprograms in these areas.

Employee Engagement

focus on the local community. Headquarter
offices also have over 150 designatedCommunity Leaders for volunteer efforts.
AIDS Walks: Every year, Gap Inc. is a majorsponsor for the New York, San Francisco andCanada AIDS Walks, which draw significant
employee participation.
Camp Old Navy: Every year we bring youth
into more than 350 of our stores to spend a
day learning about the world of work.

“You’re making an impact, and that stays with you
for a really long time. The thank-you notes areunbelievable, but I say to people, ‘You’ve changed
me and how I think.’”

Holiday Adopt-a-Family: Our stores andemployees support thousands of families
each year throughout North America.

— Deb Leichsenring,
District Manager for Old Navy in Des Moines, Iowa

Special Events

Volunteering is intrinsic to our values as acompany, and we emphasize collaborating withthe communities where we do business. Our
employees tell us that volunteering offers themthe chance to help in their communities — andto develop their own potential, both personal
and professional. One of our primary roles is tomake volunteering easy, and we offer support inthree main areas: money, time and recognition.
We believe that any amount of volunteering canhave an impact, and we recognize how hard it
is to find extra time. We support our employees
in taking on whatever’s possible for them byrunning many programs to make it easy tovolunteer in areas they feel passionate about.
In 2006, our employees devoted more than
200,000 hours to a wide variety of projects
and contributed more than $2.6 million
to non-profits. Some program and project
highlights include:
Employee Gift Match: We match financial
contributions dollar-for-dollar (and doubled ourmatching after the Southeast Asian tsunamiand Hurricane Katrina) and make a $150 grant
to non-profits where employees spend
15 hours of time. In late 2006 we launched
Gap Global Giving, providing all our employees
worldwide with the opportunity to have
Gap Inc. match their contributions.
Board Service Grants: To support leaders of
our company who sit on a non-profit board,
Gap Inc. awards that organization a significant
annual grant.
Field Team Grants: To localize our impact,
we now offer $250 grants to non-profits whenteams of three or more employees from ourstores volunteer in support of underserved
youth or women.
In Action Days: We organize several days ayear devoted to volunteering. In 2005, 2,000
San Francisco Bay Area employees contributed
more than 8,000 hours of time. In 2006 ourparticipation jumped to a new level, involving
over 2,900 employees who contributed morethan 11,000 hours of time.
Community Leaders: Participating stores(approximately 1,100 in 2006) designate one
employee to organize volunteer projects that70

Employees donated over $600,000 to disaster
relief organizations in 2005, and Gap Inc. contributed $3.3 million, for a total of $3.9 million.
Adding related expenses and contributions
from Old Navy Field Trip 4 Fun, the total valueof the disaster relief donation in 2005 was $7.3
million. The Foundation also continued to provide rebuilding support for tsunami victims.

Old Navy Field Trip 4 Fun: Hurricane
Katrina and Rita Relief Efforts
After Hurricanes Katrina and Rita in 2005,
Gap Inc. created Old Navy’s Field Trip 4 Fun
to provide assistance to those hit hardest by
the devastation — kids.
Ten cities, eight states and countless smiles
later, the program made a difference in the
lives of displaced children. Nearly 15,000 kids
were invited to attend 65 events, pick out $100
worth of new clothes and participate in a fun
in-store experience. More than 500 employees
volunteered thousands of hours to host eventsin 34 Old Navy stores. In addition, employees
donated 18,000 of their own paid time off hours
to assist colleagues from the devastated areas
who were in need of extra time off. Combinedwith the company’s gift matching, employees
donated more than $5 million in cash andclothing to relief efforts.

Additional Tsunami Support
In 2005, Gap Inc. provided $190,000 in funding
to Habitat for Humanity International for thebuilding and repair of more than 150 homes in
Sri Lanka. The majority were in the area directly
impacted by the Southeast Asia tsunami.
In addition, Gap Inc. provided funding to rebuild
a high school in the Aceh province of Indonesia.
Before the December 2004 tsunami, 28 villages
populated the Lhoong district, at the far northend of the Indonesian island of Sumatra. Afterthe 30-foot wall of water slammed through thearea, just four villages remained.
Many schools were destroyed in the flood,
including the only high school in the district.
Partnering with the Dompet Dhuafu Foundation,an NGO, Gap Inc. contributed $308,000 —or nearly 60 percent of the cost — to build a
new high school, which includes a library andscience and computer laboratories.

4 Community Investment

Community Corps
and Founders’ Award

The Community Corps program
was established in 2000 as a way
to recognize the company’s mostdedicated volunteers. Since its
inception, over 450 employees haveparticipated in the annual trips,
collectively building over 70 houses.
In the United States, teams have volunteered in Mississippi, New Mexico,
Florida, Alaska, Texas, Arizona andTennessee. In Central America,
they’ve built homes in Guatemala,Honduras, El Salvador and Mexico.
More recently, in 2005 and 2006,
Gap Inc. volunteer teams built
homes in partnership with Habitat for
Humanity in tsunami- and hurricaneaffected areas around the globe.
In 2005, builds occurred in Miami,
Florida, and the southern west coastof Sri Lanka. In 2006, our Community
Corps trips rebuilt on the gulf coastin Beaumont, Texas, which was
heavily impacted by Hurricane Rita,
and in Solola, Guatemala, which
was devastated by Hurricane Stan.
These efforts contributed to building
eight homes and involved morethan 170 employees.

In addition, we offer our annual
Founders’ Award, which provides
up to a $50,000 grant and 80 hoursof paid time off to employees
who demonstrate an unusuallevel of commitment to a volunteer
project. Our past finalists havedevoted their time and creativity
to such ambitious efforts as helping
to create a school for kids living
near a landfill on the California
border and developing a jobreadiness program for people
with disabilities. In one case,a woman’s experience with hermother’s cancer led her to address
the dilemma faced by rural families
in North Dakota who must travel
for treatment.

71This hang tag tells customers about
the Gap (PRODUCT) RED TM denim jacket.

5

MARKETPLACECAN
CLOTHESBE FASHIONABLE
AND MAKE
A DIFFERENCE?

MARKETPLACE

Social responsibility is emerging as a newtheme in today’s marketplace. In the past few
years, discussion of companies’ social responsibility practices has moved from reports
and websites to supermarket shelves and retailstores. Popular magazines from Time andNewsweek to Vanity Fair and Elle have featured
new “green” trends. While the assimilationof these messages into mainstream business
continues to be gradual, many companies
are changing the way they perceive investment
in socially responsible business practices.

A New Value Proposition
Shareholders have increasingly embraced
the belief that good corporate citizenship andinvestment in social responsibility practices aretools to help mitigate reputational risk. Yet a
strategic approach to social responsibility may
do even more to enable business growth —from making supply chains more efficient tooffering new ways to connect with customers.
This change in the value proposition is duein large part to the awakening of consumer
consciousness. In the past, consumers may
not have considered a company’s practices
when making purchasing decisions. But now
they have more choices — from buying snacks
that give to a cause to driving cars that run on
biodiesel gasoline. More and more, consumers
can support causes they care about by buying
a particular product — and avoid companies
or products they dislike by taking their dollars,

76

euros and yen elsewhere. The options arevast and growing.
Using “cause marketing” to emotionallyengage consumers is not a new idea. But
companies are becoming savvier in how they
communicate their business practices andencourage consumers to buy socially- andenvironmentally-conscious products. Social
responsibility is no longer just a tool to minimize bad press — it is becoming a way todrive customer satisfaction and brand loyalty.
As a result, social responsibility is shiftingfrom a risk mitigation effort to one thatenhances the brand experience for customers.

Across Industries
Consumer response to cause-related productand messages has driven an increase in these
efforts across industries. When gas prices
soared, eco-consciousness became thrifty andhybrid cars hit the mainstream. “Going green”
has also shown itself to be convenient — popular solar-powered cellular phone chargers allow
users to consume less energy and never missa call because of a low battery. The grocery
retailer Whole Foods has built an entire brandaround a values-driven business — and seen its
stock price rise by an average of 21.8 percent
every year since the company went public in
1992.12 From the food and automotive industries to oil and gas, companies are ratchetingup their social and environmental awarenessand product offerings.

5 Marketplace

Star PowerOne of the most exciting aspects of(PRODUCT) RED TM has been its
appeal to people from all walks oflife. In addition to a strong response
from employees and customers, wehave been moved with the way manycelebrities have embraced this effort.

Singer Natalie Maines of the Dixie
Chicks poses with her two youngsons, Beckett and Slade, in
Gap (PRODUCT) RED’s spring 2007
marketing campaign.

We know from past experience thepower that celebrities can bring tomarketing campaigns. Like U2 rockicon Bono, who founded (PRODUCT)
RED with Bobby Shriver, these individuals are often “brand names”
themselves. When they join a movement like (RED)TM they generate
excitement and media attention.
In the fall of 2006, Gap (PRODUCT)
RED featured photography by
Annie Leibovitz and appearancesfrom diverse personalities such as
Olympic gold medalist Apolo Ohno,
actress Penelope Cruz, andAcademy-award winning director
Steven Spielberg. Terrence Howard,
the Oscar-nominated actor of Hustle& Flow and Crash who appears withhis three children in Gap (PRODUCT)
RED’s spring 2007 campaign,
pointed out during a recent photoshoot how he and other celebrities
are using their time to raise awareness even though they “could bedoing a number of different things
with their lives…. People don’tknow about what’s really taking
place in Africa and they don’tknow about the pandemic thatsits before mankind right now.”
When marketing campaigns
increase awareness about the
HIV/AIDS crisis in Africa and generate demand for products that help
save the lives of women andchildren, everyone wins. (PRODUCT)
RED may be about fashionablet-shirts, hip mp3 players, trendy
sunglasses, and cool phones,
but it’s also about generating
desperately needed awareness,understanding and hope. As
Don Cheadle, who portrayed
Paul Rusesabagina in the criticallyacclaimed film Hotel Rwanda,
observed, “[(PRODUCT) RED] is sucha great way to merge fashion andactivism. Hopefully this campaign
will help people educate themselvesand get them interested about
what’s happening in the world
beyond our own borders.”

77

5 MarketplaceGap (PRODUCT) RED –A Blend of Desire
and VirtueTM

Gap (PRODUCT) RED is built ona simple but revolutionary idea.
Clothing can be fashionable andmake a difference, all at the sametime. (PRODUCT) RED taps into
the power of consumer desire andtransforms it into a tool to help fight
HIV/AIDS in Africa. It offers our customers clothing and accessories
they love, and, by directing half the
profits to the Global Fund to financeprograms that help African womenand children afflicted by HIV/AIDS,
opens up a new way for them toengage with one of the most challenging social crises of our time.
The desirable and virtuous natureof (PRODUCT) RED are not mutually
exclusive — in fact, we are increasingly learning that (PRODUCT)
RED’s “virtue” makes it that much
more desirable. People don’t haveto compromise buying products
they love in order to do good.
With (PRODUCT) RED, they can
do both at the same time. We
believe that this powerful blend ofdesire and virtue holds enormous
potential, and our hope is that
Gap (PRODUCT) RED can help
channel it into hope and positivechange for people living with
HIV/AIDS in Africa.
TM

78

DESIREVIRTUE

Made in Africa(where possible)

Great
product

Compellingmarketing

Inspires employees
and customers

Delivers
shareholder
returnUniquein-storeexperience

Saves lives anddevelops African
communities

Buildsawarenessof HIV/AIDS

5 Marketplace

Even fashion companies have begun usingsocial responsibility to appeal to consumers.
Headlines insisting “Green is the New Black”
have rocked an industry that traditionallybelieved that hemp was for a narrow, lessfashion-conscious consumer segment andsoy was just for vegetarians. Suddenly, thesefibers are strutting down runways during
New York City’s fashion week and turning
up in luxury retail outlets such as Barney’s.
“Sweatshop free,” Fair Trade, and ethicalmanufacturing are becoming popular discussion topics as brands and retailers highlightthese product attributes to differentiate themselves from the competition.

An Authentic Appeal
with No Trade-offs
One key to the success of these new sociallyand environmentally-responsible product offerings has been the simultaneous appeal toconsumer needs and desires. Driving a hybrid
car isn’t only better for the environment and a
way to save on gas — it’s also cool. Starbucks
customers may be curious about the company’s efforts to source coffee beans ethically— but they also love drinking lattes. MAC’s
Viva Glam line gives all of its proceeds topeople living with HIV/AIDS — and provides
women with premier cosmetics. In today’s
marketplace, consumers aren’t willing to lower
their purchasing standards — they still wanta quality car, fashionable clothing and tasty
food — but they may be more inclined to makethese purchases if they feel good about what
the product or company is doing for peopleor the environment.
The best socially responsible products andmarketing campaigns have also been built
on well-developed program foundations.
Toyota invested in research and development
for hybrid technology long before the Prius
became popular. Starbucks implemented
environmentally-sound and socially-sustainablesourcing practices years before it launched
its “What Makes Coffee Good” campaign.
In the most successful cases, companies haveoutlined a clear social responsibility vision,
made a commitment to realizing that vision,and then strategically leveraged it as a
distinctive company asset in a way that stoodout from the competition and left others
scrambling to catch up.

Our Role in the New
Marketplace
Gap Inc. believes this new marketplace holds
enormous potential. As a company with deep
experience in social and environmental issues,
we feel passionately that social responsibility
can provide an innovative way to engage
our customers. In 2006, we took our first steps
to put this belief into action with the launchof Gap (PRODUCT) RED — a new limited
collection of clothing and accessories formen and women designed to help eliminate
AIDS in Africa.
TM

Gap (PRODUCT) RED

TM

Founded by U2 rock icon Bono and Bobby
Shriver, (PRODUCT) RED is based on a simple
but revolutionary insight — that first-worldconsumers have tremendous power and thatwhat they collectively choose to buy or not
to buy can have a global impact. The initiative
brings together corporations and consumers
in an effort to generate a sustainable flow ofprivate sector funds towards the fight to eliminate AIDS in Africa.
Gap (PRODUCT) RED takes what we dobest — creating great products that people
love — and channels it into positive change.
Half of the profits from sales of the Gap(PRODUCT) RED collection go to The Global
Fund to finance programs that help African
women and children affected by HIV/AIDS.
The Story Behind
Gap (PRODUCT) RED
The story behind Gap (PRODUCT) RED
began several years ago, when Gap Inc.
made a commitment to continue working withapparel manufacturers in Lesotho, a small,
mountainous country in sub-Saharan Africa.
Manufacturing accounts for approximately
75 percent of Lesotho’s total exports, and theapparel and textile industry is the single largest
source of employment in the country. Facedwith a high 45 percent unemployment rate,
Lesotho depends upon its apparel industry
for the strength and vitality of its economy.
When the Multi-Fiber Arrangement expiredin 2005, many brands saw the new quota-free
global regime as an opportunity to move production out of Lesotho. Although we also hadbusiness opportunities elsewhere, Gap Inc.
determined that shifting production would
have grave consequences for the people living
and working in Lesotho. So we stayed. We
advocated for the U.S. Government to passthe African Growth and Opportunities Act(AGOA), which provides preferential tradingarrangements for apparel products from
Lesotho into the U.S. market. We also began
working with Lesotho’s government, businessleaders and factory workers to enhance theapparel industry’s technical capabilities andresponsible labor practices. EEAround the same time, Bono and Bobby
Shriver were looking for ways to help the
people of Africa. The HIV/AIDS epidemic has
ravaged the continent in recent years, andmany African countries now have the highest
HIV/AIDS rates in the world. In Lesotho alone,
estimates suggest that at least one out of
every three people is infected with the virus.
This growing pandemic threatens the entire
region’s future.
Bono and Bobby Shriver determined that
Africa needed more than government aid andisolated donors — it also needed the power,
creativity and resources of the private sector.
So they created a new business model. They
set out to do more than just raise funds toaddress HIV/AIDS — they intended to raise79

5 Marketplace

The Apparel Lesotho
Alliance to Fight AIDS
(ALAFA)“Recently I spoke to a sewing
machinist in the pilot factory
who had AIDS. She has eightfamily dependents relying on her
wage. Now that she is on ALAFA’s
antiretroviral treatment she cankeep working and her life should
be dramatically extended. Her
relief was palpable. She thought
her kids would end up as AIDS
orphans but she now expects to
be with them until they can lookafter themselves.”— Andy Salm
Regional Textile and ApparelSpecialist for ComMark Trust* www.commark.org/alafa

80

Lesotho is a tiny, independent
mountain kingdom wholly surrounded by the country of South
Africa with a population of approximately two million. Manufacturingaccounts for approximately 75 percent of Lesotho’s total exports,
and the apparel and textile industry
is the single largest source of
employment in the country. It isestimated that at least one-thirdof the apparel industry workforce
has HIV/AIDS and, in the age
category of 30-39, the percentage
may be as high as 39 percent.
In 2005, the ComMark Trust received
funding from the British Department
for International Development (DFID)
to develop a strategy to address HIV
and AIDS in the apparel industry inLesotho. ComMark’s research teamfound that two of the key long-term
drivers of the HIV/AIDS epidemic —poverty and gender inequity — werealso critical constraints on the local
industry. They determined not onlythat an intervention was feasible, butalso that it was vital to the long-term
economic vitality of the apparelindustry and Lesotho’s long-term
economic development. The biggest
hurdle was a lack of funding.

In May 2006, Gap Inc. became thefirst company to support ALAFA
by providing seed funding for apilot intervention program. The pilot
was initiated at Lesotho Precious
Garments, a Gap Inc.-approved factory in Maseru with approximately
4,000 workers, with additional funding available to expand the program
to other factories in the country.
ALAFA was designed as a comprehensive approach to fight the spreadof HIV/AIDS and to support garment
workers who were already infectedwith the virus. The funded programprovides for the training of peer
educators within the factory,
management sensitizing training,
distribution of condoms withoutcharge to the workforce, VoluntaryCounseling and Testing (VCT) andfor employees who test positive,
health monitoring and treatment
with antiretroviral drugs througha network of private practitioners.
In 2007, ALAFA aims to reach
50 percent of the apparel workers
in Lesotho with its health andmonitoring treatment program; and75 percent of the sector's workers
with the prevention campaign. For
more information, please see the
ComMark Trust’s website on ALAFA.*

5 Marketplacesocial consciousness by leveraging some of themost iconic brands in the world. They presented
companies with an idea that took business’s
greatest incentive — profitability — and channeled it into a reliable, self-sustaining source offunding to fight HIV/AIDS in Africa. (PRODUCT)
RED was born.
Why We’re (RED)TMFor Gap, (PRODUCT) RED was the perfect
fit. Employees were excited to participate —our best designers, merchants and marketers
wanted to be part of the (PRODUCT) RED team.
(PRODUCT) RED also offered a new way toreinforce our production commitments in subSaharan Africa. We had already establishedrelationships with progressive factories inLesotho and South Africa that could makethe iconic Gap INSPI(RED) t-shirts. With the
new focus on the region, we also seized theopportunity to partner with the ComMark Trust,
Irish Aid and Edun to help launch the Apparel
Lesotho Alliance to Fight HIV/AIDS (ALAFA),
an innovative and comprehensive new initiativethat seeks to bring workplace-based treatment
to HIV-positive workers in Lesotho. For more
information on ALAFA, please see page 80.
Customer Responseto (PRODUCT) RED
Gap launched its first (PRODUCT) RED items
in 2006, starting with a line of t-shirts in our
UK stores in the spring, and then a broader
product line in our North American stores in
the fall. Initial customer response was exciting.
The Gap INSPI(RED) t-shirt was the best
selling item across the entire Gap brandin October 2006. On October 13, 2006,
Oprah Winfrey featured Gap (PRODUCT) RED
on her nationwide U.S. television show, andwithin hours of the show’s East Coast airing,
gap.com had sold through its entire inventoryof INSPI(RED) t-shirts. We’ve been very
pleased and inspired by the way our customers have embraced this movement.

Gap

As of January 2007,(PRODUCT) RED TM contributions fromGap (PRODUCT) RED cancover the annual cost of
ARV treatments for AIDS
to over 25,000 women andchildren in Africa

All of

As of January 2007,(PRODUCT) RED TM (PRODUCT) RED has generated more than $25 million
for the Global Fund(PRODUCT) RED has also had an impact on
our employees. Sales associates in Gap storeswanted to learn more about the challenges
in Africa so that they could tell customers.
The richness and vibrancy of different African
cultures has motivated our design, merchandising, and marketing teams to explore new
ways to create and develop products. Even
new and prospective employees have told
us that (PRODUCT) RED inspired them to want
to work for Gap Inc.

The Future forGap (PRODUCT) RED
Some observers have recently called into
question the (PRODUCT) RED business model,
arguing that people should give money to nonprofit organizations instead of buying products.
While we certainly believe that everyone —including companies — should invest in theircommunities, we also feel strongly that donations alone are unlikely to resolve the major
challenges faced by developing nations.
For one thing, donations are inevitably limited.
Just six months after the (RED) range waslaunched in the United States, $25 million had
been generated for the Global Fund — fivetimes the amount given to the Global Fund by
the private sector over the previous four years.
Our hope is that this is only the beginning.
Through (PRODUCT) RED, we are seeking tohelp create a reliable stream of revenue for thefight against AIDS in Africa that will be complementary to, but far exceed the well-intended
but insufficient contributions from corporate
philanthropy budgets.
TM

We also believe in the power of knowledge.
Marketing has long been an extraordinary way
to raise consumer awareness — whether it’s
about a product or a cause. By using partof our existing marketing budget to talk about
AIDS in Africa, we’re engaging consumers ona critical global issue and encouraging them tobecome part of the solution. Data suggest thatwhen people become aware of crises, they give
more money rather than less. (RED) isn’t justabout great products — it’s a movement.
Finally, we believe in the need for ethical trade.
While the industry in Africa is not yet developed
enough to sustain our entire (PRODUCT) RED
line, we are exploring ways to have moreof our (PRODUCT) RED products made there.
As Edun has noted, if Africa could gain justa 1 percent share of global trade annually, it
would earn $70 billion more in exports eachyear — more than three times what the region
currently receives in international aid. FF We
are actively partnering with our approved manufacturers in Lesotho and other sub-Saharancountries to help them improve their production
capabilities. It’s a start — and our hope is that
this work will help them attract more businessand ultimately build vibrant, thriving economies.
We are honored to be an original (PRODUCT)
RED partner, and we’re confident that thisproduct will continue to help save lives inAfrica. We have been inspired by our customers’ enthusiasm for (RED) and are working
hard to develop new products and marketing
campaigns that will continue engaging them.
We look forward to helping make (PRODUCT)
RED a successful, pioneering initiative that will
set a new standard for business.

81

WHY SHOULD COMPANIESINVITE CUSTOMERS TO
PARTICIPATE IN THEIR SOCIALRESPONSIBILITY EFFORTS?

“We face such enormous challenges
in our global society today that we —companies and consumers — must work
together towards solutions. By talking
directly to customers about these challenges, companies can educate andempower thousands of individuals. They
can encourage them to act and give theircustomers a way to participate. Most
importantly, they raise awareness thatemboldens individuals to act on their own
in their everyday lives. Communicating
their CSR efforts to customers createsa sense of hope, and we all need morehope in our world.”
Kellie McElhaney
Professor and Executive Director,
Center for Responsible Business at
University of California at Berkeley’s
Haas School of Business“It’s not a one-way dialogue from thebrand to the consumer anymore. The
consumers have new tools and newtransparency for communication, andthey’re asking ‘Where do your products
come from? Who’s growing them? How
responsibly are you functioning as acompany?’ These questions represent
real shifts in consciousness in the world.”
Walter Robb
Co-President,
Whole Foods“(PRODUCT) RED is a consumer
movement. It harnesses private sector
genius and the power of brand marketing to help eliminate AIDS in Africa.
Who wouldn’t want the world’s iconic
brands to use their creativity to raiseawareness and money to buy the twopills a day that save a life? (PRODUCT)
RED puts power in the hands of the
shopper and delivers for all involved.”
TM

Bobby Shriver
Co-founder and CEO,(PRODUCT) REDTM82

5 Marketplace“In Europe, customers are keenly awareof ethical trading and environmental
issues. They expect companies tooperate not in a vacuum, but as a contributing member of our society. In that
respect, it has become increasingly
important for companies to build social
responsibility into their products andbrands — and to tell their customers how
they strive to make a positive impact.”
Stephen Sunnucks
President,
Europe, Gap Inc.

“These days, the choices we make as
consumers are the most powerful tools wehave to fight for change. A lot of us areclamoring for a way to express our values
and convictions through our daily actions.
Empowering consumers to participate inmaking the world a better place by including them, and letting them have a voice, inthe evolving relationship between corporations, communities and the environment is
powerful. Really, really powerful.”“Today’s customer is the savviest in history. Armed with instant informationand interest, they can highly praise or
deftly damn a company’s social initiative. Customers are saying tocompanies, ‘Don’t just tell me. Show
me. Invite me in. Let me interact withyou in a variety of ways. And let me
determine what is real. Then I can tellothers about how you express yourhumanity and values in action.’”Amy Dickie
MBA Student,
Gap Inc. CSR Scholar

Carol Cone
Chairman and Founder,
Cone, Inc.

83

Appendix

Global Social
Responsibility
Initiatives
and Projects
2005-2006

Global Initiatives
Ethical Trading Initiative (ETI)Social Accountability International (SAI)
Global Reporting Initiative (GRI) Apparel& Footwear Working Group
United Nations Global Compact (UNGC)
Business Leaders Initiative on Human
Rights (BLIHR)
MFA Forum
SA 8000 certifications (61 factories certified at end of 2006)
Better Cotton Initiative (BCI)
This Way Ahead signature youth program
P.A.C.E. signature women’s program
Employee gift-matching program“In Action” employee volunteer days

Bahrain
Global Wastewater Program

Bangladesh

Categories
Supply chain initiatives
Environmental initiatives
Community investment initiatives

MFA Forum Bangladesh Working Group
National Social Compliance Forum
GTZ-PROGRESS Comprehensive
Training Program
Human Resources Restructuring Project
Building structural safety monitoring
program
Brands Ethics Working Group
Global Wastewater Program
CARE Competitive Literacy Initiative

BrazilVendor Ownership Program

Cambodia
Vendor Ownership Program
MPDF Supervisory Skills Training
ILO Better Factories Cambodia monitoring and training programs
Cambodia Buyers’ Forum
ITGLWF-facilitated workshop on

Approved Sourcing
Countries

Freedom of Association for suppliers
and trade unions
Sponsorship of At the Factory Gates,
an innovative ILO-created soap opera
combining entertainment with importantsocial messages such as dispute resolution and the rights and responsibilities
of workers
Global Wastewater Program
Hagar Shelter Literacy, Life Skills &Vocational Training
CARE Reproductive Health Education
Program for Garment Workers
Sihanouk Hospital Center of Hope(capacity building for rural hospitals)
Speu Khor Biosand Water Filtration
Project

CanadaGlobal Wastewater Program

China
Vendor Ownership Program
Workplace Safety Management
Committee
Labor Law training & Help Line forworkers (by Mr. Chen)
Productivity Enhancement program (bya former HKPC consultant)Government Outreach through the
Better Workplace Association
Cross-Brand Working Group
Global Wastewater Program
Local Community Service (Gap Inc.
Hong Kong office)Colombia
Global Wastewater Program

Dominican Republic
Vendor Ownership Program
CIMCAW
Global Wastewater Program

United States
and Canada

Mexico,Central America
and the Caribbean
Costa Rica
Dominican Republic
El Salvador
GuatemalaHonduras
MexicoNicaragua

84

Egypt
Global Wastewater Program

El Salvador
Vendor Ownership Program
Independent Monitoring by Grupo deMonitoreo Independiente Salvador(GMIES)
CIMCAW

GuatemalaVendor Ownership Program
Independent Monitoring by theCommission for the Verification of
Corporate Codes of Conduct(COVERCO)CIMCAW“Global Innovations in Labor
Assurance” conference
Supervisory labor training(with COVERCO)
Global Wastewater Program
FOTOKIDS Scholarship Program
FOTOKIDS Media Center &Educational Program
FUNDAESPRO Vocational Training &Childcare Center
ISMUGUA Communal Bank Capacity
Building

Honduras
Vendor Ownership Program
MFA Forum Americas Working Group(scoping)
CIMCAW
Global Wastewater Program
Casa Corazon Home for HIV+ orphaned
children
CARE Women’s Health & HIV/AIDS
Prevention Program

South America
BrazilColombia
Peru
Uruguay

Europe(including Russia)
Belgium
Italy
Spain
United Kingdom
Bulgaria
Moldova
Romania
RussiaTurkeyAppendix

India
Vendor Ownership Program
ETI Working Group on Homeworkers
Brands Ethics Working GroupITGLWF-facilitated workshop on
Freedom of Association forSouth Asia team
Hiring program for disabled workers
Education for All (factory adult education & women/children community
education)
Worker-management communication
initiative
Factory energy saving initiatives
Global Wastewater Program
Adhayashrama Orphanage Educational
Assistance
Nagapattinam Government Hospital
Maternity Ward (post-tsunami relief)
Project Swabhiman Lifeskills Training &Education Program

Indonesia
Vendor Ownership Program
FOA team training by ITGLWF
FOA supplier & factory training by Verité
Global Wastewater Program
Dompet Dhuafa Foundation Bande
Aceh High School reconstruction(post-tsunami relief)

JordanGlobal Wastewater Program
The Living Water Center Job Skills
Training Program

Lesotho

Vendor Ownership Program
Local Community Service(Gap Inc. Seoul office)

Macau
Global Wastewater Program

Madagascar
Global Wastewater Program

Malaysia
Vendor Ownership Program
Social Responsibility Annual
Conference team training
ITGLWF training on Freedom of
Association Theory & Practice (internal
team)
Global Wastewater program

MexicoVendor Ownership Program
Global Wastewater Program

Nepal
Global Wastewater Program
CIMCAW
Global Wastewater Program
Global Wastewater Program

Peru
Philippines
Vendor Ownership Program
Global Wastewater Program

Persian Gulf

Sub-Saharan Africa

Bahrain
Oman
Qatar
United ArabEmirates

Kenya
LesothoMadagascar
MauritiusSouth Africa

MPEFI Smoky Mountain Educational &Livelihood Project
TW-MAE-W Vocational Training
Workshop
Kabuhayan Sa Komundad MicroFinance & Skills Building Program

Singapore
Vendor Ownership Program
Global Wastewater Program

Sri Lanka

Indiansubcontinent
Bangladesh
India
Nepal
Pakistan
Sri Lanka

TurkeyCross-Brand Working Group
Joint Initiative on Corporate
Accountability and Workers’ Rights
AKUT Emergency Management Systemtraining
ACEV Parent Education program
Global Wastewater Program
Local Community Service(Gap Inc. Istanbul office)United Arab Emirates

Global Wastewater Program
Ceylon Chamber of Commerce
Women’s Assistance Project (posttsunami relief)
Brandix Water Resource Board Project(village tube well construction in partnership with Brandix Lanka Ltd.)
Women in the Community “Go Beyond”
Program (partnership withMAS Holdings, Ltd.)
Habitat for Humanity building project
Dombarawa Village School Education
Project (post-tsunami relief)
Haddattawa Village School Education
Project (post-tsunami relief)
Dehiattakandita Base Hospital
Refurbishment

Global Wastewater Program

Vietnam
Vendor Ownership Program
Reproductive Health Care training (byMarie Stopes)
Occupational Health training by ISOS
Global Wastewater Program
CARE Clean Water for Schools Program
Hanoi University of Foreign Studies
Scholarship Program
East Meets West Foundation Village
Safe Water System
Hanoi University Student Support Fund
Mai Tam Drop-In Center Vocational
Training Program

United States

Thailand

Nicaragua

Vendor Ownership Program

MFA Forum Lesotho Working Group
Factory Human Resources
Development Program
Global Wastewater Program

Egypt
IsraelJordanMoroccoTunisiaSouth Korea

Oman

Kenya

North Africa andthe Middle East

Apparel Lesotho Alliance to Fight AIDS
(ALAFA)
Habitat for Humanity building project

Vendor Ownership Program
Participation in the regional consultation
convened by John Ruggie, Special
Representative of the Secretary Generalon Human Rights and Transnational
Corporations and Other BusinessEnterprises, in Bangkok, Thailand
ITGLWF training for Southeast Asia
regional team on Freedom of
Association
Global Wastewater Program

National Recovery Center (NRC)
Waste Initiative
U.S. Environmental Protection Agency(EPA) Climate Leaders Program
Global Wastewater Program
CSR Scholars Program
Glide Memorial Church partnership
AIDS Walk sponsorship & participation
Old Navy Field Trip 4 FunBoys and Girls Club of America
partnershipCamp Old NavyGreater China

Southeast Asia

North Asia

China
Hong Kong
Macau
Saipan/N. Marianas(U.S.)
Taiwan (R.O.C.)

Brunei Darussalam
Cambodia
Indonesia
Malaysia
Philippines
Singapore
Thailand
VietnamJapan
South Korea

85

PUBLIC REPORTING
WORKING GROUP STATEMENT

We applaud Gap Inc.’s continuing commitment
to an impressive array of projects designed
to improve factory working conditions at a time
when the company is experiencing significant
business challenges. Several years ago, we
approached Gap as shareholders, seeking apublic report that would allow stakeholders
to measure annual progress toward improving
conditions in the factories around the worldthat manufacture its products. That engagement produced what was widely regarded asa groundbreaking report, setting a high bar
for the apparel sector. It has been a privilege
to serve as a sounding-board for the company
on these reports, providing comments andcritiques on each.
This new report continues to set the pace forpublic reporting about global labor standards
compliance. It is disappointing that three years
after Gap’s first report, so few companies haveissued anything approaching the credibility
and transparency of Gap’s initial effort. Withfew exceptions, the state of public reportingon supply chain compliance has changed very
little, with many companies remaining silent.
Public reporting serves two important purposes; it provides public accountability to
stakeholders, and analysis of disclosed data
provides a vehicle for continuous improvement of compliance efforts. It can also help
investors to mitigate risks stemming from poor
labor standards compliance. Without suchdata, stakeholders cannot evaluate a company’s commitment to enforcement of its codeof conduct, or to key activities like capacity
building and factory level training which can
improve the lives of workers. We continue tochallenge Gap’s competitors to demonstrate
their commitment to social responsibility andaccountability by following its lead.
Gap continues to demonstrate a dynamic
approach to factory compliance, focusing
on auditing as well as a broader framework
including worker empowerment, capacity
building, and long-term partnerships toreduce the impact of factory relocations.
The report could be strengthened in somekey areas. For example, we encourage Gap
to develop metrics and data on the businessbenefits of social responsibility to match theperformance data provided on factory monitoring. In past reports, Gap identified working withother companies on a uniform code of conduct
as a high priority. There is no discussion of86

progress made toward this goal or reasons forthe lack of such progress. We also encourage
the company to look deeper into its supply
chain to reach the workers that produce
the cotton and other raw materials that go into
Gap’s products.
We would also like to see more analysis of theoverall effectiveness of Gap’s efforts to improvefactory working conditions, and to address systemic compliance issues. This analysis should
deepen Gap’s ability to move from a corrective
action system addressing individual violations,
to making permanent changes in factory culture
and practices, which are urgently needed to
improve the lives of workers.

Adam Kanzer, Esq.,
Domini Social Investments LLC

Alya Z. Kayal, Esq.,
CalvertConrad MacKerron,
As You Sow Foundation

Patrick Neyts,
Vectra International

Ruth Rosenbaum, TC, Ph.D.,
Center for Reflection,
Education and Action

David M. Schilling,
Interfaith Center on
Corporate Responsibility

OUR GOALSSupply Chain

Employees

Environment

Community
Investment

Marketplace• Move increasing amounts• Provide opportunities• Continue to reduce energy• By 2010, expand This Way
Ahead beyond New York
City to San Francisco
to include 400 youth;
explore expansion toadditional cities• Continue partnership with
(PRODUCT) REDTM through2011

of production into higher
rated factories• By 2009, increase thenumber of Level 4 orLevel 5-rated factories
by 5 percent• By 2009, decrease thenumber of Level 1-rated
factories by 5 percent• By 2008, update Gap Inc.

Code of Vendor Conduct
to more closely align with
Ethical Trading Initiative
base code and Social
Accountability International’s SA8000 standard• In 2007, implement new

information technology system to enhance our ability
to capture and quantify
social responsibility data
• Expand workshops for

suppliers and trade unions
in selected countries as partof integrated strategy toaddress ongoing challenges
regarding workers’ rights tofreedom of association andcollective bargaining

for employees to take on
new roles in the company,
as measured by increasing
the percentage of Vice
President positions filled byinternal candidates by 2009
• Foster an open, inclusive

work environment throughleadership and transparent
communication thatengages employees,
as measured by our
employee opinion survey• Increase employee engage-

ment by 2009, as measured
by our employee opinion
survey and ongoing feedback from employees• Continue investing inlearning and development
opportunities that build thecapability to deliver great
product and store experiences for our customers• Increase our investment inkeeping employees healthy
by exploring new healthcare options, including
introducing consumerdriven health care plansconsumption to achieve
U.S. Environmental
Protection Agency Climate
Leaders goal of reducing
greenhouse gas emissions
by 11 percent per squarefoot from 2003 to 2008
• By 2008, seek opportunities

for energy creation• Through the Better Cotton

Initiative, help create
cotton cultivation processes
that have a positiveenvironmental, social andeconomic impact• By 2010, include sustain-• Introduce additional lines
of socially responsible
products• By 2010, expand P.A.C.E.
to include India, China,
Cambodia, and Turkey andto impact 4,000 women• By 2008, align 70 percent
or more of our grant-making
dollars to target causes• In 2007, increase employee
participation in Gap Inc.’scommunity investment programs over previous years

able/recycled materials
in product packaging inour brands• Find new ways toincorporate sustainablydesigned products ineach of our brands• Continue strong waste

management efforts at
headquarters• By 2010, introduce newstore-level waste management initiatives• By 2010, introduce new

supply chain waste
management initiatives

PUBLIC RECOGNITION• The CRO Magazine recog-

nized Gap Inc. at number
25 on its annual listof “100 Best Corporate
Citizens” in 2007.
• In 2005 and 2006, wewere recognized as oneof the “Top 30 Companies
for Executive Women”
by the National Association
for Female Executives(NAFE). This prestigious
list measures women’s
representation among thehighest-paid and top-tierpositions at America’s
largest companies.
• In 2005 and 2006, Gap Inc.

received a perfect scoreby the Human Rights
Campaign, which rates
companies on key indicatorsof fair treatment for lesbian,gay, bisexual and transgender (LGBT) employees,
including domestic partner

benefits, discrimination
policies, and marketing
and advertising efforts.
• In 2006, Ethisphere, aleading publication on
ethics and compliance,
awarded Gap Inc. an“A” rating for our Codeof Business Conduct, theonly “A” given to the 25
retailers that were rated.
• Ethisphere magazine named

Gap Inc. as one of 2007’s
most ethical companies.
• Gap Inc. ranked fifth among

31 apparel retailers in
the Ethical Trading Action
Group Transparency Report
Card 2006: “Revealing
Clothing” report.
• In 2006, Careers & thedisABLED magazine ranked
Gap Inc. number 24 in the
top 50 employers of people
with disabilities.

• In 2006, Gap Inc. wasnamed “Ideal Employer”
among all retailers
for students interested
in careers in retail andfashion, in an annual survey
by Universum. The study,
which was reported in
Women’s Wear Daily, polled
more than 37,000 students
at more than 200 leadingcolleges and universities
across the United States.
• In 2006, Gap Inc. ranked

number 53 in a Universum
survey of 4,996 MBA
candidates to determine themost socially responsible
companies.
• Our 2004 Social

Responsibility Report
was recognized for“Commendation forContinued Excellencein Social Reporting” by
the 2005 Ceres-ACCA

North American Awards for
Sustainability Reporting.
• In 2005, PRNews recog-

nized our 2004 Social
Responsibility Report inits annual CSR Awards
competition.
• For our involvement with

(PRODUCT) RED, Gap Inc.
was recognized with a
Women’s Wear Daily 2006
Exec Tech Community
Service Award.
• Gap Inc. is listed on thefollowing social investment
indices:• Calvert Social Index• Domini 400 Social Index• Dow Jones Sustainability

Index• FTSE4Good Index

87

GLOSSARY

Better Cotton Initiative
A multi-stakeholder initiative that aims
to encourage cotton farming practices
that are more economical and healthierfor both the farming community andthe environment. For more information,
visit www.bettercotton.org.

Global Reporting Initiative (GRI)
A multi-stakeholder process and independent institution whose mission isto develop and disseminate globallyapplicable sustainability reporting
guidelines. For more information, visit
www.globalreporting.org.

Business Leaders Initiativeon Human Rights (BLIHR)
A program that assists the private
sector to further integrate humanrights standards into businesspractices and policies. For more
information, visit www.blihr.org.

Homeworkers
Garment workers who work in theirhomes or villages due to social,
cultural and economic reasons.

Business for Social
Responsibility (BSR)
A global organization that helps
member companies achieve successin ways that respect ethical values,
people, communities and the environment. For more information, visit
www.bsr.org.
CH2M HILL
A multinational firm providing engineering, construction, operations,communications, security, environmental, and related services topublic and private clients in numerous
industries. For more information, visit
www.ch2m.com.
Climate Leaders
A voluntary U.S. Environmental
Protection Agency industry-government partnership that works withcompanies to develop a comprehensive climate change strategy. Partners
complete an annual greenhouse gas
inventory and set a long-term goal
to reduce emissions.
Code of Business Conduct
Gap Inc.’s internal ethics code whichgoverns business practices and isdesigned to help the company and its
employees avoid conflicts of interest,
achieve compliance with laws andprotect company assets, including
employees and properties.
Code of Vendor Conduct (COVC)
Basic requirements set forth by
Gap Inc. that all manufacturers andfactories must be able to meet in orderto do business with the company.
The Code provides the foundation for
Gap Inc.’s ongoing evaluation of amanufacturer’s employment practices
and environmental compliance.
Ethical Trading Initiative (ETI)An alliance of companies, NGOs, andtrade union organizations committed
to working together to identify andpromote ethical trade. For more information, visit www.ethicaltrade.org.
Freedom of Association
As defined in the Gap Inc. Code ofVendor Conduct, the right of workers
to lawfully join associations of theirown choosing, peacefully associate,
organize or bargain collectively.
Global Compliance
The Gap Inc. department responsible
for enforcing the company’s Code ofVendor Conduct in the manufacturing
facilities that produce its appareland for stakeholder engagementin the area of labor standards andworking conditions.

88

Hong Kong Productivity
Council (HKPC)A multidisciplinary organization established by statute in 1967 to promoteincreased productivity and the useof more efficient methods throughout
Hong Kong’s business sectors. For
more information, visit www.hkpc.org.
Impactt
A U.K.-based consultancy group thatworks with companies, organizations
and individuals to develop businesspractices which extend the number ofpeople who benefit from international
trade and investment. For more information, visit www.impacttlimited.com.
Independent Monitoring
Ongoing monitoring of working conditions conducted by local non-profit,
civil society organizations at therequest of companies or internationalorganizations.
Independent monitoring groups usuallyreport their findings publicly.
International Labour
Organization (ILO)The UN-specialized agency thatseeks the promotion of social justiceand internationally recognized laborrights. For more information, visit
www.ilo.org.
Joint Initiative on Corporate
Accountability and Workers’ Rights
A collaboration between six multistakeholder organizations to workwith garment manufacturers with theaim of developing a common codeof factory labor standards and consistent methods of implementation andmonitoring. For more information, visit
www.jo-in.org.
Multi-Fiber Arrangement (MFA)
An internationally-negotiated systemof quotas on textile and apparel outside the rules set out in the General
Agreement on Tariffs and Trade (GATT)
which allowed importing signatory
countries to apply quantitative restrictions on textile imports when they
considered them necessary to prevent
market disruption, even when such
restrictions were otherwise contrary to
GATT rules. Under the Uruguay Roundagreement, MFA quotas were phasedout at the end of 2004.
Non-Governmental
Organizations (NGOs)
National, international and communitybased groups that raise awarenessabout social, environmental, community and human rights issues.
P.A.C.E. (Personal Advancement,
Career Enhancement)
Our community investment signature
program based in the developingworld that seeks to open up opportunities for women. Represents a uniquecollaboration between Gap Inc.
and our NGO and vendor partners
to provide life skills education as wellas leadership training to help women
advance in work and life. (Launchedin Bangalore, India in June 2007.)

Public Reporting Working GroupA group of stakeholders withwhom Gap Inc. has worked sincelate 2002 to explore opportunities
for greater transparency andincreased sustainability of our work.
This working group is comprisedof Domini Social Investments(www.domini.com), the Calvert Group(www.calvertgroup.com), the As You
Sow Foundation (www.asyousow.org),
the Center for Reflection, Education
and Action (www.crea-inc.org),
the Interfaith Center on Corporate
Responsibility (www.iccr.org) and
Vectra International.
Social Accountability
International (SAI)
A non-profit organization dedicatedto the development, implementationand oversight of voluntary, verifiablesocial accountability standards. SAI
developed the SA8000 standard,
which covers all widely acceptedinternational labor rights and requiresa factory-level management system
to ensure ongoing improvement. For
more information, visit www.sa-intl.org.
Sourcing
The process by which Gap Inc.
selects and places orders with manufacturers around the world to produce
the merchandise sold in its stores.
Stakeholders
Individuals and groups including
NGOs, unions, governments, suppliers, shareholders and employees
who have a vested interest in the way
companies conduct their business.
This Way Ahead
Our community investment signature
program that focuses on helping
underserved youth make a successfultransition to adulthood and the worldof work. In partnership with local
non-profits, the program offers
a combination of practical work
skills training, social support andadditional services addressing
personal development. Also includes
paid internships at Gap and Old Navystores. (Launched as a pilot in New
York City in March 2007.)
Vendor Compliance Officer (VCO)
A member of Gap Inc.’s Global
Compliance department who monitors
working conditions of manufacturers
producing goods for the company.
Verité
An independent, non-profit social
auditing and research organization
whose goal is to ensure that people
worldwide work under safe, fair andlegal working conditions. For more
information, visit www.verite.org.

ABOUT THIS REPORT

ScopeThis Report provides an overview
of the social, environmental, andeconomic impacts of Gap Inc.’s U.S.
and international operations. These
operations cover our Gap, Banana
Republic, Old Navy, and Piperlime
brands, as well as our Forth & Towne
brand during its lifetime. This Reportoutlines our social responsibility
efforts in the areas of corporate
governance, supply chain, employees,
environment, community investment
and the marketplace.
Timeframe
We believe that it’s important tocommunicate regularly with our stakeholders. Starting with this Report,
we will be publishing biennial Social
Responsibility Reports. These formal
Reports are an important componentof our public reporting strategy,
which also includes regular updates
to our website, www.gapinc.com/
socialresponsibility, as well as formal
stakeholder sessions and ongoing
informal stakeholder outreach,dialogue, and partnerships.
Data included in this Report relates toactivities during Gap Inc.’s fiscal years
2005 and 2006 (January 30, 2005,
through February 3, 2007), unlessotherwise noted.

Stakeholder Engagement
Throughout our work, we strive topartner with organizations that share
our commitment to social responsibility. We believe it is equally importantto partner with stakeholders in our
public reporting process.

Design: Cahan & Associates, San Francisco

Because there is no generally
accepted standard for assessing thequality of social and environmental
reporting, we rely heavily on open
communication and partnership with
our stakeholders to ensure we areproviding appropriate transparency
into our efforts. We do this in three
ways: by maintaining an open dialogue with stakeholders throughout
the year, by participating actively inmulti-stakeholder initiatives and bycollaborating with stakeholders andother companies on special projects
to address issues of mutual concern.
We also provide regular, separate
reports on our progress in all ofthese areas to the Ethical Trading
Initiative (ETI), Social Accountability
International (SAI) and the United
Nations Global Compact (UNGC)
as a condition of our membership.

As in previous years, we again partnered with our Public Reporting
Working Group in the developmentof this Report. This group was formedin late 2002 to help us determine
our strategy for reporting publicly
on our social responsibility efforts.
The members of the group provided
input on content and reviewed andassessed the final Report. Their statement can be found on page 86.
In addition to working with the Public
Reporting Working Group, we also
held an important stakeholder feedback session in New York City in early
2007. More information about theoutcomes of that session and how
they guided our development of reportcontent can be found on page 14. We
greatly appreciate the time and effort
taken by all of our stakeholders toprovide us with constructive feedback,and we know that this Report has
been substantially improved by their
willingness to engage with us.

GRI Guidelines
The Global Reporting Initiative (GRI)
is a network of organizations andindividuals that seek to develop acommon framework for social, environmental and economic reporting.
In 2005 and 2006, Gap Inc. participated in the GRI’s working group
to develop an Apparel and Footwear
Sector Supplement that would introduce a reporting framework specificto the issues in our industry. The group
included approximately 20 members
representing a geographically-diversemix of major brands, leading manufacturers, civil society organizations,trade unions, environmental experts
and investors. A summary of thegroup’s work is available on the GRI’s
website. GG
The GRI’s new G3 guidelines andthe draft GRI Apparel and Footwear
Sector Supplement helped guide us
throughout the development of thisReport. Although this Report is not infull accordance with either framework,
the table of contents of this Reportprovides an index of GRI indicatorsand the sections to which they apply.
A more detailed index is also available
on our website. HH

United Nations Global Compact
The UNGC II seeks to promoteresponsible corporate citizenship sothat business can be part of the solution to the challenges of globalization.
Since signing onto the UNGC in 2003,
we’ve been working to advance its
10 universal principles in the areas ofhuman rights, labor, the environment
and anti-corruption. We’ve included
the UNGC principles alongside related
GRI indicators in the table of contentsof this Report.
Printing Considerations
Mindful of our planet’s natural
resources, we limited the number ofprinted copies of this Report to 4,000.
We printed this Report on Grays
Harbor Quinault 100% PCW Smooth
40# Text, comprised of 100 percent
recycled post-consumer waste, FSCcertified paper and manufactured with
100 percent certified renewable, carbon neutral energy. Using this paper
instead of virgin pulp, we were able
to save the following resources:• 120 fully grown trees• 50,052 gallons of water• 70 million BTUs of energy• 5,600 pounds of solid waste• 11,050 pounds of greenhouse gases

Cert no. SW-COC-1705

Our hope is that interested readers willview this Report online, accessible atwww.gapinc.com/socialresponsibility/
sr_report.shtml.

Feedback
We welcome your feedback as we
continue to evolve our social responsibility efforts. Send us an e-mail atsocial_responsibility@gap.com and let
us know what you think.
Photography Credits
Doug Adesko: pp. 4-5 (except
Marianna Mafike and Mahesh
Amalean), 18-19, 38-39, 52-53, 50-51(except Constantina PetallidesMarkou), 55, 62-63, 65, 72-73, 82-83(except Bobby Shriver), back cover.
Annie Leibovitz: pp. 75, 77.
Luis Ascui: p. 1.
Bill Davis: p. 44.
Chris Gaede: pp. 8, 41.
Juda Ngwenya: pp. 4 (Marianna
Mafike), 21, 80, 82 (Bobby Shriver).
Tom Pietrasik: pp. 3, 23 (factory
worker).
Tom Scott: p. 23 (mannequins).
Chris Vance: p. 50 (Constantina
Petallides-Markou).
ZipFly: p. 23 (except factory worker,
mannequins).

ENDNOTES

A

www.gapinc.com/public/Investors/inv_compliance_
cbc.shtml

Bwww.gapinc.com/public/documents/CSR_Report_03.pdf

Cwww.gapinc.com/public/Investors/inv_compliance.shtml

D

For a helpful assessment of the strengths and weaknessesof different auditing models, please see Man-Kwun Chan,“Tackling the Growing Crisis in Ethical Trade Auditing,”
in BSR Weekly, Vol. 10, No. 20, June 5, 2007. A fullreport from the Ethical Trading Initiative (ETI) is also available at www.ethicaltrade.org/Z/lib/2006/11/smart-audit/
index.shtml.

1 All manufacturers producing for Forth & Towne wererequired to pass through our approval process throughout
the brand’s lifetime.
2 Please see p. 18 of our 2004 Social Responsibility Reportfor comparable results from fiscal 2004.
3 Please see p. 19 of our 2004 Social Responsibility Report.
4 This is especially true in some regions, such as Greater

China, where factories are often located far from major
cities, and our VCOs must travel several hours eachway to conduct inspections. For a detailed breakdownof geographical variation in the remediation process,please see p. 27. We will be using this data, along withother inspection data, in 2007 and 2008 to streamline
our remediation process further.

Ewww.gapinc.com/public/SocialResponsibility/
sr_fac_team.shtml

Fwww.gapinc.com/public/SocialResponsibility/
sr_fac_wwf_fap.shtml

5 Please see pp. 31-32 of our 2004 Social Responsibility

Gwww.gapinc.com/public/SocialResponsibility/
sr_fac_wwf_afm.shtml

6 Please see p. 16 of our 2003 Social Responsibility Reportwww.gapinc.com/public/SocialResponsibility/
sr_fac_bp_efo.shtml

7 Please see pp. 12-13 of our 2003 Social Responsibility

HI

www.gapinc.com/public/SocialResponsibility/
sr_fac_wwf_rf.shtml

J

For more information on this training, please visit
www.itglwf.org/DisplayDocument.aspx?idarticle=15216&
langue=2.

K

www.oxfam.org.uk/what_we_do/issues/trade/trading_rights.htm

Report.
and pp. 24-25 of our 2004 Social Responsibility Report.
Report for more information on how we define coreviolations.
8 In early 2007, the credibility of the BFC program andthe integrity of ILO monitors were questioned by senior
government officials in Cambodia. We continue to support
the program’s efforts and worked with eight other buyers
to issue a joint statement expressing our full confidence
in the program. The text of that statement is available atwww.betterfactories.org/content/documents/Statement%
20of%20support%20from%20Cambodian%20Garment%
20Buyers%20(en).pdf.

Lwww.ethicaltrade.org/z/actvts/exproj/purchprac/index.shtml

Mwww.gapinc.com/public/documents/www_study.pdf

N

For more information on our integrated sourcing scorecard,
please visit www.gapinc.com/public/SocialResponsibility/
sr_fac_bp_pbd.shtml, and see p. 30 of our 2004 Social
Responsibility Report.

9 For details on our past work with the China Association ofO

www.ilo.org

10 IPCC WGI Fourth Assessment Report. Summary forP

For the most up-to-date information on the JO-IN initiative,
please visit www.jo-in.org

Q

www.ethicaltrade.org/Z/actvts/exproj/index.shtml

R

www.ifc.org/ifcext/mekongpsdf.nsf/Content/Feature11

S

For historical background on our independent monitoring
work in Central America, please visit www.gapinc.com/
public/SocialResponsibility/sr_fac_wwf_elsalv.shtml andpp. 20-21 of our 2003 Social Responsibility Report.

Twww.cimcaw.org.gt

U

For historical background on our work in Lesotho,
please see www.gapinc.com/public/SocialResponsibility/
sr_fac_wwf_lesotho.shtml; and see pp. 22-23 of our2003 Social Responsibility Report. Information on the
MFA Forum is available at www.mfa-forum.net.

VFor more information on the MFA Forum event in Toronto,
please see Maquila Solidarity Network (MSN)’s June 2007
newsletter at http://en.maquilasolidarity.org/sites/
maquilasolidarity.org/files/0607UpdateFINALweb.pdf.

W

For more information on the ILO’s Decent Work program,please see www.ilo.org/public/english/decent.htm.

X

www.unglobalcompact.org/CommunicatingProgress/
index.html

Y

For more information about a specific case in Cambodia,
please visit www.channelnewsasia.com/stories/afp_
asiapacific_business/view/272394/1/.html.

Z

The text from our individual and joint letters to theGovernor of the State of Puebla in Mexico is available at
http://en.maquilasolidarity.org/takeaction/pastcampaigns/
Barrios.

AAwww.panda.org/about_wwf/where_we_work/asia_pacific/
where/pakistan/projects/index.cfm?uProjectID=8W0011

BB

www.bettercotton.org

CC

www.bsr.org/CSRResources/Environment/WQG.pdf

DD

The National Center for Education Statistics.
www.nces.ed.gov

EE

For more background on our work in Lesotho, please see
www.gapinc.com/public/SocialResponsibility/sr_fac_wwf_
lesotho.shtml, and pp. 22-23 of our 2003 Social
Responsibility Report.

www.edunonline.com/live/about.asp
www.globalreporting.org/InDevelopment/
SectorSupplements/ApparelFootwear/
HH www.gapinc.com/public/documents/2006_GRI_index.pdf
I I www.unglobalcompact.org
FF

GG

90

Enterprises with Foreign Investment (CAEFI) in partnershipwith other companies, please see p. 41 of our 2004 Social
Responsibility Report.
Policymakers. “Climate Change 2007: The PhysicalScience Basis” (5 February 2007) p. 13.
11 For more information, please see p. 38 of our 2003 Social

Responsibility Report.
12 “Whole Foods’ Second Banana on Being Green,” Corporate

Board Member, January/February 2007, p. 77.

Gap (PRODUCT) REDTM
Denim Jacket
Made in Vietnam
Just as the component pieces pictured
throughout this report are assembled tocreate this denim jacket, our efforts — inthe supply chain, with our own employees,
in the environment, our communities, andin the marketplace — work together to havea lasting positive impact on society.

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San Francisco, CA 94105
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