Supply Chain Imperative, The: How to Ensure Ethical Behavior in Your Global Suppliers

With that excellent case study in mind, and given all that we have explored throughout the book, there are a few concluding recommendations that are worth considering:

• First, as with the quality movement, implementing a common standard has many advantages over creating a program from scratch. A great deal of consultation and thought has gone into SA 8000, AA 1000, ISO 14001, the ETI, and the GRI, and although some of these initiatives still need to be streamlined and made applicable to individual industries, they are, nonetheless, a valuable set of tools for developing a company ethical supply chain framework. Designed to be flexible and interactive with each other, these standards and guidelines are invariably more thorough, and easier to implement, than reinventing the wheel by designing a code or standard independently.

• Second, it is important, once a business case is made, that the corporate-leadership decide on a policy of genuine transparency for the company, both for the monitoring of suppliers and for reporting overall efforts and activities in the social and environmental arena. As with financial reporting, accuracy, dependability and transparency are key attributes of a good report, and any attempt to misstate or hide issues (as has so often been the case with recent accounting scandals) invariably undermines the company s credibility among shareholders once the real information is made known. For that reason, a policy of full transparency of supplier monitoring and reporting on social and environmental activities ” supported by independent, third-party auditing ” is ultimately the most legitimate course of action and a crucial element of a company s ethical framework.

• Third, given the likelihood that the SEAAR movement will be well established within the next several years , it is in the best interest of companies to support the development of indices and ratings groups such as AA 1000 s Gradient Index. These groups provide a forum for competition and open comparison among high-performing companies, and the publicity and objectivity that they bring to the markets is something that companies should welcome, not resist.

• Companies (particularly U.S. companies) should clearly separate their philanthropic corporate social responsibility activities from a broader program for ensuring an ethical supply chain. Philanthropy can be overseen by the corporate affairs department; supplier behavior cannot be. And however genuine and however helpful, philanthropy is still optional; maintaining an ethical supply chain, increasingly, is not. Maintaining an ethical supply chain is simply how business must operate in the modern global economy.

• Monitoring the social and environmental activities of suppliers has become too important, too critical to a company s reputation, simply to leave in the hands of procurement department alone. However competent purchasing officers may be in their sourcing efforts, the criteria and methods for selecting, monitoring, and reporting on suppliers needs to be seen as a strategic corporate process, with all of the leadership and resource issues that then implies.

• Finally, it is probably also worth saying that however burdensome or unfair these new responsibilities may seem to be, they should be seen for what they are ” an inescapable fact of the modern business environment.

As we have seen, as the legal and ethical separation between buyer and supplier ” once so straightforward ” has been called into question, companies have been struggling to find an approach to supplier management that can reconcile the need for continued company profitability and market stability with the broader concerns for workers and the environment in developing economies. Until that ambiguity concerning the boundaries of ethical responsibility between buyers and suppliers is reconciled, investors will continue to feel vulnerable, corporate leaders will be chided for making empty pronouncements about caring companies, and the public will be left with a feeling of unease and mistrust of business.

And however valid arguments calling for local government oversight may be, the reality is that, at least in this phase of the supply chain revolution, governments in developing nations are still some years away from the level of control or supervision necessary to effectively prevent social and environmental exploitation. In the end, therefore, the issue is a practical, rather than legal, matter of obligation. The fact is, buying companies are being forced to take on the burden for controlling the misbehavior of suppliers in part simply because, given the current lack of government regulation or enforcement in developing economies, corporations remain the only party at this point that have the capacity to influence supplier behavior. It may not be fair, but it is reality.

And despite early reticence, U.S.-based companies are in many ways even more susceptible to pressures to accept this new level of responsibility for supplier behavior ” and for reporting on efforts in this area ” than their European counterparts. Not only does the investor community have greater influence on U.S. corporate behavior, but new legislation and litigation, including revised SEC transparency and reporting rules, state and federal antisweatshop laws, the Alien Claims Tort Act, the potential fallout from the Nike v. Kasky case, and the growing number of class-action suits filed on behalf of overseas workers, combine to create a volatile and dangerous situation for U.S. companies that remain ignorant or indifferent to social and environmental violations that are occurring in their extended supply chain.

Finally, and possibly most important, all of the above combined mean that progressive companies already see the writing on the wall and are beginning to accept the need to adhere to international standards and to report on social and environmental performance, both within their own operations, and more importantly, within their supplier community. This will lead inevitably to a bandwagon effect. Progressive companies will be able to boast of their advanced policies in these areas ” in advertising, in product comparisons, with their inclusion in ethical indices ” using their progressive social and environmental policies as a strong differentiator among their competition.

On the other hand, those companies that resist or are indifferent to the movement will find their lack of participation increasingly difficult to justify, leaving themselves open to accusations that they are laggards, are indifferent, or are hiding something, for refusing to do what other companies have done. Ultimately, competition, not humanitarian motives or governmentsponsored regulation, may prove to be the strongest incentive for companies to establish an ethical supply chain.

It is likely, therefore, that in the next five years, as triple-bottom-line accounting and better supplier management become the norm, these types of policies will become a prerequisite for inclusion on the 100 Best -type lists that are so important for company reputations. As the economy improves and the labor market strengthens, these types of ratings will begin to affect a company s ability to hire and retain good employees ” because the best employees will want to work at a company that is concerned about supplier employment and environmental issues.

Put aside all the publicity aspects and the greenwash, contends Nicholas Eisenberger, CEO of Ecos Technologies, and there is a very large bank of real effort and interest, because people who work for these companies are human beings, and . . . they belong to a generation where they grew up with this as an issue. If you have been taught for 30 years that [corporate social responsibility] is an issue, . . . you don t want to come home to your kid at night and respond to the question, ˜Daddy, what did you do today? by saying ˜I destroyed the planet. ^[1]

Moreover, from all evidence, compliance to standards and independently audited social and environmental performance reporting will soon become de rigueur for operating, as analysts and institutional investors increasingly see potential supply chain instability ” poor operations and opportunities for fines , lawsuits, or reputation damage ” as reasons not to invest in companies.

Of course, the reality is that this type of CSR ” in the form of standards implementation for environmental and social reporting ” is already becoming the status quo in Europe. It follows that with U.S. companies in active competition and operating in the same markets ” abetted by new litigation and legislative pressures ” U.S. corporations will soon be adopting these same standards and reporting regimes. As support for the SEAAR movement continues to grow among multinationals, and as European, Japanese, and Australian organizations continue to adopt strong ethical supply chain and reporting transparency policies worldwide, the combined effect of new European laws and straightforward competition may force U.S. companies to adopt similar policies whether they want to or not. After all, nonparticipation will be a difficult case to argue in any WTO conflict between the United States and the EU or Japan, once these standards and requirements are agreed upon (particularly if it appears that U.S. companies are refusing to accept levels of responsibility and transparency that other global companies are readily agreeing to). Refusing to adopt SEAAR against all the moral arguments of activists, the examples being set by foreign-owned corporations, and the demands of investors and consumers will put U.S. companies in the unenviable position of appearing ” with all of their enormous wealth and influence ” to choose profits over the good of overseas employees or the environment. It is not an easy position to defend, and more broadly, such a position could potentially cause a much greater uproar than has been caused by stepping back from the Kyoto treaty.

In this sense, the issue of an ethical supply chain and the SEAAR movement begins to overlap with concerns of globalization and anticapitalism that, at least these days, are too often focused on the behavior and attitudes of U.S. companies anyway. Accordingly, many would argue that it is much better for U.S. companies to help influence the sensible development of these standards during these formative years than to refuse to participate once the SEAAR movement has become fully implemented in other countries .

In short, these are complex and important issues, and companies ignore them at their own peril. For all these reasons, the most sensible way forward for companies is to adopt a formal ethical supply chain program using an approach such as the one we have been exploring in this book; a framework that combines a strong corporate ethics program, stringent codes of conduct, international process and performance standards, a viable supplier management program, and transparent, independently audited social and environmental reporting. Such a program is important for the company s reputation, for bottom-line efficiencies, and ultimately for the good of the environment and workers in developing countries.

^[1] Interview with Nicholas Eisenberger, August 25, 2003.