The days of thinking that suppliers who do unethical or Illegal things can’t hurt you are over

December 20, 2016 Christopher Sindik

By Martin Tolar and Christopher Sindik

Companies need to understand and proactively manage their supply chain to avoid reputational damage caused by suppliers who act illegally or unethically. The Days of thinking that suppliers who do unethical or illegal things can’t hurt you are over.  You can, and will, be held responsible for the people working for you in the supply chain, whether you like it or not.

Whether your suppliers are using child labour, poor working conditions, siphoning off your intellectual property, involved in organised crime, money laundering or corrupt practices, you could (and, most likely, will) be held accountable by your customers, employees and other stakeholders for their actions. It is not enough anymore to turn a blind eye and hope these issues go away. Regulators, whistle blowers, media and activist non-governmental organizations (NGO) will make sure that supply chain issues stay top of mind for companies and consumers alike.  You will be held liable whether you like it or not, knew about it or condoned that activity.

Quite often, a wave of criticism will come to companies after an NGO or media outlet conducts an investigation of misconduct happening in an industry or a set of suppliers.  The focus of these investigations is on brands and companies that heavily rely on business to consumer (B2C) products such as personal care products, food and beverage, clothing and electronics.  The notion that consumer social consciousness is expressed through their wallets is key for those trying to expose corporate misconduct.  A recent area of focus for these group is that of the corporate supply chain as it is an area that is highly vulnerable to ethical problems such as money laundering, bribery, environmental breaches and human rights violations.  While the companies themselves are not directly committing the violations in most cases, they are the ones being held accountable in the court of public opinion.

Most consumers of B2C products can’t name the suppliers that contributed to the items they pick off their shelves in brick and mortar stores or add to their online shopping carts.  If the product quality is poor, the consumers don’t blame the supplier that provided a poor component, they blame the company that sold them the final product and put their logo on the packaging.  While outsourcing all or some of the manufacturing process has its rewards, the inherent risk of reputational harm introduced via the supply chain is obvious.  Suppliers need to be checked, vetted and monitored on a continuous basis to ensure a supplier’s actions do not manifest themselves in the form of negative publicity for the company that partnered with them.

Adding human rights to the risk universe

When a report or outcry from the public focuses on human rights or environmental violations it cuts deep into the public’s consciousness.

Over the last 20 years, there have been a number of organisations that have had their use of child labour and human rights issues exposed.  Allegations made against many garment manufacturing companies, agricultural operations and retail companies have caused reputational damage and public outrage for years.  Companies go to great lengths to attempt to remove human rights violations from its supply chain, spending millions of dollars to address the problem. 

With the rise of environmentalism, the negative impact of harvesting natural resources in a non-sustainable manner has raised a number of issues with consumers.  The concerns have focused upon the impact that harvesting activities are having on endangered plants and animals.  Such activities have consequently received widespread media attention.  This attention follows campaigns launched by environmental groups with a view to alter the buying habits of consumers away from companies that do not obtain their ingredients from environmentally sustainable sources.

While companies focus on the environmental definition of “sustainability” in addressing these issues; the human element and the use of labour as a resource was not given the same consideration. 

Consequently, this raises the question, what does sustainable mean from a manufacturing perspective? 

For many, sustainability is only seen within the context of environmental management and the use of production techniques that have a minimum adverse impact upon the environment.  Others will argue that sustainability involves long term repeatability, but again the implication usually refers to the use of natural environmental resources.  It would appear for those caught up in the latest supply chain controversy, that it is this definition of sustainability that has been used. 

It is an extraordinary risk to have tunnel vision with a supply chain risk universe.  Many companies have prioritized the risks that can result in million dollar fines from the government or reductions in shareholder value; such as bribery, corruption, violating export laws, money laundering, and anti-competition, but they have not yet properly addressed reputational risks. 

Some compliance practitioners can argue, rightfully so, that it is these reputational risks that are more harmful to the long-term success of a company.  The importance of reputational risks is amplified by a new generation of consumers that are socially conscience and social media savvy. Therefore, companies must address the expanding risks presented by their supply chain as it is a potentially vulnerable area that is often targeted by the media, NGOs and even regulators.  One of the areas that is hard for consumers to forgive is human rights violations including forced labour, unsafe working conditions and child labour.

The old adage ‘you can outsource the process, but you can’t outsource the responsibility’ applies equally to companies, their suppliers and suppliers’ suppliers.  The risk of human rights violations typically increases the further down the supply chain a company looks. However, the blame and brunt of the harm often lands on the doorstep of the company with the logo on the package that hired the wrong supplier.

Role of the news and media

While the news cycle these days is becoming shorter and shorter, some may argue that the reputational harm to companies named in scandals will be shorted lived.  This approach of course ignores the power of the internet, the rise of social media platforms and a lower reliance upon traditional mainstream media as a source of news.

The real concern here is threefold, first is that once something has been released on the internet, then it is ‘out there’ forever.  Whenever someone uses a search engine and types in the name of company named in a scandal, the negative press can be featured at the top of the search results.  For those effected, stories like these do not go away easily or quickly.

The second issue of concern for those named companies is that younger, tech savvy consumers are more likely to be tuned into issues of environmental impact or human rights when making purchasing decisions.  So not only are they more likely to come across the report of an NGO, even if they did not see it at the time of publication, but chances are, they will factor its contents into future purchasing decisions.  This could have a negative long term impact upon the sales and revenue generated by the products produced by the organizations named in a human rights scandal due to a supply chain risk. 

And of course, let’s not forget what happens to an organisation’s reputation when these issues go viral and become fodder for keyboard warriors on any number of social media platforms.  In most instances, the truth is the first causality in telling a good story or making a political point.

Finally, the impact on companies can be exacerbated if they have previously claimed responsibly sourcing practices in their supply chain but fail to live up to their own policies or industry initiatives aimed at self-regulation.  While the genesis of such policies and initiatives aimed at supply chain responsibility can be found in response to the environmental issues raised against an industry, the claims also represent a socially responsible promise that has been made to customers and potential customers.

In some situations of sustainability, legal requirements do not exist that would require companies to harvest resources in an environmentally sensitive manner.  The decision to change previous environmental practices and to claim environmental responsibility is often made on a voluntary basis so organizations can present themselves as good corporate citizens.  By breaching this voluntary contract that has been made with the public, companies run the risk of having done irreparable reputational harm to both their brands and their products.  Harm that is greatly increased by not giving credence to the claims that were made around sustainable sourcing had the voluntary promises not been made in the first place.

Identifying and avoiding weak links in the chain

The question that then arises is, how can issues of human rights violations be prevented from occurring in the first place at your company?

The answer lies in understanding suppliers before a company gets involved with them.  Understanding where the risks are and knowing about the suppliers’ operations, workplace practices and its suppliers.  Was due diligence conducted on suppliers and if so, how comprehensive was it?  Did the due diligence just focus upon environmental (sustainability) issues, or was there a broader due diligence investigation undertaken?  Was a deeper investigation conducted if red flags were identified? Did the company follow up on its own recommendations, remediation tactics and risk ratings?

At The Red Flag Group, we recommend that any due diligence or compliance investigation focus upon at least the following key categories:

  • Anti-trust, fraud, bribery and corruption
  • Company work safety policies and practices
  • Cyber security and business stability
  • Environmental impact and sustainability

In total, our capabilities cover 23 different risk areas that can have a negative impact upon your supply chain.  This includes human rights issues, sustainability and environmental regulations

There are extreme complexities surrounding business operations in a global environment. Especially when components of final products are sourced from multiple sites and high-risk countries around the world.  The process becomes more complex and high risk when companies offer products and services to a global market via a network of international distributors.  All of which proves once again that a supply chain is only as strong as its weakest link.   It is imperative that companies be proactive in identifying, repairing and removing the weak links in their own supply chain.

 

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