How much is your socially responsible supply chain worth?
"30 billion dollars," Tim Cook, the CEO of Apple, conceivably the company with the number one global supply chain, might say, "and much more," he might add considering the brand value of Apple.
Every sustainability practitioner can relate to challenges in assigning measurable value to social policies and social risks in business. These measures are referred sometimes to as ESG (Environmental, Social Governance) factors, other times as "good and fuzzy things." Until fuzzy things happened, that is.
As Nike experienced over three decades ago when consumers revolted against working conditions in Nike's facilities in Thailand. The damage for Nike was measured in an immediate drop in sales, but more importantly - the Nike brand was tarnished significantly, perhaps forever. As demonstrates the phrase "Nike's sweatshops," which became a common and generic expression in business vocabulary.
The late Steve Jobs discovered rather painfully in San Francisco during the 2010 All Things D-D8 conference how social factors, for which Apple was not legally responsible, presented very real and very material risk. At that conference, Steve Jobs' goal was to dazzle the crowd of loyal Apple followers with then revolutionary features of the iPhone 3. Instead, he found himself on unfamiliar territory defending the manufacturing strategy and social policies of Apple, and arguing that, "Apple does not support sweatshops." Before the D8 conference, on June 6, 2010 The New York Times broke the story about suicides among employees at Foxconn facilities. Foxconn has been, and still is, the largest private contract manufacturer in China. At that time, its 300,000 employees had been assembling products for many American and global companies including Dell, HP, Samsung, IBM, Microsoft and Apple.
Apple's loyal customers did not like the news about 12 suicides in the Foxconn facility, which assembled iPhones and iPads. Apple investors did not feel comfortable either with the otherwise great performance of Apple. After the first article in May 2010 about labor conditions at Foxconn, Apple stock fell by 12% wiping out tens of billions of dollars for Apple shareholders.
Source: Yahoo Finance, Apple February 11, 2010 Stock Price
Moving forward two years: September 24, 2012 - despite many steps Apple had taken to enforce Suppliers Code of Conduct, TV and press reports from Taiyuan, China showed thousands of people rioting in the Foxconn facilities. Within two days Apple's stock fell. There were more disturbing reports from Foxconn Mexico facility. From mid September 2012 to early November 2012 Apple stock lost 5% of its market cap, which translates into staggering $30 billion.
Source: Yahoo Finance, Apple September 17, 2012 Stock Price
In its 2012 analysis "Did Foxconn bring Down Apple Stock", StockRiters wrote, "The Foxconn riots and suicides have illustrated something all American companies with factories in Asian countries should be strongly cautious about - that when American Consumers realize that behind the iPads they use, behind the bright LCDs and LEDs, the Nike shoes and the designer clothes they wear, that behind these there is an undernourished, underpaid, possibly underage laborer toiling away in some dank sweatshops in the foul underbelly of Southeast Asia - that understanding has an immediate effect on the stock of the responsible company. A company that resorts to, condones, or ignores such business practices from its contractors, will get hurt where it matters most, its bottom-line. Therefore it is sound financial astuteness to spend money on removing this sort of incidents from ever happening".
Watching Apple's stock performance during Foxconn crisis, shareholders of global corporations connected the dots between short-term cost savings of simple labor arbitrage, and long-term benefits of a responsible supply chains. Investors took decisive steps to mitigate supply chain risks. They demanded management of their companies to review and address social risks in global supply chains, even if these companies were not legally responsible for suppliers' behaviors. Investors pressed for more transparency and accountability, including supplier sustainability reporting. Since 2011-2015, the New York City Pension Funds succeeded to implement this strategy via shareholder resolutions at its 19 holdings, mostly technology and apparel companies (Gregory Elders, Bloomberg, Feb.19, 2015).
Shareholders Mounting Expectations
Shareholders of Microsoft, led by the New York City Pension Funds, at the annual shareholders meeting in October 2011, passed a shareholders resolution which required the management of Microsoft to turn its 200,000-strong supply chain into a socially responsible supply chain. Further, the resolution imposed specific requirements for auditing vendors' disclosure of their works and safety standards, and a long-term compliance with internationally accepted standards. See: http://www.osc.state.ny.us/press/releases/mar13/supply_chain.pdf
Microsoft management followed these steps with structural and policy changes. Suppliers' code of conduct has been reviewed and strict enforcement program of the code has been implemented, offering industry "gold standards" in mitigating social risk in the supply chain. Now, Microsoft's supplier selection and evaluation criteria, include so called "Global Citizenship" factors that can account for up to 11% of the total weight in vendor selection.
Microsoft is hardly an exception. Companies such as Cisco, Dell, Intel, HP, Oracle - just to name a few of those with significant global purchasing power, have reviewed their supply chain procedures and elevated standards. Among the latest changes: disclosing the list of suppliers, which brings more transparency, or in Disney's case - blacklisting countries from its list of outsourced production region (Bloomberg, Dec 23rd, 2015). And yes - some vendors who do not comply are being dropped, sometimes in highly publicized cases. As Apple did in 2012 when it fired Pingzhou Electronics Co (PZ), one of its biggest Chinese suppliers, for a violation, and subsequent non-compliance of the Supplier Code of Conduct. http://www.forbes.com/sites/connieguglielmo/2014/04/17/john-chambers-unfinished-business-can-he-reverse-ciscos-growth-slump/
Across companies and sectors, a social factor/social risk (S- in ESG) in vendor selection accounts for 3% to over 10% of the total score, in extreme cases like Nike's - 25% of the total score. As the ESG measures are being broadly adopted by global business, the significance and materiality of S-factor (social) to company's bottom line has been getting more recognition among mid-level managers who, in pre ESG reporting-times, have been rewarded for delivering savings by cutting the cost of suppliers. Shareholders of Microsoft in its resolution expressed their believe that, "The reporting requirement will also drive sustainability improvements in Microsoft's supply chain."
As of January 2015, the New York City Pension Funds has successfully introduced a total of 11 similar resolutions for the companies in its portfolio.
Outsourcing Social Responsibility? Does not work....
One may argue that the "tipping point" for the implementation of stronger social policies in supply chains, was the April 2013 collapse of Rona Plaza in Bangladesh, which claimed over 1,100 deaths. Investigations conducted by global buyers uncovered numerous violations of the code of conduct of suppliers. Outsourcing of social responsibility clearly has brought devastating consequences. As the tragedy unleashed significant change in consumer attitudes, especially demands for transparency, global brands such as H&M, Zara and Carrefour realized that they must assume responsibility for enforcing code of conduct for suppliers.
AsiaInspection a company that conducts compliance testing with global safety standards in Asia declared 2014, "the year of socially accountability for global supply chains", as reported by Forbes in March 2014.
After Rona Plaza tragedy, it has been finally accepted that global brands cannot outsource social responsibility.
Back to Apple and Foxconn - Lasting Change
In response to the initial New York Times suicides report, Apple initiated many decisive steps in implementing the Apple Supplier Code of Conduct. Even before 2010, Apple was one of the global leaders in enforcing fair labor conditions among its suppliers. In 2005, it created a very progressive, for that time, Supplier Code of Conduct and followed it up with a disciplined global audit system. But it was not enough. "Steve, Apple can do better," wrote "Jay" one of many bloggers on the MacStories Blog after suicides were reported, reflecting the views of many. "You should educate yourself," responded Steve Jobs, "we do more than any other company on the planet." Objectively true, but it was still not enough for Apple followers. More had to be done. Steve Jobs realized that quickly after being challenged by thousands of email mesages.
The FLA gave Apple a high score on addressing the situation at Foxconn specifically, and on the Chinese global market (read more at http://www.fairlabor.org/press-release/final_foxconn_verification_report). In February 2014, Apple released again its 2013 Progress Report on Apple Suppliers Responsibility, underscoring its commitment to transparency and accountability. The company continues to put strong emphasis on its Supplier Code of Conduct, relaying not only on self-reported data, third-party audits, but more and more on its own internal enforcement of the Code. In 2014, the number of Apple-own in-person audits increased by 40% covering 1,600,000 workers in 19 countries.
Apple, arguably the most powerful global company in terms of its financial ability to enforce its business principles, made a significant mark on changing global labor conditions. The long-lasting effect of Apple's response to the 2010 Foxconn suicides brought lasting changes in labor standards in China, and other parts of the world.
According to Louis Coppola, Executive V.P. of the Governance and Accountability Institute in the IT sector, 243 GRI reports were filed globally for 2013; although only 38 or approximately 16% in the United States. These 243 IT companies adopting GRI standards may not be an impressive number in itself, as it represents only a small fraction of all the IT companies in the world. However, if we consider that in 2007 only 50 GRI-style reports were filed, and the number almost tripled in 2010 to 145, then such a growth represents significant progress in global embracement of social accountability in actual business activities, including global supply chain management. However, as Robert Bowman, from Forbes, noted, "keeping tabs on complex, modern-day supply chains continues to be a challenge." See: http://www.forbes.com/sites/robertbowman/2014/03/11/is-this-the-year-when-supply-chains-become-socially-responsible/. Wal-Mart has experienced it share of challenges after introducing its Global Sustainability Index in 2009 as an integral part of its sustainable supply chain strategy. The main challenge has been in capturing reliable data, assure transparency, and enforce the code of suppliers conduct among secondary and tertiary suppliers that account for 75% of products produced specifically for China.
"Never let a good crisis go to waste"
Apple has become a true transformational leader in implementing social accountability in the global supply chain. Its decisive stand on the working conditions in the Foxconn case, its persistence in implementing transparency and accountability throughout many layers of vendor management, constitutes now an integral part of Apple's brand value. "Around the Globe, Apple employees are united in bringing equality, human rights, and respect for the environment to the deepest layers of our supply chain," says Jeff Williams, Apple's SVP of Operations, responsible for end-to-end supply chain. This is the expression of good and fuzzy things, or the "social bite" in the Apple logo, which Tim Cook might have had in mind when assessing the value of Apple's socially responsible supply chain as "30 billion…and much more."