Mitigating risk is no mean feat in today's global business landscape. Sourcing professionals must consider numerous risk factors - political, economic, social, technological, legal and environmental - and their potential influence on the business. Could financial instability, an unreliable power grid or a natural disaster where a key supplier is located result in supply chain disruption? Could conducting business with individuals employed by state-owned institutions lead to anti-bribery and corruption compliance failures? In the quest for answers to these and other questions, companies must conduct due diligence on partners, clients and the other third parties on which they rely. Why not make ethical sourcing a part of that due-diligence and ongoing monitoring process?
Corporate Social Responsibility as a Competitive Differentiator
Some years ago, Starbucks CEO Howard Schultz said, "It is no longer enough to serve customers, employees, and shareholders. As corporate citizens of the world, it is our responsibility - our duty - to serve the communities where we do business by helping to improve, for example, the quality of citizens' education, employment, health care, safety, and overall daily life, plus future prospects." He's not alone in his conviction. A growing number of organizations - and regulatory bodies - advocate for a more socially-responsible approach to conducting business. And ethical sourcing is a critical component of corporate social responsibility (CSR). What is ethical sourcing? The goal is to ensure that suppliers' companies depend on and the products that companies produce do not involve exploitation of workers or the environment. Admittedly, ethical sourcing adds another layer of complexity to due-diligence efforts, but it also offers some clear advantages.
1. Ethical sourcing keeps organizations aligned with a growing number of modern slavery laws. California's Transparency in Supply Chains Act of 2010 and the UK Modern Slavery Act of 2015 could soon be joined by the End Modern Slavery Initiative Act currently under consideration by the U.S. Congress. These modern slavery laws require that companies above certain revenue thresholds include an annual statement on their website indicating:
Organizational structure including its supply chain
Policies regarding slavery and human trafficking
Due-diligence processes in place to identify modern slavery risks
Steps that have been taken to mitigate those risks
Training available to employees regarding modern slavery
If a company fails to comply, a court order can be issued to force the company to publish the statement. The bigger threat is that consumers and investors will withdraw support for a company that declines to be transparent about possible slavery and human trafficking in its supply chain. Moreover, unethical and unfair practices inevitably catch the attention of regulators. Even if no law currently exists to address an issue, there could very well be one coming down the road.
2. Ethical sourcing mitigates other legal risks. When a garment factory in Bangladesh collapsed, killing more than 1,000 workers, a number of retailers found themselves embroiled in legal fallout because the factory's wares filled their clothing racks. Just last year, a Californian consumer filed suit against Costco and its U.S.-based distributor after slavery in Thailand's fishing industry came to light. The lawsuit alleges that Costco's transparency statement is contradicted by the fact that a third-party supplier sources farmed prawns that are fed cheap fish caught by unpaid, forced labor. According to the complaint, "Costco publicly represents that it does not tolerate human trafficking and slavery in its supply chain, yet it continues to purchase the tainted farmed prawns from defendant CP Foods. Any representation by Costco that slavery in the supply chain is not allowed is simply false." The company saw its stock price drop and consumer confidence in their products decline after the lawsuit was filed.
3. Ethical sourcing satisfies growing consumer expectations for brands. According to a 2014 study by Nielsen, 55 percent of global online consumers value brands that commit to and actively pursue positive social or environmental impact, so much so that they're willing to pay more for ethically-sourced products. When announcing the survey results, Amy Fenton, the global leader of public development and sustainability at Nielsen, said, "Consumers around the world are saying loud and clear that a brand's social purpose is among the factors that influence purchase decisions." Price still matters, of course, but in a competitive marketplace, ethical sourcing could be a game-changer, particularly among millennial consumers.
Of course, all of these factors also translate to a financial bonus: productivity climbs and employee turnover declines, saving the company money.
Companies can counter stakeholder resistance to a CSR program by pointing out these advantages ultimately tie to bottom-line results. In fact, when the Harvard Business School analyzed financial health data for companies from 1993 to 2010, the researchers found that companies that had implemented "substantive changes in business processes" to support ethical sourcing realized improved stock performance and lower stock volatility compared to similarly-sized organizations without a CSR program. The study's authors concluded, "This finding suggests that companies can adopt environmentally and socially-responsible policies without sacrificing shareholder wealth creation….In fact," they wrote, "the opposite appears to be true: sustainable firms generate significantly higher profits and stock returns, suggesting that developing a corporate culture of sustainability may be a source of competitive advantage for a company in the long-run." By committing to a due-diligence and ongoing monitoring process that also looks at ethical sourcing risks, companies can achieve a competitive advantage. Remember, as Warren Buffet once said, "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." Considering the potential advantages implementing an ethical sourcing program, is it time you start thinking - and acting - differently?
Join LexisNexis at the upcoming SIG Global Executive Summit this October 18-20 in Carlsbad, California as they present with CBRE on Regulatory Requirements and the Third-Party Threat: How Third Parties Increase Risk for Global Business and What Organizations Can Do to Reduce Vulnerability.