Wednesday 2nd Dec 2020 - Logistics & Supply Chain

A social conscience

The sporting goods company Nike made the news in April by issuing its first corporate social responsibility (CSR) report since 2001, and by going further than most in posting a complete list of its suppliers on the corporate website.

CSR reporting is becoming commonplace, especially among high-profile consumer goods companies who feel the need to justify sometimes controversial practices such as offshoring manufacturing, preferably before the protest groups set up camp in the executive car park. The extension of CSR reporting up the inbound supply chain is, on the face of it, a welcome increase in transparency, but it raises some tricky issues for supply chain management.

As Nike has previously discovered. The reason for the three-year break in reporting was that the company was sued under Californian competition law for statements in its 2001 report on labour practices in the overseas supply base which were, it was claimed, untrue or misleading. (The case was settled out of court against a substantial charitable donation.) Any company that lists its suppliers in a CSR report is implying it is satisfied those suppliers comply, or are moving rapidly towards compliance, with the company’s stated CSR goals, whether those be on labour rights, environmental protection, ethical conduct or whatever. However rigorous the inspection regime (and Nike does have a comprehensive programme of inspection by its own executives and through non-profit third parties) there is always the possibility of deception. And you can bet activists will sniff out real or alleged problems long before they surface at corporate HQ.

Given which, why would a company offer such hostages to fortune? The fact is, such reporting is rapidly becoming a quasi-legal requirement. The pressure doesn’t just come from the tree-huggers and consumer activists either. ‘Ethical investment’ is a growing force in the US and UK (less so in continental Europe simply because shareholders typically enjoy less power over the companies they ‘own’; but this is changing). And whereas the emphasis was until recently on products and customers — no tobacco, no armaments, no sales to rogue states — the inbound supply chain is now firmly in the sights of ethical investors.

Governments, regulators, and courts are interested too. The Sarbanes-Oxley Act in the US, and the new UK requirement for ‘Operating and Financial Reviews’ by public companies, may not specify supply chain issues but clearly the operational an reputational risks arising from, for example, using illegal sweatshops, are real and the courts are highly likely to back regulators or shareholders who complain of non-disclosure.

On the other hand, many organisations have good reasons not to disclose details on their supply chain arrangements even though they are operating perfectly legally. Defence contractors are an obvious case; as are many chemical, biological and pharmaceutical supply chains — could you reasonably require a firm like Huntingdon Life Sciences to disclose a list of suppliers, when those that have become known already face what is essentially terrorism from ‘animal rights’ protestors? Should a distiller be expected to tell the world, or the criminal fraternity, which haulage contractor’s trucks are likely to be worth stealing?

And while pressure for ethical, social and environmental responsibility and transparency is rightly growing (and not just in the Western World either), not all motives are pure. Nike’s legal problems may have had rather less to do with the rights of exploited Far Eastern workers and rather more to do with protecting US jobs.

What about suppliers’ rights? Will they be able to tick the box for no publicity? For example firms may find it embarrassing to be identified as suppliers to one organisation if they are bidding for work with a competitor. And how about prestigious brand owners who would rather it wasn’t widely known that they also manufacture cut-price own-brand products? Would a disinclination to be so identified exclude a firm from tender lists?

If CSR reporting requirements were laid down in statute (not that we need any more regulations, thank you) industries could at least argue the toss over some of these issues. As it is, a norm will evolve, which may differ between sectors, led by the more progressive, foolhardy or desperate companies. Those who for perfectly good reasons don’t meet the expectations for CSR reporting will be seen, not just by activists but by shareholders, customers, regulators, even perhaps by their own staff, as being dodgy or as having something to hide. The reputational risk of non-disclosure could come to outweigh the risks of greater transparency.

Briefing points

  • CSR reporting is a real and growing phenomenon, driven not only by activists but also by the investment community and the regulators.
  • The bar for acceptable reporting will largely be set by whatever is seen or publicised as best practice, not by legal codes.
  • Reporting norms will not suit every firm, and for some could be positively dangerous. It is vital that such firms hold early and continuing dialogue with investors, suppliers, stakeholders and media to explain such difficulties and justify reporting policies.
  • Whatever depth of CSR reporting is entered into, it should be robust, honest, factual, and managed as a business process with risks and opportunities, not as a PR stunt or a fire-fighting exercise.

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