So on we come to the final blog in this series on ‘Ethical compliance’. This driver addresses the ethics of a business’s supply chain and includes a bit of regulation, a bit of corporate governance and a lot of the media monster. We have looked at hazardous materials, carbon emissions and corporate decision making however now we are looking at the assessment of working conditions and business practices within the business. Ethical compliance essentially means abiding by all regulation, best practices, guidelines both formal and informal and terms and conditions of trade that involve some element of human or environmental morality. It is a remit for a number of initiatives but broadly speaking it deals with: working conditions and employment law; sustainable trading and promotion of just trading partnerships based on equality and transparency and environmentally friendly trading practices.
Of course if you want to ensure that you operate an ethically compliant company you also need to ensure ethical compliance happens throughout your supply chain from cradle to grave, and unfortunately that means auditing. So what risks should businesses be auditing for and why?
There are so many case studies to look at when considering ethical compliance that it hardly seems fair to promote a small number within this blog; However the companies and brands that I am about to reference have taken very positive steps in ethical compliance since the incidents such that they allow us to look at both the risks, and the opportunities of ethical compliance:
• In 1996, Marks and Spencer suffered at the hands of the media over allegations that one of its suppliers employed underage girls in textile mills in Morocco. M&S went through a lengthy court battle to clear its name however at a time when the company’s image was already faltering, many people still associated the brand with a low standard of overseas human rights;
• Nike has been another brand that is regularly in the media over concerns of its overseas sourcing practices. Allegations over child working conditions in Cambodia, Vietnam and Pakistan have tarnished the business brand throughout the 90s and 00s; and
• GAP equally has always struggled with ethical sourcing. In 2003 it was involved in a large class action lawsuit with sweatshop workers in Saipan who alleged working days in excess of 16 hours, unpaid overtime and a host of other infractions. No liability was ever admitted as the matter was settled out of court (along with a number of other co-defendants). More recently in 2008 the BBC highlighted concern of child working conditions in India. GAP immediately pulled the garment in question (girls’ smock blouse) from its global stores and destroyed the line.
Other companies such as Zara, Wal-Mart, H&M, Addidas and Levi have also fallen foul of the media and faced allegations over overseas working practices so this is certainly not an isolated segment of the market. But the costs faced by such allegations can have a massive impact on any company in more ways than one.
If we look at the latter GAP example, firstly from an internal perspective GAP would have costs associated with: the initial market research, the conception and design process of the blouse, the sourcing process and process analysis, the financial costs (including ROI propositions and cash flow forecasting), the production (including prototyping), the marketing and advertising costs (magazines, photo-shoots, labelling design, cataloguing), the distribution costs associated with logistics to 3,000 global stores, the retailing costs and all the indirect costs that occur throughout this whole process.
The lifecycle cost of a single garment is huge. Of course when unethical trading is brought into question there is suddenly a whole host of additional costs such as: logistics of pulling the product from the 3,000 stores, the financial costs associated with revised sales forecasts and loss of sales, the sourcing costs of investigations into the supplier and replacement suppliers and also any potentially effected secondary garments, and then, the cost of dealing with the media exposure, the cost of losing a valuable market position with the questionable garment and the opportunity cost of not fulfilling a particular garment need, the cost of c-level management time spend on the incident, the cost of loss of revenues from loss of brand, the cost of destroying the garments and so on and so on…. All of these costs are:
1/ completely fruitless as they will not realise any remuneration; and
2/ completely avoidable.
Above all else there is the huge impact on the brand’s image. Within the blog for corporate governance we assessed the devastating effect of public perception on a company such as Arthur Andersen and this is no different here. Within the consumer goods industry, in the most part consumers are blissfully ignorant, but also extremely fickle. For example, I like eating steak but that does not mean I would be enthusiastic about meeting the supplying cow a few hours before I sat down for a Kobe sirloin. This is similarly true of the consumer goods industry. I do not check who supplies my clothes from my favourite high street brands and for the most part I probably would not check if it was not obvious. But if I was made aware that my clothes were sourced for a supply chain that was not ethically compliant, it would definitely have an impact on my choice of high street shop or brand, and this is a consumer decision that a fashion brand cannot afford to be subject to.
So what can companies facing this problem do? Well firstly as I mentioned previously you need to choose your suppliers very carefully. Look for those suppliers who are members of ethical organisations such as fair-trade and the ethical trading initiative. Audit your suppliers and where necessary set your own compliance standards that best reflect your businesses outlook to ethical sourcing. Such compliance standards should cover fairness in employment, workplace safety, regulated product labelling, protection of environment (looking perhaps at recyclable packing initiatives or end of life product initiatives) and most importantly the implementation of information systems to monitor and demonstrate compliance.
As well as ethical trading intuitive and other third party organisation guidelines such as Greenpeace’s guide to greener electronics, a number of big companies have taken this internal auditing to a new level. Marks and Spencer have their own global sourcing principles which is continually growing and evolving and which is required of all of its 1,500 plus suppliers. The Wal-Mart group is looking to ensure that by 2012 all its suppliers source at least 95% of their production directly from factories which qualify highly on their environmental and social practices ratings.
Clearly there is a cost involved with auditing your whole supply chain and more importantly regularly auditing your supply chain, but taking GAP’s example above does the cost incurred in the first stage outweigh the potential cost of being branded across the front page of the broadsheets as an unethical company? Is that something that could be absolved by the company stakeholders (especially in public listed company)? The answer is probably not.
I mentioned in the blog on environmental regulation that there are currently product lifecycle systems that can track the carbon emissions and regulated substances within the supply chain, linked in with this, certain PLM suppliers also features modules that deal with ethical trading and allow companies to hold a wealth of information about their suppliers specifically for ethical compliance purposes. Some of these systems provide an ‘information gateway’ for suppliers so that all suppliers can obtain all the information required to understand and appreciate the businesses policies on ethical sourcing and undertake self-certification which can be centrally maintained and updated by the business. Of course self-certification is only as good as the trust that you have in your supplier, and if you do not have the resources that a company like Wal-Mart or M&S has to actually have internal auditing teams, you should try and perform ‘acid testing’ or auditing on a risk basis, which for most companies probably means auditing the suppliers in countries who have poor state regulation over such matters referred to in at the start of this blog such as Cambodia, Vietnam, Africa and other such states.
Where your ethical trading policies fail you then again as shown throughout this series of blogs, the best response is always to turn the public backlash into an opportunity: be open and honest about your failings and shortcomings; show the media how the company has restructured its supplier management; adopt an open and transparent stance on your supply chain; consider membership of organisations such as the ETI; and promote the new policies and ethical codes that now underpin your business. Nike, GAP and M&S have all performed this exercise and it has resulted in these companies now holding the image in some eyes as leaders/pioneers in ethical trading and sourcing policies. In 2005 Hannah Jones, (V.P. of corporate responsibility at Nike) stated “It has taken a long time to get to this point at Nike and we have made many mistakes. For many years, we were defensive about it and saw it as just a PR problem. Now we see it as part of the way we run our business. The report and the list of our suppliers was so that everyone can see where our goods come from.”
This sums it up very well. Ethical compliance should be considered within corporate governance as a core value within the company. It should underpin all business processes and should be reflected in the actions a business undertakes. It is not a hindrance, liability or an unnecessary cost but rather a strong opportunity to build relationships with the people that are essentially counting on you as much as you are counting on them to operate within your market. Of course there may be times that cost is simply the key driver for selection of supplier and ethical compliance may start to be viewed in shades of grey rather than black and white, but as always, commercial common sense should prevail. It may be hard accepting an increase in trade costs associated with an ethical supply chain, but equally it may be even harder accepting the costs of it not being.
Rob Smith is the head of enterprise projects within the Product Development Partnership Group of companies. He is also a fully qualified commercial solicitor.
Contact Rob at email@example.com