The Conference Board Governance Center Blog

May
16
2012

Labor Standards, Transparency, and the Global Supply Chain

The expansion of supply chains to the far corners of the world has resulted in numerous advantages for global companies, including cost advantages, efficiencies of scale, and otherwise impossible time-to-market rates. Along with these advantages, however, reliance on third party manufacturers has also posed some challenges and risks to companies, as evidenced by the recent media spotlight on labor conditions of suppliers based in China.

Concern over supply chain labor standards is not a new phenomenon – the concern gained significant traction in the early ‘90s, as labor activists and others began to question the labor practices of suppliers manufacturing products for high profile apparel brands, including Nike. Concern over the practices, pressure from labor activists and the threat to corporate reputations resulting from media attention, led Nike and other apparel companies to institute a number of measures to address labor issues in their supply chains. Eventually much of the focus on supply chains shifted to environmental practices, including resource consumption and efficiency (energy, water, raw materials, etc.).

Supply chain labor standards have recently re-emerged as an important issue facing global companies. Today, questions are being asked not only of apparel companies, but increasingly of companies in other high-profile industries as well. The proliferation of consumer electronics (smartphones, e-readers, tablets, etc.), in particular, has raised a number of questions regarding the practices employed by third party manufacturers producing these ubiquitous products.

The extent of a company’s responsibility for the practices of its suppliers is a question that continues to be debated. In the early ‘90s it was not uncommon for companies to operate under the principle that concern about the social and environmental practices of their suppliers was beyond their scope of responsibility. Corporate responsibility was generally limited to the four walls of the company, and the assumption was that companies had no business meddling with the operations of their suppliers as long as the suppliers were able to produce quality products in a timely manner. Supplier transparency, i.e. disclosing the names and locations of a company’s suppliers, was also virtually unheard of, in many cases due to a belief that supplier information was of high competitive value.

Today, the vast majority of companies continue to guard supplier information very closely, despite requests for transparency from activists and shareholders. There are signs, however, of a shift towards greater transparency, a trend that is of particular significance for company directors. In 2005 Nike made the decision to publish a list of its global suppliers on its website, becoming the first company in its industry to do so. The website includes an interactive map with locations and statistics on the company’s 891 manufacturers. In 2007, Patagonia launched The Footprint Chronicles, a microsite allowing consumers to track a few of the company’s products through their entire development cycle, including details on suppliers. A more recent example comes from Apple, now  at the center of attention  regarding questionable working conditions at its suppliers. In response to mounting pressure, in January 2012 Apple released a list of its major suppliers, joining a growing group of companies including the likes of Hewlett-Packard and Intel that are paving the path for supply chain transparency in the electronics industry.

Supply chains represent an important strategic advantage for companies, but if not carefully managed, they can also be a potential source of risk. As witnessed by Apple (and formerly by Nike), supply chain issues can pose significant reputational risks. Companies are often faced with the choice of ignoring pressure to address issues in their supply chains and risking a PR disaster, or taking proactive steps to become industry vanguards in an area that resonates with consumers. In 2005 Nike decided to do the latter, and in 2012 Apple is facing an opportunity to do the same.

Company shareholders are increasingly sensitive to the risks and opportunities associated with global supply chains, and recent shareholder resolutions on this topic highlight a growing and renewed interest in issues related to labor standards. As examined in this week’s Director Notes, between 2010 and 2011 nine shareholder proposals related to labor standards in the supply chain were voted on by shareholders. The resolutions primarily asked companies to develop supply chain codes of conduct and ensure adherence to human rights policies through monitoring mechanisms. Despite a number of prominent organizations issuing proxy guidelines in favor of such resolutions, in practically all cases company directors recommended voting against these resolutions. Unsurprisingly, none of these shareholder resolutions passed.

There were a couple of rationales cited for voting against these resolutions.  In some cases,  the company noted that it already had strict codes of conduct regarding human rights compliance, and that these resolutions were thus redundant. In one instance, however, the board suggested that human rights enforcement is beyond the scope of private company intervention and should be addressed and enforced by governments.

For a more detailed overview of this topic, take a look through “Global Supply Chain Labor Standards”, which examines the adoption of supplier codes of conduct and supply chain labor policies, as well as media coverage, proxy voting guidelines and shareholder resolutions related to this issue.

About the Blogger:

Thomas Singer, Researcher, Corporate Leadership The Conference Board

Thomas Singer, Researcher, Corporate Leadership The Conference Board

Thomas Singer is a researcher in corporate leadership at The Conference Board. His research focuses on corporate social responsibility and sustainability issues. In addition to his work at The Conference Board, Singer serves as an independent consultant advising on corporate sustainability strategy.

Prior to joining The Conference Board, Singer worked with Blu Skye Sustainability Consulting and SustainAbility, helping clients embed sustainability into their core business. Over his career, he has supported engagements with industry leaders across sectors, focusing on strategy development, opportunity assessment, competitive analysis, and stakeholder engagement.

He began his career as a management consultant with Kaiser Associates, advising clients on white space opportunities, competitive analysis, and benchmarking. Singer is a graduate of Tufts University.



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