Multi-Industry Chief Compliance and Ethics Officers

1.  Supplier Risk

Posted 01-23-2012 09:59 AM

Greetings to all and many thanks for the opportunity to share some of my thoughts about the most important, high-profile, and overlooked issues for shareholders this upcoming proxy season.  I'll be posting all week and hope you will participate with comments and questions. 

I'm going to lead off with a news item that grabbed my attention last week.  Otto von Bismark famously said that to retain respect for laws and sausages, one must refrain from watching how they are made.  In an increasingly global but increasingly transparent world, we have to add consumer goods to that list.  Mike Daisey's one-man show about his journey to the Chinese manufacturing facility that produced the Apple products he loved has been performed widely across the country.  Daisey was a passionately devoted Apple customer until he read about some haunting test photographs of a factory accidentally left on an iPhone.  His disturbing discoveries about the working conditions at the factory operated by Foxconn included employees who were 12 and 13 years old, occupational safety violations, and a high rate of employee suicides.  This month, Daisey's story ran on the NPR program "This American Life" with a follow-up report corroborating his findings that included fact-checking by NPR investigators and independent assessments from a Hong Kong-based NGO. 

Apple responded quickly by changing its policy to disclose its list of suppliers and submit to audits from the Fair Labor Association. The New York Times also reported last week on Foxconn's efforts to resolve wage disputes with workers following pressure from Apple and other customers.

Reputational risk management is an increasing problem for corporations and supply chains are an increasing part of that risk.  Last year, I wrote about the problems created by a sub-licensee of Warner Brothers when the an advocacy group self-dubbed the Harry Potter Alliance wrote a letter to the studio behind the Potter films, NBC Universal and Time-Warner asking them to make sure that the chocolate sold in Harry Potter wrappers meets Time-Warners' own ethical sourcing guidelines, with copies to Potter author J.K. Rowling, the corporations behind the theme park, and, of course, the press.  Four members of the movie's cast joined in, calling on the children of America to insist on chocolate manufactured without exploiting children in Africa. 

A new book, Business Ethics and Corporate Sustainability (edited by Antonio Tencati and Francesco Perrini) has a chapter on supply chain that suggests customers may be better suited and motivated to act as monitors of supply chain sustainability issues.  There is no question that concerns about customer defection prompted Apple's response to the Daisey broadcast.  Apple's reputation for coolness could collapse quickly if iPads and iPhones become associated with mistreatment of teenage workers. That makes this an issue for shareholders, too.  Nearly 40 shareholder proposals on sustainability reporting were filed in 2010 because investors believe that portfolio companies are critically underestimating the economic risk of supply chain vulnerability.  Significantly, a majority of those proposals were withdrawn following negotiations with the companies.  Every board should have an annual agenda item to make sure that supply chain issues are evaluated, disclosures meet the top global standards and facilities are audited by independent international organizations to ensure that their operations are not the next stop on Mike Daisey's itinerary.


Nell Minow

2.  RE:Supplier Risk

Posted 01-23-2012 10:22 AM

Hi, Nell - Glad to have you joining the SCCE social net.  Your story underscores another point - how relatively easy it is for outside third parties, like the press, NGOs and government agencies to uncover corporate misconduct.  When you read the accounts it just does not seem that they had to do any enormously difficult tasks to uncover this stuff. This is not only true in the supply chain - you also see it with employee misconduct. 

To me, in the compliance and ethics field, one message is that we are just not trying hard enough to find these things.  Companies talk about doing all of the seven elements of the Sentencing Guidelines.  But how much are they really looking for misconduct?  How many audits do they actually do, and are they ever unannounced?  What if any actual testing do they do?  How much do they retain third parties to check on suppliers, or even their own people for that matter?  What real controls are in place?  How much are managers incented to actively monitor what their people are doing?  Possibly one of the biggest areas of needed improvement in the compliance and ethics field is the application of more imagination.  If every now and then we took the time to think like a newspaper reporter or a consumer advocate or a prosecutor, we might come up with more effective means for checking.

I would suggest a simple test.  If the government, NGOs or reporters can find misconduct involving your company, whether it is your own employees or third parties, it should at least have taken them a lot of work.  But when you read the cases and reports, it raises real questions about how hard we are really trying, when third parties can find these things so readily.

Cheers, Joe   

Joe Murphy CCEP
Of Counsel CSLG

3.  RE:Supplier Risk

Posted 01-23-2012 12:18 PM
Thanks to Nell for raising these issues.   She mentions one commentator's view that:  "customers may be better suited and motivated to act as monitors of supply chain sustainability issues" -  which raises the threshold question of how companies actually implement their social responsibilities commitments.  It reminds me of Nike in the 90's showing a video at a CSR conference about great conditions and happy workers in its Vietnamese factory, and then a NYT story breaking 2 days later about high levels of carcinogens and wage violations ....  at its Vietnamiese factories. I hate when that happens!   

Although third party risk, including supply chain, is clearly a big Achilles' heel of any compliance program, it's such a big nut that it seems many companies are just now getting their arms around it.   (Both the UK Bribery Act and OECD Good Practice Guidance now place unprecedented emphasis on how companies monitor and manage their third party activity.)  But as Joe points out,  companies can't just sit around and wait for customers, the media and NGOs to uncover the problems.   I did read that Apple conducts surprise and annual audits directly and was planning to open its doors to independent audits by the FLA      The surprise element seems key to me since anecdotally we hear that many factories "prepare" for audits e.g. by clearing out child labor in advance of inspections.  I'd be interested in hearing what other companies are doing in the way of best practice for supply chain.   Also SCCE has just released this excellent brochure by Marjorie Doyle on third party risk controls.    

Donna Boehme
Compliance Strategists LLC
New Providence NJ

4.  RE:Supplier Risk

Posted 01-25-2012 08:36 AM
Thanks, Joe and Donna!  Mike Daisey seems to me to be the current version of what Rachel Carson and Ralph Nadar did years ago. You are right that it is easier all the time for outsiders to bust companies for issues like this one, perhaps easier than the companies themselves, despite what they hope are "surprise" inspections.