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. Thanks, Nell Minow
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