A New Ethical Supply Chain Framework

A New Ethical Supply Chain Framework

Leading companies have responded to these various pressures by developing a new approach to supplier management that includes four important elements:

  • A corporate ethical and risk management framework

  • The adoption of internationally accepted labor and environmental process and performance standards

  • A supplier monitoring and audit program

  • Reporting on social and environmental performance

As powerful as the arguments in favor of this type of approach may be, however, both in terms of risk and reputation management and for the humanitarian good that it brings , most U.S. companies are still a long way from adopting this sort of comprehensive ethical supply chain program. In contrast, this type of approach is quickly becoming the expected norm among European companies as the combined Corporate Social Responsibility (CSR) and Social, Environmental, Accounting, Auditing, and Reporting (SEAAR) movements converge and grow in legitimacy among the European Union companies, governments , and academic institutions. In fact, so rapid is this framework of internationally accepted codes of conduct, supplier monitoring, and social and environmental reporting being adopted in Europe and Japan, that there is a growing risk that a CSR schism is beginning to develop between European and Japanese companies on one hand (who see the duties of CSR as being best fulfilled by establishing an ethical supply chain, adopting standards, and completing social and environmental reporting) and U.S. companies on the other, which are more likely to interpret CSR responsibilities in light of good corporate governance and philanthropy.

Will adoption of standards and nonfinancial reporting requirements in the European Union and Japan force U.S. companies to adopt similar programs? With litigation and legislation moving in the same direction at home, will U.S. companies resist this powerful movement and risk another potential World Trade Organization (WTO) standoff? In Chapter Five, The SEAAR Movement, we examine the rapid evolution of the nonfinancial, social, and environmental reporting movement in Europe and explore the likely repercussions of this growing gap in both perception and actions between the two major trading blocs.

Getting from Here to There

Creating and maintaining an ethical supply chain doesn t come about easily; it has to be planned, resourced, and managed. So what does a company need to do in order to put in place this type of ethical supply chain framework? In Chapter Six, Who Is in Charge Here?: Organizational Responsibilities for an Ethical Supply Chain Program, we look at the key activities necessary to monitor and manage the ethical supply chain at an organizational level, and explore the many groups within a company who are now, or should be, involved in a company s ethical supply chain process.

Given these diverse, often competing, groups and interests within the modern company, how should company leaders set about developing an ethical supply chain program? Leading companies contend that a corporate ethics and risk management framework is at the heart of any ethical supply chain. This framework, explored in Chapter Seven, The Corporate Ethics and Risk Management Framework, includes:

  • A company value statement and a comprehensive code of conduct that governs employee behavior (including the behavior of employees in the company s tier -one suppliers)

  • An ongoing business case for action

  • Adoption of internationally endorsed process and performance standards

  • Measurable and verifiable indicators of performance

  • A program for building awareness and support both for company and supplier employees

  • A comprehensive supplier program

  • A nonfinancial (social and environmental) reporting program

Without this basic ethical framework, companies are often lacking the expertise, the management focus, and the necessary ground rules for dealing with questionable behavior, whether within the company s own direct operations or its extended supply chain. Accordingly, in Chapter Eight, Choosing an Aspirational Code of Conduct, we look at how companies are combining corporate codes of conduct with new, internationally endorsed codes of labor and environmental behavior, in order to create a written moral minimum statement of their values. And as with any program that requires corporate resources and investment, one of the first critical steps for any organization contemplating this type of approach is to develop a credible business case that will help stakeholders ” the Board, senior management, investors, and the supplier community ” to understand the business and financial drivers behind the program. Accordingly, in Chapter Nine, Creating a Case for Action, we look at the key costs and benefits associated with an ethical supply chain program.

As we will see, although codes of conduct are important as a means of espousing corporate principles, they are less helpful when trying to provide detailed guidelines for social and environmental activities within the supply chain. Accordingly, companies are increasingly turning to emerging social and environmental performance and process standards that provide a detailed and effective set of processes and policies by which companies monitor, adjust, and report on corporate social and environmental activities throughout the supply chain. For those who are following the rapid development of these standards ” a hybrid of the quality movement and generally accepted accounting principles ” there can be no doubt that they will become an important new feature of the modern global corporation.

Accordingly, in Chapter Ten, Choosing Performance and Process Standards, we explore the most important tools that have emerged in this area ” tools such as the SA 8000 performance standards, ISO 140001 environmental standards, the Ethical Trade Initiative, and AA 1000 process guidelines ” and explore why a combination of these new tools is beginning to provide multinationals with much of the logical and process infrastructure for their ethical supply chain framework. In Chapter Eleven, Creating Measurable and Verifiable Indicators of Performance, we look at the type of performance indicators that can help a company s organizational leaders gauge the program s progression and success.

Creating a successful ethical supply chain framework, of course, requires a strong program of communication, not only among company and supplier management and employees, but among the broad set of company stakeholders (investors, customers, unions, government agencies, NGOs) that are interested in a company s activities in this area, and can directly affect the success of the program. In Chapter Twelve, Building Awareness and Support for Codes and Standards, we explore ways that companies can go about identifying and communicating with these various stakeholders.

One of the most important aspects of these rapidly evolving standards is that they are designed to help parent companies monitor, manage, and assess the social, ethical, and environmental performance of their suppliers. This supplier management program, a combination of emerging international standards and leading strategic sourcing techniques explained in Chapter Thirteen, The Supplier Program, requires dedicated resources, a formal management program, and a new approach to supplier sourcing. It also requires a strong communication program and supplier training and monitoring activities that may be unfamiliar to most companies. And it will also require some form of supplier performance audit, covered in Chapter Fourteen, The Audit Process.

As many companies are finding, even with strong direction and incentives, it is likely that many supplier factories and farms, particularly those in developing economies, will not at least initially be in conformance to a company s ethical codes and standards. So what does a company do when it finds its suppliers are guilty of employing children, overworking employees, or dumping toxic wastes? Withdrawing the contract is the ultimate sanction , but in the end only harms the company, the supplier and, invariably, the supplier s employees, who in most cases are desperately in need of the work. In Chapter Fifteen, Compliance Issues, we examine the vexing issues associated with supplier noncompliance and explore some of the more innovative responses that leading companies have developed to bring suppliers into conformance.

A company s good efforts should be acknowledged and rewarded, and transparency in these efforts is essential for gaining the trust of the investment community. In Chapter Sixteen, Reporting on Your Good Work ” Moving Toward Triple-Bottom-Line Accounting, we look at the Global Reporting Initiative, and explore the types of activities that are necessary to create a strong social and environmental sustainability report. In order to help collect and manage this important and auditable information, and to measure compliance against various, often complex, environmental and worker safety requirements, companies are turning to enterprise-wide Environmental Management Systems (EMS), Environmental Health and Safety software, and knowledge management systems and techniques to help monitor performance and manage their document retention program. These subjects are examined in Chapter Seventeen, Systems to Monitor and Audit Social and Environmental Performance Within the Supply Chain. And finally, in Chapter 18, Pulling It All Together: The Switcher/Prem Carl Study, we look at how one innovative company has worked with its overseas supplier community to put many of these leading practices in place.

These are the types of activities that the modern corporation needs to put in place in order to reduce risk, protect its reputation, live up to its stated values, enhance the productivity of suppliers, and improve the lives of their employees. In short, these are the types of steps that are necessary for companies to establish an ethical supply chain.