Introduction

Overview

In 1998, many will remember the huge media uproar when activists reported that the Kathie Lee range of handbags (designed and marketed by Kathie Lee Gifford and Wal-Mart) were being produced at the Qin Shi factory where over 1,000 workers were forced to work 12 “ 14 hours a day, seven days a week, with only a single day off each month under contracts that amounted to indentured servitude. Their average earnings were calculated at 3 cents per hour. Forty-six percent of the employees , despite often having worked for the factory for many months, had never been paid anything. Fed two meager meals every 24 hours, the workers were allowed out of the factory for only an hour and a half each day, and were housed in tiny rooms shared by 16 people. When workers protested against their conditions, some 800 were fired . ^{[1 ]}

Three years later, in August of 2001, one of San Francisco s largest garment factories, Wins of California, Inc., which employed low-paid immigrant workers and produced clothes for the U.S. Army and the U.S. Air Force as well as prominent retail leaders such as Sears, Wal-Mart, K-Mart, and J.C. Penny, was accused by state and federal labor officials of violating wage and employment laws, and owing its workforce more than $850,000 in unpaid wages . ^[2]

These are only two of the hundreds of examples (many of which we will look at in this book) where well-known corporations in the last several years have become embroiled in reputation ” and share value damaging ” disputes concerning the behavior of their suppliers. In fact, so diligent and effective has the nongovernmental organization (NGO) and investor community become that these types of disputes now appear regularly in the media, damaging individual corporate reputations and further eroding public confidence in corporate social responsibility and American business in general.

Concern about the exploitation of workers and the environment in factories in developing countries is not new, of course. The collective conscience of the developed world really first became aware of the ethical ties between corporations and their overseas business partners in 1984 when a catastrophic chemical leak killed some 3,800 people and left 2,700 others permanently disabled at a Union Carbide pesticide plant, owned and operated by Union Carbide India Ltd., in Bhopal, India. The effect was devastating, not only on the families and the community, but also on Union Carbide, which in 2001 merged with a subsidiary of The Dow Chemical Company after having been directed by the Indian Supreme Court to pay damages that amounted to $470 million in 1989.

During the same year as the Union Carbide settlement , the Exxon Valdez oil spill in Alaska released 11 million gallons of oil into the Valdez Narrows after the tanker left the shipping lanes and ran aground. The environmental catastrophe, played on television screens throughout the world, cost Exxon nearly $2.1 billion for cleanup, and is still being disputed in the courts ” and in many ways has sullied the company s reputation for an entire generation.

Collectively, these incidents began to create a frustration and anger that was targeted against big business and capitalism , and during the 1990s, this coalesced in a powerful if poorly defined movement that has reshaped the modern business environment. Growing in momentum throughout the 1990s, the anticapitalism movement exploded onto the global scene at Seattle in 1999 when more than 50,000 activists gathered to protest World Trade Organization (WTO) activities. Those protests, often violent and uncoordinated, continued through Prague, Quebec, Washington, D.C., Davos, and Genoa.

As disparate and sometimes competing groups have tried to address every issue from debt relief to HIV/AIDS, however, this anticapitalism, antiglobalization movement has recently become more amorphous and less effective, and most would agree that attempts to disrupt world economic forums through street protests have ultimately meant that the movement has lost much of its legitimacy in the eyes of the public. When combined with the fact that the movement has suffered from the lack of a simple, unifying message, the antiglobalization steamroller has, for now at least, lost much of its momentum and support.

Yet, as the antiglobalization movement has waned, a more focused, more prescriptive movement has emerged. A surprising collaboration of activists, NGOs, investors, lawyers , academics , politicians , and business leaders have, over the past several years, begun to espouse a new global business framework that is growing in legitimacy. Under the heading of corporate social responsibility, this new framework has incorporated several key strategies that are proving to be surprisingly successful.

First, activists have shifted their focus to tangible and commonplace environmental and human rights issues. This has meant that it is no longer necessary for an NGO or pressure group to focus on a major oil spill or a devastating chemical leak in order to attract broad attention. They have emphasized more general, ongoing concerns, such as the use of lumber from rainforests, hourly wages and working conditions, or the disposal of toxic chemicals in specific factories. It isn t that the issues have changed, but activist focus has shifted to a large extent to broad ongoing questions of policy, and away from indictment of companies over single, specific incidents. This new focus on the practical day-to-day issues is much more proactive, allowing activists to search out violations and expose corporate activities to public scrutiny on an ongoing basis.

A second important characteristic of this new drive toward forcing greater corporate responsibility is a policy known as market campaigning. Realizing that publicity was their most effective tool, a powerful and increasingly effective combination of NGOs, pressure group activists, and international bodies has shifted its efforts specifically toward exposing ” naming and shaming ” large and well-known corporations. This strategy is based on the idea that if industry-leading companies such as Shell, Nike, Chiquita, McDonald s, or Home Depot are forced to change policies publicly , those improvements and reforms will also be adopted by lesserknown companies in the same industry. The larger and better-known the brand name , the more effective the campaign. This policy, however unfair, is nonetheless extraordinarily effective.

Finally, and most importantly for most companies, during this same period-there has been an effective attempt by activists to make corporations responsible for the actions of their suppliers and subcontractors , even when the corporations themselves have no direct role in governing those third-party business partners. This dramatic shift in responsibility up the supply chain, holding large and powerful corporations responsible for the actions of their suppliers, includes naming and shaming companies, encouraging consumer and investor boycotts, and, increasingly, litigation that involves both civil and criminal prosecution . This effort to essentially create an ethical supply chain has proven to be the latest and most effective means for driving reform in global business.

What is important to understand is that these strategies are fundamentally different, both in focus and in effect, than the more limited activist-sponsored activities of the 1990s. Too often still portrayed as just another business fad (i.e., comparable to business process reengineering, activity-based costing, or total quality management), corporate leaders are now beginning to appreciate that the corporate social responsibility movement will ultimately have a much more profound and lasting effect on how companies are organized and managed than the efficiency movements of the last two decades. In this sense, the CSR movement is more accurately compared to the establishment of the generally accepted accounting principles (GAAP) in financial accounting, which had a revolutionary effect on the investment community, financial markets, and the broader economy.

One reason for this is the new emphasis on shareholder awareness. With the extraordinary explosion in mass public stock ownership that took place in the past decade, publicly listed companies have become very vulnerable, and very sensitive, to incidents that can adversely affect their reputation ” and therefore their share value. A decade ago, most corporate leaders and board members only focused on maintaining stock price stability. But in the late 1990s, as increasing share value became the principle focus of a company s strategy, the relative power of shareholders, and the volatility that comes with broad, public stock ownership, increased significantly. With this strategic focus on share price, however, has come new vulnerabilities. Investors are acutely concerned about any event that might result in damage to a company s overall reputation, triggering a rush to sell and a precipitous collapse in the stock price. This wariness extends to investors ranging from day-trading housewives to large investment brokerages.

Moreover, the investment community increasingly has come to demand this sort of information ” information concerning a company s ethical policies and risk management practices ” as a matter of right. Analysts need to start paying attention to how companies manage CSR as one element of risk assessment, says John Ruggie, Director of Harvard University s Center for Business and Government. The investing public is entitled to know what a company is doing to manage these risks, because they can affect stock values and have even led to corporate bankruptcies. ^{[3 ]}

Whatever the merits of this singular focus on shareholder value, it means that U.S. companies have a particularly strong incentive to prevent any adverse publicity (deserved or not) from damaging their reputation and their stock value. Therefore, under the new realities, companies are now scrambling , often for the first time, to gain control over the unethical behavior of their own employees (not least their executives) as well as those of their suppliers, as a way of assuring investors that no ethical scandal is likely to endanger the value of their investment.

Moreover, alerted by the astonishing and outrageous scandals involving-corporate executive accounting fraud over the past three years, the media has aggressively taken on the role of whistle blower on issues of corporate behavior to an extent that they never did in the past. As a result, corporate ethics have become a common issue in major newspapers and journals, and an increased area of interest to investigative reporters, government agencies, and state attorneys general.

The definition of responsibility, at least here in the United States, is changing, warns Martin Ogilvie Brown, of PricewaterhouseCooper s Sustainable Business Solutions group in New York. That seems to have been driven by the last few years of corruption scandals and ethical challenges that we have had here. Is that going to translate into this broad corporate responsibility and sustainability agenda? I don t know; but I think it is pushing in that direction. ^[4]

All of this has fundamentally altered the way that companies ” particularly multinational companies ” behave, and those changes are being more and more universally applied. It is hard to imagine, for example, a major company a decade ago even mentioning social or environmental policies in its annual report, its company statements, its burgeoning Web site, or its advertising campaigns . Yet today, nearly every company boasts ” however flimsy the supporting evidence ” of its commitment to corporate social responsibility.

Angered and bruised by recent corporate scandals, however, investors and market analysts are no longer willing to accept unsubstantiated claims about corporate propriety made by a company s public relations department. As basing investment policy on financial statements alone has become more dangerous, analysts are increasingly utilizing proxy statements and company reputation scans , attempting to better gauge the nonfinancial measures that matter. It is that same investment community that is now seeking (and in Europe, demanding) verified reporting on a company s social and environmental performance.

Nor will investors be impressed by companies simply giving money away through corporate philanthropy, something that has been touted as corporate social responsibility by companies for too long. After all, the average investor in the postbubble market doesn t care about philanthropy, they care about the value of their investment. And as we will see throughout this book, a powerful way of protecting share price stability is to create ” and transparently report on ” an effective supplier monitoring program.

Accordingly, since the late 1990s, the combined effects of pressure group activism, an attentive media, and a super- responsive investment community has meant that many companies have begun to focus greater effort under the umbrella movement of what has become known as corporate social responsibility. Particularly in Europe, this movement is rapidly and relentlessly pushing companies toward adopting new policies and practices which will mark a fundamental evolutionary step for the modern organization that is as important as the quality improvement movement of the past two decades. In fact, for all these reasons, it is hard to imagine a top- tier company a decade from now that won t have in place an ethical supply chain program with supporting social and environmental standards and reports . These are the sorts of issues that we examine in this book, and in Chapter One, Strategic Concerns, and Chapter Two, The Extended Global Supply Chain: New Problems and New Responsibilities, we will be looking at the various new pressures that are inherent in the global economy that are forcing companies to accept greater responsibilities for the actions of their suppliers.

It has not only been the external pressures of globalization that have forced companies toward accepting greater responsibility for maintaining an ethical supply chain, however. Internal organizational issues associated with a decade-long supply chain revolution ” large-scale outsourcing, greater design and materials management collaboration with suppliers, and the evolution of strategic sourcing techniques ” all mean that companies today are more concerned than ever about the dependability of their suppliers. Dependability and quality, as we will see, however, do not sit easily with workers being forced to work 16-hour days for 3 cents an hour for 80 and 90 hours each week.

In short, many companies are beginning to find that along with external-pressures (investors, activists, consumer boycotts, litigation), internal operational issues are driving companies toward a more efficient supplier management program. Accordingly, in Chapter Three, Risky Business, we examine the many new risks inherent in the extended supply chain and consider what industries are finding themselves most exposed to these risks.

So how have companies reacted to these changing pressures and new risks during the last five years? In Chapter Four, Companies Behaving Badly, we will look at the short, tortured history of corporate-supplier relations in this new order, where companies have gone from completely denying responsibility for the actions of their suppliers in the early 1990s, to a general acceptance of responsibility for their suppliers behavior in 2003.

^{[1 ]} Wal-Mart Dungeon in China, National Labor Committee for Worker and Human Rights , July 13, 2003, at www.nlcnet.org/report00/introduction.html.

^[2] David Lazarus, Law Closing in on Factory S.F. Garment Maker Accused of Not Paying Workers for 3 Months, San Francisco Chronicle, Friday, August 17, 2001.

^{[3 ]} John Ruggie, Managing Corporate Social Responsibility, The Financial Times, October 25, 2002.

^[4] Interview with the author, November 6, 2003.