Human rights and climate change have been thrust into the centre of business practices. After decades in which shareholder primacy was assumed to be the one and only correct guide for businesses, the effects of businesses on their communities have been increasingly taken into consideration. Just a few years ago, America’s most powerful chief executives signed up to a “Statement on the Purpose of a Corporation”, in which they pledged to act for all stakeholders – customers, employees, suppliers, communities and shareholders-, not just their shareholders. One of the key concerns of communities has centred around supply chain transparency. Business executives are under pressure to ensure that their suppliers do not use forced labor, or work with suppliers who harm the environment. Last November, the chief executive officers of Ikea, Amazon, Nike and other multinationals, had to answer questions in Westminster, the United Kingdom’s parliament, regarding accusations that they worked with Chinese suppliers who used slave labor from Xinjiang, China, where Uyghur Muslims have been under oppression.
Society’s Views Are Changing
Supply chain transparency is more important than it has ever been. This reflects changing norms around what the purpose and obligations of a business are. Businesses are increasingly held accountable for the social and environmental consequences of their business practices. From a very pragmatic point of view, a business that does not take into account the need for supply chain transparency, risks reputation damage, at a time when millenials and Gen Z consumers are becoming an important part of the economy. Millenials and Gen Z consumers want to do business with value-driven businesses. For them, the sheer pursuit of profit is not enough to justify business practices. A business that is deleterious to its communities and to the environment, runs the risk of losing the most important cohort of consumers for the next few decades.
It’s not just millenials and Gen Z consumers demanding change. Values are driving purchasing decisions across demographics. Consumers want to know how and where their products were made. They want to know the labor practices involved. They want to know if any harm to the environment resulted from business practices. And, they are rewarding businesses that share their values.
The importance of supply chain transparency can be seen from a legal point of view as well. The United Kingdom has used the Modern Slavery Act to combat forced labor, such as what the Chinese are accused of employing in Xinjiang. In California, the Transparency in SUpply Chains Act has been a key driver of the trend toward supply chain transparency. Industries across the gamut of the economy have responded. Consumer electronics, apparel, and food beverage, for instance, have faced enormous pressure to make their supply chains more transparent for the benefit of the environment and communities.
Activist investors have joined in the chorus of pressure aimed at businesses. The battle for oil giant Exxon, is an example of how activist investors are increasingly guided by the social and environmental impact of businesses, and are willing to buy into businesses to force the change they believe must happen. Investors understand that the reputational damage that comes with being associated with things that run afoul of expectations of good business practice, can and will hurt their bottom line. The costs of repairing that reputational damage are significant and often go well-beyond any advantages gained from a lack of supply chain transparency. Properly constituted, even a shareholder-centric business recognises that the long-term value of a business can be hurt, when a business does no9t have supply chain transparency, especially because a lack of transparency is associated with violations of good environmental, social and governance (ESG) practices. In the United States, such violations have erased nearly $500 billion of value from public markets, between the years 1015 and 2019.
Advocates such as the Clean Clothes Campaign and Fashion Revolution, have put pressure on apparel brands, by giving publicised scores for brands, based on their supply chain transparency.
The Challenges of Supply Chain Transparency
Businesses have struggled with supply chain transparency because it entails doing business with suppliers in novel ways. It is more than just disclosing relevant information to consumers. To have that information, businesses must look into their suppliers in ways that they typically did not do in the past. Indeed, they must look into their suppliers in ways in which many of them are not equipped to do. The cost and time involved in looking into all levels of suppliers, is considerable and the risk of getting caught out is high. In addition, the need for supply chain transparency is a response to consumer pressure rather than regulatory obligations. The result is that many managers have been slow to respond, only being roused to action when “something bad” has happened. Another effect of this is that, as with the broad category of ESG standards, the absence of a single regulatory authority prescribing what businesses should do to achieve supply chain transparency, means that many businesses are left to either fend for themselves, or work according to what various non-profit bodies say. The result is that a business may find itself meeting the requirements of one body but falling foul of another body. This can lead to some resistance to even try. However, given the reputational risks of getting involved in a violation of ESG standards as commonly agreed around various topics (for instance, nobody believes forced labor is a good thing or harmless), and the damage such events can have on shareholder value, the response of businesses should be even more aggressive given the diversity of voices pressuring them. With so many voices, businesses cannot afford to just tick boxes. They have to interpret supply chain transparency in the most radical way possible. This would be in keeping with the broader societal movement toward openness. From open source software to cryptocurrency, there is a yearning by consumers for an enormous level of transparency. It is incumbent on businesses to react proactively and ambitiously, if they are not to lose consumers and shareholder value.
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