In Search of Ethical Sourcing

As we near the 2007 proxy season, my firm, Christian Brothers Investment Services (CBIS), and other concerned investors are asking a number of influential public companies to adopt sourcing standards that promote fair working conditions at vendor facilities throughout their global supply chains. Despite growing support for sourcing standards among shareholders and other stakeholders, and despite their adoption in recent years by several well-known companies, we know that some executives and directors still view this as unwelcome social activism in disguise. We think that is a mistake.

Imagine picking up the morning paper and reading that your company has been accused of using child labor in its overseas factories, or that one of your favored vendors has a documented record of worker abuse. Stories like that put your reputation as a director—along with the company’s—on the line and put shareholders at risk as well.

CBIS manages more than $4 billion for Catholic organizations worldwide, and responsible investors as a group now control nearly $2.3 trillion in capital through socially responsible mutual funds and institutional portfolios. Our interest in the success of portfolio companies is every bit as strong as that of management and other long-term shareholders. We firmly believe that strong supply chain labor standards make good business sense. We ask that directors analyze their company’s sourcing practices and ensure that management includes sourcing risks in the strategic analysis of the business.

When companies do business in the industrialized West, they face a much clearer social landscape than they do in many low-wage nations, where civil conflict, poverty and weak or capricious rule of law can lead to egregiously poor treatment of workers and even to human rights abuses in the workplace. When these events become publicly associated with company-owned facilities or those of suppliers, the repercussions can be damaging and very hard to control. At best, they create negative publicity that distracts management from pressing operational and strategic challenges. At worst, they tarnish a company’s public image, degrade hard-won brand reputations, deflate employee morale, lead to boycotts of company products and put revenue and profits in jeopardy. They are never good for a company’s share price.

Apparel manufacturers and retailers have been the traditional focus of sourcing risks, but as business becomes increasingly global and most industry supply chains spread into emerging markets and low-wage nations, nearly every large company now bears some exposure. Those that do should establish management policies to help prevent abuses from occurring and to guide rapid, effective responses when allegations of abuse are made. They ensure that you, as a director, have the information you need to assess these risks. Adopting toothless standards may confer near-term PR benefits but will certainly fail to prevent problems and will backfire when put to the test in a crisis. To be truly effective, a sourcing policy should include several key features: 

• It should ensure the company has the data it needs to fully understand its sourcing practices. Often, management does not have a clear idea just where and how supplies are produced. A good policy requires a system for developing the data necessary for risk assessment.
  

•  The policy should incorporate the International Labor Organization’s conventions on workplace human rights, which articulate basic principles such as the right to equal opportunity regardless of race, sex or religion; the prohibition of bonded or prison labor; the prohibition of child labor; and the right of employees to form and join trade unions. n Community-based organizations with proven records as local labor and human rights advocates should be recruited to assist with the independent verification of vendor compliance. Conflicts of interest can arise when companies rely solely on self-monitoring or on the word of suppliers.
  

• Companies should report monitoring and compliance results to shareholders using a standardized reporting mechanism, such as the guidelines developed by the Global Reporting Initiative. Shareholders need sufficient detail for independent verification of company reports.
  

• Incentives should be put in place to ensure the policy is taken seriously. For example, management compensation should be tied to policy compliance. Detailed, objective expectations should be communicated to suppliers.