For more than a decade, regulators have pushed companies to act more ethically and responsibly—or at least to report that they are doing so. But in recent years, regulatory focus has widened to include greater scrutiny of the thousands of suppliers and producers that organizations are doing business with to see whether these third parties share the same values, best practices, and zero-tolerance toward bribery, corruption and human rights abuses as their corporate customers. The evidence suggests that there is certainly room for improvement.
More organizations outsource now than ever before, which means that supply chains include more companies and stretch around the globe, often involving producers in countries with poor records of accountability and weak law enforcement. According to PwC, 89 companies in the Fortune 500 average more than 100,000 suppliers each, which means that, “to protect human rights as part of the overall risk management strategy, it is essential to take a broad view of the extended business, including its supply chain partners,” said Ian Livsey, CEO of the U.K.’s Institute of Risk Management.
Fraud, bribery and corruption risks have been on most companies’ radar for some time, but progress is still mixed. In forensic risk specialist Kroll’s 2016 Anti-Bribery and Corruption Report, one in four compliance officers expressed no confidence in the ability of their company’s current controls to detect third-party violations of anti-corruption laws. This is worrying, given that the Organization for Economic Cooperation and Development’s most recent Foreign Bribery Report from 2014 found three out of four foreign bribery cases involved payments through third-parties.
According to Kroll’s survey, almost half of respondents do not conduct third-party audits (48%), and only 34% say they provide training to third parties (high-risk or otherwise), down from 52% last year. Furthermore, 40% of all compliance officers believe their company’s bribery and corruption risks will increase in 2016, primarily due to global expansion and an ever-increasing number of third-party business relationships.
Other research has revealed similarly worrying results. Last year, the EY report Fraud and Corruption: The Easy Option for Growth? found that only 28% of respondents had an approved supplier database, and less than a quarter (24%) had a background-checking system in place. Only 21% had audit rights or conducted regular audits of third parties.
Human Rights Abuses
Auditing supply chains has also revealed a dark side that many may think no longer possible: slavery. The United Nations’ International Labor Organization estimates that, globally, there are 21 million victims of forced labor who annually generate about $150 billion in illicit profits. The Child Labor Index, produced by global risk advisory firm Maplecroft, rates 68 countries as “extreme risk,” with Bangladesh, China, India, Nigeria and Pakistan among those with the most widespread abuses of child workers.
Such stark facts mean that companies need to perform a level of scrutiny of their suppliers that many are not doing so far. According to supply chain resilience firm Resilinc’s recent white paper New Forced Labor Legislation Set to Impact Global Supply Chains, more than 60% of companies do not have visibility beyond their Tier-1 suppliers, and 79% of large enterprises cite this as a concern. The British Standards Institution report Global Supply Chain Intelligence found that, in 2015, nearly 80% of Argentina’s textile industry was sourcing from unregulated facilities where forced labor, child labor and poor working conditions are common. There has also been an increase in the risk of child labor use in India due to legal loopholes.
Recently, some organizations have seen their names tarnished through association with forced, child or slave labor in their supply chains. Last November, following a year-long internal audit, food giant Nestlé admitted to cases of forced labor in its fishing operation in Thailand for use in its Purina brand Fancy Feast cat food. The company is also investigating claims and facing possible legal action in the United States over reports that it knowingly worked with suppliers that employed child slaves from Mali to work on cocoa farms in Ivory Coast.
Furthermore, Nestlé acknowledged purchasing coffee from two Brazilian plantations where in 2015 authorities freed workers from conditions analogous to slavery, while rival coffee maker Jacobs Douwe Egberts admitted it was possible that coffee from plantations in Brazil with poor labor conditions ended up in its products as well.
In March, Amnesty International released a report, The Ugly Side of the Beautiful Game, alleging that migrant workers employed on construction projects for the 2022 World Cup in Qatar lived in squalid accommodations, had their wages withheld for months, and had their passports confiscated by their employers. The report criticized FIFA, soccer’s world governing body, for its lack of action and “shocking indifference.”
While the reputational damage caused by such incidents is likely to drive better supply chain auditing and monitoring, legislation is also playing a part. There has been a growing tendency for regulators and governments to make their legislation more extra-territorial, and to encourage—or demand—public assurances that ethical and legal responsibilities extend to an enterprise’s supply chain.
In an effort to address bribery concerns, the Foreign Corrupt Practices Act expressly prohibits corrupt payments made directly to foreign government officials, as well as corrupt payments made through third parties or intermediaries, by U.S. persons, businesses and listed companies (even if they are foreign registered). Non-U.S. citizens can be prosecuted under the act if there is evidence of corrupt behavior taking place on U.S. soil. Similarly, the U.K. Bribery Act also prohibits all corrupt payments, regardless of whether they are paid directly by the company or on its behalf by a third party (with or without the company’s knowledge), and makes the company and the individuals concerned liable.
In terms of tackling slavery, the Alien Tort Statute is often seen as the best chance for plaintiffs anywhere in the world to bring a legal complaint against companies specifically for human rights abuses. But other pieces of legislation contain provisions that target slavery and forced labor as well. For example, Section 1502 of the Dodd-Frank Act mandates that publicly-listed companies in the United States must thoroughly investigate their supply chains for conflict minerals, such as diamonds, gold, tin, tantalum and tungsten, while the California Transparency in Supply Chains Act (SB 657) requires retail sellers and manufacturers that do business in California, and have more than $100 million in gross annual receipts, to publicly disclose their efforts to eradicate slavery and human trafficking from their supply chains. The U.N. Guiding Principles on Business and Human Rights also implores companies to examine the treatment of workers in their supply chains and to check that business is conducted fairly and ethically.
In February, President Obama signed the Trade Facilitation and Trade Enforcement Act to prevent products made by slave labor from coming into the country. A current Labor Department list of some 353 goods produced by child or forced labor includes garlic from Argentina, peanuts from Turkey, gold from Ghana, carpets from India, and fish and shrimp from Thailand.
Meanwhile, Section 54 of the U.K.’s Modern Slavery Act, introduced last year, states that every business trading in the U.K. (as opposed to just U.K.-based companies) that has a turnover of at least £36 million ($47.7 million) must publish an annual statement setting out the steps it has taken to ensure that modern slavery and human trafficking are not taking place in its business or supply chains.
The U.K. government chose not to prescribe any particular format or length for the statement, nor has it imposed a fine or other penalty for non-compliance. In fact, the risks of non-compliance are perceived as largely reputational—and that is the point, experts say. A recent report by Ashridge Executive Education at Hult International Business School in the United Kingdom, Corporate Approaches to Addressing Modern Slavery in Supply Chains, found that reputational damage was the main factor driving 92% of the retailers and suppliers surveyed to address modern slavery risks, although the report also states that “companies interviewed all felt that addressing risk to workers was significant too.”
The threat of being named and shamed is a powerful persuader for many companies to act, and the architects of the Corporate Human Rights Benchmark (CHRB) are banking on such fears. Launched in March and developed by a mixture of investors and advocacy groups, the benchmark aims to rank the world’s 500 largest companies for their human rights performance. Piloting with the top 100 companies from the agricultural products, apparel and extractives industries, the benchmark will expand each year to cover additional industries until it encompasses the top 500 globally listed companies. The results will be published annually beginning this November.
“By creating a comparative ranking, companies will be incentivized to race to the top of the benchmark,” said Steve Waygood, chair of the CHRB steering committee and chief responsible investment officer at Aviva Investors, which co-developed the benchmark. “The leaders deserve to be recognized while the laggards should be pressed to improve.”
Know Your Suppliers
In practical terms, experts say that the surest way to tackle human rights and bribery and corruption risks in the supply chain is simply to find out more about who you are sourcing from. According to Aidan McQuade, director of human rights group Anti-Slavery International, the first step is “to map the supply chain so that companies know how many suppliers they are dealing with, where they are based, and whether the regions where they are located are ‘high risk’ areas for such behavior.”
He added that referring to Transparency International’s Corruption Perceptions Index, Maplecroft’s Child Labor Index, and signing up to industry supply chain databases like Sedex Advance and its ethical audit methodology are all good first steps to help identify and minimize risks.
Jonathan O’Brien, CEO of specialist procurement and negotiation consultancy Positive Purchasing, agreed that it is crucial to conduct “hot spot” analysis to determine which supply chains are most likely to present significant risk. He recommends that companies establish a working group and determine which regions or products pose the greatest risk. “This shortlist can then be mapped and the team can identify what the supply chain might look like and where points of risk exist,” he said.
Luckily, some experts believe that the same due diligence processes can be used to assess both bribery risks and human rights abuses. According to Dorothy Cory-Wright, partner and head of the dispute resolution practice at international law firm Sidley Austin, although legislation like the Modern Slavery Act and the FCPA are aimed at “different wrongs,” the approach companies should adopt in terms of monitoring and gaining assurance is broadly the same as both involve “conducting appropriate due diligence to know which producers they are doing business with.”
One of the key steps to gain better visibility is to conduct regular on-site visits, said Kevin Bampton, director of the International Policing and Justice Institute at the U.K.’s University of Derby. These not only enable a first-hand view of where problems may arise, but they also provide opportunities for deeper engagement and training. “Go and look at the suppliers, talk to their workers, leaders and worker’s representatives or contact NGOs with global networks like Stop the Traffik to help you with the legwork,” he said. “Think about working together with other businesses in the sector to share the burden and the cost.”
Companies should also make better use of technology and the data they already have at hand to prioritize which suppliers and countries may pose the greatest risks. “Beyond the practice of robust audits, new technology allows companies to harvest big data to identify where there may be early warning signs or weak signals of bad practice within an entire supply chain—in any language, anywhere in the world,” said James Lawn, co-founder and CEO of risk management technology firm Polecat.
To that end, companies need to make a list of warning signs that will alert them that a given supplier is high risk. “Seasonal labor industries, such as fishing and farming, rely on migrant workers very often, so companies should ask for more thorough checks on employees’ backgrounds to determine their age,” said Philippa Foster Back, director at U.K.-based corporate governance campaigner the Institute of Business Ethics.
Similarly, rates of pay need to be examined to ensure that workers receive at least the minimum wage. If a supplier pays workers less, they should ask why. “Another red flag is if the supplier is overly-reliant on servicing a contract for just one company, since it is more likely that this supplier will cut costs to service demand, and be less thorough about checking its own supply chain in order to retain the business,” she said.
She added that a company should walk away if a supplier refuses audit rights or face-to-face meetings. “There is a lot of evidence that companies are asking more probing questions about their suppliers, and those with the most clout have a stronger hand to do this,” she said.
Apple, for example, audited its top 200 facilities at risk for bonded labor in 2015, and conducted 69 special investigations. It also announced this year that every smelter within its supply chain will be subject to independent third-party audits to ensure that the company is not sourcing conflict minerals. Furthermore, in its 2016 Supplier Responsibility Progress Report, the company stated it has zero tolerance toward unfair recruitment fees and bonded labor, and has used its muscle to force suppliers to repay recruitment fees in full—irrespective of whether or not they were directly involved in the recruiting process. This has resulted in more than $25.6 million being repaid to workers since 2008, including $4.7 million in 2015 alone.
Clear communication is also vital. Suppliers need to be made aware of and understand the company’s ethical principles for doing business. Oil giant Shell has a clear and concise set of supplier principles that encompasses business integrity, health and safety, security and the environment, social performance, and labor and human rights. Following the discovery of forced labor in some of its production processes, Nestlé’s action plan for its Thailand operations now includes defining and communicating requirements for boat owners and captains. This encompasses recruitment practices and living/working conditions for boat workers and includes a training program for boat owners and captains to raise awareness of human rights and labor conditions.
“Suppliers will only be able to meet your expectations on business behavior and human and labor rights if you tell them what you actually expect,” said Peter Truesdale, director at sustainability consultancy Corporate Citizenship. “Make sure that you spell out clearly what practices will not be tolerated, and what sanctions they can expect for non-compliance, such as termination of contract and legal or financial redress.
“What suppliers in Asia or Africa consider to be fair practice may be very different from what you think unless you state explicitly what these companies need to do, and what the ramifications are for non-compliance. It is not their fault if they do not follow U.S., U.K. or EU legislation on such issues when they have little or no knowledge, direct exposure or liability to such laws.”