Downstream Disaster

Neil Hodge


November 1, 2017

supply chain risk reputation

Many companies have suffered tarnished reputations when their products have become associated with the unpopular actions of other parties. For example, heavy-equipment manufacturer Caterpillar has long been lambasted for selling equipment to the Israeli Defense Force and having its bulldozers and other trucks used to quell civil disturbances in the region. Cosmetics producers have been widely criticized for testing their products on animals—even though some countries like the United States and China have a legal requirement for them to do so. Last year, Canadian paint manufacturer Dominion Colour Corporation came under fire for using lead pigments in its products in the European Union, but was ultimately permitted by the European Commission to continue to do so, provided the company monitored how the product was used in Europe. But since there are no real controls that prevent the product being resold outside of the EU, consumers in Africa and Asia could still be at risk.

Similarly, many companies do not want to be associated with facilitating death row executions. Under pressure from human rights advocates and investors opposed to capital punishment, some of the world’s biggest pharmaceutical firms have forbidden the use of their products in state executions. Pharmaceutical firms including Pfizer, Fresenius Kabi and West-Ward now write contracts that restrict any use of their products in drug cocktails that carry out the death penalty. Some states, however, have tried to get around this by sourcing the drugs from distributors in other countries.

In April, Pfizer publicly decried the use of its drugs in executions in Arkansas. “Our distribution restriction limits the sale of 11 products to a select group of wholesalers, distributors and direct purchasers, under the condition they will not resell those products to correctional facilities for use in lethal injection,” its statement read. “We have twice communicated to the Departments of Correction in the 31 states permitting use of lethal injection for capital punishment that Pfizer strongly objects to the use of its products as lethal injections for capital punishment.”

The statement went on to note, “Pfizer did not directly supply the product to the Arkansas Department of Correction (DOC). Without Pfizer’s knowledge…a distributor sold the product to the DOC. This was in direct violation of our policy.” The company tried to request the return of the drugs—including through legal action—but recognized that the attempt could prove fruitless.

Fire at Grenfell Tower

No company wants to be linked to a death or a tragedy through the use—or misuse—of its products. Such a disaster took place on June 14 when a fire started at Grenfell Tower, a 24-story residential tower block in central London. Within an hour, the blaze had consumed much of the building, killing at least 80 people.

The incident prompted a criminal investigation, with companies facing possible prosecutions for health and safety violations and charges of corporate manslaughter. The government also ordered a public inquiry into what went wrong.

There are many villains in this story—the tower block did not have enough fire extinguishers or a building-wide fire alarm system, for example—but given the speed at which the fire engulfed the building and the widely-publicized video footage of its spread, the finger of blame pointed more immediately at the type of external cladding used on the building and how it was installed.

Cladding that should not have been used in buildings exceeding 18 meters (59 feet) was used in a high-rise measuring four times that height. Less combustible material would have cost £2 ($2.50) extra per square meter, raising the total cost by a mere £5,000 ($6,300), according to some estimates. It should be noted that Grenfell Tower is located in the Royal Borough of Kensington and Chelsea, one of the wealthiest in the country, which contains some of the most expensive houses in the world.

It has not been suggested that Arconic Inc., the company that manufactured the cladding, did anything illegal, or that it circumvented safety requirements in production or sale. (Law firm Bronstein, Gewirtz & Grossman has, however, launched a class action against the company alleging that it failed to properly notify that its cladding could increase the risk of property damage and injury if improperly used.) Instead, it appears that others chose to use its products incorrectly. Yet it is the company’s name—rather than those of the companies that purchased and used the materials—that has become linked to the tragedy.

Accordingly, on June 26, Arconic issued a statement in an effort to set the record straight. In the statement, the company said that it supplied one of its products, Reynobond PE, to a fabricator customer, which used the product as one component of the overall cladding system on Grenfell Tower. The fabricator supplied its portion of the cladding system to the façade installer, who delivered it to the general contractor. “The other parts of the cladding system, including the insulation, were supplied by other parties,” Arconic said. “We were not involved in the installation of the system, nor did we have a role in any other aspect of the building’s refurbishment or original design.”

While it “provided general parameters for potential usage universally,” Arconic said the company sold its products “with the expectation that they would be used in compliance with the various and different local building codes and regulations.” It added that “current regulations within the United States, Europe and the U.K. permit the use of aluminium composite material in various architectural applications, including in high-rise buildings depending on the cladding system and overall building design.”

The statement also made clear that Arconic’s product was only one component in the overall cladding system. “We don’t control the overall system or its compliance,” the company explained. “Nevertheless, in light of this tragedy, we have taken the decision to no longer provide this product in any high-rise applications, regardless of local codes and regulations.”

The disaster has even impacted some companies that have no direct relation to it. In August, U.K. social housing company Mears—which has no involvement with the Grenfell Tower, nor with any properties run by the Kensington and Chelsea Council—saw its share price fall by 11% after it issued a profits warning due to the amount of safety and compliance work that would be required on the rest of its portfolio following the tragedy.

Supply Chain Awareness

In recent years, there has been a concerted effort worldwide to make companies more aware—if not accountable—for not only their own actions, but of those committed by contractors, suppliers and other third parties. While there may not be specific requirements for companies to audit sales and product usage by customers, many experts believe that organizations will need to do so in the future.

John Sherman, general counsel and senior advisor at independent nonprofit Shift, says the United Nation’s Guiding Principles on Business and Human Rights mandates that companies take greater steps to ensure that their actions and the goods they produce do not cause harm. The U.N. principles, which rest on the three pillars of “protect, respect and remedy,” provide a duty for the state to protect against human rights abuses by third parties including business and establish a corporate responsibility to respect human rights. They also provide victims with greater access to effective remedy, both judicial and non-judicial.

According to Sherman, companies must be accountable for the impact that their practices and products have on their end-users, as well as for actions within their supply chains. “It is untenable for companies not to monitor or audit the actions of their supply chains now, and I can’t see why the use, sale or distribution of any product or material should escape scrutiny,” Sherman said.

Given the risks associated with how a company’s goods or services may be used (or abused), Krishnendu Mukherjee, a barrister at Doughty Street Chambers, believes that organizations should consider how they can gain greater assurance that their products are being used responsibly, and that they are not liable—or their reputations tainted—by any incidence of misuse.

He pointed out that many jurisdiction already have legal precedent requiring companies to check their supply chains for abusive practices and behavior. 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.

Meanwhile, anti-slavery legislation in the United States and United Kingdom specifically requires companies to account for the actions of their suppliers. For example, the California Transparency in Supply Chains Act (SB 657) requires retail sellers and manufacturers that have more than $100 million in gross annual revenue and do business in California to publicly disclose their efforts to eradicate slavery and human trafficking from their supply chains, while the U.K.’s Modern Slavery Act requires companies to disclose in their annual reports what steps they have taken (or not taken) to prevent human trafficking or slavery in their own businesses and supply chains.

“There is no reason similar legislation—or voluntary best practice—could not be introduced that details what measures companies are taking to ensure that their products are being sold and used responsibly,” Mukherjee said. “Given the prominence of supply chains as a key area of risk, I can see no reason why such monitoring cannot be extended to the use, sale or distribution of products in a company’s own operations or within the supply chain in the same way that companies now have an obligation to report on what steps they are taking to prevent slavery in their operations and supply chains.”

Such monitoring can save lives. For example, Mukherjee cited the recent case of consumer goods company Reckitt Benckiser and its involvement in the accidental deaths of nearly 100 women and children in South Korea.

In January, Shin Hyun-woo, head of Reckitt Benckiser’s Oxy subsidiary in South Korea from 1991 to 2005, was found guilty of accidental homicide and false advertising over the sale of a humidifier that used an “off-the-shelf” disinfectant that killed 92 people and left hundreds with permanent lung damage. Humidifiers are a popular product in South Korea, where children and pregnant women often use them to battle dry winters. The company had marketed the product as being safe without conducting proper safety checks prior to sale.

Shin was jailed for seven years (the maximum sentence available) and three former and current executives on Oxy’s research and development team were also sentenced to prison terms of five to seven years each. Additionally, six executives at local retailers Lotte Mart and Homeplus were given prison terms of three to five years for selling the deadly product without proper safety inspections. “If the sellers and producers of this disinfectant had made inquiries as to how the product was going to be used by the companies they were selling it to in bulk quantities, a lot of lives could have been saved,” Mukherjee said.

Protecting Your Company

Mukherjee outlined three steps that he believes companies should follow to minimize the risks of their products. “First, ensure that the product has been properly tested to ensure that it is safe, and in what conditions it might be unsafe,” he said. “Second, inform people of any potential safety risks so that customers can determine the level of risk of using the product. And third, conduct supply chain due diligence to see who is using the product, how it is being used, and whether there might be any contingent risk attached to that use.”

He added that there should be an obligation for companies to publicly report on what steps they have taken to check that customers are using their products responsibly and appropriately. Such reporting could be part of its annual report or a statement on its website.

Other experts believe that better disclosure and providing more information for customers would help. Lief Anya Schneider, CEO of corporate reputation and communications firm SBC London, believes companies could make simple adjustments to ensure that products are used safely, and that resellers and users are more aware of any associated risks. One such change could be reflected in product naming. “If cladding tiles are supposed to be only used in low-rise buildings, why not call them ‘low-rise tiles,’ as opposed to ‘house tiles,’ ‘bungalow tiles’ and ‘high-rise’ tiles,” she said. “If companies use more specific product descriptions rather than generic ones, incidents of product misuse may decrease.”

Lesley McLeod, CEO of the Association for Project Safety, a U.K.-based organization that promotes construction health and safety risk management, said companies need to take an active role is establishing and monitoring product use guidelines. “Control what you can,” she said. “Having clear, measurable standards that are properly communicated to staff, suppliers and partners is a good first step. Second, audit what you do. Randomly sampling and carrying out spot-checks all along the line keeps you informed and everyone else on their toes. Third, you should review your controls and procedures to find out where any weak links might lie.”

Finally, the entire process needs to continuously evolve to stay up to date. “Nothing stays the same, so make sure your business keeps up with relevant changes—such as changes to legislation or regulation, or a new supplier or customer coming on board—as well as issues that may appear insignificant, such as new packaging, which might need to include more detailed product information on contents and safety,” McLeod said.

Undoubtedly, more detailed checks on product use comes at a price. In the short-term at least, companies will need to invest in stronger product and sales controls and policies, and review their compliance budgets. But the additional investment may prove worth it if it protects corporate reputations, bottom lines and, most importantly, the safety of consumers.
Neil Hodge is a U.K.-based freelance journalist and photographer.