Transparency is apparently the new black. These days it sometimes seems as though every week brings a new story about the trend toward increasing visibility into (and disclosures about) a whole host of corporate operations and activities. Much of this activity springs from the strides made in recent years in sustainability reporting. More companies than ever are now reporting on an ever-widening range of topics, covering environmental and social impacts, governance structures, and company culture.
And now, this movement toward increasing transparency is spreading to supply chains.
As usual, industry leaders have been paving the way. Several companies, including Apple, Target and Nike, are now making their list of factories public. Nike is going one step further, publicly sharing the results of its contract factory inspections.
Certainly, part of this drive comes from new laws that are requiring certain supply chain disclosures, such as:
- The SEC Conflict Minerals Rule requires that covered companies declare whether the minerals in their products are “Conflict –free;”
- The California Transparency in Supply Chains Act (TSC) requires the disclosure of a company’s efforts to investigate and eliminate slavery and human trafficking from its supply chains;
- UK Modern Slavery Act, modeled on and similar to the TSC;
- And, in the works or coming soon:
- US House pending: Business Supply Chain Transparency on Trafficking and Slavery Act
- EU Directive on disclosure on non-financial and diversity information (Fall 2016)
But aside from complying with legal requirements, another driver of increased transparency into supply chains is the increase in understanding of supply chain risks. As company operations expand to include a greater variety of countries, business practices, and cultural norms, the risks lurking in the supply network also become more significant. Creating and maintaining transparency becomes part of the process of managing those risks by accessing, learning from, and acting on supply chain information.
Sustainability practitioners are applauding these efforts. After all, we know that many (if not most) of an organization’s social and environmental impacts come from their supply chains. We know that increasing transparency builds trust among partners, drives change, and inspires innovation. So, it’s a great development. What could possibly go wrong?
Well, companies rushing to comply with the new disclosure requirements are learning something about just what can go wrong. Call it the “Law of Unintended Consequences.” It’s what happens when flawed human beings fail to apply appropriate systems thinking to what looks like a great idea. When a disclosure is put out there, in public, people can use it for very different purposes. If companies are going to be transparent, it behooves them to make bullet-proof disclosures.
At least this is the lesson that some prominent companies have been learning.
Consider the experience of Costco. Subject to California’s TSC law, Costco posted the required supply chain disclosure on its website. The notice proudly states that Costco “has a global supplier Code of Conduct which prohibits human rights abuses in our supply chain” and goes on to note that the company conducts audits of its suppliers to ensure compliance with its Code.
One Costco shopper, Monica Sud, purchased shrimp at her local Costco and then promptly filed a lawsuit against Costco. She claimed that the shrimp were produced in Thailand, where the use of forced labor is well documented in the shrimp harvesting industry. And because the shrimp were likely produced using slave labor, she claimed that Costco’s TSC notice was inaccurate, and amounted to misleading advertising and consumer fraud. The lawsuit, a class action on behalf of all consumers purchasing Thai-produced shrimp from Costco, sought damages in excess of $5 million.
At least for now, Costco has dodged this bullet. Because Ms. Sud has been a loyal Costco shopper for a number of years, the retailer had complete records of her purchases. It turns out that the shrimp she purchased as the basis for the lawsuit had not, in fact, been fished in Thailand. They were actually a product of Vietnam. Now, reports out of southeast Asia do not paint a significantly different picture of the shrimp industry that exists in Vietnam. But her complaint was factually inaccurate, so the case was dismissed. Ms. Sud may well re-file once her facts are straightened out.
Monica Sud v. Costco Wholesale Corporation was the first case to claim that a violation of the California’s TSC law provides consumers a path to sue the company for misrepresentation. About a dozen identical cases, all class actions, have been filed since last Fall. Some have been dismissed, others are still pending or are on appeal. Human rights watchers predict that there will be more of these kinds of cases.
As progress toward opening previously hidden supply chain practices to the sunlight of public access continues, there are sure to be more good intentions that fall short or go astray. Companies making public disclosures about conditions in their supply chains need to take particular care when crafting those disclosures to be sure that the statements are complete and accurate. Those statement must be backed up with robust and appropriate policies and standards, supported by diligent efforts to enforce them, and regular monitoring. These are just as important as the act of being transparent and essential to prevent (or defend against) claims of supply chain misrepresentation.
Thinking about what your company can do to assess the impacts and risks embedded in your supply chain, or how you can create an effective strategy to minimize and be transparent about those risks? Sign up for a free webinar demo of Sustrana’s online sustainability management system for more information.