The Ethical Supply Chain Practitioner—Part One: The Social Responsibility Imperative
on Jan 16, 2020
Supply chain practitioners and executives are in a unique position to help change the world for the better by their influence over global supply chains' labor conditions, environmental footprint, and ethical practices. In this first in a series, we examine what is driving increasing corporate social responsibility and the desire by employees to do meaningful work and make a difference in the world.
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The roles that supply chain professionals play is evolving and expanding. The article “The Emergence of the Supply Chain Scientist” talks about those evolving roles, which include the need to be ‘Socially Conscious’ as one of the critical Seven Talents that today’s supply practitioners require. Supply chain practitioners have the distinct relationships and capabilities needed to influence broad swathes of behavior across supply chains. A typical supply chain practitioner or executive may control or influence $10Ms to $100Ms, or in some cases a billion dollars or more, of spend. This is an enormous power that can be used for doing some good for the world, while also doing good for the company. This is the first in a three-part series:
Part One: The Social Responsibility Imperative—Here we discuss the supply chain practitioner’s central role in building ethical supply chains; factors driving the increasing importance of sustainability and ethics in supply chains; and what individuals and organizations can do to promote these causes.
Part Two: Labor and Ethics—We look at labor-related issues in the supply chain, such as workplace conditions safety/hygiene, forced labor, living wage, forced overtime, collective bargaining, and diversity. We also examine ethical issues, such as bribery and corruption, and human rights. Guidance on how to effectively deploy a supplier code of conduct is discussed.
Part Three: Environment—Here we examine how to mitigate environmental impacts across the supply chain, including material use, transportation, packaging, carbon footprint, energy efficiency, water use, waste, and pollution.
Attitudes About Corporations’ Roles and Responsibilities in Society Are Evolving
Measuring Corporate Social Responsibility
Social accounting methodologies provide standardized approaches to measuring and communicating a company’s social and environmental impact. Dozens of frameworks, standards, certifications, and guidelines for measuring CSR have emerged and are becoming more widely used for a variety of purposes. Triple Bottom Line (TBL) is an accounting framework that goes beyond the traditional financial statements to also include social and environmental statements. The Global Reporting Initiative is an international standards body that helps businesses measure and communicate their impacts on climate change, human rights, and corruption. B Corporation certification is issued to for-profit business, certifying a level of environmental and social practices and performance. The Forest Stewardship Council certification is an example of standard for a specific industry, in this case assuring that products come from a sustainably managed forest. These are only a few of many examples. While these frameworks and standards are often criticized as greenwashing or PR-oriented, every year there are efforts to make them more substantive, impactful, and resistant to gaming.
In September 1970, the New York Times published a seminal article, “The Social Responsibility of Business is to Increase its Profits,” by the influential economist Milton Friedman. In that, he argues that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game … .” The Friedman Doctrine embodies the concepts of shareholder primacy—i.e. that shareholder interests should take first priority above all other corporate interests and responsibilities. This has been enormously influential in how corporations have been run for the past 50 years. It has also stoked a pretty negative view about global corporations amongst a sizeable portion of the population who consider big businesses to be a destructive force and have little faith in the potential for corporations to be a force for good.
The arguably narrow belief system encapsulated in the Friedman Doctrine had its critics from the start, and for the past couple of decades the tide seems to be shifting towards expectations of an increasingly expansive set of social responsibilities for a corporation. In December 2006, the Harvard Business Review published an impactful article by Michael Porter and Mark Kramer titled “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility,” in which they asserted that “If corporations were to analyze their prospects for social responsibility using the same frameworks that guide their core business choices, they would discover that CSR [Corporate Social Responsibility] can be much more than a cost, a constraint, or a charitable deed—it can be a source of opportunity, innovation, and competitive advantage.”
In August 2019, the influential Business Roundtable (founded in 1972, now with almost 200 CEOs representing America’s largest corporations) issued an updated Statement on the purpose of a Corporation, that moves away from shareholder primacy to a commitment to a much broader set of stakeholders, including communities and the environment. More broadly, civil society has become more engaged; National and international NGOs—non-governmental organizations such as Oxfam, Amnesty International, Greenpeace, the Rainforest Action Network, the Fair Labor Association and countless others—have expanded their impact significantly, with more members, funding, and sophistication of tactics to pressure corporations and governments to behave better. Boycotts have successfully pressured large corporations to take actions to clean up their supply chains and labor practices. Younger consumers have shown more of a propensity to care about buying products that have been sourced and produced ethically. The broader momentum seems to be towards demanding increasing corporate social responsibility.
The Capital Equation—Rapid Growth of Socially Responsible Investing
Figure 1 – Sustainable Investments in the US 1995-2018
At the same time, ethical investors have been ‘putting their money where their mouth is’ in a big way, creating huge growth in Socially Responsible Investing. According to the 2018 Global Sustainable Investment Review,1 “Globally, sustainable investing assets in the five major markets [Australia and New Zealand, Canada, Europe, Japan, and the U.S.] stood at $30.7 trillion at the start of 2018, a 34 percent increase in two years.” The U.S. SIF Foundation’s 2018 biennial report,2 said that in the U.S., between 1995 and 2018, assets in sustainable and responsible investments grew 18 times at a compound annual growth rate of 13.6 percent, from $639 billion in 1995 to nearly $12 trillion in 2018. These are big numbers—sustainable investing strategies represent nearly half of all assets under professional management in Canada and Europe and over a quarter of all managed assets in the U.S. As we move towards a world where the majority of investment money uses socially responsible investment strategies, corporations who misbehave will find capital increasingly expensive and hard to come by.
Is CSR Mostly PR and Greenwashing?
Efforts by corporations, as well as the standards and frameworks for reporting on social responsibility, have been justifiably criticized for many weaknesses, including that they are primarily just PR-driven, lack of sustainability context in reporting, and other defects. While many of these criticisms are valid, the general trend has been towards fixing the shortcomings and loopholes, making corporations more accountable. Furthermore, pressure increasingly comes from the employees themselves, who demand that CSR be more than just window dressing. Given the continued pressure from society externally and increasing desire from younger people for more ethical companies, we expect these efforts to become increasingly substantive and a powerful force for good in society.
A Company’s Identity (What We Stand For) and Its Role in Attracting and Retaining Talent
When people say, “oh that’s just a branding exercise,” it is usually a criticism implying that efforts to demonstrate social responsibility are purely for show, to burnish the corporate image, rather than substantively addressing underlying issues. However, forward-thinking brand managers see their brand as a promise to customers that they have to live up to, and more recently are starting to talk about their brand purpose3—i.e. the reason a company and its brand exists, beyond delivering projects, staying profitable, and providing employment opportunities. Thus, social responsibility can in some cases become the core of a company’s identity and purpose. Toms and Patagonia are good examples4 of this.
The depth and seriousness of a company’s commitment to social responsibility are becoming key factors in the ‘talent wars’—the fight to attract and retain qualified employees in increasingly tight labor markets. This is not just about current low unemployment rates. In skill after skill—from software engineers to truck drivers to data scientists—there have been chronic, decades-long shortages of qualified employees.5
Surveys have shown that young people increasingly want and expect meaning and purpose in their jobs.6 A 2018 survey,7 published in the Harvard Business Review, found that “On average, our pool of American workers said they’d be willing to forego 23% of their entire future lifetime earnings in order to have a job that was always meaningful.” Thereby, expect skilled applicants to ask, What kind of a company are you? What do you stand for? Are you a 1-dimensional money-making machine or a sustainable enterprise with a conscience, doing some good in the world?” Executives can ask themselves these questions as well. What kind of legacy do they want to build?
Doing Well by Doing Good
Skeptics will say it is all well and good to be idealistic, but corporations only survive when they are profitable over the long term. However, most executives believe CR can improve profits. Evidence correlating corporate performance with profitability exists, though with qualifications and caveats.8 Some research is more sanguine, such as one study that shows productivity increases 13%, employee turnover is cut in half, litigation risk goes down, and share price increases by 6% on average, for companies with CSR fully integrated into their operations, compared to companies whose CSR programs were managed separately from the rest of the company's operations. Another large scale study, Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence, found evidence that “using CSR as an investment to increase product differentiation allows firms to benefit from higher profit margins.” They also found that investment in CSR differentiation “decreases systematic risk and increases firm value; and that these effects are stronger for firms with high product differentiation.”
Most of the research leaves open the question of causation—i.e. do companies that are profitable invest more in CSR initiatives because they have more spare resources to do so, or do companies that invest in CSR initiative realize more profit because of those investments? Certainly, certain types of CSR initiatives, such as improving efficiencies to reduce fuel and resource consumption, can drive lower costs and thereby higher profits.
Some studies have shown that CSR activities increase trust9 and loyalty10 among customers, while others warn that this is only true if the initiatives are a ‘proactive high-fit.’11 We also have seen that social media and the ability to rapidly influence opinions and organize boycotts is quick to punish offenders who break the public’s trust by doing harm in their supply chain (such as sweatshop conditions or pollution at suppliers factories). It has become increasingly harder for skeptics to argue that well-designed CSR initiatives will harm corporate profitability and the interest of shareholders.
What Can an Individual Supply Chain Practitioner Do?
One of the most important actions a supply chain practitioner can do is to ‘vote with your resume’; i.e. your job search strategy, consciously finding and pursing positions at a company whose values you believe in. Of course, there are many other factors and pressures that determine what job and position you are in right now and what is practical, especially in the short term. But if having meaning and fulfillment in your work is important to you, then it is important not to get stuck in a company which you feel is creating more problems for the world than it is solving.
Short of moving to a new job, as an individual you can strive to flex your ethical muscles within your current realm and the decisions you have authority to make, as well as seeking to influence others outside of your realm of authority. The latter can be tricky business, as no one wants to be preached to, but still there are ways to find allies and bolster good initiatives within the firm. In particular, if you can find receptive executives with authority, then pitching ideas and/or advocating for resources for good purposes can never hurt. Educating yourself on the issues, the kinds of actions your company can take to solve them, and resources available to help in promoting those causes, is a good thing, to make yourself a more informed advocate.
What Can Supply Chain Executives Do?
Supply chain executives are in a position to sponsor/fund and demonstrate a high level of commitment and support for socially responsible initiatives. They may also be in a position to influence the company’s compensation policies and other incentive policies and practices, which can be used to motivate actions and recognize contributions to achieving specific corporate CSR targets.
More broadly, senior supply chain executives, along with their peers from other functions and the CEO, are in a position to shape the culture, belief system, and identity of the company. It is critical to create and reinforce a culture of integrity and ethics. At ChainLink, we have never hesitated to walk away from financial gain or take a loss, when it was the right thing to do. Because of that, we have generally attracted the kind of customers we want to work for (those who value our integrity) and employees who want to work for us for the right reasons as well. More importantly, we can sleep well at night and live with ourselves.
Senior supply chain executives, along with the rest of the executive team, are responsible for overall CSR strategy. They can help by coordinating and rationalizing the various different CSR initiatives within a company. In The Truth About CSR, Harvard researchers12 found that “although many companies embrace this broad vision of CSR, they are hampered by poor coordination and a lack of logic connecting their various programs … CSR programs are often initiated and run in an uncoordinated way by a variety of internal managers, frequently without the active engagement of the CEO.” They present an approach to classifying CSR initiatives into three categories (A) philanthropic, B) operational efficiencies, C) business model transformation) and advocate bringing discipline and coherence to a company’s CSR strategy, across its portfolio of CSR initiatives.
Remembering the ‘Why’ … Why This Work is So Important
The actual work of implementing supply chain sustainability and ethics can be very technical, analytical, and in some cases administrative in nature. When you are deep in the work of preparing or checking surveys and self-assessments, evaluating audits and reports and various metrics, it can be easy to slip into ‘this is just another job to do’ mentality and mode of work. It is critical to remind yourself that there are real people, real lives, and real environments at stake. It is important to foster passion and constantly remember why this work is so vital.
There are many ways to do this. One idea is to have a webinar each month, presented by the team responsible for an area, to explain the consequences of what the company does in that area—“why we do what we do … why it is important and how the decisions and actions we take make a difference.” It could be about GHG emissions one month, slave labor the next, and so forth. By making the team responsible for implementing that particular function or initiative also responsible for presenting it, it encourages those employees to more deeply understand the ‘why’ behind it and become evangelists for the cause. The first half of these sessions could be about raising awareness of the problem and putting it in human terms. This could leverage personal and factual videos and presentations that NGOs and others have already created to summarize and humanize the issue; for example, interviews with victims of slave labor explaining what it did to their lives, along with statistics on the scale of the problem. The second half is reporting what the company is doing to counter the problem, the specific goals that have been set, actions being taken, progress against the goals, and next steps going forward. Individual, specific success stories are great, as well as progress towards broader metrics. Ideally these sessions are moderated by the CEO, who could also participate in Q&A at the end, to emphasize how important the initiative is to the company and its self-identity.
There are of course numerous other ways to reinforce the ‘why’ behind the corporate culture, such as executive communications, employee volunteer programs, company meetings, and so forth.
We are only on this planet for a short time. It is up to us to make a difference. Supply chain professionals, in particular, have the potential to make a really big difference. Those who step up to the plate and do the right thing, are almost always more fulfilled and satisfied with their careers and their life as a result.