Perils of the Global Supply Chain, Part 2: Supply Chain Responsibility, Or Else.

by Perkins Coie

Twenty years ago less than 100 companies worldwide disclosed or reported on their supply chain compliance or corporate social responsibility (CSR) practices.  Those that did were trailblazers supporting the idea that companies should be concerned about more than minimum legal compliance in their sourcing, manufacturing, distribution and sales practices.  These companies often adopted CSR practices and disclosed them as part of a corporate ethos, or as a progressive branding and marketing strategy.  They did not, however, adopt CSR practices because they were legally required to do so.

What a difference two decades make.  Today the number of companies disclosing CSR practices exceeds 5,000, and that number is rising sharply.  Consumers are increasingly savvy about, and the press is increasingly focused on, products bearing labels like “fair trade,” “conflict free” and “fair labor.”  For example, in the last few weeks, major media outlets across the world have given in-depth coverage to the modern fight against slave, forced and child labor.  CNN has a months-long running series entitled “The Freedom Project:  Ending Modern Day Slavery.”  The Sydney Morning Herald, moreover, published a lead editorial in which it noted that the Australian Football Championship was sullied by a story in which a reporter personally interviewed more than 50 child workers who were forced to sew by hand the balls used in the games.  (In the aftermath of the story, the teams, sponsors, organizers and equipment manufacturers pledged donations to NGOs, reforms and crackdowns on the contracted vendors using the child labor.) The U.S. press, including the Washington Post, was quick to cover President Obama’s groundbreaking Executive Order which not only imposes new requirements on federal contractors to (1) ensure and (2) annually certify that they are not using trafficked or forced labor, but also (3) requires that these 300,000+ contractors and their subcontractors to self-report and remediate any detected violations.

Of course, all of this press and punditry comes shortly after the SEC’s announcement of its “Conflict Minerals Rules” and just before the State of California’s much-anticipated November 30, 2012 release of its list of companies that must comply with its now-effective “Transparency in Supply Chains Act."

Failure to comply with socially responsible practices once resulted in lost sales because of customer dissatisfaction.  Today, ignoring these new legal requirements can result in fines, debarment for federal contractors, class action lawsuits and imprisonment.  After all, falsely/recklessly certifying compliance with the Executive Order, for example, can result in 5 years imprisonment and a $250,000 fine. 

Yet, despite the increasing number of federal and state mandates requiring CSR practices and disclosures, and the harsh consequences for failures to comply, responsibility for corporate CSR initiatives and disclosures still tends to fall almost exclusively to corporate branding, marketing or communications professionals.  This practice, undoubtedly a vestige from the time when CSR was not a compliance imperative, should be reevaluated and, for many companies, changed.

Companies are well-advised to understand and mitigate the various subject-specific CSR risks their supply chains expose them to.  Because responsible, practical solutions to these challenges are as varied as the companies that must adopt them, companies should consult with experienced counsel to:

Understand (And Begin to Reduce) Your Risk Profile  

  • Conduct an initial mapping and risk-based analysis of your supply chain
  • Identify, rank and address discrete areas of greatest subject-specific vulnerability
  • Conduct targeted due diligence on, and vetting of, potential “risk-aggravating” transaction partners to help avoid problems at the outset

Be Prepared to Address Problems

  • Have experienced counsel available 24/7 to answer questions and hotline reports, address time-sensitive issues and appropriately escalate any more serious issues
  • Develop an integrated crisis response approach
  • Respond to allegations of serious misconduct by conducting a practical phased internal investigation

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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