Show and Tell: Transparency in the Supply Chain

August 24, 2011

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For Retailers and Manufacturers With Over $100 Million in Revenue, the Deadline of Forced Transparency on Slave Labor and Human Trafficking Policies is Looming. Is Your Company Ready?

On Jan. 1, 2012, the California Transparency in the Supply Chain Act will go into effect. The law compels an estimated 3,000 companies to disclose their policies and programs for ensuring there is no slave labor or child labor in their supply chains.

What's notable is that the law doesn't force a change in company policy or operations; disclosure is the goal. Compliance is relatively simple: a company must post its policies, proactive programs and reactive protocols on its website.

Reputation management may not be so easy. Several human rights activist organizations advocated for the legislation and it should come as no surprise if industry-by-industry rankings emerge after the Jan. 1 deadline.

With just five months to go until the law takes effect, if your company isn't already preparing for both compliance and reputation management, it's time to get started. Last week, Business for Social Responsibility (BSR) hosted a webinar – attended by more than 130 people – to provide an overview of the regulation and expectations based on its interviews with the law's proponents. Here's what you need to know:

If you are a retailer or manufacturer doing business in California and grossing over $100 million, this law applies to your company.

According to the California Civil Code, “Every retailer and manufacturer doing business in California and having annual worldwide gross receipts in excess of $100 million” is subject to the law.

Companies most likely to be scrutinized include those that sell or make goods that are on the Department of Labor's list of products with significant incidence of forced or child labor. Cotton, sugarcane, tobacco, coffee, rice, cocoa, bricks, garments, carpets, footwear and mined resources such as gold, coal, copper and iron are at the top of the list.

The company's homepage must have a visible link to the disclosure.

The law states that disclosures must be posted on the retailer seller's or manufacturer's website with a “conspicuous and easily understood link to the required information placed on the business' homepage.”

If the retail seller or manufacturer does not have a website, they must provide a disclosure within 30 days of receiving a written request of disclosure from a consumer.

Disclosure requirements are both specific and far-reaching.

Companies are required to disclose efforts to eradicate slavery and human trafficking in their direct supply chains for tangible goods offered for sale. Specifically, retail sellers and manufacturers must disclose to what extent, if any, they:

  • Verify product supply chains to evaluate and address risks of human trafficking and slavery.
  • Conduct audits of suppliers to evaluate supplier compliance with company standards.
  • Require direct suppliers to certify that materials incorporated into the product comply with the slavery and human trafficking laws of the countries in which they do business.
  • Maintain internal accountability standards and procedures for employees or contractors who fail to meet company standards.
  • Provide company employees and management who have direct responsibility for supply chain management with training on human trafficking and slavery.

BSR advises that “yes” or “no” answers are more likely to draw attention than deflect it. Human rights advocates are looking for honest, thoughtful and comprehensive answers, even if they identify areas for improvement.

Best practices you can expect to see from leading brands in each industry include third-party involvement in both risk assessments and auditing to certify implementation of company standards. Integration of standards into internal oversight systems will demonstrate that human rights standards are a priority. Brand leaders are also likely to provide rich detail on training, curriculum and how far down the supply chain auditing occurs.

Even if you don't have best practice policies today, an improved approach is possible before the deadline.

Human slavery, including child labor, is a compelling, emotional and moral issue that no company can afford to ignore – or even give the appearance of doing so. Although the transparency deadline looms, there is still time for companies to do more than prepare for compliance.

Here is what can be accomplished in the short term:

  • Identify 10 competitors and up to 10 companies of similar size, revenue and brand equity. Benchmark your current policies and practices against what these companies already publicly disclose. This is the most effective way to see where you stand relative to your peers.
  • Work with investor relations to understand which, if any, shareholders disclose environment, social and governance performance to their own investors. This information could be helpful in demonstrating a business case for strengthening the company's approach in advance of the Jan. 1 deadline.
  • If you do not already have complete risk assessments, look at your top suppliers to better understand whether they supply other companies whose policies and programs are more fully developed.
  • Identify policies that need to be strengthened and begin the internal process for approving stronger policy language.
  • Identify practices and operational changes that the company can commit to exploring or pursuing as part of the first public disclosure.

While government mandates demand compliance, heightened stakeholder expectations call for thoughtful strategy and meaningful actions. Those who ignore the call run the risk of damaging both their reputations and their position in the marketplace.