Human rights risks in the supply chain

Retailers and manufacturers sourcing from producers in emerging markets often learn that the approach to human rights and labour relations varies from country to country. Despite these local differences, regulators and stakeholders expect international standards to be upheld throughout the supply chain, and such third-party operations have come under increasing scrutiny in recent years.

New legal requirements around the world mean companies need to be able to demonstrate an understanding of their impact on the human rights of stakeholders and communities throughout their supply chain. Failure to monitor and control these issues brings risk of reputational damage.

Yet issues such as forced labour, harassment, health and safety, land rights, fair wages, and long shifts have been exposed in the supply chains of major consumer brands in recent years. And the problems aren't always easily fixed.

For example, confectionery industry initiatives to find a solution to the millions of children involved in hazardous cocoa production work in West Africa have yet to deliver meaningful change.

The fashion industry is also struggling to confront unsafe conditions in its supply chain. In 2013, the Rana Plaza building in Bangladesh, which housed factories making garments for global brands, collapsed. More than 1,100 people were killed, and thousands more were injured. Since then, driven partly by media and consumer pressure, the industry has attempted to prevent and remedy the dangers to its workforce. The Accord on Fire and Building Safety in Bangladesh was drawn up with much fanfare and signed by more than 200 clothing brands. Factories were inspected, and corrective action plans were put in place. However, 1,401 of the 1,646 factories covered by the accord are behind schedule on these tasks, according to the Accord's quarterly report dated July 2016.

Were these efforts enough to ensure worker safety in Bangladesh? For example, one area not covered by the accord is boiler safety. Investigations into the September 2016 Tampaco Foils factory boiler explosion, which claimed more than 35 lives, are ongoing. The packaging factory counted two large multinational companies among its clients. According to the International Labour Organisation, there have been many similar incidents in recent years.

Balancing profitability and responsibility is a pressing concern for retailers and manufacturers. Lower labour costs in emerging markets are an important factor in the decision to source abroad. However, organisations have to make sure that certain conditions are met, or the cost-saving move may backfire.

"Your company's reputation will one day rely on how you treat people," said Michael Rogerson, ACMA, CGMA, a sustainability consultant with UK-based OEE Consulting. "In the internet age, news will get out. The reputational risks are almost never worth it commercially."

With brand image at stake, not to mention the potential legal ramifications, retailers need to understand their suppliers' production processes, how they treat their people, the working conditions, and the environment.

"You have to look beyond the commercial win or lose of it," said Rogerson, who has worked in the Middle East and Africa. "Management accountants who are trusted advisers in companies need to be pushing for better behaviour across the spectrum of functions."

And organisations have a responsibility to look beyond their own interests. Those that view human rights issues primarily as a risk to reputation fail to address the real issue, he added. "It is a risk to reputation. But you have got to go beyond that.

"It's a risk to people, so do the human thing first."

Here are some tips for choosing a responsible supplier:

Do your research

One way of gauging working conditions in your potential suppliers' facilities is to research their reputation. "With the internet, there's a lot of good ways to search companies, find out what their labour practices are, if they've had any history of violations," said Todd Luchsinger, CPA, the CFO of Dupli Envelope and Graphics, a New York printing company. "We find reputation in the industry to really be a beneficial way to learn about suppliers, as well as leaning on industry associations to make sure that you're selecting valid and viable companies to do business with."

Luchsinger said trade associations, Dun & Bradstreet credit reports, and basic internet searches can help educate a company on potential vendors.

Other factors to consider during the research phase include:

• Location: Is the supplier operating in high-risk areas or areas that are prone to human rights violations due to lax or non-existent enforcement of regulations?
• Financials: Examination of the supplier's financials and disclosures may reveal potential red flags.
• Staff turnover: How frequently do employees leave the company?

"Any company that's selling its services to another company is going to advertise work it has done before," Rogerson said. "That gives you a list of companies you can contact. You can't hide [unethical conduct] from close commercial partners. So there's bound to be someone who has seen something, if there is something to see."

You can find former employees of that company on LinkedIn. You could have a conversation with them about the company's attitude to a specific area, such as working conditions and safety, he added.

Set expectations

When you have selected a supplier, it is essential to inform them of your expectations from the outset and provide them with your organisation's code of conduct. The code should state clear, measurable objectives for the supplier on aspects such as product quality and working conditions.

"You need to have really solid vendor compliance guidelines in place and let your factories know that ... it impacts the partnership and the performance of our business and ultimately the vendors," said Brenda Morris, CPA, CGMA, the senior vice president of finance at Torrid, a women's fashion retailer based in Los Angeles. "Our goal is to have guidelines that make sense for the entire supply chain, from the factory to our customers' hands."

Simply having requirements in place is not enough. "If you're not monitoring them, you're not really doing your due diligence and [fulfilling] your fiduciary responsibility," she said.

The first level of compliance involves self-reporting by the supplier on the metrics specified. The next level involves regular visits by auditors or quality inspectors to test the rigour of those self-reports.

In a self-assessment, consumer products company Unilever identified discrimination, forced labour, health and safety, land rights, and fair wages issues along its supply chain. The company found that harassment was the most frequently reported issue in 2014, according to the company's human rights report, the first to be based on the UN Global Compact framework, which was cited in Business and Human Rights: Evolution and Acceptance, a CGMA briefing developed with the Global Compact Network UK.

In light of the finding, Unilever launched initiatives to combat the problem, with community outreach, safety talks, and targeted training exercises in affected areas. The company committed to reporting on progress in future editions of its human rights report.

"Only when we look at our entire footprint are we able to see and implement the appropriate standards that you would expect of Unilever," Roger Seabrook, FCMA, CGMA, vice president of finance, marketing, and sustainability at Unilever, said in the briefing.

Integrate human rights considerations into ERM

Identifying and monitoring issues in the supply chain is similar to many enterprise risk management matrices.

Identify what the operational, reputational, and financial risks are, and allocate ownership of each risk to a member of your organisation. "You have a sense from a heat map standpoint how much [each issue] could impact you if it were to rise to a high level of risk in a certain factory or certain geography," Morris said.

What may be a very low risk today could change in 30 days' time to a high risk in light of an economic event somewhere in the world — a port strike or a terrorist event, for example. Constant evaluation and monitoring of the level and intensity of risk is crucial.

"This is why it's really important to have these supply-chain issues be a part of your overall enterprise risk monitoring, and make sure you are constantly revisiting," Morris said. It's important to have mitigation plans in place to manage risks and to react quickly once a risk is recognised.

Organisations also should have plans for managing risks across the threat spectrum, such as when a risk moves from low to medium, or medium to high. "You should always have a path, so you're not trying to figure it out on the fly," she said.

Visit the factory floor

Conditions will vary from country to country, factory to factory. So visiting suppliers in person is critical to assessing, monitoring, and managing risks related to employee conditions. In addition to scheduled routine visits to do product and line checks, surprise visits are really important.

"The things we're looking for typically are: making sure that people seem happy, that they're being treated well, that the conditions are good and clean, workers are getting breaks," Morris said.

Jim Rothenberger, CPA, CGMA, senior vice president and CFO of Thermacore, liaises with his operations officer to go through suppliers' facilities and observe them as regulators would. The engineering design and manufacturing company uses US Occupational Safety and Health Administration (OSHA) requirements as a guide.

"We check how clean the operation is," he said. "Is there a lot of dust flying around? If we have an operation where there may be some spray painting, as an example, is there a good exhaust fan? Because if someone's standing there all day long, those fumes are going to be inhaled. What kind of protective gear do these individuals have? Those are some easy things to look for.

"Some of the tougher ones may be as you walk past, let's say, a machining centre. Are there hand guards? Are there safety valves? Are there special pull ropes in case something fails? Those are good questions that our guys try to find answers to," he added.

If company inspectors observe an unsafe aspect of the operation, they make recommendations to the supplier. And they make it clear: "If you want to continue supplying this product for us, we wish you to address this situation," Rothenberger said.

If you see red flags, pursue them. Don't ignore them, because the problem will get bigger, Morris said.

Years ago, while working for a different company, Morris made a surprise visit to a factory in China. While there, she and her colleagues uncovered an issue with long work shifts. "People were exhausted," she said. "Everyone was downtrodden."

After speaking with workers, it became clear that the factory owners weren't adhering to the compliance manual Morris's company had provided the supplier. Rather than cutting ties with the supplier, her company sought to fix the problem.

"Sometimes it's better for the people that are working there to help you put processes in place that really address human rights issues and quality of work [conditions] so that you can continue to move product there and hopefully enhance their lives," Morris said.

As the client, you have an opportunity to drive change and improve standards to the benefit of the workforce in that sector or country. If a potential supplier does not have an ethics policy, but seems to be good, help them produce one, Rogerson said.

"Sitting with someone senior and getting them to walk you through what that might look like is a great insight into how the management thinks about ethical issues," he said. "It is always better for ethical companies to be involved. If you get out, you save your reputation, but you leave behind employees that you could have had a positive impact on. The company's policy won't change because you left."

Explain that you get better work out of people the better you treat them and the more you value them, he added. Margins in manufacturing may be tight, but those things don't necessarily involve a financial investment. Having a demonstrable ethics policy in place can also help the supplier stand out among competitors.

Develop and maintain good relationships

Regular communication and building good relationships with your suppliers is crucial to maintaining a resilient and compliant supply chain. The stronger your relationship with a partner, the more you can work with them to provide training and build their capability to reduce human rights risk and identify and tackle the root causes of a problem.

If the problem or violation proves insurmountable, disruption to your supply chain can be minimised if you have a network of factories that you work with.

"If you find that the factory is out of compliance, they're not producing the quality that you want, they're not treating their people well, you want to be able to move relatively seamlessly and not impact your product supply chain and your ability to get product to the marketplace," Morris said.

Use your access

Management accountants are in a privileged position, as they have access to much of the data that describe what goes on in a company, Rogerson said.

The kind of indicators management accountants can request from suppliers to get an instant snapshot of their supply chain include: worker hours since the last accident, the health and safety incident log, and worker pay, especially as it relates to living wage levels in that location.

If you are in doubt about any of the practices you observe, ask yourself: Would you be happy to stand up in court and say these things are taking place in your supply chain? A practice may well be legal in the strictest sense, but once you've described it in court, it is public knowledge and the ethics of it can be debated.

"If you spot something [unethical], bring it up," Rogerson said. "And if you don't get a response from your manager, go to the next level up, and keep going if necessary. If you know about it and don't do anything, you're responsible. The risk to you is you lose your job. The risk to a worker in dangerous conditions is their life."