Helle Bank Jørgensen, CEO of Competent Boards, has a stark answer for anyone doubting the business case for supply chain due diligence:

“Just ask Nike, which had to pull US$100 million worth of soccer balls from stores on the eve of the 1996 World Cup after news broke that one of its suppliers was employing Pakistani children to stitch the balls.”

So writes Bank Jørgensen in Stewards of the Future, outlining in her book how the world is now demanding a more “aggressive and proactive” approach to stamping out child labour, forced labour, and other human rights abuses.

In this age of smartphones and social media, she writes, workplace abuses can be quickly exposed and disseminated. “An unprepared board can quickly find itself caught in the vortex of a crisis.”

In 2017, France passed a “duty of care” law holding multinationals criminally responsible for human rights or environmental violations at their subsidiaries and suppliers and, writes Bank Jørgensen, several countries “followed suit, and there is little doubt that more will do so over the next few years”.

She also highlights the supply chain problems during and following the Covid 19 pandemic: millions of people being laid off as global demand suffered and supplies were disrupted. Boards, she advises, “should, at the very least, be considering whether to consolidate the number and geographical spread of their suppliers, and the consequences of doing so”.

Bank Jørgensen quotes Michael Kobori, Starbucks’s chief sustainability officer, who questions the whole system: “As we have seen through Covid, if any link in that chain is broken, the entire supply chain is disrupted. It’s not a very resilient system. In many ways, it’s quite a fragile system. I believe that in order to improve resiliency, there will be a decentralisation of supply chains. There will be redundancies built in. There will be literally more slack built into the system.

“It’s actually the supply chains of smaller- and medium-sized enterprises that are surviving, because they’ve been forced to operate on the margin, outside of those big global, consolidated supply chains. So out of necessity, they’ve been forced to be more nimble and more agile.”

A spur to innovation

Michael Kobori, Starbucks’s chief sustainability officer, recalls the time when his former employer Levi Strauss was looking for ways to reduce the hazardous chemicals used by suppliers to bring out the worn, bleached look for which Levi jeans are famous. It discovered not only that lasers could do the same job as the chemicals but also that the time to finish the product could be shortened from hours to just a few minutes. What’s more, the laser process enabled the company to delay decisions on final products until much later in the process, thus radically reducing its lead times from more than six months to as fast as weeks or days in some cases. The process brought the added benefits of lower inventories and being able to customize jeans closer to the market where they were being sold. “So that sustainability constraint led to innovation that had multiple business benefits,” Kobori notes. (Stewards of the Future, chapter 5.)

Bank Jørgensen gets to the heart of the problem of supply chain exploitation. “Directors can’t have it both ways: on one hand, demanding from management that all suppliers adhere to an ESG code of conduct, while on the other, expecting the procurement department to buy the lowest cost products with the shortest delivery times.”

She recommends boards insist that the company treats “suppliers as partners with a shared purpose and strategy. A relationship of this kind helps foster trust and loyalty, with both sides taking a similar approach to issues such as the environment and labour practices and adhering to mutually agreed-upon standards.”

“The ideal is to forge long-term partnerships with suppliers built on trust, stability, and a clear understanding of the customer’s expectations.”

With suppliers on side, the board’s job is to oversee a “shift from a focus on short-term monetary cost to the importance of environmental, social, and governance issues. It must ensure that the company has the proper processes and review mechanisms in place to effectively monitor implementation. That includes vetting new and existing suppliers to determine their ethical standards and their commitment to sustainable development and diversity.”

Competent boards should be familiar with monitoring options relevant to their firm’s circumstances and should work to implement them if they wish to avoid unflattering publicity and possibly even legal action.

Scope 3 emissions

In addition to human rights issues and resourcing, organisations must also now consider how scope 3 greenhouse gas emissions and waste management affect the sustainability of their supply chain. Scope 3 covers emissions both upstream (suppliers) and downstream (distributors and customers).

The UK’s National Grid suggests that, for many organisations, scope 3 emissions account for by far the highest proportion of total emissions and points out that, “unfortunately, these are also usually the hardest to reduce”.

Forthcoming EU regulation is expected to place an obligation on companies to start the process of assessing their scope 3 emissions and acquire the technology to track their progress in reducing them. The EU Corporate Sustainability Due Diligence Directive, passed in June, has now entered into its final stages of development, the “trilogues” negotiations with the European Parliament. Further, the OECD has joined in with its own recommendations.

Also in June, the International Sustainability Standards Board launched IFRS 52, a standard setting out targeted climate-related disclosures, and this includes reporting on scope 3 emissions. Although no one has yet imposed the standards, they are ready for governments and regulators—or companies—to adopt.

Helle Bank Jørgensen’s advice is “Familiarise yourself with the Task Force on Climate-related Financial Disclosure (TCFD) and its recommendations. Use the task force’s work as a guide for internal discussions on scenarios, strategies, risks, and targets.”

Stewards of the Future lists guidelines for boards on supply chain and human rights issues, together with ten questions that directors might like to ask themselves or use as the basis for board discussion. With Helle Bank Jørgensen’s permission, we’ve reproduced these below:

Guidelines for boards

⇒ Consider whether you can reconfigure your supply chain to build resilience and to enable training as well as closer monitoring of contractors and subcontractors.

⇒ Forge long-term partnerships with suppliers, based on mutual trust and respect.

⇒ Bear in mind the reputational risks of a relentless push for lower prices and demanding deadlines.

⇒ Keep questioning management’s policies and processes to ensure respect for human rights and responsible sourcing of supplies. Check that management is complying with relevant legal requirements, and is aware of proposed laws and regulations in the pipeline.

⇒ Familiarise yourself with relevant industry codes of conduct and government regulations relating to human rights, labour, and environmental issues.

⇒ Work with trusted community groups and non-governmental organisations (NGOs) to understand local conditions and potential trouble spots.

⇒ Align the power of procurement with incentives for suppliers.

10 key questions

1. Which board members have the expertise to exercise oversight on supply chain and human rights issues? Which of them is responsible for these matters?

2. How does the company choose and work with suppliers?

3. What governance structure has the company put in place to manage human rights and other supply-chain issues?

4. What relationships does the company have with NGOs and other experts on the ground?

5. Has the company communicated expectations for suppliers through a responsible sourcing code of conduct? Has training been offered?

6. Does the company have a system in place to ensure that potential violations among suppliers are suitably addressed?

7. Does the board know what is really going on in the supply chain? For example, is the company doing spot audits and unannounced inspections?

8. Are incentives in place to encourage supplier compliance with company policies?

9. Are you confident that management is complying with relevant legal requirements, and is aware of regulatory developments that may apply to the company?

10. Should the supply-chain strategy be revamped as a result of lessons learned during the Covid-19 pandemic?

Extracts and quotes from Stewards of the Future, A Guide for Competent Boards (Barlow Publishing) are reproduced with the kind permission of Helle Bank Jørgensen, CEO and founder of Competent Boards. The book is available in hard cover and a Kindle edition.