You Can’t ‘Contract Away’ Supply Chain Problems

Alexander Gershenson

November 30, 2018

There are many compelling reasons for international businesses to ensure that their global supply chains are free from ethically or environmentally questionable practices. Any company that’s serious about corporate social responsibility, and about the commitment of their customers to their brand, would be horrified to learn that forced laborers are assembling its products or that its palm oil supplier is clear-cutting rainforest to expand production.

However, beyond a personal sense of responsibility to be a good corporate citizen, businesses are also being held to new regulatory and legal standards. The UK Modern Slavery Act, for example, includes requirements for certain businesses to issue annual statements on steps being taken to rid forced labor from their supply chains. A growing number of corporations are being held financially accountable when a supplier’s negligence turns into tragedy.

Consumers are increasingly demanding that their preferred brands live up to higher ethical and environmental standards. They are not looking for slick marketing messages, but rather true transparency and data to back up claims of environmental stewardship and fair labor practices.

Responding to this heightened awareness around ethical supply chain management, the American Bar Association issued a report in October 2018 with a very lawyerly recommendation to global corporations — secure your supply chain with contracts.

The report, written by an ABA Business Law working group, claims to offer companies a way to live up to higher standards by moving beyond “corporate policy statements to the actual contract documents where those policies may have greater impact.” The report includes pages of sample clauses that companies can insert into their supply chain contracts to enforce stricter policies related to child labor, human trafficking, workplace safety, environmental protection, and more.

While taking real action against supply chain abuses is undoubtedly a worthy cause, it’s not the ABA’s only motivation for issuing the report. “At the same time,” continues the report, “the clauses below seek to minimize the risks inherent in the adoption of any corporate policy. Claims have been made against companies based on those companies’ undertakings as buyers in the supply chain. In other words, there is risk for such companies, often unrecognized and inadequately addressed in current supply contracts.”

When you actually read the language of some of these clauses, you get the sense that the ABA’s real recommendation for companies is to contract away their supply chain issues instead of addressing them head on. Just look at this final disclaimer:

“Buyer does not assume a duty to monitor Supplier or its Representatives, including, without limitation, for compliance with laws or standards regarding working conditions, pay, hours, discrimination, forced labor, child labor, or the like.”

While contracts certainly have their place, these clauses primarily serve to limit a company’s liability when something terrible happens in its supply chain, but do little or nothing to prevent the tragedy from happening in the first place. Instead of using contracts intended to distance a corporation legally and ethically from its suppliers, companies would be far better served by thinking of suppliers as a direct extension of their business.

If a company has gone as far as issuing specific corporate policies related to social responsibility, then it also knows what kinds of labor and environmental practices will no longer be tolerated in its supply chain. Instead of washing its hands of monitoring supplier compliance, the company should seek full transparency from materials sourcing to production to shipping.

To accomplish this, the company doesn’t just need airtight supplier contracts; it needs data. If there’s a policy against forced labor, then the company needs to collect year-over-year data from each of its suppliers about the conditions in which their workforce produces goods. For example, do they work with labor brokers? If so, which brokers and what countries or regions are the workers coming from? Then it’s up to the corporation to exercise due diligence and ensure that none of those brokers or regions have been tied to forced labor.

It’s not enough to wait until a whistleblower or a journalist divulges bad practices at a supplier’s facility. Sure, you could sever the business relationship according to the contract, but you won’t escape the bad press, the stain on your corporate reputation, and the lasting damage inflicted to your brand in the eyes of consumers.

A smarter move is to make good on your pledges of corporate social responsibility, first by collecting data about supplier behavior, and then by working directly with suppliers to improve working conditions and promote sustainable practices. It’s the kind of proactive approach that consumers respect and shareholders reward. Over the years here at SupplyShift we have been fortunate to work with corporate leaders in responsible sourcing and supply chain engagement, and look forward to providing the tools to enable real progress in supply chain responsibility.

SupplyShift helps some of the world’s biggest brands access the data they need to drive progress toward their responsible sourcing goals. Browse our library of pre-built assessments or request a demo to learn more.

Alexander Gershenson

November 30, 2018