Human rights abuses in a supply chain can bring a company undone

Human rights abuses in a supply chain can bring a company undone.

In March 2016, hundreds of professionals working in the rapidly growing ethical sourcing industry came together in London at SEDEX, the year’s largest dedicated global ethical sourcing conference.

Most of the world’s major retailers and many brands now have ethical sourcing commitments. Together, they commission an estimated 250,000 social compliance audits every year. Yet poor practices persist. These audits have become increasingly risky, as digital connectivity brings the world closer to brand-HQs to reveal darker practices deep within complex global supply chains that stubbornly resist supplier codes of conduct and audits.

In the mid-1990s, Levis, Nike, The Body Shop International and Ben & Jerry responded to significant ethical and responsibility challenges within their supply chains by establishing supplier codes of conduct and self-assessment questionnaires. These global brands also started to commission supplier audits that looked at areas such as labour practices, environmental performance, and animal welfare.

Since then, global brands have used ethical sourcing and auditing techniques to manage risks to their brands from poor labour and other practices in their supply chains. However, conference attendees, many of whom this industry is their bread and butter, had serious concerns, and were heard declaring their position in terms of being pro or anti audits.

The primary challenge from those against social compliance audits was the high level of fraud contaminating them. Industry insiders at the conference discussed a minimum of 50 percent of factories visited by third party auditors engaging in some level of fraud in response to audits. The stakes for failing an audit can be high, thus perversely creating a compelling reason to conduct audit fraud.

Contributing to the surprisingly high level of fraud in audits is a sector on a race to the bottom in terms of price. Consequently, a reality of increasingly poor quality audits and questionable auditors’ capabilities exist. The industry recognised at the conference that audits and auditors needed to be seen as much more than ‘checking, ticking and flicking’.

Delegates pointed out that there is no option but to raise the bar on audit quality and auditor capability. Audit fraud must be addressed due to the increase of legal risk attached to inaction.

In Australia, the Fair Work Ombudsman tested section 550 of the Fair Work Act. This holds Directors and other public officers liable for knowingly – by act or omission, directly or indirectly – approving procurement approaches that do not adequately manage the risk of unacceptable labour practices.

In the UK, the Modern Slavery Act introduced in 2015, mandated public reporting requirements for companies supplying goods and services to or operating in the UK with a global turnover of over £36million. The US federal government extended the scope of laws aiming to prevent the import of goods are made with child and/or slave labour.

Change is needed

Audits cannot be discussed without addressing the key question: what is the purpose of social compliance audits? Are they about achieving better outcomes for workers, comfort to companies and their boards, or is it a more complex dynamic? How integrated are they in measuring company performance, both externally and internally? How many listed company directors know about their ethical sourcing programs, and the extent to which they deliver a positive social impact?

Much was said about changes to factories only coming when the focus was on what was done before and after an audit.

An audit can only ever be a diagnostic tool at a point in time. Successful risk management within the supply chain isn’t at a point in time, but rather tying the touch points together and in the process, establishing an overall understanding of the nature of the supplier and the relationship with them. Achieving this can be a challenge when there are many tiers in the supply chain.

There are significant problems with the current situation of social compliance audits and with increasing worldwide digital connectivity, complacency is simply not an option.

During the conference, there remained a regular and simple call for compliance – a sobering recognition that there are supply chains where people work in conditions that are illegal.

What next?

It is clear that a significant section of the global ethical sourcing industry recognise that it is time to take stock. Put simply, the time has come to pause and question whether we are achieving the original intent of a social compliance audit. It may be necessary to think outside the audit box and develop new ways of thinking, and new tools and techniques.

The future of ethical sourcing is likely to contain audits for some time yet, however the way audits are undertaken will need to change.

Regardless of how things change, change they must. Because without different responses to the most significant challenges in global supply chains, broader society will lose trust, and companies and their brands will be at greater risk.

Saturday was World Fair Trade Day, where everyone was encouraged to be an ‘agent for change’ by asking how fairly are those people, who have produced the products or services they enjoy, being rewarded for their work. This is something we should do every day.

Richard Boele
Banarra

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