By Jerilyn Klein Bier
If you're invested in a major retailer or manufacturer that does business in California, take note. Starting January 1, 2012, those companies with annual worldwide gross receipts exceeding $100 million--an estimated 3,500--are required to disclose on their corporate Web sites the steps they're taking to eradicate slavery and human trafficking in their supply chains.
The California Transparency in Supply Chains Act of 2010 (SB 657) doesn't force companies to have human trafficking policies in place. It simply requires them to disclose what policies--if any--they have. It also enables the California Attorney General's office to take companies to court to make sure they comply with the law.
The legislation's aim is to educate customers so they can make informed buying decisions. People closely tracking the issue say it behooves companies to do more than just comply with the bare bones requirement of the law because the added visibility can put companies with inadequate or poorly communicated practices at risk for negative publicity, public protests, loss of consumer trust, business interruption and even lawsuits.
"Reputational risk and legal risk all translate into financial risk," says Julie Tanner, assistant director of socially responsible investing at Christian Brothers Investment Services (CBIS).
From consumer boycotts of child-made carpets and soccer balls to petitions directed at hotels, consumers haven't been bashful about pressing human rights issues, Tanner says. Neither have socially responsible investors, who began an almost immediate push for better corporate policies after a 2006 Bloomberg Markets article exposed slavery in Brazil's pig-iron industry.
Rev. David M. Schilling, director of human rights and resources at the Interfaith Center on Corporate Responsibility (ICCR), expects a number of institutional investors will start to look at SB 657 disclosures this quarter.
The law requires companies to indicate the extent to which they're: 1) verifying supply chains to evaluate and address risks of slavery and human trafficking; 2) performing supplier audits to evaluate compliance with corporate standards; 3) maintaining internal accountability standards and procedures for employees or contractors failing to meet these standards; 4) training employees and managers who have direct responsibility for supply chain management; and 5) certifying that materials incorporated into their products comply with human trafficking laws.
"Some companies believe [SB 657] is too prescriptive and some think it's too vague," says Dorothy Rothrock, vice president of government relations for the California Manufacturers and Technology Association. The association hopes the attorney general's office will let each company disclose information on its Web site in the way that makes the most sense for its consumers rather than requiring a one-size-fits-all approach.
"The vagueness of the statute makes compliance very problematic for our members," says Dave Heylen, vice president of communications for the California Grocers Association. He says an enforcement action by the attorney general can be very costly depending on the length of the process and the settlement.
Attorney Sarah Altschuller, a member of the corporate social responsibility practice at law firm Foley Hoag LLP in Washington D.C., thinks the real enforcement and bigger risk--at least initially--will be stakeholder enforcement. Stakeholders can "name and shame" non-complying companies through Chain Store Reaction and other online sources, she says.
Consumers have already sent more than 126,000 letters regarding forced labor in supply chains to roughly 1,560 companies through Chain Store Reaction (www.chainstorereaction.com), a Web site which Secretary of State Hillary Clinton has promoted.
Tanner from CBIS says SB 657, which will affect a fair number of the 1,500 companies in CBIS's portfolio, will help her figure out the leaders and laggards in supply chain monitoring.
It's not just the several thousand retailers and manufacturers who will be impacted. "Think of the companies who are suppliers to the 3,500. That's a multiplier effect," says Schilling.
To help companies prepare, ICCR, CBIS and Calvert Investments recently published "Effective Supply Chain Accountability: Investor Guidance on Implementation of The California Transparency in Supply Chains Act and Beyond."
The guide suggests and briefly explains how to develop and implement a human rights policy; establish a human rights due diligence process; conduct human rights risk assessments; review, develop and implement auditing, verification and traceability mechanisms; train staff, suppliers, vendors, contractors and auditors; and collaborate with other parties.
The guide shares best practices of various companies including Gap, Adidas, Hewlett-Packard, Levi Strauss & Co. and Nucor. Schilling says more than 290 companies have already adopted comprehensive human rights policies, which can be linked to through the Business & Human Rights Resource Centre (www.business-humanrights.org).
Erik Autor, vice president and international trade counsel of the National Retail Federation, notes that SB 657 is part of a whole number of laws at the federal and state level (including the Dodd-Frank Act's more specific "conflict minerals" disclosure provision) which require supply chain visibility. Retailers have been addressing them through their codes of conduct, he says.
A bill introduced by Congresswoman Carolyn Maloney (D-NY) proposes to take the California legislation federal. While it's unlikely to move through Congress in an election year, Altschuller says it's another indicator that companies need to be aware of the so-called "softer" corporate social responsibilities. "The soft expectations are hardening," she says.