Business Executives Want to Be Pushed Towards Responsible Sourcing

(Illustration by iStock/invincible_bulldog)

“We are all very good at the lip service.” What many of us fear and suspect—and what an executive from a leading global brand recently confirmed—is that companies do not take responsible sourcing seriously enough for it to have a meaningful impact. Instead of prioritizing the human rights of workers and communities, or protecting the environment, our interviews with executives from 21 leading brands suggested that companies will adopt only as much responsible sourcing requirements as they must. “We have invested so much with NGOs, yet we see the same problems as 10 years ago,” an executive told us; another added, “I’m not satisfied with the impact we are making. I’m not surprised we haven’t made more progress.”

What needs to be done? One executive put it bluntly: “The best strategy is to be vicious, attacking the CEO publicly.” Without denying the difficulty and complexity of responsible sourcing, many of our interview subjects made the same point: coordinated, sophisticated public pressure—including naming and shaming top brands and other stakeholders—can help catalyze necessary actions. Companies cannot simply rely on supplier audits, responsible purchasing scorecards, and the annual disclosures included in ESG (environment, social, governance) reports. Doing more of the same may check the boxes of ESG compliance systems, but to improve the well-being of workers, communities, and the environment, companies need external pressure (which includes better and smarter government regulation).

As these executives work in corporations that represent leading examples of responsible sourcing performers in their own sectors and across industries, their revelations are particularly concerning. The implications for companies in lower tiers of performance are likely even worse.

Jumpstarting Responsible Sourcing

The pandemic has revealed the systemic risks of health crises to global supply chains and the systemic vulnerability of workers, especially women workers who have disproportionately lost jobs and suffer from increased violence and increased care giving responsibility. But it’s not enough that human and labor rights and other social components of ESG have become mainstream in financial markets. Even the world’s largest asset manager, BlackRock, is elevating ESG and asking companies in its portfolio to show how they intend to prevent human rights abuses and provide “robust” disclosures about those practices across their value chain. Paying this kind of lip service is the easy part: disclosure and transparency will only yield results when watchdogs hold them to account.

For responsible sourcing to become a true business imperative that makes a material difference, executives highlighted four points of leverage:

1. Companies Need to Feel the Pressure of Activism

Though it may be counterintuitive, executives told us, “We need more pressure.” The ESG movement has taught companies and activist NGOs how to collaborate, which remains important: effective activism applies sophisticated understanding of supply chains, contracts, and incentives that targets core systemic unfairness.

However, as a result of increased collaboration between activists and corporations, the kind of campaigning activism—that once threatened reputations and raised the concern of investors, customers, employees, and regulators alike—has become increasingly rare. And without coordinated external pressure, companies that adopt responsible sourcing policies and processes—such as codes of conduct and supplier audits—are able to implement them with very little accountability.

Executives told us that companies need to experience consequences from their lack of follow-through. “It would be great if we saw attacks on our brand. It does a lot,” an executive stated. “When some companies were declining to pay suppliers and there was pressure on the big guys to reverse those decisions and in some cases they did… It needs to be loud enough and impact sales.” Some even look for activism to get personal; one C-Suite executive bluntly proposed attacking the CEO publicly, which they called “the most effective strategy by far in getting action.” As one executive explained:

“Honestly, if you can tell us that NGOs will attack our brand about what they perceive us as doing then that will get the attention of our CEO and C-suite. That will help get action and support to do more. And if you tell me that they will attack the good name of our CEO directly then that will really get us moving fast.”

2. Government Needs to Step Up

External pressure and activism include pushing for government regulation and responsibility. “Government is often completely missing, and business can’t fix everything,” as one executive put it. When governments are unable or unwilling to enforce labor laws, environmental regulations, or other ESG-related policies, it becomes difficult or even impossible for corporate buyers to influence the behavior of their suppliers. But nothing creates a persuasive business case more than legislation. The California Transparency in Supply Chains Act and the UK and Australia Modern Slavery Acts are examples of past ESG legislation, while new legislation on human rights and environmental due diligence is being drafted by the European Union and member states. “Without legislation it’s hard to get the budget for the human rights criteria,” as one executive stated; “We will need legislation.”

They also note that the gray regulatory area around corporate collusion on social and other investments in shared suppliers needs further clarity as it currently creates a legal disincentive for corporate collaboration on areas on common interest. Executives stated that greater collaboration would help address barriers such as supplier resistance, but laws and regulations designed to prevent collusion have the unintended consequence of constraining creative strategies that might bring responsible sourcing to scale. As one executive put it:

“Let’s say you work for [my competitor] and we have the same [supplier]. We can’t positively collude. We both need the [supplier] to be sustainable and invest in better tech but I can’t talk to you about it. Government isn’t flexible enough to see the legitimate value of collusion for social good. They only see social collusion as bad. It’s hard to make that happen. Our own lawyers are key. They are deathly afraid of collusion.”

3. A Business Case to Compel Real Change

Because responsible sourcing can represent change and risk, the C-Suites of major brands and factories alike need evidence that costs are manageable and justifiable, that revenue will go up, that economies of scale can be found, and that financial markets will recognize performance and deliver rewards. Executives say that most research on responsible supply chain investment tends to focus reducing employee turnover or protecting reputations. But while all evidence helps, such studies at best support incremental change inside companies. For the more dramatic change that is needed, executives need a stronger business case that shows that responsible sourcing helps, or at least does not harm, their key financial performance indicators. “Focusing on the most important business KPIs for the business case is important,” one executive noted; “For us, that will be share price and quality. If you can show that women’s health or human rights or another ESG criterion affects those KPIs, that will get executive attention.”

4. Making CEOs Responsible

The corporate incentive structures are not aligned for responsible sourcing. Corporate C-Suites are in a contradictory position: while many CEOs are outspoken champions for corporate purpose—with responsible sourcing as a pillar of those commitments—C-Suites continue to segregate responsible sourcing from strategic decision-making, which is driven mainly by metrics of profitability and cost control.

For this reason, executives described how easy it is for CEOs to cheerlead responsible sourcing, without holding business lines or supply chain managers accountable for following through. “Who’s pushing this? Is it the CEO who has been sitting with rich people at Davos who want to save people?” one executive asks, “What is that leader’s commitment to force their direct reports to make changes accordingly and will they provide political cover to staff to make those changes? Is the CEO really going to lean in on this and tell the Chief Procurement Officer to change stuff? Who will take the risk to give cover to less powerful people to do something different?”

It is difficult to expect more than incremental improvements if ESG is not integrated in business strategy and expressed through resources, incentives, and political support.

Collaborating on Carrots and Sticks

In our conversations with executives, candid and frequently critical comments about the realities they face came from valuing their companies’ efforts. They all want their companies to live up to their purpose and aspirations and use global supply chain management to reward and reinforce good ESG performance. This is an opportunity for civil society, philanthropy, financial analysts, and investors to take advantage of areas of high leverage.

We propose three top-line strategies:

1. Invest in external pressure. This starts with philanthropy investing in building a structure that puts pressure on companies to take action, and then joining in collaborative efforts. Activists need to partner with technical assistance NGOs that can collaborate with business where possible and appropriate. Funders should support efforts to build capacity and expertise and support mechanisms for coordination. Corporations and responsible sourcing stakeholders can easily collaborate on government policies that even the playing field for ESG investments, incentivize action, and remove barriers to collaboration.
2. Build a better business case. The landmark Project ROI research series gives evidence of the potential for ESG to drive financial results, and many NGOs have documented the business case for social investments. Yet the research needs to be stronger and more closely linked to financial performance, with more sophisticated analysis of ESG data. This is particularly true of the ROI for the social component of ESG. Returns from addressing women’s health in supply chains, for example, do not appear in quarterly sound bites, but often take years to emerge. Yet good performance on health can be a proxy for good corporate supply chain management and risk mitigation. If companies and investors are serious about responsible sourcing, they need to invest in strengthening the business case metrics and the sophistication of end-users in attending to and acting on the data.
3. Strengthen and align internal business systems. Brands and suppliers need support to improve their capabilities and change their approaches. They particularly need support with alignment of public commitments and internal systems, integration of tools and training into supply chain processes, alignment of performance incentives and ESG goals, and integration of gender equality into supplier scorecards. CEOs need to take leadership on this alignment. But NGOs, investors and other stakeholders need to evaluate companies not just on immediate performance, but on the integration of their ESG systems that are likely to result in better performance. Financial analysts should take note and start asking the C-Suite questions about internal alignment.

These strategies, taken together, would create the structure for coordinated action on influencing key decision makers in companies and external entities. Finding a balance between incentives for positive change and consequences for inaction or negative change is critical to generating constructive results. Incentives are necessary but not sufficient, and too much emphasis on consequences (e.g., campaign activism risk) will activate a fight-or-flight response in which some companies direct their resources to combat opposition and others sell problematic business lines to new, possibly unscrupulous owners. The strategies, therefore, work in a mutually reinforcing way to use consequences to push companies ahead and incentives to entice them to keep moving forward. At the same time, the strategies focus on changing the underlying systems that shape the way global supply chains are designed and regulated, creating further impetus for positive change. One “social” area ripe such coordination is worker health and women’s empowerment in supply chains, where effective action can have a curb-cut effect throughout a brand’s supply chain.

We recognize that much more needs to be addressed to transform the external ESG ecosystem, as the executives described in detail: better data collection systems, improved supplier management and human resource functions, capacity building for local partner NGOs that implement programs, more collective corporate action, among others. But these three strategies act as essential propellants. This work must occur in a more organized, coordinated effort by the strongest voices in responsible sourcing from global brands, major NGOs, donors, investors, activists, and thought leaders, to collaborate on a consistent, common, and well-organized collective strategy that blends carrots, sticks, and systemic change. Coordinating on a common strategy that both partners with and pressures major brands will mobilize responsible sourcing to reaffirm its core purpose and benefit the lives of workers everywhere.

Read more stories by Steve Rochlin & David Wofford.