Achieving profitability whilst managing human rights issues

In his first blog, Richard Karmel analyses how companies can achieve greater profitability from their supply chains through paying attention to their human rights impacts?

Richard Karmel is the Global Head of Human Rights at Mazars LLP and alongside his team has devised innovative services to help companies and banks manage the risks to their reputations, whilst ensuring compliance with their social and environmental obligations.

What does a company look for in a supplier?

Most companies when selecting suppliers will look for those which can deliver the right product at the right time at the right quality for the best price.  Of course, this is procurement 101 and makes most sense.  However, how many of these companies will think about the following?

  • The suppliers’ production methods
  • Whether they have geographic clustering of suppliers
  • The communications infrastructure where the supplier is located
  • The cost pressures that the suppliers are under
  • Health and safety record of suppliers
  • The use of child labour

Many companies consider human rights

Any self-respecting procurement department should be undertaking all of the above.  However, there are inherent tensions between the commercial interests and that of ensuring that the suppliers respect human rights. However, much to the detriment of their own companies, it appears that most don’t consider the following:

  • The complexity of the supply chains i.e. how many tiers of suppliers
  • The amount of overtime needed to meet production requirements
  • Whether suppliers pay living wages
  • The validity of building permits
  • The quality of local government enforcement of regulations
  • The level of corruption within the business community

The six points above would all be addressed if the company had actively addressed the potential for negative human rights impacts in its value chain.

Should companies care about the welfare of workers?

But frankly, why should companies care about the welfare of workers of their suppliers?  If they did care, they would have been addressing these issues ages ago.  However, there are now two good reasons for companies to care: one negative reason and one positive reason.

Companies should care: negative reason

Over the past few years, with the advent and availability of smart phones, a large percentage of the world’s population can just about communicate with anyone they want to.

This could be through the use of social media: twitter, Facebook, LinkedIn etc.  So what is taking place is that when human rights abuses, caused by a company’s operations takes place, that company’s name is immediately linked to something negative.

These companies potentially spend millions building their brands and reputations over many years; however, in moments, these can be damaged, sometimes irreparably.

For example, a retail label is seen in an item of clothing in a sweat shop in South East Asia with children sewing; the owner of the retail label denies publicly they have engaged with this supplier (which is probably true); however, unbeknownst to the retail label owner, the supplier with whom it did contract, couldn’t make the latest production run, so outsourced cheaply to another supplier which wasn’t aware of the code of conduct and requirements of the retail label owner.

The reason really doesn’t matter; the damage is done.

What could have potentially prevented this?  The retail label owner could have implemented a human rights risk management system and so would have in place processes and controls that could probably have prevented this scenario taking place, or at the very least alerted it to the likelihood of the risk of it taking place.

Companies should care: positive reason

Many studies show that when companies actively seek to engage with stakeholders, this builds trust and that where there is trust there is greater profitability.

Of course, with companies and their supply chains, this means undertaking greater communication than they probably are currently.  If a company were to let the supplier know what its parameters and constraints were and was to seek to understand those of the supplier, one has the beginnings of building trust.

The creation of a dialogue with suppliers rather than a monologue from the company will be the first step in this trust building.  If the company actively encourages the supplier to inform it how efficiency can be improved by way of the company’s behaviours, one has the initiation of a partnership.

How to resolve the negative issue

So, back to our ‘negative’ example above.  If the first tier supplier knew it was going to have problems delivering the order, rather than subcontracting it out without prior agreement of the retail label owner, it may have been able to explain that they weren’t going to be able to fulfil the order at that time for whatever reason. Hence the retail label owner could take that into account when placing its orders; or, maybe delay delivery times in order to accommodate the issue.

Whatever the reason, the greater communication and resultant trust (in that the supplier knew it wasn’t going to lose the contract for raising an issue) leads to greater efficiency within the supply chain and thereby greater profitability.

These issues are not technically difficult to understand and the solutions are not so difficult to implement; it is about having the right culture within the company and a basic willingness to change current behaviors.  The first acceptance is that taking the cheapest supplier, without a proper understanding of why they are the cheapest, is pure short-termism which will undoubtedly cost the company more in the medium to longer term.

Richard Karmel

Global Head of Business and Human Rights

Mazars LLP