Shining Light on Global Supply Chains,[1] an article by Galit A. Sarfaty, is a worthwhile article that looks at the effectiveness of a country’s legislation on global supply chain transparency, particularly in the context of human rights and labor practices. In general, the results are positive. As the author states in the article, “Supply chain regulation is an avenue by which states can transmit human rights norms to third-party suppliers and their host governments via multinational companies.”
This type of legislation is an emerging strategy in several industries. Examples of such legislation include the U.S. Section 1502 of the Dodd-Frank Finance Reform Act (U.S. conflict minerals legislation) and the California Transparency in Supply Chain Act. Legislation of this sort is challenging to implement effectively, and has the potential to affect a wide range of actors throughout supply chains globally.
The author presents important realities that should be considered when designing and implementing legislation that requires companies to conduct due diligence to identify or address illegal human rights or labor practices.
In addition, as the article discusses, the implementation of strategies that businesses must undertake to comply with these mandates is challenging and indirectly impacts how these mandates are often regulated by non-regulatory bodies (e.g. voluntary standards bodies, non-governmental organizations (NGOs), private auditors). Such efforts to comply with mandates that are regulated by non-regulatory bodies is a new model of “transnational new governance.” Important considerations that the author acknowledges include the complexity of multi-tiered supply chains with dynamic relationships between buyers and suppliers, and limited monitoring and enforcement capacities of the regulated entities. Seven or more layers of actors are often involved in a supply chain between a mine and the final product, and as many as 50 supply chain actors could be involved for a given product. These supply chains can quickly lead to hundreds of thousands of suppliers across an end brand’s various supply chains. Many of these actors are reluctant to disclose information about the source of their raw materials or operations. Brands often have limited interaction with or knowledge about suppliers beyond their first tier (direct) suppliers.
As companies and industries conduct due diligence on their supply chains to comply with Section 1502 of the Dodd-Frank Act, California Transparency in Supply Chain Acts, or similar mandates, many entities, including industry or human rights “watch dogs,” recognize the challenges involved. They agree that companies must prioritize their efforts to map and complete due diligence across and down their supply chains. In addition, there is an increasing acknowledgement by most engaged stakeholders that there must be some flexibility and other forms of incentives for suppliers to participate in these efforts.
Although this approach provides more flexibility, and inspires more participation, innovation, and cost-effective approaches that fit within various local contexts than traditional mandates, these new governance models may raise accountability concerns as regulations are increasingly monitored and enforced – at times through private sector actions rather than legal penalties – by private consultants who may have alternative motives.
The significance of Dodd-Frank Section 1502 over other legislation (such as California Transparency in Supply Chains Act) is two-fold: 1) the scale of affected companies (estimated at 6,000 that are directly affected and thousands more suppliers who will be indirectly affected), and 2) there are penalties for not complying in good faith, specifically liabilities for false claims and misleading statements under the U.S. Securities Exchange Act.
These domestic mandates can also put pressure on other host governments who may, in turn, develop legislation and strengthen their rule of law to avoid global companies from shifting to regions with more effective governance. For example, The Democratic Republic of Congo passed a law requiring all mining and mineral trading companies in the country to undertake due diligence in accordance with OECD Due Diligence Guidance on all levels of their supply chains. Efforts are also under way in other consumer countries (e.g. Canada, European Union) to enact legislation similar to Section 1502.
Often more important than simply stating what is required of companies is the need for the regulators or standards setting organization to assist companies in taking steps to meet the legal requirements and spirit of the law. In the case of conflict minerals, the OECD Due Diligence Guidance is the leading framework to which companies can look. The OECD Guidance provides steps that companies can take to put effective policies, management systems, due diligence measures, and grievance mechanisms in place, and to strengthen engagement with suppliers.
In the end, the impact of these emerging mandates on business is significant. For example, the cost to the industry to comply, which the SEC estimates to be between $3 billion and $4 billion initially, and between $207 million and $609 million each subsequent year. The good news is that the positive impact these mandates have had on the human rights violations they aim to address is also significant, although harder to quantify.
While I recognize that these mandates must be supported with additional efforts by policymakers, industry associations, companies, NGOs and others, I concur with the author’s conclusion that these mandates can shape corporate culture, which is a critical prerequisite for making change in their supply chains. While we have a long way to go, I think that well designed policies and resources and programs that support such policies are a good first step.
[1] Sarfaty, Galit A., Harvard International Law Journal (October 2014).
This type of legislation is an emerging strategy in several industries. Examples of such legislation include the U.S. Section 1502 of the Dodd-Frank Finance Reform Act (U.S. conflict minerals legislation) and the California Transparency in Supply Chain Act. Legislation of this sort is challenging to implement effectively, and has the potential to affect a wide range of actors throughout supply chains globally.
The author presents important realities that should be considered when designing and implementing legislation that requires companies to conduct due diligence to identify or address illegal human rights or labor practices.
In addition, as the article discusses, the implementation of strategies that businesses must undertake to comply with these mandates is challenging and indirectly impacts how these mandates are often regulated by non-regulatory bodies (e.g. voluntary standards bodies, non-governmental organizations (NGOs), private auditors). Such efforts to comply with mandates that are regulated by non-regulatory bodies is a new model of “transnational new governance.” Important considerations that the author acknowledges include the complexity of multi-tiered supply chains with dynamic relationships between buyers and suppliers, and limited monitoring and enforcement capacities of the regulated entities. Seven or more layers of actors are often involved in a supply chain between a mine and the final product, and as many as 50 supply chain actors could be involved for a given product. These supply chains can quickly lead to hundreds of thousands of suppliers across an end brand’s various supply chains. Many of these actors are reluctant to disclose information about the source of their raw materials or operations. Brands often have limited interaction with or knowledge about suppliers beyond their first tier (direct) suppliers.
As companies and industries conduct due diligence on their supply chains to comply with Section 1502 of the Dodd-Frank Act, California Transparency in Supply Chain Acts, or similar mandates, many entities, including industry or human rights “watch dogs,” recognize the challenges involved. They agree that companies must prioritize their efforts to map and complete due diligence across and down their supply chains. In addition, there is an increasing acknowledgement by most engaged stakeholders that there must be some flexibility and other forms of incentives for suppliers to participate in these efforts.
Although this approach provides more flexibility, and inspires more participation, innovation, and cost-effective approaches that fit within various local contexts than traditional mandates, these new governance models may raise accountability concerns as regulations are increasingly monitored and enforced – at times through private sector actions rather than legal penalties – by private consultants who may have alternative motives.
The significance of Dodd-Frank Section 1502 over other legislation (such as California Transparency in Supply Chains Act) is two-fold: 1) the scale of affected companies (estimated at 6,000 that are directly affected and thousands more suppliers who will be indirectly affected), and 2) there are penalties for not complying in good faith, specifically liabilities for false claims and misleading statements under the U.S. Securities Exchange Act.
These domestic mandates can also put pressure on other host governments who may, in turn, develop legislation and strengthen their rule of law to avoid global companies from shifting to regions with more effective governance. For example, The Democratic Republic of Congo passed a law requiring all mining and mineral trading companies in the country to undertake due diligence in accordance with OECD Due Diligence Guidance on all levels of their supply chains. Efforts are also under way in other consumer countries (e.g. Canada, European Union) to enact legislation similar to Section 1502.
Often more important than simply stating what is required of companies is the need for the regulators or standards setting organization to assist companies in taking steps to meet the legal requirements and spirit of the law. In the case of conflict minerals, the OECD Due Diligence Guidance is the leading framework to which companies can look. The OECD Guidance provides steps that companies can take to put effective policies, management systems, due diligence measures, and grievance mechanisms in place, and to strengthen engagement with suppliers.
In the end, the impact of these emerging mandates on business is significant. For example, the cost to the industry to comply, which the SEC estimates to be between $3 billion and $4 billion initially, and between $207 million and $609 million each subsequent year. The good news is that the positive impact these mandates have had on the human rights violations they aim to address is also significant, although harder to quantify.
While I recognize that these mandates must be supported with additional efforts by policymakers, industry associations, companies, NGOs and others, I concur with the author’s conclusion that these mandates can shape corporate culture, which is a critical prerequisite for making change in their supply chains. While we have a long way to go, I think that well designed policies and resources and programs that support such policies are a good first step.
[1] Sarfaty, Galit A., Harvard International Law Journal (October 2014).
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