Lasting Change – When the Best Is Not Good Enough

WandaBy: Wanda Lopuch, Chair, The Global Sourcing Council

How much is your socially responsible supply chain worth? 30 billion dollars – would say Tim Cook, the CEO of Apple, “and much more” he might add when considering the brand value of Apple.

It has been difficult to assign measurable value to social policies in business, referred sometimes to as “good and fuzzy things”. Until fuzzy things happened, that is. As Nike experienced over three decades ago when consumers revolted against sweatshops in Thailand. The damage for Nike was measured in immediate sales drop, but more importantly – the Nike brand was tarnished significantly, perhaps forever.

My goal for this article is to demonstrate the real and material value of companies’ social policies, such as socially responsible supply chains. To do that, I invite you to a quick analysis of the value of the stock of Apple, against certain events in Apple’s supply chain over the last four years. You will see that the only financially sound long term strategy for doing well is in fact by doing good. This is what Tim Cook, the CEO of Apple may refer to as 30 billion dollars and more. The stock analysis will show where “30 billion dollars…. and more” comes from.

The late Steve Jobs discovered rather painfully in San Francisco during the 2010 All Things D – D8 conference how social factors, for which Apple was not legally responsible, presented very real and very material risk. At that conference, Steve Jobs’ goal was to dazzle the crowd of loyal Apple followers with then revolutionary features of the iPhone 3. Instead, he found himself on unfamiliar territory defending the manufacturing strategy and social policies of Apple, and arguing that “Apple does not support sweatshops”.

Before the D8 conference, on June 6, 2010 The New Your Times broke the story about suicides among employees at Foxconn facilities. Foxconn is the largest private contract manufacturer in China. At that time, its 300,000 employees had been assembling products for many American and global companies including Dell, HP, Samsung, IBM, Microsoft and yes, Apple.

Apple loyal customers did not like the news about 12 suicides in the Foxconn facility, which assembled iPhones and iPads. Apple investors did not feel comfortable either with the otherwise great performance of Apple. After the first article in May 2010 about labor conditions at Foxconn, Apple stock fell by 12% wiping out tens of billions of dollars for Apple shareholders.

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Source: Yahoo Finance, Apple February 11, 2010 Stock Price

Moving forward two years: September 24, 2012 – despite many steps Apple had taken to enforce suppliers code of conduct, TV and press reports from Taiyuan, China showed thousands of people rioting in the Foxconn facilities. Within 2 days Apple’s stock fell. There were more disturbing reports from Foxconn Mexico facility. From mid September 2012 to early November 2012 Apple stock lost 5% of its market cap, which translates into staggering $30 billion.

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Source: Yahoo Finance, Apple September 17, 2012 Stock Price

In its 2012 analysis “Did Foxconn bring Down Apple Stock”, StockRiters says: “The Foxconn riots and suicides have illustrated something all American companies with factories in Asian countries should be strongly cautious about – that when American Consumers realize that behind the iPads they use, behind the bright LCDs and LEDs, the Nike shoes and the designer clothes they wear, that behind these there is an undernourished, underpaid, possibly underage laborer toiling away in some dank sweatshops in the foul underbelly of Southeast Asia – that understanding has an immediate effect on the stock of the responsible company. A company that resorts to, condones, or ignores such business practices from its contractors, will get hurt where it matters most, its bottom-line. Therefore it is sound financial astuteness to spend money on removing this sort of incidents from ever happening”.

Watching Apple’s stock performance, shareholders of global corporations connected the dots between short-term cost savings and long-term sound business strategy, and took decisive steps. They demanded management of their companies to review and address social risks in the global supply chain, even if these companies were not legally responsible for suppliers behaviors.

Shareholders Mounting Expectations

For example, shareholders of Microsoft, at the annual shareholders meeting in October 2011 in New York City, passed a shareholders resolution which required the management of Microsoft to turn its supply chain into a socially responsible supply chain. Further, the resolution imposed specific requirements for auditing vendors’ disclosure of their works and safety standards, and a long-term compliance with internationally accepted standards. See: http://www.osc.state.ny.us/press/releases/mar13/supply_chain.pdf

Microsoft management followed these steps with structural and policy changes. Suppliers’ code of conduct has been reviewed and strict enforcement program of the code has been implemented, offering industry “gold standards” in mitigating social risk in the supply chain. Now, Microsoft’s supplier selection and evaluation criteria include so called “Global Citizenship” factors that can account for up to 11% of the total weight in vendor selection.

Microsoft is hardly an exception. Companies such as Cisco, Dell, Intel, HP, Oracle – just to name a few of those with significant global purchasing power, have reviewed their supply chain procedures and have elevated standards. And yes – vendors who do not comply are being dropped, sometimes in highly publicized cases. As Apple did in 2012 when it fired Pingzhou Electronics Co (PZ), one of its biggest Chinese suppliers, for a violation, and subsequent non-compliance of the Supplier Code of Conduct. http://www.forbes.com/sites/connieguglielmo/2014/04/17/john-chambers-unfinished-business-can-he-reverse-ciscos-growth-slump/

Across companies and sectors, a social factor/social risk in vendor selection and evaluation accounts for 3% to over 10% of the total score. Its significance to a company’s bottom line is also finally getting more recognition among mid-level managers who, until recently, have been rewarded for delivering savings by cutting the cost of suppliers. Shareholders of Microsoft strongly believe that: “The reporting requirement will also drive sustainability improvements in Microsoft’s supply chain.” Management listens; as well as management of other global manufacturers in sectors ranging from electronic components, to general manufacturing to clothing.

One may argue that the “tipping point” for the implementation of stronger social policies in the supply chain was the April 2013 collapse of Rona Plaza in Bangladesh, which claimed over 1,100 deaths. Investigations conducted by global buyers uncovered numerous violations of the code of conduct of suppliers. As the tragedy unleashed significant change in consumer attitudes, especially demands for transparency, global brands such as H&M, Zara and Carrefour realized that they have to assume responsibility for enforcing code of conduct for suppliers.

Back to Apple and Foxconn – Lasting Change

In response to the initial New York Times suicides report, Apple initiated many decisive steps in implementing the Apple Supplier Code of Conduct. Even before 2010, Apple was one of the global leaders in enforcing fair labor conditions among its suppliers. In 2005, it created a very progressive, for that time, Supplier Code of Conduct and followed it up with a disciplined global audit system. But it was not enough. “Steve, Apple can do better” – wrote “Jay” one of many bloggers on the MacStories Blog after suicides were reported, reflecting the views of many.   “You should educate yourself”, responded Steve Jobs. “We do more then any other company on the planet”. Objectively true, but it was still not enough for Apple followers. More had to be done. Steve Jobs realized that quickly after being challenged by thousands of email.

After the suicides were reported, Apple created a comprehensive improvement plan. It called on the Fair Labor Association (FLA) an independent international labor watch-dog group, for its involvement and guidance, to assess working conditions and make business recommendations. The FLA issued its detailed report almost two years later and made it available on the internet. Under the watchful eye of the FLA, Apple and Foxconn created an action plan consisting of 356 items; 99% have been implemented. See: http://www.forbes.com/sites/connieguglielmo/2013/12/12/apples-labor-practices-in-china-scrutinized-after-foxconn-pegatron-reviewed/

The FLA gave Apple a high score on addressing the situation at Foxconn specifically, and on the Chinese global market http://www.fairlabor.org/press-release/final_foxconn_verification_report. In February 2014, Apple released again its 2013 progress report on Apple Suppliers Responsibility, underscoring its commitment to transparency and accountability.

Apple, arguably the most powerful global company in terms of its financial ability to enforce its business principles, made a significant mark on changing global labor conditions. The long-lasting effect of Apple’s response to the 2010 Foxconn suicides brought lasting changes in labor standards in China, and other parts of the world.

After the devastating 2013 event in Bangladesh, AsiaInspection (http://www.asiainspection.com) a company that conducts compliance testing with global safety standards in Asia declared 2014: the year of socially accountability for global supply chains as reported by Forbes in March 2014.

According to Louis Coppola, Executive V.P. of the Governance and Accountability Institute (http://www.ga-institute.com) in the IT sector, 243 GRI reports were filed globally for 2013; although only 38 or approximately 16% in the United States. These 243 IT companies adopting GRI standards may not be an impressive number in itself, as it represents only a small fraction of all the IT companies in the world. However, if we consider that in 2007 only 50 GRI-style reports were filed, and the number almost tripled in 2010 to 145, then such a growth represents significant progress in global embracement of social accountability in actual business activities, including global supply chain management.

However, as Forbes’ Robert Bowman noted in his March 2014 analysis, keeping tabs on complex, modern-day supply chains continue to be a challenge. See: http://www.forbes.com/sites/robertbowman/2014/03/11/is-this-the-year-when-supply-chains-become-socially-responsible/. Wal-Mart has experienced it share of challenges after introducing its Global Sustainability Index in 2009 as an integral part of its sustainable supply chain strategy. The main challenge has been how to capture reliable data, assure transparency, and enforce the code of suppliers conduct among secondary and tertiary suppliers that account for 75% of products produced specifically for China.

As far as Apple is concerned, the company is a true transformational leader in implementing social accountability in the global supply chain. Its decisive stand on the working conditions in the Foxconn case, its persistence in implementing transparency and accountability throughout many layers of vendor management, constitutes now an integral part of Apple’s brand value. This is the “social bite” in the Apple logo that Tim Cook might have had in mind when assessing the value of its socially responsible supply chain as “30 billion…and much more”.

So how much is your supply chain worth?

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