Corporate Compassion

How to reduce risks in the supply chain’s sourcing from land and labor.

By R. Paul Herman and Srdana Pokrajac

Capital One’s ad campaign asks, “What’s in your wallet?” But do you know what’s in your mobile phone? Specifically, the value of the minerals in your phone could be worth more than the cash you carry in your wallet.
Many minerals used in electronics—from gold and silver to tin and tungsten—are discovered, dug up, and distilled from war- torn countries such as the Democratic Republic of the Congo, where labor is not necessarily free and worker safety can be overrun by violence.

If you Google “corporate activism,” the first search result is “anti-corporate activism,” which presumes that corporations are detrimental to the public good and democracy. Yet forward-thinking and well-managed corporations fight human rights abuse in their supply chains and industries. Recently, at Net Impact’s 2013 annual conference, a panel theme asked, “Are corporations more effective activists than individuals?”

During the past century, the notion of corporations as positive activists was uncommon or non-existent. The 20th century activist movement originated from like-minded individuals who formed non-profit organizations or non-governmental agencies to point out infringement of human or animal rights, or environmental issues caused by big businesses. While citizens and stakeholders have raised awareness related to human rights during the 20th century, 21st century leading brands have taken the lead to mitigate the risks in their supply chain sourcing.

Intel is spearheading traceability, auditing, and certification to reduce the risk in its supply chain. Intel scores a 60 percent in the Enough Project’s Electronics Companies Ranking. Intel’s score increased 36 percent from 2010, and it now has committed to a fully conflict-free microchip by the end of 2013. Hewlett Packard scores a 54 for its suppliers to use only audited, conflict-free smelters. HP made a 22 percent improvement in achieving responsible sourcing goals from 2010. Companies that have achieved 30 percent of the progress towards conflict-free products are considered successful, including Phillips, SanDisk, AMD, Acer, Dell, Apple, Microsoft, Motorola Mobility, Nokia, and Panasonic.

The Enough Project partners with the Responsible Sourcing Network to provide a set of reporting guidelines that investors and human rights groups can use to track performance—which firms might choose to disclose in filings for the U.S. Securities and Exchange Commission (SEC). According to The Enough Project, Intel, Motorola Solutions, HP, and Apple have pioneered progress, while Nintendo has made almost no effort to audit its supply chain. Sharp, HTC, Nikon, and Canon are starting to adopt auditing, but are still behind industry leaders. The Conflict Mineral Law prescribed by the U.S. legislation has driven a positive effect on other industries, such as automotive, jewelry, mining, and industrial machinery.

Future corporate behavior might emulate Fairphone, based in Amsterdam, which seeks to make smart phones that “source raw materials that don’t fund armed forces or violent conflicts, from mines that treat people like human beings.” Fairphone seeks fair wages, less e-waste, and high transparency; the break-down of the phone’s price is openly available online. What will happen to 20th century trade secrets?

Supply chain sourcing is risky upstream in agriculture too. The Economist highlighted unethical practices of cotton- picking in Uzbekistan, where children and adults are forced to leave their jobs for the sake of the country’s most lucrative agricultural crop. Uzbek human rights groups called for an end to forced child labor in their cotton fields back in 2007, and then sought a global boycott of Uzbek textiles. The Responsible Sourcing Network has recruited 136 firms with total market values of $1 trillion to sign the “Pledge Against Forced Child and Adult Labor in Uzbek Cotton,” including Adidas Group, American Eagle Outfitters, Balenciaga, Bottega Veneta, Burberry, IKEA, Levi Strauss and Co., Nike, Patagonia, PUMA, and Zara.

Human rights, fair trade, and supply chain risks are not unique calls from NGOs or citizens. Corporations have started to engage in activism at the raw commodity level. Pledges, transparency, and auditing are notable steps in supply chain responsibility. Imagine a world with no exploitation of people and resources—I wonder if you can.
Social media such as YouTube video, Twitter messaging and Facebook postings are at everyone’s fingertips, as Patricia Jurewics of the Responsible Sourcing Network points out. Younger generations—whether corporate professionals or independent citizens—are already demanding more transparency and choosing their products based on not only performance or design, but also on factors such as health, environment, and society.

Underwriter Laboratories (UL) bought GoodGuide and its 100,000 product analyses of materials and components to align with this trend. Will companies start competing on which of them has a more responsible supply chain?
Many economists, free marketers, and business people still do not agree that business should take care of anything but business and think that free markets have the power to solve all the problems of mankind. However, we’ve also witnessed many times laissez-faire approaches to markets results in whole economic systems collapsing.

Thus, the United States pioneered a law on a federal level that has attracted attention worldwide and that aims for traceability and transparency in the supply chains of electronic devices and other manufacturers that use conflict minerals. It’s Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Barack Obama on July 21, 2010. The Organization for Economic Cooperation and Development and the SEC both seek to increase engagement and transparency. A combination of corporate leadership, government regulation, and persistent citizen intervention seeks to build a better world. Investors can mitigate risk in their portfolios by selecting firms that do this actively, rather than waiting for justice to catch up with them—something that customers, employees, and shareholders are increasingly valuing, morally and financially, in the 21st century.

R. Paul Herman is CEO of investment adviser HIP Investor Inc. and a registered representative of HIP. Srdana Pokrajac, MIB, earned her Masters in International Business from the Hult Business School, and is an independent advisor to HIP Investor. This is not an offer of securities. Disclosures can be found at www.HIPinvestor.com
Posted December 12, 2013 in 25115