Dear reader,

Welcome to the August 2015 edition of The Director’s Dilemma.

This month our protagonist explores the intricacies of international supply chains. It is easy to say 'the company should never do this'. It is really difficult to design and implement a system so that the company never can do that. I hope you enjoy the dilemma and its suggested responses.

Valerie chairs the audit committee of a large listed multinational company. The company sources agricultural products in many countries and manufactures branded food and beverage products which are sold internationally. She is a very skilled and experienced audit professional and the board look to her for leadership on ethical as well as accounting and reporting issues.

Recently the company was mentioned in an international report, and then in the press, as one of several that have purchased produce grown on farms that use child labour. The CEO has checked and can't say for certain that this did not happen although it is against all the company's policies and values. The problem is that with so many plantation and farm sources they can’t physically check each one all the time and rely on farmers self-certifying compliance with policy.

The company has worked hard to be a good corporate citizen and donates to community building projects in the third-world countries where it has operations or sources supplies. This scandal has caused a small drop in share-price but for the board the main issue is one of rebuilding reputation, regaining trust and ensuring this can never happen again.

The chairman has asked Valerie to work with the management team to build a better assurance system for labour issues in general and child labour in particular.

How should Valerie approach this problem?

Before responding Valerie needs to understand the situation on the reported farms. The company can:

1. Verify whether it purchased product from the farms mentioned. If it does not purchase directly from farms it will need to engage intermediate suppliers and discuss how to respond.

2. Engage with the organisation that produced the report to understand as much as possible about the situation(s), including when incidents occurred and what contact the organisation has with the workers concerned.

3. Release a public statement acknowledging the issue, detailing the company’s values and providing details of how the company will investigate and manage what is found.

4. Arrange an experienced third party ethical audit organisation to conduct unannounced audits on the farms.

5. If child labour is found the company should work with the farms, intermediate suppliers, the families of the children and a local NGO or charity on a remediation plan seeking to return the child to school; and monitor implementation.

6. Release another public statement updating stakeholders on the audit, what was found and what the company will do.

7. Work with the farms on strengthening age verification systems to ensure no children are hired in the future.

To build a better assurance system Valerie should:

1. Assess the appropriate resource, skills and expertise to manage such an assurance system. If a company genuinely wishes to manage the risk presented by labour issues in the supply chain, and meet increasing customer expectations in this area, appropriately skilled resources should be applied.

2. Once such resources have been identified (or hired) and if it has not done so already the company should articulate its values formally in a code of conduct document.  Share this on the company’s website, communicate to all suppliers and reference in standard terms and conditions for suppliers.

3. In parallel, undertake a supply chain mapping process. If the company does not buy directly from farms it will need to understand its supplier’s suppliers also.

4. A risk based approach can be employed to determine which suppliers are a priority for further investigation. The risk assessment should draw on publicly available information e.g. historical reports by NGOs and country based human rights risk reports.

5. Collect audit data for priority suppliers, either by arranging new audits or asking suppliers to provide details of audits conducted in the past.

6. Work with suppliers to address issues found through the audit process and report publicly on progress.

Jaana Quintance James is Ethical Sourcing Manager of David Jones Pty Ltd. She is based in Sydney, Australia.

This is an operational issue not a PR or audit issue. Child labour is a widespread problem and agriculture is an industry where the issue is prominent. Short picking seasons and the use of poor, illiterate workers make it hard for a remote head office to control what is happening, literally, in the field.

Farmers and plantation owners need to make a profit to survive and low commodity prices will inevitably tempt some to turn a blind eye to, or even actively pursue, inappropriate worker selection.  Relying on these businesses to self-certify is never going to solve the problem. The paper trail will not reach the front line and 'tick the box' audits give false assurance.

Donations are also not the answer although well intentioned; even when given to communities where the work is performed.

Valerie needs to ally her organisation with knowledgeable partners who can provide strong local oversight and who have experience working with the local communities to increase recognition of the problem and capacity to build a solution. Unicef, OECD and the Global Reporting Initiative (GRI) are all good sources of information. In addition to reporting on activities with risk of child labour and the controls in place to manage this risk Valerie needs to think strategically about the whole supply chain and the end customers' desire for ethically sourced products. She may find that, counter-intuitively, her first world suppliers can mechanise and self-certify so as to drive low unit costs whilst her developing world suppliers need active engagement that raises costs but produces a premium priced product. Some customers pay extra for fair trade coffee and would do so for juice, fruit and vegetables. Is there a viable business model based on separating sources?

If Valerie is truly a leader she must be valiant and get out into the operations with strategic business value propositions. When doing the right thing brings the best reward the right thing will become the most likely practice.

Julie Garland McLellan is a practising non-executive director and board consultant based in Sydney, Australia.

There are three key aspects for Valerie to consider:

1. Valerie should start first by understanding the supply chain better to map risks and identify root causes. We often find that most companies don't have visibility to their supply chain (ie. local hiring practices, seasonality of the work, and how farms source these workers). For example, foreign migrant workers in Australia hired through labour hirers pose a risk to companies as they do not know who is picking the crops and how these workers are hired. Valerie should start by doing a risk mapping based on self-assessments of the suppliers or by conducting some farm visits to learn relevant issues from the ground level.

2. After this, Valerie can better derive the best strategy to address the risks. The strategy may be to a) improve current auditing systems and conduct more audits, b) change how they source, or c) provide more training to enforce and align company policies.

3. Valerie should also promote education of key issues such as child labour and increase transparency of the company’s workflow. Our experience suggests that there are many structural challenges to child labour and that it will take time and many collaborative efforts to address it. For example, in India and Bangladesh the lack of schools and the need for children to support their families drives them to work in factories. Partnering with the UN World Food Programme, which subsidises families who send their children to school, has been proven successful and we would encourage Valerie to consider global partnerships. Finally, increased transparency can improve and rebuild the company’s reputation in many ways. Recognising the challenges in social issues and actively showing strides taken to tackle these challenges can strengthen trust within the company and with its customers.

Yun Zheng is a sustainability consultant at Elevate Global Limited. She is based in Hong Kong.

Book review - They Told Me Not to Take that Job by Reynold Levy. Everybody has a story of 'the thing they shouldn't have done, but did'. Unlike most this one turned out to be a success for both the company and person concerned. Surely a man who has "dealt with Laurent Kabila of the Democratic Republic of Congo, Paul Kagame of Rwanda, Slobodan Milosevic of Serbia, and their followers" would find chairing a not-for-profit in the arts sector rather boring and definitely not daunting? Apparently not. This book promises a tale of tumult, betrayal, heroics and transformation. It delivers a modern day odyssey of corporate leadership in the face of almost unsurmountable opposition. Read more …

Evaluating Governance Effectiveness - In August and September we will take the course to Melbourne and Brisbane before returning to Canberra in November. I do hope that some of you will join me. The June course in Canberra and the July course in Sydney were fantastic master classes with impressive senior governance practitioners who really relished the opportunity to apply and share their own experiences.

Full details are at
https://liquidlearning.com.au/documents/EGE0615/EGE0615_I.pdf

Early booking is advised as places are filling fast.

Inspirational quote for August - This month my favourite quote is:

“Have the courage to follow your heart and intuition. They somehow already know what you truly want to become.”

~ Steve Jobs ~

This quote sums up the ethos of leaders who really transform their companies whether in the crafting of strategy, the excellence of operations or the clarity of reporting.

Getting copyright right - I was very distressed last month when several people called and emailed to let me know that someone had published one of my dilemmas as his own work. I write these dilemmas so that we can all benefit from sharing our ideas and developing our judgement. I give them freely to the director community. If you want to use a dilemma to help in one of your courses or to give your board or director mastermind group an interesting educational exercise please feel free to take one from the hundred that are published in the archive on my website but please don't pass it off as your own creation. As long as you say that it was me that wrote it I am happy for you to use it. Of course, I will be happier still if you ask me to present it to your board or group and facilitate the discussion of the key legal and interpersonal issues.

A note on names - A few readers have asked me where I find the names for the protagonists in each case study. I can only say that I 'steal' them from people I meet or things that I read. Valerie is a girl's name that is associated with courage, valour and bravery; this month's protagonist will need all three as she approaches the solution to her dilemma.

This newsletter - If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription.

Suggestions for dilemmas - Thank you to all the readers who have suggested dilemmas. I will answer them all eventually.

Farewell until the next issue (due 1 September 2015). I look forward to greeting you again then.

Enjoy governing your corporations; we are privileged to do what we do!

Best regards,
Julie

 

The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling. Names and some circumstances in the case study have been changed to ensure anonymity. Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.