Transparency Brings New Questions To Compliance

Friday, March 21, 2014 - 09:16

In today’s supply chain, businesses must manage an increasing level of transparency and an emerging, somewhat amorphous set of ethical expectations. This network of emerging risk includes evolving standards around human rights, diversity, consumer protection, social inequality, vulnerable ecosystems, and climate change, to name just a few. Surrounding this gauntlet of risk is an increasingly dense web of citizen journalists armed with video phones who are able to share the slightest perceived failure to a global audience. Board director and Reuters columnist Lucy Marcus summed it up like this: “In the past, businesses were left to get on with things on their own, but now there is an entire ecosystem of stakeholders who care. Governments care. Investors care. Employees care. The entire ecosystem of stakeholders care about how we conduct business.”

Getting your arms around this big basket of emerging risk is no easy feat.

Environmental

According to the United Nations Environment Program, “the future of the private sector will increasingly hinge on the ability of businesses to adapt to the world’s rapidly changing environment and to develop goods and services that can reduce the impacts of climate change, water scarcity, emissions of harmful chemicals and other environmental concerns.” Environmental risk across a business and its supply chain is at a minimum about ensuring ongoing compliance with local regulations, while also having enough on-the-ground “truth” flowing back through the organization to ensure that even a legally compliant organization doesn’t also introduce unacceptably high reputational or operational risk. Meeting the letter of the law is arguably the minimum threshold, but if rivers are polluted and your client is in the international news, legal compliance may not help much. Add to that the effect on local populations’ willingness or lack thereof to continue to fulfill the operational needs of your client’s business. Similarly, if your client’s supply chain is at increasing risk from flooding or drought due to likely changes to our climate, then how should your contractual posture towards these suppliers change? Who bears the liability and increased risk of disruption?

Social

Consider this recent example of the increasing scrutiny on the social and employee/employer aspects of global business. The Thomson Reuters Foundation reported that workers for a giant beverage company were being subjected to labor and human rights abuses. Under investigation by the World Bank, one complaint noted that production targets were extremely difficult to meet leading the workforce to enlist family members, including children, to meet the production needs in order to receive their compensation. In its defense, the beverage company pointed to its full compliance with local regulations pertaining to industry agreements for the paid wages and working hours. If compliance with local regulations is not enough to manage reputational and operational risk effectively, then what is? Does this emerging “social” standard make it less attractive to source from extremely low-cost jurisdictions?

Investor

Increasing investor scrutiny is adding to these layers of reputational and operational risk. Consider Rathbone Investment Management, which traces its history back to 1742. Rathbone recently published an advocacy piece with Thomson Reuters Sustainability on the importance of building new regulatory structures around involuntary labor practices. To quote, “such approaches [to new regulation] create a real ‘sweet spot’ for sustainability – companies’ reputations are enhanced, long-term returns are safeguarded.” The broader implications are potentially significant when a 250-year-old investment house advocates for increased regulation of global business on social issues. The investment community is increasingly watching what business is doing in the sustainability (environmental, social, governance) space, and is becoming increasingly aware of the opportunity in rewarding progressive business cultures, and the risk to their own investors’ bottom lines in not doing so. As this trend evolves and the pools of capital seeking sustainable markets continue to grow, how does the risk curve change around liability to shareholders from both a compliance and financial perspective? What are the legal implications for not managing to a possible new reality of investor expectations?

Moral

All of this suggests a shifting paradigm in global business ethics. Essentially, there is an emergence of a new moral standard that is loosely tied to society’s collective sense of right and wrong, and how a story is reported. Successful legal risk management in a business context has traditionally been about compliance with local and national legal structures. This level of compliance is arguably increasingly necessary, but not sufficient for adequate management of legal business risk.

Demanding higher than legally “sufficient” levels of environmental compliance via contractual instruments with suppliers may actually be the best legal counsel in this evolving context. Drafting supplier contracts that require increased transparency around pricing of goods and services (how is value actually being transferred to a supplier base), labor practices, management diversity and working conditions are additional, tactical examples. As Ms. Marcus said, “there is no hiding and nor should anyone running a business want to, because in the end, if we are doing business well, in a way which benefits everyone, then it also benefits the business as a whole.” Whether this is something you agree with or not, it’s increasingly part of how the world is viewing business conduct, and the implications for corporate counsel are likely many and extraordinarily complex.

Tim Nixon is Managing Editor for sustainability.thomsonreuters.com. To learn more and engage in the conversation, visit sustainability.thomsonreuters.com.