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At Their Peril
The CEOs of 10 global food brands likely suffered a bout of indigestion with their morning cereal when they opened the pages of the Financial Times a few months ago to find their companies' treatment of workers in their supply chains pilloried by the respected charity Oxfam. It was part of a campaign to pressure the companies to increase transparency and accountability, and general counsel ignore such efforts at their peril.
"All of the Big 10 have neglected to use their enormous power to help create a more just food system," Oxfam stated in its report. "In fact, in some cases these companies undermine food security and economic opportunity for the poorest people in the world."
Six of the companies Oxfam targeted are based in the United States: The Coca-Cola Co., General Mills Inc., Kellogg Co., Mars Inc., Mondelez International Inc. (formerly Kraft Foods), and PepsiCo Inc. The others were Nestlé S.A., Groupe Danone, Associated British Foods plc, and Unilever PLC.
While the companies have taken steps to improve, Oxfam said they "fail to address the root causes of hunger and poverty because companies lack adequate policies to guide their own supply chain operations." Before issuing its report, Oxfam presented evidence to the companies and asked them to respond. All did. Most offered three general rationales for the problems in the food system: weak governments, powerful middlemen, and price-conscious consumers. Oxfam, however, asserted that these factors do not exempt food companies from responsibility.
Even more likely to make the CEOs, and their general counsel, queasy: Oxfam intends the campaign to "raise awareness" among the public, investors, and shareholders, according to Christopher Jochnick, a lawyer who directs private-sector engagement at Oxfam America. Jochnick says the organization is encouraging investors to push the companies to make changes.
Oxfam isn't the only organization taking an active interest in this issue. Socially conscious investors are, too. In addition to introducing unwelcome shareholder proposals and posing pesky questions at shareholder meetings, they are taking concrete action that's more extreme. For example, the world's largest sovereign wealth fund, the Norwegian Government Pension Fund (with $715.9 billion in assets), blacklisted stocks in Wal-Mart Stores Inc. over its labor practices. It cited Wal-Mart's "serious/systematic violations of human rights and labor rights."
And in the court of public opinion, Wal-Mart is still feeling the heat from a raging fire that tore through the Tazreen garment factory in Bangladesh last November, killing 112 workers and injuring many more. The factory, which Wal-Mart insists was not authorized, was apparently manufacturing clothing for the retailer under a subcontract from an authorized supplier. (Wal-Mart did not respond to requests for comment.) Problems can also occur in developed countries, as Amazon.com Inc. learned in February, when the media accused a German contractor of hiring security guards with neo-Nazi ties who intimidated temporary workers at a plant.
The threats that multinationals face aren't limited to reputations. New laws have created consequences for human rights violations that general counsel may need to studyespecially since supply chain oversight has historically been assigned to procurement, sustainability, or audit functions rather than law departments. "The role of the GC is central, but many GCs are insufficiently familiar with the issue," says T. Markus Funk, a partner in Perkins Coie's Denver office who cochairs the American Bar Association's corporate social responsibility and forced labor task force.
Familiarization may begin with getting to know the risks. One likely to hit home is the executive order President Barack Obama signed last year that bans federal contractors and their subcontractors, anywhere in the world, from permitting human trafficking in their supply chains. Trafficking includes using fraudulent recruitment practices, charging employees recruitment fees, destroying or confiscating identity documents, or failing to pay return transportation costscommon practices in some countries. Falsely certifying compliance with the order can result in five years' imprisonment and a $250,000 fine, says Funk.
Another legal challenge is the "conflict minerals rule" adopted last year by the Securities and Exchange Commission (and now being challenged in court). Public companies whose products contain four key minerals have to disclose whether the minerals originated in the Congo, where human rights violations by armed groups are common.
States have also gotten into the act. Under the California Transparency in Supply Chains Act, which also went into effect last year, companies with more than $100 million in annual revenue that do business in the state must disclose their efforts to eradicate slavery and human trafficking from supply chains.
The new rules have changed corporate views on human rights. "It's no longer an army of the willing, but conscripts," says Funk, who considers himself a pioneer of an underserved legal frontier. "This is going to be a massive compliance challenge for companies."
Companies are getting the message. A recent survey of global manufacturing and retail executives by Deloitte Consulting found one in five rated regulatory noncompliance and/or worker-safety failure as the most costly or second most costly outcome of a supply chain risk.
Where does the general counsel come in? Managing risk is a fiduciary duty of boards and managementand that includes supply chain risks, says John Sherman, a former deputy GC of National Grid, who worked with Harvard professor John Ruggie in developing the United Nations's influential Guiding Principles on Business and Human Rights. Sherman says it's the GC's duty to advise the board and CEO. "You have to have a top-level policy that is embedded in the company's formal systems, such as budgets and incentives, to respect human rights," he says.
The Guiding Principles also call on companies to adopt a human rights due diligence process as part of risk management. "It is more than a tick box," Sherman cautions. "If you work in a country with weak labor laws, you have to pay attention." The GC has to consider whether the company's own actions contribute to the problem. If it pushes a factory to the wall on delivery time or pricing, that can make it impossible for the factory to ensure safety, Sherman notes.
General counsel can help mitigate risk by drafting contracts that create leverage to ensure compliance with company policies. Many companies have also turned to organizations that help monitor suppliers. For example, in 2012 Apple joined the Fair Labor Association, an international group that promotes strict workplace rules and conducts independent compliance assessments, after newspapers reported suicides, child labor, and poor work conditions in manufacturing plants owned by Foxconn, one of Apple's main suppliers in China. (Apple did not respond to a request for comment.)
Since the publication of Oxfam's reportand after more than 100,000 people signed petitions urging the companies to do moreMars, Nestlé, and Mondelez all committed to take action to improve the position of women cocoa farmers in their supply chains. It seems that global companies, willingly or not, are coming to accept that human rights is part of their corporate responsibility.