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Businesses are now recognising the need to address the hidden hazards in global supply networks. As seen by the recent epidemic and ongoing turmoil in Europe and natural calamities throughout the world, global supply systems have become increasingly vulnerable over time. Part of the difficulty is that businesses have poor access to and control over supply networks, particularly those based in emerging economies. Because of this lack of openness, many firms are unaware of the negative impact of their supply chains on the environment, employees, particularly those who are indirectly employed and society as a whole.
Meanwhile, shareholders and stakeholders have demanded more responsibility from businesses. Companies are under great pressure to accept responsibility for the environmental, social and governance (ESG) aspects of their operations and to guarantee that they conduct business in an ethical, sustainably, and equitably. Approaches may differ by nation, but society increasingly expects the same standards to be applied across a company's worldwide supply chain. As one of the writers of this essay (Weise) noted in a recent book, firms can only become sustainable if they collaborate with suppliers to adhere to ESG standards.
To date, the rationale for resolving ESG challenges in supply chains has focused mostly on reputational threats. When business image suffers, CEOs must cope with diminishing sales and earnings, limited access to capital, reduced values, and declining desirability as employers. The third point is unavoidable; according to BCG statistics, 40% of Millennials consider ESG factors when selecting organisations to work for.
However, the business rationale for addressing ESG challenges has evolved far beyond reputation, and it is rapidly becoming a source of value generation. Companies that pursue ESG goals benefit from a variety of benefits, including the development of new technology and offers as well as improved employee, shareholder, and consumer relations. According to recent BCG studies, companies that handle ESG concerns have higher profit margins ranging from one to three percentage points, as well as stock market premiums greater than 10%. As a result, controlling ESG concerns in supply chains has become a top responsibility in more ways than one.
Supply Chain Ethics: What Is It?
The collection of beliefs and principles that direct companies' and their partners' conduct is referred to as supply chain ethics. A few places of concentration are:
Preservation of the environment
Conditions at work, such as job independence, health and safety, and a fair salary
Human rights concerns such as eliminating child labour and nondiscrimination
anti-corruption and bribing
It guarantees that goods and services are created and provided in a way that complies with moral and ethical principles.
Ensuring that labourers receive fair treatment, human rights are upheld throughout the supply chain, environmental regulations are fulfilled, and suppliers are held responsible for their actions are all part of supply chain ethics. In reality, supply chain ethics management encompasses a variety of tasks, such as enforcing rules of behaviour, keeping an eye on compliance, and performing due diligence on suppliers.
It also entails interacting with stakeholders, such as vendors, clients and civil society organisations, to guarantee that moral principles are followed and that any problems are resolved promptly and openly. Supply-side ethical concerns extend beyond the production process and encompass many tiers of intermediaries, merchants, and retailers before the product reaches the end user.
A supply chain involves more than just transferring goods or raw materials in a planned manner to deliver the finished product. Every stage of the process requires human contact, which gives rise to a variety of problems. We frequently tend to overlook these interdependent components in favour of concentrating just on the result or end product.
How are Ethics and Supply Chain Management Related?
Ethics and supply chain management are interconnected in a variety of critical ways. The significance of ethical considerations in supply chain management has increased as businesses become more global and more complex supply chains are established. Supply chain ethics and management intersect in three additional domains. The first area pertains to equitable commerce practices. Companies that prioritise ethical business practices will guarantee that their supply chain partners comply with these standards.
An equitable playing field is established for all competitors by safeguarding the labour force in the host nation from exploitative practices. All suppliers must abide by the import/export rules, safety requirements, labour laws, and environmental regulations.
The second area pertains to the maintenance of productive and positive relationships with suppliers. Fair and honest treatment of suppliers is a hallmark of ethical enterprises. They adhere to their agreements, pay promptly, and refrain from exploiting their position to exploit suppliers. Baseline compliance with all pertinent laws and regulations is a prerequisite for ethical supply chain management.
Third, companies must refrain from engaging in corrupt practices and human rights violations, even if they are permissible in the host nation. For example, supply chain professionals are required to ensure that suppliers comply with the law and conduct business operations ethically, even when they are in a foreign country.
The Value of Ethics in the Supply Chain
Ethics in the supply chain are crucial for several reasons.
First of all, it may support companies in establishing and preserving a good reputation. In the age of social media and rapid messaging, any unethical activity on the part of companies or their partners may go viral very fast, harming a company's brand and driving away clients. Businesses may show their commitment to social responsibility and gain the trust of their stakeholders by implementing ethical supply chain procedures.
Second, supply chain ethics can lessen the dangers brought on by immoral behaviour. Businesses may save possible penalties and legal action, for instance, by making sure suppliers adhere to environmental standards. In a similar vein, companies may prevent labour issues and demonstrations by making sure that employees receive fair treatment.
Lastly, companies may attain long-term sustainability with the aid of supply chain ethics.
Businesses may lessen their environmental impact and support the social and economic advancement of the areas in which they operate by implementing ethical practices.
The Effects of Immoral Supply Chain Procedures
Unethical supply chain activities may have a big and lasting effect. It might include everything from financial losses and reputational harm to violations of human rights and environmental destruction.
For instance, several human rights violations, such as the denial of opportunity and education, as well as bodily and psychological harm, have been connected to the use of child labour in supply chains. Similar connections have been shown between the usage of conflict minerals and the funding of armed conflict, as well as environmental damage.
Unethical supply chain operations come with dangers, both financial and legal, in addition to ethical ones. Businesses that violate labour and environmental standards, for instance, risk penalties and legal action. They can also lose investors and consumers, harming their reputation.
Companies with Strong Supply Chain Ethics: Examples
There are several instances of businesses implementing robust supply chain ethics policies.
For instance, a clothes brand that values social and environmental responsibility may have a code of conduct for its suppliers that stipulates rules for animal welfare, fair labour practices, and environmental standards. Additionally, it runs a programme that lets users return worn apparel for recycling or repair. An additional illustration would be a global consumer products corporation dedicated to ethical and sustainable sourcing.
They have a Sustainable Living Plan with goals to lessen its impact on the environment and raise the standard of living for labourers in its supply chain. Additionally, it has a Responsible Sourcing Policy with social and environmental standards and compliance criteria for suppliers.
How to Incorporate Moral Behavior Into Your Supply Chain
Adding ethical standards to your supply chain may be a complicated procedure. Nonetheless, companies may take several actions to guarantee that their supply chains are sustainable and moral. Among them are:
1. Doing due diligence on suppliers entails evaluating the dangers that suppliers pose to society, the environment, and ethics, in addition to making sure that they abide by all applicable laws and regulations.
2. Putting codes of conduct into action: This entails creating and putting into action a set of moral guidelines that suppliers must follow, such as those about human rights, fair labour practices, and environmental standards.
3. Monitoring compliance: This entails keeping an eye on providers' behaviour about moral principles and acting appropriately when required.
4. Interacting with stakeholders: To make sure that moral principles are followed and that any problems are resolved promptly and openly, interactions with suppliers, clients, and civil society organisations are necessary.
Ethical Supply Chain Practices' Advantages
Adopting ethical supply chain processes has several advantages. Among them are:
1. Establishing and upholding a favourable reputation: Companies may show their dedication to social responsibility and cultivate trust with their stakeholders by implementing ethical practices.
2. Reducing risks: Companies may prevent possible penalties, legal action, and reputational harm by making sure that suppliers abide by moral and legal requirements.
3. Achieving long-term sustainability: Companies may lessen their environmental impact and support the social and economic advancement of the areas in which they operate by implementing ethical practices.
Further exploration of the back-end supply chain would lead us even closer to the "raw materials" production process, which is where the intricate web of the supply chain originates.
Several challenges across the system fall under one of four general categories: business ethics, labour welfare and human rights, health and safety, and the environment. In addition to this, one should focus on pertinent local and national legal requirements as opposed to only focusing on compliance vs. non-compliance. It is important to remember that failing to do any of these poses a danger to the organisation and will negatively impact its long-term viability. The severity of issues differs between nations. The issues that developing nations must deal with include child labour, teenage labour, the minimum wage, overtime, and, most importantly, worker health and safety.
The impact on the environment and the product footprint are also significant causes for concern. These include pollution of the air, water, and soil; ecological aspects; biodiversity; flora and fauna; greenhouse gas emissions; energy and water consumption; waste management; and, where relevant, legal compliances.
Before designating a product as ethically sourced and manufactured, it is important to consider if the aforementioned concerns are truly addressed or whether they are only being seen through a rose-coloured lens. Since communication and distance are getting shorter every day, inevitably, business processes will no longer be able to continue in their conventional forms. Rather than coming up with a pretext and choosing a quicker and simpler way out, one needs to reflect and consider how to integrate sustainability into business by handling the moral dilemmas in its supply chain.
For a little while, it would provide comfort, but regrettably, the path would soon come to an end and the fall would inevitably occur!
Difficulties in Putting Ethical Supply Chain Policies Into Practice
Adopting ethical supply chain processes has several advantages. Among them are:
1. Lack of transparency: Because supply chains can be convoluted and opaque, it can be challenging to spot moral dilemmas and keep an eye on compliance.
2. Cost: Setting up an ethical supply chain may be expensive, especially for small and medium-sized companies.
3. Cultural differences: It might be challenging to create a set of universal ethical norms since various legal systems and cultures may have distinct ethical standards.
4. Lack of resources: Some companies might not have the funds or know-how necessary to put ethical supply chain procedures into place.
Upcoming Developments in Supply Chain Ethics
Supply chain ethics will probably be influenced by a variety of issues in the future, including as changes in customer behaviour, technological advancements, and changing legal frameworks.
The application of blockchain technology to improve supply chain accountability and transparency is one trend that is anticipated to gain importance. With the use of blockchain technology, transactions may be recorded transparently and safely, facilitating product tracking and guaranteeing adherence to legal and ethical requirements.
The increasing significance of social, environmental, and governance (ESG) concerns in consumer behaviour is another trend. Consumers are expected to demand more responsibility, transparency and disclosures from firms as they grow more conscious of how their purchases affect society and the environment.
Commitment from all stakeholders is necessary to establish sustainable supply chains and ethical operations.
Ethical operations and sustainable supply chains necessitate ongoing efforts to monitor performance and make adjustments, as well as the commitment of senior leadership. In the context of global sustainability challenges, regulatory pressures, and evolving consumer expectations, it is becoming more and more essential for businesses.
The resolution of supply chain issues necessitates a steadfast dedication to ethical practices at all levels of the organisation, from upper management to individual employees, as well as the utilisation of resources to verify ethical compliance.
An increasing number of consumers are basing their purchasing decisions on their perceptions of the ethical behaviour of companies. Businesses that operate with ethical supply chains can improve their financial performance, avoid human rights violations, increase consumer loyalty, and enhance their reputation.
The Role of Independent Directors
Independent directors serve a critical role in overseeing and promoting ethical and sustainable practices within a company's supply chain, particularly in the realm of Environmental, Social, and Governance (ESG) considerations. Their responsibilities extend beyond traditional corporate governance to include advocacy, oversight, transparency promotion, and stakeholder engagement in the context of supply chain ethics.
Advocating for Ethical Standards
Independent directors are influential advocates for the adoption of rigorous ethical sourcing policies within the supply chain. They champion the establishment of policies that prioritise:
Human Rights: Ensuring that all workers throughout the supply chain are treated fairly, with respect for basic human rights and dignity.
Labour Standards: Upholding standards that prohibit forced labour, child labour, discrimination, and unsafe working conditions.
Environmental Stewardship: Promoting practices that minimize environmental impact, such as reducing carbon emissions, conserving resources, and managing waste responsibly.
By advocating for these standards, independent directors help align corporate practices with global expectations and legal requirements, mitigating risks associated with supply chain disruptions and reputational damage.
Overseeing Compliance and Due Diligence
One of the primary responsibilities of independent directors is to oversee the implementation of robust due diligence processes across the supply chain. This involves:
Extending Due Diligence: Ensuring that due diligence efforts extend beyond direct suppliers to lower tiers of the supply chain, where risks of unethical practices may be more pronounced but visibility may be limited.
Audits and Assessments: Regularly conducting audits and assessments to evaluate supplier compliance with ethical and sustainability standards. These audits help identify non-compliance issues and drive corrective actions.
Risk Management: Addressing supply chain risks related to human rights violations, environmental impacts, and regulatory compliance through proactive risk management strategies.
By maintaining a proactive stance on compliance and due diligence, independent directors contribute to building a resilient and sustainable supply chain ecosystem.
Enhancing Transparency
Transparency is crucial for building trust with stakeholders and demonstrating accountability. Independent directors play a pivotal role in:
Reporting Frameworks: Advocating for comprehensive reporting frameworks that disclose supply chain practices, environmental impacts, and efforts to promote ethical conduct. These frameworks often include sustainability reports, disclosures aligned with international standards (e.g., GRI, SASB), and transparency on supplier relationships.
Public Disclosure: Ensuring that relevant information is disclosed to shareholders, regulators, and the public to provide a clear picture of the company's commitment to ethical sourcing and sustainability.
Enhanced transparency not only mitigates risks associated with non-compliance but also enhances the company's reputation as a responsible corporate citizen.
Engaging Stakeholders
Effective stakeholder engagement is essential for understanding diverse perspectives on supply chain ethics and sustainability. Independent directors engage with:
Investors and Shareholders: Addressing investor concerns regarding ESG risks and opportunities, thereby influencing investment decisions and shareholder activism.
Customers: Responding to customer expectations for ethically sourced products and services, which increasingly drive purchasing decisions.
Communities and NGOs: Collaborating with local communities and non-governmental organizations (NGOs) to address social and environmental concerns related to supply chain operations.
By engaging stakeholders proactively, independent directors foster dialogue, build trust, and ensure alignment between corporate actions and stakeholder expectations.
Conclusion
To sum up, supply chain ethics are an important concern for companies in all sectors of the economy. Businesses are depending more and more on intricate supply chains with multiple stakeholders and ethical issues as a result of the growth of globalisation. Businesses may achieve long-term sustainability, reduce risks, and preserve a favourable reputation by using ethical supply chain strategies. However putting ethical supply chain strategies into effect may be difficult, and companies may run into several legal, financial, and cultural obstacles. Despite these obstacles, developments in consumer behaviour, legal frameworks, and technology are expected to have a significant impact on supply chain ethics in the future.
Our Directors’ Institute- World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out efficiently, helping you make a significant contribution to the board and raise corporate governance standards within the organization.
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