Retailers and manufacturers doing business in California, take note: State law there has just pulled you even further into the realm of enforcing social policy by way of corporate disclosure.
Under the California Transparency in Supply Chains Act, effective as of Jan. 1, every retailer and manufacturer that operates in California with annual worldwide sales of more than $100 million must disclose what efforts they are making (if any) toward eradicating slavery and human trafficking from their direct supply chains.
Prior to the law's enactment, companies only had to disclose child labor, for example. Anti-slavery and human trafficking were not called out, explains Colette Simo, director of corporate compliance and enterprise risk management for $7.1 billion OfficeMax.
The risk for businesses is that if you don't ask your manufacturers the right questions “you don't get the right answers,” Simo says. As a result, slavery and human trafficking could be occurring, and yet never be noticed or reported. “Now we have to address it specifically,” she says.
Under the new law, a company is considered to be doing business in California if any of the following four conditions are met:
The company is organized or commercially headquartered in California.
The company's sales in California for the applicable tax year exceed $500,000 or 25 percent of the company's total sales, whichever is less.
The company's real and tangible personal property in California exceeds $50,000 or 25 percent of the company's total real and tangible personal property, whichever is less.
The company's paid compensation amount in California exceeds $50,000 or 25 percent of its total paid compensation, whichever is less.
Prior to assessing whether your company falls under the law, “determine what you already are doing in terms of your efforts to combat slavery and human trafficking and whether you want to do more,” says Renee Becker, a partner with law firm Manatt.
“It's definitely forcing companies to spring into action.”
— Naresh Hingorani,
Global Practice Leader,
To be in compliance with the law, each retail seller and manufacturer must conspicuously post a link to its disclosure on the home page of the company's Website, and make it available in writing upon request. And what exactly is a company supposed to disclose? Information about how much the business does the following:
Engages in verification of its product supply chains to evaluate and address risks of human trafficking and slavery, and whether a third party conducted the verification;
Audits its suppliers to evaluate their compliance with company standards on human trafficking and slavery, disclosing whether the audit was conducted by an independent third party;
Requires direct suppliers to certify that materials incorporated into the product comply with laws regarding human trafficking and slavery in the countries where the suppliers operate;
Maintains accountability through internal standards and procedures for employees and contractors that fail to meet company standards regarding human trafficking and slavery; and
Provides training on slavery and human trafficking to employees and management with direct responsibility for supply chain management.
The law does not actually require retailers and manufacturers to stop working with suppliers involved with human trafficking and slavery, nor does it require the implementation of any of the above steps. Failure by a company to disclose its efforts, however, could result in the state attorney general taking action. And nothing in the law protects retailers or manufacturers from additional liability under other state or federal laws, such as false advertising or misrepresentation.
“It is unlikely the California attorney general will be providing guidance, so companies need to read the law carefully and contact their legal counsel, conduct internal inquiries, and just make sure they're following closely each element of the Act,” says Becker.
Since enactment of the California law, many companies that already maintain internal accountability standards for their suppliers say they have begun to tweak their supply-chain verification and auditing programs. “It's definitely forcing companies to spring into action,” says Naresh Hingorani, global practice leader of supply-chain advisory firm Bristlecone.
Supply Chain Disclosure Requirement
The following is an excerpt from the California Transparency in Supply Chains Act:
Existing state law makes human trafficking a crime. Existing state law also allows a victim of human trafficking to bring a civil action for actual damages, compensatory damages, punitive damages, injunctive relief, any combination of those, or any other appropriate relief.
Existing law generally regulates various business activities and practices, including those of retail sellers and manufacturers of products.
This bill would enact the California Transparency in Supply Chains Act of 2010, and would, beginning January 1, 2012, require retail sellers and manufacturers doing business in the state to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains for tangible goods offered for sale, as specified. That provision would not apply to a retail seller or manufacturer having less than $100,000,000 in annual worldwide gross receipts. The bill would also make a specified statement of legislative intent regarding slavery and human trafficking. The bill would also require the Franchise Tax Board to make available to the Attorney General a list of retail sellers and manufacturers required to disclose efforts to eradicate slavery and human trafficking pursuant to that provision, as specified. .
Source: State of California.
OfficeMax, for example, has made some changes to its “social accountability audit” by adding a section that addresses anti-slavery and human trafficking questions. Running such a questionnaire allows auditors to evaluate whether manufacturers have written policies and procedures in place addressing these specific areas, Simo says.
Right now a lot of them don't score highly, “but that's understandable because they've never had to do this before,” Simo adds. “What we are really doing is increasing the training and the warnings at this point.”
Several other companies are undertaking similar measures. Ethan Allen, for example, says on its Website that it currently is developing “a more formalized verification and auditing program for all third-party suppliers to ensure they operate in accordance with our Code of Conduct and all applicable laws and regulations.”
“Ethan Allen does not condone the use of slavery or human trafficking and does not knowingly do business with any supplier who engages in such practice,” the company stated. “Further, Ethan Allen does not maintain any long-term contracts or commitments with its suppliers and is free to take its business elsewhere should a supplier fall short of our expectations.”
Ethan Allen added that it does not currently use a third party to audit or verify suppliers, but the company does perform periodic, announced visits.
Green Mountain Coffee Roasters and its subsidiary Keurig likewise don't require suppliers to certify compliance with applicable slavery and human trafficking laws. Green Mountain does, however, hire third-party consultants to perform periodic, scheduled, on-site evaluations to assess the labor practices of certain of its largest direct suppliers.
Green Mountain also created a set of vendor expectations and provides copies to all its facilities and suppliers, “which we request that they meet and post in their facilities,” the company stated.
To bolster disclosure practices, legal experts advise retailers and manufacturers as a best practice to require suppliers to verify compliance with human trafficking and slavery laws in the countries in which they operate. They also recommend conducting regular risk assessments of the supply chain by evaluating high-risk sectors, regions, and commodities frequently associated with such human rights violations.
Helpful resources include the U.S. State Department's “Trafficking in Persons” report, which ranks countries on anti-trafficking measures. Additionally, the Labor Department's “List of Goods Produced by Child Labor or Forced Labor” cites 130 goods from 71 countries that the agency believes is produced by child labor or forced labor in violation of international standards.
Auditing human rights violations may become even more important if the federal government steps into the arena as well. Last August, Rep. Carolyn Maloney, D-NY, introduced the Business Transparency on Trafficking and Slavery Act, modeled after the California law. If passed, the bill would require publicly traded companies to disclose in their annual reports to the Securities and Exchange Commission all measures taken to counter forced labor, human slavery, trafficking, and child labor within companies' supply chains.
The overall lesson, Simo says, is that you will have some manufacturers that are serious about socially accountable and some that aren't. At times, companies “have to make the tough choice of not dealing with one supplier over another, even if it is the most cost effective.”