Your corporate reputation is dependent not only on you and your subsidiaries’ operations, but also on those of each company in your global supply chain. Never before have the words “choose wisely” carried more weight. Our law firm sees clients facing a growing number of regulatory risks related to their supply chains. Global headlines are rife with news of business ethics violations and criminal conduct such as corruption and money laundering. Environment and climate change issues have been brought into sharp focus in what may end up being the warmest year on record. Social and human rights concerns are pushing to the forefront of our collective awareness, as are employment and labour affairs.
These issues—plus others—fall within several different categories: environmental, social and governance (ESG), business and human rights, and traditional corporate social responsibility (CSR) and compliance. Regardless of how they’re categorized, they’ve resulted in calls for ever higher thresholds of responsibility. Companies are now expected to not only produce good products, but to do good in the process.
That’s exemplified by the proposed Modern Slavery Act tabled in Canadian Parliament. If it’s adopted, businesses will be required to report annually on how they’re identifying and addressing modern slavery risks in their operations and supply chains. As well, importing goods manufactured by slave labour will be restricted. It’s difficult to determine when the bill will pass and what form it’ll take, but with similar laws on the books in the United Kingdom, Australia and the United States (California), Canada is likely to follow suit.
Seller beware: A common global supply chain risk
Exporters are particularly affected by these issues, since they find themselves subject to the different regulations enacted by the various jurisdictions in which they do business. Much of this regulation is extraterritorial in nature, meaning that government regulators in one country target not just the companies that are incorporated within its borders, but also the activities of any company that operates within its borders. If you’re part of a global supply chain—and in this day and age, that’s almost a given—you may be subject to international oversight.
A perfect illustration of this is in the area of data protection. If you’re selling online and your buyer is from the European Union (EU), then you’re subject to the General Data Protection Regulation (GDPR) that applies to that region. You don’t have to be incorporated in an EU country, but selling in this jurisdiction means you’re governed by its laws. The same is true of much modern slavery and human rights legislation, as well as other areas of regulation such as anti-money laundering.
5 steps to safeguard your reputation
In recent years, there’s been an evolution in supply chain risk management that’s directly correlated to the types of regulations popping up globally. There’s a trend towards greater transparency in reporting, not only throughout a company’s own operations, but across their supply chain as well. It’s essential to carry out a thorough survey of what’s going on in yours, so be sure to follow these steps.
- Mapping and risk prioritization: Identify which legal regimes affect your operations—in your own company and throughout your supply chain. Determine which risks are typically associated with your industry, business model and geographical footprint, and prioritize them based on those likely to be most severe.
- Impact prevention: A key part of prevention is looking at your own policies and procedures to mitigate the risks identified in the previous step. Next, look for ways to protect yourself when onboarding new suppliers. Apply contractual standards with cascading obligations down the pyramid or supply chain, such as human rights or anti-corruption standards, coupled with rights to inspect, investigate or audit suppliers to ensure they’re complying with regulatory standards and best practices. Another common part of prevention is capacity building and providing training to subsidiaries or suppliers on how to mitigate regulatory risk.
- Tracking and monitoring: Think of this step as the difference between theory and practice. It’s one thing to include contractual clauses to avoid, like modern slavery risks, and quite another to verify that those standards are being applied. To do this, put in place compliance, tracking and monitoring processes that detail how business is actually being conducted.
- Impact response: Prepare a strategic response for when things go wrong because a risk can materialize into an impact at any moment. Ways to respond include putting a grievance mechanism in place, as well as systems that articulate your solutions to a given problem. Analyze appropriate remediation and compensatory actions and if worse comes to worst, understand the fallout if you choose to terminate a supplier relationship.
- Transparency: This is both a process that subsumes all the previous steps, as well as a step unto itself. You need to perform all of these safeguarding activities in a transparent way, so that you can let stakeholders know that you’ve taken all possible steps. Demonstrate that you’ve mapped your own operations and those of your supply chain, how you’ve attempted to mitigate risks, show that you’ve tracked performance and make clear how you intend to respond to issues if and when they arise. This is required in many jurisdictions as part of the growing regulatory trend to address supply chain risk.
Easing the way to compliance
If you’re finding this sounds a bit onerous as a small business owner, take heart: there are software solutions on the market that can help you streamline the compliance process at various stages. Norton Rose Fulbright can help you identify legal risk and strategize your regulatory risk profile, and there’s also a multitude of general and specialist consultancies who can assist.
Legal drafting tools
Similarly, there are resources to help you and your legal team protect your company against supply chain risks. The specific wording of key contract clauses can have a huge impact on your eventual liability risk, as well as the actual level of practical control you exert over your suppliers as the ultimate or mid-chain buyer. The American Bar Association has recently published a set of model clauses that cover enforcement standards, the right to inspect or monitor and remedial action in the event of contract breaches. A similar project is underway in Canada, but in the meantime, firms like ours can help you draft appropriate contractual protections adapted to your risk profile.
In an era of instant news powered by social media, it’s not surprising to discover that reputational risk was cited as the number one risk concern by global executives in a recent study by Deloitte. It’s more important than ever to protect your reputation by ensuring the company you keep is in good standing.
This is a guest blog post. Please note that the thoughts and opinions of the author may not necessarily reflect our own.