Thursday, May 14, 2015

Did a Slave Make Your Product and Do You Care? The California AG Thinks So

Last week, I looked lovingly at a picture of a Starbucks old-fashioned grilled cheese sandwich. It had 580 calories. I thought about getting the sandwich and then reconsidered and made another more “virtuous” choice. These calorie disclosures, while annoying, are effective for people like me. I see the disclosure, make a choice (sometimes the “wrong” one), and move on.

Regular readers of this blog know that I spend a lot of time thinking about human rights from a corporate governance perspective. I thought about that uneaten sandwich as I consulted with a client last week about the California Transparency in Supply Chains Act. The law went into effect in 2012 and requires retailers, sellers, and manufacturers that exceed $100 million in global revenue that do business in California to publicly disclose the degree to which they verify, audit, and certify their direct suppliers as it relates to human trafficking and slavery. Companies must also disclose whether or not they maintain internal accountability standards, and provide training on the issue in their direct supply chains. The disclosure must appear prominently on a company’s website, but apparently many companies, undeterred by the threat of injunctive action by the state Attorney General, have failed to comply. In April, the California Department of Justice sent letters to a number of companies stating in part: 

If your company has posted the required disclosures on its Internet website or, alternatively, takes the position that it is not required to comply with the Act, we request that – within 30 days of this letter’s date – you complete the form accessible at http://oag.ca.gov/sb657 and provide this office with (1) the web links (URLs) to both your company’s Transparency in Supply Chains Act disclosures and its homepage containing a link to the disclosures; and/or (2) information demonstrating your company is not covered by the Act.

There are no financial penalties for noncompliance. Rather, companies can face reputational damage and/or an order from the Attorney General to post something on their websites. A company complies even if that disclosure states that the company does no training, auditing, certification, monitoring or anything else related to human trafficking or slavery. The client I spoke to last week is very specialized and all of its customers are other businesses. Based on their business profiles, those “consumers” are not likely to make purchasing decisions based on human rights due diligence. I will be talking to another client in a few weeks on the California law. That client is business to consumer but its consumers specifically focus on low cost—that’s the competitive advantage for that client. Neither company-- the B2B nor the B2 (cost conscious)C-- is likely to lose significant, if any business merely because they don’t do extensive due diligence on their supply chains. Similarly, Apple, which has done a great job on due diligence for the conflict minerals law will not set records with the sale of the Apple Watch because of its human rights record. I bet that if I walked into an Apple Store and asked how many had seen or heard of Apple’s  state of the art conflict minerals disclosure, the answer would be less than 1% (and that would be high).

People buy products because they want them. The majority of people won’t bother to look for what’s in or behind the product, although that information is readily available through apps or websites. If that information stares the consumer in the face (thanks Starbucks), then the consumer may make a different choice. But that assumes that (1) the consumer cares and (2) there is an equally viable choice.

To be clear, I believe that companies must know what happens with their suppliers, and that there is no excuse for using trafficked or forced labor. But I don’t know that the use of disclosures is the way to go. Some boards will engage in the cost benefit analysis of reputational damage and likelihood of enforcement  vs cost of compliance rather than having a conversation about what kind of company they want to be. Many board members will logically ask themselves, “should we care if our customers don’t care?”

My most recent law review article covers this topic in detail. I’ll post it in the next couple of weeks because I need to revise it to cover the April development on the California law, and the EU’s vote on May 19 on their own version of the conflict minerals law. In the meantime, ignorance is bliss. I’m staying out of Starbucks and any other restaurant that posts calories- at least during the stressful time of grading exams.

https://lawprofessors.typepad.com/business_law/2015/05/did-a-slave-make-your-product-and-do-you-care-the-california-ag-thinks-so.html

Corporate Finance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, International Business, Law Reviews, Marcia Narine Weldon, Securities Regulation | Permalink

Comments

Interesting issues, Marcia. Thanks for posting--and for making me feel guilty about that Starbucks grilled cheese sandwich I ate for lunch yesterday! (Like you, I balked at the calories. But I decided to treat myself (since those darned things are so good!). I do that a few times a year, btw, despite the high calorie count.

But back to substantive law. In taking on the disclosure issue--and critiquing its use in this type of case--do you address at all the "too much information" problem or other traditional disclosure-oriented analyses? Or are you, instead, just focused on the "point of sale" versus general availability issue you raise i the post? I will look forward to reading the paper, so feel free to not respond here. But I am curious.

Posted by: joanheminway | May 15, 2015 6:03:36 AM

I don't know and I DO care! I've thought for years about an app that tells you when you're getting too close to a vendor who doesn't share your values: political, environmental, etc.

There are a few apps out there (none of whose names come to mind) that offer partial solutions. (If any offer something like what I'll describe here, let me know.)

Your app should be able to take in your positions on many different political or economic questions. Then it can access many forms of public databases and media to tell you which product you are considering buying is made by a company with values (expressed in their words and actions) that you find abhorrent, offensive, or just distasteful.

If any readers want to co-found this app, let me know. I'll share the patentable details then :)

Posted by: Cameron Powell | May 17, 2015 11:38:53 AM

What I meant to add was that the solution here is sunlight - transparency. Sunlight is always a great disinfectant. Technology existing *today* is capable of allowing all progressives on the planet to vote with their wallets -- the love of money has always been the fastest path to change.

Posted by: Cameron Powell | May 17, 2015 11:42:20 AM

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