Juan Bonilla and Pedro Méndez de Vigo, Cuatrecasas
Juan Bonilla and Pedro Méndez de Vigo at Cuatrecasas discuss the increasing importance of legal compliance in relation to cross-border supply chains.
In April 2013, 1,134 people died when the Rana Plaza garment factory collapsed in Dhaka. Within the wreckage of the factory, products of almost every international fashion company were found. Furthermore, investigations revealed that the working conditions of the employees who died that day were almost unbearable. Most of the companies accused of manufacturing their products under miserable labour and health standards were not even aware of manufacturing in that country. The majority of those products were manufactured by suppliers of which the main company had no knowledge.
Rana Plaza put employment conditions, and supply chain transparency and traceability, under the spotlight. Awareness of company responsibility for their business partners’ actions has grown since then and new cases have been hitting the news. UK food inspectors discovered horsemeat in Findus beef lasagna sourced from a supplier, and French police found dozens of undercover factories where products were manufactured under unlawful conditions in the outskirts of Paris.
The Chartered Institute of Purchasing and Supply recently published a report that states that almost three-quarters (72%) of British supply-chain professionals have zero visibility of their supply chains beyond the second tier. Only 11% say they have visibility along the entire chain.
Recent events have triggered an increased concern among states, companies and public opinion regarding human rights and labour standards within the supply chain. The International Labour Organization has been working on the creation of a fair framework of employment standards since the early 1950s. Nevertheless, international standards usually lack enforceability. These standards and conventions aim to upgrade working conditions in all countries that sign and ratify them – although, as they do not include an enforcement mechanism or a sanction system in case of infringement, the practical effect may be far from clear. For these reasons, it has always been difficult for states and companies to implement those standards. But how are states and companies tackling the problem and what is the best way to actually address it?
States have started to take measures on this issue. California enacted in 2010 its Transparency in the Supply Chain Act. Its scope reached all retail sellers or manufacturers doing business in California with an annual global turnover of US$100 million or more. The Act mandates businesses meeting these criteria to disclose on their website their “efforts to eradicate slavery and human trafficking from direct supply chain for tangible goods offered for sale”. The most pioneering feature of this Act is that it extends its scope to events occurring outside the jurisdiction of California. As such, this Act sanctions companies in California for actions taken outside California.
After the Rana Plaza collapse, awareness spread quickly and other countries started to consider legislation on this matter. In 2015, the UK enacted its Modern Slavery Act, which compels companies carrying on a business (or part of a business) in any part of the UK, with an annual global turnover of over £36 million, to publish on their website a “modern slavery statement”, disclosing certain conditions of their supply chain.
Following the above-mentioned measures, this year France enacted a bill on the duty of care for parent companies. Under this law, parent companies with a) more than 5,000 employees worldwide at group level, and with headquarters in France, or b) 10,000 employees worldwide at group level, may be considered liable for labour and environmental infringements of their subsidiaries, when they did not implement the necessary measures to avoid such infringements.
In addition to national efforts to increase labour standards and human rights within cross-border supply chains, the European Union enacted the Directive 95/2014, on disclosure of non-financial and diversity information by certain undertakings and groups. This aims to provide shareholders of public-interest entities employing more than 500 people with more complete social and environmental information. It requires those companies to disclose in their management reports information regarding, among others, details of environmental commitment, social and employee conditions, respect for human rights, anticorruption and bribery issues, and diversity policies in place. The implementation of the Directive varies at each different member state of the European Union.
In addition to the public attention paid towards implementation of transparency, human rights and fair labour standards within the supply chain, companies themselves are also working hard in this direction. Proof of that effort lies in global framework agreements, signed between companies and global unions to set global employment and human rights standards and implement them within the whole supply chain. Global framework agreements help to equalise and control human rights and employment standards, especially in those countries where the main responsibility for enforcement of these conditions relies on the company.
Every Global Framework Agreement tries to reflect, and comply with, the core values of ILO norms, such as freedom of association and collective bargaining (Conventions 87 and 98); non-discrimination (Conventions 100 and 111); forced labour (Conventions 29 and 105); and child labour (Conventions 138 and 182).
The main advantage of a global framework agreement lies in its implementation method. As unions participate in the negotiation and approval of an agreement, they may also take care to enforce it wherever needed. In this sense, enforcement is normally a problem in countries where the company may find it difficult to be certain about the real labour conditions of their employees, or of the employees of their suppliers. Unions will always have a better understanding of these conditions, as they have more contact with the workforce, especially on a local level. In order to allow enforcement of the agreements through unions, global framework agreements promote unionism. This may prove particularly useful in those countries where unions are not generally recognised.
The Accord on Fire and Building Safety in Bangladesh is an example of a global framework agreement. This is signed, on a sectorial level, by several companies and unions, and aims to make all garment factories in Bangladesh safe workplaces.
On the other hand, companies are creating transparency and traceability within their supply chain through internal rules and procedures, particularly focusing on corporate social responsibility rules. These internal rules enable procedures to trace the supply chain from its very beginning, and to create legal ways to enforce the intended standards and comply with human rights.
Hence, an effective system of internal rules in procedures with the aim of creating traceability and controlling labour standards within the supply chain must comprehend the whole supply chain, and be particularly focused on suppliers. In this sense, choosing the right supplier can make the difference between having an advantage in comparison with competitors and having a rather major handicap. Therefore, it is necessary to structure the relationship with the third party correctly. Agreements and corporate social responsibility rules must be accurate and set up legal mechanisms allowing the company to withdraw automatically from agreements with suppliers that do not comply with the agreed labour standards. In addition, this system may only be useful if the party responsible for its implementation believes in it – or at least, does its job thoroughly. Thus, training, auditing and monitoring are other key factors to take into account.
When taking the above-mentioned facts into account, a question arises: is it better to sign a global framework agreement, or to implement standards and supply chain traceability unilaterally through internal rules? Such question must be answered on a case-by-case basis. It may be even the case that a company can set up internal rules and bind its suppliers to comply with them; and, at the same time, sign a global framework agreement, making unions participate in verifying those standards.
Nowadays a company cannot afford to lose control of its supply chain, since it would have an enormous impact its goodwill and revenue. But the new legislative trend for cross-border supply chains tends to suggest that, in addition to reputation issues, legal compliance will also be a key feature for the future.