Future 500 Newsletter
Corporations And Stakeholders
Newsletter February 2006, Volume 1, Number 2
In This Issue:
Featured Article: Toward a Framework for Supply Chain Leadership
New Partner Welcome
Coming Events
Support The Future 500's Programs
Previously Featured Articles
Featured Article
Toward a Framework for Supply Chain Leadership
A Draft Executive Action Report of The Conference Board
Prepared with The Future 500
This document represents a first step toward a potential framework for supply chain leadership. It is based on interviews of companies conducted before the Working Group (October 2005), literature searches and reviews of thirteen companies and ten independent supply chain initiatives, and discussions among executives during the Working Group. It is a project of the Working Group on Global Corporate Citizenship and Risk Assessment, and is prepared by The Future 500 and The Conference Board.
This document is meant to start a discussion on supply chain leadership – not finish it. The definitions, approaches, interpretations, and assertions are preliminary, intended to help drive thought and consideration. Feedback is invited.
Through this process, a management framework for supply chain leadership is emerging, elements of which will continue to be added, shaped, and improved.
On
Supply Chain Leadership is an emerging practice where a company harnesses its procurement dollars to generate both internal and external benefits. Internal benefits include traditional objectives such as value and quality, as well as brand-building, community relations, and reputation enhancement. External benefits include social and environmental improvements that may extend through the marketplace as a whole.
Companies known for their early leadership in this field include:
- Mitsubishi Electric, Home Depot, and FedEx Kinkos in timber and paper. Mitsubishi was the first company to adopt procurement preferences excluding paper and wood products from old growth sources. Home Depot used its market power to establish global sustainability specifications and track its sources. FedEx Kinkos challenged its suppliers to meet new paper recycled content standards, which led to changes across the industry.
- Gap,
- H-P and Motorola in electronics. H-P established a comprehensive set of guidelines and standards, and worked with Dell and IBM to develop a common industry code. Motorola helped link this
- Bank of America and Citigroup in loans and finance. Citigroup established sustainability standards for recipients of project finance dollars. Bank of America followed with what some felt to be higher standards; J.P. Morgan Chase then set a new benchmark beyond both.
As these and other initiatives have proceeded, they have resulted in a proliferation of initiatives, codes, guidelines, and standards, specifying new criteria to which companies hold their suppliers. But there is no management framework that helps companies institute programs effectively. As a result, supply chain leadership has largely been a learn-as-you-go endeavor to date, with many companies learning the same lessons, over and over.
This document is intended to be a first step toward a potential framework for supply chain leadership. It is based on interviews of companies conducted before the Working Group, literature searches and reviews of thirteen companies and ten independent supply chain initiatives, and discussions among executives during the Working Group. It is a project of the Working Group on Global Corporate Citizenship and Risk Assessment, and is prepared by The Future 500 and The Conference Board.
This document is meant to start a discussion on supply chain leadership – not finish it. The definitions, approaches, interpretations, and assertions are preliminary, intended to help drive thought and consideration. Feedback is invited.
Elements of a Potential Management Framework
Through the interviews, research, and working group process, the following emerged as potential elements of a management framework for supply chain leadership. As the process continues, elements will continue to be added, shaped, and improved.
Definition of Supply Chain Leadership (SCL)
Few companies had established a clear definition for SCL, though its meaning was intuitively understood. In this paper, SCL is defined as the use of corporate buying power to help drive social and environmental improvements.
Role of Globalization in Supply Chain Leadership
Globalization creates a new context for supply chain management, and is widely considered a primary driver of supply chain leadership. In national economies, companies typically operate within a set of well-established laws, regulations, and norms. Their social and environmental responsibilities are relatively clear, consistent, and explicit. However, in a global economy, this clarity evaporates. It is often replaces by a confusing array of expectations. Laws vary from country to country. Regulatory regimes are inconsistent or non-existent. National, cultural, and ethnic practices are widely varying. Social problems are often deep and systemic. As a consequence, executives are often blindsided by issues and expectations they would never encounter in their home countries. Their companies may be expected to perform services that are well outside their traditional responsibilities or capacities.
SCL provides companies with a lever that they can readily press, to meet needs and drive benefits to the communities they impact. SCL does not require that the company assume traditional roles of government or other stakeholders. Instead, it uses resources the company already has, to generate benefits that accrue to the wider community, and which may also build support, relationships, and reputation equity.
How SCL Changes Supply Chain Management: Expanded Notions of Quality
Traditionally, supply chain management focuses on optimizing value and quality. SCL adds a third criterion: social responsibility. In the Working Group, some companies felt that this third criterion is actually an expansion of the second: quality. The qualities of products or services delivered by suppliers include their social and environmental characteristics. For example, the characteristics of high quality coffee might include, in addition to rich flavor, the expectation that it was not harvested in dangerous conditions by children, which might leave consumers with a bad taste.
Two Core Elements of Supply Chain Leadership
Companies pointed to two basic approaches to SCL:
- To clean the supply chain (Risk Management) – i.e., reduce or eliminate a broad range of practices that do not meet basic standards of corporate social and environmental responsibility. Typical examples include child and forced labor and human rights violations.
- To leverage the supply chain (Strategic Leadership) – i.e., drive positive change in the broader marketplace, through strategic purchases, standards, or preferences. Typical examples include Mitsubishi or Home Depot’s forest products standards, or McDonalds humane animal treatment standards, which have helped transform broad industry and marketplace practices.
Most SCL begins as a risk management initiative focused on cleaning up the supply chain. As understanding increases, and a company discovers strategic leadership opportunities, it finds ways to leverage its buying power to achieve specific advances. For example:
- Mitsubishi Electric and Mitsubishi Motors in the
- McDonalds established standards for the humane treatment of animals. According to Dr. Temple Grandin, a widely animal behavior expert that McDonalds tapped to help shape the program, "McDonald's should be given credit for bringing about improvements in animal welfare in the entire beef industry... I have been in this business for more than 25 years, and I have never seen such a transformation."
Catalysts of SCL
Typically, several factors converge to motivate a company to embark on a program of supply chain leadership.
External factors, such as activism and media coverage, continue to be primary drivers of SCL. However, internal factors are gaining increasing momentum. In several cases discussed by the Working Group, SCL happened almost entirely due to internal decisions, with little or no outside pressure.
Of the 14 companies with which the catalysts of SCL were explored, activist pressure was part of the motivation in 11 cases, and media attention in 10 cases. Media outlets such as Time, Wall Street Journal, and the New York Times, and groups such as Rainforest Action Network, Greenpeace, and PETA were mentioned frequently. The tactics of the groups, which could be extreme, often led to resentments within the target companies, which significantly slowed their response. When the assertions made by the groups were basically true, the companies ultimately came to accept them. When the assertions were significantly exaggerated or untrue, often the executives found it extremely difficult to motivate colleagues to take the issues seriously.
In eight cases, stakeholder processes helped prompt the program. For example, Best Buy indicated that their program to take back used electronics products would probably not have happened, at least in the current timeframe, except for a stakeholder process called the National Electronics Product Stewardship Initiative (NEPSI). While NEPSI failed to achieve its objective of stakeholder consensus, the education and relationships it fostered apparently drove significant progress at several companies, if not across the sector.
Several companies suggested that actions of socially responsible investment (SRI) organizations, such as the
Legislation – passed or proposed – was stated as a factor in four cases. Interestingly, litigation was not mentioned; however, this may have been due to the group of companies and executives consulted. It would be interesting to explore whether the role of litigation in driving these types of initiatives is changing.
Corporate restructuring was a factor in at least two cases. One company had acquired several others, and needed to reconcile differences in procurement policies among them. Another was readying itself to be acquired, and wanted to reduce an environmental controversy that it perceived might impact its prospects for favorable terms.
An important note: Companies as well as NGOs agreed that an increasing number of SCL initiatives are originating inside companies, rather than from external pressure groups. Duncan Donuts and CostCo, for example, each adopted Fair Trade coffee (which offers a premium to farmers for high quality and labor conditions) for their house brands due to internal decisions by procurement or marketing executives. They were responding to their own sense of the expectations the marketplace had of their companies, and to their sense of what was “the right thing to do.”
The bottom line: several factors generally converge to trigger SCL. But increasingly, these initiatives are gaining support or even emerging from within the company, as executives gain greater understanding, acceptance, and sophistication in supply chain issues.
Program Evolution
Several executives suggested that corporate SCL initiatives often follow a common path of evolution. These phases gradually shift the initiatives from a focus on risk management, to one of strategic leadership. Bob Langert of McDonalds suggested the following three phases; we added the commentary and examples for each based on our interviews.
Phase 1: Reactive. Most companies wait until they are “clobbered” by specific supply chain controversies. Then, one executive said, they keep getting clobbered for as many as ten years while they assess (1) whether they want to respond to a controversy for which their responsibility has generally been exaggerated, and (2) whether the impact of the controversy on their reputation or sales is sufficient to justify a serious response. The companies agreed it is important to minimize the delay frequently associated with the reactive phase.
Phase 2: Learning. After a time, companies begin to explore the issues raised by the supply chain controversy. They do so through a combination of on-the-ground experience and stakeholder engagement. In the process, they gradually discover strategic opportunities to make a real difference.
Phase 3: Strategic. Companies take specific steps that leverage their market position to generate major social or environmental benefits, not just in their own purchases but across whole sectors.
It is tempting to skip phases 1 and 2 and dive right into strategic leadership. But while the first two phases can be accelerated, it is important not to skip phase two – learning. That forms the basis for a successful strategic phase. Sometimes, according to Carol Martel of Coca-Cola, “You come upon the systemic solutions by being on the ground and accidentally discovering them.”
Companies that skip the learning phase may lock themselves into failed strategic initiatives – “checkbook initiatives” that throw money at a problem but don’t get to its roots.
Management and Embedment
SCL initiatives often begin under the leadership of executives in charge of corporate social responsibility (CSR) or environmental affairs. Then, after a time, leadership shifts to senior executives in procurement, or others with strategic responsibilities and ready access to the CEO.
Of the 10 companies where this issue was explored, eight said their SCL programs were now run by procurement or strategic-level executives. In most cases, the programs had initially been run by CSR or environmental staff, but this was now true in only two cases. All of the companies said visible CEO support was important.
The general, though not exclusive, consensus of companies is that the leadership by procurement or strategic executives is optimal. Based on the experiences of several companies, a team-based approach led by supply chain executives, and involving the whole company, may be the most effective way to embed supply chain leadership initiatives. There are perhaps four key elements of an effective team-based approach:
- Explicit support by the CEO and top executives, who signal their understanding of the strategic importance of supply chain leadership, often through letters, statements, or actions at the board level or in public meetings.
- Leadership by supply chain executives, who chair or direct the team, and through their involvement demonstrate corporate commitment to suppliers and employees.
- Active involvement by business unit leaders, who by participating learn about supply chain issues, share ideas with one another, and carry the priorities back to their departments, where they become accepted routine.
- Agenda-setting and staff support by CSR experts, who set the team agenda, alert the team to emerging supply chain issues, convey best practices, and liaison with external stakeholders.
For example, at Bank of America, supply chain leadership strategy is set by an Environmental Council composed of 20 executives, most heading select lines of business, and a few with environmental or social expertise. The Council is chaired by a senior vice president in corporate affairs, who convenes meetings quarterly, and reports their results directly to the CEO. The advantage of this approach, according to Kaj Jensen, who staffs the Council, is that “it drives integration” – rather than putting CSR in a “silo” under charge of internal specialists, “many executives in charge of key business units are directly involved; they see the whole picture, and are better able to embed practices, with better acceptance within their units.”
McDonalds initiatives are led by the Vice President of Supply Chain Management. “This is key,” according to Bob Langert, Senior Director of Corporate Responsibility. Langert says his role is to “make the business case, provide a rational perspective, and help set a vision. That helps inspire and motivate the company. But to make it work, this needs to be a supply chain initiative, not a CSR one.”
Guiding Principles and Codes of Conduct
An array of supplier guiding principles and codes of conduct have emerged to set the criteria to which companies hold their suppliers.
Generally, companies felt that efforts to establish principles and codes which extend across many sectors begin strong, but flounder due to the very different circumstances faced by different industries.
On the other hand, principles and codes within specific sectors, such as electronics or timber harvesting, have shown a tendency to converge either into a single standard, or several related standards along with processes by which suppliers can assess their performance against them all. For example, in the electronics arena, an Electronics Industry Code of Conduct (EICC) has been established by H-P, Dell, and IBM in the
Often, the confusion caused by conflicting standards drives the evolution of more compatible, or at least similar, standards. Mitsubishi Electric set a new standard for the procurement of paper from old growth sources; 400 other companies emulated it. Home Depot set new timber sourcing standards; Lowes adopted a similar standard, but its implementation differed in ways intended to create greater appeal for its more female-oriented customer base. Citibank adopted a new standard for loans and project finance; Bank of America matched and beat that standard; J.P. Morgan Chase then topped B of A’s commitment, according to the activist group RAN. RAN indicated that part of the reason was that each agreement became a template for the next; different provisions could be improved as all sides gained experience in the process.
On the other hand, sometimes there is outright competition between companies to be the social responsibility leader. Office Depot set new standards for recycled paper. Staples beat those standards. Then FedEx Kinkos established an even higher standard, and drove changes in the paper industry that made 30% post-consumer recycled paper broadly available at a low price.
It is too early to make broad assertions about best practices in codes and guiding principles. Among the questions worth exploring: should companies focus on:
- Principles (which focus on objectives) or Rules (which specify methods)?
- Guidelines (which tend to be broad principles) or Codes (which tend to set rules)?
- Broad and comprehensive (covering all social/environmental issues), or narrow and focused (to make a difference in a targeted area)?
- Consistency across industries, to ease supplier compliance?
- Consistency and applicability across many industries, or specific to a few?
Supplier Tiers Covered
Many companies faced the complex challenge of regulating the practices of second-tier and third-tier suppliers. Of the eight companies who discussed this issue, however, none had found it possible to directly audit or even identify these suppliers. There were simply too many, and the companies had no direct leverage over them.
The general consensus of companies, as well as several NGOs, was that each tier of companies needs to be held responsible for its tier one suppliers. For example, FedEx Kinkos indicated that where it served as a tier one supplier to institutional customers, many of those customers wanted the company to adhere to high recycling standards. FedEx Kinkos, in term, set standards for its tier one suppliers. Among those were standards to pass along to their tier one, and so on. This approach – where each company “owns” and is responsible for its tier one – was regarded as the only practical way for standards to flow through the supply chain.
Performance Monitoring and Evaluation
Most companies rely on widely-respected third party entities to monitor and evaluate the performance of suppliers. Of the seven companies with which this was discussed, none conducted their own audits of suppliers; all seven used independent third parties. Four of these third parties were not-for-profit organizations; three were for-profit.
For example, to audit its suppliers on workplace standards, Coca-Cola has retained firms with experience in the apparel and footwear industry, which faced supply chain controversies earlier than the food and beverage industry.
To audit its global network of meat, poultry, and seafood suppliers, McDonalds retained Conservation International (CI). Langert calls CI an “invaluable partner” that “works directly with our suppliers. They are almost a part of our department.” CI helped develop the Scorecard for the animal welfare program, and is deploying it through its supply chain. They also eventually won the trust of seafood suppliers, despite initial skepticism by suppliers that “tree-huggers” could be trusted.
Incremental vs. Systemic Approaches
The key to effectively advancing social and environmental interests, rather than simply providing stop-gap assistance or reputation-enhancing PR, is to take a systemic approach to problem solving, most companies report. They suggest that companies:
- Learn about the problem, especially root causes. For example, in response to social needs among workers at sugar suppliers in
- Pick your battles – be strategic. For example, Mitsubishi companies could have responded to rainforest activists by paying to protect selected forests – but very little forest would have been protected. Instead, they discovered they could have more influence by setting a specific procurement policy that, adopted by other companies as well, would drive fundamental changes in the market, and in timber practices.
- Involve all stakeholders. Many supply chain problems are symptoms of larger issues. Companies cannot realistically take responsibility for the health, education, or welfare of whole communities. Roles of different stakeholders must be established and understood. Each stakeholder must “own” a set of responsibilities that fit together with those of other stakeholders, to provide sustainable remedies. These can only be found through joint engagement among the many stakeholders. Without stakeholder engagement, problems will not be solved, and blame will continue to be passed from one group or company to another.
Sometimes, such as the cases of Mitsubishi and Home Depot, SCL may consist of a company convening stakeholders to understand the root cause of selected problems, then taking action in the supply chain to address the problem strategically.
Next Steps
The above is a first step toward inventorying practices in supply chain leadership, and developing a management framework that can shape standard operating practice for all companies whose supply chains are global.
The Working Group on Supply Chain Leadership is the only initiative currently underway to develop such a management framework. It was convened as part of a larger process, the Working Group on Global Corporate Citizenship and Risk Assessment, sponsored by The Conference Board and facilitated by The Future 500.
New Partner Welcome
Future 500 is pleased to welcome global packaging company Sonoco as a new partner.
Coming Events
Corporate Social Responsibility Forum: Silicon Valley in a Global Context
March 3, 2006 in Mountain View, California
Come hear Future 500 President and CEO, Bill Shireman, give the closing keynote speech at this important event. Opening keynote will be presented by Symantec Chairman and CEO, John Thompson, and panels will include speakers from Hewlett Packard, Sun Microsystems, Boston College, Cisco Systems, GRI, UN Global Compact and others. Learn about trends in CSR and its importance to Silicon Valley business - hear the business case for CSR, and learn how to take action in a corporate environment and more.
Ethical Corporation Two-Day Conference On Business-NGO Partnerships
March 28-29, 2006 in London, UK
Understand the nuts and bolts of Business-NGO partnerships: Who pays for what? Discover how to keep the partnership fair. Learn how to get decision-makers from your organisation to buy-in. Gain valuable insights into the planning, implementation and day-to-day management of Public/Private Partnerships. Discuss Exit strategies, how to anticipate pitfalls – and work out some ground rules to resolve disputes. Future 500 President and CEO, Bill Shireman's will present on "Partnerships: Do they make or break performance and reputation."
Sustainable Enterprise Conference 2006
April 7, 2006 in Rohnert Park, California
Gain valuable knowledge about building sustainable enterprises through workshops, interactive panels and networking sessions. Former CEO of Fetzer Vineyards, keynote speaker Paul Dolan will discuss the business case for sustainability and Future 500's Erik Wohlgemuth and Lance Funston will be conducting a workshop on "Engaging Stakeholders: Engaging and Reporting to Build Partnerships That Last."
Ethical Corporation Two-Day Conference On Business-NGO Partnerships
May 9-10, 2006 in New York, New York
Get practical guidelines for creating a successful partnership. Identify challenges and learn how to overcome them. Find out how to negotiate a win-win partnership and how to maximize return while minimizing risk. Review best practices and successful case studies and learn the secrets of effective communication. Participate in the interactive roundtable, Institutionalizing stakeholder engagement: Getting started, processing feedback and measuring progress, with Future 500's Director of Stakeholder Engagement, Erik Wohlgemuth and Dupont's Director of Sustainable Development, Dawn Rittenhouse.
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Previously Featured Articles
October 2005
PET Peeve:In the face of continued declines in plastic recycling rates, a handful of PET industry advocates have hit upon a new strategy: prevent new more sustainable alternatives from entering the market. Their approach is just plain wrong. Better alternatives are the key to the success of plastic recycling, and may represent the future of the companies now devoted to PET. PET exploded onto the marketplace, and quickly captured share once held by more easily recyclable packages, like aluminum and glass. PET now dominates the soft drink market, especially bottled waters and noncarbonated drinks. But the promise of PET recycling has not been filled, and never will. READ FULL ARTICLE.
July 2005
Avoiding Survey Fatigue:It is an old truism that wise investing depends on good information. While there are well-developed, government-regulated mechanisms for collecting and disseminating accurate and relevant financial information from publicly traded companies, the means for gathering and distributing non-financial information are relatively early in their development. But the demand for non-financial reporting is growing as even mainstream asset managers and institutional investors increasingly appreciate the importance of issues like greenhouse gas emissions and other environmental and social liability potential. Many companies have responded by...READ FULL ARTICLE.
March 2005
The Stakeholder Imperative, Part 2:In this article, we outline a three-phase stakeholder engagement process. These phases (and the steps or tasks that comprise each phase) build a sequence of activities that can create the foundation for an effective stakeholder engagement process, guide the business strategic planning agenda, and increase a company’s ability to be robustly competitive in a changing business environment. READ FULL ARTICLE
October 2004
The Stakeholder Imperative, Part 1:Today’s companies serve not just shareholders but an increasing array of ‘stakeholders’ including employees, customers, community groups, governmental regulators and environmental advocacy groups...What are the features of this new environment for business? READ FULL ARTICLE
July 2004
Jumpstarting California's Hydrogen Economy: Governor Schwarzenegger’s recent announcement to commit 0 million to create a California hydrogen highway by 2010 positions the State as leading this technological transformation in the U.S. But several states – Ohio, Michigan, New York, Texas -- are competing for this title. READ FULL ARTICLE
April 2004
Dogged By Dozens of CSR Standards: The surge of standards for Corporate Social Responsibility (CSR) and Socially Responsible Investing (SRI) is creating tremendous challenges and opportunities for leadership companies. READ FULL ARTICLE
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