Author: Leas Bachatene, CEO,
Today, it’s not enough for leaders to ensure their company values are echoed through the halls of social media. Regulators, investors and consumers alike are often just a click away from ESG reports and breaking news of scandals, making cancel culture something of a ticking time bomb.
“Cancel culture” – the exertion of social pressure via threat of ostracism – is coming for corporations. Once a concern only in celebrity spheres, cancel culture is reaching beyond actors, comedians and influencers into the world of business and many leaders find themselves ill-prepared to face the consequences of missteps that provoke the masses.
Peak visibility means peak risk exposure
With the relentless advances in global connectivity have come increasingly stringent expectations of visibility from business leaders. For years, activist investors and concerned consumers have vocally demanded that executives take public stances on contentious social issues, make explicit commitments to address environmental impacts and boost the transparency of governance. Socially engaged employees have also joined this chorus of scrutiny, highlighting the importance of trust and purpose in an energized values-based economy.
Leaders must understand that cancel culture has developed an outsize impact on bottom lines and reputation, and must therefore become a key focal area in sustainable risk management. In this climate of scrutiny and swift action in the case of a misstep, leaders must actively stand up to critics’ expectations and view ESG as the lens for understanding old and new risks.
The supply chain sticking point
While many companies have made great strides in enhancing transparency, supply chains remain a significant pain point. The global disruptions spurred by the COVID-19 pandemic and its ongoing ramifications have drawn a spotlight to the importance of supply chains, and highlighted to investors and consumers the pitfalls companies can fall into when their supply chain monitoring is inadequate in one way or another.
One supply chain dilemma has arisen over Shake Shack’s hamburger bun supplier, Martin’s Potato Rolls. Customers have incited blistering discourse over the fact that Shake Shack pushed a promotion in which their milkshake proceeds benefited The Trevor Project, while the owners of Martin’s made over $100,000 in donations to a far-right candidate for Pennsylvania governor. Irate customers view this clear misalignment in values as a sign of bad faith on Shake Shack’s part, and while the effect of their social-media driven boycott remains to be seen, the reputational damage and damage to the social aspect of ESG is tangible.
A less political and more globally significant accusation related to third parties creating ESG risk comes from Hyundai. A Hyundai Motor Co subsidiary has been accused of using child labor at an Alabama parts plant–a serious allegation with international regulatory ramifications. The plant operator, SMART Alabama LLC, has declared itself in compliance with federal, state and local laws, and pushed the blame onto temporary work agencies.
Together, these examples demonstrate the two-fold risk associated with building a supply chain. Shake Shack, which has declined to drop Martin’s as a supplier, is a good exhibit of how supply chain choices result in “soft” consequences like a dip in social sentiment. The SMART allegations, which imply dramatic social and governance failures, may result in potentially disastrous regulatory consequences. Examples like these should prompt serious thought about how companies are held responsible for the actions of third-party partners even several degrees removed.
Encompassing intermediary and supplier ESG risk
Historically, intermediaries have posed a higher risk to corporations because these businesses are acting as distributors, resellers, agents and more–and they represent you to your customers. Intermediaries must be screened in keeping with anti-bribery, anti-corruption to keep companies from running afoul of regulators and maintaining adequate governance, but supplier risk has been subject to less scrutiny until now.
Addressing supplier risk requires assessing at more touchpoints, from issues like sanctions to human rights to emissions and disposal of toxic materials. In the past, customers didn’t typically have insight to these parts of the supply chain, and were only galvanized to boycotting action by bombshell revelations–like the Global Labor Justice report detailing slavery in fast fashion, which spurred H&M to become the first major fashion chain to publicly list its suppliers.
While the established risk of intermediaries and distributors remains high, leaders must acknowledge and adapt to the fact that investors and consumers are reaching further down the supply chain to evaluate companies, and a comprehensive strategy that monitors the entire chain is necessary to remain competitive as well as compliant on a regulatory level.
Moving the needle with responsible relationships
As old and new risks are increasingly falling under the banner of ESG, the bottom line is that companies and their leaders must do more to create a comprehensive supply ecosystem. Action is crucial as regulations tighten and the public expects companies to take responsibility for third parties from upstream suppliers to downstream intermediaries.
Now is the time to invest in tools that bring transparency to all third-party networks by analyzing and elevating supply chain standards to hold suppliers and distributors accountable. The ability to remediate with the right practices for long-term stability and maintain relationships with responsible suppliers will continue to be key in making meaningful ESG progress and creating real impacts one third-party at a time.
Our latest ESG capability on the 360 platform, ESG GreenLITE seamlessly integrates with your third-party risk management program, giving a holistic ESG supply chain risk management solution and end-to-end coverage in near real-time.