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Name and shame is new supply chain game

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In October of 2007, the U.K. newspaper, the Observer, reported that child workers, some as young as 10, were discovered working in an Indian textile factory in slave-like conditions to produce clothes for Gap Kids.  

The children described long hours of unpaid work as well as threats and beatings.  Gap Inc., regarded as a model for fair labor practices, said that it was unaware that the clothing had been improperly subcontracted to a sweatshop using child labor.  Suffering a blow to its corporate image, Gap conducted an intensive investigation and severed its contracts with suppliers found in violation of its code of ethics.

Today, Gap, together with other major retailers, is proactively implementing best practices to combat forced labor in their supply chains.  Until now, companies have voluntarily adopted supply chain verification and auditing policies to stop such abuses.  Since such efforts have not been reported in a standardized manner, it has been difficult to compare one company's supply chain practices against another's. This will change dramatically with the implementation of the California Transparency in Supply Chains Act or SB 657 that went into effect on Jan. 1.

SB 657 is an example of so-called "name and shame" legislation, which seeks to achieve social goals indirectly through consumer and shareholder pressure.  The Act requires large retail sellers and manufacturers doing business in California to disclose what they are doing to address forced labor and human trafficking in their supply chains. It applies to retailers with $100 million or more in worldwide gross receipts that are "doing business" in California.  Companies whose annual sales in California exceed $500,000, whose real or tangible personal property in California exceeds $50,000 or whose annual payment of compensation in California exceeds $50,000 are deemed to be "doing business" in California.

The retail seller or manufacturer must disclose the extent to which it:

Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery and whether the verification is conducted by a third party.

  • Conducts audits to evaluate supplier compliance with company standards for trafficking and slavery in supply chains and whether verification was not an independent, unannounced audit.

  • Requires direct suppliers to certify that materials incorporated into products comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.

  • Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.

  • Provides company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products.

A company's policies, or lack of policies, must be disclosed on the company's website and be accessible by a "conspicuous and easily understood link" from the homepage.

If a company fails to comply with SB 657, the Attorney General of California may obtain an injunction requiring the company to make the required disclosures. Although no monetary penalties are authorized under the Act, consumers or others may seek monetary damages or other remedies for violation of other state or federal laws such as unfair business practices, false advertising or misrepresentation.  Accordingly, companies must carefully draft their disclosures to insure that are true and accurate.

Currently, California is the only state to have enacted such legislation.  However, at the federal level, Rep Carolyn Maloney (D-NY14) introduced a bill in August 2011 entitled "Business Transparency on Trafficking and Slavery Act" (H.R. 2759), which would require publicly-traded companies to disclose on their annual reports to the Securities and Exchange Commission, any measures that are being taken to identify and address conditions of forced labor, slavery and human trafficking within the company's supply chains.

SB 657 raises both legal and business issues for the retailer.  As an immediate matter, a disclosure complying with the provisions of the Act must be drafted and posted on the company's website.  However, the company must also consider how the disclosure will affect its stakeholders, particularly its customers and investors.  A less than robust anti-slavery policy may negatively impact a company's brand in the eyes of its customers.  With the proliferation of online blogs and social media, the danger that these disclosures will be used to cast the company in a bad light cannot be ignored.

According to the Interfaith Center on Corporate Responsibility, the availability of the information requested in SB 657 will allow investors and analysts to more fully understand how a company is managing its human rights risks.  Investors will be evaluating how companies are addressing the challenges facing workers in complex global supply chains, seeking evidence that companies are considering the long-term impact of these issues.

Although companies may comply with the Act by simply stating that they have no anti-slavery policies, few seem to be taking this approach based on a recent search of website disclosures.  More commonly, disclosures highlight a company's commitment to fair labor practices in its own operations and adherence to the laws of the countries where it does business.  Preparing disclosures that meet the legal requirements of SB 657 will enhance, or at least will do no harm to, the company's reputation, but will require close cooperation between the company's management and its legal counsel.

Steven Nakasone is senior counsel in the Los Angeles office of McGuireWoods LLP, a full-service law firm with 19 offices worldwide. He focuses his practice in the areas of distribution, licensing, advertising and intellectual property protection. He represents domestic companies and domestic affiliates of foreign companies engaged in the manufacture and distribution of consumer, commercial and industrial products. He may be reached at snakasone@mcguirewoods.com.

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