Ben Fouracre is the Japan representative for the Berkeley Research Group. Jody Ono is adjunct professor at Hitotsubashi University Business School, and is an outside director at Mabuchi Motor.
It is the email CEOs are receiving much more frequently these days: "We've received a letter from an NGO asking what we are doing about forced labor at our suppliers in Southeast Asia."
Not new: companies fielding questions on their business practices. New: the close scrutiny, the sharp tools and the steepening expectations for ethical supply practices, in particular relating to human rights.
With sustainability mandates come specific demands for transparency and accountability, as well as tough questions about where and how revenues are extracted. Well-funded pressure groups monitor suppliers' practices in terms of working hours, wages, conditions, health hazards, child labor, water quality and more. And they are rightfully passionate about the causes they seek to serve.
Reputational risk is massive in a social media-led world, of getting singled out, boycotted, shut out of M&A deals, or being targeted by activist investors; financial risk in investor withdrawal, sinking stock prices, plus the cost and disruption from any remedial action; operational risk from social unrest, workforce disputes, strikes and reviewing policies and practices throughout their organization.
In such a setting, companies trying to be responsible may have trouble making viable social, environmental, health, labor standard and safety programs stick. Industries relying on agriculture or manufacturing in emerging markets are especially exposed to human rights risk given the cycle of poverty endemic in some regions. While cheap supply is essential to cost-cutting, companies must consider who will be hit hardest when supply chains are squeezed. The modern slavery market, said to be valued at $150 billion according to International Labor Organization, introduces substantial moral hazards.
In the era of human rights due diligence, or HRDD, companies must now monitor not just their own conduct but also that of their suppliers and partners. And this broader Scope Three concept of a supply chain is gaining ground in shareholder and regulatory inquiries. The emerging realization is that as companies engage more with achieving social development goals, they will need to nurture their supply and be ethically responsible for it. What was once a value creator via cost-minimization may well become a value creator via investment.
Are Japan's traditionally pro-social companies anticipating these risks effectively?
"We will not budge in the slightest in our stance on democracy, human rights and other universal values," Masakazu Tokura, who took over the head of the Japan Business Federation, or Keidanren, on July 1, said last month after Japanese companies' supply practices in Myanmar and in China's Xinjiang were being scrutinized by the media.
An ongoing Nikkei survey of 50 listed companies on Xinjiang cotton shows a mix of responses to date: some are stopping use; others intend to stop if use of forced labor is proven; others have yet to answer.
Given its reliance on overseas markets for supply, Japan needs to prepare to readdress its supplier relationships. Globally, discussions of corporate behavior are prompting a re-imagining of corporate purpose for a more inclusive form of capitalism, with profit as an indicator of financial fitness enabling corporate behavior that delivers on duty of care.
With HRDD legislation moving almost daily now in Europe and the U.S., the time to lead is now. Japan's companies can reassert their well-played pro-social role through HRDD. To do that, management will need to prove that workers in their value chains, from whose labor they benefit, are able to raise their quality of life, along with their income, through work.
Companies must examine their supply chains. A proactive stance imparts a sense of control; a defensive stance, the opposite. Management may opt for an independent social audit, where personal and triangulated interviews of stakeholders often find problems that companies' own monitoring does not.
Risk-mapping should ask: Are we making money anywhere out of some kind of damage? Where can we make positive change? Where do we need support? Respected NGOs and NPOs can be helpful partners in conducting social acceptance studies to gauge local views on the company's activities. Importantly, qualitative assessments are as critical as quantitative metrics for tracking impact.
Equipped with high-quality information, companies can build a tool kit: a well-vetted policy, an official statement, corporate-wide education, clear procurement criteria embedded in supply codes. And they can devise solutions to problems that bear not only ethical appeal but also pro-social impact, such as creating safe spaces for the children of workers.
In a recent television advertisement, Standard Chartered stated that only 6% of companies have full transparency in their supply chains. And it is the less visible lower-tier supply where most human rights abuses occur.
Assessment therefore should work from the bottom up, not from the top down. Any activity that creates value for the company is worth assessing. More collective effort, within industries and across sectors, throughout value chains -- Unilever's 12 Fundamental Principles is a good example -- is needed.
Through the pandemic, workers of the world on farms and ships, in mines and hospitals, came to be recognized as essential.
If global business buys its own rhetoric on empathy; if Japan still believes in the civic power of gainful work; if we all hold with Martin Luther King Jr.'s assertion that "all labor has dignity," then as the world calls for pro-social corporate action, we can think of no better answer than the promotion of human well-being in every link of the value chain.