Business must adapt to social risks

Opinion article appearing in Het Financieel Dagblad (FD)

“Companies must incorporate social risks into their business processes. They would then be much better prepared for the violation of human rights in their supply chains and for the growing international legislation on transparency.” So writes Irina van der Sluijs, a Berenschot Associate, in the FD.

The recent disturbances at an Apple supplier in China, where 2,000 workers came to blows with their security guards and a fire in a factory in Pakistan where 300 people perished because the emergency exits were blocked, underscore this. The German textile chain KiK is currently collecting funds for the survivors and victims; Apple is staying quiet.

We have known for a long time that company reputations can suffer serious damage due to the violation of human rights. This why Corporate Social Responsibility (CSR) has taken off, often in the form of awareness creation seminars organised by governments, round tables with NGOs and grant incentives. This ‘soft law’ approach is slowly making room for international legislation which is clearer in terms of identifying what companies are responsible for and which creates a more level playing field. Ultimately this offers a company more benefits than drawbacks. This is certainly true for Dutch companies, which are leaders in terms of transparency and chain management. They can seize the opportunity of better integrating CSR into their operations. This is essential, not because it would preclude the type of dramatic events described above, but to minimise risk and to position the company in advance in relation to the growing legislation.

Three examples to illustrate this point. Last week, the European Parliament adopted legislation that imposes rules governing transparency on listed companies in the mining industry, the oil and gas production industry, and the timber industry. The legislation requires companies to disclose how much money they contribute to governments on a per project and a per country basis. The American Congress approved the Dodd-Frank Act which obliges companies to only extract so-called conflict-free raw materials from the Congo. This means that mining companies, in addition to financial controls, must now also incorporate social controls into their operations.

A second example concerns Americans who already previously understood that responsible chain management is not a question of moral superiority, but of rational business operations. They designed the first transparency legislation in 2010, the California Transparency in the Supply Chains Act. In standard business process, you identify the relationship between operating risks and the internal management system, develop a risk estimate of incidents and formulate measures designed to control risks.

Third. Legislation pulls CSR away from the PR and communications angle. Glossy CSR annual reports are nice, provided they are based on policy and implementation. Clear rules about transparency and accountancy ensure that CSR criteria are included in the annual audits. This way CSR is more easily integrated into the company, including into the departments that feel themselves less responsible. A company that is convinced of the risks abroad reacts faster and more adequately to the human dramas that are taking place in supplier countries.

A PDF version of this article is available under ‘Downloads’.

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Irina van der Sluijs, associate at Berenschot

Business must adapt to social risks.

FD, 01-10-2012

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