Purpose Drives Profit: Rethinking Due Diligence in Complex Supply Chains

In a podcast interview for Diginex, Dr David Cooke and Diginex’s own Dr Hannah Thinyane discussed how responsible business practcies can drive profit and benefit the most vulnerable workers in a supply chain.

Dr Cooke is the author of Kind Business: How Values Create Value and former CEO of Konica Minolta Australia – a Japanese multinational tech company, whose competitors include Xerox and HP.  

His book was inspired by his experiences as Managing Director of Konica Minolta where he noticed significant increases in productivity and deal value as a result of the social responsibility initiatives he spearheaded.  

Dr Thinyane is the creator of Apprise – a worker voice tool built to screen for business risk early and improve the lives of labourers in complex supply chains where top-down visibility is poor.  

Below you’ll find the most thought provoking insights and takeaways from the episode.  

ESG has a blind spot: companies understand carbon better than people

When faced with the challenge of making positive changes within a business, administrators gravitate towards the familiar and accessible.  Nobody wants to engage with something they don’t understand. The ‘E’ (Environmental) of ESG therefore gets the most attention.  

Carbon emissions, at least in scopes 1 and 2, are simple to understand and the infrastructure for collecting the data is increasingly effective and navigable. Not so with ‘Social’ concerns.  

Labour rights are inconsistent and, in some territories, inadequate. Policies are hard to enforce when companies are two or more steps removed from suppliers and audits have limited temporal reach.  

However, if a company can tell investors their emissions profile but nothing about their supply chain due diligence, there is a serious disconnect. ESG, whether Environmental, Social or Governance is about protecting people.  

Dr Cooke pointed out that overwhelm is understandable, but inaction is not. Businesses have been using tech to tackle problems for years. This problem is no different. The tech exists to begin addressing supply chain due diligence and therefore the time has come to stop hiding behind green signalling and approach ESG holistically.  

Worker voice changes the economics of compliance

We mentioned how traditional auditing can be limited.

Audits naturally provide a set of ‘time-stamped’ data from which to extrapolate information about the supplier and the supply chain as a whole. Impossible to avoid but limited in their usefulness now that expectations on businesses have changed.  

They are very effective proof of an organisation’s due process, but do not yield much information about the highest risk people in that organisation’s supply chain.  

Dr Thinyane’s research led her to interview ~200 auditors in an effort to understand the biggest limitations they found with current processes. You can read the full details here. The following were cited most often:

• Audits are time pressured - often spanning only 2 days, this results in a number of time-saving measures that limit their capacity to detect policy violations.

• Random or handpicked sample – workers are chosen either by the employer or at random for interview, resulting in a small and potentially unrepresentative data capture.  

• Interviews happen in groups – workers interviewed in groups are less likely to talk about their situation. It is impossible to know what the relationships are like between the workers, whether any are related to someone senior. This muddies the data set.  

• Translators introduce bias – a number of issues had arisen where translators are blamed for mistranslations (whether intentional or accidental).  

• Lack of trust – workers in exploitative situations are very guarded. They don’t trust the auditing process and they can fear reprisal for speaking honestly.

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Worker voice seeks to address these issues. It is a continuous process, allowing workers to come forward on their own, answer questions privately and in their own language without any go-betweens.  

Understanding the limitations of traditional auditing processes helps to illustrate why risk is broader in reality than on paper. Luckily, mitigating risk and protecting vulnerable people can be solved by the same mentality-shift.  

Purpose drives profit

Corporate values increasingly influence commercial purchasing decisions. One key insight from Dr Cooke was that following his efforts to create Corporate Social Responsibility initiatives, he began to see an increase in sales.  

In recent years a shift in the global standard for internal governance policies has led organisations to evaluate more than just cost when it comes to procurement. Many internal policies specifically require organisations to consider:

• governance  

• ethics  

• culture  

• reputation  

• values alignment  

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Dr Cooke noticed that Konica Minolta was awarded large contracts from clients they’d never worked with before, who all said similar things – that their reputation for ethical business was the main draw factor in a commoditised market.  

Tenders that were once decided on spreadsheets were now being decided by an organisation’s soul.  

The information problem compounding labour risk

Around 100,000 people are identified each year in situations of forced labour – a legal definition which the International Labour Organisation describes as “all work or service which is exacted from any person under the threat of a penalty and for which the person has not offered himself or herself voluntarily”. The estimated number of people in forced labour is 27.8 million and in modern slavery 50 million. The discrepancy is a problem for any large organisation with a supply chain. It proves that existing methods for identifying forced labour in supply chains are not reaching the right people. However, if we can identify and remedy issues of exploitation and labour risk, it is possible to prevent the situation escalating into an instance of forced labour.  

One significant thread from the discussion inspiring this article examines executive attitudes toward due diligence processes and institutional responses to identified issues. The detection of forced labour indicates operational systems are performing as intended rather than broken. Fundamentally, due diligence serves to protect the most marginalized individuals within supply chains, rather than establishing an impossible standard of zero violations.

Identifying an issue enables an organisation to act. The focus should be on identifying problems and forced labour indicators sooner and addressing them quickly. Currently, there is not enough data to identify people in exploitative situations, which is why labour risk is an information problem.

Having robust systems which are used to screen for risk, identify instances of exploitation and ultimately close the data gap is the future of ethical business.  

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