More Information about Implementing the New California Disclosure Law - California Transparency in Supply Chains Act of 2010

News Brief

By Cydney Posner

As noted in the posting from 11/1/2011, the California Transparency in Supply Chains Act of 2010  will become effective on January 1, 2012. As she explains in more detail, the Act requires each retail seller or manufacturer (as evidenced by the principal activity code reported on its California tax return) that has annual worldwide gross receipts in excess of $100 million and that does business in California to describe on its website "its efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale."

Unlike the conflict minerals legislation, this law does not require companies to take any specific actions. Rather, the mandate is strictly disclosure-based. As a result, in theory at least, companies could disclose that they have no policy and have done no due diligence on their supply chains. However, that may not be the best approach from a PR, let alone ethical global citizenship, standpoint. Certainly. no company would want to be the subject of a journalist's investigative report that any of its key suppliers engage in these horrific practices (as has happened to some companies There are some positive steps, however, that companies could take without an enormous effort, at least as a preliminary matter, allowing companies to report where they are in the process, including the actions that they have taken about which the law requires disclosure. Of course, a number of companies already have admirable extensive social responsibility programs (for example, the companies mentioned in the Bloomberg article above) and will only need to prepare their disclosures. 

The first element of the required disclosure is to indicate the extent to which the company engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery.

  • As with the pending conflict minerals regulations, a first step for many companies subject to the law may be to contact their own trade organizations, which may be able to provide helpful advice about the application of the new law industry-wide, along with other useful guidance and resources about supply chains. For example, the Outdoor Industry Association has developed a Fair Labor Toolkit that is free and includes a form of code of conduct and provides a variety of strategies for monitoring labor standards compliance. There is also a Sustainable Apparel Coalition.  The Electronic Industry Citizenship Coalition and the Global e-Sustainability Initiative (EICC-GeSI) has been very active in these areas.
  • One place to begin assessing the risk would be to look at the geography and the nature of commodity purchased. The U.S. State Department produces a Trafficking in Persons Report, which ranks countries on anti-trafficking measures.  If all of the company's suppliers are located in the U.S. and produce their materials in the U.S., a Tier One country, the company's risks are very low, and it would be reasonable if the company did not engage a third-party auditor or engage in other extensive verification efforts. If the company or any of its suppliers has a factory in one of the poorly ranked countries, further inquiry may be warranted. In 2010, the United States Department of Labor released a report required by the Trafficking Victims Protection Reauthorization Acts of 2005 and 2008 that identified 128 goods from 708 countries that are believed to be produced by forced labor or child labor in violation of international standards. (More goods were found to be made with child labor than forced labor. By sector, agricultural crops were the largest category, followed by manufactured goods and mined or quarried goods. The most common agricultural goods listed are cotton, sugarcane, tobacco, coffee and cattle; the most common manufactured goods listed are bricks, garments, carpets and footwear; and the most common mined goods listed are gold, diamonds and coal.) Although the list is not necessarily comprehensive, if the company's supplies and locations are identified in the report, further inquiry would be warranted.
  • Companies could also examine any public records and newspaper reports that may disclose suppliers' human rights records. 
  • HP follows a risk-based approach in conducting its assessments, which might be useful for other companies with huge volumes of suppliers.

The next item of disclosure is the extent to which the company conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains. An audit might include, among other things, an on-site inspection to monitor working conditions and review of the records of the supplier to verify hours worked by employees and amounts actually paid. (For example, GE says that, between 2008 and 2011, it conducted on-site assessments in 67 countries.) Of course, most smaller companies are not likely to be able to conduct on-site inspections of their supply chains worldwide.

The law next requires disclosure of the extent to which the company requires certifications from direct suppliers that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the countries in which they are doing business. As with the conflict minerals legislation, obtaining certifications from suppliers (which could also cover sub-suppliers) is a step that most companies should be able to take. Companies may also want to add representations into their standard supply agreements going forward, and, in some cases, companies may even want to amend existing agreements. See, for example, these representations from HP and its supplier agreement regarding human rights issues American Licorice includes representations in its standard form of terms and conditions.  Gap also requires vendors to agree to abide by its Code of Vendor Conduct.  Supplier codes of conduct can also provide a framework for the following disclosure obligation regarding accountability.

Disclosure is also required regarding the extent to which the company maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking. A simple non-controversial step that companies should take is to adopt a human rights policy and/or supplier code of conduct. Some companies expand these policies to cover other issues, such as environmental and sustainability issues. Companies should also develop an internal policy regarding the corrective action or other consequences of failure by employees and suppliers to follow the human rights policy or code of conduct. For example, Novo Nordisk provides that all "suppliers with an unsatisfactory rating receive a feedback letter from Novo Nordisk, and when needed an action plan is agreed upon."  Here are some other sample policies or codes of conduct for suppliers, all of which probably predate the California law, but are worth looking at:

Finally, disclosure is required of the extent to which the company trains responsible employees regarding human trafficking and slavery, particularly with respect to mitigating risks. Here is a course from the UN: (includes a code of practice) and another course from the University of Delaware that is designed to teach employees how to assess the risks and identify and mitigate problems specifically oriented towards the California law ($95 for one person). Organizations like Verite and SA Intl also offer training.

Following are links to disclosure from several companies in response to the new California disclosure law: 

Below are additional sources of materials from various NGOs and other organizations, including useful information and recommendations on assessments, practices and policies:

Related Practices & Industries

Public Companies