By Pendragon Stuart, former Consultant at Sancroft.
Stories of local lockdowns and COVID-19 outbreaks have stolen headlines, but increasingly the question is about whether companies are to blame, from Boohoo’s Leicester suppliers to outbreaks among vegetable pickers in Herefordshire.
Coronavirus has already highlighted the importance of the social dimension within ESG, helping to put a value to it as corporations have been pushed for how they are supporting societies and jobs. But now this is going further, showing the measurable, financial impact of poor labour practices on communities and reputations. They don’t just create personal misery, but are a sign of hidden practices, like poor health and safety standards that lead to local outbreaks of disease.
Covid-19 has shown we are all connected. Now we’re seeing the cost when that connection is abused. This is a turning point for responsible business and a lesson for others on how to get ahead of imminent ethical, reputational and financial risks.
Taking the biggest story, Boohoo has faced a range of accusations about the suppliers they use, from modern slavery to underpaid employees, furlough fraud and dangerous working conditions that may have both made employees sick and spread coronavirus across Leicester.
These kinds of accusations are not entirely new, but the fact that they have been enough to wipe over £1.5 billion off the value of the stocks and cause the announcement of a £10 million supply chain audit shows that this time is different.
So why now – and what does it mean for business?
- Interconnected issues & risks: The fact that poor labour conditions are not just a human rights abuse, but lead to dangerous practices that can spill over into the whole community shows what experts have been emphasising for a long time – sustainability/ESG risks are interconnected. Failure to solve one often makes many others worse. As we highlighted in our recent report, there are 6 main sources of disruption to supply chains coming – often amplifying each other. Businesses need to understand these, how they interrelate – and how to effectively solve many at once to de-risk and create new value.
- Investors & peers take note: Previously, the responsibility to drive change for business was often pushed onto consumers – it would be left to them to shift opinion and force businesses to change. But now it is investors and business partners who have been spooked by the scandal as they recognise these interconnected risks are a material financial issue that can escalate. Finally there is the clearly recognised financial threat that incentivises rapid change – while there is growing attention to the governance that could let this happen. Indeed, Standard Life Aberdeen specifically dumped shares after they said a week’s worth of calls during the crisis gave them no confidence that management was taking the issue seriously or reacting effectively. Meanwhile Next and Asos suspended sales of Boohoo brands on their sites for fear of contagion to their brands and businesses.
- Short supply chains and agile business models questioned: Coronavirus has brought questions about shortening supply chains – to make businesses more resilient and adaptable, to support local economies. But businesses have often neglected the real issues closer to home – assuming that poor standards are seen abroad, failing to recognise the illegal abuses that happen in the UK. Will shoppers want to trust the proudly British firms that may be employing seasonal workers at illegally low wages and in awful living conditions, especially if they now see these as hotbeds of infection? Even if disease is not spread via the products of such businesses, the risk of causing more local outbreaks is hard for anyone to stomach. Similarly, Boohoo has grown impressively in part because its factories based in the UK can rapidly respond to trends and scale up production on whatever sells well – which plays well to the world of constantly updated Instagram and TikTok feeds. However, these accusations question whether that speed and affordability is based on illegally low labour costs. The focus needs to be on responsible, resilient supply chains, not shifts that appear efficient, but create hidden abuses and weaken communities and businesses.
This crisis is still evolving, with more stories of local lockdowns in food processing and other fashion retailers like Quiz now announcing their own concerns and investigations. It not only threatens to tar the wider industries with this brush, but also raises questions for all businesses about a new era of interconnected threats, stakeholder activism and investigation of business models.
At Sancroft, we have seen time and again how mapping these interconnected risks, identifying the opportunities and strengthening governance not only improves the lives of everyone in the supply chain, but significantly strengthens the health of the business.
No business welcomes having half of their value wiped out in a week, but this does not have to be an unexpected risk. Now is the time to shape the future you want, not just react to today’s crisis.
If you want to explore how to strengthen your supply chain, to make it more sustainable and visible, so it drives business growth, manages risk, improves relationships with your suppliers and empowers you to make sustainable profits you can be proud of, please get in touch via email@example.com.
You can read our most recent report on the new shocks coming to supply chains and how to turn them into opportunities, here. For more insights from the Sancroft team, please sign up to our newsletter here.