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Wednesday, October 29, 2014

Strategic CSR - Samsung

The article in the url below reports Samsung's discovery of child labor violations in its supply chain and its decision to suspend one of its suppliers as a result:
"Samsung Electronics said on Monday that it had temporarily suspended business with a factory in southern China after allegations last week that it had illegally hired under-age workers to produce cellphone components. … In a news release, Samsung said that the authorities in China were investigating the case, and that if the under-age workers had been hired illegally, the factory could be permanently barred from working with Samsung."
The Risk & Compliance Journal (a daily Newsletter published by the Wall Street Journal) commented on this story, arguing that this will likely encourage other firms to investigate their supply chains and root out similar transgressions, if they exist:
"Samsung Electronics Co.'s admission it has child labor within its supplier network and the U.S. State Department's recent demotions of Thailand, Malaysia and Venezuela to lowest-tier status for child and forced labor problems are serving as a wake-up call to multinational companies about cleaning up their own supply chains. Failing to weed out problems in their systems could lead to their bad behavior becoming front-page news, says the head of one organization fighting to eliminate child labor. 'The hide-your-head-in-the-sand days are over,' said Diane Mull, executive director of the International Initiative on Exploitative Child Labor."
Two things interest me about this case: First, is that Samsung apparently knew nothing about these violations, in spite of having widely-lauded audit procedures and auditing this specific factory three times in the past year (the last time less than a month ago):
"The allegations were embarrassing because on June 30, Samsung released its annual global sustainability report, which noted for the second year in a row that its audits had not turned up any under-age workers in more than 130 supplier factories audited in China. The company also said that it had strict compliance procedures in place, including facial recognition software at its facilities and instructions that Samsung suppliers refrain from hiring workers younger than 18."
Second, I agree that events such as this constitute "a wake-up call to multinational companies about cleaning up their own supply chains," but not in the way that the WSJ sees it. I think it is just as likely that companies will learn the opposite lesson from this – that if they keep quiet the chances are they will slide under the radar, but if they "weed out these problems" they will be pilloried in the press (rather than being lauded for having investigated and identified transgressions). Given the poor record of unearthing problems like this, companies continue to be incentivized to know as little as possible about what is going on in their supply chain. At least then they can claim ignorance, rather than companies that self-report a problem, only to be accused subsequently of covering things up. In short, firms are currently discouraged from seeking complete and voluntary transparency (think BP after the Deep Horizon oil spill). There are as many people waiting to take advantage of corporate willingness to admit wrongdoing as there are people willing to encourage such behavior in the first place.
Ultimately, whether or not there is a social sanction will determine whether such behavior is deterred. I wonder how many people chose not to purchase a Samsung phone as a result of this news story? I am guessing, not many.
Take care
David Chandler & Bill Werther
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Samsung Suspends China Supplier Over Child Labor Case
By David Barboza
July 15, 2014
The New York Times
Late Edition – Final