Can Apple Redeem Itself on Supply Chain Sustainability? Taking a Cue on Accountability from Nike’s Playbook

NOTE: Portions of this piece originally appeared as a guest column in Sustainable Business Oregon

Last week, on the way to a business meeting in downtown Portland I tuned into the local sports radio station.  Nationally syndicated sports commentator Dan Patrick (“DP”) was providing his one minute Above the Noise segment.  The focus was on if, how and when sports icons that have fallen from grace (due to an off the field indiscretion) they could ever redeem themselves in the public court of opinion.  And could they ever regain public acceptance to be ‘marketable’ commodities again.  Think player product endorsements.  Think Tiger Woods, Michael Vick, Ben Roethlisberger, Kobe Bryant, Ron Artest- well the list is WAY to lengthy to cover here, but you get the idea.  Most that have regained endorsement status (like Bryant) have either redeemed themselves through community service and on field performance, but often the public-at-large (er, consumers) just forget.  The past indiscretions have faded from the tabloids.

So I got to thinking that this sounded very familiar when it comes to companies (manufacturers and service industries in particular), and the ways in which they address sustainability matters.  I am thinking of manufacturers who have made environmentally impactful products, and willingly or knowingly conducted socially irresponsible or possibly unethical business practices that have led to public backlash.  And I thought about how some have been able to successfully “redeem” themselves and regain a positive marketplace reputation, while others never quite recovered.

Since this past week Apple was in the news, I thought DP’s radio op-ed was a perfect parallel.  According to a report issued by anti-pollution activists in China, Apple is more secretive about its supply chain than almost every other American company operating in the country. Apple came up among the laggards among 29 major electronics and IT firms in a transparency study drawn up by a coalition of China’s leading environmental groups.  The reports focused on “the openness of IT firms and their responsiveness to reports of environmental violations at suppliers”.  Though Apple is known in the industry for the secrecy it wraps around its newest product offerings, the “mystery of its supply chain is more a matter of covering up than preventing leaks”, the report stated. The report claimed that Apple’s suppliers have been involved in breaches of environmental regulation, including major waste discharge violations in recent years at several Chinese firms that are believed to be  part of Apple’s supply chain.  To be fair, Nokia, LG, SingTel, Sony and Ericsson also fared poorly in the survey, but Apple stood out in how it did not address and respond to the findings.

Apples Supplier Commitment

Of course this revelation was not the first time that Apple’s supply chain management oversight (or lack thereof) has been ‘shaken to its core’. Despite Apples Supplier Code of Conduct, it appears that they are not fully conforming to their own internal commitment and policies.  An insightful post from back in mid 2009 highlighted the series of issues that Apple has had with its supply chain, from human rights violations and pollution to lax supplier oversight and unfortunate subcontractor worker suicides.  Apple itself admitted its complacency in addressing social and environmental sustainability issues in a pragmatic but resolved manner.

Nikes Redemption Story- a Work in Progress

Apples current predicament is not unlike another company that relies on a deep contractor supply chain, whose headquarters in my backyard- Nike.  In the late 1980’s reports were starting to circulate from Indonesia and Asia concerning Nikes alleged “sweatshops”.  Over the course of the 1990’s, continued exposure of unscrupulous labor and human rights practices, combined with intensive public protests and campaigns continued to hound Nike and dragged down its reputation.

By 2001, the issue erupted and Nike was stung by reports of children as young as 10 making shoes, clothing and footballs in Pakistan and Cambodia.  Phil Knight, Nikes CEO admitted the company “blew it”. Nike, like many other companies (like Nestle, PepsiCo, Wal-Mart and other consumer products manufacturers and retailers) learned the hard way that taking liberties with “social license” to operate (especially in foreign countries) has its negative financial and reputational consequences.

That’s not to say of course that all is perfect in Niketown.  But with the corporate and supply chain infrastructure now in place to monitor, validate and continually improve supplier relations and accountability, fewer violations have occurred. Nike has continued to push open innovation and environmentally focused product design with social accountability in mind.  The Ethisphere Institute named Nike as one of the World’s Most Ethical Companies for 2010. The Institute recognizes organizations annually that “promote ethical business standards and practices by going beyond legal minimums, introducing innovative ideas benefiting the public and forcing their competitors to follow suit.”   Also, last October, Newsweek magazine took 500 of the largest publicly traded U.S. companies and produced a 2010 Green Rankings List.  Nike, was 10th on the list, and was noted for having a strong commitment to evaluating and improving the environmental footprint of its suppliers.  They also scored a 97 in the reputation category. (Apple by the way scored 65^th, with a reputation score of 71.  I guess that low score represents that missing piece in Apples iconic logo.

Stepping Up to the Plate on “Social License to Operate” and Accountability

A great research study from 2002 (from the Center for the Study of law and Society at University of California Berkeley)  highlights the steps that companies in the apparel, forest products, consumer goods, oil and energy and other highly capitalized industries have gone through to “redeem” themselves and restore brand trust.  They’ve achieved this through rigid compliance with local environmental rules, product  and environmental stewardship, verification  and proactive social engagement.

Apple needs to do the same thing and implement a proactive supplier sustainability and verification program.  As I have laid out in prior posts, companies like Nestle, Corporate Express, Danisco, Starbucks, Unilever and the apparel industry stepped up in a big way to address human rights, fair labor and sustainable development in areas in which they operate throughout the world.  So too have major electronics companies like Hewlett Packard and IBM in leveraging their supply chains in assuring that corporate sustainability performance objectives are met.   Further, in 2010 the International Organization for Standardization (ISO) unveiled its ISO 26000 Corporate Social Responsibility guidance document.  In addition, two prominent organizations, UL Environment and Green Seal unveiled and vetted two sustainability focused product (GS-C1) and organization (ULE 880) standards this past year, both of which may markedly affect supply chain environmental and social behaviors in the future.  That’s not to mention the issue of conflict minerals, which strikes deep at the cell phone manufacturing sector.  Finally, the age of openness and collaboration has arrived on the heels of Wikileaks and numerous high profile reputational back breakers.

Engaging and Leveraging the Supply Chain

The most successful greening efforts in supply chains are based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies.  Leading edge, sustainability –minded and innovative companies have found “reciprocal value” through enhanced product differentiation, reputation management and customer loyalty.  Suppliers and customers must collaboratively strengthen each other’s performance and share cost of ownership and social license to operate.  But supply chain sustainability and corporate governance must be driven by the originating manufacturers that rely on deep tiers of suppliers and vendors for their products.

So Apple should take a cue from Nikes playbook- “Just Do It!”  This issue will not go away on a wing and a prayer.  Here’s how to get it done- right:

1)  As the 2009 post that I mentioned said, get your company on the ground and enforce your Supplier Code of Conduct – now.

2)  Open Up and reach out to external stakeholders, not just your suppliers.  Engage non-governmental organizations early and often.   Find a respected international organization or other third-party to facilitate the engagement process.   Treat communities, NGO’s and suppliers with respect.

3) Work with your supply chain and with industry peers to standardize requirements. Create or revisit the resources allocated in internal procurement networks to collaborate on environmental and social sustainability issues.

4) Construct environmental and social accountability requirements at the purchasing phase. Build environmental and social conformance criteria into supplier contract specs and incorporate sustainability and environmental staff on sourcing teams

5) Inform suppliers of corporate environmental concerns. Standardize supplier questionnaires and make sure that the Supplier Code of Conduct lands in the right hands.  Promote exchange of information and ideas by sponsoring charettes to facilitate discussions between customers and suppliers on environmental and social license issues.  Develop a supplier/vendor peer or mentoring program that promotes co-innovation on sustainability issues

6) Build environmental considerations into product design w/ suppliers. Apple already considers Design for environment (DFE) product innovation and life cycle analyses in its product design.  You’d be well served to coordinate minimization of environmental impact in the extended supply chain and work with suppliers to manage end-of-pipe environmental issues.  Give your suppliers an incentive to reduce their environmental loading associated with their products and improved worker conditions.

7) Follow up! Without adequate on-the-ground follow-through, on-going supplier engagement and long-term commitment of human and financial capital, your sustainability problems will persist.

So like sports stars, business stars can redeem themselves and their reputations.  But it first takes admitting that you have a problem before you can start down that path.  Apple has had a pretty rough year, what with CEO Steve Jobs taking medical leave, its products having persistent quality problems and its connection with negative environmental and human rights issues.  I’m hopeful that Apple and others will get the message that ol’ Ben Franklin stated so long ago but holds true today:

“It takes many good deeds to build a good reputation, and only one bad one to lose it.” -Benjamin Franklin

Until then, “I’m a PC”.

Sustainability that You Can ‘Bank’ On: Value-Added Steps to ‘Green’ Financial Institutions

This past week, the Financial Times and IFC (World Bank Group) announced the winners of the 2010 Sustainable Banking Awards (http://bit.ly/ZNISO).  The annual awards recognize banks and other financial institutions that have shown leadership and innovation in integrating social, environmental and corporate governance considerations into their operations.  Short of two funds, American banks were absent from the list.  Let’s face it, with the global economic collapse of the past two years, and the banking industry’s corporate social responsibility reputation in the tank, Wall Street firms and the banking industry in general is under pressure to “do good”  (http://bit.ly/a5D7r4).  But all is not lost and it’s not too late for banks to regain consumer confidence while improving their operations and bottom line.

Unfortunately, the current economic downturn and lending issues faced by the banking sector has created a threat to “triple-bottom-line” focused sustainability i.e. green programs that are meant to manage banking risk being neglected or moved to the bottom of the “to do” list.  I am not talking about the ‘low hanging fruit’ like lighting retrofits or e-statements or recycling programs (all good starts by the way).   My focus is on seeing banks implement deeper initiatives focused on governance, sustainability focused risk, reputational management, and value-added community benefit.

The Environmental Minefield that Banks Walk Through

The banking sector generally perceives itself as environmentally neutral.  However, the regulatory landscape that large commercial and community banks often find themselves walking through is constantly changing and looks more like a minefield.  Although banks themselves do not largely impact the environment much through their own ‘internal’ operations like a large scale manufacturer or developer might, the ‘external’ impact on the environment can be substantial.  That is because banks like any other business may be potentially liable for environmental damage that their operations or fiduciary involvement may cause.  In banks cases, the concern is on derived environmental liability through debt and equity transactions.

The “Green” Question

Environmental and corporate social responsibility issues highlight both risks as well as opportunities to banks.  The banks and financial institutions that made the FT 2010 list are serious about greening their operations and financing sustainably-focused projects that put sustainable governance at the heart of decision-making.  Not only does this leverage a bank’s risk, but it’s value-added in the long run.  How?  Because substantial evidence is available that demonstrates how environmentally responsible investments and projects that ’give back’ to a local economy more than they “take’ are better investments in the long term.

There are no specific legislative drivers to encourage better performance in terms of sustainable lending or project finance.  However, several voluntary standards and sets of principles exist and are gaining steam in the business marketplace.  Examples include the Equator Principles (http://www.equator-principles.com) , World Bank IFC Guidelines, Global Reporting Initiative (GRI) Finance Sector Guidelines (http://bit.ly/aFmaYe), and even Securities and Exchange Commission federal reporting requirements.  Leading international finance and local banking institutions have signed on to many of these guidelines, which are rapidly becoming the “norm” in the banking industry.  Only a few U.S. financial institutions have stepped up to the plate so far, notably Citigroup, Wells Fargo, Bank of America and JP Morgan Chase.

The Risk Management Challenge

Environmental   issues present the banking sector with a daunting and often long term challenges. Banks can face financial risks from borrowers defaulting on the repayment of their loans because of fines imposed for poor environmental performance.  As I already noted, current environmental regulations in the U.S. can make banks liable for environmental damage caused by borrowers.  Banks, therefore, need to strive to minimize these risks with the introduction of measurable and verifiable environmental criteria into their credit policies and overall lending processes.  All too often, evaluations are often made on unverified business pro-formas, deficient appraisals, or on applicants environmental reports, often compiled on a voluntary basis.

However, the lack of environmental and other sustainability criteria in a loan-vetting process may prevent banks from estimating the full risk premium of investments and expose the bank to further short and long term risk. Therefore, banks might consider starting by reassessing their credit policies and loan screening processes to assure that sustainability is accounted for.

Solutions that Add Value and Real Sustainability

A growing body of quantitative and qualitative data demonstrates the bottom-line benefits of sustainability-focused credit risk management performance in the banking industry are evident in the market place. Some key benefits of such an approach, reported by over 85% of banks surveyed that have implemented similar programs) include:

• Improved Financial Performance
• Reduced Operating Costs
• Enhanced Brand Image and Reputation
• Increased Loan Originations and Customer Loyalty
• Increased Ability to Attract and Retain Employees.

To be and to stay on the leading edge of our new financial world, forward- thinking banks must consider developing robust, performance based lending policies and processes to ensure that 1) the organization not only offers competitive products to its customers and gives value back to the community in which loan assets are located, but 2) the organization protects its fiduciary position, environmental and reputational risk from servicing questionable projects.   So far here in the U.S., efforts by established banking institutions in the “deep-sustainability” space is scant, and I can only point to a few real, demonstrable leaders with a firm track record in this area.

My company’s approach to ‘green’ banking focuses not only on helping our clients find the obvious ‘low hanging fruit’ as I noted earlier, but get to the “core” risk management success factors that can make or break a bank:

• Sustainability focused operations procedures & policies;
• Value-added bank loan/credit risk management tools and sustainability scoring indices, leading to innovative customer products and enhanced profit streams.
• Working with compliance and regulatory agencies interacting with financial institutions.

How well banks handle social and environmental risks is increasingly important because, in today’s global economy with unrestricted information flows, such risks can affect a bank’s reputation and long-term business success.  Who knows- with a little guidance, innovation, determination and daring, more U.S. financial institutions may make the FT Sustainability Banking 2011 list.  I’ll be watching where my money goes- will you?

Embracing Sustainability and Innovation to Get (and Stay) Ahead in Business

This week, I am sure that you are reading this along with the many other blogs that mark the 40^th anniversary of Earth Day.   For 40 years, as Americans, we have aspired to change the world through enhanced environmental consciousness, policy making, and technological innovations that drive sustainability.  In the U.S. we have lurched forward, sputtered badly, recovered, then stopped all together, then jumped forward again.  So our choices and actions moving forward in this new “green economy” have not been entirely without influence or challenges, from ourselves and from nations afar. The only certainty is that it’s our own actions that can shape the path of our own organizations, communities and markets.

Disruptive technology and disruptive innovation are terms used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers. http://www.claytonchristensen.com/disruptive_innovation.html.  Christensen’s’ theory, featured in both “The Innovators Dilemma” and “The Innovators Solution” provides a prescription for a small entrant with less resources to compete with and beat a large incumbent. A quick look at the Disruptive Innovation model is at http://www.youtube.com/watch?v=DaKgMcFP4Mo

Disruptive innovations either create new markets or reshape existing markets by delivering relatively simple, convenient, low-cost innovations to a set of customers who are ignored by industry leaders. Historically, companies that dominate an industry have had little interest in pursuing these types of innovations because profit margins are often lower and the innovations don’t address the needs of those companies’ best customers. http://www.innosight.com/documents/diprimer.pdf

What does this have to do with “sustainability”?  I had the chance to participate in a recent Leadership Summit here in Portland, hosted by the University of Oregon.  The goal of the summit was to vette business and sustainability leaders in Oregon/SW Washington are as to how the U of O Center for Sustainable Business Practices could serve as a catalyst for innovation and bring sustainable solutions to the marketplace in Oregon and beyond.  One goal that the Center has is to seek innovative approaches that can break the endemic boom-bust cycle that Oregon and many western states have often found themselves in.  Never mind that there are tax related issues or brittle governance, or well intentioned but ineffective public-private partnership infrastructures that add to the fiscal malaise.

The discussion that ensued was interesting and of particular note because of the many references to disruptive technology.  From this dialogue, it became clear that collaboration- finding ways to harmonize research, policy, manufacturing and service – is vital to a stable, sustainable economy.  It was generally agreed that  in order to support meaningful job growth, an educated community and sustained economic performance, two things must happen:  1) all parts must be working together and 2) there needs to be a policy/governance, educational, and public-private infrastructure that supports disruptive technology and innovation.

A book that I have been reading, The Silver Lining, A Playbook for Uncertain Times, by Scott Anthony, provides some answers as to how communities and organizations can move forward to realize opportunities in their markets. This 10-point checklist synthesizes The Silver Lining‘s key messages and provides practical guidance for leaders. Each item links to a blog post describing the item in more depth.

Does your organization:

1. Recognize today’s transformation imperative?
2. Have a handle on the future potential of innovation?
3. Have a process to prudently prune its innovation portfolio on a regular basis
4. Have clear consensus on the 1-3 top growth opportunities?
5. Always ask, “How does the customer define more?” before asking people to do more with less?
6. Match technological experiments (“can we?”) with strategic experiments (“should we?”)?
7. Constantly search to share the innovation load to de-risk innovation?
8. Have a plan to “love the low end” in existing and emerging markets?
9. Run an innovation factory with systems and structures to make innovation repeatable?
10. Have a plan to help leaders transform themselves?

Finally, I want to share with all of you a seminal piece which I recently purchased from the Harvard Business Review (HBR) and that I “tweeted” about last fall http://bit.ly/2yfirf.   Please read this!  Authors Nidumolu, Prahalad, and Rangaswami have found that the quest for sustainability can unearth organizational and technological innovations that yield both top-line and bottom-line returns. That quest has already begun to transform the competitive landscape.  The authors found that companies on the journey to sustainability go through five distinct stages of change:

1. viewing compliance as opportunity
2. making value chains sustainable;
3. designing sustainable products and services;
4. developing new business models; and
5. creating next-practice platforms.

By going through these key stages of change, the study found that “sustainability isn’t the burden on bottom lines that many executives believe it to be. In fact, becoming environment-friendly can lower your costs and increase your revenues. That’s why sustainability should be a touchstone for all innovation.  In the future, only companies that make sustainability a goal will achieve competitive advantage. That means rethinking business models as well as products, technologies, and processes.”

This research was for me transformative and insightful, and offers compelling reasons for embedding sustainability into operational practices and strategic business strategies.

Whether you read Anthony, explore Christensen’s ideas or the review the HBR article, history shows us that innovation flourishes, no matter how dark the times. You can either reflect on this time in our economic recovery as the beginning of the end or a jump-start to transform your business or your market space. It all depends on your actions, so get innovative now!

All Parts Working Together