The cost of inaction versus the cost of action reminds me strongly of a term in the German language from my university times: “Mit der Sorgfalt eines ordentlichen Kaufmanns”, which translates to “with due care and diligence of a prudent businessman.” So, given supply chain risks, what is the risk of doing nothing? There are several risks associated with doing nothing in terms of supply chain risks:
- Reputation risk: By not addressing supply chain risks, businesses risk damaging their reputation and losing the trust of customers, investors, and other stakeholders. This blow to their reputation can lead to negative publicity, impacting a company’s bottom line.
- Legal compliance risk: By not addressing supply chain risks, businesses risk non-compliance with laws and regulations related to human rights and environmental protection. Non-compliance can result in fines, legal action, and other penalties.
- Cost risk: Failing to address supply chain risks can lead to disruptions in the supply chain, product recalls, and other costly problems. These high costs can negatively impact a company’s financial performance.
- Risk of negative impacts on society and the environment: Supply chain risks can negatively affect the environment as well as the people and communities involved. Businesses risk not addressing these risks, contributing to adverse social and environmental outcomes.
- Competitive disadvantage: In today’s world, consumers and investors are increasingly seeking proactive companies addressing social and environmental issues. Businesses must address supply chain risks to avoid falling behind competitors and losing market share.
Regulatory measures are often put in place to ensure that companies act ethically and responsibly, especially in cases where there is a potential for negative impacts on people or the environment. These measures can include laws and regulations related to human rights, labor practices, environmental protection, and other related topics.
Last week, I mentioned the concept of having an ethical or moral compass. Why is it not natural for companies to follow business ethics? Why is it necessary to force them with regulatory measures to act ethically? Many would argue that it’s the most logical course of action.
However, it’s not always true that companies do not naturally follow business ethics. Many companies do have a strong sense of corporate responsibility and take proactive steps to address social and environmental issues in their operations and supply chains. But the fact remains that some companies prioritize short-term profits over the long-term health and well-being of their stakeholders and the environment.
From my experience and observation, there are several reasons why regulatory measures may be necessary to encourage companies to act ethically:
- Market failures: In some cases, markets may not adequately account for the negative impacts of business activities on people or the environment. This inaccuracy can lead to a situation known as a “market failure,” where companies do not internalize the total costs of their actions and externalize them onto society. Regulatory measures are designed to address market failures and ensure that companies are held responsible for their actions.
- Lack of transparency: In some cases, companies may not disclose information about their operations and supply chains, making it difficult for stakeholders to hold them accountable for their actions. Regulatory measures can offer transparency and accountability by requiring companies to disclose certain information.
- Limited stakeholder power: Some stakeholders, such as workers or communities in developing countries, may have limited power to hold companies accountable for their actions. Regulatory measures can help level the playing field and give these stakeholders a stronger voice.
Regulatory measures can ensure that companies act ethically and responsibly and can be an essential tool for protecting people and the environment. Examples of such measures include human rights, labor practices, environmental protection, and other related laws and regulations. Failure to address supply chain risks can result in disruptions, product recalls, and other costly issues.