Preparing for Compliance with the California Transparency in Supply Chains Act

Today is National Human Trafficking Awareness Day.  In less than one year, on January 1, 2012, The California Transparency in Supply Chains Act will go into effect.  As discussed in previous posts, many large retailers and manufacturers doing business in California will be required to disclose their efforts, if any, to ensure that their product supply chains are free from slavery and human trafficking.

Companies that will be impacted by the legislation include both brand name retailers that have already faced considerable scrutiny with regard to human rights issues in their supply chains, as well as companies that have not historically received much attention with regard to these issues.  All impacted companies must make the required disclosures on their corporate websites.

What should companies doing business in California be doing to prepare for this legislation?

  • Identify whether the legislation applies to your company.  If your company does business in California and is identified on its tax returns with a "principal business activity code" that falls within the category of “manufacturing” or “retail trade”, the legislation applies if your company’s annual gross receipts exceed one hundred million dollars.  This will impact a range of companies, including clothing retailers, grocery stores, and metal manufacturers.
  • Review any human rights policies and standards applicable to your product supply chain.  If the legislation applies, it is time to closely review your corporate policies and supplier standards that address issues of human rights.
    • Does your company have policies in place that address forced labor and human trafficking?
    • How does your company inform its suppliers of these policies?
    • Does your company have procedures to evaluate the risk of forced labor or human trafficking associated with the manufacture of its products?
    • Do your supplier standards require certification that the raw materials used in the manufacture of products were sourced in compliance with applicable laws on slavery and human trafficking?

These are all important questions to consider when evaluating your company’s capacity to produce the required disclosures.

  • Review, or implement, auditing and verification mechanisms.  Policies and procedures must be implemented and verified.  It is important to evaluate the capacity of existing verification procedures: 
    • How does your company verify compliance with its human rights policies? 
    • Does your company have systems in place to audit suppliers for compliance with corporate human rights policies? 
    • Are existing, or planned, auditing procedures sufficient to evaluate the specific risks of forced labor and human trafficking associated with your product supply chain? 
    • Does your company use independent auditors? 

Note that the legislation will require companies to specify whether verification of supplier compliance is done through independent, unannounced audits.

  • Review internal accountability mechanisms and training procedures.  Your supplier policies and standards provide little assurance unless they are effectively integrated into the management of your supply chain.
    • Are corporate human rights policies integrated into supplier guidelines and standards?
    • What functional areas within your company are best-positioned to implement policies on forced labor and human trafficking?
    • Are the correct people within the functional areas noted above held accountable for implementing corporate policies on forced labor and human trafficking?
    • Is your company providing sufficient training to the right personnel to ensure that corporate policies are carried out effectively?  

Note that the legislation specifically calls for disclosures regarding internal accountability mechanisms and training programs for employees and management.

  • Start thinking about the content of disclosures.  When planning public disclosures, one year can go by very quickly.  It is important to begin internal discussions about the content of the required disclosures within your company.  The California statute requires disclosure of corporate efforts "if any" — and this allows for a range of potential approaches.  It may be appropriate to engage in discussions with external, as well as internal, stakeholders when determining what information should be provided. 

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