Do markets reward sustainable supply chains? The forces of social capital may change the rules…

In a recent dialogue with Barbara Grey, the author of new research on social capital today, we discovered an interesting anomaly.   It seems that companies who seek to identify problems and issues in their supply chain, and who intend to do the right thing, are not always rewarded by the markets for doing so.  In the series of sustainable supply chain assessments we’ve completed this year, our student teams assessed the extent to which codes of conduct were measured, audited, and rewarded/penalized by companies seeking to drive improved sustainable performance down the supply chain.  One would naturally assume that companies that are “doing the right thing” would be rewarded in the market…. but is it so?

Exhibit “A” is the apparel manufacturer, Lululemon.  In recent weeks, Lululemon’s stock went down 10% when it was announced  that they product issues.  The apparel maker pulled some of its yoga pants from store shelves for being too see-through, and their product officer fell on her sword taking the blame.  But they had the guts to do the recall…. and even though they took a hit, the company is fundamentally based on a strong culture of transparency and ethical behavior.  In the longer term their stock is going up.

Exhibit “B” is Apple…as I’ve noted in prior blogs, Apple has begun a campaign of audits, but has not made significant changes to its stable of manufacturing partners as a result. Its inspections have turned up serious violations at hundreds of plants, but only 15 suppliers have been terminated since 2007.  And their stock?  Taking a major hit, and dropped from a high of 700 to below 400…..that’s a lot of market cap to lose.  But was it because they were transparent – and if they do try to drive more change, will they be rewarded?

Barbara recently wrote an insight  on a new phenomenon called Social Capital, which is based on social media as a forum to drive change.  Social media has the power to influence, expose, and disseminate views (both positive and negative) on a company’s products and/or services, including how a company treats their suppliers and stakeholders, and how a company’s business activities impact society and the environment. This will enable parties in the supply chain to self-organize and join forces on a common cause to gain support from others and lobby for social and regulatory reform and change.  In the process, they will begin to create new communities to enable learning, collaboration, and co-creation.

In my opinion, organizations now have to make a tough decision.  To be transparent, or to hide their supply chain flaws.  I truly believe that those organizations that step up to the plate and make the tough calls, drive new measures into their supply base, and lift up the bar for the entire community will win in the longer term…. not the short term mind you – but the long term.  The forces of Social Capital are at work.