Targeted violation reports are more likely to encourage vertical integration and reward “good” firms
Research led by the University of California, Riverside shows NGOs are more likely to sway companies into ethical behavior with carefully targeted reports that consider a range of factors affecting the companies and industries. The report also finds that too much pressure can actually backfire. The study suggests that vertical integration, where companies own and control all steps of the production process, can be economically feasible and promote responsible sourcing throughout an industry.
Social and environmental responsibility in globalized supply chains are hard to police. That task often falls to nongovernmental organizations, or NGOs, that publicize abuses and call out irresponsible corporations and industries.
Adem Orsdemir, an assistant professor of operations and supply chain management at UC Riverside wants to help NGOs direct their limited resources.
He wondered under what conditions it would be economically feasible for companies to vertically integrate instead of maintaining an unethical or unsustainable status quo. He mathematically modeled two competing firms selling in the same market under pressures that included the risk of being exposed for failed corporate social and environmental responsibility, or CSER, and the effects such exposure could have on consumer demand for their products.
He found that in industries where horizontal sourcing is unlikely, firms keep the status quo under low CSER violation exposure risk and vertically integrate under moderate violation exposure risk. Surprisingly, they may maintain the status quo under high violation exposure risk, even when it has a strong negative effect on the overall consumer demand for the industry.
Where horizontal sourcing is possible, a firm vertically integrates under moderate-to-high CSER violation exposure risk. However, the firm may not share responsible supply through horizontal sourcing if most of its competitor’s customers start buying from them instead. If negative attention on the competitor’s violations spurs customers to start buying only from the responsible company, it has no incentive to share its responsible supplies with competitors. The responsible firm benefits but industry-wide responsibility doesn’t necessarily improve.
Where horizontal sourcing is unlikely, NGOs should specify both violating and nonviolating firms specifically in their reports, rather than call out an entire industry. Good firms will benefit when they are named.
“If horizontal sourcing is not possible too much pressure may backfire and discourage firms from vertical integration,” Orsdemir said. “On the other hand, trying to create positive consumer demand for responsible firms is always good.”
When horizontal sourcing is possible, NGOs should allocate more resources to scrutinizing firms’ CSER violations and should create industry-wide violation reports. But the researchers say NGOs should avoid naming specific firms, which may discourage the sharing of responsibly sourced supply by driving customers to only the responsible firms. This could help improve responsibility within the industry as a whole.
About UC Riverside
The University of California, Riverside (www.ucr.edu) is a doctoral research university, a living laboratory for groundbreaking exploration of issues critical to Inland Southern California, the state and communities around the world. Reflecting California’s diverse culture, UCR’s enrollment is more than 24,000 students. The campus opened a medical school in 2013 and has reached the heart of the Coachella Valley by way of the UCR Palm Desert Center. The campus has an annual statewide economic impact of almost $2 billion. To learn more, email firstname.lastname@example.org.