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Journal of Public Affairs f. Publ. Aff 6: 228-240 (2006) .-••- ®WILEY Published online in WUey InterScience •^^ Cwww.interscience.wiley.com) DOI: 10.1002/pa.232 T^ Safeguarding corporate social responsibility (CSR) in global supply chains: how codes of conduct are managed in buyer-supplier relationships Esben Rahbek Pedersen^* and Mette Andersen^ 'Department of Operations Management, Copenhagen Business School, Solbjerg Plads 3 DK-2000 Frederiksberg C, Denmark ^ Copenhagen Centre, Porcelaenshaven 24A, 2000 Frederiksberg, Denmark In the wake of globalization, companies are becoming increasingly aware ofthe social and environmental aspects of international production. Companies of today not only have to beprofitable, but they also have to be good corporate citizens. In response to the increasing societal pressure, many com^panies adopt the concept of corporate social responsibility (CSR) by introducing codes of conduct that are expected to ensure socially responsible business practises throughout the chain —from supplier of raw materials to final end- users. However, there are several challenges to the management and control of codes of conduct in global supply chains. Active commitment is a precondition for the successful implementation of the codes, but the incentive to comply with the codes does not necessarily extend to all the actors in the chain. Moreover, it is difficult to enforce codes of conduct in global supply chains, because the involved companies are separated geographically, economically, legally, culturally and politically. In consequence, introdu- cing codes of conduct in global supply chains raises a series of agency problems that may result in non-compliance. Realizing that norKompliance can have severe consequences for the initiator (due to consumer sanctions, negative press, capital loss, government interventions, damaged brand etc.), the article analyses how the interests of the actors in the supply chain can l?e aligned with the terms of the codes. IKEA is used as a 'best case' example to illustrate how codes ofconduct can be effectively managed in the supply chain. Copyright © 2006 John Wiley & Sons, Ltd. •Correspondence to: Esben Rahbek Pedersen, Department of Operations Mani^ement, Copenhagen Business School, Solbjerg Plads 3, DK-2000 Frederiksberg C, Denmark. E-tnail: [email protected] Copyright © 2006 John WUey & Sons, Ltd. Journal of Public Affairs, August-November 2006 DOI 10.1002/pa
Transcript
Page 1: Supply Chain

Journal of Public Affairsf. Publ. Aff 6: 228-240 (2006) .-••- ®WILEYPublished online in WUey InterScience • ^ ^Cwww.interscience.wiley.com) DOI: 10.1002/pa.232 T ^

Safeguarding corporate socialresponsibility (CSR) in globalsupply chains: how codesof conduct are managedin buyer-supplier relationshipsEsben Rahbek Pedersen^* and Mette Andersen^'Department of Operations Management, Copenhagen Business School, Solbjerg Plads 3 DK-2000Frederiksberg C, Denmark^ Copenhagen Centre, Porcelaenshaven 24A, 2000 Frederiksberg, Denmark

• In the wake of globalization, companies are becoming increasingly aware of the social andenvironmental aspects of international production. Companies of today not only have tobe profitable, but they also have to be good corporate citizens. In response to the increasingsocietal pressure, many com^panies adopt the concept of corporate social responsibility(CSR) by introducing codes of conduct that are expected to ensure socially responsiblebusiness practises throughout the chain —from supplier of raw materials to final end-users.

• However, there are several challenges to the management and control of codes of conductin global supply chains. Active commitment is a precondition for the successfulimplementation of the codes, but the incentive to comply with the codes does notnecessarily extend to all the actors in the chain. Moreover, it is difficult to enforce codes ofconduct in global supply chains, because the involved companies are separatedgeographically, economically, legally, culturally and politically. In consequence, introdu-cing codes of conduct in global supply chains raises a series of agency problems that mayresult in non-compliance.

• Realizing that norKompliance can have severe consequences for the initiator (due toconsumer sanctions, negative press, capital loss, government interventions, damaged brandetc.), the article analyses how the interests of the actors in the supply chain can l?e aligned withthe terms of the codes. IKEA is used as a 'best case' example to illustrate how codes of conductcan be effectively managed in the supply chain.

Copyright © 2006 John Wiley & Sons, Ltd.

•Correspondence to: Esben Rahbek Pedersen, Department of Operations Mani^ement, Copenhagen Business School,Solbjerg Plads 3, DK-2000 Frederiksberg C, Denmark.E-tnail: [email protected]

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Safeguarding CSR in global supply chains 229

Suppliers

Supply Chain

Manufacturer Distributors

•Child labour•Discrimination•Long workinghours•Abuse ofunion rights•PoliuUonetc.

CSR issues

•Corruption•No freedom ofspeech•Dangerousworkingconditions•Social Inequityin localcommunitvetc.

•Wtioiesafediscrimination•Britaery•Unfaircompetition•Unethicalinvestments

Examples of CSR issues in supply chains (Neergaard and Pedersen 2005. p. 103). Inspired by WBCSD (2003).

Introduction: CSR in global supplychains

Doing the right thing in business is no longerjust a matter of making profit. The ethics ofbusiness activities are becoming increasinglyimportant, and more and more companiesare evaluated on their ability to meet not onlythe customers' needs but also the variousneeds of employees, NGOs, the local com-munity representatives and other interestgroups. In response to this development,companies are increasingly embracing thediscourse of CSR, and a wide range ofinternational organizations, business associa-tions and standardisation organizations haverecently introduced management standards,labelling schemes and reporting systems,which all address the social and environmen-tal aspects of production (Utting, 2000, p.l;Kapstein, 2001, p. 114; Kolk and van Tulder,2003. p. 267).

Moreover, a large number of especiallymuJtinational corporations (MNCs) have intro-duced Codes of Conducts, that is a set ofwritten principles, guidelines or standards,which are intended to improve the company'ssocial and environmental performance. Realiz-ing that CSR issues arise throughout the supplychain (see Figure 1) and that companies areincreasingly held responsible for the conditionsunder which their products are being pro-duced, these codes often go w ell beyond the

boundaries of the individual organization andinclude social and environmental requirementsforsuppUers(cf. Roberts, 2003, p. 163; Jenkins,2005, p. 527).'

When the success of CSR depends on theactions of all parties in the supply chain, thegovernance of these inter-organizational rela-tionships are of crucial importance. Failure tomanage and control the social and environ-mental impact of the supply chain willincrease the risk of non-compliance, whichin turn may damage the reputation of thecompany that developed the code (theinitiator). One thing is to be socially irrespon-sible; another is to be a socially irresponsibleliar. Inotherwords, the initiator of a code hasa strong incentive to ensure that the othercompanies in the supply chain comply withthe code.

So far, much research has addressed thequestion of whether CSR initiatives are reli-able from the perspective of the variousinterest groups in society (e.g. unions, NGOs,government, customers). Much less has beendone in order to investigate how companiessafeguard CSR in global supply chains. Realiz-ing the complexity and difficulties in mana-ging external relationships with independentcompanies operating in different geographical,

'According to the Worid Bank (2003, p. 2), there is anestimate of approximately 1000 of these codes inexistence today World Bank (2003A, p. 2)..

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230 Esben Rahbek Pedersen and Mette Andersen

social and political settings, the question ishow a company can be certain that thesuppliers fulfil their obligations stated in thecode.

Theoretical perspective

Based on a simple buyer (principal)—sup-plier (agent) relationship, the article will tryto answer this question by presenting some ofthe safeguards/protective mechanisms onwhich a company may rely when planningand implementing Codes of Conduct in globalsupply chains. The presentation will be basedprimarily on agency theory, which is useful inthe analysis of most cooperative efforts,where it is difficult for a principal to monitorthe work of the agent. Moreover, a number ofrelated theories (most notably transactioncost theory) and alternative perspectives(most notably network theory) will serve asdiscussion partners in the analysis.

Agency theory assumes that individuals areself-interested creatures and addresses theproblem of opportunism, that is, self-interestseeking with guile (Dees, 1992, p. 29; Koch,1995, p. 3; O'Donnell, 2000, p. 526). Withregard to the latter, it is not expected that allindividuals are opportunistic, but that someare, and that it is difficult and costly to separatethe opportunistic actors from the non-oppor-tunistic ones (Williamson and Ouchi, 1981, p.351)- In order to avoid opportunism, it isnecessary to provide the agent with incentivesto act in accordance with the principal'sinterests (Dees, 1992, p. 25; Petersen, 1993,p. 277; Koch, 1995, p. 13). In short, this can bedone either by monitoring behaviour orrewarding outcomes (Eisenhardt, 1989, p- 61;Petersen, 1993, p. 281; ODonnell, 2000, p.526). Monitoring can be seen as a mechanismused by the principal to obtain informationabout the actions of the agent, whereas rewardsare outcomebased, financial incentives (cf.O'Donnell, 2000, p. 526). However, bothalternatives are associated with costs, whichdepend on the characteristics of the activity(the complexity of the assignment, the abilityto monitor the agents, the correspondence

between outcome and the agents' behaviour

Agency problems and codesof conduct

It is generally acknowledged that opportunismposes a threat in inter-firm relationships, andone case in point is the planning and imple-mentation of Codes of Conduct in global supplychains (see e.g. O'Donnell, 2000, p. 526; Dasand Rahmann, 2000, p. 89). To be morespecific, opportunism in relation to Codes ofConduct and other CSR standards becomesrelevant due to the fact that these initiatives canbe costly and time consuming (See e.g. Walleyand Whitehead, 1994, p. 46; Kolk, 2000, p.118-119; Sinding, 2000, p. 86; Utting, 2000,p. 26; Kapstein, 2001, p. 115). In consequence,suppliers might have an economic incentive toreduce social and environmental standards inorder to achieve financial gains. Moreover, thepotential benefits from introducing Codes ofConduct might be unevenly distributed amongthe companies in the supply chain. Forinstance, goodwill from being socially respon-sible is often associated with a brand, whichonly one of the companies in the chain holds.This company will receive the full benefits fromintroducing a Code of Conduct. The rest of thecompanies in the chain will have to share theindirect benefits, for example from newdeliveries. If these companies furthermorehave to bear the costs of implementing CSRinitiatives, there is a potential conflict ofinterest between the companies in the chain.This increases the risk of opportunistic actions.

It would be easy to deal with this opportu-nism if it were possible to formulate anenforceable contract, which included all con-tingencies (Milgrom and Roberts, 1992, p. 127;Greve, 2000, 155). However, most contracts

^Morc formally, agency costs can be defined as;'T. • •)thecosts of structuring, monitoring ami bonding a set ofcontracts among agents with conflicting interests.Agency costs aiso include the value of output lostbecause the costs of full enforcement of contracts exceedthe benefits" (Fama and Jensen, 1986, p. 279). See alsoJensen and Meckling (1976).

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Safeguarding CSR in global supply chains 231

are incomplete and this applies to Codes ofConduct as wcil. As noted by Utting (2000,p. 12-13): 'Codes very often remain at thelevel of lofty principles and well-intentionedpolicy statements that are not effectivelyimplemented (...)'. In line with Utting, Sethi(2002) also criticizes Codes of Conduct fortypically being presented as public statementsof lofty intent and purpose without a specificcontent. In consequence, it becomes difficultto verify whether a supplier has actuallycomplied with the Code of Conduct. Moreover,Klein argues that codes of conduct are awfullyslippery' (2000, p. 430). This statement is basedon the argument that the codes cannot beenforced in the same way as legal require-ments, and that they are not drafted in responseto the needs of the employees of the companiesthey are directed towards. Historically, Codesof Conduct have also been characterized by aremarkable lack of efficient monitoring sys-tems. Only a minority of firms with Codes ofConduct actually mention monitoring inrelation to the implementation, and themajority of these use internal systems (Kolket al, 1999, p. 169; Kolk and van Tulder,2001. p. 274; OECD, 2000, p. 31).

Safeguards/proteetive mechanisms

The potential conflict of interest between thecompanies in the supply chains and theincomplete nature of Codes of Conductmakes it relevant to discuss how an initiatorof a code can be 'safeguarded' from non-compliance on pan of its suppliers. It is worthmentioning, however, that opportunismoccurs in all relationships between indivi-duals, and thus safeguarding is relevant in theunderstanding of all aspects of the social andeconomic life.

Safeguards, or protective mechanisms, arebasically means to ensure that an agent fulfilshis or her obligations according to the agree-ment (Koch, 1995, p. 8). Safeguarding includeselements of different theories, but the purposeof this article is neither to give a detailedpresentation of the different positions, nor toengage in the dogmatic discussions between

Figure 2. Safeguards/protective mechanisms.Stjurcc: Based on Koch (1995, 1997)

them. Instead, the article intends to discusshow safeguards can ensure compliance withCodes of Conduct in global supply chains.

The safeguards/protective mechanisms dealtwith in this article are direct sanctions, goalcongruence, third-party intervention, trust andreputation effects (see below).^ In the follow-ing sections, we will present each safeguard inturn and discuss how they are manifested in theSwedish home furnishing retail chain, IKEA.

Safeguarding mechanisms at IKEA

IKEA is a Swedish home furnishing retail chainselling low-priced products, including furni-ture, accessories, bathrooms and kitchens. Thecompany was found in 1943 by IngvarKamprad. /KEA is short for /ngvar iCamprad,flmtaryd—the farm he grew up at, andXgunnaryd — the village he grew up in. Tobegin with, IKEA sold pens, wallets, pictureframes, table runners, watches, jewellery andnylon stockings at low prices. The first

classification is based on the work of Koch (1995,1997). It is by no means stated that the classification isdefinitive. The different types of safeguards are inter-related, and depending on perspective and interest, someof them coutd probably be united or split up. However, itis ai^ued here that the five safeguards give a fairiyrepresentative overview of some of the means, which arerelevant for companies implementing Codes of Conductin global supply chains."•The analysis is based on written documentation andinterviews with representatives of IKEA. Conducted in2004.

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232 Esben Rabbek Pedersen and Mette Andersen

furniture showroom opened in 1953 inAlmhult, Sweden, which is still the location ofIKEA's headquarters. Two years later, IKEAbegan designing its own furniture, and in 1958,the first IKEA store opened in Almhult. Fromthe outset, the idea was to design furniture atlow prices. After a while, the company alsobegan to think in terms of designs suitable forflat packaging, which led to even further pricereductions. Today, IKEA employs approxi-mately 90000 co-workers and operates in 44countries. In the financial year 2004, salestotalled 14.8 billion euro.

IKEA's product range is produced byapproximately 1300 suppliers according toproduct specifications developed by IKEA.Almost 2/3 of the suppliers are located inEurope and 1/3 in Asia. Only 3% of the suppliersare from North America. Purchasing is handledby 46 'trading service offices' divided into 16regional 'trading areas'.

Recognizing that negative publicity aboutthe environmental or social conditions of itssuppliers might damage the IKEA nameconsiderably, the company realized by theend of the 1990s that it needed to relateactively to the environmental and socialconditions of its suppliers. Therefore, thecompany decided to develop a Code ofConduct aimed at all its suppliers worldwide.The code is labelled 'The IKEA Way onPurchasing Home Furnishing Products'—in day-to-day operations referred to as'IWAY', and it was introduced in year 2000.IWAY defines what the suppliers can expectfrom IKEA and what IKEA requires from itssuppliers with regard to working conditions,child labour, environment and forestry man-agement. IKEA requires from its suppliers tocomply with national laws and regulationsand with international conventions on theprotection of the outside environment, work-ing conditions and child labour. The suppli-ers are expected to abide by the mostdemanding of the requirements, whether itis the applicable legislation or IKEA's specificrequirements. IWAY includes 19 differentareas divided into more than 90 specificissues.

Direct sanctionsContracts, complete or incomplete, are of littleuse, if it is impossible to enforce diem. However,the description of monitoring and the conse-quences of non<ompliance are often absent inCodes of Conduct (see e.g. Kolk et al, 1999, p.167-169). In consequence, it is rather unclear,what sanctions are open to a buyer, whichdiscloses a supplier's non-compliance with a code.

The fastest and most ultimate sanction is tobreak off the relationship with the supplier incase of non-compliance. However, this exitstrategy has certain limitations. Most impor-tantly, the principal's ability to terminate anagreement depends on the bargaining power ofeach party in the relationships. Exit is onlyapplicable as a safeguard, if it is a crediblethreat. Hence it follows that the threat of exithas little effect, if the supplier's products andservices are of vital importance to the buyer(buyer-dependence). On the contrary, the sup-plier has at strong incentive to honour the termsof a Code of Conduct, if the future of thecompany depends on continuous co-operationwith the buyer (supplier-dependence) (Helper,1990, p. 5; Hill and Jones, 1992, p. 142; Buvikand Reve, 2002, p. 265).

The way direct sanctions work in IKEA is thateach supplier is audited against the code byIKEA's own auditors. As the company has astrategy of engaging in long-term relationshipswith its suppliers, it does not break off relationsdue to non<ompliance with IWAY require-ments as long as the suppliers show a will-ingness to improve conditions. Instead, itrequires that the suppliers prepare a writtenaction plan detailing how the non-complianceissues will be rectified. The company requiresthat the suppliers carry out the correctiveactions within a period of 24 months. If asupplier is not able to fulfil the IWAY require-ments within this time frame, but shows apositive attitude towards implementation ofIWAY, he is put on a 'risk register' and givenadditional time to fulfil the requirements.However, IKEA is willing to terminate therelationship with suppliers who do not showan interest in fulfilling all the IWAY require-ments. And the company has in fact terminated

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Safeguarding CSR in global supply cbains 233

supplier relationships, either partly or entirelydue to lack of IWAY fulfilment. Thus, sinceIWAY was introduced in 2000, a total of 354supplier contracts have been terminated(Andersen, 2005, p. 141). Of these, 6% wereterminated mainly due to non-compliance ofIWAY issues, and 11% were terminated partlydue to non-compliance of IWAY issues. IKEA'sability to use contract termination as a safe-guarding mechanism should in large part beseen in the light of its size. Due to its large size,IKEA constitutes an important customer formany of its suppliers. The Regional QualityManager puts it this way:

"When we place an order, we are nottalking about 250 pieces only — we aretalking about 25 to 50 containers. Thisfactor alone has the effect that a supplieralmost turns his factory upside down Just todeliver to us".

As a result of their dependence on IKEA as acustomer, many suppliers are often willing togo to great lengths to fulfil IKEA s IWAYrequirements. They simply cannot afford togive the code a low priority, as this might implya termination of the relationship with IKEA,which in turn could be very damaging to theirbusiness. We might therefore argue that thecase of IKEA indicates a great deal of supplier-dependence.

In summary, direct sanctions can be a veryefficient safeguard, if the buyer is the dominantpartner in the business relationship (unlessnon-compliance is likely to go undetected, ofcourse) (Koch, 1995, p. 14). If not, the buyermight envisage more subtle means, which willalleviate the fear of opportunism. Movingbeyond the scope of institutional economics,buyer-supplier dialogue during the planningand implementation process can be an impor-tant element in this process (see next section).

Goal congruence

Implementation of Codes of Conduct requiressome kind of motivation and commitment. Insupply chains, however, it is not enough thatthe initiating company is dedicated to social

and environmental issues. The company mustpersuade the other organizations in the supplychain to act socially responsible too. In a buyer-supplier relationship, this might be difficult, iffor example a supplier shows no interest in CSRor the buyer holds limited bargaining poweragainst the supplier.

Opportunism is only likely to occur, if thereis a conflict of interest between the principaland the agent. The basic idea of agency theory istherefore to give the agent incentives to act inaccordance with the principal's interest (cf.Dees, 1992, p. 28; Milgrom and Roberts, 1992,p. 185-188; Koch, I995,p. 13). Higher levels ofgoal congruence in relation to Codes ofConduct can be acquired in numerous ways:(1) the buyer can compensate the supplier forcosts associated with code compliance. Forinstance, the buyer and supplier can makejointly investments in environmental friendlymachinery; (2) the buyer can reward thesupplier for complying with the code. As anexample, the supplier can get an exclusive rightto deliver products and services to the buyer;(3) the parties can undertake joint investmentsin transaction specific assets which will com-mit both of them to the relationship; (4) byreferring to the strategic potentials of CSR, thebuyer can convince the supplier that they willboth be better off in the future, if theyimplement the code; (5) the buyer can involvethe supplier in the planning and implementa-tion of the Codes of Conduct, thereby stimulat-ing commitment and goal congruence.

With regards to the latter, using non-economic incentives to increase commitmentis normally outside the scope of standardagency theory. It is nonetheless worth noticingthat if it is possible to create commitment to theCodes of Conduct, whatever the means,compliance is more likely to be accomplished,ff the Codes of Conduct are implemented as atop-down approach, where the suppliers haveUttle influence on the terms, it might be difficultto ensure commitment to the project. A bottomup/voice approach, where both the buyer andsupplier are involved in whole process, mightbe an important element in a successfulimplementation of Codes of Conduct (cf.

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Helper, 1990, p. 6; Schary and Skj0tt-Larsen,2001, p. 183).

IKEA puts great efforts into ensuring goalcongruence between itself and its suppliers.The company makes use of several of the above-mentioned means. First of all, IKEA makes sureto emphasize up front to the suppliers that itdoes not require IWAY fulfilment just for itsown sake, but that it is indeed important for thesuppliers' employees as well as environmentalsurroundings. Secondly, the company lets thesuppliers know that IWAY is a great opportu-nity for receiving assistance to build up somewell-functioning environmental and social rou-tines. The Regional Quality Manager explains:

"We tell the suppliers that 'we will give youall the time you need, we will provide youwith all the help you need. And if it costs youmoney, we will discuss that as well'. Theyhave nothing to lose, but everything togain".

As indicated, IKEA provides its supplierswith technical as well as financial support. Tobe able to provide technical support, thecompany trains its employees to follow-up onand support the implementation of the Code ofConduct requirements at the suppliers. Ofparticular importance in this process are theefforts to change the mind-sets of the suppliers,particularly in developing countries, and henceimprove their knowledge and understanding ofCode of Conduct-related issues. With regard tofinancial support, IKEA is willing to support theimplementation of capital-intensive invest-ments such as a wastewater treatment plant.Such support will normally be in the form of aloan, which the supplier will pay back, forexample through deliveries to IKEA.

However, even thou^ the voice strategy is attractive tomany academics, because it seems more constructivethan the take-it-or-Ieave-it exit strategy, voice is not apanacea, which can be applied to all business relation-ships. The voice strategy requires information, commu-nication and coordination between the buyer and thesupplier, wbich will inevitably increase the transactioncosts of the cooperation. These additional costs have to becompared with the benefit.s deriving from increasedcommitment and goal congruence (Helper, 1990, p. 10).

In conclusion, creating goal congruence isone of the main tasks in establishing efficientsafeguards, which prevent the buyer againstnon<ompliance. Especially in global supplychains, where monitoring is complicated andcostly.^

Third-party intervention

Even though the principal believes that theagent has violated the contract, the conflictresolution is often in the hands of, for example,courts and arbitrators. The normal legal systemis probably one of the most important protec-tive mechanisms in this regard.^ However,there are a number of limitations to the legalsystem's ability to ensure compliance withCodes of Conduct in global supply chains. Forinstance, it is difficult for the legal system toimpose sanctions on agents, unless they fail tocomply with existing laws. Moreover, manyCodes of Conduct include issues that arebeyond the legal requirements, and in conse-quence non-compliance with codes does notnecessarily mean non<ompliance with thenational laws. Last but not least, enforcementof codes is difficult in countries with a weakinstitutional structure. This is especially rele-vant to buyers, which engage in global supplychains involving suppliers in developing coun-tries.

Even if the legal system were able to settleconflicts between buyers and suppliers, thesystem will still face difficulties in determining.

'Tiowever, it is worth noticing that time changes and sodoes the level of goal congruence between the buyer andsupplier. As Kocb (1995, p. 13) notes: '[clbanges,unexpected or expected, originating "outside" thetransactional relationship may change the situation toa considerable degree as well. In this case, low ex antegoal incongruence may well turn into high ex post goalincongnience'. Moreover, the societal expectations tothe companies develop overtime and tbese changes mustbe reflected in tbe codes. Therefore, goal congruence isnot established once and for all. It requires continuousinterrelation between the buyer and supplier andresponsiveness to the changing societal demands.^Tlie normal legal system can be defined as: "(...) theregulatory body that can impose sanctions on theparties to a transaction in order to force them toftilftltheir obUgalions" (Koch, 1995. p. 4).

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whether the supplier has acted opportunisti-cally or not. As mentioned earlier, Codes ofConduct are incomplete contracts. When thebuyer and supplier are unable to account for allcontingencies and formulate the Codes ofConduct in precise language, the resultingambiguity of the agreement will leave roomfor different interpretations of the terms. Inconsequence, both the buyer and the thirdparty might be unable to prove that the agenthas not complied witli the agreement (Milgromand Roberts, 1992, p. 131-133).

Therefore, it is relevant to consider otherthird parties, which can safeguard the buyersfrom non-compliance, for example industryorganizations, certification auditors, externalconsultants, NGOs or legal authorities (Diller,1999. p. 118; Kolk etal., 1999, p. 168). From acontractual point of view, it is of little relevancewhether the buyer or a third party carries outthe monitoring of the supplier. However, thirdparties might have special competences inevaluating code compliance, and most impor-tantly the third parties will improve thereliability of the codes. Moreover, customersand other stakeholders might perceive thirdparty monitoring as being more reliable andcredible.**

As already mentioned, IKEA makes useof internal auditors for carrying out on-siteaudits at the suppliers. However, to ensureobjectivity and credibility in the eyes ofthe stakeholders, the company also usesexternal auditing companies to conduct third-party verification audits of the suppliers. TheSocial and Environmental Manager for IKEAGroup emphasizes the role of external audits byarguing that;

"If it's internal, we need someone withother eyes to look into how we operate andmanage it".

"According to Kapstein (2001), the reliability of third-party tnonitoring can also be questioned. From a casestudy it was concluded that: "(... )/tJbeauditors ignoredhazardous chemical tise. barriers to freedom of associa-tion and collectit>e bargaining, violation of overtimeand wage laws, and other infractions' (Kapstein, 2001,p. 116).

In fact, these compliance audits haverevealed that some of IKEA s own auditorshave used too low judgement levels. Thecompany has subsequently had to re train someof the auditors to increase their competencelevel as well as re-audit suppliers. This indicatesthat in the case of IKEA, third party interven-tion has in fact enhanced the credibility ofIKEA s monitoring work.

To sum up, third-party intervention mightserve two purposes. Most importantly, thirdparties' monitoring of code compliance servesas a protective mechanism, which can preventviolation of the codes. Moreover, third partiesimprove the credibility of the codes and signalcommitment to the company s stakeholders.In contrast to current practises in the businesscommunity, where most codes today aremonitored internally, third parties should playa more prominent part in the monitoritig ofCodes of Conduct.

Trust !

All theories have build-in assumptions, whichare statements about the world, that are neitherobservable nor testable (Neuman, 1997, p. 41).With regards to the behavioural assumptions,trust versus opportunism has been one of themajor controversies between network theoryand the institutional economics (see e.g.Granovetter, 1985, p. 72; Ring and Ven, 1992,p. 492; Podolny and Page, 1998, p. 60-62).Both agency theory and transaction coststheory are inclined to see opportunism as acentral behavioural assumption, whereas net-work theory favours the concept of trust(Williamson and Ouchi, 1981, p. 351; Petersen,1993, p. 279; Foss and Koch, 1996, p. 190).However, both institutional economists andnetwork theorists seem to agree that it is notessential that all economic agents are opportu-nists/trustworthy (Williamson and Ouchi,1981, p. 351; Schary and Skjott-Larsen, 2001,p. 92). One might question then, whetheropportunism/trust is a behavioural assumptionor a variable, which the companies have to takeinto consideration when they engage in con-tractual relationships. Opportunism (lack of

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236 Esben Rahbek Pedersen and Mette Andersen

trust) and trust (lack of opportunism) areinterrelated and all co-operative activities willinclude aspects of both.

A high degree of trust between the buyer andsupplier can be an efficient safeguard, whichcan reduce the costs from, for example,monitoring and performance evaluations.^The question is how the buyer knows, whichsuppliers should be trusted. Agency theoryseems to favour control in preference to trust,because it is difficult and costly to separatetrustworthy agents from the opportunists.However, both agency theory and networktheory nonetheless share the opinion that somekind of trust can develop over time in businessrelationships Qohanson and Mattson, 1987, p.37; Eisenhardt, 1989, p. 62-63; Petersen, 1993,p. 286; Podolny and Page 1998, p. 60). Ingeneral, new buyer-supplier relationships areexpected to be characterized by low levels oftrust. Trust is something the company mustaccept in a world of incomplete contracts.However, as the relationship evolves over time,the partners might begin to feel a moralobligation towards the cooperation. Trustemerges between the parties, and in conse-quence, the governance can be more relaxed(Ring and Ven, 1992, p. 488-489; Child, 2000,p. 244-249; Buvik and Reve, 2002, p. 261).The basic argument seems to be that if asupplier could be trusted in past transactions,he or she is also likely to be trusted in futuretransactions. The cooperation can be seen as anongoing screening process, where the princi-pal and the agent learn about each other. Inrelation to Codes of Conduct, the buyers willoften get a record' of experiences from work-ing with the suppliers. Based on this informa-tion, the buyer will often have a fairly good ideaabout which suppliers should be monitoredmost carefully.

IKEA strives towards building up a highdegree of trust between itself and the suppliers.This trust is in lai^e part established as a result

'in this article, trust is defined as:"(...) the confidence ofa person, group, or organization relating or transactingwith another utider conditions of some uncertainty thatthe other's actions will be beneficial rather thandetrimental to ir (Child, 1998, p. 243-244).

of IKEAs choice of engaging in long-termrelationships with a limited number of suppli-ers. Within the last few years, the company haschanged its supplier strategy by going from'trading to purchasing\ Whereas it previouslyengaged in short-term relationships with manysmaller suppliers, where the focus was onbuying articles, IKEA is today increasinglyengaging in long-term relationships with fewersuppliers, where the focus is on buyingcapacities. Moreover, whereas IKEA previouslydemanded a certain level of quality, service,price and environmental and social responsi-bility of its suppliers, the company is nowdeveloping these issues together with thesuppliers (Andersen, 2005, p. 115). This newway of relating to the suppliers implies thatboth parties are committed to working hard tomake the relationship work. Termination ofsupplier relationships is accordingly less fre-quent today, since both parties have typicallyinvested much money and time in the relation-ship. Moreover, by virtue of the long-termrelationships, frequent interaction takes placebetween IKEA's employees and the suppliers'employees. This has in turn laid the ground forthe establishment of a fairly high degree ofpersonal trust.

When looking specifically at the implemen-tation of IWAY at the suppliers, IKEA seems toput much effort into making sure that its follow-up activities take place in a cooperative mannerand hence do not have a resemblance to a'police function'. This is so as IKEA spendsmuch time explaining to and showing thesuppliers how to improve their non-compli-ance issues. This could be seen in contrast tofollow-up activities based almost solely oncontrolling whether the suppliers rectify thesenon-compliance issues. IKEA's way ofapproaching the follow-up activities signals toits suppliers that it has trust in their ability toimplement IWAY. On the other hand, astronger degree of control would probablymake the suppliers believe that IKEA does nothave much trust in their capabilities. Inconsequence, trust-based follow-up activitiesare likely to give the suppliers greater incen-tives to implement IWAY.

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Safeguarding CSR in global supply chains 237

In summary, trust can be an efficient safe-guard, especially in long-term relationships,where the buyer and supplier have accumu-lated a thorough knowledge about each other.(Diller, 1999, p. 109). It will be a waste ofresourees to monitor suppliers, which tradi-tionally have been proactive in the implemen-tation of social and environmental standards.In the planning and implementation of thecodes, the buyer can use experiences from pasttransactions with suppliers to target the mon-itoring of suppliers.

Reputation effects

Related to trust are reputation effects. Reputa-tion is one of the main reasons why companiesare adopting Codes of Conduct in the firstplace. They want to persuade the customersthat their products and services are producedin a socially responsible way.'" In a supplychain perspective, however, the company'swish to be seen as socially responsible is notnecessarily shared by the other actors in thechain. Therefore, compliance with codes willbe affected by these actors' interest in keepinga reputation as reliable transaction partners.

The reputation of a supplier can be seen as aresource, w hich influences future income(Koch, 1995, p. 16; Bensaou and Anderson,1999, p. 469). For instance, if a supplier actsopportunistically, the buyer will probably notengage in future transactions. Moreover, thebuyer might tell other companies that thesupplier is an unreliable partner. On the otherhand, there might also be costs associated withestablishing and maintaining a reputation as anhonest and trustworthy person (Ostrom et al.,1993, p. 44). The supplier's choice of actiontherefore depends on a valuation of the costsand benefits from being a reliable partner.

'**!n an investigation of 246 voluntary Codes cf Conduct, itwas concluded that enhancement of the company'sreputation and stronger customer loyalty was a strongmotivation for implementing codes (OECD, 2000. p. 4).Moreover, in an analysis of Swedish firms introducing ISO14000, 88.5% of the companies considered 'corporateImage' as an important or very important motivationfee-tor (Hoksinska et al., 2003, p. 593).

In the case of IKEA, reputation has proven anefficient safeguard. In the eyes of many of itssuppliers, IKEA has an image as a ' t o i^ 'customer, which is in lai:ge part due to its IWAYrequirements. Despite the feict that its toughrequirements at times lead to complaints fromthe suppliers, IKEA also seems to benefit fiom itsim^^e as a tougli and demanding customer. Thus,nCEA has experienced that several supplierscoasider compliance with its IWAY requirementsa good reference toward other (potendaO custo-mers, and consequently they are willing to go togreat lengths to fulfil the requirements.

In conclusion, the applicability of reputationeffects depends on the supplier's overallinterest in keeping a good relationship withthe buyer. Reputation is a highly relevantsafeguard, when the supplier can benefit fromfuture co-operation with the buyer, and/or thebuyer can harm the supplier by communicatingnon-compliance to other relevant actors, forexample in business networks. Relying on thisprotective mechanism requires an analysis ofthe power structures in the relationship, thecharacteristics of the transactions, and theexternal environment.

Conclusion: managing codesof conduct in global supply chainsCodes of Conduct can be seen as a contractbetween the company and society. The com-pany promises to fulfil its societal obligations asa corporate citizen by being profitable, law-abiding and ethical (cf. Carroll and Buchholtz,2003, p. 40). In a global supply chain perspec-tive, however, where part of the productionprocess is outsourced to companies in differentgeographic, cultural and institutional settings,such a promise cannot be made without theactive commitment of all actors involved.However, Codes of Conduct are often vagueand poorly monitored, which leaves someroom for interpretation—and opportunism inthe form of non<ompliance.

Realizing that this non-compliance constitu-tes a threat to the companies, which promotethemselves as socially responsible by developingCodes of Conduct, it is becoming increasingly

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238 Esben Rabbek Pedersen and Mette Andersen

important to develop new means to man-age and control inter-organizational relation-ships.

In the previous sections, this article hasdiscussed some of the problems, which areassociated with ensuring code compliancethroughout the chain, and has tried to give anoverview of some of the basic protectivemechanisms, which can safeguard the buyerfrom non<ompliance with Codes of Conductin global supply chains. The discussion ofsafeguards can be summarized into a numberof general recommendations to companiesimplementing Codes of Conduct in globalsupply chains:

• Direct sanction is a very effective safeguard ifthe buyer is the dominant partner in thebusiness relationship (Unless non-complianceis very likely to go undetected, of course)(Koch, 1995, p. 14). The governance ofcode implementation can be relaxed if theexchange relationship is very important tothe supplier (cf.HiU and Jones, 1992, p. 135).An analysis of the power structure and theresource dependency in the chain must beincluded in the planning of safeguardmechanisms. A description of legitimatedirect sanctions should be included in theformulation of a Code of Conduct.

• Metaphorically speaking, direct sanction/exit is the stick whereas a bottom up/voiceapproach can be seen as the carrot (Helper,1990, p. 6). Codes of Conduct are oftenimplemented in a top-down way, but anincreased involvement of the supplier in theplanning and implementation of the codesmight reduce the risk of opportunismbecause it aligns interests and establishescommitment to the initiative throughout thesupply chain.

• Goal congruence can be achieved throughjoint investments and/or medium and long-term delivery contracts conditioned by codecompliance. For instance, the buyer cansupport investments in socially and envir-onmentally friendly technology and offertraining and technical assistance in social andenvironmental management.

• Trust can be an effective safeguard, espe-cially in long term relationships in which thebuyer and the supplier have accumulated athorough knowledge of each other. How-ever, it is difficult to separate opportunisticand trustworthy suppliers, and thereforetrust must be combined with other safe-guards.

• Third-party monitoring and enforcement canbe an effective protective mechanism. More-over, third party verification can be a meansto improve the overall credibility of thecodes. Codes of Conduct are often met withsome scepticism, and failure to ensurecompliance with the codes might erode theoverall credibility of the buyer s voluntaryinitiative. In general, third party involvementcan be recommended in the implementationof Codes of Conduct.

• Reliance on reputation effects depends onthe costs and benefits of opportunisticbehaviour. Reputation is a highly relevantsafeguard when the supplier is dependent onfuture co-operation with the buyer, and/orthe buyer can harm the supplier by commu-nicating non-compliance to other relevantactors, for example in business networks. Aswith direct sanctions, the planning of code-compliance mechanisms requires an analysisof the relationship with the suppliers in thechain.

Future reseatvh

It could be argued that successful implementa-tion of Code of Conduct requirements atsuppliers not only depends on the type andscope of safeguarding mechanisms employedby the buying company but also on the abilityof suppliers to adopt the necessary CSRpractices in their ow n organization. Therefore,future research into CSR in supply chainsmay preferably include examinations of thesuppliers' ability to receive and interpretthe requirements from the buyer. Somestudies already exist, which deal with thechallenges and barriers experienced bysuppliers — particularly suppliers in lessdeveloped countries — in the process of

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Safeguarding CSR in giobal supply chains 239

implementing the environmental atid socialrequirements of their buyers (Business forSocial Responsibility, 2001; World Bank,2003b). These studies reveal the existence ofseveral issues, which could be investigatedfurther so as to gain a more comprehensivepicture of the complexities related to workingwith CSR in global supply chains.

A second issue to be researched fiirther is theapplicability of safeguarding mechanisms tosmall and medium sized companies. Today,most companies working systematically withCodes of Conduct are large multinationalcompanies. However, in a Scandinavian—andeven European—context, the majority ofcompanies are small and medium-sized.Even though an increasing number of smalland medium-sized companies seem to workwith Codes of Conduct, we may argue thatthey often lack bargaining power as well asfinancial and human resources, which areoften necessary for safeguarding a Code ofConduct. Accordingly, future research regard-ing CSR in supply chains should concentrateon examining the potential of small andmedium-sized companies of safeguarding CSRrequirements.

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