Social and Environmental Compliance in the Licensor-Licensee Ecosystem

1/21/2014
Building socially responsible and environmentally sustainable supply chains has become a critical mandate for the licensing industry. Recent cases of unsafe working conditions in many supplier factories, as well as environmentally harmful business and manufacturing practices in many companies, have put the spotlight on this subject, prompting customers and stakeholders to demand responsibly produced and marketed brands.

However, the licensing industry model is complicated, with several hurdles involved in managing compliance with social and environmental standards in the supply chain. While licensors contract their business and brand to licensees, the licensees either manufacture the products themselves in their own factories, or sub-contract the manufacturing to other third parties, who might in turn rely on their own suppliers to source raw materials.

Subcontracting is one of the most risky components of the licensor-licensee ecosystem, posing several risks to the licensor's brand and image. In this complex supply chain equation, licensors who own the brands might fail to have direct control over the vast and highly dispersed supply chains.

Overseeing these supply chains, and monitoring their compliance with various regional and global social and environmental guidelines and mandates, is a huge challenge. What it demands is a reliable partnership between licensees and licensors, who need to work together to factor in each other's expectations and objectives, implement best practices, and together achieve social and environmental compliance.

Need for high social and environmental standards in the licensing industry
The licensing industry must be guided by high social and environmental standards in its supply chain operations. This will help achieve the following benefits:

Mitigate brand risks
There are numerous risks that might damage the brand image and value of companies that license their brand and business to licensees. One of the most important risks is the absence of direct relationships in the licensing supply chain. The current international marketplace is increasingly vast and intricately interconnected, giving rise to several complexities. 

Licensors also face new legislations that address specific environmental and social issues, and mandate greater transparency. Increased scrutiny by civil society, as well as media awareness and activism, have helped unearth multiple environmental and social malpractices and issues that affect the reputation of companies.

Establishing a transparent Environmental, Social and Corporate Governance (ESG) program will enable licensors to better control these multiple brand risks. Many investors have begun to equate ESG with business performance.

Reduce sustainability issues in the supply chain
Licensors and licensees who align their business objectives to sound social and environmental policies will be well positioned to effectively address various sustainability issues that influence and impact the supply chain.

These issues can be categorized under three distinct groups:
  • Environmental issues: Use of energy, water, and raw materials, recyclability of products, emission of greenhouse gas, biodiversity, material toxicity and chemicals, and air pollution
  • Social issues: Humane treatment of workers, fire safety, industrial hygiene, wages and benefits, occupational safety,  freedom of association, working hours, child and forced labor, and non-discrimination
  • Governance issues: Intellectual property protection, conflict of interest management,  misconduct reporting, and fair competition
Reap the business benefits
Licensors who collaborate with licensees to implement a clear social and environmental sustainability plan across the extended supply chain enjoy several business benefits. They get to minimize business disruption from environmental, social and economic issues, have better control over business risks, and are thereby able to protect their organizational reputation and brand value. In addition, they are able to produce and market sustainable products, and consistently innovate to meet the needs and expectations of the evolving market.

Similarly, licensees who efficiently manage the social as well as the environmental issues in their supply chain gain multiple business benefits. Their compliance audits become less resource-intensive or less frequent. They also maintain long lasting, reliable and trustworthy business associations with their licensors, and prevent negative consequences such as the termination of contracts or reduction of business. In fact, such licensees get to partner with more retailers and licensors because of their commitment to being socially and environmentally responsible.

The bottom line is that licensors and licensees can together take to the market quality and responsible brands that can efficiently withstand competition.

A roadmap for social and environmental compliance
Social and environmental compliance warrants a systemic change and greater collaboration among licensors, licensees and retailers. Retailers and licensors associated with a brand must set forth clear compliance guidelines, keep track of the status of compliance, and offer expertise and guidance to licensees to operate in accordance with their policies. On the other hand, licensees must work in harmony with their suppliers to achieve the desired advantages of a shared social and environmental strategy.

Licensors and licenses can meet these objectives through the following measures:

Following a uniform code of conduct
Licensors need to develop a comprehensive code of conduct and communicate it to their licensees and suppliers. It must be well documented and prominently published on their websites. Licensors must also ensure that licensees and suppliers have the resources and commitment to adhere to the code.

At the same time, licensees must make an effort to understand the requirements in the code of conduct, discuss the compliance challenges with the licensors, and find common solutions for issues. They need to identify key code of conduct themes, such as environmental permits which certain licensors emphasize. It is also imperative that licensees have the budget, time and resources to implement the licensor's policies in their own business as well as their suppliers.'

Improving key business practices
Licensors must have clear insight into their business practices, functions and products so that they can effectively determine areas for better environmental and social compliance. They must also reduce change orders and try not to repeatedly modify product and business plans or else employees in the licensees' or suppliers' factories may have to work overtime. This, in turn, could result in multiple environmental and social compliance issues.

Both licensors and licensees must review the cost of the factory structure as per the terms of their contract. Business partners should be rewarded for good performance with respect to business requirements and compliance. Compliance must also be made an integral part of the factory selection and contracting process.

Adequately mapping the supply chain
Creating a detailed map of the vast and extended global supply chain is one of the key steps in ensuring social and environmental compliance. Licensees and licensors need to identify and assess risks across different geographies and suppliers. For instance, there is a high risk that 3TG minerals used in many products might be sourced from conflict regions in and around the Democratic Republic of Congo (DRC).

Licensees also need to avoid establishing production plants in restricted countries and consult government guidelines such as those published by the Office of Foreign Assets Control, under the U.S. Treasury Department. They also need to consider the specific policies of the licensors while making sourcing decisions.

Assessing and improving licensee facilities
The licensee must proactively declare its production facilities to the licensor and have a good understanding of what the licensor thinks is “in scope” for the purpose of declaration. The licensor can also contribute by facilitating licensee self-assessments.

Often, licensees subcontract to several other vendors and suppliers, without the approval and knowledge of licensors, to meet tight production timelines and to expand their thin profit margins. The sub-contractors, who almost always operate through the back door, often have no awareness of the licensor's code of conduct and compliance standards. This is another hotbed of brand risks for the licensors. Therefore, licensors must lay clear subcontracting protocol and guidelines in their contracts. This process can help licensors in establishing definite visibility into their supply chains. The licensee must also declare the details of its sub-contractors for enhanced transparency.

The licensor's responsibility is to conduct regular environmental and social compliance audits of licensee facilities, and ensure that suitable controls have been established to prevent bribery, corruption and counterfeit records. The audit frequency can be determined by the severity of the risk of non-compliance, the status of management practices, and the compliance history of the licensee. Regular audits help determine risk levels as well as significant compliance violations. Effective follow-ups and corrective actions help to remediate issues and to prevent them from cascading into bigger problems.

Technology as an enabler
Web-based technology frameworks enable easy collaboration among all stakeholders in the supply chain ecosystem and allow licensors to effectively manage social and environmental compliance across their vast and extended licensee and supplier network. Licensors can also streamline and automate various compliance processes, and thereby achieve cost efficiency.

Technology systems help licensors design an effective code of conduct as well as compliance policies, and seamlessly communicate them to their licensees and suppliers. Some systems can be integrated with external industry sources, allowing licensors to receive regular social and environmental compliance updates that can be used to modify their policies and strategies.

Centralized data management tools allow licensors to simplify data management by integrating all critical supplier and product information — including factory and financial details, Bill of Materials (BOM), and comprehensive company profiles — in a common repository for easy search and reference. Advanced tools for supplier performance and supplier risk tracking provide the required visibility into the supply chain and thereby enable licensors to monitor high-risk suppliers.

Risk management systems with comprehensive risk heat maps and risk scorecards help licensors develop Key Risk Indicators (KRIs), identify, monitor, assess, weigh and analyze supplier risks, and adopt suitable controls to mitigate these risks. Controls can also be effectively monitored for their efficiency.

Workflow-based audit management tools can be used to manage the whole array of supplier and factory audit activities. The entire audit lifecycle from audit planning and scoping, to audit scheduling, to audit implementation and monitoring, to issue management and follow-ups can be streamlined and standardized across the enterprise.

Audit tools can also simplify the exercise of preparing, administering and analyzing supplier surveys and self-assessments. Some tools offer offline audit functionalities, which can be employed by auditors to conduct fieldwork in remote locations without network connectivity. Apart from these benefits, technology enables licensors to initiate and execute closed-loop issue remediation processes based on audit findings and recommendations. Automated alerts and notifications can help accelerate the remediation process.

Powerful graphical dashboards with drill-down capabilities can offer real-time visibility into the different levels of social and environmental compliance at every point of the supply chain. These tools can also be used to manage traceability across suppliers, raw materials and products. Add in advanced analytics, and licensors have the capability to capture and analyze valuable compliance and risk data, empowering stakeholders to make informed decisions.

Technology is indispensable in a successful social and environmental compliance initiative. It plays a valuable role in enabling licensors and licensees to forge reliable and lasting relationships, and build a strong and risk-intelligent supply chain.

Conclusion
Social and environmental compliance ranks high on the business agenda of companies in the licensing industry across different geographies. It is increasingly linked to brand reputation and value, and helps in winning and retaining the trust of socially conscious stakeholders. Building a responsible and sustainable supply chain is no more an option, but a definite requirement for continued business success. Therefore, the licensing industry can maximize its shared benefits through collaborative compliance programs, driven by advanced technology solutions.


This article is based on a presentation given by BSR managing director Laura Gitman, as well as work conducted by BSR's Licensing Working Group. BSR is a global business network and consultancy that has worked with companies on sustainability for more than 20 years.

Sonal Sinha is the associate vice president of industry solutions at MetricStream Inc., developer of enterprisewide governance, risk, and compliance (GRC) solutions.
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