Deadline on CA Supply Chain Transparency: Does Your Company Need to Act?

By: Dave Pedersen

Justice Louis Brandeis famously wrote:  “Sunlight is the best disinfectant.”  Inspired by this quote, California SB657 (“The California Transparency in Supply Chains Act of 2010″) mandates supply chain transparency for approximately 3200 companies, specific to their policies and efforts to combat Human Trafficking and Slavery.  The attention to Human Trafficking and Slavery will continue to grow, thanks to last week’s introduction of similiar legislation [HR2759] by NY Representative Carolyn Maloney in the U.S. House of Representatives.

California SB657 does not require companies to do things differently, merely to describe what they are doing in a simple declaration on their website.  However, the glare of sunlight and the judgment of public opinion make this deceptively simple law a major concern for companies that are “behind the curve” on this issue.   Signed into law in October, 2010, it allowed plenty of time for impacted companies to be in compliance by January 1, 2012.   More importantly, it allows time for proactive companies to move beyond mere compliance and increase their meaningful efforts in this area.
Misconceptions abound as to who is required to comply.  There are three criteria that determine the applicability of the law to specific companies.   Let’s take a look at three potential mistakes that can be made, based on the eligibility criteria:

ASSUMPTION #1 : “We’re not a California company, so we don’t have to comply”

The law specifies that a company must meets SB657 criteria if it does business in California. This threshold is expressed in dollar amounts and can be as triggered by merely owning one piece of property, having one “remote” employee in the Golden State or even having significantly less than 1% of sales revenue in the state. The threshold is very low.
ASSUMPTION #2:  “We don’t do $100 million worth of business in California so it doesn’t affect us”

While there is a $100 million revenue compliance threshold, it’s based on worldwide< revenues, not California revenues.  This $100 million in worldwide revenues threshold encompasses thousands of companies.  As a point of reference, it takes roughly $1.5 billion in revenue to break into the Fortune 1000.   ASSUMPTION #3: “We’re not a retailer or manufacturer”

The third trigger for compliance is that your company is a retailer or manufacturer.  This is not based on self-identification or consumer perception. It is actually driven by your firm’s filings with the California Franchise Tax Board; specifically, how you list your “Principal Business Activity.”  To determine if you meet this third criteria, you need to head down to your Tax Department and get this information.  Better yet, grab a cup of black coffee and then head down to your Tax Department.
If your firm  meets all three criteria (doing business in California, $100 million in worldwide sales, retailer or manufacturer), you must provide the necessary disclosures. The bar for eligibility is set quite low, so it is not surprising that an estimated 3200 companies will be required to comply.  If your firm is one of them, beware of:
ASSUMPTION #4:  “Compliance is easy and we have plenty of time”
Mere compliance with SB657 is deceptively simple.  Meaningful compliance that protects your brand equity requires significantly more effort.  Compliance is required by January 1, 2012 and can require months of work to train employees, develop policies and engage suppliers in meaningful ways that allow a company to answer an honest “YES” to the five questions that SB657 poses.  The centerpiece of SB657 is a declaration on the company’s website along the law’s five dimensions of compliance.   
While enforcement efforts by the California Attorney General will continue throughout 2012 and the list of those companies required to comply will not necessarily be made public, there are numerous companies that are obviously required to disclose.  Targeted companies can expect the “outsourced enforcement” that will be led by NGO’s and consumers.  The stakeholders who fought hard for the law will certainly use mainstream and social media to spread awareness as to which consumer brands are (and are not) truly fighting Slavery and Human Trafficking within their Supply Chains.   Companies  that proactively manage their supply chains and protect their brand equity should be hard at work in the remaining months of 2011 to assure compliance.

[Image Credit: deniscollette, Flickr]

Dave Pedersen is a Supply Chain and Sustainability professional  based in Southern  California and has provided thought leadership for corporate and governmental initiatives.  He works at the intersection of Supply Chain and Sustainbility and he has educated professionals in a variety of forums. 

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