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Mandated Social Disclosure: An Analysis of the Response to the California Transparency in Supply Chains Act of 2010

Journal of Business Ethics volume 152, pages 827–841 (2018)Cite this article

Abstract

In this study, we examine investor and firm response to the California Transparency in Supply Chains Act (CTSCA) of 2010. The CTSCA requires large retail and manufacturing firms to disclose efforts to eradicate slavery and human trafficking from their supply chains and is a rare example of mandated corporate social responsibility disclosure. Based on a sample of 105 retail companies subject to the CTSCA, we find a significant negative market reaction to the passing of the CTSCA. Furthermore, we find that the reaction is significantly more negative for larger firms and companies facing greater supply chain risks (apparel and footwear retailers), suggesting that investors place a negative value on exposure to legitimacy threats in the social domain. With respect to company disclosure response, we document relatively high compliance with the legislation, although we also find that the disclosure response appeared to be more symbolic than substantive in nature. Finally, our analysis indicates that both disclosure choice and disclosure extensiveness were significantly higher for the high-supply chain risk companies, suggesting that the response was influenced by concerns with strategic legitimation. Overall, the limited quality of disclosure suggests that, without additional rules and guidance, mandates alone may not lead to meaningful social disclosure.

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Notes

  1. Prior to 2010, corporations in the U.S. were only required to provide certain types of environmental information (for an overview of these requirements, see, e.g., Cho et al. 2012). Also passed in 2010, the Dodd–Frank Act now also requires disclosures related to conflict minerals and mine safety.

  2. Various articles include differing terms for this exposure. For example, Blacconiere and Patten (1994) refer to these as regulatory costs, Cho et al. (2015) call them social and political pressures, and Walden and Schwartz (1997) use the term public policy pressures. We use these terms interchangeably in this paper to identify the general idea of exposure to the social and political environment. Walden and Schwartz (1997, p. 127) argue that the pressure can arise from the dissatisfaction of elements of society, from new or proposed political action, and/or from increases in regulatory or enforcement activities. Importantly, the increased exposures are assumed to represent a threat to the legitimacy of the affected firms.

  3. Larrinaga et al. (2002), although bringing in the concept of normativity, similarly report low levels of compliance with the PGC.

  4. The legislation does not require companies to change any practices related to their supply chains, but instead only to report their efforts associated with them. However, at least some firms opposed the law citing concerns with the level and difficulty of the reporting (see http://www.prnewswire.com/news-releases/christian-brothers-investment-services-leads-investor-coalition-to-encourage-governors-support-of-california-supply-chain-transparency-bill-103058499.html).

  5. For an overview of this research, see Deegan (2014) and Patten (2014).

  6. The CRSP database is maintained by the Booth School of Business at the University of Chicago. It provides market return data for securities traded on U.S. stock exchanges and has been used extensively in academic studies in finance, accounting, and economics. The Research Insight database provides financial statement information from publicly traded U.S. and Canadian companies, and it has also been used widely in academic business research.

  7. A list of sample firms is available upon request.

  8. There was at least some concern that the Governor might veto the legislation. For example, PR Newswire reported that mid-way through September, 2010, a coalition of research firms, institutional investors, and faith-based investors led by Christian Brothers Investment Services sent Schwarzenegger a letter encouraging him to sign the legislation into law (see http://www.prnewswire.com/news-releases/christian-brothers-investment-services-leads-investor-coalition-to-encourage-governors-support-of-california-supply-chain-transparency-bill-103058499.html).

  9. More recently, from 2012 to 2015, three separate disasters occurred in apparel industry workshops: the Ali Enterprises fire in Pakistan, the Tazreen Fashions fire in Bangladesh and the Rana Plaza factory complex collapse, together resulting in the death of more than 1600 garment workers. Although these events don’t relate specifically to slavery and human trafficking issues, they help to illustrate the increased exposure the apparel and footwear retailers face regarding their supply chains.

  10. The lack of significance on the prior reporting variables adds additional support for the argument that investors did not consider the implementation costs of the CTSCA requirements as value relevant.

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Author information

Affiliations

  1. Department of Accounting, Illinois State University, Normal, IL, 61761, USA

    Rachel N. Birkey, Ronald P. Guidry & Dennis M. Patten

  2. School of Accountancy, Queensland University of Technology, Brisbane, QLD, 4001, Australia

    Mohammad Azizul Islam

Authors
  1. Rachel N. Birkey
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  2. Ronald P. Guidry
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  3. Mohammad Azizul Islam
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  4. Dennis M. Patten
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Corresponding author

Correspondence to Dennis M. Patten.

Appendices

Appendix: Disclosure Content Analysis Scheme

The California Supply Chain Transparency Act of 2010 (CTSCA) requires companies to publicly disclose on their website the policies they have in place to ensure that their supply chains are free of slavery and trafficking. The law specifically mentions disclosure related to five major areas (identified below). We calculated two separate disclosure metrics, the first of which is un-weighted and involved awarding one point for each of the specific areas required under the CTSCA. For the second metric, we classified disclosures, where present, as either general (one point) or more extensive (two points). Below we identify the specific CTSCA disclosure requirements and, for each, provide examples of general and more extensive disclosure as based on our review.

Appendix 1: Evaluate and Address Risks in Supply Chains

  1. 1.

    Destination Maternity Company—DMC carefully consider selection of its vendors. In particular, DMC is risk averse to doing business with vendors in countries that do not have what we consider to be adequate human rights protections. Either an employee of DMC, or a third party directed by DMC, conducts periodic onsite audits on selected vendors to ensure material compliance with our Global Labor Practices, included to evaluate risk of human trafficking and slavery. Content Score of 1.

  2. 2.

    CVS Caremark—Respect for human rights is expressed in CVS Caremark’s Supplier Ethics Policy, which all vendors around the world must adhere to as a condition of doing business with the company. The policy conforms with the conventions of the International Labour Organization (ILO) and prohibits human trafficking and the use of child, forced or imprisoned labor, requires that working conditions are safe and fair; forbids any form of discrimination with regard to age, gender, minority status, and/or other protected classes; and upholds the right to freedom of organization. We monitor compliance with the Suppliers Ethics Policy through risk-based audits conducted by external third parties. Content Score of 2.

Appendix 2: Direct Supplier Certifies Compliance

  1. 1.

    Maidenform, Inc.—Prior to accepting any orders for Maidenform, Inc. product, our suppliers are required to sign our Sourcing Agreement and agree to be bound by our Code of Vendor Conduct, Maidenform, Inc.’s Code, which states that:

    Maidenform expects all Vendors to operate within full compliance of all applicable laws and regulations of the countries in which they operate… Content Score of 1.

    1. 2.

      American Eagle Outfitters, Inc.—AEO, Inc.’s Vendor Code of Conduct (hyperlink to Code) is based on universally accepted human rights principles and sets forth our minimum standards and expectations for suppliers. Our Code expressly prohibits the use of child labor and forced or involuntary labor. These prohibitions include, but are not limited to, trafficked, prison, bonded, and indentured labor, as well as forced overtime.

      All suppliers must agree contractually and in writing to abide by the terms of our Vendor Code of Conduct and other applicable laws and regulations before we do business with them. As part of this agreement, AEO, Inc. suppliers also warrant that any subcontractors they may independently contract with to produce AEO, Inc. product will comply with the terms of our Code and other applicable laws and regulations. For more details on our Code of Conduct as well as associated guiding principles and governance, please see the Corporate Governance Section(hyperlink) of AE Better World(hyperlink). Content Score of 2.

Appendix 3: Supply Chain Audits

  1. 1.

    Jos. A. Banks Clothier, Inc.—The Company conducts, or directs that there shall be conducted, audits of most of its suppliers to evaluate compliance with Company standards regarding trafficking and slavery in supply chains. Most of the audits are performed by independent third parties; some are performed by Company Associates. Content Score of 1.

  2. 2.

    Talbots, Inc.—Auditing: Our factory monitoring partners audit factory compliance with The Talbots, Inc. Merchandise Supply Chain Code of Conduct (hyperlink), which prohibits human trafficking and forced labor. In fiscal 2010, 33 % of our apparel factory base was audited by an independent, third-party auditing firm. The remaining 67 % were audited by Li & Fung’s vendor compliance team. Approximately 4 % of all active apparel factories in fiscal 2010 received unannounced audits. In fiscal 2011, our goal is to increase the percentage of apparel factories that are audited by an independent, third-party auditing firm. We also plan to increase the percentage of factories that receive unannounced audits. Content Score of 2.

Appendix 4: Maintain Accountability Standards

  1. 1.

    Home Depot, Inc.—Supplier Certification: The Home Depot has a Supplier Buying Agreement in place with all direct supplies requiring them to comply with international standards and applicable laws and regulations, including those related to forced labor and child labor as specified in the Home Depot Social and Environmental Responsibility Standards. Content Score of 1.

  2. 2.

    Gap, Inc.—Prior to accepting any order for Gap, Inc. branded products, our suppliers are required to sign our Vendor Compliance Agreement and agree to be bound by our Code of Vendor Conduct (COVC). Gap Inc.’s COVC states that:

    Factories that produce goods for Gap, Inc. shall operate in full compliance with the laws of that respective countries and will all other applicable laws, rules, and regulations including those relating to labor, worker health and safety, and the environment.

    In signing Gap Inc.’s Vendor Compliance Agreement which also incorporates the COVC, Gap Inc. suppliers agree to comply with the following:

    All applicable laws, rule and regulations.. these laws include, but are not limited to, laws relating to the employment, conditions, of their respective employee such as (1) wage and hour, labor, child labor, and forced labor requirements, (2) health and safety, (3) immigration, (4) discrimination, (5) labor or workers’ rights in general and (6) environmental laws and regulations. Content Score of 2.

Appendix 5: Provide Employee and Manager Training

  1. 1.

    Men’s Wearhouse, Inc.—For training, managers with direct responsibility for supply chain management of our direct sourced products have attended training by our third-party consultant, Underwriters Laboratories, Inc. on human trafficking and slavery, particularly with respect to mitigated risks within the supply chains of products. Additionally, those managers attend regular calls with the third-party consultant to help ensure the safety, quality, and socially responsible manufacture of the Company’s direct sources of products. Content Score of 1.

  2. 2.

    Office Depot—Training: Office Depot continuously develops and enhances our training programs for our associates. We provide regional training to our associates and our associates are required to acknowledge and adhere to our Code of Ethical Behavior, which includes compliance with all applicable laws where Office Depot conducts business. Additionally, we are in the process of enhancing our associate training for our associates who are directly responsible for our supply chain management on mitigating risks of slavery and human trafficking and anticipate such training to commence in early 2012.

    Education and Training Awareness (Supplier Security Guidelines): A Security awareness program should be provided to employees including recognizing internal conspiracies, maintaining product integrity, and determining and addressing unauthorized access. These programs should encourage active employee participation in security controls. Content Score of 2.

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Birkey, R.N., Guidry, R.P., Islam, M.A. et al. Mandated Social Disclosure: An Analysis of the Response to the California Transparency in Supply Chains Act of 2010. J Bus Ethics 152, 827–841 (2018). https://doi.org/10.1007/s10551-016-3364-7

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Keywords

  • Supply chains
  • Corporate social responsibility
  • Disclosure
  • Regulations