Outsourcing Social Responsibility: Lessons Learned by Apple and Nintendo

After the Wall Street Journal published its story on suicides at a Foxconn manufacturing plant in May 2010, Steve Jobs learned that his loyal followers were deeply concerned about the working conditions of workers who assemble iPhones and other branded electronic gadgets.  A few weeks later, while Steve Jobs was promoting new iPhone 3 features, Apple users demanded accountability for the Foxconn suicides.  In fact, Apple users went further and demanded accountability for the working conditions at all Apple manufacturing plants, and they demanded it very loudly. Apple has been listening.

For many years, electronic companies like HP, Intel, Motorola, Nokia, Microsoft, Dell and others argued for transparency and broader disclosure to consumers of processes and practices used in sourcing materials for production of their devices.

Over 80% of the world production of minerals commonly used in Smartphones, such as tantalum, tungsten, tin and gold has been sourced from the Democratic Republic of Congo. Profits from mining these minerals are claimed by local warlords, fueling the bloody conflict in Congo and surrounding areas. According to the International Rescue Committee, since 1998 over 5.4 million people have died as a result of this conflict. Many deaths are of children, who are forced to work in very dangerous underground mining operations.

On July 21, 2011 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which contained a controversial section 1502(c), referred to as the Conflict Minerals provision.  The State Department and the SEC were mandated to develop specifics of the policies within a year.

Details on a months-long, highly charged debate on the Dodd-Frank Act are dramatic.  At the 11th hour of debate, the Conflict Minerals provision was inserted, requiring public companies that are manufacturers of electronic products, to implement a two stage certification system for metals used in the production of their devices: (1) an independent third-party supply chain traceability audit, and (2) reporting the result of the audit to the SEC and to the public.

The Conflict Minerals provision was a significant victory for the companies united around the principle of sourcing transparency. However, there continue to be many critics of this provision, such as Paul Griffin, a professor in the Graduate School of Management at the University of California, Davis, who argue that the audit requirements will increase the cost of electronic products and reduce competitiveness of US electronic manufacturers.

For years, watchdog organizations and some media outlets have followed electronic manufacturers and their sourcing transparency policies. One such organization, The Enough Project, has rated 24 electronic companies on their progress towards responsible sourcing of minerals. On one end of the spectrum, companies such as HP, Intel, Motorola, Nokia, Microsoft and Dell lead the pack with implementing audit and disclosure requirements voluntarily. On the other end of the spectrum, Nintendo, Sharp, Canon and Panasonic have not made any progress towards transparency in their sourcing.

On August 16th, CNN reported on the state of conflict minerals and pointed out that Nintendo received a score of 0 for its transparency practices of mineral mining. Nintendo told CNN that it “outsources the manufacture and assembly of all Nintendo products to our production partners and therefore is not directly involved in the sourcing of raw materials that are ultimately used in our products.” However, Nintendo added, “we nonetheless take our social responsibility as a global company very seriously and we expect our production partners to do the same.”

Nintendo’s attitude is a recent example of the ways in which global companies extol the virtues of responsible sourcing but fail to act in accordance. Reading between the lines, Nintendo’s policy may sound more or less like this: We, Nintendo management, outsource manufacturing to lower cost destinations so we can increase our profits and deliver the highest returns on capital to our shareholders. This is, after all, the principle of capitalism.  Profit, not values, is the goal of capitalism.

For Nike in the 1980s and Apple in 2010, values translated into consumers’ support, which in turn translated directly into the price of stock.  Therefore, values do in fact carry a tangible material value, which can greatly impact the return on capital to shareholders.  That’s why companies aggressively protect their brands, as brands represent values. This is a lesson that Nintendo has failed to learn.

Or perhaps they did, but still decided to gamble.  This author cannot help but wonder if the Nintendo policy of outsourcing social responsibility was calculated based on the fact that, unfortunately, many Nintendo consumers do not even know where Democratic Republic of Congo is, or what drives the bloody conflict there.  And for Nintendo users, unlike for Apple users, “blood phones are cool” – as expressed by numerous bloggers.

On August 22nd, the SEC voted to uphold the requirement of third-party audits and disclosure of the source of conflict minerals. Therefore, the Nintendo-style (and Sharp-style, and Canon-style) outsourcing social responsibility practice will not be sufficient, or even legal, under US law. Nintendo and other similar companies are obligated to implement the audit and report the source of conflict minerals.

Thus these values have been written into the capitalistic profit equation for the US public companies. We have now entered a new phase of outsourcing social responsibility: the phase of bringing values and social accountability into a global financial accounting systems.  Indirectly, but clearly, values are making their ways into P&L statements.  And more is to come.

Stay tuned for additional developments in the debate of outsourcing and social responsibility.  In a follow-up article, I will discuss how Apple and Foxconn, unlikely partners in accepting social responsibility, passed the outsourcing social responsibility test with impressive marks. □

Dr. Wanda Lopuch is the Past Chair of the Board of the Global Sourcing Council as well as leading MDA Associates, Inc., a consulting organization focusing on “greening” global operations and their supply chains while improving economic outcomes of businesses in the life sciences, IT, FMCG and financial sectors. Prior to joining MDA Associates Inc., Ms. Lopuch was the president of Medical Data Management Inc., the company she founded and grew into a multi-million dollar business with locations in seven countries. After the successful acquisition of Medical Data Management by Dendrite International, Wanda served as the Vice President and General Manager of Dendrite Central and Eastern Europe. Ms. Lopuch holds a Ph.D. in Administration and Supervision from Marquette University, Milwaukee, WI, and an MS in Computer Sciences from the Wroclaw University of Technology, Wroclaw, Poland.  She may be contacted at wanda@lopuch.com