Transcript | Building Sustainable Operations and Supply Chains

It should come as no surprise that according to research from Protiviti, ESG metrics and measurement are among the top priorities for CFOs and finance teams to address, and a majority are substantially increasing the focus on and frequency of their ESG reporting. A key part of these efforts must be building sustainable operations and supply chains, but this only scratches the surface.

This is Kevin Donahue, a senior director with Protiviti, welcoming you to a new edition of Board Perspectives. Board members today are looking for deeper insights into the organization’s ESG footprint. Our conversation with Beverly Norman Cooper, chief strategist with Reimagining Supply Chain Diversity, and Protiviti’s Tony Abel will inform you of key ESG considerations in business operations and supply chains. It also will help you formulate the right questions to pose to management to understand clearly the organization’s strategies and policies in these areas.

Beverley, in her current role with Reimagining Supply Chain Diversity, helps companies harness supply chain purchasing to create good jobs, increase community wealth, and accelerate the economic, social and physical regeneration of underresourced communities. She previously led supplier diversity and environmentally preferable sourcing for a major health care organization. Over three years, she took the organization from $1.3 billion in annual diverse spend to more than $2.3 billion in annual spend.

Tony is a managing director with the Business Performance Improvement solution at Protiviti. He is a leader with the firm’s Supply Chain and Procurement practice and leads Protiviti’s manufacturing, supply chain and circular-economy ESG working group. Tony has more than two decades of experience as a procurement and supply chain leader within companies, management consulting firms and outsourcing environments across a variety of industries.

Beverly, welcome to our program. It’s great to speak with you.

Thank you. I’m happy to be here.

Tony, it is great to connect with you again as well.

Good morning. Thanks for having me, Kevin.

Let me ask both of you our first question, and Beverly, I’ll have you chime in on this one first. As organizations are advancing their focus on ESG, supplier sustainability is receiving more attention, especially recently. However, when we talk about supplier diversity, that’s been a consideration for quite some time. Are both diversity and sustainability important considerations for ESG?

Kevin, they’re probably more important now than ever. We’re living in unprecedented times with the social political and economic climate we’re all facing in 2022. Supplier diversity is as relevant today as it was when the program first came into being in the late 1960s, or even more relevant. So, as the US tries to get back on its feet and provide jobs for people, particularly those who live in underresourced communities, supplier diversity and sustainability become of paramount importance.

Let me go back to the history of supplier diversity — and I know Tony’s going to speak broadly about both these things. GM was the first automotive company to establish a formal supplier diversity program in 1968, and in 1969, one year later, President Richard Nixon issued an executive order creating the program, which was nestled in the Department of Commerce. Back then, the mission was simple, and it still is that mission today: to create opportunities in minority communities for business owners to grow and develop their businesses so they’re strong and they can pass those benefits back onto the neighborhoods and communities where those businesses are located.

Today the basic premise still holds: A company awards a contract to a diverse company for goods and services, and that company hires more people and buys more goods and services to meet the demand. This stimulates a lot of economic activity, which then creates tax revenues and community wealth. In my mind, Kevin, that’s what supplier diversity is all about: It’s about capitalism at its best.

That’s fascinating to hear. Thank you, Beverly, and you just outlined what is right now a minimum 50-year journey and counting — quite remarkable. Tony, what are your thoughts on this, especially when we get into supplier sustainability?

When you think about supplier diversity and sustainability, a number of folks would align supplier diversity with that S, or the social aspect of ESG, and supplier sustainability, with the E, or the environmental aspects. However, as Beverly noted, both are critically important and need to be a key component of any ESG program. And taking that one step further, as you consider the ethical practices of your suppliers, concepts of anticorruption or diversity and equity, all of that is really part of the G, or the governance dimension of ESG.

All areas of ESG are important and must be considered across the full spectrum of the supply chain, including Tier 1, Tier 2 and Tier 3 suppliers. In ESG, sustainability cannot be limited to that within just the four walls of any organization, as it requires the sum of the entire supply chain to consider the true output and the sustainability diversity of that organization.

Just a quick example: When calculating emissions, in organizations, true carbon footprint is that which is emitted by the organization itself, as well as each of the suppliers in the chain. Likewise, when assessing an organization’s human rights or health and safety or diversity practices, those same practices need to be considered for suppliers, as they contribute to an organization’s end product or service.

Thanks, Tony. Beverly, let me ask you this: Especially from a board member’s perspective, what are the benefits you see of a diverse and sustainable supply base? Sometimes I may think, “That’s obvious,” but perhaps it’s not. What are your views on that?

It’s tempting to use that time-worn argument that a company should launch a supplier diversity program because it’s the right thing to do. While there’s a feel-good benefit to that statement, that’s like saying I should eat more broccoli because it’s good for me. That may be true, but it doesn’t always sustain me in the long run.

And I love to allude to history to help us all understand and be on the same page: When I think about a case study in the benefits of a diverse and sustainable supply chain, I like to go back to, when Henry Ford was offering his workers five dollars a day for eight hours of work in a factory, that was more than double the average factory wage at that time, but he was looking at chronic absenteeism, lots of worker turnover, so he gambled that higher wages would attract better, more reliable workers. Benefits were almost immediate. Productivity surged. Ford became the company that doubled its profits in less than two years, and Ford himself ended up calling it the best cost-cutting move he ever made.

It’s also widely believed, though, that, that by giving those higher wages to his workers, he was able to expand his market — he also paid employees enough to buy the cars that Ford made. So, while that wasn’t his main motivation, it was a collateral benefit and a game changer.

I like to tell this story because there are lots of general benefits of supplier diversity and sustainability — benefits such as access to a more flexible and local supply chain, and the ability to buy goods and services at more cost-effective prices, because smaller suppliers simply don’t have the immense overhead that a large organization has. And supplier diversity has been known to help companies recruit and retain employees, as well as, it’s now being used to recruit board members. At its core, creating a diverse and sustainable supply base is a business strategy. It is not a social strategy; it is a business strategy that focuses on how a particular company can deliver unique value to its stakeholders.

Each company must look at its own strategic comparatives, its markets, its customers, its community, its business model, and it then must decide how that supplier diversity and sustainability program can help derive social, commercial and economic benefits it needs to realize how to embed supplier diversity into its DNA.

That was a long answer, but the bottom line is, there is no one-size-fits-all. When you’re talking about the benefits of a diverse supply and a sustainable supply base, every company must examine how instituting these programs can help achieve its business objectives.

Beverly, that was a great answer. I have a quick follow-up for you: You brought up the talent subject here. We’re in a talent war right now — I think most people agree — the Great Reshuffle, the Great Resignation and so forth. Is this diverse sustainable supply base a key differentiator in bringing in the talent you need as an organization to grow?

What a lot of organizations are finding is that it is a competitive advantage. When you look at a program like supplier diversity and sustainability, it’s almost like your balance sheet. It’s a snapshot in time, and what that program needs to do is look at where we are in 2022. Look at the political climate, the social climate, the economic climate. Boards are becoming more diverse. Employee bases are becoming more diverse. They’re hiring more women or African Americans, more people from underrepresented groups. Supplier diversity simply becomes one more in the continuum of how a company shows up and how it recruits and retains people at the board level, at the worker level, at the supply-base level, to show that that company is responding to the needs of the moment. There’s a little bit of urgency now that a lot of us in this space have not seen in a number of years, and it’s great news.

Thanks, Beverly. Those are great insights, and among everything else, we know boards are asking about whether the organizations have the talent they need, the skills they need. You just explained that these are key components in helping organizations get to reach those goals from a talent standpoint.

Tony, let me ask you about metrics and measurement. How is supplier diversity and sustainability measured?

Unfortunately, many organizations today aren’t measuring their suppliers performance against ESG targets, and frankly, many of those that are, are almost exclusively focused on carbon emissions. And further to that point, those that are measuring carbon emissions are primarily focused on scope 1 and scope 2 emissions. Scope 1 are those emissions that are direct from the company’s operations. Scope 2 are emissions from purchased energy like electricity or steam, or what-have-you. It’s the scope 3 emissions that are related to a supplier’s emissions.

So, while there are a lot of organizations still making progress toward reporting on supplier diversity and sustainability, there’s certainly an evolution of reporting regulations and standards that are coming very quickly. Companies will be required to report on, as I mentioned, scope 1 and scope 2 emissions — likely within the next 18 months or so. Scope 3 emissions will follow that by perhaps another 12 months, but it’s coming. It’s certainly coming. The SEC just issued a rules proposal on these reporting requirements on March 21 which outlines these requirements.

As for how organizations should be, and soon will be, required to report on diversity and sustainability, it’s important that companies follow a basic process for measuring performance, and that basic process would include things like creating clear and actionable goals, identifying KPIs, or key performance indicators, that will track against those goals. It will be important to establish a baseline against those KPIs, but probably most important will be drawing insights from the data captured and tracked on an ongoing basis.

What’s most important is that organizations identify actions to do better against the established targets — and at its core, this isn’t a reporting exercise. It’s an evolution of a company’s operations to be more efficient, to use less energy, perhaps renewable resources, use less water, reducing waste water, reducing waste as a percent to landfill, eliminating single-use packaging, etc., but that’s the core of what this is all about. We’re going to see a pretty rapid evolution toward organizations reporting against some of those targets.

Kevin, may I also add something to what Tony just said? Many years ago, in the first iteration of supplier diversity, oftentimes, a company simply reported out the dollar amount of its spend. You had organizations like the Billion-Dollar Roundtable, which my former employer was a part of, and those are companies that commit to spending at least a billion dollars annually with diverse suppliers. You measured your performance by how much you were spending.

There was an evolution, and it’s continuing to evolve right now in the world of supplier diversity, where it’s also measuring the economic impact. You can spend $1 billion or $2 billion through your supplier diversity program, but the question becomes, how many jobs with good wages are you creating through that spend? The evolution of this work is that companies are now asking themselves, and asking their leaders, what is the economic impact of that spend? Then, more importantly, they’re also asking, what does that do for our company or our organization in particular?

To give you a quick example, my last company was in the healthcare space, and one of the things that was important was the whole issue of preventative health — eat healthy, exercise, all those kind of things. We tied the supplier diversity program to the business imperatives of our organization, and we were able to say if we are looking at how much we’re spending in a particular ZIP code where we have patients or members, are we creating enough wealth and jobs with good income so that people can buy broccoli or they can send their kids to better schools? The whole evolution of how supplier diversity is measured is one that I welcome, because it forces companies to understand, is that spend creating a benefit for the company as well as for the community?

Those are great insights. I want to circle back to one point Tony made referencing climate-related disclosures. The SEC just issued a new proposed rule for climate disclosures that are going to affect most public reporting companies in the United States. It’s in the proposal stage right now, and likely going to be passed and become effective either for this fiscal year or the following fiscal year. Protiviti issued a short paper, SEC Issues Proposed Rules for Enhancement and Standardization of Climate-Related Disclosures. I’ll put a link to that paper in our show notes, where you can find it for more information. Tony, what are some of the key questions board members should be asking or reviewing about their programs’ impact?

I’ll share three key questions that every board should be considering given where we’re at with the some of the things you just mentioned, as the SEC is releasing rules proposals, and the evolution of organizations focusing on this important topic. One is, what are our short-term and long-term ESG goals, and what KPIs will get us there? It’s important to have a strategy that goes well beyond how to report against ESG targets. The strategy needs to include goals and targets that are inclusive of the end-to-end supply chain — incorporating aspects of environmental, social and governance performance of suppliers, all of which, again, contribute to the output of the goods produced or the services provided by the organization itself. So, that’s number one.

Number two would be, what framework or standards are being used? It’s important to understand the landscape of ESG ratings, rankings, and related frameworks and standards. As I mentioned, and you just recapped, the SEC is taking action to provide guidance on this, but there are also more than 600 active and inactive raters and rankers. These are organizations that either scrape publicly available information from company websites or financial reports or other published information, or they use surveys and questionnaires to score and rate an organization against defined ESG criteria. I won’t spend too much time on this topic that we covered in one of our earlier Board Perspectives podcasts, but I encourage our listeners to check that podcast out, if they haven’t already.

The third question is to, the point I referenced earlier, are we simply reporting historical performance against these defined metrics, or are we drawing insights from the reporting data captured, and doing things differently — doing things more sustainably and more responsibly? There’s a tremendous amount of focus on the issue reporting, and that’s going to be a critically important component of any issue program. With that, many organizations are setting lofty goals related to whether it’s emissions or diversity or human rights. The only way, however, all of this amounts to anything is if companies start doing things that positively impact the climate, the Earth and our global society.

Thanks, Tony — and we did have a great podcast with Protiviti’s Bob Hirth and Melanie Harkins, going into detail on those ESG ratings and rankings, as Tony said. I encourage you to check out that podcast as well. Beverly, in your view, what is the first step a company should take to initiate a supplier diversity and sustainability program? I asked that because I imagine even today, many organizations are wondering where to get started.

It goes back to something Tony hit on earlier. As I said earlier, there’s no one-size-fits-all for every company. It’s about a company’s executives asking themselves, what are our short- and long-term business imperatives? That’s the first question. Then, the second step is, once that is defined, a clear-eyed look at how implementing a supplier diversity and sustainability program will help the company drive business results. The board has a role in that as well, because a lot of boards are now looking at workforce and the leadership pipeline, and they’re asking questions of the company’s executives: “What are you doing there?”

A board has a role to play in this world of supplier diversity, because it is part of diversity, equity, inclusion and belonging. Boards are becoming increasingly active in asking their CEOs or presidents to report out — “What are you doing with supplier diversity?” “What is the impact your program is having?” The first step is, look at your company or organization, look at your business model, look at your business imperatives, and then decide how a supplier diversity and sustainability program can help you in the short and long term, because that’s the only way that these programs become embedded in the DNA. It becomes not just, “We do this because it’s the right thing to do. We do it because it is so integrated into our business model and how we do things that are sustainable for generations to come.”

Tony, I want to see if you have any thoughts on this as well, particularly in some of your day-to-day work with different companies — certainly, around the United States, and likely, around the globe as well.

Some of the points that I mentioned earlier are the key points around ensuring that there is a strategy, you’ve established your ESG-related goals, you know how you’re going to measure yourself against them. And then, most importantly, how are you going to evolve your organization operationally to achieve those targets? That’s probably going to be the most difficult thing for organizations as we evolve through this life cycle of ESG. Many will find that aligning with the standards and establishing the right reporting rhythms and understanding how they will report to the street some of their performance against these targets will probably be the easier step — and that’s not going to be easy, but easier than making the operational changes that will be required to do better as an organization against some of these ESG targets.

Beverly, Tony, this has been a great conversation today. I have one more question I’ll ask you, but I first want to remind our audience that you can find a wealth of information related to these ESG-type topics at Protiviti.com/ESG. That includes links to other episodes of our Board Perspectives podcast series in which we’re focusing on ESG topics. My final question — and Tony, I’ll have you answer first — thinking about a board member or board of directors, what would you say would be the single takeaway, or perhaps several key takeaways, you would offer to a board today on this topic of supplier diversity and sustainability?

Two key points: One, as a key takeaway, consider that your suppliers’ performance is a key component of your performance. That’s number one. Number two is, embrace the operational changes that will, as I mentioned earlier, inevitably be required to achieve your ESG goals. Those would be the two takeaways I’d offer.

Outstanding. Beverly, I’m going to give you the last word here. What would your guidance be on these areas for a board of directors?

It’s pretty simple, and that is, the board can hold organizational leaders accountable. The board, as Tony alluded to earlier, is about accountability. It is not just about wonderful aspirations and the desire to do the right thing. It really is, how do we decide we want to implement these programs? Who are we holding accountable for the execution? And how do we measure? The board has a big role to play in ensuring that leaders are executing on the strategy and on the plan that benefits not just the company but also other stakeholders in that community. Ultimately, it is about accountability and how the board can hold leaders’ feet to the fire in some ways to make sure they’re executing on that strategy.

That was a great conversation with Beverly and Tony. I want to thank them for joining me and providing the revealing insights and perspectives on building sustainable operations and supply chains. One particular takeaway really stands out: This is a business strategy. It’s not just about a commitment to being green or being socially responsible. Rather, this should be approached as a business strategy similar to any other critical enterprisewide initiative in the organization. For more information and insights, please visit Protiviti.com/ESG, and I hope you will subscribe to our Board Perspectives podcast series and review us wherever you get your podcast content.