Disclosure-Driven Social Engagement in Supply Chains

Abstract

Problem definition: We empirically examine the effect of buying firms' disclosures of their efforts to mitigate forced labor and human trafficking in their supply chains on their supplier's actual labor outcomes. Triggered by several scandals involving well-known firms in 2020, major regulatory actions are ongoing in addressing forced labor in supply chains through increased buyer disclosures. However, many question whether disclosure alone would be effective in generating real outcomes, and there is little empirical research on whether buyer disclosure could translate into supplier-size net improvements.

Methodology and Results: We use the passage of the California Transparency in Supply Chains Act (CTSCA) as a regime shift in the intensity of disclosures and compare negative forced-labor incidents in (1) suppliers of the disclosing buyers and (2) otherwise-identical suppliers of matched control firms not subject to the CTSCA. We find that 64% of firms subject to CTSCA make the requisite disclosures, and suppliers of these firms realize a substantial reduction---up to 56%---in actual negative incidents post-CTSCA, despite having nearly identical pre-CTSCA incident levels and trends to suppliers of control firms. We provide countervailing evidence against firms' improving their supply chain profiles irrespective of CTSCA, and evidence consistent with disclosing firms' undertaking more aggressive supply-chain-focused investments to mitigate the increasing reputational risks of inaction. We further find that consumer proximity and institutional equity ownership is predictive of both the disclosure decision itself and the level of detail in the disclosures.

Managerial implications: Although disclosure mandates do not automatically result in full compliance, they could serve as an effective way of encouraging firms to more actively shape their supply chains' ESG profiles. Further regulations should be designed with the goal of increasing consumer and investor awareness---and thus the reputational risks of inaction---in mind.

Keywords: disclosure, human rights, supply chain, transparency, reputational risk