Tandra Jackson, Vice Chair of Growth and Strategy at KPMG U.S. recently sat down with boardmember.com columnist Matthew Scott to discuss how continuing challenges caused by the Covid-19 pandemic and new disruptions from the Russia-Ukraine war could potentially affect board oversight of ESG risks in the supply chain. Ms. Jackson, who has an extensive background in risk, governance and technology advisory services and has also served on several non-profit boards in her career, outlined key questions regarding supply chain management in the following edited version of their conversation.
As companies continue dealing with challenges from Covid-19 and disruptions from the Ukraine war, which areas of supply chain management do boards need to be most concerned about?
Boards have really got to be hyper focused on providing the right level of governance—challenging management and giving guidance to management—around what they’re doing regarding the supply chain. If Covid-19 showed us anything, it’s that supply chain resiliency and supply chain sustainability are key.
From a resilience standpoint, you’ve just got to know that management has in place everything that they can to minimize disruption in the supply chain. And that’s everything from looking at how they do strategic sourcing, to their supply chain strategy, to ensuring that they’ve got a good understanding of their supply network, and where they might have geopolitical and other potential exposures. You’ve also got to ensure that management has strong practices and processes in those areas. Traditionally organizations have focused on ways to eke out cost from the system, as most companies want a cost efficient, tax efficient supply chain.
Now we see that it is even more important to ask, where do we have potential risk? How might geopolitical instability or Covid labor shortages impact us? And how do we ensure that we’ve got supply chain connections in the right places so that we have continuity of our supply?
And the role of the board is to understand what is the company’s strategy around its supply chain network. What is your level of transparency? How can management make things transparent enough, so directors know what you’re monitoring and how you’re ensuring that you’ve got the right level of resiliency?
So, what should boards do to focus on how their suppliers are dealing with ESG challenges that they may face?
ESG concerns get layered on top of supply chain issues. If you take the environmental regulations within the latest proposed SEC disclosure rules that have come out, then you’ve really got to home in on your own company’s emissions and objectives, which means you’ve got to look at your supply chain and understand what those companies are doing. So how are you getting a better understanding of your suppliers’ compliance with environmental regulations regarding decarbonization? And how do you gather that information? How are you tracking that? How can management report that information so there is confidence that the reporting is going to be appropriate and accurate?
It’s also important for boards to have a deep understanding of their company’s practices around supplier agreements and the ESG posture of suppliers.
For example, regarding agreements with suppliers, is the board’s knowledge enough to challenge management on the process of sourcing, selection and contracting with suppliers, as well as the mapping of the supplier network? The board should want to understand ESG practices for the company’s existing footprint and how the company is assessing those efforts. The board must then ask: how are they going to be able to capture that ESG data to report to relevant stakeholders?
And of course, it’s important that the board understand the company’s ESG posture, for example: how is your company planning to comply with the carbonization and energy efficiency rules? How are you complying with the social aspects of ESG? What’s your posture around diversity and inclusion? And what are you doing around fair labor laws and human rights?
Some companies may have to reshape their practices; there are likely some things that they were doing already around strategic sourcing, supplier agreements, and monitoring in certain areas. But I believe companies have got to dial that up in a much different way than they have in the past. And it’s the board’s responsibility to specifically understand how management is doing that. What’s the strategy? What’s the plan? What’s the timeline to tackle reporting of third-party data on emissions? How are you getting a handle on this across the supplier base? And how do you monitor that process to make sure you don’t have risk exposures, and that reporting is accurate?
Which key questions should boards ask about ESG-related disclosures to give shareholders confidence that they are responding to ESG and climate change concerns?
ESG metrics, particularly around climate disclosures, are going to be a big deal going forward. So, what you disclose will depend on how far the company wants to go to eventually get to the Scope 3 Emissions standard, and how fast they want to get there. The board has got to make sure management has practices in place to ensure the integrity of data being reported, and internal controls within the ESG data capture and reporting processes.
So, if a company is going to Scope 3, they should ask, how are we capturing data around emissions of our suppliers? How are we ensuring the integrity of that data? What process do we have in place? Who is doing that? And are we conducting audits?
Companies should also ensure supplier agreements allow supplier audits and have practices in place to conduct supplier audits. You might want to audit their controls and practices to make sure that they have in place what they’ve agreed to have in place to be a supplier in your network. The board will want to ensure the company understands and has the right practices in place to ensure supplier practices and resiliency are in line with company expectations.
That’s why you’ve got to start with understanding your network and having a set strategy, because maybe the network you have today is not the network that you need to have. You may need to de risk your supply chain, which is a question that the board should be asking itself and management.
How much should companies engage shareholders on this issue? And how should they do it?
Well, the CEO is obviously the main contact with investors, but that doesn’t mean the board should not be present, “as appropriate.” What you need to make sure is the company has a voice to its stakeholders.
Regarding how the board should engage with its shareholders—that should be agreed upon by the board chair, CEO, and other senior leaders of the company. What you want to make sure is that you are sending the right and accurate message to your stakeholder base.