Microsoft to Require Vendors to Submit Sustainability Reports

Microsoft says it “aspires to be more than just a good company—it aspires to be a great company.” The company’s latest step in this direction is a focus not on products or practices, but on the company’s supply chain. The company announced on Thursday that starting in 2013 it will require a cross section of its suppliers to provide reports on their adherence to the requirements listed in the existing Microsoft Vendor Code of Conduct.

This is an important step as it is supposed to provide Microsoft’s vendors with a much greater incentive to uphold Microsoft’s high standards for legal compliance, business ethics, labor and human rights standards, environmental protection, and respect for intellectual property, which are detailed in the code. Vendors will find that this code is covering almost every possible problematic issue, from minimum wage to child labor to complying with environmental laws.

What makes this story even more interesting is how it started – with a shareholder resolution filed by John Liu, the New York City comptroller, on behalf of the New York City Pension Funds. In other words, this is not just a story about a company working to make its supply chain more sustainable and accountable, but also about the power of stakeholder resolutions to move companies in the right direction.

It’s not clear yet how many of Microsoft’s tens of thousands of vendors will be required eventually to provide these reports, but according to their press release, Microsoft will begin informing a dozen of its key vendors about its new reporting process in the coming months.

Now, these standards shouldn’t be actually new to any of Microsoft’s vendors. It has been in place for several years and was even updated and strengthened lately in accordance with Microsoft’s commitment in their FY2010 Citizenship Report.  Microsoft reported on its FY2011 Citizenship Report that this was their first major update to the code in three years. Changes included more stringent provisions on anticorruption, customer security and privacy, and human rights, a limit of 60 hours of work per week, even if local law allows more, and an explicit prohibition of discrimination against union members.

On Microsoft’s end, the effort to hold their suppliers accountable was focused until now on monitoring priority suppliers based on risk and compliance records (in FY2011 about 80 significant suppliers underwent human rights risk assessment and monitoring), conducting supply-chain-wide third-party anticorruption assessments, training suppliers to ensure compliance, particularly with the human rights standards, and initiating a new grievance process - collaborating with the Fair Labor Association and Clear Voice Hotline to launch a 24/7 anonymous reporting hotline for employees in the supply chain.

These efforts are certainly impressive, but apparently were not enough to meet Microsoft’s expectations from their vendors “to uphold the high standards of Citizenship to which we hold ourselves.” At least, that was the case from the perspective of New York City Comptroller John Liu, who acts on behalf of the New York City Pension Funds, an institutional investor that owns 19.2 million shares of Microsoft stock.

Why Liu was worried that the existing monitoring practices were not enough? A spokesman for Liu’s office told Greg Lamm of TechFlash that, as an institutional investor, managing the New York City Pension Funds, their office wants to make sure investments are protected from an adverse affects on company revenue that could be brought on by labor, environmental or other issues involving Microsoft.

Microsoft decided to adopt this approach, probably understanding such reporting can be a helpful tool to reach their CSR goals with regards to the supply chain. "This new reporting requirement will help shareholders, customers and others understand how Microsoft and its suppliers are meeting their expectations for social responsibility,” said Brad Smith, general counsel and executive vice president of Legal and Corporate Affairs for Microsoft.

Another important part of the new initiative is transparency. Microsoft said vendors also will be encouraged to make their reports public and that it will include a summary of information from the vendor reports in its annual Citizenship Report. This is meant not just to provide further visibility to the company’s stakeholders, but also to make vendors understand that their reporting is not going to read just by Microsoft, but will be shared with the public (at least a summary of it). Hopefully it will encourage vendors to take reporting as well as the implementation of Microsoft’s standards more seriously.

This sort of reporting looks like an important tool to promote accountability and transparency among supply chains – wouldn’t it be great to see other companies with large supply chains do the same? Liu’s office definitely think so and said the New York City Pension Funds are taking this proposal to other companies and expect that they will follow the prudent path Microsoft has chosen. If this would be the case, Microsoft will be the first in what might become eventually known as Liu’s supply chain reporting revolution.

Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is also an adjunct professor in the University of Delaware’s Alfred Lerner College of Business and Economics.