204 Supply chain due diligence: where does it end?

Another specific responsibility increasingly allocated to corporate boards is to conduct due diligence concerning the actual and potential adverse impact caused by their corporations to human rights or the natural environment throughout their supply chains.1 Due diligence processes can help corporations to avoid the risk of such adverse impacts. A responsibility to conduct supply chain due diligence therefore functions as an important complement to the board’s responsibility for risk management, enabling boards to integrate social and ecological aspects in their governance.2 Examples of specific topics for supply chain due diligence are the use of conflict minerals, illegally felled timber, and child labour.3 The reach of such due diligence is increasingly being extended beyond the internal business activities of a corporation to include its whole value chain.4 As a result, the allocation of specific responsibilities for supply chain due diligence alters the boundaries of corporate governance, as boards are expected to go beyond the boundaries of their enterprise to consider the activities of external suppliers as well.

In relation to social and ecological interests, this extension of the boundaries of corporate governance raises two problems: the problem of identification and the problem of representation.5 The first problem relates to the ex ante identification of stakeholders impacted by a board decision, while such identification may only be possible after the decision has been made.6 Due diligence has its intrinsic limits due to the operational impossibility of obtaining all information relating to all aspects involved in the enterprise and its supply chain. Particularly when corporations operate transnationally as part of a complex and agile supply chain, then supply chain due diligence may not be able to include all aspects and scenarios in which the enterprise is involved.7 This leaves some stakeholders at risk of falling outside the scope of what can reasonably be expected from corporate boards when they conduct their due diligence.

Linked to this issue is the second problem of representing social and ecological interests as identifiable stakeholders, while such interests may not be capable of being fully represented by a human intermediary (such as the interests of local natural ecosystems). This problem of representation questions whether boards may be required to consider such non-representable social and ecological interests in their due diligence even if a recognizable stakeholder is not yet involved.8 Risk management coupled with due diligence is particularly well suited to capture such non-identifiable and non-representable social and ecological interests, since boards may notice an actual or potential adverse impact before potential stakeholders are able to do so. Supply chain due diligence therefore offers a promising tool for integrating social and ecological aspects in corporate governance. While the lack of representation of such interests may further emphasize the need for extensive supply chain due diligence by corporations, the operational limits intrinsic in such due diligence will remain. In sum, a fourth issue for further research arises, questioning how boards should determine the legitimate boundaries of their supply chain due diligence.9