1. See “The Other Side of Apple II: Pollution Spreads Through Apple’s Supply Chain,” Friends of Nature, Institute of Public & Environmental Affairs, Green Beagle, Envirofriends, and Green Stone Environmental Action Network, Aug. 31, 2011, www.ipe.org.cn/Upload/Report-IT-V-Apple-II.pdf.
2. L. Hook and K. Hille, “Apple Attacked Over Pollution in China,” Financial Times, Aug. 31, 2011.
3. D. Barboza, “Apple Cited as Adding to Pollution in China,” New York Times, Sept. 1, 2011.
4. See “Dirty Laundry: Unravelling the Corporate Connections to Toxic Water Pollution in China,” Greenpeace International, July 2011; “Adidas Group Response to Greenpeace Report,” Adidas Group, July 2011; and J. Watts, “Greenpeace Report Links Western Firms to Chinese River Polluters,” The Guardian, July 12, 2011.
5. J. Pfeffer and R.I. Sutton, “The Knowing-Doing Gap: How Smart Companies Turn Knowledge Into Action” (Boston: Harvard Business Press, 2000).
6. R. Locke, M. Amengual and A. Mangla, “Virtue out of Necessity? Compliance, Commitment, and the Improvement of Labor Conditions in Global Supply Chains,” Politics & Society 37, no. 3 (September 2009): 319-351; R.M. Locke, F. Qin and A. Brause, “Does Monitoring Improve Labor Standards?: Lessons from Nike,” Industrial and Labor Relations Review 61, no. 1 (October 2007): 3-31; and R. Locke and M. Romis, “Improving Work Conditions in a Global Supply Chain,” MIT Sloan Management Review 48, no. 2 (winter 2007): 54-62. Our analysis of a game-theoretic model suggests that an increase in auditing effort by a buyer results in lower compliance effort by the supplier and increased risk of violations and negative public relations (of the sort recently experienced by Apple) in two cases. In the first case, the buyer bears a substantially higher cost associated with a violation than does the supplier, and the supplier is likely to be able to hide problems from the auditor. Then, high audit intensity motivates the supplier to hide rather than comply. In the second case, the supplier has thin margins, a high cost of compliance and substantial cost in the event that a violation is detected. Then, the supplier does not hide information from the auditor. Instead, the supplier relies on the auditor to identify problems. As the buyer puts more effort into auditing, the supplier has a lower risk of suffering an externally detected violation for any given level of compliance effort, and therefore the supplier puts less effort into compliance; in short, the supplier free-rides on the buyer’s auditing effort. An alternative approach is for the supplier to engage and pay a reputable third party to undertake the auditing. That may improve compliance and profitability for both buyer and supplier — assuming the third party is not corrupt. Q. Zhang and E.L. Plambeck, “Auditing, Hiding, and Compliance in Socially Responsible Supply Chain Management,” working paper, Stanford Graduate School of Business, 2011.
7. T. Fuller, “‘Sweatshop Snoops’ Take on China Factories,” New York Times, Sept. 15, 2006; and “Secrets, Lies, and Sweatshops,” Business Week, Nov. 27, 2006.
8. E.L. Plambeck and L. Denend, “Wal-Mart’s Sustainability Strategy,” Stanford Graduate School of Business case no. OIT-71 (Stanford: Stanford University, April 17, 2007): 9.
9. W. Clem, “Timberland Linked to Polluting Factories,” South China Morning Post, Aug. 7, 2009.
10. “Electronics Supply Networks and Water Pollution in China: Understanding and Mitigating Potential Impacts,” Business for Social Responsibility, November 2010.
11. S. Oster, “China Report Finds Extensive Pollution,” Wall Street Journal, Feb. 10, 2010.
12. The Electronic Industry Citizenship Coalition in 2007 launched the E-TASC program (the electronics industry’s Tool for Accountable Supply Chains) to manage data and share audit results.
13. “Walmart Global Sustainability Report: 2010 Progress Update” (Bentonville, Arkansas: Wal-Mart Stores Inc., 2010), http://cdn.walmartstores.com/sites/sustainabilityreport/2010/WMT2010GlobalSustainabilityReport.pdf.
14. “Unlocking Energy Efficiency in China: A Guide to Partnering With Suppliers,” Business for Social Responsibility, May 2010, p. 11.
15. “Walmart Global Sustainability Report.”