6-6. A Case of Human Rights Violations Caused by Flawed Supply Chain Audits and the Resulting Loss of Corporate Reputation

In recent years, human rights issues in the supply chains of global companies have become more prominent, and more cases have drawn international criticism. Many of these incidents are rooted in companies conducting superficial and ineffective supply chain audits. Human rights violations—which manifest as labor exploitation, child labor, and harsh working conditions—can severely impact a company's reputation and brand value. This article explains examples of human rights violations caused by inadequate audits and the business risks they pose.

1. Typical Examples of Human Rights Violations Caused by Audit Failures

In one case, an apparel company failed to grasp the reality of its supplier's factory, where child labor was a routine practice, because its audits were limited to a review of documents. When this fact was reported, the company faced strong criticism from consumers and investors, which led to a drop in its stock price and a decline in sales. In another instance involving an electronics parts manufacturer, a human rights NGO pointed out forced labor at a subcontractor factory. The company explained that its "regular audits had not identified any issues." However, it was later revealed that the audits were announced in advance and had become a mere formality, which significantly damaged the company's credibility.

2. Impact on Corporate Reputation

When such human rights violations are exposed, they are not just temporary scandals but can impact the entire corporate reputation. First, investors increasingly focus on ESG (Environmental, Social, and Governance) scores, and companies that fail to manage human rights risks are more likely to be excluded from investment portfolios. Second, as consumer awareness of human rights grows, there is a stronger trend toward "ethical consumption." Boycotts and criticism spread on social media can accelerate brand damage. In some cases, it can even affect business continuity through contract cancellations by business partners or investigations by regulatory authorities.

3. Underlying Causes of Inadequate Audits

Insufficient supply chain audits are often caused by cost-cutting pressures, a reliance on perfunctory third-party audits, and barriers of local culture and language. Audits that are announced in advance, in particular, allow factories to temporarily put on a better face, which carries a high risk of concealing the real situation. Furthermore, the problem is exacerbated when companies only focus on primary suppliers and fail to gain a sufficient understanding of their sub-suppliers.

4. Measures for Recurrence Prevention and Restoring Trust

To properly manage human rights risks, the following approaches are effective:

• Unannounced Audits and On-Site Interviews: Conduct effective investigations that go beyond document checks and include direct dialogue with employees.

• Leverage Technology: Introduce supply chain tracking systems and use blockchain to increase the transparency of labor records.

• Multi-Layered Audit System: Conduct comprehensive audits that extend beyond primary suppliers to include subcontractors and raw material sourcing.

• Management Involvement: Clearly position human rights as a management priority and fulfill responsibility across the entire supply chain.

5. The Perspective of Enhancing Corporate Value

Strengthening human rights management in the supply chain is not just about avoiding risk; it leads to long-term corporate value enhancement. Companies that are conscientious about human rights are more likely to be highly rated by investors and trusted by consumers. Conversely, if deficiencies are left unaddressed, a company's reputation can quickly collapse, requiring a great deal of time and a high cost to recover.

In conclusion, inadequate supply chain audits are a major risk factor that can lead to the neglect of human rights violations and a loss of corporate reputation. Companies are expected to prevent superficial audits and ensure effective human rights due diligence to secure sustainable management and social trust.