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The ethical dilemma of ‘pay to stay’

Date: 2 Mar 2015

In recent days, highly regarded corporate responsibility champion B&Q has been attacked for what is described as a “pay to stay” request of its suppliers. It makes the company the latest that has been exposed indulging in what some describe as bullying - a fact that is all the more remarkable because its parent group Kingfisher had signed up to initiatives focusing on fair play for suppliers.

It’s not a rare phenomenon. The Federation of Small Businesses has said that one in five smaller firms has experienced this kind of pressure from their larger customers. It’s not always ‘pay to stay’ - it may be measures such as subjecting suppliers to egregiously long payment terms or changing those terms retrospectively. But in each case it is based on the muscle of larger companies taking for granted that the smaller ones depend so much on their business that they have no choice but to comply - and that power and leverage can be used to boost the profitability or the cash flow of the larger company at the expense of the smaller suppliers.

If corporate social responsibility is primarily about how businesses respond to the changing expectations of society, there’s not much doubt that these sorts of arrangements are - whenever they come to light - roundly criticised as representing the worst of corporate behaviour. And yet it is often companies that are actively committed to CSR that are caught in the spotlight. Why the apparent contradiction?

The justification given for demands for cash from suppliers usually focus on ‘investing for growth’. The rationale goes that all those suppliers have a stake in the success of the larger business, since they will profit by increased business with them. Therefore, if funds are needed to invest in new capacity, better marketing or whatever, then suppliers who will share some of the benefits of success should contribute to the costs of investment in the spirit of true partnership.

Of course it doesn’t feel much like a partnership if it comes with a threat of delisting if the cash is not forthcoming. If the wages of your employees are dependent on this large customer, then you have little choice if the gun is held to your head like this. And it’s not as though these large companies agree generous terms with their suppliers in the first place, giving them lots of margin to dig into. If you drive a hard bargain, pushing your supplier’s profit margins down to the narrowest level possible - and then you demand cash payments on top - where does that cash come from?

Premier Foods was the previous company to attract ire by demanding ‘pay to stay’ provisions. It was forced after a relatively short period of time to acknowledge it had made mistakes in how it had gone about its ‘Invest for Growth’ programme. But that acknowledgement stopped short of admitting that the principle was wrong per se. After all, noted the CEO Gavin Darby, all businesses sought to get best value from their commercial relationships in order to do right by their own employees, shareholders and customers. So there.

And that is the nature of the dilemma. Price genuinely does matter. Any sustainable business has to be able to be successful in its chosen business field and that means getting the quality of product high alongside the costs of producing that product low. Yes, there is a line when it comes to your supply chain. If getting those prices low involved using people that utilise child labour, everybody knows that is over the line (you would hope). But at what point does driving a hard bargain with your suppliers cross the line into bullying? If you give generous terms to your suppliers and then lose out to competitors offering cheaper prices, who benefits in the long term?

This is what makes this such a difficult dilemma. The definition of sustainable and socially responsible business cannot be one where companies are expected to make themselves uncompetitive in the quest to ‘do the right thing’. And the simple truth is that this is one area of responsible business practice where there is only a relatively soft business case. Yes, if you push your suppliers too hard, you may destroy them, and in the process damage the security of your own supply base. But how hard is too hard? If you are too cautious, you can lose out. If you’re too aggressive you will be (and will deserve to be) criticised. How many heads of procurement and their executive bosses are equipped to make those sorts of fine judgement - or even recognise that there is a balance there to be struck?

There is no CSR rule book that defines what is, or is not, acceptable. It’s all down to what are society’s expectations and, as we know, those can change and evolve over time. On current form, the following would seem to be how this issue is viewed: driving a hard bargain with your suppliers is expected, although if the power of a few large firms can push an industry to the brink of survival - as has been the case several times between the supermarkets and the dairy industry - then people will see that as self-evidently crossing the line. Also no supplier should have to wait three months to be paid for goods that you’ve already sold to your own customers and been paid for. No supplier should be forced to pay money in addition to those tight terms under the threat of delisting. You may think it’s an area of mutual interest so to do - but you chose to outsource your processes. In older times, companies were vertically integrated and owned the whole of their process. But then we found you could move faster if you didn’t do that. There were real benefits to the company to operate a lean operation. That’s fine, but you can’t have it both ways.

It seems likely that this will continue to be an issue for some time to come, however, and it may well be one of those areas where voluntary action and commitment isn’t enough. In the UK, Labour have already proposed legislation to outlaw some such practices. Regulation in such areas is tricky, because you don’t want to legislate your domestic businesses into a non-competitive space. But if even the CSR champions are now routinely getting caught out with practices that the public finds to be intuitively indefensible it is inevitable that legislation - whether well judged or not - will follow. If well-judged, that should be helpful. It will at least create a level playing field to the benefit of businesses large and small.

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