Blockchain’s potential for managing corporate impact and reputation

3 minutes read

Corporate malfeasance has occurred in many forms over the past few years, ranging from obfuscation of noxious emissions by Volkswagen, to the iron ore tailings dam failure by Brazilian mining company Samarco, to human rights violations within manufacturing supply chains at retailers like Nike and Gap. Scandals like these do not just cost a company restitution dollars and reputational damage, they also expend significant social capital within the communities they operate. Companies will often find that their social license to operate (SLO), that is, the legitimacy of a company’s operations in the court of public opinion, is threatened in the wake of such disasters (Demuijnck & Fasterling, 2016), with the tacit or explicit loss of stakeholder approval causing serious operational delays and incurring significant costs (Melé & Armengou, 2016). In the case of Samarco, after the mining company’s dam unleased 60 million cubic meters of water into the Brazilian state of Minas Gerais, killing 11 people and destroying hundreds of homes, the company was slapped with a $100 million fine, agreed to pay out a further $250 million in damages, and faced cries from around the country for mining ventures to face stricter operational regulations (Rifai, 2015). 

Regarding Samarco, it is fair to wonder whether the company engaged in thorough due diligence to prevent the dam from failing in the first place. When companies expand their operations into new areas, it is expected that they undertake an appropriate level of impact assessment, particularly social impact assessment (SIA), in which they estimate the consequences of their operations on local human populations (Burdge, Fricke, & Finsterbusch, 1995) and create intervention plans in the case of potential negative consequences (Vanclay, 2003). Samarco’s attempts at SIA could be characterized as haphazard at best, considering that they undertook assessment on their infrastructure and were warned about the dam by consulting engineers, but failed to engage in the next critical SIA steps by developing strategies for monitoring and mitigation (Kiernan, 2016; Wilson, 2017). However, other companies have done their best to follow SIA principles and still failed to prevent disaster. In the case of Gap, the company had created extensive social auditing systems to prevent human trafficking in their manufacturing and supply chain operations; and yet a mere three years after implementation of the auditing scheme, undercover reporting revealed that subcontractors still employed thousands of children in the production of Gap’s clothing (McDougall, 2007). Even for companies like Gap that try to implement SIA principles, the ability to maximize benefits in the communities in which they operate is hindered due to limited local resources for assessment and the lack of strong regulation enforcement mechanisms in certain jurisdictions (Bice, 2014).

Given the difficulty of achieving impactful SIA, it is worthwhile to assess how technology can help companies develop and implement SIA plans to prevent “lost” SLOs within their operating communities. Blockchain in particular contains features that both promote transparency while eliminating the burdensome costs of stringent self-regulation; its immutable nature means that parties cannot alter transactions (Rîndaşu, 2019) while the provision of copies of transactions to parties, as well as the storage contracts on the chain, eliminate a need for intermediaries (Queiroz, Telles, & Bonilla, 2019). In regard to SIA specifically, these features have the most applicability in the realm of land rights and supply chain management, as blockchain’s immutability can ensure maintenance of proof of ownership, and transactions stored on the chain can be tracked as the purchased goods travel through supply chains (Heuberger & Puhl, 2018; Lehr & Lamb, 2018) from initial mining of raw materials, to production and refinement of products, to their transport to retailers, until their final consumption as end-of-life of products. For example, the diamond startup Everledger uses blockchain to track a diamond’s progression from extraction to retail sale to prevent counterfeiting and, most importantly, to prevent the sale of unethically sourced diamonds (Everledger, 2018).

However, blockchain and its sister technology, smart contracting, cannot provide all of the solutions in implementing SIA principles at present. As much of blockchain’s development is sourced from technology developers rather than SIA-focused organizations, the application of the technology in SIA has been slow; not to mention the technology will have to be onboarded with existing practices and regulations, which could cost valuable time and money (Mainelli and Milne, 2016; Lehr and Lamb, 2018). In addition, the discussion around blockchain’s application to SIA largely centers around the execution of contracts and transactions between parties, as well as monitoring assets, and less around other key aspects of SIA, such as predictive pathways of influence and monitoring of worker behavior and well-being. In the case of Gap and in regard to labor trafficking in general, the application of blockchain is murkier, as human rights activists described the lengths to which sweatshops would go to disguise child laborers, such as when they forced children to hide in sacks and underneath loose floorboards to avoid being caught by Gap’s labor compliance checks (McDougall, 2007). In this author’s view, there are many facets to SIA beyond a simple exchange of services between companies and communities, and much can be done to close the research gap between blockchain’s potential and its applicability to SIA.