When should Procurement leaders disengage from unsustainable suppliers?

Responsible disengagement involves structuring relationships thoughtfully, fostering conditions for success, and handling disengagement with care when necessary. Key considerations include balancing transparency with commercial sensitivity, evaluating supplier progress, and navigating critical dependencies. It addresses ethical dilemmas in supply chains where disengagement may be harmful or unavoidable while maintaining influence post-disengagement.

In today’s complex global supply chains, how companies end relationships with suppliers matters as much as how they begin them. When companies sever ties with suppliers without considering the consequences, it is called “irresponsible disengagement”.

The impact of such behaviour can extend far beyond simply terminating a contract.  It can have profound consequences for workers, local communities and the environment, such as:

• Workers suddenly left with no income, with no transition support or alternative economic opportunities
• Entire local communities destabilised
• Environmental hazards left unaddressed

By contrast, responsible organisations approach supplier relationships – and their potential end– with nuance, foresight and a commitment to minimising negative impacts.

Understanding responsible disengagement

According to the OECD Guidelines for Multinational Enterprises, responsible disengagement is a carefully managed process that adheres to the following principles:

1. It is always the last resort
2. It is only pursued after genuine attempts to mitigate identified impacts have failed (or where mitigation is deemed unfeasible)
3. It is executed with a proportional response to the severity of the risks involved

The core principle is straightforward yet crucial: before cutting ties, companies must conduct a full assessment of potential social and economic consequences. This means understanding the broader ecosystem, that is, how disengagement might impact workers, local communities and broader economic stability.

It is also important to distinguish disengagement from de-risking. This is where a company avoids sourcing from an entire region, sector, or type of supplier rather than conducting proper due diligence. We’ve seen the devastating consequences of this approach – for instance, when international traders abstained from sourcing minerals from the Democratic Republic of Congo after the Dodd-Frank Act was passed, leaving entire communities economically devastated.

From voluntary guidance to legal obligation and back?

While responsible disengagement has been embedded in frameworks like the UN Guiding Principles and OECD Guidelines for years, we’re now seeing its evolution into binding legislation. The EU Corporate Sustainability Due Diligence Directive (CSDDD) initially contained strong language around disengagement, but recent updates as part of the Omnibus proposal have notably weakened these requirements – focusing on “suspension” as opposed to “termination” and removing mandates for stakeholder engagement in disengagement decisions.

These changes represent a potential step backward in ensuring companies manage disengagement responsibly – leaving a gap between legislative requirements and best practice that companies committed to responsible business conduct will need to bridge voluntarily.

When exit strategies fail: learning from real-world cases

Case 1: The abandoned mining operation
A multinational mining company disengaged from an operation in a politically unstable region without meaningfully engaging with affected stakeholders. The operation was subsequently sold to new owners who significantly lowered human rights and environmental standards.

This process overlooked meaningful consultation with local communities and workers, treating the transaction as a purely financial decision. No mechanisms were established or contracts signed to ensure the new owners would maintain existing human rights and environmental standards.  Had the company conducted proper stakeholder engagement to understand these potential impacts before finalising the sale, appropriate safeguards could have been implemented. Instead, operational risks were effectively transferred without any protective measures in place.

Case 2: Fashion’s pandemic panic
During the COVID-19 pandemic, numerous garment suppliers faced situations when brands abruptly cancelled orders (as this paper from SOMO, the ECCHR and PAX highlights).

In one notable case, a major brand ended its business with a supplier despite an agreement that prevented the supplier from selling to other major buyers of the same nationality. The supplier ultimately went bankrupt and dismissed all employees – predominantly low-paid female workers. The brand failed to use its leverage to prevent or mitigate these impacts, despite having significant influence over the supplier’s business model through its restrictive contracting practices.

Core principles for effective disengagement

These cases highlight crucial lessons for responsible disengagement:

1. Apply rigorous due diligence before, during, and after: Before ending a relationship, assess potential impacts on workers, communities, and the environment. Develop plans to mitigate negative effects and monitor outcomes post-disengagement.
2. Recognise ongoing responsibility: Ending a business relationship doesn’t end responsibility for adverse impacts. Companies maintain certain responsibilities even after disengagement. Support companies can offer to suppliers can range from transition planning and follow-up monitoring to remediation if a negative impact has been caused.
3. Communicate and consult meaningfully: Engage transparently with affected stakeholders about disengagement decisions. Provide adequate notice, explain rationales, and collaborate on transition plans.

The responsible path forward

The most responsible approach is to structure relationships thoughtfully from the beginning, create conditions for success, and if disengagement becomes necessary, to execute it with the same care and consideration you would hope to receive yourself. In a future piece, we’ll explore the architecture of responsible disengagement, including how to establish expectations at the “Arrivals Terminal” (see my colleague, Luke Smitham’s piece), build effective leverage and create incentives for responsible conduct.

FAQs – Navigating the grey areas

While this article outlines the foundations of responsible disengagement, business leaders must grapple with numerous complex decisions that don’t have simple answers. The following questions represent challenging scenarios where ethical imperatives and business realities intersect, requiring careful consideration and nuanced approaches:

• What role do purchasing practices and business models contribute to creating conditions in the supply chain that are so harmful or unsustainable that disengagement from a supplier becomes the only viable option?
• What strategies can companies employ when disengagement isn’t viable because the supplier provides critical components or services that can’t be easily sourced elsewhere?
• How can companies evaluate whether sufficient progress is being made by a supplier to justify continued engagement?
• Is immediate disengagement ever justified?
• How should companies approach the tension between transparency in communicating disengagement plans and commercial sensitivity?
• How can companies maintain monitoring and influence after formal disengagement?