Your company touts itself as ethical - what about your suppliers?
By Michael R. Levin and Richard J. Cellini, Integrity Interactive

Being an ethical company isn’t enough anymore. These days, leading brands are judged by the company they keep. Consumers, investors, business partners, regulators, and media organizations now expect a company and its entire supply chain to be ethical. Sooner or later, every company is bound to find itself part of a supply chain that experiences a significant ethics or compliance violation. When this happens, chances are great that the biggest brand in the chain will get stuck with most of the blame.

The supplier-generated ethics scandal is probably one of the biggest (and least foreseen) business risks most leading companies face today. The damage can be great, and protective measures can and should be adopted immediately. The good news is that feasible, affordable solutions exist and can be implemented relatively quickly and painlessly.

What is the ethics problem in the supply chain?
Almost every company buys unfinished inputs provided by many other companies (suppliers), before refining them and sending them downstream toward their ultimate end-users (consumers). Simply put, the ethics problem in the supply chain is that consumers often blame purchasers for ethical lapses that were actually committed further upstream by suppliers.

It’s worth noting that it’s often not just any company that takes the rap for wrongdoing committed by suppliers. In the typical supplier-related ethics imbroglio, any of a number of different purchasers could theoretically be hit with the blame (since multiple supply chains are usually involved in delivering a finished product or service to the marketplace). In reality the blame almost always falls on the biggest brand that played any role whatsoever in bringing the offending product or service to market.

The scapegoat company could be a designer, a manufacturer, a distributor, or even a retailer. The scapegoat could be closely associated with the unethical supplier, or many steps removed. But the scapegoat will always be the player with the biggest reputation to protect (i.e., the one most susceptible to pressure from outsiders). This state of affairs may not be fair, but it is how the ethics and compliance game now works (at least where ethical violations by suppliers are involved).

This type of risk is not hypothetical, and no organization or industry is immune. In 2007 alone, the drama unfolded at eye-catching companies such as Mattel, Del Monte Pet Products, Toshiba or Dole.?Each of these examples is a real-world example of a leading brand taking the hit for ethics or compliance breaches committed by suppliers. Mattel did not paint its toys with lead paint. Del Monte did not choose poisonous wheat gluten for its pet food. Toshiba did not build the flammable batteries in its laptops.

In these and many other instances, suppliers were responsible for creating the dangerous conditions that captured the public’s attention – yet nowhere in the headlines could the suppliers’ names be found. The biggest brand paid the price. When toy shopping, consumers did not impose justice upon invisible-supplier Yip Sing. Instead, consumers rightfully (and righteously) boycotted the Mattel brand. Despite the pervasiveness and seriousness of the problem, companies can take at least one positive step toward inoculating themselves against damaging headlines: implementing a credible Supplier Ethics Management (SEM) initiative. In fact, boards of directors should make this a priority for 2008.

What is the current state of SEM?
Most companies today do a pretty good job of managing risk categories within their own four walls. However, these very same companies often fall far short when it comes to managing and mitigating corporate integrity risk in their supply networks.

In a recent survey of Global 2000 companies, Integrity Interactive uncovered the following facts

88% of respondents do not maintain a Web-based portal that suppliers can use to receive communications of any kind from the purchaser. (Of the 12% of respondents that do maintain such portals, none used them to deliver any kind of compliance- or ethics-related information to suppliers).

86% of respondents concede that their primary ethics code does not address the conduct of suppliers.

59% of respondents do not include suppliers in their analysis when assessing their company’s own ethics and compliance risks.

Compliance officers should collaborate with procurement colleagues
Few legal and compliance officers at Global 2000 companies possess (or even have access to) a list of their company’s major suppliers; fewer still have adequate contact information for those suppliers. Yet almost all big-company legal and compliance officers want to forge closer working relationships with their colleagues in procurement and supplier relations. Why is this?

This type of internal collaboration is inexpensive, sensible, and arguably “win-win” from everyone’s perspective (including suppliers’). At the very least, increased procurement-compliance interaction will better position your organization to declare to the media that it is not simply enabling or ignoring the ethics problem in the supply chain. And it stands a good chance of preventing the problem from actually occurring the first place.

What can companies do today?
Most Global 2000 companies lack the ability and infrastructure to communicate with their suppliers on critical issues of ethics and compliance. In most cases, this glaring deficiency could be remedied in less than six weeks’ time.

A web-based SEM platform allows a company to collect and maintain contact information for most or even all of its suppliers, and communicate mission-critical ethics and compliance information to them on a regular basis. Deploying an SEM platform is probably the fastest and easiest way to get a handle on ethics and compliance risks in the supply chain. SEM platforms are inexpensive to create, and are typically hosted, maintained and administered by third-party vendors who specialize in ethics and compliance risk management.

SEM platforms typically perform several basic important risk management functions, including

distributing a company’s code of conduct and regular updates to its suppliers

documenting supplier receipt of these requirements

facilitating two-way communication between a company and it suppliers on mission-critical topics relating to matters of ethics and compliance.

Supplier Ethics Management is not a new risk management discipline. SEM simply involves the application of existing risk management tools, programs, and practices to new risk-populations (i.e., business partners operating outside the traditional “four walls” of your corporate entity). Your company’s legal and compliance professionals already know how to manage and mitigate ethics and compliance risks among your own employees. With very little additional time, money, or administrative effort, they can do the same thing among the thousands of companies in your supply chain.

If and when an ethics scandal crops up in your supply chain, at the very least your company will be able to credibly say that it has taken proactive steps to regulate and influence supplier conduct and behavior. In the current environment, that is a whole lot better than saying “Technically, it wasn’t one of our employees.”
Michael R. Levin is Vice President of Corporate Integrity Strategy at Integrity Interactive. Michael has worked with over 100 companies around the world to establish best-practice compliance and ethics initiatives. Michael is a Certified Compliance & Ethics Professional, and a member of the Massachusetts Bar.??Richard J. Cellini is a vice president at Integrity Interactive. Richard has over 20 years of professional and managerial experience in the areas of business and market strategy, high technology and corporate law. Richard is a member of the New York and Washington, D.C., bar associations.