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Building an Ethical Supply Chain

By Michael R. Levin

The supplier-generated ethics scandal is probably one of the biggest (and least foreseen)
business risks most leading companies face today.

B
eing an consumers often blame purchasers paint its toys with lead paint. Del Monte
ethical for ethical lapses that were actually did not choose poisonous wheat gluten
company committed by suppliers upstream. Blame for its pet food. Toshiba did not build
isn’t enough attaches to the purchasing company the flammable batteries in its laptops.
anymore. These even though its suppliers are legally
days, leading (and factually) distinct and independent In these and many other instances,
brands are corporate entities. And, in reality the suppliers were responsible for creating
judged by the blame almost always befalls the biggest the dangerous conditions that captured
company they brand that played any role in bringing the the public’s attention—yet nowhere in
Michael R. Levin keep. Consumers, offending product or service to market. the headlines could the suppliers’ names
investors, be found. The biggest brand paid the
business partners, regulators, and media The scapegoat company could be a price. When toy shopping, consumers
organizations now expect a company designer, a manufacturer, a distributor, will not impose justice upon invisible-
and its entire supply chain to be ethical. or even a retailer. The scapegoat could supplier Yip Sing. Instead, consumers
Sooner or later, every company is bound be closely associated with the unethical will rightfully (and righteously) boycott
to find itself part of a supply chain supplier, or many steps removed. the Mattel brand.
that experiences a significant ethics But the scapegoat will always be the
or compliance violation. When this player with the biggest reputation to Despite the pervasiveness and seriousness
happens, chances are great that the protect (i.e., the one most susceptible to of the problem, companies can take at
biggest brand in the chain will get stuck pressure from outsiders). This state of least one positive step toward inoculating
with most of the blame. affairs may not be fair, but it is how the themselves against damaging headlines:
supplier ethics & compliance game now implementing a credible Supplier Ethics
The supplier-generated ethics scandal works. Management (SEM) initiative. In fact,
is probably one of the biggest (and least boards of directors should make this a
foreseen) business risks most leading This type of risk is not hypothetical, and priority for Q1 2008.
companies face today. The damage can no organization or industry is immune.
be great, and protective measures can In 2007 alone, the drama has unfolded What is the current state of SEM?
and should be adopted immediately. The in these eye-catching headlines:
good news is that feasible, affordable • Mattel Does Damage Control After Supplier Ethics Management is the
solutions exist and can be implemented New Recall (Wall Street Journal) management of suppliers and supply
relatively quickly and painlessly. • Del Monte Pet Products Recalls Food relationships with strategies, programs,
Items (Washington Post) and metrics that better align supplier
What is the ethics problem in the • Toshiba Laptop Batteries Pose Fire business conduct with purchaser
Hazard (computerworld.com) standards, with the goal of reducing
supply chain? • Dole Pre-packaged Salads Recalled For the purchaser’s overall risk of corporate
Almost every company (in its role as E. coli (AP Online) integrity failure in the supply chain.
“purchaser”) buys unfinished inputs •F  rench Retail Giant Carrefour Is Fined “Corporate integrity failure” embraces
provided by many other companies (AP Online) any enterprise-level scandal involving
(called “suppliers”), before refining a violation of compliance, ethics, or
them and sending them downstream Each of these headlines is a real-world corporate responsibility standards.
toward their ultimate end-users (known example of a leading brand taking the
as “consumers”). Simply put, the ethics hit for ethics or compliance breaches Most companies manage fairly well
problem in the supply chain is that committed by suppliers. Mattel did not these three risk categories within

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their own four walls. However, these What is changing? leaders to develop creative approaches
very same companies often fall far to overcome at least two of these
short when it comes to managing and Historically, corporate leaders believed deficiencies, and possibly the third one
mitigating corporate integrity risk in that their duty to ensure ethical as well.
their supply networks. business conduct ended at the four
corners of their own corporation, To counter the “no time” problem, 86%
In multiple, recent surveys of over one and did not extend beyond their own of respondents contend that someone
hundred companies in the Global 2000, employee base. At most, companies else (i.e., suppliers themselves or
we uncovered the following facts: inserted clauses into their standard an independent third-party) should
procurement contracts, requiring assume the responsibility to drive
• 88% of respondents do not maintain suppliers to represent and warrant that supplier participation in the purchaser’s
a web-based portal that suppliers can they would “comply in all material ethics & compliance initiatives. And to
use to receive communications of respects with all applicable laws, circumvent the “no money” problem,
any kind from the purchaser. (Of the statutes, and regulations.” In short, 75% of respondents agree that suppliers
12% of respondents that do maintain the all-purpose corporate defense to should share or bear the cost of
such portals, none used them to allegations of wrongdoing in the supply participating in the purchaser’s ethics &
deliver any kind of compliance- chain has historically boiled down compliance initiatives.
or ethics-related information to to “It wasn’t one of our employees”
suppliers). (occasionally buttressed with “But our The remaining piece of the puzzle is
supplier promised us in writing that this administrative resources. The creative
• 86% of respondents concede that would never happen!”). solution emerging to address this final
their primary ethics code does not obstacle has to do with collaboration
address the conduct of suppliers. When a supplier-generated ethics (internal and external).
scandal occurs, this kind of defense is
• 78% of respondents do not include no longer enough to mollify incensed Compliance-procurement
suppliers in any other type of ethics consumers, investors, business partners,
& compliance program or initiative. regulators, advocacy groups, or media
collaboration
organizations. Nowadays, these and The majority of corporate legal and
• 64% of respondents have some other “stakeholders” count on leading compliance officers have no regular
kind of code of conduct (primary brands to do something more in order contact with their colleagues managing
or secondary) that regulates to keep the marketplace’s trust. Not procurement and supplier relations. Few
supplier conduct, but only 40% of everything they possibly can—just more. legal and compliance officers at Global
respondents require suppliers to 2000 companies possess (or even have
actually take any action with respect Although most companies today do access to) a list of their company’s major
to that code (e.g., disseminate it to very little to manage ethics risk in the suppliers; fewer still have adequate
employees, train on it, acknowledge supply chain, tomorrow appears to be contact information for those suppliers.
receipt of it, certify compliance with a very different story. While 78% of all Yet almost all big-company legal and
it, or simply read it). companies surveyed by us currently fail compliance officers want to forge
to include suppliers in their compliance closer working relationships with their
• 59% of respondents do not include and ethics programs, 57% of them say colleagues in procurement and supplier
suppliers in their analysis when that suppliers will be included within relations. Why is this?
assessing their company’s own ethics the next two years. This represents a
& compliance risks. near-seismic shift in risk management In most large companies, procurement
priorities, attention, and resources executives “own” the company’s
• 56% of respondents make no effort within Global 2000 companies. supplier relationships. In order to have
to audit supplier business conduct on Until now, companies have typically any type of positive impact on these
a regular basis. cited three reasons for their inaction in supplier networks, legal and compliance
the area of Supplier Ethics Management: officers know they must cooperate and
• Only 20% of companies believe insufficient time; inadequate budget; collaborate with their procurement and
they are “already doing enough” to and insufficient administrative purchasing colleagues. In fact, savvy
manage ethics and compliance risks resources. Recent headlines have legal and compliance officers proactively
in their supply chain. apparently galvanized corporate offer to partner with procurement

B o a r d r o o m B r ie f i n g : t h e C ON S U L T AN T S issue 39
colleagues in some or all of the contact most or all of the companies in • documenting supplier receipt of these
following five major areas: their supply chain, and communicate requirements (and, where appropriate,
with their suppliers on critical issues supplier acknowledgement and/or
• Making compliance & ethics a factor of ethics and compliance. In most acceptance of same); and
in supplier selection and evaluation; cases, this glaring deficiency could be
remedied in less than six weeks’ time. • facilitating two-way communication
• Targeting & segmenting suppliers by Many Global 2000 companies have between a company and it suppliers,
commercial importance and ethical already begun the work necessary to fill on mission-critical topics relating to
risk; the gaps (often by collaborating with matters of ethics and compliance.
other companies to develop technology-
• Creating & maintaining compliance
powered “Supplier Ethics Management Supplier Ethics Management is not
histories of important suppliers;
platforms”). a new risk management discipline.
• Assigning compliance personnel to SEM simply involves the application
important supplier relationships; and A web-based SEM platform allows of existing risk management tools,
a company to collect and maintain programs, and practices to new risk-
• Conducting regular assessments of contact information for its suppliers, populations (i.e., business partners).
supplier risk-profiles. and communicate mission-critical ethics Your company’s legal and compliance
and compliance information to them professionals already know how
This type of internal collaboration is on a regular basis. Deploying an SEM to manage and mitigate ethics and
inexpensive, sensible, and arguably platform is probably the fastest and compliance risks among your own
“win-win” from everyone’s perspective easiest way to get a handle on ethics employees. With very little additional
(including suppliers’). At the very least, and compliance risks in the supply time, money, or administrative effort,
increased Procurement-Compliance chain. SEM platforms are inexpensive they can do the same among the
interaction will better position your to create, and are typically hosted, thousands of companies in your supply
organization to declare to the media that maintained and administered by third- chain.
it is not simply enabling or ignoring the party vendors who specialize in ethics
ethics problem in the supply chain. And and compliance risk management. Michael R. Levin is director of corporate integrity strategy
it stands a good chance of preventing at Integrity Interactive. He has worked with over 100
the problem from actually occurring the SEM platforms typically perform several companies around the world to establish best-practice
first place. basic (but important) risk management compliance and ethics initiatives and is a Certified
functions, including the following: Compliance & Ethics Professional, and a member of the
What can companies do today? Massachusetts Bar. To comment on this article, email the
• distributing a company’s code of author at mlevin@i2c.com.
Most Global 2000 companies lack the conduct and regular updates to its
ability and infrastructure to quickly suppliers;

Julien and Marks, from page 27 and expectations of all stakeholders. The Just as important, CAE mentoring
audit committee chairman can use cost of compliance continues to increase. will be achieved by interacting with
their experience to help mentor the Thus, it is critical for audit committees experienced board members about
CAE while at the same time discussing to locate and use their missing emerging business risks, and the audit
emerging risks and encouraging an link—the CAE—to create a value- committee will be better positioned to
interactive and continuing dialogue. added relationship that maximizes the help the organization attract and retain
organization’s compliance investments. the most qualified auditors.
The missing link
Aligning the objectives of the audit Rick Julien is an executive specializing in risk
Finding and strengthening the missing committee and the IA function management with Crowe Chizek and Company LLC
link. The challenges facing audit strengthens oversight and helps allocate in Oak Brook, Ill. He can be reached at 630.586.5280
committees have never been greater. limited resources. The IA function will or rjulien@crowechizek.com. Jonathan Marks is an
This is a demanding time for everyone appreciate a closer working relationship executive specializing in risk management with Crowe
involved in the corporate governance in assessing risks and executing the Chizek and Company LLC in Philadelphia. He can be
process because of increasing scrutiny audit process. reached at 856.581.7146 or jtmarks@crowechizek.com.

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