30/04/2015

By Toby Duthie, Partner & Founder, at Forensic Risk Alliance (FRA)


Regardless of the sector in which your company operates, or the country in which it is based, it is undoubtedly influenced by international laws - particularly the FCPA (Foreign Corrupt Practices Act) and Dodd-Frank in the US, and The Bribery Act in the UK. These laws (and activities from NGOs) have far-reaching implications for businesses. In the case of the FCPA, it only requires your company to make a single transaction to the value of one dollar anywhere in the world, to bring your company under its jurisdiction. But it doesn’t stop there. This dollar transaction doesn’t even need to have been carried out by your company - it could have been carried out by one of your third suppliers (known or unknown) - such as a product manufacturer in your supply chain.

As a result, businesses managing their supply base against standards with a far wider focus than just price, quality and location. Instead, they are implementing safer and stronger business models which set the foundations to succeed in the world of transparency and best practice and safeguard their reputations. Examples of reputational damage range from the wrong kind of meat to bribery and breaches of ethical standards and human rights. Mitigation of these types of risk is vital, as is minimization of direct financial loss. In this context, supply chain management is a vital component.

Attention is also expanding from management and vetting of the existing supply chain to evaluation and selection of new vendors. In higher-risk activities such as logistics and customs clearance for example, FTSE-100 corporates are increasingly evaluating the ethical policies and procedures of potential new vendors. Vendors with clear, detailed, and demonstrably active ethical programs open up clear blue water between themselves and their competition. Ironically, this means that suppliers with historic problems, and the enforced remediation that follows, find themselves in a much stronger position than their competition.

With society attributing greater value to ethics and corporate responsibility, NGOs and the media frequently place the world’s leading companies under scrutiny. Where companies are found to be operating in an objectionable manner – such as avoiding paying tax in jurisdictions where they generate substantial revenue or being linked to child labour in South Asia – businesses can face negative publicity campaigns and consumer boycotts.

Going forward, businesses are increasingly empowering their procurement function to be the natural manager of the supply base, supported by investment in fit-for-purpose systems and tools. This sounds deceptively simple, but the truth is that, in many corporates, procurement departments are sidelined by operating and sales management who find their own “key” suppliers and set them up, often in ignorance of top-down group policy. By empowering the procurement function, corporates can ensure that the supply base is enfolded in policy and best practice, and can be managed through one common procurement system, integrated with compliance and finance functions. Often the benefits of this extend beyond risk mitigation into basic commercial improvements over price and consistent service delivery. For many corporates that have evolved through a history of acquisition and Business Area independence, this can be a real challenge to implement.

Meanwhile, ambitious suppliers aiming to be successful players in the modern world market face an investment requirement too. The desire to demonstrate a willingness to enter into the spirit of these requirements needs to be accompanied by investment in unwelcome overhead costs. For small to medium-sized businesses, this is a real challenge, but in a world where “flight to big” is rewarded with risk mitigation, the rewards for investment will be worth it. Recognition as a transparent, successful partner to global businesses that protect their reputation will be a sales tool in its own right, and ought to generate rewards.

In summary, All corporates should take an interest in their supply chains, undertake appropriate due diligence of new business partners and implement robust compliance programmes which meet international best practice norms. Should they fail to do so, they risk losing out on lucrative contracts and suffering reputational damage as public scrutiny of business ethics continues to grow.