Ethical Issues Run Broad and Deep

CIPS 25 July 2019

By Bill Michels, VP Operations, CIPS Americas

Problems of ethics can pop up anywhere – even in your kitchen cupboard. The New York Times recently published a story about Syrian refugees subjected to conditions of forced labor by growers of hazelnuts in Turkey. According to the Times, Turkey grows 70% of the world’s supply of hazelnuts – so are you sure that what’s in your pantry was not sourced from orchards using forced labor? Luckily, if Nutella is your brand, it has committed itself to responsible sourcing and 100% traceability of its nuts back to farms that use sustainable agricultural practices and responsible labor practices.

Ethical Issues Run Broad and Deep

The world is full of watchdog organizations and media organizations who readily publish their reports, so bad ethical choices by supply managers can put their own careers and the success of their organizations in serious jeopardy. And while U.S. companies often have ethics policies in place themselves, a 2018 benchmark survey by Kroll Ethisphere found companies were very concerned about the risks of unethical behavior by suppliers. Those concerns are not unfounded. Do you recall the fallout for Walmart when t-shirts it had ordered were found in the ruins of a Bangladesh garment factory that collapsed in 2013, killing more than 1,000 workers? Walmart’s buyers were apparently unaware that a supplier had subcontracted work at the unsafe plant. 

Ethical issues can arise in a number of ways, but they generally can be categorized as bribery, corruption, fraud, and human rights abuses. Those behaviors often provide apparent short-term benefits, but they eventually undermine your value to your employer, your professional reputation, and your own personal integrity.

The only way to really stay on an ethical course is to have clear policies in place, fair enforcement and audits by independent firms. Ethical behavior also has to start from the top. Early in my career I was sourcing canvas to cover large piles of coal that were stored on my company’s site. The owner of the company had one requirement for the winning bidder; that the contractor also provide a free canvas cover for the owner’s private airplane. While that business owner might have thought he was being very clever, the message he sent to every employee of the company or contractor he hired was that cheating was not only allowed, but encouraged.

On the other hand, a former client of mine was purchasing an agricultural product. One day a bidder from India came into his office and dropped $10,000 in traveler’s checks on the buyer’s desk. When the buyer first refused to accept it, the bidder said he could not take it back because it was very difficult to return that much cash to India. The buyer said he was sorry, but he was going to leave the office with the money on the desk and report the incident. He added that if the maintenance staff found the money when they cleaned his office, it would be their windfall. With that, the bidder relented, but not before he had damaged his own reputation.

Non-cash gifts are often problematic for buyers, so a clear and consistently applied corporate policy is the best way to address them. Anything that creates an appearance of an obligation is problematic; full disclosure and logs of even small gifts can prevent harmful situations. That said, any rule on gifts has to also consider cultural norms in countries where business meetings often include an exchange of small personal gifts. If there is an exchange, the likelihood of a lingering obligation is small. However, a clear and consistent corporate policy is still the best defense against accepting gifts that would be considered bribes if they were given in cash.

An ethical problem that many younger buyers don’t recognize is sharing bid information from a competing company. While it might seem a good negotiating strategy to force an incumbent into a lower bid – it corrupts the process in the long run. An organization that maintains a tough, but fair procurement process is, over time, going to get more and better honest bids from companies that can deliver on them. 

The “gig economy,” in which more people have side businesses of their own creates more opportunities for another ethical problem -- conflicts of interest. I once encountered an example of that from a buyer of janitorial supplies. His conflict was revealed when he came to work to show off his commission check from the well-known cleaning supply company he was also working for.

Another business trend that creates new ethical risks is empowering more employees to make their own purchases within certain budget parameters. The approach can give a company a faster speed to market with supplier-driven innovations, but it may shortcut the due diligence that could save an organization from an ethical and PR disaster.

When it comes to ethics, shortcuts are usually minefields that could blow up at any time. The Society for Corporate Compliance and Ethics (SCCE) publishes a good risk assessment guide for evaluating suppliers’ ethics practices. Find it on the website.

In summary, here’s a list of steps adapted from Supply Management that can help prevent ethical mishaps.

  1. Establish, publish and enforce policies to log and regularly report gifts and other hospitality from potential suppliers.
  2. Create ‘conflicts of interest’ documentation and circulate regularly to staff to read and sign.
  3. Use a two-person change process in the procurement team, so suppliers are not added or deleted without another staff member knowing.
  4. Clear old suppliers out of the system to force new diligence if they return to bid.
  5. Watch staff movements. If someone goes to work for a winning bidder, investigate.
  6. Enforce your own rules consistently.
  7. Conduct due diligence on suppliers to establish ownership and confirm their ethics and responsible sourcing practices.
  8. Continue your due diligence through all tiers and significant subcontractors in your supply chain.
  9. Audit compliance with visits to supplier locations or third party auditors.
  10. As a deterrent, advertise your policies and processes to combat fraud.

CIPS also offers a comprehensive training and certification program for ethical supply management. Members learn from proven lesson modules and earn their certification after an exam. Individuals or an entire procurement division can be CIPS-certified. To get started, CIPS offers a free Risk and Resilience Assessment Tool on our website. There is no good reason for bad ethical behavior.

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