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Keeping the supply chain unsullied

Multinationals are keeping a close eye on suppliers to ensure ethical standards are not breached, says Derek Patterson, principal, Forensic Risk Alliance* (pictured)

December 2014

Major companies, from BP to Coca Cola, now have stringent supplier codes of conduct that they require partners to sign up to in order to enter into business relationships. Technology giant Apple’s Supplier Responsibility 2014 Progress Report, states that “to do business with Apple, our suppliers must live up to the toughest standards in the industry, and we make sure there’s no confusion over our expectations”. The standards that Apple and other leading multinationals impose upon their business partners frequently meet international best practice standards beyond the minimum levels set by legislation. In theory, this ought to create a domino effect that forces the rest of the supply chain to get their houses in order or risk losing important contracts.

Major companies are willing to take drastic steps to protect their reputations. A 2014 survey of 383 corporates published in 2014 by Dow Jones  indicates that reputation and government sanction issues are the events most likely to trigger relationship reviews (81 per cent and 79 per cent of respondents respectively).  There are numerous examples of companies terminating supplier contracts due to ethical failures. In January 2013 a number of companies, including Tesco and Burger King, dropped Silvercrest after it became embroiled in the European horse meat scandal, costing the firm tens of millions of pounds in lost orders. Tesco claimed in a statement that “the breach of trust (was) simply too great”. Other multinationals, including Nike and Gap, have cancelled supplier contracts for a range of breaches of ethical standards generating reputational risk.

Increasingly, attention is expanding from management and vetting of the existing supply chain to evaluation and selection of new vendors. The Dow Jones survey indicates that 77 per cent of those surveyed operate a new partner due-diligence process. In particular, 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 programmes 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.  

 

Apple’s move

On February13, 2014, technology giant Apple published its Supplier Responsibility 2014 Progress Report. The report made public details of its progress in raising standards throughout its global supply chain, educating staff, improving working conditions and imposing higher standards of conduct on the businesses it relies on for the manufacture of products such as the iPad, iPhone and Mac.

Of particular interest is Apple’s decision to publish a list of smelters and refineries used by the company, indicating which of them may be using conflict minerals (metals, typically tungsten, tantalum, tin and gold, which are mined in conditions of armed conflict and human rights abuses, mostly in the eastern provinces of the Democratic Republic of Congo and adjacent areas of neighbouring countries). This follows calls from a number of NGOs for companies to be more transparent about their suppliers’ business practices but also responds to a recent US law that obligates companies to disclose the origins of certain minerals used in their products.

This is an excellent example of the fact that supply chain management is no longer simple and that companies need to factor in such things as human rights, economic sanctions, export controls, corruption and local content laws. Increasingly, this deliberate focus by corporates on ethics means that national regulators and enforcement agencies can increasingly count on the corporate community itself to help in the bid to tackle complex crimes such as fraud and corruption. While this may represent the leading edge of corporate compliance, market-leading corporations are promoting sustainable, ethical practice by integrating it into supply chain evaluation and selection processes and by pushing obligations, certification and transparency on their supply chains.

Following the release of Apple’s report, Greenpeace published a statement praising Apple’s transparency in its monitoring of conflict mineral usage, urging its competitors to follow suit. Such endorsement from an activist NGO provides an added benefit for taking a proactive approach to its supply chain, adding further incentive to corporations to take a more active interest.

 

What this means

It is clear that companies at all levels of the product supply chain must think beyond compliance with the national laws they are subject to. With 70 per cent of global trade estimated to involve the world’s 500 largest companies, multinationals are crucial to the financial health of smaller corporates throughout the world. They are also the primary targets of prosecutors, NGOs and consumers owing to their high profile. NGOs and the media pressure companies to address issues throughout their supply chains, from the mining of raw materials to the sale of finished products.

In the face of such scrutiny, multinationals are increasingly widening their compliance programmes to require business partners to comply with best practices from appointment onwards, and to monitor performance. Corporations that recognise this and incorporate these features into their businesses and into their customer management will become market leaders. On the downside, the repercussions of breaching such standards can be devastating, with companies risking the loss of their most valuable and high-profile customers. This means that even companies outside the jurisdiction of laws such as those of the USA or UK face the commercial imperative of ensuring they implement their own best practice compliance programmes to minimise ethical risks.

Practical steps that suppliers should consider include implementing policies and procedures for all staff and key suppliers, accompanied by regular training and certification. However this must be accompanieb by owners and managers who genuinely espouse the policies, and who would never consider entering into a transaction which breached them. A further action which could be considered is to seek specialist certification from a third party, such as Ethic Intelligence, or Trace Inc., which may be favourably considered by multinational customers.

No doubt these types of steps will represent a change in business practice for suppliers. Those who view change as an opportunity will develop their reputation as key players in the new world of business.

 

*Patterson is a forensic accountant with over 20 years’ experience in reviewing complex financial facts, fraud and corruption, evaluating financial losses, and in matters requiring internal investigation. He is currently involved in a number of complex financial reconstructions, multi-jurisdiction corruption investigations and pre-emptive reviews under a variety of anti-corruption regimes, including the US FCPA, the Swiss federal prosecutor, and the UK SFO. In addition, Patterson has recently undertaken compliance reviews and internal investigations for US and European clients in the Extractive sector, the Infrastructure sector, and in the Medical Devices sector.

Forensic Risk Alliance is an international firm of forensic investigators and accountants, data protection experts and eDiscovery specialists with offices in the US, UK, France and Switzerland. It helps businesses to resolve complex and high-risk financial, legal and regulatory challenges.




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