What is Supplier Integrity ?
The Cambridge Dictionary defines integrity as “the quality of being honest and having strong moral principles that you refuse to change”. Increasingly the term ‘business integrity‘ is being used to reflect the way companies manage compliance risks and regulatory obligations. More recently, the term ‘supplier integrity’ is also starting to arise.
Supplier Integrity is a logical extension of the concept of ‘business integrity’ (see below – note that some authors use ‘business integrity’ specifically to refer to anti-bribery and corruption). Before diving into the concept in more detail, it is worth setting some boundaries for what constitutes ‘supplier integrity’.
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Despite searching, at the time of writing I was unable to locate a standard or guideline on supplier integrity. However, the OECD Due Diligence Guidance for Responsible Business Conduct provides a useful set of guardrails for what might be included within a supplier integrity framework:
- Human Rights
- Environmental Protection
- Employment and Industrial Relations
- Financial Crime, specifically:
- Anti-Bribery & Corruption
- Economic and Trade Sanctions
- Money Laundering & Terrorist Financing
- Tax Crime
- Consumer Protection
- Competition & Anti-Competitive Practices
In my opinion, one of the other fundamental elements to Supplier Integrity is Beneficial Ownership, or the identify of the natural person(s) who actually own the supplier. Whilst determination of beneficial ownership is likely to occur during Supplier Due Diligence, understanding who you are actually proposing to do business with – what the World Bank refers to as the “corporate veil” – is essential and should not be overlooked (refer this related post).
Why is Supplier Integrity important?
There are at least two main reasons why Supplier Integrity is important in business today: the first is legal, whilst the second is more a reflection of ethics and values. One of the primary legal reasons for needing a robust supplier integrity program is Principal-Agent Theory which holds that the company contracting the third party (‘principal’) is generally responsible for actions taken on its behalf by that third party (‘agent’), making it essential that companies have the right programs in place to select, onboard, oversee and terminate their supplier arrangements.
- Under this legal doctrine, if a supplier does something illegal there is generally a degree of civil and / or criminal liability for that conduct which can fall on the principal.
- Whilst activities such as Supplier Integrity and associated supplier compliance programs can help mitigate this liability in the event of something going wrong, it generally does not absolve the principal completely.
- One example of this in practice is a principals’ liability for bribery and corruption performed on its behalf by a supplier under the U.S. Foreign and Corrupt Practices Act (FCPA) (FCPA Guide, p136).
In relation to ethics and values, there are four key drivers which underscore the importance of a robust Supplier Integrity Framework:
- ESG and shareholders – the Environmental Social Governance (ESG) investment movement is becoming increasingly important globally as we recognise the value and importance of sustainable business practices, as well as the importance of integrity and transparency in business generally. According to McKinsey, companies demonstrate a strong ESG proposition correlate with higher equity returns.
- OECD Guidelines for Responsible Business Conduct (RBC) – these Guidelines cover covering environmental, industrial relations, financial crime, competition, human rights, and consumer protection and are the OECD’s most comprehensive international standard on Responsible Business Conduct. The Australian Government is committed to promoting the use of the Guidelines and their effective and consistent implementation. Companies operating in Australia and Australian companies operating overseas are expected to act in accordance with the principles set out in the Guidelines and to perform to the standards they suggest. The Guidelines are supplemental to Australian law and are not legally binding (AusNCP).
- Consumer expectations and social licence to operate – this driver is much more fluid and reflects the will and appetite of the local community and populace to allow a company to operate. Companies which do more respect the communities or environment in which they operate are being identified and actively targeted by global consumers for socially unacceptable behaviour, potentially impacting sales, employee attraction and retention, and political support.
- Reflection of the company’s values and ethics – perhaps the most important of all, a companies suppliers are a reflection of its brand. Poor choices in suppliers can manifest in quality and reputation risks impacting factors such as profitability down stream.
What would you expect to see in a Supplier Integrity Framework?
A Supplier Integrity Framework fulfils and specific purpose – ensuring that the principal’s suppliers conform with its ethics and values as well as comply with applicable legislation. There are six components I would expect to see in any Supplier Integrity Framework:
- Supplier Code of Conduct – reflects the principal’s ethics and values to ensure these are demonstrated by its suppliers
- Supplier Integrity Policy –
- Outlines roles and responsibilities, acceptable behaviours or expected practices (see Supplier Code of Conduct);
- Aligns with compliance obligations and the principal’s broader policies and frameworks (eg risk and compliance frameworks, procurement policy, supplier management framework),
- Outlines the ongoing monitoring and due diligence practices and the supplier compliance program; and,
- Sets out how incidents are to be reported and managed.
- Risk Assessment – identifies the main supplier integrity risks and where they may manifest in the supply chain (geographical, spend category, etc), as well as associated controls and risk treatment plans
- Supplier Due Diligence and Ongoing Monitoring Program – conduct due diligence and continous monitoring on a supplier’s integrity throughout the supplier lifecycle (i.e. selection, contracting, contract management, termination)
- Supplier Compliance Program (aka Supplier Assurance Program or Vendor Assurance) – documents how and what the principal will do to ensure compliance with its Supplier Integrity Framework as well as other aspects of contractual compliance. This should also include appropriate incident management, audit and investigation provisions.
- Performance and reporting – details how compliance with the policy will be tracked and reported with appropriate levels of governance and oversight.
Relationship between Supplier Integrity, Procurement and Supplier Management Frameworks
The Supplier Integrity Framework is likely to be one element of a principal’s broader suite of corporate governance artefacts. Ordinarily this framework will be subordinate to other frameworks in the organisation such as the principal’s Code of Conduct and other business integrity policies and practices which apply to all employees.
The Supplier Integrity Framework is likely to be subordinate to the Procurement and Sourcing Policy, which likely sets out how the principal performs these functions, as well as other Supplier Relationship Management (SRM) and Supply Chain Management (SCM) frameworks.
Each of the above policies and frameworks performs and important role in the overall supply chain of third party management ecosystem. Importantly, a well-designed supplier integrity framework compliments other governance and risk-related concepts, such as those outlined in the Australian Government’s Critical Technology and Supply Chain Principles (’10 Agreed Principles’, see previous post), as well as providing a solid foundation from which to address a range of other supply chain threats and risks.
- Australian National Contact Point [AusNCP] (2020). OECD Guidelines. https://ausncp.gov.au/oecd-guidelines
- Curwell, P. (2021). The trouble with company registers – not a uniquely Australian problem, https://forewarnedblog.com/2021/03/13/the-trouble-with-company-registers-not-a-uniquely-australian-problem/
- Curwell, P. (2022). Australia’s Critical Technology and Supply Chain Principles – a new reality for industry (part 2), https://forewarnedblog.com/2022/03/19/australias-critical-technology-and-supply-chain-principles-a-new-reality-for-industry-part-2/
- Department of Justice & Securities Exchange Commission (2020). FCPA: A Resource Guide to the U.S. Foreign Corrupt Practices Act, 2nd Edition, United States Government, https://www.justice.gov/criminal-fraud/fcpa-resource-guide.
- FATF-GAFI (2014). Transparency and Beneficial Ownership, FATF Guidance, Financial Action Task Force, https://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf
- Henisz, W., Koller, T. and Nuttall, R. (2019). Five ways that ESG creates value, McKinsey Quarterly, November 2019, www.mckinsey.com.
- OECD (n.d.). OECD Guidelines for Multinational Enterprises – Responsible Business Conduct, OECD Centre for Responsible Business Conduct, https://mneguidelines.oecd.org/
- OECD (2018). OECD Due Diligence Guidance for Responsible Business Conduct, OECD Centre for Responsible Business Conduct, https://www.oecd.org/investment/due-diligence-guidance-for-responsible-business-conduct.htm
- Shahid, A. and Azar, S (2013). Integrity & Trust: The Defining Principles of Great Workplaces, Journal of Management Research, 5(4):64, DOI:10.5296/jmr.v5i4.3739.
- The Ethics Centre (2018). Ethics Explainer: Social license to operate, 23 January 2018, https://ethics.org.au/ethics-explainer-social-license-to-operate/
- The Ethics Centre (2018). Trust, legitimacy & the ethical foundations of the market economy, https://ethics.org.au/wp-content/uploads/2019/02/The-Ethics-Centre_180410-on-trust-and-legitimacy.original.pdf
- van der Does de Willebois, E., Halter, E.M, Harrison, R.A., Park, J.W, and Sharman, J.C. (2011). The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, Stolen Assets Recovery Initiative, The World Bank and United Nations Office of Drugs and Crime, Washington D.C. https://star.worldbank.org/
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