Monitor Ethics, Compliance in Supply Chain

NEW YORK—Business relationships with suppliers and third-party vendors can be risky if their ethics and compliance house isn’t in order.

HR professionals can mitigate those risks by doing a thorough risk assessment and communicating company standards and expectations proactively. In addition, they can cut risk by developing relationships with suppliers that share similar values and addressing allegations of wrongdoing when they happen, experts said recently.

Some companies are even drilling down to focus on key suppliers and helping them to build their ethics and compliance programs in an effort to protect reputations and head off potential conflicts.

“Collaboration is key between us and our supply chain—it’s really important to be working with them in a proactive way,” David Reid, vice president and ethics director for Texas Instruments in Dallas, told attendees April 21, 2010, at a business ethics and compliance conference presented here by The Conference Board.

Figuring out which suppliers to focus on is another matter. Texas Instruments’ risk analysis focuses first on key suppliers—the top 50 responsible for about 75 percent of the company’s annual spend.

“If you try to chase 10,000 suppliers, you’ll find you’re kind of draining the ocean,” Reid explained. “But if you say only X suppliers in total comprise Y percent of our spend, that’s the universe that we want to focus on.”

Risk Assessment Is Critical

Texas Instruments operates in 25 countries and has about 26,000 employees, more than half of which don’t work in the U.S. The company has a growing presence in China and India.

One factor the company considers is where suppliers are located. Texas Instruments uses Transparency International’s annual Corruption Perceptions Index, which measures the perceived levels of public sector corruption in 180 countries, to “figure out statistically where these problems exist around the world,” Reid said.

In addition, the company considers its history with a supplier and whether it is in the product flow. In other words, Reid said, he’s less concerned with someone who makes smocks that people wear in clean room environments than a supplier who provides chemicals and metals that go into its products before they are shipped.

Texas Instruments researches whether its top 50 suppliers are on record as a good corporate citizen, for example, by being a member of the United National Global Compact or by having other certifications, such as SA8000, which is a global social accountability standard for decent working conditions developed by Social Accountability International in New York.

The company lightens its scrutiny of suppliers who are sustainable partners of another major multinational, such as a Sony Green Partner.

Sending the Message

Reid said the next step is ensuring that “we are sending the right messages to our suppliers.” In some cases, Texas Instruments provides training and workshops for suppliers so they understand the company’s expectations and how it operates.

The “value of ethics at Texas Instruments,” a document on the company’s web site, is translated into a dozen languages, and Reid said the company encourages suppliers to adopt something like it or to use it as a template.

Such values are communicated in bid documents and in terms and conditions of master agreements as well. Reid said the company opens a channel between the ethics office and its chief procurement office because “it’s easier to handle a big supplier if you work them through several channels. … So you sort of embrace a supplier and help them move in the right direction.”

Site Visits and Reporting Channels

Reid conducts site visits of key suppliers, often with someone from procurement and quality control. He looks primarily for safety and labor issues such as whether there are underage workers or “anyone who appears not to be there on their own volition,” he said.

“I have a pretty high bar,” Reid noted. “I want to see that they operate their factory similar to the way we would have a factory operated at Texas Instruments.”

Reid reports to the company’s board of directors’ audit committee and has solid line responsibility to the senior vice president of HR and dotted line responsibility to the company’s general counsel and chief compliance officer.He said he relies on the company’s chief procurement officer during risk assessment; figuring out where problems might exist is a partnership.

“He and I look through this list and identify any suppliers who might be in someone else’s penalty box,” Reid said. “We try to take that holistic view.”

Texas Instruments works to cultivate suppliers for information about its own employees who might be “behaving in an unethical or unsavory fashion,” Reid said, adding that “we want that supplier to report that employee to us … and take those reports very seriously.”

Some Polling Numbers

Measuring ethics and compliance risks may be a challenge for some at the conference. In an audience poll, nearly a quarter (24 percent) reported that they’re “not comfortable” with the way their company measures ethics and compliance risks, while another quarter (24 percent) reported that they are “getting by with something good enough.” A total of 38 percent reported that they are “getting better, not there yet,” while only 14 percent reported that they were measuring ethics and compliance risks “quite well.”

The survey of about 45 conference attendees found that most perceive bribery and Foreign Corrupt Practices Act violations to be the greatest potential threats (36 percent), followed by problems in their supply chain(15 percent), then antitrust violations and product safety/quality, which each received 13 percent of the vote.

A Different Take

El Paso Corp., a Houston-based interstate natural gas pipeline and exploration company, has standards for service and material providers and offers guidance and advice to help suppliers “make appropriate decisions” surrounding ethics and compliance, according to Harry Britt, manager of ethics and compliance for El Paso. The company responds to possible violations.

The company’s code of business conduct spells out a system for employee conduct and applies to employees globally, but El Paso communicates those standards and expectations to suppliers as well. It gives all suppliers and vendors a pamphlet, titled “Standards for Service & Material Providers,” that outlines minimum requirements El Paso expects, Britt said.

The pamphlet covers conflicts of interest; compliance with laws and regulations; fair competition and antitrust matters; insider trading; transacting international business; safety and environmental issues; and employment practices. It addresses prohibited items (such as drugs, alcohol and weapons); gifts and entertainment; accuracy of business records; confidential information and trade secrets; and the use of electronic media, Britt said.

“It’s kind of like a miniature code of conduct for our suppliers,” Britt explained.

A Recent Ethics Investigation

To further ensure that El Paso and its contractors operate in a manner beyond reproach, El Paso encourages contractors to voice concerns promptly and offers a confidential and anonymous toll-free telephone number.

In late 2009, El Paso investigated an anonymous allegation that one of its managers was requiring some suppliers to do some “outlandish personal task for him if they wanted the company’s business,” according to Britt. The corporate audit department confirmed the allegation and the El Paso employee was fired, Britt said.

El Paso’s supply chain management placed the four suppliers on probation and barred them from the company’s approved vendor list pending implementation of “some form of ethics and compliance program for their employees,” Britt said.

Pamela Babcock is a freelance writer based in the New York City area.