Patty Houser (plhouser@landolakes.com) is Compliance Counsel at Land O’Lakes Inc. in Arden Hills, Minnesota, USA.
Hey, stay in your lane! I’m talking to you, supplier code of conduct.
In your lane, you are an important tool helping companies select sound business partners that share their values. Outside of your lane, you are a paradox, failing to promote true compliance while teetering on the slippery slope of “compliance theater.”
To keep a supplier code in its rightful lane, one must remember its purpose: what it is and, more importantly, what it is not. Let’s examine the purpose of supplier codes, how to avoid compliance theater, and best practices when writing or revising.
The supplier code of conduct
A company’s code of conduct stakes out its commitment to ethics and integrity, setting forth expectations and guidelines for its employees. Companies, however, have realized that to make good on their ethical commitments, they must select business partners that share their values. Even the most well-crafted codes of conduct and sincerest commitments to integrity will ring hollow if a company’s partners engage in bad practices.
Therefore, just as a code of conduct sets forth expectations and guidelines for employees, a company’s supplier code sets expectations for suppliers or business partners.
But a supplier code is not just a statement to business partners; it’s a company’s public statement to consumers, customers, and investors as to the practices that its partners must follow. Now more than ever, companies understand they will be called to account not just for their actions but for the actions of their partners—if not in a court of law, certainly in the court of public opinion where companies risk the loss of public trust and potentially irreversible damage to their reputations.
Understandably, companies have leaned on supplier codes—but, at times, perhaps a bit too much.
Remember the code’s purpose; avoid compliance theater
The purpose of a supplier code is to set expectations, give guidance, and promote ethical practices. While straightforward, putting that purpose into practice can be tricky. Facing growing risk and increasing public expectations, companies may be tempted to rely on their codes to address all possible supplier issues. That’s a tall order, as many companies have diverse supply chains ranging from sophisticated partners operating in highly regulated countries to smaller, less sophisticated ones working in locations without robust legal frameworks.
Understandably, when drafting a supplier code, companies are likely concerned with the partners that might present the most risk. The result can be a long, elaborate supplier code requiring business partners to fully adopt the code and train their entire workforce on it. But is this solving a problem or creating a paradox?
While this hard-charging approach may work for less sophisticated partners, it likely won’t work for all suppliers. A requirement that a sophisticated partner, with its own internal code of conduct, adopt another supplier’s code—and train its thousands of workers on that code—is likely just not feasible. If a company demands compliance with the impossible, its supplier code is not promoting ethics and compliance. Instead, it is merely compliance theater: actions that lack impact and are just for show.
No company putting together a supplier code likely sets out to just put on a performance. So, what goes wrong?
Theater is a comforting illusion. Wherever there is risk and uncertainty, there is a possibility of theater. When faced with growing risk, increased public pressure, and a diverse supply chain, an onerous supplier code may make one feel better since actions are being taken and risks are being addressed—just not effectively.
Companies can be effective and avoid compliance theater by remembering the supplier code’s purpose: set expectations, give guidance, and promote ethical practices. Companies with this focus don’t require compliance with their exact verbiage but with the spirit of their expectations. The conundrum of varying levels of sophistication and diverse legal frameworks is solved by requiring either that a business partner have in place similar standards—such as its own code of conduct—or adopt and train on the supplier code.
This approach works because most codes of conduct overlap. Whether internally drafted or drafted by a supplier, most codes address human rights, fair labor practices, legal compliance, and environmental responsibility. Therefore, if a business partner has its own code of conduct, or internal compliance policies, chances are the topics covered by the supplier code will be addressed.
Moreover, supplier codes should set forth short, high-level expectations, which increases the likelihood of overlap in both content and spirit. Codes should avoid granular, specific commitments that may not universally apply to all suppliers.
By requiring a commitment to similar principles and its spirit—not a verbatim adoption—a supplier code stays true to its purpose and promotes ethics and compliance.
Choose the right tool
While important, supplier codes are not a panacea. They cannot cure all potential supplier ills. If a company needs to do more than set expectations, give guidance, and promote ethical practices, it needs a different tool.
Companies have many tools at their disposal. They should determine their ultimate goal and pick the right tool for the job:
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Need the force of a contract term? Use a contract, purchase order, or an addendum thereto.
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Need to be assured that specific policies or practices are in place? Do a deeper dive with an in-depth survey.
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Need to confirm that partners are measuring up? Conduct an audit.
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Short on resources? Take a risk-based approach looking at those suppliers that present the most risk or with whom one conducts the most business.
Don’t look to a supplier code to deliver these outcomes. It simply cannot. Codes of conduct are by definition short, high-level documents that set expectations and give guidance. Supplier codes are not contracts, nor should they attempt to rewrite a party’s agreement. Nor can they provide the deep dive into a supplier’s practices that a survey or an audit can afford.
By considering the ultimate goal, and by remembering what each tool can provide, companies can keep the supplier code in its lane while still fulfilling its compliance objectives.
Drafting best practices
When drafting or revising a supplier code of conduct, once again look to its purpose: set expectations, give guidance, and promote ethical practices. Here’s how:
Set expectations and give guidance
Clearly state your commitment to integrity and ethical business practices, and make it clear you seek business partners that hold that same commitment. Set forth your required compliance obligations, keeping it short and high level. To determine which compliance obligations to include, look to:
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Your company’s code of conduct: It contains the obligations important to you.
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The supplier codes of other similar companies in your industry: What have similar companies chosen to include?
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The location of your suppliers: Given the location and your industry, are there any special considerations that should be included?
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Internationally recognized standards: Look to standards like the Ten Principles of the UN Global Compact or the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work.
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Benchmarking: Common compliance topics include:
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Human Rights
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Anti-discrimination/harassment
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Anti-corruption/anti-bribery
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Safe work environment
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Data security/confidentiality
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Compliance with applicable laws
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Environmental stewardship/sustainability
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Gifts and entertainment
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Conflicts of interest
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Fair wages
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Promote ethical practices
Modern supplier codes often recognize that compliance is a journey. Your supplier code can promote ethics and compliance by:
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Making it clear that you expect suppliers to immediately address any shortcomings,
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Encouraging suppliers to continuously improve their operations, and
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Committing to work with your partners to meet your compliance obligations.
Putting it all together
Be sure to include the right to:
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Amend the supplier code;
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Terminate the business relationship; and
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Audit the supplier for compliance
Drafting dos:
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Stick to the supplier code’s purpose: set expectations, give guidance, and promote ethical practices.
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Keep your expectations high level and universally applicable.
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Include your company’s hotline information.
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Keep it short. Aim for two–four pages in length.
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Make it easy to read. Use a conversational tone.
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Use design elements such as photos, color, graphics, branding, and white space.
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Require compliance with the code’s standards, principles, and overall spirit.
Drafting don’ts:
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Avoid specific, highly detailed commitments that are not universally applicable.
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Resist the temptation to just require suppliers to sign off on your internal code of conduct. Chances are, it won’t translate well. Instead, distill your code of conduct down and adapt for your supplier audience.
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Don’t require a mandatory, verbatim adoption of the supplier code.
One tool with one purpose
Supplier codes of conduct are important tools, but they are not the only tools to address supplier risk. By keeping the code’s purpose in mind, a company can ensure its supplier code avoids compliance theater and truly promotes ethics and compliance.
Takeaways
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Be careful of the company you keep, as you likely will be called to account for the actions of your business partners.
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A supplier code of conduct is one of many tools available to address supplier risk. Be effective by choosing the right tool.
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A supplier code is the right tool if your intentions align with its purpose: setting expectations, giving guidance, and promoting ethical practices.
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Modern supplier codes stay true to this purpose by requiring a commitment to similar principles as opposed to a verbatim adoption of the code.
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Supplier codes should be short, high-level commitments to integrity and ethical practices that avoid overly specific criteria not universally applicable to all partners.