It’s unfortunately common to hear about corruption and unethical behavior in the supply industry, including among Fortune 500 companies. To combat this, many companies have implemented a zero-tolerance policy towards unethical purchasing practices. However, the definition of ethical behavior can vary between organizations and individuals, making it crucial for companies to clearly outline what is considered unethical. Let’s delve into some general ethical principles that apply to both businesses and individuals.
Fraud / Dishonesty
Supply chain fraud can be devastating for companies, causing financial loss and damage to their reputation. Fraudulent behavior can come from individual employees or suppliers, such as misrepresenting information, lying, or sharing confidential information. To prevent fraud, it’s important to establish clear separation of duties, so that no one person has complete control over the purchasing and payment processes. For instance, no single person should be able to create and approve a purchase order, and then also be responsible for paying for it.
Conflict of Interest
It is crucial for purchasing personnel to steer clear of any potential conflicts of interest while dealing with suppliers. This entails refraining from unethical influences when selecting suppliers and not dividing loyalties between their own company and that of a supplier. For instance, if a manager or buyer is a stockholder in the supplier’s firm, or has a close relationship with them as a friend or relative, it could create a conflict of interest.
- In situations where a buyer has a direct financial interest in the success of a supplier, any business awarded to that supplier should be disclosed to management. To avoid conflicts of interest, it’s best for someone else to handle the purchase of that item or service.
- It is important to avoid personal conflicts of interest in business, such as awarding a contract to a supplier who has employed a close relative or the buyer themselves. If such a situation arises, the buyer should disclose the relationship and remove themselves from the conflict.
Determining what is legal and illegal in this area can be tricky, as it often comes down to whether or not an activity restricts competition. For example, giving preferential treatment to suppliers who purchase the buying organization’s products or services may be seen as unfair. Additionally, reciprocity – where suppliers who are also customers receive preferential treatment – can also be a cause for concern. Essentially, this means that some purchasing contracts are made with the understanding that if the supplier buys from the organization, the organization will buy from them in return.
Bribery and Corruption
Corruption is a major hindrance to doing business in numerous economies worldwide, impeding economic and social progress. Procurement-related corruption can manifest in various scenarios, such as:
- Demanding or offering kickback in order to receive contracts
- Providing inside information during bidding process
- Demanding bribes in order to buy goods or services
- Offering bribes to overlook poor quality goods or services
- Submitting false invoices for work done or products delivered
- Offering/acceptance of gifts, entertainment, gratuities or favors in exchange for business
Companies typically have policies regarding the acceptance of bribes or gifts. They may set a limit on the dollar value of gifts existing suppliers can give as a way of thanking the buyer, while gifts from potential suppliers are often not allowed. It’s important for companies to have consistent standards across all departments, such as prohibiting purchasing from accepting gifts from suppliers, while also prohibiting marketing from sending gifts to potential customers.
Numerous countries have implemented anti-corruption laws, which require companies to steer clear of unethical conduct and implement anti-corruption measures both internally and throughout their supply chain.
- If the action is illegal, both the buyer and the firm may face legal or financial penalties.
- The professional reputation of the buyer may be damaged, not only internally, but within the industry, and may be difficult to improve.
- The buying organization’s reputation may be harmed with their supply base, as well as the general public, which may impact their ability to profit and succeed.
Organizational Best Practices
Organizational best practices for avoiding non-ethical behavior include:
- Establishing a code of conduct and ensuring that employees understand its principles and sanctions
- Implementing reporting procedures and mechanisms
- Publicizing attempts to bribe employees
- Establishing a reputation for zero-tolerance
- Providing anti-corruption training to staff and suppliers
- Putting preventive measures in place, such as limits to buying authority, multiple levels of authorization, system of checks and balances, separation of duties
- Establish effective whistleblower policies so that interested parties can anonymously report fraudulent behavior without fear of reprisal
Basic Rules for Procurement
Some basic rules for ethical behavior by procurement professionals include:
- Buyers must perform their duties for the organization’s benefit, not their own.
- Buyers must not accept outside gifts or benefits that violate their organization’s policies.
- Buyers should not be influenced by or have financial arrangements with unethical suppliers.
- Buyers should act ethically toward existing or potential suppliers by treating them professionally and with respect.
- Buyer’s should not use or provide confidential information to any third party.
- Buyers must uphold their organization’s ethical standards.