The headlines speak for themselves: Wal-Mart, Costco and Trader Joe’s caught selling products made by factories using sweat-shop conditions; half of Hewlett-Packard’s larger vendors fail to adhere to wage and hour standards; and a new York garment manufacturer for Macy’s and gap is accused of cheating its immigrant workers.

Lured by the financial advantages of operating in developing regions, a flood of multinational businesses have begun working with manufacturing firms overseas. Yet, few of these companies are incorporating their international vendors into their existing ethics and compliance programs.

Unfortunately for these companies, as global awareness of such supply-chain mismanagement rises and consumer demand for socially responsible goods swells, companies are faced with increased pressure to communicate and manage standards of conduct to their globally diverse supplier base.

A survey conducted by ethics and compliance firm Integrity Interactive, shows that of the 108 Global 2000 companies surveyed, 78 percent omitted suppliers from their Codes of Conduct and 58 percent “were not sure if their company regularly assessed ethics risks in the supply chain.”

Suppliers are, in many ways, autonomous from purchasing organizations. It was this autonomy that allowed purchasing companies to turn a blind eye to supplier misconduct in the past. However, the negative publicity that comes from improper conduct is increasingly being associated with the purchasing company itself.

Erica Salmon-Byrne, Assistant General Counsel to Corpedia, an ethics and compliance consultancy, explains, “From a company’s environmental reputation to its anti-corruption efforts, suppliers and vendors can have a tremendous impact.”

For instance, skimming over the last year’s headlines reveals a staggering number of big names tied up with their suppliers’ bad business. There are stories about Primark and Esprit using child labor in India, Chinese-based metal suppliers circumventing a boycott from Disney through the hiring of illegitimate middleman companies and British businessmen giving IKEA managers nearly a million pounds in order to bypass company rules on vendor contract limitations.

These stories don’t come about because of the behavior of the companies’ direct employees, but rather because of their suppliers’ conduct. In the minds of the public and the media, the actions of the supplier and the actions of the company are one and the same—and in many ways they are right.

SKIMMING OVER THE LAST YEAR’S HEADLINES REVEALS A STAGGERING NUMBER OF BIG NAMES TIED UP WITH THEIR SUPPLIERS’ BAD BUSINESS.

But it isn’t all bad news. The Ethical Sourcing Report 2008, produced by inspection and certification firm Intertek, highlights the growing awareness of supply chain CSR requirements in producer countries. The report goes on to state “socially responsible companies don’t claim to have all the answers but are building public trust through authenticity about the issues and continuous focus to raise the bar.”

In other words, companies across the globe are recognizing how important it is to create supply chain systems that focus on best practices. Unfortunately, they often lack the necessary policies and procedures to do so.

“One way to address the issue is to communicate clearly to suppliers the way your company does business via a supplier code,” Salmon-Byrne says.

Just as a traditional code of business conduct communicates organizational standards of behavior to the workforce and promotes the ethical culture within an organization, the supplier code of conduct must convey a similar message specific to the supplier base of an organization.

Salmon-Byrne continues, “The standards for supplier codes are similar to a company’s employee code-it should be clearly written and communicate the organization’s values in a manner appropriate for the audience.”

Industry-wide standards for supplier conduct can establish a credible foundation for the creation of a supplier code of conduct. However, failing to consider your organization’s unique operational and cultural circumstances may expose further liability. Excluding this consideration puts your organization at additional disadvantage by falling short in the attempt to communicate
clear expectations to your supplier base.

But what should be included in a supplier code of conduct? The Ethisphere Institute, in collaboration with its member companies and content partners, has developed an inspection methodology to assess the current environment of supplier codes of conduct. The criteria takes into account 43 individual points of inspection organized into eight broad categories:

1. Public Availability-What is the availability and ease of access of the organization’s supplier code?
2. Tone from the Top-To what extent is the leadership of the purchasing organization visibly committed to the values and topics addressed in the supplier code?
3. Readability and Tone-Is the document written in an appropriate style and tone for its intended audience?
4. Organizational Values-Does the supplier code communicate the values and ethical standards of the purchasing organization?
5. Monitoring, Auditing and Enforcement-Does the supplier code explain the purchasing company’s right to audit and monitor the vendor and enforce discipline in the event of noncompliance?
6. Risk Topics-Does the supplier code communicate all key risk areas and behavioral expectations to its suppliers?
7. Management, Communication and Training-Does the supplier code utilize learning aids? Does it provide resources for suppliers to ask questions, report violations or obtain training on the supplier code?
8. Presentation and Style-Is the supplier code conducive to easy reading? Are topics sufficiently organized and presented clearly?

Several organizations have well-established guidelines and procedures, globally recognized as the best practices in how to provide standards of conduct for vendors and suppliers. These guidelines were considered when developing the Ethisphere supplier code review methodology, including:

• Universal Declaration of Human Rights (UDHR)
• Ethical Trading Initiative (ETI)
• International Labour Organization Standards (ILO)
• Social Accountability International (SAI)
• Electronic Industry Code of Conduct (EICC)

OVERALL GRADE METHODOLOGY:
In calculating the overall grade for a supplier code of conduct, each of the eight assessment categories were assigned a weight based on their relative importance within a supplier code: Public Availability: 5%; Tone from the Top: 10%; Readability and Tone: 10%; Organizational Values: 10%; Monitoring, Auditing and Enforcement: 25%; Risk Topics: 25%; Management, Communication and Training: 10%; and Presentation and Style: 5%.

While the scores for many of these supplier Codes of Conduct are relatively low, ethisphere would like to commend these companies for being ahead of the curve and establishing supplier Codes of Conduct before most of their peers.