Ethics and compliance officers have a new resource by which to assess potential risks that may lurk in their supply chains.

The Ethics and Compliance Initiative (ECI) last month published its “Global Business Ethics Survey (GBES), Ethics and Compliance Risk in the Supply Chain,” which offers a rare look at supply chain risk through the lens of supply firm employees. Prior to this report, much of the research done on supply chain risk has been viewed through the perspective of the buyer companies. The GBES report aims to fill this gap by providing a snapshot of “supplier employees” and the real-world challenges they face, providing a unique picture of ethics and compliance risk in the supply chain.

To get a global perspective of supply chain risk, ECI surveyed respondents from the private, public, and not-for-profit sector across 13 jurisdictions: Brazil, China, France, Germany, India, Italy, Japan, Mexico, Russia, South Korea, Spain, the United Kingdom, and the United States. A total of 1,000 responses were collected in each jurisdiction (except the United States, for which 1,046 responses were collected), for a grand total of 13,046 responses in the GBES data set.

The report defines “supplier employees” as those whose companies provide goods or services to a larger company, as opposed to employees whose firms provide goods or services directly to consumers. Within the GBES data, several notable differences emerged between supplier and non-supplier employees.

For one, the global reach and scope of supplier firms, compared to non-supplier firms, reflects the inherent complexity of today’s complex supply chain web. According to the GBES survey, 53 percent of supplier employees said their companies operate outside their geographic borders, compared to 27 percent of non-supplier employees.

Furthermore, supplier employees themselves are far more likely to personally interact with contacts outside their country. According to the findings, 50 percent of supplier employees said they personally come in contact with clients, customers, or vendors in other countries compared to 24 percent of non-supplier employees.

The survey also found that supplier firms are more vulnerable to ethics and compliance risks than non-suppliers, based on the experiences of their employees. Specifically, ethics and compliance risks were measured by looking at four key indicators:

Pressure to compromise organization standards and policies;

Observed misconduct in the workplace;

The rate of reported misconduct when observed; and

Retaliation experienced as result of making a report.

Overall, employees at supplier firms are more likely to experience workplace integrity challenges: “Employee misconduct happens more often, pressure to compromise standards is more widespread, and employees who blow the whistle on rules violations and ethics and compliance breaches are more likely to experience retaliation than at non-supplier organizations,” the report stated.

“The impact of integrity breaches is ultimately passed on to the buyers that contract for the suppliers’ goods and services, so it is imperative that organizations pay close attention to their suppliers’ ethics and compliance policies.”
Neal Hochberg, Global Leader, Forensic & Litigation, FTI Consulting

For example, 31 percent of supplier firm employees said they felt pressure to compromise organization standards and policies, compared to just 18 percent of employees at non-supplier firms. Additionally, 42 percent of supplier firm employees said they had observed misconduct on the job, compared to 28 percent of employees at non-supplier firms.

What’s more, the survey revealed that employees at supplier firms observe the same types of misconduct as employees at non-supplier firms, but at far higher rates. For example, 28 percent of supplier employees said they observed the hiding of potential violations prior to on-site inspections, compared to 15 percent of non-supplier employees. In another example, 29 percent of supplier employees said the observed a conflict of interest, compared to 19 percent of non-supplier employees.

“The impact of integrity breaches is ultimately passed on to the buyers that contract for the suppliers’ goods and services, so it is imperative that organizations pay close attention to their suppliers’ ethics and compliance policies,” says Neal Hochberg, global leader of the Forensic & Litigation Consulting segment at FTI Consulting, which worked with ECI on the report.

Management involvement. Often, these ethics and compliance violations are perpetrated by top or middle managers at supplier firms, the report stated. For example, 55 percent of anti-competitive practice incidents were committed by top or middle managers.

“This is important and very problematic, because managers teach ‘appropriate’ conduct,” Katie Lang, senior researcher at ECI, said during a recent webcast discussing the report’s findings. “If they are engaging in misconduct, it sends a powerful message that such misdeeds are acceptable, lowering the standard for all employees.”

In other cases, management involvement is the result of lapses in ethical leadership. For example, 51 percent of retaliation incidents were perpetrated by top or middle managers.

Another significant finding from the report is that employees are most vulnerable to violations of workplace integrity when companies are experiencing internal upheaval—such as changes in top management, layoffs, cost-cutting measures, or a corporate restructuring—and that such events are more common among supplier firms. According to the report, 71 percent of supplier employees said that their companies have undergone at least one of these changes within the past year.

In practice, any time a company goes through an organizational change, “it’s an opportunity for the company to implement new policies or reemphasize old policies and basically bring attention to the importance of ethics and compliance programs,” said Lindi Jarvis, a senior managing director in the forensic accounting and advisory services practice at FTI Consulting.

Country-by-country. The frequency of specific violations varied significantly country-by-country. Observation rates for certain types of misconduct appear to be particularly high in Brazil, Germany, India, Russia, and the United States, the report stated.

Employees of supplier firms in India, in particular, cited several issues of integrity, including observing conflicts of interest; delivery of goods or services that fail to meet specifications; inappropriate alteration, falsification, and/or misrepresentation of the company’s documents or records; and engaging in anti-competitive behavior (e.g., price fixing, bid rigging). Many of these same ethics and compliance violations also were observed by employees of supplier firms in Germany.

In Russia, violations of health and safety regulations and hiding potential violations prior to an on-sight inspection were particular common observations cited by supplier employees. In the United States, the most common integrity issue witnessed was the “inappropriate alteration, falsification, and/or misrepresentation of the company’s documents or records.”

Breaking down the four key indicators country-by-country, “pressure to compromise organization standards and policies” was cited most frequently in Brazil (50 percent) and India (49 percent); “observed misconduct in the workplace” was most commonly observed in the United States (50 percent), France (49 percent), and Russia (48 percent).


Below are ECI graphs that tell how many supplier employees are more likely to work for multinationals or clients, customers, and vendors in other countries.
Supplier employees more likely to work for multinational organizations

Of the four key indicators measured in the GBES report, “reported misconduct” garnered the highest numbers in every country, with India (87 percent), the United States (86 percent), and the United Kingdom (82 percent), receiving the highest numbers. These same three countries also received the highest number of responses, however, from respondents who reported retaliation for making such reports: India (86 percent), the United Kingdom (83 percent, and the United States (65 percent).

High rates of reporting tend to coincide with widespread retaliation not only country-by-country, but among supplier firms, as well. “When one goes up, so does the other,” Lang said.

Positive findings

There were a lot of positive findings to come from the survey, as well. Compared to non-suppliers, employees at supplier firms have higher levels of awareness of ethics and compliance program resources. The majority of supplier employees know of their organization’s written standards (70 percent); training on those standards (69 percent); and resources to help employers address ethics-related issues (67 percent).

Employees at supplier firms are also more likely than non-supplier employees to be aware of helplines or other confidential channels for workers to raise concerns or report rules violations, cited by 61 percent of supplier employees, versus 51 percent of non-supplier employees.

Having and being made aware of ethics and compliance resources within a program is not enough. “Employees need to be willing to engage and use those resources as well,” Mara Lindokken, assistant director of research at ECI, said during the webcast.

Thus, it’s a positive finding that employees at supplier firms said they are not only aware of their company’s ethics and compliance resources, but actively use them. Eighty-three percent of supplier employees said they seek guidance when faced with an ethics-related situation if they’re not sure how to deal with it, as compared to 72 percent of non-supplier employees.

Additionally, supplier employees are more likely than non-supplier employers to believe senior managers support workplace integrity. For example, 80 percent of suppliers said they hear their leaders talk about the importance of workplace integrity, compared to 67 percent of non-suppliers. Another 72 percent said they believe top managers set a good example, compared to 58 percent of non-supplier respondents. “These positive perceptions are important because time and again, ECI research links ethical leadership to improved workplace ethics,” Lindokken said.

The report further revealed that supplier employees are more likely than non-supplier employees to report misconduct. According to the findings, 68 percent of supplier employees said they reported violations when they saw them, compared to 51 percent of non-supplier employees. This coincides with the finding that supplier employees were more aware of and, more likely to use, helplines.

One main difference between supplier and non-supplier employees is the avenues they first turn to when they report misconduct. Among non-suppliers, the majority of reporters (57 percent) turn to their supervisors first, compared to 45 percent of reporters at supplier organizations, many of whom said they use their company’s helpline first.

If the company outsources its helpline service, it’s important to select a third-party helpline provider that meets the needs of the organization, Jarvis said. “Does it have the right language capabilities? Are they able to take down the details of a complaint and produce an understandable summary report?” she says.

Whether performed by compliance or audit, these questions should be incorporated into a regular risk assessment. If they find any issues, companies should provide feedback to the helpline provider, Jarvis said.

Due diligence

The findings of the report reinforce the need for third-party due diligence, Jarvis said. Furthermore, multinational companies should include audit rights in contracts with small, domestically based supplier firms from whom they buy goods and services, Jarvis recommended.

When FTI Consulting helps firms conduct a books-and-records review—for example, assisting internal audit on a risk assessment or reviewing the books of a third-party distributor—“we see a lot of variation concerning the awareness ethics and compliance program elements,” Jarvis said. Invariably, employees of small supplier firms don’t have the same depth of understanding with respect to ethics and compliance issues as the multinational companies that they’re doing business with, she says.

Their only awareness of ethics and compliance issues tends to be through the clauses included in the contracts with that larger, global multinational and not aligned with the policies and procedures of the small supplier firm, at least not at an operational level, Jarvis says. For example, small, regional distributors often have an anti-corruption clause in the contract with that multinational company, but often don’t have an independent or robust set of policies governing their own employees, she says.

Multinational companies should also consider educating third parties on specific policies and procedures. Companies should also consider encouraging third parties to adopt robust policies and procedures as part of an overall ethics and compliance program, Jarvis says.

The existence of a helpline is also a simple thing to look for when conducting due diligence on a potential supplier, Lindokken says. When conducting due diligence on supplier networks and other third parties, too, “make sure ethics is included in the conversation,” she said.

Lindokken recommends asking third parties the following questions:

Does this potential supplier operate with integrity and expect employees to do the same?

Are senior leaders committed to ethical performance?

Are their employees properly trained to recognize misconduct, and will they report it if they see it?

If they do speak up, will they be supported by their company’s leadership?

“None of the questions are easy to answer,” Lindokken added, “but the potential risk makes it a business imperative for ethics integrity to be part of the conversation moving forward.”