The Ripple Effect: When Compliance Efforts At Home Have A Global Impact

Chief Executive Officer

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Whatever your politics, it’s hard to avoid the conclusion that the world is experiencing a vacuum of leadership.

The coronavirus response has been marked by a lack of effective coordination among governments and international bodies. Sadly, ethical collaboration is increasingly taking a back seat as cooperation fades and a damaging go-it-alone mentality prevails.

This growing vacuum is forcing companies to consider their role in fostering ethical behavior — not only among their own employees but throughout the ecosystem of far-flung suppliers and channel partners.

Having a thorough compliance program is a vital — and underrated — part of this. Many companies still tend to think about compliance as essentially a CYA exercise, checking off boxes to avoid the legal and financial consequences of bad behavior by employees or suppliers. Consequently, compliance departments often don’t get the resources or recognition their work deserves.

In reality, good compliance is much deeper and more powerful than box checking; it’s a way to reinforce ethical behavior throughout international supply chains, resulting in changes that create better social conditions on the ground.

It’s not just altruism either. Ethical companies are increasingly being rewarded as investors recognize they are more sustainable and build stronger brands and reputations over the long term. Assets under management in funds that abide by environmental, social and governance (ESG) principles have more than doubled in the past three years, and they’ve outperformed traditional sectors during the pandemic.

Companies that fall short of these standards are more likely than ever to suffer consequences in capital markets. For example, Norway’s sovereign wealth fund, the world’s biggest, divests from companies that don’t meet its standards on human rights, pollution and corruption.

And of course nothing brings down a company harder and faster than an ethics breach—whether in a civil or criminal sense, or the court of public opinion.

But there’s another benefit to vigorous compliance that’s often missed. Call it a multiplier effect. When enforced across a multiplicity of companies, compliance becomes even more powerful. A supplier might be tempted to skirt rules from one buyer. But if several key customers are laying down requirements, the supplier quickly realizes its whole business would be threatened by a failure to comply. That, in turn, can have a domino effect throughout a supply-chain ecosystem as those suppliers push their own vendors to get their houses in order.

It’s not hard to find examples of where stronger compliance practices could have prevented ethical problems and subsequent reputational damage. U.S. retailers, including Walmart and Kroger, were embarrassed after an Associated Press investigation five years ago found they were selling fish caught by slaves on Thai fishing boats.

When the Rana Plaza building in Bangladesh collapsed in 2013, killing more than a thousand textile workers, several Western garment firms discovered through media reports they had items made there. These firms’ formal standards on labor conditions hadn’t been enough to stop their suppliers outsourcing production to awful, unsafe places like Rana.

Proofing a third-party ecosystem against ethical blind spots doesn’t have to be an all-consuming, boil-the-ocean exercise. The right approach to compliance is to devote the most scrutiny to partners that present higher risk.

Certain industries, countries and regions can be classified by the degree of risk they carry. Any part of a supply chain dealing in metals like gold, cobalt, tin and tungsten that could come from conflict zones, for example, are obvious candidates for a more intense compliance focus. The same goes for industries or countries that have track records of corruption or human rights problems like forced labor.

Data privacy is a less obvious but emerging risk area for potential ethical breaches.

Global businesses have won a reputation, sometimes justified, for being exploitative when they source from lower-wage countries. Strong compliance is a big step toward countering that narrative and not letting it take hold for your own company.

It will always make economic sense for many items to be made in low-wage countries. But companies must convey to their suppliers that they expect a clear set of behaviors and that there will be enforcement and consequences if those suppliers fall short.

This is the mechanism by which ethical business practices and strong compliance standards can actually allow global companies to improve on-the-ground conditions in lower-wage countries.

Compliance departments have been trying for years to get company leadership to understand that their work goes beyond box checking and has much deeper benefits. It’s time for CEOs and boards to start hearing them.

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