Corruption and sourcing-related human rights risks are top of mind for many companies, and for good reasons. Both risk categories potentially carry substantial legal and PR risks and can be outside of a company’s direct control to the extent they are implicated by the conduct of third parties. However, corruption and responsible sourcing risks are often managed by different corporate functions. Corruption risks traditionally fall under the ambit of the legal/compliance department, whereas responsible sourcing risk management is often handled by sourcing, sustainability, or related supply chain management functions. These functions are often siloed and distant from each other in the organizational structure. Greater coordination between the anti-corruption compliance and responsible sourcing functions could save company resources and generate other synergies.
This is one of the key themes of a recent draft OECD report titled “Connecting the anti-corruption and human rights agendas: A guide for business and employers’ organisations” (“the OECD Report”). The report, published on May 4, explains the interrelationship between corruption and human rights violations and advocates for a more integrated approach to corporate risk management. In particular, the OECD Report notes that corruption undermines the rule of law, erodes trust in institutions, decreases investment and damages economies – all of which foster an environment of poverty and lawlessness that allows human rights violations to flourish. In the corporate context, corruption and the lack of rule of law leads to less corporate accountability, which makes it easier for suppliers to ignore laws prohibiting forced labor, trafficking, and other labor abuses in farms, factories and other facilities. Therefore, in jurisdictions with a higher incidence of corruption, it is particularly important that companies not only convey their strict no-corruption policies to suppliers, but also ensure that their responsible sourcing standards are effectively communicated. The OECD Report concludes that corruption and human rights essentially are two sides of the same coin, and aligning the fight against corruption with promotion of human rights can thus be mutually reinforcing.
Below are four key takeaways on why companies should reassess their approach to corruption and responsible sourcing risk management and how to do it effectively.
First, ensure adequate coordination between the relevant functions. Even though maintaining distinct corruption and human rights risk management processes can be effective, adequate coordination between relevant company functions is critical. Anti-corruption compliance and responsible sourcing functions greatly benefit from information sharing. Corruption and human rights violations that can lead to substantial corporate liability facilitate one another, thrive in similar environments, and often have common root causes. Risks relevant to anti-corruption compliance and responsible sourcing functions frequently reside within the same group of suppliers in emerging or other challenging jurisdictions. By sharing information uncovered during risk assessments, audits and due diligence reviews, corporate functions avoid duplication of efforts, benefit jointly from supplier touchpoints and information gathered, and enhance the company’s overall understanding of its risk profile – all without having to disrupt the distinct risk management processes already in place. In today’s world of global supply chains, maintaining constant oversight over every supplier is often unrealistic, and information sharing between corporate functions with supplier touchpoints improves the scope of oversight over high-risk suppliers.
Second, consider implementing joint risk management processes where possible and effective. For example, when contemplating a large sourcing project or joint venture in a jurisdiction with a high Corruption Perception Index, companies should consider conducting joint anti-corruption and human rights risk assessments. Anti-corruption compliance and responsible sourcing functions base their risk analyses on similar information. By conducting joint risk assessments, a company saves costs while expanding its risk awareness to cover both anti-corruption compliance and responsible sourcing risks.
Third, educate the relevant functions’ employees on the connection between corruption and human rights violations. Anti-corruption compliance and responsible sourcing issues that can lead to corporate liability are easier to detect and prevent if the relevant employees are aware of their connection. This awareness is achieved through training, implemented corporate policies and procedures, and regular communication between relevant functions. The OECD report also references a best practice that many companies with mature supply chain compliance functions already embrace – establishing a cross-functional working group that could include members from Legal, Compliance, Human Resources, Business Development, Sustainability, Supply Chain, Corporate Responsibility, and Accounting departments. The cross-functional group’s purpose is typically to maintain dialogue on how to best identify and manage risks across disparate areas of the business, where there is overlap between corruption and human rights risks. In addition, joint reporting mechanisms, such as a hotline, dedicated to both anti-corruption compliance and human rights concerns can reinforce the interconnectedness of the two issues to employees and suppliers and ensure that reports of violations appropriately consider potentially related conduct.
Finally, maintain coordinated public reporting on anti-corruption compliance and responsible sourcing efforts. Coordinated public reporting can be complementary and result in more articulate and holistic messaging on the company’s stance towards abuses in its supply chain. With Environmental, Social and Governance (ESG) investment on the rise, companies benefit where efforts and accomplishments in promoting transparency and respect for human rights are known to the public. In today’s ESG-focused environment, companies benefit financially where their understanding of the relationship between corruption and human rights abuses is demonstrated to be mature and sophisticated.
Of course, there is no one-size-fits-all approach to effectively managing corruption and responsible sourcing risks. The look of a successful risk management program hinges on many factors, including the size and complexity of a company’s supply chain, the impact of compliance processes and structures already in place, and available resources. However, given the substantial legal risks associated with anti-corruption legislation (including the U.S. Foreign Corrupt Practices Act and the UK Bribery Act) and human rights violations in the supply chain – along with ever-increasing stakeholder expectations regarding corporate social responsibility – now is the time for multinational companies to reassess their current compliance risk management approach to benefit from valuable synergies.