The right road [June 2012 print edition]

Finding the most ethical route in procurement isn’t always easy. Here are a few tips on reading the signs.

July 9, 2012
by By Michael Power

Controversy surrounding the Canadian government’s sole source purchase of F-35 fighter jets leads to a highly critical Auditor General’s report on the procurement process’s shortcomings. Charges of poor working conditions at Taiwanese company Foxconn—Apple Inc’s main components supplier—result in Apple and its new CEO Tim Cook rethinking the tech giant’s sourcing practices. Recent headlines have shown no shortage of coverage related to ethical issues in procurement. And certainly, no organization wants to end up at the top of the day’s news due to an ethical breach or misstep in judgement. So what can procurement organizations do to ensure they’re travelling the ethical road?

Talking code
Ethics training is included for those who work towards their SCMP designation through the Purchasing Management Association of Canada (PMAC), says Cheryl Paradowski, its president and CEO. Within the designation there are eight modules and six workshops, including a three-day workshop called Ethical Behaviour and Social Responsibility. That workshop outlines some of the issues surrounding ethical behaviour and deals with several recent hot topics in procurement ethics like gift giving, discrimination, sustainability and corporate social responsibility (CSR), Paradowski says. Ethics is also a recurring theme featured during educational sessions at the organization’s national and regional conferences, as well as through its webinar series.

One recommendation the program makes, she notes, is that organizations develop their own code of ethics governing acceptable behaviour. PMAC has its own code of ethics, which is available on the organization’s website and Paradowski encourages companies to use the document as a module for their own codes or simply to adopt it outright. “And we certainly have heard that there are a number of companies that have done that,” she says.

Paradowski notes PMAC is currently updating its code to accommodate issues like CSR and sustainability that, a decade ago, received far less attention. Those issues have grown in prominence as supply chains have lengthened and procurement’s reach extended. “It hasn’t been updated, for example, along with our designation to be reflective of the full field of supply chain management as opposed to just purchasing,” she says.

Members who controvene the association’s code may also face real consequences, Paradowski says. When new members join, they agree to adhere to the code and anyone found in breach is subject to a complaint and discipline process that’s managed within each provincial PMAC institute. An ethics committee considers complaints against members and gathers information and evidence. PMAC has a list of sanctions based on the severity of the allegations, Paradowski says, which goes as far as revoking the member’s designation and restricting membership.

Codes of conduct for suppliers are also useful to ensure alignment between an organization’s values and those of the supplier, says Victoria Wakefield, purchasing manager, student housing and hospitality services at the University of British Columbia. Since organizations enter into financial agreements with suppliers, such codes help to keep transactions as open as possible, Wakefield said.

Before the Vancouver 2010 Winter Olympics, for example, the city drew up an ethical procurement policy that had an code of conduct embedded in it, notes Wakefield, who acted as the “ethical sustainable contract specialist” for the process of writing the policy. The code, which included core labour conventions of the International Labour Organization (ILO), strove to ensure safe and healthy workplaces for those making products for the games. The code also provided a system to report complaints of abuse, Wakefield says. Vancouver also chose to publicly post the names of the suppliers it was sourcing from. That step demonstrated the city recognized a supplier’s reputation could change rapidly, Wakefield says.

“I think that is a very positive leadership role,” she notes. The move also strengthened the procurement department’s relationships with NGOs, and such partnerships can prove useful. Many not-for-profits have their feet on the ground in international locations and can provide information regarding a supplier’s workplace conditions that a company mightn’t otherwise have access to. “We’re not out in the marketplace as frequently as we’d like to be, so connecting with NGOs is very critical,” she says.

In the private sector, Mountain Equipment Co-op (MEC) helps lead the pack in ensuring its supply chain and procurement process remain ethical, Wakefield says. Among several other initiatives, the Vancouver-based company has a factory audit program done by MEC merchandisers against its supplier code of conduct, external auditors and the Fair Labor Association (FLA). New suppliers are screened for potential ethical risks before getting an order. Through the company’s ethical sourcing program, MEC monitors factories, reports findings and works to improve factory conditions if needed.

Ethics goes global
International supply chains now extend further than ever. Procurement professionals therefore must pay attention not only to what goes on in their own backyard, but what their suppliers around the globe are doing to maintain ethical standards, says Larry Berglund, principal in Presentations Plus Training and Consulting, Inc. But Berglund, who teaches a module called Supply Chain Management Practices and Social Values ethics during PMAC’s residence week and chaired the taskforce responsible for developing the association’s updated ethics code, notes that doesn’t equal a universal standard by which to measure ethical behaviour. Cultures, values, assumptions, beliefs and expectations vary depending on where in the world you are, he notes.

“The value proposition in North America is very different compared to, say, India, the Middle East or wherever,” he says. “We (in North America) look for goods that are sweatshop free—that might be a minimum expectation for sourcing or importing. But it may not be so high a priority in another area. Labour practices vary quite widely around the world.”
Canada even passed the Corruption of Foreign Public Officials Act (CFPOA) in 1999 to charge those working in Canadian companies who are caught bribing foreign officials.

Ensuring transparency throughout the supply chain becomes important to help sustain suppliers’ ethical conduct two or three tiers along the way, Berglund says. Last January, Apple Inc’s image took a hit when reports surfaced that were critical of working conditions in China at Foxconn, the Taiwanese contract manufacturer that assembles most of Apple’s products.
“That is where ethics comes in,” he says. “If you’re making ethical purchasing decisions you should be ensuring that your business isn’t supporting that kind of practice.”

Berglund’s recommendation for avoiding such ethical blind spots involves looking at and staying aware of sourcing conditions before awarding a contract. Meanwhile, Apple knew about the criticism of Foxconn’s labour practices for some time, but downplayed its severity. It was only last April that Tim Cook, Apple’s new CEO, developed a policy statement designed to deal with poor labour conditions, Berglund notes. “It’s a pretty passive approach to a rather massive problem,” he says.

Procurement ethics on the international scene can get murky rather quickly, so Berglund recommends using international standards to navigate them—for example, supplier codes of conduct that recognize the International Labour Organization’s (ILO) standards. The ILO is recognized and monitored by third-party organizations like Verité and the Fair Labour Organization (FLO). As well, putting a supplier code of conduct into a contract gives legitimacy to an otherwise voluntary code.

“If a supplier is found to be in violation of the ILO standards as they’re described in their supplier code of conduct, that puts the supplier—if they don’t correct the problem—in breach of contract,” Berglund notes. “And that contract could be subject to a cancellation. That’s a huge piece of the importance of using third-party certification in codes of conduct, which is absolutely connected to the ethical values of the organization.”

The next generation
For many of today’s consumers, issues surrounding corporate ethics have moved from the nice-to-have category to expected, bare-minimum behaviour for organizations, says Wakefield. And it’s not only the end-users of products and services who care. Many new to the workforce want not only a paycheque but a feeling of connection to the values of the organization they work for. In other words, having good corporate values also benefits organizations by helping them to attract and keep talented workers. “If you’re not taking it on and doing a good job of it, you’re not able to hire good resources—they don’t want to work for you,” she says.

There are other benefits to organizations engaging in ethical procurement, says Cassandra Dorrington, president of Toronto-based Canadian Aboriginal Minority Supplier Council (CAMSC). The organization promotes supplier diversity and procurement opportunities between corporations and suppliers owned and operated by aboriginals and minorities. A decade or so ago aligning ethical issues such as sustainability, CSR and supplier diversity with procurement practices would have been seen as “the nice thing to do,” Dorrington says. But the landscape has evolved to the point where organizations see the ROI of issues like ethics, sustainability and supplier diversity—benefits such as access to new sourcing pools and fresh, out-of-the-box approaches to business.

“It’s not just a social cause,” says Dorrington. “There is a business imperative and it’s tied to the fact that there’s a business return. ”