Post By: Charles Thomas, Director, Anti-Bribery and Corruption, LexisNexis Risk Solutions
In the 21st century, corporate ethics is not a “nice to have” but a “need to have” in organizations of all sizes. The public demands that businesses maintain high ethical standards and demonstrate that they care more than ever how the public perceives their actions. This means that ethics must be made a priority and significant resources devoted to it. However, for many, where to begin is a challenge. While we all have an ethical compass, can it be pointed in a positive direction for an entire organization? Making sure that employees abide by an ethical code is one part of this, but what about those third parties that you work with? Can you be confident that you know enough about them? Are you sure that they are living up to the ethical standards that you set for your organization?
Below are some guardrails to help ensure that your due diligence program is robust enough to avoid the pitfalls of having unethical business partners.
- A balanced approach to due diligence
The basis of any due diligence process is a risk-based approach. This allows companies to effectively focus their efforts, resources and budget on the areas that pose the most potential risk. They need to strike the balance between “under-complying” and over-spending on a due diligence program. A good program adequately encompasses different risks presented by diverse locations, which is a major issue for international businesses.
A constant demand in almost all compliance and regulatory regimes is for “adequate” due diligence. What is adequate for one company may be overkill for another. However, establishing a foundational level of due diligence – where all third parties are subject to the same broad spectrum of due diligence – can help form a strong defense when potentially unethical situations arise. Combine this with a rigorous approach to keeping records to show what was known when, how decisions were reached, steps to rectify, etc.
Another vital part of implementing a due diligence and compliance program is employee engagement. A top-down approach is the only option. The highest echelons of management must be seen — and indeed to actually be — buying into and forwarding the process of compliance. Without that, it will be nearly impossible to ensure that every employee is aware of their responsibilities. In an industry with a diverse workforce spread over multiple and vast locations, it is vital to get a local manager in West Africa to see the importance of due diligence and compliance in the same light as a C-suite executive in New York. The importance placed on compliance must be the same globally.
2. The effects of deploying a strong due diligence program
All too often, due diligence is seen as a barrier to business, but this doesn’t need to be the case. Done properly, it can increase business transparency, strengthen supplier relationships and even potentially drive cost efficiencies in a supply chain. Yes, there will be some cost implications, but those tend to exhibit real benefits for a business.
Conducting due diligence at an early stage of onboarding a new business partner can save a lot of time and money since it results in avoiding entering into any compromising business relationships – it’s always harder to get out of a bad relationship than it is to not get involved in the first place. Extending the process to include ongoing monitoring changes in a partner’s status, such as monitoring government connections or adverse media reports, can also help pre-emptively identify issues before they become real problems.
For example, a business partner might be trusted today, but what if they knowingly or unknowingly became involved in the use of slave labor or someone in their organization took a bribe on behalf of a peer/competitor with whom they also work? Knowledge of incidents like these before they have any impact on your business is critical. Just because you have worked with someone for years, does not mean you should not be checking in on him or her periodically.
Badly implemented due diligence programs can be a drain on resources, divert attention away from core business functions and create a negative impression of a business unit that just spends money without creating anything. It’s certainly a balance. By automating the heavy lifting part of the process, a company can then assign resources to look only where it is needed — areas of higher potential risk or actual incidents of risk. This removes the under-complying element of the process and frees up resources to focus on higher risk areas.
3. A strong ethical footing
Carrying out due diligence is not just about a compliance-led box-checking exercise, nor is it about simply looking for “the bad guys”. It is about building stronger, more actionable information on business partners, clients, customers and more. Use that information to better understand and better interact with those third parties. In doing so, a company can identify potential areas of risk, and also highlight the strengths of their supply chain. A company with a strong due diligence program is able to help prove that they have taken strong steps to:
- Eradicate bribery and corruption from their business
- Work to eradicate slavery and trafficking from their business
- Move towards a model that does not fund terrorism or inadvertently support money laundering
Upholding high ethical standards and keeping the company out of negative news cycles are of paramount importance. In an age where businesses are under increasing consumer scrutiny and pressure, a strong due diligence program can weed out the sorts of organizations a company really should avoid as a partner.