Caroline Hayward and Stacy Ford discuss the Supplier Code of Conduct and why it is a good idea to have one in place. This is an essential part of maintaining an ethical supply chain – increasingly important for ESG and sustainability obligations and targets. Read on for the latest in KWM’s inhouse-centred series: From our inhouse to yours.
‘In civilized life, law floats in a sea of ethics’ – Earl Warren.
An essential part of in-house counsel’s role is to provide advice in relation to the legal relationship between their organisation and its suppliers. This typically takes the form of advising on supplier agreements or disputes, but increasingly in-house counsel are being asked to work with procurement and compliance teams to consider ethical supply chain considerations as well. This is particularly prevalent where new legislative or regulatory requirements have come into existence.
There is also pressure on the organisation from clients, investors and even employees to maintain an ethical supply chain. Having an ethical supply chain is considered a reflection of the business’ own ethical standing. And people want to do business with and work for organisations that are ethically sound.
To avoid running aground (or being cast adrift from your clients), you should put in place a Supplier Code of Conduct to set out your compliance and ethical requirements with your suppliers.
What is a Supplier Code of Conduct?
A Supplier Code of Conduct sets out an organisation’s requirements and expectations of its suppliers in relation to the supplier’s conduct. At a high level:
- It covers areas that may give rise to compliance and ethical risks within the organisation’s supply chain.
- It is commonly used to set requirements in relation to areas of ESG and sustainability.
It should be noted that a Supplier Code of Conduct is separate to an organisation’s internal Code of Conduct for its personnel. Although both codes may share similar themes, a Supplier Code of Conduct is only applicable to the organisation’s suppliers and not its personnel.
Why is having a Supplier Code of Conduct a good idea?
Consider the potential fallout that would occur if it was discovered that your suppliers are involved in modern slavery, bribery and corruption (among other unethical practices). It would not be a good look for your procurement processes and would likely lead to loss of business and a damaged reputation. If that doesn’t convince you, then consider the below points.
- Compliance requirements: Organisations are observing new compliance requirements, particularly in relation to ESG and sustainability. Some of these requirements require organisations to consider and report on their supply chains, such as with modern slavery reporting (see our article on navigating modern slavery risks here). A Supplier Code of Conduct assists you with meeting your compliance requirements by having your suppliers agree to a standardised code of conduct that is reflective of those requirements.
- External stakeholders: External stakeholders want to know about your ethical stance on certain areas. Clients are not just considering cost benefits when selecting a supplier, but they are also considering how the organisation treats its people, its conduct, and whether it has an ethical supply chain. Similarly, investors are also considering these questions. Implementing a Supplier Code of Conduct shows external stakeholders that you are committed to ethical business practices, and it may also provide you with a competitive advantage.
- Internal stakeholders: Employees also want to know that their employer is carrying out its business operations in an ethical manner and engaging suppliers of good standing. Failing to set ethical requirements and expectations within an organisation’s supply chain may cause concerned employees to seek employment elsewhere.
What form should a Supplier Code of Conduct take?
A Supplier Code of Conduct is generally a standalone document. It is usually accessed from the organisation’s website. To make the code binding on a supplier it can either form part of the supplier agreement or exist as a standalone agreement.
- Inclusion in supplier agreement: A simple method is to incorporate the Supplier Code of Conduct by reference in a clause and to provide a hyperlink to it. The Supplier Code of Conduct can also take the form of a schedule or attachment in the main supplier agreement.
- Separate agreement: You can draft the Supplier Code of Conduct as a standalone agreement for the supplier to sign. However, this is (generally) a more time-consuming approach, involving separate execution and maintenance of the document.
What should you include in a Supplier Code of Conduct?
There is no set proforma. The code should cover off the main areas of compliance and ethical risk for your organisation, industry and supply chain. Some common areas to consider include:
- Business conduct & ethics: A requirement for suppliers to comply with applicable laws and to carry out their operations in an ethical, fair and professional manner free from corruption, exploitation or contraventions of any law.
- People: A requirement to engage and manage their people ethically and to comply with all applicable laws, regulations and standards in relation to employment conditions, equal employment opportunity, and human rights.
- Anti-bribery & corruption: A requirement not to engage in acts of bribery and corruption and to comply with all applicable laws in relation to anti-bribery, corruption and prohibited business practices.
- Sustainability: A requirement to ensure good environmental performance through complying with applicable climate and sustainability laws, and to implement internal procedures in relation to managing adverse environmental impacts.
- Confidentiality & Privacy: A requirement for suppliers to maintain confidentiality in respect of the services that they are providing, and to observe all applicable privacy laws in relation to personal information.
What happens if a supplier breaches a Supplier Code of Conduct?
Where a Supplier Code of Conduct is legally binding (ie it is incorporated into a supplier agreement or is a standalone agreement), you should include remedies for breach of the code.
These remedies normally take the form of a right of termination of the supplier agreement for serious or persistent breaches, or a requirement for the supplier to rectify the issue to your satisfaction for minor lapses or unintentional breaches. You should draft the clause to make either remedy available at your discretion.
Charting an ethical course
Putting in place a Supplier Code of Conduct is an effective tool to manage compliance and ethical risk within your supply chain. Importantly, it shows both external and internal stakeholders that you are engaged in charting an ethical course with your suppliers. We trust that this article has set out the strong merits of having a Supplier Code of Conduct in place.
Further information
If you need further guidance on Supplier Codes of Conduct, or business & human rights matters, please reach out to your KWM contact or Edwina Kwan and the Business & Human Rights team.
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