2014 Trends: #1 Third party risk – still the ethics and compliance ‘Achilles heel’

by NAVEX Global
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As we embark on 2014, we’ve pulled together key ethics and compliance industry trends with an eye towards planning for the year ahead.

To help, we’ve asked industry experts, our colleagues at NAVEX Global and ethics and compliance officers from across our more than 8,000 clients to identify key events and topics from 2013 that will likely have an impact on ethics and compliance in the months ahead – and what you can do to prepare.

Our complete list has been gathered into our annual trends whitepaper, but we thought we’d share a bit from each of the trends we covered in the whitepaper over the next few days on our blog.

#1: Third party risk – still the ethics and compliance ‘Achilles heel’

The first, once again, is third party risk – and it’s number one again for several reasons:

  • Baseline screening of all your third parties, along with enhanced due diligence have become the “new normal.” The public – including investors, but also employees and consumers - are increasingly demanding transparency and corporate social responsibility throughout the manufacturing and distribution process.
  • Tragedies, such as the Rana Plaza factory collapsein Bangladesh, galvanize public opinion and human rights organizations worldwide to keep up pressure – especially on retailers and manufacturers.
  • The most recent figures from the U.S. Department of Justice (DOJ) show that over 90 percent of its anti-corruption actions involved a company’s use of third parties.
  • The proliferation of guidelines and requirements is accelerating. Consider, for example, the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.
  • One sign that the new normal is here to stay: the Wall Street Journalreported that, sensing continued demand, “more than a half-dozen universities have recently introduced undergraduate majors, M.B.A. concentrations and even entire degree programs dedicated to… global supply-chain strategy.”
  • To underscore the need for action, a recent survey conducted by NAVEX Globalfound that only 36 percent of respondents track information on their most critical third party relationships and an additional 35 percent do not track third party information at all.
  • Finally, in an independent 2013 study of more than 300 ethics and compliance senior executives conducted by a global market research firm for NAVEX Global, more than 25 percent of respondents indicated that their budget to address third party risk would grow by 20 percent or more in 2014 – the fastest growth area of all ethics and compliance solutions.

Every company, and especially those with global supply and distribution networks, needs to assess the adequacy of its third party risk management systems. Unfortunately, many companies are inconsistent in their application of standards or they rely on manual processes that are time consuming, difficult to audit and lack the ability to be benchmarked for industry comparisons.

Given the pressures placed on organizations to know and understand the risks posed by all their various – often thousands – of third parties, in the coming year it’s prudent for companies to consider implementing a system with standardized questions for third parties together with automated systems for processing responses, generating auditable reports and flagging third parties that require follow up attention. In addition, companies should also consider the following steps:

  • Assign managers within your organization with the responsibility to ensure that third parties are aware of their responsibilities and your expectations.
  • Make your code of conduct available to third parties and consider ways that you can assist your business partners in developing or accessing relevant training and other ethics and compliance resources.
  • Collect due diligence results about your third parties from across your organization for review and ongoing assessment.
  • Ensure that you’re continuously monitoring your third parties for red flags; there’s no credit given for an issue found the day after you performed your due diligence.
  • Do a baseline assessment of all third parties (entity identification, financial background checks, sanctions and watch lists checks, media and reputation audits, adverse affiliations or involvement with politically exposed persons (PEPs), and then concentrate more intensive diligence on those organizations presenting higher levels of risk.
  • Be specific in contracts regarding ethics and compliance requirements and ensure that your contracts allow you to periodically audit third parties on a schedule of your choosing.
  • Have a specific process for onboarding third parties as part of potential merger and acquisition activity.
  • Hold third parties accountable if they do not meet their responsibilities.

Stay tuned for trend #2, navigating the myriad anti-corruption and bribery laws, later this week.  Also, feel free to download the whitepaper for the whole list at any time.

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