The Ethisphere 2021 World’s Most Ethical (WME) companies awards and reports are out. Over the next few posts, I will be examining these reports and information. We will look at three reports issued in conjunction with the 2021 World’s Most Ethical Companies; leading practices on managing a global workforce effectively, leading practices on managing third-parties risks, and leading practices in effective training and communications in a compliance program. (All available here.) In today’s edition, I review leading practices on third party risk management (the Report). Most generally, the Report breaks that management into pre- and post-contract signing.
Third parties still present the highest risk in Foreign Corrupt Practices Act (FCPA) enforcement actions. Yet, engaging third parties can be an essential component of maximizing business opportunities. The Report noted, “Partnerships can offer cost savings, efficiencies, regional insights, and valuable business connections. In some geographies, partners are legally required for doing business. That said, third parties also present significant risks.” Moreover, “Compliance cannot stop at the four walls of the business. Leading companies expect the same level of integrity and ethical business conduct from third parties as they do from their own employees. Achieving that goal is top of mind for compliance teams.”
Third parties therefore present both opportunity and risk. This is all while the burden on third parties continues to increase. Erica Salmon Byrne stated, “It is interesting. We have been talking a lot about this internally in terms of why this is still an issue. The burden on third parties is tremendous and it’s largely because no one is consolidating and coordinating their diligence processes. The same is true around auditing third parties; for instance, what is finance asking? What is the sustainability and ESG team asking? What is the group responsible for modern slavery asking?”
Most companies understand the need for and perform risk-based due diligence before entering a relationship. In addition to being a Department of Justice (DOJ) expectation, it is a commercial necessity. Appropriate screening and vetting allows companies to make informed decisions about the suitability of a potential partner and mitigate, on the front end, any risks inherent in the relationship. The Report goes on to note that WME companies typically go beyond the basics by “taking a holistic approach and focusing on a broad, inclusive set of risk factors, including data security, labor, human rights, the environment, and social responsibility—issues that are increasingly important to both internal and external stakeholders.” In the age of social media, the reputational risks are exponentially increased.
In addition to more enhanced and a holistic approach to due diligence, companies are finally waking up to the fact that the real work starts only after the contract is signed; that is, you must manage the relationship. Today, due diligence and the contracting process are only first steps in the life cycle of a relationship. The Report stated, “Third-party risk management cannot be put on the back burner after the onboarding process, and in fact we are seeing more companies pivot to focus more resources on post-contract management and oversight. The need for deeper, systematic engagement after onboarding has become more urgent as third-party networks have grown in complexity. Relationship duration is another factor to consider. Many business relationships are long term and risks change.”
One area which both innovation and improvement was around communications to and training with third-parties. WME award winners “have made communication part of the regular course of business with any partner that could pose a material risk. In addition to that, six in ten go further and provide them with ethics and compliance training assistance and resources.” Byrne stated, “we saw a lot of companies who are taking their training to some of their key third parties, while delivering training to their employees in the region. They are inviting some of their key third party contacts to be a part of that training process. Other companies are making some of their reporting functionality available to their third parties.” Byrne said it is all in an effort to “increase the ability of the third party you are working with to follow the contract terms.”
While there have not been significant advances in auditing of third parties, there has been an uptick in ongoing monitoring. WME companies are assessing whether their third parties have the “capability and controls to meet the ethics and compliance requirements in their contracts for at least some risk areas. This provides the company with a more complete picture than simply relying on due diligence, and it allows the company to get ahead of issues that could escalate into serious problems affecting profitability and reputation.”
Byrne noted that some of the areas WME companies are looking at include reseller contract levels, using contract volume monitoring to keep an eye on some of their resellers and distributors in foreign countries. Other companies are monitoring billing and payments around round dollar amounts. This type of monitoring is increasingly being enabled by the technology, which she said, “is really exciting thing to see. The technology is starting to enable some very exciting advancements on the monitoring side.” Another area of management after the contract is signed is through a “deeper engagement emerging in formal third-party performance evaluations as well. More than one-third of honorees use a “score card” or other written evaluation tool that specifically includes ethics and compliance criteria. Another 55 percent say ethics and compliance is a topic of discussion during the evaluation. Looking at the full picture of a partner’s performance reduces risks, of course, but it also drives improvement in the relationship.”
Much of the information in this year’s WME awards and reports will be discussed in Ethisphere’s 2021 Global Ethics Summit, which will be held virtually April 13-15. Readers of this blog will receive a 15% discount to Ethisphere’s Global Ethics Summit For more information and registration details click here. Use the code tomfox15 for your discount.
Join us tomorrow where I continue my exploration of the 2021 WME information with Erica Salmon Byrne, Executive Vice President and Chair of Business Ethics Leadership Alliance (BELA), Ethisphere, as we take a deep dive into leading practices on training and communications.
[View source.]
