An issue that is coming up more frequently in the context of vendor relationships is whether or not the purchaser should insist that its vendors and other parties involved in the supply chain process should be subject to specified elements of the purchaser’s own global compliance rules and procedures. It is clear that with increased use of rapid communications technologies and sophisticated logistics tools, companies are becoming more dependent on the skills and actions of outside firms and persons who are not their employees. As such, it is understandable that companies may be concerned about whether their domestic and foreign partners are adhering to ethical principles and obeying applicable laws. However, before extending the scope of their compliance programs to their suppliers companies must carefully evaluate the legal consequences associated with that decision, including the possibility that they will be held responsible for liabilities arising from supplier legal problems, and also consider possible adverse impacts to their image and reputation.
Potential legal liability for the conduct of others, including firms in the supply chain, may be based on a variety of common law theories, court decisions and statute-based rules:
Companies are increasingly vulnerable to expansion of common law principles of “respondeat superior” that could lead to liability for actions of suppliers who are deemed to have become “agents” of their customers by virtue of the duties that they undertake and the benefits derived by their customers.
Liability for illegal actions of third parties may occur under the Foreign Corrupt Practices Act of 1977, which makes it unlawful for a company to make a payment to a third party while knowing that all or a portion of the payment will go directly or indirectly to a foreign official for the purpose of influencing the official in his decision-making capacity.
The Sentencing Guidelines for Organizations (the "Guidelines") have attempted to create real incentives for corporations to establish and maintain an "effective compliance and ethics program" as a way to identify and respond appropriately to misconduct and mitigate sanctions for such misconduct that might be imposed by governmental agencies. In its definition of what constitutes an effective compliance program the Guidelines call for (i) communicating company compliance standards and procedures to agents and providing training therein to agents about their roles and responsibilities; (ii) establishment of a publicized system that allows agents of the company to report misconduct anonymously or under protection of confidentiality; and (iii) encouragement by larger companies to their smaller business partners that such partners implement their own effective compliance and ethics programs.
The Sarbanes-Oxley Act of 2002 effectively requires audit committees of public companies to establish procedures for confidential, anonymous submission of concerns of accounting-related misconduct that are broad enough to be known, and accessible, by non-employees.
The voluntary Guidelines for Multinational Enterprises promulgated by the Organization for Economic Cooperation and Development includes a strong recommendation that companies actively encourage their business partners, including suppliers and contractors, to establish and adhere to principles of corporate conduct that are consistent with the Guidelines.
In addition to these specific legal considerations companies are also becoming increasingly sensitive to how the business practices of their partners, particularly foreign vendors, may reflect on how they are perceived by regulators, customers and investors. For example, US companies have come under strong criticism when it is disclosed that they have used overseas suppliers that have used child and/or forced labor in their manufacturing activities on behalf of their US customers. In light of how the business conduct and practices of third parties can expose companies to legal liability and/or have an adverse impact on their image and reputation it comes as no surprise that they are considering and implementing various strategies for making sure that the rules and principles in their corporate compliance programs are applicable to their business partners (i.e., suppliers and contractors performing various activities such as customer service and maintenance). I’ll describe some of those strategies in my next post.
The content in this post has been adapted from material that will appear in Business Transactions Solutions (Fall 2008) and is presented with permission of Thomson/West. Copyright 2008 Thomson/West. For more information or to order call 1-800-762-5272.