Extending Compliance Programs to Suppliers Part 2


Extending Compliance Programs to Suppliers Part 1 introduced the important topic of extending compliance programs to suppliers and provided suggestions for drafting key elements of a supplier compliance program including ethics guidelines in connection with procurement activities and a social and environmental responsibility policy for suppliers that can be used as a de facto checklist for the due diligence that company personnel are expected to do before entering into a relationship with a new supplier.

However, while imposing compliance standards on partners in the supply chain seems to make a lot of sense, and may have actually become a mandate to fulfill specific legal obligations, a word of caution is in order for those companies adopting such an approach.

One obvious potential problem, especially with suppliers in remote foreign countries, is making sure that adequate resources are invested in actual monitor of supplier activities and enforcement of the standards set forth in policies and supplier agreements. One of the reasons for including third parties within a compliance umbrella is the ability to represent to regulators, customers and investors that the company is indeed a good "corporate citizen" and deals only in goods and services that have been produced in accordance with the highest legal and ethical standards. If it turns out that their vendors fail to follow those standards the company runs the risk that its own reputation will be tarnished, particularly if it can argued that the company did not adequately monitor a vendor's activities.

It is important therefore for companies to use their contractual audit rights and take other reasonable steps to monitor their suppliers including regular visits to supplier facilities to observe the effectiveness of the supplier's efforts to adhere to labor and environmental standards (for an example of audit procedures, see Gutterman, Business Transactions Solution section 37:153.30).

In fact, failure to do so might even be perceived as a breach of an unexpected duty to a third party such as a customer injured by products provided by the supplier or even employees of the supplier. Potential problems of this type should be managed by including language in policies or supplier agreements that expressly deny that anything therein is intended to create duties to and rights in favor of third parties.

The content and conduct of the audit process should be driven by objectives standards for suppliers that set out basic expectations with respect to fundamental issues such as voluntary labor, labor hours, hiring and employment practices, compensation, freedom of association and collective bargaining, dormitories and canteens, and the environment. See Gutterman, Business Transactions Solution section 37:153.70.


Alan S. Gutterman is the founder and principal of Gutterman Law & Business (http://www.alangutterman.com), a leading provider of timely and practical legal and business information for attorneys, other professionals and executives in the form of books, online content, webinars, videos, podcasts, newsletters and programs that also offers legal and training services to businesses of all sizes around the world. Mr. Gutterman has three decades of experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company. All editions of the Business Counselor Advisor are compiled into Business Counselor Update, which is released monthly and available along with other publications by Mr. Gutterman on the Thomson Reuters Legal Solutions site and through Westlaw Next at Business Counselor. Mr. Gutterman can be reached at [email protected]