Balancing sometimes personal business relationships and an ethical approach to procurement demands transparency
For a high-profile example of a conflict of interest, look no further than the US presidency. A report by US think tank Public Citizen has accused President Donald Trump of “unprecedented conflicts of interest”, with 64 trade groups, foreign governments, Republican candidates and others staying at or holding events at properties linked to President Trump during his first year in office. Other reports claim the Republican National Committee spent $271,000 – 86 per cent of its venue and catering expenditure – at Trump hotels in one month alone.
Where an organisation chooses to spend its money can all too easily slip into conflict-of-interest territory. Buyers need to be on their guard. Businesses are built on relationships, but what happens when relationships are so close that rational judgment is clouded and what is procurement’s role in preventing a misstep from turning into a public relations disaster?
What qualifies as a conflict of interest?
Rob Handfield, Bank of America university distinguished professor of supply chain management at the University of North Carolina, sums up a conflict of interest as “when you take care of your needs as an individual above those of the organisation”. “The question is: is [something] influencing you to make a decision you wouldn’t make otherwise?” he says.
According to experienced procurement professional Kurt Warren, associate director at NYU Abu Dhabi, there are four areas of conflict of interest to be aware of: the giving and receiving of gifts, family and personal relationships, investments, and the use of company resources. “Why it falls over is because people don’t really understand what a conflict of interest is, what’s permissible and what’s not,” he says.
People don’t really understand what a conflict of interest is, what’s permissible and what’s not
At more mature organisations, there should be multiple safeguards and governance processes in place. For example, says Ian Bolger, vice president at procurement consultancy Efficio, multiple levels of sign-off and a sourcing council or contracts committee, connected to the board, which approves all types of contract above a specific level or of a certain type. “Dual responsibility is critical,” says Mr Bolger. “No one person should be able to navigate all the way through.”
Preventing the formation of risky relationships
Some organisations go further. Founder of procurement consultancy The Fivis Partnership, Jens Hentschel used to work at consumer goods giant Procter & Gamble (P&G), where procurement employees were moved every couple of years, to avoid the development of inappropriate relationships. “It was frustrating for suppliers, but it did avoid those conflicts of interest,” he says.
More often though, Mr Warren points out, the potential ethical misstep will not be coming from procurement. “It’s usually not the buyer with the conflict of interest, as they are in the middle,” he says, adding that in his world “engineers love to use their friends”. “The role of the buyer is to say ‘that’s not our policy, that’s not ethical’ and make sure the checks and balances are there.”
This can be a tricky line to walk. “It’s common for CEOs to say ‘I want to go with my buddy’,” says Professor Handfield. “Some are very good at getting to know executives on the golf course and bypassing traditional tendering. The good CEO would say they have to run it through the regular channels.”
Not doing so can be damaging to an organisation’s reputation, thanks to media attention and increasing public interest in business transparency and ethics. According to the Edelman Trust Barometer, only 43 per cent of the public trust businesses in the first place.
Mr Hentschel says at P&G the million-dollar question was: “Would you feel comfortable if what you’re doing was published in The New York Times? If not, you probably shouldn’t be doing it.”
Procurement’s role in conflicts of interest
Lack of objectivity in the tender process will also most likely not lead to the best outcome for the organisation. Mr Hentschel says it drives complacency, as suppliers feel assured of business, while Mr Bolger notes it limits innovation and lessens the chance of getting the best deal.
For startup organisations that are growing organically, things may be less straightforward. Professor Handfield says: “It’s fuzzy as people are often wearing multiple hats.” The key is to share information. “Tell someone else what you are planning to do,” he advises. “Be transparent in your actions.”
Mr Bolger agrees it’s a balancing act. “When you’re running a small business, it’s about networks and agility, and it’s your rules,” he says. However, startup founders have often taken risks and are aligned to wanting the best outcomes for their firm, he adds. Having skin in the game provides natural constraints.
Procurement’s role is to maintain the ethical compass of the company and their own moral compass
Where things have to change is once investors come on board. “When there’s third-party investment, there has to be that duty of care to make sure leaders are making the best decisions,” says Mr Bolger, who often works with startups once they have received funding, helping them professionalise their procurement processes.
He cites a current example where an individual is doing all the high-value deals and there are lots of handshake agreements. “That might have been right when the business started, but not once it has reached a certain threshold,” he says.
“Procurement’s role is to maintain the ethical compass of the company and their own moral compass,” says Mr Warren. But there will often be shades of grey. As Mr Hentschel concludes: “Business is always about personal relationships and, as procurement professionals, we need to be aware of this.” The key is managing it in as transparent a way as possible.