In today’s global economy, a company’s supply chain is more important than ever. Historically, companies have outsourced portions of their business in order to see improvements in efficiency, pricing and quality.

But now, businesses face legislation, court cases and non-government organization initiatives regarding behaviors of business partners. At this point, more than efficiency is at stake. It becomes a matter of reputation.

Whether it’s the risk of bribery and corruption, or concerns about treatment of workers, factors up and down the supply chain can have a profound influence on how a corporation is viewed by the public.

Bad reputation?

Baker & Mackenzie recently published a study, “The Companies You Keep: Global Supply Chain Management: Five Steps to Managing Third-Party Risk,” which explored the link between supply chains and reputation management.

This focus on reputation was a bit of a surprise to the firm, according to Nick Coward, chair of the Global Trade and Commerce Practice at Baker & Mackenzie. “What emerged from the survey, topping all and equal to product quality, was compliance issues,” says Coward. Companies were concerned with “risks that were associated with companies that were bad actors. That could be corruption or bribery risks, or entities that have been placed on restricted party lists because of association with sanctioned countries or financing terrorist activities.”

But there is a flipside to the supply chain/reputation equation. Some companies, of course, have faced public relations disasters as a result of bad news somewhere along their supply chain. Take, for example, the widely publicized suicides at the Foxconn manufacturing facilities in China. These tragedies cast a long shadow on a number of technology companies that used the facilities.

While it is clear that a supply chain problem can harm a company’s reputation, proper supply chain management can actually improve a company’s reputation, points out Ashley Watson, senior vice president, deputy general counsel and chief ethics and compliance officer at Hewlett-Packard.“When we engage with a supplier in a particular area and give them a big contract, we give a boost to that area,” Watson explains. “There is an economic boost that comes from the supply chain. We can contribute by hiring suppliers, and that helps our local reputation.”

She says that HP considers both sides of the equation, weighing the positive more than the negative. “The motivation in the supply chain is less about avoiding a bad headline—there is some of that, but it doesn’t drive what we do. There is a positive impact on communities where we work.” She also points to the economic benefit of this positive impact, pointing out that workers who are happier at their jobs are more efficient, and this positive energy feeds on itself, making for a better business model.

Sources of risk

The truth is, most companies have placed risk issues in a silo, with legal specialists who are focused on one area only. Coward points out that businesses need to move past this, taking a look at how each aspect of supply chain management fits into the company and how individuals with varying expertise can work together to reduce risk.

With supply chains that can stretch over thousands of miles with dozens of individual players involved, there are, of course, a number of potential risks that companies can face. One factor that can have a large impact on risk is geography. “As it happens, a lot of the countries that have the best economic features in terms of getting good product for less money happen to be in countries where corruption is a big issue,” says Coward. “India and China, two of the largest centers for outsourced activity because of the benefits of cheap labor and a well-educated population, are sources for a great deal of corruption concern.”

Watson acknowledges that many companies focus on corruption in the supply chain, but she feels that treatment of workers is a bigger area of risk, at least as far as HP is concerned. Still, no matter what the specific concern, companies need to take a close look at each region in which they operate and create a set of internal processes that address the major forms of risk.

Corporate responsibility

Experts recommend several keys to managing supply chain risk, focusing on responsible choices that business leaders can make in order to minimize risk and maintain a strong reputation.

Coward identifies five steps that companies should take in order to nip supply chain risk in the bud. These steps include: vetting companies in the selection process, providing structure and documentation, training and education, monitoring and evaluation, and proper reaction to any problems.

According to Coward, the process starts with considering the general business environment and specific concerns in the industry and geographic region, and then looking closely at the practices of potential partners. He stresses creating agreements with appropriate compliance clauses that include auditing provisions. Training and education is paramount with supply chain partners in the same way it is important with internal staff, and the same goes for monitoring and evaluation.

Finally, he says, “How you react to and remedy a situation if and when something goes wrong is important. You may have a legal obligation to respond and you can’t stick your head in the sand. If the unexpected happens, you have to be sure you are not scrambling.”

As companies evaluate their supply chains to ensure compliance and responsible behavior up and down the line, it may seem like they are making decisions solely based on regulatory guidelines or ethics. But, as Watson points out, making ethical decisions does not mean sacrificing smart business moves.

“One of the toughest issues that companies face is the question about the need to pay a living wage. What is a living wage? Who decides? When is it a societal obligation to pay a certain wage and when do we let the free market reign?” She asks. “In places, we have insisted on workers in our supply chain being paid more than the minimum wage. It’s a combination of the fact that it is the right thing to do, but it offers a cost savings in the end. There is less attrition and workers tend to work better.” This, then, is when ethical and business best practices come together.

In the end, perhaps the most important term that companies can keep in mind in regard to their supply chain and reputation is transparency.

“Transparency is important because the reality is, for public corporations, our brand is the most important thing to us. What we report on impacts what we do,” says Watson. “Since no business can ensure that it is ever free from controversy, companies should be clear about where their challenges are and what they are trying to do to fix them.”

In the end, honesty may be the best public relations move of all.