Corporate governance is a system of rules, processes, and practices that create the framework for fulfilling a company’s mission, goals, and objectives. -BY Andrew Hale

As a framework, it supports the desired organizational culture, determines internal controls and performance measurements, and drives action plans. It is also a significant factor in how suppliers are selected, engaged, and utilized to achieve corporate goals. Effective governance begins with the board and executive level, but it also ensures that leaders throughout the organization at all levels adhere to policies put in place. As it impacts the supply chain, the governance policies drive the key supplier relationships that are critical to reducing risks and supplier diversity. The challenge is developing a governance framework that does not leave the possibility of undetected gaps developing.

Setting the Corporate Tone Through the Governance Framework

The Corporate Governance Institute named five building blocks of excellent corporate governance. They are board architecture, effective leadership, composition, culture, and systems. To understand the relationship of governance to strategic supplier engagement, consider what these building blocks encompass that might impact internal and external relationships. Board architecture includes determining what the board decides, which means the board sets the tone and influences the culture. Effective leadership influences through connectedness, communication, ethical behavior, and a high degree of emotional intelligence. Composition includes ensuring appropriate diversity, independence and objectivity. Culture consists of a shared sense of purpose, transparency, advocacy, supportive leadership, accountability, pride in affiliation, and stewardship. Systems includes reporting systems, risk management, financial management, regulatory and compliance controls, and internal controls.

The board sets the tone and expectations for the organization, the executive leadership sets the goals supporting the organizational mission and ensures the governance structure, standards, and tools are available to succeed in meeting goals, and managers and supervisors implement the procedures and processes.

Governance drives organizational relationships with internal and external people. The key suppliers in the supply chain are critical to organizational success, so governance directly impacts supplier relationships and diversity. An effective governance framework reduces the chances of both inconsistencies and failure to implement management policies intended to reach goals. An ineffective governance framework can reduce trust, lead to missed innovation opportunities, fail to achieve supplier diversity goals, harm environmental sustainability efforts, and allow conflicts to remain unresolved.

Governance Framework Supports Accountability

The many discussions on why so many companies still need to meet diversity commitments in the workforce and supply chains or environmental sustainability goals inevitably conclude that lack of accountability is the culprit. Yet, a lack of accountability reflects a gap in the governance framework. Simply stated, organizational leaders are not held accountable for failing to adhere to board and executive-level policies and processes. This could be intentional, but in many cases, it is due to a lack of a feedback loop enabling accountability.

For supplier diversity policies to succeed, organizational governance must support the full implementation of practices. The governance framework provides the incentive structure for increasing diversity in the supply chain, the type of relationships developed with key suppliers, and the metrics to track performance. When the organization does not provide adequate resources to supplier diversity programs and does not hold internal buyers accountable for supporting supply chain diversity, implementing and sustaining progress easily leads to missed goals. It also sends a message that the organization is not committed to diversity in the supply chain, which also means weak support for meeting goals in assisting underserved communities. Supplier relationships are weakened because the organization’s culture does not fully support inclusion.

In another example of the role of governance, the organization may commit to environmental sustainability but not hold supply chain managers accountable for developing the right supplier relationships. Researchers writing for the Journal of Business Ethics say, “To fight climate change, firms must adopt effective and feasible carbon management practices that promote collaboration within supply chains.” After surveying 345 companies in the Carbon Disclosure Project, the researchers found, “The results indicate that companies that integrate climate change into their strategies and are involved in developing environmental public policy are driven by moral motives to engage their suppliers and customers in carbon management.” Moral motives include “integrating climate change into the company’s business strategy.”

Supply Chain Governance

As mentioned, the organization’s governance framework embraces several factors intended to guide decision-making down the management structure, the allocation of resources, and people management. Included is supply chain governance. The organization’s governance framework should support corporate values, transparency, collaboration, technology investments, and accountability - and these elements should also be found in supply chain governance. The organization’s governance structure is reflected in the supply chain’s governance structure. What does this mean?

As Logility, a digital supply chain platform, explains, good supply chain governance is not supply chain management which is concerned with operations and strategic coordination of partner actions. Supply chain governance is concerned with integrating the “coordination of operations and ensures that the proper policies are implemented and controlled. It means taking intentional actions to affect partner relationships. Supply chain governance creates leverage and scale, helps manage risk, increases bottom-line profitability, and conforms to your regulatory, social, and environmentally friendly company agenda.” The key components are working collaboratively to plan, establish, and communicate policy guidelines, performance expectations, assessing risks, risk mitigation plans, and compliance metrics. Governance also includes providing visibility into supply chain expenditures, planning and executing initiatives incorporating governance values, and tracking, auditing, and reporting initiatives and key governance measures internally and externally.

To build a sound supply chain governance framework, identify the core elements of importance, such as transparency, accountability, collaboration, organizational and environmental sustainability, ethical management, and supplier diversity. Identify the oversight responsibilities at the board and executive levels and ensure reporting processes deliver the required information. Develop the bridge between the governance framework and operations by defining role responsibilities, reporting lines, accountability, and communications strategies that deliver regular feedback to the board and executive level, and back to operational managers. This process is repeated to develop a supply chain governance structure within the organization’s governance framework.

Getting the Building Blocks Right

Getting the building blocks of governance right ensures the right organizational culture is maintained and supports operations with guiding principles and processes that keep the organization on track to achieve goals, whether these are increased supply chain diversity, improved environmental sustainability, or any other strategic focus. It may require a complete overhaul of the corporate governance infrastructure for some organizations, but the effort can lead to a new level of organizational resilience.