There is a known theory among economists called the ‘trickle-down economy’. Pretty much every state and federal government since the Reagan administration has used some form of trickle-down economics to drive their economies.
An example of the theory is tax cuts to corporations stimulating the economy. Companies can invest what they have saved by paying less tax into further growth, development, salary increases or capital investments. The benefits ‘trickle down’ to the rank-and-file employee, putting more money in the hands of employees, suppliers and consumers, and driving the economy further from a consumption perspective.
The ‘trickle-down’ idea is also used in other forums. It is a concept that can be used when a change at the top can trickle down to those at the other end of the chain, where the impact of the change will be far greater.
While there has been much argument as to whether or not trickle-down economics actually works, we at Speeki believe that trickle-down concepts can be used in compliance and to drive behavioural change across businesses.
The concept of trickle-down compliance is not new. Almost every contract written by a major company pushes the other party to adopt and comply with obligations that they might otherwise not have a legal requirement to comply with. These contractual provisions might be for a supplier or partner to agree with the adoption of the company’s code of conduct or to comply with laws like the Foreign Corrupt Practices Act (even if the supplier is not based in the United States and the law does not apply to them).
The last few years has seen a significant change to the approach to pushing down obligations to suppliers and partners. These obligations have now gone far beyond a requirement to follow a law (which may or may not otherwise apply to that supplier), and now include obligations arising from policies. Companies regularly try to push down obligations around their own diversity policies, HR rules, reporting obligations, use of certain compliance reporting tools, and the requirements to have compliance programmes in place.
Why are companies including these obligations in their contracts?
The inclusion of push-down obligations in contracts is becoming more common simply because companies are being held responsible for the actions of their suppliers and partners. While the laws (and the governments that create and regulate those laws) may not be piercing the corporate veil and holding companies accountable for the conduct of their third parties, the court of public opinion and the media certainly are. There is an increasing risk that members of the media and users of social media will ignore the corporate-veil principles and hold companies accountable for the acts or omissions of their suppliers, irrespective of fault. The adage that ‘if your logo is on the front of it, you are responsible’ is certainly playing out in the views of the community.
Does trickling down obligations through to suppliers work?
A supplier is unlikely to follow 100% of their contracted obligations and actively adopt and report out on compliance.
In many cases, contractual requirements are there for the company to rely on in case they want to terminate the arrangement – the requirements are not there as a true trickle-down initiative that the company genuinely wants to be effective. To the company, the inclusion of the trickle-down obligations into the contract is ‘compliance’ and they have no intention of following up, checking compliance, or actively driving the supplier to adopt such standards – they are just ticking a box because they are required to ‘pass on obligations to suppliers or other parties’.
Most trickle-down compliance is actually focused on an attempt to shift risk rather than an actual interest in improving the compliance programmes of the contracting party.
Should companies use trickle-down compliance, and is it an alternative to regulations?
Trickle-down compliance can work when it is done with the clear intention to improve compliance of those further down the chain – not to shift risk.
Most governments have failed to pass and/or actively enforce laws around pending global issues, which has left a void that companies are trying to fill. In fact, we still do not have laws that actively regulate (and punish companies for failures surrounding) workplace equality, human trafficking, sustainability, carbon usage, whistleblower protection, compliance management and reporting, or ethics and integrity.
While big global companies can regulate themselves (and will be regulated by the media and by their customers), this is not the case for most small and medium businesses. Even if laws do exist, they are poorly enforced.
Push-down compliance, if done correctly, can drive better adoption of standards (even in the absence of a law or regulation) around many compliance and ESG issues. As stated above, trickle-down compliance has been practised for years by in-house lawyers in the drafting of contracts (they just did not know that they were doing it as it was more about shifting of risk). The problem has been that there has been little to no enforcement, and the standards themselves have been vague and imprecise. If companies practice trickle-down compliance correctly and do so progressively, with the right aims and objectives, enough time for those down the chain to transition to compliance, clear and consistent standards and fair enforcement, then there is a great opportunity to improve global compliance across a range of issues.
Five obligations that you could trickle down to drive compliance
- Having someone own compliance and be accountable for it using a known and respected framework for compliance such as ISO 37301
- Having a compliance reporting system with independent and anonymous reporting options in any language from any device
- Meeting certain ESG targets and obtaining and maintaining a rating or certification
- Meeting strict anti-corruption standards and following a standard like ISO 37001
- Ensuring that each obligation has trickled down to the next step in the chain
Five steps to get trickle-down compliance right
- Stop using trickle-down compliance as the shifting of risk to another party
- Use trickle-down compliance to drive up standards and drive consistency across the entire chain
- Allow time for people down the chain to adopt compliance with the trickled-down obligation
- Focus on behavioural change and the cultural change in your trickle-down communications and show the value of change to the recipient
- Actually follow up, validate, check and audit for compliance and ensure that the trickle down is working