Ethical Principles and Challenges in Procurement Management

Ethics in Purchasing/Procurement, Acquisitions (Contracting) Management

This paper looks into the concepts of responsibility and accountability, and procurement beneficence, through a review of the challenges and principles, which are often faced in the procurement process, by purchasing managers, staffs and suppliers, in both private and public institutions.

There are 2 basic definitions of ethics. The first is that ethics are moral principles that influence conduct, and the second is that ethics is a body of knowledge on moral principles.

Ethics is the grounds upon which almost all purchasing-related principles, including honesty, transparency and fairness, are based. There are several ethical standards that should be maintained in every organization, regardless of whether it is private or public. The standards are that every employee should commit to:

Conduct themselves in an honorable manner in all dimensions of their career activities.

Behave in a way that will ensure that trust and confidence is maintained in the integrity of the procurement process.

Not to undertake any "clever" actions that are meant to take unwarranted advantage of the process.

Always report and avoid situations that bring about conflict of interest ( Interagency Procurement Working Group (IAPWG), 2012).

Procurement is the main link that facilitates the ownership, and later, disposal of both products and services, thus, it is the ingredient necessary for running both public and private organizations efficiently. Thus, to implement green procurement processes, which are based on Ethical codes of conduct, the following three elements should be considered: ethical sourcing, ethical procurement and ethical purchasing (Graafland, 2002). The use of the term ethical purchasing in this paper covers procurement, sourcing, and purchasing. Ethical purchasing in this case simply means the acquirement of products and services in a manner that is responsible, and that takes into account the conditions surrounding the way the products and services are produced and brought to the organization, and a mechanism for promoting enhancements (Mamic, 2005). When organizations utilize contracting as a way of acquiring goods and services for their firm, there may be concerns brought about by the entity the firm is dealing with. Thus, there is a need to conduct the procurement process in a manner that is ethical so as to address these concerns (Mathenge, 2012).

In the recent years, there has been an increase in interest in procurement and supply chain management. This has led to several business practices that are not ethical and violate the set codes of conduct. For example, the execution of tendering processes in a manner that is not transparent, allows suppliers to have opportunities to gain consideration by giving bribes so as to gain favor from those involved in awarding the tender (Huang, 2008). According to researchers Gray et al. (1997), if the process of procurement is conducted in a manner that is responsible, transparent, fair, and accountable, this could have a positive effect on the company's performance, and also the confidence of its stakeholders. However, such a positive effect cannot be achieved without implementing ethical principles and codes of conduct (Gichure, 1997).

The rest of the sections in this paper look into the following areas: codes of conduct, ethical theories and principles, the challenges involved and the possible risk areas in the procurement process, and how to incentivize compliance to the codes.

Codes of Conduct

Businesses and professional bodies usually attempt to address the issues of conformity to standards via the adoption of codes of conduct. However, the majority of the codes of conduct are often worded in very wide conceptual terms, instead of situational terms specific to the profession. Thus, such professional codes of conduct are often ambiguous and leave plenty of room for misinterpretations. Practitioners in the field of procurement should not just stick to the wording of the ethical codes, but instead, their conduct should be guided by the broader meaning of the terms expressed in the codes. It is also known that quite a number of organizations involved in the procurement business avoid having specific / detailed codes since they think that such codes may not be exhaustive, leaving a lot of room for misinterpretations. Not having such specific codes also enables these companies to avoid situations, whereby, professionals form other fields to disregard an issue, since it has not been captured in the code, not realizing that perhaps the issue is critical to the procurement process. Those who are not aware of the general requirements may be unable to apply the code to different specific situations. It doesn't matter how creative and exhaustive policymakers attempt to be, they will always not be able to fully capture and specify everything related to procurement. Thus, it is important for those involved in procurement to understand the broader context or the spirit of the law ( Interagency Procurement Working Group (IAPWG), 2012).

Ethical Principles in Procurement

Transparency, Confidentiality and Fairness

Acquisition processes should always be as transparent as can be, within the business and legal boundaries. This entails being open with all stakeholders, so that each and everyone, particularly suppliers, become aware of the components of the process (timescales, requirements, selection criteria, procedures and expectations). In no circumstance should the confidential information provided by the suppliers be revealed to a third entity, or be utilized, without getting explicit consent from that particular supplier. To be more specific, such data shouldn't be revealed to other suppliers, who are in competition. This is especially important, in situations where a specification based on output, is being developed. Even though, it is common and acceptable to share ideas amongst the competing suppliers, so as to get the best solution for the business; the confidentiality of the information supplied should be maintained. Every person involved in the procurement process should be aware of the principles of commercial confidentiality. In no case should relevant data be withheld from the suppliers (unless it is a situation, whereby, the information has been acquired from another supplier in commercial confidence), or the individuals involved in the process give any misleading information. It is standard practice that when a supplier asks for something to be clarified in the purchasing and supply management process, all the suppliers who have bid for the project should be supplied with the information requested. However, in cases where the supplier asks a question that is insightful, such information shouldn't be given to all the others, since that may eliminate the supplier's competitive edge. Thus, every professional involved in the procurement process is not only expected to act professionally, but also to exercise his or her best judgment in every specific situation, and should seek advice if in doubt (CIP, 2007).

Integrity

Those involved in the procurement process are expected to have and to always conduct themselves in a manner that is moral and full of integrity. A procurement officer must cast aside his or her cultural differences, such as his industry, ethnicity or nationality. Principles of integrity that are not specific to any culture must be allowed to prevail, particularly, for procurement officers that are working in the global market. Thus, individuals such as United Nation's procurement officers should show integrity by:

Sticking to the principles contained in the UN charter.

Showing the values set by the UN, such as honest, impartiality, fairness and truthfulness in their day-to-day conduct and activities.

Acting without expecting anything in return

Not crumbling to unwarranted political pressure in their decision-making processes

Not abusing the power bestowed upon them by the UN

Taking immediate remedial measures in situations where there has been unethical conduct.

Due Diligence

Due diligence in terms of United Nations' procurement involves one acting in a manner that is careful and thorough. Due diligence necessitates that procurement officers should, in their professional conduct, go beyond minimum effort to carry out their responsibilities. For instance, diligent United Nations' procurement officers should:

Review the reference filed by the suppliers who have bid for the project

Be impartial in their selection criteria

Carefully consider all the bids submitted

Not take shortcuts for their own personal gains

Avoidance of the Appearance of Impropriety

In private organizations, appearances are often influenced by the standards set by the management of the organization. Employee behavior is assessed based on customer satisfaction and its legality. However, procurement officers that are involved in the international marketplace have to stick to more strict standards ( Interagency Procurement Working Group (IAPWG), 2012).

Ethical Issues in Procurement

Beneficence and Benevolence

The word beneficence is linked to kindness or mercy, and it implies altruism, humanity, or promotion of the good of other people. In practical terms, the concept of beneficence is quite broad; however, it is understood, in the ethical context, to involve all manner of action that is aimed at benefiting others (Arneson, 2004). The rule of beneficence is all about having a moral duty to act in a manner that will benefit others, assisting them to achieve important and legitimate goals, often by removing any possible obstacles. Many different aspects of applied ethics seem either directly or indirectly, to incorporate acts of beneficence in this dimension (Hurley, 2003). For instance, when clothes manufacturers are condemned for not having the best labor practices in their workplaces, the ultimate goal for such a situation would be to make the working conditions better, and to improve compensation packages for the employees. While, on one hand, beneficence is all about acting to benefit others, on the other hand, benevolence (a closely related term) refers to moral virtue of being inclined to behave in a manner that will benefit others (Gert, 2005). Normally, an individual acts in beneficence, out of a duty or an obligation, however, such acts may also be performed from voluntary, moral ideals, which are the standards that come from a morality of merit-based aspiration of organizations or individuals to adopt higher goals that don't hold for everyone. Exceptional beneficence is one that entails performing beyond the minimum standard, or what is required. Such acts may include: giving gifts, voluntary public service, quickly forgiving a friend's costly mistake, and/or accepting what others request you to do for a benefit, when what is being asked is beyond what one is bound by duty or to do (Mack, 2002).

Conflict of Interest

In many businesses, one of the biggest ethical issues in procurement is that of possible conflict of interest (Gomez, 1999). Procurement officers who end up buying goods or services from companies or individuals with whom they are related, leaving the company open to or risk overpayment for goods supplied, at best. Thus, a proper procurement management policy should provide a framework with the definition of what a conflict of interest is, and prohibit procurement of goods, where such a conflict exists. This would bring about ethical tendering, where the procurement process is transparent and its managers accountable, and also in which, the tender is ultimately awarded based on merit and fairness (Gray, Dey, Owen, Evans, & Zadek, 1997). Conflict of interest is one of the common risk situations. Ethics laws prevent government employees from having a conflict of interest, particularly, a financial one. By taking into account just a few fundamental concepts, one can help ensure that the tenders are awarded devoid of any undue influence or suggestion of impropriety (Denett, 2007).

Gifts and Gratuities

Offering clients gifts is quite a common business practice, particularly, in the private sector. Offering gifts is a marketing technique that is based on reciprocity: that is, if we get something, we feel duty-bound to give something else in return or exchange. Many suppliers frequently give different gifts, such as perishable goods, hospitality, exhibitions, free training, fair trades, or donations to activities that a specific UN organization is dealing in. Identifying secret gifts is not usually easy, particularly, during situations when some training activity being offered is seen as a benefit to the recipient organization. However, a thorough review of the impact of receiving such a gift should be considered. For example, the management of the recipient organization should ponder the question of whether accepting the gift would in any way benefit one supplier over others, or not? Or would accepting such gifts still allow for a fair bidding and awarding process? In instances where the programs of such training are found to be necessary, and that they will help the organization to further its causes, then the organization should by itself use its own funds to cater for the travel expenses ( Interagency Procurement Working Group (IAPWG), 2012).

Corruption

Procurement officers, who witness or become aware of any form of corruption, have the responsibility to their profession and to their employers, to alert the management or their elected officials, if there's an occurrence. Procurement officers in public organizations should not tolerate any kind of corruption. The various forms of corruption may include:

The act of bribery, which involves acts, such as the acceptance, promising, offering, or authorizing of any unwarranted financial advantage for, by, or to individuals, in the procurement process so as to obtain some advantage. Bribery often entails: (i) giving a part of contract payment back to relatives, employees, or business partners, or (ii) utilizing middlemen, such as consultants, subcontractors and agents to channel monies to government officials, or to relatives and partners.

The demanding of a bribe is referred to as solicitation, regardless of whether or not a threat was used. Procurement officers should strive to prevent cases of extortion and are encouraged to alert the management through any available forms of reporting mechanisms.

Trading in influence is the solicitation or giving of unwarranted advantage so as to exact some form of influence.

Laundering the proceeds of corruption is the hiding of illegitimate sources, location and disposition or change of hands of property, in the full knowledge of the fact that such monies and properties are of crime.

Nepotism is the utilization of influence or authority to favor friends and families who do not have merit (Principles And Practices Of Public Procurement, 2013).

Potential Areas of Risk in the Procurement Cycle

Some of the key areas of risk in terms of ethics in procurement are listed below:

Budgeting: Corruption and fraud must be funded from somewhere. Insufficient budgetary control mechanisms should be put in place. For instance, in cases where all the funds have not been budgeted, for a specific function, some of the other funds, without any specific use, could be used for corrupt practices.

Financial Policy: all financial policy should entail strict management and audit controls. One can misuse his own position or someone else's.

Perceived Need: there is always a need to closely scrutinize requirements as some of them can be falsified.

Specification Development: some people can write down requirements/specifications so as to favor a specific supplier. Specification clarification should only be provided to all invited bidders in the tendering process.

Selection/Evaluation Criteria: such criteria can often be written to suit a particular supplier, or even amended after receiving the bids.

Pre-screening: although this process is valuable in getting only the most suited applicants, it can also be used to give advantage to the favored supplier.

Invitation to Tender: this can at times be utilized to give the idea of competition, when it doesn't really exist. This is done by inviting firms that are unsatisfactory, or not giving all companies the complete requirements.

Offer Evaluation: during this process, fraud can occur when the tender evaluation committee doesn't agree in advance on the evaluation criteria they want to use. Technical staff can also utilize their professional knowledge to mislead the committee ( Interagency Procurement Working Group (IAPWG), 2012).

Tools and Mechanisms to Prevent and Detect Unethical Practices

Some of the tools and strategies that may be utilized to prevent or to quickly identify and eliminate occurrence of practices and behaviors that are not ethical in nature are listed below.

Management Responsibility

An organization's administration should always strive to maintain the best practices in their day-to-day dealings. When a firm's administration behaves in a manner that is not ethical, the same will happen for all other levels of the firm's hierarchy. It is the duty of the management to maintain integrity standards throughout the firm. Company administrators should quickly point out unethical behavior among the employees. And then, they should set standards for what is acceptable behavior and what is not. Managers also ought to come up with strategies and mechanisms to protect all the operations and assets that are under their control, for the purpose of minimizing corruption.

Code of Conduct

All companies should come up with an ethical code of conduct that all their employees have to follow. A code of conduct is a formal statement that explicitly states the type of professional conduct / behavior that is expected of all workers, and what is not acceptable.