The Vital Role of Third-Party Governance in Organization Integrity
The Interconnected Reality of Modern Business
The modern organization operates in an interconnected world with the extended enterprise. However, recent global disruptions have highlighted the profound impact these connections have on business operations. This has underscored a vital lesson: the importance of relationships in defining business success.
Martin Luther King Jr. famously said, “Whatever affects one directly, affects all indirectly. I can never be what I ought to be until you are what you ought to be. This is the interrelated structure of reality.”
This principle applies not only to personal relationships but also to the intricate web of third-party relationships that sustain modern enterprises. Today’s businesses are no longer confined by physical walls or traditional employee structures. Instead, they are supported by an extensive network of suppliers, vendors, outsourcers, service providers, contractors, consultants, temporary workers, brokers, agents, dealers, intermediaries, partners, and more. This is the extended enterprise.
Governance and Corporate Integrity
The ability of a business to achieve its objectives is closely tied to how well it governs its third-party relationships. Effective third-party governance ensures that an organization can manage risks and maintain resilience. The integrity of an organization, including its compliance with regulations, commitments, and core values, is also reflected in the integrity of its third-party relationships.
The old adage, “Show me who your friends are, and I will tell you who you are,” rings true in the business context: show me your third-party relationships, and I will tell you who you are as an organization. Modern businesses are defined by their ability to manage and govern third-party relationships. This ensures that the organization can reliably achieve its objectives, manage uncertainty/risk, and act with integrity across the extended enterprise.
Modern businesses face numerous risks stemming from their third-party relationships. These risks highlight the interconnectedness of today’s global business environment:
- Resilience. Disruptions in the operations of service providers and outsourcers can significantly impact an organization’s ability to deliver goods and services. For example, supply chain disruptions can halt production, and service outages can affect customer satisfaction and business continuity. In the context of IT risk, as organizations increasingly rely on digital tools and remote work, the risk of cyber breaches grows. Third parties may introduce vulnerabilities through their IT infrastructure, potentially compromising sensitive company data.
- Integrity. Rapidly changing business environments can strain controls over third-party relationships. This increases the risk of unethical behavior, such as fraud and corruption. Effective governance frameworks are essential to maintain high standards of conduct and compliance. Global supply chains often extend into regions with varying labor standards. Organizations must ensure that their third-party relationships uphold human rights, avoiding issues like forced labor, poor working conditions, and child labor.
These risks must be managed within the complex web of interconnections that define the modern organization. For instance, a disruption in one part of the supply chain can cascade, affecting numerous other areas and ultimately impacting the organization as a whole.
In response to these challenges, organizations are focusing on several strategic trends to enhance third-party governance, risk management, and compliance (third-party GRC):
- Integrity & ESG. Companies are re-evaluating their core values, ethics, and standards of conduct and extending these principles across third-party relationships. This includes a strong emphasis on ESG, including human rights, privacy, environmental standards, and security.
- Resilience. Maintaining operations amid uncertainty requires a comprehensive understanding of third-party relationships and their performance in the context of risk. Organizations need a holistic view of GRC within each relationship.
- Governance. Clear governance of third-party relationships is crucial. This involves defining and managing the objectives and sub-relationships, such as contracts and service levels, to ensure risk and uncertainty are controlled effectively.
- Federated Approach. Moving away from siloed operations, organizations are adopting a federated strategy for third-party governance. This ensures collaboration across departments like procurement, information security, compliance, and ethics, facilitating consistent management practices.
- Integration. To support a federated strategy, organizations are redesigning their technology and information architectures. This involves creating systems that can manage diverse third-party governance needs and integrate seamlessly with existing ERP and procurement systems.
Implementing Effective Third-Party Governance
To address these strategic trends, organizations must implement comprehensive third-party GRC programs. These programs should include:
- Due Diligence. Conduct thorough due diligence on third parties before entering into relationships. This includes assessing their financial stability, compliance history, and ethical standards.
- Continuous Monitoring. Implement ongoing monitoring of third-party performance and risks. Use technology to track changes in risk profiles and compliance statuses in real-time. This requires third-party risk intelligence.
- Incident Management. Develop robust incident management protocols to respond quickly to any issues that arise in third-party relationships. This includes having clear communication channels and predefined response strategies.
- Training and Awareness. Ensure that both internal employees and third-party partners are well-trained on policies and practices. Regular training sessions and awareness programs can help maintain high standards across the extended enterprise.
- Collaborative Platforms. Use third-party risk management platforms to facilitate communication and coordination between different departments involved in third-party governance. This promotes a unified approach and helps break down silos.
The end game is that organizations need a complete view of what is happening with third-party relationships. This contextual awareness requires that third-party management have a central nervous system to capture signals found in assessments, and changing risks and regulations for interpretation, analysis, and holistic awareness of risk in the context of third-party relationships.
As my mother used to say, “You will be known by who your friends are.” In the world of business, our third-party relationships define us. Addressing third-party risk is not just about risk management; it’s about upholding corporate integrity and ensuring that our business practices reflect our core values.
GRC 20/20 is facilitating Third-Party Risk Management By Design Workshops in:
- SAN FRANCISCO: May 29 @ 1:00 pm – 5:00 pm PDT, Third-Party Risk Management by Design, SAN FRANCISCO
- LONDON: June 25 @ 10:00 am – 6:00 pm BST, Third-Party Risk Management by Design, LONDON