8 Aug 18

Directors' fiduciary duties make the case for SRM investment

Directors' fiduciary duties make the case for SRM investment

Procurement professionals seeking investment in SRM should add fiduciary duties among the benefits and risks covered in this business case.

In June, the UK government published draft legislation stipulating company directors’ responsibilities when it comes to dealing with suppliers. While many will be surprised to learn that directors’ fiduciary duties will extend to supplier relationships, the principle is not in fact new.

Existing UK legislation requires directors' to perform duties associated with the promotion of supplier engagement. For example, section 172 of the 2006 Companies Act specifically says directors' should have regard for “the need to foster the company’s business relationships with suppliers, customers and others”.

The legislation currently under consideration goes further. It was developed from the Corporate Governance Reform report of August 2017 which says big businesses need to do more to reassure the public that organisations are operating not only in the best interests of the board and stakeholders, but also have a clear understanding of their responsibilities to employers, customers and suppliers.

The most significant reform that will increase director engagement with suppliers is reflected in the government’s intention to introduce secondary legislation. The proposed legislation states that private and public-sector companies of significant size (those with more than 1,000 employees) have to provide an explanation surrounding how their directors have served the interests of employees, suppliers, customers, the community and the environment.

The government describes practical approaches to engaging stakeholders, including suppliers. They may sound familiar to those with an understanding of SRM:

  • Identifying and prioritising stakeholders according to the influence they have on a company’s ability to operate effectively, and the long-term value they can generate
  • Identifying which key individuals/groups will operate as the main points of contact to help foster more robust relationships
  • Implementing a process to frequently review stakeholders in order to ensure that engagement levels remain at the appropriate level for each specific group
  • Establishing forums and advisory panels. For example, Marks & Spencer has created a shareholder panel in part to facilitate increased flow of information between directors' and suppliers
  • Collecting data from stakeholders to agree on solutions on how to improve the relationship between the board and non-shareholders

Directors' can be held personally responsible for executing their fiduciary duties and, in some cases, their failure to do so can constitute an offence. Those personal responsibilities come with the territory for a company director. It’s the downside to all the perks.

But it is an opportunity for procurement professionals. They have been selling the business benefits of SRM for some time. Lower costs, lower risks, improved service levels and increased supplier innovation all count among them, but the long-term commitment required to make SRM a success can make it tough to get the backing from director-level management. For directors', fiduciary duties focus the mind on their personal liabilities.

If you are in the process of seeking SRM investment don’t forget to add these responsibilities including fostering of relationships with suppliers when putting together the business case.