A contract manager reviews a vendor contract and notices a clause that is legally valid and could levy hefty penalties against them. Realizing that exploiting the vulnerability of the vendor is not just unethical but could also jeopardize the trust between both parties. The ethical approach is to take the high road, reaching out to the vendor and initiating a dialogue to renegotiate and create a more balanced agreement.
We live in an increasingly fast-paced world and business leaders recognize that ethical business practice is not just about adhering to laws and regulations, it's about adhering to a strong moral code and promoting a culture of integrity.
Ethical considerations play a major role in shaping an organization's integrity which leads to trust and profitable relationships.
When it comes to contract management practices, transparency, integrity, and trust are invaluable, and embracing these qualities can give any business a competitive edge.
Here is an interesting statistic from World Commerce & Contracting (formerly IACCM) that states that 70% of respondents agree that their partners believe ethical conduct is essential for successful contract performance.
In this blog post, we delve into common ethical dilemmas, guidelines, and standards that govern ethical practices, continuous improvement, and the role of technology in Ethical Contract Management.
Understanding Ethical Contract Management
Ethical contract management refers to the practice of managing all aspects of the contract lifecycle by committing to fairness, integrity, and transparency. From a utilitarian perspective, deciding the morally right course of action to maximize profits while adhering to legal and regulatory requirements.
However, when you consider the long-term consequences acknowledging ethical complexities can help organizations foster trust, minimize disputes, and maintain a positive reputation.
Contracting teams have moral and ethical obligations that align with legal standards and corporate values. As ethical dilemmas can arise at any stage of the contract lifecycle, navigating the ethical landscape of contract management can be challenging for contract managers.
It is the responsibility of the general counsel and the legal teams to find ways to establish and enforce ethical standards.
📑 Also read: General Counsels: Take Control of Contracts, Drive Business Value
Common Ethical Dilemmas in Contract Management
Navigating the complex relationships between legal obligations and moral responsibilities can present ethical challenges for contract managers and here are some of those common challenges:
Pressure to Secure Deals
In a competitive environment, it is often challenging for contract managers to make ethically sound decisions while they deal with the pressure to secure contracts. Sometimes, contract managers are compelled to overlook unfavorable clauses or exploit vulnerabilities in certain clauses during the process of closing a deal.
Unethical Requests from Counterparties
Contract managers often face the dilemma of prioritizing transparency while maintaining a professional relationship. Encountering an unethical request, such as attempts to influence the negotiation process through coercive tactics such as making threats or withholding information, undermines the contract's integrity.
Misrepresentation of Information
Another ethical challenge that poses significant risks to the reputation of an organization. When parties misrepresent terms or clauses either intentionally or unintentionally, it can lead to a breach of contract and legal disputes.
Unequal Bargaining Power
This is a situation in which the contracting parties' negotiation capabilities are imbalanced, potentially imposing unfair terms on the weaker party. What contributes to unequal bargaining power is the information asymmetry or the knowledge gap where the more informed party has an advantage and could dictate terms.
Ethical Communication in Contract Management
Ethical communication is important in contract management to ensure all the parties are aligned with the organization's goals and aware of their obligations and expectations. This involves active listening to understand the perspectives of the counterparty, being open to feedback, and providing clear updates on the benefits and risks. But striking a balance between transparency and keeping confidential details private is what makes a contract management team successful.
📑 Also read: Building a High-Performing Contract Management Team
When one party in a negotiation finds that the terms favor the buyer and takes advantage of them financially, this raises ethical concerns. This is why contract managers should be explicit about contract terms, such as price structures and deliverables, to minimize confusion. Conducting thorough marketing research helps contracting teams in setting competitive and reasonable terms.
Conflicts of Interest
Ethical considerations play a major role in mitigating conflicts. These conflicts arise when a person's or an organization's interests conflict and affect decisions regarding a contract.
These conflicts can be unfair or unethical and addressing these situations is important to maintain trust and ensure fairness. Overlooking unfavorable terms or making concessions based on a personal relationship with a vendor raises ethical concerns that can damage the reputation of the organization.
Mitigating the risks associated with conflicts of interest requires organizations to implement a conflict-of-interest policy. A well-designed policy explicitly outlines conflict-of-interests rules, and how to identify, disclose, and manage them. These policies should be aligned with the organization's code of ethics, and they should include clear and unbiased conflict resolution procedures.
Environmental and Social Responsibility
Sustainability is a non-negotiable for any organization that prioritizes business continuity and growth. Aligning contracts with organizational commitments to sustainability is now a necessity to ensure businesses thrive in the long run.
Sustainability-oriented contracts help to streamline operations, assess and manage environmental impact, and capitalize on chances for long-term growth. Incorporating sustainability requirements in the contract indicates potential environmental risks and opportunities paving ways to reduce your business's carbon footprint.
Compliance with Legal and Regulatory Standards
This is a fundamental aspect of ethical contract management, ensuring compliance with ever-evolving legal and regulatory standards. In order to avoid legal and reputational risks, organizations include regular contract review, clause drafting, and negotiation to make contracts legally sound and compliant.
It also involves adhering to regulations and standards set by government bodies such as the Health Insurance Portability and Accountability Act (HIPAA) and data protection regulations.
Let's say a healthcare organization that manages sensitive patient data needs to keep the contracts updated as regulations like HIPAA impose strict requirements on data privacy and security. Regular and thorough contract reviews using a robust contract management system help identify any real-time gaps, reducing their exposure to various legal and financial risks.
📑 Also read: Ensuring Contract Compliance: Risks, Rewards, & Strategies
📑 Also read: Microsoft 365 for Secure Healthcare Contract Management
Safeguarding Whistleblower
Whistleblowers are individuals who report unethical or illegal contracts that violate moral or legal standards within an organization. In today's corporate landscape of contract management, whistleblowers face significant risks, including job termination, demotion, or unfair treatment.
This is why organizations need to establish clear and comprehensive whistleblower protection policies that encourage anonymous reporting of unethical activities and ensure confidentiality. These whistleblower protection policies should outline the rights of whistleblowers and clearly state the protections in place to prevent retaliation.
Establishing reporting mechanisms and multiple channels for reporting is important to ensure transparency and fairness in contracts. Creating an environment that is safe for whistleblowers and creates a culture of transparency helps organizations prevent reputational damage and reduce legal liabilities.
The Role of Technology in Ethical Contract Management
Technology plays a significant role in fostering a culture of ethical contract management. By identifying potential conflicts of interest and providing data-driven insights, technology enables organizations to enhance transparency and accountability.
AI-Based Contract Review and Negotiation
AI-based contract management involves using historical contract data to identify patterns and trends. Using AI-based contract management systems can help contract managers analyze historical contracts and negotiation data to provide insights and recommendations for negotiation strategies that align with ethical contracting.
Automated Compliance Monitoring
Automated systems are changing the contract management processes for the better. Automated contract management systems can track changes in compliance laws, regulations, and contractual obligations. Automated alerts and updates can be set up on such systems alerting the relevant stakeholders on time ensuring compliance and minimizing the risk of penalties. Ultimately, a culture of ethical behavior is nurtured by automating compliance monitoring.
Data-Driven Risk Management
Using technology for contract risk management involves using empirical data to identify and proactively minimize potential risks. A contract lifecycle management system can identify unethical clauses and flag discrepancies in terms of promoting ethical practices. Data-driven contract risk management strategies enable better-informed decisions while also ensuring ethical alignment with an organization's goals and values.
Data-Driven Risk Management
Using technology for contract risk management involves using empirical data to identify and proactively minimize potential risks. A contract lifecycle management system can identify clauses or flag discrepancies in clauses that are unethical. Data-driven contract risk management strategies enable better-informed decisions while also ensuring ethical alignment with an organization's goals and values.
Collaborative and Customizable Workflows
Automated, collaborative, and customizable workflows tailored to specific contract types or projects eliminate errors and enable quick approvals from relevant stakeholders in the contract. Contract management systems facilitate in-built collaboration, streamlining internal communication and enabling stakeholders to stay informed of the contract status. Effective contract lifecycle workflows help stay on top of contractual obligations and ultimately support ethical contracting practices.
Any business that wants to work toward a sustainable future, adopting ethical contract management practices and harnessing the benefits of a contract lifecycle management system (CLM) can be the catalyst that fuels long-term business growth. Want to learn how Dock 365 CLM helps navigate the complexities of contract management while ensuring both compliance and alignment ethically with your core business values? Schedule a demo.
