Supplier-Initiated and Buyer-Imposed Social Responsibility Codes of Conduct

Abstract

Supplier-initiated voluntary codes of conduct have gained traction as an alternative to buyer-imposed codes for managing social responsibility in supply chains. We model a supplier's decision to adopt a voluntary code and a buyer's decision to impose its own code on the supplier. Our findings challenge the notion that voluntary codes supplant buyer-imposed codes. Consistent with the industry practice we observe, a buyer may impose its code on a supplier that has already adopted the voluntary code. Paradoxically, when the buyer faces a low cost from public exposure of a supplier violation, it may monitor suppliers that adopt the voluntary code more strictly than those without any code—counter to the intuition that a voluntary code reduces the need for the buyer to impose oversight. The design and implementation of a voluntary code—through the levers of signaling, operations, and monitoring—play a pivotal role in shaping social responsibility outcomes. We characterize how each lever affects supplier adoption, buyer engagement, and the likelihood of undetected violations. Curbing violations requires particularly nuanced maneuvers, as tightening all three levers can sometimes increase—rather than decrease—violations. Strengthening all three levers curbs undetected violations only when the buyer anticipates a low reputation cost from exposure.

Keywords: supplier code of conduct, social responsibility, supply chain management, signaling game