GOVERNANCE, CONTROL, AND COMPLIANCE

Uncovering corruption and poor practices

GOVERNANCE, CONTROL, AND COMPLIANCE

Dominant factors
VARY BY COUNTRY

GOVERNMENT-LED PICTURE

On the governance side, Russia, Mexico, and Turkey score worst for the rule of law, while the Philippines and Indonesia rank poorly for corruption. Weak judicial independence, inconsistent regulatory enforcement, and opaque contracting environments all undermine business confidence. These conditions pose compliance challenges and increase the likelihood of delays, hidden costs, and legal disputes.

This index captures the risks of weak governance and labor standards based on indicators like corruption, rule of law, workers' rights, and informal employment. While the composite score provides a high-level overview, it's helpful to distinguish between two types of exposure: Government-led risks (e.g. corruption, poor contract enforcement) and labor-led risks (e.g. workforce protection, informality)

Sectors with heavy government oversight are most exposed, particularly energy, natural resources, construction, and infrastructure, where large-scale public contracts and state-owned entities are common. However, even highly regulated sectors like healthcare and food and beverage are affected, with corruption or enforcement gaps introducing friction and liability. Sourcing in these markets requires heightened due diligence, strong legal protections, and a tolerance for unpredictability.

LABOR-LED PICTURE

Labor-related risks cluster in APAC and Latin America, where informal employment and limited worker protections create significant ethical, reputational, and operational risks, especially in agriculture, retail, construction, and manufacturing.

In many APAC economies, including India, Indonesia, the Philippines, and Thailand, between 65% and 90% of the workforce is employed informally. A 2023 global index named the Philippines and Turkey among the worst countries for workers, citing union repression, wage exploitation, and lack of legal protections. This challenge is structural, particularly in India, where micro, small, and medium enterprises (MSMEs) make up 90%+ of businesses and employ over 110 million people, mostly informally.

Between 65% and 90% of the workforce of many APAC countries is EMPLOYED INFORMALLY

Examples of informality by sector:

CONSTRUCTION | Day laborers dominate
AGRICULTURE | Smallholder farming prevails
RETAIL | Spans home-based sewing to informal street vendors
MANUFACTURING | Formal firms often subcontract to informal workshops

In our analysis, APAC emerges as the most compliance-vulnerable region. More lenient enforcement has historically contributed to the lowest cost structures, making it attractive for global sourcing. Businesses were able to bypass minimum wage laws and formal hiring requirements.

However, with buyers increasingly turning to more ethical sourcing, this trade-off is under the microscope. Within APAC, many markets are strengthening regulations to ensure ethical compliance, which is a precursor to global trade.

In contrast, the US and Canada offer stronger legal frameworks, particularly in sectors like automotive and food. Sourcing from these regions provides a higher baseline compliance, though risk may persist in tier 3 and 4 suppliers, where oversight weakens.

The EU has the lowest compliance risk, driven by strict labor standards and a strong culture of transparency. New legislation, such as the Green Claims Directive and Corporate Sustainability Reporting Directive (CSRD), is raising expectations further. However, even in Europe, companies must remain vigilant, and supplier monitoring remains essential to avoid hidden risks and uphold ESG commitments.

SOURCING AND SUPPLY TACTICS

Upstream and downstream due diligence is critical to addressing key vulnerabilities. While supplier due diligence is key, weak governance and corruption can exist beyond Tier 1 suppliers in subcontractors like factories, mills, farms, or local logistics.

Procurement teams must ensure the right standards and checks are embedded in the supply chain. While this starts with the sourcing process and putting appropriate contracts in place, companies may choose a more active in-life approach for key risk areas. This could include deep, multi-tier audits, including spot checks, worker interviews, and putting in place whistleblower systems.

Technology is one of the critical enablers of modern supply chain risk management. It is the only realistic way to monitor and manage at scale. Off-the-shelf tools offer basic risk screening and more in-depth assessments.

Further, blockchain is gaining traction for its tamper-proof audit trails. Walmart, for instance, uses IBM Food Trust to trace food origins. Satellite and geospatial monitoring are also emerging. Unilever uses these tools to monitor production locations and transport routes, especially in “first-mile” zones where risk is highest. Though full multi-tier visibility remains challenging, today's leaders deploying tech are setting the standard for tomorrow’s best practice.

In countries with shifting laws or weak enforcement, contracts need to go beyond protection and support life management and enforcement. Practically, that means including mechanisms such as anti-bribery clauses, audit rights, flow-down obligations, and clear triggers for exit or suspension.

H&M offers a strong example: sourcing from Vietnam and India, it ties incentives to audit scores, builds corrective actions into contracts, and uses short-term agreements to retain agility. This enables fast exits if risks escalate and ensures accountability beyond Tier 1. Agile contracting allows procurement teams to manage live risks rather than shield against them.

3 | APPROPRIATE (AGILE) CONTRACTS

2 | MONITOR THIRD PARTIES
WITH TECHNOLOGY

1 | DUE DILIGENCE AND AUDITS

The interplay of weak governance, corruption, labor abuses, and informality presents complex challenges for procurement teams. Beyond financial and operational risk, default here often reflects on a brand’s values and reputation.