Case Study 4: Non-executive director being used as a sounding board by an employee

Outline of the case:

You are a non-executive director of a manufacturing company. The companys success and reputation rely on one core product. In order to manufacture the product, it needs to source two main components, X and Y. Component X may be purchased from either of two suppliers, A Limited or B Limited. The board has agreed a strategy that both suppliers will be used, thereby enabling the purchasing department to exercise bargaining power over its suppliers.

On the days that you attend monthly board meetings, you take lunch in the staff restaurant. One day you find yourself in conversation with the purchasing manager, who is unfamiliar with the concept of a non-executive director. As you explain your role, the purchasing manager takes the opportunity to seed your opinion on a matter that has been causing her some concern.

She is responsible for placing orders for stocks, and orders of component X are usually placed on a weekly basis. Prices and obtained from A Limited and B Limited on a regular basis, and confirmed prior to each order being placed. However, in recent months the purchasing director has been taking a more active role in the ordering process. He has been directing the manager to place almost every order with B Limited, although the manager believes that a better price could often haven been obtained from A Limited. The director has told the manager that he has been building an effective relationship with the sales director of B Limited, which will lead to a reduction in prices in the long term. This has involved regular business lunches and an invitation for the purchasing director and his family to spend a weekend on the sales directors private yacht.

The purchasing manager expresses her opinion to you that the purchasing director is accepting bribes, as well as ignoring the companys agreed purchasing strategy, which aims to limit the risk associated with exposure to just one supplier. You are asked for your views on the situation, as the purchasing manager is delighted to have this opportunity to run the issue past you, informally and off the record.

What advice should you give to the purchasing manager, and what action should you take in role as a non-executive director?