The relationships between ethical codes of conduct, ethical supplier risks, and financial performance: a buyer-supplier perspective

Although ethical codes of conduct are commonly used in supply chain management, the effectiveness of the codes has been questionable and the ethical risks from a supplier are rarely examined in a buyer-supplier dyad. Drawing on the literature on supply management, business ethics, agency theory and stakeholder theory, we propose that both the buyer and supplier should adopt ethical codes of conduct in order to reduce ethical supplier risk and improve their financial performance. A survey of 200 pairs of matched manufacturers and suppliers was conducted from automotive, clothing, food and pharmaceutical industries in China. Structural equation modelling was used to analyse the data. Our findings show that the implementation of buyer (supplier)’s ethical codes positively relate to its financial performance, and the buyer’s ethical codes positively relate to the supplier’s financial performance through ethical supplier risk. Our findings provide new empirical evidence on the critical significance of ethical codes of conduct and the particular role of suppliers in the adoption of this initiative in a supplier-buyer dyad.