Statutory steps to combat the perennial scourge of late payment have been proposed in a new campaign from the Federation of Small Businesses (FSB). [1]

In its latest effort to tackle the payment pain that smaller firms in the supply chain suffer on a near-constant basis, the FSB is calling for more effective corporate leadership on the issue. As such, it has set out three, primary measures that it wants the government to enforce:

i) Assign responsibility for preventing late payment to non-executive directors (NEDs): Every large firm should be required to put an NED in charge of overseeing payment practice and supplier relationships. The appointed individual should carry out those duties either as chair of a specially dedicated Supply Chain Committee, or through their firm’s existing Audit Committee. Companies must then summarise the related work in their Annual Reports.

ii) Strengthen payment enforcement: The government should fine firms that either fail to provide, or provide in only incomplete form, Duty to Report on Payment Practices data [2]. As part of this measure, the Small Business Commissioner should be able to undertake mystery shopper-style investigations into large firms’ payment habits – including by verifying Duty to Report data and examining instances of supply chain bullying. In addition, all FTSE 350 firms should be required to sign up to a tougher Prompt Payment Code.

iii) Adopt Project Bank Accounts: To guarantee accountability and ensure prompt payment to suppliers, Project Bank Accounts must be utilised as a regulatory prerequisite for major procurement efforts – accompanied by parliamentary oversight. If any major construction scheme fails to adopt a Project Bank Account for managing its financial affairs, then that oversight must be explained in a ministerial statement.

Announcing the launch of the campaign – dubbed Fair Pay, Fair Play – FSB national chair Mike Cherry said: “For far too long some big businesses have been allowed to get away with poor behaviour that has seen them use their dominant position to bully and squeeze our small firms.

“This behaviour has forced many small businesses to take drastic steps like turning to personal credit cards and overdrafts, just to survive the wait for a payment. Sadly, some don’t survive this wait.”

Could the three measures proposed in the campaign make an impact? And in the meantime, what could leaders of small firms do on the client-relations front to minimise their exposure to late payments?

The Institute of Leadership & Management head of research, policy and standards Kate Cooper says: “Drawing attention to a problem is the first step towards solving it, and we have known for such a long time that late payment puts an intolerable strain on small firms. When SMEs are relying upon bills to be settled so they can pay their workers and afford their own resources, it is a matter of day-to-day survival. So any campaign such as the one FSB has launched is absolutely to be welcomed.”

On a broad level, though, she notes: “Ethical treatment of your supply chain should be a central tenet of any company policy. It makes for sound, internal CSR, which actually helps to support external CSR. In that light, the idea of an NED holding up a mirror to the firm and saying, ‘We can’t claim to be ethical if we’re causing hardship to people in our supply chain,’ is a highly constructive one. So it’s pleasing to see that momentum is gathering for these sorts of approaches.”

Cooper says: “It’s hard to suggest what SMEs themselves may do to cover themselves in the meantime. They can rigorously highlight their payment-related terms and conditions when deals are set up; they can put clauses in their contracts to make those terms enforceable. But the power dynamic is so often skewed to the extent that the costs of attempting to enforce terms outweigh the gains of simply waiting for late payments to turn up.”

With that in mind, she adds: “The onus here is really on larger firms, as the most powerful partners in these relationships, to take an ethical lead. Of course, small firms can keep the subject on the agenda and continue to bring it up. But it’s difficult to envisage a situation in which they would be prepared to walk away from business purely because of late payment. That’s why the concept of NEDs being supply-chain champions is so attractive: it would enhance their profiles at board level, and give their voices greater clout.”

For further insights on the themes raised in this blog, check out the Institute’s resources on building trust

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