Archive for the ‘bribery’ Category

Corruption Overseas: An Ethics & Compliance Minefield

The problem of corruption is a tough nut to crack. The bulk of bribery and other forms of corruption (though by no means all of it) goes on in developing countries where rule of law is lax and the opportunities for profit are rich. Companies succumb to the temptations at their peril. The ROI on bribes is pretty hard to specify, and the jail time that can result ought to be a pretty good deterrent. But evidently that doesn’t make the problem much easier.

Last week, in conjunction with Canadian Business, the Jim Pattison Ethical Leadership Program hosted an executive seminar on the topic, called “The Ethics and Compliance Minefield: New Rules for Doing Business Overseas.” The day’s schedule included terrific speakers from Siemens, the World Bank, and the RCMP. (If you want to find out more, see here.)

A number of themes came to the fore during the day.

First was the role of rationalizations. As I’ve written before, rationalizations play a key role in all sorts of wrongdoing. Good people generally need to give themselves excuses if they’re going to do bad things and still look at themselves in the mirror in the morning. This is nowhere more true than in the realm of corruption. Claims like, “That’s just how business is done over there,” and “No one really gets hurt,” or “We’ve always done it that way” or “That’s the only way we’ll make our sales targets” are often false, and seldom provide cogent support for the moral conclusions they are intended to support.

The second theme that came up repeatedly was the question of control systems. Companies whose employees and agents engage in bribery seem (anecdotally, at least) to have weak internal controls. And that’s not surprising. In order for a few million dollars to go “missing” here and there, and end up in the pockets of local politicians or shady middle-men, you’ve pretty much got to be mislabelling the money at the very least. This sort of thing should be worrisome, and not just from the point of view of ethics and compliance. Sloppy business is sloppy business.

A third theme that arose was the notion that companies who want to avoid corruption face what is really just a special case of a more general set of management challenges. Instituting appropriate financial controls is a general standard management challenge. Ensuring overall organizational integrity (in the broadest sense) is a standard management challenge. And engaging in serious organizational change (such as in the wake of a bribery scandal, for instance) is a standard management challenge. In other words, this stuff is the stuff that good managers, and good leaders, ought to be good at, and if they’re not they need to get good at it or face peril.

The final theme that arose was cooperation. Stamping out corruption requires cooperation at several levels. It requires cooperation among countries, and in particular among their police forces and other enforcement agencies. It also requires cooperation between companies, who have a lot to learn from each other. (What, for example, might smaller companies learn from a been-there-done-that company like Siemens?) It also requires cooperation between different kinds of organizations — for example, between companies and law enforcement agencies.

None of this is easy. But given the potent ethical arguments against corruption, not to mention the potent legal penalties for being caught engaging in it, it’s a problem that needs to be tackled head-on.

Curbing Illicit Flows of Money

The development goals of many underdeveloped nations are seriously hampered by illicit flows of money. The money sent into those countries in the form of aid and foreign direct investment is, in many cases, dwarfed by the money that flows out as a result of money laundering, bribery, and dodgy transfer pricing. Some estimates put that outflow as high as a trillion dollars. And a lot of that money flows through, between, or within corporations.

I recently took part in a panel discussion on this topic, part of a larger event put on by a group called Academics Standing Against Poverty (ASAP).

Here are a few of what I take to be the key points, not necessarily in order of presentation, from my discussion of the topic:

Corporations have two different categories of responsibilities when it comes to curbing illicit financial flows. First, they are of course responsible for their own behaviour. Under this heading, corporations have three key obligations. First is not to game the system to avoid taxes. Minimizing taxes — even going to significant lengths to avoid taxes — may seem to be part and parcel of a manager’s obligation to maximize profits. But there is no general obligation to maximize profits, and certainly no such obligation to do so ‘at all costs.’ Even the weaker duty to ‘put shareholders first’ is a vague enough concept to be consistent with a principled stance against aggressive tax avoidance, even where taxes can be avoided legally.

A second direct obligation has to do with transparency about transfer pricing. When goods or services are being sold between branches of a multinational, the prices charged should be fair and should be rooted in a clear methodology. And total taxes paid internationally should be reported in a company’s audited annual reports. Even when gaming the system is legal, it is dishonourable.

Third, companies should have zero tolerance for bribery. Besides being corrosive to local economies, bribery is often just a lousy competitive strategy: it involves payments that cannot be guaranteed to work, and when they don’t work there is of course no recourse to the courts. Businesses generally know this, but sometimes see bribery as a necessary evil; they need to work to make it less necessary.

In addition to these direct obligations regarding their own behaviour, big companies arguably have some responsibility for the indirect effects of their operations. Major corporations support entire ecosystems of smaller businesses — suppliers, subcontractors, agents, and so on. And activities within that ecosystem can be a major source of illicit transfers. Corporations should assume some responsibility for illegal and unethical activities in their shadow. This should at least mean setting clear standards for the behaviour of the companies with which they interact, and sharing best practices. Companies are starting to do this with regard to bribery, but they should consider extending that to other areas.

Next, a point with regard to how businesses interact with governments. The least controversial, over-arching norm for business is to play by the rules of the game. Normally, governments set rules and as long as businesses play within those rules, they are at least coming close to meeting their obligations. But not all governments are equally capable of setting and enforcing the requisite rules. And the absence of clear rules doesn’t imply an absence of obligations. So, for example, the fact that the government of a small developing nation hasn’t passed regulations (as Canada and the US have done) that set standards for fairness in transfer pricing doesn’t mean that a company can be complacent.

Finally — and this bit of advice is aimed at development advocates — it is important to avoid thinking of transnational corporations as the enemy. My sense is that a significant subset of folks who are concerned with development are focused on the negative side-effects of corporate involvement in developing nations. What we need to do, though, is to harness the power of corporations rather than regretting it. Business corporations, in addition to being potent organizations, have a vested interest in reducing poverty worldwide. Anyone living on $1.25 a day makes a lousy customer and a lousy employee. Of course, corporations face a collective action problem when considering how to reduce poverty. No one corporation can do much on its own, and it’s a challenge to find ways to get long-term interests in poverty reduction to override short-term interests in profits. But still, the development community needs to see corporations as important partners. We can’t let a culture war over capitalism get in the way of helping the world’s poor.

The video of our panel discussion is now available, here:

Why the Wal-Mart Bribery Scandal Doesn’t Really Matter

The recent allegations of bribery at Walmart de Mexico are, if true, a damning indictment of a significant handful of senior executives. But they tell us little about the company as a whole, and even less about capitalism.

One of the most pervasive, and least endearing, characteristics of human beings is our tendency to project instances of failure on the part of one or a few individuals onto entire groups or institutions, and to use such individual failures as evidence confirming deep, dark suspicions to which we are already committed. The nationalist and racist versions of this pattern are too familiar to need description. But this tendency plays a role in our evaluation of various corporations, too.

This is precisely the risk with regard to the recent Wal-Mart bribery scandal.

Many critics of Wal-Mart, or of the corporate world more generally, are, I suspect, secretly or not so secretly pleased at the revelation that executives at the highest levels of the company are (allegedly) implicated in this scandal. It supports, after all, a thesis that critics believed all along. It proves, doesn’t it, that the company is rotten to the core. And perhaps it even proves, or at least adds substantial weight to the thesis, that capitalism itself is inherently evil. After all, we now see credible allegations that the most senior executives at one of the world’s biggest companies — that very paragon of ruthless efficiency and expansionary capitalistic zeal — were engaged in a practice so thoroughly discredited that it is illegal even in places where, unfortunately, it is still common.

It’s a tempting conclusion, but also a very bad mistake.

First, it’s a mistake because the (alleged) behaviour of Eduardo Castro-Wright (president of Walmart de Mexico during the events in question), Mike Duke (CEO of Walmart Stores, Inc.), and other top executives tells you nothing about the other 2.2 million people who work there. It tells you nothing about the character of the people who stock the shelves and work the cash registers. And it certainly tells you nothing about the sincerity of the people hard at work to implement the company’s ambitious sustainability and CSR goals. Nor do the recent revelations help with the big question about Walmart’s overall impact. Some people hate Walmart; others literally think the company deserves a Nobel Peace Prize. The corrupt actions of a handful of executives tell us nothing about whether the company is, on net, a force for good or evil. Walmart serves as a go-between, joining poor factory workers in Asia with (mostly) poor consumers in North America. It improves lives at both ends, while notoriously squeezing the middle-man. Whether that is on balance a good thing has nothing to do with who bribed whom to do what.

Nor do the recent accusations tell us anything, factually or ethically, about capitalism itself. Bribery isn’t a feature of capitalism; rather, it is anti-capitalistic, the very opposite of proper, competitive, capitalist behaviour. The accusations, if true, don’t prove that capitalism is inherently corrupt, but merely that a handful of executives at one particular company were corrupt.

Not to be clear: none of this is exculpatory, nor is it intended to trivialize the very significant impact that this scandal might have on Walmart, its employees, and its suppliers. None of what I’ve said above excuses the reprehensible behaviour that seems to have gone on at the world’s biggest retailer. That behaviour violated fundamental moral principles. It violated the law. It violated the company’s own standards of ethics. It violated the fundamentals of capitalism. But we must not confuse the actions of individuals, even highly-placed individuals, with the virtues or vices of entire organizations or of the market itself.

Wal-Mart Bribery and Bad Examples

This is the third in a series of postings on the bribery scandal at Wal-Mart de Mexico and its parent company, Wal-Mart Stores, Inc.

I’ve already dealt with why bribery is so seriously problematic in general. But let’s look here at why this particular instance of bribery (or pattern of bribery, really) by this particular company is especially problematic.

It goes without saying that the bribery that allegedly took place at Wal-Mart de Mexico is a wonderful example of lousy “tone at the top.” Eduardo Castro-Wright, who was CEO of Wal-Mart de Mexico during the bulk of the wrongdoing, is centrally implicated, as are senior people at Wal-Mart Stores, Inc., including CEO Mike Duke. How on earth can they now hope to exercise any ethical leadership? Clearly, they can’t, and that’s why in my opinion they both need to resign or be fired.

But the bad example set by this set of behaviours goes well beyond the walls of Wal-Mart itself.

Wal-Mart is an industry leader, taken by many as an example of how business ought to be done. The signal sent here is particularly corrosive with regard to doing business in Mexico. Mexico clearly has its problems with corruption. But there’s a self-fulfilling prophesy in this regard. If companies see Mexico as a place where bribery is necessary, they’re sometimes going to offer bribes to public officials who, in turn, will come to expect bribes. And if Wal-Mart, of all companies, says it can’t compete effectively in the Mexican market without engaging in that sort of thing — well, the lesson for merely-mortal companies is clear. If Wal-Mart can’t thrive there by playing by the rules, who can?

Think also about Wal-Mart’s supply chain, and the example this behaviour sets for the thousands of companies that supply Wal-Mart, directly or at one or more steps removed, with the goods it sells. Wal-Mart is notoriously tough on its suppliers, insisting on lower and lower prices and higher and higher levels of efficiency. But naturally — naturally! — Wal-Mart wants its suppliers to do all that within the limits of the law, right? Or at least that has to be the company’s official policy. But now, what are suppliers to think? With the revelation of Wal-Mart’s own lawless behaviour, the message to suppliers — thousands and thousands of them — is that getting the job done matters more, and that the ends justify the means.

OK, but won’t the fact that the Wal-Mart executives involved got caught also serve as an example? Well, perhaps. But that depends in part on what action is taken by law enforcement agencies and by the company’s own Board. I strongly suspect that decision-makers at a lot of companies will continue to fall prey to the cognitive illusion that so often facilitates wrongdoing of all kinds: “I’m too smart to get caught.”

So Wal-Mart has provided a clear example in terms of the benefits of bribery, and only a weak one in terms of the costs. Wal-Mart’s shareholders lost $10 billion this past Monday, in the wake of these revelations. But I fear the real impact of the scandal will be much bigger, and broader.

What’s Wrong With Wal-Mart Bribery, Anyway?

Everyone is aware by now of the stunning exposé on bribery at Wal-Mart de Mexico. As promised, this is the next in what will likely be a series of commentaries I’ll post on the scandal.

It’s worth starting at the very beginning, by considering the very basic question: What’s wrong with bribery in the first place?

The fundamental ethical problems with bribery are clear. Bribery of public officials induces those officials to engage in acts of disloyalty. Civil servants are sworn to uphold the public good, and every decision they make needs to be made on that basis. Bribery violates that principle; it interferes with the decision-making of the functionaries of a democratic system.

Bribery also tilts an otherwise fair playing field. It’s one thing for a company like Wal-Mart to muscle into new territory by means of its superior management techniques and hyper-sophisticated supply-chain. Such advantages are well within the rules of the game. If you invent a better mousetrap, the maker of the old mousetrap has little grounds for complaint when driven out of business. But bribery is well outside the rules of the game. It represents a refusal to compete openly and fairly, and an attempt instead to gain special advantages that have nothing to do with ingenuity or with the quality of one’s services.

And, from a systemic point of view, bribery is a zero-sum game that acts as a drag on an economy. Consider: when two companies engage in bribery as a competitive strategy, the only guaranteed winner is the undeserving recipient of the bribe. The companies involved suffer unnecessary expenses that could better have been spent on research and development, on higher wages for employees, and so on — if only they were jointly able to forgo the bribery.

There is, from an ethical point of view, no plausible pro-bribery argument.

What about cultural differences, you ask? We are all aware that, in doing business in a foreign country, we are liable to run into ways of doing business that would not pass muster back home. And we’ve all heard the saying, “When in Rome, do as the Romans do.” But that saying is no doubt used as an excuse for wrongdoing far more often than it is used as a reminder to be sensitive to cultural variations. The trouble is that bribery is a lousy way to show respect for someone’s culture. You don’t respect a culture by corrupting its public officials. Never mind the fact that bribery, though perhaps not uncommon in Mexico, is none the less illegal.

But perhaps the most stinging critique of bribery is this. If you have to engage in bribery in order to succeed, it implies that you are not very good at your job. Eduardo Castro-Wright, the man who was Wal-Mart de Mexico’s CEO at the height of its bribery activities, was considered a true Wal-Mart star. In fact, he’s now vice chairman of Wal-Mart Stores, Inc. And his reputation was built in no small part upon his stunning success in pushing Wal-Mart de Mexico’s rapid expansion. But, as it turns out, he wasn’t quite as great a manager as he seemed to be: the rapid expansion wasn’t so much a credit to him as it was a credit to the campaign of carefully-targeted bribery conducted by his underlings. As is so often the case when it comes to white-collar crime, this suggests that senior managers at Wal-Mart de Mexico were not just lacking ethically, but lacking as managers too.

Bribery at Wal-Mart de Mexico

Just when things seemed to be going so well at Wal-Mart!

Six years ago, just after I started blogging, I made a happy prediction about Wal-Mart. The company was subject to a truly enormous amount of bad press at the time, accused of everything from environmental infractions to falsifying employee time-cards. Nonetheless, I predicted that “within 5 years, Wal-Mart will be at the top of at least some business ethics / corporate social responsibility / corporate citizenship rankings.” I don’t think it was a particularly brave prediction: Wal-Mart has the money, and the organizational efficiency, to do just about anything it turns its mind to. And most of the bad things the company was being accused of weren’t central to its business model, so there didn’t seem to be any major barriers to the company turning over a new leaf in response to massive public pressure.

And my prediction turned out to be roughly right. While certainly not free of criticism, Wal-Mart has turned into an icon of environmental sustainability, and has indeed won a number of ethics-related awards. The bad press had dropped to virtually zero.

And then this.

If you haven’t yet read the stunning exposé on bribery at Wal-Mart de Mexico, you should. The short version: Wal-Mart de Mexico was apparently involved in an organized campaign to use bribery as an aid to its ambitious plans for expansion. When insiders notified Wal-Mart head office in Bentonville, Ark., of what was going on — the corruption, the devil-may-care attitude to law-breaking, the risk to corporate reputation — the big fish there basically swept the problem under the rug.

It’s a damning story, one that has vast implications all the way to the very top of the company’s world-wide operations. All kinds of questions arise. Where was the Board? What does this say about ‘tone at the top’? What role was played by international differences in law and custom? What damage will this do to Wal-Mart’s attempt to rehabilitate its reputation? What does this scandal say about the management skills of top executives at Wal-Mart de Mexico? Should heads roll? Or, more likely, whose heads should roll? To what extent does this pull the rug out from under the company’s sustainability and CSR efforts? I’ll explore a few of those questions here in the coming days.

Business Ethics Around the Globe: Zimbabwe and Russia

Flags of Zimbabwe and RussiaIf you have an interest in business ethics, it’s worth keeping an eye on the international scene for commentary about the role that ethics plays in developing economies. Here are a couple of recent examples.

First, by Manson Mnaba, for the Zimbabwean publication NewsDay: “Corporate Zimbabwe should embrace business ethics”
Two things are worth remarking. The first has to do with Mnaba’s description of the state of his country’s economy:

We are a nation emerging from the woods and doldrums. The past decade was particularly painful, strange and unique in every aspect. Conventional economics failed. Strait-jacket business principles failed to offer corporate direction.

Executives had to think outside the box through creativity and innovation. But Creativity and innovation devoid of human conscience is disastrous….

Note that this sounds a lot like how many Americans would describe the US economy. The difference, of course, is that Zimbabwe is actually poor, with a per person GDP that is one one hundredth that of the US.

The other thing worth noting is that Mnaba sees clearly — perhaps painfully clearly — the necessity of ethics in building an economy:

A business landscape where there are no ethics is a gangster’s paradise. Business ethics and corporate governance workshops would help us to sharpen our business intelligence quotient.

Next, to Russia. Russia isn’t a developing nation like Zimbabwe, but it is an economy in transition, still struggling to come to grips with the mechanisms and traditions necessary to sustain a free market, after generations of suffering under oppressive government and a command economy.

See this story, by Andrew E Kramer for the NYT: At 35,000 Feet, a Russian Image Problem. The story recounts the trouble that Russian airline manufacturers, in particular, have faced in trying to build jets for the Western market. Just one stumbling block:

…Russian television station NTV reported that 70 engineers at the plant making the Superjet had obtained fake engineering diplomas by bribing a local technical college; Sukhoi said those employees were not directly involved in assembling the planes….

Unfortunately, this isn’t all that surprising, for a country that scores near the bottom of Transparency International’s corruption perception index. Not surprising, but unfortunate. As I’ve pointed out before, trust — and hence ethics — is absolutely essential to commerce. And if Russia wants to expand its market, and hence its economy, it’s going to need to figure out more consistent business ethics.

Bribery, Legal Clarity, and Lame Excuses

Bribery is quite probably among the very oldest of unethical business practices, right up there with short-changing your customers and adulterating your products. Many modern economies have recognized that bribery has no place in a fair and efficient market, and have rightly taken action to prohibit what is widely acknowledged to be a pernicious practice. But not everyone is consistently appreciative of legislative efforts at curbing bribery. Take the U.S. Chamber of Commerce, for example. To see why the Chamber isn’t altogether happy about the U.S. government’s anti-bribery efforts, see this story from the Washington Post’s David S. Hilzenrath: “Quandary for U.S. companies: Whom to bribe?”

American companies doing business abroad have a problem: They don’t know whom to bribe.

Federal law prohibits the bribery of some people but not others. And the business world argues that the rules of the road are not clear. One guy’s bribe, as it turns out, is another guy’s cost of doing business….

A few points:

1) In principle, at least, bribery is an ethical no-brainer. There really is no pro-bribery point of view. Some may argue that it’s a necessary evil, something that companies are forced into by practical considerations in some countries. But that’s at least nominally different from thinking that bribery is ethically OK. Bribery involves inducing someone to violate a duty of loyal service, and it diverts resources that ought to go to more legitimate ends. And besides, bribery is a zero-sum game, which means that by definition the business community as a whole cannot win.

2) The Chamber’s basic plea, here, is an entirely reasonable one: the law does need to be clear. One fundamental element of the rule of law is the notion that citizens (and, derivatively, corporations) must be able to know what the law requires of them. Ignorance is no excuse, but uncertainty may be, at least when lack of certainty is the legislator’s fault. In other words, if the citizen is ignorant of the law, shame on the citizen. But if the law is opaque, shame on the state.

3) If the law really is unclear in dangerous ways, the evidence for that is remarkably thin. The Chamber cites just one anecdote, quite possibly apocryphal, about a company that nearly got prosecuted for a trivial non-offence (paying for a bureaucrat’s taxi ride). We only have Hilzenrath’s account to work with, here, but clearly if there’s a real issue here the Chamber needs to do a better job of making the case.

4) There are just two kinds of situations in which bribery seems truly necessary, and neither of them reflects well on the businesses involved. One is when you’re operating in a context where bribery truly is endemic, and you need to engage in bribery just to keep up. The number of places where that’s true is likely exaggerated. And besides, that need is a lousy excuse, frankly, and any self-respecting businessperson should think seriously about why they want to do business at all in such places. The other situation, of course, in which bribery seems like a true business necessity is one in which you simply aren’t good enough at what you do to compete effectively without doing things you know to be wrong.

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