Archive for the ‘corruption’ Category
Canadian engineering giant SNC-Lavalin continues to provide plenty of fodder for ethics classroom discussion, and making news in all the wrong ways. Over just the last three days, the company has made headlines for making over $1 million in illegal political donations in Quebec, for disguising dodgy payments to an agent in Angola, and for police searching the home of a former executive as part of a prosecution involving more than a dozen criminal charges.
Against this backdrop, slightly less attention has been paid to an announcement last week that the company had hired a former Siemens executive to take over the role of Chief Compliance Officer, a portfolio that ostensibly puts him in charge of ethics, too.
I was interviewed about this recently on BNN, (see video here) and the key question not surprisingly was whether having hired a new Compliance Officer is going to be enough to turn the company around, either in terms of ethics or in terms of reputation. In this regard, I think three key points need to be made.
First, a word about the relationship between ethics and compliance. The new guy SNC has hired (Andreas Pohlmann) is first and foremost in charge of compliance. Compliance with the law will of course be a very good start for SNC, but it’s just a start. Ethics has to be part of the picture. For that matter, even if Pohlmann’s only goal is to get the company consistently onto the right side of the law, there’s good reason he should pay attention to ethics, so that employees at SCN understand the ethical underpinnings of the laws the company has been breaking.
Second, the company needs to see that its reputation has to be built on more than its ability to pull off big engineering projects. SNC needs to be a company all stakeholders – including investors – can trust, because trust is the foundation of business. Given its track record so far, if I were looking for a big engineering contractor I wouldn’t put much trust in SNC at all. If they play fast-and-loose with the rules as much as they seem to, what’s to say they aren’t going to play fast-and-loose with their obligations to me, too?
Finally, the company needs to get past its apparent belief that bribery is just part of doing business. Bribery isn’t just illegal — illegal pretty much everywhere, even in places where it’s tragically common — it’s also bad business. And by “bad business,” I mean it is bad capitalism. It’s the opposite of free and open competition.
If SNC is going to regain its place as a rockstar Canadian company, it needs to show that it can go out there and compete and win on quality, rather than on its ability to bend and break rules.
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:
The picture above is one I took, of a box of free books a neighbour of mine left outside on the sidewalk. When I ran by one recent Saturday afternoon, only one book remained: Armstrong’s book. Funny but sad, I thought. When I passed again roughly 24 hours later, the box looked exactly the same: just one book, unwanted even for free. I snapped a picture.
(Another perspective on the book’s value: Amazon is still selling the book, for about $11, though you can also buy a used copy via Amazon for just a penny — in other words, for the cost of shipping it.)
The book, as you can surmise from reading any of a number of reviews, tells the story of Armstrong’s rise to prominence in cycling, his battle with and ultimately triumph over cancer, through to his victory at the 1999 Tour de France. It is, in short, the story that made him a hero to so many.
We are now all but certain that Armstrong’s meteoric rise to the pinnacle of the cycling world was aided by pharmaceuticals, a sophisticated and rigorous doping program that he not only stuck to but bullied his teammates into adopting. Should he still be regarded as a hero in any sense? And is his book still worth reading? We all know now that the book left out crucial details, but as far as I’ve heard there’s no reason to doubt the basics: he had cancer, he had surgery, he “beat” the cancer, he trained hard, he won the Tour de France. So the basics of the hero story remain as valid today as they were when the book came out over ten years ago. So why is the book now effectively — literally! — consigned to the trash-heap?
For some, the explanation might be simple personal disillusionment. When a hero falls, he falls really hard. So some who previously lionized Armstrong may not want even to think back upon what they now see as their own naiveté. Others may not want to be ‘inspired’ by someone they see as a liar: perhaps they just don’t want to listen to life lessons and inspiring stories, no matter how useful, told by someone who cheated and then lied about it.
The best answer, I think, lies in the loss of trust. Armstrong’s message was one of hope and courage, and it can only really bring hope and courage to the reader if the reader trusts Armstrong’s words. Armstrong’s message was like that of the kind, experienced physician in whom the cancer patient puts his or her faith. “We’re going to take good care of you,” says the physician. Armstrong’s message: You too can triumph over adversity. Neither messenger can guarantee results: surviving cancer is much more a matter of luck, and good medical care, than it is of gutsy determination. But the other half of the message — the reassurance, the comfort, the message of hope — requires that the patient put their faith in the messenger. And that is the part of his own message that Armstrong so effectively killed.
Toronto Mayor Rob Ford has been found guilty of violating the Municipal Conflict of Interest Act, and will be removed from office. The much-anticipated court decision was handed down this morning.
Regrettably, this is unlikely the end of the story. Ford had announced, prior to the decision, his intention to run again should the judge remove him from office. The judge had the option to include, as part of Ford’s sentence, a prohibition on running again, but opted not to do so.
Ford has plenty of detractors. Some don’t like his politics. Some question his aptitude for the job of mayor of Canada’s largest city. Others worry about his being implicated not just in one but in a string of conflict of interest violations. But he also has plenty of defenders — after all, there are an awful lot of people out there who voted for him, and many of them are sticking to their guns on that choice. So the debate will rage. Plenty of ink is sure to be spilled in by both camps in the wake of this decision. I’ll limit myself here to just two quick points. One is about leadership, and the other is about governance.
First, leadership. Whatever your views of Ford, and whatever your views about the severity of his breach of the Conflict of Interest Act, you pretty much have to agree that Ford demonstrated a disappointing lack of leadership ethics, here. Yes (as his lawyer pointed out) people do make mistakes, and even a mayor can be forgiven for an incidental breach of a rule now and then. But what’s particularly worrisome here is that Ford, who by all rights ought to be the guy who leads Council in understanding its ethical obligations, seems to be utterly clueless about them. And he doesn’t seem terribly worried about that, either. According to a report of the court proceedings, Ford “testified he never read the Conflict of Interest Act or the councillor orientation handbook. Nor did he attend councillor training sessions that covered conflicts of interest.”
My second point has to do with governance. As Marcus Gee pointed out in the Globe and Mail recently, bumping Ford from office might be a case of ‘out of the frying pan, into the fire.’ Turmoil is likely to ensue. Council is now faced with the choice of having someone else — someone not elected to be mayor — serve out the rest of Ford’s term, or spending several million dollars of taxpayer money to hold another election. The result of turfing Ford seems especially troubling when we compare Ford’s ethical cluelessness with the out-and-out corruption that has brought down mayors in other major cities.
But what was the alternative? A judge has no choice but to call ‘em like he sees ‘em. Ford violated important rules, and those rules say he should be removed from office. Note that the judge in this case would have had the same range of sentencing options if the dollar amount at the heart of this case had been $3.15 rather than $3,150. A more sane system would perhaps allow for a broader range of penalties. Examples could be found in other systems and at other levels of government. A fine? Censure? Limitation of future mayoral discretion? Mandatory ethics training? I don’t know the answer. But a governance system that allows a political leader to blunder this way and then throws a city into turmoil is not a good system. Principles matter, but so does the way we implement them.
I spoke recently to a corporate audience on the topic of Ethics for Leaders. One of the sub-topics I touched on was the fact that leaders need not only to make good ethical decisions, but also to help others make good ethical decisions. As a practical example, we looked at techniques a leader might use to help someone else understand what is ethically problematic about bribery. Sure, someone in a leadership position might have the authority simply to give orders; but in many cases it will be much more effective to explain the values and principles that underlie a particular prohibition.
One of the attendees at this session pushed back in a useful way. “I get the ethical argument against bribery, and I agree. But I’ve talked to Sales Managers overseas who say it’s just not realistic to avoid everything that could be construed as a bribe. How do I deal with that, beyond simply pointing to the FCPA?”
This is a tough challenge, one that needs to be taken seriously. Whether it’s bribery or nepotistic hiring practices, local practices that violate the rules of business “back home” can seem hard to avoid. Business is a competitive game, and it sometimes really is the case that scrupulously following the written rules puts a company at a significant — maybe even definitive — disadvantage.
It’s far too easy to play Monday Morning Quarterback and to speak in idealistic terms about integrity in business. But ethics isn’t about being a saint; it’s about finding a way to do your best to find suitable limits on profit-seeking behaviours when those behaviours put other people’s legitimate interests and rights at risk. So, if we are to avoid sounding preachy, what can we say about the Sales Manager above?
First, make sure the “when in Rome” argument isn’t just being used as a fig leaf to cover up what is really an appeal to convenience. Sometimes it may be easier to follow local custom, but that’s not quite the same as necessity.
Second, if — if! — it really is necessary, when doing business overseas, to engage in practices that wouldn’t be allowed back home, are you at least doing what you can to a) minimize the frequency of such violations and b) working, in at least some small way, to improve standards in the local business community? Bribery and other forms of corruption are truly corrosive, and economies in which they are common would be much better off without them. Are you part of the problem or part of the solution?
Third, ask whether unscrupulous (or merely ‘grey zone’) behaviour is being used to cover up poor performance. It may be that the Sales Manager who feels the need to offer bribes simply isn’t very good at his job and is looking for ways to succeed without having sufficient talent or making sufficient effort. Sometimes lack of ethics suggests lack of competency.
And finally, ask what your company can do to change incentives such that a Sales Manager isn’t so single-mindedly driven by numbers that he feels compelled to bend or break the rules. No one within an organization should ever think of themselves as having just a single objective. Yes, a Sales Manager is in charge of Sales. But he also has responsibilities that include risk management (including avoiding bringing the company into shame or into court) and managing morale within the sales team. People will behave according to how you reward them, and so reward mechanisms ought to be as balanced as you would like their performance to be.
The challenges posed by doing business in the global marketplace are never easy. Only by avoiding both naïveté and cynicism can you hope to do good while still doing well.
On Wednesday, The United States Anti-Doping Agency (USADA) released a small mountain’s worth of evidence against champion cyclist Lance Armstrong. Not surprisingly, comparisons to corruption in the world of business were not far behind. On Twitter, a number of wags referred to Armstrong as the “Bernie Madoff of cycling,” or variants on that.
The comparison with Madoff is unsurprising. In both cases, you have wrongdoing of impressive scope. In both cases, the wrongdoing was truly brazen, going on right under the noses of regulators. In both cases, you can’t escape the feeling that someone should have been able to figure it all out sooner. And in both cases, you see the eventual fall of a man who was a hero to many.
But the comparison is also off-target in important ways.
For one thing, the USADA’s account of things suggest that Armstrong was not just a cheat, but a ringleader. While others may have been complicit in Madoff’s scheme, there’s no suggestion that he engaged in organized, cynical bullying to push others into wrongdoing the way Armstrong apparently did. Armstrong is accused of having used his position of leadership to coerce others into cheating too.
The bigger difference, though, has to do with differences in the nature of the competitive contexts in which Armstrong and Madoff were each embroiled. Madoff was a stockbroker and investment advisor. It is a job in which an honest person can find success. For all the talk of Wall Street being a place where crooks thrive, there’s no indication that an investment advisor has to be a crook just to survive or to do his or her job effectively. And even if it were the case that cooking the books was somehow normal, something “everyone was doing,” that fact would do absolutely nothing to justify Madoff’s ponzi scheme. It’s not something that, in any sense, Madoff had to do.
Armstrong, on the other hand, was a cyclist competing at elite levels, during an era in which, by all accounts, doping was absolutely rampant. And in such a setting, it does at least arguably matter that “everybody does it.” It is an unfortunate fact that in the world Armstrong competed in, for every individual cyclist doping was a necessary evil, a way of keeping the playing field level. Any cyclist not engaging in doping was effectively relegating himself to the back of the pack. That’s not an excuse, but it’s an accurate description of the facts of the case.
So doping was, in a sense, non-optional for the elite cyclist trying to do his job properly, because after all his job is to try to win. And during the era in question, doping was apparently “allowed” under the unwritten rules of the cycling game. It was embedded in the social norms of the relevant group. It was, in other words, a collective problem. Regrettable, to be sure, but the sort of problem that is devilishly hard to solve, and against which individual integrity is absolutely impotent to solve it.
In this sense, doping is much more like bribery than like a ponzi scheme. Where bribery is rampant, it may literally be true that a company cannot compete without engaging in that kind of corrupt behaviour. But bribery, like doping, is an arms race that no one can be sure of winning. And the damage it does is significant. Like doping, it exposes competitors to all sorts of dangers. And when such behaviour is exposed — as in the case of Walmart Mexico earlier this year — the result is not just scandal, but a loss of confidence in the integrity of the game itself.
A recent survey of Wall Street executives paints a bleak picture of the moral tone of a central part of our economic system.
According to the survey (conducted for Labaton Sucharow LLP), 24 percent of respondents believe that financial professionals need to engage in unethical behaviour in order to get ahead. 26 percent report having observed some form of wrongdoing, and 16 percent suggested that they would engage in insider trading if they thought they could get away with it.
Two points are worth making, here.
First, some perspective. Far from alarming, I think the number produced by this survey are relatively encouraging. Indeed, the numbers are so encouraging that I can’t help but suspect unethical attitudes and behaviours were seriously underreported by respondents. Only 26 percent had seen something unethical? Seriously? That seems unlikely. And the fact that only 16 percent said they would engage in insider trading is also relatively benign. There are, after all, people who believe that insider trading isn’t unethical at all, and shouldn’t be illegal. They argue that insider trading just helps make public information that shouldn’t be private in the first place. I don’t think that point of view hold water, but the fact that it’s put forward with a straight face makes it pretty unsurprising that a small handful of Wall Street types are going to cling to the notion.
Second, a survey like this highlights the difference between our ethical evaluation of capitalists, on one hand, and our ethical evaluation of capitalism, on the other. One of the major virtues of the capitalist system is that it is supposed to be able to produce good outcomes even if participants aren’t always squeaky clean. In no way does it assume that all the players will be of the highest virtue. Adam Smith himself took a pretty dim view of businessmen. In The Wealth of Nations, Smith wrote:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”
And yet despite his dim view of capitalists, Smith remained a great fan of capitalism — or rather (since the term “capitalism” hadn’t been coined yet) a fan of what he referred to as “a system of natural liberty.” The lesson here is that evidence (such as it is) of low moral standards on Wall Street shouldn’t make us panic. Perhaps it should make us shrug, and say, “Such is human nature.” The challenge is to devise systems that take the crooked timber of humanity and mould it in constructive ways. Governments need to take corporate motives as they are and devise regulations that encourage appropriate behaviour. And executives need to take the motives of their employees as they are and devise corporate structures — hierarchies, teams, incentive plans — that motivate those employees in constructive ways. In both cases, while the players should of course look inward at what motivates them, the rest of us should focus not on the players, but on the game.
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.
What is it that justifies the record-breaking $92.8m fine slapped on Raj Rajaratnam by the US Securities and Exchange Commission?
I’m not posing this question skeptically. That is, I don’t particularly doubt the fairness of the fine. But it’s still useful to ask what reasons lie behind particular instances of punishment, particularly when those punishments are record-breakers like this one.
It’s worth noting that Rajaratnam is also going to jail, as a result of a separate criminal proceeding related to the same wrongdoing. But let’s focus just on the monetary judgement issued as a result of the SEC’s civil case. There are at least 4 possible justifications for punishment by means of a fine.
1) Deterrence. Sometimes we punish in order to make the offender less likely to re-offend, or to set an example for others who might otherwise have been tempted to commit similar crimes.
2) Restoration. Sometimes a financial penalty can be used to “make whole” the parties harmed by the wrongdoer. This, of course, would require that (some of) the fine actually be given to those who lost out due to Rajaratnam’s hijinks. As far as I know, that’s not going to happen. But then, there’s a sense in which society as a whole loses out when someone violates market norms as aggressively as Rajaratnam did. So maybe American society is the ‘victim,’ here, and is being compensated through its representative, the SEC.
3) Retribution. The fine might just amount to imposing pain on a roughly eye-for-an-eye basis. From this kind of point of view, the goal isn’t to achieve any particular outcomes (like, say, deterring wrongdoing) but rather just to ‘get even’ with the wrongdoer. Retribution is rooted in some pretty primitive (and, frankly, ugly) emotions, but it certainly has its appeal and plenty of defenders.
4) Denunciation. Closely related to retribution, denunciation is essentially the act of saying “No!” in response to crime. From this point of view, a big fine is a way of saying, loud and clear, that the kind of behaviour in which Rajaratnam engaged is simply not OK in our society.
What does the SEC say?
“The penalty imposed today reflects the historic proportions of Raj Rajaratnam’s illegal conduct and its impact on the integrity of our markets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
OK, that helps. But let’s get it from the horse’s mouth. Let’s look at the words of the judge. According to Judge Jed S Rakoff,
“S.E.C. civil penalties, most especially in a case involving such lucrative misconduct as insider trading, are designed, most importantly, to make such unlawful trading a money-losing proposition not just for this defendant, but for all who would consider it.” He added that it was a warning that, if caught, “you are going to pay severely in monetary terms.”
So there you have it. The rationale behind the historic fine is deterrence. The fine was a warning to others. Of course, the fact that deterrence was the goal doesn’t mean that the fine is actually going to deter anything, or that the outsized fine is going to be more effective in that regard than a more modest fine would have been. Does anyone seriously think that a $92.8m fine is going to work where a $50m fine would not have?
But anyway, the problem here is liable to be the same as that faced in trying to deter street crime, which is that no one expects to get caught. That’s likely to be doubly true of a man like Rajaratnam. After all, he was a Wall Street titan, a self-made billionaire. He was — to steal a phrase from Enron’s Jeff Skilling — the ‘smartest guy in the room.’ How could a man like that even imagine being caught by the mere mortals at the SEC and FBI? The result is that deterrence may well be futile. So what we really need is for our markets and regulatory agencies to be designed with the full expectation that, every once in a while there’s going to be a Raj Rajaratnam. We need institutions to put safeguards in place, precisely to deal with the inevitable lapses in conscience and lapses in our belief in our own fallibility.
The Toronto Star recently reported that the city’s beleaguered Mayor, Rob Ford has stumbled yet again. The Mayor, it seems, opted not to use the city’s standard (cheap) method of having business cards printed. He opted, instead, to go his own route. That might not be surprising a surprising move, coming from a maverick mayor, except for two facts. One is that his way cost a fair bit more. The other is that his way meant giving the contract to his own family’s printing business.
Three additional points are worth making.
First, this is an actual, bona fide conflict of interest. The Star reports City Councillor Josh Matlow as being critical of Ford’s decision, and wondering if the decision carried the risk of “a perceived conflict of interest”. Perhaps Matlow was pulling his punches, attempting to be collegial. But the term “perceived conflict of interest” is properly reserved for situations in which the concerned observers might understandably but wrongly think that the decision-maker had an external interest that could have influenced his decision-making, perhaps because outsiders are misinformed about who was responsible for what decisions.
Second, as always, it’s important to differentiate conflict of interest from corruption. The term “corruption” implies a level of intentionality not required to establish conflict of interest. You can be in a conflict of interest through no fault of your own. Whether there was fault, in the present case, is for voters (and quite possibly the city’s city’s integrity commissioner) to decide.
Finally, it must be acknowledged that the dollar amounts here are pretty small. The total cost of the business cards Ford ordered is just a tad over $1500. Compared to the city’s budget, or even just the budget for the Mayor’s Office, that’s pocket change. But one thing that corruption and conflict of interest share in common is that size isn’t always the issue. What’s at issue in conflict of interest is the need to protect the integrity of the institution, and in particular the way key stakeholders perceive its decision-making processes. Whether in business or in public office, it is crucial not just that top executives make the right decisions, but that they be seen as making decisions on the right basis.