Austrian Peter Löscher, the first non-German to head engineering giant Siemens, is one of a new breed of chief executives behind a worldwide crackdown on bribery and corruption.
Löscher took over when the previous board quit in the wake of a scandal that cost the company €2.5bn in fines and fees. Since then, he has transformed the way it tackles bribery and corruption. He has provided fresh leadership and set out new anti-corruption regulations, while the compliance team has grown from 170 to nearly 600 to ensure the company’s rules are adhered to.
Löscher is among a growing number of business leaders who recognise that bribery pollutes the world of business. In India Azim Premji, chairman of technology provider Wipro, and Deepak Parekh, head of the Housing Development Finance Corporation Bank, are among those who have called on the government to fight the growing tide of corruption.
In the UK, Ian Tyler overhauled compliance processes and procedures at infrastructure group Balfour Beatty when he became chief executive in 2005. This followed “payment irregularities” and “inaccurate accounting records” on an Egyptian construction project – the firm paid £2.25m to settle the case.
Despite their work and that of others, bribery and corruption casts a long shadow. Nobody can be sure how much is paid in bribes. After all, accountants don’t assign a column to “pay-offs” in their ledgers. But the World Bank says that it could top $1trn annually.
“Corruption in all its forms remains a cross-cutting challenge of momentous proportions,” says Georg Kell, executive director of the New York-based UN Global Compact, which promotes ethical business practices worldwide. “In order to mount an effective response to the scourge of corruption we need targeted, collective action that can stimulate lasting change.”
As part of its contribution to collective action, the UK government is planning to implement a new Bribery Act, probably later this year (see panel, right).
Siemens provides a good example of targeted policies in action. Löscher appointed Peter Solmssen, a US lawyer, as the company’s first compliance director with a seat on the main board and bluntly told the firm’s 405,000 employees: “Only clean business is Siemens’ business – everywhere, everybody, every time.”
Löscher’s anti-corruption policy is based on three principles: prevent, detect, respond. “Prevention is about training in the anti-corruption policies, detection is about monitoring and controlling how the policies are working and responding is about taking action on violations,” explains John Garred, Siemens’ UK regional compliance officer. “If somebody crosses the line and nothing happens, then your programme is not worth the paper it’s printed on.”
Management accountants play a key role in ensuring Siemens sticks to its compliance rules. “They work in the background helping with reconciliations and making specific control checks on payments,” Garred says. “If they see a payment that looks untoward they’ll scrutinise it more closely. They are the eyes and ears of the compliance organisation.”
Löscher believes it’s possible to both run a global business and avoid the bribery bear traps by chasing nothing but clean business. But it can go awry all too easily. In December, FTSE 100 engineering company Weir Group was fined £3m for bribing allies of Saddam Hussein in 2001 in an oil-for-food project. It had already paid £13.9m, the profit it made from the project.
“Today,” says Lord Smith of Kelvin, Weir’s chairman, “we have in place robust ethical policies and procedures and operate a zero-tolerance approach to any behaviour that contravenes them.”
But fines and reputational damage are not the only penalties a company could face. When Macmillan Publishing admitted bribing officials in Sudan to win an education deal, the World Bank banned it from bidding on any of the contracts it sponsors for six years. Since then, Macmillan has adopted a new anti-bribery and corruption policy and reviewed its compliance policies and procedures. Annette Thomas, chief executive, says: “We will not tolerate any form of potentially unlawful behaviour.”
The problem is that too many companies still regard cracking down on bribery as somebody else’s problem, says John Burbidge-King, chief executive of risk management specialist Interchange. “This year, there are likely to be more instances of companies finding themselves in the dock because either they didn’t act or didn’t act in time,” he says.
“Internationally, bribery is a real problem. Tackling it is about appropriate risk assessment and focusing a business’s export efforts in those markets where they can properly assess and implement the right measures to mitigate the risk,” he adds.
Finance officers need to be more proactive in the fight against bribery, says Chandrashekhar Krishnan, executive director of Transparency International UK. “If you look at some bribery cases, you wonder what the auditors were doing,” he says. There needs to be more due diligence before a major international deal is signed off, argues Krishnan.
At Balfour Beatty, Tyler and the board have taken personal responsibility for the company’s anti-corruption policy. When the company reviewed its policies three years ago, it decided to start with values rather than rules, says Chris Vaughan, general counsel and company secretary.
“We wanted to create a culture that is values-based and say to employees: ‘We know this stuff is difficult, but we trust you to do the right thing and here is a framework within which you can operate’,” he says.
The corporate values are underpinned by a code of conduct and both act as a lodestar so employees make the right decisions when faced with tough choices. “Employees can ask themselves certain questions: are you personally happy with what you are doing? Would you be happy reading about it in a newspaper? If you have value-based principles when thinking about that, you’re not going to go far wrong,” says Vaughan.
Balfour Beatty rolled out its new approach to anti-corruption at a series of roadshows around the world (fronted by Tyler) to underscore the board’s commitment to the project. “We supplemented the code with a training programme based on a mixture of e-learning and in-person training that was targeted at specific groups within the company,” explains Vaughan.
The key to an effective anti-corruption programme, Vaughan says, is to tailor it to the risks the company faces: “Some of our companies in different sectors and different parts of the world face very different risks.”
“We have put in place an assessment tool to analyse the risks we’re taking every time we go into a new sector, market or country,” says Vaughan. “Every time we undertake a project, particularly in high-risk countries, we assess the risks specifically for that project.
“One of the biggest single risks we have is that of intermediaries, agents, partners or sub-contractors. There is a long supply chain in the construction industry and we don’t want anybody in it to do something that taints us or the project.” To counter this danger, Balfour Beatty has strict due diligence procedures for all of its business partners to follow.
Balfour Beatty’s internal audit function carries out corruption testing on a sample basis to identify payments that may need further scrutiny. There is also a whistleblowers’ helpline – run by an outside contractor – for employees to report any suspicious activity.
But do these high ethics come at a high price? Does Balfour Beatty lose out on contracts to companies that are prepared to pay bribes? Is it prepared to walk away when bribery is part of winning the contract?
“Yes, we would and we have done,” Vaughan says. “But we try to make sure we only work in countries where the risk is manageable.”
What happens when a company finds itself competing for a contract with a rival that is prepared to pay bribes? George Dallas, director of corporate governance at F&C Management, which handles investments worth £108bn across the world, takes a firm view.
“The argument that paying £1m to get a £100m contract may simply be good business is, in our view, a very short-term argument. We are starting to see fines increasing, in some cases very substantially. There is also a risk to companies that resort to bribery of being blacklisted from bidding on future contracts. That could cut into the muscle of the business in a way that would make a fine seem almost superficial,” he says.
Just so. Increasingly, companies may find that the wrong kind of payments have painful consequences.
To learn more, enrol for the CIMA Mastercourse “Bribery Act 2010 – are you and your business ready?” www.cimamastercourses.com/BACT
Peter Bartram is an editor, author and journalist
The corruption crackdown
BRIBERY ACT 2010: WHAT YOU NEED TO KNOW
The UK’s Bribery Act 2010 is much tougher than previous anti-corruption laws. “It introduces a comprehensive scheme of offences that will allow a more robust and effective response to combating bribery in the UK and elsewhere,” says Jeff Kaye, director of finance and resources at Global Witness, an organisation that campaigns on the links between resource wealth, corruption and conflict in the world. Kaye has written a CIMA briefing on the new Act. Under the Act, there are four offences:
1. Bribing another person. Offering money or other advantages to persuade somebody to perform a relevant function or activity improperly – or to reward them for doing so.
2. Being bribed. Taking money or other reward for executing a function or activity improperly.
3. Bribing a foreign public official. Offering the said official directly, or through a third party, money or other advantages to perform their duties improperly to the advantage of the briber.
4. Failure to prevent bribery. Aimed at commercial organisations operating in the UK that fail to ensure that people associated with it do not engage in bribery anywhere in the world. Associates include employees, agents, sub-contractors and joint venture partners.
Kaye says that companies are able to defend themselves against the catch-all “failure to prevent bribery” offence if they have “adequate procedures”, such as training and instruction, to prevent misconduct. The government will eventually issue guidelines on the adequate procedures. At the time of writing, the Act is being reviewed and plans to have it operating from April have been shelved. A Ministry of Justice spokesperson says: “We are working on the guidelines to make it practical and comprehensive to business. We will come forward with further details in due course. When the guidance is published, it will be followed by a three-month notice period before implementation of the Act.”
BRIBERY BY NUMBERS
1,000,000,000,000 Annual sum in dollars paid in bribes each year (World Bank Institute)
25 per cent of African states’ GDP lost to corruption each year (U4 Anti-corruption Resource Centre)
400 per cent gain in GDP for countries that seriously tackle corruption (World Bank)
34 Number of countries signed up to the Organisation for Economic Co-operation and Development’s anti-bribery convention
148 Number of countries signed up to the UN Convention Against Corruption
10 Maximum years imprisonment for an offence under the UK Bribery Act 2010 (Ministry of Justice)
9 per cent of businesses that think the new Bribery Act is “entirely fair and reasonable”
(Russell, Jones & Walker)
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