Transparency International (TI)'s methodology to develop a new tool for investors that rates companies on their risk exposures to corruption uses forward-looking indicators in the context of business exposure and news flows. The rating aims at mitigating increasingly material corruption risk and enabling engagement, according to a recent report by Kepler Cheuvreux (KC).
Risk Exposure to Corruption
In a recent report, Transparency scores companies on their risk exposure to corruption using key criteria that include public disclosure of anti-corruption systems, geographical disclosure, jurisdictional exposure, past settlements and current allegations. Companies in key sectors receive a grade from A to F. The scoring system for public transparency is based on an in-house methodology created by Transparency International, which they consider to be the benchmark in its field. They add certain criteria around the area of whistle-blowing, which they maintain as playing a central role in protecting companies and therefore investors against corruption risks.
Sector Risks Emphasized Under New Regulation
Extractives on Front Line
The oil, gas and mining sectors which have been exposed to corruption risks and a number of high-profile cases perform strongly in the area of public disclosure. However, they remind investors that even with strong disclosure of anti-corruption systems, current allegations still present critical risks for investors even though they sometimes date back a number of years. This is the case with Total SA (ADR) (NYSE:TOT), Eni SpA (ADR) (NYSE:E), and Saipem SpA(ADR) (OTCMKTS:SAPMY) (BIT:SPM).
Also they focus on the extractives sector explicitly as payment transparency regulation has been enacted in the U.S. and is currently being finalized in the EC for the sector. It will require country-by-country reporting of the major payment types to governments at a national and project level. The view is that those companies with the highest quality anti-corruption systems will be best positioned for such legislation, whose major ramifications will be in the area of uncovering illicit payments.
Forestry Makes an Appearance
Forestry has been included in EC legislation proposals and they identify it as a key sector. Its disclosure is poorer than its oil-and-gas and mining extractive peers, and in the coming years they would expect logging activity to be a subject of greater focus.
Telco, Construction and Banks Now on Radar Long Term
They also present a broad overview of three other sectors which have been proposed for payments transparency: telecom, construction and banks—these sectors have been recently dropped but in the long term are more likely to be included again within future legislation. Telecom companies have had a number of allegations primarily related to the acquisition of licences in emerging markets. They reiterate concerns regarding ongoing risks to investors where companies in this sector have not implemented adequate systems against corrupt payments. Construction is a sector that performs poorly on disclosure but where allegations, though smaller in scale than extractives and telecom, continue to have an impact on investors. In a small sample of companies within the banking sector, they highligh that disclosure remains poorer as a whole and that risks surrounding illicit payments feed into a number of major recent controversies that are affecting shareholder value.
Best and Worst Practices: What Really Differentiates Companies?
Below are the questions which correlate to the best and worst scores–worst practices are more self-evident: if a company does not disclose even any theoretical anti-corruption commitment, it is unlikely to be able to implement the accompanying systems to ensure the reduction of corruption risks. One might say that failure to answer positively and clearly on these base questions represents a clear risk to shareholder value for any company with a global presence, especially in the riskier sectors. By contrast, those best practice questions to the left of the table require a level of awareness on the company's part of its own risks and also a level of implementation which can be considered advanced in order to disclose publicly that it conducts anti-corruption due diligence systematically in M&A activity.
Best practices: Examples
Rio Tinto plc (NYSE:RIO) (LON:RIO), with a primary listing and major management office in London. would certainly be exposed to the U.K. Bribery Act. Its approach to facilitation payments states clearly, "The only way to guarantee compliance with UK laws on bribery is to avoid making facilitation payments anywhere in the world." It goes on to recommend that operations set out a long-term strategy to reducing exposure to these payments and receipt or written confirmation of its legality, inform senior officials of relevant government agencies about any unofficial requests for cash, and seek to build alliances with other firms facing similar problems."
Risk Assessment for Business Decisions
Statoil ASA(ADR) (NYSE:STO), the best performer all round for anti-corruption systems disclosure, notes a variety of processes integrated into its operational and business models that are related to the following risk areas:
- Country risks as evidenced by perceived high levels of corruption and an absence of effectively-implemented anti-corruption legislation, among other factors.
- Transaction risks such as those associated with social investments interactions with public officials or transactions relating to public procurement.
- Business opportunity risks such as those associated with projects involving intermediaries acting on Statoil’s behalf.
- Business partnership risks such as those associated with joint ventures and the use of intermediaries or others acting on Statoil’s behalf in transactions with public officials.
Due Diligence for M&A
ArcelorMittal (ADR) (NYSE:MT) shows best practices in disclosure regarding M&A risk, which as a globally diversified entity with a history of acquisitive activity is clearly material to it. In a dedicated section on M&A corruption risk, the company explains the concept of "successor liability" where the company takes on legacy responsibility for the company it acquires if corrupt activities have taken place. It goes on to explain the technical detail of asset acquisition and how such activity should also receive due diligence even if legally there is less risk for the company.
Training of Higher Risk Personnel
BG Group plc (ADR) (OTCMKTS:BRGYY) (LON:BG) demonstrates to stakeholders that its communication channel for reporting and grievances has made some progress by stating exact numbers of reports passing through the system. This is still all too rare and they believe it is one of the key differentiating factors of the best whistle-blowing systems. Like the best codes and policies, the fact that they exist does not equate to them being used. As stated, whistle-blowing is the key device through which complaints come to court–should a company have a chance to treat allegations before the press or prosecutors begin their work, they are much better positioned to limit damage and propose solid internal reform, and retain the goodwill of the staff concerned.