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

Facilitation Payments

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

Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) has a clearly set out policy in this area with onlin  training available to all employees, with further face-to-face training for higher risk personnel.

Whistleblowing Transparency

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.