Corporate Governance: When US Companies Commit Crime Abroad

Corporate Governance: When US Companies Commit Crime Abroad

The recent news of Wal-Mart Stores, Inc. (NYSE:WMT) paying bribes in Mexico brings to focus how capitalism is fighting the monsters created by need, greed and maybe capitalism itself.  If ordinary citizens pay bribes to government officials for favors or for speeding up approvals, why wouldn’t companies resort to such practices to further their business interests?

Corporate Governance: When US Companies Commit Crime Abroad

In countries where income levels are lower, corruption has percolated to all levels of government. U.S. companies which operate in such political environments, always face the compulsion to pay bribes to secure government contracts or obtain licenses/permits etc.

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In case they do not fall in line with these practices, they risk losing out or being left behind in the race. This is because some other company, from some other country, may pay the grease money and ultimately get the business. Further, corporations, which are always under pressure from stakeholders to perform, sometimes give in and accept corruption as a means to the end of increasing shareholder’s wealth.

Even managers of these U.S. companies use bribery to increase sales/business thereby bettering their career prospects or increasing their bonuses. Mind you, all nations have reasonably strict laws against corrupt practices where public money is involved. However, when the entire system is corrupt, it is difficult for law enforcement agencies or the Judiciary to effectively prosecute and convict the offenders. Ubiquity of corruption makes it easier and lucrative for U.S. companies and their mangers to use corrupt practices in these foreign nations for professional gains.

People (hard core capitalists) would argue in favor of “following the suit” in such countries to remain viable. If we do not pay, someone else will and get the contract. The profit from the contract will ultimately go to the shareholders. So why shy away?  This argument, which focuses solely on the immediate benefits of corrupting foreign officials, has often swayed companies into corrupt indulgences. It misses a few points though.

To curb this menacing practice, in U.S., the Foreign Corrupt Practices Act (FCPA) was enacted in 1977. While this law is reasonably strict with heavy fines and penalties, it also provides a level of acceptance to corruption. This is because it excepts facilitation and expediting payments from its ambit.

These are payments of the nature where the purpose is to expedite or secure performance of routine actions by the foreign government officials e.g. simply speeding up getting a license. Incidentally, the relevant U.K. law (Bribery Act 2010) does not make any such exception and paying bribe of any “type” is an offense.

Ultimately, corruption is an ethical issue. It may have its origins in deprivation, disparity and commercial arguments like the one mentioned above, but, in the long run, it is about injustice and immorality. If one looks at the big picture and the macro-economic effects, there are serious arguments in favor of strongly discouraging the practice.

Usually, in corrupt transactions, the free & fair selection process is hindered because foreign officials do not use their discretionary powers in a bonafide manner. Thus, there is a high probability that the undeserving corporation gets the contract. Had there been a level playing field, the most suitable bidder would have won and the losers, and their stakeholders, would have come to know of some inefficiency or deficiency in their management capability.

Bribery may also become the first resort of incompetent managements as they may not stand a chance in a fair competition. It is also reasonable to believe that the extra money paid to secure the contract will ultimately be “recovered” by the corporation by compromising on some aspect of quality or quantity. Thus the citizens of these countries do not get value for their money and the price discovery is not optimal.

Of course, corruption makes the political system unstable and increases the risk element. This increases cost of capital which hurts the bottom line thereby adversely affecting shareholders wealth. Excess cost of goods, services or capital projects due to corruption hits the balance sheet of the government, also increasing inflation to a certain extent. Furthermore, these corrupting practices ultimately make the organization itself corrupt.

This is because the likelihood of the acceptability for corruption seeping into other parts of the company is very high. Corruption also corrodes and significantly weakens subordination or chain of command in any hierarchy. Overall, it erodes the professionalism of the organization. Importantly, if the corporation gets “caught in the act” in the foreign country, there is a strong likelihood that shareholders will lose money due to lost goodwill and investment and penal action, both in the U.S. and in the foreign country.

Because of these reasons, it is extremely important for organizations to build clear corporate governance policies and systems on this issue, especially for its overseas operations. The companies should especially strengthen their resolve in the area of facilitation payments where bribery is “acceptable” under the FCPA.

In fact, however difficult, one may try, distinguishing between various “types” of bribery may often lead to gray areas. The board and the shareholders should be patient with their managers when they start operations abroad. If they start expecting results overnight, the executives will be coerced into taking shortcuts for achieving their targets.

In case the corporation believes that zero tolerance to corruption may not work in a particular country, the board may take a conscious decision to avoid that turf. The employees should be educated about the long term positive effects of ethical behavior and there should be severe punishments for breaking these rules. While enforcing the laws, the Department of Justice and the Securities and Exchange Commission (SEC) should not distinguish between individual and organizational intent so that the companies are wary of even isolated incidents of corruption abroad.

The accounting policies prescribed in the law should be strictly followed and there should be no room for concealment. The board audit committees should be extra careful while examining the books of foreign transactions or foreign subsidiaries. Taking these aspects into account, the board should formulate and document a clear-cut policy declaring its stand on corruption and also spell out the policies & systems in place for dissuading and combating the problem.

Corporations have to understand that corrupting foreign officials will increase their nuisance value, ultimately corrupting them absolutely. In any case, there is no reason for promoting ethics in domestic operations on the one hand and tacitly encouraging bribery outside U.S. on the other.

Eventually, morality in the domestic U.S. operations will degrade if such culture is allowed to flourish. Last but not the least, sooner or later, the FCPA will catch up with these delinquent corporations. In fact, even these foreign countries are now becoming increasingly averse to the perverse logic of corruption being good for economics. The risk-reward ratio is no longer in favor of accepting corruption as a way of doing business.

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