Investor alert: Bribery risks are rising

Despite government crackdowns and shareholder demands for greater transparency, the risks of bribery will increase as multinational corporations push further into emerging markets.

|
Edgard Garrido/Reuters/File
A pedestrian stands by a Wal-Mart store in Mexico City. The US and Mexico, as well as Wal-Mart itself, are investigating allegations that the retailing giant's Mexican unit paid millions of dollars in bribes to get building permits and other favors.

It's getting tougher for companies to get away with bribery these days. Shareholders are demanding greater transparency in business dealings. Governments are cracking down.

But that doesn't mean the practice is disappearing. As risky as the practice is, the temptation to grease the wheels of corporate deals with cash and other under-the-table gifts is growing as companies push further into underde-veloped nations and competition heats up. That means greater risk for investors in companies with international dealings.

"It's a reflection of the desire to expand into territories that are not highly regulated," says David Holley, senior managing director at Kroll Advisory Solutions, a risk-mitigation company based in New York. "There are opportunities in places where there are less stringent rules when it comes to [using bribes] to get things done."

Bribery can be costly, both in dollars and reputations, for companies that get caught. For Siemens, two years of investigations ended in 2008 when the company paid $1.6 billion to settle bribery charges brought by Germany and the United States in connection with a $1 billion contract to produce national identity cards for Argentina, among other international contracts. Siemens ended up forfeiting hundreds of millions in profits. Eight of its former executives face charges in the US.

The damage begins long before cases come to court. The US and Mexico, as well as Wal-Mart, are investigating allegations that the retailing giant's Mexican unit paid millions of dollars in bribes to get building permits and other favors. Such investigations consume company resources, spark shareholder lawsuits, and create a public-relations mess.

"Wal-Mart is a good corporate citizen … and yet look at the damage to its reputation," says Karen Egger, senior program manager for Transparency International, a nonprofit anticorruption group based in Berlin. "[We hope] that will be a good lesson."

Multinational corporations are making progress but need to do more to battle corruption, a new Transparency International report finds. And the risks of bribery are rising. Half of the 139 multinationals Kroll surveyed in late 2011 and early 2012 said their risk exposure would go up in coming years; only 8 percent expected it to fall.

Although bribery is risky, refusing to bribe someone carries risks, too. In developing nations, locals often expect compensation for moving things along. Payment to corrupt government officials can open doors to significant deals, expedited permitting, and speedy access to essential infrastructure such as ports.

"Sometimes you're operating in a culture where what could be considered bribery here might very well be normal business practice there," says Michael Hoffman, executive director of the Center for Business Ethics at Bentley University in Waltham, Mass. "It's kind of built into their salary structure."

Foreign competition is another driver. Gone are the days when American firms operating overseas faced competition primarily from Western Europeans, whose governments ensured all were held to similar standards. Now they face able competitors based in Russia, China, and other nations that impose no restrictions on how they do business abroad, according to Ms. Egger of Transparency International.

"Companies tell us that they want to do the right thing, but they're competing with companies from countries that don't have the same kind of legislation as exists in the US and the UK," she says. "It's extremely difficult. There's no level playing field."

Another factor: outsourcing. As companies increasingly rely on partners in developing nations, they run the risk that partners might pay bribes on their behalf. In the Kroll survey, companies that see their risks rising cited related factors: more international clients (24 percent), conditions in emerging markets (17 percent), and more reliance on third parties (9 percent).

Because bribery is illegal and therefore hidden, it's difficult for investors to protect themselves. For example, it's impossible to hold up specific companies and say with certainty that they've thrived without turning to bribery, Egger says. Even so, some companies have earned high marks from watchdogs in recognition of transparent revenue reporting practices. Transparency International, for example, gives top scores to Norwegian energy company Statoil and Australian/British mining giants Rio Tinto and BHP Billiton. BHP Billiton introduced a line item in its budget for anticorruption training in fiscal 2011.

Disclosure and training help reduce risk, but they're not foolproof, says Patrick Gnazzo, a McLean, Va., consultant who advises companies on anticorruption practices. As long as some nations punish their firms for bribing abroad while others turn a blind eye to it, the playing field will be tilted, he adds.

"US companies tell their employees over and over, 'We won't tolerate [bribery],' " says Mr. Gnazzo, a former compliance officer for United Technologies. "But they have many employees outside the United States who hear what we're saying and aren't sure if they can believe that we really mean it."

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Investor alert: Bribery risks are rising
Read this article in
https://www.csmonitor.com/Business/2012/0801/Investor-alert-Bribery-risks-are-rising
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe