Monthly Archives: January 2015

Corruption, Compliance & Criminal Regimes: An Interview  with Sarah Chayes

Corruption, Compliance & Criminal Regimes: An Interview with Sarah Chayes

Sarah, thank you kindly for participating in this Q and A. I call readers’ attention to your new book Thieves of State, Why Corruption: Threatens Global Security. (Amazon Link here). Today will be part I of our II part interview.

For those who are not familiar with your background, let me summarize.  An award-winning NPR correspondent, you set aside your journalism career to stay in Afghanistan after covering the fall of the Taliban to “try to make a difference,” as you have put it. Toward the end of a decade on the ground in Kandahar, you were tapped to serve as special advisor to two commanders of the international troops (2009-2010) and then the chairman of the Joint Chiefs of Staff (2010-2011). Now, as Senior Associate in the Democracy and Rule of Law Program at the Carnegie Endowment for International Peace (link), you focus your research on the security implications of severe corruption.

Your Awards include the chairman of the Joint Chiefs of Staff Distinguished Civilian Service medal, Tufts University’s John Mayer Award for global citizenship, the Bulletin of the Atomic Scientists’ inaugural Ruth Adams award for writing in international security, and Oprah Winfrey’s Chutzpah Award.

In Afghanistan, I might add, you worked as an entrepreneur, launching a manufacturing cooperative that produces natural skin-care products for export. (www.arghand.org) That could be the topic for another whole blog: How to Expand Your Business in an Active Theater of War!

So, as the entire focus of my blog is corruption and compliance from the front line, your front-line, let me share, is breathtaking: as a journalist, an entrepreneur trying to run a business in one of the most corrupt environments on earth, and then a high-level government official, seeking to develop strategic anti-corruption policy. Sarah, that is the front-line of compliance and corruption!

You don’t pull punches, either. You shine a light on realities that many with anticorruption responsibilities would rather not discuss. This is a work that addresses, as you put it, “systemic corruption and all the reasons that can be dreamed up for ignoring it.” Sarah, you don’t pull the curtain back on the front lines of corruption, your book puts an RPG right through it!

In other words, readers, this is the antithesis of the type of abstract, expository text that abounds in the compliance field. This book is down there in the oak-tree-roots of reality.   I hope that today’s Q and A will be widely distributed to those at the front-lines of international business, who deal with these issues in their personal and/or business lives.

My struggle here, Sarah, is where to start. If I were leading an overseas sales team I would require each member to read your work and submit an essay entitled “The Consequences and Implications for our Work of Corruption.”

So, lets dig in.

Q:  Early in your book you state that “Perhaps corruption is not, in fact, a boring topic to think about, but rather a threatening one. Perhaps this issue, in some profound way, challenges people’s worldviews.” You then add that corruption “is almost too conceptually challenging to contemplate.” Sarah, I am intrigued by those statements and their implications. Can you elaborate?

Sarah: First, thanks so much, Richard, for that overly kind introduction. What I really hope to do here is make people think twice. Spark a debate. So I am grateful to you for this interaction.

The statement above results from long perplexity. I just could not figure out why what seemed to me — and to victims of corruption all over the world — obvious, namely, that acute corruption makes its sufferers so angry that many of them are driven to violent extremes, seemed to be such an impossible notion for Western decision-makers to grasp.

So I began to wonder whether there wasn’t some sort of psychological resistance at work.

And I came up with the following hypothesis. Americans, in terms of their attitudes to the political economy, can be divided into roughly two groups. There are those who fundamentally believe in government. They think that government helps order society, ensure minimally fair rules of the game, and protections for the losers, and provides public goods that the free market can’t be relied on to furnish. Of course, the people who work in government don’t always perform optimally, improvements are constantly necessary. But the basic institution of government is valuable. For those people, my thesis is challenging because I am saying that in many countries, the government is not functioning as a government at all, but rather as a criminal organization bent on extracting maximal resources for personal gain. That is an almost impossible concept for people in this first group to take on board.

The second group of Americans scoffs at the first group. ‘Of course the government is the problem,’ they argue. The solution, in their view, is to reduce government’s meddling, unfetter the market, unleash people’s entrepreneurial genius, and let the laws of competition rule. But what this book shows is that the push to privatize, deregulate, and impose structural adjustment on many developing countries played right into the hands of the criminal elites, who simply privatized publicly owned assets into the hands of their cronies. The aggressive free-market ideology of the 1980s, in fact, may well be to blame for the wave of egregious corruption on display today.

My thinking, in other words, hits Americans on both sides of the political divide where they live. It is extremely discomfiting to each of their world-views.

Q: Sarah, I would like to reference a quote that, while referring to the context of Afghanistan, still resonated with me. You stated, “I have always been perplexed at the sham regret, and authentic eagerness, with which so many have embraced helplessness as a rationale for inaction.” Do you still feel that way, and if you do, why?

Sarah: I do. Let me take the example of Nigeria, which has been preoccupying me of late. According to a carefully documented memorandum the then-governor of the central bank submitted to the Nigerian senate in Feb. 2014, between ten and twenty billion dollars in oil revenues had gone missing over an 18-month period ending July 2013. That central bank governor by the way, Lamido Sanusi, is the only one in the world who not only bailed out the banks during the financial crisis, but also disciplined the bankers. Sixteen top executives were sacked, nine stood trial. He was credited with singlehandedly saving the Nigerian financial industry, won The Banker Magazine’s top central banker of the year award.

So Sanusi calls in the managing directors of the banks over which he has regulatory authority, and tells them they will have to open their books to his examiners so they can start tracing some of these missing billions.

Within days he is fired.

A few months later, Boko Haram militants kidnap a bunch of girls, and U.S. officials are fulsome in their expressions of support to the Nigerian president — the same person who has been syphoning off the billions. How many people have died due to the non-expenditure of that money on public health, decent roads, sewage systems, etc.? How many Nigerians have committed suicide when faced with unbearable tradeoffs due to the cost in bribes of basic public services?

Though rightly cautious about working with a military known for its human rights abuses, the U.S. was quick to mobilize military resources to try to help counter Boko Haram. But to date, nothing has been done to try to trace or seize those massive stolen assets, or sanction officials known to be part of the heist, or make it harder for the ill-gotten gains to be enjoyed here in the U.S. The U.S. ambassador has been arguing against such an approach, worried that it might damage relations with Abuja.

My question is, why should we be so concerned about our relations with a criminal regime?

Q: One area which you address, and which I have shared in my own front-line perspective, is the segmenting of corruption between “high level misdeeds,” and “petty corruption.” As you well stated, “such a formulation profoundly misunderstood the character, impact and structure of acute corruption.” Thank you! In my view, thinking that low-level corruption is nothing more than “how things get done around here,” can lead to great peril for businesses. Sarah, if you were sitting with a front-line sales manager in a territory with a low-integrity reputation, who is in constant contact with requests for petty bribes, what would you share to impact the thinking? Would you share your model of criminal organizations where “every level paid the level above, and the men at the top had to extend their protection right to the bottom?”

Sarah: There are two questions here. One has to do with the notion of a “culture of corruption.” I heard that all the time with regard to Afghans. But I only heard it from Westerners. Afghans were screaming about corruption. They couldn’t bear it. Of course, the subset of Afghans with whom most Americans — government officials and businesspeople alike — mostly dealt were making out. So it was in their interest to soothe foreigners with the notion that it’s just “how things get done around here.”

What international businessmen miss is that they can afford to pay those “petty bribes,” and get their work done. But for ordinary citizens in these countries, the bribes represent a potentially crippling ad hoc tax. I met an Uzbek journalist who was eating his heart out over whether to sell his car so his son could get into university. Though his grades were high, there was no way to secure a place without a major bribe. But the journalist desperately needed his car to work.

So, by playing along with this system, international business is reinforcing it, and making life much harder for the locals. Those locals see what’s going on, and eventually come to resent the foreigners whom they see as enabling this system and extracting their piece of the cake. No wonder people get violently angry at international business interests.

The second part of the question has to do with vertical integration. Many people choose to think that “petty corruption” is just the work of the cop on the street — poor guy, he doesn’t get enough salary to live on anyway. He’s just trying to make ends meet. That’s true. But the corruption doesn’t stop with him. In nearly all the countries I have looked at, people BUY their positions in the police. Now why would a person go into debt to buy a job with a lousy salary? Because — with the bribes they can extract — the job is so lucrative. The candidates usually have to pay a lump sum, but then also a monthly cut of their take to their superiors. Those superiors pay their superiors, and so-on up the line, all the way to the minister of the interior…who also benefits from fantastic opportunities to facilitate drug smuggling, or customs fraud, or whatever.

To reiterate: we are not talking about governments that are plagued by some corruption here. We are talking about sophisticated, vertically integrated criminal organizations that are masquerading as governments.

And businesspeople seeking to engage in these environments should think about it that way. I’m not saying the answer is always to shun them. But investors should think about it the same way they would think about doing business with the Medellin cartel. They should think about risk to their investment, because once they’ve accepted the principle of an extra-legal toll booth, they have implicitly accepted the notion that the toll will be extracted repeatedly, or raised, or that they suddenly won’t be allowed to pass even if they pay the toll. All bets are off once you get onto that ground. Also there is risk at the hands of irate locals — as oil majors have experienced in many contexts.

They should think about their reputational risk too, as more and more Western consumers become alert to this type of abuse, the way they have become alert to labor standards in countries manufacturing our consumer goods.

And they should think about corporate social responsibility in broader terms. If this type of corruption is indeed fueling security threats, such as terrorism, then don’t they have a responsibility not to enable it?

 Well, that seems like an appropriate place to break and I look forward to sharing the second part of our interview in a few weeks.

Corruption, Reputation & Risk: An Interview with Andrea Bonime-Blanc

Corruption, Reputation & Risk: An Interview with Andrea Bonime-Blanc

Hi Andrea, and thank you for joining me in a Q & A and to reflect on your recent book The Reputation Risk Handbook (http://bit.ly/1284TMR ), which I found very relevant to today’s enforcement and risk environment. As you well state “at the end of the day, each one of us owns 100% of our personal reputation risk management.” If you don’t mind, could you share some of your background and experience as to provide even greater context for your work.

Andrea: Thank you for the opportunity to have this conversation, Richard. After almost 20 years as a senior executive leading a variety of legal, GRC and CSR roles at four global businesses, I started GEC Risk Advisory (www.GECRisk.com) to provide a more strategic, holistic and value-added approach to all things GRC/CSR. We are focused on transforming risk into value for our clients and in just two years, we are doing business and developing innovative solutions with clients and partners on almost every continent. We are honored to have received recognition in a short period of time including being named to the 2014 100 Most Influential People in Business Ethics by Ethisphere,  and by participating extensively in conferences, and  media. My writing is referenced through The GlobalEthicist bimonthly column for Ethical Corporation Magazine,  and tweeting @GlobalEthicist.

Q:  Thank you Andrea. As someone who has experienced, first hand, how reputation and risk have an impact on people and corporations, I found your work extremely resonating. I really enjoyed your setting out the challenge up-front in that we all have “a chance to enhance reputation,” and that “its not just about protecting the downside, it’s about enhancing the upside.” Thus, from an individual and corporate perspective, where do you see the greatest opportunities for “enhancement?

Andrea: I think that both the personal and the corporate, or more accurately institutional, perspectives are intricately interrelated. Let me explain, each of us individually (personally and professionally) need to think about reputation as a valuable asset that we build over time and can either increase or decrease in value depending on our actions, who we associate with and who associates with us and other circumstances that are often beyond our control. In the “Age of Hyper-Transparency” and super-connectivity we now live in, these issues are more important than ever both personally and institutionally as bad news (as well as good) can travel at the speed of light. As Warren Buffet famously said a while back “it takes 20 years to build a reputation and 5 minutes to ruin it”. Nowadays it takes a nanosecond.

So to answer your question more directly, I believe that if everyone understood this fact clearly – that reputation risk management is both an individual and corporate/institutional matter and that they are intricately intertwined – we would be more proactive about protecting the downside and building the upside while at work. Building the upside or enhancing reputation might include, for example, (1) paying attention to the quality and accuracy of the information you create, share, distribute or post; (2) ensuring that you understand the 360 of who your stakeholders are: stakeholders at an individual level might include family, friends, school, colleagues, etc.; stakeholders at the institutional level would include customers, regulators, suppliers, etc. If you maintain a mindset at work that quality of information, communication and interaction with your stakeholders is key to protecting value, you might become more aware of how to enhance both your own and your company’s reputation.

Q: As I spend most of my time reading and writing about corruption risk, I found your sub-chapter “Reputational hits and consequences” to be reflective of what we have recently been reading about in terms of anti-bribery enforcement actions. You speak of “reputation management generally with a pretty veneer but not substance,” as “neither sustainable nor responsible.” In your Chapter “The Business Case for Effective Reputation Risk Management,” I see you as returning to that theme when you state that throwing billions of dollars and thousands of people at ‘compliance’ does not address the more “systemic cultural and leadership problem in need of a more strategic solution.” You add that “the real challenge begins and ends at the very top: the CEO and the board.”

Well, I am the choir on that chapter! We continue to see in the anti-bribery field numerous corporations, which when commenting on enforcement actions reference their ‘ethics program’ and ‘commitment to compliance’ and then take out the ‘rogue employee or group’ script to explain away the conduct. Is that reputation risk management? Or, is that the abandonment of risk and reputation management as “related to mistakes by organizations, (and) their senior managers, in exercising their responsibilities as leaders?”

Andrea: I don’t believe that this example is effective reputation risk management, as this would require that there be depth behind the claim – i.e., synchronization between what the company claims it has and what it really has, in this case on anti-corruption. One of the true disconnects I believe exists within many companies is that between company/leadership “talk” and “walk”. What I mean by this is that leaders may talk a good game on ethics and compliance (and anti-corruption) and may support the placement of certain program bells and whistles, but underneath that surface lies a culture of bending rules, looking the other way, burying your head in the sand, or pretending that certain things aren’t taking place when they do. There is no depth – no “there” there when it comes to an effective program. This is where the “rogue employee or group” subterfuge comes in handy to explain away a corruption incident.

Companies and leaders that are intent on a culture of integrity will provide the proper resources, speak the right words, and take the appropriate actions when and if compliance failures occur. The trick for the prosecutors and investigators is to distinguish between the “Potemkin” program and the real or effective one. As with most things in life, there is a spectrum between the two and it is true integrity leadership (or the lack thereof) that is the ultimate differentiating factor.

Q: Is this related to your definition of the “superficial leader” as someone who creates a pretty façade of compliance but who “doesn’t support a deep culture of responsibility of integrity?” I would really like to hear more about what you mean when you state that “the superficial style of leadership does not institutionalize integrity.”

Andrea: When it comes to creating a sustainable culture of integrity, the superficial leader is one who does not place deep value (either philosophically or in terms of resources and budget) to supporting the creation and implementation of an effective ethics and compliance program. They do believe in creating a surface sheen through glossy marketing, brochures and codes of conduct and displaying verbal an written commitment to “integrity”, “zero tolerance” and “values”. The superficial leader is a marketing and public relations guru who lacks the underbelly of true commitment to these issues. Thus they do not help and indeed hinder in many ways the creation of a long-term culture of integrity that is institutionalized within the organization, its processes, decision-making and performance.

Q: In your discussion of “Strategic Risk Management,” you speak of the importance of risk management “where both management and the board have a sophisticated and well informed view and infrastructure in place to deal with all entity risks including reputation risk.” There has definitely been a lot more discussion of late with respect to what responsibility the Board has with respect to corruption risk, and recent surveys have identified this as an area of great concern and risk.

You discuss how “Boards have a critical role to play with regard to reputation risk.” Well, what is your view of the current state of affairs on this issue? I am also thinking of this question in the context of you statement that Boards need to “demand a new bottom line from their chief executives.”

Andrea: As you correctly state, Richard, it has become clear in recent years that boards have a much more important and strategic role to play in risk oversight than ever before. Part of this has to do with the era of scandals we have been living through (where many boards missed some of the critical risks their companies were confronting) and part of it with the age of hyper-transparency and super-connectivity we are living through where risk issues hit harder, faster and more materially than ever before. As a result of these developments, reputation risk, which I deal with in my new book, The Reputation Risk Handbook, has become the number one concern of boards and c-suites around the world. Boards now need to step up to the strategic risk oversight plate hard and fast to keep up with the serial and concurrent risks coming at companies like bullets in a videogame. Boards need to beef up their own composition to meet this challenge as well as ensure that their companies have the right risk infrastructure and expertise in place. This ultimately entails ensuring that a CEO is in place who understands risk management almost as well as he/she understands the business and the financial bottom line.

Q: I always like to finish with the positive. In your work you reference Siemens as turning “a corner from being the corporate corruption pariah to a leader in the global fight against corruption with all the attendant reputational benefits.” Andrea, if you had to rip one page from that playbook to share with others, what might that be?

Andrea: Though it was a long, expensive and tortuous road for Siemens, they eventually embraced the changes that were necessary. Since then, Siemens has been a force (by funding the Integrity Initiative with the World Bank, for example) for deepening and expanding our understanding of corruption in many different aspects of life – not just the corporate. In addition, I recently heard that Siemens has made the internal third party anti-corruption management program they created in house available as a commercial product to other companies. Now that’s what I like to call transforming risk into value (which happens to be my company’s tagline!).

Richard: Well, thank you Andrea, and I hope that we can continue this discussion again sometime soon

Andrea: Thanks so much for this opportunity to discuss these important topics with you, Richard, and thank you for the great contributions you are making to the anti-corruption field through your writings and work in this space. I look forward to continuing the dialogue!

The Compliance Advantage in Mexico

The Compliance Advantage in Mexico

A View from the Front-Lines of Compliance in Mexico

Today, I am pleased to welcome Patrick Henz as a guest contributor. Patrick started his career in Compliance at the end of 2007, when he was responsible for the implementation of the Siemens Anti-Corruption program in Mexico and several Central American and Caribbean countries. Together with these tasks, he gained valuable insights into global Compliance programs, with a focus on Latin America. Since 2009 in his role as Compliance Officer he is responsible for an effective Compliance program, based on prevention, detection and reply. With these means, he defines Compliance as a pro-active function, being perceived as guardian, expert and facilitator. In total he lived and worked in Mexico from 2003 to 2013. Thus, Patrick brings his perspective from the “front-lines” of Compliance.

Where Compliance plays a key role, Patrick actively promotes the idea at university workshops and conferences (including the ACI Compliance Boot-Camp 2013 in Houston). He was twice President of Honor of Marcus Evans’ Latin-American Corporate Compliance Conference (2011 and 2012 in Mexico City) and co-founder of the Ethics & Compliance Forum in Mexico, including editor and co-author of the Ethics & Compliance Manual, published in April 2014.

Since July 2013, Patrick works and resides in the Atlanta Area, as the responsible Compliance Officer for Customer Services and Metal Technologies (Siemens), and since January 2015 as the Regional Compliance Officer Americas for Primetals Technologies (A joint venture of Siemens, Mitsubishi Heavy Industries and Partners).

Thus, with that introduction, I welcome Patrick’s perspective, as he shares his real-world approach and experience with respect to anti-corruption compliance.

The Transparency International Corruption Perception Index (2014) presents Mexico as 104 of a total of 175 countries. In comparison to 2013, this was a “one point improvement” from a score of 34 to 35. Thus, with a given statistic uncertainty, everything stayed the same as in the year before. There are several historic reasons and further theories as to why perceived corruption in Mexico remains so high, which is not the topic for today’s article. More important is that corruption is not limited to a single government, but represents a dynamic that can be found in all parts of society. Most countries have their share of pressures and temptations; Compliance can take those and convert them into an advantage. As corruption is not a theoretical construct; people from all social levels face its negative effects in their daily life. The good news is that Compliance can present itself as a practical problem-solver, not just limited to corporate life, but also as bringing integrity to the personal level. So, lets address some of those details, both with respect to Mexico, as well as to the implications for current Compliance efforts.

  • Mexico has a high-perceived corruption level, but on the other hand this does not mean that our employees are dishonest people! The goal for a Compliance Officer should be to be recognized as a “trusted advisor”. This includes two sub-roles, being a trusted expert, but also a trusted colleague. It makes no sense being the biggest Compliance expert if you have no idea about the business and how the company is earning money. As Compliance Officer you should trust your employees, but be prepared that in the beginning you will not receive the same level of trust returned by them. According to the OECD study “Society at a Glance 2011”, Mexicans express a low level of trust in others. As a Compliance Officer you have to be prepared to earn trust, with visibility, accessibility, and the perception as efficient problem-solver.

Compliance by Walking Around

  • Visibility (office, plant and project-site) is needed so that employees can perceive their CO as a trusted colleague, who is not just talking about Compliance, but living it as a good example. This investment is important, as you need employees to build up trust in you, as only with trust will they come forward on difficult topics and use the offered whistleblower hotline. Therefore, it is helpful not to see everybody as a potential risk factor, but rather, embracing the idea that more than 99% of employees are good and honest people, putting forth their best efforts for the benefit of the company. These people are to be protected and prepared so that they will not get into trouble via an accident, or through a case caused by a trustworthy or rouge employee.
  • From all OECD countries, Mexicans work the most hours, an average of 43 hours a week, and often have sideline work (risk: conflict of interest). This combines with only 6 paid vacation days and 7 paid public holidays. With this Mexicans have significant less free time than their colleagues in other Latin American countries such as Argentina, Brazil or Colombia. Time is precious and petty bribes present a great temptation, as small payments can often avoid spending a complete day (with loss of wages) at public office or a police station.

A Circle of Trust

  • Mexico is similar to other Latin countries with respect to the importance of family & networks as circle of trust (risk: conflict of interest) Also important are the social implications of, where a business invitation dine is more than just a possibility to talk about commerce, but also a sign of respect and appreciation (risk: gifts & hospitality). Due to the warm Mexican climate it is common in some regions to have a two or three hour break in the middle of the day, and for employees work until late in the evening, accompanied by business lunches and dinners. Most of these cultural dynamics present a small or medium Compliance risk, and can be mitigated by adequate tone from the top and Compliance communications. We are talking here about temptations, which mean we have to help our employees to not give in to them! The most relevant cultural risk factor here is the focus on family and friends, where business relationships are often included. Thus, in Mexico, the lines and distinctions between business and personal life are often blurred, as friendships play a strong role in business. In this environment, for Compliance, it is imperative to have robust controls, including the company’s business partners, travel and entertainment expense and other third party controls (risk: business partners / procurement / handling of competitive information).
  • Another known Mexican problem is the impunity of many public cases. If the Compliance department wants to make a difference, it has to ensure that Compliance cases are not just identified, but also remediated. There cannot be different answers for different levels of employees. If a violation is discovered, the company has to take the hard decision to separate the employee from the company, even if this means a loss of important knowledge and complying with the difficult local labor laws. Just this way you can earn the respect of the employees by avoiding any appearance of favoritism or impunity. As is valid for all other countries, a Compliance department has to be independent, adequately staffed and financed; reporting to the CEO and / or a global Compliance department.

 Compliance as a Competitive Advantage

  • Compliance is a sales advantage! A robust Compliance program is a base of business reliability and sustainability. Global and local companies need to understand and embrace the importance of this issue. Some have learnt it the hard and others the easy way. Since 2011, Compliance and Internal Audit experts meet in the Mexican Forum for Ethics and Compliance. Started as self-help group, it has grown to be a relevant forum for an exchange of experience, best practices, and a platform for collective actions. It published a “Manual for a Compliance and Ethics Program,”a free document (link here) , which has its focus on small and medium sized companies. The manual explains how to implement a robust anti-corruption and ethics program. I highly recommend this manual, as it was developed by personnel who have a broad knowledge of experience and background, combined with a working understanding of the corruption risks which face corporations and business teams working in Mexico.

 Train with with Real-World Examples and Perspectives

  • Regarding training and workshops, employees appreciate the discussion of real cases, which the company has had in the past, or around a situation that could come up regarding future business. This can also go involve small role-plays. Actual news and experiences like those of Richard’s, should be included into the training, as corruption is not always limited to big political and business cases. Rather, as is the case in Mexico, it often starts as small facilitation payments, petty bribery or product piracy (all forbidden under Mexican law). According a survey of the American Chamber of Commerce in Mexico, 80% of Mexicans have bought or downloaded pirated products. Thus, in many Mexican households, corruption is learnt by the youngest; as they receive pirated products from their parents or they observe their father give a small payment to the policeman. Demographically, the average age in Mexico is rising, at 27.7 years, but this is still quite young. Thus, there are a lot of the employees who have younger children and who embrace the wish is that they would grow up in a more transparent surrounding and environment. This starting position makes it easy for Compliance to get perceived as trusted advisor. In other words, in Mexico, and elsewhere, the Compliance officer sets an example, as someone to be trusted internally, as a role model, and as an example of success without corruption! You can make a difference!
Sources:
  • American Chamber Mexico (2011): “Survey on Pirated and Counterfeit Product Consumption in Mexico”, link here.
  • Foro de Ética y Cumplimiento México (2014): “LinkedIn-group”, link here.
  • OECD (2011): “Society at a Glance 2011: Trust”, link here.
  • OECD (2014): “Average annual hours actually worked per worker”, link here.
  • Pliego Carrasco, Fernando / Lot, Maite (2012): “Family culture in Mexico and the well-being of the population”, link here.
  • Statista (2014): “Mexiko: Durchschnittsalter der Bevölkerung von 1950 bis 2015 (Altersmedian in Jahren)“, link here.
  • Transparency International (2014): “Corruption Perception Index 2014”, link here.
  • Wikipedia (2014): “List of countries by income equality”, link here.
  • Wikipedia (2014): “List of statutory minimum employment leave by country”, link here.

Success Without Corruption in Africa

Success Without Corruption in Africa

In a  Bryan Cave blog piece (link here) “Corruption costs: why your business needs an anti-corruption strategy if you are investing or operating in Africa,” authors Anita Esslinger and Cara Dowling (Bryan Cave Attorneys) state: “As a continent rich with mineral resources, Africa offers abundant business opportunities for international companies and foreign investment.” Furthermore, while their report focuses specifically on the risk of investment and engagement in the extractive industry sector, it is abundantly clear that Africa presents great opportunity and risk across industries. As Jonathan Berman states in Success in Africa, a must-read book (Amazon link here) for those interested in being a part of Africa’s growth, “Africa is experiencing a boom that extends from metals to mobile payments,” and while extractive industries are a large part of that growth, “three fourths of the story is elsewhere.” And, the reader should note, Berman shares his story from his extensive experience on the ground, working across public and private organizations doing business in Africa.

Indeed, as New York Times Dealbook author Danny Hakim explains (link here), opportunity in Africa goes well beyond manufactured products and extractive industries, as “bankers are jockeying for the next sovereign debt deal.” Hakim describes Africa as “a continent that foreign investors have long been wary of, for its economic woes, rampant poverty and political instability” but adds that “now that narrative is changing.” Accordingly, I look at the paper by Esslinger and Dowling as providing an excellent road map of the risks, along with the work by Berman as articulating the “perspectives on Africa, what works there, and why.”

Esslinger and Dowling discuss the risks associated with doing business in Africa as representative of markets “where corruption can be systemic and entrenched,” in part due to “dealing with governments or state owned or controlled entities, having regular contact with government officials, and depending on third parties.” If we combine the recent Transparency International Corruption Index and the OECD Bribery Report, we see a multitude of red flags across industries and African governments. But is that cause to abandon business development in Africa as impossible due to corporate ethics and anti-bribery regulation?

Africa: Tremendous Upside and Substantial Risk

As Berman states, for companies small and large, contemplating business investment so as to capture lucrative sales and earnings outside of traditional markets, Africa can look like “a new horizon in a place that many had written off.” But business in Africa contains both tremendous upside and substantial risk, along with Berman’s words of caution that “nobody succeeds in Africa in a straight line.” Furthermore, as Berman reflects, the tipping point where investor confidence and government policies “create a good business environment at the regional level,” is “not here yet. It’s coming.” Thus, Africa is very much a work in progress.

Alison Taylor states in a recent Control Risks White Paper (link here), that organizations need to have a “clear eyed” strategic view of the risks they face before they commit personnel and investment resources to business development in new markets. Africa, as a high-risk region is certainly no exception. In addition, Africa is not a ‘one size fits all’ continent, so businesses would be well advised to listen to Berman when he speaks via his own ‘boots on the ground’ experience that, “businesses falter in Africa because they fail to distinguish its parts, and because they fail to grasp its whole.” In other words “Africa has parts: see them,” which is a good partner to Taylor’s “all risks are not created equal.”

So, with all of the risks which are described and well listed in the Esslinger and Dowling work, especially third party exposure, is success possible? I was recently addressing a business group from the financial services sector, where one individual who was managing a business development team in Africa, asked, “how can we manage our business, the requests for bribes are everywhere?” The answers in large part are elevated in Berman’s work, and are addressed when he states: “In Africa, as in most frontier markets, operating profitably and addressing the needs in the surrounding environment is essentially the same challenge.” So what does that mean and how does it relate to corruption?

Beginning with the issue of third party exposure, again, the possibilities of risk and reward abound. Esslinger and Dowling point to the dynamic that “controlling third party conduct will always be an issue,” and that “companies can be held accountable for corrupt practices of certain associated third parties.” The flipside of that risk, as Berman addresses, is the ability to engage with local companies as part of “being local” and to “merge core values with local needs” as part of doing business together across multinationals, local companies and government. Ok, so how?

Berman describes the environment in which corruption thrives, as very similar to Matteson Ellis’ description of “weak state institutions.” (see How to Pay a Bribe, 2014, Wrage) Berman defines corruption as occurring “in conjunction with other governance challenges, like excessive bureaucracy, an absence of working systems and a shortage of either manpower or skills, or both.” Indeed, and here my experience aligns with both Ellis and Berman. Where I saw corruption (for the most part), I observed poorly trained procurement personnel who were tasked with executing procurement regulations that were deliberately confusing, as to “bake in” (Ellis) the requests for bribes into the procurement process.

The GE Experience: A Better Customer is a Less Corrupt Customer

Thus, Berman focuses our efforts on “how a business obtains good governance” as on a higher order than “how it avoids corruption.” Here is where the reading gets interesting, as Berman separates from the pack of compliance practitioners who simply proclaim, “just say no.” How? Berman provides plentiful examples of corporations that work with African governments in order to strengthen the “systems of governance at the technical, institutional, and strategic level.” As Berman articulates “institutional systems that work well reduce the scope for human inconsistency, including corruption.” In other words, tackle the problem of governance, not the output of corruption, to make real progress towards ethical conduct and clean commerce.

Berman points to those such as GE, where Jay Ireland, President and CEO, GE Africa, remarks “if you can be seen as a company engaged in the country’s long-term development, and explain the benefits you and your team bring to support that development, it shows real commitment. Most importantly, it shows that you’re here to stay.” Sounds nice, but what does that mean in terms of business practice? Berman describes the GE “country-company” approach whereby “the long-term development needs of the country” are addressed “independent of any single transaction.”

In addition, in this process, GE “reinforces its message of long-term commitment by focusing the dialog not only on product, but on the creation of skills, employment and enterprises in the national economy at scale, and well beyond its own workforce.” In other words, while participating in corruption just perpetuates it, the GE experience suggests there is another way. GE succeeds in Africa by staying persistently and resiliently engaged in way that, in the end, helps to create a better customer.

Berman then continues to describe the components of collaboration, which from my experience, transcends markets or the size of the corporation as “delivering value to government for value returned,” and avoiding a “transactional tit-for-tat.” Berman isolates a very relevant road map for newcomers and existing players that should not be dismissed as “well, we don’t have GE’s resources.” These variables, including “Collaboration, Not Reciprocity,” “Broad Participation,” and “Consistent Posture,” among others, are all significant components of a successful business model. Tullow Oil Director, Aidan Heavey, captures this process when he states, “if you start off doing things properly, people respect you for it,” and “when you’re there for the long haul, politicians change, people change.” You don’t have to be big like GE to participate in that dynamic.

Perhaps Emerging Capital Partners (ECP) founder Tom Gibian, who reflects, “you look at the numbers, you run through your analysis, and you simply conclude that Africa over time rewards honesty and punishes corruption,” best summarizes the potential of Africa. And, as he adds, “maybe not in every single transaction, but over time.” Or, as Jeff Immelt states: “If you want to be a good global company you have to know how to make money in a country for a country. If you don’t understand that, you’re never going to win.” And you don’t need GE’s capitalization to play by those rules. Maybe we should look at his model of success and reflection that “Being in Africa doesn’t make us better in Africa. It makes us better everywhere.”