The behavior of business partners is becoming a central issue for the com- pliance systems of large corporations. In practice, it may not be easy for
Box 4.5. A Common Issue: Reimbursement for Customer Entertainment
An employee asked the SGS ethics office the following question:
Q.: We have invited and provided business-class air transportation and accommodations to a local government official so he could visit one of our branches abroad. When he arrived there, his wife was with him. He explained that he had exchanged the business-class ticket for two economy-class tickets so his wife could accompany him. He expects the company to bear his wife’s additional expenses during the trip. What should we do?
A.: The Code of Ethics clearly states in answer to the question “Is it appropriate to organize technical trips, seminars, or visits to SGS opera- tions for public officials?” that “family members may only be invited at the cost of the participants.” . . . It would therefore be the local govern- ment official’s responsibility to pay for his wife’s expenses for this visita- tion of an SGS facility. You should explain to the official that if the company were to pay for his wife’s expenses, this could appear improper to the public—both on the part of SGS and on the part of the government official. With regard to the exchange of the business-class ticket, there is little that the company can do now to rectify the situation. In the future, however, you will want to ensure that we issue tickets that can only be altered with the company’s advance knowledge and approval.
an individual company to assess on its own the integrity of its partners or to impose sophisticated compliance requirements. This is especially true in joint ventures where the local partner owns a controlling share. Asian corporations operating in other East Asian countries say they feel rather vulnerable to the ethical lapses of their partners.
Suppliers and Joint-Venture Partners
A significant number of companies with corporate compliance policies and programs have statements regarding supplier (33 percent) or joint- venture partner (16 percent) adherence to these policies and programs.
Among these companies is Ondeo Services, the water services manage- ment company of the Suez Group, which explains that it “seeks to avoid having the selection of an inappropriate partner lead to behavior contrary to its policy or its ethical values, thereby compromising its reputation and future.” Suez applies its Ethics Charter to its own directly controlled sub- sidiaries, as well as to their subsidiaries and affiliates. Representatives strongly encourage the companies in which they have minority interests to adopt the tenets contained in the Ethics Charter in drafting their own rules of conduct.
In the case of suppliers, Asian trading companies act as agents for cus- tomers (for example, clothing manufacturers) who are increasingly con- cerned about “ethical sourcing.” The trading companies, in effect, have a standard contract clause with their customers to monitor supplier com- pliance with a customer’s code of practice for ethical sourcing. Thus, sup- plier adherence to anticorruption policies is in some instances part of the trading company’s monitoring requirements under its contract with its own customers.
Li & Fung, a Hong Kong trading company that participated in this study, conducts training programs in all of its sourcing companies.
Although suppliers are not required to participate, the Li & Fung repre- sentative noted that a high percentage of them do so: “Indeed, they appre- ciate training because they will lose business if they fail to comply.”
In general, suppliers are more likely than joint-venture partners to be formally bound by company anticorruption policies and to participate in the company’s discussion and training programs. But the governance and business structures in East Asia are such that even though the company may not exercise the formal command and control that makes a supplier or joint-venture partner subject to its anticorruption policies, the supplier or joint-venture partner may be accountable de facto for adhering to com- pany policy.
In East Asia management of the enterprise, not majority share own- ership, is often the key to exercising compliance oversight. The key question, as James Watkins, general counsel of Jardine Matheson notes,
is, “Do you manage the business for the shareholders?” Indeed, it is not uncommon (particularly in capital-intensive oil or water projects in China) for the enterprise to be managed by a company with a minority interest.
Royal Dutch/Shell, for example, has operational control of 19 of its 20 Chinese joint ventures. The Nanhai joint venture, which can be consid- ered a model, has included the Shell Business Principles as part of its arti- cles of association, and Shell has preserved audit rights as a matter of contract. The internal audit program looks at all business processes, including the implementation of the Business Principles.
Besides management of the enterprise, East Asian country managers described other ways of obtaining compliance with the company’s busi- ness principles. A country manager in the Philippines said that a non- managing minority shareholder company can still exert sufficient control through periodic communication and audits and, perhaps most important, the choice of an external auditor who is acceptable to the parent company.
A local manager conversant with the business practices of Chinese municipal governments took a pragmatic approach, saying that small projects are the best strategy for avoiding corruption. He advised limiting investments to US$15 million–US$25 million, so that a large bribe would not be reasonable; a “nice restaurant” would be the limit.
Intermediaries
Payments to intermediaries are known to be the principal vector of corrup- tion, especially in the context of international operations (see chapter 2). In many countries a company faces daunting challenges in controlling or sim- ply putting pressure on its partners.
Safeguard procedures vary among companies, but typically they seek to:
• Assess the intermediary
• Have the intermediary commit to an ethical pledge
• Check the adequacy of the remuneration for the actual service pro- vided (especially for agents).
Recent Initiatives
There is a growing perception that more comprehensive mechanisms are needed to promote awareness and behavioral change among business partners. With this in mind, recent initiatives or proposals include:
• Cooperation between international firms operating in the same indus- try to exchange information on suppliers (as has been tried in the oil industry).
• Increased transparency in bidding and contractual documents. For instance, some corporations have proposed that the names of agents and suppliers be disclosed in international bidding documents.
Large companies with strong programs are increasingly involved in dissemination activities targeting their partners and others and helping to reduce their vulnerability (box 4.6).