• 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).
Unfortunately, these questions, which are discussed in turn below, are difficult or impossible to answer, given the present state of knowledge.
The programs are relatively new, and no independent assessment of their effectiveness is available, so observations must be based on anecdotal evi- dence and common sense. Companies have data gained from tracking their implementation of programs, but they typically do not have quanti- tative indicators of program effectiveness. One company has been trying to create a series of indicators of compliance, using statistics on reported incidents, but with difficulties and limitations.
In the future, the credibility and sustainability of programs could be greatly enhanced through monitoring and evaluation using generally agreed techniques.
Do the Programs Reduce Corruption within the Firm?
A major goal of company compliance programs, as reported in chapter 4, is to reduce the risk of malpractice and fraud by employees. How effec- tive have these initiatives been?
Implementation. Most of the companies featured in this study point to measures of their success in implementing their programs. Toyota Motor Corporation, for example, surveys its employees to assess their familiar- ity with the company’s Guiding Principles and Code of Conduct, allow- ing the company to evaluate the success of ethics communications and training. In April 1999, 15 months after the code was introduced, 91 per- cent of the respondents were found to have a good or improved under- standing of the code; the average score had risen to 3.6 (out of 5) from 3.0 six months earlier. Companies also cite the sometimes huge participation rates of employees in developing company codes of ethics and in related training programs, and the incorporation of compliance standards into employees’ performance evaluations.
Effect on corruption. The companies interviewed say they have no doubt that their programs are succeeding in reducing the incidence of corrup- tion. Local managers of international corporations frequently state that referring to the company code of conduct empowers them to resist extor- tion. Shell cites figures for 2000, when 106 contracts were terminated and two joint ventures were divested for incompatibility with Shell’s Business Principles. Four incidents of bribery were also identified in 2000, resulting in seven dismissals.
Effect on the firm. The genuine commitment to integrity by an increas- ing number of managers and boards is having effects in the field. Com- panies increasingly acknowledge that their strict stand on corruption may lose them business, but they are prepared to accept this short-term risk.
The existence of compliance programs can help reduce the severity of penalties when corruption does come to light. The history of enforcement by the SEC shows that litigation settlements do indeed take account of the quality of compliance arrangements in companies charged with wrong- doing (box 4.7).
What Effect Do the Programs Have in the Countries in Which Firms Operate?
It is too early to judge whether the programs noticeably reduce corrup- tion in the countries where the firms do business. As regards large-scale corruption, a firm’s compliance program can set a powerful example for others. For instance, Jardine Matheson of Hong Kong imposes strict ethical requirements on its suppliers, as does the trading company Li &
Box 4.7. Third-Party Liability and Corrective Action in SEC Enforcement: An Example from Indonesia
On September 12, 2001, the U.S. Securities and Exchange Commission (SEC) announced the filing of actions related to the alleged payment by employees of Baker Hughes Inc., for the purpose of influencing an Indonesian tax official. The SEC alleged that the chief financial officer and controller of Baker Hughes made a payment of US$75,000 to its Indonesian accounting firm, with knowledge that the payment was intended for an Indonesian tax official who was reviewing a Baker Hughes tax assessment. The entire payment was inaccurately recorded in the company’s books, records, and accounts as a payment for pro- fessional services.
The SEC, in a cease and desist order, found that Baker Hughes had violated provisions on books and records and on internal accounting controls. This relatively mild finding apparently took into account the fact that Baker Hughes had uncovered the illicit payment, had taken strong corrective action, had reported the incident to the SEC staff, and had cooperated fully with the staff’s investigation.
The SEC also filed the first-ever joint civil action against KPMG Sid- dharta Siddharta & Harsono and against a local partner at that firm for participating in the alleged bribery scheme. The SEC is litigating charges against two former Baker Hughes officials.
Source: SEC.
Fung. Merck’s Korean branch has been instrumental in promoting a code for that country’s pharmaceutical industry. Similarly, foreign investors in China tell an encouraging story. Their ventures have in many instances taken over or replaced the operations of state-owned enterprises (SOEs). Customarily, most SOEs did not pay taxes and used other channels to make financial or in-kind contributions to local gov- ernments—not always transparently, and often with some degree of corruption. The joint ventures have brought in new managers and fresh practices—including payment of taxes—that have put the private- public relationship on a more transparent footing. Companies say they have overcome initial resistance by appealing to higher levels of government.
The companies interviewed cited examples of lost business due to the enforcement of their codes of conduct. There is, however, a definite belief among them that their stand is beneficial in the long term. One consider- ation is that corrupt deals are increasingly likely to be voided by new, less corrupt governments (see the section on NATCOM in part II).
Common sense and the anecdotal evidence thus far suggest that cor- porate programs have good potential for leveraging improvements in supplier and partner firms and that resources, public and private, should be committed to help maximize the effects of these programs beyond the firms that introduce them (see chapter 6).
Notes
1. At Toyota Motor Corporation, for example, respect for teamwork and spontaneous individual commitment are central to the “Toyota Way.”
Reflecting these values, the company’s Code of Conduct is stated not in terms of “must not do” but “should/should not do,” to enhance each employee’s sense of spontaneous commitment.
2. In particular, in industries such as extraction, or where substantial local share ownership and even control may be typical or required (as in China), the need to formulate values and adapt processes in accordance with local custom is a necessary part of the give-and-take of the gover- nance process.
3. Turnover is another reason why periodic review of East Asian employ- ee attitudes, through focus and discussion groups and hotlines, can be a critical element in program success. As one company’s experience shows, turnover can vary considerably within countries and occupational groups. Turnover figures cited by a Western operator are as follows:
China, 13 percent; Korea, 7 percent; Taiwan (China), 9 percent; and
Thailand, 23 percent. (The reason for the larger figure for Thailand is that a group of employees was hired by a competitor.)
4. The restriction in the second half of this phrase is seldom stated with the same emphasis as the permission in the first part.
East Asian managers and employees are not the only people who have difficulty distinguishing between a facilitation payment and a bribe:
“Britain’s Department of Trade and Industry concedes that there is no clear definition of a facilitation payment or of precisely how it differs from a bribe” (Economist 2002: 63).
Both the design of compliance programs and expectations for their suc- cess need to take account of the environment in which companies are working. This chapter looks at three key features of the environment: the adequacy of internal control practices and standards in the area of accounting and auditing; the prevailing standards of corporate gover- nance; and the business culture, which in East Asia is influenced by the traditional practice of guanxi.