Why good companies end up on the wrong side of the law

HOPING FOR THE BEST

Modern corporations are often too big and complex for compliance systems to work well

Despite the significant growth of compliance programmes, the number of executives accused of wrongdoing appears to be increasing

You might easily believe that the world is in the grip of a pandemic of corporate fraud and corruption. One after another, countries are launching anti-corruption campaigns or introducing new regulatory measures to combat attempts by dubious executives – aided and abetted by venal public officials – to steal money and undermine public ethics.

Different countries are throwing themselves at the task of rooting out sleaze in different ways. In China, the anti-corruption drive is part of a long-term concerted attempt by the Chinese leadership to assert the authority of the Communist Party and tackle one of the key issues that undermines the legitimacy of the Chinese state. In Brazil, the panoply of judicial investigations that has rocked both the corporate and political elite started almost by accident with the Lavo Jato – car wash – investigation into allegations against Petrobras and has spread its tentacles into the deep recesses of the Brazilian economy, fuelled by an admirably determined cohort of public prosecutors responding to genuine public anger at widespread graft.

It is not just Brazil and China; it seems that almost every country is introducing new laws, empowering prosecutors or setting up special commissions to tackle a problem that shows no sign of abating. For international companies operating in these countries, this can be anxiety inducing. The risk of being inadvertently entangled in a bribery scandal is a genuine peril for firms with complex international structures and long supply chains. And in some countries, foreign companies are deliberately targeted by capricious authorities keen to apply leverage and extract fines.

Good people doing bad things

On the front-line are executives whose actions can determine whether a company becomes enmeshed in a reputational and legal morass. It is worth pausing to reflect on what divides behaviour that ensures the company remains scrupulous in its dealings and others whose actions spill over a line and attract the attention of law enforcement and prosecutors. In our experience at Control Risks, it is only occasionally a simple case of entrenched dishonesty. More often, it is a question of good people doing bad things.

Richard Fenning

Chief Executive Officer of Control Risks

jumble of cultural justifications. This is particularly the case in countries with established patterns of doing business where the regulatory and legal framework is at

What motivates people to do the wrong best opaque and often applied inconsistently. thing? Well, a few of them are just It is also not uncommon for executives downright dishonest; the better angels of accused of wrongdoing to have been willing their nature have effectively been silenced participants in compliance systems designed and the normal boundaries of personal and to prevent the very activity of which they corporate morality have disappeared. But in are subsequently accused. We should most cases, the reason is not some genetic never underestimate the capacity of the predisposition to criminal wrongdoing. human mind to compartmentalise our We often come across executives who have own behaviours in ways that internally become too inured to the characteristics of a at least do not seem to be contradictory. specific market. For example, if a particular And this is not the preserve of businesses business technique is an established method and executives operating in complex of winning new contracts – the payment of emerging markets. We see exactly the same commissions to a small number of agents cycle of self-justification and warped moral for instance – then over time it becomes reasoning in the financial centres of North possible to see no other way in which that America and Europe. Executives drawn from market might operate and the commonplace the same socio-economic class, educated at and open nature of the transactions seems the same exclusive schools and universities, to legitimise the activity. People tend to working for an elite group of financial think of criminal acts as being secretive institutions and enjoying themselves in the and clandestine and have difficulty seeing same country clubs, ski resorts and summer impropriety in the open and familiar. retreats, can lose perspective just as easily as

Similarly, we see executives the executive long-forgotten who have become completely It is not by head office in some remote absorbed into prevailing business environments that are characterised by uncommon for executives frontier market. Again, it is mostly not a question of intrinsic cronyism, nepotism and the sense that all of this is cultural. We hear this often: accused of wrongdoing to wrongness but the consequences of myopia-induced distortion ‘It is just the way things get have been willing of what justifiable risk-taking done here – it’s cultural’. It rarely is cultural for there are participants is and what is beyond the pale of ethical boundaries. few cultures where stealing in compliance Senior financiers genuinely something that is not yours is an authentic ingrained characteristic of society. systems designed to prevent the committed to a range of philanthropic and charitable causes in private will commit And even if something can be deemed quasi-cultural – the exchange of lavish gifts very activity of which they are acts that go beyond what is acceptable not because they consciously have crossed the for example can at a push subsequently line between right and wrong be seen as part of ingrained social behaviour in some accused but because their judgement has been muted by the circumstances – that does closed social and professional not mean that it remains immutable for all echo-chamber in which they live and often by time. But it is a common explanation even the wholly disproportionate rewards on offer. if it is erroneous and used by executives There may be no simple answer to these who have too easily allowed themselves to problems. Modern corporations are often become embroiled in illicit activity on the too big and complex for compliance systems justification that it is so widespread that little to work well – despite huge advances in is done to hide what is going on. When the technology – and human nature too malleable prevailing definition of what constitutes in its ability to justify bad behaviour. But there normal suddenly changes – as it has in is a need for brave people to give voice to their China and Brazil – they find that the defence inner misgivings more often. After every of universal complicity is worthless. major scandal there is always somebody – an independent director maybe – who Willing participants knows that they suppressed their instinctive It is often hard for compliance programmes fears and suspicions about what was going designed at head office, sometimes with on in the company for fear of stepping out insufficient input of ‘ground-truth’, to of line and looking foolish. It is time to listen penetrate and be relevant in this complex more carefully to these voices.