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

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By Richard Fenning – Chief Executive Officer of Control Risks

 

 

 

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.

“It is not uncommon for executives accused of wrongdoing to have been willing participants in compliance systems designed to prevent the very activity of which they are subsequently accused”

What motivates people to do the wrong thing? Well, a few of them are just downright dishonest; the better angels of their nature have effectively been silenced and the normal boundaries of personal and corporate morality have disappeared. But in most cases, the reason is not some genetic predisposition to criminal wrongdoing. We often come across executives who have become too inured to the characteristics of a specific market. For example, if a particular business technique is an established method of winning new contracts – the payment of commissions to a small number of agents for instance – then over time it becomes possible to see no other way in which that market might operate and the commonplace and open nature of the transactions seems to legitimise the activity. People tend to think of criminal acts as being secretive and clandestine and have difficulty seeing impropriety in the open and familiar.

Similarly, we see executives who have become completely absorbed into prevailing business environments that are characterised by cronyism, nepotism and the sense that all of this is cultural. We hear this often: ‘It is just the way things get done here – it’s cultural’. It rarely is cultural for there are few cultures where stealing something that is not yours is an authentic ingrained characteristic of society. And even if something can be deemed quasi-cultural – the exchange of lavish gifts for example can at a push be seen as part of ingrained social behaviour in some circumstances – that does not mean that it remains immutable for all time. But it is a common explanation even if it is erroneous and used by executives who have too easily allowed themselves to become embroiled in illicit activity on the justification that it is so widespread that little is done to hide what is going on. When the prevailing definition of what constitutes normal suddenly changes – as it has in China and Brazil – they find that the defence of universal complicity is worthless.

Willing participants

It is often hard for compliance programmes designed at head office, sometimes with insufficient input of ‘ground-truth’, to penetrate and be relevant in this complex 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 best opaque and often applied inconsistently. It is also not uncommon for executives accused of wrongdoing to have been willing participants in compliance systems designed to prevent the very activity of which they are subsequently accused. We should never underestimate the capacity of the human mind to compartmentalise our own behaviours in ways that internally at least do not seem to be contradictory.

And this is not the preserve of businesses and executives operating in complex emerging markets. We see exactly the same cycle of self-justification and warped moral reasoning in the financial centres of North America and Europe. Executives drawn from the same socio-economic class, educated at the same exclusive schools and universities, working for an elite group of financial institutions and enjoying themselves in the same country clubs, ski resorts and summer retreats, can lose perspective just as easily as the executive long-forgotten by head office in some remote frontier market.

Again, it is mostly not a question of intrinsic wrongness but the consequences of myopia-induced distortion of what justifiable risk-taking is and what is beyond the pale of ethical boundaries. Senior financiers genuinely committed to a range of philanthropic and charitable causes in private will commit acts that go beyond what is acceptable not because they consciously have crossed the line between right and wrong but because their judgement has been muted by the closed social and professional echo-chamber in which they live and often by the wholly disproportionate rewards on offer.

There may be no simple answer to these problems. Modern corporations are often too big and complex for compliance systems to work well – despite huge advances in technology – and human nature too malleable in its ability to justify bad behaviour. But there is a need for brave people to give voice to their inner misgivings more often. After every major scandal there is always somebody – an independent director maybe – who knows that they suppressed their instinctive fears and suspicions about what was going on in the company for fear of stepping out of line and looking foolish. It is time to listen more carefully to these voices.

 

About the Author:

Richard Fenning is Chief Executive Officer of Control Risks, a leading global specialist risk consultancy. He advises some of the world’s largest organizations on crisis planning and crisis management and he comments frequently on the effects of geopolitics on business risk and the role of the private sector in fragile and post-conflict states.