Bribery Briefing Mar 2010 Eiris -Fracaso corporativo en la lucha contra la corrupción a nivel...
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Transcript of Bribery Briefing Mar 2010 Eiris -Fracaso corporativo en la lucha contra la corrupción a nivel...
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8/9/2019 Bribery Briefing Mar 2010 Eiris -Fracaso corporativo en la lucha contra la corrupcin a nivel global
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Reduced risk, enhanced reputation? An analysis of corporate responses to
bribery
Introduction
This report summarises recent findings ofEIRIS research in relation to its criteria on
countering bribery. It also providesrecommendations to investors for futureengagement with companies to improvetheir management response to bribery.
1) Why is bribery an issue?
Recent bribery cases involving largecorporations have highlighted thesignificant impact and adverse effects thatsuch scandals can have on individualcompanies performance - as well as on thewider economy. It is therefore crucial for
both companies and investors to recogniserisks in relation to bribery and corruptionand develop measures to counter briberyeffectively.
I m pacts on Soc iety and Marke ts
Bribery and corruption can have variousnegative impacts. Bribery is known todistort markets and the allocation ofresources by manipulating prices ofproducts and services. Bribery can also
adversely affect the economic and socialdevelopment of countries by deterring long-term foreign and domestic investments,enhancing inflation and therebydepreciating national currencies andreducing expenditure on education andhealth.1
I m pacts on compan ies and i nvesto r s
Large, off-the-book payments to publicofficials or intermediaries may prove to be
a significant financial burden for a companyand call into question the performance of
its duties to its stakeholders. Adversepublicity can significantly damage thecompanys reputation, which may in turnresult in restricted access to markets ordifficulties in raising capital. Recentscandals have brought these challengesinto sharp relief. Bribery scandals costSiemens EUR 2 billion, including the USD
1.6 billion fines paid to the US and Germanauthorities. News of a federal investigation
in the United States into allegations ofbribery was linked to an overnight 10% fallin BAEs share price on the New York StockExchange.2 Overall, companies may benefit
Key findings:
Bribery poses significant risks toany company (and its shareholders)
which has operation across multipleterritories and markets
Most FTSE All World listedcompanies do not adequately
address bribery leaving them
exposed to risks of unlimited fines,reputational damage, restrictedaccess to markets and difficulties inraising capital
Oil and gas sector displays the most
advanced response to bribery
National regulations and stock
market listing requirements areencouraging more companies tocounter bribery
Companies with a high level of
exposure to have better policiesand systems for countering bribery
than their peers with lower riskexposure - possibly a result of theclose scrutiny this sector has faced
from civil society groups, investors,regulators and other stakeholders
Companies which are more highlyexposed to bribery are more aware
of the risks they face and are doingmore to address these risks than
those that are less exposed. Investors have a crucial role to play
in shaping the anti-bribery agenda
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with short-term gains but at the possiblecost of long-term profitability.
These elements have significantimplications for the shareholders of
companies and the risk profile of
investment portfolios.
I n te rna t i ona l Conven t ions
Governments and internationalorganisations have sought to eliminate
corrupt practices from business activitiesand introduced several codes to addressthe issue. The OECD Anti-BriberyConvention was adopted in 1997 toestablish laws to criminalise bribery offoreign public officials in international
business transactions. It has been adoptedby 38 countries including 22 members ofthe EU.3
In June 2004 the UN Global CompactSummit expanded its key principles ongood corporate practices that cover humanrights, labour and the environment, toinclude a 10th measure focusing oncorruption. The new principle calls oncompanies to put effective managementsystems in place to combat bribery.
The United Nations Convention againstCorruption is the first global, legally-bindinganti-corruption instrument bringingtogether key anti-bribery principles. Itentered into force in December 2005 andhas been signed by 140 states as of
January 2010.
Additionally, signatories to the UNPRIpledge to seek information fromcompanies regarding adoption of/adherence
to relevant norms, standards, codes ofconduct or international initiatives (such asthe UN Global Compact)
UK Cont ext
It was announced in 2009 that the UKgovernment would introduce legislation tocriminalise companies or individuals whooffer, promise or give a financial or other
advantage to another person, or whorequest, agree to receive or accept afinancial or other advantage. A breach ofthe new law may result in up to 10 yearsimprisonment.
2) How does EIRIS researchbribery?
EIRIS has developed bribery assessmentcriteria in co-operation with Transparency
International, a global civil societyorganisation with afocus on corruption, toevaluate how companies are addressingthis complex and difficult issue. The criteriaidentify a companys risk exposure tobribery and corruption and provide a
comprehensive analysis of the companysanti-bribery policy, management systemsand reporting that are in the public domain.The research allows investors to engagewith companies on the issue of bribery bycomparing results within and across
sectors.
The level of exposure to risks relatedto
bribery is determined by business sectorsand countries of operation, as well asbusiness activity, including whether thecompany requires government contracts orlicensing for its operations.
After identifying the exposure level, EIRIS
assesses the companys anti-bribery policy,management systems and public reporting
using five grade levels:
No ev idence- a review of companyliterature has revealed no evidence of anypolicy / system / reporting mechanisms inplace to address the issue of bribery
L im i ted -there is some evidence that the
company is aware of the issue of briberyI n t e r m e d i a t e -there is evidence of a
company policy / system / reportingmechanismaddressing the issue of bribery
Good -the company's countering bribery
policy / system / reporting are consideredadequate to manage risk by EIRIS
Company risks
Large expenditures affectingfinancial performance
Negative publicity andreputational damage
Impaired access to finance andcapital markets
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Advanced-this category is intended toidentify leading practice companies
3) Research findings
Below are recent results from EIRISresearch on companies in the FTSE AllWorld Developed Index.4 All figures arebased on information extracted from EIRISdatabases as of January 2010.
Risk Exposur e and Response to Br iber y
As figure 1 indicates, of the nearly 2000companies that constitute the FTSE All
World Developed Index examined for this
report, 32% have been classified to have ahigh level of exposure to bribery, 52%medium and 16% low exposure.
Fig 1: Risk Exposure Breakdown
32%
52%
16%
High Medium Low
Figure 2 shows how companies withdifferent risk levels have responded tobribery and corruption. A companys overallbribery assessment is determined by the
combined scores derived from a companysanti-bribery policy, system and reportingassessment. It is noticeable that far more
high risk companies have achieved anadvanced, good or intermediate overallgrading than medium or low riskcompanies. Whilst 46% of bribery high riskcompanies have been assessed as havingat least an intermediate level of response to
risksfrombribery, only 24% of mediumrisk companies and 10% for low riskcompanies have achieved this level.
Fig 2: Company Response by Risk Level
0%
20%
40%
60%
80%
100%
Low Medium High
No evidence Limited Intermediate Good Advanced
The above result indicates that companieswith a high level of exposure to bribery
responded to their heightened risk by
implementing more comprehensive policiesand systems for countering bribery andmaking these transparent through moredetailed reporting mechanisms than their
peers with lower risk exposure. High riskcompanies are more likely to have faced
pressure from civil society groups, investors,regulators and other stakeholders toaddress the issues of bribery within theiroperations. Despite this, however, only onecompany achieved an overall advancedassessment amongst all the companies
analysed.
Business Sector s and Response toBr ibe ry
Companies in different sectors havedemonstrated varying performance, asillustrated in Figure 3. In the Mining sector,13% of companies and in the Oil and Gassector, 8% of companies, have been
assessed as good. This can be attributed tothe valuable work of sector initiatives and
civil society pressure. For example, thesector initiative by theInternational Councilon Mining and Metals (ICMM) in 2001 andin 2002 the Extractive IndustryTransparency Initiative (EITI) wereestablish to highlight certain controversialissues within these sectors and
transparency and bribery in particular.Bribery scandals have often affected wholesectors and this has made some sectorsmore aware of the issue than others.
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Fig 3: Company Response by Sector
0%
20%
40%
60%
80%
100%
Aerospace&De
fense
Chem
icals
Electricity
,Gas
&Water
GeneralIndustrials
Mining
Oil&
Gas
Producers
Pharma&Biotechnolo
gy
RealEstate
Tech
.Hardw
are&Equip
ment
Telec
oms
No evidence Limited Intermediate Good Advanced
Other sectors which are showing positivedevelopments in the area of countering
corruption are the Electricity, Gas andWater sectors as well as the TechnologyHardware and Equipment sectors. Realestate is the high risk sector with mostscope for improvements. In this sector,
only 6% of companies have been assessedby EIRIS as having an intermediate overallassessment and no companies as having agood or advanced assessment. This sectordisparity may be linked to disclosure trendsin different countries. For instance, asignificant number of Real Estate
companies are listed in Hong Kong andSingapore where legal regulations and
Stock Exchange requirements in relation tobribery are limited.
Response to Br ibery by Count r y and Region
Specific country regulation or stock marketrequirements has a positive impact on thedevelopment of company policies and
systems to counter risks related to bribery.As shown in Figure 4, 92% of all high riskcompanies in Italy have been awarded atleast an intermediate assessment, with
none assessed as demonstrating noevidence. This is due to the implementation
of the compulsory Legislative Decree 231.5
A similar trend can be observed for USlisted companies. In the US companies arerequired to implement a Code of Ethics forrelevant staff and whistle blowing
procedures by the Sarbanes Oxley Act(SOX).6 Additionally the Foreign CorruptPractices Act (FCPA) has raised awareness
of bribery issues amongst companies. Thishas contributed to 52% of North Americancompanies having been credited with anintermediate assessment for counteringbribery risks. No high risk North Americancompany has been assessed as having no
evidence.
Fig 4: Company Response by Country/Region
0%
20%
40%
60%
80%
100%
Asia
exJap
an
Japan
AT,DE&C
H
Australia&N
Z
Benelux
Finland
France
Greece
Isra
el
Ita
ly
North
Amer
ica
Scandinav
ia
Spain
&Portug
al
UK&Irela
nd
No evidence Limited Intermediate Good Advanced
AT = Austria, DE = Germany, CH =
Switzerland,NZ = New Zealand
On the other hand, companies in countrieswithout relevant legislation, demonstrate
poorer performance. In Asia excludingJapan (i.e. Hong Kong, Singapore andSouth Korea), nearly half of companies,
49%, have not produced evidence of takingany significant steps to counter bribery.
4) Conclusions andrecommendations for investors
Bribery and corruption is a key issue forinvestors. It has been addressed by some
companies but many are yet to developeffective ways to deal with the issue.Approximately a third of all companies in
the FTSE All World Developed Index areclassified as facing a high exposure to riskslinked to bribery and corruption. However,under half of the high risk companies havedemonstrated even an intermediate level ofmanagement response, with only onecompany achieving an advanced
assessment.
This represents an important area of riskfor investors but is also an importantopportunity for them to play a key role in
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promoting good practice. Investors canengage with and reward companies withinnovative anti-bribery tools, express theirconcerns in relation to bribery and helpcompanies find new possibilities tointegrate anti-bribery practices into their
day-to-day business. Investors should beencouraged to engage with companies on abroad scale, since it is not only companieswith a high risk exposure that are facingbribery issues.
Shareholder pressure can be of vitalimportance in the successfulimplementation of the UN Global Compact.
Where a financial institution has signed theUN Global Compact, investors in thatinstitution also have a responsibility to sign
the Global Compact. Furthermore, thePrinciples for Responsible Investment (PRI),which have been signed by 198 assetowners and 362 investment managers, also
focus on the implementation of the 10principles of the UN Global Compact.7
The need for investors to engage withcompanies can be seen in particular withregard to the public disclosure ofcompanies anti-bribery efforts. Manycompanies still hesitate to talk about
bribery. EIRIS research has found thatreporting mechanisms lag significantlybehind policy development and theimplementation of systems withincompanies. Only 0.3% of companies facinghigh risk exposure to bribery demonstrategood reporting and none have beenassessed as advanced.
Public disclosure can help to open the anti-bribery debate amongst companies,investors and civil society.
EIRIS research on bribery and corruption
provides a tool for investors tocomprehensively monitor a companyscountering bribery policy and systems aswell as monitor whether a company makesquantitative and comprehensive qualitativedata available in the public domain. Thisenables investors to invest in companieswith a strong awareness of issues inrelation to bribery, engage with companies
on issues that are not sufficiently includedin a companys risk management orultimately consider divestment fromcompanies that have not incorporated
adequate measures to counter bribery intheir company culture. EIRIS researchprovides investors with a tool to identifybest practice examples and thereby helpthem engage more effectively withcompanies.
Recommendations forinvestors:
Integrate anti-bribery responsesin investment process
Engage with companies, inparticular focusing ontransparency and reporting
Reward good performance and
highlight areas of concern Identify best practice examples
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Funded by the E IR I S Founda t i on This briefing has been made possible by a grant from the EIRIS Foundation, registered charity number 1020068. The
EIRIS Foundation is a charity that supports and encourages responsible investment. It promotes research into the
social and ethical aspects of companies and provides other charities with information and advice to enable them to
choose investments which do not conflict with their objectives. The Foundation funds specific projects to achievethese aims.
Author: Sachi Suzuki with thanks to Stephanie Maier, Franziska Jahn-Madell and David Tozer
1 MAURO, Paul: Why worry about corruption. IMF Economic issues No. 6, 1997
2 Aerospace Daily & Defense Report, Volume 222, Issue 62, 27 June 2007
3 http://www.oecd.org/document/20/0,3343,en_2649_34859_2017813_1_1_1_1,00.html
4 The index rules are available at www.ftse.com/Indices/FTSE_All_World_Index_Series/index.jsp
5 Prior to the enactment ofLegislative Decree number 231 of June 8, 2001 the Italian legal system did not provide for
corporate administrative responsibility for the criminal conduct of employees. Employees were liable individually for
their criminal actions; however, corporate entities as a whole were not responsible, except for the reparation of the
civil damages caused by the illegal conduct. This new law is inspired by the compliance models that are adopted in
the United States, and it has forced Italian corporations to adopt similar models.
6 The Sarbanes-Oxley Act was passed largely in response to the Enron and Worldcom scandals; it was passed by the
U.S. Congress in July 2002 and signed by President Bush on July 30, 2002. The legislation requires the CEOs and
CFOs of listed companies in the United States to certify the accuracy of their companies' accounts and annual reports
(Form 20-F for foreign companies) submitted to the U.S. Securities and Exchange Commission, the U.S. financial
market supervisory body.
7 http://www.unpri.org/
How we can help EIRIS Convention Watch Service
EIRIS is a leading global provider of independent research into the social, environmental governanceand ethical performance of companies. We offer a range of products for responsible investors.
EIRIS Convention Watch explores claims that companies have broken international principles on
human rights, labour standards, the environment, health and safety, or bribery.
Convention Watch provides a clear understanding of the many serious negative allegations madeagainst companies in press articles and through NGO campaigns. It reviews and assesses allegationsof company breaches of the spirit of major international conventions on human rights, labourstandards, the environment, corruption, anti-personnel landmines and cluster munitions. Full reports
on companies performance are provided.
For further information on EIRIS products and services for responsible investors please [email protected], visit www.eiris.org or call:
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