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April 01, 2010
Companies Not Doing Enough to Limit Exposure to Bribery
    by Robert Kropp

A new report from EIRIS finds that the vast majority of companies in the FTSE All World Developed Index lack adequate anti-bribery policies, and almost none provide effective reporting on the issue.


Recent high-profile instances of corporate corruption suggest that, especially for those companies involved in high-risk business activities, insufficient attention is being given to the issues of bribery and corruption. The US Justice Department's fraud division has charged a former senior executive at Armor Holdings, a manufacturer of bulletproof vests that was acquired by BAE Systems in 2007, of bribing UN officials to win contracts for the outfitting of UN peacekeeping forces. Innospec, a chemical company, pleaded guilty to bribing officials in Iraq to secure contracts for the supply of a fuel additive, and set aside $40 million to pay for fines relating to the charges.

Furthermore, whatever the ambiguities involved in the guilty pleas in China by four executives of Rio Tinto, a mining company—the Chinese government originally charged the men with stealing state secrets, and only charged them with bribery after the Australian government lodged a complaint—the executives did end up pleading guilty, and were subsequently fired by Rio Tinto.

Despite the fact that the OECD Anti-Bribery Convention, whose 38 current signatory countries have pledged to pass legislation that criminalizes the bribery of a foreign public official, has been in force since 1999, and the United Nations Global Compact lists anti-corruption among its ten principles, "Relatively few companies have much of a policy about bribery at all," Stephen Hine, Head of International Relations at Ethical Investment Research Services (EIRIS), a UK-based environmental, social, and governance (ESG) investment research organization, told SocialFunds.com.

"No company wants to think they have an issue with bribery and corruption," Hine continued, "So while companies may be good at other aspects of ESG and corporate social responsibility (CSR) issues, many are lacking in addressing bribery."

"Therefore, companies' reputations could be at risk," he added. "There's the risk of litigation as well, not to mention the financial cost to the companies."

In the US, the Sarbanes Oxley Act, enacted in 2002, requires companies to implement a code of ethics addressing bribery and corruption. A
report issued this week by EIRIS found that, as a result, no North American companies were assessed as showing no evidence of addressing bribery. In the UK, where a bribery bill is under consideration by Parliament, 56% of companies were found by EIRIS to lack adequate anti-bribery policies. More than three-quarters of them lack adequate management systems, and none of them adequately report on the issue.

Overall, according to EIRIS, "Of the 625 global businesses analyzed, 85% lack adequate anti-bribery policies and 94% lack adequate management systems on bribery. Levels of transparency and openness on bribery are also extremely poor with less than 1% of companies adequately reporting on the issue." The companies studied in the report are listed on the FTSE All World Developed Index.

Sachi Suzuki, report author and Research Analyst at EIRIS, said, "Corporate failings on bribery of this scale pose significant risks to investors and leave companies exposed to risks of unlimited fines, reputational damage, restricted access to markets and difficulties in raising capital."

The report found that "Companies with a high level of exposure to have better policies and systems for countering bribery than their peers with lower risk exposure." Companies in the high-risk sectors of mining, electricity, gas, water, and technology hardware and equipment "are more aware of the risks they face and are doing more to address these risks than those that are less exposed," the report continued. Real estate was found by EIRIS to be the high-risk sector most in need of improvement, with only 6% of companies receiving an intermediate ranking.

With overall reporting on ESG factors by companies becoming the mainstream, the noticeable lack of reporting on bribery and corruption by the companies studied by EIRIS is especially striking. Hine told SocialFunds.com, "It may be unclear to companies what to report on. I think as time goes on, and investor and society pressure builds, we'll see more reports and more policies."

A 2009
report issued by the Global Compact and Transparency International provides comprehensive guidance for organizations seeking to develop an anti-corruption program and report on it.

Stating that "reporting on anti-corruption activities establishes a common language to measure, compare, discuss and improve anti-corruption activities and practices," the report lists a number of basic elements for reporting on progress made in implementing the Principle against Corruption. It recommends that companies commit publicly to work against corruption and be in compliance with all relevant laws, provide training on the anti-corruption commitment for all employees, and monitor the commitment for continuous improvement. The report frames reporting on the issue in terms of the Global Compact's Communication on Progress (COP), but its elements are relevant for inclusion in corporate sustainability reporting as well.

As Suzuki noted in her statement, the risk to investors of poor corporate performance on bribery by their portfolio companies is significant. EIRIS devotes the concluding section of its report to recommendations for investors seeking to promote good practice. It recommends that investors implement bribery considerations into their investment decision-making process, and focus their engagement with companies on transparency and reporting.

"There are a number of things that investors can do," Hine said. "Analyze which companies in their portfolios are at the greatest risk for bribery, given their business operations and the locations of their operations. Identify those which have the best policies."

"Investors might want to focus on engagement with companies to improve bribery policies and reporting," he continued. "They might want to do it collaboratively, through the
PRI and other outlets. The more we can get collaborative engagement on the subject, the better the outcome."

Hine concluded, "Although this may seem a new and challenging area for companies and investors, it is one whose time has come. The ever-growing number of scandals out there is a warning sign."

 

 
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