Is Anti-Corruption a Business or Legal Issue?

Used with permission from Mak Yuen Teen

On June 5, 2014,  Philippe Montigny, President of Ethic Intelligence (www.ethic-intelligence.com) asks exactly that question in an editorial (here).  My own perspective of compliance remains much along the lines of those such as Mr. Montigny and that of Professor Mak Yuen Teen (National University of Singapore), whose article I discussed in a recent post (here).

On June 4th 2014, I addressed an internal audit and investigatory group at a global hedge fund, where I discussed my experience through international sales, cooperation, and sentencing. I concluded my presentation by sharing my thoughts on current compliance challenges and asked the attendees for feedback relative to my own journey and their  professional challenges. What I found interesting is that many of the questions from the audience during the presentation addressed a number of the issues which are now starting to rise in the compliance debate, including "what is the role of corporate strategy and compensation when trying to drive compliance policies and procedures to the front line of the business?"

These questions were encouraging, as I am starting to see a gradual shift in the debate from the specifics of compliance, including "tone at the top," "third party management,"  and "how to organize a compliance department," (among others) all of which have a fundamental and valid place in the compliance discussion, to one of looking at business strategy as the primary foundation of compliance. Lately, we see in the news companies such as GSK and Citibank which are edging the discourse away from the "rogue employee," model or as Professor Mak calls it, "plausible deniability" towards one where business strategy itself is coming under scrutiny, sometimes from regulators, sometimes from shareholders, and often,  both.

In any case, while the details of a compliance program are not to be ignored, if the business strategy itself supports contradictory messages to the field between the "means" of compliance and the "ends" of winning above all else, then as Mr. Montigny concludes, compliance programs will "continue to be perceived by employees and other stakeholders as providing window dressing only."

Or, as I recently asked Donna Boheme @donnacboheme on a tweet, "when does the paradigm shift with respect to the "rouge employee" concept." Her response "when #boards stop accepting #lame excuses +demand accountability from management." Sometimes the limitations of a tweet  make the points of a message so much more relevant!

Bribery, Business Strategy and Plausible Deniability

Can business strategy in itself be a red-flag of corporate corruption?

In one word,  yes, and I discuss how in a recent guest blog (May 19, 2014) in Ethic Intelligence's "Experts Corner." 

I ask, if strategy is pulled back at the C-Suite, does it expose an executive message of strict anti-bribery compliance, while the economics of the sales forecast and corresponding personal incentive packages speak to a "win over everything else" mentality?

A gap in the debate

As I shared in the Q and A, I am concerned about the lack of discussion with respect to the corruption risk that front line international sales and marketing personnel face. Specifically, I draw attention to how corporate business strategy can directly contradict, through sales growth plans and incentive compensation packages, the messages of anti-bribery compliance. Such a situation leaves the sales force to decide "what does management really want, compliance or sales?"  While in past  writings I have discussed "compliance as bonus prevention" in the context of  incentive compensation, in the Q and A with Ethic Intelligence, I discuss the role of business strategy as a stand alone red-flag, of which compensation is a sub-set.

I am not alone

While I might have thought I was alone in expressing this concern, I recently came across an article by Professor Mak Yuen Teen, published in the Singapore Business Times on May 21, 2014, but also on his blog Governance for Stakeholders, titled "Plausible deniability and graft by MNCs." By way of background, Professor Mak is an Associate Professor of Accounting at the NUS Business School, Singapore. For his full (and impressive) CV, see here.

In his article, Professor Mak first calls attention to  the recent reports of GSK bribery in China, and GSK's public reaction as calling the conduct "outside of our processes and controls..." (The Guardian, July 22, 2013). However, Professor Mak goes onto demonstrate the  reporting relationship between Mark Reilly, former head of GSK China (and subsequently charged by Chinese officials), and his supervisor, Abbas Hussain, President of Europe, Emerging Markets and Asia Pacific, who is part of the "corporate executive team of GSK." As Professor Mak states, with this relationship "direct involvement in the scandal has moved up the chain of command of GSK." However, notwithstanding the discussion and relevancy of  the "rouge employee" GSK script, there is a far more interesting element to Professor Mak's writing as relating to corporate strategy.

"Did you wake up from a 10-year nap?"

Professor Mak references an on-line comment to the GSK allegations as above, and asks "whether he (GSK CEO Andrew Witty) and the board ought to have at least asked some probing questions when GSK China was reporting strong sales growth over the years proceeding the scandal." And that is where compliance gets separated from the reality of international sales growth.  Clearly, GSK executives were aware of two basic facts:

• There was a robust anti-bribery program in place at GSK, as referenced in  public statements. Professor Mak makes reference to a 29 page anti-corruption document, and Tom Fox discusses the GSK Corporate Integrity Agreement (here).

• There was high sales growth in China. 

Therefore, was it in fact what I have called a "zero-sum" game of compliance and sales?  Could those two factors have co-existed?  In other words, and I don't think is unique at all to GSK, "was it a case of don't ask, don't tell," at the C-Suite, as Professor Mak remarks. When the regional sales numbers were reported into management was it all "high fives," or did someone ask "hey, how did you get there?" I would ask the same of those who read this, who have been in those rooms, when the sales figures are shared.  What is the message?

Professor Mak focuses on complex multinational corporations (MNCs), where corporate executives are separated from the front line of sales by a deep and wide organizational chart. He asks, "should only executives such as Reilly take the fall while senior management and the board escape accountability..." and "can they really claim that they did not know what was going on...?"  I completely agree with Professor Mak, in that it is a long way from the C-Suite, where compliance programs commence, to the front line of international sales and marketing; however, does that distance justify the escape from accountability in not challenging the "reporting of strong growth in markets well known for corruption."

Professor Mak thinks not, and makes a compelling case, which is reflective of my own view.  I repeat his conclusion in  its entirety and in bold (just to make sure you get the message):

"It is time for senior management and boards of MNCs to stop hiding behind business conduct codes and anti-corruption and compliance programs, and a "plausible deniability" defense, and address more fundamental questions about the benefits and costs of doing business in highly corrupt countries, their business practices, and how they reward, retain and promote their employees." From my perspective, it would appear that the "default" for compliance and sales growth in low integrity countries, remains "zero-sum."

Maybe it is time that GSK listen to its own Chief Medical Officer James Shannon whom I referenced in a prior post, when he stated (in an interview with Reuters) that "sometimes you have to step backwards to move forward.." and that it is time for "an entire rethink about our business practice."

GSK, "Free Samples," and a New Business Model.

On April 16th, 2014 Hester Plumridge and Christopher M. Matthews, Wall Street Journal, reported that GlaxoSmithKline (GSK) is investigating claims that its employees bribed doctors "in Jordan and Lebanon by offering perks such as flexible travel arrangements and free samples that doctors could sell on..." (for the full article, link here).  GSK, as reported in the article, stated that the allegations "relate to a small number of individuals in these countries." In their press release of 16 April, 2014 "GSK Statement on Media Reports," (link here), GSK disclosed the number of violations, breaches, dismissals and warnings with respect to sales and marketing misconduct,  claiming "these numbers are very similar to those reported by other companies in our sector." Well, is that a good or bad statistic?

Nonetheless, what really caught my attention with respect to this article was the use of "free samples" as part of the "incentive scheme," as juxtaposed  to GSK's "rouge employee(s)" insinuation. While I am not an investigator, journalist nor compliance practitioner, I do have some experience when it comes to controlled samples (assuming these drugs are subject to some level of regulatory and customs control), and thus, I think there is an additional component to this issue.

From my perspective, it would be difficult, if not impossible, for a salesperson to transfer samples for re-sale, either through carrying such samples to the end user, which would require a carnet (see here for carnet information), or even by shipping them, without other individuals and departments knowing that these samples would never return to their point of origin. Furthermore, when shipping or carrying samples, there are numerous customs and regulatory declarations that the samples are either going to be returned, or that they are not subject to re-sale, or both. Thus, at minimum, we have what could be a serious disregard for customs and export declarations in this scheme. 

Again, assuming that given the business in which GSK operates, that they have strict shipping and accountability protocols, including internal and perhaps regulatory audit, that the "we didn't know" just does not square with this type of operation.  It requires too much internal and customs paperwork for such samples to simply "disappear" without  the knowledge of  support and/or management personnel.  Furthermore, one would think that Glaxo would have internal tracking protocols which would alert them when product simply "disappears." As someone who spent over a decade dealing with the issue of controlled samples and international shipments, there is, most likely, a logistical and/or managerial underbelly to this story, beyond the "its just a few." Expensive sample drugs, such as those referenced in the article,  just don't disappear without someone signing off on the expense. 

Maybe Its Part of a Greater Issue, Maybe....

One day later, as reported in Reuters (link here), GSK appeared to have broadened their reaction, given prior corruption issues in other countries, including China, declaring that they will commence to "build a new sales model designed to eliminate sharp marketing practices."  What caught my attention was the quote attributed to GSK Chief Medical Officer James Shannon when he stated  that "sometimes you have to step backwards to move forward.." and continued, "this is an entire rethink about our business practice." When I hear a C-Suite executive publicly stating that the company is looking at a total shift in the business model when it comes to their international business strategy,  I pay attention. 

Why? Because it means that management has accepted that a tinkering of the existing model, including a shifting of compliance and ethics priorities, will not suffice in addressing the issue of international corruption. Its too deep, and even if not "discovered," it remains too engrained in the operating mentality of the international sales, marketing and business development teams which operate in high-risk regions known for corruption.  Thus, it appears in this report, that GSK is no longer content with their problems being "similar to those reported in other companies."

So, What are the Alternative Models?

Coincidentally, while reading the current reporting on GSK, I had the benefit of getting a link on  the HBR Blog Network called "How GE and IBM are Playing Global Development to Win," by Jonathan Berman, as posted on April 16th, 2014 (link here). I read Mr. Berman's post, then immediately ordered his book Success in Africa: CEO Insights from a Continent on the Rise  (link here). In his post, Mr. Berman lays out what I consider to be no less than a total change in  international business modeling, whereby GE and IBM (as two examples) analyze countries not as customers but as business development partners.  It is a mutual investment of time and resources to identify the infrastructure challenges a country faces and then to examine the potential role that the corporation can play in meeting those challenges.

Mr. Berman describes compelling examples of how both GE and IBM used the "development to win" model in order to "spur economic development and create opportunities for their companies." Thus, it is not your traditional "sales cycle" approach to business development with the standard marketing SWOT analysis (strength, weaknesses, opportunities and threats); it is much deeper, as it engages the customer, and in this context we are speaking of state owned entities, as a partner,  not just a  recipient of products and/or services.  Futhermore, in my opinion, it also reduces the level of risk which impacts overseas compliance, bribery and corruption by taking a longer term and patient approach to international business development.

Long Term Vision and the Reduction of  Risk

Again, from my perspective, a longer term horizon with respect to the international sales cycle means less exposure to corruption risk. Why? In many countries and regions the sales cycle is unstable, subject to delays due to regime change, personnel turnover, funding delays and procurement instability. Much of the history of  FCPA enforcement relates to companies trying to "overcome" these instabilities. Thus, a long term vision, as stated by Mr. Berman, includes:

• An upfront "investment of money and time to understand the growth challenges" in the perspective country.

• "Senior management and board involvement." Adding that "companies playing development to win have CEOs traveling to the region 2-3 times per year, supported by engagement of the full management team." Accordingly, here we have the involvement of the C-Suite in the international business development process, stepping outside the normal organizational groupings of sales and marketing personnel.  

• A vision of earnings, investments and returns which are "long term" and "its common to invest for a decade or more before shareholders see material earnings."

As Mr. Berman concludes, "The companies playing development to win need the institutions and policies with which they are engaging to yield tangible results," which in the case of infrastructure investment in state entities, means providing the benefits of those projects to the citizenry. Thus, going back to the paradigm shift, if we think of transactions involving bribery and corruption as producing short term gains, where the immediate beneficiaries are the companies receiving the contracts and those receiving the bribes, this model takes that gain out of the equation. In the "playing to win" model, the vision is long-term, whereby both the corporation and the state both have a sustainable investment in one another, and results are delivered to their mutual constituencies in order bring long term value to all.  It is a positive definition of mutual dependence and both parties have a lot to lose if they don't deliver meaningful value.

In my view, this shift takes the entire debate on corruption and compliance, both in terms of ethics and programs, to a different level of engagement. I am looking forward to reading Success in Africa, CEO Insights, from a Continent on the Rise,  for deeper understanding.