Profiting from Integrity

How CEOs Can Deliver Superior Profitability and Be Relevant to Society

Alan Barlow

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351610391
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

The case for a pro-integrity approach to business is due to endemic corruption, inadequacy of compliance and irrelevance of corporate social responsibility. It is demonstrated empirically that there is a direct causal relationship between companies operating with heightened integrity and their resultant superior profitability.

For chief executive officers (CEOs) to achieve this, an innovative pro-integrity business model for companies to adopt is proposed, based predominantly on the author's business experience. The model is demonstrated by application to a case study multinational corporation where the author was CEO. A considerable amount of what ordinarily would be highly sensitive commercial information is provided in the case study in a frank manner. Using the prointegrity business model which encompasses stakeholders, vision, integrity, leadership, staff and feedback, Alan Barlow explains the value and application of his approach. He draws on benchmarking research and a case study example to provide rigour and context to the model. The result is a compelling argument for a pro-integrity approach to business as an integral part of an organisation's culture, communication and management practice.

Profiting from Integrity provides a powerful evidence-based argument for chairmen, non-executive directors and shareholders, staff and other stakeholders to challenge incumbent CEOs as to why they are not leading their business with a pro-integrity approach and thereby delivering superior profitability.

Part 1

The case for integrity

1The need for a pro-integrity business model

Bank of America, Barclays Bank, Citibank, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley, Enron, KBR/Halliburton, Rio Tinto, Rolls-Royce, Siemens and Volkswagen.

What have these prestigious financial institutions and blue-chip companies got in common? They have paid billions of US dollars in fines for unsavoury business practices or alleged bribery.

Despite the greater prominence given by many corporations to acting with integrity, there is endemic corruption and the cost to business is enormous. The World Economic Forum calculated the ‘cost of corruption in 2011 at more than five percent of global GDP (USD $2.6 trillion)’ and states that ‘corruption increases the cost of doing business by up to 10% on average’ (CleanGovBiz, 2014, p. 2).

Society’s reaction to this corruption has led to increasing distrust with business. Capitalism is in crisis. It is increasingly losing its connection, and hence its relevance, to society.

Due largely to financial institutions’ behaviour, the crisis of 2008 not only resulted in an economic crisis but also required the institutions to be bailed out financially by governments at a huge cost to society. In addition to corrupt behaviour, society sees the impact of public relation advisors being retained by many businesses to lobby government to change their policies so as to further the interests of businesses to the detriment of the interests of society. Current and recent events demonstrate a continuing trend of public distrust of business (Harris, Moriarty and Wicks, 2014).

Business wants to generate superior profits. Society wants businesses to act with integrity. This book responds to the following questions:

• Is it possible for companies to enjoy superior profitability and operate with heightened integrity at the same time?

• Is it possible for companies and society to enjoy shared values?

• Is it possible for companies and society to both benefit from enjoying shared values?

• Is it possible to identify a new competitive frontier in order to deliver this for business and for society?

• Will corporations acting with heightened integrity and thereby enjoying superior financial results along with a greater connection to society become the Holy Grail of competitive differentiation for businesses in the coming decades?

There is a growing body of empirical evidence which demonstrates a direct causal relationship between a company acting with heightened integrity and its resultant superior profitability. The value shared by both companies and society here is integrity. The benefit created by acting with integrity is superior profitability for the company; for society, it is the ensuing reduction in corruption, maladministration and mismanagement. This is delivered through investment by companies in the intangible asset of the core business process of operating with heightened integrity, which underpins their longer-term success. Businesses should, therefore, have a self-enlightened interest in proactively acting with integrity where they deliver superior profits and other measurable attributes of success along with direct benefits to society.

The pro-integrity model: An opportunity and a challenge

The objective of this book is to demonstrate with empirical and evidence-based argument that when CEOs robustly lead and operate their corporation with heightened integrity, superior financial performance is delivered. It goes further. It puts forward a well-grounded and innovative pro-integrity business model for delivering superior commercial returns. The model is based directly on the experience of business executives. The model is demonstrated in practical terms through its application to a case study multinational corporation where this author was CEO.

A considerable amount of what ordinarily would be highly sensitive commercial information has been provided in the case study in a frank manner. This has proved possible because the case study company was acquired by and subsumed into a much larger industrial group, and the private equity owner was also subsequently acquired and no longer exists.

Where corporations enjoy superior profits, it becomes axiomatic that they enter a virtuous circle of providing the funds to finance additional investment to drive subsequent and further profitable growth. Overall, this results in the creation of a new frontier of competitive advantage when such corporations continue to operate with heightened integrity in a proactive manner, and thereby benefit from its additional commercial success.

With a company acting with increased integrity, by definition, this reduces its non-compliance and drives out maladministration and corruption and also improves its dealings with business counterparties and other external stakeholders. A related consequence would be greater market efficiency and improved allocation of resources for society. A result would be the building of greater trust and shared connectedness between business and society. Benefits thereby arise for all stakeholders – from customers to employees, to suppliers, to shareholders, to communities and to governments. Consequently, a wider proposition is that a proactive approach to greater integrity in business both delivers bigger financial returns for corporations and reduces maladministration and corruption throughout society for the betterment of society at large.

The need

Endemic corruption

The challenge for widespread and meaningful adoption by corporations of a pro-integrity approach to business is huge. Despite the greater prominence given by many corporations to acting with integrity, there is endemic corruption. Not unsurprisingly, there is a regular roll call of allegations of corrupt behaviour by major blue-chip corporations which has resulted in them paying millions of dollars in settlements (see Box 1.1).

Box 1.1 Fines paid by blue-chip corporations for alleged bribery

• Rolls-Royce faced allegations of paying bribes over the period 2012 to 2016 through hiring a network of agents in 12 countries to win contracts. It subsequently paid UK £671 million to settle bribe claims (The Times, 2017).

• Volkswagen, with its emissions scandal of 2015 (whereby it fitted devices which reduced vehicle emissions when being certified), has set aside USD $19.9 billion to cover the cost of compensating owners, while also facing criminal charges in the US and will pay penalties amounting to USD $4.3 billion (The Economist, 2017).

• In 2016, Rio Tinto fired two senior executives (including one in charge of legal and regulatory affairs) after uncovering a USD $10.5 million payment relating to the vast Simandou West African iron ore project (The Times, 2016).

• KBR/Halliburton of the US paid a then record USD $579 million in fines relating to allegations of spending USD $182 million to bribe Nigerian government officials over a ten-year period to win more than USD $6 billion in construction contracts (Washington Post, 2009).

• Siemens paid penalties of USD $1.6 billion in 2008 to settle charges that it had been engaged in bribery worldwide (CleanGovBiz, 2014).

Hence, it should not be surprising that according to a survey of over 600 chief compliance officers of multinational corporations by the international law firm Hogan Lovells, nearly 60 percent of them responded that anti-bribery and corruption was not one of their CEO’s top priorities (Cancian, 2016). They also admitted that their corporations adopted a culture of profits before prevention.

Inadequacy of compliance

A challenge facing society is that regulatory and voluntary compliance-based policies are not delivering reduced corruption. Rather than positively addressing integrity and its bottom line impact on corporations’ performance, much of the literature is essentially orientated towards what can be called a compliance-based approach: the application of the law and prevailing norms. International organisations have published a series of guides for resisting extortion and solicitation, toolkits for combating corruption and case studies.¹ But, there is an absence of evidence that the latter have made any contribution to significantly improving the financial performance of corporations.

For business, compliance can be viewed as an inescapable overhead with an asymmetrical risk profile. That is, corporations have to incur the cost of complying with regulations without any attendant revenue stream. The disproportionate risk comes from the threat and disruption of dawn raids from regulators and damage to reputation and brand.

The 2007 financial crisis demonstrated that many of the large, reputable financial institutions that were embroiled in unsavoury practices ticked all the boxes for compliance. However:

• Otherwise prestigious banks were corrupted through greed; for example, in knowingly mis-selling mortgage backed securities, interest rate manipulation, aggressive tax avoidance and money laundering.

• A consequence for somewh...