Integrity in Business

Developing Ethical Behavior Across Cultures and Jurisdictions

Frank Holder

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9781032838342
• eBook ISBN:
  9781317115144
• Topic: Business
• Subtopic: Business General
• Index: Business

Business integrity is rarely a matter of straight-forward rules. As the nature and geography of business transactions become more complex, managers are required to make judgements and to tackle new ethical dilemmas that are often local and situational. Integrity in Business explores the complex nature of integrity and business and illustrates how organizations have avoided major setbacks to their reputations and value by encouraging integrity. It also examines those organizations that have failed or experienced serious reputational damage due to lack of preparation, lack of transparency and lack of leadership. Frank Holder analyzes how transparency and integrity depend on a state of balance in competition and knowing who you are doing business with. He explains the significance of leadership awareness which, whilst now global, is alert to the need to establish integrity in local markets. Using his research from a review of significant fraud cases, legislative mandates and governmental and nongovernmental initiatives over the past 15 years, the author provides a rigorous and sophisticated guide to understanding and adopting an holistic business integrity strategy- one which has a realistic chance of protecting your organization from the kind of catastrophic loss or reputational damage that can easily be the result of an error of judgement in a world that is increasingly connected and driven by instant and social media.

CHAPTER ONE

THE MYTH OF AMORAL BUSINESS

There are a multitude of books, articles and white papers written on the subject of business ethics. Some involve case studies or tell a history of ethics in business, while others focus on a religious and/or personal moral theme. This book will answer the question ‘What is business ethics?’ and provide a guide on how you can improve your business ethics. There are far fewer references on business integrity promoting the value of integrity as a strategy and a prerequisite for successful business in a globalized world. There are also a number of titles written in textbook or academic styles. Consequently, there are few books that are written as practical guides for professional practitioners who have to struggle with business integrity issues as they relate to their everyday businesses. The assertion, by the more cynical commentators, that business and integrity are contradictory and oxymoronic dismisses further examination into the evolution of best practices, serves as an effortless explanation about why some organizations have failed, and plainly ignores the trend towards more compliance in a globalized world. It is very simple: integrity in business today is not only about decisions willingly made by organizations, but also the individuals employed by the organization, its key partners and suppliers, clients and market trends. The requirement to comply with rules and regulations is growing and the trend towards more transparency requires individuals and organizations to perform their appointed tasks with the highest level of integrity or risk damaging their reputation and the reputations of their associates and/or clients. This book will discuss the trend towards more transparency and how cases of fraud and corruption are increasingly being exposed. Fraud and corruption by individuals and businesses is now in the spotlight, especially because of the ability of the media to have an aggressive and exponential effect on public awareness and perception. The result of this awareness is twofold. First, media technology is helping regulators keep fraud a salient issue with each new discovery and helping grow the public’s demand for officials legislate against fraud. It has indeed become a hot-button issue, especially after the downturn of the global economy. Second, this awareness is causing us to ask questions about how much legislation is needed to prevent fraud while allowing businesses to remain competitive in the global market. The increase in fraud and corruption, legislation in response to it and rise in awareness due to media technology has produced a dilemma. Fraud needs to be curtailed and transparency is key to any solution, but there are limitations that come with too much regulation for businesses. It is not necessary to lose a competitive edge in the marketplace to ensure integrity. In fact, there are ways that businesses can work with governments, utilize the guidelines set by non-governmental organizations and their experts to combat corruption, and police themselves to ensure they function with integrity.

This book aims to focus, at times, on the complex nature of integrity and business and to demonstrate how organizations have avoided major setbacks to their reputations and market value by encouraging integrity. These same organizations have avoided setbacks because they identify and manage strategically those organizations with whom they transacted business; by using competitive intelligence, followed by diligent relationship management, they have exercised proper due diligence. The examples used will demonstrate how the more successful organizations also happen to be the most transparent, have top-down approaches to fostering integrity and—most importantly—have strategies to identify, manage and avoid organizations and/or individuals that pose a risk to their reputations. We will also examine those organizations that have failed and/or experienced reputational damage due to a lack of preparation; lack of transparency, lack of the kind of leadership which facilitates an environment where integrity is key, and failure to exercise due diligence when doing business. We will explore the lessons of these failed organizations in order to identify what went wrong and to develop a practical guide either to fix or prevent similar issues in your own organization with the hope that you will be armed with strategies—based on a set of tools learned through these examples—of how other organizations have prevented a crisis, or completely recovered following a major issue. This practical guide will ensure continuity in the event of a potential public relations crisis surrounding your business ethics and includes perspectives on how to measure your business integrity and take action in a globalized business environment.

One unavoidable trend in the past 50 years has been the development of technologies that are making the world increasingly interconnected. These technologies range from communication to transportation and have revolutionized the way the world works and how we perceive it. These technologies inevitably caused changes in business as well. These changes, which are global in nature, are central to each argument in this book. They reflect the new difficulties that have been produced in businesses and what organizations are doing to deal with them. For practitioners concerned with the difficulties of running multi-jurisdictional and multicultural organizations in today’s complex compliance environment, insight into how this trend has changed the rules of the game is critical. I have written this practical guide for c-suite officers, directors of companies, general counsels, audit departments, compliance officers, government agencies and professional services firms in the legal, audit, tax and consulting areas. I have included both a case study methodology, using only the most germane and up-to-date cases, as well as a comparative analysis of the current regulatory environment in the world, while looking at a brief history of the evolution of integrity and business, drivers of current behavior, and an analysis of what is wrong as well as practical tips in the final two chapters on how to fix it. All of these practical tips will serve to provide a guideline for doing business in a globalizing world.

The interconnections driven by globalization cannot be perceived as a process that standardizes the global business environment. ‘Globalization’ must be understood as a complex set of interacting processes and not a standard homogenized process. The word is more aspirational than real and in the gaps between the concept and the reality lie significant risks. Therefore, this practical guide exposes the trends of globalization across different markets, specifically in Chapters 2 and 3, and highlights the value of being informed about every aspect of your business and the global market, and examines the risks to your business integrity when you or your organization only concentrate on your proximate concerns without examining the risks posed by your key partners and suppliers and clients during your due diligence efforts. As Chapter 4 highlights, fraud and corruption could have been prevented if a few individuals, whether internally or externally, took additional steps and scrutinized the individuals and/or companies they were conducting business with and brought attention to any inconsistencies like unusually high returns in a bear market in the case of Bernard L. Madoff’s Ponzi scheme. Fortunately, these additional steps are not costly. Access to information today is more available due to more stringent legislation mandating transparency, worldwide awareness of corruption and media technology. Information is a critical asset and must therefore be protected while conduct must be as transparent and clear as possible. There is no room in today’s world for grey and/or mixed messages because the penalties and risks are too high. This holistic approach ensures your information remains up-to-date and relevant and provides preparedness while simultaneously safeguarding conduct, guaranteeing business integrity, and confirming a great reputation.

It is not an easy task to set forth an argument on how integrity can successfully be present in companies without compromising revenue because a company could never be fully transparent. In fact, it is important that companies have trade secret protections and penalties for disclosure of proprietary information by employees who signed non-disclosure, or who have non-compete clauses in their contracts, act as disincentives. At the heart of every successful business there is a special formula, process, design, and/or information that allows for a legal competitive advantage in the marketplace. This can be done without compromising integrity. Competition remains at the heart of business and entrepreneurship. This will not change. It may seem as if there is no integrity due to the privileged nature of information, but this is the foundation of a fair market system: you have an innovative idea, you protect that idea, your idea becomes obsolete as a result of improvements or disinterest, and a new idea arises. The speed of business creates a circumstance in which today’s groundbreaking idea is tomorrow’s outmoded and largely forgotten commodity. Whether these ideas drive, or are driven by technological advances, rapid changes in the way we do business are inevitable. Such changes force leadership in organizations to be more cognizant and knowledgeable about the reputations of their associates and cautious about the risks posed by conducting business with another organization and/or individual that possesses a questionable background. Transparency, whether through self-policing or mandated through legislation, does not mean that a company has to provide access to its ‘secret sauce’ and, in turn, its trade secret protection. Instead, it simply means that there needs to be a fair balance in competition, and knowing whom you are doing business with is essential to ensuring your company is protecting itself from internal and external corruption while maintaining a positive reputation in the open market. To protect itself and customers, every company should take a holistic layered integrity/business ethics approach to achieving this balance (see Figure 1.1). Most importantly, while the scope of leadership’s awareness is now global, establishing integrity within local markets still remains the foundation of any business. The integration of market systems, coupled with the upsurge of social media, makes it so that it is no longer sufficient to remain concerned with your immediate surroundings (i.e., you, your organization, clients, key partners and suppliers) at any given time. The greatest lesson learned from failed companies, those that recovered successfully from a crisis, or those that have proved remarkably resilient and never suffered a public relations predicament was the value of being informed. Those who were able to remain in business were more likely to have had more understanding about its immediate dealings as well as thorough information about their clients and the market at any given time. They were prepared. Unfortunately, some were not prepared or were ‘wilfully blind’ to corruption and no longer exist. In addition, the corruption in failed companies such as Enron, WorldCom and Bernard L. Madoff Investment Securities LLC have led to widespread collateral damage and have caused other companies to fail (e.g., Arthur Andersen (Enron)), milked investors of their funds, and caused employees their pensions and jobs. Furthermore, it has led to lost confidence in the market.

The consequences of not knowing and understanding the organizations and/or individuals with whom you are doing business were considered insignificant for companies in the past because it seemed the risks were low, but this is no longer the case. We are increasingly interconnected and the value of your reputation is now combined with severe penalties for non-compliance. The US Foreign Corrupt Practices Act of 1977 (FCPA), which is discussed in Chapter 5, along with other drivers of current behavior, serves as an example of the importance of knowing your customers and your suppliers prior to engaging in any business dealings with them. In fact, the FCPA was amended in 1998 and was considered the strongest legislation in the fight against corruption until the United Kingdom’s Bribery Act of 2010. Both the US FCPA’s 1998 amendment and UK Bribery Act of 2010 serve as examples of governments’ responses to corruption. However, while governments across the globe are affording their respective regulatory agencies more resources and introducing legislation to combat corruption in order to ensure investor confidence and business integrity, companies must also be responsible for the enforcement of their internal compliance systems as well. These compliance systems must be able to adjust to governmental changes, company policies and personnel. Otherwise, the system itself risks becoming rigid and/or obsolete. A company’s compliance system must be enforced as strongly as legislation mandates. It needs to be internally enforced as well and, in order to be effective and ensure key partners and suppliers, clients and employees in your company do not act with poor judgement, these acts of indiscretion should be dealt with accordingly. Governments and companies will have different understandings about what constitutes corruption. However, having company compliance guidelines, awareness of them, and enforcing them will provide clarity to your values.

Figure 1.1 Holistic layered integrity/business ethics approach

What constitutes integrity in business has evolved just as many other values-based concepts have. It was as recently as 2000 that the French government started to identify the differences between passive and active bribery and imposed an international treaty regarding the payment of bribes in commercial contracts. Officially known as ‘exceptional commercial expenses’, these bribes were acceptable.¹ Today, they are largely unacceptable and are discouraged with sanctions and penalties. Value-based concepts have changed in no little part because business increasingly crosses international boundaries and new cultures; e.g., the Chinese, the Indians and the Brazilians are starting to influence the way the world conducts its business. Technology and transparency are making it more difficult to conceal bribes and/or deny them when they do happen—the same transparency is true with incentives offered for exceptional performance. In addition, transnational regulatory organizations such Transparency International (TI), the Organisation for Economic Cooperation and Development (OECD), and Partnering Against Corruption Initiative (PACI) are spearheading the movement to ensure bribery in international business is monitored and criminalized. Later in the book, I will discuss the significance of these non-governmental regulatory organizations and government actions as well as their ability to prevent corruption and encourage transparency and integrity. Prior to discussing these organizations and governmental legislation thoroughly, we have to have a better understanding of fraud, the motive, the method and the people and/or companies that committed fraud. Companies have to be aware of the motives and methods fraudsters used to cover their schemes and how their own corporate structure and way of conducting business can allow for fraud and corruption within its rank. Companies need to adopt standards and create a culture that emphasizes anti-corruption. A company’s internal compliance policies are the foundation upon which everything else is built.

DEFINING BUSINESS

The seminal examples of corruption and lack of transparency in businesses in the first decade of the twenty-first century are Enron’s accounting fraud discovered in 2001, the HP spying scandal in 2006, Siemen AG’s corruption and bribery scandal discovered in 2008, and several Ponzi schemes carried out, specifically Bernard L. Madoff’s scheme, to name a few. It is not a surprise that the public, with the aid of the media, are demanding fundamental change in the way companies conduct business. Of course, it is important to get a sense of perspective. The majority of business transactions are honest and compliant, but the fraudulent anomalies are what make headlines in the media. This is especially true when hindsight provides us with various gaffes by regulatory agencies that could have stopped or, at the very least, prevented these fraudulent activities from getting worse. This is why companies must have the tools to police themselves and minimize risks and liabilities. The fact is that, while regulatory agencies may hurt their reputations for failing to notice fraud, your company will be penalized and probably fold. While businesses have a more difficult time regaining their image and reputations, regulatory agencies are able to quickly change administrative leadership and continue to rebuild after a public relations disaster. Companies do not have the benefit of starting over. Thus, it is more imperative for companies to establish internal controls on their own along with governmental mandates. This will minimize your company’s risks and liabilities and serve as a preventative tool to deter fraud.

Unfortunately, fraudulent activity within one part of a business or one industry is extraordinarily corrosive and infectious to those around it. Thus, the scandal that engulfed Enron not only affected Enron and its subsidiaries also led to the collapse of other firms, such as the accounting firm of Arthur Andersen, associated with Enron. Therefore, if your company is connected with a lack of integrity, even if that connection is by association with a third party, it becomes a risk even if you are fully compliant and the culture of your company thrives on integrity. While your company may have procedures and resources to establish a strong internal compliance system that adheres to legislative mandates, the companies and individuals you conduct business may lack them. Your compliance system must include a set of procedures that must be satisfied prior to conducting business; this will be discussed in Chapters 6 and 7 where I discuss optimal solutions regarding fraud and corruption prevention. However, it must be noted that integrity is a value-based concept. It is difficult and, at times, impossible to fully define a value-based concept like integrity, let alone in a company that does business across multi-jurisdictional and multicultural settings. We have to look at the consistency of actions of a company and its employees and how they resolve any inconsistencies they face. A company’s culture, and value systems within that culture, go a long way to determining whether or not it has the ability to prevent corruption as well as survive it. In my experience, the following is a summary of how companies can measure their integrity.

The Measure of Integrity

How do we measure a company’s integrity and validate that its employees will act responsibly, especially when placed in a difficult position? Increased rules, greater competition and access to new, more geographically disparate markets have increased the risk of dubious business practice, without necessarily defining the picture of what this actually means in practice. Business integrity requires us to examine, among other things, organizational behavior (i.e., its culture of compliance), how the company is structured, details about the company’s associations and clients, whether it facilitates an open platform for discussion, how compliance issues are dealt with and whether transparency exists. The following are potential key measures by which you can assess the level of integrity within your company:

1. Policies, vision and mission

2. Tone from the top and leadership

3. Training and awareness

4. Consequences (including, penalties and termination for poor judgement)

5. Whistle-blower and similar internal control programs.

An effective company implements policies that provide a structure to the workplace. The process of measuring integrity and how it functions in a globalized business world begins with a glance at a company’s policies and whether or not these policies are understood by employees. While a company’s vision and mission may be answered in simple, and often creative, statements, a company’s policies are what drive behavior. In addition to policies, a vision and a clear mission, these procedures must be supplemented with training, awareness of the consequences of not following these procedures, and whistle-blower and other internal control programs. Most importantly, leadership is directly responsible for ensuring employe...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• About the Author
• Chapter One The Myth of Amoral Business
• Chapter Two Emerging Markets
• Chapter Three Developed Markets
• Chapter Four Case Studies of Major Fraud and Corruption Around the World
• Chapter Five Drivers of Current Behavior
• Chapter Six What in the World is Wrong?
• Chapter Seven Improving Integrity
• Index