Globalization of Ethics and Compliance by @EricPesik

Globalization of Ethics and Compliance UB School of Management 21 September 2013 By Eric Pesik Image Credit: Confident businesspeople by Victor 1558 http://www.flickr.com/photos/76029035@N02/6829325255/

Image by Eric Pesik

Starbucks Inside the Forbidden City by Satbir Singh http://www.flickr.com/photos/satbir/224429602/

Corporate logos are property of their respective companies, used here under the doctrine of fair use for purposes of identification, education, and critical commentary.

Apple Store - Scottsdale Road by Dru Bloomfield http://www.flickr.com/photos/athomeinscottsdale/4780635479/


Image: Garment factory Jiaxing by Memn http://www.flickr.com/photos/29027365@N03/2716435026/

The open pit of the Udachnaya Diamond Mine, Russia http://en.wikipedia.org/wiki/File:Udachnaya_pipe.JPG

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Justin Bieber performing Believe Tour in October 20, 2012 buy MyCanon http://en.wikipedia.org/wiki/File:Believe_Tour_7,_2012.jpg

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Image: Ahmedabad Gujarat India by Emmanuel Dyan http://www.flickr.com/photos/17616316@N00/5933944812/

Image: Greed by Liz West http://www.flickr.com/photos/53133240@N00/2207307656/

Image Credit: Confident businesspeople by Victor 1558 http://www.flickr.com/photos/76029035@N02/6829325255/


Image: The Pay Off by Chris Potter (www.stockmonkeys.com) http://www.flickr.com/photos/86530412@N02/8449175260/

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Where did it start?



1970s

Image: http://en.wikipedia.org/wiki/File:Leonid_Brezhnev_and_Richard_Nixon_talks_in_1973.png As a work of the U.S. federal government, the image is in the public domain

Image: B-52 Stratofortress with bombs http://en.wikipedia.org/wiki/File:B-52G_with_bombs.jpg As a work of the U.S. federal government, the image is in the public domain.

Image: Same Year Different Weather, Author Unknown, Year Unknown Image: http://www.designer-daily.com/10-amazing-cold-war-propaganda-posters-2901

Image: http://en.wikipedia.org/wiki/File:Nixon_Mao_1972-02-29.png As a work of the U.S. federal government, the image is in the public domain

Songs of the Italian Communists., revolutionary songs released on 7 ″ singles by the Italian label ‘i dischi del sole’ Image: http://waxidermy.com/canti-comunisti-italiani/

Portrait of Antonio Gramsci around 30 in the early 20s http://en.wikipedia.org/wiki/File:Gramsci.png This image (or other media file) is in the public domain because its copyright has expired.


http://office.microsoft.com/en-us/images/results.aspx?qu=MP900400667&ex=2#ai:MP900400667|

A 1960 comic book cover presenting communism as the iceberg that could sink America. Image: http://www.designer-daily.com/examples-of-american-cold-war-propaganda-2918

President Jimmy Carter signing the Foreign Corrupt Practices Act into law in December 1977 (photo courtesy of Carter archives) See http://www.presidency.ucsb.edu/ws/?pid=7036

Wedding Gift by Project Hotsauce (Julian Wylegly) http://www.flickr.com/photos/quattro_ftw/3424691075/

FCPA prohibits (1) giving or offering to give (2) anything of value (3) to obtain or retain a business advantage

Signpost by Andrea_44 http://www.flickr.com/photos/8431398@N04/2680944871/

Every Country in the World Prohibits Bribery

http://office.microsoft.com/en-us/images/results.aspx?qu=MP900409031

Books and Records Requirements

Image: The Pay Off by Chris Potter (www.stockmonkeys.com) http://www.flickr.com/photos/86530412@N02/8449175260/

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Extra-Territorial Reach

Image: Risk by Bien Stephenson http://www.flickr.com/photos/benstephenson/27298596/

The FCPA Blog http://www.fcpablog.com/blog/tag/top-ten Image: Arms Folder by D Planet

http://www.flickr.com/photos/dplanet/94441584/

Top 10 FCPA Fines of All Time

$95 Million

$137 Million

$185 Million

$219 Million

$338 Million

$365 Million

$395 Million

$400 Million

$579 Million

$800 Million

Deutsche Telekom (Germany)

Alcatel-Lucent (France)

Daimler AG (Germany)

JGC Corporation (Japan)

Technip S.A. (France)

Snamprogetti/ENI (Holland/Italy)

Total S.A. (France)

BAE (UK)

KBR/Halliburton (USA)

Siemens (Germany)

Greed by Liz West http://www.flickr.com/photos/53133240@N00/2207307656/

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Image: Cut your Bills by Images of Money http://www.flickr.com/photos/59937401@N07/5857660216/

Image: Chinese Flag by Philip Jägenstedt http://www.flickr.com/photos/48982392@N00/2489526032/

The value of a dollar by rahims http://www.flickr.com/photos/rahims/2110236034/


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Did You Say Bribe by Chris Potter (www.stockmonkeys.com) http://www.flickr.com/photos/86530412@N02/8448086741/

Talk to the hand by John Lambert Pearson http://www.flickr.com/photos/orphanjones/2123340817/

We accept U.S. Money by Roland Tanglao http://www.flickr.com/photos/roland/6536340101/

Televised confession on China's central broadcaster CNTV

International Currency by epSos.de http://www.flickr.com/photos/epsos/8453271596/

Where are we now?

Corruption costs the equivalent of a 20% tax

Six Questions on the Cost of Corruption With World Bank Institute Global Governance Director Daniel Kaufmann

http://go.worldbank.org/KQH743GKF1 Image: We Want You by D Planet http://www.flickr.com/photos/dplanet/94442625/

20%

11%

11% of companies say “firms like theirs” bribe

Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)

Image: Don by D Planet http://www.flickr.com/photos/dplanet/94442620/

40%

40% of companies claim to have lost business to competitors who won contracts unethically


Image: Adjust Tie by Dplanet http://www.flickr.com/photos/dplanet/94441582/

What’s next?

Is bribery worth it?

Is it worth the risk of bribing and

getting caught?

Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047

Is it worth bribing and getting away with it?

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How much did you pay? What value did you get?


What is the ROI of bribery?

Most bribery statistics come from firms that

got caught

http://office.microsoft.com/en-us/images/results.aspx?qu=handcuffs&ex=2#ai:MP900402864|

Who bribed and got away with it


Image: http://www.fanpop.com/clubs/marlon-brando/images/9109847/title/godfather-fanart

Don’t write if you can talk, don’t talk of you can nod your head, don’t nod your head if you don’t have to.

The Family Corleone Prequel to Mrio Puzo's The Godfather

“

How much did you pay? What value did you get?

How much did you pay?

Historical Financial Analysis

166 historical bribery incidents 107 publically listed firms 20 stock markets 52 countries 36 year time period


Median bribe amount


Image: http://office.microsoft.comus/images/results.aspx?qu=MP90044

$1.06 M

$11.43 M

Low Rank Officials High Rank Officials

Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012) Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422532

$16.77 M

$13.77 M

$7.63 M

$5.32 M

$5.00 M

$0.50 M

$0.19 M

Head of State

Member of Parliament

Government Minister

Military Officer

Judge

Head of Agency

Governor/Mayor

Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012) Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900448685

Bribe percentage of project awarded:

1.94%


Image: http://www.flickr.com/photos/34728058@N08/4818131438/

4.42% 1.22%

Bribe % Low Rank

Official

Bribe % High Rank

Official Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)

Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900401019

What value did you get?

Theatrical poster for Fight Club, Copyright © 1999 by 20th Century Fox. All Rights Reserved. http://en.wikipedia.org/wiki/File:Fight_Club_poster.jpg This image is of a poster, and the copyright for it is owned by either the publisher or the creator of the work depicted.

http://office.microsoft.com/en-us/images/results.aspx?qu=reading&ex=1#ai:MP900422989|mt:2|

Efficient Markets Theory

http://office.microsoft.com/en-us/images/results.aspx?qu=reading&ex=2#ai:MP900442375|mt:2|

UK Bribery Act 2010 Exogenous shock: Newspapers did not discuss vote Previous legislation was early 19th & 20th century All previous attempts had failed Included unexpectedly severe fines

Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013). Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422830

645 UK firms $3.768B Average Market Cap $429M Median Market Cap Event Date: 25-March 2009

Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).

Cumulative Abnormal Returns

-0.06%

-0.87%

-0.05%

CAR [-20;-1] CAR[0;1] CAR[2;20]

$2.43 Trillion Loss in Market Cap Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).

Foreign Corruption Exposure Firms that operate in more corrupt environments experience a larger drop in firm value

Image: http://www.transparency.org/cpi2012/results

0.51% more negative CAR [0;1] $2.19M more negative loss for median-size firm

-0.87% -0.61%

-1.12%

-0.51%

Baseline Low Foreign

Corruption Exposure High Foreign

CorruptionExposure


Other Anti-Bribery Regulations Firms that are already subject to US anti-bribery regulations (FCPA) experience a smaller drop in firm value

Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900400667

0.37% more negative CAR [0;1] $1.58M more negative loss for median-size firm

-0.87% -0.92%

-0.55%

-0.37%

Baseline No Cross-Listing US Cross-Listing


Spillover to Foreign Firms Non-UK firms with UK links and high foreign corruption exposure experience higher drop in firm value

Image: http://www.transparency.org/cpi2012/results

Foreign firms with high foreign corruption exposure and UK links had 0.19% more negative returns

-0.87%

-0.19% -0.31%

-0.12%

-0.19%

UK Firms Foreign Firms Foreign Firms with UK Link

Foreign Firms without UK Link


Median size firms with high corruption exposure experienced US $2.19M more negative loss than firms with low corruption exposure

But what about individual firms and individual bribes...

Return on Investment

Example: Elf Aquitaine paid $46M in bribes to acquire German oil refinery assets in 1992 At the time the deal was originally announced, Elf earned $327M excess returns (7 X return) with a net benefit of $281M after cost of bribe or an ROI of 6.1 (The bribe was later discovered later and numerous executives received jail terms in 2002-2003)


Who bribed and got away with it


166 actual bribery incidents 107 publically listed firms 20 stock markets 52 countries 36 year time period


For the 166 bribes studied, the average return was 10.5 X


10.5 X

5.5 X

All Bribes

High-Rank Politicians

CAR [-1,+1] relative to initial contract announcements, divided by amount of the bribe.


But that’s not the end of the story...

Do firms that bribe perform better?


http://office.microsoft.com/en-us/images/results.aspx?qu=reports&ex=1#ai:MP900422411|mt:2|

2.70%

5.10%

3.20%

0.90%

2.30%

1.40%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 Sales Growth

Companies that bribe have greater sales growth compared to control firms


-1.20%

-1.50%

-0.90%

-0.70% -0.70% -0.60%

-0.30%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 ROA

Companies that bribe have poorer return on assets (ROA = EBIT divided by total assets)


-12.10% -11.80%

-9.70%

-14.20%

-10.60%

-6.60%

-2.40%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 Asset Turnover

Companies that bribe have poorer asset turnover (sales revenue divided by total assets)


-0.90% -0.90%

-0.50% -0.40%

-0.80%

0.00%

-0.30%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 Operating profit margin

Companies that bribe have poorer operating profit margin compared to control firms

(operating profit divided by sales revenue). Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)

0.00%

-0.50%

-0.10% -0.20%

-0.40%

-1.20%

-0.60%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 Net Profit Margin

Companies that bribe have poorer net profit margin (net income divided by sales revenue)


Companies that bribe have poorer cumulative abnormal returns (difference between the sum of the monthly returns

for bribing firms versus control firms)

-2.90%

0.50% 1.50% 1.60%

0.30%

-4.60%

-6.80%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 CAR


Bribe-paying firms underperform the market for 3 years before and 3 years after winning the contract (except for sales growth)

Discussion Question: Why?

Globalization of Ethics and Compliance UB School of Management 21 September 2013 By Eric Pesik Image Credit: Confident businesspeople by Victor 1558 http://www.flickr.com/photos/76029035@N02/6829325255/

Acknowledgements

Acknowledgements How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, (March 30, 2012). http://ssrn.com/abstract=1772246 Bribes and Firm Value Evidence from Anti-Bribery Regulation Zeume, Stefan, (August 18, 2013). http://ssrn.com/abstract=2179437 Report to the Nations on Occupational Fraud and Abuse Association of Certified Fraud Examiners (2012) http://www.acfe.com/rttn.aspx Microsoft Office Online Images from Microsoft Office Online are used with permission from Microsoft. http://office.microsoft.com/en-us/images/ Flickr Creative Commons Images from Flickr Creative Commons are used under Creative Commons license. http://www.flickr.com/creativecommons/ Other Sources Corporate logos are property of their respective companies. All other sources and images are acknowledged where they appear.

About the Author Eric Pesik Eric Pesik is a frequent speaker on legal and compliance matters and has taught law school and business school in the USA and Singapore. Background Mr. Pesik is currently the Associate General Counsel and Compliance Officer for Seagate Singapore International Headquarters Pte Ltd. He has been a lawyer since 1997 and is a member of the State Bar of California, USA. He is also admitted to the US Court of International Trade in New York and the US Supreme Court in Washington, DC. Other Presentations Many of Mr. Pesik’s presentations are available on SlideShare at: http://www.slideshare.net/ericpesik Disclaimer This work represents the opinions of the author alone, and is not the opinion his employer. Creative Commons Attribution License You are free to share, copy, distribute, and transmit this work; to remix or adapt this work; and to make commercial use of this work, under the condition that you must attribute this work to me (but not in any way that suggests that I endorse you or your use of this work). http://creativecommons.org/licenses/by/3.0/ Each slide contains source attributions and URL; you should obtain the original images from the original sources before reusing. You must comply with any applicable license restrictions imposed by the original source.

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Globalization of Ethics and Compliance by @EricPesik

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