How boards can deal with corruption in emerging markets

Canadian companies must be vigilant about preventing corrupt practices in their overseas operations.

The Lujiazui Finance and Trade Zone and Huangpu River in China (Photo: Jacky Lee/Getty)

Instead of relying on the slow-growing U.S., the Canadian government is enhancing trade with emerging markets, thereby opening up countries with hundreds of millions (or even billions) of people. Just in the past 16 months, Prime Minister Stephen Harper has visited China, India and Brazil. Foreign Affairs Minister John Baird even traveled to Libya after the Arab Spring.

But for Canadian companies embarking on overseas operations, there’s one variable that could prove problematic in their new environs: corruption.

Just look at the countries our government has visited. India, China and Brazil rank as the 95th, 75th and 73rd least corrupt nations, respectively, on Transparency International’s corruption perception index. For the record, Canada ranks as the 10th least corrupt country in the world. And Libya—where SNC Lavalin had been tied to the toppled Gadhafi regime—comes in at 168, right near the bottom. Within these countries, the governments themselves are the net beneficiaries of much of the corruption, so politicians are far from motivated to impose reform.

On the other hand, regulators in many Western countries are taking corruption very seriously.

In the U.S., the Securities and Exchange Commission and Department of Justice recently released 130 pages of guidance on the Foreign Corrupt Practices Act, which has been in place since 1977. Enforcement and penalties have gone up dramatically in recent years. The UK Bribery Act, from 2010, has some of the most stringent bribery laws in the world. And in Canada, we have the Corruption of Foreign Public Officials Act, circa 1999.

What’s clear is that there’s an enormous disconnect between home country regulations and actual business practices abroad.

So how should boards with operations in emerging markets address corruption? Six things come to mind:

-You need a director with on-the-ground experience. This person should have worked in the country for a period of years and know the local competition, the regulators and emerging trends and forces in the industry. For example, a Canadian company with operations in India needs a qualified Indian director on its board.

-Boards must make it crystal clear to management that bribes won’t be part of any business dealings.

-Internal controls over financial reporting must be as strong in the emerging market as they are at home.

-Boards must have their own experts to scrutinize off-balance sheet and related-party transactions, validate and assure internal controls, and provide foreign language document translation.

-Overseas auditors should have the same oversight, scrutiny and direct contact with the audit committee as home auditors.

-The board needs to communicate a “zero tolerance” policy to each employee and supplier.

Companies and politicians are feeling the pain, both at home and abroad. The Wal-Mart bribery probe has widened beyond Mexico to include China, Brazil and India. The RCMP has raided SNC Lavalin’s Montreal and Oakville offices. In Quebec, the corruption inquiry has cost the mayors of Montreal and Laval their jobs. And finally, a senior Canadian director remarked that Canada (and specifically Ontario) has a reputation for being “the best place to carry out a stock fraud in the industrialized world.” (The quote comes courtesy of The Globe and Mail and paraphrases the director.)

Clearly, boards need to be informed about their overseas operations and how business is done abroad. On the other hand, there’s still much work to be done on corruption at home.