external_study_company_practices_for_corruption

11 Company Practices for Corruption Reduction

Stockholm School of Economics in collaboration with Globalt Ansvar, 2008.


Stockholm School of Economics MBA 2008.

A practical and academic examination of what companies from four distinct industries operating in Sweden – ABB, Skanska, Swedbank and Pfizer Sweden – are doing to help reduce corruption and support the UN Global Compact’s 10thPrinciple.



Executive summary: The purpose of this document is to describe practical and effective ways of applying the UN Global Compact’s 10th principle within a business context and to share these findings with other interested businesses. Since the 2004 addition1 of the UN Global Compact’s 10th principle, which states that, "Businesses should work against corruption2 in all its forms, including extortion and bribery," many companies have elected or been obligated to place an increased focus on their anti-corruption policies and the enforcement of those policies. In order to facilitate companies’ efforts, we have explored how companies are currently best implementing their anti-corruption policies. Drawing on live examples from companies in four distinct industries - ABB, Skanska, Swedbank and Pfizer Sweden – and input from investors at Banco Fonder and Folksam, we have collected empirical learning about what policy implementations work effectively to deter or reduce corruption and bribery3. 11 company practices stood out when comparing the stories we gathered across the four industries. Each is important. No chronology or ranking is intended except for the first action. A strong company culture - one that does not tolerate corruption at any level in the organization - sits at the core or foundation of the ten others. The 11 company practices are as follows:

• Make anti-corruption a strong part of company culture • Raise awareness • Train your employees • Update and inform • Increase control • Reinforce zero-tolerance policies • Specify gift policies • Be transparent • Assess risk • Engage constructively • Follow the leaders

Reducing corruption is not as easy as implementing these practices, especially in countries where perceived corruption is high4. However, implementing as many of these practices as soon as possible will help companies reduce risk by helping it stay an 1 At the 24 June 2004 UN Global Compact Leaders Summit it was announced that the UN Global Compact was to include a tenth principle against corruption. 2 The OECD defines corruption as "the abuse of entrusted power for private gain." 3 The views expressed in this paper are solely those of the authors and do not necessarily reflect the views or positions of the companies discussed herein. 4 See Transparency International Corruption Perceptions Index: http://www.transparency.org/policy_research/surveys_indices/cpi/2007



important step ahead of an increasingly corruption-aware social zeitgeist7,and by creating competitive advantages that perpetually benefit both business and society. A closer look at the 11 company practices for corruption reduction:

• Make anti-corruption a strong part of company culture. Company culture needs to incorporate ethics and anti-corruption.

Folksam’s Carina Lundberg Markow made note that if ethics and anti-corruption is not incorporated into the company culture then a company will have a limited chance of successfully combating corruption and bribery. As laudable examples of company cultures that embrace anti-corruption, ABB includes their ethical standpoint in their strategy statement, Swedbank does the same in their Group Policy on Ethics issued by the Board of Directors (supervisory council) and Skanska’s zero-tolerance policy is one of the Five Zeros in the company vision statement. Pfizer has implemented a global Ethical Code for Business Conduct and an International Anti-Bribery and Anti-Corruption Procedure with emphasis on integrity and zero-tolerance to corruption. The Swedish Institute Against Bribes (Institutet Mot Mutor) maintains that top management should take “overall responsibility” for the implementation of ethical policies8. Company involvement at every level, with visible and sincere actions and messages from top management, is critical to deterring corruption.

• Raise awareness. Raising awareness of policy errors and successes helps reduce corruption.

As Banco Fonder’s Sasja Beslik notes, given that corruption is difficult to track, there is a degree of ignorance among Swedish companies regarding the extent of the existence of corruption. However, what is clear is that if your company is operating or has suppliers in a ‘corrupt’ country9 it is at a higher risk of internal corruption and bribery. Several companies have developed systems for raising awareness internally in order to confront corruption and bribery. For example, ABB raises awareness through meetings and employee publications as well as via the intranet. Swedbank and Pfizer regularly maintain awareness through e-mail and publish internal policies on the company intranet with additional information available on the Internet and in their global annual report. Local investors can request to have country specific procedures that implement the global policies locally sent to them. Pfizer employees are encouraged to also educate their customers as to what constitutes bribery. 7 “The Path to Corporate Responsibility,” by Simon Zadek, HBR, December 2004. 8 “The Use of Benefits to Promote Business Contacts and Relationships.” Stockholm: Institutet Mot Mutor, 2000. 9 Transparency International’s Corruption Perceptions Index: http://www.transparency.org/policy_research/surveys_indices/cpi/2007



Sharing stories of success can also be a potential competitive advantage. For example, Skanska won the $1bn New York Jets stadium contract on the basis of their ethical standpoint. With all other factors equal, Skanska’s strong ethical track record, as part of its Five Zeros commitment, was the differentiating factor that won the bid.

• Train your employees. Training employees, especially through e-learning, as a means of communicating company policies helps reduce corruption.

ABB trains its employees as well the employees of its suppliers on a continuous basis. It is important that employees understand ABB’s strict compliance program and the harsh consequence – dismissal – related to violations. At Skanska, all employees are educated on their Code of Conduct, which includes policy in regards to ethical breaches. Their training programs include dilemma training to deal with culturally specific situations. Swedbank has an e-learning training system to educate, inform and test employees of company policy, including ethical questions, bribery and dilemma training. Pfizer also educates its employees on-line as well as in classroom training. All employees must complete several global e-learning sessions. The additional local e-learning training explains how to follow PARIS (Pfizer’s Ethical/Affärsetiska Rules In Sweden) guidelines. The classroom anti-corruption training gives in depth practical advice on how to act in different situations, complete with examples from the real life. As Folksam’s Carina Lundberg Markow notes, companies are more likely to take corruption and bribery issues seriously if they have had to deal with a corruption incident. These experiences not only motivate training but also can become important examples in the training itself so that mistakes are not repeated.

• Update and inform. Update policies and inform employees in order to keep corruption issues top-of-mind.

Swedbank, like many organizations, updates their policies at least once a year. Skanska’s Code of Conduct, however, has not been updated since 2002; a new updated version will be released, as well as an updated Compliance Guideline, in late 2008 in order to incorporate more stringent language especially in regards to public sector communication and interaction. At ABB, there is continuous education on updated policies. Pfizer updates its policies approximately once a year. If a major change occurs during the year, it is communicated via email immediately and changes are made in PARIS accordingly. Some companies are currently considering introducing annual mandatory re-certification systems so that employees will better informed and up-to-date about changes in the law and corporate policies.



• Increase control. Adopt a controlling mechanism, such as a whistleblower system, an open-door policy, or internal or external audit, as a necessary element to any anti-corruption policy.

Though the first steps in combating bribery and corruption are developing and implementing policy, a policy is not effective if there are no consequences to violating it, i.e. if there is no controlling mechanism. While whistleblowers systems are typical and accepted in an American context, the word whistleblower has a very bad connotation in many cultures. Even though according to Swedish law employees cannot be fired for reporting corruption or bribery, turning in a fellow employee is unheard of in some countries. The efficacy and legality of whistleblower systems is also being challenged in many countries because the system itself can be abused or infringe on privacy rights. More effective methods than whistle-blowing are internal audit systems and direct reports to superiors. Skanska’s internal audit team actively monitors for breaches of business ethics policies, investigates company behavior and involves external agencies, such as local police, whenever necessary. Skanska employees are encouraged to report directly to the SVP-Sustainability, the CEO or any other senior person in the corporation. Pfizer adopts a similar approach. In addition to a global anonymous compliance hotline, Pfizer company culture encourages an open door policy for reporting instances of bribery or corruption and internal audits and proactive reviews with focus on corruption are performed at regular intervals. The most extreme form of a controlling mechanism is external auditing. Swedbank recognizes and underlines the importance of frank discussions of ethical issues and encourages employees to communicate legitimate concerns. Swedbank also maintains a process for reporting suspected employee wrongdoing. Reporting could be done anonymously to the Group Compliance Officer in accordance with the procedures established in their Policy on Ethics10. Their compliance functions monitor both external regulation and internal policy adherence, such as the Policy on Ethics.

• Reinforce zero-tolerance policies. A Zero-tolerance policy is an example of a strict approach that sends a clear message to employees and other stakeholders, but it should also be supported by proactive measures that influence the source of corrupt activities.

When the UN Global Compact added the tenth principle, and the reputational and financial risks associated with bribery increased, many companies were motivated to adopt zero-tolerance policies. For Skanska, a zero-tolerance policy means they do not tolerate any form of bribery or corruption. Any breach of the policy leads to extreme consequences - most frequently dismissal and if required, legal action.

10 Within the banking industry there are regulations from FSA (Finansinspektionen) as regards internal control, FFFS 2005:1, http://www.fi.se/upload/90_English/30_Regulations/2005/FFFS0501_eng.pdf



For example, after falsified invoices were discovered in Argentina, Skanska dismissed the local Business Unit President plus six local directors and handed over evidence to the Argentinean authorities. Such breaches can also impact the remuneration of superior managers, including the CEO, responsible for employees who have violated policies. ABB follows zero tolerance approaches concerning business ethics violations throughout the Group. As per policy, ABB will take disciplinary and terminal action against employees who violate the law, the ABB Code of Conduct, or company policies. Pfizer also follows a zero tolerance approach and will take disciplinary action, including termination, against any employee who violates the law or Pfizer’s policies. Swedbank has a similar approach. Swedbank clarifies within its policy that high ethical standards equate to going beyond just refraining from illegal activity. Swedbank policy states that all employees must maintain a respectable distance from improper and unethical behavior. Violation of duty can lead to employment actions including dismissal. Zero-tolerance policies, though effective, are not an entirely proactive anticorruption system. Therefore, other procedures, such as Pfizer’s Maximus Approval system, can proactively help catch corruption before it gets out of control. For example, all marketing activities are obligatorily entered into an electronic approval system before they are executed. IMA (Information and Marketing Responsible) trained approvers check the data prior to the execution of any action. Because the employee entering the data might not know the regulations in detail, it is up to the approvers to make changes or stop the activity.

• Specify gift policies. Gifting policies should be as explicit as possible in order to avoid loopholes and grey zones where bribery may occur.

Company gifting policies are often intentionally vague in order to leave room for cultural differences. This flexibility can be abused and increases the likelihood of bribery if loopholes are found in the law. To combat such abuses, Pfizer has implemented an explicit gifting policy. Pfizer follows the monetary guidelines for gifts11, lunches, dinners and giveaways set by LIF (The Swedish Association of Pharmaceutical Industry). Though bribes are not value-dependent – it is the intent that counts; monetary limitations may be the only measurable approach to developing boundaries that deter bribery. 11 Pfizer follows LIF guidelines for a) give-aways: < SEK 100, b) personal gifts not allowed, c) lunch max SEK 250 and dinner max SEK 600 incl. beverage and VAT.



• Be transparent. Transparency facilitates the reduction of corruption and bribery.

Skanska uses external transparency as a deterrent to breaches of their ethical standards. The company has a policy of making information publicly available, for example by publishing details on the company website. In fact, it is often their own internal auditors who contact relevant authorities in cases of significant policy violations. Swedbank focuses more on internal transparency. They educate employees on policies and spark internal discussions. Pfizer posts its corruption policies publicly online and in its global annual report. While Pfizer’s detailed procedures are not publicly accessible, interested investors may receive copies upon request. In Sweden, all activities involving physicians- or patient organizations, or similar, are published on a public website trough LIF. Folksam often encourages companies to be transparent when they address company behavior in the media or when they present at companies’ annual meetings. As an investor, Folksam receives systematic information from the external consultancy, Global Ethical Standards, which screens for corruption cases.

• Assess risk. Implement country-specific risk assessments before entering a foreign market in order to help prevent corruption incidences abroad.

Corruption is local in that ethical standards are culture-based. More than understanding what constitutes a bribe or a gift per culture, companies should be aware of the social, political and economic risks before entering a country. If a company plans to do business in a ‘corrupt’ country, it will inevitably face corruption and bribery. Often, companies neglect to prepare for such situations. As a proactive approach to combating bribery and corruption in foreign markets, companies should do a risk assessment and develop specific action-based plans for each market prior to entering. Folksam does ground research for all investments, but pays special attention to specific countries or industries prone to corruption. Pfizer regularly conducts due diligence of its business partners and conducts proactive market reviews aimed at identifying possible corruption risks. In addition, once in a country, analysis should continue to keep a pulse on corruption levels. For example, in order to stay in the Latin American market, Skanska evaluates the importance of maintaining a socially responsible relationship with their supply chain and implements the local and culturally relevant SA8000 (social accountability standard) certification. Skanska also rigorously applies its risk assessment approach to prospective clients, projects and countries. For example, Skanska chose to exit several Latin American markets due to unacceptable Code of Conduct risk assessment results.

• Engage constructively. Constructive engagement – the attempt to influence the business environment - can be a proactive, long-term approach to combating bribery and corruption.

As an alternative to exiting a corrupt market, companies can choose to enter or stay in a market and form industry coalitions with the intent to influence the local business environment in the direction of accordance with company’s desired ethical standards.



Pfizer is driving and supporting the adoption and enhancement of international and local codes of Pharmaceutical Industry Associations in order to regulate interactions with customers and to prohibit illegal or undue influence. ABB operates in all countries in the world except for North Korea, Myanmar and Sudan. They work to reduce bribery in the countries they work in indirectly in by supporting organizations that work to reduce bribery worldwide such as Transparency International and the World Economic Forum.

• Follow the leaders. Follow the example of companies and industries that have had a head start in dealing with corruption, like the pharmaceutical industry.

Given the many layers of susceptible relationships (between doctors, patients, hospitals, etc.), the pharmaceutical industry has been forced to confront many corruption and bribery issues early on. Other companies and industries can apply many of this industry’s best practices in order to combat corruption and bribery. Most pharmaceutical companies are very procedural in their approach to bribery and corruption thereby eliminating grey zones. For example, Pfizer requires documentation for every single action in order to track behavior via their electronic approval system, and has a very explicit gifting policy in order to proactively prohibit corruption and bribery. By industry-wide meetings and standards, the industry as a whole is tackling the issues of corruption and bribery.



A visual summary of the 11 company practices:

external_study_company_practices_for_corruption

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