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/

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

The open pit of the Udachnaya Diamond Mine, Russia
http://en.wikipedia.org/wiki/File:Udachnaya_pipe.JPG
Licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

http://office.microsoft.com/en-us/images/results.aspx?qu=pollution&ex=1#ai:MP900448679|mt:2|

http://office.microsoft.com/en-us/images/results.aspx?qu=storm&ex=1#ai:MP900401427|mt:2|

Justin Bieber performing Believe Tour in October 20, 2012 buy MyCanon
http://en.wikipedia.org/wiki/File:Believe_Tour_7,_2012.jpg
This file is licensed under the Creative Commons Attribution 2.0 Generic license.

Image: Ahmedabad Gujarat India by Emmanuel Dyan

Image: Greed by Liz West

Image Credit: Confident businesspeople by Victor 1558

Image: The Pay Off by Chris Potter (www.stockmonkeys.com)

http://office.microsoft.com/en-us/images/results.aspx?qu=medical&ex=1#ai:MP900390537|mt:2|

http://office.microsoft.com/en-us/images/results.aspx?qu=loop&ex=1#ai:MP900399332|mt:2|

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
Every Country in
the World
Prohibits Bribery

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

http://office.microsoft.com/en-us/images/results.aspx?qu=MP900444309&ex=1
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://office.microsoft.com/en-us/images/results.aspx?qu=MP900422830&ex=1#ai:MP900422830|

Image: Cut your Bills by Images of Money

Image: Chinese Flag by Philip Jägenstedt

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

Did You Say Bribe by Chris Potter (www.stockmonkeys.com)

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/

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
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

40%
40% of companies
claim to have lost
business to
competitors who
won contracts
unethically
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: Adjust Tie by Dplanet

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?
Image: Adjust Tie by D Planet

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

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
“

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

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

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|

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).

-0.06%
-0.87%
-0.05%
CAR [-20;-1] CAR[0;1] CAR[2;20]
$2.43 Trillion Loss in Market Cap

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...

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)

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%
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%
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%
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%
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%
CAR

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

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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