Hard Times – from 1854 to 1504 (Dodd-Frank)

Masters and “Quiet Servants”

Charles Dickens wrote “Hard Times – For These Times” (usually known as “Hard Times”) in 1854. This was a bleak analysis of mid-19^th Century factories and the mechanistic drive for material reward.

The world of the Industrial Revolution saw immense material improvement within a 19^th Century mindset that saw business develop on the back of “resources” – whether they were natural resources (like coal) or human resources – Dickens’s “quiet servants”. Resources were resources and how they were discovered, whose they were, the conditions under which they were mined, how they were shipped or the conditions under which they were placed into the manufacturing process were not much of a consideration.

Britain and other developing nations of the time grew wealthy on their own drive, ingenuities, financing and trading and manufacturing instincts but the whole process would have collapsed if access was not obtained to raw materials from the rest of the world and the use of “human materials” from all over (including their own countries). The terms “human resources” is still with us along with natural resources – but the “quiet servants” grew louder.

Gradually, from 1833 when Britain enacted laws that children under nine should not work in factories, throughout the second half of the 19^th Century and into the 20^th, our human resources (people working in factories and mining, for example, in the industrializing nations) campaigned and secured rights over income, health and safety, length of the working day and age restrictions.

Developed countries worked out that, to work well and succeed, we had to develop ways that we all could share to some extent in the benefits that material gain provided. This is the basis of free and fair societies based on successful economies.

From nation to global

The last thirty years has seen a vast shift from developed nations using the rest of the world merely to buy from and sell to, to a shift to manufacturing and now development and R&D throughout the world. Trade has grown internationally and the so-called integrated “global economy” is in place. We are no longer merely the industrialised west and the under-developed rest, but an inter-connected web of nations within one, world economy.

Yet, the strains are clearly showing. Allied to the vast changes in internet communications (similar to the vast increase of communications that shaped 18^th Century politics and the 19^th Century – the telegraph and the phone), all peoples of the world now see themselves as part of this world (or global) economy in the same way that 19^th and early 20^th Century factory workers saw themselves vis a vis factory owners. They then, understandably, demand rights and safeguards.

This is now happening on a world scale as we develop our global nation (economically).  The changes are profound and, if done properly, will be of enormous benefit.

21^st Century Responses

This week saw the approval after two years of the US SEC (Security and Exchange Commission) of articles 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The two measures could have major implications for all of us in that (properly implemented) they set a real standard for the globalized economy in two, crucial areas:

1. the willingness of all of us to buy items cheaply no matter how the raw materials were obtained
2. the willingness of all of us to buy items from wherever in the world, no matter what corruption was employed in their provision.

Article 1502 refers to the mining of key raw materials in Africa such as tantalum, tungsten, gold and tin. It will (after an implementation period) require all suppliers and manufacturers to state that their products do not contain raw materials that financed war or bloody conflict. So many years after blood diamonds were headlined, there is now a statute that demands that companies step back and consider what they are buying. Manufacturers that buy such raw materials have had to count the cost of reputational disaster if they continue to sidestep basic human responsibilities in this global market. Now, there will be a legal imperative in the USA.

Article 1504 is the Cardin-Lugar rule which sets rules for country-by-country reporting of companies in the extractive industries concerning the revenues and profits they make in all countries where they do business (on a project by project basis).

Both articles require all companies that are listed in the USA to comply (although not immediately), wherever those countries are based. The European Union is expected to pass similar laws.

The implementation of the two articles will help to drive change on a global scale, where individual nations (e.g. where the resources are extracted) are unable to do so. Why? For several reasons:

1. Developing nations (especially resource-rich and economically poor) are prone to corruption and often unable or unwilling to enact these laws themselves;
2. Developing nations (especially in parts of Africa) use resource revenues to fund conflicts and wars;
3. Corporations operating in those areas need to show global sensibilities – where treatment in their overseas subsidiaries and employees is brought up to levels that we believe are credible and reasonable. It is hard to do that without legal change as competition is too high to expect corporate ethics (whatever that means) to work on its own.

To Ayn Rand libertarians Dodd-Frank is an economic travesty and many in the US are waiting for Romney and Ryan to get elected and reverse these laws. That would be the travesty. It is enough that in developing nations, the gaps between the rich and the rest are widening; it is enough that nations like Greece are now collapsing economically. There is potential for real strife in nations where inequality is too widespread.

But, we now live in a global economy where we are all dependent on each other. That means simply that best practice (that works on a national scale) has to be introduced globally wherever feasible. The intricate balance of trade, manufacturing, design and the need for natural resources (as well as the need to work together on climate change issues or disease control, for example) dramatically increase the need to treat the global economy as one economy – which it is. This means that national rights have to be respected but that is not enough.

Article 1504, for example, takes the trust element away from many nations like Equatorial Guinea, where the leadership is a kleptocracy and where riches from oil revenues do not go to the people in any meaningful form. Country by country reporting will, eventually, put an end to opaque deals between companies and those who have taken over the ownership of natural resources in those countries by showing transparently what profits are made and revenues generated on a project by project basis. Citizens in those countries will begin to be able to see how those revenues are used or not. Information is valuable and a first step to more equitable conditions.

21^st Century Ethics

As we enter the fifth year of the post-sub prime recession (with economic collapse in Greece and high youth unemployment in Spain), we remain much more concerned with ourselves than with people and nations thousands of miles away. The change that global economics has wrought, however, is that we can no longer ignore the plight of those so far away even if we (wrongly) wish to do so. Their plight is ours just as the impoverishment (economically and educationally) of our inner cities is a blight and our plight.

The Chinese view things differently, of course. A thousand years of relative impoverishment has left it hungry for economic growth and its hunger leads it to plunder the natural resources of Africa. China’s legalist centre, its Confucian heart and its loathing of western imperialism means that it is content to leave governance issues aside. Its own internal corruption (the corruption of a centrist and legalist government, where bribes are the common currency of the status quo) means that it is unlikely to require good governance in return for its acquisition of raw materials. In fact, its non-linkage of governance requirements gives China a distinct trading advantage in Africa.

It is to be hoped that this is a short-term business expedient and a long-term mistake for the Chinese. Just as the best manufacturers in the 19^th and early 20^th Century were leaders in improving conditions for their employees (notably, Henry Ford who wanted his own staff to be able to afford to buy his cars) and just as the US spearheaded safety rules in the 20^th Century, it is likely that the best companies will understand that improving the safeguards overseas (whether in their own companies or those of suppliers) will be important, medium-term investments.

Reputational loss is now potentially huge (as Apple realized when suicides at one of its biggest suppliers in China, Foxconn, began to rise and changes in working practices were required by Apple). The raw materials that we require for so many of the goods that we buy are obtained under horrendous conditions in Africa. It is not just blood diamonds but all those naturally occurring elements that the SEC has just regulated into law.

In addition, the country-by-country reporting will shine a light on the regimes that take in billions of dollars of income and disburse so little to their people. Pressure will mount from outside and inside.

Organisations like One, Transparency International, Global Witness and Enough and the Publish What You Pay coalition deserve huge credit for a relentless drive over many years to enact such positive changes. The US Congress deserves huge credit for bringing it into law in the powerhouse of the US economy. The EU should follow and they should all work within the OECD and elsewhere to ensure that these measures, providing an ethical underpinning to the global economy, are made global.

We live in a globalized economy and comparative advantages should be developed through intelligence, hard work and ingenuity – not via the impoverishment or hardship of our global neighbours.  The bringing into implementation of Dodd-Frank’s articles 1502 and 1504 suggests that the global economy is waking up to the fact that our “quiet servants” deserve respect wherever they are – close to home or further away. The global economy (and climate change and air travel and the internet….) means we are all neighbours now.

Business and bribery – globally speaking

A couple of weeks ago, I posted “Everyone should be allowed to bribe”

https://jeffkaye.wordpress.com/2012/05/27/everyone-should-be-allowed-to-bribe/

and received a lot of good feedback. From business people, from NGO’s, from those in countries where the bribes take place and impact the most, it is clear that this is a major concern.

The NGOs’ position is understood – bribery is bad, it is illegal in most countries, it does irreparable harm, it distorts the market, and it creates poverty in those countries, which cannot afford to exacerbate intolerable economic conditions.

For those in those countries where bribery takes place, the impact is felt acutely. It is not just that money is wasted on bribes that could be spent elsewhere; it is not just that money is wasted on products and services that are bought only because of the bribes. Just as critical is the fact that the country may see bribery and corruption as the norm – nothing is done without a bribe – it is a mafia-type culture where favours and reward for favours are the norm. This is a distortion of the market that leads to those in certain positions benefitting and the rest (those outside the inner circles) are deprived of economic well being (maybe no housing or food) and deprived of being part of a moral centre to their lives.

The Business of Bribery

For large businesses operating out of countries with well-developed legal structures, bribery and corruption is now officially not on the agenda – reputational losses are, in the main, far too severe to allow a short-term gain to be allowed if through bribery. The problems that Wall-Mart is suffering from alleged facilitation payments in Mexico is a case in point – the legal hassles, the continuing publicity, the constant press all drain the company and, overall, question the economic sense of the payments (which may well not be illegal under the Foreign Corrupt Practices Act – FCPA).

For large organisations operating in corruption-endemic parts of the world, the situation is fraught with danger. A business operating in the UK or USA, for example, would be acting illegally if bribing overseas. Yet, there are many instances where it appears that business takes a calculated risk – using money to influence decisions that (even if found out and prosecuted) may well represent a reasonable return on investment overall. These companies may well be in mining or construction, or defence – industries prone to bribery opportunities where the dangers are continuous.

For small to medium-size enterprises (SME’s), the situation is hugely risky. Many complain that meeting the requirements of the UK’s Bribery Act are severe and highly costly. Lawyers require large fees for sifting through the processes of any business to “ensure” that “Adequate Procedures” are in place. Many have gone too far and maybe spending too much in ensuring no bribery takes place.

For others, there remains the feeling that bribery is not a bad thing – it is the norm, they say, for doing business in certain places and British business (or American or whoever) should not be crowded out by parsimonious governments led by the nose by the NGO’s.

For these businesses, they are competing for the survival of the company (in their minds) – why does the UK not “get it” – that “we are not on a level playing field with the Chinese and others who allow their firms to do what they want when overseas?” Arguing that it is unethical produces a wry smile – and a call to deal in the real world where business is tough and economic conditions tougher. A business does whatever it needs to do.

From 19^th Century business ethics to 21^st Century Globalisation

A parallel with the business of bribery was the rise of industry in the 19^th Century and how the demand for health and safety procedures were crowded out and resisted by businesses that saw this as an affront to their rights to do business. The laws allowed child labour and working conditions modeled on workhouses – prison-like conditions.

In 1833, the UK introduced a law that ruled that:

• Children under nine could not be employed in textile factories.
• Children aged nine to thirteen could work a maximum of nine hours per day and 48 hours per week.
• Young persons aged thirteen to eighteen could work a maximum of 12 hours per day and 69 hours per week.
• Night work for children and young persons was not permitted.
• Children were to attend school.
• Four independent factory inspectors were to be appointed.

This was the beginning of a movement that business owners felt would wreck their businesses.

We can now look back on the waves of pressure in both directions that pushed for better working conditions on one side and the status quo on the other.

But, the world changed – developing countries realized that to be prosperous meant developing the so-called middle class and that all parts of society had to be covered – not enslaved by appalling conditions. While risks still persist in many industries in the UK and other developed nations, the focus has moved.

Globalisation has meant that we now source so much of our goods from overseas and this means that Asia, for example (mainly China) now represents our supply base just as the under-9’s did before 1833. Our natural resources (from which the British Empire rose up) are still derived from many of those countries, which were plundered in the 19^th Century.

Yet, the norms that we require in our own countries are not the norms in our supplier base – even if we obtain the benefits. When a UK retailer is discovered using child labour in one of its overseas suppliers, there is an outcry and their reputation suffers. Our consumerism does not, in the main, take precedence over what we see as basic ethical norms – which have changed in the last 180 years.

So, bribery and corruption is no different. Early 19^th Century England was a place where bribery was endemic. We have, for the most part, cleaned up our act at home. This ethical state was not transposed to the work we do overseas for many years – in 2001, the costs of overseas bribes remained tax deductible in the UK. Now, the situation has changed – the ethical state has changed in law – if not yet in practice. Globalisation does not mean we should hide our eyes from the rest of the world – we are now all part of the same economy (just as the textile workers and their 9 year-old children were in 1833).

Taking business beyond bribery

The laws are in place but business (operating under difficult economic conditions) and business people feel under pressure. Passing a law does not mean that it becomes easy to deal with it. There are a number of changes that we need to see made.

1. SME’s feel under pressure because they have been scared by the Adequate Procedures requirement in the UK – which means that individual Directors are unlikely to be prosecuted even if someone in their firm is guilty of bribery if there exist processes, which mean that the bribery charge is shown to focus on a rogue element. Lawyers and others have made the most of this – firms are hit by high charges if their risk assessments show them vulnerable. The answers lie in common sense (like all business decisions) but also, for many who think themselves vulnerable, for Chambers of Commerce and other business organisations (CBI, IOD) to go to their aid by working with government and NGO’s (like Transparency International) to educate wherever possible.

I have myself chaired conferences in the Bribery Act – I hesitate to state the percentage of companies that have been to such conferences, but I bet it is a low one.

2. Working for a US corporation for many years, I had to sign-off every three months that I was unaware of any bribery going on in my business. We should have the same in the UK – this should be done for all companies audited, where a document should be signed off every year by the Board. For those companies that are too small for an audit, there should be a statement that is sent in with the Balance Sheet to this effect.

3. For companies that are subject to bribery requests and / or intimidation, there has to be somewhere to go just like the Embassy if an individual is imperiled. Every embassy should have a commercial attaché or equivalent that is trained in the Bribery Act and knows how to deal with the issue. This entails pressure on host governments as well as alerting the issue to UK Authorities – as it is anti-competitive and will hurt British firms in the short-term. It also requires links between the Embassies and industry groups to channel information and to act on it.

4. The Governments that are signed up to the OECD Anti-Bribery Convention have to seriously and continuously pressure those countries that aren’t to enter into a world wide anti-bribery agreement – it should be a WTO requirement for trade that countries make their firms bribe-free and that supplier nations work towards bribe-free regimes. This should also include those regimes that have surpassed bribery and where small groups have taken over the resources completely. Angola comes to mind (Sonangol controls the energy industry and is vitally owned by the governing clique) but South Sudan (one of the poorest nations on earth) is bemoaning the loss of $4 billion through corruption in its oil sector.

Business Ethics good for Business

Business has to deal with many challenges – and external challenges can be the hardest. I have seen businesses in aerospace and defence positively transformed because of the adoption of good ethical practices. CSR has focused many large companies on to going beyond what is legally required to what is right. That usually makes for good business as consumers are far more “savvy” and can change their buying habits very quickly.

For small businesses (maybe part of a supply chain where the end-consumer is not in sight), it is just as important. Large companies are responsible for their supply chain, too under the Bribery Act. There is not much escape.

The Bribery Act took 200 years to get into Law – it is very unlikely to be overturned. The 21^st Century world is one economy – each nation and group of nations are linked by trade flows, supply and demand, financial flows, people flows. Just like CO2 emissions, one country impacts another. Bribery may be an unseen crime – it is a crime nonetheless, but, like in regard to health and safety (and child labour laws) we move on.

“Everyone should be allowed to bribe”

I had an interesting discussion the other day at a Fundraising event. Sitting opposite me was a businessman who also does a tremendous amount of work for charity. We got into a discussion on corruption – specifically, bribery. The discussion centred on how “the Bribery Act was causing business a lot of trouble” and that the UK “as always” was taking it seriously whereas other countries would not. We would therefore be undermined and lose business.

I argued differently. Working for Global Witness since 2007 (I left in late 2011), I had played a small part in working to get the Bill into law, then to ensure the guidelines made sense and have since worked with organizations like the Chartered Institute of Management Accountants (CIMA) to provide guidance (I wrote their guidance on the Act) and chaired their Bribery Act conference at St Paul’s Cathedral in 2011.

The businessman, actually a very interesting, successful and intelligent individual, suggested that, to make it fair, “everyone should be allowed to bribe” as much as they liked.

It was a Fundraising event, so not the time for a row – nevertheless, it reminded me sharply about how the world works and how it is split between those who understand the chaos that endemic bribery causes and those that see only the micro-economy (through the eyes of individual businesses) rather than the macro-economic chaos and individual misery that bribery causes.

We live in a disjointed world

I have recently been involved in the filming of a documentary on corruption that will go out later this year. So, although I have left Global Witness (which campaigns against natural resource-related corruption and conflict), I have stayed in touch with the issue.

It is easy when involved within an NGO to forget how business folk (as I counted myself for many years) can disassociate themselves from wider issues. I spent most of my career in business and those who are very successful are completely focused – like an athlete focused on winning a gold medal at the Olympics. The best are relentlessly single-minded in the pursuit of gold – the best business people are similar. This means that they are completely focused on what benefits their business.

This is why the US Chambers of Commerce have been waging a war on the Foreign Corrupt Practices Act (FCPA) for some time. The USA has, since the FCPA was brought into being in 1977, been way ahead of the field in anti-bribery law. This has heated up recently as the US authorities have piled into those who are believed to have breached the Act and, mainly through out of court settlements, have gained hundreds of millions of $ in fines and caused real change in US companies and how they operate outside the US especially.

But, the Chambers of Commerce believe that this puts the US at a disadvantage as other countries don’t have similar laws, they believe, or flout them.

Of course, this is no longer the case in many parts of the world. The OECD Anti-Bribery Convention was signed up to by 39 countries and the Convention is a tough one. As a result, the UK was eventually shamed into all-party support for anti-bribery legislation and the Bribery Act was the outcome – which came into law in July, 2011. It is actually a tougher law than the FCPA – making facilitation payments illegal, for example, and making the bribery of anyone (including government officials) a criminal act if it affects a decision. However, if a company has good processes and trains its staff well (Adequate Procedures), Directors of the company are unlikely to be prosecuted. Let’s face it, the funding of prosecutions is also likely to mitigate against major cases being developed.

However, the Act has led to a large industry being developed in training and in new processes. I was on the working group in the UK that brought in guidance for the not-for-profits (charities and NGO’s) in the UK (under the auspices of Transparency International and Mango) so saw very clearly how every organization (business or not-for-profit) could be affected by the Act.

This new anti-bribery industry has seen a number of lawyers move from the Serious Fraud Office (SFO) to private industry – confirmation if needed for business people that the whole thing is a cash generator for law firms and those in them and nothing more.

The equivalent of the “revolving door” that has been denigrated for years when politicians or civil servants enact laws or make project decisions and then move to senior positions in companies, is now taken as a serious concern by business people who see the same situation used against them! There is an irony there somewhere.

Corruption hurts

Business people see anti-bribery legislation as a problem. It makes business (in their opinion) more difficult in the same way that early 20^th Century business people saw health and safety legislation as a problem. I am sure that many business people in the 19^th Century saw government money being used to build the sewer system in London as a huge drain on their wealth and a public use of funds that proved that their wealth creation was being used against them – even if for the public good.

So, it must be galling to see anti-bribery legislation (which is international in concept and which is aimed at benefitting the poor in the poorest countries) put into force. In the USA, business is working to erode the law that has been in place successfully for 35 years – a law that has led the world. In the UK, there is irritation (maybe mounting anger) at the Bribery Act. And its implementation costs.

Business folk (and I was one for many years) see the short term and their bottom line. They find it hard to associate themselves with the wider questions about how corruption transfers wealth from the mass of people to a few – as, say, in Angola; how it ensures that money is spent on items that are not needed – very expensive air traffic control systems  in Tanzania, for example; how it adds to the price that poor nations pay; how nations like Nigeria are completely beholden to corruption as was England in the 18^th Century – a nation where every job, every hospital appointment, every legal decision is likely to be subject to payment / bribes. Look at Greece and its current malaise – not paying tax is a symptom of a society corrupted – so much of the economy is bribery-induced – the black market is a corrupt market and leads to short-term benefits and long-term disaster.

Values are not for sale

The Bribery Act is now in place in the UK; the FCPA has been tried and tested in the USA for 35 years; 39 countries have signed up to the OECD convention. Yet, we probably face a bigger problem. The growth of nations such as China, India and Russia face us with enormous challenges as each nation is, in its own way, a centre of corruption.

China has adopted a Confucian posture – hit hard at home to rid itself of the endemic corruption that is at the centre of its totalitarian heart while allowing corruption to exist where it trades – such as in Africa. The Confucian spirit allows it to leave alone the nations with which it does business at the same time as Western nations attempt to apply governance to aid budgets. This is a time of real challenge and western countries should be working more than ever to instill values not just trying to compete for short-term gains. It used to be “if we don’t bribe, the French will”;  now the same phrase is directed at China, Russia and India (the home of www.Ipaidabribe.com).

We should not allow our values to be for sale for short-term benefits even in times of economic stress.

Is Bribery good for Business?

There are examples of businesses that have high values and most do not engage in bribery. Usually, those with the highest values are large businesses that know their CSR will be shaken by reputational problems. It makes business sense not to take the risk – bribery is bad for business.

Medium to small businesses, where the main opportunity for employment growth exists in most countries, are less concerned with CSR – which most think of as meaningless nonsense. Societal issues are way down the list of priorities – international issues are nowhere.

Hemmed in (in their view) by unjust legislation on all sides that seeks to choke off the spirit of enterprise, small businesses fight to survive daily. To them, bribery may be a necessary part of life. So what if people overseas suffer as a result – jobs are created for British firms and if we don’t do it, someone else (like the Chinese) will.

Globalisation in this context means nothing but cheap supply chains, cheap overseas labour and opportunities for exports. Globalisation does not mean we should take account of international problems.

Like 19^th mill owners who fought sanitation bills as bad for business, who (in the main) were not interested in the health of their workers, who were only constrained by legal changes, many business people will only react to changes in the law because they are focused on their business and anything that adversely affects that business is bad – by its very nature. Bribery may allow business to take place – if a British company is not allowed to do it, business may well be lost.

Is bribery good for business? Of course not – just like the death of a worker because of shoddy safety systems, just like the gradual reduction in bullying at work because most acknowledge it is not needed – we inherently know that bribery (the corruption of people to make decisions go our way) is abhorrent. The impact is grotesque and cannot be justified even for a few extra short-term jobs.

Relentlessly focused business leaders know that bribery is wrong (at least most do) and, apart from the most extreme libertarians, understand that globalization means that the rules of business engagement are going to be made international. We cannot for long assume that developing countries will, for long, expect to be treated as the working class of 19^th Century England. The class structure of international business will, over time, lessen just as we have made changes to our own class structure in Europe and North America and elsewhere.

Good business cannot “allow everyone to be bribed”. It is not just an ethical position, but a business one. Business should be undertaken on a level playing field where no-one bribes – we should be striving to ensure that bribery is minimized not allowed everywhere. Rules or norms are basic for societies to function. In a global society, the norms need to be widely applied. Bribery is bad – we all know it. Business leaders, here and in the USA, should be leading the fight – not over-reacting and running in the opposite direction.