COMING CLEAN
Some companies in Asia are taking the war against sleaze down into the ranks, aiming to bring integrity to corporate culture.
By Justin Wood

Few firms commanded greater trust or respect. In business for well over a century, and with a reputation built on a bedrock of Swiss impartiality, by the 1990s Société Général de Surveillance (SGS) had become easily the world's largest cargo inspection company. Governments and companies the world over had come to rely on the honesty of SGS to verify the size and quality of shipments of cocoa beans, industrial machinery, electrical goods and the like.

Then came 1997, an annus horribilis for the venerable SFr2.4 billion-a-year (US$1.8 billion) business. In Pakistan, allegations emerged that a third party SGS had used to help negotiate a government contract had paid a bribe five years earlier to the prime minister at the time, Benazir Bhutto, in order to secure the deal. While SGS denies any wrongdoing, the incident cost the company its contract and tarnished its impeccable reputation.

Elsewhere in Asia, other problems had emerged too. In particular, some of the company's customs inspectors in China, whose job was to assess the value of export cargo, were found to be receiving bribes in return for undervaluing the goods and so reducing import tariffs in destination countries.

For respectable SGS, such discoveries were a harsh wake-up call. If it wanted to preserve its role as a trusted verifier then it would need to work harder on its ethical standards. As Francois Stettler, the firm's chief compliance officer, notes: "For the sake of its reputation, the company had to act swiftly and decisively."

And that's exactly what it did, overhauling its code of conduct and putting every one of the firm's 32,000 staff on an ethics training course that continues to this day. SGS also installed an ethics telephone hotline so that workers could report questionable behavior - a system that Stettler says has highlighted several breaches of integrity. What's more, the company set up an ethics committee to oversee the implementation of the code of conduct, to keep a close eye on levels of integrity at the company and to handle cases of misconduct. The committee also vets and approves all intermediaries - such as those used to help negotiate with governments - before they are allowed to work on behalf of the firm.

Culture Vultures

Given the current spate of corporate scandals sweeping the world, the experience of SGS is instructive. For, while one government after another has introduced new rules to promote corporate integrity, few observers believe that merely complying with the law is enough to stamp out fraud, theft and corruption.

"Rules are useful, they provide a framework, but they only go so far," observes Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong. "What's needed as well," he adds, "is for managers to go beyond the rules and instill a sense of integrity into their firms."

A growing number of companies agree with him, and are taking bold steps to achieve that, but it isn't easy. Primarily, that's because the question of raising corporate integrity increasingly boils down to dealing with the knotty problem of managing a company's culture. Stronger internal controls certainly have their part to play too in boosting corporate integrity (see "Command and Control," below), but improving a company's culture is arguably more important. That means trying to influence the moral, social and behavioral norms of an organization, its attitudes, beliefs and motivations. Or, in other words, the way it does things and why. It's far from easy, for culture is an intangible, shifting concept that's difficult to pin down. And for CFOs, who are often more comfortable with managing profits than people, it can be doubly tough. Still, more and more of them are making the effort.

Crime Time

The scope and scale of corporate malfeasance certainly shows no sign of letting up. And while much of the attention has focused on high-profile cases in the US such as Enron, Worldcom and HealthSouth, the rest of the world is no better. In Europe, for example, accounting fraud destroyed Lernout & Hauspie, a Belgian maker of speech recognition software, and threatens to kneecap Ahold, the Dutch supermarket chain. Elsewhere, Roche, a Swiss pharmaco, unveiled record losses in March of SFr4 billion thanks to fines arising from a price-fixing scandal in its vitamins business, while Allied Irish Bank wrote off US$691 million in 2002 thanks to the actions of a rogue currency trader. More unusually, late last year, three executives at Ericsson, the Swedish phone giant, were charged with peddling defence secrets to Russian spies.

As for Asia, the record is equally dark. In Korea, for example, the Financial Supervisory Commission recorded 205 cases of accounting fraud during 2002, while in March this year ten executives at SK Global, a trading company, were charged with overstating profits to the tune of 1.6 trillion won (US$1.25 billion).

In China, cases of fraud such as that found at Guangxia, a pharmaceuticals and agriculture group, led former premier Zhu Rongji to proclaim in 2001 that accounting scams "have become a malignant tumour threatening to rattle the market economy". Even squeaky clean Singapore hasn't escaped the tendrils of malfeasance. Back in 1996, five foreign firms - Siemens of Germany, Marubeni and Tomen of Japan, the UK's BICC Cables and Pirelli of Italy - were barred for five years from bidding for government contracts when one of their intermediaries was caught paying bribes to win business from the local Public Utilities Board.

So what should CFOs do to combat such corporate wrongdoing? How should they go about improving the ethical standards that define their corporate culture? The answers are far from clear. As Yeoh Oon Jin, partner in charge of professional standards at PricewaterhouseCoopers (PwC) in Singapore, states: "There's strong consensus about the need to improve corporate integrity, but far less consensus about how to achieve that."

Nonetheless, most commentators agree that any drive to improve ethical standards has to start with a definition of what those standards are. Sadly, describing and codifying a company's values is all too often little more than an exercise in window dressing, with one firm's statement of principles looking almost identical to the next.

And yet, every company faces its own particular ethical challenges, says Mick Bennett, Asia Pacific CEO of Hewitt, a human resources consultancy. For example, in banking, what relationship do equity analysts have with corporate finance teams? At media firms, what sort of influence should advertising salesmen have on editorial direction? And in transport companies, where does the trade-off between safety and profits lie?

"Business leaders need to talk to their staff and debate the ethical issues that are unique to them," argues Bennett. "Only then will you end up with a code of conduct that's relevant to them."

Still, that's only the first step. No matter how good a company's statement of values, it's useless if it's left languishing on a shelf gathering dust. The next step is communication, and that has to be led from the top. "It's up to a company's most senior managers to set the ethical agenda," states PwC's Yeoh. "They have to walk the talk and lead by example."

The need for leadership isn't lost on Bob Rogers, president of Development Dimensions International (DDI), a privately-held US-based human resources consultancy. As head of the company, he tries to spend as much time as possible traveling the world and meeting his staff to spread the word that honesty matters. "There are no shortcuts to this," he says. "You need to get out of your office and spend as much time talking to employees as you can."

What's more, adds Rogers, companies need to demonstrate their integrity in everything they do, turning down business that might compromise the firm and acting swiftly to sack dishonourable workers. Still, as Rogers concedes, good intentions only go so far - despite all his hard work, last year DDI discovered two clerks in its finance team had embezzled US$300,000 by writing checks to their personal bank accounts.

Its Good to Talk

Communication, of course, isn't limited just to a personal crusade by the CEO. Companies can and should take plenty of other approaches too. Consider Royal Dutch Shell, a US$236 billion-a-year Anglo-Dutch petrochemical giant. As long ago as 1976, the company first published its "Shell General Business Principles", outlining the ethical standards that it expects employees to adhere to. Today, all 115,000 of the company's workers must read the guidelines and sign a statement every year saying that they agree to abide by them.

Ian Robertson, vice president, finance for the Asia Pacific and Middle East regions of Shell Oil Products - a US$184 billion-a-year division of the parent group - says that such an exercise sends a powerful message to staff about the sort of integrity expected of them. But Shell doesn't stop there. It has also produced a primer on bribery and corruption that provides guidance on dealing with dilemmas that arise in the course of business, and then there are further booklets detailing the firm's policies on conflicts of interest, and on accepting gifts from customers and suppliers.

"Publications such as these form the backbone of Shell's drive to raise ethical standards," explains Robertson. And they don't just apply to internal corporate culture, says the finance chief. "We also make sure that a copy of our business principles is adopted in every deal we sign with a third party, such as contracting or procurement deals, or joint ventures."

As for Robertson, he feels that he too has a role to play in educating staff about the company's values. In fact, he says, "all senior managers at Shell are expected to challenge people and to play the role of corporate conscience." To that end, Robertson regularly sits down with staff to discuss Shell's code of ethics in relation to their jobs. Recently in Malaysia, for example, he personally developed a program designed to educate staff on general business controls, part of which focused on Shell's code of conduct and how to apply it.

Truth, Lies and Audiotape

Moving beyond communicating and educating workers about integrity, companies can also take a host of practical measures to raise ethical standards. One critical step, says Richard Blaksley, Asia Pacific managing director for Kroll, a risk consultancy, is to ratchet up pre-employment screening so that dishonest workers are weeded out even before they're hired. "Very few companies in Asia, and almost none in China, vet new employees," notes Blaksley. "Even simple checks, like confirming education credentials, can make a big difference."

Another step is to set up an anonymous telephone hotline for staff to report dishonest co-workers. Indeed, new rules in the US - part of the Sarbanes-Oxley Act - will make such hotlines mandatory. A survey released in 2002 by the Association of Certified Fraud Examiners in the US certainly supports their use.

In examining 663 cases of fraud, the association found that just over a quarter of all frauds were discovered thanks to a tip-off from an employee. In comparison, internal audit teams uncovered fraud in only 18.6 percent of cases, while internal controls flagged fraud just 15.4 percent of the time.

John Bray, the Tokyo-based director of analysis at Control Risks Group, a business consultancy, is a fan of hotlines although he warns that they need to be managed carefully. In particular, firms need to think about how informers are cared for. "In parts of Asia, it can be dangerous to blow the whistle on a colleague," he counsels. "Expatriate workers can always be moved home, but what about local staff?"

Ethical Excellence

Running a hotline, and indeed all other parts of an ethics program, demands that somebody within the company take day-to-day responsibility for it. Often that's the compliance team, or else the internal audit department. But a growing number of companies are also setting up dedicated ethics committees.

Take Citigroup, the US financial services behemoth. Following the string of scandals that engulfed Wall Street over the past three years - and which so far have cost Citigroup and nine other banks US$1.4 billion in fines - the company decided enough was enough. On October 1 last year, Citigroup set up a new Business Practices Group, and appointed Michael Masin, the bank's vice-chairman, as its head. Its mandate was simple: ensure that Citigroup becomes a paragon of ethical excellence.

"There is a higher standard than the law - it's called doing the right thing," thundered Sandy Weill, Citigroup's chairman, at a conference in mid-October last year. "While no laws were broken, looking back [to the late 1990s], we can see that certain activities did not reflect the way most of us believe business should be done."

Those sentiments sit at the core of the Business Practices Group, says Ken Fagan, the bank's general counsel for the Asia Pacific region and a member of the group. At its fortnightly meetings, the committee not only discusses compliance issues and ethics training programs, it also debates how it can "foster policies that achieve the highest standards of corporate and community-sensitive behavior", explains Fagan. "Consistent with our chairman's message, simply being legal is not enough."

One recent decision by the committee, for example, led to greater transparency in Citigroup's structured finance division. From now on, publicly-held clients must disclose all details of complex off-balance-sheet financing deals to their investors.

Asian Laissez-faire

Sadly, ethics programs like these don't seem to have found widespread appeal among Asian firms. According to a report released by Control Risks Group in October last year, companies in Asia are far less likely than their counterparts in Europe and the US to have set up training programs to help staff prevent corruption. They're equally unlikely to have set up an ethics hotline, or to have written a code banning the giving and receipt of bribes.

Naturally, there are exceptions. Japan's Mitsubishi Corporation, a Y13.2 trillion-a-year (US$99.5 billion) metals-to-food conglomerate, is a case in point. Under the personal guidance of Koji Furukawa, the firm's CFO, Mitsubishi re-wrote its code of conduct in 2000 and now makes every employee read and sign a copy of it. It has also introduced extensive training programs and set up an ethics committee and a confidential hotline. In addition, new staff joining the firm are put through a cultural induction program to school them in the company's values.

Of course, such measures will never guarantee that a company remains corruption-free, for temptation and greed are integral to human nature. Nonetheless, in the battle against corporate malfeasance, the role of culture should not be underestimated.

Justin Wood is Executive Editor, southeast Asia, of CFO Asia