Emerging Markets Connect

More on Ethics: This Time It's Your Team

Tracking back to a post a little while ago on how companies are managing high-level ethical challenges  in emerging markets (think government interactions, "compromises" when securing new business), one of our retail members recently took a different angle on the ethics question, this time focused more on the line. The executive expressed concerns about preventing "fraudulent behavior" among staff in a sourcing operation in China.

Three themes coming out of advice from other experienced executives in our member network:

1. Apply all of your standard tools first. The most common advice from members sounded awfully familiar: establish a firm code of conduct, conduct annual surveys on conflicts of interest and compliance, maintain a robust ethics committee and reporting hotline, and establish a strong tone at the top. You should be doing this anyway in your HQ; if you aren't, get moving. One interesting wrinkle to this from a computer software industry member: "I’ve seen and heard of cases [where] anonymous whistleblower accusations are used more to defame or retaliate against another person for whatever reason, so keep in mind not all escalations may be valid, but all should be treated seriously."
2. Watch out for ghosts. Here's where the emerging markets differences emerge a bit mor starkly. Members highlighted the appearance of "ghost" vendors in their master files receiving payments from staff. To counter this, advice highlighted making it "as difficult as possible to include a vendor in the vendor master file." This includes both a demanding vendor approval process, as well as tight controls over who maintains vendor information in those master files.
3. Don't accept "different business cultures," but be prepared for an extended transition. It's easy to explain away ethics compromises as simply being part of a local culture. While it may be true, it's not an excuse. You don't need to try and change an entire culture, but you do need to be clear about what's accepted on behalf of your company, and at the same time manage your own expectations around how quickly you can transform behaviors.
4. Be your own private investigator. A healthcare products company member shared how they check up on information passed on by local staff tasked with identifying new suppliers. The executive sends quote requests under a shell domain name directly to the same companies that their staff are quoting, and matches those to make sure there's no inflation. Fortunately they've found no pricing anomalies from their own staff to date.

This topic actually carries quite a bit of relevance in light of the current global economic slowdown. Our parent company, the Corporate Executive Board, has been working hard providing guidance to members on how to respond to the current economic crisis (see, for example, here, here, and here), and one of the items we've been emphasizing is, as our guidance has phrased it, "Difficult times often beget many more instances of less-than-perfect human behavior; counter this risk by closely managing ethical and leadership postures." In emerging markets in particular, many employees have been riding a wave of growth for several years, and this downturn introduces an era in their professional lives that many haven't before experienced. Be mindful.

Whatever Your Temptations, Don't Leave Your Ethics at the Border

While big news of companies running afoul of general business ethics in emerging markets sprout up every year or so (see Alstom, Siemens, many others), experienced executives know that lurking dangers aren't exclusive to mega-contracts. Executives in emerging markets face pressures and decisions every day that can cross the line into unethical practices. What's harder, where that line exists is not always clear. Ernst & Young in its 10th global fraud survey found that 2/3 of respondents knew nothing about the Foreign Corrupt Practices Act--the emerging standard for ethical behavior globally.

One of our telecom industry members, considering entering an African nation, posed a question to our network around how others address variability in ethical practices across emerging markets. Strongest point coming out of responses from other experienced executives: Don't fall into the trap, even if it means reducing your competitiveness locally.

Some very useful tactical points also came through:
1. Clearly establish your own benchmarks: Members recommend developing detailed policy manuals for operating standards in international markets, including a section on dealing with bribes. This not only serves as an internal "check-point" for staff, but also as a leverage point in negotiating unethical terrain: "We've got clear policies here. See for yourself. Here are my limits."
2. Do it yourself: Third party relationships (brokers, distributors or agents, particularly when they're local) open you up to some very bad potential situations. These partners often won't consider themselves bound to the same restrictions as you are, and won't always feel a need to tell you how they're getting things done. Although some might view this as a plus--"Wasn't me. I didn't tell them to do that"--if things go wrong, you'll be in as much deep water as those partners, if not more. As one of our members put it, "Direct employees or proven 3rd parties are your only likely shot at conforming to business practices while maintaining ethical approaches."
3. Tease within your boundaries, but never go all the way: A health care industry member shared successes with hinting in negotiations at great things to come to get a foot in the door. "'Don’t worry we know how to look after our friends,' or 'we of course will show our deep gratitude after we get the contract.'” Of course this is often code for a bribe, but it doesn't have to be. The trick then is that once a deal is closed, small gifts like a watch with your company logo or a fancy dinner are sufficient. When the expectation of a payoff is then brought up, as the member notes, "you can say something like 'Oh, I would never insult a respectable person like yourself by offering a bribe.'" Caveat here is that it will probably only work once with any local party, and only a couple of times within any country. But once you're viewed as a lucrative partner regardless of your standard ethics, interactions and expectations can often change.

[CEB members who would like to view detailed member responses to this question, email us.]