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Corporate Governance On this page
* * * Best Practices for Creating Global Ethics and Compliance ProgramsA 2007 survey of global ethics and compliance programs shows the current trends in how multi-national companies are designing, implementing, and evaluating their programs in an international context. Language and Culture Worldwide (LCW) released the report in order to highlight the importance of international relationships in business and identify the challenges that arise from them. EthicsWorld has posted other reports highlighting the differences across cultures in the understanding of ethical behavior. A recent Conference Board report stated that companies have a long way to go in integrating third parties into their ethics and compliance programs. It is no surprise then, as companies become increasingly global, integrating their international stakeholders into their ethics and compliance programs is a significant challenge. This report is useful in order to identify current best practices and where there is still room for improvement. The following is a summary of the key findings in the report. Please see the full LCW report for more in-depth analysis. Strengths and Weaknesses In the LCW survey, most companies are providing formal training for all employees, have local representatives to communicate ethics/compliance initiatives to international employees and implement helplines that use diverse tools for communicating. A fewer number of the respondents in 2007, compared with the 2005 survey, said their programs were “primarily values-driven,” rather than “primarily compliance-driven.” Overall, companies are not incorporating their international employees as well into the development of their programs or codes of conduct. It is less likely that companies are modifying their codes of conduct or training content to incorporate cultural differences, local policies and procedures, and local laws. It is also rare that ethical assessments are included in performance evaluations. Primary Concerns of Implementing a Global Program
*out of 266 respondents total How Companies Measure the Quality of Ethics/Compliance Programs
How Companies Benchmark with Other Programs
*out of 266 respondents total OVERALL TRENDS
Companies Have Diverse Modes of Communicating Ethics and Compliance Initiatives All respondents confirmed they had a code of conduct and most had helplines and communications from senior management. Fewer had focus groups or pilot testing for their programs or had competitions/rewards programs. Communicating Initiatives to Outside Stakeholders Still Low Almost 70% of respondents said they formally communicated ethics initiatives or had training for domestic and international vendors, while less than 50% said they did this for domestic and international consultants. Only around 20% of companies communicated ethics initiatives to domestic and international consumers. More Companies Adapting Codes of Conduct More than half (59%) of respondents noted their code has been translated, adapted, and/or modified for international affiliates. Thirty-one percent of respondents described their code as a single code of conduct that is distributed, unmodified, to all employees. However, more organizations are modifying international code(s) to incorporate cultural differences, local laws, and local policies, compared to 2005. Training Becoming Increasingly Electronic The 2007 survey results showed an increase in training across the company (both senior and lower level employees). More than half of respondents confirmed they are delivering less face-to-face training and more e-training. When asked how international employees were involved, the two most common activities were: responding to a solicitation for comments and/or participating in pilot testing of the training program. A quarter of the respondents reported international employees were not involved in the development of international training materials. Many respondents believed international training was worth the investment - 60% said it was “very much worth the investment.” Local Representatives More Involved in Investigations Over 80% of local ethics/compliance representatives work in their organizations’ legal department. Typical functional backgrounds for other local representatives include: human resources (65%), auditing and finance (64%), or country managers/head of a business unit (38%). Compared to 2005 responses, 2007 results show that local representatives are more involved in investigating incidents and implementing disciplinary actions. They are less involved in reviewing audit results. Views Differ on Why International Employees Report Less Frequently When asked why misconduct may be underreported among international employees, 64% identified “cultural difference regarding what is considered misconduct” as a “definite” or “likely” cause of underreporting. Another likely cause that respondents reported was because international employees “don’t trust that the report will be kept confidential;” they “don’t believe employees would be held accountable for their actions;” and they “don’t know whom to contact.” Most Companies Have Formally Reviewed Their Helpline When asked to describe the usage of e-mail reporting processes by international employees, 31% described it as “limited or nonexistent.” When asked to describe helpline usage by international employees, 42% described it as “limited or nonexistent.” Posted 3/5/08* * * US Proposed Federal Contracting Regulation Will Require Governance StandardsNewly-revised, U.S. federal regulation, which would require companies that hold contracts with the U.S. government to establish and maintain ethics programs and training for company employees, is expected to take effect later this year, according to Integrity Interactive Corporation, a consulting firm on compliance and risk assessment. Amidst the growing number of investigations probing corruption involving U.S. contractors and the public sector, both within the United States and abroad (for example, see EthicsWorld coverage of public procurement), the U.S. government appears to be taking the issue of sound corporate governance more seriously. The Federal Acquisition Regulation (FAR) was proposed in February 2007 and was followed by a comment period, which ended in May. The aim of the regulation is to streamline the policies already in place at the Departments of Defense, Veterans Affairs, and the Environmental Protection Agency which concern a contractor code of ethics and business conduct. The proposal also adds that the new rule should cooperate with the Department of Homeland Security in regards to contracts funded with disaster assistance funds. When adopted, the new rule will apply to those companies who hold at least one contract with the U.S. government over $5 million in value. According to an article in Ethisphere Magazine, the new rule will require companies to:
The proposal outlines a very specific description of the internal control system. It outlines a control system that:
In instances of non-compliance, Ethisphere reports that the government can withhold contracting fees for the contracting period and cancel awards fees. Integrity Interactive Corporation says “Well-founded and effective compliance programs will become ‘table stakes’ for winning federal contracts, keeping them, and actually getting paid.” It believes the new regulation will significantly change the bidding process and will have implications for thousands of companies - both public and private, foreign and domestic. Companies will have to demonstrate that their ethics and compliance programs are legitimate. Integrity Interactive says federal contractors must prove “their compliance training programs and controls are adequately funded (in relation to the company’s overall size and procurement revenue), and actually effective in detecting and correcting compliance breaches.” Posted 10/2/07* * * Anti-Bribery Experts Say Paying "Facilitating Payments" Is Bad for BusinessThe United States (and many other countries that have ratified the OECD Convention Against Bribery) permit the use of "facilitating payments" by companies doing business abroad. Alexandra Wrage, President of TRACE, a nonprofit business association that conducts research on and provides companies with tools for anti-bribery compliance, and Matthew Vega, an attorney who provides legal advice on compliance with the US Foreign Corrupt Practice Act (FCPA), argue that the negative consequences heaped on companies who pay facilitating payments far outweigh the positive results. Wrage and Vega are the authors of "Small Bribes Buy Big Problems," published by the Association of Corporate Counsel. The following is a summary of the article.Reprinted with permission of the authors and the Association of Corporate Counsel: Alexandra Wrage and Matthew Vega, "Small Bribes Buy Big Problems" ACC Docket 25, no. 7 (September 2007): 102-112. All rights reserved. If you are interested in joining ACC, please go to www.acc.com, call 202.293.4103 x360, or email membership@acc.com Facilitating payments are not allowed under the FCPA and the OECD Convention. Wrage and Vega say the legal distinction between a bribe and a facilitating payment under the FCPA “is supposed to be whether the benefit bestowed was within the official’s discretion to grant or whether it was due to the payer as a matter of course.” The problem comes when companies have to explain to their employees that paying large bribes are prohibited, but small bribes are to be used at their discretion. This mixed message is really a slippery slope that can get companies into a lot of trouble. Wrage and Vega lay out many additional risks to those companies that still allow facilitating payments. Higher Risks Companies risk the loss of the local community’s confidence, since a company that is viewed to buy its way though the business process is usually viewed negatively. Not only is there a “moral” risk, but bribing a government official is always illegal in at least one country. The legal landscape in each country is often complicated, giving companies more complications when they try to comply with international regulations. Companies interviewed at TRACE expressed concern that small bribes lead to costly legal complications. Bad Business Practice Facilitating payments also cause accounting problems, as accountants must choose between altering company records to conceal the payment, breaking US law, or recording the payment knowing it violated a local law. Despite bad legal practice, Wrage and Vega argue facilitating payments are simply bad for business. Companies at TRACE said “they amount to a hidden tax on business, they tend to proliferate, they buy an uncertain, unenforceable advantage and—the most common complaint—they are simply irritating.” Rather than making business run more smoothly and efficiently, as some business people have argued, World Bank researchers have actually found the opposite to be true. The World Bank reported “firms that pay more bribes are also likely to spend more, not less, management time with bureaucrats negotiating regulations and face higher, not lower, cost of capital. Adopting a Better Business Policy Wrage and Vega suggest the following steps to adopt a successful business policy that prohibits facilitating payments: To read the article in full, click here to view the .pdf version. Posted 9/5/07 * * * Open Windows: How Company Codes of Conduct Regulate Political Spending A Model Code to Protect Company Interests and Shareholder Value Faulting leading U.S. companies (S&P 100 companies) for weak regulation of their political spending, a Center for Political Accountability report urges the adoption of a strong model code of conduct to protect companies and their shareholders. The report, entitled Open Windows: How Company Codes of Conduct Regulate Political Spending and a Model Code to Protect Company Interests and Shareholder Value, found that the codes of conduct of most S&P 100 companies handled political spending in “a weak and cursory manner.” According to the study, none of the companies surveyed included comprehensive policies in their codes to ensure broad political transparency and accountability and ethical political behavior. Based on an extensive survey of companies, the new report includes an 11-point model code to provide guidance to companies. Corporate political spending exposes companies and shareholders to serious risks that are increasing as companies come under heightened pressure to contribute and as trade associations play a larger political role,” the report warned. “Corporate codes of conduct provide an opportunity to develop political spending policies that establish transparency and accountability that can help mitigate these risks.” Click here to read the full report. 1 Political spending shall reflect the company’s interests and not those of its individual officers or directors. 2 The company will disclose publicly all expenditures of corporate funds on political activities. The disclosure will include regular reports on the company’s website. 3 The company will disclose dues and other payments made to trade associations and other tax-exempt organizations that are or that it anticipates will be used for political expenditures. The disclosures shall describe the political activities undertaken. In the case of trade association payments, the disclosures will involve some element of pro-rating of the company’s payments that are or will be used for political purposes. 4 Company disclosure of political expenditures shall include direct and indirect political contributions (including in-kind contributions) to candidates, political parties or political organizations; independent expenditures; electioneering communications on behalf of a federal, state or local candidate; and the use of company time and resources for political activity. 5 The board of directors or a committee of the board shall monitor the company’s political spending, receive regular reports from corporate officers responsible for the spending, supervise policies and procedures regulating the spending, and review the purpose and benefits of the expenditures. 6 All corporate political expenditures must receive prior written approval from the General Counsel or Legal Department, and the company shall identify all senior management officials responsible for approving corporate political expenditures. 7 In general, the company will follow a preferred policy of making its political expenditures directly rather than through third party groups. In the event that the company is unable to exercise direct control, the company will monitor the use of its dues or payments to other organizations for political purposes to assure consistency with the company’s stated policies, practices, values and long-term interests. 8 No contribution will be given in anticipation of, in recognition of, or in return for an official act. 9 Employees will not be reimbursed directly or through compensation increases for personal political contributions or expenses. 10 The company will not pressure or coerce employees to make any personal political expenditures or take any retaliatory action against employees who do not. 11 The company shall report annually on its website on its adherence to its code for corporate political spending.
International Corporate GovernanceExploring Corporate Governance in the World's Major Capital Markets by Allison Garrett at Faulkner University's Jones School of Law Principles Based AccountingJames Kroeker, the SEC's Deputy Chief Accountant, recently spoke on the topic of principles-based accounting. * * * The State of Corporate Governance in China: Overview and Trends As China's role in the global economy becomes more and more imporant, so too do its corporate governance structures, how they are regulated and where their weaknesses lie. In his paper, "The Trends of Transparency, Laws and Regulations on Chinese Corporate Governance," co-author Professor Chi Guotai of Dalian University provides an overview of the corporate governance system in China, recent trends, and where reforms are needed. The paper is divided into three sections, the third (which is posted below) explains the factors influencing and reasoning behind China's governance structure, the effects state owned enterprises have on corporate governance, and the main problems with current system. To download the full paper, including endnotes and the first two sections which cover the general structure and development of Chinese corporate governance please follow this link. Trends in Chinese Corporate Governance Motivations for Changes in China-Based Corporate Governance The Effects of China State-Owned Enterprise Reform The state-owned enterprise (SOE)’s reform has been quite successful in terms of improvement in total factor productivity (TFP). According to many studies, the annual increase of TFP has been 24% since 1979, much higher than in the pre-reform period. However, the reform has not been successful, at least in terms of profitability of SOEs. It is widely reported (and most people believe) that one third of SOEs make explicit losses, another one third make implicit losses, while only one third are slightly profitable. Main Problems of Corporate Governance in China - The percent of negotiable securities is relatively low. As discussed above, the promoters hold the majority stake. Based on existing regulations, State-owned shares and legal entity shares held by the promoters are not traded in the open market. As such, more than half of the shares are non-negotiable securities. In addition, for listed companies that went public in the earlier days, shares held by the public cannot be traded in the open market until three years after the company has been listed. This reduced the amount of negotiable securities. - The difference of company stock structure. Between the parent corporation and the subsidiary corporations, black-box transactions happen frequently. These hurt both listed corporations and the public investors. And the directors and managers of the corporations mainly come from the controlling shareholders’ companies or units. There is no effective managers’ market among Chinese listed corporations. Company manager capacity and experience is not their main employment factors. - The regulation system is invalid. The board of directors and the general managers of the state proprietary stock companies are appointed by the State Department. Chairman of the board of director is often general manager at the same time. The function of decision making of the board of director could not separate from the executing function of the management. This directly results in the invalidation of the control system. * * *
The European Commission Starts Consultation on Next Phase of Corporate Governance Plan The European Commission has launched the second phase of its company law and corporate governance action plan by asking European stakeholders what needs to be done next. In a December 20, 2005 report in Accountancy Age, writer Paul Grant noted that the consultation, which runs until the end of March next year, intends to evaluate the overall aim and context of future priorities, the continued relevance of medium and long term measures and the value of modernizing and simplifying EU company law.The article quoted European Union Internal Market Commissioner Charlie McCreevy as saying: “The first implementation phase of the Action Plan has been a real success. Since May 2003, nearly all measures scheduled for implementation in the short term have been adopted or are in the process of adoption. But today's context is different from the one in which the action plan was adopted, and we need to make sure that it still provides the most efficient response to market needs. That is why we have launched this consultation. Expert input will be important in preparing the strategy for EU company law and corporate governance in the coming years. Our future action must ensure that EU businesses are properly run and competitive.' * * *
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