A lack of transparency in the anti-corruption efforts of emerging-market companies could leave U.S. companies that do business in developing countries vulnerable to violations of the Foreign Corrupt Practice Act and other anti-bribery laws around the world.
A recent report examining the public reporting practices of 100 emerging-market companies revealed significant problems when it comes to transparency in corporate reporting in such areas as corruption compliance, ownership and structure, and even traditional financials.
According to a study conducted by corruption watchdog Transparency International, 75 percent of emerging-market companies scored less than five out of a possible 10, with zero being least transparent and 10 being most transparent. The average company score was 3.6 out of 10. “It certainly indicates that a lot of work still needs to be done for these companies to be more transparent,” says Susan Côté-Freeman, program manager at Transparency International. “It's not a stellar score.”
The TI report assessed three main aspects of corporate disclosure transparency:
On anti-corruption programs, such as bribery, facilitation payments, whistleblower protections, and political contributions;
Organizational transparency, including information on corporate holdings; and
Country-by-country reporting, including revenues, capital expenditure, and tax payments.
According to the index, Indian companies faired the best in all three aspects of corporate disclosure transparency, although with an overall index score of 5.4 they still have room for improvement. Several companies in India occupy the top positions in the overall index, including Tata Communications with the highest overall score of 7.1, followed by Tata Global Beverages and Tata Steel, each with a score of 6.6.
On the opposite end of the spectrum, Chinese companies lagged behind in every aspect of transparency with an overall score of two, with many occupying the lowest positions in the overall index. These include Chery Automobile with a score of 0.0; China Shipbuilding Industry Corp. with a score of 0.1; and the Fung Group with a score of 0.2.
Côté-Freeman stresses that the individual scores observed in the TI report are not a reflection of a company's level of corruption. “That is not what we were looking at. We can't measure that, and it's not what we're attempting to measure.” The TI index looked only at each company's level of disclosure, she says.
Anti-Corruption Transparency
When it comes to the transparency of anti-corruption programs, emerging-market companies evaluated in the TI study achieved an average result of 46 percent, meaning companies scored six points on average out of a possible 13 points. This score is much lower than the reporting performance of Western companies, including U.S. companies, which average 68 percent on anti-corruption transparency, according to the findings of a similar TI study conducted in 2012 on the world's 105 largest listed companies.
Nicola Bonucci, director of legal affairs for the Organization of Economic Cooperation and Development, says the results of the TI study are not all that surprising. “The trends we are observing are not dissimilar to the ones observed by TI,” he says. “The level of transparency of [developed market] companies is higher than the level of transparency of emerging-market companies.”
According to TI, the information a company reports on its anti-corruption processes says a lot about management's awareness and commitment to fighting corruption. The more transparent companies are in this area, the more they are driven to improve their anti-corruption measures, says Côté-Freeman. “If you're stating in a report that you have certain policies and procedures to mitigate corruption, you're going to make sure you're actually doing that,” she says. “We've seen that reporting does drive practice.”
In the TI report, no company achieved a top score of 100 percent, but four publicly listed companies based in India scored 92 percent each, only one point short of a perfect score. The companies include Tata Communications, Tata Global Beverages, Tata Steel, and Vedanta Resources.
“The level of transparency of OECD companies is higher than the level of transparency of emerging-market companies.”
—Nicola Bonucci,
Director of Legal Affairs,
Organization of Economic Cooperation and Development
Companies that scored high in this area make it very clear what policies they have in place to mitigate bribery and corruption. “We're not expecting them to give us minute details of their procedures, but to communicate that they have policies and procedures that they're monitoring and that they're verifying that the procedures are working and doing risk assessments,” says Côté-Freeman. “All those things would be characteristic of a company that is transparent about what it's doing on the anti-corruption front.”
Eight companies received an overall score of zero. In a couple of instances it was not because these companies had no anti-corruption processes or transparency measures in place, but because they limit accessibility to that information. The kind of information that TI looks for in order to score a company—such as the availability of a code of conduct or anti-corruption policy—isn't always easily accessible, because some companies publish this information on password-protected investor relation sites, Côté-Freeman explains.
“Some of those companies got a zero score because of that,” she says. “We really want to encourage those companies to be more public about the efforts they are carrying out to mitigate the risk of bribery and corruption.”
Organizational Transparency
The TI study also evaluated organizational transparency by assessing the amount of information companies disclose on their majority and minority holdings, including names, percentages owned by the parent company, country of incorporation, and countries of operations. “It seems like that information would be obvious, but sometimes it's not that clear how companies are structured and where they're operating,” says Côté-Freeman.
Organizational transparency is important for many reasons, not the least of which is because company structures can be made deliberately opaque for the purpose of hiding the proceeds of corruption, the TI study stated. On average, emerging-market companies scored 4.3 out of 8 possible points for organizational transparency. This figure is considerably below the average company score of 72 percent achieved in the same category by the top 105 companies assessed in TI's 2012 report.
Five emerging-market companies achieved a perfect score of 100 percent on organizational transparency, including Emirates Airlines (UAE); Johnson Electric (China); Petronas (Malaysia); Shanghai Electric (China); United Company Rusal (Russia).
Publicly listed companies tend to be much more transparent on ownership and structure than those that are state-owned or privately held. This may explain why Indian companies overall fared much better than Chinese companies when it comes to transparency in their reporting practices.
“One of the main differences between Chinese companies and Indian companies is that most of the Indian companies we're talking about are public companies, but in China they are state-owned enterprises,” says Bonucci. “Communication by state-owned enterprises is always more difficult, not only in China but also in some OECD countries.” Nine out of the eleven worst performers are incorporated in China, seven of which are privately owned and four state-owned.
The TI study further revealed that 50 percent of the worst-performing companies on anti-corruption transparency were privately owned, even though privately owned companies constituted only 12 percent of the overall sample.
Public companies were also more transparent on their company structure, achieving an overall score of 67 percent, compared to the state-owned and privately held companies, with a score of 24 percent and 15 percent, respectively.
Among the 17 state-owned companies, four received scores of zero and two. Emirates Airlines and Petronas achieved perfect scores, which demonstrates that state ownership is not in and of itself a barrier to organizational disclosure, TI stated. Among the 12 privately owned companies, seven scored zero, four remained in the below-average zone of 6 percent to 31 percent. Only one company, Thailand's Charoen Pokphand Group, achieved a high score of 88 percent.
Country-by-Country
Country-by-country transparency of financial reporting of revenues, capital expenditure, and income tax, is the only area where emerging-market companies did better than the top 105 global companies from TI's 2012 study. Emerging-market companies achieved an overall score of 9 percent, compared to an overall score of 4 percent by the top global companies.
EMERGING COMPANIES TOP PERFORMERS
Below is an excerpt form TI's emerging markets report with statistics on top performers.
TOP PERFORMER OVERALL WITH A SCORE OF 7.1
Tata Communications (India, Telecommunications, publicly listed)
92% in reporting on anti-corruption programs: discloses all information except for regular program monitoring.
88% in organizational transparency: discloses all information except for countries of operations for material subsidiaries.
34% in country-by-country reporting: discloses revenues, pre-tax income and income taxes for all material subsidiaries, revenues on country-level for 13 countries out of 34.
BEST SCORES IN REPORTING ON ANTI-CORRUPTION PROGRAMMES: 92%
Tata Communications (India, Telecommunications, publicly listed);
Tata Global Beverages (India, Consumer goods, publicly listed);
Tata Steel (India, Basic materials, publicly listed); and
Vedanta Resources (India, Basic materials, publicly listed).
BEST SCORES IN ORGANISATIONAL TRANSPARENCY: 100%
Emirates Airlines (UAE, Consumer services, state-owned);
Johnson Electric (China, Industrials, publicly listed);
Petronas (Malaysia, Oil and gas, state-owned);
Shanghai Electric (China, Industrials, publicly listed); and
United Company Rusal (Russia, Basic materials, publicly listed).
BEST SCORES IN COUNTRY-BY-COUNTRY REPORTING: 50%
Falabella (Chile, Consumer services, publicly listed): all information on revenues and income tax, partial information on community contributions, and description of projects
BEST UNLISTED COMPANIES
Petronas (state-owned): best overall index score: 6.3
Votorantim Group (private) and Petronas (state-owned): best in reporting on anti-corruption programs: 88%
Emirates Airlines (state-owned) and Petronas (state-owned): best in organizational transparency: 100%
Odebrecht Group (private): best in country-by-country reporting: 6%
Source: Transparency International.
This result can be attributed in large part to the 20 Indian companies in the study that scored an average of 29 percent, mainly due to Indian law that requires companies to provide key financial information on all their subsidiaries. “So the stronger performance of the Indian companies brought up the general average of the emerging-market companies in that dimension, says Côté-Freeman.
Without strong performance by Indian companies, the average result would have been similar to that of the weak score of the 105 largest global companies, TI stated. The best-performing company was Chilean retailer Falabella, which achieved a 50 percent score. Thirty-eight companies scored zero.
Country-by-country disclosure has been a point of contention for most global companies. Côté-Freeman surmises that the reason that country-by-country reporting lags in all parts of the world is because it's a new requirement for most companies, “so it's understandable that performance has been lagging in that area.” Another reason is that such reporting requirements are fairly controversial as well, Côté-Freeman adds.
The 2010 Dodd-Frank Act, for example, mandates country-level reporting of all payments to both U.S. and foreign governments by extractive companies registered on the U.S. stock exchange, although the Securities and Exchange Commission is still working on the final rules. In the European Union, legislators recently adopted similar rules for European companies in the oil, gas, mining, and logging industries.
Historically, most companies have been reluctant to share information that they felt could be perceived as adverse to the company, says Bonucci. Over the last decade, however, the trend has shifted toward more transparency and more disclosure, he says.
Côté-Freeman says TI is observing similar trends. Every time TI does these studies, “we have more companies coming back to us to discuss the data we have compiled and wanting to give feedback,” she says. “We've also had a number of companies that have called us after the report was published to discuss their score and where improvements could be made, so there is this interest on the part of companies to improve on their assessments.”
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