Board Matters Quarterly, June 2014

Addressing bribery and corruption risks in China

Proactive approaches to address bribery and corruption risks in China

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China has experienced strong economic growth over the last few decades. Since 1978, the country’s gross domestic product has increased tenfold to US$8.939 trillion in 2013.

However, MNCs doing business in China face substantial bribery and corruption risks.

Enforcement of the US Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and other local anti- corruption drives is mounting. At the same time, China’s leadership has taken a tough stance, launching investigations that have made headlines.

As in the US, Chinese law enforcement authorities can arrest and detain employees, seize financial and other records, revoke licenses and prohibit a company from doing business.

Board and audit committee members should be aware of these trends so they can drive awareness and help prevent bribery and corruption from becoming a systemic problem in both domestic and international operations. Management should have a proactive posture rather than a reactive one. If necessary, the board needs to play a key role in pressing for that change in philosophy.

The audit committee’s role

The board — and the audit committee in particular — is responsible for overseeing management’s approach to addressing bribery and corruption risk. This responsibility includes assessing whether management is applying appropriate attention and resources, both centrally and locally. Management should be repeatedly communicating the need to comply with anti-bribery and corruption laws and use tangible, objective indicators to determine whether the company is on the right path.

Managing these risks requires an investment, and if such spending decisions do not originate with board sponsorship, it could take longer to implement change.

When moving toward proactive compliance, companies should consider the following:

  • Foster open communication. This is both a top-down and a bottom-up dynamic. The board and management set the tone by communicating a robust framework of rules and employee standards. An engaged compliance function, as well as an effective whistleblower program, feeds information back up to the board about how well those standards are being adopted.
  • Encourage local solutions. Making compliance relevant to local teams means engaging them to design specific procedures. The board is there to set consistent guiding principles that apply globally, which management can then achieve in a rational, locally efficient manner.
  • Bolster technology. Companies with large Chinese operations are increasingly using technology to detect potential problems much earlier in key functions, such as third-party due diligence, vendor transactions and employee expenses. The board is uniquely positioned to make the case that such proactive measures are more cost-effective than a corruption investigation.
  • Conduct regular assessments. Reviews should be vigorous and frequent to determine whether existing internal controls are effectively detecting and thwarting bribery and corruption. Management should share those findings with the board and, if necessary, design remedial actions. Companies with subsidiaries in Asia-Pacific must follow local and overseas regulations and engage local independent third parties to undertake assessments.
  • Make everyone accountable. Ethical practices are just as essential to the business as branding and cost management, and all employees should be involved. The board should see that specific responsibilities in the execution of the company’s compliance program are clearly communicated by management throughout the organization and that they are a part of employee performance measurement.

The benefits of persistence

As one can see from cautionary tales unfolding among MNCs in China, the rewards of a robust anti-bribery and corruption program can far outweigh the costs. China is poised to become perhaps the top consumer market in the world, which means foreign companies are in China to stay, but the compliance challenge is not getting easier.

It is time for companies to view compliance in China as a long-term risk that can be managed with the right mixture of tools, commitment and leadership.

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Questions for the board to consider

  • Is the board confident that the company is taking a proactive stance against bribery and corruption, rather than waiting to react to an event?
  • Does the board have a clear idea of the degree and types of compliance risks that exist in the company’s Chinese operation?
  • Is the company using technology to manage these risks? If so, does the board understand how it works, and does it think the technology is calibrated to the size and complexity of the company’s operation in China?
  • Is the board confident that those evaluating compliance in the company’s Chinese operations are independent and can provide he board with an objective opinion?
  • Is the board aware of increased efforts by Chinese leadership to crack down on corruption and how that may impact the company’s compliance risks?