Identifying risks, ensuring compliance—and HR's role
Corruption poses a major challenge for both public and private sector organisations: the pressure is on to do business but the means by which it is done can come at a high cost. With HR becoming a strategic entity, it plays a vital role in ensuring ethical standards amongst its staff—but with 52% of employees saying anti-corruption polices are ‘neither effective nor relevant’, it is time to get to grips on the role HR departments should play in preventing corrupt practices.
JOSEPH LEE
Principal Corruption Prevention Officer, ICAC
In a city that is famed for its anti-corruption laws and enforcement, corruption has dominated the headlines in Hong Kong over the past year. In the latest of a string of controversies, former Chief Executive Donald Tsang Yam-kuen was charged with misconduct in public office in October during his tenure in the territory’s top government post and follows the imprisonment of Rafael Hui Si-yan—formerly Hong Kong’s number two government official—last year for corruption and misconduct in public office.
While these episodes have shone a light on corrupt practices in Hong Kong—known for its strict anti-bribery and anti-corruption (ABAC) laws—these cases do highlight an unfortunate reality. While one would associate corruption with the likes of China, the Middle East or FIFA perhaps, the hard truth is that corruption is pervasive and illusive no matter which jurisdiction one is in. But it is by no means unavoidable—through understanding the true cost of corruption and adopting some common sense steps can organisations get on top of the problem.
| What is corruption?
EY: Where a person offers, or promises or gives an advantage, financial or other, to another person, whether that is directly or indirectly through another party, with the intention that the advantage will induce the recipient to perform improperly a relevant function or activity. ICAC: Corruption is defined in the Prevention of Bribery Ordinance (POBO). Section 4 deals with public sector corruption—which makes it illegal for any person who offers any advantage to a public servant as a reward or inducement or for the public servant to do anything for him/her in relation to their public service duty. It is equally illegal for that public servant to accept the bribe. Section 9 deals with private sector corruption—which makes illegal any employee or agent of a private company who accepts or solicits an advantage from another person as a reward or inducement for him/her to do something in relation to his/her company’s affairs unless he/she has their company’s permission to accept the advantage. |
Cost of corruption
The reputational cost of corruption is as damaging as it is opaque. According to the World Economic Forum (WEF), the cost of corruption is estimated to be USD 2.6 trillion—or 5% of global GDP with the World Bank estimating that USD 1 trillion are paid in bribes each year. The cost to business itself is also substantial with the WEF estimating that corruption increases costs by up to 10% on average.
But according to Joseph Lee, Principal Corruption Prevention Officer, Hong Kong Independent Commission Against Corruption (ICAC), the true extent of bribery and corruption will never really be known. He commented to HR Magazine, “If any corruption is going on, it will be secretive in nature—so it is almost impossible to estimate the true cost.”
While it is hard to put exact figures on it, one cannot be under any doubt about the costs at stake. As Lee explained, “The cost is not always linked to the immediate financial cost. Of course a company has to pay more to buy the goods but it is not just limited to this. There will be a series of consequential costs—for example, if you buy some materials that are inferior, that will result in your company producing goods or services which has a lower quality. If you sell this to your customers, they will be unhappy, you will lose business and also there are large reputable companies which will stop doing business with you.”
Losing business is just one part of it. With strong anti-corruption efforts being stepped up in emerging markets such as China or Indonesia, the risk is not merely about losing profit but could bring firms into serious disrepute with law enforcement. In 2013, not only did major British pharmaceutical firm GlaxoSmithKline (GSK) see huge falls in profits in China in the wake of a corruption scandal there, the company was fined a record RMB 3 billion—around 4% of its 2013 operating profits—with the Head of GSK in China deported and four other executives jailed between two to four years.
Cost in the war for talent
As for HR departments, a direct cost of corruption comes in the form of talent attraction and retention. According to EY’s latest Asia-Pacific Fraud Survey 2015, the accounting firm found that when asked about their perceptions of an organisation that has been involved in a major bribery or corruption case, 78% of respondents said that they would be unwilling to work for such an organisation or would consider other employment opportunities—with as many as 86% of under-25s saying they would not work for ‘unethical companies’.
The findings may at first seem unsurprising but as Chris Fordham, Managing Partner—Fraud Investigation & Dispute Services (FIDS), Asia-Pacific, EY explained to HR Magazine, “When you already have a war for talent going on, if people are not prepared to stay around for long, then that puts unethical behaviour and compliance at the top of the agenda not just for financial losses but also when formulating strategies around talent retention.”
He added, “This survey doesn’t suggest that hundreds of people are going to walk out of the door but in a war to attract and retain talent, this is clearly an issue and a dimension to human resources that has been under addressed.”
CHRIS FORDHAM
Managing Partner—Fraud Investigation & Dispute Services (FIDS), Asia-Pacific, EY
Thou shall not
It is clear that organisations themselves do not want to be associated with these risks either. EY’s survey found that 76% of companies in APAC have an ABAC policy—an increase of 16% from 2013—and that more companies, 68%, have clear penalties for breaking those policies. Despite these positive findings, the theory does not always seem to meet the practice—a staggering 52% of respondents stated that ABAC policies at their firm were ‘neither relevant nor effective’.
In large part, this is to do with wanting a competitive edge. As Lee explained, “You can tell the front-line not to bribe, but actually, if the top is simultaneously putting a lot of pressure on the front-line to make sales through whatever means possible, it does not match the ethical message that companies try to push with ABAC policies.” This pressure creates desperation that generates bribery risks for companies as their own staff could go onto offer corrupt deals. Indeed, according to the ICAC, purchasing and procurement often in fact is the most common area which attracts the largest number of complaints to the anti-corruption body in Hong Kong.
ABAC policies are also largely challenged through operating within markets that demands businesses to pay corrupt payments. Again, according to EY, 27% of its respondents agreed that ‘if we followed our ABAC policy very closely, it would harm our competitiveness in our local market.’ Further to this a 2009 KPMG survey found two-thirds of respondents said there were places in the world where they cannot do business without engaging in corruption. Whether it is in the form of gaining market share, access to resources or even just processing a visa, dabbling in corruption has often been a route into certain markets.
At times, the problem can be much more complex. In the US, for example, some ‘bribes’ could be considered more ethical than others—such as so-called ‘facilitation payments’. According to the Oxford academic Elizabeth David-Barrett, these are ‘a small payment that is routine and which allows a company or individual to receive a service to which they are in any case entitled.’ In other words, it allows one to receive a service faster but is an area that Fordham told us remains particularly grey and open to interpretation under the law.
For all that pressure and risk, the ultimate decision of engaging in corruption is in the hands of the front-line staff representing that organisation—and for Fordham, often the problem is that they are misguided. He explained, “It’s all very well saying ‘thou shall not’ but most of the time when we are dealing with this, people who have been guilty of bribery and corruption think erroneously that they are doing the company a big favour.”
Zero-tolerance
The reality though is that these employees, far from doing a big favour for their company, are actually doing it a great disservice. The costs are clear and once exposed for corruption, the damage is difficult to handle. With so many corruption landmines out there and the complexities that come with them, the message from both Lee and Fordham is clear—zero-tolerance to any kind of corruption in all jurisdictions.
As Fordham elaborated, “The best starting point is that none of these payments are ethical in the first place. So if you find that you’re being asked to make such a payment, it is best to have a zero-tolerance approach.”
Adding to this, Lee stated, “If anyone is asking you for a bribe, you have to refuse to offer a bribe—and even if that means losing the contract, you don’t bribe. You have to have a clear message and practice it.”
Disconnect
ICAC Headquarters, North Point
Yet the problem of corruption can still pervade, especially for the major corporations where oversight can be difficult and the financial risk greater. As the entity that manages the workforce, human resources departments are a critical stakeholder and need to get stuck into anti-corruption efforts. Lee explained, “HR might see themselves as having a minor role in terms of fraud or corruption prevention. They may think that is the duty of the compliance unit but that is to miss out the important link with training, ethical practice and staff integrity.”
He further said, “What we would like to see is that HR functions in companies take more ownership in helping companies to draw up integrity guidelines and to promulgate those integrity rules to start, promote ethical culture in the company, and organise staff training in this area.”
The task is challenging. Not only is it imperative that effective ABAC policies are drawn up but they are implemented effectively in practice too. This means bridging the disconnect between front-line staff and the message from management—but of course, Lee highlighted, that does mean HR needs to get senior management buy-in as well as themselves communicating a clear message on the issue.
So what can HR do practically?
| Innovative and iterative training As the major player responsible for staff training, it is HR’s responsibility to use it as a platform to counter corrupt practices. At the heart of this, the message needs be clear on what corruption is and the consequences it has for the employees and the companies.In particular, the ICAC recommends that HR should cover:
Such training should not be a one off. As Fordham advised, “Training on corruption needs to be iterative—risks and themes change. The company itself enters into new markets, into new services that brings it into touch with new risks. If you just train people once, you are just going to capture people there at the time.” As such, a further suggestion for HR is that weekly/monthly department or team meetings should incorporate a ‘compliance moment’—similar to that of health and safety briefings. This section could cover corruption risks but also look at money laundering, terrorist financing, sanctioned countries or organisations and supply chain risks. For those companies looking to improve on their training, the ICAC does also offer training advice or tailor-made interactive training workshops for companies itself—both free-of-charge and confidential.
Ensure good practice within HR & the organisation Importantly, according to the ICAC, all the administrative functions carried out by HR need to be fully and properly recorded. Everything—including staff recruitment, remuneration packages, staff supervision, disciplinary procedures, handling of complaints, performance appraisals and promotion procedures—need to have clear guidelines, all actions taken recorded with time-stamps and documented safely. For more information, you can check out the ICAC’s website and their Staff Administration Best Practice Checklist: www.icac.org.hk. HR should not be alone in documenting—it should be a habit for the entire organisation. As Fordham illustrated when confronted with the risk of corruption, “Confirm that you are making the payment to a government organisation rather than an individual, confirm that you are going to get an official receipt for the payment—then if the payment turns out to be some kind of corrupt payment, then asking these perhaps naïve, obvious questions can expose that and would help to counter such practice.” In addition, he recommended that in such cases it is also best to foster a culture of consulting internally in regards to risks. Just as training needs to be updated to reflect the current trends in compliance, so should ABAC policies and codes of conduct—a measure which is surprisingly is at times overlooked. Lee illustrated when dealing with some companies, “They can’t find their code of conduct and when we see it, we realise that it was dated more than ten years ago and many people were not aware of what the content of the code was." Advice on ABAC policies and codes of conducts—so they can be brought into line with Hong Kong standards—can be sought from the ICAC's Corruption Prevention Advisory Service free-of-charge and confidentially.
Ensure an ethical culture throughout the company Lee explained, “HR must secure the top management’s buy-in: they should not just do it as a HR issue, otherwise it would not be effective enough. Top management needs to send a clear message about the ABAC policy and the code of conduct and sometimes spread messages about integrity issues. After they have the top management’s support, then HR can help to promulgate including through arranging trainings.” Only through this can HR really help to get the message across and ensure its employees are compliant. |
Conclusion
With competitiveness being a top priority for businesses, organisations need to fully understand the financial as well as reputational risk that corruption carries with it. One cannot understate the problem—the incentives for engaging in such practices do exist and as the primary entity for managing employees, HR has a crucial role to play in their firm’s strategy to combat and prevent corruption wherever it may occur.
Paul Arkwright
Publisher
