COMPLIANCE IN CONTEXT Navigating the Realities Use outside these parameters is a copyright of Emerging Markets For use only in the course BUAD 301 AY 24-25 (SU/FA24) at California State Un By MATTHIAS KLEINHEMPEL V Folkswagen's emissions fraud is go- tion; for Walmart in Mexico, it was a case of lo- ing to hurt financially, not only in cal executives paying bribes to public officials potential fines but also in terms of in exchange for favors. the stock rout the company has suf- Doing business in emerging economies of- fered since news of the scandal broke in Sep- ten means assuming greater risks. Legal vacu- tember 2015. The consequences of Walmart's ums and widespread instability provide fertile 2011 Mexican bribery scandal are still being ground for corruption. Compliance officers in felt as negotiations with U.S. federal prosecu these markets generally experience higher lev- tors continue. Both scandals show the cost els of stress and responsibility. of non-compliance, but the issues they raise Little wonder, then, that among the more for compliance officers in developed versus than 200 compliance officers surveyed for emerging markets are distinct. a recent study I conducted with colleagues Although the role of compliance officers in at the Center for Governance and Transpar- any company is fundamentally the same, the ency at IAE Business School, 94 percent be- on-the ground realities can differ enormous- lieved that their priorities should be adapted ly, depending on the market. For Volkswagen to the context in which the company was in Germany, it was a breach of industry regula- operating 32 FOURTH QUARTER 2015 ISSUE 27 https://dx.doi.org/10.15581/002.ART-2791 IESEinsight Page 109 of 128Cause for Concern 83 percent of these companies suffered sub- All companies are coming under increasing stantial losses in emerging markets between pressure to implement and maintain compre- 2010 and 2014 as a result of either regulatory or hensive ethics and compliance programs. This reputational issues or problems related to brib- is largely because some countries, including the ery or fraud, with the latter accounting for the United States, the United Kingdom and Brazil, greatest volume of losses have introduced stricter rules and regulations, Besides having fewer material and human indicating that the penalties may be less harsh resources at their disposal, most compliance for those whose compliance programs fulfill officers in emerging markets have to navigate certain legal requirements. complex environments characterized by wide- Besides the legal consequences, the media spread non-compliance, largely as a result of fallout from being embroiled in a scandal is an- lack of awareness or training; acute deficiencies other incentive for companies to take steps to in the ethical tone set by senior management; safeguard their reputations with their custom- intense pressure to deliver financial results; ers, suppliers and investors. The reputational and frequent changes in policy and regulation, damage can severely hamper a company's abili- giving rise to lots of gray zones. ty to attract vital financial resources and recruit The design of compliance programs is usu- top talent. ally based on risk maps, but the risks in Mexico Numerous surveys of compliance officers of are not the same as the risks in Germany. These large multinationals based primarily in devel- differences are rarely accounted for in the oped nations indicate that their main concern codes of conduct established by multinational is industry regulation, followed by corruption, corporations. As a result, compliance officers data privacy and confidentiality, conflicts of operating in emerging markets must interpret interest and competition law. and apply unilateral global policies and stan- For use only in the course BUAD 301 AY 24-25 (SU/FA24) at California State University - Fullerton from 5/28/2024 to 1/27/2025. Use outside these parameters is a copyright violation. However, a study we carried out of compli- dards to local and regional realities. ance officers in Latin America reveals stark dif- The problem is that many of the standards ferences in their order of priorities: corruption conceived in developed contexts are hard to ap- tops their list of concerns, with money laun- ply in emerging ones. And those who conceived dering, data protection and competition law the standards did not factor in the extra time appearing lower down the list. and effort required to translate them into terms Their worries about corruption seem whol- that local employees can readily embrace and ly justified. An FTI Consulting study of the risk put into practice. and compliance officers of 150 North Ameri- "The company's standards clash with those can and European multinationals shows that of the local culture," complained one compli- ance officer. "The challenge of breaking down the cul- EXECUTIVE SUMMARY tural barrier of institutionalized corruption is huge,"lamented another. "In emerging markets All corporate compliance economies of Latin America you have to internalize compliance functions programs share a common reveals the special challenges first, whereas in developed economies this feature: to ensure that the that compliance officers in function is consolidated already.' company obeys the law and these markets face. How Apart from having different starting points, that all organizational members the differences are deal there's the added difficulty that some compa- behave ethically. However with is usually a function of hies simply regard acts such as paying bribes as multinational companies ational culture, culturally inevitable. Others worry that if they operating in a country like especially the ethical tone set do not engage in such practices, they will be left Mexico, for example, face at the top. This article explains at a disadvantage vis-a-vis less high-minded issues very different from how management priorities competitors. those of Germany - a reality and the rollout of compliance that many codes of conduct programs must be adapted Leading by Example fail to recognize. The author's to on-the-ground realities in Many of the challenges compliance officers face esearch on compliance specific business contexts in emerging economies relate to internal threats, programs in the emerging around the globe. in particular those that affect organizationalThe benefits of running a compliance program are considerable, as are the costs of not doing so. Fostering an ethical organizational culture helps to mitigate financial, legal and reputational risks. culture. As such, the tone set by senior manage- do with the nature and execution of work, as ment is paramount. For 74 percent of partici- some of the compliance officers in our survey pants in our survey, this was the most important reported. challenge, with training in ethical culture and In developed economies, there are more integrity coming a distant second. By contrast, regulations and institutionalized controls that the internal challenges most frequently cited in make the compliance officer's job much easier, surveys on compliance in developed economies whereas in emerging markets, rules are much areformal complaint channels, codes of conduct more chaotic and unpredictable. Furthermore, and training. the informal economy is much larger in emerg Training efforts should begin at the top. Af- ing economies, making it more difficult for terall, if the senior management is not commit- companies to achieve transparency in the local ted, there is little point in training up the rest of value chain. Imagine trying to reconcile a global the managers and employees. Indeed, encour- corporation's policies and standards with an in- aging conduct that clashes with that of senior formal economycontaininga bewildering array management would be counterproductive. of providers, distributors and affiliates. Use outside these parameters is a copyright violation For use only in the course BUAD 301 AY 24-25 (SU/FA24) at California State University - Fullerton from 5/28/2024 to 1/27/2025. The benefits of running a compliance pro- It's hard enough to find major suppliers gram are considerable, as are the costs of not able to comply with a corporation's code; it's doing so. Fostering an honest, ethical organi- even harder to do so with small-scale suppli- zational culture helps to mitigate financial, le- ers lower down the chain. It used to be that a gal and reputational risks. As such, companies compliance officer's main responsibilities operating in emerging markets should invest were ensuring due diligence for new provid- more time and resources in raising awareness ers and monitoring their performance to avoid among senior management of the importance potential cases of corruption. Today, however, of compliance. That's where the company's the range of responsibilities is much broader credibility will be won or lost. - from inspecting labor conditions, to protect- ing the environment, to preventing money Different Settings laundering. Companies that were once quite Another key difference between compliance happy to accept declarations of compliance in developed and emerging economies has to from providers, partners and distributors must now personally oversee the implementation of third-party compliance programs, managing : ABOUT THE AUTHOR and controlling the processes in much the same way as they do with quality control Matthias Kleinhempel is a the Power Cables Division This approach may be firmly established professor at IAE Business with responsibility for the in the United States and Europe, but it is only School, Buenos Aires, where worldwide business. His beginning to take shape in emerging econo- he also serves in the Center for research focuses on corporate mies, particularly in Latin America. (See the Governance and Transparency. governance, good business sidebar on Collective Action on the Map.) As He holds an MBA from IAE practices, compliance such, trying to implement a compliance pro- and a law degree from the program rollouts and regional gram throughout the value chain and across all University of Hamburg. He has strategies, and he has written processes is a tall order. It's relatively easy to held a number of executive several books, articles and impose such a system on one provider or dis- positions at Siemens in South technical notes on these tributor and monitor their compliance. Doing America, including CEO of subjects. so with the hundreds or even thousands ofCollective Action on the Map The United Nations Global Compact's "Practical Guide for Collective Action Against Corruption" provides extensive analysis of 28 collective action initiatives taking place around the world. Here we highlight some from Latin America. MEXICO O INTEGRITY PACT FOR THE SUBURBAN TRAIN PROJECT. In 2005, the government transportation agency, the Mexican chapter of Transparency international and various bidding companies signed declarations under oath that they would abstain from corrupt practices in the construction of rail services to the Greater Metropolitan Area of Mexico City. An independent monitor was present at every meeting PARAGUAY O COLOMBIA O COMMERCIAL ETHICS PACT TRANSPARENCY PACT Supported by the U.S. Department of Since 2005, more than 130 principle- Commerce and the American Chamber based transparency pacts have been of Commerce in Paraguay, this certifying signed in the country, to ensure best business coalition provides training practices in business partnerships on legal and ethical compliance, and between local municipalities and conducts random audits of its 150 companies in relation to bribery, anti- For use only in the course BUAD 301 AY 24-25 (SU/FA24) at California State University - Fullerton from 5/28/2024 to 1/27/2025. Use outside these parameters is a copyright violation. member companies. One benefit is that competitive behavior and human rights. certified members are given an easier time in customs when moving goods across borders. ARGENTINA O BRAZIL OMICIDI WELL MORON AND ESTEBAN ECHEVERRIA BUSINESS PACT FOR INTEGRITY AND INTEGRITY PACTS AGAINST CORRUPTION Two municipalities - Moron and Esteban Launched by the Ethos Institute, the Echeverria - and the NGO Poder Ciudadano Brazilian Committee of the U.N. Global (Citizen Power) signed transparency Compact and other partners, this multi- agreements in the bidding processes for waste sector pact uses media campaigns to removal. raise awareness about good business HEALTH SECTOR PRINCIPLE-BASED INITIATIVE practices, with more than 200 This is but one example of a voluntary signatories. agreement among industry professionals who CLEAN GAMES INSIDE AND came together to create a formal platform OUTSIDE THE STADIUM for discussing and managing sector-specific This initiative promotes integrity in issues, with the intention of evolving into infrastructure projects related to Brazil's a membership-based, certifying business hosting of the 2016 Olympic Games, as coalition. was done with the 2014 FIFA World Cup. providers and distributors with whom a multi- keysuppliersand distributors. This work would national must work is another matter entirely. include: due diligence and ongoing supervi- One inevitable result is a sharp increase in the sion; the expansion of compliance policies to legal, financial and reputational risks the firm all levels of the supply and distribution chain; faces. training and communication; and the docu- One way out of this conundrum is to reduce mentation of processes, auditing and financial the number of providers and distributors and statement assertions. to invest some of the savings into outsourcing None of this is easy, especially in the infor- the work of supervising the compliance of a few mal economy where compliance with the law isDespite the starkly different realities that compliance officers might face in one country or another, there is a common set of rules that applies to any ethics and compliance program. not given the same priority. In many cases, the them to "think outside the box, multitask and expansion of international compliance pro- get involved in the company's day-to-day de- grams may have the opposite of their desired cision-making." They find themselves taking effect: people may look the other way rather on a multifaceted role, helping the company than lose an important client. navigate the many dilemmas that arise along the way. Flexibility and Adaptation The clash between compliance objectives and Values Are the Rule economic objectives was mentioned by one in- Despite the starkly different realities that terviewee. He said if you told a sales manager compliance officers might face in one country that he needed to carry out due diligence on or another, there is a common set of rules that a particular distributor, the typical response applies to any ethics and compliance program. would be, "The rest of the market doesn't do Most programs focus on legality. So, the it. We will lose clients." Chief Compliance Officer's role becomes one This economic pressure was made appar- of making sure that the organization's inter- For use only in the course BUAD 301 AY 24-25 (SU/FA24) at California State University - Fullerton from 5/28/2024 to 1/27/2025. Use outside these parameters is a copyright violation ent by the case of a local advertising agency. To nal and external procedures do not violate comply with the code of conduct of the multi- any laws. Critics say this focus lacks efficacy. national for which it worked, the agencyended What often happens is that compliance offi- up subcontracting work to an "informal" pro- cers spend more time providing legal advice vider in order to meet the reduced prices de- to employees than actually trying to improve manded by the client. This was cheaper than their level of conduct. legally hiring new employees and, perversely, Laws give basic indications of appropriate was the source of the agency's competitive ad- conduct. Like the Sarbanes-Oxley Act, passed vantage over other providers. in the wake of the Enron and WorldCom ac- Incidents like this underscore the need counting scandals in the United States, such to have a compliance officer at the local level lawsaddress detected vulnerabilities but leave who can see beyond the boundaries of head of- loopholes. People can use those loopholes to fice, who acknowledges the dilemmas that can find ways around the law while still claiming emerge when two very different worlds col- they have done nothing illegal. lide, and yet who is willing and able to oversee Legalistic compliance programs tend to the application of compliance policies to every fail and can have an adverse effect on the com- last link in the value chain. pany's ethical performance. It's a lot more ef- Working for a developed-nation multina- fective to develop a system that promotes val- tional operating in emerging markets requires ues and allows the compliance team to focus flexibility and the ability to bridge different more on prevention than on the avoidance of cultures: the local one and that of head office. wrongdoing or illegal behavior. If everyone be- The feedback from the survey we conducted havesin accordance with the company's stated emphasized how important it was for compli- values, then complying with the law won't be ance officers in emerging markets to be able turned into agame. to "deal with the ambiguity resulting from Extensive research has shown that the unclear rules and chaotic regulatory systems" technical and formal features of a compliance as well as "handle the political implications of program are less important than the values operating in gray zones." underpinning it. That's why it's essential that Several survey respondents said this forced companies establish an ethical culture that is: United Against Corruption Collective action is one of the tools commonly used by the private sector to combat corruption in Latin America. Ethical Commitment External Enforcement merging markets have Ebeen stepping up their fight against corruption. ANTICORRUPTION INTEGRITY PACT Regulators in Argentina and DECLARATION This is "a formal contract which is Chile have introduced new This is "a public commitment, externally monitored and helps increase laws and rules for companies without external monitoring transparency in projects." Participants listed on the stock market. to act appropriately during a establish mutual rights and obligations in Project-Based Agreement Short-Term, project." This frequently applies a formal, written contract. All transac- Brazil, Colombia and to public tenders, whereby bid- tions, documents and meetings are fully Mexico have passed new ding companies declare that their monitored. Violations or infringements anticorruption measures. employees did not offer, pay, of the contract are referred to arbitration, But apart from whatever accept or solicit bribes. and sanctions apply laws exist, companies Collective are increasingly coming Action together voluntarily to take "collective action" with their PRINCIPLE-BASED INITIATIVE CERTIFYING BUSINESS stakeholders and industry Various companies and stakeholders COALITION peers, agreeing among Use outside these parameters is a copyright violation. Here business coalitions join forces For use only in the course BUAD 301 AY 24-25 (SU/FA24) at California State University - Fullerton from 5/28/2024 to 1/27/2025. within a country or sector come together themselves the terms that as joint signatories of a shared affirmation to "monitor and certify compliance will guide their business against corruption. This approach is of their members with core shared Long-Term Initiative interactions, and thereby useful in contexts where anticorruption principles against corruption." helping to level the playing laws do not exist or their enforcement External auditors check that field. is weak, as it pushes governments to do companies are taking action and something to improve the overall legal complying with agreed standards The World Bank has environment and promote transparent within a country or sector identified four main models business conduct. of collective action, some of which have been successfully SOURCE: "A Practical Guide for Collective Action Against Corruption." United Nations Global implemented in Latin America. Compact, 2015/ World Bank reflected in the organization's day-to-day ac- the beast." To change this attitude, compliance tivities and the conduct of all its employees. officers must do more than just make sure all To be credible, this ethical culture must also the paperwork is in order. Their responsibili be reflected in the company's style of leader- ties should include instilling an ethical culture ship; its appraisal and remuneration systems; in the heart of the organization, helping to raise its internal justice mechanisms; and its will- the bar on what is understood by "business as ingness to discuss ethical dilemmas with em- usual." (See the sidebar on United Against ployees openly, without the threat of reprisals. Corruption.) If what the company says does not match Many compliance officers see this as one of what it actually does, and if the compliance their most difficult challenges. As one compli- program is widely perceived as purely a means ance officer said, "To be successful and con- of protecting senior management, it will only sistent with the objectives and values of head be a matter of time before disaster strikes. office, we must enforce a compliance culture in Abandoning the legalistic approach is even such a way that employees always do the right more important in emerging markets, where thing by following their own ethical criteria, bribery is sometimes viewed as "the nature of and not only when they are being monitored."Complaint Channels Though they may have more constraints, compliance officers in emerging economies must have sufficient human and financial resources to investigate irregularities. O ne of the most effective compliance department or audit investigating the matter cannot ways of combating illegal or committee follow up directly with the fraudulent behavior is by having complainant. If companies choose employees report it - though this DECIDE WHO PARTICIPATES. Should not to allow complaints to be made can be easier said than done. In the service be made available to anonymously, then they mus many cases, people fear reprisals each and every employee or just guarantee strict confidentiality for and won't want to put themselves certain groups of employees? those who do come forward. in the firing line. Moreover, those Should senior management be who report criminal behavior can included? What about external CONDUCT THOROUGH, SWIFT AND get branded as disloyal. stakeholders? TRANSPARENT INVESTIGATIONS. To deal with this, many Complaints must be investigated companies are setting up dedicated ESTABLISH THE REQUIREMENTS FOR swiftly and tackled head-on, channels, such as helpline CONSIDERING COMPLAINTS. One with appropriate punishment for hotlines, for employees to report common condition is that people the guilty parties and corrective concerns of misconduct. General must have exhausted all other measures taken. Motors' Awareline, Siemens' Tell possible means of addressing the Us and Philips' Ethics Line are problem internally before escalating MAKE THE RESULTS KNOWN. Use outside these parameters is a copyright violation For use only in the course BUAD 301 AY 24-25 (SU/FA24) at California State University - Fullerton from 5/28/2024 to 1/27/2025. pertinent examples. How should the complaint elsewhere. This is to Companies must communicate such channels work? avoid causing unnecessary harm. their policies and the findings Sometimes proof must be provided. of investigations. Doing so GO TO THE RIGHT PLACE. Complaints demonstrates the caliber of the need to end up in the right hands: GUARANTEE CONFIDENTIALITY. corporate culture and sends strong either an external ombudsman or One drawback of anonymous signals of support to other potential third-party monitor, or an internal complaints is that those complainants To achieve that, compliance officers must Glossy manuals on ethics or corporate so- sensitize employees to the ethical and legal is- cial responsibility offer little help in prevent- sues at stake, encouraging them to share bad ing this. Nobody became a virtuoso pianist by news and ask for help whenever necessary. reading sheet music. Confronting moral dilem- The goal is to get everyone to see the positive mas and navigating gray zones in an instinctive effects this has on company decision-making fashion require constant honing. Two 45-min- and to convert that into a source of competi- ute sessions a year will not suffice. tive advantage. You have to establish a process of continu- ous training and skills development. Only then A Fundamental Tool will you be able to change the habits of workers The most powerful tool in the compliance of- and prepare them to confront high-pressure, ficer's kit is training and development - at all morally challenging situations with confidence. levels of the corporate hierarchy. Having the right values is important but not Every day well-intentioned people make bad enough: the ultimate goal is making them op decisions. An organization's internal climate can erative in all company decision-making, up to wreak havoc on employees' moral compass. Peo- the final link in the value chain. ple often try to defend wrong behavior with ex- In addition to running activities aimed at cuses like, "It's what's expected of me," "I'm still improving the organization's ethical culture, better than everybody else" or "When in Rome." compliance officers must conduct regularaudits to evaluate the main risks facing the Most important, organizations must not company, ensuring that the objectives of the regard their compliance officers as police offi- ethics and compliance program are being met. cers but rather as coaches who offer advice and This monitoring helps companies determine guidance on how to do the right thing. They are where they need to devote their efforts and re- there to raise awareness and improve every. sources as well as identify areas that may need one's ability to identify ethical conflicts. They a different approach. are also there to listen to the problems that em- ployees are experiencing and try to help them Don't Shoot the Messenger find solutions. In short, they serve as the bridge To know their business inside out, compliance to a better world. officers must be well versed in the company's day-to-day operations. They should also have The author wishes to acknowledge the valuable carte blanche to investigate any issue without comments and contribution of Beatriz Diaz, Claudia fear of reprisal. Maskin and Diego Ramallo. The Chief Compliance Officer must com- mand influence and respect at all levels of the organization, so that the decisions and rec- ommendations he or she makes are accepted and do not get lost in the corporate hierarchy. That means having a direct line to the advisory board, its audit committee and the CEO to no- tify them of all anomalies, risks or changes in the compliance program. To guarantee the Chief Compliance Of- For use only in the course BUAD 301 AY 24-25 (SU/FA24) at California State University - Fullerton from 5/28/2024 to 1/27/2025. Use outside these parameters is a copyright violation ficer's independence, the conditions of his or : TO KNOW MORE her contract and dismissal should depend ex- clusively on the firm's advisory board, which, together with the CEO, should set the objec . Kleinhempel, M., G. Cecchini and M. Miller. "A tives and evaluate the management quality. Practical Guide for Collective Action Against The effectiveness of compliance officers Corruption." United Nations Global Compact, can be constrained by the resources at their 2015. disposal, which will be more limited in emerg- ing economies. At the very least, they need suf- . Heller, D., G. Jorge and L. Moreno Ocampo. ficient human and financial resources to set up "Bribery Risks and Business Partners II: Moving complaint channels, investigate irregularities, Towards Strategic Due Diligence." Business and run training and development programs. Compliance 4, no. 3-4 (2015): 42-52. (See the sidebar on Complaint Channels.) In terms of personal qualities, the role re- . Kleinhempel, M. "Corporate Governance and quires someone with extensive managerial ex- Compliance." IAE Business School, 2013 perience, knowledge of operations, the capac- ity to work closely with senior management, . Kleinhempel, M. "Compliance Training." IAE the ability to manage and monitor compliance Business School, 2012. audits, a full command of the legal frameworks, strong character and genuine passion for ethi- . Kleinhempel, M. "Collective Action: A Practical cal principles and practices. Tool to Fight Corruption." IAE Business School, Companies can choose whether to recruit 2011. from within or outside the organization. An obvious advantage of recruiting from within . Kleinhempel, M. and G. Cecchini. "Best Business is familiarity: the company will know them, Practices and Variable Pay: A Contradiction in and they will know the company. This can be Terms?" IAE Business School, 2011. a double-edged sword, though, since being an insider could compromise their objectivity and . Kleinhempel, M. and G. Cecchini. independence. "Whistleblowing." IAE Business School, 2011.PROCESS- Shreds MUST be typed- 200-300 words Step 1: Read the case completely, from start to finish. Re-read the case with a writing utensil in hand making notes as you read, either on the case itself, or on a separate piece of paper. Step 2 Define and state the problem = Decide on the short-term objectives and the company's long-term goals in this case. = State the facts of the case and analyze how they played a part in the problem. Step 3: Specifically state the business problem(s) facing management. Typically, at least one fundamental business problem is present. Problems can include tactical issues such as how a customer can collect monies from delinquent accounts to larger and broader problems such as problems associated with a company's cash flow. Keep in mind that you may identify more than one problem and in complex cases often address several simultaneous problems. Step 5: Identify and Rank the Order of the Critical Issues. Herein lies the heart of the case; if you miss a critical issue, you miss the opportunity to solve the case to the satisfaction of involved stakeholders. Identify least to most critical. Remember that Some issues are interdependent Some issues are more important than others s Each issue has a time dimension Some issues are merely symptoms of larger or deeper problem Step 6 Consider Relevant Information and Underlying Assumptions. Accept that most of the information included in the case will not be useful and that you will never have as much information as you want to produce a solution. Such is life; unfortunately, not all of life's problems have neat, tidy endings. Make a list of significant facts and events