Apple case throws spotlight on corruption

Published in Business Times, Aug 26, 2010

The consequences of not paying attention to ethical, social, and environmental issues and putting in place systems and processes for managing them could be catastrophic

LAST year I wrote a commentary titled ‘Beware of corruption risks’ (BT, Sept 4) where I argued that Singapore companies may not be paying enough attention to corruption risks when they do business overseas and that global companies are increasingly focused on risks residing along the supply chain.

I cited the Bribe Payers Index published by Transparency International, which ranks 22 major exporting economies on the propensity of their firms to pay bribes when doing business overseas, where Singapore was ranked only ninth.

I said that the risks associated with poor ethics, governance, and compliance will threaten the survival of our companies which do business with international companies – including our small- and medium- sized enterprises – if they do not accept them as a new business reality and put in place measures to address these risks.

Recent news reports about the bribery charges and the civil lawsuit against Apple’s global supply manager, Paul Devine, has put the spotlight on three Singapore, and several other, Asian companies which are suppliers of Apple’s iPhone and iPod accessories.

The three Singapore companies identified in the legal action are JLJ Holdings, Lateral Solutions, and Fastening Technology. Paul Devine is accused of colluding with Andrew Ang, a former business development of JLJ’s wholly owned subsidiary, Jin Li Mould Manufacturing Pte Ltd, whereby Mr Devine would provide suppliers with confidential Apple business information to help them win business with Apple in exchange for money. Mr Ang was also indicted in the criminal charges.

While the actions so far are directed against Mr Devine and Mr Ang, and not against the companies, there will undoubtedly be concerns about the processes that these companies have in place for managing corruption risks, which could have a drastic business impact on them.

The stockmarket reaction to the news for JLJ, which is listed on Catalist, provides some indication of the potential business impact (the other two Singapore companies are private companies). On Thursday, Aug 12, the day before the arrest of Mr Devine in the US, the closing share price of JLJ Holdings was 23 cents.

Almost seven million shares were traded that day and more than 25 million shares were traded on the day of his arrest, compared to a daily volume of less than 850,000 shares for the month prior to that. JLJ announced on Aug 16 that its subsidiary had been mentioned in the indictment and civil suit.

By Aug 20, the closing share price had almost halved to 12 cents. The market reaction is not surprising because Apple is a major customer of JLJ. In its offer document dated July 6, 2009, pursuant to its listing, it stated that for FY2008, ‘Apple and Apple intermediaries’ accounted for 82.5 per cent of JLJ’s revenues.

Even if JLJ and the other companies do not directly face legal action, there is a real risk that they could lose not only Apple as a major customer, but other companies as well. In fact, it remains to be seen whether the market has fully absorbed the potential impact of this case.

Like many other international companies, Apple has a code of conduct for its suppliers, which sets out its expectations of suppliers in terms of ethics, and social and environmental responsibility.

In relation to ethics, it states that it expects suppliers to be ‘committed to the highest standards of ethical conduct when dealing with workers, suppliers and customers’.

It also states that suppliers ‘shall not engage in corruption, extortion or embezzlement in any form’ and they ‘shall not offer or accept bribes or other means to obtain an undue or improper advantage’. Apple expects its suppliers to have systems in place to implement the code.

In March this year, Apple published its ‘Supplier Responsibility’ progress report based on 102 facilities it audited in 2009. Interestingly, one of the areas of focus in its 2009 audits was the protection of foreign contract workers by its suppliers, something which is close to home for our companies.

One would expect that with the alleged corruption involving Asian suppliers, Apple will pay even more attention to corruption risks when it audits suppliers.

One would also expect that other international companies which do business with the companies named in the action would place the latter under greater scrutiny because of concerns of legal and reputation risks that these suppliers will bring to them.

If they are not satisfied that there are systems to manage such corruption risks, the most drastic action they can take is to sever business ties with the companies.

Recently, I did a study with an NUS business student, Genna Poh, on the practices relating to the code of ethics, whistleblowing programme, and supplier selection of the Fortune Global 50 companies.

We used public information, including those published on the websites of these companies. We found that 49 of these companies has a company code of conduct/ethics (the exception is a Russian company), and that 36 per cent of these codes specifically mentioned that suppliers are also expected to comply with the company code.

We also found that 46 per cent of these companies had a separate code for their suppliers, and 20 per cent of the companies require suppliers to comply with both their company’s code and a separate code for suppliers.

Because we rely on public information, our study probably underestimates the extent to which these companies are focusing on the conduct of their suppliers.

Beyond these 50 companies, I also know from anecdotal evidence that many other companies, such as Apple, are also increasingly focused on ensuring that their suppliers uphold high standards of conduct when doing business.

The case involving JLJ and the other Singapore companies is a sobering reminder of the importance of managing corruption risks when Singapore companies do business with international companies.

The consequences of not paying attention to ethical, social, and environmental issues and putting in place systems and processes for managing them could be catastrophic for the companies.

This episode has also put an unwanted spotlight on Singapore companies, as most of the news reports on the case have specifically mentioned the three Singapore companies. If Singapore companies do not do more, it could also damage Singapore’s hard-earned reputation for low corruption and a high standard of ethics.

The author is an associate professor at NUS Business School, where he teaches corporate governance and ethics in senior undergraduate and executive MBA programmes