By Mak Yuen Teen
When things go badly wrong, such as in the recent Keppel Offshore and Marine (KOM) scandal, which has resulted in a US$422 million penalty being imposed, a common response of the board of directors is: “We did not know”.
Readers may be interested in this article I wrote in 2014 about “plausible deniability” which is posted on my website:
In the article, I related a story, which I have reproduced here:
“This reminds me of a true story a former senior executive of a multinational corporation (MNC) shared with me. Following the Asian financial crisis in 1997, there was pressure in Asia on working capital. For the MNC concerned, “working capital” really meant debtors. A bonus plan was introduced rewarding a reduction in debtors.
One of the countries in the region had the lowest debtor days in the group globally. They achieved that by subcontracting debt collection to a firm owned by the military. At a Main Board budget review, a director asked “how do you achieve such a great debtor performance?” The CEO looked at the director and said: “Before I answer, are you sure you want to know?” There was a long silence, the question was never discussed and the meeting moved on.
The funny side was that one debtor did contact the regional office and asked if it was really necessary for the debt to be collected by soldiers in an armoured car! It is doubtful that such debt collection methods fit with the espoused values of the company.”
I am not saying that this scenario happened in the KOM corruption scandal and that the Board asked and then did not want to know the answer. One of the main points of my article is that often times, the Board would not ask the awkward questions, particularly when things are going smashingly well. Who wants to be the wet blanket on the board who asks: “How do we win all these contracts in an industry that is so rife with corruption in a country that is rated so poorly on transparency and corruption-type indices?”. There are reports out there that look at corruption risks by industry sectors and countries and putting the two together should suggest that O&M and Brazil = very high corruption risks. I may be accused of 20/20 hindsight but I have written about this for several years now, warning about the corruption risks when our companies venture overseas. There’s also a cautionary lesson about avoiding groupthink on boards and the value of having someone who is prepared to ask the tough questions – or even questions that may be seemingly stupid.
In the Business Times article today “Keppel scandal holds lessons for Singapore Inc” (January 5, 2017), there is an interesting comment about the “entire economic group” concept under Brazilian law whereby a group will be held responsible for any wrong-doing committed by any company owned by it. In other words, it does not matter if a parent company in Singapore sets up a wholly-owned subsidiary, which then sets up another subsidiary overseas, which then sets up a joint venture, which then engages a third party who then pays bribes. In fact, that’s sort of how this happened in the present case. The separate legal entity, often used to “ringfence” a company’s risks, does not really work. In fact, even if the “entire economic group” concept does not apply, anti-corruption laws in various countries, including US and UK, does not allow companies to circumvent their rules just by creating a chain of separate legal entities, or using subcontractors or third parties to pay bribes. I have been surprised by senior executives who have admitted to making “facilitation payments” through third parties and said they do not believe in paying bribes! We call them “facilitation payments” because “bribes” is a dirty word.
Chris Bennett and I wrote a report on the governance of company groups that discusses the issues faced by companies and directors in a company group situation. It offers a framework for starting to think about the challenges and mitigating measures but by no means provides all the answers. Readers can access the report from here:
https://governanceforstakeholders.com/wp-content/uploads/2014/06/governance-co-groups.pdf
