It was a great experience.
While I was impressed with the depth and scope of the students’ questions, one question stood out for me.
The questions was: “do people in different countries have different ethics than us?”
This questions stood out for me because its something I deal with everyday in my professional life. Because I represent individuals and companies from all over the world, it’s my job to ensure that they follow both U.S. laws and the laws of the countries they operate in.
While ethic standards in developed countries are widely understood, they are less so in emerging markets where bribery and corruption is prevalent.
I mention this because the Harvard Law School Forum on Corporate Governance and Financial Regulation has an excellent post on whether it is “appropriate to set the same standards for anti-corruption in all jurisdictions, particularly in emerging markets, where many underlying conditions are different and where bribery and corruption are particularly acute in both the public and private sectors?”
The article goes on to list areas of emphasis for foreign investors in emerging markets to consider:
- Audit quality. A company’s auditors are on the frontline of assessing the accuracy and robustness of its financial statements and controls. Auditors are typically better-positioned than investors to detect abnormalities or potential red flags that might signal fraud or corrupt practice. As users of financial statements, investors should expect auditors in emerging markets to demonstrate sensitivity to corruption risks when conducting audits. In particular western audit firms operating in emerging markets through partnerships with local auditors must prioritise the maintenance of consistent auditing standards between emerging and developed markets. While it is beyond the scope of auditors to seek to detect fraud or opine on the effectiveness of anticorruption measures, diligence as to corruption risks can help to raise standards and create greater barriers to prevent corruption.
- Foreign direct investment. While most institutional investors have portfolio holdings in emerging markets through investment in listed equities, the influence of foreign direct investment can be even greater in terms of providing fresh capital and sources of employment in emerging markets. It is often the case that foreign direct investors themselves are based in developed markets, and are held in the portfolios of institutional investors. Consequently, investor engagement with investee companies active in direct investment in emerging markets should emphasise the important of high ethical standards that direct investors should apply. In no small part this relates to significant potential legal risks for direct investors that are subject to extraterritorial corruption legislation such as the US FCPA and the UK Bribery Act.
- Creditors. The role that creditors can play is sometimes overlooked in terms of potential influence on emerging market companies. Particularly for closely-held companies where controlling shareholders do not wish to dilute their control through external equity offerings, debt capital can represent an important source of funding for emerging market firms. Creditors can and should leverage this influence through demanding high ethical standards of companies they provide credit to, whether in the form of loans or bonds. Creditors have a natural aversion to the risks of fraud, bribery and corruption, particularly given that this can be difficult to legislate for in traditional credit analysis. Not only is there scope for more attention on the part of bank lenders and fixed income investors in emerging markets, it is also the case that credit rating agencies can pay greater attention to potential ethical risks in their assessments of companies and their management. Rating agencies can play a very influential role in providing companies a “passport” to public debt markets. If companies in emerging markets appreciate that ethical management and anticorruption practices can be a factor affecting its credit rating (particularly if lacking), this can be an important motivator for standards to be raised.
- Public policy engagement. Governments in emerging markets tend to welcome both portfolio and direct investment flows to provide capital for economic growth and development. Investors that provide this capital to emerging markets therefore hold a strong playing card to call for greater political will and for higher standards of enforcement on bribery and corruption, both in the public and private sectors. Investors need to communicate their concerns to governments about the negative economic effect of corruption on economic development, valuations, the cost of capital — and ultimately access to capital. Established initiatives, such as the Extractive Industries Transparency Initiative and the United Nations Convention Against Corruption provide useful global frameworks for progressing this dialogue in emerging markets.
The article concludes by stating that foreign companies operating in emerging markets should consistently apply their business ethics as much as they do in the more developed markets. While that’s excellent advice, it’s also the law.
What do you think?