Boards must rise to challenge of stamping out corrupt practices
When headlines "Claims Corruption Rife at Leighton", "Bribe Claims Hit Board", "Going Rogue" and "Ex Leighton exec quits as bribe scandal intensifies" were plastered on the front pages of Fairfax Media newspapers earlier this month it wiped 13 per cent off the construction group's share price and left the investment community jittery about bribery and corruption risks in other companies.
Leighton has denied the allegations and said it has spent a lot of time improving its processes, including banning facilitation payments. Despite this, the share price continues to languish as the stories roll out anew and investors consider the potential knock-on effects.
Citi analyst Elaine Prior has articulated the risks to companies in a series of reports that identifies companies in the ASX top 100 potentially at risk of bribery and corruption, based on the location and nature of operations in countries where corruption is a perceived risk, using the Transparency International's Corruption Perception Index rating.
She says while many companies disclose "generic" information on their policies such as policy statements, record keeping, stance on facilitation payments and whistleblower facility, few companies in her study provided much detail on how the policies were implemented and monitored in practice.
"In future, we suspect that investors may seek more information on companies' bribery risk assessment approach, how companies know that their people are following their stated bribery and corruption policies, what training is provided, and what internal compliance review processes are in place, rather than simply seeking codes of conduct and policy documents."
Given the impact on Leighton of the bribery scandal and the regulatory crackdown sweeping the world, she is probably right. Even a sniff of a corruption scandal will force investors to take seriously the risks or face the prospect of a sharemarket sell-off.
Since Australia first introduced anti-bribery laws 12 years ago 28 cases have been referred to the Australian Federal Police. But there have been too few scalps. Reserve Bank subsidiary Securency was one of the most high profile cases and the one that resulted in some arrests.
This has put pressure on the government and the AFP to start using the legislation more effectively to stamp out corruption and bribery. In the case of Leighton, the AFP has been investigating the company for almost two years yet it has not interviewed some of the key players alleged to be involved in the web of corruption. This is unfair to everyone.
Prior says companies are increasingly assessing their contractors and agents for potential bribery and corruption risk.
She says this could be particularly relevant for companies that provide services to mining companies, who may become subject to their clients' due diligence processes relating to bribery and corruption.
Prior says companies that conduct due diligence on agents or partners include Alacer, Alumina, BHP, BlueScope Steel, Flight Centre, Macquarie Group, News Corp, Rio Tinto, Wesfarmers, Woodside Petroleum and WorleyParsons.
In a second report, Bribery and Corruption in the Spotlight, Prior draws attention to the fact that some countries are adopting stronger regulation and that will have a knock-on effect on businesses as regulatory enforcement cranks up.
She notes that companies with British connections face tougher regulation following a beefing up of the UK Bribery Act.
Prior says companies that associate with corrupt activities can be excluded from future contracts. This means companies will increasingly be forced to conduct due diligence on their contractors, partners and agents.
"Companies implicated in bribery or corruption may face loss of contracts, or loss of the opportunity to tender for contracts," she says. "When allegations or investigations occur, this may divert substantial management/board efforts away from more productive activities, to the detriment of the company. These impacts are in addition to legal fees and financial penalties."
As seen in the Leighton scandal, regardless of the outcome, there has been an impact on individuals, with a number of former Leighton staff falling on their swords. This is the best indication yet that companies are increasingly sensitive to "perceived or possible links with corrupt conduct".
Allegations include a $43 million kickback relating to a contract in Iraq, allegations relating to an Indonesian barge contract and the resignations of former employees. These include David Stewart, who resigned as chief executive of Laing O'Rourke, David Savage, who quit the board of British engineering group Keller plc, and Russell Waugh, who left a senior position at UGL.
"While we are in no position to judge potential legal outcomes, it appears that the various organisations were keen to distance themselves from these contentious issues," the report said.
It has also prompted class-action lawyers to sniff around to see if there is a case to answer in relation to potential continuous disclosure breaches given the fall in the share price.
Leighton informed the market early last year that the AFP was investigating a possible breach of the law relating to payments that may have been made to facilitate work in Iraq. At the time the share price fell but not significantly as there was no mention of how big the potential bribery payment was.
There is no question investors have been spooked by the talk of corruption and bribery. For this reason they will start pressuring for more information about their policies.
At the same time as Australian companies increase their footprint in developing countries, the risks become greater, making it a greater issue for boards.