How Managers Should Respond When Bribes Are Business as Usual by

David Montero NOVEMBER 16, 2018

Corporate briberythat is, the practice of companies paying government officials for preferential treatmentis not only illegal in dozens of countries. Studies show that it's also counterproductive resulting in lower profit margins, return on equity, and employee morale; costly delays as players haggle over the size of the kickback; and poverty and poor governance in the markets where they're paid. Yet, according to the World Bank, roughly one-third of firms around the world use kickbacks, paying an estimated total of $400 billion a year. Since 2006, hundreds of companies including global brands like Novartis, Hewlett-Packard, and Rolls Royce have reached settlements with U.S. authorities on charges of overseas bribery..

Why do kickbacks continue? According to my own research into dozens of bribery cases and five years of reporting on four continents, it's because executives believe that their competitors are using bribery as a tool to get ahead, so they must, too. "[Bribes] are like steroids," one oil consultant told me. "Everybody's doing it, and if you don't do it, you fall behind."

Of course, copying what your competitors doespecially when it is illegal and inefficient - is the opposite of innovative. How can companies kick this habit? After surveying corruption experts and business executives (including one who went to jail for bribery) I identified four strategies:

Have a resistance plan for bribe demands. Managers on the ground should be prepared with the following line: "I can't give you a bribe, but I can do this, this and this, for you," says Kent Kedl, the senior partner for Greater China and North Asia at Control Risks. The key is to better understand what motivates the official seeking the backhander. More often than not, Kedl explains, the bribe is not about money; it's about that person wanting to feel respected. "We tell companies, 'What's another way to give them some respect, to have them be a key opinion leader for you?'" One way is to offer the person or his or her staff members a chance to participate in high-level discussions about the company's commitment to the local community and to give that office a greater voice in shaping those decisions. Another is to offer to create more jobs or provide more training or technical service than your competitors are offering. You can highlight the lasting legacy you want to help the official create and promise to publicly highlight his or her involvement.

Build the cost of avoiding bribery into your business projections. Bribing government officials has costs. But saying no can be expensive too: from delays in delivery (the customs official refuses to release goods at the border until he gets a kickback) to failing to win a contract outright (the minister who expects his 10% cut of a procurement contract). Firms should calculate these costs into their business plan, says Frederick Davidson, the CEO of Energold Drilling. He provides an example: "What we normally run into is in customs. A lot of these countries pile rule upon rule upon rule. If you're one of the locals, you have to pay somebody off and you skip all the rules. We don't anticipate doing that. So, we build into any bid additional brokerage costs, legal costs, etc. You can easily add 10 to 20 percent. Let's say you're talking a $300,000 contract. You would factor $30,000 to $60,000 in certain places just to address the bureaucracy that they put in place."

Companies should also explain to investors that, rather than ratcheting up their quarterly forecasts, they are smoothing them out to account for delays in avoiding kickbacks, adds Richard Bistrong, who went to jail for paying bribes around the world and now heads an anti-bribery consulting firm. He offers an example of how to present this: "Our normal expected return in a particular region is 18-24 months, and we believe that is attainable, but we're projecting 24-36 months to achieve those objectives in a way that is sustainable and ethical."

Identify "moon markets" and walk away. Some marketsfor example, several in Chinaare too rife with bribery to get around it, and no amount of innovation can change that reality. Kedl therefore advises companies to treat these markets are as if they were on the moon (that is, inaccessible) and reset their ambitions accordingly. This may mean a contraction in profits in the short-term, but in the long run it also means building a more resilient company, with consistent growth year after year. "And that's what companies in challenging markets need to be thinking about," he adds.

As a corollary to this, firms may need to invest in gathering the intelligence to identify moon markets, and other costs associated with avoiding bribery. Coca-Cola, for example, uses data from Transparency International to build a map of its bribery risks in various markets each year, and then determines where to focus its anti-corruption efforts.

Recalibrate performance-based targets and compensation relative to high risk. In markets with high corruption risk, front-line employees have little incentive to refuse a proposed kickback if it means failing to make their quota and risking a significant portion of their compensation. Salespeople shouldn't receive "a financial haircut" for saying no to corruption, Bistrong says. One best practice he highlights? The creation of an annual bonus pool for these sorts of situations. "Let's say a foreign official is demanding a bribe. When the front-line salesperson raises the possibility that the bribe demand may cause delays, management will actually pay any accrued bonus as if the sale had been completed, drawn from the bonus pool. At that point, everybody will lean in together to fix that problem in an ethical and compliant manner, even if it takes considerably longer," Bistrong says. "That's enlightened management." By 2016 , after Novartis and GlaxoSmithKline paid multi-million-dollar fines following investigations of their alleged bribery around the world, both companies shifted the way their sales teams operate. GlaxoSmithKline did away with sales targets, CNN reported, and now rewards reps based on their knowledge of the needs of patients and doctors. Novartis capped its performancebased compensation at 35% andreps are rated from 1 to 3 based on their values and behavior, not a quota; receiving a bonus requires scoring higher than a 1, according to Reuters.

In today's world, a company that creates state-of-the-art products, and devises state-of-the-art strategies to sell them without bribes is not only innovative, but disruptive, helping to dismantle a centuries-old system that perpetuates poverty abroad and stifles creativity within.

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questions

1. Read the HBR paper "How managers should respond when bribes are business as usual", and answer the following questions:

(1) How does Coca Cola utilize the CPI to fight against bribes?

(2) For the countries with a high degree of corruption, list out some suggestions for doing business there?

(3) How did Novartis and GlaxoSmithKline recalibrate their sales rewarding system?