Managing ethically in corrupt environments

Companies seeking to expand their global presence are increasingly entering emerging markets. However, the rules for doing business are not always the same. John Mullins explores ways you can do business ethically wherever you choose to go.

This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.

In October 2009, and again in 2010, the Mo Ibrahim Foundation announced that it was unable to award its annual Ibrahim Prize for Achievement in African Leadership. The foundation, which promotes ethics and good governance in Africa and recognises excellence in African leadership, was unable to select a suitable laureate from the democratically elected former heads of state who met the requirements for the prize. Corruption, apparently, remains alive and well in Africa. But does the problem really lie just in Africa?

Ten months earlier, in December 2008, Siemens, the German engineering company, agreed to pay about €1 billion to American and German authorities for engaging in a systematic pattern of bribing government officials to win infrastructure contracts in ten countries between 1999 and 2007. To Reinhard Siekaczek, who oversaw a portion of Siemens’ bribery budget for its telecommunications business, the payments were vital to maintaining the competitiveness of the business. “It was about keeping the business unit alive,” he says, “and not jeopardising thousands of jobs overnight. We thought we had to do it. Otherwise we’d ruin the company.”

Says Uwe Dolata, a spokesman for the Association of Federal Criminal Investigators in Germany, “Bribery was Siemens’ business model. Siemens has institutionalised corruption.” Is bribery, especially on such a systematic and widespread scale, as vital as Siemens management thought? Surely, despite the supplications of corrupt government officials, there must be a better and more ethical way to win contracts and run a global business. Indeed, there is.

We have identified a set of creative and systematic tactics — a best practices toolkit, in a sense — for managing ethically in corrupt environments. The tactics were developed the hard way by the business development team at Celtel International, a fast-growing mobile telecom operator that built cellular phone systems in sub-Saharan African countries during essentially the same time frame in which Siemens’ bribery was having its heyday.

The tactics were developed because Mo Ibrahim, Celtel’s founder and CEO and an African native (and now the Mo Ibrahim Foundation’s principal donor and board chair), was adamant that business could be done cleanly and honestly in sub- Saharan Africa despite the region’s corrupt reputation. And Ibrahim and his team wanted to prove that doing so was both possible and profitable.

These tactics, developed to deal with problems common to people who do business in the developing world, address issues such as winning requisite licences from governmental authorities, getting imported capital goods through customs in a timely manner, obtaining real estate on which to build facilities, building an ethical management team and so on.

We identify these tactics not to show how they apply in the telecom industry but to inspire the kind of creative thinking that can lead to an even broader, more comprehensive set of practices that’s applicable elsewhere. We intend them to be indicative, not exhaustive.

Dealing with governments

Government officials — sometimes underpaid, sometimes simply corrupt — lie at the heart of the dilemma that Siemens, Celtel and others doing business in sub- Saharan Africa and similar places confront daily. Celtel developed three tactics for dealing with them:

Build the right board

Ibrahim felt that, if Celtel was to operate cleanly, it would need investors and board members willing to invest in the company and to commit to protecting it against ethical dilemmas. He said, “We were going to be in sub-Saharan Africa for the long run and could not afford to be tangled in a corruption scandal — we could not risk losing profits and shareholders overnight.” So building an ethical board was Ibrahim’s first step toward building an ethical business.

Representatives of the leading development finance institutions were obvious candidates, as they held and were key players in providing foreign investment capital to the African countries in which Celtel would do business. They also provided access to government and business officials. The key, though, wasn’t just building the board — it was deploying its international stature effectively. Celtel made it clear to countries where it sought to do business that any requests for ‘political contributions’ and the like would be referred to its board for discussion and would, therefore, be discussed by representatives of the major donor nations. In Ibrahim’s view, “It showed everybody that we were serious about our anti-corruption stance and it was great protection.” Also to Celtel’s benefit, its board helped Ibrahim and his team navigate the complex political currents that were ever-present.

Let governments compete for your capital

The supply of Western capital and expertise that can help emerging economies develop is limited. Rather than treating each government licence as a scarce commodity over which it had to compete, Celtel did its best to convince governments that the truly scarce commodity was the investment capital that the company could bring from the developed world to invest in Africa. Celtel told governments that it would deploy its capital not just where markets were attractive but also where it could do business in an ethical manner. In this way, the playing field was levelled, at least partially, and governments had to compete to be Celtel’s next market to enter.

Publish what you pay

Across the developing world, multinational companies have developed reputations for extracting value — from oil to diamonds to minerals — from their foreign investments without putting value in place that serves local communities. Ibrahim wanted to address this issue head-on. “We firmly believe in a ‘publish what you pay’ policy and are proud of being one of the top tax payers in a given country. We put everyone on the payroll, from managers to taxi drivers. Paying full taxes and being transparent was a radically different approach to what government officials were used to. By paying taxes, we showed how much revenue we generated in a country and how much we were contributing to the local economy. At the same time, this helped us avoid being asked for government bribes.”

Dealing with locals

Dealing with corrupt government officials is only part of managing ethically. Business in many developing economies is done one tribe or village at a time. Here, too, there were ways to manage business transactions ethically:

Fund communities, not chieftains

Celtel’s policy was to refuse paying bribes, period. But the line was often blurred. When Celtel entered Zambia, it had to cross a lot of tribal territory to install and maintain cell towers. In one such area, Celtel negotiated with the local Bemba chief to lease a small plot of land on which they would build a cell tower. Everything appeared to be settled but, when the crew went to install the equipment, they were blocked from entering Bemba territory. The tribal chief said, “You bought the land, but you must pay a tribute every time you cross our land.”

Celtel was furious because this hadn’t come up in the negotiations. Eventually, they came up with the idea to give the money to the local school as a ‘community investment’, instead of giving the money to the chief. While the tribal chief wasn’t happy about it, an agreement was reached for which the chief could take public credit among his community. After a few weeks of delay, Celtel got access to its land.

Hire family farmers as caretakers

When Celtel entered Malawi, the company approached villages in which they wanted to build cell towers. They spoke with the village leaders and explained that the cell tower would be part of their community. Building a tower required the company to construct roads in order to access the tower, but the community could also use the roads. Because power was rarely reliable in rural areas, Celtel had to bring in diesel generators to run and cool the cell towers, and that posed a problem: while most materials in the cell tower were not of much local value, the diesel for the generator was. If the diesel fuel supplies were stolen, the tower could not run. One Celtel manager even joked, “I sometimes don’t know whether I’m in the power or the telephony business.”

Celtel soon found a creative solution to safeguard its diesel fuel and its local investment. They hired a local person as a guard to watch over the station, which counteracted theft issues. They built a small home on-site and encouraged the guard to bring his family and plant crops on the surrounding land. In this way, the generator became part of the community; anyone harming it would not only be hurting the community but would also be hurting his neighbour’s livelihood. Hiring locals to look after the cell tower and equipment, not to mention the diesel fuel, proved far more effective than bringing in outsiders.

Dealing with customs

Because much of the necessary capital equipment must be imported into developing economies, customs officials find it all too easy to hold inbound goods ransom to under-the-table payments. Here, too, Celtel developed creative and ethical solutions:

Let it wait

Simply waiting was a tactic Celtel often used to avoid bribery. When the company entered Malawi, it put in the order for equipment after determining the cell tower locations. A few weeks later, Celtel’s local managing director went to meet the equipment at the airport. “I arrived at the airport to find the plane gone and my equipment nowhere to be found. After talking to numerous airport employees and inquiring after my base stations, I was finally directed to a customs official.”

The customs officer led him to an airplane hangar where Celtel’s base stations and equipment had been offloaded. In addition to the customs forms that were to be completed, the customs official mentioned the equipment would have to be held for up to a month for ‘inspection’. However, ‘special fees’ equivalent to $200 could be paid to expedite the inspection. The Celtel MD looked the customs officer straight in the eye and said, “Let it wait.”

In practice, once customs officials discovered that the company would not play the usual game, they cleared Celtel’s shipments to free space for other incoming shipments that might prove more lucrative. Most of the time, ‘let it wait’ did not mean waiting very long.

Create a media event

In a similar situation in Congo Brazzaville, Celtel did not have the luxury of waiting. Said one company official, “We were under a tight deadline to start operating for a number of reasons…. We had already put in the order for the equipment, but I couldn’t get any guarantees from the customs officials that we would be able to get our equipment right away.” In fact, talks with customs officials had indicated the equipment could be held for up to six months, unless ‘special fees’ were paid to expedite the process.

Frustrated with the process, Celtel decided to try another tactic: “We decided to organise a grand media occasion when the new equipment arrived — sort of a symbolic event of our entry and investment in Congo Brazzaville. We rented three big cargo planes to ship in three base stations and a switching container. The planes were so big we even loaded a couple of Land Rovers to fill them up. We invited the minister of communication, political dignitaries and a few local celebrities and contacted the local TV station and press. When the plane landed, everyone was so excited about the fancy equipment that it turned into a public relations spectacle. With all the media involved and public attention, the customs officials had no choice but to release the equipment to us.”

Building ethical teams

At the end of the day, managing ethically is in the hands of local partners and managers. Building ethical teams is no trivial task:

Make your partners investors

In a region in which the overwhelming majority of political rulers had been overthrown in military coups, forced to resign or assassinated in office, it was difficult for Celtel to gain steady footing. As one Celtel manager recalled, “It was difficult talking business with a minister when what we wanted to do was build an efficient business, but all he wanted was to become president.”

The solution was to ally with local partners, but not, as some companies do, as a strategy for “outsourcing” the corruption. The challenge was finding local partners who could open doors, were independent of the shifting political currents and were committed to doing business ethically. Celtel required that all local partners invest in its domestic business and thereby become long-term shareholders, rather than short-term agents looking for a fast buck. Having agreed to this first step, would-be partners then had to pass scrutiny by the Celtel board based on a rigorous screening process that company management developed. Only following successful completion of these two steps would negotiations ensue for the partnership to be consummated.

Hire for fit, mix ethnic cultures

To build a culture of meritocracy, Celtel hired all staff, from management to the cleaning crew, based on fit with the company’s culture rather than direct industry experience, ethnicity or social connections. This was highly unusual in Africa where nepotism and tribal influences pervaded business transactions. By explicitly mixing people of diverse backgrounds, nationalities and cultures, Celtel sent a clear message that it was a meritocracy. All candidates had to apply and interview. If someone wanted to hire his cousin or brother-in-law, that candidate would have to follow the same process as everyone else and be judged as an individual, not on whom they were related to.

But hiring objectively was only part of its strategy for building an ethical company culture and management team. Celtel recruited local managers with international work experience and moved them to other countries to gain regional experience and to insulate the business from local or tribal pressures. To assist these expatriate managers in integrating with the business community and in understanding local contexts, Celtel hired local non-executive board members of similarly diverse backgrounds.

All of these steps made it less likely that Celtel managers would come under or succumb to pressure to make hiring or other decisions for the wrong reasons or to pay bribes based on local ethnic pressures.

When all else fails

While each of the tactics noted above offers the potential to avoid paying bribes, sometimes corruption is so entrenched that none of them will work. In one country, Celtel purchased an operating licence and then embarked on the necessary steps to launch a cellular telephone system. For more than a year and a half, Celtel’s business development team repeatedly requested a government ministry to resolve a number of items relating to making the licence operational. The delays and resistance Celtel encountered with many of the civil servants smacked of corruption.

A Celtel official elaborated, “I had become used to dealing with and getting around corrupt tactics and thought we would be able to get around this one. Typically, once we spoke with higher level ministers and conveyed our policy of doing clean business, we were able to come to an agreement that both parties were satisfied with.”

After long delays, Celtel CEO Alan Rudge decided to get involved and make a personal visit to demonstrate the company’s commitment to operating in that country. Just after Rudge and [co-author of this article] Terry Rhodes left Amsterdam, a fax arrived at their office listing the names of a number of people the duo were to meet with the next day. The fax, however, was even more comprehensive: next to each name was a dollar amount ascribed to each person, totalling $50,000. Rudge’s assistant tried to reach him to inform him of the fax, but the local telecom infrastructure was so poor that she was unable to do so.   

As Rhodes later recounted, “Rudge and I met with the minister of communications, completely unaware of the fax listing the bribes. The meeting was thoroughly unproductive and the minister refused to agree or commit to any of the issues we had outlined. When the meeting concluded, a few of his team members stayed behind and kept looking at us expectantly. They were clearly waiting for something. After a lot of roundabout talk, the senior civil servant conveyed that, if the payments were made, then everything would be sorted. We demanded that it be put in writing, which the civil servant refused. Rudge and I agreed that we could not proceed further under these conditions.”

Rhodes decided to try again using different channels. He leveraged Celtel’s social network, getting their national employees to set up meetings and having their local partners get involved in the negotiations. Despite these efforts, Rhodes made no headway and began to realise the government might be too corrupt to do business with. Eventually, Celtel sent an official letter itemising Celtel’s needs to operate in the country. As the Celtel board and Rhodes predicted, the government refused to sign off on their conditions and Celtel was left with no option but to walk away from the deal, writing off a considerable investment in doing so.

Much to the company’s surprise, walking away from its licence investment gave it enormous credibility in negotiating subsequent licence deals. Celtel later cited the example without naming the country, telling governments that the company had won that licence but couldn’t pursue it for certain ethical reasons and noting that clearly they did not want to be in the same position. Thus, in the end, Celtel’s clear stance actually strengthened, rather than weakened, its negotiating position. Taking an ethical stand served as a badge of honour. And, in the larger picture, the financial loss was negligible.

A social and generational imperative

Surely, it’s much easier to talk about these creative, perhaps high-minded, ethical principles and tools than to actually deploy them in today’s hotly competitive marketplace. Won’t such practices simply result in losing business to unethical, better paying competitors — whether competing for government licences or in other kinds of situations? This, in essence, was the Siemens argument.

As one Celtel executive noted, “We accepted that sometimes our ethical stance could mean losing ground to competitors in the short term. But, as an infrastructure company, we had to build a sustainably profitable business. Our licences were for ten or 15 years and some of the assets were cemented into the ground. We held the pragmatic view that, if you paid a bribe once, you could expect others to find out and join the queue for future bribes. So not paying meant better results in the long run.”

Further, competing on merit — rather than competing via bribery payments — forced the company to earn its competitive advantage in the marketplace, another benefit for the long term. Finally, doing business ethically with entities outside the business made it easier to build a meritocracy inside the business, which helped attract the talent necessary to build a great company.

Some of the tactics we’ve outlined here might be seen as engaging in “socially responsible” business. To Ibrahim and his management team, there was another, more compelling, reason for developing and using them, however. They were simply good business, a set of useful tools for managing a variety of ethical and other challenges that were endemic in the environment in which Celtel operated.

Collectively these tactics helped Celtel obtain, and in some cases protect, the resources it needed to do business. Obtaining them — on favourable, rather than extortionate terms — is a common challenge for virtually every company, large or small, that seeks to enter markets where corruption is widespread.

How then, might your company do business ethically in corrupt markets you wish to enter or in markets where you are already doing business in questionable, if not clearly unethical, ways? Actually, we argue, it’s easier for companies just getting started on international expansion to adopt these kinds of tools more quickly and easily. Why?

First, such companies don’t have past unethical practices to unlearn. Second, such companies need to offer something special to win the business in the first place. If governments or others want what they have to offer, they’ll have to compete with other countries to be the next new market.

It’s easier to convince others to do business ethically with you than you might imagine, especially as more Western-educated people from Africa, Asia and other corruption-prone regions return to their homelands to participate in their countries’ economic renaissance. Whether in governmental or business roles, they are likely to understand your pitch that it’s better for their country and its residents to do business ethically, regardless of past practices. After all, in reality, bribes are an invisible and insidious tax that raises the cost of roads, other infrastructure projects, and goods and services of all kinds.

But what if you are running a division of a large company with bad habits — bribery or more — that you know must be broken. Where might you begin, without jeopardising the jobs that depend on the growth that emerging markets bring? We’d like to tell you that there’s a simple answer. But there’s not.

For Siemens, though, several steps that might light the way are both encouraging and instructive. Siemens has replaced all but one of the directors on its management board. Additionally, it has taken aggressive steps to preserve evidence of past wrongdoing and shared it with authorities. Moreover, it has paid external consultants €630 million since 2006 to investigate allegations of corruption and report the findings to government authorities. Perhaps most important, though, is a new attitude at the top. Siemens’ Chief Executive, Peter Löscher, has vowed to make Siemens state-of-the-art in anti-corruption measures. “We must get the best business — and the clean business,” the company now says. That kind of support at the top can provide much-needed cover for those further down who would prefer to do business ethically, not to mention legally. Tough new laws, like the UK Bribery Act, which came into effect on 1 July 2011, make bribery at home or abroad more than an ethical matter.

The facts are that the overwhelming majority of growth in tomorrow’s global economy will occur in markets in which corrupt business practices presently abound, where bribery of all kinds and at all levels of society is rampant. Learning to manage ethically and legally (as bribery is against the law in the countries in which most of the world’s large and fast-growing companies are headquartered) in such environments isn’t simply something that will feel good to do. It’s a business imperative, as aggressive government prosecutors ramp up their anti-corruption efforts.

Siemens’ Siekaczek wonders, though, whether the publicity surrounding the Siemens case will make much difference. Bribery and corruption are still widespread, he notes. His level of worry remains intact. “People will only say about Siemens that they were unlucky and that they broke the 11th Commandment: don’t get caught.” For those who break that commandment and do business the old (corrupt) way, personal consequences may well ensue, though, especially if, as some observers anticipate, some Siemens executives soon find themselves behind bars.

The world is counting on government leaders and business people to provide the leadership that will make tomorrow’s businesses and governments ethically responsive to what their customers and citizens need, whether better roads, safe water or new goods and services. Thus, managing ethically is no longer just a business imperative; it’s a societal imperative, too, if we’d like our children to live and work in a more ethical world. Given the seeming inability of some governments and government leaders to carry this baton, it’s clear that the responsibility must be borne in the private sector, in companies like yours. If yours is a family business, to which generation should this important task be entrusted? To yours, or those of your children or grandchildren? It’s not too late in your company, large or small, to get started now.