As the U.S. Ramps up Prosecutions for Corporate Bribery Overseas, Investors Should Look for Companies with Effective Risk Mgt

The followingentry appeared as part of GovernanceMetrics International’s GMI Blog. GMI is the leading independent provider of global corporate governance and ESG ratings and research. Corporate stakeholders – including leading investors, insurers, auditors, regulators and others – use GovernanceMetrics services to identify and monitor risks related to non-financial measures covering key environmental, social, governance and accounting risk factors.

By Nathaniel Parish Flannery, Research Analyst

Despite the fact that U.S. regulators are making unprecedented efforts to prosecute companies for engaging in illegal and unethical activities, from a corporate governance perspective, most U.S. companies have been slow to update their mechanisms of risk management oversight.

For instance, Deere & Co., the farm equipment manufacturer, recently announced that the U.S. Securities and Exchange Commission requested documents relating to the company’s business activity in certain foreign transactions. Press sources have reported that the SEC investigation relates to allegations that the company may have violated the U.S. Foreign Corrupt Practices Act (FCPA), a law that prohibits U.S. companies from paying bribes to foreign officials. The Wall Street Journal reported that the SEC is investigating Deere’s business practices in Russia and nearby countries.

Deere, the world’s largest farm equipment producer, has been working to expand its operations into higher-risk developing countries in recent years. The changing nature of the company’s operations, however, has not been reflected in the make-up of Deere’s board and board sub-committees, the highest organs of managerial oversight.

For instance, Deere has not established a separate board-level risk management committee and none of the directors sitting on the board seems to have any executive experience in risk management. More broadly, according to research from GMI, almost 95% of the largest 1,743 U.S. listed companies have not appointed board committees that are dedicated to risk management oversight.

In recent weeks Goldman Sachs, Johnson & Johnson, Tyson, and several other major global companies have faced similar inquiries from the SEC. Not one of these companies has appointed a risk management expert to serve on its Audit Committee.

The SEC’s focus on investigations into potential violations of the FCPA should come as no surprise to investors or publicly listed companies. After all, on January 13, 2010, Robert Khuzami, director of the Division of Enforcement of the SEC, announced that the SEC had formed Specialty Unit devoted specifically to investigating issues related to the FCPA.
According to a statement from the SEC, the unit is targeting companies in “high-risk” industries like energy, pharmaceuticals, medical devices, telecommunications, and defense as well as companies operating in “high-risk” locations, such as China, Russia, the Middle East and Africa.

In 2008, Siemens AG agreed to a $1.6 billion settlement with the SEC, the largest settlement ever reached in an FCPA case. In subsequent months more settlements were reached. In total during 2010 the SEC collected a record-breaking $1.8 billion in fines.

Overall, the number of FCPA enforcement actions increased by 85% in 2010. Over the course of the year the U.S. Department of Justice brought 48 criminal cases and the SEC filed 26 new actions. The trend has continued in 2011. In February, 2011, Tyson agreed to a $5.2M settlement. A number of other high-profile companies are currently facing FCPA investigations. The SEC has updated its enforcement approach, but most companies have been slow to improve their internal risk management and risk oversight mechanisms. According to GMI, only 6% of the U.S.’s largest publicly traded companies have appointed Audit Committee members who have professional experience in risk management.

Obviously, FCPA investigations and other types of lawsuits represent a significant threat to shareholder value. Publicly traded companies should work to implement strong board-level risk management oversight mechanisms. Otherwise, if liabilities from lawsuits start to pile up, they run the risk that investors will take their money elsewhere.

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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