Cross-border compliance

May 01, 2008
<p>Looser business practices overseas challenge global companies</p>

Get a group of CEOs and board chairmen together, as Foley & Lardner recently did in its headline panel at the National Directors Institute, and what’s the first topic of conversation? Alcoa. The aluminum producer is fresh in the sights of the US Department of Justice, which is investigating allegations of conspiracy, bribery and fraud in some of Alcoa’s dealings in Bahrain.

It’s the kind of case that scares anyone running a company with global operations. That’s because so many executives find themselves forced to compete for business against rivals and in countries with looser business cultures and practices.

This move to less familiar markets is occurring amid a government crackdown on corruption at US companies operating abroad and in the face of that unforgiving requirement of the Sarbanes-Oxley Act that CEOs and CFOs certify their company’s internal financial controls. Of course US executives are still quite interested in pursuing cross-border sales, acquisitions and even joint ventures if they can find ways to manage the risk.

The panel of executives discussed how to get comfortable with the level of compliance when running operations overseas. ‘There are some non-negotiables,’ says Terry Growcock, chairman of the board of Manitowoc Company. ‘Internal controls and the Foreign Corrupt Practices Act (FCPA) are two of these… You have to have a set of principles you will not waver from.’

Making sure your house is in order starts with internal controls. Since 2003 Manitowoc has been outlining the areas it has to monitor in order to set a standard that the corporate office can communicate to the rest of the company, which has more than 50 percent of its operations overseas. Over 70 Manitowoc managers sign the same internal controls certification as the CEO and CFO and flag problems for the disclosure committee to resolve before the financials get final executive approval. All employees and board members also take the same ethics course online every year, Growcock says.

Strange as it sounds given the history, CEOs say they find some welcome aspects to Sarbanes-Oxley regulations. ‘One of the nice things about 404 is that there is a lot more discipline around how the processes work,’ says Randall Hogan, chairman and CEO of Pentair, a water delivery and technical products company. ‘That can help uncover issues.’

Pentair copes with international compliance issues in part by running web-based training around the FCPA as well as an internal hotline for reporting suspect conduct. It also publicizes employee infractions and dismissals. ‘Never waste a teaching opportunity to show you mean what you say,’ Hogan says.

Speaking the same language

Sometimes the intent and the specifics of rules get lost in translation. Companies need to offer not only a good literal interpretation of the compliance process, but also a cultural one. ‘These are strange concepts in some territories,’ comments Robin Johnson, a London-based partner with Eversheds, a law firm. ‘What you really need is a champion in your local manager. If you talk in French to your French employees about the FCPA, you’re going to get a much better reaction than if you get someone from, say, Texas who tells them what they’ve got to do.’

Finally, there is the thorny issue of whether or not to enter into an international joint venture. There are so many challenges that many CEOs decline to do deals where they won’t have full control. ‘It’s incredibly complicated in a place like China,’ says Timothy Sullivan, president and CEO of Bucyrus International. ‘You’ve got the same fiduciary duty issues and you’re the minority. You don’t have a lot of stick.’

But turning away may mean losing your only access to a desirable market. ‘You have to be diligent about living up to your values everywhere,’ Hogan says. ‘There are countries we don’t invest in because you really can’t do business there in a way I’m comfortable with.’

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