In his professional life, Don Hughes is always on the lookout for red flags – and he is not talking about the political type.
As vice president and general counsel for Hitachi Data Systems in Europe, Middle East and Africa (EMEA), he is constantly monitoring for early warning signs of potential corporate risk and legal liability in the sometimes difficult task of doing business in emerging markets.
“I think that corruption is probably the greatest risk companies face and there is great potential in emerging markets,” says Mr Hughes.
Companies such as Hitachi Data Systems (HDS), the international data storage and software subsidiary of Hitachi, are naturally attracted to countries experiencing rapid industrialisation and growth. But it is precisely there that the risks can be greatest, ranging from the impact of local culture and customs to attitudes to gifts, entertainment, bribes and third-party payments.
Doing business through third-party representatives in emerging markets – a common practice when international companies move into a new market for the first time – can pose particularly high risks.
Corruption is probably the greatest risk companies face and there is great potential in emerging markets
“We continually monitor what we do and look for red flags, and have a lawyer, a local lawyer where possible,” he says. “And depending on the level of corruption in a particular country, we will do face-to-face training with resellers.”
Before working for Hitachi, Mr Hughes had international legal experience with telecommunications group Cable & Wireless and as a solicitor specialising in technology, telecommunications and media for Clifford Chance.
There can be little doubt about the scale of the potential problem over corruption. An Ernst and Young survey of 3,000 senior executives doing business in EMEA and India found that 67 per cent thought bribery and corrupt practices were widespread in rapid-growth markets. Some 25 per cent of those interviewed thought giving gifts and entertainment to win or retain business was acceptable.
A PricewaterhouseCoopers (PwC) study suggested that payments through third-party agents were the most prevalent form of corruption.
Apart from the warnings such surveys provide, Mr Hughes has quite a few standard weapons in his armoury to mitigate risk.
The Transparency International Corruption Perceptions Index ranks 176 countries on how corrupt they are perceived to be. Denmark, Finland and New Zealand come top at the good end of the index. The UK is in 17th position with Ireland 25th.
Unsurprisingly Somalia, North Korea and Afghanistan bring up the rear.
“That index gives us an indication where the risk is and, of course, we also study the case law,” says Mr Hughes, who in addition can call on information from the World Bank Corruption & Transparency Index.
For companies prepared to take a risk in an attempt to get ahead of competitors, the perils of getting it wrong have never been greater.
“What you find with the Foreign Corrupt Practices Act [FCPA] in the United States is that companies are being fined increasing amounts of money and more executives are going to jail,” warns Mr Hughes.
A corrupt payment could be made in some sort of way and, as a result, we decided not to proceed
A landmark case involved the German group Siemens, which in 2008 pleaded guilty to multiple violations of anti-bribery rules in Latin America and the Middle East. The company paid an FCPA-related fine of $450 million, but the total in other fines, penalties and returned profits reached no less than $1.6 billion.
The arrival of the UK Bribery Act adds another layer of complexity in doing business. “I wouldn’t say it was a minefield – it’s probably not that bad – but you have to be careful and have procedures in place. The worst thing you can do is stick your head in the sand,” says Mr Hughes, emphasising that in ethical matters the lead has to come from the top.
HDS has a global gifts and entertainment policy, which is in effect a tariff, for every individual EMEA country where it does business. Anyone who wants to spend more has to ask for permission.
“What we do with third parties is we basically do due diligence, and a specialist company is asked to produce a report on distributors and retailers. We are looking for any red flags,” he says.
All third-party representatives are tied into contractual agreements to trigger a breach of contract if they do anything wrong.
“We have come across instances where we have been asked to do business in a certain country, and we have looked at the structure of the business and we have just thought that there was too much risk – a corrupt payment could be made in some sort of way and, as a result, we decided not to proceed,” Mr Hughes adds.
For the past three years, HDS has been included on the Ethisphere World’s Most Ethical Companies list.
For Mr Hughes, and his American and Japanese bosses, behaving ethically simply adds up to good business. “I think if you can go out to the market and say we are an ethical company and we try to do business the right way, actually other companies and your customers respect you for it,” he says.
He carried out a survey of his own legal team and was surprised to find out just how important to them it was to work for a company with a good reputation, even more than pay and conditions.
After you have dealt with the pitfalls of gifts, entertainment, bribes and third-party payments that still is not the end of the story. You yet have to cope with another thorny area, which is particularly important for a high technology company such as HDS.
There is a complex web of export controls. At its simplest the US, for example, does not want anything involving missile technology going to Iran. As a result British businessman Christopher Tappin was sentenced to 33 months in jail for exporting specialist batteries which could be used by the Iranians in surface-to-air missiles.
Hitachi has a global trade compliance department to track all the company’s products including software.
“Japan and the US have such stringent export control laws, and we have to meet those high standards. The reputational damage, the fines, the fact that executives could end up in prison if the laws are breached shows you have to have provisions in place,” says Mr Hughes.
The HDS executive also has to pay attention to how local laws differ in particular countries, such as Poland’s very strict data protection laws and the Black Empowerment Code in South Africa.
