Today, the Holy Grail of compliance –Return on Investment—for your compliance program. In a very interesting article by Paul Healy and George Serafeim entitled, “An Analysis of Firms’ Self-Reported Anticorruption Efforts”. In this academic paper, the authors looked at the issue of not simply profitability of companies, which had more robust anti-corruption compliance programs but also what was the direct effect on the companies’ return on equity (ROE) in countries which were perceived to have a high incidence of corruption.
Not surprisingly, in countries in a low risk for corruption, there was not much difference in the sales growth for companies with robust anti-corruption compliance programs and those business which into the authors’ ‘cheap talk’ category. However when it came to growth in countries which had a high propensity of corruption, there was a dramatic difference.
When quantitative types say, “The magnitudes of the estimated coefficients are economically interesting”; it is a HUGE deal. These findings are equally large and important for the CCO or compliance practitioner. The authors conclude by making several observations. First, companies which have more robust compliance programs are from countries which have more robust enforcement and monitoring. Second the more robust your compliance program is the lower your sales growth may be but the higher your overall return in a high risk country will be going forward. Finally even if a company sustains high sales grow in a high risk country; if it does not have a robust compliance program, the sales will drop off dramatically and may well lead to negative ROE.
All of this information points to companies which are on the Ethisphere list of the World’s Most Ethical Companies and their financial performance. They have better than average financial performance because they are better run. The are on this list because they have robust finance internal controls which include compliance internal controls. To mix metaphors, robust internal controls around compliance do not slow you down but allow you to go faster and move more safely into high risk countries.
So the next time some business type tries to say that following the law by having a robust FCPA anti-corruption compliance program in place; you can correct him. Spikes in sales in high-risk countries do not translate into sustained growth and without an effective compliance program in place; your company may actually lose money.
- Demonstrating ROI is the Holy Grail of compliance-use it.
- Compliance helps drives sales in high risk countries.
- Long term sales and profitability drop off when bribes are paid in high countries.
For more information, check out my book Doing Compliance: Design, Create and Implement an Effective Anti-Corruption Compliance Program, which is available by clicking here.