Beginning of Week 7 - we have a few more cases left in Finance, Marketing, Strategy and Ethics. Today, we have three cases - one on Finance, one on ethics related to bribing and one on Europe. The case on Europe was quite interesting with representation from many countries in Europe, the discussions were rich - and the time was not enough.
Interestingly the term "United States of Europe" was used by Winston Churchill in his speech delivered on 9th Sept 1946 at the University of Zurich in Switzerland. In this speech given after the end of the 2nd World war, Churchill concluded that, " We must build a kind of United States of Europe. In this way only will hundreds of millions of toilers be able to regain the simple joys and hopes which make life worth living".
Why the European Union ? What is the motivation ? There are many reasons:
- Small markets ; joining together will economies of scale
- Too many small companies
- Avoid wars and conflicts, by creating interdependency's
- Deregulation leading to higher ability to compete and grow in US and Japanese markets
- Social cohesion
How does it work ? While it is too complicated even for the Europeans to explain in simple terms, the following are the basics:
- European Commission is in Brussels
- Bureaucracy sits here - huge staff of over 16,000; many translators
- Make proposals and laws for approval
- Check and report on implementation
- Control budgets and trade
- Interestingly, in the case of Germany, 90% of the laws come from Brussels; it may vary for other countries
- European Parliament
- 732 members - directly elected
- Sort of a powerless body
- Sort of a lower house
- Most Europeans do not take part in the election of these Parliamentarians
- Council of Ministers
- Any legislation drafted by the European Commission becomes binding through a vote of this Council
- Akin to the Upper house
- One representative from each country, and depending on the issue being discussed, different national ministers would fill the seats
- Votes for each country is weighted based on country population
- For broader topics, the Prime Ministers or President would attend
- European Court of Justice
- Sort of the US Supreme Court
In order to enable easier trade, they created a principle of "Mutual recognition". What this means is, members states do not block the import of goods meeting the regulatory requirements of other member states.
Creation of a common currency, removed control over monetary policy to the European Central Bank. Many countries which devaluation of their currency to make their exports more competitive, no longer had that lever with them. But to join the Euro, countries needed to meet strict criteria - which was called the Maastricht Treaty. These criteria were:
- Debt as a % of GDP to be less than 60%
- Deficit as % GDP to be below 3%
- Inflation to be within 1.5% of the average of the lowest three
- Long term interest rates to be within 2% of the average inflation of the lowest three
Because of the common currency, there was a need to have a common fiscal policy as well. One of the aim was to replace the $ as a global currency. The aim was also to have four freedoms : free movement of goods, free movement of capital, free movement of services and free movement of labor. Achievement in each of these freedoms are different in the various countries, due to many local issues. For example, the recent case of eviction of the Roma's from the streets of Paris is a case in point - this goes against the free movement of labor.
While there were many issues, the biggest challenge came in during the financial crisis created by the sub-prime mortgages in the US. It was a test for the ECB. While there were major issues with the new members of the EU, especially Czech, Hungary and Romania, one could say the ECB handled them pretty well. But by 2010, the focus shifted to Greece. This resulted in a creation of a massive European Financial Stability Fund by the ECB.
After two years of crises and responses, the end was no where in sight. Whether the EU will emerge stronger after the crisis is still a question mark. With the new group of countries - PIIGS - Portugal, Ireland, Italy, Greece and Spain - all in some sort of trouble, the 50-year cooperation among countries will be severely tested in the years to come.
The second session was on the financial options available to an advertising company in a growing China market. There were three companies in the outdoor advertising market - who between themselves owned pretty much all the market. How they played the game and in the end all three merged together to take almost all the market is the core of this case. More importantly, in emerging markets:
- There is an exploding market with high growth potential, having a need for capital
- Fragile legal systems and weak anti-trust laws leads to high ROE
- Concerns exist on property rights and how to take money out of the country
- High potential for valuation bubbles
- March 2009: Coca-Cola's buyout of Huiyuan Juice was blocked
- Sept 2009 : Pfizer and Wyeth - required Pfizer to divest a swine vaccine business
The last case was on Fighting Corruption in Siemens. This was a case in which a large company turned a blind eye to corrupt practices and over a period of time, it became so pervasive that it was impossible to get out - and needed an external shock amounting to millions of dollars in fines, bad image and prosecution, for the company to clean itself up and setup new policies and processes.
In Nov 2006, German prosecutors raided the offices and homes of Siemens AG staff as part of the ongoing investigations into bribery. The investigations covered businesses representing 60% of the revenues of Siemens (which was approx US $110b in 2006) and spanned operations in Asia, Africa, Middle East and Americas. At the conclusion of the legal proceedings, the company paid $1.6 billion in fines, sacked over 500 employees and sued nine former members of the Managing Board.
The United Nations estimates that over US $1.0 trillion is spent on bribes. Who gets hurt by bribes ?
- Non-corrupt competition
- Public, both users of government services and tax payers
- Corrupt companies - cannot set high moral standards on anything internally
- Productivity of the economy
- Investors
- Customers, who will get inferior quality product or services
- Countries, if they develop a reputation for corruption, good companies will stay away
Corruption will have a corrosive impact on respect for the law. Coming back to Siemens, it was surprising to me that, till 1999, German Law did not specifically prohibit the payment of bribes to secure foreign business. In fact they were tax deductible !
How Siemens recovered from this is inspiring and there can be many lessons here. The first act was to get a CEO from outside Siemens, which was a first for Siemens. Leadership teams, led by the CEO started on the long journey to change the culture of the company, using the slogan, " High Performance with High ethics". It was quite important to get the message across that while ethics is important, that cannot be the reason for poor financial performance.
Siemens made changes at different levels - tightened internal controls, set up an amnesty program to help people volunteer information and designed a series of compliance elements:
- Anti-corruption guidelines
- Business partner policies
- Communication
- Training on compliance
- Help desk to answer queries on compliance related concerns
- Created a compliance organization led by a Chief Compliance Officer, with 600 full time employees
And more importantly, they reorganized their businesses with accountability at the CEO level for Compliance. They even added compliance as one aspect of the compensation paid to top management.
Siemens' experience with corruption is not unique; many companies all over the world are face with similar legal and ethical challenges. Collective action by all companies, Governmental agencies, NGO's and other stakeholders are required - this was done under the World Economic Forum umbrella called Partnering Against Corruption Initiative.
In Bangalore, India , in order to raise awareness about corruption in daily life, an NGO organization, funded by eBay founder Pierre Omidyar, has started an initiative called I-Paid-A-Bribe. IpaidABribe.com is a unique initiative to tackle corruption by harnessing the collective energy of citizens. You can report on the nature, number, pattern, types, location, frequency and values of actual corrupt acts on this website. Your reports will, perhaps for the first time, provide a snapshot of bribes occurring across your city. They will use them to argue for improving governance systems and procedures, tightening law enforcement and regulation and thereby reduce the scope for corruption in obtaining services from the government. What do you think ?
We had an evening session with Bill George on his book, titled "True North". I will write separately on this topic sometime later. More later ...
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