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integrity due diligence

Integrity due diligence

 

Evaluating company integrity

A couple of recent episodes in the entertainment sector and sports sector in the United Kingdom have highlighted a dilemma that has troubled many organisations at one time or another: can a single employee who generates a lot of money for a company be worth more than that company’s integrity?

Firstly, and most recently, the English broadcaster Jeremy Clarkson had his BBC television contract terminated following allegations that he attacked producer Oisin Tymon. This is by no means the first controversy to have embroiled former Top Gear host Clarkson. He has previously been accused of racism on two separate occasions, and had to flee Argentina after he offended Falklands War veterans by driving through the country in a car with a number plate that (coincidentally, according to Clarkson) containing the letters ‘FKL’.

The motoring TV show Top Gear is one of the BBC’s most financially successful programmes, with an estimated audience of approximately 350 million people. The franchise is one of the broadcaster’s ‘super brands’ meaning that it earns it more than £50 million (US$75 million) per year. However, Top Gear’s future is now up in the air, with the remaining episodes in this series not yet shown.

Much of the show’s success is down to Clarkson’s irreverent personality and personal popularity. Before the decision to terminate his contract was announced, more than one million people signed a petition calling for him to remain as presenter.

Following Clarkson’s suspension, British Prime Minister David Cameron even lamented the potential downfall of the show. ‘Because he is such a huge talent and he amuses and entertains so many people, including my children, who’d be heartbroken if Top Gear was taken off the air, I hope this can be sorted out, because it’s a great programme and he’s a great talent.’

While the world awaited the news of Clarkson’s fate, former BBC Trust chairman Sir Michael Lyons said, ‘There is nobody who is bigger than the BBC’s reputation … [Clarkson’s behaviour] has been a nagging problem for some time. But it must be dealt with on the facts of the moment – not the sort of legacy – and it certainly mustn’t be clouded by arguments about what the BBC earns.’

Following one incident of alleged racist remarks by Clarkson, BBC Television director Danny Cohen said, ‘It’s like football clubs. No one is bigger than the club. No one show or person is bigger than the BBC and that includes me. I found [the language] entirely unacceptable.’

Cohen’s reference to football brings to mind another example of a high-profile employee who caused his employer all sorts of PR trouble as it contemplated the merits of terminating the employee’s contract for unethical conduct.

Uruguayan footballer Luis Suárez was a striker for Liverpool Football Club when, in April 2013, he inexplicably decided to take a bite out of Chelsea defender Branislav Ivanović. According to BBC Sport, Liverpool’s defence of the player seemed to be ‘transforming Suarez into a figure who is bigger than the club’. Following another biting incident during the 2014 World Cup [Suárez’s third in total], Suárez was sold by Liverpool to Barcelona for £75 million (US$112 million). Claiming that the club would recover from the loss of its star player, Liverpool manager Brendan Rogers added that ‘no one is bigger than the club’.

Suárez was sold by Liverpool in July 2014 despite finishing the 2013-14 season as the English Premier League’s (EPL’s) top goal scorer with 31 goals. With his help, Liverpool finished second in the EPL for only the third time since its inception in 1992.

The second-place finish saw Liverpool earn a spot in the following season’s UEFA Champions League, earning the club approximately €8.6 million (US$9.23 million). But despite the prospect of more money to follow if the club reached the League’s knockout stages – and not including related sponsorship deals – the club decided that the profit and success generated by Suárez was not as important that the club’s integrity.

Integrity as a marketing tool

Integrity can be used by companies as a powerful marketing tool. However, this type of marketing must be carefully considered, as misplaced integrity marketing can damage a company’s reputation and revenues.

Global coffeehouse chain Starbucks recently tried to market its integrity by entering the national conversation on racial tensions in the United States. Staff at the Seattle-based company were instructed to write ‘Race Together’ on customer cups in an attempt to spark a conversation about race in America – a topic that has been at the centre of media attention following the controversial deaths of black citizens at the hands of white police officers.

Starbucks’ plan backfired, however, when the company was widely derided on social media for its actions. The BBC reported on Twitter users mocking Starbucks with tweets such as ‘Black Coffees Matter’ (in reference to the ‘Black Lives Matter’ slogan used in recent protests) and ‘African-Americano’.

John Howell, who is editorial director of a company that maintains websites on corporate social responsibility, described Starbucks’ marketing initiative as ‘a bit aggressive’ and ‘odd’, according to The Wall Street Journal.

However, a number of media outlets praised Starbucks intentions, even if its execution was clumsy. The decision to try to start a conversation on race was hailed by Web.Search.Social., ‘Starbucks has lost money over its social stance before and they’re probably doing it again now.’

Although marketing its integrity on this occasion may not have achieved the desired outcome for Starbucks, a more carefully considered campaign could’ve resulted in commercial success.

Companies need to consider what their integrity is worth. Fictional Hollywood character Gordon Gekko might have said that ‘greed is good’, but is that right? To what extent should making money be a company’s sole consideration when operating in a capitalist society?

The line of tolerance will inevitably vary between different companies. However, rather than waiting for controversy to occur, companies ought to have a clear code of conduct and set repercussions for breaches so that decisions on how to deal with them are not discretionary. Independent third parties can help prepare and implement policies and codes to ensure that they are in line with a company’s integrity and tolerance, with clear repercussions for breaches.

A paper by Pankaj M Madhani of the ICFAI Business School in India recently asserted that investors and stakeholders want to be associated with firms that have strong governance, ‘as the relationships are likely to be more prosperous, fairer, and longer lasting than those with firms with less effective governance’.

The paper also states that 60 percent of investors would avoid investing in firms with poor governance standards, suggesting clearly that poor ethical standards will lead to a drop in profits. According to the paper, companies with good corporate governance are able to increase their value by between ten percent and 12 percent.

Ethics and integrity should always be prioritised ahead of profits, as continuing to allow staff members to operate unethically will ultimately hurt profits. Whether company action takes the form of disciplining an individual who is unethical but highly successful – or even terminating their contract – or simply ‘doing the right thing’ in the face of extreme criticism, organisations must consider the long-term repercussions of allowing profit to flourish at the expense of ethics.

HOW DOES INTEGRITY DUE DILIGENCE PROTECT A BUSINESS?

What is integrity due diligence?

Integrity due diligence is gathering independent information in order to gain an understanding of the integrity and corruption risks associated with a third party. The third party could be a distributor, representative, agent, supplier or any other member of the supply chain.

The overall aim is to identify any unethical conduct such as corruption, terrorism, bribe. Having this knowledge will enable the business to make strategic financial decisions whilst protecting the company’s reputation.

Why does integrity due diligence matter?

As a result of the increase in global trading, integrity due diligence has become increasingly significant. It can be hard to unravel the origins of a third party, but it is essential to do so unless you are prepared to jeopardise your business and risk financial or legal penalties.

Do you really know who you are dealing with? What on face value may appear to be a privately owned European company might have its origins in the Far East or be part owned by a communist state.

Becoming involved with wrong trading partners can be catastrophic. A business’ reputation can be damaged irretrievably whether or not it was aware of the partners or associates’ activities. Finding out that a supplier has been supplying arms to a terrorist organisation is not conducive to receiving business opportunities.

The process of due diligence

Due to globalisation it can be difficult to know exactly who owns what or who and this can make it easy for businesses to mask. It is essential that the process of integrity due diligence is thorough in order to gain insight into all of the third party’s operations.

Information collated about each third party may include:

  • company identity and ownership details (including any state ownership interests)
  • the identity of the company and associations with any other trading partners
  • the business background and activities
  • key players within the organisation, their background/associations, including any business/political interests
  • any reported involvement of the third party or its key players in issues including bribery and corruption
  • a full search of any international sanction lists

Can integrity due diligence prevent corruption?

Legislation has been introduced in many countries to prevent illicit activities such as money laundering, terrorism financing, financial sanctions, corruption and bribery. In the UK, the Bribery Act specifically cites the need to conduct due diligence on not only potential third parties but also current ones in the UK and on an international basis. This is a legal requirement in order to ensure that “adequate procedures” are in place to prevent corruption.

Businesses are faced with the challenge of conducting integrity due diligence on potentially thousands of third parties on a worldwide basis. Whilst it may seem an onerous task, it is essential in order to protect your business both now and in the future.