Emerging market multinationals overall are doing a poor job when it comes to corporate transparency, leaving them vulnerable to bribery and corruption risk.
That’s according to a recent report conducted by corruption watchdog Transparency International, which evaluated the public reporting practices of 100 emerging-market companies headquartered in 15 countries. The multinationals assessed in this report operate on average in 26 countries each, and in aggregate they operate in 185 countries.
Overall, the report uncovered significant corporate disclosure deficiencies in the reporting of key elements of their anti-corruption programs; company structures and holdings; and key financial information on a country-by-country basis.
The report follows in the wake of the infamous Panama Papers scandal, which laid bare the widespread use of shell companies and offshore tax havens, often for illegal purposes such as tax evasion and money laundering. “It behooves companies to be as transparent as possible, particularly at a time when there are so many corporate scandals in the news,” says Susan Côté-Freeman, head of the business integrity program at TI.
Being transparent forces companies to focus on their corporate governance practices. “It drives better performance,” Côté-Freeman says.
According to TI’s report, 75 emerging market multinationals scored less than five out of a possible 10, with zero being least transparent and 10 being most transparent. The overall average score was 3.4—a weaker performance than the 3.8 average score of the world’s 124 largest publicly traded companies, according to a similar TI analysis conducted in 2014.
In the emerging markets report, Indian companies scored highest in all three aspects of corporate disclosure transparency. In fact, several Indian companies occupy the top positions in the overall index, including telecommunications company Bharti Airtel, with the highest overall score of 7.3, followed by Tata Communications with a score of 7.0, and car maker Mahindra & Mahindra with the third top score of 6.7. Other top-scoring Indian companies include Tata Global Beverages, Tata Motors, Tata Consultancy Services, and Wipro, each with a score of 6.5.
On the opposite end of the spectrum, Chinese companies lagged behind in every aspect of transparency, with many occupying the lowest positions in the overall index. These include Chery Automobile; appliance maker, Galanz Group; and automobile parts maker Wanxiang, each with a score of 0.0.
Best-in-class companies make public their anti-corruption efforts, supported by a robust anti-corruption program that’s woven into the fabric of their global operations, including their third parties. Some of the disclosure elements TI assessed include a public statement by the company on its commitment to anti-corruption and compliance with relevant laws; disclosure of political contributions; and application of its Code of Conduct to employees, directors, suppliers, and agents.
“It behooves companies to be as transparent as possible, particularly at a time when there are so many corporate scandals in the news.”
Susan Côté-Freeman, Head, Business Integrity Program, Transparency International
Of the emerging market multinationals evaluated in the TI report, 84 stated publicly that they are committed to compliance with the law, including anti-corruption statutes. Sixty-seven companies publicly stated that they have a zero-tolerance policy for corruption, while 40 companies said they disclose their political contributions.
Most emerging market multinationals, however, received low scores regarding disclosure practices on facilitation payments, with only 19 stating that they forbid facilitation payments. In comparison, 56 of the top 124 companies assessed in TI’s 2014 report did so. “We think all companies should ban facilitation payments,” Côté-Freeman says.
Facilitation payments—more commonly called “grease payments”—are small sums given to foreign officials to expedite normal business transactions, such as clearing goods through customs. They differ from bribes, which are typically meant to entice foreign officials to commit acts they might otherwise not do, such as awarding a contract.
Agents and other intermediaries especially pose a high risk of bribery for companies, and yet only 34 emerging market multinationals state that their Code applies to third parties. “If companies are not dealing with third parties in a comprehensive manner, they’re not mitigating their risk of corruption,” Côté-Freeman says. Companies should ensure that agents and other intermediaries acting on their behalf are contractually bound to comply with their anti-bribery program, she says.
Overall, emerging market multinationals achieve an average score of 48 percent, meaning that companies scored 6.2 points on average out of a possible 13. This score is much lower than the reporting performance of Western companies, including U.S. companies, which average 70 percent on anti-corruption transparency, according to TI’s analysis of the world’s 124 largest companies.
No company achieved a perfect score of 100 percent for anti-corruption transparency, but one company—Sabanci, an industrial and financial conglomerate based in Turkey—scored 96 percent. Another company that scored high was Embraer, with a score of 92 percent.
On the opposite end of the spectrum, seven companies scored zero points for anti-corruption transparency. Most of these are Chinese companies, including Chery; Wanxiang; Galanz; delivery services company Shunfeng; and construction machinery maker Zoomlion. The two other companies that scored poorly are Charoen Pokphand, a Thailand-based private food company, and Indofood, an Indonesia-based food company.
HIGHEST AND LOWEST SCORING COMPANIES
Below are the top 10 lowest and highest scoring companies ranked in Transparency International’s 2016 report, “Transparency in corporate reporting: assessing emerging market multinationals.”
Top 10 highest scoring companies:
Bharti Airtel (7.3)
Tata Communications (7.0)
Mahindra & Mahindra (6.7)
Tata Consultancy Services (6.5)
Tata Global Beverages (6.5)
Tata Motors (6.5)
Tata Steel (6.5)
Tata Chemicals (6.3)
Lowest scoring companies:
China National Chemical Corporation (0.7)
China Shipbuilding Industry Corporation (0.7)
Charoen Pokphand Group (0.6)
Chint Group (0.4)
Geely International (0.4)
China State Construction Engineering Corporation (0.3)
Chery Automobile (0.0)
Galanz Group (0.0)
Wanxiang Group (0.0)
Source: Transparency International
Greater organizational transparency plays an important role in fostering a corruption-free culture in areas such as public procurement, government contracting. and taxation. Thus, full disclosure of a company’s holdings is a crucial element of corporate transparency.
“Companies should disclose all their subsidiaries, associates, and joint ventures, including information about the percentages owned by the parent company, the countries of their incorporation, and the countries in which they conduct their business,” TI said. Only companies that fully disclose all of their subsidiaries were awarded perfect scores in the report.
The evaluation of organizational transparency consisted of eight questions, with four focusing on fully consolidated subsidiaries and the other four on associates and joint ventures. These questions assessed, for example, the names of subsidiaries, countries of incorporation of subsidiaries, and percentages owned in subsidiaries.
The findings reveal that regulation enhances the transparency performance of emerging market multinationals, TI said. India’s Companies Act, for example, requires firms to disclose key financial information on all subsidiaries wherever they are located, resulting in Indian companies achieving the strongest score in this dimension, according to the TI report.
At the bottom of the ranking, nine companies—eight from China and one from Mexico—scored zero. Another 54 companies received above average scores of 50 percent or more. State-owned companies managed a weak but nevertheless higher score (18 percent) than privately owned firms (14 percent) in this category. The 19 Indian companies achieved the best score of any country in the sample, with an average of 77 percent.
The data point most commonly disclosed by companies is a list of their fully consolidated subsidiaries. The least frequently disclosed data point concerns the countries of operation of associates and joint ventures. Only three companies—telecommunications company Bharti Airtel, state-owned oil-and-gas company Petronas, and Chinese telecommunication company ZTE—disclose this information for all relevant entities, earning them high scores in this category.
Emerging market multinationals scored considerably better than the top global companies in TI’s 2014 report, achieving an average score of 47 percent versus 39 percent. Additionally, more than half of emerging market multinationals score higher than 50 percent for organizational transparency, compared to only 34 of the top companies in the 2014 analysis. “This suggests that emerging market multinationals, when subject to legal requirements, are more open about their corporate structures than global multinationals,” the TI report stated.
Country-by-country transparency of financial reporting of revenues, capital expenditure, and income tax, is another area where emerging-market companies performed better than the top global companies from TI’s 2014 analysis. Emerging-market companies achieved an overall score of nine percent, compared to an overall score of six percent by the top global companies.
The highest level of country-level transparency is measured for revenues: 49 out of the 100 companies disclose some type of country-level data regarding their revenues, though only two disclose full revenue data by country. The least-disclosed item is community contributions, for which only five companies provide some country-level financial data.
Maintaining its 2013 leadership in the ranking, the best-performing company was Chilean retailer Falabella, with a score of 60 percent. At the bottom of the scale, 43 companies scored zero, including 26 Chinese firms and seven of the 12 Brazilian companies covered in the report.
Voluntary anti-corruption efforts by companies, however, only go so far, Côté-Freeman says. Moving forward, strong anti-bribery laws around the world that are vigorously enforced, she says, can effectively raise the bar for corporate anti-corruption practices and incentivize companies to adopt stronger anti-bribery compliance measures.