Bribery and corruption are clearly incompatible with good governance and harmful to the creation of value.

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The cost of corruption is enormous and it undermines the markets’ trust in companies and countries.

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Corruption is a governance issue and a social issue, and of course, a financial issue.

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As fund managers, we have to ask ourselves, how can shareholders intervene most effectively to eliminate these inappropriate practices? As stakeholders, we have to ask ourselves, how can we intervene effectively to improve public governance?

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In terms of public governance, governments around the world have passed legislation to outlaw corruption. The corporate world has been very supportive of the efforts under the 1997 Organisation for Economic Co-operation and Development Anti-Bribery Convention. For example, large global accounting firms and company boards have tried to identify and rectify inappropriate and corrupt practices.

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The most effective way to combat corporate corruption is by encouraging individual companies to be transparent.

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There are specific international companies in high-risk areas that have been dealing with state and local authorities, such as in the construction and infrastructure sectors, that have taken measures to ensure that they have embedded vigilance and preventive measures within their working processes to identify bribery and corruption.

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Share-owners are responsible for demanding that companies have stringent policies to avoid bribery and corruption, regardless of the jurisdiction they operate in.

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As shareholders, we encourage the companies that we invest in to have clear monitoring of supply chains and business providers, as well as to closely scrutinise the selection and monitoring of third parties used to support business development.

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On our company visits, we encourage systematic monitoring of procedures through the reporting of material incidents.

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The corporate world was recently stunned by the Satyam scandal in India. The operating profit was overstated significantly, creating a fictitious US$1.1bil cash balance that underpinned the firm’s share price on three global exchanges. The scale, complexity and brazenness of the fraud has prompted comparisons with Enron.

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The investing public was outraged that regulators took so long to act against the company, and sold down the stock very aggressively. The authorities in India have had to take a tough stance in proceeding with this case.

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The long-term impact on the Indian outsourcing business may be severe if the rest of the world is not convinced of the reliability of Indian companies’ financial information.

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Entire sectors – indeed national capital markets – can be affected by the failure of the members of one particular board of directors to do their jobs well. It is vital that the authorities around the globe encourage corporate reform by implementing measures to reinforce transparency.

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Since the scandal initially broke, the authorities have replaced the entire board of Satyam, and both the chairman and chief executive officer are in jail waiting for trial.

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In Malaysia, the media highlighted a scandal that involved a number of issues in Port Klang Free Zone.

 

PriceWaterhouse Coopers (PwC) was engaged to investigate and we have recently seen the release of the report.

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Clearly, this will be a case study on public governance for some time to come.

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Various media reports have pointed out alleged conflicts of interest at varying levels. Authority limits, procurement issues and abuses of power apparently have taken place at enormous financial expense. One has to wonder if the authorities will act swiftly and do what is necessary to reassure stakeholders that action is being taken and transparency is being pursued at all costs.

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Refreshingly – and clearly a step in the right direction – stakeholders are now able to debate the details of the PwC findings of this issue.

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The easiest path would have been to not release the findings of the report. Yet, as we are clearly on the road to greater transparency, it is now available for discussion and perhaps legal recourse.

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Stakeholders in Malaysia will demand recourse equivalent to that meted out to the Satyam board members, and will sell down as they did with the Satyam stock if they are not satisfied that transparency is being pursued.

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Inappropriate behaviour does happen all over the world. Just take a look at what has happened in Britain with the member of parliaments. But for younger nations like us, being able to open up, admit that things are not always correct and pursue corrective action, is an enormous step in the right direction.