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In some parts of the world, bribing government officials is still considered a normal cost of doing business. Elsewhere there has been a growing trend over the past 40 years to make it illegal for a corporation to pay bribes. In the United States, Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977 in the wake of a succession of revelations of companies paying off government officials to secure arms deals or favorable tax treatment. More recently other governments have implemented anticorruption statutes. The U.K., for instance, enacted the strict Bribery Act in 2010 to replace increasingly ineffective statutes dating back to 1879. The purpose of these actions is to enable ethical and law-abiding companies to compete on a level playing field with those that are neither. A cynic might wonder about the real, functional difference between, say, Wal-Mart’s recent payments to officials in Mexico to accelerate approval of building permits and the practice in New York City of having to engage expediters to ensure timely sign-offs on construction approval documents. No matter – the latter is legal (it’s a domestic issue, after all) while the former is not.
Moreover, the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have increased their oversight of bribery. At the beginning of 2013 they jointly issued the Resource Guide to the U.S. Foreign Corrupt Practices Act. For its part, the SEC has stepped up enforcement using its own resources. Recently, it charged a group of bond traders with enabling a Venezuelan finance official to embezzle millions of dollars by disguising the money as fees paid to the broker/dealer to handle apparently legitimate transactions. Tellingly, though, there was another relatively recent bribery issue that involved Morgan Stanley where the SEC declined to include that company in an enforcement action because it had demonstrated diligence to prevent it.
Before anticorruption laws, it was expedient for corporations to pay government officials to close business, get preferred status or prevent punishment. Once the laws were established, that stopped being the case. However, from a management standpoint, compliance with the law became complicated because of the dual nature of the corporation, which is both an entity and a group of individuals. In the case of the latter, when an individual breaks the law, is that person at fault, is the corporation or are both? Regardless of how a case is decided, there can be severe reputational damage to a company found violating the law, and that will have repercussions for corporate boards and executives.
This question leads to the agency dilemma, an important consideration in enterprise risk management. Economists long ago recognized the agency dilemma when the modern corporation separated the roles of its principals (that is, the shareholders) from its management. The agency issue exists where the best interests of the principals are either not aligned or in conflict with the interests of the agents (the professional managers running the corporation). But agency issues also extend to the company’s executives and may be rife in any large-scale business. Within the management group, authority to act independently is delegated down through the hierarchy, and the interests of the lower-level managers may be in conflict with those of senior executives, the board of directors and shareholders. For example, suppose that a local manager believes his performance evaluation, compensation and prospects for promotion hinge on the timely opening of a new facility. Confronted with a culture of payoffs for permits, that manager may try to find a way to pay officials for expedited consideration, especially if he is local to the area. From that individual’s perspective, corrupt activity may be the norm, and he may believe himself to be clever enough to violate company policy without detection.
It was once acceptable for a company to claim that it had a stated policy prohibiting bribery and that executives were ignorant of an employee’s actions. Absent proof to the contrary, that often was enough. However, the FCPA changed this norm, imposing the need for diligence and affirmative actions on the part of companies to prevent employees from breaking the law as well as to detect and report any such violations that do occur (which is how the Wal-Mart situation came to light). Public standards, too, have changed since the 1970s. Despite its self-disclosure after the fact and the steps it took to address the corrupt behavior, Wal-Mart suffered severe reputational damage. Yet even with the likelihood potential consequences, our benchmark research reveals that just 6 percent of companies have effective controls for managing reputational risk.
We assert that the most effective control is to prevent illegal activity from taking place at all. Short of that, companies that can demonstrate that they have taken all reasonable steps to prevent a violation of the law are in a better position to claim that the individual, not the company, is at fault.
An organization should have clearly articulated and documented antibribery and corruption policies and procedures, institute mandatory training of and signed acknowledgements of having taken it by executives and managers, and put in place incentives and disciplinary measures. However, these required measures are increasingly insufficient to demonstrate diligence in preventing corrupt activities. Companies also must have a software-supported internal control system that flags suspicious activity immediately and triggers a rigorous remediation process that analyzes, investigates and documents the disposition of each incident. Incidents that are detected long after their commission are more difficult to cope with and pose much higher legal, financial and reputational risk.
Software is available that helps detect activities that violate anticorruption laws and regulations as they occur or shortly thereafter; this is far more effective than waiting for internal audits or (worse still) whistleblowers to uncover malfeasance. To prevent violations of the FCPA and other antibribery statues, corporations must be able to monitor their financial and other systems for warning signs. These applications take advantage of operational intelligence, a class of analytical capabilities built on event-focused information-gathering that can uncover suspicious actions as they occur. Our research on innovating with operational intelligence shows that companies use an array of systems (led by IT systems management and major enterprise applications such as ERP and CRM) to track events, analyze them, report results and create alerts when conditions warrant them, as detailed in the related chart. The research also shows that about half (53%) use 11 or more information sources in implementing their operational intelligence efforts. In the future, effective FCPA software increasingly will need to look at a wider range of internal data as well as information from external sources and social media to determine, for example, whether a consulting company that just received a finder’s fee is run by or employs a relative of a government official. Today, companies can utilize software from large vendors such as IBM, Oracle and SAP, as well as vendors with FCPA-specific software such as Compliancy and Oversight Systems.
Bribery and corruption are unlikely to disappear entirely. Regardless of anyone’s best intentions, corporate boards and executives can find themselves enmeshed in a scandal not of their own devising. The best defense in such cases is plain evidence that the organization has done everything reasonable to prevent its occurrence and has discovered and dealt with it promptly if it does. Policies and training are vital components, but software can be the extra component necessary to improve the effectiveness of monitoring and auditing to support anticorruption efforts.
Robert Kugel – SVP Research
IBM this week announced its pending acquisition of the Star Analytics product portfolio. Star Analytics is a privately held company that offers products designed to provide easy access to and integration with Oracle Hyperion data sources. While Star Analytics has a good product and solid references, it has lacked critical mass to support more effective sales and marketing efforts. Star Analytics’ strategic value to IBM lies in its ability to unlock data held in Oracle Essbase multidimensional databases, which is the repository for applications such as Hyperion Enterprise, Financial Management and Planning. It supports IBM’s aim to offer comprehensive business analytics capabilities, which means it must be able to facilitate access to all data sources. Longer term, it enables IBM to compete with Oracle for finance department customers with IBM’s own financial performance management applications. Star Analytics gives IBM a means of fostering relationships with existing users of Hyperion applications and a more graceful migration path to using IBM’s financial, analytics and business intelligence software.
Finance organizations have been heavy users of Hyperion financial applications. While these applications are workhorses for important finance tasks, the information in their data stores has been difficult to access from outside of Hyperion environments. Larger companies often must try to knit together their complex applications and databases with hard-to-maintain custom integrations, or use spreadsheets to combine data from multiple sources. Since companies maintain a great deal of useful information, they wind up spending a considerable amount of time and effort working around accessibility issues. Star Analytics’ software helps companies make data much easier to integrate into financial information processes, enabling consolidated reporting and analytics that can accelerate the time it takes to assess overall financial results.
Larger companies that have significant, longstanding investments in Hyperion software often store a great deal of information in multidimensional databases (“cubes”) that serve as the foundation for their consolidation, reporting and planning software. These databases are extremely useful for analysis and reporting and are a considerable improvement over desktop spreadsheets for collaborative and repetitive tasks. Yet their utility is confined mainly to the needs of the finance department’s specific application because, in practice, it’s very difficult to extract the information contained in these databases into data warehouses accessible to the rest of the organization by using standard business intelligence (BI) tools. This is a serious ongoing problem. Today, to produce the kind of advanced analyses and reporting that generate deeper insight and more useful, effective business models, it is necessary to integrate financial and operational information. The operational data comes not only from a company’s ERP system but also supply chain and logistics systems, customer relationship management and other software that manages processes and tracks business performance. The finance department itself likely has multiple cubes in use, and the process of extracting data from them and synthesizing it into a report or analysis can be time-consuming.
To address these issues, Star Analytics developed the Star Integration Server so that companies that have Hyperion applications (Planning, Financial Management or custom-built software built on Essbase) can more easily extract information for wider use (say, in a company-wide data warehouse or financial data mart). All departments within a corporation can then use the data in their applications or analyses. They can create reports (using whatever reporting and analysis tools they currently use) that use this information in conjunction with operational data from other sources. Moreover, the software allows companies to bring together data from multiple cubes so that they can analyze and report on all of the information that is kept in these separate data stores. Finance departments in particular are able to consolidate and manage complex hierarchy structures in their cubes so that they can speed up processes such as business analyses, periodic reporting, forecasting and planning. The Integration Server also enables companies to pull out proprietary data structures, embedded calculations (such as allocations or ratio analyses), business rules (consolidation parameters), security protocols and supporting detail from Hyperion applications. The software can support the data volumes larger companies use, as well as ensure that data security protocols are observed. The Integration Server has native support for exporting to major relational databases such as IBM’s DB2, Oracle, Microsoft SQL Server, MySQL and Sybase.
The Star Command Center automates data movements, database consolidations and schedule-related processes, eliminating the need to devote IT resources to repetitive mechanical tasks. It is a far more comprehensive, flexible and easy-to-maintain alternative to the custom coding approach organizations often adopt to lash together their disparate applications and databases. It is designed for point-and-click simplicity so that it is usable by finance/IT-types, in contrast to other tools aimed at IT/data center professionals. The Command Center even enables integration between on-premises and cloud-based data sources, and can be accessed and operated via a mobile application.
Currently, most companies either extract information from their Oracle/Hyperion systems in a laborious and time-consuming fashion, or have consultants build custom solutions. Companies that use Oracle’s Financial Management, Planning, Enterprise or custom applications running on Essbase should make it easier to integrate data from these systems for broader business analytics purposes. Users of Star Analytics’ software can save considerable amounts of time in performing analyses and generating reports – in some cases going from days down to hours. This technology will help IBM enable its vision for finance that I outlined last year and help companies using Oracle to find value from existing investments. Since financial information is available quickly, the data can be used to do more rapid planning and analysis cycles or have management or financial reports available sooner. Moreover, unlocking financial and other information enables corporations to do more integrated business analysis, planning and reporting. Information that was once inaccessible can be readily available when it’s needed. Knowing more enables companies to do more.
Robert Kugel – SVP Research