When it comes to thinking about organisational crime, directors need to change their mindset, says soon-to-exit Serious Fraud Office (SFO) boss Adam Feeley. He’s genuinely nonplussed by board attitudes and ambivalence about treating fraud and corruption as governance priority.
Despite the recent spectacle of the collapse of almost all the country’s finance companies, fraud and corruption is hardly on their radar, he muses. How can that be when corporate crime threatens to “cost their organisations great deal of money” on the one hand and, could “get them into heaps of personal hot water” on the other, he asks?
Notwithstanding disturbing statistics and plethora of anecdotal evidence that there’s more corporate crime about, New Zealand’s listed companies and organisations think they are bullet proof. “Whether it’s internally or externally hatched, crime costs,” says Feeley. “And why is ignoring the prospect that it could negatively impact the bottom line any less strategy than implementing new business growth plan to enhance profitability? It doesn’t make sense.”
Most boards ignore what Feeley sees as growing problem. Directors think their internal processes will deal with it. “Saying ‘we have processes’ is such an inane comment,” he says. “And we hear that rationale time and again. In any large scale fraud, be it Enron, Libor or anything else, the organisations defrauded all had processes. Processes count for very little when faced with determined fraudsters – internal or external.
“Boards need to acknowledge that financial crime and corruption is daily occurrence in every industry sector. Directors should ask themselves how they can be sure their business is not somewhere, somehow exposed to or involved in it. And that’s about board ethics, organisational culture and commitment to tackling the problem differently and seriously,” he adds.
Fraud barometer
Earlier this year, global consultancy KPMG released its latest fraud barometer. It showed the value of local fraud cases climbed almost $80 million to $279 million last year. Admittedly most of the increase involved fraud against financial institutions, including some very large ones.
“Fact is,” says Feeley, “businesses’ increasing complexities, speed and exposure to external markets are collectively changing the ball game. Directors should be changing their practices and priorities to reflect the impacts of these changes. New Zealand’s board practices are shaped by, and based on historical perceptions that are no longer relevant. History provides no guarantees or guidelines by which to measure future corruption trends,” he adds.
“Crime, fraud, corruption, call it what you will, is growing part of organisational reality. We are socially, ethnically and financially – in terms of rich and poor in our society – very different country than we were few years ago and, particularly since the global financial crisis [GFC].”
Feeley is involved in organising meeting of global law enforcement agencies in the United Kingdom before he leaves the SFO. “We need to work more closely with the world’s law enforcers – there are so many cross-border contacts now. And the legal framework in our jurisdictions is not as good as the operational network that we can create,” he says.
Boards need to determine and articulate their organisational ethics and values. Companies are inanimate but in reality they reflect people that represent them, says Feeley. Boards don’t, in his opinion, seem to put much effort into deciding their values. Even when they agree on values-driven approach they fail to “operationalise” those values.
Principles and values
“It is not enough to sit around the board table and say: ‘we agree that we’ll do business fairly and lawfully, we’ll be ethical and we are good people and our staff understand that and it will happen’ – it doesn’t,” he says. “Employees don’t necessarily share their directors’ values. So directors and senior management must clearly state the values and everyone on the payroll must know that, while they are at work, those values apply. The principles and values must be clearly stated, put in place and enforced.”
That doesn’t often happen in New Zealand. For example, only 44 percent of the top 50 NZX companies have formal policies prohibiting bribery. Only 18 percent have policies on regulating facilitating payments. By contrast, 72 percent of UK’s top 100 companies by market capitalisation have explicitly prohibited giving and receiving bribes. In Europe it’s 57 percent and in the US 69 percent.
Only 16 percent of NZX companies have code of ethics that is rated ‘Advanced’ by Corporate Analysis. Enhanced Responsibility (CAER), the Australia-based centre for ethical research.
“It may be cliché, but the tone at the top [of business] is not good in New Zealand,” according to Feeley. In his opinion the tone set by directors who overtly live their organisational values is fundamental to good governance and building values-based organisational culture.
There are, says Feeley, fundamental misconceptions about New Zealand’s ranking as one of the world’s least corrupt countries. And that “incorrect” perception is, he thinks, part of the reason directors feel so smug about resisting formalised anti-corruption and values-based corporate policies.
He dismisses the value of the emphasis placed on Transparency International’s Corruption Perceptions Index (CPI) that ranks New Zealand as the world’s least corrupt nation. “All that survey tells us is how people feel about life here. How they feel and what is actually happening are quite different things. The CPI is nothing more than perception.”
Corruption free?
Feeley points to recently completed SFO survey to support his argument. The survey of around 800 randomly chosen New Zealanders found that more of us think we have fraud and corruption problem than don’t.
“This independent and valid survey on corruption says that perceptions about our corruption-free society are wrong and that New Zealanders do not, indeed, have that perception of their country.
“According to our survey, only 37 percent of us think New Zealand is ‘largely free’ of serious fraud and corruption. In other words, 63 percent don’t think this country is ‘largely free’ of serious fraud and corruption. And 50 percent of the respondents think New Zealand is safe place in which to invest while 60 percent don’t think those who commit financial crime are held to account.”
Feeley’s work-life experiences and three-year stint heading the SFO have together provided him with all the evidence he needs to claim emphatically that corporate crime and corruption is alive and well and growing rapidly in both incidence and scale in New Zealand. Meanwhile, like Nero, directors fiddle with the facts, allowing them to feel comfortable in the belief that they won’t get burned.
“We are conditioned, in part by the media, to believe that we live in cosy and comfortable corner of the world. Law enforcement simply can’t operate on that assumption,” he says. Boards and politicians need to accept that both the New Zealand private and public sectors are increasingly:
• influenced by transnational organised crime
• dependent on local companies that trade internationally
• confronted by rising social inequity
• demographically more diverse, fragmented and values conflicted.
Governance reform
Feeley, on the other hand, is heartened by conversations he’s been having with the Institute of Directors. “We are talking about changes. I’ve been invited to speak to IoD branch meetings around the country. We are also pleased by some of the media comments IoD has made about directors who have been found wanting in some of the finance company trials,” he adds.
He thinks the IoD should become more profession-based, rather than membership-driven, society. He thinks it should be harder to become director and easier to toss unprofessional practitioners o
