The Wall Street Journal reports that Oracle is under investigation by the US Department of Justice, the SEC and the FBI for bribery in West and Central Africa. Oracle could face stiff penalties of up to $2 million per incident under the US Foreign Corrupt Practices Act which makes it illegal to bribe a government official anywhere in the world. In 2008 Siemens settled its FCPA case with the Feds for an unprecedented $1.6 billion in fines and disgorgement of profits. Expect Oracle to cooperate fully and quickly with investigators because Federal sentencing guidelines allow for a reduction in penalties in the event of wrong doing if the firm can demonstrate the incident was an anomaly and that it gnerally has an effective compliance and ethics program in place. But avoiding a fine maybe only half the battle. The biggest bottom line impact could be the potential loss of business upon conviction if Oracle is banned from public sector contracting in many countries. Such was the fate of Siemens.
Important to note we just don't know the scale of the alleged offences under investigation nor the strength of the government's case at this point in time. However, we do know a bit more about the broader scale of the corruption problem in Africa and its consequences. Take Oracle's West Africa base Cote d'Ivoire - it ranks an alarming 146th as one of the most corrupt countries on earth in the Transparency International Corruption Perception Index , life expectancy is a miserable 58 years with an average of 3.3 years of education provision and 23% of the population living on less than $1.25 per day. In fact, Larry Ellison's personal net worth of $39.5 billion according to Forbes exceeds Cote d'Ivoire's GNP of $34.5 billion as estimated by the World Bank. Clearly, West African countries such as Cote d'Ivoire are economically vulnerable and create a vortex of social pressure for anyone doing business there. Under conditions of weak local enforcement and weak internal controls, companies can equally be pressured to succumb to the apparent norm of bribing (demand) or they can take their own permission to do so (supply). The results can be tragic as the German Ministry for International development puts it:
- Corruption is one cause of poverty. It impedes poverty reduction.
- Poverty is one cause of corruption. It impedes the fight against corruption.
News of the investigation comes after a run of high profile challenges to Oracle's reputation including removal from the Nasdaq OMX Sustainability index for lack of sustainability reporting, removal from the FTSE4Good Index for lack of Human Rights protections and a hostile shareholder resolution demanding a board sub committee for sustainability to ensure Oracle 'walks its talk' on sustainability. However, the issues at stake here can in no way be isolated to Oracle. In fact, HP is currently under investigation for alleged bribery in Russia and IBM settled its FCPA case earlier this year for $10 million. IBM was accused of bribing for business in China and Korea and was found by the SEC to have had 'deficient internal controls'. According to FTSE4Good criteria the entire tech industry, if engaged in public contracting in high risk countries, must be rated as high risk for bribery. The leading NGO/ think tank on the issue, Transparency International describes the problem of public contracting in high risk countries in its most recent annual report:
The enormous amounts of money flowing from government budgets through procurement create ideal opportunities for corruption. Contracts can be awarded without fair competition and politically connected companies can be favoured over competitors. Companies within the same industry can rig their bids, so each company gets a piece of the pie. Our research shows that corruption can add on as much as 50 per cent of a contract’s value. Corruption in public procurement is not just about money though, it can cost lives. Incidences of collapsed buildings and counterfeit medicines have happened in many countries.
The curious thing about the tech sector's vulnerability to the risk of corruption is that of late it has celebrated the motherhood and apple pie virtues of sustainability for value creation. Its hard then to square up the problems at IBM, HP and Oracle with the promise of a Smarter Planet, A Connected World and an Eco Enterprise respectively. In recent years sustainability has become something of a gold rush though innovators would do well to remember to also take care of the basic hygiene factors. Recently Harvard's Michael Porter has led the charge with his idea of Creating Shared Value (CSV) - a sort of reformed Economic Value Added doctrine for the new age. But the ever brilliant John Elkington, father of sustainability accounting, challenged Porter on the importance of first principles:
Michael Porter has made immense contributions in such fields as the five-forces and business-cluster theory, but we should honour – not diss – the work of the pioneers who opened up the new social and environmental horizons, even as we begin to build new, more opportunity-based approaches. Aiming for a target no-one else can yet see doesn't mean that we have to kick over visible targets designed for those still trying to improve their aim. Recognise, too, that CSV is unlikely to pick up some of the really thorny Corporate Social Responsibility (CSR) issues, including human rights or bribery and corruption, and – in that context – we should beware of kicking out the bottom rungs of the evolutionary ladder just as emerging market companies are waking up to CSR.