Business scandals

We take a look at what recent business scandals tell us about today’s business expectations, and the practical systems and practices that are now considered necessary to be implemented

Walmart and Hewlett-Packard are just two of the stellar names in business to have found themselves at the heart of major scandals in recent times.

In 2014, computing multinational Hewlett-Packard was forced to pay US regulators £65m to settle a corruption scandal involving employees at subsidiaries in three countries, charged with bribing government officials to win and keep lucrative public contracts.

Corruption was unearthed in connection with contracts worth £24m to install IT equipment at the national police headquarters in Poland, £28m of work for government prosecutors in Russia and a deal to supply Mexico's state-owned petroleum company.

The investigation involved regulators in Poland and Germany, as well as in the US where the Department of Justice, Securities and Exchange Commission and the FBI were all brought in.

Kara Brockmeyer, head of the SEC enforcement division, said: 'Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company's books and records reflected the payments as legitimate commissions and expenses.

'Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.'

Walmart Mexico

In 2012, accusations of widespread bribery surfaced from within retail giant Walmart’s Mexican operation Walmart de México, accusations that drew a raft of investor lawsuits and a US government investigation into the company’s global operations.

The Times newspaper reported that Walmart consistently bribed public officials in Mexico in order to receive building permits to speed up expansion work.

Following the emergence of the scandal, a large number of executives from Walmart’s management holding critical positions have left the company.

Walmart has also spent close to £300m dealing with the matter, including the investigation itself and overhauling its compliance structure, while the number of compliance staff has grown by 30% to 2,000.

Other changes include a mandate that any potential foreign corruption violations must be reported to corporate headquarters and the board – as a result, it is likely to be harder for senior executives to plead ignorance in future.

Walmart’s new system means that any potential corruption should be reported to the board’s audit committee, whose outside counsel is tasked with investigating accusations.

Internal relations

While critics suggest the new oversight structure lacks independence and is 'window dressing', both of these major scandals highlight how – in today’s business world – it is becoming clear that the relationship between a board and management should be a two-way commitment.

CEOs and senior management need to communicate with the board regarding the real state of affairs within their company – without spin. If a CEO manages the board or holds cards too close to his own chest, this will inevitably cause problems.

The board also needs to be the first to know when problems crop up, while management need to have systems, processes and incentives that encourage full transparency and reporting, right up to the board and committees. This was clearly a major problem at the heart of the Walmart operation.

To do its job to the best of its ability, the board is entitled to attain any piece of information or have access to any member of staff. Management should support full information flow, including information that does not necessarily support the position of management.

Directors also need to be able to speak their mind in board meetings and not have hidden agendas, while the board should speak with one voice and not send mixed messages to management. Directors who undermine fellow directors or management without being direct can lack integrity.

As a result, it is important for directors to be able to 'disagree without being disagreeable'. At the same time, management is entitled to directors preserving their independence and not placing management in compromising positions. For example, directors who take consulting contracts with the company, holiday with senior management, accept jobs for family members or friends, and who have social relations, will inevitably have their independence muddied.

A board of directors should direct management in order to prevent the CEO from making any big mistakes; the board should be in charge at all times – and management should be constantly aware of this to avoid becoming involved in any future corporate scandal.

"Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf."

Kara Brockmeyer - SEC