Examination of Witnesses (Questions 420
- 439)
TUESDAY 9 JANUARY 2001
MR DAVID
PHILLIPS, MR
IAN WHITE,
DR REG
HINKLEY, MR
MIKE WELTON,
MR STEPHEN
WILLIAMS AND
MR JOHN
BRAY
420. And you have done in the past?
(Dr Hinkley) Yes, we have done that in the past.
Chairman
421. Can you tell me would it be helpful and
are you pursuing international agreements on these corrupt practices
which would help you and other companies? We are talking about
a whole range of companies. Would it help you to develop some
kind of international anti-corruption standard which all companies
applied and all governments are supposed to apply as well to which
you could make reference when dealing with subcontractors and
insist that they apply it?
(Dr Hinkley) You asked a number of questions there.
First of all, are we actively pursuing, I think the answer to
that currently is no. Do we think it would be helpful to have
common standards, the answer is yes, I think there are advantages
in having common standards. We work very much within the Foreign
Corrupt Practices Act. A large part of our business—
422. In the States you mean?
(Dr Hinkley) In the States, yes. A large part of our
business is in the States and we have a heritage through our mergers
and so on where many of our staff, and indeed our activities,
have been derived, if you like, from US led organisations. We
have generally found that Act to be a helpful point of reference.
Looking more broadly, the things that stand out, I think, are
that it is helpful to industry to have as much commonality as
we can rather than different forms of requirement running across
different jurisdictions. The more we can standardise, the more
helpful. The other issue is really around enforcement and compliance
issues.
423. Yes, enforcement is very difficult.
(Dr Hinkley) Clearly we do not want compliance and
enforcement issues to be unduly onerous in relation to the problems
they are addressing. That is another issue for us. I think those
are practical questions that can be considered in the context
of specific discussions about the issues. The matter of principle,
I think, is generally helpful.
Chairman: We must hurry on. Can we look
at Unilever.
Mr Colman
424. The question is mainly to Mr Williams.
In your written evidence to us in section six, "Ceasing to
do business", you mentioned our interest in your actions
in Bulgaria in March 1997 when you closed your representative
office and ceased to do business there and you stated that you
would be happy to explain why you did this in more detail. Could
you take this opportunity to do that.
(Mr Williams) Yes. Just a few words first of all about
the representative office system that was in operation there.
We have been operating in Bulgaria through a rep office for some
time, about a dozen or so salesmen and merchandisers. The principle
of the rep office runs as follows: the goods are ordered from
one of our operations outside of Bulgaria, in this case it was
Hungary, and the whole transaction, which is transport, customs
clearance, payment of duties, VAT, storage, distribution, etc.,
is carried out by the distributor who is ordering it in the country.
The role of the rep office is to be at the other end, at the consumer
end, which is to spend money on advertising, to stimulate demand.
So, if you like, we are at two ends of the see-saw and the fulcrum
in the middle is the distributor. So we are manufacturing in country
X, in this case Hungary, we are stimulating demand, advertising
it in the marketplace stimulated at the receiving end, the distributor
is the middle man all the way through. What happened here was
we became aware that the prices being charged for our merchandise
by the distributor, and ultimately on the shelves in the shops,
was such, and we knew from the price we were charging the distributor
that the import duties could not have been properly paid on these
products. That is, the middle part of the transaction was by whatever
means not being honoured by the distributor, he was breaking the
law, he was obviously engaged in illegal activities. We felt,
and this was the subject of considerable alarm, the business group
president felt, supported by the board, that he did not want to
be party to a business system that was, if you like, corrupted
in that fashion. He felt, and we felt, that being at the front
end and the back end of this transaction did not exonerate us
from ownership of it, albeit that the middle part was being undertaken
by a third party where the problem was. There were some discussions,
believe it or not, with one or two senior ministers in the country
about this who at the time showed a rather world weary approach
to the matter.
Chairman
425. An interesting term, "world weary".
(Mr Williams) In the absence of any support from central
government we decided we could not tolerate this any longer and
we pulled out of the operation in Bulgaria in totality. A similar
action was taken in the Ukraine shortly thereafter. We are now
back in Bulgaria. Three years have passed and the regime has changed.
In fact, there was a little ceremony when we went back in there
with an on-site operation and Prince Charles was there and the
Deputy Prime Minister and one thing and another. We are now operating
in Bulgaria because a number of things have happened. The regime
is different, we have a regime that we can deal with, and is an
uncorrupted regime. The duty situation is different, it is now
part of the Eastern European Economic Co-operation area, therefore
the duty differences that gave this step that people were not
willing to pay, or were seeking to avoid, has gone, so if you
like the opportunity for dodging for an advantage has gone. We
are now back there. Interestingly enough, and maybe this is a
bit of a case study, I do not want to strike any note of sanctimony
about this because there is no reason to be complacent in this
area anywhere, there are a number of initiatives in Bulgaria in
terms of overseas companies in conjunction with the Bulgarian
Government now in terms of cleaning up the terms of trade in Bulgaria.
I cannot help thinking that perhaps in some modest way our withdrawal
helped stimulate the interest of a new regime, of a new government,
in actually having a transparent and a clean business environment.
It is a story with a happy ending.
426. When you withdrew in March 1997 did you
seek to persuade other multinationals, who I assume were operating
under a similar situation, to join you and thereby bring pressure
to bear, as it were, on the Bulgarian Government?
(Mr Williams) I cannot say that we did. I would hope
that maybe we did locally but I do not know that we did. I do
know that some of our competitors stayed on and made their own
accommodation, who knows.
427. Can I ask whether BP or Balfour Beatty
have had the same experience or Crown Agents in Bulgaria?
(Dr Hinkley) We have not had that experience.
(Mr Welton) We have not.
(Mr Phillips) Our exposure would be only on donor-funded
contracts.
(Mr Bray) We have very limited operations in Bulgaria
but we would say it is a particularly difficult environment in
which to operate. As a company we have never had an office in
Bulgaria.
428. Did you work with local organisations within
Bulgaria? You mentioned you spoke to the ministers and they were
world weary in your words. Did you work through a local chapter
of Transparency International in Bulgaria?
(Mr Williams) No, we did not. From what I have learned
of Transparency International, from reading the submissions to
this Committee, I must say that at another time in another place
one certainly would. At the time, in so far as I was involved
in that situation, I was not aware of Transparency International
although I do understand that we know them around the world.
429. How do Unilever use the experience of this
corporate governance in working with companies in developing countries?
BP has been pressed by Mr Robathan in terms of what they do, working
with joint ventures and other organisations where they operate.
Do Unilever have similar arrangements that they enter into in
terms of ensuring that their standards, Unilever standards, of
corporate governance are maintained?
(Mr Williams) Yes, we do. One of the areas where we
can be undone in terms of one's way of doing business is when
you are venturing with other parties. Our own Code is rigorous,
and can be something of a nuisance sometimes, in ensuring and
requiring that Unilever's principles are honoured by its joint
venture partners and we will not enter into arrangements with
companies or organisations if we have suspicions that their practice
is not the same as ours. We would leave if, through our management
involvement, we became aware of any practices that would infringe
our own Code, otherwise the thing is a hollow vessel.
430. It is a zero tolerance approach, is it?
(Mr Williams) Yes, just as it would be for our own
employees, there is no difference.
431. You do not keep a sort of scorecard which
says if it does not get up to this level we will continue working
in this country and working with companies in this country but
if it goes above that then we will withdraw?
(Mr Williams) It is a zero tolerance level in terms
of joint venture partners, that is absolutely right. One thing
I would say about our withdrawal from Bulgaria is, as I made clear,
we had an operation there but it was not a hugely extensive operation,
we were not responsible for a thousand employees. I was trying
to rationalise this in my own mind. One of our chairmen in a speech
a couple of years ago put it rather well, that we have a way of
doing business and only if we find that we are in a situation
whereby we cannot survive by applying our way of doing business
would we withdraw, as was the case in the Bulgarian example because
the whole business system was utterly undermined. Absent the business
system being undermined there is a nice balance to draw. We would
not withdraw, we would apply our own principles and stagger on
but it means you are missing opportunities and it costs you money
and you are at a disadvantage sometimes in corrupt environments.
We would not withdraw lightly. I think Transparency International
in their submission said that it was an in extremis remedy. I
think you do have obligations to your own staff that you do not
reach for the withdrawal lever too readily, but equally by the
same token you do not cease to apply your own rules, you simply
have to do business your way no matter how disadvantageous it
might be in a particular situation. You go on doing business your
way.
432. Do you have key criteria indicators that
you use to determine the level of corruption in a country? You
read out a list of countries where people have been dismissed.
There were some very interesting countries, obviously. Are you
keeping a scorecard?
(Mr Williams) We are acutely aware of the difficulties
and the risks that our business faces in many environments. There
is not a thermometer in the sense of what countries are unacceptable
and what countries are acceptable. The test for us is can we do
business in accordance with our own principles in that environment.
If we cannot, we will leave it. If we can, no matter that we do
it less efficiently, we are there for the long term. We believe
that in due course this problem will be eradicated. Companies
have a role to play in that, we discussed it earlier on. We are
there for the long haul. It would be naive to say that we do not
know that in many countries we have to have our guard much more
firmly up than others.
433. You mentioned you went back into Bulgaria
because of the change of government. Did the same thing happen
in the Ukraine? You were talking about withdrawing, I think, from
the Ukraine.
(Mr Williams) At the moment I do not think we have
any operation in the Ukraine. I am sure we do not.
434. Because of the high level of corruption.
(Mr Williams) Yes.
435. What would you wish to see, if you saw
yourself going back into the Ukraine, what are the determinants
you believe you would need to see in order to decide to go back?
(Mr Williams) Directionally, from my particular position
in the organisation, one of the things which matters most to me
is some form of the rule of commercial law, that if you strike
a bargain, you have some reasonable prospect of a forum where
it can be enforced. In some of these countries in the last 10
or 15 years there really was no forum, no matter how even handed
that forum might prove to be.
Chairman
436. You are talking about the rule of law being
the administer of justice not just theoretically in place?
(Mr Williams) Indeed. If the practice of commercial
activity is the making and performing of contracts, if the contracts
are resting on nothing then you really are in a remarkable environment.
It makes life very difficult for businesses and it makes life
difficult to operate in accordance with our own precepts. That
is a bright light for me in my personal role in the company.
Chairman: Now we are going to move quickly
to ask the Control Risks Group some questions and Andrew Robathan
is going to ask those.
Mr Robathan
437. Mr Bray, if you are doing a risk analysis
of a country
where corruption is endemic how do you assess
the comparative level of risk in that country? At the same time
presumably if you were doing it for a company do you assess the
ability of the company to withstand the pitfalls surrounding corruption,
whether it has the right controls and checks and balances in place?
(Mr Bray) First of all, on the country, the kinds
of issues we would look at are the ones we have mentioned, the
possibilities of commercial law, putting it rather more broadly,
the institutions and especially the checks and balances. So among
the checks and balances we would look at the judiciary, but we
would also look at civil society, the role of the press, whether
there is a legitimately recognised opposition. Those things are
all important indicators. If we were doing a project for a particular
company we would want to look at the vulnerability first of the
industry. As we have indicated already some industries are more
at risk than others. Yes, we could and indeed do—and this
is another department rather than mine in another area of expertise—look
at companies and take a view on whether the controls are effective
or not. A colleague of mine has a phrase which I have been repeating
which is "control delusion", the idea being the companies
have controls and they may put more faith in them than they deserve.
He would look at them with a cynical "poacher" type
eye to see whether they would really stand up.
438. Turning to foreign direct investment, apparently
UK-based companies rank corruption as the greatest barrier to
foreign direct investment above such things as lack of infrastructure
and political instability. Indeed bribery and extortion were ranked
as the factors with the greatest negative impact on investment
by multinational companies. Given that, are there examples that
you know of where a country has successfully tackled corruption
and seen an increase in foreign direct investment?
(Mr Bray) Unfortunately these things are always an
ongoing battle but within South America, for example, I understand
that Chile has a better reputation than most as a destination
for foreign direct investment and relative transparency and strength
of institutions is quoted as a reason for that. In Africa, Uganda.
I am afraid its reputation has gone up and down again but Uganda
is still regarded as better than many of its competitors and its
efforts to address corruption were seen as one of the reasons
for that. Yes, we do believe it makes a difference in what actually
happens in terms of investment flows. Perhaps I can add, there
is some more technical analysis which is being done in America
by a man based in Harvard, now on secondment to the World Bank,
which seeks to demonstrate this empirically. What he argues is
that levels of corruption have a similar effect as levels of tax,
so where the levels of corruption increase, the levels of investment
go down, rather as they would if levels of tax were increasing.
Chairman
439. Can I ask others on the panel whether levels
of corruption in a country are a deterrent as to whether or not
you will invest and do business in that country? Is that an important
factor in your decisions?
(Dr Hinkley) Yes. We, like a lot of other companies,
do undertake a comprehensive risk analysis of entering a country
or, indeed, making major new investments. In fact, our policies
are one of the yardsticks which we use in that risk assessment.
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