Sunday, January 31, 2016

Two-Faced Compliance

In what you are about to read, the names have been changed.

Jonathan had just taken over as managing director for his multinational company's Thailand operations, where they were under pressure to finish constructing a new manufacturing facility. Sitting in his new office he met with his first visitor, who identified himself as one of Jonathan's "assistants" - a local who we'll call Kasem. 

"Good news!" reported Kasem. "The production equipment for the new facility has arrived from the German manufacturer. It is at the port now. I'll take a team down to pick it up."

Knowing that "facilitating payments" were often expected in such situations, Jonathan asked, "Will you be needing to make any kind of cash payment to the customs agent?"

Waving a hand to dismiss the concern, Kasem replied, "Oh, not to worry. I have a good relationship with the customs officer." And with that he turned and left.

Down at the port, Kasem approached the customs desk and inquired about the shipment. From the back, out came Pandit, his long-time "friend" at the customs office. Pandit explained that the shipment needed to be fully unpacked and checked against the manifest. "You see," he went on, "this will take a very long time. You might want to return some time next week."

Kasem countered, "Pandit, might there be some way that we could expedite the process? This shipment is very important to keeping us on schedule for opening the new facility."

Pandit feigned thinking for a moment, and then observed, "Well, that could be done, for a payment of 2000 Baht." (That would have been about $60 USD at the time.)

Kasem made the payment. It was, after all, within the guidelines of the company's policy on such payments at the time. And with that his team was allowed to leave with the shipment, still unopened.

Once back at the new facility, Kasem was surprised to see that the shipment contained an extra compressor that was not listed on the shipping manifest. That compressor was due to arrive in the next shipment. "This is excellent!" he stated to his team. "This will speed up our installation considerably!"

A week later, Kasem received another call from customs, informing him that the next shipment had arrived. So he headed down with his team to pick up this shipment. Checking in at the desk, Kasem was surprised to see a different customs agent, whom Kasem did not know, come out from the back. Again this agent explained that the clearing process would be long and laborious, and again Kasem suggested that perhaps some way could be found to speed up the process. To this the customs agent replied, "Yes, such a thing is possible, for a payment of 6000 Baht."

Appalled, Kasem exclaimed, "That is quite unreasonable! 2000 Baht is the customary amount. I refuse to even consider such an increase!"

The customs agent shrugged, and then instructed the customs officers to open the shipment and begin the long process of checking its contents against the manifest. Kasem waited, impatiently, until at some point the customs agent called him over: "Sir, your shipment cannot be cleared because the manifest is incorrect. It lists a compressor, but there is no compressor in this shipment." 

"Ah, not to worry," reassured Kasem. "You see, that must have been the second compressor included in our shipment received last week."

"May I please see the manifest from that shipment?" requested the agent. Upon reviewing the manifest, he observed, "There is no second compressor listed on this manifest. You clearly smuggled that compressor into the country. But I can overlook this problem, for a payment of 15,000 Baht."

Kasem lost his temper. He refused to pay and stormed back to the office, where he reported the incident to Jonathan. Hearing all that had gone on, Jonathan surmised "I'm glad you did not pay that unreasonable demand. Obviously we are not guilty of any offense!"

Then the phone rang; it was the company's legal department. Jonathan sat stunned at the news. The customs agent had reported his company to the authorities, who were charging them with smuggling. If convicted, he would do time and the company would be fined $50,000 USD!

At this point, Jonathan reported the incident to corporate, who advised him to comply with the authorities and pay the fine immediately. Apparently, it was certain that they would be found guilty either way, and have to pay the fine, but at least this way there would be no further delay and no chance of jail time for Jonathan.

Surprised? First let me assure you that the facts here are true. This incident here is the subject of a case study written by Professor Bruce McKern. The story illustrates the slippery slope involved when the norms of the "informal economy" run up against the rules and regulations of the "formal economy."

I've noticed that when telling this story to executives, they quickly fall into one of two groups. One group, the "holier than thous," are certain that this could never happen to them. As one particularly sacrosanct compliance officer once said regarding this incident, "This could never happen at our company. We've been trained!" The other group, the "realists," roll their eyes at the holier than thous. One such realist, reacting to the compliance officer, barked "well then I guess you'll never do business in most of the world!" Whichever of these groups includes you, please let me warn you not to miss the point here. And there are two ways to miss the point:

The sacrosanct: Acting holy won't help if you have people trying to make their performance review numbers in areas where facilitating payments are the norm. You've trained them, sure, but they still need to pay the rent.

The realist: There was a time when company policies (like the one above) would build in the guidelines of the "Foreign Corrupt Practices Act." (Essentially they would OK payments of small amounts paid to lower level employees to speed up services to which the firm was entitled.) But since the passage of the UK Bribery Act in 2010, even payments such as this may end up getting you in trouble. (And outsourcing to an agent may not help!) So even though much of the world still expects such payments, you could end up the loser if you (or your agent) make them.

The leadership lesson? Most companies still expect their managers to make their numbers. So while the compliance officers are making sure you're "trained," your incentive system still expects you to perform. This is two-faced compliance, where we say we comply and tell our managers to "behave," and then give them incentives to look the other way.

Today's managers are in the middle of an intersection where two worlds are colliding. If this describes you, be warned. If this describes your firm, what does that say about your leadership?


Thomas Fox has a practical guide to dealing with some of these issues.