Can A Case Be Made To Justify Corporate Bribery From The Corporation’s Perspective?

Imagine that you are the chief executive officer of a global energy corporation. You are attempting to secure a contract to drill for oil on the territory of an emerging African nation. If you believe that a bribe might help “facilitate” the securing of the contract, would you offer to pay one? And if so, how much would you offer?

That is the situation that Royal Dutch Shell (i.e. Shell Oil) and the Italian firm ENI faced in 2011 while they pursued drilling rights for an oil field in Nigeria named OPL 245. The field was believed to contain nine billion barrels of oil, valued at approximately $500 million.

The corporations paid $1.3 billion to the Nigerian government prior to securing the contract. In April 2017, the BBC reported that $466 million of this payment may have been diverted to the personal bank accounts of various politicians.

Two weeks ago, Italian prosecutors arrested 15 individuals in connection with the contracting process. One would think that it would be difficult for the individuals to justify the payment, wouldn’t it?

But let’s think about the situation from the contrarian perspective. What if such payments are legal activities in the emerging nation? What if other energy corporations, based in nations where such payments are commonplace, are ready and able to step in and develop the oil field? And what if these other corporations are already well established in the emerging nation?

If Shell and ENI didn’t decide to pay the $1.3 billion and then recoup the cost from the contract’s operating revenue, another company would have likely done so. The Chinese economy, for instance, has become the African continent’s largest economic partner. It supports many firms that can manage oil fields.

The question is not a simple one. Although some can certainly argue that bribery is a pernicious activity that must remain illegal, others can reply that the types of payments made by Shell and ENI are justified because they support the development of the Nigerian and European economies and societies. Without such payments from European firms, the Nigerian economy and society will simply become more interdependent on firms from societies where bribery is commonplace.

Incidentally, this is not an isolated case. Global energy corporations have grappled with such questions for decades. And several years ago, Michael Kraten (the author of this blog) developed a corporate training case with other professionals to address this issue amid other business concerns.

It’s called Save The Blue Frog, and it is available online at SaveTheBlueFrog.com. The case is named after a different issue that challenges global energy corporations; namely, the existence of an endangered species on the proposed oil field site.

If you’re feeling aghast at the very idea that bribery may be justifiable, you need not worry. At the moment, there are no significant initiatives underway to repeal the Foreign Corrupt Practices Act in the United States or similar laws elsewhere.

But you may wish to keep in mind that there are reasons why China has become Africa’s largest economic partner. In other words, there are costs to be paid — and opportunities to be lost — when a nation enacts laws that are based on moral codes of conduct.

Risk Management: Cubes To Doughnuts

Let’s imagine that your private equity fund is considering a long term investment in an American energy company that ships millions of barrels of crude oil through Philippine waters each year. When Filipino President Duterte unexpectedly calls American President Obama a “son of a whore” while promising to “continually engage China in a diplomatic dialogue rather than anger officials there,” do you change your mind about the investment opportunity?

Under normal circumstances, in order to make an informed decision, you would prepare a valuation analysis that compares the investment’s immediate cost against the present value of its future benefits. But how can you possibly assess its future benefits when massive uncertainty over President Duterte’s evolving foreign policy makes it impossible to render any predictions about the future?

For guidance in managing such risks, we generally turn to the Enterprise Risk Management (ERM) framework that is promulgated by the Committee Of Sponsoring Organizations (COSO) of the accounting profession. The current cube-shaped framework prescribes eight component activities for managing such risks, with Event Identification representing the first of its four central activities.

Indeed, one of the reasons for this framework’s enduring popularity is its reliance on the identification of clearly definable risk events. Thus, when a risk factor can be defined in terms of future discrete events, the COSO cube is a natural choice for risk managers.

Worried about the impact of potential hurricane damage on a waterside property, for instance? A hurricane is a future discrete event. It will either occur or not occur, and the consequences of its occurrence or non-occurrence are relatively easy to estimate. If a hurricane occurs, there will be massive losses. And if not, the status quo will continue unabated.

But what if a risk factor cannot be defined as a discrete event? What if the long term impact of a risk factor depends on slowly evolving circumstances that are extremely difficult to even define, let alone assess? Does COSO have a different framework for such factors?

Yes, it does. A new version of the framework is only available in a draft exposure format at the moment, but it is expected to be finalized shortly. It uses a doughnut symbol, instead of a cube. And although Risk Identification continues to represent an important underlying function of ERM, it no longer appears prominently on the face of its new framework.

Whereas the older cubic framework prescribes a list of eight rigidly defined and sequenced component activities, the newer circular doughnut framework relies on 23 broad principles like “Commitment to Integrity and Ethics” and “Develops Portfolio View.” So, with these two frameworks in mind, let’s think about the political risk that is challenging our private equity investor.

On the one hand, President Duterte’s colorful comments will undoubtedly impact the short term relationship between his nation and the United States. But on the other hand, this relationship will continue to evolve over time, and will be impacted by numerous unpredictable future circumstances. So even though President Duterte’s eventful actions can influence the future Filipino-American relationship, he cannot unilaterally determine it.

That’s why we need a doughnut shaped framework, with its 23 principles, to assess such complicated circumstances. Although the event-centric cubic framework is sufficient for more easily defined risks, the circular framework is required to analyze the complex risks that challenge us in our multi-dimensional environment.

A Holiday Gift From Mexico: Energy!

As Jose Feliciano’s classic song Feliz Navidad enters its fifth decade of holiday season popularity, people around the world are dashing from store to store, trying to find gifts for their family and friends.

There are times, though, when companies receive gifts too. As well as industries. And entire sectors of the global economy.

Last week, the Mexican government approved legislation that essentially delivered an attractive gift to the global energy industry. It’s quite possible that the gift will ultimately benefit the Mexican people, although one legislator literally stripped off his clothes in protest before voting against the measure.

The gift is a law that will permit private corporations around the world to develop Mexican energy resources, to own Mexican retail gasoline stations, and to operate other facilities and programs. For the past 75 years, prior to the law’s passage, the energy industry was a government monopoly led by the state owned Pemex.

For decades, the creation of Pemex was a source of immense national pride. During the Great Depression of the 1930s, Mexican oil workers went on strike against an array of foreign energy companies from the United States, Great Britain, and the Netherlands. President Cardenas, siding with the labor movement, seized all foreign energy assets and declared public ownership over them.

But over the ensuing decades, the often cash strapped Mexican government struggled to find the resources to maintain energy facilities and invest in new research and development activities. Mexico’s new conservative President, Enrique Pena Nieto, thus supported the drive to privatize his nation’s energy industry.

Congressman Antonio Garcia Conejo protested that the decision would strip the Mexican people of their natural resources; he literally stripped off his clothing on the floor of the legislature in protest. Nevertheless, the measure was signed into law last week.

Will the legislation prove to be effective? Will it benefit the Mexican people? Ironically, the answer to that question may not be determined by the global energy industry at all.

It is, indeed, likely that an infusion of private capital will lead to a wave of modernization and an increase in efficient energy production. And that, in turn, will likely generate more government revenue.

But in order to generate benefits for the Mexican people, the government will need to find a way to channel that revenue into programs that support social and economic growth at the grass roots level. In other words, the success of the privatization initiative will ultimately be determined by the capabilities of the government sector.

That’s quite ironic, isn’t it? Although the Mexican government is looking to the private sector to help the Mexican people, it will inevitably need to look to itself to ensure the success of the initiative.

Power Blackout: Mark Your Calendars!

Why do the managers and employees of our electrical energy companies always seem to be taken by surprise when catastrophic events black out the power grid?

In retrospect, so many of their improvised responses seem feckless. Who can forget the awkward attempts of the Japanese military to drop giant buckets of water from helicopters on the Fukushima nuclear power plants?

And what of Connecticut Governor Dan Malloy during the blizzard of Fall 2011? He demanded that utility executives meet their own self-defined deadline in the aftermath of the storm, and then reacted with frustration when they failed to do so.

If you have felt enraged by the inability of the power companies to plan for such events, you’ll be pleased to learn that they are taking steps to address these challenges. For instance, on November 13, the North American Electric Reliability Corporation (NERC) will conduct a simulation exercise called GridEx to practice its planned response to a massive cyber security attack.

Simulation exercises, of course, are not always constructive planning activities. Some of these protocols, such as the one that Tokyo’s Tama Zoo utilizes to practice its responses to dangerous animal escapes, have become exercises in silliness. But a serious simulation activity can help any organization identify weaknesses in its own emergency response plans.

In fact, the risk response planning process is a core activity of the COSO integrated framework of Enterprise Risk Management. It’s embedded in the front of COSO’s iconic cube as the fifth of eight core steps.

So on November 13, if you hear a news update about a power blackout, please don’t panic … it’s just a drill! And in fact, it will likely help the electrical energy companies respond to a crisis during the next monster storm.

Why Apple Vs. Exxon?

America’s largest corporations always pay close attention to their industry rivals. For instance, who can forget the riveting moment when Bill Gates and Steve Jobs clashed on stage over Apple’s Mac vs. PC ad campaign? Or the time when Exxon and Mobil, the two largest firms in the energy industry, decided to merge?

It’s less common, of course, when firms in different industries compete with each other. Nevertheless, Apple and Exxon are now doing so for the mantle of America’s most valuable company. A year ago, Apple astonished the capital markets by surging past Exxon to become #1 in terms of market capitalization. But just last week, Exxon returned the favor and passed a slumping Apple to regain the top spot.

On the one hand, the track records of these two companies can be attributed to the internal capabilities of the firms themselves. But on the other hand, these recent swings in market valuations also reveal something meaningful about the computer and energy industries.

A Pillar of Stability

Exxon Mobil is a venerable firm; it can trace its roots all the way back to 1870. That year, only a decade after Colonel Edwin Drake of the Seneca Oil Company launched the contemporary energy industry with the discovery of oil in Titusville, Pennsylvania, John D. Rockefeller incorporated the Standard Oil Company.

By 1890, just two decades after its incorporation, Standard Oil controlled almost 90% of all of the refined oil in the United States. When the Supreme Court declared the firm to be an “unreasonable” illegal monopoly in 1911, the firm was split into 33 distinct organizations. The two largest successor firms were Standard Oil of New Jersey and Standard Oil of New York; they respectively later evolved into Exxon and Mobil.

In other words, the firm now known as Exxon Mobil has existed (together or apart) as one of the largest firms in the world for well over a century. But what of Apple, the firm that it is now battling for the title of America’s most valuable corporation?

Continuous Reinvention

Apple Inc. did not even exist until Steve Jobs and his two partners formed the firm in the 1970s. Its first great burst of growth occurred in the 1980s, when its primary rival was IBM. In fact, its “1984” Super Bowl television commercial about its Big Blue adversary has become one of the most widely admired marketing events in contemporary business history.

Apple then experienced a period of decline during the 1990s; it came perilously close to filing for bankruptcy during the decade. Its most widely remembered event during this era was the announcement of a noteworthy $150 million investment in the weakened Apple by a dominant Microsoft, featuring a gigantic on-screen image of Bill Gates towering over an on-stage Steve Jobs.

Of course, Apple’s market valuation eventually surpassed Microsoft’s during the rise of today’s internet era. Apple has introduced one radically successful product innovation after another, while Microsoft continues to strive to design products and services that can compete in the evolving market.

Seismic Shifts

It may be inappropriate, however, to attribute changes in the recent fortunes of Apple and Microsoft to differences in the abilities of the organizations. After all, the computer industry is inherently prone to seismic shifts every twenty years or so.

For example, IBM’s decade of dominance in the 1960s coincided with the development of mainframe computers. But demand for computing power shifted dramatically towards desktop devices during the 1980s, enabling the emergence of Microsoft Corporation. Likewise, the growth of the internet during the 2000s then empowered the rejuvenation of Apple.

When an industry experiences an era of continuous transformation, its market leaders inevitably struggle to remain dominant against younger and nimbler competitors. In other words, their competitive strengths become weaknesses, and stability itself becomes a handicap.

The “New” Electric Car

The energy industry, on the other hand, has experienced stability for over a century. Most automobiles, for instance, have been powered by internal combustion engines throughout this entire period. And oil burner technology has not fundamentally evolved since M.A. Fessler and others developed the technology during the early 1900s.

Indeed, Standard Oil and its descendants have been the beneficiaries of a remarkable era of stability in the energy industry. Even our newest technologies, such as the electric automobile motors of the current century, can trace their ancestries to vehicles like the Davenport car of 1837, the Morrison automobile of the late 1800s, and the Columbia Mark Runabout of the early 1900s.

So if you feel inclined to marvel at the sustained track records of companies like Exxon Mobil or the volatile histories of firms like Apple and Microsoft, you might wish to avoid attributing all the credit (or blame) to the firms themselves. After all, they might merely be serving as the beneficiaries (or as the bearers of the burdens) of their respective industries.