Address by Richard Joseph on Financial Impropriety, to the British-Caribbean Chamber of Commerce

ADDRESS BY RICHARD JOSEPH, CHAIR, TRINIDAD AND TOBAGO TRANSPARENCY INSTITUTE TO THE BRITISH- CARIBBEAN CHAMBER OF COMMERCE MEETING “TRINIDAD & TOBAGO – PROSPECTS FOR 2010 – MAKE OR BREAK?

November 30, 2010

FINANCIAL IMPROPRIETY – THE IMPACT ON LEGITIMATE BUSINESSES

The term ‘Financial impropriety’ has a genteel ring to it. It sounds like an understandable lapse or mistake probably caused by circumstances; something that if the person involved is appropriately contrite can be forgiven and forgot.

Financial impropriety is associated with executives, managers and other persons in high responsibility. When found out it is resolved in private with a dismissal and where possible restitution. Taking legal action could be complex and expensive, and often embarrassing to connected colleagues in the executive suite. Similar actions carried out by persons lower down the organisation would probably elicit a fraud investigation and the police!

Transparency International defines corruption as “the abuse of entrusted power for private gain.” Financial impropriety falls directly under this definition as in normally involves the misuse or misappropriation of funds belonging to an entity by persons with authority and discretion over the use o those funds.

The primary victims of financial impropriety are normally seen as companies and organisations. People seem to have a more relaxed attitude to crime when the victim is a faceless company or organisation,
rather than when the victims are people who have an emotional response.

According to the Economist newspaper, “the hidden costs of corruption are almost always much higher than companies imagine.” More damaging than the financial loss is the damage to the organisational culture. An organisational culture is set by the “tone at the top’, meaning how senior executives conduct themselves and discharge their responsibilities. As we say in Trinidad and Tobago: “goats cannot make sheep”. If there is a perception that the senior executives engage in or overlook financial impropriety, junior staff takes this as a signal for them to engage in similar practices. The knock on effect of this is a culture that:

• Allows cutting of corners and shoddy work, ultimately leading to poor products and services.

• Demotivates persons of competence and integrity who could make a positive contribution to the company.

• Deters potentially high quality recruits from seeking employment in the company.

• Deters high quality business partners from establishing relationships, or increases the cost of doing business with them.

• Experiences high levels of employee non-conformance in the areas of attendance, timekeeping and adherence to safety procedures.

All of these factors erode the pillars of business success and lead to poor performance and possibly closure. While the company continues to survive it causes distortion in the marketplace due to unfair competition, and impacts on the efficiency of the sector in the economy.
Quite often the secondary victims of financial impropriety are unseen. They may be customers or employees who might be denied a fair service or reward. They might be creditors going unpaid with a ripple effect n the company. They might be children denied a proper education, sick denied proper health care or a wider population denied proper infrastructure. There are recent allegations that financial improprieties at a major financial institution has exposed thousands of people in the Caribbean to loss of pensions and life savings.

Private sector corruption is now engaging the increased attention from local and international security agencies. It is seen as having strong links to terrorism and money laundering. No doubt it is attracting a lot of wiretapping and similar covert activity.

Global competitiveness has no space for the inefficiencies caused by financial impropriety and corporate corruption. Companies that wish to be efficient and competitive in the future see a strong business case for the introduction of structured programs to support ethical behaviour in companies whatever the size. These programs should be more than vague encouragements to be honest, and should be based on clearly articulated values that are linked to the overall vision and mission of the company. The Manual of Business Ethics for Small and Medium Sized Enterprises prepared by the Inter-American Investment Corporation and the US Department of Commerce describes the following benefits among others from introducing a business ethics programme:

• Enhanced Reputation and Goodwill: A reputation for integrity is important for securing the loyalty of customers, for recruiting and training the best staff, for winning community acceptance and accessing bank and supplier credit.
Risk reduction: The process of developing a business ethics program involves the company in identifying and assessing the factors that could pose risks to reputation and financial performance, and developing and implementing the business processes that reduce those risks.
Reduced costs: Providing employees with clear guidelines of how to conduct day to day business such as how and when to obtain quotations, how to carry out tenders, how to conclude contracts and how to avoid conflicts of interest can reduce transaction costs and improve the supply chain function.
Protection from Unethical Employees: A program would include clear guidance in respect of the misappropriation and unauthorised use of company resources, and the consequences that could flow from violations, information that employees with undeveloped values may not fully appreciate.

The methodology of the implementation of the program at the company level is very similar to that of an ISO series business process implementation. There is also considerable overlap with the introduction of a strategic plan if one has not been done before. First, a diagnostic assessment (gap analysis) is performed of the current state of the company. An Ethics Program, a Business Code of Conduct Manual, and an Ethics Reporting Mechanism is then prepared based on the results of the assessments and the requirements of best practice. Company staff is trained to implement the business ethics program while collateral support components are being prepared. These components include a communications strategy and materiel, and a monitoring and evaluation element.
Companies that wish to avoid and minimise the risk of financial impropriety should deliberately develop a culture which would strongly discourage that type of behaviour.

I would like to thank the British-Caribbean Chamber of Commerce for allowing me the opportunity to offer these views, and I look forward to a rich exchange of ideas.

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