Interesting article on McKinsey’s website called “Confronting corruption” – it seems tailor made for the current Brazilian news cycle.
How about avoiding corruption? It is impossible for a huge company to control every worker everywhere and all the time, right? Even Warren Buffett has said that “Berkshire has 300,000 employees and someone, somewhere is doing something wrong” (H/T: Mason Myers Blog).
I don’t disagree, but any company can mitigate the risk by avoiding incentive systems and a corporate culture that favors “shortcuts”. I had posted twice about an interesting framework for managing corporate risks by HBS professor Robert Kaplan (here and here), until I finally decided to attend his superb course at Harvard Business School called Risk Management for Corporate Leaders. This one-week course is absolutely great and I highly recommend it for investors – but it is even better for corporate executives. It goes into the subject of fraud and corruption with great detail. I’ll highlight a few other sources for discussing this kind of preventable risk inside (click on Read More), and I definitely intend to write a deeper story into this – someday…
Having said all this, back to the “investor-only” hat: always remember that you can choose the types of companies you buy for the long term. If they look shady, are in shady sectors where political influence is a large part of the value generation drivers, or if this analysis is almost impossible to get right at any given time: be careful. Or, even better, choose to stay out.
Sources / further reading:
Robert Kaplan’s instant-classic HBR article on risk management: Managing Risks: A New Framework. Its co-author, Prof. Anette Mikes, also teaches the Risk Management course at HBS.
Kaplan’s presentation: A new framework to manage strategy and external risks. Check out the “Fraud Triangle” and think about where your company culture – or that of your investments – fits. And don’t take the stated culture at face value: dive deep into this and you won’t regret it. Call it an insurance policy.
Another presentation, a bit older (from Sept. 2012).
A bit more detail on the Atlanta Public Schools case – complete with a delicious new quote (“”): Corporate Culture, The Balanced Scorecard and The Grand Jury.
Another Kaplan article: Risk management and the strategy execution system (2009).
The OECD’s resource page on corruption.