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Julie DiMauro
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Shruti J. Shah
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Russell A. Stamets
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Eric Carlson
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Tom Fox: Robust compliance, not cheap talk, drives sales growth in high-risk countries

An article in this month’s edition of The Accounting Review by Paul Healy and George Serafeim looked at the direct effect of robust compliance programs on companies’ return on equity (ROE) in countries perceived to have a high incidence of corruption.

One finding was that companies with good governance tended to have more robust compliance programs. The authors noted, “Managers of firms with independent and engaged board oversight may take anti-corruption laws and enforcement seriously and adopt/enforce policies to deter corruption.”

Conversely, the authors said, “some investors, boards, and managers may jointly view corruption as an unavoidable cost of doing business in certain parts of the world, yet engage in cheap talk in an effort to reduce regulatory costs.”

This good governance was more than simply tone at the top. It was also measured by board independence and board oversight of a company’s compliance program.

Not surprisingly, in countries at low risk for corruption, there was not much difference in the sales growth for companies with robust anti-corruption compliance programs and those the authors put into the “cheap talk” category. However, when it came to growth in countries that had a high propensity of corruption, there was a dramatic difference.

The authors found a negative relation between investments and a company’s return on investments in high countries where the company did not have an effective compliance program. This was true even when there was increased sales growth. For firms with up to 10 percent growth in high-risk countries that didn’t have a robust compliance program, the negative ROE was between 24 percent and 30 percent.

The authors conclude with several observations.

First, companies with more robust compliance programs are from countries that have more robust enforcement and monitoring.

Second, companies with more robust compliance programs, even with lower sales growth, will have a higher overall return in a high risk country.

Finally even if a company sustains high sales grow in a high-risk country, if it doesn’t have a robust compliance program, the sales will drop off dramatically and may well lead to a negative return on equity.

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Thomas Fox, pictured above, is a contributing editor of the FCPA Blog and a Compliance Week columnist. He’s the founder of the Houston-based boutique law firm tomfoxlaw.com. A popular speaker on compliance and risk-management topics, Fox is also the creator and writer of the widely followed FCPA Compliance Report. His book Lessons Learned on Compliance and Ethics topped Amazon’s bestseller list for international law. He can be contacted here.

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