Transparency International (TI), the global organisation against corruption, has published a policy study, Transparency in Corporate Reporting: Assessing the World’s Largest Companies (the study). The study ranks 105 of the top publicly-traded companies, based on their advertised commitment to transparency. Overall, these companies showed improvement in their level of anti-bribery and corruption reporting when compared with a similar TI study conducted in 2008. Despite the improvements, TI urges these companies to take additional action to further increase the transparency of their operations.
Although transparency does not necessarily equal a good anti-bribery and corruption performance, TI believes that reporting demonstrates a company’s commitment to countering bribery and corruption and increases the accountability of the board of directors. TI assessed the 105 companies, together worth more than US$11 trillion, by compiling data collected from each company’s global website.
The assessment was structured in three sections: anti-bribery and corruption programmes, organisational structure and country-by-country financial reporting. TI produced scores for each company for each of these three sections and an overall index that ranks the companies across all three areas.
Anti-Bribery and Corruption Programmes
Anti-bribery and corruption programmes constitute a company’s first line of defence against bribery and corruption. TI believes that full disclosure of these procedures illustrates a company’s commitment to opposing bribery and corruption and enhances ethical conduct among management, partners, employees and agents.
Half the companies assessed achieved a score of 77 per cent or higher in this section of the study. The average performance of the healthcare and technology companies was strong, while the 24 financial companies (the biggest industry group in the study) received the lowest average marks. Oil and gas, basic materials and utilities companies displayed a wide range of scores, making a trend across these sectors difficult to discern. The study notes that the results relating to the prohibition of facilitation payments were disappointing overall.
TI considers organisational transparency to be particularly important for multinational companies as they are likely to operate through a network of interconnected subsidiaries, affiliates, joint ventures and other holdings that may be incorporated in a number of different jurisdictions. By disclosing corporate structures, issues such as inter-company financial movement can be followed easily.
The average result in this category was 72 per cent, with 45 of the 105 companies achieving maximum possible scores. However, TI notes that in order to achieve the maximum score a company only needs to disclose its “material” entities (as defined by the applicable accounting standards or regulations), which often do not include holding companies in developing countries or secrecy jurisdictions.
Companies in the oil and gas, utilities and basic materials industries generally performed well in this area. Technology companies, at the other end of the spectrum, disclosed the least information on their corporate structures. The financial sector had an average score of 67 per cent, slightly below the sample average, with US financial services firms all failing to achieve top marks.
TI advocates country-by-country reporting as a tool to expose the link between a parent company and the local jurisdiction in which it operates. TI believes this will help make companies accountable in all territories, shed some light on any special arrangements between governments and companies and provide a solid basis on which to evaluate all a company’s activities in a particular country.
The best performing sectors were oil and gas and basic materials, with the highest average scores. Among the 24 financial institutions evaluated, 13 disclose no data on their foreign operations. The average score in this category was only about four per cent. TI suggests that this very poor result may be attributed to the fact that reporting on a country-by-country basis has not yet been the subject of regulatory attention, which should change as relevant legislation comes into effect in the future. As a result, if companies publish their international financial reports they tend to aggregate their accounts by region, not by country.
TI notes that multinational companies typically report to the tax authorities in each country where their subsidiaries are incorporated or doing business. This means that these companies possess internal financial information on a country-by-country basis so, the study argues, it should be possible for them to achieve good levels of disclosure with respect to each of their overseas operations with relative ease.
Focus on Financial Services
The study gives special consideration to the financial sector in light of the recent global financial crisis and the critical role this sector plays in the global economy. TI emphasises the need to broaden the discussion on regulation and oversight of the financial system, and it urges companies in the financial sector to improve considerably their reporting on all transparency-related issues. TI maintains that the low levels of reporting reflected in the study indicate that the financial sector is prone to the risk of bribery and corruption and the illicit movement of money. The study advises that financial companies should ensure their anti-bribery and corruption programmes cover agents and intermediaries acting on their behalf and argues for a prohibition on facilitation payments.
Recommendations for Multinational Companies
The study recommends that companies should
- Publish detailed information on their anti-bribery and corruption programmes.
- Publish exhaustive lists of their related entities. Many companies currently publish lists of their material subsidiaries and some also list their material affiliates and joint ventures. However, TI considers that the materiality criterion can result in the exclusion of many holdings that are relevant for understanding and evaluating a company’s structure.
- Publish individual financial accounts for each country of operations. TI believes this will have a big impact on the countries in which multinational companies operate, in return for a relatively small incremental effort, as the information is already produced by the companies for tax purposes.
- Have a transparent and informative corporate website in at least one international language if they are a multinational business. At the moment, some companies reserve a great deal of corporate information for their registered investors, employees or selected stakeholders.
To view the Study, please click here.
Keo Shaw, a trainee solicitor in London, contributed to this article.