Business Ethics in ‘Eastern Europe’ – Concluding Thoughts

I have lived and worked in ‘Eastern Europe’ since the summer of 1987, when the region still lay behind the ‘Iron Curtain’. The last years of Soviet-inspired communism were apathetic rather than fervently ideological, and cynicism about public institutions – Government, the law, the media and politics – was the norm.

On the other hand, greed and materialism had little to work with. Following the collapse of Soviet Communism private enterprise emerged and finally flourished, unconstrained, on the whole, by law and morality. The crumbling assets of the former regime were up for grabs, and grabbed they were.

eastern europe

I’ve written four posts on the ethical framework of those years, and have itemised many of the ways in which the cynical businessman might exploit his partners, competitors, suppliers, employees and the state.

Ethics and Business – ‘Eastern Europe’ after the Revolutions

Business Ethics in ‘Eastern Europe’ -Everyday Misdemeanours

Business Ethics in ‘Eastern Europe’ – Further Opportunities for Mischief

Business Ethics in ‘Eastern Europe’ – Tax Evasion and Other Ills

It was within this framework that I built my own company LLP Group in Prague from 1992. Staying ‘clean’ was not impossible, but it was difficult, assailed as one was by requests for bribes, and recommendations by clever accountants of clever tax avoidance and evasion schemes. It was the Wild East, where anything went, and where the Government was always and ineptly in catch-up mode.

As LLP grew and spread across the region – to Hungary, Romania, Bulgaria, Poland, Russia, and Slovakia – I tried to spread the ethical word through frequent visits and by explicitly documenting the company’s policies. In the management manual I wrote as guidance for local managers I made it clear, for example, that if a gift (a bottle of wine at Christmas, a box of chocolates, flowers, a lunch or dinner) could not be declared by the recipient to his or her manager (and so on up the tree) then it counted as a bribe.

Times have changed, and business ethics have reached a much higher standard. By chance we found ourselves, in 2010, involved in clearing up the ethical mess of the UK’s Parliamentary expenses, as the supplier of the expense management system into which all MPs’ must now enter their Parliamentary expenses. I was proud that an Eastern European company was chosen, especially in the light of everything I’ve said. It no longer seems obviously absurd.

I’ve painted a dismal picture of business ethics in Eastern Europe. Most of what I’ve described was common practice before admission to the EU. It’s less common now, but still not infrequent. Business with the public sector is still as corrupt as ever but in the private sector less so. Business with international companies and organisations is overwhelmingly clean.

Joining the European Union (there were two waves of admission – in 2004 and 2007) has helped, and I think the Czech Republic, Slovakia, Hungary and Poland, are cleaner than they were. I would guess that if you were to award the UK nine out of ten for business probity, you could probably give these four countries six out of ten. Four out of ten, perhaps for the Balkans (Romania and Bulgaria), two out of ten to Russia, one out of ten to Ukraine.

If you’re an investor considering investment in a business in Eastern Europe (or anywhere else, for that matter), how can you judge that a business is ethically sound?

There are audit firms that specialise in ‘ethical audits’ but I am sceptical as to how thoroughly and imaginatively they can do their research.

  • You must look at how a business treats its suppliers, its employees, its customers, and the wider community it operates in.
  • Are its products harmful? If so, does it take steps to mitigate that harm, and inform its market of the dangers of its products (I’m thinking of drink, drugs, sugar, fats, and sex).
  • Is it careful with its consumption of energy?
  • Does it treat the environment well, and clean up the damage it might do?
  • Is it, literally, a blot on the landscape?
  • Does it encourage its employees to study?
  • Does it retain its employees and foster their career development?
  • Is it reasonable with regard to medical absences, maternity, or paternity leave?
  • Are its offices and workshops safe and pleasant?
  • Does it encourage employee feedback?
  • Is staff turnover an indication of care or disregard?
  • Does it pay its suppliers on time?
  • Does it strenuously avoid, or evade tax?
  • Does it contribute to good causes and do so with the active involvement of managers and staff?
  • Does it abuse the EU’s largesse?

These are difficult questions to answer when you’re looking at a business form the outside, and from a distance, but to be really sure that you’re investing ethically, in the wider sense, I would suggest you need answers to them all.

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Blatter, Blather and Bluster

I’m the Chairman of a business software consulting group that operates in ten countries. We’re not large – around 100 staff – and we’re a relatively loose association, in that ownership differs from place to place. Policy is arrived at by consensus and operational management is devolved. But in some important respects the buck stops with me. I set the tone and style of the organisation, and, again, with the agreement of my partners, its ethics.

If I were to discover that the group were riddled with corruption and fraud I would resign.

pigs

Pigs at the trough

I am no expert in these matters, but these are some thoughts on how ethical standards must be set and maintained, whether an organisation is small or global.

Write them down

We have a management manual. Amongst other things it says:

Corruption is widespread in business, perhaps a little more so in Central and Eastern Europe than in other more mature markets. LLP Group and its agents, however, never pay bribes, neither directly nor indirectly.

This means that we never do business when we believe that decision makers are being covertly induced to express an opinion in our favour, whether that inducement comes from us directly or from any other intermediary.

Why?

  • Because it is dangerous. Corruption can damage our business.
  • Because it is illegal. Corruption can send us to jail.
  • Because it is wrong.

What is ‘covert inducement’?

Decision makers are ‘covertly induced’ when they are unable to declare an inducement to their own organisation.

Examples:

A salesman pays a ‘commission’ to the buyer’s employee which the employee cannot acknowledge within his organization.  This commission may come in the form of money, gifts, holidays, etc.

LLP pays an intermediary (for example, a consultant) who is acting as an advisor to the buyer, but the consultant is unable to declare this income (money, shares, holiday, gifts, whatever).

Failure to observe this code will result in immediate termination. No excuses.

Audit

An organisation must constantly be on the alert and should go looking for corruption.

Style

Senior managers should behave with austerity. Luxury hotels, first class travel, limousines, Michelin-starred restaurants, and other forms of prancing, have no place in business life.

Openness

An organisation must be open to inspection by its staff and by the media, and should publish information by default.

Sanctions 

Wrongdoing must be openly punished.

Responsibility

Managers must take responsibility for the lapses of their subordinates. This encourages vigilance.

FIFA would appear to fail in every respect. Corruption is rife, austerity is anathema, investigations are thwarted, secrecy shrouds its inner workings, sanctions are few, and responsibility is shunned.

And Sepp Blatter is still the President of FIFA. And all we hear from him is blather and bluster.

Not Today, Darling, I’ve Got a Headache

Corruption is depressing, especially because it’s more common in countries where there isn’t enough to go around. It’s also a drag on economic growth, because it stifles fair competition and the success of the most deserving and productive ideas. It brings riches to a few, but steals from the many.

corruption

So I’m sorry to read that even those caught red-handed (7 million CZK in a wine-box) in the Czech Republic, the country where I live, can make a mockery of the judicial process. In this case former Czech regional governor and health minister David Rath is seeking a further adjournment of his case, suffering from headaches after falling from a bicycle.

Rath Seeks Adjournment

Corruption in this part of the world is endemic. I’d thought it was in decline. Perhaps it is, but even so Transparency International ranks perception of public sector corruption in the ‘LLP’ countries as follows, with most of our countries disgracefully low in the order (2014 rankings):

9th     Luxembourg

15th   Belgium

17th   USA

47th   Hungary

53rd   Czech Republic

54th   Slovakia

69th   Bulgaria

69th   Romania

103rd Mexico

136th Russia

I joked some years ago, when part of our company won a contract to implement an expenses system for the UK Parliament, that we would heavily discount our software for the Parliaments of countries who fall below 50th in the rankings. The offer is still open.

Read more about Transparency International here

Here’s the full ranking:

1 Denmark
2 New Zealand
3 Finland
4 Sweden
5 Norway
5 Switzerland
7 Singapore
8 Netherlands
9 Luxembourg
10 Canada
11 Australia
12 Germany
12 Iceland
14 United Kingdom
15 Belgium
15 Japan
17 Barbados
17 Hong Kong
17 Ireland
17 United States
21 Chile
21 Uruguay
23 Austria
24 Bahamas
25 United Arab Emirates
26 Estonia
26 France
26 Qatar
29 Saint Vincent and the Grenadines
30 Bhutan
31 Botswana
31 Cyprus
31 Portugal
31 Puerto Rico
35 Poland
35 Taiwan
37 Israel
37 Spain
39 Dominica
39 Lithuania
39 Slovenia
42 Cape Verde
43 Korea (South)
43 Latvia
43 Malta
43 Seychelles
47 Costa Rica
47 Hungary
47 Mauritius
50 Georgia
50 Malaysia
50 Samoa
53 Czech Republic
54 Slovakia
55 Bahrain
55 Jordan
55 Lesotho
55 Namibia
55 Rwanda
55 Saudi Arabia
61 Croatia
61 Ghana
63 Cuba
64 Oman
64 The FYR of Macedonia
64 Turkey
67 Kuwait
67 South Africa
69 Brazil
69 Bulgaria
69 Greece
69 Italy
69 Romania
69 Senegal
69 Swaziland
76 Montenegro
76 Sao Tome and Principe
78 Serbia
79 Tunisia
80 Benin
80 Bosnia and Herzegovina
80 El Salvador
80 Mongolia
80 Morocco
85 Burkina Faso
85 India
85 Jamaica
85 Peru
85 Philippines
85 Sri Lanka
85 Thailand
85 Trinidad and Tobago
85 Zambia
94 Armenia
94 Colombia
94 Egypt
94 Gabon
94 Liberia
94 Panama
100 Algeria
100 China
100 Suriname
103 Bolivia
103 Mexico
103 Moldova
103 Niger
107 Argentina
107 Djibouti
107 Indonesia
110 Albania
110 Ecuador
110 Ethiopia
110 Kosovo
110 Malawi
115 Côte d´Ivoire
115 Dominican Republic
115 Guatemala
115 Mali
119 Belarus
119 Mozambique
119 Sierra Leone
119 Tanzania
119 Vietnam
124 Guyana
124 Mauritania
126 Azerbaijan
126 Gambia
126 Honduras
126 Kazakhstan
126 Nepal
126 Pakistan
126 Togo
133 Madagascar
133 Nicaragua
133 Timor-Leste
136 Cameroon
136 Iran
136 Kyrgyzstan
136 Lebanon
136 Nigeria
136 Russia
142 Comoros
142 Uganda
142 Ukraine
145 Bangladesh
145 Guinea
145 Kenya
145 Laos
145 Papua New Guinea
150 Central African Republic
150 Paraguay
152 Congo Republic
152 Tajikistan
154 Chad
154 Democratic Republic of the Congo
156 Cambodia
156 Myanmar
156 Zimbabwe
159 Burundi
159 Syria
161 Angola
161 Guinea-Bissau
161 Haiti
161 Venezuela
161 Yemen
166 Eritrea
166 Libya
166 Uzbekistan
169 Turkmenistan
170 Iraq
171 South Sudan
172 Afghanistan
173 Sudan
174 Korea (North)
174 Somalia