Corporate Compliance Insights: How The West Can Win

by KLINK
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The following article was originally published in Corporate Compliance Insights on January 12, 2016.  

Overcoming the Western-Emerging Markets “Disconnect”

Western businesses are active around the world. Manufacturing, sales, logistics, research and development and other critical corporate functions are still ongoing in the West, but are also increasingly occurring in Asia, Africa, the Americas and the Middle East. Success in growth or emerging markets depends heavily upon the sophistication of your organization’s risk practices and the strategies you utilize to understand and navigate less transparent jurisdictions such as China, Brazil, India, Indonesia, South Africa and beyond.

Western organizations can and do succeed in emerging nations. Having a solid understanding of an emerging nation’s culture, common business practices and risks, however, is critical to that success. Organizations that fail to do their homework can suffer material losses or even face the complete collapse of the business.

In our thousands of due diligence, fraud and competitive intelligence investigations, we continue to find a substantial “disconnect” between perceptions of high-level Western executives and business practices, often involving deception, in so-called “emerging markets.”

Western business leaders from the United States, Canada, Australia and Europe naturally view the world through a prism of their own experiences. Mostly raised and educated in the West, with a technical and often data-driven focus upon accounting, strategy, statistics, finance, engineering, technology and sales, key executives may travel through Asia, for example, for days or weeks on end, but typically will not live outside the West. Even where leaders have lived abroad, due to comfort or security, Western citizens typically live in enclaves with others like them. Western leaders often do not perceive that “aggressive” business tactics are the norm in emerging markets while they’re virtually unheard of back home.

Executives and managers born and bred in emerging-market nations think very differently than their counterparts raised in more comfortable settings. This disconnect extends from the manufacturing floor into the executive suites and boardrooms of major publicly traded organizations.

Western business leaders run the numbers (not knowing that the numbers they are running are a complete fraud) and then make a decision. Emerging market executives know to distrust the numbers, and think: “How could I be deceived? Why would the other side tell me X, Y or Z?”

Common growth market challenges:

Material fraud, sometimes reaching billions of dollars, regarding financial statements and other records

  • Vendor kickbacks
  • Side deals with suppliers
  • Creation of competing firms
  • Theft of intellectual property
  • Payment of bribes to government inspectors
  • Loss of substantial business opportunities due to theft, fraud and corruption

Five ways Western global businesses become victims:

  1. Lack of understanding of growth-nation cultures and business practices
  2. Limited due diligence practices allow important facts to be hidden during the vetting process
  3. Under-staffed internal audit and compliance units based in Western countries are forced to rely upon information provided by complicit management employees based in the emerging economy
  4. Inadequate hotline protocols allow wrongdoers to perpetrate massive schemes
  5. Compliance processes and protocols are insufficient and outdated

Western organizations can and do succeed in emerging nations by having a solid understanding of the emerging nation’s culture and common business practices. Solid due diligence can prevent massive and material fraud and compliance headaches. Evolving and effective compliance programs can directly impact the bottom line. Finally, a healthy dose of skepticism can be the difference between success and failure in a growth economy.

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