From high-profile wars in Iraq and Afghanistan to lesser-publicized conflicts sprawling from Senegal to Thailand, there are about 30 violent conflicts in the world today. The global annual cost of these conflicts approaches $100 billion, and the average poverty rate in a conflict-ridden country is over 50 percent – enough reason for most firms to dismiss the prospect of doing business in one. The relationship appears doomed from the start; after all, forty percent of conflict zones return to a state of conflict within 10 years, according to the World Bank.
Consider Rwanda, which was just recognized for making significant regulatory reforms. In the 2011 Doing Business ranking, Rwanda made the top-ten most improved list. Case in point: an entrepreneurial group there raised $25 million in capital in 2006 – just 12 years after mass genocide killed more than 800,000 people in the small East African nation.
The skyrocketing global demand for power has led to an explosion of growth in sub-Saharan Africa, where the International Monetary Fund expects the region’s economies to expand by 5.5 percent in 2011. That growth isn’t a one-off: between 2001 and 2009, real GDP growth across Africa was almost 5 percent – more than 1.5 percentage points higher than in the global economy.
Even with these success stories, business development is just warming up in many conflict zones. Places where peace through commerce is taking root aren’t featured on CNN every day: countries such as Georgia, Burkina Faso, Kosovo. New interactions are starting just as the world looks away.
As business moves in, troops move out. There is a proven connection between economic growth and the reduction of violent conflict. Economic development contributes substantially to long-term peace, and economic freedom is about fifty times more effective than democracy in diminishing violent conflict, according to the Fraser Institute.
The modern world is a global one, and significant advances in technology and manufacturing needs have led businesses to seek out less expensive environments to produce goods and new markets for their services.
That means businesses of all sizes, in almost all industries, are faced with the choice of wading into the risky business of conducting operations in a potential conflict zone. And while they are there, they often contribute to creating the conditions necessary for peace.
Research has found that businesses can’t help but have an impact on a number of factors associated with conflict and peace, even if they are not aware of their impact. Less acknowledged is the fact that businesses’ bottom lines usually benefit from their contributions to peace, too. Turns out, purpose and profit are not at odds.
How does a business decide to pursue a strategy that links peace and commerce? How do managers determine what traits to look for in a potential country? It’s admittedly difficult to link business practices directly to a peaceful outcome, but there are some key considerations to weigh in a courtship with a conflict zone.
Seeking a Stable Relationship
Selecting the right partner is the most critical choice. Beyond the potential for economic stimulation, there has to be a deeper connection. And perhaps a shared appreciation for the rule of law.
It is well documented that countries with inherent respect for the rule of law – ones that demonstrate confidence in the legal rules of a society – tend to be less violent, less corrupt, and have a better track record with peace. Weak governments are not as reliable partners when it comes to mitigating conflict.
Governmental weakness is especially likely in cases of conflict within the country – which is often the form conflict takes: more than 90 percent of recent conflicts have occurred within states, not between them.
Associate Professor Jennifer Oetzel focuses on risk management and business’ responses to political and economic challenges, especially in developing economies. She and her research colleague, Assistant Professor Chang Hoon Oh of Ontario’s Brock University, took existing research on the topic a step further and discovered a direct correlation between the quality of a country’s governance and businesses’ decisions to invest in that country.
Oetzel and Oh studied a sample of 71 multinational enterprises and their subsidiaries. They determined that if a disaster (natural or otherwise) occurs in a country with high quality governance, business disinvestment is less likely due to the widespread belief that the country will overcome the disaster.
“Every country has the potential for a disturbing event, whether it is natural or terrorist-related, but effective governance can minimize the loss of life and the likelihood that foreign firms will reduce their investment or withdraw completely,” Oetzel said.
The critical effects of country governance were highlighted by the sharp differences in devastation following two major earthquakes last year in Chile and Haiti. But while the headlines focused on the disparate fallout from the quakes, a better measure of the long-term resilience of the countries is reflected in the ease or difficulty of launching a business there as reflection of their governance. The Doing Business 2011 index places Haiti at the near-bottom rank of 178 out of 183 total countries for the ease of starting a business in the previous year; Chile hovers near the top third at No. 62.
But the really staggering figures lie in the differences in sheer cost of starting a business. The index measures the cost as a percentage of the economy’s income per capita to level the playing field; in Chile, the cost of starting a business is at 6.8 percent; in Haiti, it is astronomically higher at 212 percent.
We know, then, that governance has an impact on business. But how do we break the vicious cycle and begin to reform? Is there hope for unstable relationships to find stability in the future?
In a follow-up study with an expanded sample of 116 multinational firms operating in more than 100 different countries from 2001 through 2007, Oetzel and Oh concluded that firms with greater experience managing crises – particularly high-impact ones – were able to leverage that experience in new markets. In sum, businesses ‘learn’ from their bad relationships, just as people do. Experience matters.
Part of that experience includes learning when to take a step forward, and when to step back.
When Confrontation is Right
As Oetzel and Oh discovered, learning how to deal with bumps in the road makes a business relationship stronger.
Indeed, the business beneﬁts to conﬂict resolution are considerable: the company benefits from stability; the community’s gratitude might lead to future preferential treatment; the institutional knowledge gained could translate to a competitive advantage.
But when things are not going well, when is it time to confront the problem? It is easier to opt for the path of least resistance, but sometimes it is best to take a stand.
Businesses have the same options when faced with a conflict: to respond directly, indirectly, or avoid the problem. A business can take the high road by holding negotiations, cutting off payments from conflict creators, or participating in multi-track diplomacy. On the other hand, it can play the role of peacemaker indirectly by addressing the causes and consequences of violence, not the violence itself. Those avenues wind through human resource practices, strategic philanthropy, small business development and external relations.
Which factors cause a business to be blunt? And which scare a firm into an indirect stance? That’s what Oetzel and Professor Kathleen Getz tackled in 2010. Getz, who serves as senior associate dean for academic affairs, focuses her research on the issues at the intersection of corporate responsibility and development, with an emphasis on business’ responses to violent conflict.
The pair surveyed 471 international member firms in the United Nations Global Compact, a consortium of businesses that are committed to the UN’s strategic policy initiative. By dissembling and quantifying the fundamental traits of conflicts – their intensity, duration, geographic scope and disruptiveness – Oetzel and Getz determined how the businesses chose to intervene in differing situations. The research helped to construct a framework for business’ reactions to conflict with respect to existing projects and facilities.
The reactions that they discovered are rational responses based on human nature. Short-lived conflicts are generally ignored by businesses. Especially conflicts that are unlikely to recur. Essentially, the business figures, “Why bother to enter?”
Direct interventions are perceived as risky: they draw attention to the firm (sometimes from the parties to the conflict) and present the risk of retaliation. Nevertheless, firms did get directly involved in conflicts that were narrowly dispersed over a geographic region, such as the 2008 South Ossetia War; disruptive to key services or infrastructure, such as the civil war in Rwanda, where government offices were regularly attacked; or conflicts that had barely begun, where the firm saw an opportunity to step in before it was too late.
In that case, the firms were right on. Scholars and practitioners concur that direct approach is most feasible in the “pre-conflict” stage, and is viable until the conflict intensity nears its peak.
After that point, going toe-to-toe is no longer advisable. Oetzel and Getz point to Chevron’s actions in Nigeria in March 2003.Chevron temporarily shut down all its operations in the Western Niger Delta in response to increased violence in the area, which grew to threaten its employees’ safety. Once the intensity peaked, Chevron suspended operations entirely.
If the geographic scope is more concentrated, chances are the embedded firm may be familiar with key players, including instigators. That increased understanding may contribute to a firm’s willingness to intervene directly to try to stop the conflict.
And when vital services, such as infrastructure or utilities, are disrupted, firms are more likely to step in – often in their own self-interest – and work directly with others to try to bring a stop to it.
Safety in Numbers
It is easier to tackle a problem and conceive of a solution with a companion, especially when the problem is in a conflict zone.
A collaboration of businesses helped bring relative peace to Northern Ireland in the mid-1990s with the publication of the Peace Dividend paper. The authors, a group of Northern Ireland business leaders, outlined the economic despair the region faced as a result of ongoing violence. If the violence ended, they asserted, the $1.4 billion spent on law and security services could be reinvested in the economy.
A brief trial proved them correct: after an August 1994 ceasefire, tourism rose 20 percent in one year, unemployment dropped to its lowest level in 14 years, and over 30 million pounds in new investment ventures were announced.
This type of collaborative action is a popular strategy with far-flung conflicts or conflicts with a long duration. Oetzel and Getz discovered that, in these cases, firms are more likely to attempt peace-building tactics indirectly and in concert with others. Those conflicts are more likely to have negative effects on the firms’ supply and distribution chains or its employees and their families; as a result, many firms simply aim to limit the conflicts’ tentacle-like effects.
Size (of the firm) also matters. Only large, multinational firms with substantial clout – and capital – are likely to pursue an overt agenda of peace. For smaller firms, collaborating with other organizations is a more viable option, even though it can be costly. If a firm wants to build understanding around the conflict (or avoid blame), collaboration is frequently viewed as the best approach.
Should You Stay, Or Should You Go?
Even with a helping hand, the gut reaction to risk or conflict is usually avoidance. Both people and business entities tend to give conflict a wide berth and hope it quietly goes away. And, for their part, most companies don’t want to be viewed as political actors — whether or not they are.
“It’s not personal; it’s business”? It’s the professional equivalent of “It’s not you, it’s me.”
Yet research suggests that engagement is often a better strategy than avoidance – for both parties: businesses and conflicts.
Nevertheless, a business doesn’t have to be a caped crusader to consider its involvement in a conflict zone a success. Oetzel recommends setting realistic goals, drawing on one example from Ivory Coast that the UN Global Compact uncovered.
“The ethnic conflict that existed in society had spilled over into the workplace, and the managers realized it was becoming a major problem,” Oetzel said. By coincidence, one ethnic group made up the company’s day shift; a competing ethnic group comprised the night shift. The result was ongoing conflicts during shift changes.
The managers decided to develop internal practices to alleviate the issues: they held a dinner at night and both groups were invited. Once the employees knew and understood each other better, conflict between the two shifts reduced. Instead of exacerbating the conflict by firing one group to create homogeneity, the managers’ actions led to higher morale and a better organizational performance.
Although engagement is slowly becoming more common, often divestment is still perceived as the last stand, either to save the business or send a message to the conflict creators. Divestment was the end of the line for Polaroid in South Africa during apartheid. After employees at the company’s U.S. headquarters objected to the products’ distribution in South Africa, Polaroid first stopped selling products to the government, then pulled out entirely in 1977.
Polaroid was one of the first companies to divest due to apartheid, and the company’s choice led other American businesses to question their presence. With help from the activist movement, divestment was embraced on a wider scale by the early 1980s.
Divestment’s ultimate victory in South Africa had more to do with apartheid’s intractable history than with the concept of a business taking an active role in resolving conflicts. After all, divestment isn’t a cure-all. In the ongoing conflict in Sudan, divestment activists can run into a harsh reality: their influence is often limited to companies that are publicly traded in Western stock markets.
That was the case with Canadian energy group Talisman, which sold its 25 percent stake in a controversial oil project in Sudan in 2003 after years of severe criticism from U.S. human rights groups. The oil project’s revenues directly funded the Sudanese government’s war effort, and harsh public outcry threatened Talisman’s business in U.S. financial markets.
Sometimes, however, the buyer is worse than the seller. All too often, a Western company that attempted (but struggled) to comply with human rights standards pulls out of the country to avoid bad press; then, other foreign companies that aren’t subject to the same external pressures will step in and scoop up the profits – often Chinese companies. “There are simply no human rights concerns – even massive genocidal destruction – that will lead the Chinese regime to accept …[any] threat to its production and development activities in Sudan,” noted Smith College Professor Eric Reeves on his website, sudanreeves.com.
The result: no lasting reforms, and no one to bargain with.
And Then There’s Corruption
There is no question that bribery and corruption charges inflame conflict zones and detract from the notion of peace through commerce. In outlining business principles for the “interim period” after the 2005 peace agreement, the European Coalition on Oil in Sudan explicitly called for companies to combat bribery and extortion.
And in Afghanistan, where the local government and its Western allies are in the midst of conflict over the presence of private security contractors, a self-admitted briber leads the largest private security firm. Commander Ruhullah admits to bribing politicians, police chiefs, army generals and is even suspected of paying off the Taliban, on behalf of his firm, Watan Risk Management, according to a recent congressional report.
Thus, if businesses can recognize redeeming qualities in conflict zones, they must also recognize weaknesses. Here’s a big one: if the relationship goes sour, there could be a messy, public breakup. The modern version of a business restraining order: enforcement of the U.S. Foreign Corrupt Practices Act (FCPA).
The act surfaced dramatically, the result of a perfect storm from the fallout of the Watergate investigation and a program where the SEC solicited and received voluntary disclosures from more than 400 U.S. companies that made questionable or downright illegal payments to foreign officials to the tune of $300 million. One of the most high-profile dirty deeds concerned – of all things – banana prices. United Brands Co. bribed the president of Honduras to lower the country’s banana export tax, saving UBC more than seven million; the scandal set off a domino effect that surfaced with the suicide of United Brands’ CEO Eli M. Black and eventually led to the overthrow of Honduras’ military-led government.
Enter the FCPA, passed two years later in 1977 – though not without limitations. Initially, the act only held accountable U.S. companies or persons that are employed by them but was later amended to include any company doing business for or in the U.S. and any agents acting on their behalf throughout the world. And while the ramifications do include fines, the true penalties to fraudulent companies lie in the market’s response – which doesn’t always react the way you might expect.
The law’s best known for the accounting transparency provisions that it added to the Securities and Exchange Act, because the provisions significantly impact public and private firms. There have been about 1,060 enforcement actions on the accounting side, as compared to just over 160 for bribery-related actions. Associate Professor Gerald Martin has been researching those actions for more than a decade.
The Cost of Cooking the Books
In studying the FCPA penalties imposed on almost 600 firms for financial misrepresentation through 2005, Martin and his colleagues discovered that the true penalties to firms lay in the market’s reaction – not the fines imposed through the legal system.
On average, firms paid only $23.5 million each as a result of the SEC’s and DOJ’s enforcement actions – chump change for a multinational company. But the “reputational penalty,” which Martin calculated based on lower sales, higher financing costs and other expected losses, is more than seven times the legal one.
Martin found that for each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $3.08. Of the additional loss, $0.36 is due to expected legal penalties and $2.71 is due to lost reputation.
In firms that survive the legal process, lost reputation is even greater at $3.83 lost for each dollar the firm inflates its value. This contradicts the widespread belief that financial misrepresentation is disciplined lightly; rather, reputation losses impose substantial penalties.
Martin and his fellow researchers won the coveted William F. Sharpe Award from the Journal of Financial and Quantitative Analysis in 2008 for their work.
Bribery: Business As Usual?
Bribery alone simply doesn’t pack the same punch that financial misrepresentation does, leaving Martin and his colleagues to question whether there exists a significant deterrent to foreign bribery as a standalone offense.
“[The firms] get in trouble for bribery; what we’re trying to point out is that the market responses to the two violations are completely different,” Martin explained. “You suffer very little reputation effects to the firm if you’re found doing a bribe versus if you’re found cooking the books.”
Think of it as if you were an investor in a firm. If you make a decision to invest in a firm based on financial statements you’ve read, then you’re told those statements were phony – you’re going to punish the firm, and the stock price is going to react accordingly.
If, on the other hand, the firm is bribing – it’s essentially trying to drum up business for its stakeholders. “Investors don’t punish that type of activity, versus being lied to,” Martin explained.
“It’s hard to stop [bribery],” Martin noted, pointing out that many of the bribery enforcements of the FCPA are cases in which the company self-reported the violation to the regulators. “A lower-level manager who has incentive to get something done might also have incentive to pay a bribe to get it done – which the firm has no control over until they find out after the fact.”
Almost all of the stock price reaction to the revelation of bribery can be directly explained by the costs of being caught – including fines (three times the amount of profits from the sales), legal costs, firing the guilty employees and the cost of the bribe itself.
“Based on the research, you’re led to believe that investors really don’t care if firms bribe or not,” Martin said.
No One Gets Out Alive
There are human casualties of the drama of financial misrepresentation: the employee.
Martin tracked more than 2,200 individuals who were held responsible for SEC and DOJ enforcement actions and discovered that a whopping 93 percent lose their jobs. Most are explicitly fired. Beyond that, they face restrictions on future employment, their shares of the firm, and substantial SEC fines. A sizable chunk – more than a quarter – also face criminal charges and an average jail sentence of 4.3 years.
In short, the individual perpetrators of financial misconduct face significant disciplinary action.
After the Iraqi invasion of Kuwait prompted international economic sanctions against Saddam Hussein’s regime, the UN said the Iraqi people faced “imminent catastrophe” as their basic food and shelter needs were threatened by the country’s perilous economic conditions.
The UN Oil-for-Food program allowed Iraq to sell its prime export – but required the government to use two-thirds of the profits to meet its population’s basic needs.
Siemens, Europe’s largest electronics and electrical engineering conglomerate, and its subsidiaries paid over $1.7 billion in kickbacks to the Iraqi government, ostensibly through the program, to obtain 42 contracts and earn $38 million in profits.
Combined with corrupt payments by three Siemens subsidiaries to Venezuelan, Argentine and Bangladeshi government officials, Siemens earned a whopping $450 million in criminal fines and $350 million in disgorgement.
Source: Richard L. Cassin et al. at www.fcpablog.com.
Panalpina’s customers—including Shell and Transocean Ltd.—were also charged with bribery and record keeping violations. In all, the companies will pay $156.5 million in criminal fines and $80 million in penalties and disgorgement.
Currently Fighting Extradition for $137 Million in Bribes – Jeffrey Tesler, British Intermediary for Kellogg Brown & Root
Testler faces extradition to the U.S. for his role in KBR’s bribery of Nigerian officials. The global engineering, construction, and services company and its former parent company, Halliburton, paid $137 million in bribes to Nigerian officials to build liquefied natural gas facilities on Bonny Island in Nigeria’s oil-rich southern delta.
So far, the U.S. has collected $1.28 billion in fines from companies involved in the Bonny Island case. Some of the companies involved are U.S. companies (hence Tesler’s extradition). Tesler lost his March 2010 extradition hearing, but has begun the appeal process with his lawyers.
A Laborious Responsibility
Of course, the easiest way to avoid getting caught red-handed is simply to play by the book.
Businesses can take proactive steps to hedge against exacerbating an existing conflict and mitigate the risk they face. “We learned that businesses must take preventative measures to ensure safety,” Oetzel said.
First, study your firm’s opponent. Gain a detailed understanding of the nature of the conflict, especially when it comes to hiring. A firm’s lack of preparedness can lead it to partner with negative contributors to local conflict, thereby perpetuating the strife.
“Human resource practices become especially critical in managing conflict,” Oetzel said. “A firm that, knowingly or not, hires locals who are involved in the conflict can cause overwhelming inter-office tensions.”
“Also, there are times when the issue becomes who the firm does not hire—if a firm never hired members of a locally oppressed group it may unwittingly aggravate existing tensions.”
U.S. based-firms (or those with a significant presence here) are predisposed to consider race or gender disparity when making hiring decisions. Understandably, as they are the hallmarks of human resources conflict stateside. But by understanding the dynamics of the host country, a firm may discover that conflicts between workers there are based on regional differences or ethnic backgrounds.
“Those are differences that are not obvious to a foreign organization, so they may not perceive even the potential for a problem,” Oetzel said.
This is one role that a not-for-profit or activist group with subject matter expertise – acting as a partner – can fulfill. “NGOs can bring greater legitimacy to the company,” Oetzel said. “Managers are not prepared in all of the social diplomacy, the countries’ histories, and all of the intricacies of the country context. Outside players can bring a lot of that to the table.”
Assistant Professor Michelle Westermann-Behaylo said that not-for-profits often play a pivotal role by identifying problems with the status quo in a country. Westermann examines business ethics and stakeholder management in her research, especially as they relate to human rights. In conflict zones, she said, NGOs generally fulfill one of three roles: as a “bad cop”; as the moral authority; or by shedding light on economic possibilities.
Activist groups, on the other hand, often provide a watchdog function or a formal legal role through the Alien Tort Claims (ATCA) statute, according to Westermann. Through ATCA, U.S. courts have some extraterritorial jurisdiction over the foreign actions of a firm with U.S. ties. The act’s use is fiercely contested; organizations such as the National Foreign Trade Council and International Chamber of Commerce are actively seeking to limit or repeal the law to diminish corporations’ liability.
ACTA played a pivotal role in Talisman Energy’s divestment from Sudan. Talisman was motivated in part by a $1 billion class action lawsuit, filed in New York in 2001 and brought under ATCA. The suit charged Talisman with violating human rights, and dragged on for years before it was dismissed in 2006. The U.S. Supreme Court declined to hear the case in October 2010.
The intellectual conflict here lies in the gap between a business’s legal obligations and its moral ones. The question is – how wide is that gap?
The UN Secretary-General’s Special Representative on business and human rights, John Ruggie, published a draft of guidelines on the responsibility of businesses to respect human rights in November 2010 and called for feedback.
Westermann jumped at the chance to provide it, and argued that Ruggie’s risk-avoidant approach sets the baseline responsibility of businesses too low. Merely directing them to refrain from impinging on human rights is attune to saying “do no harm” – with no mention of doing good.
“If the company is knocking on the door of the stakeholder in the form of a lawyer doing risk avoidance, I don’t think the stakeholder’s going to want to actively engage with the company,” she concluded.
Westermann agrees that establishing a baseline of legal responsibility for businesses is crucial. But as any teacher knows, when you set the bar low, many pupils will simply do the bare minimum.
Rather, she asserted, the UN should be encouraging businesses to manage their human rights responsibilities holistically, to build a mutual trust with stakeholders and build a trustworthy reputation. The UN implementation should champion the strategic benefits businesses can gain by being more proactive and engaged.
“If business could see how incorporating human rights into their business plan is going to be good for them, they’ll be more likely to do it,” she said. “I’m worried that if this is institutionalized [in its barest form], then nobody will go further than that. That shouldn’t be the end of the line for peace through commerce – there’s so much more possible.”
The shortcomings of a strictly legal approach to business’ role in human rights become abundantly clear when the issue of enforcement is raised, Westermann said. As the FCPA and ATCA demonstrate, there’s yet to be a true consensus on who has the authority to hold business’ feet to the fire.
Entrepreneurs and Domestic Firms
There are always people to whom the rules don’t apply – or those worth breaking the rules for.
In the world of peace through commerce, those exceptions at the moment are considered by many to be the highly charged war zones of Iraq and Afghanistan. The involvement of the U.S. military has complicated the dynamics there, and present economic development in the countries is coming primarily from other sources: domestic firms and local entrepreneurs.
To say that Iraqi and Afghan entrepreneurs face an uphill battle is an understatement. While securing funding is the biggest hurdle they face, there are plenty of other obstacles. To start with, the entrepreneurs themselves may be simply ill equipped to produce sophisticated business plans.
From Conflict to the Classroom
Bob Sicina is an executive-in-residence in Kogod’s International Business department and co-teaches the Peace Through Commerce practicum course, which enlists students in the aid of entrepreneurs. “The biggest value that we bring to the entrepreneur is helping them think through a thousand things they haven’t thought about,” he said. “Of all the projects I’ve worked on, none of the principals would have been able to produce the product we ended up doing.”
Sicina, his co-teacher Associate Professor Heather Elms, and the others know that the value of working with entrepreneurs isn’t purely in whether or not the business plans come to fruition. Rather, the students’ experience – combined with their faculty’s research – will educate the next generation on the value of peace through commerce.
It’s far from instant gratification, but as the students graduate, enter the workforce and rise through the ranks, they will bring an understanding of the complex global business environment, from Washington, D.C. to Baghdad.