I'm in my 2nd term of my 1st year as an MBA student at DLSU-RVR Manila. One of the very first subjects I took was BUS500M (Management Principles and Dynamics). Part of the course requirement was to submit analysis of HBR (Harvard Business Review) cases. I'm sharing my analysis to all my readers. You can use this as a guide during your own analysis.
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The Shakedown:
Authors: Phil Bodrock, Alan L. Boeckmann, Rafael Di Tella, Thomas W. Dunfee, Bozidar Djelic
Description:
Customer Strategy Solutions, a California-based developer of order fulfillment systems, is facing a shakedown. Six months after the firm's CEO, Pavlo Zhuk, set up a software development center in Kiev, local bureaucrats say the company hasn't filed all the tax schedules it should have. Moreover, Ukrainian tax officials claim that the company owes the government tax arrears. Zhuk is shocked; he and his colleagues have done everything by the book. This isn't the first time Zhuk has encountered trouble in Ukraine. In the process of getting the development center up and running, a state-owned telecommunications utility had made it difficult for Zhuk to get the phone lines his company needed. Senior telecom manager Vasyl Feodorovych Mylofienko had told Zhuk it would take three years to install the lines in his office--but for a certain price, Mylofienko had added, the lines could be functioning the following week. Even as the picture of rampant bribery and corruption in Ukraine becomes clear, Zhuk still doesn't want to pull out. Of Ukrainian descent, he has dreams of helping to modernize the country. By paying his programmers more than they could make at any local company, he hopes to raise their standard of living. And yet, he isn't sure he can keep compromising his principles for the sake of the greater good. Should Customer Strategy Solutions pay off the Ukrainian tax officials?
Case Analysis # 1 (by PinoyYuppyHusband)
1. Problem Statement:
Pavlo Zhuk, driven by a desire to create opportunity, to bring hope, and to help build a modern society in Ukraine, faces a tough choice, should he pay-off the Tax officials who initiated the shakedown?
2. Objectives:
2.1 To identify problems that Foreign business encounter in Ukraine
2.2 To identify actions that Zhuk can take to keep his business ethics intact and still remain in Ukraine.
3. Areas for Consideration:
3.1. Customer Strategy Solutions SWOT Analysis
Zhuk sees great opportunities for his company’s presence in Ukraine. Ukranian Software Developer’s Association (USDA) forecasts that the country’s exports of IT-related services will double over the next two years. He’s playing to his company’s strength in being the only software development center for a multinational in Ukraine. He has steady supply of highly skilled and reasonable priced programmers. Zhuk’s friend in the Banking industry even advice to take Customer Strategy Solutions public as it will get a bigger shares premium because of its development center in Kiev.
Zhuk’s company like many other foreign SME companies in Ukraine remains vulnerable to continued extortion due to corruption in the country’s bureaucracy. Bribes is becoming a way of life in the country as reflected in Business Environment survey done by the International Finance Corporation (IFC) last December 2004 wherein 69% of the respondents believed that Corruption is one of the main obstacles for business. Survey results demonstrate that relations between private business and the state in Ukraine remain imperfect. Entrepreneurs point to an unstable legislative environment and corruption as key impediments to business.
Chart 3.1 Main Obstacles for Business in Ukraine
Source: 2004 Business Environment in Ukraine, IFC.
3.2 Ukraine’s Corruption History
Ukraine is a “country plagued by many serious challenges, among the most important of which is widespread corruption. This is hardly surprising. Many, if not most, post-Soviet states have been plagued with varying degrees of political corruption as well as increased levels of corruption in nearly all sectors of the economy. While the challenges posed by corruption are by no means unique to Ukraine or Ukrainians, the Atlantic Council’s Task Force on Corruption in Ukraine has concluded that the country today is experiencing a degree of pervasiveness of corrupt behavior which permeates society and all levels of government. Corruption, which in some cases intersects with the operations of Ukrainian and international organized crime, has reached a level that leads many Ukrainian and Western observers to describe it as a direct threat to the country’s democratic development and economic prosperity.” (1)(2)
The Transparency International Corruption Perceptions Index (CPI) currently ranks Ukraine #118. CPI is the degree to which corruption is perceived to exist among public officials and politicians. It is a composite index, a poll of polls, drawing on corruption-related data from expert and business surveys carried out by a variety of independent and reputable institutions. The CPI reflects views from around the world, including those of experts who are living in the countries evaluated. Ukraine’s CPI score of 2.7/10 is steadily improving since 2000 although it is still way below acceptable levels as shown in the graph below. This shows that there is still room for improvement in Ukraine through reforms.
Chart 2: Ukraine: Corruption Perception Index (CPI)
Source: http://www.transparency.org/
4. Alternative Course of Actions:
4.1. Do not pay-off the UTA Special agents and face “some serious consequences”. Business ethics dictates that Zhuk should not pay-off the bribes to the UTA Special Agents. Zhuk’s company is also covered by the US Foreign Corrupt Practices Act (US FCPA) of 1977 Anti-Bribery provisions which makes it unlawful to bribe foreign government officials to obtain or retain business.
Pros
1. Follow legal course of action under the US FCPA
2. Zhuk protects high moral values required for managers and act as an inspiration to his people
3. Cost of business is maintained
Cons
1. Backlash from local authorities
2. Company might be given hard time
BASIC PROVISIONS PROHIBITING FOREIGN CORRUPT PAYMENTS (3)
Anti-Bribery Provisions: The FCPA makes it unlawful to bribe foreign government officials to obtain or retain business. The anti-bribery provisions apply both to certain issuers of registered securities and issuers required to file periodic reports with the SEC (referred to as "issuers") and to others (referred to as "domestic concerns"). A domestic concern is defined as any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship that has its principal place of business in the United States or that is organized under the laws of a state of the United States, or a territory, possession, or commonwealth of the United States.
Payments by Intermediaries: It is also unlawful to make a payment to any person, while knowing that all or a portion of the payment will be offered, given, or promised, directly or indirectly, to any foreign official (or foreign political party, candidate, or official) for the purposes of assisting the firm in obtaining or retaining business. "Knowing" includes the concepts of "conscious disregard" or "willful blindness."
Enforcement: The Department of Justice is responsible for all criminal enforcement and for civil enforcement of the anti-bribery provisions with respect to domestic concerns. The SEC is responsible for civil enforcement of the anti-bribery provisions with respect to issuers.
SANCTIONS AGAINST BRIBERY
The following criminal penalties may be imposed for violations of the FCPA's antibribery provisions. Firms are subject to a fine of up to $2 million; officers, directors, and stockholders are subject to a fine of up to $100,000 and imprisonment for up to five years; employees and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Fines imposed on individuals may not be paid by the firm.
4.2. Pay-off the UTA Special Agents and risk being labeled as a “soft target”.
Does Ukraine have a culture of Corruption wherein businesses cannot escaped giving bribery to government officials if they expect to survive in the business environment?
Pros
1. No hassles for the company in doing government “transactions”
2. Zhuk protects his business interest
Cons
1. Vulnerable to prosecution under the US FCPA 1977
2. Erratic cost of business as bribes may reach exorbitant prices
3. Not a good role model for his employees
According to a recent study (4) Recent figures published by the MCC 2007 Baseline Survey on Corruption in Ukraine indicate that the public believes corruption is widespread in Ukraine in terms of “grand corruption” while most Ukrainians themselves have experienced a signifi cant amount of “petty corruption” across a range of different sectors (government, business regulation and inspection, university, health care, etc.):
• 67 percent of Ukrainians who have dealt with government officials over the past 12 months say that they have been directly involved in corrupt transactions of some sort.
• Bribe extortion by offi cials (25 percent) is twice as prevalent as voluntary bribe-giving (11%).
• Large numbers of Ukrainians give bribes because it is customary and expected. Often bribes are given to ensure that public services are delivered either at all or in a timely fashion.
But this is a dangerous proposition for whomever whishes to follow this route. Last 2003, in Kazakhstan, James H. Giffen, an American counselor to President Nursultan Nazarbayev of Kazakhstan, was arrested March 30 and accused of funneling $60 million in oil commissions into his boss' secret Swiss bank accounts and another $17 million into the accounts of the country's then-top oil official. He was released on bail pending trial expected to start next January.
4.3 Lead a double life, abide by the local rules of the game while investing in initiatives led by local NGOs that wanted to battle corruption in the country.
Zhuk can also choose to play along with the “local laws” and bribe all of the government officials threatening a shakedown. At the same time, Zhuk can funnel some funds to NGOs that fight corruption.
This will be a lame course of action for Zhuk as there will not be a big headway in fighting corruption if companies will hide behind NGOs while fronting a corrupt business practice.
Pros
1. No hassles for the company in doing government “transactions”
2. Zhuk protects his business interest
Cons
1. Vulnerable to prosecution under the US FCPA 1977
2. Erratic cost of business as bribes may reach exorbitant prices
3. Not a good role model for his employees
4. Will not portray a good business practice within the industry.
5. Promote culture of corruption
5. Conclusion and Recommendations
Best course of action for Zhuk is not to tolerate bribery when dealing with government officials and follow the following course of actions:
Follow anti-bribery provisions as listed in the US Foreign Anti-Corrupt Practices Act of 1977. This is the law, a good and socially responsible company should follow the letter of the law.
Draw up Code of Ethics for his company and let all employees from Top management to rank and file employee read, understand and sign the document. Expect only high moral standards and impeccable business practices when dealing in and outside of the company.
Expose bribery attempts by unscrupulous government officials to the Media. Ukraine media has been very sensitive to corruption issues especially after the Orange Revolution.
Local and Foreign Businesses should form organizations to lobby the government to implement through legislation, stricter and tighter controls for business deals.
Form an industry-wide oversight committee which will monitor all Corruption-related issues, prosecution and judicial rulings so that external check and balance can be attained.
REFERENCES:
(1) Neutze J. & Karatnycky A. (2007). Corruption, Democracy, and Investment in Ukraine. The Atlantic Council of the United States
(2) International Finance Corporation. (2004). Business Environment in Ukraine. Norway. Ministry of Foreign Affairs of Norway.
(3) Pala C. (2003, May 17). Oil Scandal Hits Kazakhstan. Washington Times. JRL 7187
(4) USIS (1998, November). Economic Perspectives. USIA Electronic Journal 3(5).
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