Emerging Market Multinational Companies – Ready for Prime Time?
October 17th, 2013
October 17th, 2013
Transparency International released the report, Transparency in Corporate Reporting: Assessing Emerging Market Multinationals, on October 17th. You can download the report here.
The world is changing. The United Nations Development Programme projects that by 2020, “the combined economic output of three leading developing countries alone – Brazil, China and India – will surpass the aggregate production of Canada, France, Germany, Italy, the United Kingdom and the United States.”
The growing importance of emerging markets means their impact is felt broadly around the world. Thus it is important companies from emerging markets do all they can to stop corruption from being a part of their business. As markets become global, the ethical and transparency standards of companies must become higher and more universally applied.
The Transparency International study Transparency in Corporate Reporting: Assessing Emerging Market Multinationals assesses the corporate reporting practices of 100 large multinational companies from emerging markets. These rapidly expanding companies, identified as rising stars of the world economy, come from 16 different countries.
Our report, which used the same methodology as our similar reports carried out for the world’s largest 105 companies in 2012 and for the oil and gas sector in 2010, looks at what companies disclose publicly about the measures they have in place to fight corruption. It also looks at companies’ openness about how they are structured and to what extent earnings and taxes in specific countries are made public.
Get with the programme…
The 100 emerging market companies evaluated in our study achieved an average result of 46 per cent in reporting on their anti-corruption programmes. In the 2012 Transparency International report assessing the reporting performance of the world’s 105 largest listed companies, the average score on reporting on anti-corruption programmes was 68 per cent. Emerging market companies have to do better but with some effort they can surpass the performance of global companies.
No company achieved a perfect score but companies from India are clearly ahead of the pack. Tata Communications, Tata Global Beverages, Tata Steel and Vedanta Resources scored 92 per cent. 50 per cent of the companies with the lowest scores are privately owned.
Seventy-nine companies published a statement that they are committed to complying with all laws, including anti-corruption laws. But almost half did not have an unequivocal statement of zero tolerance of corruption. Only six companies were found to have a public statement on the prohibition of facilitation payments.
If you’ve got it, flaunt it!
A few companies scored 0 overall, not because they have no anti-corruption or transparency measures in place, but because they limit the access to the pages of their websites where the information we look for is generally located. Companies that publish their anti-corruption policies and disclose the key measures they have in place to fight corruption send a strong signal to stakeholders that the company is committed to fighting corruption. Public reporting also helps companies focus attention on their practices and helps them improve.
Practice makes perfect
There was a small overlap between the companies surveyed in this study and those covered in the June 2012 study Transparency in Corporate Reporting: Assessing the World’s Largest Companies. Of the five companies included in both reports – América Móvil, Gazprom, Petrobras, Reliance Industries and Saudi Basic Industries – four significantly improved their reporting on anti-corruption programmes.
Corporate structures – let the sun shine in
Our study looked at the amount of information companies disclose on their related holdings, particularly information on majority and minority holdings: names, percentages owned by the parent company, country of incorporation and countries of operations. This is important because company structures can be made deliberately opaque to hide the proceeds of corruption. It’s also important because it allows citizens to know which companies are operating in their country, bidding for government licences or contracts, and who has asked for or obtained favourable tax treatment.
The average result for the organisational transparency dimension is 54 per cent. Five companies scored 100 per cent. This shows it is not impossible for companies to provide this information.
Nine out of the eleven worst performers are incorporated in China.
Companies that are listed on the stock exchange are much more transparent about their corporate structure than those that are state-owned or privately held. The listed companies achieved 67 per cent, state-owned companies 24 per cent, and privately held companies 15 per cent.
The payments made to governments by companies should benefit the communities these companies operate in. This is why we evaluated the disclosure by country of financial reporting of revenues, capital expenditure, income before tax, income tax and community contributions by the 100 emerging market companies.
And we’re not the only ones who think this kind of information is important. The Dodd-Frank Act passed in the United States in 2010 makes it mandatory for companies registered on a US stock exchange to report – for every country they operate in – all payments to governments (US and foreign). In the European Union, legislators recently adopted similar rules for European companies in the oil, gas, mining and logging industries.
So how did the 100 companies fare in country-by-country reporting? The average score was 9 per cent. Granted, it’s a lot lower than the scores achieved by the companies in the two other dimensions (46 per cent and 54 per cent) but in comparison to the results of the largest 105 global companies evaluated in our 2012 study, it’s more than twice as high as that group’s 4 per cent score.
Indian companies scored an average of 29 per cent and that’s because Indian law requires companies to provide key financial information on their subsidiaries. This is a very positive step but it’s not quite as transparent as reporting on a country-by-country basis.
The best performing company was Falabella, a Chilean retailer, which achieved a 50 per cent score. Still, 38 companies scored zero.
Building transparency – one BRIC at a time
The BRICS – Brazil, Russia, India, China and South Africa – have become economic powerhouses. Their total contribution to global economic growth is estimated to have soared to 50 per cent following the financial crisis. Because of their role in the global economy and the leading role they play among emerging markets, we believe the BRICS must join the global fight against corruption. But their companies (75 are covered in this report) have a way to go before they can claim to be at the forefront of anti-corruption and transparency practices.
Companies from India performed the best overall among the BRICS, with a score of 54 per cent (5.4 out of a maximum score of 10) on the strength of their performance on country-by-country reporting.
South African companies followed close behind, leading on the first two dimensions: reporting on anti-corruption programmes and organisational transparency. China lagged behind with a poor score of 20 per cent (2 out of a maximum score of 10). Russian companies averaged 43 per cent (4.3 out of a maximum score of 10).
For more on the BRICS’ performance, see our report’s special section beginning on page 34.
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