In the news, some politicians are disagreeing with ESG or Environmental, Social and Governance goals, while many companies including investment managers are agreeing to examine ESG factors. In reality, ESG are factors to help you choose between candidates. In terms of environmental – how does the company treats its wastes and what happens if a spill happens? In the social – the social can be how does it treats its workers and the community it is located in? and governance includes how are decisions made at the Board level and does the company use bribes to secure business?

The issue of bribes is a book called Kickback – Exposing the Global Corporate Bribery Network written by David Montero, published by Viking Press, NY, 2018.

All companies will policies on how much to give in the expectations of continuing business relationship beyond the normal aspects of great products and customer service. How is the decision made to have the contract go to your company? All company executives have to meet their numbers or quota or whatever you wish to call it. Relationship building is part of the tax code and is part of the business, sectors such as hospitality and corporate gift giving depend on it.

In the book, Mr. Montero outlines companies which have paid bribes to government officials to secure large contracts in the country. The big pharma, big oil companies, the big telecommunications companies, the big construction companies and the list goes on, all have paid bribes and many paid fines because of their actions.

In 2009, Jonathan Karpoff, an economist at University of Washington analyzed the Foreign Corrupt Practices Act (FCPA) cases 143 cases ranging from 1978 to 2013. The evidence was companies making bribes are rarely apprehended and that bribe penalities are too low. Mr. Karpoff believes the ratio is 6.4% and while the penalities to the companies are often in the millions, given the companies are worth billions, it is less than 5% of their income or the behavior does not change.

Mr. Karpoff estimates for every $1.00 in bribe paid, it receives $5.60 in benefit. The Justice department believes the number is closer to $10.00 in benefits. In addition, when a company announces a foreign deal, the stock tends to increase 3.15%. Mr. Karpoff found if the firm is fined for bribery, Wall Street yawns, but if the charges include financial fraud or financial manipulation, then the stock tends to go down.

Linking to dividend paying stocks, one of the good things about dividend paying stocks is they tend to have sustainable income every year and many are diversified to where the revenues are received. Some of the revenue is received from outside the US which gives the country a larger pool of customers. Some of the countries outside the US the government officials will need to receive donations to the reelection funds or a number of years ago in Indonesia, the government’s family became a 10% partner in the company. The President was known as Mr. 10%, he is no longer President but the family’s business connections remain. Bribery is an accepted part of doing business, if the company does not want to do it then it often stays a regional company in size.

There are more questions than answers, till the next time – to raising questions.