Europe's New Minefield

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European companies are adapting too slowly to the regulatory environment, potentially giving an advantage to U.S. corporations. The tough enforcement climate that European companies now face is nothing new in the United States. It has been 30 years since its Foreign Corrupt Practices Act made the payment of foreign bribes illegal, compared with less than nine for Europe. The so-called "long arm" of U.S. law and years of coping with hostile legal and political environments have driven U.S. corporations to build compliance programs that are stronger and more far-reaching than their European counterparts.

The problems facing Siemens, the German industrial group, exemplify the cost and distraction that bog down a company suspected of wrongdoing. More than $2 billion of suspicious transactions in more than 60 countries have been identified. On the legal front alone, more than $475 million has been paid in fines and penalties, with a further $938 million spent on advisers. Siemens has been barred from being a supplier to the Italian, Nigerian and Norwegian governments. Top executives have resigned or been fired, and several Siemens managers and consultants have been arrested or put under criminal investigation. The Siemens-Nokia joint venture was put on hold. Siemens' share price has suffered. We can expect other negative consequences long after investigations end.

European corporations operate in more complex environments than ever before, where the odds of facing a damaging compliance crisis are high. Markets and the media tend to view the accused as guilty as soon as a regulatory inquiry begins. Aggressive consumer groups, activist international investors and busy plaintiff lawyers relentlessly shadow corporations undergoing a compliance investigation.

Because of new laws and enforcement actions, as well as cooperation among prosecutors and regulatory authorities, European companies also face far higher legal risks. New capital market laws and reformed codes of corporate governance mean more stringent internal controls and disclosure requirements. International bribery was made illegal by the 1997 Organization for Economic Cooperation and Development convention, and in some countries corporations have criminal liability. Competition laws are stronger and more rigorously enforced, with violations treated as criminal offences in countries such as Britain. Consumers and retail investors have greater protection and new legal remedies, such as class actions in France and Italy.

The risks multiply with so many European companies operating beyond their country of incorporation. Managers operating locally may be more tempted to accept requests for bribes or enter into anti-competitive agreements. Global operations require working with agents, suppliers, distributors and other third parties, and proper due diligence on these parties is often missing.

To be sure, more than a few global companies with headquarters in Europe maintain sophisticated processes to support compliance, often as a result of past regulatory disputes. Akzo-Nobel and Shell are two examples. Most European companies, however, are ill-equipped. Many corporate heads of legal affairs and compliance recognize the regulatory threats and the potentially disastrous consequences of alleged wrongdoing. Unfortunately, too many boards and chief executives practice avoidance and let their companies operate at a competitive disadvantage.

We prescribe prompt action. Companies must commit sufficient resources to build the culture and infrastructure to address these challenges, including "mapping" of legal risks, internal controls, monitoring and action in response to compliance issues. The policy at the top is essential; closing one or both eyes and letting mid-level managers engage in illegal practices is no longer a viable commercial strategy.

A big component of U.S. corporate compliance strength is the prominence of the legal and compliance functions. The chief legal officer is often among the company's best paid executives and has full access to the board and the resources he needs. It is no surprise that when Siemens elevated the global legal and compliance position to react better to the crisis, it hired a legal executive from General Electric. In-house lawyers need both status and access to corporate leadership in order to fulfill the duties expected of them.

European companies must also learn how to interact effectively with regulators during investigations, as well as how to maintain relationships with officials as the company (and the law that regulates it) changes and grows. Addressing the issue of compliance is important to be able to compete effectively and preserve the company's reputation and value. Call your chief legal or compliance officer and get his views. Today.

Leigh Dance is president of ELD International, a consultancy to global corporate legal departments and law firms. Bruno Cova is a partner of Paul Hastings, former general counsel at Eni and Fiat and chief legal adviser in the Parmalat investigation. This comment appeared in the Financial Times.