FCPAméricas Blog
“Instrumentality”: Ways the Government’s Power-to-Appoint Creates Control Over SOEs
8.24.2012
This week, the DOJ filed its reply brief in the Esquenazi appeal before the 11th Circuit on the meaning of “foreign official.” This is the first time that an appeals court will consider the heated issue of “instrumentality” under the FCPA – what types of entities constitute “foreign officials” for purposes of foreign bribery. In its brief, the DOJ argues that one of the factors establishing that the company Teleco was an instrumentality of Haiti was that “Haiti’s president and high-level ministers controlled Teleco through their appointment of Teleco’s board of directors and general director.”
What does this type of “control” look like? In the last six months, I have had the opportunity to work directly with two state-owned enterprises (SOEs) to advise them on building anticorruption compliance mechanisms. Through these experiences, I have seen ways in which such “control” can manifest itself:
Board appointees selected for political reasons, not commercial ones. When this happens, board members do not always have the necessary qualifications for the job. In cases I have seen, a board’s audit committee members could not read financial statements. Governance committee members had never served on a board before. Many board members were not experienced in the specific industry and thus were unable to make informed decisions on strategy and technology. Some board members saw their positions as rewards for political good acts, not as fiduciary duties. Some thought they were supposed to be involved in the day-to-day decision-making of the company, not long-term strategy-setting.
Unqualified lower-level hires. The government can impact the company’s business by pressuring it to hire people at lower levels of the operation. In cases I have seen, these people were not qualified to do their jobs. They became burdens, not assets. This undermined the effectiveness of the particular business unit and wasted resources.
Unfavorable suppliers and third parties. The government can impact the company’s decisions on use of suppliers and third parties. A company might be pressured to hire a supplier with a relationship with a government official and whose equipment is more expensive and less reliable. It might be asked to hire a marketing agent who has no knowledge of that market.
Misguided investment decisions. The government can impact the company’s decision-making on investments. Decisions on the provision of services might be made to please certain constituent groups for short-term political gain rather than lay the groundwork for long-term commercial success.
Such political interference means that the company is not fully operating like a commercial entity. It is somewhat serving a political purpose, and somewhat performing a commercial role. This bipolar existence has the effect of damaging morale. Employees want their company to succeed. They want their own performances to be measured against transparent standards. They are frustrated when decisions are made, not to improve the bottom line, but for other reasons. Constant turnover of a country’s political leadership leads to turnover of state-owned company’s own leadership, which thwarts planning and growth.
The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.
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© 2013 Matteson Ellis Law, PLLC
Post authored by Matteson Ellis, FCPAméricas Founder & Editor
Comments
August 28th, 2012 at 9:17 pm
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June 18th, 2013 at 5:01 pm
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