Confronting Corruption in Emerging Markets
JOEL ROSENTHAL: Thank you all for coming. I'm Joel Rosenthal, president
of the Carnegie Council.
The Workshops for Ethics in Business is an important part of the Carnegie Council's work. We believe strongly that business practice is a very important part of international affairs, and the power of business leaders to effect positive social change is something that's important to us. We hope that we can create a format here that will attract some of the best, leave us with some of the best ideas, and also give us the opportunity to communicate these ideas around the world.
Through the wonders of digital technology, we are able to use video, audio, and transcripts in very creative ways to reach audiences far beyond this room, primarily in classrooms, business schools, colleges and universities, but also in continuing education formats as well. So we hope that what happens around this table will have a long and lasting life, adding value to conversations about ethics in business.
Before I turn it over, I do want to say several thank-yous. I want to thank a couple of members of our Board of Trustees, who have been very supportive of this effort. Two in attendance today are David Hunt and also, in particular, Jonathan Gage. Jonathan has been very helpful in supporting the effort to make business an important part of our work.
I also want to thank Elizabeth Jordan for all of her work in getting us around the table today. I also want to say a special thank-you to Bill O'Rourke who came in from Pittsburgh. I can tell you that Bill actually knows how to say "Carnegie," I noticed right away, the Scottish and Pittsburgh way.
I know you are very busy, and we really appreciate your coming today. I'm going to turn it over to Julia.
DiscussionJULIA TAYLOR KENNEDY: Thank you so much, Joel.
Welcome to the Carnegie Council. Today we have Bill O'Rourke speaking on corruption in Russia.
As Joel mentioned, we are changing the format a little bit on this workshop. We have small cases that Bill will work through with you. We very much encourage your participation. We also have cards spaced around the tables in case you have any comments or questions that you prefer to share anonymously.
I would like to go around the room so that we can all introduce ourselves in just a moment. But first it's very important to give you a little bit more information about Bill O'Rourke. We have all become so familiar with him over the past two weeks, we can laud him. But let me give you a few facts about his background.
He has been with Alcoa for more than 35 years. He is vice president there currently of Sustainability and Environment, Health & Safety. He was president of Alcoa Russia from 2005 to 2008. He, in fact, opened Alcoa in Russia. There he learned a lot about corruption and ethics in emerging markets. He has many practical examples to share with us. He has been very reflective about that experience and goes to business schools across the country to share lessons that he has learned there. So he has a way to put all of this into a framework as well.
When we were doing research for this event, we were in touch with his former boss, Paul O'Neill, who used to be CEO of Alcoa and then moved on to be U.S. secretary of the treasury. He is an important guy to have in your corner. He calls Bill an excellent example of a values-based leader. So we felt very confident in bringing him here for this workshop and feel very lucky that he has joined us.
Bill, why don't we just start with an overall question. Tell me why ethics in business interests you and how you got started looking at these questions.
WILLIAM O'ROURKE: These issues of ethics permeate absolutely everything we do. Everyone in this room understands that. It's from the little decisions to the big decisions we make. It seems to me that they are at the foundation of everything we do. We have all had our jobs from the time we got out of school or even before that. At the time we were taught to follow the rules. Sometimes that's easy. There are rules in place for how we pay our taxes and other things that we do. But oftentimes there are not rules in place for what we do.
We have all wrestled with those difficult decisions that say, what is the right thing to do? Who are the people that are involved? How do I act in this situation? I found that that really permeates absolutely everything that we do inside and outside of our work.
It's very important, as you evolve in a corporation, that you build the kind of culture where doing the right thing is acceptable. I have started to reflect on that more and more.
I'm approaching retirement from Alcoa and that causes you to reflect an awful lot.
I reflect on people that I have had in leadership positions in my life. I have been blessed by having leaders who showed the kind of integrity where you had the support and actually the expectation that you would make the right decisions.
So you find this at all levels throughout everything that we do. I find it to be most important.
I'm a firm believer that the companies that act correctly succeed, and they succeed in the long term. It's imperative that we do that.
I have had the opportunity to be exposed to a culture like Russia. I was there from 2005 to 2008. There you learn that some things could be a little different. That has been a most successful learning experience.
JULIA TAYLOR KENNEDY: Why don't we jump in and do some of these interactive cases? We're going to start with Alcoa's decision to enter Russia. What I'll do is lay out the case against, maybe, going into a country like Russia and then I'll ask you, Bill, to talk about what the opportunity was. Then we would love your input on what you would do if you were put in the position of deciding whether to enter Russia or not, if you were at Alcoa.
Here are a few reasons maybe not to go into Russia. Paul O'Neill, former CEO of Alcoa, went in 1996 to see if there was an opportunity there for Alcoa to enter the country. He had a handshake deal with the head of a smelter there, and then, after meeting him, thinking this was a great opportunity, read in the newspaper the next day that the owner of this smelter had been killed at his workplace and decided, "Okay, I'm not going in."
You said he referred to Russia as a cesspool at the time. This was the mid-1990s.
More recently, in 2010, Transparency International ranked Russia 154 out of 178 countries on perception of corruption. It was the lowest ranked of any major economy. Multinational corporations like Siemens and Daimler branches have been accused of corruption in Russia. The current president of Russia, Dmitry Medvedev, has made several efforts to combat corruption, but he himself has said these efforts have had little impact.
So there are a lot of things against going in, especially if you state as your goal that you want to open up a noncorrupt location in Russia.
What was the market opportunity and what was on the other side as reasons for entering?
WILLIAM O'ROURKE: A lot of things changed from 1995, when Paul O'Neill made his first visit to Russia, to later. The market opportunity was always there. If you looked at the per-capita consumption of aluminum in Russia in 2005, it was about 4 kilograms per person. If you look at Western Europe or the United States, it's closer to 35 to 40 kilograms per person. So it was felt that there was a lot of upside potential in the aluminum markets.
In aerospace, all of the airplanes in Russia needed to be replaced, and they were projecting that the aerospace industry was going to take off.
In the packaging area, they put almost nothing in cans. The beverages were put in glass and they were put in plastic containers. There was an upside for the packaging industry.
Building and construction and the auto industry probably had a market opportunity that would be later. But the early ones would be transportation, packaging, oil and gas. We are drilling now at depths of about seven miles. The steel pipe gets brittle at this depth. Aluminum pipe is more ductile. We saw opportunities there.
So the market opportunity was there.
Also, we perceived it to be a good deal. We could buy some pretty good assets for $257.5 million. There were two large manufacturing plants that we wanted to buy. They were downstream facilities, not the smelter that we were looking at a year earlier. We would buy the aluminum from RusAl Corporation, who would sell us the ingot and then we would make that into castings, forgings, extrusions, and sheet and plate.
The facilities were enormous. The facility in Samara was 388 acres, had 129 buildings. It had the largest forging press in the world, the largest extrusion press in the world, a five-stand rolling mill. It had 8,000 employees just at that location. I learned that there were 400 women on maternity leave when I arrived. I thought that was high.
It's interesting. The Russian culture encourages women to stay home two or three years—not six or seven weeks, two or three years—after you have your child. You get paid a certain amount of money, a fraction of what you got paid before, which wasn't high. But they do stay home longer, so that number wasn't that extreme when you consider 8,000 employees.
We had another 7,000 employees at the plant that was in Belaya Kalitva in the Rostov region.
So these were big facilities, and $257.5 million didn't sound like a lot to pay for them.
However, 15 years earlier, the Russian government sold these facilities to private industry, who neglected them for 15 years. They were going to need a lot of investment. They were going to need about $700 million of investment in three years, which was an awful lot. We decided that we could make that investment and we could be in a position to seize the market opportunity when the business turned around.
JULIA TAYLOR KENNEDY: My question for you all is, do you see it the same way? If you were in that position, what would you do?
WILLIAM O'ROURKE: To get the discussion going, I'll tell you that in Venezuela we decided not to go. That's still the case today. So Alcoa hasn't decided to go everywhere. We still have some criteria for going in.
PARTICIPANT: To what degree could you measure the potential of corruption in Russia when you decided to enter? How much work did you do? What did you find? How did you make the decision?
WILLIAM O'ROURKE: An excellent question. If you think about what you're going to run into in Russia, number one on our list was corruption. Second was bureaucracy. We also separately identified the Russian mob that could possibly interfere, negatives that will be associated with layoffs—these facilities had about ten times the people that we would have in our good facilities—and then government interference.
We decided that we needed to establish relationships in the organization throughout the country, and we would start with the government. So we hired experts. In fact, Tom Graham is sitting next to you, who is one of the experts who was hired by Alcoa to first help us identify who were the people we needed to build relationships with. We needed to identify them. They had governors, super-governors, mayors, and then people that were in the cabinet. We did do investigations and felt that we would get the support of the government to avoid corruption at the high level. That's what we believed we would get going in.
We felt that we could beat the bureaucracy because we're an efficient Western organization that doesn't have to worry about having 7,000 accountants working on the books.
We felt that we wouldn't have interference with the Russian mob too much or we could counteract that through government help.
So that's the way that we investigated. We also talked to people like the American Chamber of Commerce and the U.S.-Russia Business Council and asked, "What are your experiences in these areas?"
We were also buying an industry that was of strategic importance to the Russian government. It was very questionable whether they would even allow us to buy 100 percent of these facilities. We were going to sell into their aerospace industry. They were going to watch us very closely. It actually took a vote of the Duma to allow this to happen.
So it was pretty high-level. We felt with that kind of visibility, we could push through corruption and bureaucracy.
JULIA TAYLOR KENNEDY: Tom, I'm wondering if you can talk through your experience working with Alcoa and maybe other firms that you have worked with on relations with the government and what that's like in Russia.
THOMAS GRAHAM: Actually, the first time Alcoa came to see me, I was working at the National Security Council. At that point I didn't tell them whether they should make this investment or not. That was certainly off-limits. But we did have a conversation back then about general perceptions of Russia, what was going on, the politics, and the corruption issue.
For Alcoa going into Russia, it was important that they were in a strategic sector, in part because this meant that there would be high-level Russian government interest in this. Two, it was also clear that there would be high-level U.S. government interest in this as well. Clearly one of the things that the U.S. government has done with the Russian government since the breakup of the Soviet Union is to stress, one, support for American companies, but very clearly that American companies are not supposed to engage in corrupt practices when they are operating anywhere, certainly in Russia, and that this is something that the U.S. government would be watching very closely.
The tactic for some company like Alcoa is, in fact, identifying those people in the government that are going to have a direct interest in this; beyond that, two or three people in their equivalent of the Congress, the Duma and the Council of Federation who are public figures that can speak either well or ill of an investment, but also are people who are important in presenting Russia's image abroad and are clearly aware of the corruption issue as a real black mark on Russia, and therefore will be interested in dealing with a specific company or a range of companies, ensuring that there aren't corrupt actions.
I will just add one other thing that we haven't talked about here which is a problem for companies even like Alcoa going into Russia. If you are going to succeed over time, obviously you have to hire Russian staff. You are not only talking about the workers that are already there, but a new breed of Russian managers, who understand the society and can operate in a different way. Alcoa has been very good in doing that, not only in Russia, but elsewhere around the globe.
Part of the training of the Russian managers is that you have to bring them out of this culture of corruption. Corruption in Russia really is, at some level, pedestrian. You face it at every moment in your life growing up. Anybody who has driven a car in Russia knows that if you are pulled aside, you have to make the split-second decision of whether you are going to pass over the 100 rubles or have something worse happen to you. Almost everybody passes over the 100 rubles.
You get an education. To visit the doctor now in Russia often requires paying a bribe. It's things that you do day in and day out, where what we would consider a bribe is actually very natural to Russians.
So how do you train your Russian managers that there is a different set of standards that they have to meet if they are going to succeed?
JULIA TAYLOR KENNEDY: Our third case is on exactly that point, so we are definitely headed there.
Maybe something that would be easier for everyone to engage on is, if you were entering an emerging market—you can use Russia as an example or, in your experience, another market that you have worked in abroad—what do you want to know ahead of time about the culture? How should managers be preparing for entering that other culture?
PARTICIPANT: One strategic approach is how to enter these new markets. Do you really go with a partner, a trusted joint venture partner, in the local market and maintain that trusted friendship/partnership approach to bring the culture to bear? That's one approach that a lot of multinational corporations have attempted, some successfully, some not.
Another approach, which we used in our case, is to take a very modest stake in a company, in a successful business locally. We have done this particularly in the Middle East, just taking 20 percent of a business. Over a period of years, you bring your culture to bear on the way they operate, on the way they produce their numbers, on their philosophies and their cultures. That actually has proven to be very successful.
Normally the world policing, for want of a better expression, catches up to these new markets and they begin to understand that their clients, which are principally multinational corporations—at least 50 percent of the clients tend to be local, some multinational—the multinationals will insist upon the transparency and the clarity. The locals will still play by the old rules if you're not careful.
The real thrust has to be, how is each corporation going to enter these markets? Is it going to go organically, which is very hard? Is it going to go in partnership? Will it take a modest minority stake and try and bring the culture across? All three elements have successes and all three elements have failures. You just have to choose what's appropriate for you in that circumstance.
JULIA TAYLOR KENNEDY: So do you want to talk a little bit about the approach Alcoa took and what it was like once you got there?
WILLIAM O'ROURKE: Alcoa decided to go into Russia. We paid the $257.5 million. We knew that we had to invest an awful lot more. As Tom mentioned, we brought a lot of expats into the operation at the beginning. There were 62. We made a mistake. We linked an expat with a Russian. There was an expat and a Russian as a leader in each of the departments. Then we realized that the Russians want to know who is in charge. They want to know who's the boss. That's their culture. And we created two bosses for all of them. It was terrible. So we dismantled that in a couple of weeks, which was a shame.
But Alcoa thought that we could bring some of our culture in, and it would help. First is safety. The safety culture in Alcoa is very high. The safety culture in Russia was about as low as I've ever seen whenever we entered the area.
These two facilities averaged more than four deaths a year for 50 years. That's terrible. The lost-workday rate and recordable rates were terrible. They didn't wear safety shoes, hardhats, earplugs, or eyeglasses at all. The people working in the cast house weren't wearing heat-reflective clothing. So we brought all that to bear.
We explained what the rules were. By the way, Russia is the most literate nation on earth. These are smart people. Once you explain the rules to them and what the consequences are, they follow the rules. The Russians followed the safety rules very well, to the point that in 2006, the first full calendar year that Alcoa owned them, there were no fatalities in those operations. The Russians said that was just luck. But it wasn't. It was following the procedures, putting the equipment in place. It was very successful.
The second was in financial control. Sarbanes-Oxley legislation had recently been passed. Alcoa was an American company that had to follow that legislation. We had to pass a Sarbanes-Oxley audit at the end of the first year and did. It came from an awful lot of processes, audits, and internal controls being put in place. Again, the Russians, when they understand the consequences, they follow the rules, and they did a very good job of that.
There was also environmental stewardship. We didn't think we had to do much. The environmental laws in Russia are excellent. The two plants that we had were ISO [International Organization for Standardization] certified. We understand that the ISO certification in quality is ISO 9000; in environmental management systems it's ISO 14000. Both of our plants had the certification.
I soon learned that you can buy anything in Russia and that may have been the case over the previous years. But we did put environmental programs in place. The Alcoa system is pretty strict. We actually passed the environmental audits and health and safety audits, which are internal in Alcoa, at the end of the first year.
So we focused on a lot of the Alcoa culture and figured that that could permeate into other areas that we had. We made some mistakes along the way, of course.
QUESTION: Do you want to say what you did on FCPA [Foreign Corrupt Practices Act] compliance?
WILLIAM O'ROURKE: The Foreign Corrupt Practices Act has become even more and more important through the years. FCPA is very important to any organization these days. There had to be strict training programs for the leaders in the organization that had to permeate then throughout the organization, so that they understood what the rules and requirements were. They were legal rules and requirements, and compliance with FCPA is absolutely imperative.
Alcoa has a pretty strict ethics and compliance program. We have the compliance line, a corporate compliance officer, the compliance investigations that go on, et cetera. We found that the Russians were very reluctant to use the compliance line and to report anything, probably because of the cultural practices of corruption that were there over time.
But, yes, we had a very strict program on FCPA. We had to.
The other area that was important was community relations. Alcoa likes to be a good neighbor in the community where we operate, and that was true in Russia as well. We had to decide, through Alcoa and the Alcoa Foundation, where we would invest, where we would try to let the community know that we were going to be a good neighbor. Early on, our foundation, through some experts on the outside, was advised to bring art exhibits to Russia. We brought an Andy Warhol exhibit out of the Pittsburgh Andy Warhol Museum. We participated in another art exhibit called "America" that went to Russia and traveled around to some different cities.
Early on, I made a recommendation that we shouldn't do that. There are people like the veterans and others who are poor, and they really could use help. Why don't we put that money to other uses? I was wrong. The Russians appreciate art and culture probably as much as, if not more than, most of the cultures in the world. They really appreciated the art exhibits that came there. So that was very good advice, and another learning for me, to be in a new culture and realize what was going on.
A couple of early remarks. The risks we found to be manageable. Corruption—sure, there was extortion in different areas, especially in the supply chain, but not as much as we expected. Bureaucracy was extreme, and I didn't clear that out as much as I wanted to. We put an Alcoa financial system in place, and I found out that the Russian financial system was still in place. We couldn't dismantle it. So they closed the books twice. Alcoa closes books in eight hours, by the way, corporately, globally. So we were doing that and then the Russians would take two more weeks to close the Russian books, which was a shame. But that kept going on.
We had no interference from the Russian mob. Smaller companies that I have met have had that interference, but we didn't, and probably because of the strategic importance and the federal awareness, both in the United States and in Russia, that our company enjoyed.
We thought there would be negatives associated with layoffs, because we were going to reduce the workforce by a lot. We actually got it from over 15,000 to 8,000 in three years. There were jobs available in the city of Samara at the time. In fact, we had people who were volunteering to get laid off, because we were going to give them a bucket of money.
The severance requirements in Russia were very low, almost nothing. We decided that we were going to give them a fair wage on the layoff, which was a few months' pay. Most of the workers had never had that kind of money before and they were volunteering to go. Then they could go somewhere else and get a job and have their small bucket of money to take with them. So that didn't turn out to be the negative that we thought it would be.
Government interference—none at the federal level to speak of. At the lower levels, as soon as you got to governor and below, yes, there was direct interference.
JULIA TAYLOR KENNEDY: Let's talk about one specific instance of that that you ran into.
Tell me about a corrupt city mayor that you came in touch with.
WILLIAM O'ROURKE: We were going to make a lot of investments. One of the investments we were going to make was to install an aerospace plate furnace in one of our facilities. We're going to make plate for the aerospace business. It's only made in four places in the world. We're going to put this city on the map. We're thinking this is wonderful. The investment is probably around $40 million just for that furnace.
The trucks are rolling in. They are bringing up the furnace from Germany. They come into the town and they get stopped by the local authorities.
JULIA TAYLOR KENNEDY: So the trucks have been stopped. They are in this small city. Then what happens?
WILLIAM O'ROURKE: The demand is made: "I see all this money coming into my city. I want some."
JULIA TAYLOR KENNEDY: This is from the mayor of the city.
WILLIAM O'ROURKE: "And I've decided it's 250,000 rubles," which at the time was $8,000 or $9,000, "or the trucks don't roll."
JULIA TAYLOR KENNEDY: So the money is trapped. Bill is trying to run this noncorrupt business. It's not a ton of money that he is being asked for in terms of the size and what he's looking to come to Alcoa Russia, to Samara.
Put yourself in his shoes. What would you do?
PARTICIPANT: Call the president's office.
JULIA TAYLOR KENNEDY: You would call the president. Why?
PARTICIPANT: Because he has the ability to direct a change on the part of the mayor.
In your opening remark, you indicated you had already established good relations and you were not worried about corruption, you were very careful to say, on the higher levels. Of course, you ran into it on the lower levels. That was inevitable. Since you had high-level interest, support from the beginning, they would be your natural allies in arresting this.
JULIA TAYLOR KENNEDY: A very interesting solution. You go over his head, essentially.
PARTICIPANT: The issue really is, if you succumb to that easy $8,000 bribe, then it's going to multiply and everybody is going to have their hand out, and you'll just never get anything accomplished, without $8,000, $10,000, $15,000 every time you turn around.
JULIA TAYLOR KENNEDY: So you're ready to take a stand.
PARTICIPANT: Your counsel would have probably told you, if asked, that you can't pay that because if you start doing that, you are going to get a letter at some point in time from the Department of Justice asking you about corrupt payments in foreign countries. So you really have a Hobson's choice there. You really can't do it for a variety of reasons. You don't want to and it's going to create larger problems for the company if you do.
PARTICIPANT: Counter to what I would say most of the time, you cannot listen to the people that work for you, because I'm sure they are lined up ready to pay the money and get the trucks rolling.
PARTICIPANT: Don't you have to ask, in the Russian context, is this, in fact, a bribe? Is this a normal procedure? Is there some juridical or legislative right the mayor has to ask for this payment? Is it, in some sense, the right thing to ask?
JULIA TAYLOR KENNEDY: So you call Tom Graham first and ask or call a Russian expert first and ask what the culture is and what the legislation is.
Now I'm going to move off of—this is not from Bill's case, but I'm sure this happens. Say you call Pittsburgh—this is hypothetical—and you have your CEO saying, "We've got to get this going. We need this fast."
So he doesn't overtly say, "Pay the bribe." But there is some pressure from above. Then what do you do?
WILLIAM O'ROURKE: That's not hypothetical, by the way. I sit in staff meetings—keep in mind, all the business presidents that report to one group president are sitting there. I have a $100 million capital budget in the first year. I'm on a path to spend $20 million, and the other business presidents want my capital money. "Give it to me. I'll spend it." I've only spent $20 million. The reason was that we wouldn't pay these people off. So I'm being told by my group president, "Do whatever it takes."
Think about it. He didn't say to do anything wrong. He wouldn't ever. He's smarter than that. He doesn't want me to do anything wrong. But, still, the pressure is there, implicit or tacit. The pressure is there to get the business done. We have to make these investments. We have orders for aerospace plate, and now the trucks are stopped.
JULIA TAYLOR KENNEDY: So you're sweating here.
PARTICIPANT: Much, then, depends on your skill and your company's skill at raising these implicit issues to the level of explicit and how practiced you are and how practiced your president is at literally saying, "There is a line which we define as corruption." Maybe it's a monetary line; maybe it has something to do with the kinds of circumstances that John and everyone have been talking about. If you can't have those kinds of conversations, then you are reduced or elevated to absolutes.
WILLIAM O'ROURKE: He makes a great point. How many times have we heard people say, "That goes without saying"? Well, no, it doesn't. We actually have to say it. In fact, the people that we counsel and advise—we have to tell them more and more that it has to be said. You can't be assuming that everybody understands what those rules are. It doesn't go without saying.
PARTICIPANT: One guideline in this area, and a common phrase that's used, is "the tone at the top." It starts at the top. It starts with the CEO and the chairman of the board making it clear to everybody in the organization what the ground rules are for going into a country such as this and what's going to be tolerated and what's not. It has to be done in full seriousness, in full candor. It can't be an eyewink. It can't be, "Yes, we're going to be ethical—and, by the way, I don't really believe it, because that will subvert the effort."
So the tone at the top in establishing the ground rules going in would be critical. You would be confronted with how meaningful that was in a situation like this.
WILLIAM O'ROURKE: I clearly wasn't the top of Alcoa, but I was the top of Alcoa Russia then. I was sent in there for a reason. I was previously the corporate auditor, the assistant general counsel, the patent counsel of the company, and had run the procurement organization. They wanted this kind of person to be there to set that tone. But the tone has to be audible. You can't be silent and think that you are setting a tone for a corporation. You just can't do this.
This was clearly a test. Early on in the organization, people are going to watch—"what are you going to do with this one? Let's watch and see what he does with this one."
All the Russians were telling me, "Pay the money. It's only a few thousand bucks. Pay it and we'll get this stuff going. We keep getting criticized for not spending the money."
There is a lot going on.
PARTICIPANT: I'm just wondering in a situation like this if there is strength in numbers. Sometimes when there is a real ethical dilemma, to be able to get somebody else on your side—and in a company like Alcoa, surely there have been many times when senior executives have faced tough choices like this—a call to someone just to talk through what happened in that case gives everybody a chance to reflect on what the stakes are and how to make this visible in the way that you just described.
PARTICIPANT: If you take the approach that Bill had to set the example and had no choice but to carry on normal practices, would he have considered finding other means to pressurize the mayor through his union at the factory, because of the jobs that would be created if the trucks went through. You have to bring in your own form of political pressure to achieve your ends, without necessarily going right up to the top of the pile. That's a practical approach. In these situations you have to look at other forms of nonfinancial pressure you can bring to bear , to achieve the goals.
JULIA TAYLOR KENNEDY: Does anyone here think he would have paid up?
PARTICIPANT: I would have considered paying the bribe and then calling Moscow and saying, "Look, this happened. We have to get this thing under way. But we're not going to do it again."
But you also have the problem that you have governors that have very different kinds of authorities than the federal government. Many of you may be salmon fishermen. There has been a Western company that was flying people into the Kola Peninsula of Murmansk. The local governor was not getting what he considered to be a proper payoff. So they sent a whole group of helicopters in, arrested everybody, and threw them out of the company. This has been in front of the International Court of Justice. The federal government took no position whatsoever. They would not come.
So you have so many different equities at play here.
But I would like to know what did happen.
JULIA TAYLOR KENNEDY: Great. What happened?
WILLIAM O'ROURKE: We informed the authorities that we were not going to pay, that the furnace can rust before they would get a kopeck, and hoped that they would be enlightened.
At the same time, we did dispatch people to try to make them enlightened and let them realize we were going to put his city on the map of the world, to make aerospace plate—"your country needs this product." We tried that way as well.
We thought about calling the authorities, but because of the fact that the federal government doesn't always have authority over the locals, we didn't do that. We also didn't do it because this was only one of many examples I can tell you. We were in a supply chain where the import/export office doesn't let anything move until you pay them. We told them, "Sorry, we're not going to pay you," and it wasn't moving. That's why we were only spending $20 million out of the $100 million budget the first year.
So we didn't do that, but we marked that down, that at our next meeting with so-and-so it will be mentioned, "These things are going on and we would appreciate your help if you could exert some influence." So that was good.
I called some other companies and asked them, "What do you do?"
They pay. Every one I called said, "Oh, you pay. It's only $8,000. Just pay. That's part of it."
Isn't that terrible?
PARTICIPANT: The Americans don't pay; their Russian employees do the paying.
WILLIAM O'ROURKE: Correct. That's what they do. In fact, they distance themselves from any of those decisions. They have justifiable deniability—"Oh, is that going on? I didn't know that."
PARTICIPANT: I have a question. Did you anticipate this problem? To the extent that you did, did you have contingency plans in place? Did it impact your procurement staging so that they couldn't hold you hostage and you could still continue with the project, generate revenue? Or was it an unanticipated all-or-nothing kind of event?
WILLIAM O'ROURKE: We anticipated the extortion through the supply chain, but we thought we could get around it. We actually built a staging area where we could import material to Finland and clear it there and clear it through St. Petersburg a lot easier, and then pay a little more in transportation to bring it to our facilities from there. That cost an awful lot of money, and then we found out that that didn't work. So we had more of the interference in the supply chain than we originally anticipated.
We did talk to the federal officials and we told them what was going on in different places. I'm sure they did something somewhere along the way. This was very frustrating. Somewhere along the line—it was about 18 months later—something happened. Maybe they realized you just don't get money from these people. So the second year, we spent $120 million; the third year, we spent $200 million. We started to spend the money without interference. But it worked, by sticking to our guns. People must have realized, "You don't get money from them. Let it go. We'll get it other ways."
I won't say that some of the suppliers didn't increase their prices, for some reason, and say, "We're going to give you expedited service, but you're going to pay a little bit more." It was transparent. It was known. It was identified. Taxes were paid on that amount. So we didn't have any issues with that.
But about 18 months later, it seemed like a veil was lifted and things happened.
PARTICIPANT: I wonder if I could make this just a little bit more difficult. Suppose the threat had not been the equipment; the threat had been, "This is a dangerous place, your employees are in danger, and you really need some protection. There's a security service locally that we can provide at a price."
Then what becomes the reaction, when you have to protect your employees?
WILLIAM O'ROURKE: That makes it very difficult. We did anticipate that to be one of the issues that we would face going into the country. We beefed up the security force a lot and got a lot of expert advice in the security area early on. Health and safety was of critical importance to us. If that would have happened, we would have protected employees. We would have made those decisions.
But we didn't have those kinds of interferences, where people would threaten lives or otherwise.
I have people ask me periodically, "What would you do if the Russian government showed up at the front door with tanks and said, 'We want the business back'"? I said, "I would give them the keys and ask for a ride to the airport," of course.
So there are certain places where you do cross the line, where you just have to say, "That's it." Maybe, if that would have happened, that's time to give up the investment. But that didn't happen in our case. We were fortunate.
JULIA TAYLOR KENNEDY: I want to move on to an issue that Tom Graham brought up earlier, which is corruption from within the organization. This is something that you faced as well. So let's move on to our next mini-case.
This one is about the time you found corruption in your own human resources department. First, how did you find out about it? Just answer that question.
WILLIAM O'ROURKE: One of the English-speaking Russian employees came to my office and said, "Are you aware that the HR manager is extorting the laid-off employees?"
JULIA TAYLOR KENNEDY: So then what do you do?
WILLIAM O'ROURKE: That can't happen in our organization.
JULIA TAYLOR KENNEDY: Right. So what do you do when you get that kind of news? What's the next step?
PARTICIPANT: You have to investigate the veracity of that claim. People constantly claim all sorts of things when they have been let go or when they have left which may or may not be true. So you have to find out whether it is indeed true first.
WILLIAM O'ROURKE: In fact, that's the case in almost every ethical issue: Gather the facts. You had better find out what's really going on in any ethical situation, because the accusations that get made can be extreme.
But this can't be going on in an Alcoa organization, that the HR is laying off employees—and as I mentioned, we gave a little more severance than you would have given otherwise or than was required in Russia. The HR manager was leading the laid-off employees to believe that they had discretion and that she was going to give them a little bit extra going-away money if they gave a little bit back in a kickback. How about that? We're talking thousands of employees, so even if it's a couple of hundred rubles, this person is going to get rich.
JULIA TAYLOR KENNEDY: How did you find out all those facts? What did you do?
We have another comment.
PARTICIPANT: I'm a little surprised that this wasn't one of the things that you did going in. I can imagine what her practices were before that, when they were hiring the people in the first place. I can't imagine. When you did your due diligence, did you find any corruption and unethical practices that you went in and took care of first?
WILLIAM O'ROURKE: We found none in the businesses we were operating, but I'll say that we didn't do enough diligence. I can give you more examples than this. The sales force gives a discount to the customer and then they somehow get a payment in return. We found some of those going on.
But it was rampant. It's the culture of the company. If you are in the stream of money and you don't take some, you're an idiot. That's just the theory in Russia. These people are poor, they are underpaid, et cetera.
And let's not be hypocrites now. The United States ran this way at the turn of the century. If you go in some places in the country, it's still being run that way. So I don't want to be too hypocritical about these practices in Russia. They have only had perestroika for 17 years. Let's give them some time to develop. They are, by the way, developing.
But we didn't do enough diligence in those kinds of areas. We allowed them to surface and felt that we would address them right away.
One way that we handled that was by bringing the expats in at the high levels—so, hopefully, would be aware of decisions at a high level—and then train and educate and bring the Russians into those positions as time would evolve.
PARTICIPANT: It strikes me that the issue really is that of petty corruption, these small bribes. My wife and I went on a tour of Moscow about five years ago. One of the deputy prime ministers dispatched his wife, car, and driver to take us around, and twice during the day, the driver reached into the center console and pulled out a 100 ruble bill to get past a police officer. It goes to the highest levels of government.
The question I have, with that preamble, is, how do you deal with all the petty little bribes that impact the company and your employees?
JULIA TAYLOR KENNEDY: Before I let Bill answer that question—because I think he should—let's return to the case. You have done your facts; you have done your due diligence; you know this is going on. What's your response as a manager to this situation?
PARTICIPANT: Fire the employee.
WILLIAM O'ROURKE: Exactly. Thank you.
JULIA TAYLOR KENNEDY: You fire the employee. She's gone. Then is there anything else related to that firing that you would implement?
PARTICIPANT: You have to set up a set of guidelines and say, "Here are the rules. This is the way the severance payment is going to work. There are not going to be kickbacks," and you put somebody in that position who you think understands that. Then you have to monitor it. Compliance is a two-stage thing. You can write a bunch of rules, but if the rules are not observed, having the rules doesn't do any good. Once the rules are there, compliance has to be followed up. Corporate audit or internal audit, whatever they are called, has to do some sort of monitoring and see that they are observed.
JULIA TAYLOR KENNEDY: Go ahead.
PARTICIPANT: In my experience, you often get a lot of kickback, as an international company trying to create new precedents of behavior within a foreign firm. Did you ever think about trying to find or identify Russian firms where you thought it was done well, to kind of hold them up as an example of how this company should behave?
WILLIAM O'ROURKE: Yes, we did. I was more successful in finding Western firms that were doing business in Russia doing it well. There were some good examples of that.
PARTICIPANT: In response to what you do after that, obviously you fire the employee immediately, but then you make an example of her. Then you roll out a robust training session so that people understand the no-tolerance policy and they understand what's right and wrong. It seems like there are a lot of gray areas in that culture. So to try to clarify that, have a very robust training system, and then test your employees on it frequently is what you have to do next.
WILLIAM O'ROURKE: These are all excellent comments, and they fall in line with what we did. We did terminate the employee, of course. I gave this example at an MBA program about three weeks ago, and one of the students suggested that that employee should get a severe reprimand. If that didn't cross the line, what would cross the line? So termination, definitely.
But then restitution. Let's go after this person to get that money back. In some jurisdictions you would actually invoke criminal conduct for that kind of behavior and give that to the authorities.
PARTICIPANT: I'm curious. Would your methodology have been any different if you were still in the United States and you found one of your employees in the United States, in human resources, was doing the same thing? I should think your methodology would be just about identical.
WILLIAM O'ROURKE: Exactly right, although in the United States our employees would have known what the severance policy was. They would have known what they were entitled to. We lacked transparency. So we had to put that program in place of not only educating the human resources department, but educating every employee that this is what you are allowed to get in a severance situation. That was the mistake we made. We didn't let all the employees know.
You have to let the people know what's going on. You have to let the employees know what the rules are and what the sanctions are going to be. For example, they drink in Russia. So we publicized for the first full month we were there, February of 2005, that intoxication is grounds for dismissal. In March of 2005, 88 people lost their jobs for intoxication, most of them on the way out, which astounds me. I found that interesting. The next month, it was about 60, then 40, 20, and now it's a handful a year, which is interesting.
You explain what the rules are, you explain what the sanction is, and then follow those rules.
We lacked transparency in that severance problem. We should have instructed every one of the employees that this is what's going on.
JULIA TAYLOR KENNEDY: Another interesting question that was brought up that I would love to hear you talk a little bit more about is the idea of public firings and making sure to follow up. Why is that so key?
WILLIAM O'ROURKE: It helps to set that tone. It helps to let the employees understand what's going to happen, and you let people know that we really do have sanctions. The sanctions are in place and they actually do happen.
In our company, for example, like most companies, we have a policy against hitting the wrong sites on the Internet. If you do that—there's no tolerance in our company—you lose your job. We're still losing 12 employees a year, which surprises me, that we have that lack of judgment at that level. We don't have to put their names in the paper, but we ought to put out on a regular basis that 12 employees lost their job for hitting those sites, to let people know this is real. Sure, you sign a paper when you come to work, but you have to let people know that these are the rules on a regular basis. And sometimes you do that publicly. Other times you actually put the name and address in there.
PARTICIPANT: Did you consider the possibility of reimbursing those employees, since one of your employees had extorted them?
WILLIAM O'ROURKE: Every one of them was reimbursed. In fact, some of them that weren't extorted claimed that they lost the money, too.
PARTICIPANT: In both case two and case three, you have this period where people are coming to terms with a new reality. Sooner or later things come around. So there was this 18-month period, in case two, after which your company wasn't besieged by bribe requests all the time. Similarly with the employee behavior, it smoothed out. Did you get the sense that that was singular to Alcoa or was that kind of a rule of thumb for companies throughout Russia, that there would be this period, roughly a year and a half, after which you were kind of over the hurdle and things were in a new normal?
WILLIAM O'ROURKE: Some of it was testing, early on. That does take some time.
But it was a unique period for Russia. From 2005 to 2008, they were coming to grips with things like financial controls and compliance officers in your corporation. I heard no talk of it in 2005, or very little talk about it. And what talk you did hear about ethics was coming from the Western companies. By 2008—and that's a pretty short period of time—you now had Russian nationals in CFO and CEO positions talking about corporate controls, Sarbanes-Oxley kinds of compliance, compliance lines in their corporations. So they were at least talking about it in that short period of time.
Sure, some of that was just the evolution of time and some testing of this new company. But it was also a change of a culture that was going on in this country at the same time.
PARTICIPANT: Two quick questions. Was there any time that you were there that you felt that trying to change the whole culture was really more than you wanted to take on?
Secondly, I don't remember exactly when Klebnikov was killed, but did that have any effect on your thinking about the whole system of corruption? Here was a man who was about to publish an article about corruption for Fortune magazine. They still haven't solved it. I wondered, did that have any effect on you or the people at Alcoa in terms of "what are we really up against here?"
WILLIAM O'ROURKE: To take your first question first, I tell people that the job I had in Russia was the best job I ever had in my life. It was also the worst job in my life. I had it every day. The highs and the lows were just terrible.
The safety accomplishments that they had in Russia—they are at 550 days without a fatality at these two big manufacturing plants—are wonderful. They were the highs. You see people getting educated and trained in some of the Alcoa locations in other parts of the world and then come back into Russia and take on leadership positions. You see the Russian nationals taking over that location and turning it profitable. That's wonderful.
But then you have the lows of every day, the frustrations. I've been robbed by the police. I've been detained in almost every airport in the country. It's terrible. It's frustrating. Sure, you reflect on it. Do we really belong here? Can we really make this work?
Then you have the highs. The highs now outweigh the lows both commercially and culturally. To see the appreciation of the Russians, to see the values that they do have—they are patriots. They are a proud nation. What they have done with the space program, the Olympics, other sports, the sacrifice they made during the Great Patriotic War in World War II, losing 27 million men in that war—it's incredible. The pride they have in their families, the love they have for relatives, it's wonderful.
So those highs outweigh the lows. If you look over the spectrum there are some real setbacks, but they are making progress. It's slow. It's slower than anybody in the world would like including some of the officials. But they are making progress. Frustration? Regularly.
PARTICIPANT: One question—maybe you're going to get to this later—what kinds of status reports was the board of Alcoa getting on this new venture? How much of the nitty-gritty were they being made aware of—for example, the incident with the human resources director? Was any of that reported up to the board in terms of their oversight role over this major initiative?
WILLIAM O'ROURKE: Our board of directors wanted a report on Russia as a regular standing agenda item at every meeting that they had, from 2005 to 2008, while I was there. I had to give the report to someone else, who would deliver it to the board. But the board thought the Russian investment was so critical that they actually visited. They brought the whole board of directors. They went from Moscow, where our offices were, to Samara to Belaya Kalitva, which is hard to get to, in the Rostov region. There I would have those discussions. Our board members really wanted to know, "What are those day-to-day issues? Could you go over them?" They appreciated that.
In fact, I thought I had their sympathy, so when I came back I suggested that my three years in Russia were like dog years and I should get 21 years of credit. But that didn't work.
They took a sincere interest. They would ask me on a regular basis how things were going.
JULIA TAYLOR KENNEDY: I'm curious, since so many of you have worked in emerging-market contexts as well, what common threads do you see from this discussion we are having about Russia that have emerged in your work in other emerging markets? What is distinct?
PARTICIPANT: You identified at the start that one of the major reasons that you went in was to satisfy local demand. You tend to run into fewer problems when you are supplying the local economy rather than when you are exporting product. I'm actually from the oil and gas space, and there are hundreds of examples of oil companies in Russia that seem to have had a lot more problems than you. A lot of that is due to the export nature of those businesses rather than industrialization and building more jobs.
WILLIAM O'ROURKE: Our import/export percentage was about 50/50. That was the plan going in and it's the plan going forward, although it's currently at about 60 percent domestic.
PARTICIPANT: And that's a lot more domestic than you will see in the oil and gas space, domestic of 10 percent, 5 percent.
WILLIAM O'ROURKE: Right.
PARTICIPANT: To what extent is the Alcoa experience in Russia really relevant to most American businessmen considering establishing a business in Russia? Alcoa is a gorilla of American industry. It has enormous capital. It has enormous influence in the United States government, close ties to the American military establishment.
You set the groundwork by establishing contacts with the highest levels of the Russian government. You are positioned in a way that most American businessmen would not be positioned if they were going to try to establish a plant or plants in Russia. So I'm not sure if your experience, as difficult as it was, how relevant it would be to a more normal businessman or how Larry [Larry Zicklin] would deal with this in one of his classes at business school, talking about the perils of going into Russia, China, India, or Brazil. It's all the same.
WILLIAM O'ROURKE: That's a great observation. Our context would probably pertain to people like Coca-Cola and Pepsi-Cola who are successful there, Boeing, BP, and other big giants. But for a medium-sized corporation to come in, they are going to run into an awful lot more problems. I appreciate that. Yes, it's completely different. They will see the same petty theft that we talked about before at the big and the small corporations that you could deal with in different ways, but at the higher levels, I'm sure we avoided an awful lot because of size and influence.
JULIA TAYLOR KENNEDY: You actually pointed that out to me when we had our interview a few weeks ago, that you recognized that.
I had one other mini-case to run, but we are running short on time. But I do want you to get the story out. Tell me about the time that you were at an airport and you heard someone talking about some confidential information. I just love this story.
WILLIAM O'ROURKE: It's an interesting one for other business schools. That's why Julia liked it. I was sitting in an airport and there were four businessmen behind me talking about the upcoming negotiation with Alcoa. This is the sales force, and they are behind me. What do you do?
That was a hard one for me.
PARTICIPANT: You put your hearing aid on and turn it up.
JULIA TAYLOR KENNEDY: Maybe for a couple of minutes, we can brainstorm. What would you do in that situation?
WILLIAM O'ROURKE: How many would listen and take notes?
How many would walk away?
PARTICIPANT: These were employees of Alcoa?
WILLIAM O'ROURKE: No. These were employees of a company that we sell to.
PARTICIPANT: Well, you shouldn't protect people from their own stupidity.
WILLIAM O'ROURKE: That's one reason. You're not breaking any law by sitting there and taking notes. They are the idiots who are out in a public place discussing something that they shouldn't. It's clearly confidential, privileged information. Is it right or wrong?
The good part of this example is that different people have different moral compasses, and they will point in different directions. Some people say you have an obligation to walk away. Others say, "No, you don't. You take those notes. They're the idiots. You use it against them."
I got up and I turned around and I said, "I'm Bill O'Rourke. I work for Alcoa," shook hands with all four. I sat back down again. They continued talking. Then I felt they crossed the line of stupidity. I took notes and got back and I called the sales manager. I wasn't even in that business. I called Bill and said, "You're going to like this phone call," and told them all the sales negotiation points.
But I have still had students in some classes say, "You still had an obligation to walk away."
It's interesting that we all have a different moral compass. The important point is that you recognize that as an ethical dilemma and you at least deal with it.
PARTICIPANT: At the beginning you mentioned Alcoa didn't go into Venezuela. You made this comment in the context of corruption. I'm wondering whether that was the decision or if it was more because of government intervention.
WILLIAM O'ROURKE: It was probably at least as much government intervention. That's a very good point. The criteria for not going to Venezuela are not the same criteria for not going to or going to other countries. That's a very good point. And it is government intervention.
PARTICIPANT: Could I just ask—this is probably a big question—why would Alcoa be interested in cleaning up the corruption in your business in Russia? They obviously put you in place, as you said, because of your background and because you were someone that would not corrupt easily. Why is Alcoa interested in that?
You could put this as, Western countries, Americans, have this culture of ethical superiority. Maybe because I'm Mexican, I don't tend to think that way. I think everyone is the same; it's just about rules and enforcement.
I'm wondering, what was the reason that Alcoa was putting you in place there?
WILLIAM O'ROURKE: I don't think it is a holier-than-thou attitude. It's rules and enforcement. In Alcoa, we have a vision that we want to be the best company in the world. We're not. But we aspire to be the best company in the world. We also have a set of values. It starts with integrity and it runs through health and safety, accountability, and profitability for the customer and the people. We want to follow those rules as well. So we have expectations in the company. We want to run the company globally under the same rules. So we weren't going into Russia to correct that company; we were going into Russia to run Alcoa the way Alcoa runs, and not allow a culture to change that.
Don't let me say that we were going to ignore the Russian culture, however. I learned an awful lot of lessons on what you should do and shouldn't do in Russia because of their culture and their beliefs and the way that they live, too. You have to respect that.
PARTICIPANT: Do you think it comes down to who has better business practices at the end?
WILLIAM O'ROURKE: Yes. And those that follow the rules win. I really do. They succeed.
PARTICIPANT: Bill, taking your comment right now, that those who follow the rules win, considering that your company was helped a lot by the Foreign Corrupt Practices Act and Sarbanes-Oxley being in existence, now that there is a lot of discussion in Congress and the U.S. Chamber of Commerce is coming out on weakening those rules and relaxing those requirements, why are more businesspeople not speaking out on the importance of having these rules in place that have not only implications here, but globally, which is in America's interest? We don't hear too many businessmen speaking out. I wonder where Alcoa stands on those kinds of positions being taken.
WILLIAM O'ROURKE: That's an excellent comment. I'm surprised as well. It's myopic for the business leaders not to take a stance. Business is in a position now to make more of an influence on how the world is run than we have taken. Business needs to stand up and take positions, and not be afraid to. They should be standing up and taking these positions. It's even in their own self-interest to have those rules in place to protect us when we are in certain jurisdictions and we can point to them. That could be self-interest.
But it's the right thing to do. It's myopia that is going on in an awful lot of corporate practices—that this might hurt me or my image might get distorted because of that. It's just the opposite. Your image might get raised a little bit if you start speaking out on the right issues.
JULIA TAYLOR KENNEDY: One more question from the audience. Then I saved the last question for myself.
PARTICIPANT: Businesses are economic animals. Ethics are critical and they are important. But it is true that corruption is a cost. It adds to the cost of doing business in places, and it's a cost that shouldn't have to be incurred. There are ethical reasons not to do it, but there are economic reasons not to do that. That's why businesses should speak out, because they shouldn't be having to incur those costs. If they all ganged up and said, "We're not going to do that," maybe it would be reduced, if not be eliminated.
WILLIAM O'ROURKE: Well said.
JULIA TAYLOR KENNEDY: Bill, we started out saying you are entering this period of reflection. You are talking to lots of different business classes and looking at your experience in Russia, as well as over your whole career.
Could you share your umbrella approach to ethical decision making? What are you able to distill from all of these situations that you have been in? Tell us why it's important to have that kind of informed approach for top managers.
WILLIAM O'ROURKE: I have tried to look at an approach for addressing ethical issues. The first step is, of course, gather the facts. There are so many people that don't do that. They jump to the conclusion or the sanction before they have gathered all the facts. It's all the facts, not just the ones you heard, but what's really going on.
Then you identify all the parties involved. There is a lot involved. If you look at what's going on at Ohio State right now, it's not the coach and it's not the quarterback. It's the fans. It's those poor students who signed up for the scholarships for the next few years. It's the other teams and the indictments that you are bringing on everybody else.
When there is an ethical issue, you are going to find that there are an awful lot of parties involved. You have to identify all of them and what their interests are.
Then identify the consequences and the obligations to different people, different organizations, and consider character and integrity, especially for leaders. A lot of you advise leaders in different places. Whenever that leader makes a stance, they are going to reflect their own character and integrity and what they are trying to build in their own organizations. They do have to speak up and say what they are trying to do.
We can come up with creative solutions on how to address an ethical issue.
My next-to-last step is to check your gut. You can feel when something is wrong. It's a visceral reaction that this is right or this is wrong. We can feel it. We know that. Some of it comes with maturity and education, but we can feel when something is right and something is wrong.
Then the final step is, act. Not acting is acting, in ethical issues. And you often have to act fast. You have to look at your watch, not your calendar, and get a decision made. Sometimes it won't be the best decision, but if your compass is pointing at least generally north, you will be glad you acted fast.
That has generally been my approach.
JULIA TAYLOR KENNEDY: Bill, this has been wonderful. You deserve a round of applause.
I want to thank you all for your participation today.
I want to thank everyone who joined us on the Web today and thank everyone in the room, Bill, of course, and everyone at Carnegie who helped put this together. It was an enormous team effort. Thank you so much.
WILLIAM O'ROURKE: Thanks for your comments. They were very good.
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