Tag Archives: eastern europe

Business Ethics in ‘Eastern Europe’ – Concluding Thoughts

I have lived and worked in ‘Eastern Europe’ since the summer of 1987, when the region still lay behind the ‘Iron Curtain’. The last years of Soviet-inspired communism were apathetic rather than fervently ideological, and cynicism about public institutions – Government, the law, the media and politics – was the norm.

On the other hand, greed and materialism had little to work with. Following the collapse of Soviet Communism private enterprise emerged and finally flourished, unconstrained, on the whole, by law and morality. The crumbling assets of the former regime were up for grabs, and grabbed they were.

eastern europe

I’ve written four posts on the ethical framework of those years, and have itemised many of the ways in which the cynical businessman might exploit his partners, competitors, suppliers, employees and the state.

Ethics and Business – ‘Eastern Europe’ after the Revolutions

Business Ethics in ‘Eastern Europe’ -Everyday Misdemeanours

Business Ethics in ‘Eastern Europe’ – Further Opportunities for Mischief

Business Ethics in ‘Eastern Europe’ – Tax Evasion and Other Ills

It was within this framework that I built my own company LLP Group in Prague from 1992. Staying ‘clean’ was not impossible, but it was difficult, assailed as one was by requests for bribes, and recommendations by clever accountants of clever tax avoidance and evasion schemes. It was the Wild East, where anything went, and where the Government was always and ineptly in catch-up mode.

As LLP grew and spread across the region – to Hungary, Romania, Bulgaria, Poland, Russia, and Slovakia – I tried to spread the ethical word through frequent visits and by explicitly documenting the company’s policies. In the management manual I wrote as guidance for local managers I made it clear, for example, that if a gift (a bottle of wine at Christmas, a box of chocolates, flowers, a lunch or dinner) could not be declared by the recipient to his or her manager (and so on up the tree) then it counted as a bribe.

Times have changed, and business ethics have reached a much higher standard. By chance we found ourselves, in 2010, involved in clearing up the ethical mess of the UK’s Parliamentary expenses, as the supplier of the expense management system into which all MPs’ must now enter their Parliamentary expenses. I was proud that an Eastern European company was chosen, especially in the light of everything I’ve said. It no longer seems obviously absurd.

I’ve painted a dismal picture of business ethics in Eastern Europe. Most of what I’ve described was common practice before admission to the EU. It’s less common now, but still not infrequent. Business with the public sector is still as corrupt as ever but in the private sector less so. Business with international companies and organisations is overwhelmingly clean.

Joining the European Union (there were two waves of admission – in 2004 and 2007) has helped, and I think the Czech Republic, Slovakia, Hungary and Poland, are cleaner than they were. I would guess that if you were to award the UK nine out of ten for business probity, you could probably give these four countries six out of ten. Four out of ten, perhaps for the Balkans (Romania and Bulgaria), two out of ten to Russia, one out of ten to Ukraine.

If you’re an investor considering investment in a business in Eastern Europe (or anywhere else, for that matter), how can you judge that a business is ethically sound?

There are audit firms that specialise in ‘ethical audits’ but I am sceptical as to how thoroughly and imaginatively they can do their research.

  • You must look at how a business treats its suppliers, its employees, its customers, and the wider community it operates in.
  • Are its products harmful? If so, does it take steps to mitigate that harm, and inform its market of the dangers of its products (I’m thinking of drink, drugs, sugar, fats, and sex).
  • Is it careful with its consumption of energy?
  • Does it treat the environment well, and clean up the damage it might do?
  • Is it, literally, a blot on the landscape?
  • Does it encourage its employees to study?
  • Does it retain its employees and foster their career development?
  • Is it reasonable with regard to medical absences, maternity, or paternity leave?
  • Are its offices and workshops safe and pleasant?
  • Does it encourage employee feedback?
  • Is staff turnover an indication of care or disregard?
  • Does it pay its suppliers on time?
  • Does it strenuously avoid, or evade tax?
  • Does it contribute to good causes and do so with the active involvement of managers and staff?
  • Does it abuse the EU’s largesse?

These are difficult questions to answer when you’re looking at a business form the outside, and from a distance, but to be really sure that you’re investing ethically, in the wider sense, I would suggest you need answers to them all.

Business Ethics in ‘Eastern Europe’ – Tax Evasion and Other Ills

There are all sorts of ways you can cheat your customers, your employees, your competitors, your partners and the taxman. Whilst you can find such mischief all over the world, in former socialist ‘Eastern Europe’ these tricks were especially common in the early years of democracy and capitalism in the 1990s, even if they’re a little less common now.

See my three previous posts on the background to and the development of business ethics in the region:

Ethics and Business – ‘Eastern Europe’ after the Revolutions

Business Ethics in ‘Eastern Europe’ -Everyday Misdemeanours

Business Ethics in ‘Eastern Europe’ – Further Opportunities for Mischief

Ethics and legality are necessarily different issues, even if ethics is the foundation on which law is built, but the law can only attempt to sanction the most egregiously immoral acts of business mischief, not the lesser, everyday kind. Even so, what is not illegal is nevertheless sometimes wrong, and almost always inexcusable and avoidable. It is no excuse to protest that many kinds of mischief are and always will be perfectly legal. In all aspects of life, there are more ways of doing wrong than of breaking the law – there is no law, for example, to prevent you cheating on your partner (in most of the developed world, at least).

taxevasion

Sadly, though, it’s often possible even to break the law without sanction. Tax evasion, for example, the deliberate flouting of the law, is often very hard to detect. What are the usual tricks?

Number 1: Many business owners put their personal expenses through the company.

This is an easy option if the sums aren’t too large. Who’s to say that those air tickets to New York aren’t a legitimate business expense? It might be hard to justify tickets to the Met (client entertainment perhaps?), but for auditors it would be difficult to establish that a visit to New York was pleasure, and not work. You can also use this trick as a tax-efficient way of rewarding your employees.

Number 2: Many companies bill phantom ‘services’ from tax-efficient jurisdictions

Unless you’re operating in a flat-tax jurisdiction (Slovakia was briefly one), it’s usually better to get money out of your company before the taxman levies corporation tax on the profit that remains. For example, you can siphon cash anonymously through tax-havens by invoicing spurious (but plausible) services from, say, Cyprus, thereby reducing the tax base. The company in the tax-haven, if it’s not actually entirely yours, takes a cut and passes the rest on to an offshore account.

In the early 1990s the Governments of Eastern Europe lacked the investigative powers and the devious imaginations required to chase this errant profit to its low-tax haven. Civil servants are often less talented than tax advisers and are paid a lot less. This also makes them more amenable to corruption.

A friend of mine worked as an accountant for a small British firm that set up shop in Prague in the 1990s precisely to perform this clever kind of service for expats like me who were running small businesses.

Number 3: You can get paid in cash to avoid revenue being booked and declared

Many businesses like to be paid in cash, especially black market cash that doesn’t find its way into the company’s accounts, and which doesn’t therefore get taxed. It’s cash that can be used to pay unofficial bonuses to employees, too, instead of taxable salary. You have to be a cash-based service business such as a hotel, or a restaurant, if you’re going to do this on a big scale.

In the end, companies and private individuals pay their taxes when they’re reasonable, and when they trust their government to collect them fairly and spend the money wisely. In the moral vacuum of post socialist Eastern Europe there was no such trust, and it would be rare for a businessman to feel that denying the Government tax meant that some poor pensioner, or needy child, might suffer.

Businessmen can cheat their partners, their customers, their employees, their competitors and the taxman. But the list doesn’t end there.

The Banking System.

Banks can also be easy prey. Before 1989 state banks in Eastern Europe operated under Government and Party rules. Unleashed, they were free to make unsafe loans at attractive rates of interest to friends of friends who wanted to purchase state assets at knockdown prices from other friends of friends. The limited liability company, especially when operating in a legally loose environment, was the perfect channel for cash to flow from the public domain into the private pocket. Set up a company, borrow from the banks, pay the money to yourself either directly or through another ‘service’ company, and then default on the loan and close the company you started with. I met a lady who had danced her way with this particular quickstep into an enormous fortune. Butter wouldn’t melt in her mouth.

Lending is now more sophisticated, but in Moldova they’re still dancing to this kind of tune. A billion dollars (nearly 10% of GDP) was ‘lent’ by state-controlled banks for unknown purposes to a number of anonymously owned shell companies (one or two of them located, I believe, in Glasgow) that have since defaulted and vanished from view. The former Prime Minister, Vlad Filat, is widely suspected of collusion, and has now been charged, but he’ll probably get away with it. What is possible appears to these perpetrators to be permissible, and it all takes place anonymously and at high altitude, as if there are no desperately poor villagers to pay the price.

The European Union.

The EU has sent billions into Eastern Europe. I won’t go into the detail of how these funds can be diverted, but suffice it to say that there’s a whole industry built around it.

There are also sins of omission:

Good Deeds.

In the West, businesses pride themselves on the good works they do that have little to do with their business, such as supporting charities, sponsoring the arts, and so on. This is good for employee morale, good in itself, and, let’s face it, good PR.

They also take care to pick suppliers who are ethical. High street clothes retailers are expected to make sure that their suppliers are also behaving ethically.

Good businesses also take care of the environment.

Awareness of these obligations is growing in Eastern Europe, but from a very low base.

As a businessman I’m aware of all these tricks, but have avoided them. At my company we refused to pay bribes, and I held firm to this policy despite the occasional entreaties of my sales staff (in the distant past). That meant we couldn’t bid for Government tenders, but the companies we worked for, large multinationals making new investments in new markets, were by and large clean. We were asked for bribes once or twice, but we refused.

Bribery isn’t lawful for most Western firms, but who can discover if bribes are delivered by third-party consultancies. Protection money shouldn’t be paid, either, but I was given to understand that when a large international oil firm set up its petrol stations around Moscow’s ring road, protection money was paid on its behalf by a third-party security firm.

And when is a bribe a bribe rather than, for example, an ‘educational trip’? The large pharmaceutical companies, who, on balance, do a lot of good in the world, send health care professionals on lavish educational or professional conferences, and sponsor their research. Do these benefits encourage them to recommend their products? We would be naïve to suggest not.

 

Business Ethics in ‘Eastern Europe’ – Further Opportunities for Mischief

Business ethics in the former Socialist Republics of ‘Eastern Europe’ have evolved, by and large positively, over the last 25 years, but from a deplorably low base. Oligarchs, corrupt civil servants, politicians, judges and policemen, you can find them all on the beaches of the Riviera, even if nowadays you might also find a few honest businessmen.

luxury

In two previous posts I’ve written about the moral vacuum of the early ‘Wild East’ days that followed the collapse of a socialist utopia where all were equal losers, and I’ve outlined the opportunities that sadly still exist for the exploitation of business partners, competitors, and employees. These misdemeanours, though practiced with an easier conscience in Eastern Europe, aren’t at uncommon in the rest of the world either, especially those related to tax.

Ethics and Business – ‘Eastern Europe’ after the Revolutions

Business Ethics in ‘Eastern Europe’ -Everyday Misdemeanours

There are many other kinds of victim. Let’s continue….

Suppliers.

Unfortunately suppliers, too, like to be paid for what they supply you with or do for you. They, too, have designs on your money. What can you do to avoid this?

  • One option is simply not to pay them.
  • Another is to screw them in terms of the demands you make, and the prices you force them to accept.
  • But best of all, is to be them, so that when you do pay them you’re actually paying yourself.

When large state companies were broken up in the early 1990s one common trick was to set yourself up as the owner of an essential supplier of the larger company you worked for. You might even arrange to buy a spun-off supplier at a knockdown price. You could then arrange for attractive deals to be done with the company that you own.

I believe you must treat suppliers fairly. One of our earliest multinational customers was Johnson & Johnson. They make consumer goods, medical devices and medicines. They’re generally a delight to work for, reasonable in their demands, and prompt in their payments. In each of their offices they place their Credo on the wall where staff, customers and suppliers can see it. Amongst the usual blah-blah about customer care and quality (which, of course, they do take extremely seriously) was something that I was pleased but surprised to see – a sentence that goes something like this: ‘We will treat our suppliers reasonably and we understand that they must make a fair profit.’ This is not an understanding common to all businesses. For most, the game is one of ‘screw the supplier’ as if the contract is a zero-sum game. A supplier’s profit is the customer’s loss. We’ve recently seen Tesco in the UK criticised for this approach.

My company, LLP Group, is fortunate in dealing with international companies, who are, by and large reasonable (we haven’t yet worked for Tesco) but I know that Eastern European companies abuse their suppliers with relish. In one instance, one of Russia’s oil majors abandoned their efforts to implement the software we’d sold them for their subsidiary in Romania, and simply chose not to pay us the 50,000 EUR they owed us, with complete impunity. There was nothing we could do about it. Lawyers are too expensive and, anyway, it would have taken at least three years for the case to come to court.

In running LLP Group I take the view that one must pay one’s suppliers promptly according to agreed terms, unless there are very good reasons not to. It is a moral duty as well as a legal duty.

Tax Authorities.

No one pays their taxes eagerly, but in most countries there’s at least a modicum of trust between the taxing and the taxed. We recognise, reluctantly, that the taxman and woman represent the country’s real interests, and whether we quibble or not about refugees and benefits, there are roads to be built, armies to sustain, and hospitals to run. In Eastern Europe there is no such consensus that Governments tax justly and spend sensibly.

Just the other day, I was offered the opportunity to wriggle out of the 15% withholding tax that I must pay on dividends I pay myself from the company.

‘I think 15% is reasonable,’ I said. ‘I’d pay much more tax if I lived in the UK.’

‘You wouldn’t think it reasonable if you knew how much the Government steals, or wastes,’ was the reply.

There are always two ways of reducing your tax bill. There’s the legal way, which is called avoidance, and the illegal way, called evasion. The practice isn’t peculiar to Eastern Europe, and I’ll refer to some Western businesses to illustrate some of the most common tricks.

Now, avoidance is fun. It’s a creative art. There are probably as many ways of avoiding tax as there are tax laws multiplied by the tax consultants who can help you circumvent them.

These are some of the obvious scams. They’re immoral even if they’re not illegal and they’re used by some of the largest and most successful companies in the world, such as Google and Starbucks.

  • You can ‘Google’ (a new meaning for the word) your intellectual property to a tax-efficient location and siphon your profits away from higher-tax locations (we were once advised to register the ‘LLP’ brand in Luxembourg and then bill all our subsidiaries for its use)
  • You can ‘Google’ your invoices from a tax-efficient location and claim that that’s where the sales took place

The fact is that Google and Starbucks aren’t actually breaking the law. If they were, prosecutions would have been brought. If they’re making deals with the tax office and paying a little more into the public coffers, it’s only for PR purposes (for the benefit of both parties) rather than any admission that they’ve filed their tax returns incorrectly.

Google defiantly claim to make its sales, and therefore, its profits, in Ireland. But what makes a sale? What establishes the physical location and the tax jurisdiction of a sale? Is it a matter of where goods and services are received? Or the location of the company that’s paying? Or where the bill is printed and booked? Or the location from which the goods and services are delivered? These are difficult questions.

Should taxes be levied on sales value at the customer’s location (as Lord Lawson has recently suggested) or on ‘profit’, something that international companies, especially in the service sector, find it easy to manipulate. Place some intellectual property (such as the Starbucks logo and methods) in a low-tax jurisdiction such as Luxembourg and you can get away with charging around 7.5% of revenue to your subsidiaries for their ‘use’ of the corporation’s branding. That takes care of most of a company’s taxable profit (who makes much more profit than 10% of revenue?).

I don’t see an easy solution to this problem. Taxing sales, on the basis of the location of the recipient of goods or services, would be very cumbersome to administer and an impediment to economic activity. My company, for example, would find itself paying taxes in more than fifty countries each year? How could those states audit the correctness of our calculations?

So, there’s the ‘sales location’ scam that suits companies, such as Google that deliver intangible items and there’s the intellectual property licensing scam that suits companies such as Starbucks where operations are delivered by a subsidiary but ‘designed’ elsewhere.

And there are countless other scams, such as the insurance scam. A large international company can set up an insurance agency in a low-tax jurisdiction and charge large premiums to subsidiaries elsewhere. Profits are thereby transferred. All of these acts of tax avoidance are immoral, but they’re not usually illegal.

But is tax actually a moral issue? In their defence, managers of these large international companies cite their duty to shareholders to maximise distributable profit, as if ethics are irrelevant. But ethics are important, and it is left to the owners of small companies such as mine, answerable only to a small group of shareholders, to make moral choices when it comes to tax avoidance. In my view it is wrong to avoid tax through clever, energetic, distorting manoeuvres. Somehow tax law needs to build on our sense of what is ‘appropriate’ and ‘natural’ when it comes to tax. We all know when people are being evasive, and we all know when companies are being evasive. But how to capture that in definitions that will ensure a level playing-field, as the law does?

Tax harmonisation, of course, would solve some of these problems, since one country couldn’t outmanoeuvre the others by offering the incentive of lower taxes, but even so, a large international company could still obtain economies of scale by placing all of its administration and tax affairs in one place rather than in many.

Next time, we’ll look at evasion.

Business Ethics in ‘Eastern Europe’ -Everyday Misdemeanours

In Ethics and Business – ‘Eastern Europe’ after the Revolutions I described the moral vacuum that prevailed, at least in the public domain, as Eastern European socialism collapsed at the end of the 1980s.

It was in this jungle that I started my own business in 1992 in Prague. I came to it, of course, with a very different set of business principles from those of the ruthless pragmatists, often former socialist party functionaries, who found themselves enviably well placed to take over, or steal, the public assets of the former regime. My parents had instilled in me the ideas of decency, honour and social responsibility, but these would have meant nothing to these new capitalists on the make.

oligarchy

What was ‘business’ to them?

They would probably think of business in the crudest terms – businesses make money for their owners. Conventionally, of course, money comes from profit, but loans from banks, tax credits from the Government, EU funds, all these can do the trick too. The problem, if you’re an entrepreneur is always that there are others who want the money too, or want to take it away from you. For example, your partners, your competitors, your employees, your suppliers, the taxman, your lenders, the European Union, even do-gooders who want to spend your money on orphans, the hungry and the sick, they all want your money.

How can you stop them from getting it?

Partners and Shareholders.

Well, best not to be sentimental. Partners and shareholders are useful at the beginning, when you need their money, ideas or connections, but if you don’t need them anymore and you want to get rid of them, you can simply ‘tunnel’ them to reduce their shareholding and thereby reduce the dividends you must pay them and the value of their shareholding. You can do this in at least two ways.

If you have a sufficient majority in the company, and if your shareholders’ agreement permits the move, you can call for a capital increase which you know your partners can’t afford or won’t risk. Thereby, their own shareholding is diluted and more of your company and your profits are yours.

For example, a friend of mine was involved a few years ago in the purchase and re-launch of a dance club in Prague. He had the idea and the experience, and another man had the money. My friend became a substantial minority shareholder. Sadly he was more optimistic than he should have been when he signed the shareholders’ agreement. Once the club became successful, financed by a loan from the majority shareholder, a capital increase was announced. The majority owner converted his loan into equity. My friend couldn’t match his investment, with the result that his own shares were diluted to insignificance.

Another way, if you have legal responsibility for a company (there must usually be a legally appointed managing director for a limited liability company), you can empty out the business by selling everything, lock, stock and barrel, at a knock-down price to another company you’ve set up that you own in its entirety.

There are other even more unsavoury ways. If you’re so minded, you might threaten your partners with violence, and persuade them to sell you their shares for a pittance under duress. You could also bribe a judge or two to rule that your partners’ shares are invalid. One thinks of Russia.

Competitors.

There are no rules when it comes to competition. Rumours, spying, sabotage, all are useful tools for the Eastern European businessman. Fair play and amicable competition, an agreement to differ, all are alien concepts to many of the new businessmen of Eastern Europe. In Britain, amicable, respectful disagreement is part of life and business. Even when emotions run high in the House of Commons, it’s entirely imaginable that ideological adversaries (take Tony Benn and Enoch Powell, for example) can find common, human, ground. In the Parliaments of Eastern Europe, as between businessmen, fights are not uncommon. Competitors are enemies, and there are no conventions and rules to limit the damage they might attempt to do to each other. And then, of course, in extremis, you can kill them.

But if you can’t beat them or kill them, then join them. Collusion is the next best ruse. That way, everyone might get his piece of the pie. Public tenders are often approached in this way with prices engineered in advance so that each company wins the right component of the deal.

If you still can’t neutralise the competition, you must bribe those who might decide in your favour. Public tenders are the most amenable. In the early years, you simply bribed the decision-making body, but tender methods soon became more sophisticated. Sometimes a random element was introduced to reduce the field from, say, twenty, to five. But there’s a famous YouTube video that does the rounds in the Czech Republic that shows someone quite obviously ‘feeling’ for the right slips of paper in a bucketful of applicants (https://www.youtube.com/watch?v=f0-SY70ZR08).

There’s a lot of fun to be had with balls, too. When numbered billiard balls must be selected manually from a bowl, you simply put the ‘right’ balls in a freezer for a couple of hours so that whoever is making the selection will know which ones to choose. After an hour or two the evidence of malpractice has reached room temperature.

Employees.

The awful thing about employing people is that you must pay them. But why give them any more than they need? Treat them as inhuman resources if you can. After all, the business is yours, and your employees are merely instruments at your disposal. Take all possible advantage of them if you can. Delegate all the dodgy, semi-legal stuff you do, to them and keep your own hands clean.

You might also pay them in cash, or partially in cash, if you can, to avoid the tax and social insurance payments the state demands. Never mind that this might curtail their pension rights.

The idea that a company is a joint endeavour, even if you’re the owner of its shares, has only very gradually emerged. In the early years of Eastern European capitalism, many businesses felt no great responsibility towards their staff. Promises weren’t honoured, legally binding contracts were ignored. No wonder that employees would also cheat their employers whenever the opportunity arose.

For some of us, these approaches to business were, and are, anathema. They were common in Eastern Europe. But, sadly, there’s much more to come in my next post on the subject. Opportunities for exploitation are almost unlimited.

Not Even for Ready Money

Buenos Aires has the ‘perfect amount of chaos’ according to our guidebook. It’s an odd idea, but I understand it. I suppose Singapore, by contrast, though its rulers couldn’t in a million years appreciate the concept, has a very imperfect amount of chaos – none at all. I prefer a little scruffiness, and the feeling that I’m not a disappointment to the city I’m visiting, and I like the sense that things might change in uncertain ways. I like a smidgeon of trivial civil disobedience, too. There’s also a perfect amount of graffiti for a city, which, again, is a little more than none at all. Order and complacency are death to the human spirit and order should be striven for but never attained.

Buenos Aires is an impressive, scruffy, lively, city, and if you’ve been to those Latin American cities where chaos dominates (I’ve been to Mexico City, Caracas, Sao Paulo and Rio de Janeiro) you’d be forgiven for imagining yourself in a slightly improved Spain (Argentine gastronomy doesn’t involve tapas). And until yesterday morning, I was blissfully unaware of anything that might spoil the party, such as the much talked about economic ills, or their causes.

DSC02532x

Argentina has suffered serial military dictatorship, and serial financial crises, the one, perhaps, the cause of the other, and vice versa. The country has defaulted twice on its international debts in the last decade or two. It’s hard to understand why the country shouldn’t in fact be spectacularly prosperous, given its natural resources, but on yesterday’s evidence I’d say that there’s much too much regulation and far too many vested interests, and whether these are the interests of landowners, the military or the unions, all of them are stifling progress. The country celebrates 200 years of independence this July, but I doubt there’s been a decade of political consensus in all that time.

In view of the recent financial crisis, we were told by our travel agent to travel to Argentina with wads of dollars, but this advice turned out to be out of date. The Argentinian peso has floated freely since December, so you no longer need to change your dollars on the black market to make the fun affordable. Actually, no one wants your dollars anymore, except the hotel receptionist at an outrageous rate, and some rather dubious creatures who lurk in tourist hotspots. Most people would rather take pesos. That, of course, would be all very well were it possible to get hold of some. One of the biggest problems in Argentina is that the banking system isn’t fit for purpose, at least not fit for the purposes of the tourist.

ATMs don’t usually work. My success rate with a Visa debit card issued by a reputable UK bank (well, RBS) has been about one in ten. The pesos we got on Sunday were running out by Monday morning, and with everyone back at work, every ATM in the city was mobbed, and most of them were empty of cash (who knows why!). I tried dozens of them. Easy, you might think, just to change some of those dollars into cash at a bank or exchange office, except that banks are allowed only to carry out exchange transactions for their customers, and exchange offices, such as tourists use, are few and far between.

After three hours of punching numbers into ATMs, without success, and advised by a pleasant cashier at a branch of Citibank, we took a taxi ride to the city centre, to an official ‘casa cambia’, where, without passports, we were still unable to obtain any pesos (they must see your passport to determine that you are foreign and haven’t exceeded the permitted 90-day period during which you may exchange foeign cash for pesos). And then, miraculously, at a branch of HSBC an ATM finally coughed up some ready money.

DSC02714x

It all took three hours, so it was afternoon before we could do anything rewarding. Perhaps Argentina is one of those countries where the population wastes half its time dealing with entirely unnecessary problems, as in Eastern Europe before the Wall came down. We visited MALBA, the Museum of Latin American Art of Buenos Aires, a beautiful building and a mercifully small but delightful collection.

DSC02673x

 

Ethics and Business – ‘Eastern Europe’ after the Revolutions

I was invited this week to present some ideas on business ethics to the committee that provides guidance to a London-based fund whose investments are guided by ethical principles. They were interested particularly in the way business ethics are perceived in former ‘Eastern Europe’, parts of which, including the Czech Republic (where I live), are now better known as ‘Central Europe’. It was in Prague, in the Czech Republic, that I started LLP Group in 1992.

business ethics

I have to admit that I was initially sceptical about the idea of an ethical fund (it can sound like that much derided concept of an ‘ethical foreign policy’, derided because impractical), but that was before I looked more carefully at the fund’s website, where its clarifying principles are published. I studied philosophy at university and have enjoyed a life of puzzled uncertainty about almost everything ever since, and I tend to see a hundred sides to every issue, at least when I come at things from a distance and with incomplete knowledge. You would often find me sitting comfortably on the fence when it comes to complex ethical issues. And so I couldn’t see how one could apply ethics consistently to investment decisions.

But, as published, the fund’s principles are reasonably pragmatic. They’re carefully defined in terms of where the fund might invest, and where it definitely won’t. The fund wisely avoids the perils of simply saying it will invest in businesses that are good, and not in those that are bad. I had previously wondered how it could calculate the ethical value of one form of business over another in the real, complex, interconnected world, but in fact they’ve made it simpler than that.

But even so, calling a fund an ‘ethical’ fund, even with careful qualification, still lays it open to embarrassment if it finds itself invested in a company whose practices are dubious for reasons other than those the fund lists.

Ethics should be a day-to-day consideration for businesses of all kinds. Businesses should be measured by ethical balance sheets, as well as by financial ones. Of course, when you’re actively involved in a business, as I am, it’s much easier to know right from wrong. My and my business partners’ decisions about the company are made in nearly full knowledge and understanding of the choices we have before us, and in our case they’re usually small choices made in the context of a medium-sized, privately held business whose whole history and complexity I and my partners and colleagues know completely. In any case business software is rarely morally contentious. But judging large businesses from the outside is altogether a different and more difficult matter.

All human institutions operate in both a legal and a moral framework. Neither framework can be precisely defined, nor are they ever complete. We’ve seen in recent months how tax law has been strained by the changing, digital nature of ‘sales’ and ‘service delivery’, and as for moral principles, these are personal, cultural, ideological, political, religious, or national, and will never be uniform. LLP Group’s business history lies largely in former socialist Central and Eastern Europe (let’s call it Eastern Europe for the sake of brevity), where business history itself began, or began again, only following the fall of communism in 1989. I’ve seen legal and moral frameworks struggling to emerge, and I’ve been acutely aware that for many in the region, there was no ready-made framework after 1989. For some, ethics were entirely irrelevant and, for all, the law was too loosely defined, and only sometimes a limitation.

I want to focus on two areas – the acceptability of corruption and the distinction between the legal and the ethical, a distinction that even twenty-five years after the end of Communism still isn’t fully appreciated in Eastern Europe.

I often say that I grew up in Hungary albeit in my early 30s. In 1987 I was sent by my employer into the professional and social isolation of a world where the spoken language was more remote from English than Hindi, where just about everything from hemlines to computer technology was old-fashioned and second hand, and where everyone I met was my Cold War enemy.

The Hungarian Socialist People’s Republic was initially a shock, in all kinds of ways. I’d been brought up, as most of us were, to imagine socialist Eastern Europe as uniform, monolithic, bureaucratic, ideologically hostile to the West, ardently socialist, strenuously equal, socially liberal, and determined to demonstrate that socialist values could triumph over capitalist materialism. I had read Tony Benn’s admiring but naïve accounts of life behind the Iron Curtain.

What I found was ideological apathy. The vast majority of people were impotently acquiescent in the life that had been prescribed for them by the Party. The few who sought power and responsibility had the Party ladder to climb. They were mildly ambitious, sometimes talented, more or less tolerated by the acquiescent majority and generally forgiven for the nonsense they had to spout. Someone had to do the job. Rather them than us. The Party wasn’t quite the monster it had once been. It wasn’t murdering its enemies anymore. As Janos Kadar said after the Soviet invasion, ‘Those who are not against us are with us.’ This reversal of Lenin’s view of seventy years earlier captured the tone of the last years of communist rule.

Cynicism, though, was a feature of everyone’s life. Impotent acquiescence wasn’t a particularly unpleasant condition, as long as there was enough food, drink and the occasional Cuban banana at Christmas. For the majority what mattered most was the private sphere, the personal life of family and friends, hobbies, and sometimes religion. Greed was completely pointless and envy had nothing much to work with. Everyone had more or less the same. Material reward wasn’t what stoked ambition, either inside the Party or outside it. If you worked hard in your profession it was only because you took some pride in it.

On the other hand, and to my very great surprise, I found racial prejudice, nationalism, homophobia and sexism wherever I looked, coexisting with the enforced state socialist ideology that didn’t in theory allow them. I sometimes say I became racist in Hungary too, if only inasmuch as I was made to feel conscious of race wherever I went. It was always, ‘Watch out, he’s a gypsy, she’s a gypsy.’ And once it was, ‘I know it was terrible that the Germans killed the Jews, but you know we never really liked them.’ Society seemed to have been frozen in the late 1940s when the socialist revolutions came. It was no surprise to me that, as in former Yugoslavia a few years later, these evils re-emerged once the Party straitjacket had been removed.

Petty corruption was a ubiquitous feature of daily life. If you wanted good hospital treatment you made a small gift to your doctor and your nurses (a little cash, a bunch of flowers, a jar of homemade pickles, or a bottle of palinka). Waiting lists and queues were long, and you often needed to bribe a little to get to the top or to the front.

I looked for the ardent ideologists, with whom I could discuss socialist ideology, but I found none, nor any hostility towards me as a representative of the decadent capitalist world. Indeed, if you were from the West you enjoyed a spurious (almost corrupting) celebrity, and I found that in the technical areas I worked in as a programmer, whatever I said was taken as Gospel. It was as if the locals accepted they’d been left behind, and that the socialist experiment had failed.

Public life prior to the failure of Communism was, in theory, governed by the ethical-political principles of socialism. Private life (including religion) was more or less a matter for the individual, and private endeavour in the public sphere was impossible. ‘Business,’ therefore was impossible. Because of that, ethics applied only in the private sphere. In the public sphere ideology and morality were generally discredited.

This was the world that collapsed into the arms of Western capitalism in 1989. And when socialist ideological control of public life failed there were no rules left to operate outside the private sphere. Few had ever believed in the public rules, but there hadn’t been much opportunity to break them. Whatever new rules now emerged as a divided multi-party democracy came into being, weren’t impressively framed. They were generally based on the principles of Roman law, and where they were inexact, mischief flourished. They were easy enough to break or circumvent. Little now limited private endeavour in the public sphere and there were plenty of spoils for all to seize. The petty corruption that was endemic to the socialist system bloomed into opportunism and organised crime.

Another, rather unexpected, thing happened, unexpected for those intellectuals who’d publicly dissented from one-party ideology (though if they’d read Animal Farm more carefully they might have seen it coming). Whilst the topmost dogs in the Party apparatus lost all their credibility and power, the vast ranks of ambitious, pragmatic and cynical apparatchiks, those who’d made the socialist system more or less work, quickly learned how to dance to the new capitalist tune, as nimbly as Orwell’s pigs stood on their two hind legs. They understood the technicalities of power, they had the connections. They even possessed a few management skills (which, sadly, you don’t learn as a dissident intellectual driving a taxi or stoking a boiler). For those who thought their time had finally come, this was bitterly disappointing, even more so when the West went to these turncoats for advice and assistance. For these incumbent bureaucrats things were suddenly even better than they’d ever been before. Now there were no rules, no d ideology to which they must pay lip service.

I’ll write more in a day or two about what happened next!

Blingless in Sofia

There are large parts of the world where many of those of moderate wealth, and all of those of great wealth, have acquired their possessions questionably. In such places bling abounds. If there are ‘expensive’ restaurants for business visitors or tourists they tend to be decorated brightly, opulently and ostentatiously, with the undiscerning, and undeserving, rich in mind. They are peopled by fat-bellied, swarthy gangsters, shouting into their mobile phones, blowing cigarette smoke with arrogant abandon and largely ignoring their blonde and leggy molls, who look on vacantly, even anxiously, uncertain of their tenure.

Such was Sofia some fifteen years ago, and such is Moscow still, and probably Almaty. If you weren’t wearing Gucci, or Versace, and weren’t dripping with ill-gotten gold, you were consigned to a table in a dimly lit corner of the restaurant, to be served, eventually, by reluctant waiters, and glanced at with sneering pity by more profligate and better-tipping oligarchs.

I feel a great nostalgia for such times. There was an edge to travel in the newly free democracies of Central and Eastern Europe that has been lost to normality. It was an adventure. Now it is merely a pleasure.

I’m in Sofia for two nights on the first leg of a four-country tour of LLP Group’s offices in Bulgaria, Romania, Hungary and Slovakia, before returning to my home city of Prague, and then on to the UK for Christmas with my mother. I’m travelling not on a Santa-style sledge, drawn by flying reindeer decked out in our company’s colours, but by low-cost airlines, which take me through two additional capitals, Belgrade and Berlin. If time permits I might also make a detour to Vienna on Sunday, since I have designs on Demel, the great Viennese café and cake shop, who make the best stollen and gingerbread in the world. I need stocking fillers for Christmas.

The purpose of my tour is unambitious and largely gastronomic. I take my colleagues out to lunch or dinner. I bestow Christmas goodwill, and listen to their woes and joys. Yesterday I took my Bulgarian colleagues to my favourite place in Sofia, the entirely bling-less Made in Home, a restaurant that is the antithesis of gangsterism, ostentation and tastelessness. The blingy rich wouldn’t even be seen dead there, though, aware of it or not, they’re far more likely to be seen dead at the places they do frequent. Its décor comes from grandmothers’ attics, bizarrely juxtaposed with original modern paintings and prints. Its chairs are a mismatched collection from the last ten decades, and your table may well have been made from a door. It’s cosy, friendly, inexpensive, and peopled by people of all kinds, none of them eager for display, and the food is absolutely excellent. It is the kind of place you might find in New York, London, Tel Aviv, or Paris, but that’s not to suggest it’s bland.

sofia1

We booked a table for 12.30 and although we set out from the office at 12.15 we were lucky to arrive before losing our table. Traffic in Sofia is appalling, made worse by breakdowns (see my colleague Stoyan removing an overheated car from our path) and by road works. Sofia, one of my favourite cities in Eastern Europe, is still being remade.

sofia3

sofia2

We enjoyed an excellent lunch, choosing from a menu that included Bulgarian as well as ‘international’ dishes. The emphasis is on vegetables, but you can also eat fish and meat. It was so good I returned, alone, for dinner, and ate the zucchini patties with yoghurt all over again.

 

It’s just not worth it sometimes!

I don’t want to encourage criminality, but sometimes it’s worth breaking the law, or, certainly, convention. I don’t mean laws that protect us from seriously harming each other or ourselves. Rather, I mean the little laws, such as those about when you can cross the road, or, in this (admittedly slightly dull) case, how you do your debits and credits. Where no harm is done it’s always worth asking, does the penalty exceed the cost of compliance?

dont

I’m not thinking of anything particularly alarming, unless you think that the way you present debits and credits is an issue of morality.

Don’t read on if you’re not remotely interested in accounting.

In a number of Eastern European countries accounting rules require that you make a distinction between a credit and a negative debit, and a debit and a negative credit. This would sound weird to most of the world’s accountants. In most of the world, the opposite of a credit is a debit and the opposite of a debit is a credit and that is the end of the matter. There are debits and credits and no other kind of transaction.

Not so in parts of Eastern Europe. If you make a mistake in your accounting system, you do not ‘correct’ a debit with a credit but with a ‘negative debit’. This enables the reporting of both credit and debit ‘turnover’ on an account, ‘turnover’ consisting of debits and their correcting negative debits, and credits and their correcting negative credits. ‘Turnover’ is something that the tax inspectors look at with quite remarkable enthusiasm, but I am not sure why.

Most Western accounting software packages don’t handle this well. They are built to handle just debits and credits, but convention, if not law, requires that when the tax inspector comes knocking on your door in Budapest, or Sofia, or Bucharest, or when they bash your door down in Moscow, you must serve up reports that show ‘turnover’.  Never mind that your business obtains no benefit at all from this.

But what happens if you can’t?

I remember doing some consulting in Bucharest, many years ago. During a system design workshop (we were putting in SunSystems) the chief accountant went on at length about negative debits and credits.

‘We have to have them,’ she said.

Her boss, the British Finance Director began to look concerned, so I tried to demonstrate some workarounds. But the chief accountant was adamant. I suggested some more expensive workarounds, maybe five days of work. Finally it occurred to me to ask:

‘What happens if you can’t show these negative and debits when the tax inspector comes?’ I asked.

‘Well, you may be fined.’

‘How much?’

‘About 50 dollars.’

Not much. Indeed, immensely less that the cost of working around the constraints of the software to make the right reports possible.

The Finance Director looked relieved and we quickly moved on.

The moral of this story is this always work out if it’s really worth doing something that brings you no benefit, even if it seems wrong.

Someone may tell you you’ve got to do it, but always ask, ‘What happens if I don’t?’