News & Press: IoDSA in the Press

Collusion and anti-competitive behaviour: Some red flags for directors to look out for

Wednesday, 19 March 2014   (0 Comments)
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The Competition Commission’s
 findings that leading companies in the bread and, more recently, the construction industries colluded caused a veritable media storm—and the imposition of significant penalties on many of the country’s leading companies. But for directors in boardrooms across the country, these and other similar cases raise the issue of how boards could better detect such behaviour within their companies and, even more difficult to discern, within subsidiaries. 

In other words, assuming the directors are not themselves party to the collusive practices, what signals would alert them that something was amiss, and that further investigation was warranted?

“Although it’s very hard for board members to detect, and they have to rely, to a certain extent at least, on the processes they have put in place, the existence of anti-competitive behaviour does reflect negatively on their ethical leadership,” says Ansie Ramalho, Chief Executive at the Institute of Directors in Southern Africa (IoDSA). “And if the move to criminalise cartel conduct bears fruit, then directors could find themselves having to rebut the assumption of guilt which could result in personal liability even if they only ‘acquiesced’ in such behaviour.”

At present, companies alone are responsible for paying fines, as well as suffering the extensive reputational damage that accrues in such cases. However, there is nothing to stop them from instituting civil actions against directors or other executives who were involved in the practices. Indeed, criminal charges could also be made against executives in their personal capacities. 

Speaking to IoDSA members at a recent function, Oliver Josie, acting deputy commissioner of the Competition Commission, and leader of the investigation into cartels in the construction industry, said that one obvious red flag was when a company was making abnormal profits. He argued that if a company was making much higher profits than its peers, or its profitability was running counter to the industry trend, there was a strong possibility that something untoward was going on. 

Another red flag was if there was a pattern in the way a company won tenders, including whether it typically won (or did not win) tenders in specific geographical areas. “Directors have a huge responsibility, and must always guard against rubber-stamping what goes on in the company,” Josie advised. 

Cartels—which typically involve secretive and collusive behaviour between apparent competitors—are notoriously hard to identify and, as a result are very long-lived. International research suggests that an average cartel will endure for up to six years. 

Ramalho says that additional signs of collusive and anti-competitive practices tend to be buried within a company’s operational data, and directors will need to ask for this sort of information. Typical types of information include discrepancies between the prices of tenders and published price lists, client cost estimates or previous tenders by the same firm; fewer bids than expected or likely bidders failing to submit a bid; or repeated instances of a successful bidder subcontracting work to companies who unsuccessfully tendered for the same job. 

“To work well and last, cartels require those meeting to communicate regularly to share information. This can be very difficult for board members to pick up, but they need to consider ways of establishing whether officers of the company or its subsidiaries have excessive contact with their peers in competitor companies,” says Ramalho. 

She adds: “But in the long run, cartels only come into being and survive because the respective corporate cultures support them. Board members can make the most headway in stamping out this type of behaviour by demonstrating ethical leadership and, critically, ensuring that ethics becomes ingrained in the way that the company does its business.”