Scrapping With the Chinese: Schnitzer Steel Industries

March 5, 2008
Former chairman and CEO violates anti-bribery regulations in quest for Chinese market share.

It would be an understatement to say that the steel market is currently red hot. As the dynamic of stiff global competition ignites the market worldwide, this hot commodity is becoming a crucial battleground between steel-producing and consuming industrial nations. And other market forces (such as large container traffic demand exceeding supply and fuel costs raising shipping rates) are cutting into revenue and profits and making life tough for companies like IW 50 Best Manufacturer Schnitzer Steel Industries.

In such a highly competitive environment, company directors are expected to be angling for every advantage, no matter how slight. Sometimes, however, they cross the line into unethical or even illegal behavior.

In an example of precisely this dilemma, late last year the Securities and Exchange Commission (SEC) filed a complaint alleging that former Schnitzer chairman and CEO Robert Philip violated the anti-bribery provisions of the foreign corrupt practices act (FCPA) by attempting to use cash and gifts to buy off officials at Chinese government-owned steel mills.

The SEC complaint alleges that, from 1999 to 2004, Philip authorized payments of more than $200,000 in cash bribes and other gifts to managers at Chinese government-owned steel mills to get scrap metal purchasing contracts.

According to an Accountancy Age story, Schnitzer generated more than $96 million in revenue, and more than $6.2 million in profits, from sales to customers who had received the improper payments (which was paid out in the form of commissions to purchasing managers at the foreign firms). The SEC complaint also alleges Philip authorized more than $1.7 million in payments to managers of privately owned steel mills in both China and South Korea, generating more than $500 million in additional revenue for the company.

Finally, the story reports that Philip has agreed to return nearly $170,000 in bonuses and pay $16,536 in prejudgment interest and a $75,000 civil penalty, and has also agreed to an order directing him from future violations of the FCPA.

On balance and out of context, it seems like a very good deal. Even adding in the quarter million dollar costs of the judgment to him personally (which he surely received many times over in various forms of executive compensation) the company and its former chairman received a return many times over the initial illegal investment.

Schnitzer Steel Industries, Inc.
At A Glance

Schnitzer Steel Industries, Inc.
Portland, Ore.
Primary Industry: Primary Metals
Number of Employees: 3,499
2006 In Review
Revenue: $1.85 billion
Profit Margin: 7.71%
Sales Turnover: 1.78
Inventory Turnover: 8.26
Revenue Growth: 117.41%
Return On Assets: 20.17%
Return On Equity: 24.69

However, there is no getting around the fact that such behavior, however profitable it might be, violates the letter and spirit of free trade law. Philip's role in Schnitzer's short-term gain undermines the global reputation of the United States of America has built over years for fair play and ethical business practices -- a reputation, in fact, that forms one of this country's competitive advantages in the global marketplace. America is a nation of laws, and we stand united behind the evenhanded application of these laws and letting free market dynamics play out -- whoever it might benefit in any individual case. And China, which is still suffering from endemic corruption at all levels of business and government, certainly does not need any encouragement or lessons in how to do the wrong thing.

Since the 2005 investigation that forced Philip to step down, the company has enjoyed tremendous growth -- in fact, its rise in revenue was the highest of any IW50 company, up over 117% in 2006 alone. It seems as if Schnitzer and other American companies struggling to make headway in tough global markets may have learned that not only is virtue its own reward, but it pays shareholder dividends as well.

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About the Author

Brad Kenney | Chief Marketing Officer

Brad Kenney is the former Technology Editor of IndustryWeek and now serves as director of the mobile/social platforms practice at R/GA, a global marketing/advertising firm in New York City.

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