Corruption in Business: Power to Destroy Firms…

 “Power corrupts; and absolute power corrupts absolutely.” — Lord Acton, British historian. (In other words, a person’s moral compass goes bonkers when his/her power increases).

Corruption, the abuse of entrusted power for private gain, is the single greatest obstacle to economic and social development around the world. It distorts markets, stifles economic growth, debases democracy and undermines the rule of law.

• Estimates show that the cost of corruption equals more than 5% of global GDP (US $2.6 trillion), with over US $1 trillion paid in bribes each year.

• Corruption adds up to 10% to the total cost of doing business globally, and up to 25% to the cost of procurement contracts in developing countries.

• Moving business from a country with a low level of corruption to a country with medium or high levels of corruption is found to be equivalent to a 20% tax on foreign business.

The international legal framework that companies are facing is changing fast and has been strengthened during recent years. It now includes the following intergovernmental instruments:

Inter-American Convention Against Corruption (1996)

• OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997)

• European Union Instruments on Corruption

• Council of Europe Conventions on Corruption (1997-1999)

• The African Union Convention on Preventing and Combating Corruption (2003)

• United Nations Convention Against Corruption (2003). Governmental instruments are increasingly being adopted at the national level; sometimes with global implications to companies, i.e. the Foreign Corrupt Practices Act and the Sarbanes-Oxley Act in the US.

Companies are subject to extortion and some play a role in paying bribes. Accordingly, the private sector is also part of the problem and can also be part of the solution (for example, by sharing responsibility for finding ways to effectively fight corruption). An increasing number of companies are demonstrating leadership by implementing effective anti-corruption programs within their companies. Common features of such programs include:

• Detailed policies on company-specific bribery issues such as kickbacks, extortion, protection money, facilitation payments, conflicts of interest, gifts and hospitality, fraud and money laundering, and political and charitable contributions

• Management systems and procedures outlining frameworks for risk assessment, training, sanctions, whistle-blowing, continuous internal self-review and external reporting Companies are increasingly engaging in sector-specific or multi-industry initiatives, locally, regionally and/or globally, to share their experiences, learn from peers and, in partnership with other stakeholders, contribute to leveling the playing field.

Corruption remains a major obstacle to international business according to a new survey commissioned by the risk consultancy “Control Risks” and the law firm “Simmons & Simmons”. Despite new laws criminalizing foreign bribery, there have been few prosecutions outside the US and honest companies are still losing out to dishonest competitors on a large scale.

Host countries lose out because high levels of corruption discourage reputable businesses from investing. And, although many companies are tightening their anti-corruption procedures, overall standards of compliance remain highly uneven – both across countries and across sectors.

“Control Risks” and “Simmons & Simmons” jointly commissioned the survey, which involved telephone interviews with 350 international companies based in seven jurisdictions: the UK, the US, Germany, France, the Netherlands, Brazil and Hong Kong. This is the fourth in a series of “Control Risks” surveys on international business attitudes to corruption: Successful action against international bribery requires combined action by both governments and businesses.

Laws making it possible to prosecute companies and individuals for paying bribes abroad are now in place in all 30 Organization for Economic Cooperation and Development (OECD) member states. Leading international companies have responded by introducing anti-bribery codes and training programs to help executives avoid corruption. However, more than half of the companies surveyed were not aware of their own country’s legislation covering bribes paid abroad. The new bribery laws clearly need to be promoted more effectively if they are to make a lasting impact.

The management of agents and other commercial intermediaries is a particularly sensitive issue. Good management practices include due diligence procedures to assess the integrity of agents before employing them. Such procedures are becoming more common, particularly in the US and, to a lesser extent, in Western Europe.

There were wide variations in the extent to which companies seek to control their agents’ conduct by contract. In the US (74%) and the UK (70%), it is common for companies to enter into agreements explicitly forbidding agents to pay bribes to secure business on their behalf. In other jurisdictions, such as Brazil (15%) and Hong Kong (27%), this practice is much rarer.

As in other areas, transparency is one of the main weapons against corruption. Companies from most sectors said that the identity of their agents was known ‘in the market place’. The exception was the defense industry, where 26% of companies said that they employed agents whose identity was confidential.

Similar issues arise with regard to commercial relationships with joint-venture partners and suppliers. Companies’ reputations may suffer if their commercial partners are known for their lapses of integrity. Particularly in the UK, the US and the Netherlands, it is becoming more common for companies to engage in a formal integrity procedure before entering such relationships, but the practice is far from universal. Companies from countries such as the US, which have high standards of compliance, frequently complain that they have to compete at a disadvantage against competitors following lower standards.

In the book “The Corporate Governance and Anti-Corruption Nexus” it writes: It is widely accepted that corruption, be it corporate or political, petty or grand, has become a worldwide problem. This acceptance is attested to by the host of international conventions and efforts designed to stamp it out. However, opinions vary as to who ultimately bears responsibility for that corruption, how that corruption can be reduced, and who will take the lead in its eradication. One thing though is clear — in dealing with corruption, there are no simple answers.

Corruption has many faces and many moving parts. In some instances business can be a source of corruption, in others — it is simply a victim. Some governments only pay lip service to combating bribery, while others genuinely attempt to put in place transparent institutions. In some countries, citizens accept institutionalized corruption as the reality of day-to-day transactions, while in others they refuse to give up without a fight.

Corruption is a corrosive drain on public trust and on the legitimacy of public and private sector institutions. Its toll can be devastating to a national economy, particularly at a time when open global markets can rapidly reverse investment and capital flows if confidence and trust are compromised by revelations of systemic corruption.

Corruption affects all types and sizes of business firms — from global conglomerates to Small and Medium-Sized Enterprises and co-operatives — each with varying degrees of resources and capabilities to deal with the consequences. It has the power to destroy firms and with them the livelihoods of stakeholders who depend on a company’s success. This further dehumanizes and undermines the reputation of the private sector as a positive force for economic growth and development in poor countries.

The private sector can be a force in developing solutions to the corruption problem, and companies around the world are taking charge. They are doing it in a multiplicity of ways. Some engage in collective action to reform the business climate to make it more transparent. Others push for ethical standards and fair practices in dealing with the government, as is the case with industry initiated integrity pacts.

These private sector solutions to corruption however are not only external in nature and so many companies are also beginning to look inside, seeking ways to ensure that they are not unwittingly contributing to the climate of corruption. For example, and this is just one of the issues facing modern companies, how do you make sure that leadership calls for anti-bribery trickle down through the whole company, down to the employee on the ground in a different country thousands of miles away?

One way of addressing this dilemma and others is the establishment of strong corporate governance. It is increasingly emerging not only as a tool that increases efficiency, improves access to capital, and ensures sustainability — it is also emerging as an effective anti-corruption tool.

Simply put, on the day-to-day transaction level it makes bribes harder to give and harder to conceal. At the decision-making level, it injects transparency and accountability, so that it is very clear how decisions are made and why. And, underlying the very roots of corporate governance, and providing its moral compass, is ethics.

The ethical behavior of companies is rarely recognized as a cornerstone of good corporate governance. Yet, in many ways, ethics underlies much of business behavior, whether it is at the Board or staff level, and regardless of a company’s geographic location, size, or industry. The moral underpinnings of the decision-making processes can be observed not only in a large company from an OECD country doing business in its own back yard but also in a small business from a developing country engaged in regional trade.

Still, while ethics underlies much of what we do, the actual ethical performance of individuals and the companies they represent differs among and between countries, often significantly; and these variations can in large part be explained by the differences in political, economic, and social institutions. Often, business and ethics are viewed as two separate worlds. Yet, sustainable business, as many early thinkers of today’s economic theory have argued over the centuries, is defined by the ability of companies to do repeat transactions with their customers.

Customers need to feel that they are treated fairly and honestly. This in turn, depends much on the quality of institutions, such as contract enforcement, rule of law and property rights, as well as, business ethics — moral guidelines of behavior. In places where institutions are weak, ethics plays a much more fundamental role in facilitating repeat business transactions and, as such, a sustainable private sector.

Ethics in the business world is not only about global conventions and statements — it is also about meaningful actions and the personal commitment to raise ethical standards. The corporate sector is replete with examples of firms that profess strong ethical cultures on paper but become unraveled by corrupt behavior. Having a strong sense of ethics is not a guarantee that a company will always do the right thing.

But the opposite is also true: many companies have started from poor reputations and set new benchmarks of corporate ethics. The key component underlying much of what the best ethical companies do is leadership. Leadership — made visible through actions, commitment, and examples — sets the moral tone that emanates from the top of a company and that translates ethical principles into the concrete behavior expected from all persons acting on behalf of a company.