The private sector plays a pivotal and expanding role in improving the well-being of societies, communities and individuals. It can help produce the economic wealth that lifts people out of poverty and expands access to health care, education and other vital public services. It can create economic opportunities to fulfill the aspirations of the young, the poor, the disenfranchised and all people intent on staking out their individual path to continuing improvement and a prosperous future for their families. It can generate ideas, innovation and efficiency in the use of resources, to help meet the environmental challenges of our times.
The private sector can also fail on all these counts, however. It can enrich a few at the cost of the many. It can recklessly overexploit the environment and obstruct innovation. It can disenfranchise, destabilize society and foster corruption, whether in communities, markets, governments or international relations, ultimately undermining the prerequisites for its own existence.
Corruption risks in the business sector and success in controlling them are crucial determinants of whether businesses and markets can live up to their productive, contributory role, or succumb to their destructive potential.
The scale and pervasiveness of corruption risks for business
Corruption is not a marginal issue but a central concern for business – in developing, emerging and industrialized countries alike. It affects multinationals in the United States and Europe. It touches manufacturing powerhouses in China information technology service providers in India, farmers in Latin America and extractive industries in Africa, Ce ntral Asia and the Middle East. It is an issue for large-scale conglomerates and family-owned businesses and individual entrepreneurs. In developing and transition countries alone, corrupt politicians and government officials receive bribes believed to total some US$20 to 40 billion annually – the equivalent of around 20 to 40 per cent of official development assistance. Moreover, the problem appears to be growing. Many actors in the business sector are entrusted with powers that are vulnerable to abuse for private gain to the detriment of other stakeholders and society more broadly. Executives and board directors are empowered to steer companies and manage risks in the interest of sustainable profitability for shareholders and stakeholders alike. Purchase managers oversee large budgets to source inputs for the enterprise. Human resource managers are entrusted with hiring staff. Labour representatives are entrusted by workers to represent their interests to management. Investment firms handle the savings and pensions of citizens and are expected to manage these investments responsibly. Accountants, auditors and rating agencies are entrusted by regulators and investors to verify and assess critical information and risks reported by companies.
Bribing public officials to win public contracts, circumvent regulations or speed up services is a central and persistent concern. Evidence of the prevalence of bribery provides a worrying example. In a survey of more than 2,700 business executives in twenty-six countries conducted by Transparency International in 2008, almost two in five respondents claimed that they had been requested to pay a bribe in the previous year when seeking attention from a series of institutions that provide vital services for business, such as customs and tax revenue authorities, the judiciary, the police, registry and permit offices or providers of basic services.
In a different survey, of more than 1,000 executives, almost one in five claimed to have lost business due to a competitor paying bribes, and more than a third felt that corruption was getting worse.
In many places the problem is even more pronounced. In countries such as Egypt, India, Indonesia, Morocco, Nigeria and Pakistan, more than 60 per cent of the business executives polled in the TI survey reported having been solicited for bribe payments from the key institutions listed above. In Colombia, more than a half of the companies interviewed in that country’s first comprehensive survey on business and corruption described bribery as a viable strategy to trump the competition.
In Brazil more than 40 per cent, and in Hong Kong as many as two-thirds of businesses believed that they lost opportunities on account of corruption by competitors within a one-year time frame.
No sector or industry is unaffected by corruption although some are hit harder than others. More than a half of all companies interviewed in the construction sector and the oil, gas and mining sectors complained that bribery by competitors had deprived them of business opportunities in a five-year time frame. In a different survey, more than a half of all the polled executives operating in the energy, mineral resources and telecommunications sectors reported having been asked for bribes in a one-year time frame.
The overall impact of corrupt business practices, which allow companies to operate beyond the reach of the law may be visible and imminent – such as water scarcity in Spain, exploitative work conditions in China, illegal logging in Indonesia, unsafe medicines in Nigeria and poorly constructed buildings that collapse with deadly consequences in Turkey.
Many other adverse effects are more hidden, but no less harmful, such as inflated costs for a public contract, a biased judicial ruling or the nurturing of a kleptocratic political class that plunders the public wealth of a country. Even small payments made to ‘get things done’ are harmful, as they are funneled up through the system and help sustain corrupt bureaucracies, parties and governments.
What business has to gain from the fight against corruption
The business case for countering corruption is clear. A half of international business managers estimate that corruption increases project costs by at least 10 per cent, in some cases more than 25 per cent. In addition to direct financial costs and lost business opportunities, there are substantial damages to brand, staff morale and external business and government relations.
Stronger enforcement of anti-bribery rules in some jurisdictions has significantly upped the ante, making stiff prison sentences and penalties in the tens of millions of US dollars increasingly likely.
Corporate compliance and responsible citizenship also pays direct rewards. Higher-quality internal governance opens access to lower-cost capital and can raise company valuations and result in better performance. Responsible corporate citizenship also offers opportunities for brand differentiation and marketing that can increase sales in industries sensitive to consumer perceptions. Contrary to common belief, a commitment to clean business also seems to boost rather than harm immediate business prospects. Companies with anti-corruption programmes and ethical guidelines were found to suffer up to 50 per cent fewer incidents of corruption, and were less likely to lose business opportunities than companies without such programmes.
The corruption challenge for business does not stop with countering bribery, however. It extends to the broader challenges of doing business in a more complex and more globally competitive climate, in which new forms of corruption are taking hold and provide an additional threat to a competitive, sustainable business environment.
Corporate corruption and the global financial crisis
The dramatic consequences of the global financial and economic crisis were unfolding at the time of writing this report. Only over time will the full picture of the eventual scale, consequences and causes of the crisis.
The broad message is already clear, however: the conditions enabling the crisis to build and unfold include structural shortcomings in corporate integrity systems, such as conflicts of interests entangling key gatekeepers; insufficient transparency and accountability on the part of important markets, market players and oversight mechanisms; and widespread lapses in corporate due diligence, governance and integrity.
Persistent conflicts of interest for a vital layer of financial gatekeepers, such as auditors, accountants and rating agencies, have been identified as a major issue for corporate integrity and an important factor in the financial crisis.
Executive remuneration and its misalignment with long-term performance have encouraged excessive risk-taking that prepared the ground for the crisis. It is a major focus of reform efforts.
The crisis has also brought into sharp relief the new nature of the interdependence in the international financial system and the hazardous implications of corporate strategies that seek to exploit weak regulation, taxation and disclosure standards in some pockets of the global banking system. Such manoeuvres have created highly opaque and leveraged financial risks that have wiped out investors’ confidence and brought the international credit markets to their knees.
There has long been concern about financial offshore structures whose lack of transparency, regulatory oversight and cooperation facilitate capital flight and tax evasion while hindering the recovery of public assets stolen by corrupt rulers. These structures have also been abused to establish and hide slush funds for large-scale bribery.
In the wake of the financial crisis, the leaders of the European Union have demanded that ‘no financial institution, no market segment and no jurisdiction must escape proportionate and adequate regulation or at least oversight.” This represents a promising commitment to reform but there needs to be improvement in the transparency and accountability of key stakeholders in this setting.
Closely related, the crisis has also focused attention on the failings of public regulators. Overhauling and strengthening regulatory oversight has been put high on the agenda, as the leaders of the world’s twenty most powerful countries resolved at their first major meeting on reforming the financial system: “We pledge to strengthen our regulatory regimes, prudential oversight, and risk management [and] commit to transparent assessment of our national regulatory systems.” Much remains to be done, both with regard to regulatory frameworks and ensuring that adequate resources for enforcement are available to translate such promises into action. The global financial crisis has not only added new urgency to addressing corruption risks in the business sector and strengthening corporate integrity systems. It has also provided a much-needed impetus for real reform.
Beyond bribery
Corruption is defined by Transparency International as ‘the abuse of entrusted power for private gain’. For business, this means more than the perceived need to bribe public officials. Corruption risks inside the enterprise include, among many others, corporate fraud, manipulating accounts and insider trading. Corruption in dealing with customers and suppliers can take the classic form of kickbacks to public officials, but it also includes, for example, the bribing of purchase officers to win business at other companies’ expense. (commercial bribery).
In the wider market environment, entrusted power can be abused to collude with competitors or form cartels, hurting markets and consumers. At the societal level corporate power can be abused to dodge laws and regulatory oversight or exercise undue influence on regulations and policy-making with implications for foreign direct investment, global supply chain integrity and transnational taxation. All these corruption risks are interrelated, and at times mutually reinforcing, in at least two important ways. At the motivational level corruption in any of these business spheres fosters a culture of moral ambivalence and reckless opportunism that undermines the overall commitment to integrity and opens the door for other corrupt acts. When high-level executives award themselves extraordinary pay packages, lower-level managers may be tempted to sweeten their own pay package by soliciting bribes from suppliers. When top managers take steps to corner the market by forming illegal cartels, lower-level managers may feel encouraged, or even pressured, to close these important deals with the help of kickbacks – all in the spirit of boosting company profits at any price.
At the organizational level The very strategies and mechanisms used to circumvent internal or external controls and cover up a specific corrupt activity can also provide the infrastructure for other corrupt acts. For example, slush funds set up to bribe purchasing managers can be retooled to pay off politicians. Likewise, financial structures that leverage secrecy and weak regulation to win business, such as tax avoidance at the borderline of legality can be abused to launder the proceeds of corruption, conceal financial risks or manipulate earnings. All this puts the stability of companies, investments and even markets generally more at risk.
Companies are entrusted by society with a social licence to operate. This requires them to act as responsible corporate citizens and manage what are often enormous economic resources as well as their social, environmental and political impact, with integrity, accountability and according to the letter and spirit of the law.
