Business Case for the Anti-Corruption Principles
Introduction
Corruption is now recognised to be one of the world’s greatest challenges. It is a major hindrance to sustainable development, with a disproportionate impact on poor communities and is corrosive on the very fabric of society. The impact on the private sector is also considerable – it impedes economic growth, distorts competition and represents serious legal and reputational risks. Corruption is also very costly for business, with the extra financial burden estimated to add 10% or more to the costs of doing business in many parts of the world. In 2004 the World Bank stated that “bribery has become a $1 trillion industry.”
There are many reasons for why it is in any company’s business interest to ensure that it does not engage in any corrupt practices. All companies, large and small, are vulnerable from time to time and the potential for damage to them is considerable.
The following are some of the key reasons for avoiding involvement in corrupt practices, they are further explained below:
- Legal risks
- Reputational risks
- Financial costs
- Being 'known as clean' dissuades opportunist corruption
- Blackmail, and security risks
- "The one who cheats will be cheated against"
- Companies have a vested interest in sustainable social, economic and environmental development
Legal risks Regardless of what form a corrupt transaction may take; there are obvious legal risks involved. Not only are most forms of corruption illegal in the world’s jurisdictions, but also it is increasingly becoming illegal in a company’s home country to engage in corrupt practices in another country. The principle that it is illegal to bribe foreign officials was first established in the US Foreign and Corrupt Practices Act of 1977 and since then, this principle has gained legal standing within the whole of the OECD and in a number of other countries. It is a principle that was universally recognised in 2003, through the adoption of the UN Convention against Corruption. The enforcement of anti-corruption legislation internationally has hitherto been relatively poor, but this is slowly changing. In developing countries and emerging markets, where the opportunity for corruption has been rife because of weak law and regulation, corruption has become an issue of significant political importance and there is growing determination to act and to take those accused of corrupt practices to court. There are also a growing number of examples where developing countries with limited capacity to handle such cases have obtained outside legal assistance. This changing environment of law, regulation and enforcement makes it harder for business managers to assess and quantify the legal risks to which corruption exposes their operations.
Reputational risks Experience over recent years reinforces that companies whose policies and practices fail to meet high ethical standards or that take a relaxed attitude to compliance with laws and avoidance of corrupt practices, are exposed to serious reputational risks. Global brands are worth billions of dollars and this value is determined largely by reputation. Interbrand estimates in their 2004 Survey that Coca Cola's brand is worth 67 Billion dollars. The Economist noted that "Aon, an American insurance company, recently surveyed 2,000 public and private companies and found that they viewed reputational risk as their single biggest hazard." Often it is enough to be accused of mal-practice for a reputation to be damaged even if a court subsequently determines that they have not been involved in corrupt practices. It is of critical importance for a company to be able to quickly quash any unfounded allegations by demonstrating that it acts in a transparent manner and has in place policies and procedures designed to prevent corruption.
Financial costs There is now clear evidence that in many countries corruption adds upwards of 10 per cent to the cost of doing business and that corruption adds as much as 25 per cent to the cost of public procurement. This undermines business performance and diverts public resources from legitimate sustainable development.
Being 'known as clean' dissuades opportunist corruption. There is growing evidence that a company is less likely to be under pressure to pay bribes if it has not done so in the past. Once a bribe is paid, repeat demands are possible and the amounts demanded are likely to rise. Conversely a company which takes a firm and principled stand against all forms of corruption will become known for this and the risk of its employees being exposed to demands will lessen. For example, a business manager representing a large international company in China recently confirmed that despite pressures to do otherwise, his company did not accept any kinds of corruption: 'Zero tolerance is the only practical solution'.
Blackmail and security risks By engaging in corrupt practices, company managers expose themselves to blackmail. Consequently the security of staff, plant and other assets are put at risk.
'The one who cheats will be cheated against' If a company engages in or tolerates corrupt practice, it will soon be widely known, both internally and externally. Unethical behaviour erodes staff loyalty to the company and it can be difficult for staff to see why high standards should be applied within a company when it does not apply in the companies' external relations. Internal trust and confidence is then eroded.
Companies have a vested interest in sustainable social, economic and environmental development It is now clear that corruption has played a major part in undermining the world's social, economic and environmental development. Resources have been diverted to improper use and the quality of services and materials used for development seriously compromised. The impact on poorer communities struggling to improve their lives has been devastating, in many cases undermining the very fabric of society. It has led to environmental mismanagement, undermining of labour standards and has restricted access to basic human rights.
Business has a vested interest in social stability and in the economic growth of local communities. It has therefore suffered, albeit indirectly, from the impact of lost opportunities to extend markets and supply chains. The business community can and should play its part in making corruption unacceptable. Furhter, it is important to recognise that corruption diverts resources from their proper use. Financial resources that were intended for local development may, as a result of corruption, end up in foreign bank accounts instead of being used for local purchasing and the stimulation of local economies. At the same time it distorts competition and creates gross inefficiencies in both the public and private sectors. In most cases when corruption occurs, the services or products being purchased are inferior to what had been expected of contracted for. The long-term sustainability of business depends on free and fair competition.
Corrupt practices also accompany and facilitate drug dealing and organized crime. Money laundering and illicit international money transfers, in particular, are used as support mechanisms for international terrorism. Global businesses have to be constantly vigilant to avoid being associated with these major international challenges.
The above information is taken from the joint publication of the Global Compact, the Prince of Wales International Business Leaders Forum and Transparency International. "Business against corruption - a framework for action. Implementation of the 10th Global Compact principle against corruption."
Corruption's Greatest Challenge: The Enduring Incentive to Bribe
Corruption can be so pervasive that it is almost impossible for a company to escape. Moreover, first movers often punished rather than rewarded. For example, if a company that does not take part in bribery might lose all its business if it is working in a corrupt environment. Moreover, in some societies corruption is not seen as scourge, but as a cost of doing business and even a cultural norm.
Companies have a vested interest in sustainable social, economic and environmental development. The justifications listed on the previous page present a compelling case for conducting business in a responsible and transparent manner. Occasionally, businesses will find themselves in positions where the business case fails, that is, where it is not in their short-term financial interest to integrate responsible business practices. However, by taking a long-term view and contemplating the Prisoner's Dilemma, business can break this cycle of lose-lose and reap the opportunities responsible business practice offers.
When the Business Case Fails: Prisoners' Dilemma
The problem that the prisoners face is the lack of complete information to make a proper decision. Together, the suspects are better off (ie, reach the most optimal equilibrium) if they both remain silent, than if they confess. However, without knowledge of the other's decision they cannot know if their decision to remain silent will be in their best interest. Individually each suspect will rationally have greater incentive to cooperate with the police, since from his/her perspective that will yield a higher payoff. Consequently, this creates a dilemma where the participants experience a more negative aggregate result when acting in rational self-interest (eg, both confess and both go to prison for two years) than irrational selfless behavior (eg, both receive only 6 months). This results in an equilibrium that is not jointly optimal for both players.
The situation can become much more complicated when the experiment is repeated several times, referred to as Iterated Prisoner's Dilemma, because the "prisoners" can attempt a tit-for-tat strategy by extrapolating from previous experience what the other will do.
Prisoner's Dilemma, despite its uniqueness, does not belong only within the confines of police interrogations. It has been useful in explaining or expanding on various topics ranging from military strategy to evolutionary biology. This dilemma can be observed around the world in business, economic, and political settings. Specifically, the inefficiencies of the prisoner's dilemma can be found in preventing corruption, encouraging sustainable development, and managing supply chains.
Recognizing the Prisoner's Dilemma as a Basis for Corruption
Corruption comes in many shapes and sizes, across countries as well as sectors and industries. Companies engaging in the fight against corruption on their own are often faced with some form of Prisoner's Dilemma. That is, corporations do not necessarily have a desire to bribe but feel pressure to pursue corrupt acts since if they refrain from bribing, while their competitors continue to do so, they risk losing business.
This incentive exists due to the fact that acts of corruption, such as bribery, are a dominant strategy. In a corrupt environment, profit maximization encourages all companies to behave in a similar manner, leading to a non-Pareto solution.
If all firms would agree to refrain from corrupt actions as a group they would be better off given that on average it is more optimal for all firms to engage in non-corrupt practices.
However, in practice a 'free-rider' problem exists. If a single firm alone decided to act against corruption while others do not, it may end up worse off from potentially being cut off from profitable opportunities more readily obtainable to those bribing corrupt officials. Additionally, even if a group of businesses agree to collectively fight corruption, the incentive remains for a single firm to free ride (benefit from the actions of other without individually contributing) by defecting out of cooperation by bribing to increase profitability. Thus, this problem, a prisoner's dilemma, requires some sort of collective action for an optimal solution.
Bribery will continue unless companies collectively agree to cooperate to generate a level playing field or pre-competitive arena. Collectively creating and sustaining a fair business environment across the globe is the key for fighting corruption and generating a more beneficial state for all.
The Solution
Only a collective response can be an effective, both at the global and local levels. A growing number of companies understand that allowing corrupt practices increases business risks - from exposure to blackmail to the risk of violence. In addition, corruption commonly creates a negative corporate culture that can fuel disloyal staff behavior. Adequately fighting corruption serves the purpose of managing and minimizing risks.
Due to the negative consequences of acting alone in the fight against corruption, such as missing out on profitable business opportunities, there is less incentive for firms to take the first move. Thus, a collabourative effort by businesses along with additional outside leadership from governments, civil society, and NGOs is essential in order to solve the prisoner's dilemma facing firms and society as a whole.
Since international corruption is likely to have a prisoner's dilemma structure occurring to some extent within a single firm, a proper anti-corruption strategy would ensure strong internal corporate governance and increased transparency concentrated on preventing its own employees from corrupt actions with public officials.
Similarly, international corruption will probably have prisoner's dilemma structure also at the global level in a political sense. It is pertinent that collabourative efforts exist within governments around the world and public officials that represent them. To further facilitate this, the UN Convention against Corruption was created.
Overall, governments have the responsibility in controlling extortion and bribery while the business community has the corresponding responsibility to strengthen its own efforts to combat extortion and bribery.