On 24 June 2004, during the UN Global Compact Leaders Summit it was announced that the UN Global Compact henceforth includes a tenth principle against corruption. This was adopted after extensive consultations and all participants yielded overwhelming expressions of support, sending a strong worldwide signal that the private sector shares responsibility for the challenges of eliminating corruption. It also demonstrated a new willingness in the business community to play its part in the fight against corruption.
Principle 10: “Businesses should work against corruption in all its forms, including extortion and bribery.”
Corruption is now recognized 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. The World Bank has stated that “bribery has become a $1 trillion industry.”
The rapid development of rules of corporate governance around the world is also prompting companies to focus on anti-corruption measures as part of their mechanisms to protect their reputations and the interests of their shareholders. Their internal controls are increasingly being extended to a range of ethics and integrity issues and a growing number of investment managers are looking to these controls as evidence that the companies undertake good business practice and are well managed.
The international legal fight against corruption has gained momentum in more recent times through the Organization for Economic Co-operation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and through the entering into force of the first globally agreed instrument, the United Nations Convention against Corruption (UNCAC) in December 2005.
There are a number of very different reasons for why businesses should combat corruption in all its forms.
The ethical case
Corruption is inherently wrong. It is a misuse of power and position and has a disproportionate impact on the poor and disadvantaged. It undermines the integrity of all involved and damages the fabric of the organizations to which they belong. The reality that laws making corrupt practices criminal may not always be enforced is no justification for accepting corrupt practices. To fight corruption in all its forms is simply the right thing to do.
The business case
There are many reasons why it is in any company’s business interest to ensure that it does not engage in corrupt practices. All companies, large and small, are vulnerable and the potential for damage to them is considerable. The following are some of the key reasons for avoiding involvement in corrupt practices:
- 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 where it occurs, 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 recognized 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 is also a growing number of examples where developing countries with limited capacity to handle such cases have obtained outside legal assistance. To this end the OECD is playing a critical role in ensuring that its member states are developing judicial capacity to enforce the prohibition against any involvement in bribing foreign officials.
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. Change brings uncertainty. Of particular significance for many large companies is the degree to which they may be responsible for agents acting on its behalf in other countries. What may yesterday have been considered an independent agent – for whom the principal company carried no responsibilities – may today be someone whose actions the principal company indeed can be legally accountable for.
- Reputational risks
Based on the experience of recent years, companies whose policies and practices fail to meet high ethical standards, or that take a relaxed attitude to compliance with laws, are exposed to serious reputational risks. Often it is enough to be accused of malpractice 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. The argument that although what they may have done may have been against the law or international standards, it was simply the way business was done in a particular country is not an acceptable excuse. Nor is it good enough to claim that other companies and competitors have engaged in similar practices.
- 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.
- ‘Known as clean’ and repeat demands
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, no recourse 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 behavior 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 company’s 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 labor 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. It is important to recognize 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 or 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 are used as support mechanisms for international terrorism. Global businesses have to be constantly vigilant to avoid being associated with these major international challenges.