Bribery: What's it worth?

Corporate are cleaning up their act, but the search for profit still encourages business leaders to take risks.

by INSEAD and CEIBS
Last Updated: 23 Jul 2013

Every man has his price," said Sir Robert Walpole, the UK's first prime minister. "Yes," cynics added later, "and the incorruptible man's price is highest of all." Has anything really changed in the last two and a half centuries since those observations on human nature were made? Everything and nothing - as corporate executives know only too well. These days, global business is supposed to be conducted on a level playing field, but off-the-ball incidents give unfair advantages to some. Bribery and corruption are at the heart of this, and that is the weakness, says Raymond Baker, author of Capitalism's Achilles Heel: dirty money and how to renew the free-market system.

But might we be on the brink of a new, cleaner era? It is helpful that business is under greater scrutiny today than ever before. Enron, Parmalat, WorldCom and the rest serve to remind us that the books can get cooked, that official numbers may lie - 'profit is an opinion, cash is fact' - and that not every CEO's motives are wholly admirable. In the age of Sarbanes-Oxley, it is corporate clean-up time.

And yet the opportunities and pressures of globalisation encourage business leaders to take risks, to test the boundaries of what is possible, to strive for growth even in the unlikeliest of circumstances. Squeezed in this pincer movement of risk and reward are human beings: the business leaders who have not forgotten the difference between right and wrong, but who feel obliged to explore the middle ground between those two moral absolutes in the search for profit.

And to err is human. Facilitation or 'success' fees, emoluments, expenses, presents, back-handers, baksheesh: whatever you want to call it, oiling the wheels of industry sometimes appears to be necessary to win orders and close deals. In the global era, supply chains are long and complicated. Geopolitics are increasingly unstable. In many circumstances, cash - especially off-the-books, this-never-happened cash - is king.

If you think this sounds unattractively cynical, consider the serious advice that highly respectable management consultancies offer these days - for a (legal) price, of course. For example, in their 2004 book Hardball - are you playing to play or playing to win?, George Stalk and Rob Lachenauer, two senior Boston Consulting Group advisers, urge businesses to go right up to the line of what is legally and morally possible if they are serious about succeeding in today's global markets.

Stalk and Lachenauer say that corporate leaders need to draw a "bright line" in the "caution zone" - that is, the legal (and moral) grey area that is "so rich in possibility". Leaders know "where the bright line is, let everybody know when they're getting close to it and take corrective action as soon as anyone steps over it". In other words, mistakes are going to happen and they are not really such a bad thing. Indeed, they are a sign of your commitment to succeeding. You just have to try and react quickly enough to avoid getting into too much trouble when things go wrong. With conventional wisdom like this flowing around the business community, it is easy to see why bribery and corruption might be widespread.

Can we put a figure on global corruption and bribery? By definition, these murky payments are almost impossible to quantify precisely. They remain, as Donald Rumsfeld might say, "an unknown unknown". You can certainly count the deals that may have gone astray where upstanding businesses refused to play the corruption game. The US Commerce Department estimates that between May 1994 and April 2002, the outcome of 474 contracts worth $237 billion may have been affected by bribery. According to officials, US companies lost 110 of these contracts, worth $36 billion.

National and supranational bodies, as well as non-aligned pressure groups, have done their best to create a regulatory framework and culture, where corruption and bribery can be discouraged and penalised.

The US has its Foreign Corrupt Practices Act, which bans the bribery of foreign officials; the OECD has an anti-bribery convention; the UN was the first to launch an anti-corruption convention in 2003; the Organization of American States has its 'inter-American' convention; the African Union and the Council of Europe both have their own anti-corruption conventions; and Berlin-based Transparency International continues its impressive work in the fight against malpractice (see box). And yet the names of often distinguished firms that have fallen foul of these conventions continue to appear in the newspapers.

Boeing famously lost its CEO and CFO in the wake of a procurement scandal in December 2003. ExxonMobil finds its name dragged up in the US courts, along with those of Amoco, Phillips Petroleum and Texaco, as the trial of former US investment banker James Giffen continues. US federal prosecutors argue that Giffen offered Kazakh leaders 'facilitation fees' of up to $84 million to gain access to Kazakh oil fields in one of the largest international criminal bribery cases ever. Even though the oil companies, which have since merged with rivals, have not been charged, their corporate reputations will be dented.

Bribery and corruption know no boundaries. The CEO of Glovis, the logistics subsidiary of Korean car maker Hyundai, was arrested earlier this year on corruption charges. Lee Ju-eun was accused of embezzling KrW7 billion ($6.7 million) to lobby politicians. Previously, Korean businessman Kim Jae-rok had been arrested and charged with illegal lobbying; Hyundai has been accused of paying Kim for his influence with politicians and local government officials. Hyundai chairman Chung Mong-Koo has been charged with embezzling KrW103.4 billion in company funds, and also has been charged with raising about KrW130 billion of slush funds since 2001.

US car maker DaimlerChrysler suspended several managers earlier this year over bribery allegations linked to the UN oil-for-food programme in Iraq, after an internal investigation. In October 2005, a UN report published by former US Federal Reserve chairman Paul Volcker found that Saddam Hussein's regime received $1.8 billion in illicit payments from firms including Siemens, Volvo and the Weir Group.

DaimlerChrysler managers should have known that they were transgressing company rules. As the company's statement of policy declares: "DaimlerChrysler does not tolerate any ethically unsound or corrupt practices on the part of its employees and business partners. Equally, the company prohibits any involvement in or toleration of bribery. This is also stipulated in our Integrity Code. We underscored our commitment to condemning corruption in all forms in 2002 by joining the German section of Transparency International."

Other companies have been stricter. Last year, General Electric dismissed 125 employees and took disciplinary action against a further 243 for legal or ethical violations. These numbers were published in GE's first corporate citizenship report.

More prosaically, BAA, the UK airports operator, was criticised by shareholders in 2004 after it had granted free airport car parking to UK politicians. BAA did not regard the car spaces as a political contribution, but shareholders wanted to pass a resolution authorising BAA to make political contributions of up to £1.25 million ($2.3 million). The value of the car spaces was estimated by BAA to be £1.1 million a year.

Some observers take a tough, possibly even wearier, view of these sorts of practices. In an as yet unpublished paper in Henley Management College's '21st century manager' series, Professor Bill Weinstein argues that human nature being what it is, and global commercial pressures being what they are, we should not expect corrupt practices or bribery to cease.

"People's behaviour in business has not changed, and probably will not change over time, in so far as it often exhibits both scant regard for moral scruples, whatever the prevailing moral code, and ambitions and motivations for power and riches," he writes. "The behaviour exhibited covers a wide range, but as a starting indication we may mention fraud, deceit, false promises and breaking one's word. Such behaviour shades into grey areas of sharp competitive and bargaining practices."

Weinstein espouses a more robust view than that expressed at many business schools openly at least. But until recently - with a few honourable exceptions - ethics had been notoriously neglected by the business school community. The late Sumantra Ghoshal, of London Business School, rightly accused the MBA orthodoxy - of growing 'shareholder value' linked to the excessive rewards for CEOs - as creating the perfect incentive and environment for corrupt behaviour.

As Thomas K Lindsay, provost of the University of Dallas, wrote in the LA Times in November 2002: "Business education in this country is devoted overwhelmingly to technical training. This is ironic, because even before Enron, studies showed that executives who fail - financially as well as morally - rarely do so from a lack of technical expertise. Rather, they fail because they lack practical wisdom; what Aristotle called prudence."

As human beings, we are prone to play with the truth, to exploit loopholes and to put our own interests first. But is it wrong to suggest that people's behaviours do not change (even in business)? Through education one can influence people's attitude, values and eventually behaviour. Then - through laws, rules, codes of conduct - society and corporations attempt to monitor self-interest, to control greed and endeavour to promote behaviours to take account of the common good.

Managers are under constant pressure to succeed. Thousands of miles from head office, and in spite of what they may have been told on training courses and what it may say in the company handbook, business leaders are up against competitors whose behaviour may be no better (and possibly a lot worse) than theirs. What are you supposed to do? Lose out again and again to people who will not play fair? How long will you survive in your post if you keep missing out on all the crucial contracts? What will that do for your career prospects?

The tremendous competitive pressure experienced by managers and corporations may induce them to cut corners to maximise self-interest. The consequence is the dramatic development - in some countries particularly - of corruption, of no respect for the law (or its non-application), and of little respect for the environment, intellectual property and all kinds of rights. Hence, as society becomes more aware of those situations, the interest rises in such subjects as CSR, ethics, corporate governance and corporate citizenship.

In the final analysis, it is individuals who use their freedom to decide how to handle the dilemmas in the grey areas. People always have a choice, even if often one of the alternatives of the dilemma will not satisfy short-term interest, and their awareness of issues having a moral content can be enhanced.

Economist John Kay offers a test: "Would you feel uncomfortable describing your actions to your family and friends? If you would, you should probably not be doing it. People should not apply moral standards in their business life that are significantly different from those they would apply in their everyday activities in the communities in which they live."

SIX STEPS TO COUNTERING BRIBERY

STEP 1: Decide on a policy

Effective anti-bribery performance can be expensive, and managers need to be able to make the case for it based on complying with laws, on the benefits from countering risks and enhancing the company's reputation. Board reluctance is less likely if the project has the full backing of the chairman or CEO, but success will still depend on top-level commitment.

STEP 2: Plan the implementation

A risk assessment exercise is crucial to developing an effective programme. Those processes with greatest risk are traditionally in procurement and supply chain management, and the relationship with business partners and where the company's success depends on obtaining approval for licences from authorities. Companies in multiple jurisdictions should establish a mechanism for country-specific adjustment.

STEP 3: Develop the content

Success will depend on the ability of the support functions to take on the change in thinking. The legal department will need to ensure it has an adequate database to record relevant laws and has assigned responsibility for tracking changes. Finance will need to adapt reports, develop software and implement enhanced controls to deter corrupt transactions.

STEP 4: Implementation

The launch of an anti-bribery programme should be led from the top. This should be followed up with a communications campaign to make sure employees cannot overlook the changes required. In order to protect employees from extortion or from being offered bribes from suppliers, the policy should be communicated to key firms in the supply chain.

STEP 5: Monitor

Techniques to monitor the programme's effectiveness include surveys to discover the extent of employees' and external parties' familiarity with company policies, and asking for any indication of contravention, tests of purchasing results with market price information. Ultimately, the question is: is the company safer from the risk of bribery as a result of the programme?

STEP 6: Evaluation

The culmination of the monitoring process should be contained in reports to management and to the audit committee. Reporting should be regular and follow a consistent pattern to allow comparison. The company should consider how it can build the credibility of its anti-bribery performance with key stakeholders.

Source: Transparency International

BP'S CODE OF CONDUCT

Our corporate reputation and brand are based on trust. Bribery and corruption of all kinds undermine trust, inhibit social and economic development and undermine fair competition. Our code of conduct requires that our employees or others working on behalf of BP do not engage in bribery or corruption in any form. The code of conduct outlines BP's position on bribery and corruption: namely, that employees are forbidden from making, offering or promising to make a payment or transfer anything of value (including the provision of any service, gift or entertainment) to government personnel or other officials for the intention of improperly obtaining or retaining business, or for any other improper purpose or business advantage. This position also applies to third parties acting on BP's behalf, including agents. The code also highlights BP's policy of not permitting facilitation payments (payments made to secure or speed up routine legal government actions, such as issuing permits); even if these payments are nominal in amount. We monitor adherence to our code of conduct, group standards and relevant laws and regulations (including those on bribery, corruption and facilitation payments) via our annual certification process. BP supports institutions and NGOs that aim to eliminate bribery and corruption in their many forms. We are a corporate supporter of Transparency International, and participated in the development of its 'Business Principles for Countering Bribery'. These principles were field-tested in our business unit in Azerbaijan.

Source: www.bp.com

Henri-Claude de Bettignies is the Aviva chair professor of leadership and responsbility at INSEAD and the distinguished professor of global responsible leadership at CEIBS (China Europe International Business School). Stefan Stern is management columnist for the Financial Times.

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