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Corporate Governance Tool For Fighting Corruption

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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 (SMEs) 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.

In dealing with corruption, there are no simple answers. In some instances business can be a source of corruption, while in others it is simply a victim. Crucially, 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. Many companies are also beginning to look inside, seeking ways to ensure that they are not unwittingly contributing to the climate of corruption.

One key way of addressing corruption problem through internal measures is the establishment of strong corporate governance within companies. Good corporate governance is not only a tool that raises efficiency, improves access to capital, and ensures sustainability — it is also emerging as an effective anti-corruption tool. On the day-to-day transaction level it makes bribes more difficult to give and to conceal. At the decision-making level, corporate governance injects transparency and accountability, so that it is very clear how decisions are made and why. Finally, 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. How business decisions are made matters from both an ethical and pragmatic standpoint not only in a large company doing business in its own back yard but also in a small business from a developing country engaged in regional trade. In fact, legislation such as the U.S. Foreign Corrupt Practices Act (FCPA) or the United Kingdom Bribery Act places legal responsibility on companies for the behavior of their suppliers and distributors in global value chains.

Enforcement of these laws is creating pressure for companies to seek overseas business partners who share their commitment to anti-corruption. It also removes deniability of wrongdoing at the all levels when a local agent or supplier pays a bribe. Therefore, internal compliance becomes a key element of the board’s and company’s approach to risk management.

The principles underlying good corporate governance and business ethics are deeply rooted in universal values. The Universal Declaration of Human Rights has established a global consensus on the applicability of shared moral principles across various countries. Many of these principles that deal with individual rights such as right to property and equal treatment under the law are now reflected in landmark documents on ethical business behavior: OECD Anti-Bribery Convention; United Nations (UN) Convention against Corruption; World Economic Forum’s Partnering Against Corruption Initiative; Transparency International’s Business Principles for Countering Bribery; International Chamber of Commerce Rules of Conduct to Combat Extortion and Bribery; and the UN Global Compact’s 10th Principle, among others. Growth of strong national anti-corruption legislation such as Foreign Corrupt Practices Act (FCPA) and United Kingdom Bribery Act (UKBA) also affects the emerging global standards.

The challenge is to make sure that international and national commitments to anti-corruption as well as leadership calls for anti-bribery at the board level trickle down through the whole company to every last employee on the ground in countries around the world.

Good corporate governance practices cannot be imposed by fiat, even if promulgated by the highest levels of leadership. Nor can corporate governance exist in a vacuum; firms will find it hard to comply with corporate governance regulations if there are no initiatives to improve the overall legal and regulatory climate in a country. Ethics and values (internally), and legal and regulatory institutions (externally), guide how corporate governance is developed and implemented. Corporate governance by itself should not be regarded as a panacea or an automatic cure for all corporate ills. However, if bolstered by the values and behavior engendered in genuine ethical organizations with sound governance standards, corruption becomes the exception rather than the rule.

The importance of corporate governance as a tool for addressing corruption is essential when organizations start to understand the fact that corporate governance is not an issue of legislation, but a way to building sustainable businesses across the world.

Transparency International’s definition is brief yet very comprehensive “the abuse of entrusted power for private gain.” As we all know and have seen in many countries, Systemic corruption is by far the most damaging and the one that is most difficult to analyze and prescribe solutions. Its effects are well documented in various literatures, but it can still be too difficult to isolate the complex web of variables and factors that account for its damaging effects on undermining property rights; weakening the rule of law; limiting private sector growth; eliminating incentives to invest; debilitating institutional capacity; and delaying economic and political development.

Equally damaging to society is “state capture,” particularly in the context of transition economies where companies make payments to government officials to shape legal and regulatory environments that help them create and maintain market control. On the other end of the spectrum are corporate raiding, a problem particularly widespread in, where state-connected companies manipulate the government’s judiciary and taxation powers to expropriate private companies. In contrast with protection schemes or extortion, corporate raiding does not seek to gain just a portion of a company’s profits but rather to take over the entire business through schemes involving corruption-tainted bankruptcy, litigation, or land and asset acquisition. Such schemes often involve falsifying a target company’s corporate documents, illicitly obtaining control over a significant portion of its shares, or using corrupt influence over the local judiciary to skew litigation outcomes and to authorize the seizure of assets.

The art of crafting preventive and punitive measures for corruption remains a central focus of reforms around the world. Preventive measures involve working through a country’s legal framework and a society’s moral norms to eliminate corruption incentives. Examples include the quality of procurement laws, business regulations, codes of conduct, freedom of information legislation, and independent oversight mechanisms. Punitive measures, on the other hand, are the post facto prosecution and application of specific sanctions to acts of corruption, with the intention to generate untenable costs that deter future corrupt behavior.

Where does corporate governance fit in this picture? It fits in where organizations understand that for effective relationship to be maintained with all their stakeholders, a high level of trust must exist. For sufficient levels of trust to occur, four overarching corporate governance principles need to be in place:

  • Transparency: Organizations must make clear to the providers of capital and other key stakeholders why every material decision was made.
  • Accountability: Organizations should be held accountable for their decisions and account to all stakeholders by submitting themselves to appropriate scrutiny.
  • Fairness: All stakeholders should receive fair consideration by the organizations with a sense of justice and avoidance of bias or vested interests.
  • Responsibility: organizations should carry out their duties with honesty, probity, and integrity.

With corruption as an outcome of poor governance, the definition and practice of corporate governance is increasingly expanding beyond its traditional understanding of legal rights and obligations. Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals… the aim is to align as nearly as possible the interests of individuals, corporations and society. As such corporate governance is crucial to anti-corruption and all other aspects of business operations.

One does not have to rely solely on moral sensibilities to make the case that improving corporate governance is the right thing for a company to do. There is a business case for the benefits it brings to all types of companies. While traditionally associated with large, publicly listed corporations for which the main benefit of good governance is being able to raise outside capital through a stock exchange, corporate governance is much more broadly applicable. It can deliver benefits to other types of companies – including family owned firms, state-owned enterprises, and even SMEs – because it provides a framework for efficient, transparent, and accountable decision-making in every enterprise regardless of the size or form of ownership. Such benefits include a way of reconciling divergent interests, planning for strategy and succession, accessing capital, cultivating company image, and ensuring legal compliance.

Corporate governance introduces internal controls that foster accountability and disclosure. Even in a poor investment environment of many emerging markets and developing economies, a well-governed company can do better than its competitors. An ABN AMRO study showed that Brazilian firms with above-average corporate governance had ROEs (returns on equity) that were 45 percent higher and net margins 76 percent higher than those with below-average governance practices.

Corporate governance helps organizations build strong ethical standards, which improves the organizations ability to be sustainable in the near and distant future. Such organizations develop these standards using a three pronged approach of practical actions. See table below

Setting the Foundation – Complying with Legal and Regulatory Framework

– Having a designated Ethics Officer for all reporting and disclosure requirements established by law and regulation
– Having a written code of ethics in place, adopted by the Organization
– Consulting Internal and External stakeholders on the Organization’s ethical performance

Committed Engagement – Institutionalizing a Comprehensive Ethics Program

– Commissioning external company ethics assessment to determine the risks and opportunities
– Activate engagement of internal and external stakeholders to determine the organization’s ethics program
– Having their ethics program as an integrated and systematic application of key related components such as
     1.  Ethics Structure at the highest level providing strategic leadership (Ethics Committee)
     2.  Ethics office with appropriate level of designated staff and resources
     3.  Communications strategy targeted at both internal and external stakeholders
     4.  Safe reporting lines for unethical behavior (anonymous whistle blowing line)
     5.  Ethics training program at all level of the organization and key stakeholders
     6.  Internal monitoring and audit systems to report on the effectiveness of ethics program
     7.  Reporting and disclosure of ethical performance
to external stakeholders
– Certification of ethics officers

Leading by Example – Setting New Ethical Standards

–  External independent verification of ethics program and assurance of performance
–  Leader in initiating collective action solutions of forming coalitions to fight corruption

In conclusion, Anti-corruption attitudes have changed significantly over the past two decades. Corruption is no longer regarded as a subject to be avoided and is now widely condemned for its damaging effect on countries, industries, and the livelihoods of individual citizens. More importantly, the view of the private sector in the corruption equation is changing. Companies are no longer viewed only as facilitators of corruption — they are increasingly recognized as victims and a valuable source of working solutions and anti-corruption efforts will be seen as an integral part of good corporate governance for organizations.

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