private-to-private corruption: how to make the companies the remedy, not the cause of corruption...

PRIVATE-TO-PRIVATE CORRUPTION:HOW TO MAKE THE COMPANIES THE

REMEDY, NOT THE CAUSE OF CORRUPTION

Antonio ArgandoñaEmeritus Professor, “la Caixa” Chair of

Corporate Social Responsibility and Corporate GovernanceIESE Business School

Conference “Reducing Corruption: Focusing on Private Sector”Tallinn, 11-12 February 2016

“Business should work againstcorruption in all its forms,

including extortion and bribery”

UN Global Compact, 10th principle

2Prof. Antonio Argandoña


V. Lucas and J. Gutmann, “Unbundling Private- and Public-SectorCorruption: Insights Based on Two New Indicators”, 2015

There are several definitions of private corruption

Any misconduct in the organization, any act forbidden by law

“The abuse of public office for private gain” (World Bank 1997)

“The abuse of a position of trust for obtaining a dishonest profit”

“The misuse of an organizational position or authority for personal gain (…), where misuse (…) refers to departure from accepted societal norms”

(Anand, Ashforth & Joshi 2004)


… and there are many varieties of corruption

Bribery and extortion or solicitationCommissions, gifts, hospitality, favorsAbuse of power or influence, embezzlement of property or

funds, fraudConflict of interest, nepotism, favoritism, cronyism, influence

peddlingIncorrect use of privileged informationIllegal financing of political parties or campaignsMoney launderingOrganized crime, mafia, 'protection', kleptomaniac State


•Companies should not ignore any variety of corrupt behavior



Less corruptionMore corruption

Less corruption

More corruption

V. Lucas and J. Gutmann, “Unbundling Private- and Public-SectorCorruption: Insights Based on Two New Indicators”, 2015

Private vs. public corruption

Private corruption is not so bad!For-profit companies are efficient in protecting their interestsThere are fewer incentives in private companiesCorrupt practices may increase the efficiency There is less private corruption (or have we less information?)

Oh, no! It is really bad! And dangerous!Connection with public corruption: the distinction becomes

irrelevantGlobalization, competition risk of proliferation leveling the

playing field More legal pressure companies are now more awareIncreasing social awareness: the attitudes are changing


• Private corruption is no less bad than public corruption, and its consequences are not lighter

• The difference between public and private corruption is becoming irrelevant


Causes of private corruption

1a. The rotten apple: the individual is the problemCorruption as a personal, isolated behavior: transaction level Benefit, probability of being captured and cost of capture

1b. The rotten apple in the basket: the individual works in a companyThe individual (and the company?) are the beneficiaries

The organization ignores (or pretends to ignore)

An organization with corrupt individuals


• On a personal level, corruption is seen as an incentive problem


2. The basket that rots the fruits: the organization is at center stageA corrupt organization

Corruption rooted in the culture of the company“If we don’t pay bribes we cannot do business”“This is the normal way of doing business here”

The organization ignores, allows or promote corrupt practices

MechanismsStructure: tasks, responsibilities, rules, procedures…

incentives!Culture: shared ideas, expectations, values, visions,

customsBureaucratic culture: loyalty, conformity… pride,

arrogance, hubris… collusionCulture may be a predictor of corrupt conduct


• For companies, corruption is always an organizational problem

• Companies have a key role in the fight against corruption, both public and private


3. The corrupt warehouse that pollutes many baskets: the social / political / cultural dimensionsCorruption is a common practice of the industry or the country

“Everybody does it” “Greed is good”

Legal, political, institutional environmentBusiness environment: rent-seeking Social, cultural, moral ideas: the decline of values


• Individuals and companies suffer the consequences of the social, moral and political environment in which they move

• And, therefore, companies should take an active role in the fight against corruption in their environment



The costs of private and public corruption for the companies

1. High costsDirect costs: higher costs, lower revenues

Transaction costs, not selling or buying at the best price, quality or service

Financial costs of the corrupt actionsLocked-in with accomplices, uncertainty about the pay-off Fines and jail (for the individual and the organization),

reputation loss, rejection of clients, employees and investorsHigh long-term costs: contagion, social reactions, changing

anti-corruption climate, reorganization costsLong-term practices doesn’t mean long-term gains

Indirect costs: misrepresenting financial information, opacity, loss of governance quality, discomfort of employees, tax evasion

2. Undesirable learningExtension to other areas of the firmOther kinds of immoral behavior: putting the personal interest in front

of the company’s Adverse selectionLoss of trust and unity

3. It is a bad strategyUncertain outcomes, undifferentiated, easy to imitate, it

discourages innovative strategies, difficult to change, diminishing competitive advantage

Resource misallocation, capability-building deterrence, lack of confidence and credibility

Problematic leadershipIt could become endogenousRisk of blackmail


• In a cost-benefit analysis, corruption is probably a mistake

• Corruption is bad management


Private corruption is costly also for the industry

1. An uneven playing field

2. Undesirable learning, unethical atmosphere

3. Deterioration of the business environmentUnderground economy, fiscal fraudDifficulties to act according to the lawHarsher regulations and controlsReputation hamperedThe appearance of the “specialist”

4. It could become endemicIt is difficult to eradicate


• If there is corruption in one sector, the consequences for the companies are always bad

• Companies must be active in the fight against corruption in their environment


Anti-corruption strategies are changing

Traditional strategies: fighting public, domestic corruption

1970s: fighting international public corruption: US Foreign Corrupt Pratices Act 1977Ethical arguments, national legislation, emphasis in demand side

New strategiesEconomic arguments Involvement of international financial

institutions International conventions: OAS, Council of Europe, OECD, UNCAC,

AU Involve more countries, international cooperationIndependent monitoringEnlarge de concept of corruption: private corruption is part of the

problem


Emphasis in the supply side The problem is in the organizations Multistakeholder cooperation Companies are an important part of the solutionEthics and compliance programs: US Organizational Sentencing

Guidelines 1991, UK Bribery Act 2010Economics is not enough: change the organizational

cultureIntegrated, preventive and corrective complianceIntegrated: legal, tax, competition, anti-

corruption, environmentMaking the adoption of corporate principles mandatoryDetect and respond, investigate

Disclose, open communication

Problem-solving approachPrivate and public (and other misconducts too)


• Companies should develop ethics and compliance programs integrating all risks under the supervision and with the commitment of top management, and engaging everyone in the company

• Managers must understand the nature of the risks, their characters, how they depend on the context, power and market imperfections and how society and prosecutors understand it: it is not what you think but how the prosecutors perceives it

• Employees should be aware of the risks and costs of corruption, must understand how to protect themselves and the company and what to do when problems arise

• SME: do what you can, but do it!


Ethical arguments

The person who receives the bribe: injustice and disloyalty towards the companyFails to fulfill his due, abuses a position of power

The person who pays the bribe: accomplice or instigatorPossible damages to the company

Lower quality of products, worse conditions...Reputational riskContagion Lack of transparency, falsification of records

Injustice to competitorsHarm to society

Encouraging corruption, opacity


• Ethics is necessary to fight corruption

• But ethics is not enough if it does not translate into adequate rules, structures, incentives, customs, controls, accountability, role models and professionalism

• Law and judges are also necessary, but not enough: the “carrot and stick” approach has limitations, if not accompanied by higher inner motivations


“The morality of a companyis as strong as the morality of the

weakest employee.We are all links in a chain”

Ron SugarPresident and CEO, Northrop Grumman

[email protected]://blog.iese.edu/antonioargandona

Thank you!

private-to-private corruption: how to make the companies the remedy, not the cause of corruption...

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