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Public Sector Governance

 

Global Corruption: Applying Experience and Research to Meet A Mounting Crisis

Keynote Opening Speech by Frank Vogl at the

2006 International Business Ethics Conference:
Business Ethics in the Corporate Governance Era


Domestic & International Trends in Transparency, Regulation, and Corporate Governance

Seattle University. July 6 and 7, 2006, Seattle, Washington, U.S.A.

Executive Summary

Summary of Key Points

  • Corruption adds to global insecurity, undermines efforts to build democratic institutions, complicates the task of reducing global poverty, and erodes public trust in business and the free enterprise system. The damage wrought by corruption is often underestimated by experts in international affairs, corporate leaders and business analysts, and by the press. We need to change this by explaining the true costs of corruption, and by drawing upon research and experience to forge and to implement pragmatic approaches to curbing corruption.

  • Corruption is complicated and it takes many forms. There are inextricable overlaps between malfeasance in major multinational corporations and the plight of millions of victims of governmental corruption.  Today, we see vast problems of integrity among major corporations, some of whom may well be prime suppliers of bribes, while we see corruption in scores of public offices. Effective approaches to curbing corruption must address both the suppliers of the bribes and the takers. In both cases we need to not only consider critical issues of law, regulation and policy, but also the core cultural issues that permit wrongdoing.  

  • My focus is on grand corruption – defined as the large-scale abuse of high office.  This definition is broad. In business, for example, I see abuse including the extraordinary levels of compensation that top executives have secured, sometimes exceeding 1,000 times the annual pay of the average employee in their companies. By abuse of office I do not only consider enormous financial gains by top public officials, but also systems and conspiracies deployed by those officials to keep themselves in power and to broaden their control.

  • The abundant evidence of business and governmental corruption has undermined public trust in major institutions. A crisis of corruption has swept across corporations, governments, civil society organizations (CSOs), charities, sports institutions and universities. At home here in the United States, and abroad, leaders have been shamed, imprisoned and forced to resign their positions of trust, but corruption continues unabated.

 

The Costs of Corruption

  • Daily we read the headlines: Californian Congressman Cunningham pleads guilty to taking bribes; Boeing agrees to pay the Government a fine of $615 million to end Pentagon procurement bribery investigations; the top executive of Hyundai in Korea is indicted on kickback charges; dozens of Brazilian politicians are named in a corruption scam; Kenyan ministers are seen to be involved in a corruption conspiracy; the media is censored and civil society is undermined as Kremlin leaders enrich themselves; and, top U.S. corporate executives take home multi-million dollar incomes, as the pensions of their employees are frozen and as their corporation’s profits decline.

  • Bribery involves tens of billions of dollars each year, but the costs reach far beyond monetary sums. The damage being done covers many areas, including:

  • Corporate ethics*- the scandals weaken public confidence in our free market system.
  • Economic growth – suffers enormously due to waste, theft and distorted public policy.
  • Democratic values – corruption undermines efforts to build democratic institutions…perceived corruption by powerful elites produces populist backlashes.
  • Human rights – where corruption is widespread, human rights abuse is also formidable.
  • Environmental Damage – bribing to evade environmental laws and protection is commonplace.
  • Poverty - The United Nations Millennium Development Goal of reducing global poverty by one-half by 2015 will not be attained so long as corruption continues unchecked. The crisis of corruption is taking us each day further and further down the road to human misery.
  • Social injustice – corruption expands income gaps between elites and the average citizen.
  • Security – bribery in arms sales is enormous and adds to our insecurity.

Research and the Lessons from Experience

  • To meet the challenge of today’s crisis we need to look to the research and anti-corruption projects that have been pursued over the last decade. There has been a formidable rise in research and in actual experience in this area. We have learned, for example that:

  • The costs of corruption are higher than most people perceive.

  • Corruption takes many forms. It may be tempting to seek ‘one-size fits all’ solutions but each country is unique and each solution has to be tailor-made.

  • The operations of all organizations need to be driven by a robust integrity culture that is managed and directed on a top priority basis by their leaders. When this is absent, then the actions of governments and regulators to promote better corporate governance is of marginal benefit.
     
  • Sustainable reform has to be home grown. External organizations that seek to contribute to reform in individual countries have to understand that their roles are complementary and supplementary to the work of domestic leaders.

  • Success in curbing public sector corruption demands, as its leading edge, vigilance on key political issues: from building democratic institutions that enhance accountability, transparency and the rule of law, to actions that uproot embedded networks of corruption that exist in most governments.

  • There are no short-cuts to curbing corruption. Its complex and intractable nature means that the road to victory will be long with a frustrating number of setbacks.

Corporate Integrity

  • The ethics of American corporations are better than their reputation. But significant improvements in such areas as corporate social responsibility and employment practices have been overshadowed by top level scandal and extraordinary greed by a number of prominent top executives.

  • Securing sound ethical practices in business requires the establishment of a guiding framework: companies need to be driven by core values set within a corporate integrity culture (this applies to charities and sports organizations and universities, just as it does to businesses). The prime purpose of business is to make profits, but how business sets about this objective is important. At the heart of a corporate integrity culture is the notion that doing the right thing is more important than profit maximization.  Specific individual corporate governance reforms will be of marginal value if they are not implemented within the framework of a strong corporate integrity culture. To develop such a culture it is useful to consider eight key actions:
  1. Companies need substantive codes of ethics;
  2. Codes need to be current and embrace a comprehensive agenda, including social responsibility issues;
  3. Building and sustaining a strong integrity culture requires leadership – “the tone at the top” matters;
  4. There must be a high level of public accountability by top executives and corporate directors and transparency;
  5. Ethics code enforcement is essential;
  6. Corporations need highly skilled ethics officers who are part of the top management team;
  7. Living the code calls for a combination of communications, training and incentives for performance; 
  8. Greater encouragement of whistleblowers is essential.
  • These eight sets of proposals aim to provide a framework for creating and sustaining an integrity culture within corporations. Public trust in business will not be repaired unless many more corporations build integrity cultures.  Further deterioration in public trust may strengthen pressures for greater governmental regulation of business, undermining the vibrancy and flexibility of the free enterprise system that is the cornerstone of U.S. economic growth and that of most countries.

The Supply-side of Bribery – Curbing the Bribe-payers.

  • The supply-side of corruption in the international arena should not be seen as distinct from the core issues of business ethics. Rather, how a company operates relative to the public sector should be wholly driven by its values and integrity culture. Corporations that take their ethics codes seriously will not pay bribes, at home or abroad. My focus here is just on one aspect of the supply-side of bribery: illicit payments made by multinational corporations and government officials outside of the corporation’s home country.

  • Private investment is crucial for development and the path to economic growth in most nations requires the import from business of capital and know-how. But the imports have to be clean. If the relationships are based on bribes, then the outcomes for the peoples of the developing countries will be negative.

  • Actions to curb the supply-side of bribery to government officials need to highlight enforcement, closing loopholes in laws, boosting the watchdog roles of civil society organizations (CSOs), increasing transparency in transactions, and raising public understanding of what is at stake.

  • Enforcement is critical - companies need to fear being caught and punished for bribing public officials. Business leaders need to recognize that there are serious risks in bribe-paying. This is not the case today. The overwhelming majority of the 36 countries that ratified the OECD Anti-Bribery Convention, which came into force in 1999, are not enforcing it.  

  • Not only should the law be applied, but loopholes in the laws should be closed. The OECD Anti-Bribery Convention and the national laws that flowed from it offer opportunities for abuse. For example, allowance of “facilitating payments” in current laws in practice is a permit to bribe.

  • Applying clear codes in business-public partnership reduces opportunities for extortion - companies must to be encouraged to accept ethics codes, such as the Equator Principles.

  • Keeping pressures on companies to report on their anti-bribery actions. Business should publish verified reports on their anti-bribery actions. Programs such as the Extractive Industries Transparency Initiative should be expanded to all business sectors to enhance transparency in transactions between firms and governments.

  • Companies must learn to say no and to forsake business, rather than bribe officials. 

  • The roles of civil society organizations (CSOs) should be greatly expanded with regard to monitoring public procurement and business contracting.

Curbing the Demand-side of Corruption  

  • Many initiatives have been launched in the last few years to limit the demand-side of the corruption equation. Many of these deal with technical issues from strengthening laws and regulations and auditing practices. These should be encouraged.

  • Cutting foreign aid to countries with corrupt regimes, as the World Bank is now doing more frequently, hurts the poor who most need assistance. Suspending aid, therefore, should solely be a temporary measure. The key is for aid agencies to find ways to continue assistance to the poor while circumventing corrupt governments.

  • To strengthen direct support to civil society some aid agencies may need radically new approaches, including changes in their basic charters to permit this.

  • Aid agencies should be encouraged to continue to take risks with novel approaches in the hope that they curb corruption and assist the poor – the failures of the World Bank’s Chad pipeline approach should not discourage risk-taking by the Bank.

  • Building on experience it is now time for a quantum rise in international aid agency support for civil society organizations to enable them to be still more effective in a range of areas, including:
  • - Tracking the enforcement of laws, rules and regulations designed to curb corruption;

    - Participating in the project appraisal missions of donor agencies;

    - Becoming key participants in efforts by donors to monitor the progress of donor-funded projects;

    - Monitoring competitive bidding in public procurement at the national, provincial and municipal levels;

    - Playing leading public roles in international discussions about corruption in their own countries;

    - Forging local, national and international networks to exchange information and learn.

  • There are almost certainly some corrupt CSOs. But, the World Bank and other agencies are increasing the scale of their internal investigative units to discover fraud and corruption in their own projects and programs. These agencies have the skills that could be applied to funding to CSOs to ensure that funds are well spent. Other monitoring efforts may be necessary.

  • But, worthy as many aid agency supported programs are, they have tended so far to ignore a crucial area: politics. Curbing the demand-side of corruption requires greater efforts in the political arena, including work to build democratic institutions and uproot embedded political networks of corruption.

 

Placing Politics at Center Stage

  • First, key is recognizing that the citizens of each country are not only best placed to make judgments on the best political anti-corruption strategies to pursue, but they alone can take the initiative. As John Makumbe, chairman of Transparency International Zimbabwe, has noted “All the elements outside Zimbabwe’s borders can only support reform, but only the people inside the country can initiate the salvation of Zimbabwe.”

  • There are no simple formulas that can be applied to support political reforms that curb corruption. Every country needs to develop approaches that most effectively take unique national factors into full account.

  • The Carter Center, the National Democratic Institute and numerous other organizations are playing valuable roles as outside supporters of domestic CSOs in key political areas. Far more needs to be done, involving the engagement of major international aid agencies.

  • The villains often know how to encourage aid donors to work with them and see them as partners – aid agencies need to learn from local experts in non-governmental organizations and provide major support to their efforts, otherwise many worthwhile reforms will fail. Sustained progress in the anti-corruption field will only emerge if government is open and subject to the scrutiny and the checks and balances that are central to a modern democracy. To believe that authoritarian governments will counter corruption over lasting periods is naïve.

  • Democracy is not a panacea. But building strong democratic institutions is a vital component of an anti-corruption strategy. It is not an assurance against corruption, but it is imperative if corrupt leaders are to be held accountable and meaningful reforms are to be sustained.

  • Our aid agencies need to find ways to be more responsive, more flexible and more dynamic and openly and publicly support mass political movements. Our major charitable foundations need to find ways to provide far more direct funding to such movements. Leading international CSOs also need to be far more engaged in supporting these movements, encouraging their development and promoting their causes, than they are today.

  • The time has come when we need to ensure that strong civil society organizations, driven by their own firm integrity cultures, are equipped to play leadership roles at the center of the stage in the global fight against corruption. They need to be actively promoting the full panoply of actions and reforms that open to the public the processes of government, that enhance the enforcement of the rule of law, and that strengthen accountability by public officials.

  • CSOs in the OECD countries need to be encouraged to broaden their education campaigns. By and large they have limited their awareness-raising efforts to top governmental elites, academics, aid agencies and foundations. For the public in general the corruption problems in developing countries continue to be seen widely as cultural or technical, rather than as the humanitarian tragedies that they really are.  The impact of corruption needs to become as well understood as the issues of child poverty that UNICEF is concerned with; as the HIV/Aids issues in developing countries that Bono has promoted; and, on a par with the human rights issues that Amnesty International and Human Rights Watch have brought to public attention.

  • There is an enormous amount that can be done to curb corruption. What is absolutely clear is that we dare not slacken our resolve to fight corruption – great successes may be elusive for many years to come, but enormous waste, pervasive cynicism, and avoidable human tragedies abound each day as the result of corruption. This is intolerable.

* Americans talk about business ethics. In many countries, however, the word “ethics” raises suggestions of morality and religion and there is greater comfort in talking about corporate integrity. It is strictly in this latter sense that I use the word ethics in this paper.

Note: The views expressed in this paper are solely those of the author and do not seek in any form to represent the views of organizations with which Frank Vogl is associated.

To download the full version of the paper in .pdf format please click here.

 


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