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Public Sector Governance

 

Ethics, Corruption, & Globalization


Speech by Frank Vogl

Keynote Address at the Goodwill Delegates Assembly, June 22, 2003

Introduction

We live in an ever more challenging world where the contribution you make is vital and where the opportunity you have to expand your contribution, here at home and abroad, is formidable. Today, I shall argue that critical to your future success is the strengthening and the maintenance of an ethical culture in your organizations. This demands management approaches that I will seek to briefly describe consisting of commitment, accountability, integrity programs, monitoring and communicating.

Ladies and gentlemen it is a pleasure to be here. Goodwill has pioneered one of the most remarkable stories of successful philanthropy in the world. You have done immense good. You are constantly building on a long and rich tradition. You have brought to the non-profit sector a business professionalism that makes you a role model, not just here at home, but overseas as well.

We live in a world where more than one billion people barely survive on just one dollar a day. It is a world that has too much corruption and too little charity. It is a global village where it may be more comfortable and easier to focus on problems closest at hand and on the unfortunate in our neighborhoods, but today more than ever, developments in one corner of the village impact the lives of all in the village. Goodwill has a tremendous role to play in the global village, which can yield benefits to you and this great organization, while providing enormous gains for humanity.

Success around the world for all organizations depends on the degree to which they can build trust and strengthen confidence in their integrity among the public, partners, regulators and customers. For American organizations the challenge now is greater than ever.

****

Challenges to American Organizations

The challenge of building trust overseas has become more difficult. Around the world, we see rising anti-Americanism – and despite the growth of Goodwill in numerous countries beyond U.S. borders, I strongly suspect that in many parts of the globe you are seen as American and, as such, may suffer as anti-Americanism spreads. This damaging phenomenon is the product of three entwined strands – jealousy, White House unilateralism and U.S. corporate scandal.

There is jealousy in many places of our nation’s super-power status, our affluence and our way of life. Then, there are fears of the willingness of the Bush Administration leadership to consider preemptive military strikes on foreign countries. We are seen by many people abroad as too ready to use our military and our Pentagon power to solve global problems.

Concern about America’s role in the world is increased by our proclivity to reject the views of the majority of the world’s nations – we vetoed the Kyoto treaty on global warming and we stood alone among nations in opposing the establishment of an International Criminal Court. This unique court, which was formally inaugurated in the Netherlands on June 16, seeks to bring to justice the world’s worst perpetrators of genocide, mass murder and human rights violations.

In addition, many people abroad are worried about the rising power of American corporations and fear that their constant quest for ever greater profits may be at the expense of the globe’s fragile environment. For years our multinational enterprises, which have been in the vanguard of globalization, have countered the arguments of the critics and declared: “trust us.”

Trust in Corporate America has been undermined. The wounds are self-inflicted. Corporate leaders cooked the books, cheated shareholders, perpetrated fraud, and personally pocketed fortunes. They have added to anti-Americanism around the world. Every twist and turn of every horrible episode has been reported in great deal abroad. The scandals have been manna from heaven for long-time critics of American capitalism and globalization. The political influence of these critics, especially in Europe, is increasing. This can impact our trade, investment and general international business interests and make it harder for all American organizations to forge new ties with foreign institutions.

The corruption, the fraud, and the abusive tax evasion at one company after another over the last 18 months, raises fundamental issues and prompt the conclusion that American business has lost its moral compass. That CEOs from coast to coast are ethically challenged and that aspects of our civilized society are in trouble.

Against this background, Rob Walton, Chairman of Wal-Mart, whose company has not been embroiled in any shape in the scandals, recently felt compelled to devote his entire annual letter to shareholders on the theme of business ethics. Evidently, he feels the pressure and the need to go that additional mile to build trust at a time when disenchantment with Corporate America is so pervasive. Mr. Walton noted: “First and foremost, a culture of ethical behavior underlies all that we do at Wal-Mart…Setting the right ethical tone at the top is the first step towards good corporate governance.”

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Organizational Ethics

Ladies and gentlemen, no asset is more precious to any organization – be it a business or a not-for-profit – than its reputation.

Today, at a time when corporate scandals abound and when ethics-challenges have come so much to the fore through diverse events in the Catholic Church, the Olympic Games, The New York Times, the Red Cross and United Way and many other types of organizations – at such a time as this every good organization must follow Rob Walton’s example and redouble its good governance efforts.

At the core of organizational good governance is the building of an integrity culture. The leaders of every organization must not just have a meaningful institutional code of ethics, but a plan to ensure they are seen across their organizations as ethical role models. Their pro-active stance, backed by superb ethics-directed communications and employee training, ensure that an ethical culture is built and sustained.

Organizations that fail to assign the highest priority to this challenge will lose their reputations in due course. They will fail.

And, while it is difficult to build the appropriate ethical culture in organizations at home, it is even harder in foreign affiliates and subsidiaries and partner associations abroad.

Barings Bank was a great name in finance. But, it failed to secure the ethical standard that it avowed in its distant affiliates. A junior employee, Nicholas Leeson, based in Singapore, put greed above ethics and committed Barings to vast deals that led to the bankruptcy of the Barings Bank itself.

In Argentina, far from IBM’s head office in New York State, some managers decided that building the balance sheet at any cost was the right thing. Their pervasive bribery produced a scandal that has sullied IBM’s name across Latin America.

International Corruption

So often, the difficulties overseas focus on corruption. There is grand corruption, where senior politicians and public officials, who control the judges and muzzle the media, collude with large enterprises – domestic and foreign – to spend government money. They buy the products and services that involve the biggest personal kick-backs for them, rather than what their nations need. The volume of this grand corruption is tens of billions of dollars a year. It impoverishes nations, it traps the poor in poor countries in endless poverty. It undermines democracy. It distorts fair commerce.

Each year Transparency International, a global anti-corruption group, publishes its Corruption Perceptions Index, which ranks countries in terms of perceptions of corruption among public officials. The cleanest countries from this perspective include the Scandinavians and the Canadians – those seen to have the greatest corruption are also among the world’s very poorest nations in Africa, Asia, Central America and in Eastern Europe.

A former World Bank colleague of mine, Peter Eigen and I and some friends created Transparency International exactly 10 years ago to fight corruption across the world. Today, the organization has 90 national organizations in place. Our fight continues, because as Peter Eigen, the current Chairman of TI has stressed, given all that is going on today in the Middle East, and in some other parts of the world: “There is a deepening recognition of the fact that the democratic gains of the past decade stand at risk if the explosion of corruption the world has witnessed is not contained. If large numbers of people in the emerging democracies become disillusioned with the democratic experiment and start to yearn for times of greater certainty, then the chances are that the old and failed remedies will be tried once more, and further impoverish their lives.”

Transparency International Bribe Payers Index 2002 (www.transparency.org)

In the business sectors with which you are most familiar, please indicate how likely companies from the following countries are to pay or offer bribes to win or retain business in this country [respondent’s country of residence]?

2002 Rank

2002

1999

2002 Rank

2002

1999

1

Australia

8.5

8.1

11

Spain

5.8

5.3

2

Sweden

8.4

8.3

12

France

5.5

5.2

3

Switzerland

8.4

7.7

13

USA

5.3

6.2

4

Austria

8.2

7.8

14

Japan

5.3

5.1

5

Canada

8.1

8.1

15

Malaysia

4.3

3.9

6

Netherlands

7.8

7.4

16

Hong Kong

4.3

n.a.

7

Belgium

7.8

6.8

17

Italy

4.1

3.7

8

UK

6.9

7.2

18

South Korea

3.9

3.4

9

Singapore

6.3

5.7

19

Taiwan

3.8

3.5

10

Germany

6.3

6.2

20

China People’s Rep.

3.5

3.1

21

Russia

3.2

n.a.

Domestic companies

1.9

n.a.

Question: 835 business experts in 15 leading emerging market countries were asked: In the business sectors with which you are most familiar, please indicate how likely companies from the following countries are to pay or offer bribes to win or retain business in this country?


Sadly, our own country’s reputation is far from perfect. The bribes are being paid by American firms alongside companies from many other countries. International surveys show that foreign business executives state that the propensity of American firms to pay bribes is quite high. Surveys of leading business executives in key emerging market economies in 1999 and 2002 for Transparency International by Gallup International showed that U.S. firms are widely seen as having a high propensity to bribe – indeed their willingness to bribe foreign government officials appears to have increased in recent years.

Further evidence from a different source has been published recently by Control Risks Group Limited who commissioned IRB Ltd. to survey international business executives on the corruption issue. One finding was that while many U.S. companies strive to ensure at least partial compliance with the FCPA, “some 67% of (survey) respondents believed that U.S. companies still use middlemen to circumvent anti-corruption legislation either ‘regularly’ or ‘occasionally’.”

Moreover, right now, for example, a full-scale investigation is moving forward – it could be the largest in the 26 year history of enforcement of the Foreign Corrupt Practice Act - into oil deals in the Caspian Sea area. The U.S. is investigating whether representatives of Mobil participated in a scheme to route $78 million in payments from U.S. and European oil companies to the Swiss bank accounts of Kazakhstan's president and his associates.

I am not surprised with the gloomy news about U.S. business reflected in the BPI. Why should we believe that top executives running huge companies that cook the books, that cheat the IRS, that steal from shareholders and employees, and who add tens of millions of dollars to their personal bank accounts, should not encourage the use of bribes to win foreign deals?

Writing to his shareholders at Berkshire Hathaway earlier this year, Warren Buffet explained: “ Most CEOs, it should be noted, are men and women you would be happy to have as trustees for your children’s assets or as next-door neighbors. Too many of these people, however, have in recent years behaved badly at the office, fudging numbers and drawing obscene pay for mediocre business achievements. These otherwise decent people simply followed the career path of Mae West: “I was Snow White but I drifted.”

Well, when it came to ensuring against foreign bribery by their corporations, then I think many CEOs in recent years also “drifted.” The furious quest for ever bigger earnings and the ever-greater linkage between short-term earnings and CEO compensation created massive distortions in many firms. It seems to me to be naive to believe that policies of anti-corruption did not slip, just as policies in so many other corporate areas plummeted.

And, this has added to a pervasive expectation in many parts of the world that Americans seeking business are all too willing to pay bribes. Your challenge, as you venture abroad is to not only be aware of such perceptions and expectations, but to ensure that none of your potential overseas counterparts, let alone your employees, have any doubts where you stand.

This issue is all the greater when it comes to petty corruption, which some lawyers here like to call “facilitation payments” but which are rightly called bribes around the globe. These are payments to low level officials to expedite permits and customs clearances and bureaucratic hassles. They are illegal. They are corrosive. They start small, but have a tendency to become ever larger.

Don’t pay bribes. Just say no.

There is ample evidence that organizations with a very strong ethical culture can impress people overseas with their firm adherence to basic values. Organizations can enter a country and tell official and business counterparts immediately and directly – we don’t pay bribes. We are here for the longer-term. We are here to act as good citizens. We are here to work with you to the benefit of your peoples. We can bring our experience and knowledge to your needs – but we do not pay bribes.

Keeping your excellent reputation will be all the harder as you expand abroad. In the global village of which I have spoken the reporter in Croatia instantly communicates through the internet to the editor in New York – suddenly, to the horror of an American parent organization, a front page article appears in The Wall Street Journal stating that the Croatian affiliate of the U.S. enterprise has been bribing local officials.

The damage is done. The stock price is hit. Shareholders complain. Consumers voice their anger. The organization starts to be depicted as another Enron. Top management finds itself ever more distracted by what is in relative terms for this organization an absolutely minor malfeasance in a country that top management has hardly ever heard of before. But, the smell of corruption wanders the corridors of power, the board starts to ask questions, the legal advisers huddle and ramp up their bills, the CEO feels besieged.

None of you need that kind of grief. The reality is that in the internet age there is nowhere for large organizations to hide.

****

Pragmatic Ethics Management

Securing and fostering a reputation of integrity is an imperative. If your organization is absolutely confident that it is acting and breathing at the highest levels of institutional integrity, then you will succeed.

In the post-Enron era this demands a 7-point checklist of key actions.

1. COMMITMENT. As leaders you know that unless you and your key colleagues in your organizations are 100% committed to doing the right thing, then your employees will not buy into the ethics code. At home and abroad, leaders must know in their hearts that cutting corners, engaging in minor malfeasance to expedite actions, is just plain wrong. They must accept that sometimes it is better to lose a deal, than to violate sound ethics.

2. ACCOUNTABILITY. Organizations must assign authority to a designated manager, or set of managers, for the implementation of integrity programs. Just chatting to the lawyers from time to time to see if the organization is in compliance is not good enough. The public is distrustful and suspicious. The risks of slips and poor judgments landing big organizations on the front page of The Wall Street Journal are too large. Making distinct individuals responsible for ensuring the solidity and viability of the institutional ethical culture is a necessity today. It makes it easier for executives overseas who may have doubts about the right path to follow to check quickly with head office for guidance.

3. POLICIES. Directors and top executives today need to ensure they have clear policies in place that cover all of the critical issues of institutional ethics – from the appropriate ways to deal with workplace misconduct here at home, to dealing overseas with corruption, human rights, labor rights and local community needs.

4. AUDIENCES. You and leaders like you have to assess the diverse audiences that your organization has to reach to build buy-in and support and understanding of your ethical approaches. For example, imagine that you are initiating conversations in Germany with potential partner organizations and they look at you with some suspicion and start questioning the fact that you actually believe that, even as a non-profit institution, you could operate a large-scale retail space and generate very significant sales revenue. At the start of your conversation, even before they start raising questions, you can say that firstly you want to explain the guiding ethical principles upon which you run your organization and that every

one of your employees understands and adheres to. That kind of an opening statement builds trust – and that is crucial.

5. PROGRAMS. Ensuring understanding and buy-in among your many audiences of employees, partners and customers requires the development of effective target-directed educational programs. Securing support for a viable ethics code, here at home and abroad is not automatic. People need training. People need to know that they are encouraged to report misconduct when they see it.

6. MONITORING. The progress of good ethics programs needs to be monitored. Each program area is a potential source of vulnerability - today more than ever before. People you work with overseas, for example, must repeatedly be told that you don’t tolerate the payment of bribes, that enforcement of this and other core integrity policies is not an option, but an essential basis for further partnership. Programs that are not monitored fall by the wayside.

7. COMMUNICATING. Leaders need to communicate internally and externally about values and integrity on a consistent and continuing basis. The goal is clear: Leaders need to consistently build trust and confidence and tirelessly work to secure a reputation that makes Goodwill stand out.

I believe that as you pursue such a 7-point pro-active agenda you will find that your organizations here at home grow in strength and your confidence to expand abroad grows enormously.

***

Conclusion

In this world of great prospects and abundant human misery you – all of you together in this room – are a beacon of light and of hope. You have knowledge, commitment, dedication and inspiration that, when shared around our planet, will make an enormous humanitarian contribution.

Goodwill Industries International has 33 associate members in 22 countries outside the United States and the potential to grow rapidly and successfully in many countries. I am confident you will seek to expand further and share your skills with others to make Goodwill a proud and recognized global brand name.

Despite the critical issues of anti-Americanism and corruption, you can overcome the hurdles of succeeding in the global village. I think you must because there are opportunities in scores of foreign national markets for you to grow your organization. Moreover, the poorer peoples of the world need what you can offer.

Thank you.

 

 


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