PRIVATE-TO-PRIVATE CORRUPTION: HOW TO MAKE THE COMPANIES THE REMEDY, NOT THE CAUSE OF CORRUPTION

1. PRIVATE-TO-PRIVATE CORRUPTION: HOW TO MAKE THE COMPANIES THE REMEDY, NOT THE CAUSE OF CORRUPTION AntonioArgandoña Emeritus Professor, “la Caixa” Chair of Corporate Social Responsibility and Corporate Governance IESE Business School Conference “Reducing Corruption: Focusing on Private Sector” Tallinn, 11-12 February 2016

2. “Business should work against • corruption in all its forms, • including extortion and bribery” • UN Global Compact, 10th principle Prof. Antonio Argandoña

3. V. Lucas and J. Gutmann, “Unbundling Private- and Public-Sector Corruption: Insights Based on Two New Indicators”, 2015 Prof. Antonio Argandoña

4. 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) Prof. Antonio Argandoña

5. … and there are many varieties of corruption • Bribery and extortion or solicitation • Commissions, gifts, hospitality, favors • Abuse of power or influence, embezzlement of property or • funds, fraud • Conflict of interest, nepotism, favoritism, cronyism, influence peddling • Incorrect use of privileged information • Illegal financing of political parties or campaigns • Money laundering • Organized crime, mafia, 'protection', kleptomaniac State Prof. Antonio Argandoña

6. Companies should not ignore any variety of corrupt behavior Prof. Antonio Argandoña

7. Less corruption More corruption More corruption Less corruption V. Lucas and J. Gutmann, “Unbundling Private- and Public-Sector Corruption: Insights Based on Two New Indicators”, 2015 Prof. Antonio Argandoña

8. Private vs. public corruption • Private corruption is not so bad! • For-profit companies are efficient in protecting their interests • There are fewer incentives in private companies • Corrupt 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 irrelevant • Globalization, competition  risk of proliferation  leveling the playing field • More legal pressure  companies are now more aware • Increasing social awareness: the attitudes are changing Prof. Antonio Argandoña

9. 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 Prof. Antonio Argandoña

10. Causes of private corruption • 1a. The rotten apple: the individual is the problem • Corruption 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 company • The individual (and the company?) are the beneficiaries • The organization ignores (or pretends to ignore) • An organization with corrupt individuals Prof. Antonio Argandoña

11. On a personal level, corruption is seen as an incentive problem Prof. Antonio Argandoña

12. 2. The basket that rots the fruits: the organization is at center stage • A 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 • Mechanisms • Structure: tasks, responsibilities, rules, procedures… incentives! • Culture: shared ideas, expectations, values, visions, customs • Bureaucratic culture: loyalty, conformity… pride, arrogance, hubris… collusion • Culture may be a predictor of corrupt conduct Prof. Antonio Argandoña

13. For companies, corruption is always an organizational problem • Companies have a key role in the fight against corruption, both public and private Prof. Antonio Argandoña

14. 3. The corrupt warehouse that pollutes many baskets: the social / political / cultural dimensions • Corruption is a common practice of the industry or the country • “Everybody does it” • “Greed is good” • Legal, political, institutional environment • Business environment: rent-seeking • Social, cultural, moral ideas: the decline of values Prof. Antonio Argandoña

15. 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 Prof. Antonio Argandoña

16. The costs of private and public corruption for the companies • 1. High costs • Direct costs: higher costs, lower revenues • Transaction costs, not selling or buying at the best price, quality or service • Financial costs of the corrupt actions • Locked-in with accomplices, uncertainty about the pay-off • Fines and jail (for the individual and the organization), reputation loss, rejection of clients, employees and investors • High long-term costs: contagion, social reactions, changing anti-corruption climate, reorganization costs • Long-term practices doesn’t mean long-term gains • Indirect costs: misrepresenting financial information, opacity, loss of governance quality, discomfort of employees, tax evasion Prof. Antonio Argandoña

17. 2. Undesirable learning • Extension to other areas of the firm • Other kinds of immoral behavior: putting the personal interest in front of the company’s • Adverse selection • Loss of trust and unity • 3. It is a bad strategy • Uncertain 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 leadership • It could become endogenous • Risk of blackmail Prof. Antonio Argandoña

18. In a cost-benefit analysis, corruption is probably a mistake • Corruption is bad management Prof. Antonio Argandoña

19. Private corruption is costly also for the industry • An uneven playing field • 2. Undesirable learning, unethical atmosphere • 3. Deterioration of the business environment • Underground economy, fiscal fraud • Difficulties to act according to the law • Harsher regulations and controls • Reputation hampered • The appearance of the “specialist” • 4. It could become endemic • It is difficult to eradicate Prof. Antonio Argandoña

20. 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 Prof. Antonio Argandoña

21. Anti-corruption strategies are changing • Traditional strategies: fighting public, domestic corruption • 1970s: fighting international public corruption: US Foreign Corrupt Pratices Act 1977 • Ethical arguments, national legislation, emphasis in demand side • New strategies • Economic arguments  Involvement of international financial institutions • International conventions: OAS, Council of Europe, OECD, UNCAC, AU  Involve more countries, international cooperation • Independent monitoring • Enlarge de concept of corruption: private corruption is part of the problem Prof. Antonio Argandoña

22. Emphasis in the supply side  The problem is in the organizations  Multistakeholder cooperation  Companies are an important part of the solution • Ethics and compliance programs:US Organizational Sentencing Guidelines 1991, UK Bribery Act 2010 • Economics is not enough: change the organizational culture • Integrated, preventive and corrective compliance • Integrated: legal, tax, competition, anti-corruption, environment • Making the adoption of corporate principles mandatory • Detect and respond, investigate • Disclose, open communication • Problem-solving approach • Private and public (and other misconducts too) Prof. Antonio Argandoña

23. 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! Prof. Antonio Argandoña

24. Ethical arguments • The person who receives the bribe: injustice and disloyalty towards the company • Fails to fulfill his due, abuses a position of power • The person who pays the bribe: accomplice or instigator • Possible damages to the company • Lower quality of products, worse conditions... • Reputational risk • Contagion • Lack of transparency, falsification of records • Injustice to competitors • Harm to society • Encouraging corruption, opacity Prof. Antonio Argandoña

25. 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 Prof. Antonio Argandoña

26. “The morality of a companyis as strong as the morality of theweakest employee.We are all links in a chain”Ron SugarPresident and CEO, Northrop Grumman Thank you! argandona@iese.edu http://blog.iese.edu/antonioargandona