___ The World Bank NUM1BER 66 PUBLIC SECTOR Implementing antcoruption programs in the private sect Recognizing the costs and risks of corruption, companies around the world are implementing programs to combat it. Although attention has focused on public are being implemalenited by companies from sector initiatives to fight corruption on the high-income couLntries as well as emer-ginig demand side, private companies in every markets. Moreover, anticorluptioll tech- region have developed programs to fight niques have become more sophisticated All types of firms it on the supply side. Policymakers and in established U.S. systems. advocacy grouLps-such as Transparency In 2000 the Conferenice Board, a global recognize that International-consider such preventive businiess member-slhip organizationi, askecd efforts to be a critical component of the anti- companiies worldwide about their- anticor- corruption raises the corruption toolkit. ruptioni programiis. The survey foundcl All types of firms-large and small, multi- complianice-style programs in 42 couLntries, cost of doing national and local-recognize that cor- a sharp increase fi-om the exclusivelVAInglo- ruption raises the cost of doing business and Saxon findings of earliel- surveys. Moreover, business and should should be prevented. The World Business 40 percenit of responidents were based out- Environment Survey, for example, provides side North America and Wlestern Europe. be prevented a wealth of evidence on firms' perceptions To better under-stand these progr-amiis, and behavior-and shows that managers of the Conference Board and the WAlorld Bank's medium-size firms perceive the problem in East Asia and Pacific Region investigated much the same way as representatives of the efforts of EastAsian firms and East Asian international companies. subsicdiaries of North Americani and Eur o- Most company anticorruption programs pean firms. The research focused on: rely on compliance systems that consist of a a Identifying the state of the art in corpo- company code of conduct, training, and deci- rate compliance programs. sionmaking and reporting mechanisms. This * Understanding mechanisms and incen- self-regulatory approach was pioneered in tives driving program implementation. the 1970s by U.S. rnultinational corporations * Creating case studies of 20 companies, after unethical practices were revealed and two-thirds based in East Asia, as a in response to the 1977 Foreign Corrupt knowledge base ofbestpractices for train- Practices Act. Until recently this approach ing and dissemination on compliance was greeted with skepticism outside the programs. United States. Critics argued that efforts to implement U.S. compliance-based tech- Externall and lnternaI incentives niques would fail in other business cultures. Although bribery is universally prohibited, Skeptics also questioned the effectiveness of the most far-reaching anticorruptioll iea- cornpany anticorruption programs. sures address firms' behavior outsicle their- But such views have changed consider- home countries. Under the Foreigni COI-rupt ably in recent years, and compliance systems Practices Act, U.S. companies can be prose- FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK cuted for engaging in corrupt practices out- increases the risk of internal fraud. Thus side the United States. The Anti-Bribery Con- compliance systems are often part of com- vention, issued in 1997 by the Organisation prehensive efforts at risk management that for Economic Co-operation and Develop- encompass internal and external corrup- menit (OECD) and ratified by 35 countries- tion. The same approach is starting to be includinig noi-()ECD members-codifies the followed by companies in emerging mar- act's extraterritoriality principle. kets that desire a global reach. The OECD convention targets not only direct payments but also third party pay- Components of an effective menits, a main channel of corruption. program Because the convention makes companies Research does not support claims that U.S.- liable for the behavior of their branches style compliance systems encounter serious Compliance systems and affiliates and, to a significant degree, resistance in other cultures. Basic compli- for the conduct of their business partners, ance systems often require significant adap- are often part of it encouL-ages companies to implement tation, but they are much the same in global compliance mechanisms and local companies around the world. Anticorrup- comprehensive ethics programs. Another important pro- tion programs in companies from all sec- vision reflected in corporate codes is a tors and regions share three components: efforts at risk focus on grand corruption. Taking a prac- a clear statement of values strongly sup- tical approach, the Foreign Corrupt Prac- ported by top management, training and management that tices Act and OECD convention tolerate dissemination grounded in the experience petty corruptioni sUChi as facilitating pay- of company staff, and effective information encompass internal imients (smiiall amouLnlts paid to "get things and support systems. clone"). The challenge for companies is to for- and external Althougl the Foreign Corrupt Practices mulate core principles and implement cred- Act prolhibits certain conduct, it does not offer ible procedures adapted to local business corruption companies incenitives to develop compliance cultures. In particular, for companies oper- systems. So, in 1991 the U.S. government ating in industries with substantial local owvn- issued Organizational Sentencing Guidelines, ership (as is common in China), the need giving companies the carrot needed to to adapt training, dissemination, and infor- develop such systems. The guidelines impose mation systems to local customs is more than Imluchi lower penalties if a company has an an intellecttial exercise. effective compliance system and can prove that any unlawful activity was the work of a Values rogue employee rather than established com- Ethics programs that respond to risk man- pariy practice. agement needs are part of an inclusive Still, legal pressure does not fully account process that draws on a company's collec- for the motivation of companies to establish tive intelligence and experience. Employ- anticor-ruption programs. Indeed, between ees from all regions, businesses, and job 1977 and 1995 the U.S. Department ofJus- categories participate in surveys and dis- tice prosecuted only 16 bribery cases under cussions to formulate values statements and the Foreign Corrupt Practices Act. warning systems. For example, as part of its Anticorruption programs are also driven most recent code drafting process, Merck bv forces within firms. A growing number surveyed 22 percent of its workforce. As of companies do business in complex polit- part of this dynamic process each compo- ical and culltural environments, subjecting nent is periodically reviewed for relevance themiiselves to greater scrutiny from civil soci- and effectiveness. ety and nongovernmental organizations. In Company leaders should be actively addition, companies now realize that turn- involved in values formulation. Board mem- ing a blind eye to corruption outside the bers and managers must participate visibly companiy breeds poor ethics within and in code drafting and program design. PREMNOTE 66 APRIL 2002 Training and dissemination ment in these discussions. An even more Consistentwith theview thatevery employee's important measure may be the use of hot- conduct exposes a company to risk, most com- lines. A heavy volume of relevant, serious pliance programs now require that all complaints is a positive sign-but company employees-notjust managers-have some spokespeople say that the ultimate indica- familiarity with company codes and practices tor of sLIccess is heavy user reliance on the and discuss their practical application. Senior complaint process for advice rather than to executives and employees involved in critical report infractions requiring remedial action. functions such as sales or procurement typi- Whether successful or not, companies cally receive more extensive training. are under growing pressure to assume more Case studies, often drawing on a com- responsibility for compliance. Using incenl- pany's experience, are invariably part of tives to encourage self-monitoring can be ethics program discussions. Not surprisingly, more cost-effective than sanctionis-based Self-monitoring can the most debated issue is the fine line public enforcement. Self-monitoring is espe- between facilitating payments and bribes. cially useful in countr-ies with limited be more cost- Sometimes at a company's insistence, and resources for law enforcement. increasingly at their own request, suppliers More difficult to assess is the impact of self: effective than and joint venture partners engage in these monitoring on anticorruption policies in host discussions. Companies strongly prefer to countries, though there is evidence of corn- sanctions-based use their own senior executives as trainers. panies losinig business as a result of a strict Where consultants are involved, it is often stand on corruption. But there are also cases public enforcement to train the trainers. where an adherence to principles deliver s rewards: a telecom company regained lost Information and support systems business when political upheaval in an East Of the three components of ethics systems, Asian country voided corrupt deals entel-ed warning systems confront the most cultural into by a previous administration. The resistance. But research and company expe- research indicates, however, that companies rience have found successful warning systems faced with extortion often prefer to stay silent in most regions and industries, indicating and not use local anticorruption agencies. that generalizations about the unwillingness of people in certain cultures to use these A prerequisite: good corporate systems-lest they be seen as "informers"- governance are vastly overstated. A company manager Practitioners recognize the link between based in China, for example, confirmed that good corporate governiance and effective whistleblowing occurs there and that about anticorruption programs. The 1997 East 40 percent of the informants identify them- Asian financial crisis showed that weak cor- selves. Resistance to whistleblowing may be porate governance can resuLlt in widespr-ead, more rooted in a company's culture than damaging corruption. The increase in anti- in the country where it is doing business. corruption programs in the private sector Most warning system hodines evolve from coincides with the recent global focus on an initial stage where employees call in with corporate governance. every kind of complaint, to a phase where At the operational level this link is legitimate irregularities are discovered, to straightforward. Because briber)' is tiniver- a final stage where callers seek advice and sally prohibited, it requires "creative" are counseled to avoid bad decisions. accounting and dissimulation that are incompatible with modern accounting and Are ethics programs effective? disclosure standards. This core principle Company spokespeople say that their ethics is explicitly recognized in the OECD con- programs work. They cite records of par- vention on corruption. ticipation in training programs and surveys Surveys conducted by the Confer-ence confirming employee interest and involve- Board since the mid-I980s have shown, in PREMNOTE 66 APRIL 2002 ever-x regiol, steatdily increasing involvement mission and the Hong Kong (China) Inde- b hoard cls of directors andl atidit committees pendent Commission Against Corruptioll. in the fornitilation and delivery of ethics Combining legislation with incentives for r Ograms. For examiple, a 1987 sur-vey founid self-regulationi is a pragmatic way to combat t.hat 21 pei cent of companiy boards played corruptioni on the supply side. a lIolc in ethiics programs; by 1999 this fig- iire w as 78 percent. Alimiost onie-thiird of the Further reading companies responding to the most recent Batra, Geeta, Daniel Kaufilmanil, and sUrvey citecd "heay" board participation. Not Andrew Stonie. 2002. "Voices of the Firms, surprisingly case studies show that good cor- 2000: Findings of the WAorld Business por(ate governance ofiaffiliates is crucial for Environment Survey." World Bank, Pri- effective anltiCOIrUptiOnl pr-ogr-amis in large vate Sector Advisorv Services and World Good corporate cOr pOr atiOnIS-partictilarly those operating Bank Institute, 'Washington, D.C. through joint ventures. Berenbeim, Ronald E. 1999. "Global Cor- governance of porate Ethics Practices: A Developing Spreading the good word Consensus." The Coife-ence Board, New affiliates is crucial Ben chinai-king and expel ieice sharing are York. primarv mechianiisms for disseminatinig best . 2000. "Compally Programs for for effective practices on anticorruption efforts. This Resisting Corrupt Practices: A Global kincl of iniformilaLioll sharinig is also used to Study." Thie Conference Board, New York. anticorruption establish comimilitimetit amonig iidustries aid OECD (Organ isation for Economic Co- r egions. Associations of motivated execit- operationi and Development). 2000a. programs in large tivcs witl international exposure have been "Guiidelines For Multinational Corpora- key faictor-s in the recenit proliferation of tions." Paris. corporations ethics pr(ogramns in japan thl-ough the Busi- . 2000b. "No Longer Btusiness As ness Ethics Researich Center. Similarly, the Usual: Fightling Bribery and Corruption." Federation of Korean lIndtistr-ies used U.S. Paris. experienices to desigin its model program. L.arge multinational and regionial corpo- This note was wrnitteni by Ronald E. Berenbeim rat ions also play a role. lardine, from lHong (Principal Researcher and Directo7; Global Busi- Ksong (Chiia), is imposing str-ict ethical ness Ethics Programs, Conl.ference Board, r CCluil eenl lts On its suppliers. Merck's Korean ronald.be renbeinm@con7fer-en ce-board. org) andJean- branch has been instr-uimienital in promiloting Franfois Arvis (Private Sector Specialist, East a cocde for that con ntr-y's pharmaceutical Asia and Pacific Region, jarvis@wvorldbank. org). incdttstLr\ AnticorrTLipfion dissemination efforts The Conference Board is a leading global busi- cian also build onl existing networks-such as ness membership organization that enables exec- the Institute of Corporate Directors-dedi- utivesffrom all industries to explore and exchange cated to promoting good corporate gover- ideas on global business policies and practices. nance in emerging markets. If you are interested in similar topics, consider Public regulators increasingly catalyze joining the Anticorruption Thematic Group. Con- best practices in the private sector-as with tact Helen Sutch (x35438) or click on Thematic the U.S. Securities and Exchange Com- Groups on PREMWnet. This note series is intended to summarize good practice and kev policy find- nœ ~ings on PREM-related topics. The vievs expressed in these notes are those of the aLithors and do not necessarily reflect the views of the W'orld Bank. PREM- P IE ?,,, notes are distributed widely to Bank staff and are also available on the PREM mEmebsite (http://prem). If you are interestecl in writing a PREMnote, email votir idea to Sarah Nedolast. For additional copies of this PREMnote please contact PmeyReducnimdotinanoamieMegtme the PR£M Advisory Service at x87736. Prepared for World Bank staff