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Research shows that a ‘carrot and stick’ approach, one that not only punishes bribery but that also rewards companies with preferential business treatment, works best in tackling corporate corruption
By Jermyn Brooks
A recurring theme at the 8th Gulf Cooperation Council Regulators’ Summit in Dubai last month was the increasing expectation from regulatory bodies for effective sanctions, especially when targeting the financial services sector.
But little discussed was the motive for compliance. Why should banks and other companies get involved in supporting improved compliance and ethical behaviour? Increasing amounts are being written about WHAT companies should do, such as establishing an internal anti-corruption ethics and compliance program. But WHY companies should comply is far less elaborated. Are companies doing this only because they are required to by law? Are they doing this because it is the right thing to do? Or does it actually make good business sense?
In addition to a moral desire to do the right thing, there are typically two major motives why companies counter corruption: “fear factor” and “relief factor”.
Corruption is illegal and companies responsible for it should be punished, often referred to as the “stick approach”. Recent years have seen attempts to make corruption more costly through severe legal, commercial and reputational sanctions. But sanctions can only be applied if companies are actually caught engaging in such acts. And while we have seen a significant increase in law enforcement over the last years, there is still much that needs to be done. The latest Transparency International report on enforcement of the OECD’s Anti-Bribery Convention shows that “in half of the [OECD] countries there is little or no enforcement against foreign bribery”. Thus, in environments where sanctions exist only on paper, such threats are typically not a sufficient deterrent for companies. The fear of getting caught is simply too low.
No company is immune to corruption. Even companies with an outstanding program can be subject to incidents of wrongdoing. Nonetheless, companies with such a programme should be treated differently from those without. To that end reduced sanctions, so-called mitigation incentives, are increasingly offered under certain conditions for self-policing, self-reporting, cooperation or remedial actions. But again, sanctions can only be applied if a company is caught. And if sanctions are not applied in practice, no mitigation incentives by reducing the “penalty stick” can be given either.
So if doing the right thing is directly associated with a loss of business opportunities, and if sanctions are not (yet) applied in practice, what else can be done to motivate companies more to follow ethical practices and to fight against corruption?
CARROT AND STICK
An answer is a combined approach of sanctions and incentives. Especially in countries with weak law enforcement, offering a second type of incentives, so-called genuine incentives, can be far more effective than simply using sanctions alone – in other words a carrot and a stick approach. Such genuine incentives would show that preventing corruption makes business sense, and not only because the company can avoid sanctions or have them reduced.
There are already foundations for such an approach. For example, in the 2009 recommendations of the OECD Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions, Article X.C.vi states that member countries should encourage “their government agencies to consider, where international business transactions are concerned, and as appropriate, internal controls, ethics, and compliance programmes or measures in their decisions to grant public advantages, including public subsidies, licences, public procurement contracts, contracts funded by official development assistance, and officially supported export credits“. Genuine incentives within the business sector can include commercial and reputational advantages, such as (but not limited to) preferred supplier status, assistance for capacity building, favourable payment conditions, public recognition.
Providing tangible business advantages to companies that demonstrate ethical leadership can motivate even those which have not previously seen any value in countering corruption. But research from the Humboldt-Viadrina School of Governance shows that the value of this approach is often under-estimated or unknown to those seeking to advance the anti-corruption agenda.
Obviously, such genuine incentives are not a substitute for sanctions. But in addition to sanctions and mitigation incentives, stakeholders should offer genuine incentives to business. If the commitment to counter corruption is linked to tangible business advantages, the likelihood is much greater that companies will actually make that commitment. Fighting corruption then becomes a business decision, supporting the moral desire to do the right thing.
Jermyn Brooks is the Chair of Transparency International’s Business Advisory Board and a member of the Steering Committee of Humboldt-Viadrina School of Governance's project on ‘Best Practices on Anti-Corruption Incentives and Sanctions for Business’, based in Berlin.
