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Tuesday
Oct282014

Collective Action: A new approach to combat corruption (Part 7)

In my prior post on Collective Action, I wrote about the importance of voluntary codes of conduct and concluded that in an era of weak regulation, corporate behaviour would have been significantly worse over the last decades without them.

Still, one has to ask, why is it that the biggest corruption scandals in recent years have come from industries which have made substantial efforts to raise the game through codes of conduct? If you take any of the industries mentioned in my last post -- defense, extractive, banking and pharmaceuticals -- the names of companies associated with corrupt activities slip off the tongue with embarrassing ease: Finmeccanica, BAe, Weatherford, Barclays, GSK and the list goes on. These companies had mostly signed up to various codes of conduct in their industries and ethical standards in-house -- they were market leaders, not companies who rejected the principles of fair-play.

The major difficulty with codes of conduct is how to set them up in a way that will guarantee the desired impact over a number of years.

Here is a case study which provides some useful lessons. The code of conduct was set up, but did not manage to significantly reduce corruption. For reasons of confidentiality, I won’t mention the country, companies or the industry by name.

About five years ago, a small number of market leaders in a high-tech industry supplying to the state sector in an emerging market agreed to set up a code of conduct.

The first hurdle was the intense distrust between the parties. There had been a history of bribery in the market, and at least one of the players had been “outed” and prosecuted. The companies with a clean track record were reluctant to talk with the companies that had engaged in bribery -- it seemed to them that this was just a quick way for the company to restore its compliance credentials and whitewash the past. Thanks to a series of joint activities (such as those described in my earlier blogs), sufficient trust was built to enable the project to proceed.

The second hurdle was the fact that only the market leaders agreed to participate. They accounted for a majority market share, but the low-end importers and local producers who played by a whole other set of rules would not join the initiative. The fact that there were only a small number of companies with similar values enabled them eventually to reach agreement. But part of the market was not covered, potentially undermining the whole effort.

Even with common values, the starting points of the market leaders differed considerably. Some were highly compliant with FCPA, others did not believe that they were liable under U.S. legislation. For some it was a nice to do, for others, a have to do.

Furthermore, some companies were supplying directly to end users, bypassing third party distributors, whilst others were selling their products to offshore import agents set up by the client, a particularly high-risk strategy in terms of exposure to corruption. With such different distribution models, it was always going to be difficult to get a truly level playing field.

There was also a lack of agreement between the players about engagement with the government to reduce the risk of solicitation on the demand side. As a result, the government -- as the client and the key source of risk of bribery on the demand-side -- was never invited to participate.

Five years later, the code of conduct remains in place. Unfortunately, since the code was set up, there have been continuing accusations of foul play among the market leaders.

The lessons learned from this particular case study point to general challenges in setting up effective codes of conduct, especially in emerging markets.

The “Prisoners Dilemma” can be an instructive way of looking at it, as Mike Scher and Scott Killingsworth have recently pointed out. Companies are faced with the options of cooperating to raise the standard of business in their markets, or not cooperating. If they all cooperate, they are all better off because risks and costs are reduced. If none of them cooperate, it’s the law of the jungle, with increased risks and costs.

If a company believes that it will benefit more by not observing the rules of the code, they will “defect.” They will pursue this course of action since the rewards of winning a large deal by foul play are substantially more attractive than the costs of losing it because they have adhered to the rules of the code. For companies working under a voluntary code of conduct within a jurisdiction categorised by weak rule of law, the rewards may be too tempting to resist.

In my final set of posts, we will move to the top part of Collective Action pyramid -- Integrity Pacts -- to show how Collective Action can support self-regulation to improve market behaviour.

For previous posts in this series please click:  1     2     3     4     5     6

_________

Brook Horowitz is a contributing editor of the FCPA Blog. He's the CEO of IBLF Global, a not-for-profit promoting responsible business practices worldwide.

Reader Comments (3)

From the example cited here Collective Action appears to have failed in this case. However, just as building trust between the parties is important to get Collective Action started, so is a sustained approach whereby the companies go beyond signing up to a Code. In other words, equally important to make a difference is a genuine commitment to follow through on their agreement. This could involve convening regular meetings with a neutral facilitator to examine the gaps in implementation of the Code amongst the parties, holding each other to account in a constructive manner. Collective Action is not an easy option, but benefits are possible if companies genuinely engage.
October 28, 2014 | Unregistered CommenterGemma Aiolfi
Dear Brook,
prior to written above, I am happy to congratulate your star among the contributing editors of FCPA Blog. I am very much remembering your lessons of kind governance and look forward to collaborating in nearest future.

Regarding your "Collective Action" thesis. It should be clearly defined why does the organization need to voluntary coding its conduct, and influence its ee-s to do so, when it is already meant by the law to follow certain legal steps to comply.
Practically we all see that creating new and developing the existing (sub-) industry codes is an interim measure applicable usually after stressing that serious crimes happen in that industry. Remember how The News of the World case influenced the further development of UK Editor Code of Practice? That is the example and my first standing point
- Building Anti-corruption Ethics in Business is not an industry-specific problem.

and the second one is the question, as you re responsible for delivering this CA propaganda, so can you please share IBLF Global experience as an organization.
- Does IBLF Global use the Code of Conduct and what voluntary codes do you participate in?
October 28, 2014 | Unregistered CommenterN. Zyryanov
i am really enjoying this series, particularly as we spend a lot of energy in our efforts to draw business into active (corporate) citizenship in combatting corruption. However, the one argument that does stick in my throat is in Part 5, viz, the caution that 'local business culture' should influence the definition of corruption. I fully accept the notion that approaches to combating corruption should be influenced local conditions. But they should not influence core definitional issues. The notion that 'greasing palms' or 'facilitation payments' should be viewed differently in China (or in most developing countries) as compared to developed countries is what justified some developed countries in permitting tax write offs on bribes. And as dangerous it allows someone like our very own South African President to proclaim - in submissions to the prosecuting authority when deciding whether or not to prosecute him - that 'corruption is a western paradigm'. The truth is that countless domestic statutes, not to mention the vast array of multi country initiatives (including at least 2 African initiatives) to which our government is party clearly outlaw all forms of bribery. That these 'facilitation payments' are inevitably made clandestinely clearly establishes that these practicies are not part of the local 'culture', but rather that the law is not enforced and that largely because of a corrupted criminal justice system.
October 29, 2014 | Unregistered CommenterDavid Lewis
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