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Tuesday
May192015

Inside view: What do corrupt organizations look like?

The concept of corporate culture -- generally defined as "the way we do things around here" -- isn't a rigid paper process. It's hard to measure, which explains why corporate culture has been largely neglected by regulators and the anti-corruption-consulting industry.

Instead, the focus has been on internal compliance programs which respond to risks in the external environment -- "that’s just the way they do business over there" or to the individual characteristics of "rogue employees" -- the bad apples that bring companies down.

But organizational and team culture and norms are overwhelmingly important in explaining why and how corruption occurs. When you begin working in a new organization, the person at the desk next to you is a far more important source of how things really work and how to get things done than the code of conduct.

Understanding what behaviors get rewarded and punished, who has power and status, and how decisions are really made, gives a far more accurate picture of a company’s culture than the value statement on its website.

I interviewed 23 prominent anti-corruption experts and asked them what characteristics corrupt organizations have in common. Overall, their answers provide new clues on how to spot red flags and identify risks that may evade common compliance processes.

Each one of these characteristics heightens the vulnerability of a team, office, or division to corruption. Where several are present, there is a high likelihood of a corruption problem.

Strategy: Growth is the primary goal, and all others are irrelevant; competition is high, and it is agreed that the ends justify the means. There is little regard for the ‘social licence to operate’ or relationships with any stakeholders other than shareholders.

Leadership: Leadership is complacent; diffuses accountability, opaque and arrogant. Information is hoarded –communication is restricted and top down. There is complacency, and a lack of engagement with business conditions on the front line – just enough to maintain plausible deniability. Ironically, leaders who preside over corrupt practices are likely to project successfully a self-image of being a high-performing, high-status individual.

Structure: High local devolution and autonomy combines with limited oversight. The group or team isolates itself, by design or circumstance. This isolation creates a sense of mystique, which is very powerful when combined with high commercial success.

Authority: Decision-making is strongly hierarchical and directive, top down, and with little consultation, and short-time horizons.

Incentives: Incentives emphasize high pressure and high rewards. Discretionary bonuses and targets are unrealistic, set without regard to market conditions or risk.

Values and Beliefs: The workplace will hold a pervasive culture of fear, necessity, insecurity, powerlessness, and intense rivalry. The language is of war, games and sport. Corrupt processes are described with jokes and euphemisms, reflecting the need to create distance and reduce shame.

Norms and Behaviors: There is pervasive secrecy, defensiveness, and a lack of pride in the organization.

There are situational and behavioral factors that clearly predict corrupt outcomes. The archetypal corrupt team is based in a location far from headquarters, where it succeeds in meeting unreasonably challenging sales targets under a keenly directive, controlling leader.

The team is widely regarded as successful and high-performing, though mystique or confusion attends the basis for its performance. Information is synonymous with power and is tightly held. Individuals in the team are fiercely loyal to each other and are driven by a sense of necessity, insecurity, competition, and short time horizons. There is heavy use of in-group language, commonly including euphemisms for misconduct and metaphors of war and sport.

Many companies have teams and leaders like this. Front-line and middle management employees can usually identify them with ease. (If the team in question is the C-suite, expect problems for the entire organization, not just a particular division.) The individuals leading these teams are probably powerful, high-status personnel who command significant revenue.

By shifting the control focus towards the cultural dimension, we can identify these problems hiding in plain sight. This can help target investigative and compliance interventions at the points of highest risk.

______

Alison Taylor is director of advisory services at BSR, a non-profit consultancy and company network focused on sustainability and CSR.

Reader Comments (1)

Alison,

Thanks for crystallising this typology of corporate culture risk indicators, which I expect a lot of investigation and compliance practioners will recognise but may not include in their formal workplans.

I agree that regulators have prioritised internal controls over corporate culture but think it is possible to see a clear evolution in this regard - see the FCPA Resource Manual's reference to including compliance in balanced scorecard evaluations, the UK Bribery Act guidance on 'internal risk factors' and the increasing interest of financial regulators in incentive structures and broader behavioural risk factors.

While wishing to avoid spurious accuracy, it is possible to start evaluating and tracking cultural risk indicators through sensible use of decent proxies - e.g. Human Resources can help provide insight through a range of soft and hard metrics, from surveys and exit interviews to personnel churn rates.
May 20, 2015 | Unregistered CommenterNick
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