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Monday
Jan112016

Johann Graf Lambsdorff: How fewer controls lead to more compliance

Behavioral science has provided us with impressive evidence on people being trustworthy, willing to trust others, guided by an intrinsic motivation and responsive to communication. We can utilize this contribution of behavioral science for preventing corruption.

In a recent paper entitled "Preventing Corruption by Promoting Trust – Insights from Behavioral Science," I explain this with the help of six examples:

  • First, the “four-eyes principle” builds on the idea that people in teams of two monitor each other. But this mutual control goes along with a collateral consequence, often labelled “the hidden costs of control.” The principle creates an atmosphere of distrust that reduces the self-esteem that people get from contributing to the public good and working with individual responsibility.
  • Second, another standard approach to preventing corruption is to limit official discretion. Procurement, officials, for example, are often required to base their decisions only on objective and predetermined criteria. This is supposed to make it harder for corrupt officials to manipulate the procurement process. But this approach also means that honest procurement officers cannot use their experience for selecting high-quality and uncorrupt suppliers.
  • Third, elimination of official discretion has counterproductive effects in development aid. Development workers are nowadays required to select partners using formal, verifiable systems that hinder corruption. They can no longer cooperate with local partners, whose systems and capacity in anti-corruption they are supposed to help develop.
  • Fourth, many organizations have policies that require employees to sign “compliance statements.” Behavioral science is full of examples on how such small moral reminders can have a substantial impact on behavior. Unfortunately, many compliance statements tend to be complex and lengthy, and are signed long after decisions have already been made -- contrary to insights from behavioral science.
  • Fifth, law enforcement (such as the UK Bribery Act or the U.S. prosecutorial policy) may be more lenient to firms whose employees paid bribes if the companies can provide evidence of "adequate procedures“ or an effective compliance program (allegedly demonstrated by signed compliance statements, expenses for ethics training, and the like). This, in turn, gives corporate leadership perverse incentives to act in a hypocritical way. These incentives undermine employees’ individual responsibility for ethical conduct.
  • Sixth, widespread evidence shows that the so-called “tone at the top” has a profound impact on behavior, more important than the "adequate procedures." People react to praise and criticism by corporate leaders and their business partners. Our problem is that the tone at the top is not objectively measurable. Its existence cannot be verified solidly by outside observers. Preventing corruption with a focus only on objective criteria will not pay attention to this most important aspect.

These six examples relate to preventive methods that are built on distrust towards officials and employees. These are seen as potentially corrupt actors, who must be rigorously controlled. Behavioral science points to the hidden costs of such methods. It provides us with impressive evidence that in most circumstances people are trustworthy and willing to take individual responsibility. Rather than adding more and more controls, we should allow people to use their discretionary power for preventing corruption.

_____

Prof. Dr. Johann Graf Lambsdorff, pictured above, holds a professorship in economic theory at the University of Passau, Germany, since 2003. In 1995, he designed the Corruption Perceptions Index on behalf of Transparency International and oversaw its realization until 2008. He is globally recognized for his work on measuring corruption and the institutional and behavioral economics of reform. He can be contacted here.

Reader Comments (3)

Nice article with great insights, but as a compliance professional I am torn between what the law requires me to do and what I believe works best to increase actual compliance.

As the law itself is not based on trust, and I cannot rely on never being confronted with law enforcement requiring (proof of) adequate procedures, I am forced to stay within the confines of building files, gathering evidence of our compliance efforts within the company.

I truly believe in own responsibility, but I also believe my company cannot do without the monitoring, signatures and proof of training.

It would be nice if someone wrote an article on how to combine the method of what is believed to be most effective in promoting compliance with the requirements of adequate procedure and the evidence required to show compliance with the law.
January 11, 2016 | Unregistered CommenterWendy Bouman
Thanks for the thoughtful article. While on the surface it may seem counterintuitive to increase compliance by decreasing controls, too often we fail to consider human behavior in designing compliance systems. Humans aren't robots and don't want to be treated as such. Given ownership and understanding about the "why" and my feeling is that most people will respond favorably. Perhaps the biggest challenge is your point "fifth." Compliance programs are generally not put into place because of the moral position of a company but because of legal requirements, non-compliance penalties, etc., so there is a logic to designing a program that regulators view favorably even if it is less effective than the alternative. How do we overcome this?
January 11, 2016 | Unregistered CommenterEAC
One of the points missed in some of the behavioral work is that these principles apply to averages. So certain techniques have “tendencies” to reach certain results. “Most” people will act a certain way. XX% will not steal if there are pictures of eyes looking at them.

Trust and feeling good are really nice things to have. But relying on this alone misses the point that companies are responsible for all the acts of all their people all the time. Any companies with large numbers of employees need also to recognize that there will be sociopaths and psychopaths among those large numbers – bad actors, no matter what the culture may be. The company should certainly follow behavioral science for insights, but still needs a system of controls to address all contingencies. As one of my friends has observed, “trust is not a control.”

I do not believe that effective controls cause misconduct. What does create a problem is poorly done controls. For example, companies that have “no gifts” policies enforced against the workers are typically victims of another common phenomenon: “the big guys get in trouble and the little guys get ethics training.” Ridiculous controls do not work. But those that are intelligently designed, including input from the workers dealing with those controls, are necessary.

The behaviorists’ insights are useful, but I still side with Lord Acton, who observed that power tends to corrupt and absolute power corrupts absolutely. I believe this is no less true in business than it has been in politics. Those with power in corporations need to be subject to checks and balances, in addition to any behavioral steps we may try.

Cheers,

Joe
January 11, 2016 | Unregistered CommenterJoseph Murphy

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