Does fighting corruption really make business sense?

No doubt, business plays a crucial role in countering corruption. So as attempts have increased to motivate companies to engage in the fight against corruption more, so have references to the so-called “business case against corruption”.

It argues that corruption is not only morally wrong and damaging to societies, but also detrimental to the companies themselves. It thus concludes that countering corruption makes business sense; that companies that engage against corruption are better off economically than those that do not.

But is this true? Because if such a business case to counter corruption existed, why are companies still engaging in corrupt acts?

This is one of the main questions elaborated on at the Humboldt-Viadrina School of Governance in a project on anti-corruption incentives and sanctions for business, which looks at what it is that motivates companies to counter corruption. Are they doing so only if required to by law? Are they driven by a desire to do what is morally right? Or does countering corruption actually make good business sense? And what can different stakeholders do to strengthen these motivations?

The difficulty of quantifying the business case

When arguing for the business case, notable figures are often cited to underscore the negative impact of corruption on companies, such as the fact that corruption adds up to 10 per cent to the total cost of doing business, or that corruption adds up to 25 per cent to the cost of procurement contracts in developing countries.

However these arguments fail to capture two important points.

Firstly, the general numbers coming from the global cost of corruption tend to ignore the individual perspective of companies in a specific situation or context. Because – at least in the short-term – the perceived gains of corruption can be substantial. A business representative who is bidding on a crucially important tender may, for example, opt for corruption if he or she feels not doing so will cost him or her the deal.

Secondly, the perception often prevails that there is no alternative to corruption. A customs official may, for example, solicit an extra payment to clear perishable or time-critical goods. Here, bribery may seem unavoidable in the short term, even if the company is aware of its negative long-term effects.

Many business managers, if not most, understand the business-related arguments against corruption, such as unfavorable dependencies, process inefficiencies, increased transaction costs or low employee morale. They also agree that corruption is morally wrong. But when faced with challenging and urgent business decisions they may opt for corruption nonetheless.

Strengthening the business case through sanctions and incentives

To outweigh the (perceived) short-term benefits of corruption, a variety of punishments (or sanctions) are thus imposed across the globe. The intention behind these is to make corruption more costly through fear of a later punishment.

If the giving or receiving of an undue advantage is likely to result in a hefty fine, substantial bad press, debarment from bidding for contracts, or even a prison sentence, corruption will quickly lose its appeal as well as its profitability.

However, effectively changing business behavior through sanctions has proved challenging. All too often sanctions are neither enforced effectively, nor are they proportionate to the crime. So building a business case against corruption on sanctions alone turns out to be difficult.

Increasing the benefits of acting against corruption can be an alternative. This is where incentives play a crucial role. If refraining from corruption, for example, translates into access to the supply chains of multinational companies; if visible commitment to anti-corruption results in praise from NGOs or positive media coverage; or if effective anti-corruption ethics and compliance programs mean better conditions when bidding in public tenders, companies’ engagement against corruption will likely increase drastically.

The World Bank for example (at times significantly) reduces sanctions (for example, debarment periods) for companies that improve their conduct after a corrupt act occurred or that took preventive measures from the outset. It thus provides strong motivations for companies to implement internal anti-corruption measures, to cooperate with authorities, or to take remedial actions.

Rewards, however, do not only come in the form of reduced sanctions. They can also come in the form of genuine incentives for good performers. One such example is reputational praise, which is where civil society stakeholders can play an important role.

Transparency International Bulgaria, for example, put forward several integrity pacts for public procurement (for example, with the ministry of health) and subsequently published a white list of companies that sign up to the pacts.

Such white lists do not only enhance the reputation of good performers, they also give a platform to companies that try to tackle corruption in challenging contexts or environments. Another example of providing reputational incentives is the recent Transparency in Corporate Reporting from Transparency International.

Such a ranking of comparative company performance adds an element of peer pressure and thus provides motivation for improvement. (A poor performance on such rankings would obviously serve as a sanction).

Several initiatives that have emerged in recent years are adding commercial genuine incentives to reputational ones (such as the Label pour la Responsabilité Sociale de l’Entreprise of the Moroccan Coféderation Générale des Entreprises du Maroc). Such initiatives provide companies that abide by certain standards not only with reputational praise, but also with tangible commercial benefits (such as reduced costs when accessing finance or fast tracks at customs). The idea behind this being that providing tangible business advantages to companies which demonstrate ethical leadership will motivate even those who, so far, have not seen any value in countering corruption.