Innovations in Fighting Corruption

Sep 24, 2007

GPI's second Workshop for Ethics and Business was held in New York City on September 19, 2007. The meeting of civil society and corporations, Innovations in Fighting Corruption: What Works, What Doesn't, and Who Is Accountable?, was co-sponsored by Booz Allen Hamilton's strategy+business magazine. Matthew Hennessey authored the rapporteur's summary.

Steve Rochlin, head of AccountAbility North America, began by acknowledging that many large corporations try to address corruption, though they face obstacles. To illustrate these difficulties, Rochlin offered an anecdote.

On a recent international flight, he was seated alongside a mother and two poorly behaved young children. In the hopes of surviving the flight with his nerves intact, Rochlin engaged as little as possible with the troublesome tots. Upon disembarking, the airline staff upbraided him for doing so little to help his wife manage the unruly boys. "But she's not my wife," he pleaded. The airline staff apologized, indicating that the entire plane had been under the impression that he was an uncaring father.

The story is analogous, Rochlin said, to the situation corporations face when combating corruption. In conversations with AccountAbility, corporations note that they are often perceived as being responsible for abuses of integrity that occur merely in proximity to their business operations. "This is not my responsibility," Rochlin said, mimicking an imaginary corporate compliance officer or CEO, "But everyone is talking about me as if it were."

Rochlin highlighted one of the difficulties surrounding discussions about corruption—defining the terms. The watchdog group Transparency International views corruption as a question of improper payments or bribery. The World Bank, the leading development agency, defines corruption as the privatization of public policy. This is a definition that makes many in the United States uncomfortable, Rochlin said, because it touches near the system of institutional lobbying that operates in American democracy.

Many corporations lament that they simply don't know what the boundaries are when it comes to corrupt practices around the globe. Multinational corporations find themselves navigating complex supply networks and diverse operating environments, including cultural differences. The common barrier to early action on corruption is the free rider problem—less ethical corporations may have lower costs and thus gain market share. These were themes on which all of the speakers touched.

AccountAbility's goal, according to Rochlin, is to build and extend a dynamic network of accountability among stakeholders. To this end, AccountAbility seeks to elucidate expectations for companies, for the broader industries they work in, and for public and civil sector bodies. The model for this, Rochlin said, is the Extractive Industry Transparency Initiative (EITI), which supports improved governance in resource-rich countries through the verification and publication of company payments and government revenues from oil, gas, and mining.

EITI works to build multistakeholder partnerships in developing countries in order to increase the accountability of governments. By creating an industry dynamic, Rochlin said, EITI has begun to "shine the light of day" on the extractive industry. There is a growing energy and enthusiasm that EITI could serve as a model for similar initiatives in the pharmaceutical, defense, and other industries.

Rochlin expressed his belief that innovations and technological breakthroughs will accelerate the progress of anticorruption initiatives by empowering stakeholders and giving citizens a voice in policy formation.

"The system of corruption is a failure of governance," he concluded.

Alice Eldridge, Vice President for Ethics and Business Conduct at Lockheed Martin Corporation, spoke next. She is responsible for managing the Corporation's ethics program, which includes awareness and compliance training, outreach activities, issues management, and performance tracking.

As a government contractor, Lockheed Martin uses a basic definition of corruption: fraud, waste, and abuse. Corruption issues affect employee relations and the overall level of goodwill by creating a loss of trust among employees and customers. High-profile corruption cases breed cynicism and mistrust in the industry, she said, extending from the community of employees to the shareholders and corporate customers.

Eldridge insisted that an ethics regime that focuses solely on compliance is not the most effective way to improve the culture and trust issues associated with abuses of integrity. At Lockheed Martin, she said, there is a minimum expectation of integrity attached to the privilege of employment with the company. A strong compliance program is esstential, at least at Lockheed, but to truly impact culture, compliance programs do not offer the "best bang for the buck," she noted.

When performing due diligence on potential partners and prospective acquisitions, Lockheed makes it known that it is unwilling to abandon its core values of Doing What's Right, Respect Others, and Performing with Excellence. Further, Lockheed's compliance training adheres to a uniform understanding of corruption and integrity across its international business groups.

Katy Choo, Senior Counsel, Litigation and Legal Policy, at the General Electric Company, spoke third. She supports GE with respect to government and internal investigations, compliance issues in acquisitions, compliance initiatives of the company, and preventive law. She counsels GE's businesses with respect to anti-corruption efforts globally.

GE is highly diversified with six main business units: Its Industrial, Infrastructure, Commercial Finance, Money, Healthcare, and NBCU lines of business. The ethical challenges are very different in each of these areas, she said. The company is actively trying to address potential corruption issues in each of these units as its business becomes increasingly global.

In 2007, Choo said, half of GE's revenue is expected to originate outside of the United States, and the company's growth markets in the developing world correlate strongly with Transparency International's index of corruption hotspots. The company is therefore ever vigilant about the need to to advance anticorruption initiatives and to promote both good governance and solid corporate integrity, she said.

Frequent risks as GE further globalizes, Choo said, include possible improper payments, conflicts of interest, and controllership failures. In regions where operations are not to scale like in larger sites, risks related to segregation of duties—a form of conflicts of interest—also can arise. Functions that would be divided among different employees might be consolidated in one person, creating opportunities and incentives involving conflicts that would otherwise not arise.

Choo emphasized the importance of a corporate culture of integrity that she described as the "tone at the top." The core policies of GE's ethics program are outlined in the GE handbook and are routinely and methodically measured to determine where gaps exist. The handbook contains 14 key policies and is translated into 31 languages. Its core message of its improper payments policy, according to Choo, is that improper payments to gain advantage in a business setting are never acceptable.

All GE employees worldwide are required to complete training on the company's integrity policies, she said. Higher-risk functions are required to complete deeper, more advanced training on policies that are most relevant to their jobs. So for the improper payments policy, the sales and marketing function and those that interface with customers would be placed in this category of having to complete more advanced training.

"Businesses devise their own means to mitigate risk, and one best practice I would like to showcase is a tool used by our Energy business," Choo said. She explained that the Energy business has a digital tool that tracks training of its third parties on certain core integrity policies. "Third parties that don't complete the training," she continued, "are at serious risk of not being renewed because of their failure to comply."

Brian Levy, Adviser, Public Sector Governance at the World Bank, was the final speaker. He discussed the positive relationship between two key variables in the developing world: per capita income, and quality of governance. Yet, there is considerable debate as to the priority of anticorruption efforts vis-à-vis development.

The World Bank's mandate, he said, is the reduction of poverty worldwide, but the fact that poor countries are generally those where governance is weaker, and corruption higher, poses some important dilemmas for the mission. The World Bank has a fiduciary obligation, according to Levy, to ensure that the money it contributes as aid to developing countries is used for its intended purpose.

Of late, questions have emerged about the World Bank's efficacy as a corruption fighter. In any year, he said, there are on average 130 investigations of corruption at the World Bank. One-sixth of those are linked to World Bank staff involved in fraud and corruption. Of these, between January 2005 and June 2007, there were only about ten cases of demonstrated fraud across the institution involving Bank staff.

Until a decade ago, Levy said, the World Bank was seen as setting the standards for managing the distribution of development funds. There is a need to intensify efforts to build anticorruption frameworks that endow multiple stakeholders with responsibility for good governance and public integrity. Typically, he noted, the standard control environment takes a zero-tolerance approach to corruption issues.

This approach is challenged by development projects, such as those promoted by the World Bank in Indonesia, that put resources directly in the hands of the community. While there is a lack of top-down controls, there is nonetheless a track record that suggests such projects better target the needs of the communities themselves. It's unfair, he implored, to say, "Well, there is corruption in Indonesia, so the World Bank should leave Indonesia." That's not in line with the organization's mandate.

Effective aid, Levy said, targets development projects that help strengthen institutions. He called this a country-systems approach. In Tanzania, this country-systems approach has resulted in 7 percent economic growth since the late 1990s. There have been major improvements in health and physical infrastructure as a result of foreign aid totaling 8 percent of Tanzanian GDP. Half of this aid took the form of direct budget support, putting the country in the driver's seat.

The World Bank is continuing to make major investments in the quality of public financial management in the countries where it works. Nevertheless, a review conducted in 2001 of Tanzania's public procurement systems suggested that up to 15-20 percent of the country's procurement expenditures did not go for the purposes intended. There have been major subsequent reforms of the procurement systems. But it is still too early to judge the impact.

"When working in a low-income environment, a difficult environment, where broad systems are still imperfect, should the World Bank retreat to a gold-plated island?" Levy asked rhetorically. His answer was a hearty "No." The World Bank must maintain a commitment to stay engaged in the face of systemic corruption in the developing world, he concluded.

After a discussion with the audience, Devin Stewart, Director of the Carnegie Council Program Global Policy Innovations, thanked the participants and added a brief summary of the afternoon's meeting. He noted five themes touched on by the participants:

  • Cultural questions surrounding the definition of corruption—ethical behavior is not contextual but rather universal;
  • Multistakeholder engagement to build accountability inside and outside the organization;
  • Metrics designed to measure the success of anticorruption initiatives, adding a level of transparency;
  • Creating awareness in far-flung operations of what is considered ethical;
  • Serving as exemplars of good behavior when operating in ethically challenging environments.

The following are links to audios of this event:

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