On my very first visit to Bolivia, back in 1998, I was asked to give a lecture on corruption at the Escuela de Altos Estudios Nacionales (roughly translated: school of higher national studies). Of course I knew almost nothing about the topic, other than a vague recollection that Teddy Roosevelt had had something to do with cleaning up the civil service, but I never let ignorance stand in the way of a good lecture. I threw together a seminar based on a set of case histories in civil service reform from the Kennedy School of Government which I presented, followed by a lively and extended discussion. Needless to say, I think I learned a lot more from that discussion than the students learned from me.
Then one of the civilians in the class, a medical doctor, asked a simple question that brought me up short. "What about corporate corruption," he asked. "We have been talking and talking about corruption in the police, in the civil service, in the courts, and in the legislature. Isn't there also corruption in corporations?"
To be honest, I had never even thought about it. I fumbled around with a few platitudes and the discussion moved on, but I have been thinking about it ever since.
Corrupt Internal Practices
If corporate corruption were analogous to civil service corruption, then we would be talking about such things as promotion and hiring policies (for reasons of merit, rather than, say, political connections or payment of bribes or sexual favors). These topics are important, of course, but most of the damage caused by corporate corruption comes from other areas.
The corporate scandals that came to light over the last few years exemplified by Enron, Worldcom, and Adelphia demonstrate some of the ways in which corrupt accounting practices can damage or even destroy a corporation. Jack Powelson has covered some of these issues in past letters: see TQE #47 and #48 on corporate accountability, and TQE #81 on corporate greed.
The core problem lies with imperfect corporate governance. Internal corrupt practices, such as cooking the books to hide losses and indebtedness from stockholders, must be dealt with by better oversight by independent external accountants, free of conflicts of interest and backed up by serious law enforcement, in all countries of the world.
It is all too easy for Americans to think only of their own laws, ignoring everything that is going on in the rest of the planet, as though somehow the behavior of foreign corporations is not our concern and does not affect us. But as globalization proceeds, and more and more foreign corporations enter the international arena, this myopia will become increasingly damaging. At the international level we need much stronger efforts to set minimum standards for accounting laws, and to bring pressure on those nations whose laws and enforcement practices are substandard.
Corrupt External Practices
Corporations are owned by their stockholders, and managed in the fiduciary interest of the shareholders by an executive team, working under the guidance of a board of directors. Here is the question: Exactly how far does the fiduciary interest of the stockholders extend? What range of corporate behavior is justified by this interest?
Let us start with lobbying. The practice of lobbying in Congress for legislation that is favorable to a corporation's business is legal under the law, and clearly in the interest of the corporation and its stockholders. It is a legal way for the corporation to communicate its concerns to legislators. I have reservations about the ethics of a corporation lobbying for a new law that makes legal a business practice which is currently illegal, but it seems that few people share my concerns.
From the point of view of a corporate executive, not to engage in lobbying on an issue of vital concern to a corporation would be a clear failure to advance the financial interests of the stockholders. Jobs have been lost for less than this.
When lobbying includes non-monetary gifts, or paying for the "expenses" of legislators, then my concerns increase. This is too close to outright bribery for my comfort. The fundamental problem is that large corporations have financial resources that are enormous in comparison to the wealth of individual citizens and their legislators. Experience teaches that where there are great disparities in resources, abuse is very likely to follow. There is a lot of variation in the laws of sovereign nations concerning the extent to which lobbying can include such practices, and even greater variation in the extent to which these laws are enforced.
From the point of view of a corporate executive, not to engage in energetic lobbying, including gifts to the maximum extent allowed by law, might be construed by some to be a failure to advance the financial interests of the stockholders. I have met executives who say exactly this, and believe what they are saying. "Allowed by law" is itself a slippery term: it has been interpreted by some aggressive executives to include even those practices that are technically prohibited, under laws which are never enforced.
What about lobbying to change the laws about lobbying? Since wealthier corporations can give bigger and more effective gifts than poor ones, is it not in the financial interest of the stockholders of the very largest corporations to lobby in favor of a relaxation of the laws governing lobbying, so as to allow gifts to legislators? Those same aggressive executives would answer, "Of course it is!"
Now let us consider an all-too-common case. A business incorporated in wealthy country ABC is also doing business in impoverished country XYZ. The laws of XYZ prohibit the corporation from undertaking some activities from which it could make a very handsome profit. To what extent does the financial interest of the stockholders require that the corporation lobby the legislators of XYZ in an attempt to induce them change their laws? Once again, the aggressive answer is clear: executives may and indeed should do everything that is legally permitted to obtain a change in the laws of XYZ, so that they can pursue their business profitably. To do otherwise is to fail to advance the financial interests of the stockholders.
What if certain lobbying practices are illegal in ABC, but legal in XYZ? Unless the laws of ABC are written in such a way as to require its corporations to follow its own laws in every country in which it operates, then the citizens of ABC* will have the uncomfortable experience of watching its corporate citizens engage in behavior abroad that would be unacceptable at home. After all, these corporations would be failing to advance the financial interests of their stockholders if they did not!
Reductio ad Adsurdum: Lobbying to Legalize Bribery
Finally, what about a business incorporated in ABC lobbying to have the laws of XYZ with respect to lobbying changed? Why should they not go all the way, and simply lobby to make bribery legal in XYZ, or at least so difficult to enforce that enforcement efforts cease? After all, the corporations of ABC are far wealthier than those of XYZ, so every business advantage that they can legally obtain should be justifiable as serving the financial interests of their stockholders.
Why stop at legalizing bribery? If in the pursuit of business advantage a wealthy foreign corporation finds it strategically desirable to induce a change of any law, criminal or civil or constitutional, in an impoverished country with weak governance, is it not fully justified in pursuing such a change under the doctrine of fiduciary responsibility? Would not executive jobs be at risk if they did not try to induce such changes in local laws, thus causing their stockholders to lose potential profits?
As you may have guessed, I have gravest possible doubts about legitimacy of this logic. When pursued to its logical conclusion, it opens up a Pandora's Box of cross-national abuse and gradual subversion of legal systems. This is not just an academic concept: I have seen indications that this process is already underway in several of the countries that I visit on a regular basis.
Minimum Standards of Corporate Law
I am somewhat hesitant to suggest a concrete plan of attack to prevent such abuses, given the complexity of the issues. Where and how should the lines be drawn, and who should do the drawing? Worse, it is simply not enough for each nation to reform its own laws as it sees fit, precisely because so many nations have entire legislative and judicial systems which are, in effect, for sale to the highest bidder. Without properly functioning legislative and judicial systems in every country of the world, commerce and development will be hobbled and huge zones of poverty and exploitation will persist indefinitely.
I think the time has come for an international effort to set minimum standards for all national bodies of corporate law. I would like to see the OECD (Organization for Economic Cooperation and Development) take the lead in this. The OECD already has a Steering Committee on Corporate Governance, but it is clearly still in its adolescence. Two years ago it issued a proposed a set of principles for corporate governance, but it received a grand total of just 70 comments from individuals and organizations. This is a pathetically small number, for a world in which multinational corporations have such power and whose behavior arouses such passionate emotions. Surely we can do better than this!
Sincerely your friend,
* US laws are strict with respect to the use of bribery in foreign countries, but not all developed nations have such strict laws.
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Editor's Note: There is another view of corporate corruption, as the following comment shows.
From the perspective of business administration, there is a different picture. In an open market, business financial success will come through superior product functions, superior marketing and promotion, cost consciousness, and continuous improvement. A company that relies on direct payments to influence policy has selected that method (bribery) as a primary manner to compete. Since individuals, once bribed, can change their minds, and since other companies may offer higher bribes, this is not the sure-fire strategy that it is often suggested to be.
Organizations with effective leadership will generally avoid bribery. Those that lobby in the United States (as most do), use the lobbying approach as a small part of a very sophisticated marketing and public relations strategy.
Business is too complex to suggest that success can be achieved solely by bribing an official or a group. Translated into management accounting, the return on investment (ROI) from good public relations or product development is generally higher than the ROI from investments in collusion with regulatory or government officials. Therefore, the administrative decision to "invest" in bribery is often not in shareholders interest. While the empirical analyses support this conclusion, the urban myth of the evil corporate executive exploiting the poor rest of us is so evocative that it remains the elephant in the room.
In most cases that I am aware of, the "return" sought from bribing an official or from collusive practices was not intended to benefit shareholders. Rather, it was intended to benefit directly the corrupt individuals who are making the decision. When shareholders benefit from bribery, it is an unintended consequence of self-serving decisions made by the bribe makers.
Even the lesser example used of giving gifts to the fullest extent allowed by the law is, in fact, seldom very effective today. Disclosure and ethics rules restrict such gifts enough to ensure that their value will not sway a policy maker. Generally, corrupt practices are not effective in achieving corporate goals.
The market offers its own discipline to corruption: less corrupt organizations out-compete more corrupt ones over time and put them out of business.
Christopher Viavant, Director, Utah Health Choice Network.
Concerning overseas bribery: US law, since the 1960's I think, has prohibited paying bribes overseas. US-based multinational corporations complained that other developed-nation corporations were not prevented from paying bribes. I saw this in Uruguay in the early 70's, when the local Ford and GM heads complained about the bribes that Fiat paid in Argentina and Uruguay. In the 90's, agreement was finally reached at the OECD that member nation corporations would not pay bribes overseas. I think that most or all OECD nations have passed legislation to implement this, but I could be wrong, and perhaps French and Italian corporations still pay bribes overseas. Of course, non OECD corporations based in nations such as China, India, Brazil, etc., still have no limits in home country legislation on paying bribes overseas. If you look at news stories on US corporations paying bribes overseas, it is now almost always a case of local employees violating company rules.
William G. Rhoads, Germantown (PA) Friends Meeting.
It seems an omission to me to not mention the influence of corporate, industry and wealthy individuals' money in DC beyond lobbying. I'm referring, of course, to mostly legal contributions in dozens of ways to candidates and election committees and third party organizations that exist in the thousands.
I am on the national CablePAC Board of the National Cable Television Association which participates in the federal money game "in order to remain on par with the competition." Some people see such legal entities (Political Actions Committees [PACs] and 527 organizations like Media Fund and Swift Boat Veterans for Truth) as much of a problem as the direct bribery operating in other countries. US laws against US corporations engaging in bribery in other countries, however, are quite strict.
The issue, as I see it, is reducing the influence of big money in the political system. Reform is very difficult because the people in power, regardless of the political system, are strongly inclined to support the system that put them in place. The US, from time to time, makes a pass at transparency, but loopholes abound. Even modest efforts at reform seem possible in DC only after major scandals like Watergate and Enron.
Norval Reece, Newtown (PA) Friends Meeting.
Is it really your position that corporations should be allowed to lobby" So you would join with Charlie Wilson in saying: "What is good for General Motors is good for America"?
If ever there was a case for market failure it is in the purchase of Congressional votes. I refer you to today's Garry Trudeau cartoon that notes that the administration has reduced Court awarded damages against tobacco companies from $130 billion to $14 billion. The strip end with the tobacco saying: "How can we ever repay the administration for its interference?" and the White House saying: "Hasn't he (Big Tobacco) ever heard of soft money?"
At a World Bank seminar on corruption, an American explained that bribery is not a problem in the U.S. "because we can lobby."
Will Candler, Annapolis (MD) Friends Meeting.
Corruption in Corporations? TQE is really walking into unfamiliar territory. Thanks for doing so.
This issue of TQE highlights one of the Achilles heels of economic analysis. Without good data, there can be no informed discussions.
The kind of corruption you seem to be focusing on in TQE #128 occurs when there is collusion by management to break the rules (laws) of a society to give the business an advantage over other businesses. I want to address two other kinds of corruption business need to deal with. One is corrupt illegal acts by corporations and the second is corrupt "legal" acts by corporations.
First, there is corruption within corporations, where employees do not follow the rules of the corporations and thus steal from the owners, customers, vendors, other employees of the corporation no matter where they live. I guess we would call most of these actions "illegal". Many auditing practices and procedures have become "rules" only after a stockholder lawsuit against a CPA firm ended up with a big fine or settlement.
There are myriad accounting internal controls to deal with this and that is mostly what external (and internal) auditors deal with testing the effectiveness of the internal controls established by management. We build systems with checks and balances to make sure that the opportunity for an individual to become corrupted is minimized. I used to teach my auditing students that not establishing a good system of internal controls would be like flinging dollar bills out on the street and wondering why, eventually, someone came and picked them up. Of course, if top management is flouting the rules then no internal controls can help prevent that. Examples: Enron, Arthur Andersen, Worldcom, Qwest, AIG, CIBC, etc. (US Gov't, Inc?)
Secondly, I also think a discussion of corruption in corporations needs to include those actions that produce products and or use processes that are harmful to its customers and the communities it serves. This could include companies that produce products that, even if used as directed, can kill or maim. Some examples of products that fit this category are: tobacco, food with chemicals known to be harmful, guns, automobiles and trucks, power companies that pollute the air, businesses that foul the water.
This second kind of corruption is the most dangerous, in my opinion. There is very little recourse available to its victims. It is kept in place by lobbying and bribery, as discussed in TQE #128, by corporations that wish to continue the "Free Lunch" they are getting at everyone else's expense. This is caused by accounting principals that do not require inclusion in a corporation's reported costs the use of resources that our society pretends are "free". These include air, water, earth and health of it's citizens.
The important issue of keeping people and the food supply healthy doesn't seem to be in many ROI (Return on Investment) calculations. Europe is way ahead of the USA in creating standards for reporting this kind of corruption.
The University of St. Andrews, in Scotland, maintains a valuable website at:
Maybe economists can use their clout to get some of these practices implemented before lawsuits make it happen?
Free Polazzo, Douglasville, GA.
You chose a topic that could be an ongoing newsletter all by itself and it is different in different cultures. When there was a strong movement in the U.S. to have every corporation issue its own code of ethics, Arjay Miller, former president of Ford and then dean of Stanford Business School, observed that he didn't need to call in his lawyers to write such a code all he needed was to ask himself, "How would it look on TV?" The people have a pretty good eye for what is right and wrong. That's probably why most corruption takes place under the table, in secret, rather than out in the open. The aim of the game for us, then, would seem to be to make things as transparent as possible.
Making corporate affairs transparent is the most important tool for the SEC in protecting American investors from fraud and abuse. Transparency International now publishes an annual Corruption Index and a Bribery Index to shine the spotlight on countries perceived as corrupt or major sources of bribes. Current efforts by Tony Blair and the IMF to "Publish What You Pay" are focusing on extractive industries, particularly oil, where secret revenues passing through the hands of government officials are a major source of corruption: http://www.publishwhatyoupay.org/english/
James Wolfensohn likes to point out that when he arrived at the World Bank he was told not to use the "C" Word. What we call corruption, many of the World Bank's directors felt was simply part of their nation's culture and outsiders should not interfere. He changed that policy and the World Bank is now a leader in finding ways to measure corruption, which is an integral part of their measures of governance: http://www.worldbank.org/wbi/governance/govdata/
As Lord Kelvin said many years ago, "If you cannot measure it, it is difficult to improve it." We are making progress!
Gordon Johnson, Alexandria, VA.
Let us not confuse ethics with legality. We must adhere to out highest ethical standards wherever we do business. Our obligation is to all of the stakeholders, not just shareholders. This includes the citizens. In my case, as the CEO of a very large multinational public company, it included not taking orders directly from weapons manufacturers. People may not have agreed with me, but the respect that we encountered helped our business be extraordinarily successful.
It is my great fortune that my wife was a student of Jack's at the University of Colorado (Boulder) and introduced me to both his work and the great man himself. My life has genuinely been changed by his insights. And all credit to you for taking up the reins so admirably.
The issue of corporate corruption is, as you identify, a complex one. Lobbying is particularly difficult as we need our lawmakers to be informed on the matters upon which they legislate. Lobbyists have a place to serve in ensuring that this is the case. It is only when lobbyists fail to consider the issues of all stakeholders that lobbying fails.
I am now working as a technical manager at the Institute of Chartered Accountants in England & Wales. We recently published a document that blows apart the myth of "Anglo-American corporate governance" and shows that the UK and American systems are in fact poles apart in their approach. One wonders how the US system can change itself to give shareholders proper, meaningful rights that are commonplace in the UK, and whether this would lead to companies being held more to account over their lobbying activities. The publication is available here.
It is my current view (working within a corporation), that taxing corporations could as easily result more in declining conditions for the consumer and general workforce as it could result in any material impact felt by senior management and investors. People often forget in discussions of taxation how many more modest personages are within the corporate world. However, I do agree that more safeguards need to be in place concerning how corporate funds are used especially in larger and more public corporations. The real evil I see right now in our capitalistic system is a spiritual cost in terms of people who are lost to the service of Christ:
1. The leader (corporate or otherwise) who takes his amassed resources and uses them for conspicuous and absurdly copious consumptions and wastes of time and the establishment of a lifestyle of comfort to the net detriment of others. While wealth creation should and often is a great good, I think too many people see entrepreneurship and the resulting wealth it creates as a path to divinity in itself! Similarly I've seen during my career high level managers who valued excessively how many people they dominate within their rather absurdly deep organizational structures. Both of these obscene behaviors seem to me at least to be increasingly respected and reinforced the higher up the corporate chain of command you go. I am interested in what others may have seen.
2. The investor or inheritor who while mild of manner does nothing good with their life other than live indulgently off a perpetuity. In a nutshell, the parable of talents.
How can we compare the magnitude of these significant failings to those resulting from organizational corruption such as bribery which you describe in your article? What can we do to support those leaders who are strong enough to resist these temptations in a way that is consistent with our faith?
I seek every day to create more wealth around me, but with equal vigor I seek to recognize the temptations becoming a channel for wealth and resources bring for I can barely manage the wealth and resources I have without often straying from what I believe is the proper path. It is probably a good thing I am not a great risk of obtaining access to great wealth! For me economic and religious and political issues are very intertwined and this is okay I would believe that all topics to some extent should be accessible topics within a Meeting. What of our lives should not be held in the Light?
Mark, in Minnesota.
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