Corruption in International Business

The Challenge of Cultural and Legal Diversity

Sharon Eicher, Sharon Eicher

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317159216
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Gobierno empresarial

It is common practice to assume that business practices are universally similar. Business and social attitudes to corruption, however, vary according to the wide variety of cultural norms across the countries of the world. International business involves complex, ethically challenging, and sometimes threatening, dilemmas that can involve political and personal agendas. Corruption in International Business presents a broad range of perspectives on how corruption can be defined; the responsibilities of those working for publicly traded companies to their shareholders; and the positive influences that corporations can have upon combating international corruption. The authors differentiate between public and private sector corruption and explore the implications of both, as well as methods for qualifying and quantifying corruption and the challenges facing policy makers, legal systems, corporations, and NGOs, as they seek to mitigate the effects of corruption and enable cultural and social change.

Chapter 1
Introduction: What Corruption is and Why it Matters

Sharon Eicher

A New Consciousness

People everywhere are more concerned than they ever have been about corruption and business ethics. This represents social changes that are occurring everywhere, though to different degrees.

Partly this may be due to the pioneering efforts of the organization Transparency International, which has not only spearheaded the fight against corruption, but has made it possible to gauge and compare corruption across countries. Partly, it may be due to the plethora of scandals and company collapses that was experienced at the end of the 1990s and in the early 2000s. It may also be due to changes in the demographics of investors. Today the worker is also the capitalist, and the largest investors, institutional investors, are protecting the common person’s pension savings, insurance funds, etc. It may also be due to globalization.

Globalization has expanded communication and the flow of information among ever widening circles of people, some of whose interests conflict with those of the private sector, and those adversely affected have organized themselves in a variety of ways to express their discontent. Globalization has forced like-minded western capitalists to interact with their counterparts in lower-income countries, where interpretations of trust, reciprocity, honesty, and social engagement may differ. Finally, globalization has created visible, open clashes among private actors, public officials, individuals, and organized groups at an unprecedented level and pace.

Public awareness has risen through the efforts of NGOs, international agencies, and scandals in the media. This awareness, combined with the changing definition of ‘capitalist’ and globalization, contributes to a new consciousness concerning corruption.

Today companies do not operate within national boundaries – where the rules are straightforward and understood – but in multiple countries, each with its own set of norms and rules. Corruption has entered the public sphere and dealing with corruption must become a foremost issue in training business professionals.

Defining Corruption

One difficulty in combating corruption is our struggle with defining it. ‘Virtually every published work on corruption, from the 1960s to the present, wrestles with the problem of defining it’ (Sandholtz and Koetzle, 1998). Without an internationally agreed-upon definition, operationalizing anti-corruption strategies is problematic.

In many cases ‘corrupt’ and ‘illicit’ are used interchangeably (Bardhan, 1997). This suggests to many that corrupt behavior violates a principle of legality. However, not all illegal behavior is corrupt,¹ and not all corrupt behavior is illegal. Rose-Ackerman (1975) describes the corruption payment constituting a bribe as ‘an illegal or unauthorized transfer of money or in-kind substitute’. Illegal or unauthorized. So, corruption payments may be legal but unethical, as they are not allowed under one’s rules of operation.

A common misconception, held in both western and developing countries, and even among many researchers on corruption, is to confuse what is corrupt with what is legal. Laws are defined by values, as are ethical norms, but the two are not equivalent.

Until recently, it was legal in many countries to use foreign-paid bribes as tax deductions. It was legal, but it was arguably unethical and corrupt. Paying a bribe was a crime only insomuch if it violated a law in the country in question.

In countries that have ratified the OECD Convention to prohibit bribing foreign officials, it is no longer legal to use these as tax deductions. Now that it is not legal, is it less unethical and more corrupt? Plenty of corrupt behaviors, as with all ethical issues, are not illegal. Corruption in the public sector, involving public officials and employees, on the other hand, is illegal in most countries, though it may be highly tolerated. Consideration of the law and consideration of business ethics and corruption are necessarily two different, albeit closely related, matters.

Many firms have legal counsel to advise them and to set their anti-corruption policies. This will help companies to follow the laws of their home countries and their foreign bases of operations. It will not necessarily help them to avoid scandals, as many corrupt practices may be perfectly legal, such as offering incentives to a representative who is accepting bids in order to win a contract.

One of the ways that corruption may be differentiated is by discussing public corruption versus private corruption. Public corruption could occur when a member of the tax-paying public is given poor service or asked to pay a bribe by one who is engaged in public service: a judge, a policeman, a civil servant, etc. An example of private corruption could be when public company managers, whose job it is to look out for the interests of shareholders, engage in side deals or make decisions for the company in order to benefit them personally, rather than doing what is best for the firm and the shareholders.

Corporate corruption generally takes two forms: engaging in bribe-making, usually as a supplier of bribes, and violations of ethical and professional standards with the intent to deceive or defraud investors. With respect to bribes, corporate corruption could consist of a representative of the firm receiving bribes in order to make a decision advantageous to the bribe-maker, or as a bribe-giver, either to another private party or to a representative of a domestic or foreign government.

In either public or private corruption, a dichotomy exists between what a person is charged to do and his or her actions. With public service, one is charged with serving the public and is compensated with a salary. Corruption occurs when one serves the public arbitrarily and with bonuses to one’s salary. With private service, one is charged with serving the shareholders, or owners, of the firm for which one receives compensation. Corruption occurs when the worker’s individual interests are served in a way that is not analogous to the interests of the company as a whole. (This problem only occurred in modern capitalism when ownership and management separated; Gitlow, 2005) Both forms of corruption involve misuse of one’s position for personal gain – or in some cases company gain – at the expense of others, usually one’s constituency.

All definitions of corruption include political corruption. ‘Government for sale’ is the phrase used to describe corruption where government property or services are privatized (see, for example, Schleifer and Vishny, 1993; De Soto, 2000). Corruption is defined by the World Bank (2005) similarly, as ‘the extent to which public power is exercised for private gain, including petty and grand forms of corruption, as well as “capture” of the state by elites and private interests.’ The misuse of powers afforded by a government monopoly on services is the most restrictive definition of corruption.

The above definition defines the act by the actor, not by the action itself. All cases of corruption in the public sector include some combination of public officials, individuals, firms, or industries on one side and public officials on the other. That is, one cannot exclude private individuals or firms from even public corruption’s definition. For this reason, broadening the definition of corruption and dealing with the action, rather than the actor, is the most sensible way to define corruption. Corruption research is moving in this direction, although many corruption indicators still explore only ‘political corruption.’

Transparency International, a leader in fighting corruption,² has broadened its definition: ‘Corruption is the abuse of entrusted power for private gain. It hurts everyone whose life, livelihood or happiness depends on the integrity of people in a position of authority’ (transparency.org). This allows one to look at abuses of power rather than which type of actors are engaged in corrupt behavior.

In this work, corruption is defined as any act where a trust between the principal, the one whose interests are supposed to be protected, is violated by the agent, the one who is supposed to be protecting the principal’s interests. Rose-Ackerman (1975) describes how ‘the person bribed must necessarily be acting as an agent for another individual or organization since the purpose of the bribe is to induce him to place his own interests ahead of the objectives of the organization for which he works.’ This corresponds to Transparency International’s definition, and it expands the definition of corruption into the broader realm of professional ethics. This principal-agent model is commonly used in the literature on corruption.

Corruption is a term that encompasses a wide variety of illicit behaviors. Some of these are illegal and others are not. All could at least be arguably unethical.

Corruption’s Multiple Dimensions

Forms of corruption arise from a myriad of behaviors that are all lumped together and called ‘corruption.’ Confounding this problem are the subtle variations in how corruption is defined. Complicating how we view corruption is the possibility that some forms of corruption may allow us to accomplish goals in highly bureaucratic and inefficient environments better than we can if we are strictly honest and ethical. Corruption is a very complex issue, made no simpler by international production and commerce.

The discussion of ‘corruption’ groups together behavior that might arguably be considered unethical, which involves money, privileges, or favors in payment for a particular action, and through which someone is directly or indirectly harmed. A wide variety of unethical behaviors, such as bribery, fraud, kickbacks, and economic espionage, among other behaviors, are all grouped within this category.

One division within the acts that may be labeled as ‘corrupt’ is that which is done to benefit the firm in the short term and that which is done at the expense of the firm. Economic espionage and kickbacks, for example, are examples of unethical or corrupt behavior that may benefit the firm, although one might argue that the perpetrator committed the act more to enhance his or her career and reputation rather than to help the company. On the other hand, insider trading and securities fraud are examples of unethical or corrupt acts that harm the firm.

Transparency International also differentiates types of corruption by motive. Facilitation payments, or ‘speed money,’ is according to rule corruption; whereas a corrupt act committed in order to circumvent the law or regulations is against the rule corruption. Corruption behaviors that benefit a firm are also called functional corruption, whereas corruption behaviors that harm the firm are dysfunctional corruption. The basic idea is that some corrupt acts are part of management strategy to enhance profits and some are to enhance personal power and wealth.

This distinction is particularly relevant when discussing international business and corruption. Some acts, such as kickbacks and bribes, may allow the company to operate more profitably, at least in the short run. The problem with working in a business climate where corruption is accepted is that engaging in such practices reinforces the corrupt culture. It requires that future business transactions offer similar ‘perks.’ It may violate the firm’s code of conduct as well as the home country’s legal norms. In such an environment, refusing to participate in the corrupt system may be disadvantageous in the short term because bureaucratic processes may move much slower and deals may be lost to another who is willing to ‘be a player.’

Supranational organizations, such as the World Bank, and non-governmental organizations (NGOs), such as Transparency International, are mostly concerned with the kind of corporate corruption that may be beneficial to a firm in the short run, such as offering kickbacks and bribes to win contracts. Prohibitions against this type of corruption, are included as part of corporate social responsibility (CSR) programs. CSR policies adopt the perspective that managers must consider all stakeholders, the local community, local government, suppliers, as well as employees and shareholders. Through CSR policies that prohibit ‘firm-beneficial’ or functional corruption, companies constrain the supply side of corruption (who is offering a bribe, for example). These policies limit how money, favors, and gifts can be used to induce favorable business outcomes.

The difficulty in delineating between functional and dysfunctional corruption is that market economies and societies evolve. Gradually, many developing countries become better governed through rule of law. At some point, paying bribes to contractors and civil servants, insider trading, and other forms of corruption that are prevalent particularly in many developing countries, shift from being functional to dysfunctional. Bureaucratic systems become easier to navigate and systems become more transparent and more accountable. When this happens, the established procedures for public and private systems work well enough that corruption is not necessary. These actions no longer save a company money by facilitating bureaucracy and deal-making; they become burdensome additional costs for the company to bear. In other words, functional corruption is a part of a developmental stage of an economy.

Banfield (1975) differentiates personal corruption and official corruption. An agent is personally corrupt when he does not fulfill his obligations but serves his own private interests. She is officially corrupt when she acts illicitly in order to serve the principal’s interests, such as by bribing someone to accept a contract’s bid offer in order to gain an advantage for one’s own firm. Using the previous terminology, official corruption might be functional and personal corruption might be dysfunctional.

The wording in the anticorruption convention sponsored by the Organization on Economic Cooperation and Development (OECD) differentiates between active corruption and passive corruption. Passive corruption is committed by a government official who receives a payment. Active corruption is committed by the one who pledges to give a bribe.

Another differentiation in defining corruption in the public sector is between state capture corruption and administrative corruption. State capture refers to the ability of an individual, firm, or industry to influence the content of law. Deflem (1995) discusses bureaucratic corruption which involves transfer of power and is similar to state capture. Bureaucratic corruption circumvents the regulations just as ordinary bribes do. Administrative corruption is the ability of an agent to affect how laws are implemented, i.e., this agent may receive special considerations when dealing with the state bureaucrats, regulators, etc. Public corruption which perverts government and misallocates power is viewed as the most egregious form of corruption by most people.

Complications from gift-giving practices

The concepts of rationality espoused by classical economics may be less important in conducting international business than relationships. In many cultures, people may require that a relationship be developed before business transactions occur. One way that this occurs is often through socializing and gift-giving that denote respect and appreciation or gratitude. It is often the case that in countries where commodity money (animals, furs, metals, etc.) were used recently, gift exchange is more common (Davies, 2002).

Cultural differences regarding such norms as gift giving make articulating international anti-corruption strategies difficult. ‘Practices that one society condemns as corrupt are considered harmless or even appropriate in another cultural context’ (Sandholtz and Koetzle, 1998).

Favors and gifts, which may seem like bribes to some, may be expected. A common, western example is that the service provider is expected to pick up the lunch bill for the potential client when initiating or reinforcing a business relationship. Is this a bribe? What differentiates this practice from expecting and accepting something larger and grander than a lunch bill? That which delineates a free lunch from receiving a grander favor or gift is largely cultural. Many societies do not differentiate between large and small gifts, while others do. What part of such practices is cultural, what part is acceptable, and what part constitutes an ethics violation? Unfortunately, there is no simple answer to this question, only guidelines.

Guidelines are created and reinforced by the individual’s employer. In some cases, the guideline is to accept or offer nothing. For example, the author was explicitly prohibited from accepting a can of Coca Cola, a coffee cup, or writing implement from any student while teaching in the Kansas State University system. Rather than differentiate between ‘appropriate gifts’ and ‘inappropriate gifts,’ no gifts may be accepted. The protocol followed by employees of the Economist is appealing – one may accept any gift so long as it can be consumed in one day (Economist, 23 Dece...