Monday, 3 January 2011

Bribery and Corporate Governance

Although I have written before about the new Bribery Act and corporate governance, I was struck by a newspaper headline, “US war on terror is tangled up in web of bribery, corruption and fraud”. The report stated that the US investigators are working on 110 cases of suspected fraud with at least a dozen US army procurement officers already convicted of taking kickbacks. A major, was jailed for 17 years for taking nearly $10m in bribes and the Special Investigator General for Iraq Reconstruction (SIGIR) has obtained over 40 other convictions..

The lessons that leap out are that corruption depends upon three things;

Controls and procedures

To prevent corruption there must be a network of controls so that deals and contracts are independently reviewed. Clearly the US was in a hurry to get things moving in Iraq and decided to sacrifice normal controls. I remember reports about huge sums of money being disbursed in the early days of the occupation without even proper records being kept. That also brings us on to the second point…

The cultural climate

Even with controls in place, if there is a culture that accepts and promotes bribery it is very hard for them to work effectively, not least because record keepers, investigators and judges can be bribed. So the potentially dishonest individual is assailed with numerous temptations whilst seeing a culture of impunity around them. Once again, the US compromised for political reasons – the agencies of a generally uncorrupt US chose to dispense money through local political bigwigs, fuelling an explosion in corruption.

Let us not use only US institutions to illustrate this. Consider Mrs Andreasen, chief accountant at the European Union Commission who, according to the Daily Telegraph was

“shocked to discover that the EU did not have double-entry book-keeping when she joined the Commission in January, fearing that funds could be diverted without leaving an electronic fingerprint. Her claims, which were originally dismissed by Mr Kinnock's office [Kinnock was a British commissioner whose role was meant to be to control fraud], were later substantiated by a secret internal report from the Court of Auditors.

She claims that her superiors ignored warnings, so she eventually contacted the Court of Auditors and then MEPs. Mr Kinnock first moved her to another job, then subjected her to disciplinary proceedings, and finally suspended her...

He denied that Mrs Andreasen had been mistreated, saying that she violated staff rules by defaming her superiors, bringing disrepute on the Commission, and violating hierarchy lines.” This is the classic response of the company whose misdeeds are shown up by a whistleblower. In response many countries, including the UK, have introduced legislation to protect whistleblowers. It is hard to think how she could have defamed Kinnock who has lost any reputation that might have been capable of defamation.

Individual integrity

Only last is individual integrity an issue and, as implied above, once corruption takes hold it is hard to root out because the honest know they will not be protected. Indeed they fear they will be attacked by the corrupt and hauled before corrupt justice if they speak out.

Parallels with the corporate situation are clear. Controls are necessary but not sufficient without a culture of integrity because behaviours matter as much as rules. The Enron case is often cited as an example; there were rules and procedures that should have prevented at least some of the misbehaviour there but individuals did not act appropriately to enforce them and the Board itself connived at a conflict of interest which had only one possible purpose – to mislead users of published accounts. This permitted an inappropriate cultural climate to overwhelm the controls.

And back to the individual. The corrupt individual will still occasionally find ways to bypass controls or a cultural climate that is unfriendly to malfeasance - whilst the incorruptible individual will occasionally defeat corruption.

Since most companies have controls in place and there exists a mix of honest and dishonest people everywhere, the lesson is that the cultural climate at the top that is most important and provides the action point. Whether the US reconstruction in Iraq, The European Commission Budget or Enron, we find that it is political decisions at the top that provide cover for corruption.

1 comment:

  1. This is great -- a very nice primer on how corruption happens. The only thing I would add is that there's good evidence that one of the crucial ingredients in wrongdoing is the ability of individuals to allow themselves certain kinds of excuses. (And it's likely that certain kinds of organizational culture encourage the use of those excuses.)

    See this blog entry of mine for more:

    Chris MacDonald