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Fear proves stronger than virtue in fight against corruption

Source: Thomson Reuters Foundation - Wed, 22 Jan 2014 09:41 AM
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Handcuffs are seen during a police operation in La Libertad, El Salvador, June 8, 2012. REUTERS/Ulises Rodriguez
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Any opinions expressed in this blog are those of the author and do not necessarily reflect those of the Thomson Reuters Foundation

(Corrects paragraph 9 to show that the expulsion of 4,290 companies from the UN Global Compact was since 2005, not all in 2012, and to clarify the reasons)

What works best in addressing corporate bribery and corruption: moral suasion or fear of punishment? Most anti-corruption experts argue for a healthy dose of each, but some are starting to doubt the effectiveness of voluntary corporate initiatives.

Over the past decade, corporate giants have linked arms with transparency and good governance advocates in a growing number of collective action groups to set standards for ethical behavior in corporate dealings with government officials. By banding together they create a form of moral pressure to behave well.

The Extractive Industries Transparency Initiative (EITI), the United Nations’ Global Compact and the CEO forum called the Partnering Against Corruption Initiative are premier examples of these collective action groups. By promoting ethical standards in business, they serve as a private sector response to the growing threat of getting sued by governments for bribing public officials to win government business.

Public procurement is big business these days. It accounts for roughly 15 percent of world GDP, according to Rolf Alter, director of public governance at the Organisation for Economic Cooperation and Development (OECD). Getting a slice of that fast-growing market can prove highly lucrative for a local or an international company. No wonder the pressure is on to make the contracting procedure more open, competitive and transparent. It benefits the taxpayer who gets the best value for money, and it benefits the company by leveling the playing field when they compete for business.

Despite these efforts to clean up business in the public sector, a new study by the Center for Strategic and International Studies released this week suggests that private-sector corruption remains a significant problem in developing countries. It calculates that private-sector corruption exacts at least $500 billion in costs a year - essentially a tax on doing business, raising the cost of providing goods and services and lining the pockets of corrupt public officials along the way.

Getting companies to band together voluntarily to agree they will not pay bribes and to disclose the public contracts they sign sounds like a great idea. Done properly, it can minimise the need for burdensome government regulation and burnish the image of a good corporate citizen.

In the United States, the oil industry has lauded the EITI process, which brings civil society, government and corporations to the table to agree jointly on publishing details of oil, gas and mining contracts. The American Petroleum Institute is arguing this process means governments can take a light regulatory hand and need not force them to make detailed contract disclosure when they are doing it voluntarily already.

But how well does moral suasion through these voluntary pacts really work? After a decade of experience, holes are getting exposed.

The UN Global Compact, a forum for private sector companies and governments to jointly agree on anti-corruption, human rights, labour and environmental principles, said it has expelled 4,290 businesses from its membership since 2005 for failing to file progress reports for two years running on those voluntary standards. And only 10 percent of multinational companies have signed up to it.

The Kimberly Process, a multi-stakeholder group set up in 2003 to certify that the diamond trade does not finance rebel violence, is stumbling after several civil society groups including human rights watchdog Global Witness walked out, saying its voluntary oversight role is failing.

The problem with these voluntary corporate compacts, said Michael Hershman, a co-founder of Transparency International and the CEO of the corporate consultancy Fairfax Group, is that they lack muscle. There is no enforcement mechanism.

“Until we reach a point where we have some type of oversight of collective compacts, it is going to be really difficult to know which companies are simply signing up but are not adhering to the standards,” he said.

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