The global economy has sparked unprecedented efficiency and innovation, but the age-old problem of corruption has also flourished along global supply chains — particularly those that traverse markets with weak rule of law.
It is a problem that undermines the functioning of the free market and hinders economic development where it is most needed, says Leslie Benton, vice president of advocacy and stakeholder engagement at the Center for Responsible Enterprise and Trade (CREATe.org).
While governments are grappling with the problem by implementing new laws or toughening existing ones, she warns that global companies can’t afford to ignore the growing corruption risk posed by business partners in remote locations.
“The best bet is to reach out to these third parties and engage them in ongoing anti-corruption efforts, but so far, few do,” says Benton, who works with global companies to stamp out corruption across their supply chains. Ideas lab spoke with her about the evolving risk of corruption and how companies can be proactive to combat it.
Why is the risk from corruption on the rise?
For most companies, survival in the global marketplace requires partnerships — in some cases, dozens, hundreds or thousands of them. These partnerships can be critical assets for gaining access to local knowledge and sometimes are legally required for operating in a given country. But, in some markets, local partners may see the exchange of money or other things of value for business and other types of graft as normal or even essential to doing business.
At the same time, many countries are putting in place new or expanded anti-corruption laws that – such as the U.S. Foreign Corrupt Practices Act (FCPA) — hold companies accountable for violations by business partners working on their behalf.
In the big picture, what is at stake for companies is more than millions in criminal penalties that may be assessed for a violation. The face value of bribery, shareholder derivative suits, and other costs from graft amounted to a $515 billion “tax” on the private sector in emerging markets according to a 2014 report by the Center for Strategic and International Studies.
Don’t most companies have anti-corruption policies in place?
Many do, but policies are unlikely to be effective unless companies communicate clearly what they are and how to adhere to them — through formal training and less formal communication channels. They must also put in place a monitoring system to ensure adherence by employees and business partners and take action to sanction violations and correct problems when procedures are not followed.
Earlier this year, we completed a pilot project looking at the anti-corruption programs for dozens of companies operating across diverse sectors — aviation, information technology, consumer goods, telecommunications — and geographies, including Asia, Latin America, Europe and North America. One of the top-level takeaways was that the companies tended to rely on their policy documents and didn’t go the extra step to ensure that effective anti-corruption procedures are implemented to support the policies.
One glaring weakness is the absence of monitoring. Fifty-seven percent of the participants said they do not monitor the performance of their anti- corruption program inside their company — and 86 percent said they do not monitor the anti-corruption compliance of their supply chain and business partners. A Dow Jones survey of compliance officers at companies around the world came to a similar conclusion.
Regular monitoring is valuable in part as a deterrent — signaling to employees and third parties alike that senior management is paying attention to anti-corruption compliance. It also allows a company to know where risks lie, and helps to address problem areas in the future.
Another finding from our pilot program was that many participating companies failed to communicate. Many did not train internal employees, and virtually none provided their third parties with training.
Formal anti-corruption training should be supplemented with ongoing, regular communication — from the top of the company down — to underscore the company’s message of zero tolerance for corruption and the importance of compliance and ethical business practice.
Are companies providing enough anti-corruption training for non-employees?
Some are starting to. Ericcson, for instance, requires its suppliers to take an online course and test on its code of conduct with anti-corruption practices as one of six areas of proficiency. Microsoft requires the company’s partners to provide anti-corruption training to all employees who resell, distribute or market its products or services — and even provides a free e-learning module on its website for any partner who wants to use it. Cisco works closely with its supply chain partners to communicate its code of conduct requirements, monitor compliance, improve partner performance and build their capacity.
These examples remain as exceptions to the rule, however.
Is it possible to weed out corruption risk through extra thorough vetting of potential partners?
Due diligence is critical, and it seems that companies are becoming clear on this point. The number of companies that conducted third party due diligence in the area of corruption increased to 97 percent this year from 87 percent in 2013, according to a recent report by consultancy Kroll and Compliance Week.
But these processes provide only a partial picture. According to the Dow Jones survey, 51 percent of compliance officers who responded were confident in the effectiveness of their due diligence process, and fewer than 5 percent were “extremely confident.” Difficulties accessing information from third parties and assessing its reliability were cited as reasons for their doubts.
Despite concerns, many companies continue to take what the Kroll report adroitly termed a “vet it and forget it” mentality — which we believe is doomed to fail.
To address the growing risk from third-party corruption, it makes sense to treat anti-corruption training, communication and monitoring as an investment and an integral part of business from the get-go and plan for those activities accordingly — or potentially suffer damage to profits and reputation from violations.
Leslie Benton is Vice President of Advocacy and Stakeholder Engagement at the Center for Responsible Enterprise and Trade (CREATe.org). She previously led the anti-corruption and compliance communications practice for Levick Strategic Communications. As Senior Policy Director for the U.S. chapter of Transparency International, Ms. Benton spearheaded outreach to the U.S. Government, the G8 and G20, international institutions, multilateral development banks and the private sector. Ms. Benton earned a Master of Laws from Harvard Law School and her J.D. from the Emory University School of Law.