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The Paradox Of Corruption

The man on the left is David Hess, an Assistant Professor of Business Law & Business Ethics at the University of Michigan's Ross School of Business. He's on the blog today because he thinks and writes a lot about how to control corruption in international business. Among his articles are many dealing with ways to help corporations develop more ethical cultures -- through the use of sustainability reports, the Federal Sentencing Guidelines, and deferred prosecution agreements, among others.

Prof Hess is a member of the Pennsylvania bar and has a law degree from the University of Iowa and a PhD in management from Penn. He recently bagged the Aspen Institute's 2008 Rising Star Faculty Pioneer award for his work on ethical behavior and sustainable economic development.

The following interview is from the University of Michigan Business School's site. Our thanks to the folks there for permission to republish it.

What are you thinking about?

Hess: I'm continuing my research on controlling corruption in international business. I'm looking at both government regulation and the use of voluntary initiatives by multinational corporations. This research includes not only bribe payments to public officials, but also private-to-private corruption, which involves corrupt payments between two corporations' agents.

Why is it interesting to you?

Hess: The topic interests me because corruption is such a harmful but enduring practice. Some people have stated that it's a paradox in that corruption is universally disapproved yet universally practiced. It's also important to remember that corruption in developing countries is harmful not to just economic development, but also to the realization of human rights and the attainment of sustainable development.

In the United States, the Department of Justice has stepped up enforcement of the Foreign Corrupt Practices Act in the last few years. However, most enforcement actions seem to be based on self-disclosure by the bribe-paying corporation and clearly only a very small percentage of those paying bribes are turning themselves in. The challenge is get to get more corporations to prevent the payment of bribes by their agents in the first place, and, if someone does pay a bribe, to disclose those actions. The recent case of the German company Siemens shows why this is such a difficult challenge. Siemens -- a conglomerate operating throughout the world and employing close to 500,000 people -- apparently had corruption thoroughly engrained in its culture. One report indicated that the company's own internal investigators identified over $2 billion in suspicious payments over the past several years. Apparently, these practices were so common that individuals at all levels of the organization either no longer questioned their appropriateness or felt powerless to oppose them.

Overall, we need to provide incentives for corporations to self-regulate, help them develop effective compliance programs that allow self-regulation to work, and find ways to help corporations like Siemens reform themselves. The legal, managerial, and ethical issues involved create many interesting and important research questions.

What implications do you see for industry?

Hess: Corporate officers recognize the business case for ending corruption. They see the costs that corruption imposes on operations and the damage it can do the company's reputation. Thus, there is a strong business case to end bribe payments. However, they also see their competitors paying bribes to win contracts. This makes it very difficult to ensure that employees refuse to pay when bribes are requested by customers and clients. It also means that collective action is required. All corporations must be committed to combating corruption and working together to solve this problem. Ending corruption is both pro-business / economic development and pro-human rights / sustainable development. Unfortunately, due to these collective action problems, breaking the cycle of corruption is a significant challenge and requires novel solutions.

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An example of Prof Hess' work is this July 2008 Working Paper called The Three Pillars of Corporate Social Reporting as New Governance Regulation: Disclosure, Dialogue and Development.

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Full post as published by The FCPA Blog on November 16, 2008 (boomark / email).