Carrots Before Sticks: Motivating Mid-Sized Businesses in Emerging Markets to Launch Compliance Programs

Article at a glance:

  • Corruption is primarily an institutional issue and combating it requires proactively preventing corrupt practices through supply- and demand-side reforms.
  • Collective action and anti-corruption compliance are practical approaches that reform-minded businesses can use to build a critical mass of companies committed to operating with integrity.
  • Companies in emerging markets can greatly benefit from improving their anti-corruption practices, which makes them more attractive business partners in global value chains.

This article is based on a presentation given on October 4, 2015 in Las Vegas, Nevada at the Society of Corporate Compliance and Ethics’ 2015 Annual Conference held October 4-7, 2015. To listen to the full presentation, order the recording here.

Introduction

The Center for International Private Enterprise (CIPE) supports good governance practices and strengthens anti-corruption compliance in emerging markets around the world. Anti-corruption standards such as the United Nations Global Compact Principle 10, domestic laws, and laws with transnational reach, including the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act, all support integrity in international business transactions. There is also a strong business case for combating corruption at a firm level. Companies that reduce risk through strong anti-corruption compliance programs enjoy higher valuation, stronger brand reputation, and a competitive advantage in the global marketplace. Yet, companies in emerging markets often lack the resources to ensure compliance in their daily operations, thus losing out on opportunities to join global value chains. CIPE offers the tools to bridge this gap.

CIPE conducts programs and training workshops in countries around the world to help companies operationalize the principles of responsible business conduct. CIPE works to strengthen the compliance programs of local firms according to international best practices. As a result, these companies manage corruption risks better and become more attractive business partners in global value chains.

Corruption is a global problem: it occurs everywhere to different degrees. Importantly, corruption is an institutional issue, not just a transactional one. Consequently, naming and shaming or attempting to discern the ethical and moral qualities of a person who succumbs to corruption is not particularly helpful in finding systemic solutions to corruption problems. CIPE is instead interested in reforming the institutional structures that enable corruption. The key questions are: 1) What are the legal, regulatory, and other institutional factors in a country or in a particular company that create perverse incentives for people to engage in bribery? and, 2) What can local businesses in emerging markets do to demonstrate a credible commitment to integrity in their operations?

The Role of Mid-Sized Enterprises in Addressing Corruption

Business is not the sole contributor to corruption problems. If a government official is asking for a bribe, then the demand will be met in many cases, especially if it crosses into the realm of extortion. A business paying a bribe is also a victim of corruption: no business wants to have to pay a bribe or be extorted. Therefore, CIPE focuses on how businesses, acting in their own self interest, can be part of the solution.

Small and medium-sized enterprises (SMEs) are often easy victims of corrupt officials and, some companies, especially smaller ones, find it difficult to fight back when refusing to pay a bribe may result in the end of their business. Still, while many SMEs are large and resilient enough to resist paying bribes, they typically lack sufficient resources to translate their commitment to anti-bribery into a robust compliance program. They do not have the money to pay a law firm or a consulting firm to help with setting up such a program, and they often have a poor understanding of how to customize a compliance program to align with their sector and size. What is more, in the emerging markets were CIPE works, few SMEs are aware of legislation such as the FCPA or the UK Bribery Act. These laws can expose emerging market firms’ foreign business partners to prosecution because the foreign business partners are accountable for corruption that takes place in their own global value chains. If the emerging market companies can be reached with the right tools and support – and that is CIPE’s focus – the potential for reducing corruption is immense.

This is an important moment in time to be working on anti-corruption compliance because there is a critical mass of countries around the world that are putting in place foreign corruption practices legislation – such as Brazil, Canada and even China. Consequently, more multinational corporations are demanding compliance from third-party actors in value chains. This impacts mid-sized enterprises in emerging markets.

The following are four case studies which detail CIPE’s anti-corruption work in Russia, Kenya, Thailand, and Ukraine. CIPE’s approach differs depending on the local context but always relies on local business partners – business associations, chambers of commerce, and other private sector organizations such as institutes of directors – to advocate and implement stronger anti-corruption practices and mechanisms.

Russia

In recent years, Russia has become such a corrupt environment that some government entities have taken on roles traditionally played by organized crime. At the same time, Russia remains a profitable market for multinationals, especially in the consumer and energy sectors. Multinationals operating in this environment face serious anti-corruption compliance concerns.

Russia has a new law on corruption, Article 13.3 of a broader 2008 Law on Combatting Corruption. Article 13.3 was introduced in 2013 as part of the country’s bid to join the Organisation for Economic Co-operation and Development (OECD). It requires all legal entities to develop and implement measures to prevent corruption. Other reforms were introduced as well, such as establishment of a business ombudsman who can hear complaints from the business community and act on them. The Russian anti-corruption law is now quite good on paper, and reasonable in terms of taking into account the size of the company putting in place a compliance program. However, the laws and policies are not implemented evenly and are mostly “window dressing” that the Kremlin has put in place to mollify entrepreneurs who are adversely affected by the corrupt environment. Yet, in a restrictive environment like Russia’s, the very fact that the Kremlin is talking about corruption as a problem opens up space for non-governmental organizations (NGOs) and businesses to act when it comes to anti-corruption.

In 2014, CIPE analyzed how 15 regional chambers of commerce could provide compliance consultancy services to local companies. CIPE’s approach in Russia was to train compliance consultants who would then work in the chambers of commerce and provide low-cost advice. The chambers are now actively working in this area, providing services such as hotline hosting, model policies and procedures, and compliance education and training. There is demand from member businesses because prosecutors are starting to enforce the anti-corruption law, even if the enforcement is sometimes selective and politically motivated.

Early in the program, CIPE engaged with multinationals such as ABB, Johnson & Johnson, and Pfizer, several larger Russian companies, and international law firm Baker & McKenzie for advice on local needs and best approaches to helping local companies with their compliance challenges. Working with these organizations, CIPE formed an advisory group for Russia, and this signaled to local firms participating in the CIPE program that if they wanted to do business with multinationals, they had to pay attention to compliance.

The case of Russia is an illustration of how CIPE must be flexible as the local context changes. CIPE recently left Russia and closed its office in Moscow because of the worsening political situation in the country. Encouragingly, though, the chambers of commerce are moving forward with the compliance efforts even without continued support from CIPE. Their motivation is two-fold: to fulfill the government’s mandate for anti-corruption compliance programs, and to make compliance a sustainable fee-based service for chamber members and other local companies.

Kenya

The 2010 Kenyan Constitution included strong provisions for anti-corruption, and corruption remains a heated topic in domestic debates, which are widely covered in the media. For instance, a recent Auditor-General’s report included figures showing that a large portion of the national budget is unaccounted for, or not very well documented. Similar problems are happening at the regional level, since one of the provisions of the 2010 Constitution was devolution that gave more power to the country’s 47 counties. The counties receive some transfers from the national budget but they also need to raise revenue. This puts a lot of pressure on businesses because county government officials target the local business community in order to raise funds.

While the large number of incidences of corruption that come to light is certainly not a good thing, an open discussion of these cases demonstrates a recognition of corruption as an important issue. Debates on how to combat corruption also generate constructive ideas on what key stakeholders can do – the government and the private sector alike.

Progress is visible on the public sector side. President Barack Obama was in Kenya in July 2015 and signed a comprehensive agreement on fighting graft. The U.S. is sharing anti-corruption resources with Kenya, training government officials, and helping with investigations. Kenya also made commitments to join international initiatives such as the Extractive Industries Transparency Initiative (EITI).

The private sector is making strides as well, and that is where CIPE contributes. For many years now, CIPE has been working in Kenya with local business organizations to address business climate issues and the demand side of corruption. CIPE’s work helps identify and reform laws, rules, and regulations that may inhibit business and create perverse incentives for bribery. More recently, due to interest from CIPE’s local partner, Kenya Association of Manufacturers (KAM), CIPE is focusing on anti-corruption compliance.

KAM is one of the largest business organizations in Kenya, with over 800 members that have a presence throughout the country. KAM is also the secretariat for the United Nations Global Compact Network in Kenya. The Global Compact helps create a critical mass of companies that have committed to Compact principles, including Principle 10 on anti-corruption. Last year, KAM also cooperated with KPMG and the British High Commission on publishing case studies of local companies committed to improving integrity in their operations: AAR, East African Breweries, Kapa Oil Refineries Limited, and Safaricom. The companies conducted a self-assessment of their own anti-corruption compliance programs, sharing best practices, and lessons learned.

These and other local companies have shown a lot of interest in strengthening their anti-corruption compliance. CIPE is currently exploring next steps with KAM on how to provide practical tools and anti-corruption compliance training to local companies.

Thailand

CIPE’s focus on the supply side of corruption and what companies themselves can do internally or collectively, regardless of what the government is doing to combat corruption, started in Thailand back in 2010. CIPE partnered with the Thai Institute of Directors (IOD), an organization formed in the 1990s in response to the Asian financial crisis and the demand for more qualified, better trained corporate directors. CIPE helped IOD expand into anti-corruption work as a natural complement to the focus on sound corporate governance. Working with IOD, CIPE created an integrity pledge that interested companies sign. The next step is a training and certification process where companies commit to specific compliance measures they need to adopt. The pledge also includes a third-party audit (as a part of the routine financial audit) of whether or not businesses implemented these commitments.

At the start of this project, IOD surveyed local business on key corruption issues. Bribery, political favors, and other forms of corruption were at the top of the list. Subsequently, CIPE and IOD brought together like-minded businesses to act collectively in taking a stand against corruption. When CIPE first started work in Thailand, the main form of collective action was integrity pacts tied to government procurement. Typically, a civil society monitor ensures that parties abide by their commitments to the clean procurement process. Integrity pacts are valuable, but they are transaction-based and the costs associated with them are high because of the time and resources needed to structure the deal and to have independent monitoring. CIPE suggested that IOD consider other forms of collective action that would make it more accessible to a larger group of companies and apply integrity principles more broadly to how businesses operate in their daily work.

Collective action in the form of an anti-corruption business coalition gives credibility and strength to the CIPE-IOD initiative. There is strength in numbers, and the momentum created by more and more companies joining the coalition, currently over 500-company strong, has generated a snowball effect. Larger companies, both multinationals with a presence in Thailand and Thai companies, were the first to join because many already had good compliance mechanisms in place. The program provided these companies with a recognition of their efforts, and a platform to improve their compliance programs in specific areas. Mid-sized companies joined, as the initiative grew, in order to learn from their peers.

All participating companies sign an integrity pledge, undergo training and, upon enacting internal compliance mechanisms, eventually receive certification that their business has an anti-corruption compliance program in place. The training and certification revolve around 71 questions that address internal anti-bribery policies and procedures – specifically whether the policies and procedures exist and are implemented in practice. Compliance is then verified through an external audit as a part of each company’s regular financial audit. This is a unique and effective approach that makes the integrity pledge more meaningful and fully actionable.

Ukraine

In Ukraine, a series of political events in the past few years have put in place a new president, and a new parliament. One of the top priorities that voters have for these new leaders is to fight corruption. Polls show that, just behind the military conflict with Russian-backed separatists, corruption is the number one issue of concern to the Ukrainian public. Ukrainian citizens have consistently shown themselves ready to put their lives at risk to address corruption. This is an unusual situation in the former Soviet Union where often the populace remains quite passive. Meanwhile, the government desperately needs the billions of dollars the development banks and international lenders can offer to be economically viable.

The free press in Ukraine is extraordinarily effective at revealing corrupt schemes, and international and domestic NGOs are also extremely vocal about corruption issues. However, politicians have yet to demonstrate real political will -despite enacting laws that meet international anti-corruption standards. These laws provide public oversight, transparency, and periodic review of the performance of the agencies by the Anti-Corruption Bureau. However, Ukraine is still missing an effective Prosecutor’s Office, which to this day remains in the hands of corrupt elites and is reluctant to take anti-corruption enforcement actions.

Ukraine is a great case study highlighting how one can have in place all these different elements pushing for anti-corruption reforms – the vast majority of the public wanting change, tremendous pressure from overseas – and yet certain immovable forces block progress. Ukrainian businesses are not waiting for the government to take action. Instead, with CIPE’s assistance, they are seeking ways to advance integrity through their own actions.

The new anti-corruption laws lay out what the responsibilities are for business. CIPE conducted a pilot training program in the city of Dnipropetrovsk for company executives and legal officers on implementing compliance programs. With assistance from Baker & McKenzie, CIPE has been training executives in what anti-corruption compliance is and what steps companies need to take to be compliant. While at the moment the prospects of attracting foreign investment in Ukraine are not good, once the conflict in the east is resolved, these companies will be ready to partner with multinationals on bringing much-needed investment into the country.

Going forward, CIPE will also focus more on state-owned enterprises (SOEs) because of the important role they play in the Ukrainian economy and because they face significant corruption risks. Without instituting better governance and stronger compliance measures, SOEs are ill-prepared for the upcoming privatization process meant to bring new funds and modernization to the economy.

Conclusion

Corruption is an institutional issue which requires engaging a range of stakeholders including business associations, chambers of commerce, governments, and civil society organizations in order to change existing incentives and practices. While the points of leverage differ depending on the country, CIPE has identified practical approaches for addressing systemic corruption issues by engaging the private sector in emerging markets.

First, collective action led by private sector organizations provides more traction to anti-corruption efforts than any business acting alone. CIPE’s work in Thailand has shown that holding companies accountable for their anti-corruption promises through certification and third-party audits can greatly assist the advancement of collective action.

Second, governance and compliance programs can be tailored to fit the size and sector of a business, as long as the company understands the business case for compliance. Compliance programs offer benefits beyond anti-corruption: attractiveness to multinational partners, stronger management practices, and better reputation. Compliance education training, such as that offered by CIPE in Kenya, Russia, and Ukraine, can demonstrate to local businesses the benefits of preventing corruption.

Finally, emphasizing the benefits (“carrots”) of strong compliance programs tends to work better than threatening to penalize non-compliance (“sticks”) as an incentive for companies in emerging markets to put in place a compliance program. This approach also helps to bridge the gap between what multinational companies are doing to push good anti-corruption compliance practices through their value chains, and what local businesses are doing to improve the environment in which they operate. There are considerable synergies there, and business associations, chambers, and other local private sector organizations are well positioned to capitalize on these synergies to improve both company-level compliance and country-level governance.

To learn more about CIPE’s anti-corruption work download Anti-Corruption Compliance: A Guide for Mid-Sized Companies in Emerging Markets and visit CIPE’s Corporate Compliance Trends blog.

Frank Brown is the Value Chain/Anti-Corruption Program Team Leader at the Center for International Private Enterprise (CIPE), a non-profit affiliate of the United States Chamber of Commerce based in Washington, DC. Brown is leading the development and implementation of programs focused on innovative approaches to reducing the corrupt practices of firms in emerging markets. Working with European and U.S. compliance officers as advisors, Brown launched the program in Russia in 2013 at an international conference, at which Western compliance officers and a former SEC litigator presented to Russian compliance officers the necessity of anti-corruption compliance programs in order to join international supply chains. Prior to joining CIPE, Brown spent 15 years as a journalist, the last 11 of them based in Moscow, where he was the bureau chief for Newsweek magazine. Over the course of his journalistic career, Brown reported on conflicts in Russia, Serbia, Kosovo and Sri Lanka, as well as on business, politics, and religion.

Anna Kompanek is the Director of Multiregional Programs at the Center for International Private Enterprise (CIPE), an affiliate of the U.S. Chamber of Commerce based in Washington, DC that works with chambers and business associations around the world. As a part of this work, she has been leading several CIPE initiatives to combat corruption in global value chains in Kenya, Pakistan, and Ukraine. She has also authored and co-authored numerous publications addressing the challenges of anti-corruption reforms around the world, including CIPE's Anti-Corruption Compliance: A Guide for Mid-Sized Companies in Emerging Markets. The guide is meant to help local companies think about anti-corruption compliance as a strategic investment and take concrete steps to introduce or strengthen their internal compliance programs. Prior to joining CIPE, she worked as a business consultant in her native Poland on the issues of competitiveness and market entry in Central and Eastern Europe, and in Washington, DC on industry benchmarking and corporate strategy.

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