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TI Source Book 2000Chapter 16: The Private Corporate SectorHaving been involved in exporting to various countries in the Middle and Far East and in Africa, I have bribed government ministers and officials of all grades, in the form of cash payments, commissions, introductory fees, new cars, hospital treatment and so on for more than 40 years. If I were not now retired I would continue to do so. That is the way one does business in those places... |
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The private sector has a special role to play in the maintenance of acountry's national integrity--not only where corporations are based, butalso in the markets where they choose to operate. Corporations exist to makeprofits, and if they fail, their employees and those of associatedenterprises, suffer along with their shareholders. To make those profits,corporations have to live in the world the way it actually is--and not theworld as many of us would like it to be.
Fortunately, the traditional view that corporations exist solely to makeprofits for their share-holders--all that matters is a profitable bottomline--is giving way to a new sense of a wider corporate responsibility, notonly to customers and clients, but also to the communities and societies inwhich they operate. It also recognises that "people seem happierworking for organisations they regard as ethical [and that] in a boomingjobs market, that can become a powerful incentive to do the rightthing".[1]
Given the increasing role of the private sector in providing essential goodsand services, many of which for generations have been the preserve ofgovernment agencies, improved corporate responsibility is a powerful tool infighting corruption. With the passing of control to the private sector,accountability through Parliaments and Legislatures is, of course,effectively diminished, if not completely lost.
In this process, the private sector is coming to see itself more as a partof civil society than it has in the past. In the pursuit of profit, privatesector players are simply self-serving; however, when they address communityand society objectives and enter into coalitions with others to pursue awider public benefit, they are acting as a civil society member.[2]Corporations are increasingly seeking partnerships with relevantnon-governmental organisations, and in particular with TransparencyInternational. The views of major corporations are increasingly far-sightedand, in many parts of the world, there are arguably the highest standards ofethical leadership being demonstrated by business leaders. There is also achallenge here for legal systems. Courts in a growing number of countrieshave seen themselves as having an oversight role--through judicialreview--of the legality of public actions. As noted elsewhere, a whole bodyof law has been developed to act as a check on the abuse of public power.Similar jurisprudence is likely to become increasingly relevant forgoverning at least some of the activities of the private sector, where theseimpact on the public interest to a major degree.
Social Accounting is being increasingly recognised as a necessity, not justa desirable activity. Standards of corporate governance are being developedto provide greater protection, not only for corporations and theirshareholders, but for all those who have a stake in the success of theprivate sector, which includes just about everyone.[3]Legitimising "whistle-blowers" is also being recognised asimportant in protecting the public interest. Employees who raise matters ofpublic concern that arise in the course of their employment, but which theiremployers may be trying to hide, must be protected.[4]Examples include the health risks of company products, the presence ofunsafe signals on railway lines, not to mention the abuse and misuse ofpublic funds.
In parallel, regulatory structures are being developed in many countries,simply to impose standards and ensure that ordinary people are not beingexploited by monopolies and near monopolies.[5]The United States has been the leader in this area. Critics of the marketeconomy should reflect on the fact that in the USA, the Bell TelephoneCorporation was broken up on the insistence of regulators, simply because ithad been so successful as to be unduly dominant. It is a myth that under'capitalism', the market is everything and 'capitalists' are free to do whatthey wish. For a system of competition to work, it is crucial that dominantpositions are not abused (e.g. aggressively undercutting prices to drive asmaller newcomer to the wall, as was the case with British Airways andVirgin.) If the market-place is to serve the needs of all, then it must beeffective, efficient and fair--and above all, it cannot be corrupt withoutnegatively impacting on everyone. As well, actions within the privatesector, for better or for worse, impact on others within the sector. Forexample, when banks give neutral references for staff who they aredismissing for reasons of dishonesty, they are taking an easy way out.However, it is one which can lead to other employers hiring staff who theybelieve to be honest, but who are, in fact, the very reverse.
The activities of the private sector take place in two quite separate arena:transactions with the public sector and transactions that lie wholly withinthe private sector. What in the past have been traditionally seen as"public sector" activities are now increasingly passing intoprivate hands. As privatisation proceeds apace in many countries, theimportance of checking corruption in the private sector grows ever moreurgent. Activities in both arena need to be purposefully addressed.
Corruption of public officials is explicitly or implicitly illegal in everycountry which has a legal system, therefore it should not be an option forany private sector company. There is no difference in principle between alarge bribe given to a minister or top official ("grandcor-ruption") and a small bribe given to a junior official ("pettycorruption"). However, the practicalities of working in certaincountries may cause some companies to justify the distinction, describing"petty corruption" as being a "facilitation payment" toobtain what they are entitled to, for example, clearance of goods by customsor the connection of a telephone line. However, the directors of a companyhave a specific responsibility for ensuring that the company obeys allrelevant laws.
Corruption in the private sector is far from being as clear-cut as publicsector corruption. While some countries have laws explicitly criminalisingthe acceptance by employees of "secret commissions" or"kick-backs", many do not. Yet it is increasingly recognised thatsuch activities are criminal. The recipients of kick-backs within theprivate sector, or who exploit their positions to sell their employers'goods at a premium when in short supply, are effectively stealing from theiremployers.
As formerly publicly-owned utilities pass into the private sector,frequently in monopoly or near-monopoly situations, the need for individualcountries to ensure that any loopholes in this area are closed, becomes evermore compelling.[6]
Private sector bribery is pervasive in all parts of the world and innumerous industry sectors.[7]Given our global economy, it is as international in scope as public sectorbribery. Foreign bank accounts are widely used as repositories for privatebribes.
The Board of Certified Fraud Examiners asserts that trust, and abuse of it,is the cornerstone of occupational fraud, and it recommends striking abalance between trusting employees too much and trusting them too little.
It argues for:
The Board predicts a continuing rise in occupational fraud and abuse,arguing that the expansion of the use of computers has drastically changedthe speed of transactions and that they do not necessarily create thedocuments needed to detect fraud and abuse--although computers can, in somecircumstances, also be tools for detection.
Among the major areas where private sector bribery occurs are the following:
Internal concealment of bribes can lead to false accounting, false taxdeclarations and kick-backs to company staff. Furthermore, one of the mainprinciples of competitive tendering is that contracts should be won by thosecompanies offering the best combination of price and quality, with otherfactors such as delivery or financing terms sometimes being taken intoconsideration. Corruption is an unacceptable factor which destroys such freeand fair competition. It is also the case that corruption in themarket-place retards private sector development. New players are effectivelyexcluded, and inefficiencies are rewarded, rather than redressed.
Fraud, particularly in the area of financial management, is, of course, along-standing problem for the private sector no less than for the publicone. An example is the accountant who warned her superiors that abook-keeper was fiddling the books by raking money from the payments system.The book-keeper was prosecuted and sacked, but the company did nothing toimprove its management scrutiny. As a result the very same accountantstarted running identical scams, but for even larger amounts, writingcheques to suppliers who were, in fact, supplying herself.
In another instance, a company secretary started paying his bills withcompany cheques drawn on the directors' current accounts. Being careful touse the same wine merchant, travel agent and garage as the board, theswindle went undetected for a long time. Such malpractices are hard to spot,and even harder to stop. Controls are not breached, they are simplycircumvented.
However, bribery to obtain contracts is still the most frequent form offraud in the private sector, and probably more widespread than employersrealise. Simply having tenders evaluated by different people at differentstages is no real safeguard unless the procedures also prevent people from:
As procurement moves onto the Internet, so does fraud. However, theInter-net's electronic systems record all the traffic meticulously and thereare "data-mining" programmes which can unearth and exposesuspicious patterns. E-trade customer checks recommended in a recent reportinclude:
Procurement frauds range from creating cartels to faking invoices, but themost frequent is the kickback in exchange for a contract. As this iseffectively a "refund" on the price (but paid to the employee, notthe employer) it drives up the costs of business.
Private sector companies feel the pressure to bribe, on the grand corruptionscale, in three main areas. The first concerns certain countries,particularly in the developing world, where it can be very difficult foranyone to win a major government or parastatal contract without paying alarge bribe. This is normally done through a representative who receives apercentage commission when the business is secured. The commission is agenerous one, and well able to withstand the payment of the necessary bribe.A company may justify its action not only on the ground of 'businessnecessity', but also that it is merely conforming to local practice. If thelocal representative is not 'playing straight' with the principals, therehave been suggestions that they may inflate the amounts claimed as needed to"buy" a Minister or a head of government, and then either keep thesurplus for themselves or split it with corrupt elements within the salesstaff of the company on whose behalf the bribing is being done.[9]
The second point of vulnerability is that off-shore bribery is generallycondoned 'because everybody does it'. It may even be morally defended on thegrounds that the resulting business is saving jobs, regardless of the factthat it may be costing jobs elsewhere. The third factor comes into play whencompanies, seek to create work by offering very attractive bribes todecision-makers to approve unneeded purchases or projects.
The first two points discussed above have a sufficient element of truth inthem to satisfy the conscience of the company which is hungry for businessand does not consider itself legally bound to reject grand corruption as atool, particularly when used indirectly through a representative. Manycompany directors also feel entitled to shelter behind their ignorance ofthe company's operations, particularly its foreign operations. While thisposition is not supported legally, it is a widespread phenomenon and canlead a director to feel no responsibility to question the level of anoverseas representative's commission, even if it seems excessive.
If a company resident in Country A bribes an official in Country A, it iscommitting a crime. If the same company bribes an official in Country B, itis committing a crime in Country B. Is it also committing a crime in CountryA? If the company is American and therefore subject to the Foreign CorruptPractices Act (FCPA), there is no doubt about its criminality.[10]But until recently, if the company was not American and the entiretransaction took place outside its own country and through a third party, ithad generally not committed a crime in its own country.
This situation is now changing, and changing radically. Action at theOrganization for Economic Co-operation and Development (OECD) led to thesigning of the OECD Convention on Combating Bribery of Foreign PublicOfficials in International Business Transactions.[11]As described elsewhere, the Convention requires signatories to criminalisebribery of foreign public officials. It is accompanied by a raft of"soft law" requirements which parallel the "hard law" ofthe Convention, including a requirement to end the tax deductibility ofbribes as being a "legitimate business expense".
The Convention and its "soft law" recommendations are not beingleft on the shelves of justice ministries' law libraries. Rather they arebeing closely and vigorously monitored to see that each country's laws andpractices are adequate and effective. Arms control treaties apart, neverbefore has there been an international convention which has involved peerreviews, and teams of signatories entering the territory of others toexamine their practices and procedures. Much is at stake, and the forceful,authoritative forms of peer review provide reason to hope that theConvention will succeed. Certainly, anything less would have failed.
In the meantime, the private sector has to continue to go about its businessin an environment in which the rules are in a state of flux.
Directors should understand and accept their responsibility for keepingtheir companies within the laws of all countries where they operate, andplay an active and probing role in ensuring, wherever possible, that thespirit and the letter of the law are observed. It appears that grandcorruption in international transactions, which distorts competition and hasa restrictive impact on trade, will also offend the rules of the World TradeOrganization.
While there is no difference, in principle, between grand and pettycorruption, companies may be excused for believing that the difference ismore than merely a matter of scale. Grand corruption is intended toinfluence decision-makers in favour of one company against another, or tofavour one project or purchase over the alternatives. By contrast,"grease" or "facilitation" payments to minor officials(to do the work which they are already being paid to do, and to provideservices to which the company is legally entitled) are highly undesirable;but it is recognised that, in the real world, companies cannot always beexpected to adhere to the strictest principles on very small matters. Forexample, the American FCPA does not apply to "grease payments",although it certainly does not condone them. Huge shipments ofvitally-needed equipment may be stranded at the dockside, with customsofficials demanding small payments before they will release them.
This is a complex and contradictory area, and the dilemma will subsist untilthere are reliable enforcement procedures in the countries concerned. In themeantime, where companies accept, however reluctantly, that on occasionsthey may be victims of extortion and have little option but to pay, clearrules are needed to guide their staff. All such payments should be recorded,and any payment which is more than a very small one should requireauthorisation at a senior level to ensure that "grease payments"do not become a gateway for grand corruption. Above all, the companiesshould make it clear to all staff that these practices are not condoned.
As long as the position of bribes paid in international transactions remainsunclear in criminal and civil law, companies' voluntary codes of conductwill be important to set the tone for all employees and to indicate to thirdparties the standards to be expected from the company. Company codes varygreatly in strength. The least useful are those which are limited towell-intentioned, but vague expressions of principle. The most effective arethose which are specific in their descriptions of what employees are notallowed to do on behalf of the company. The best are those which are notonly specific, but also require an annual or six-monthly signature from thechief executive to confirm that they have been observed in every respect.[12]
However, it must be recognised that the best voluntary code is only aseffective as the com-pany's board of directors is determined to make it.Directors should take responsibility for monitoring the application andobservance of company codes, recognising that they can be an effective meansof discharging their liability for maintaining the company's legal and moralstandards. Large companies should ensure that there are ethics programmes tobreathe life and meaning into what are otherwise decorative documents: andthese should not be lectures on what to do and what not to do, but involvereal life situations and dilemmas, and active discussion among employees asto how these should be resolved. We return to the question of codes below.
It is understandable that, in the present situation of widespread grandcorruption and legal uncertainties, many companies seeking internationalcontracts are reluctant to risk losing business to those who continue to paybribes. All companies, however, can welcome the Anti-Bribery Pacts (orIntegrity Pacts) increasingly imposed by certain countries on tenderers formajor public contracts. In such Pacts, all the players start on a levelplaying-field so that the risk of a bribe is greatly reduced.[13]
There also appears to be considerable scope for international professionalassociations and federations to include a mandatory anti-corruption clausein their ethics codes, with expulsion from its membership as the sanctionfor non-observance. When such an association is strong in terms ofworld-wide membership, its members have relatively little to fear fromnon-members gaining an unfair advantage from bribery. For example, financialinstitutions could be expected to support members of an appropriateprofessional body against non-members.
Finally, private sector companies should recognise that grand corruption isthe enemy of high standards and efficiency. When the decision-maker isinfluenced by a bribe, opportunities are created for sub-standard performersto gain a contract at the expense of those whose product, reputation orskills would make them the likely winners of a fair competition.
One of the most compelling reasons for companies to review their ethicalbehaviour is likely to be that of self-interest. There is a growing body ofevidence which appears to indicate that companies which tolerate corruptionabroad by their employees are placing themselves at risk. "Off thebooks" accounts, secret bank accounts, payment of staff serving prisonterms and use of former senior staff as "middlemen" all cultivatean atmosphere in which the bottomline justifies criminal activity. This isinherently dangerous, and it may be only a matter of time before the companyitself finds that it is the victim of similar conduct on the part of itsemployees.[14]
In some countries the legal system does not yet permit the prosecution ofcorporate bodies for criminal actions, based on the premise that only livinghuman beings are capable of forming the necessary intention to commit acrime. The effect of such a prohibition can be to greatly reduce thepenalties that can be imposed, and to significantly increase the problems ofgaining the necessary proof of guilt: it may be obvious that a company hasbroken the law, but to successfully prosecute, a prosecutor will have toname specific individuals and prove that they were personally responsible.Even if these can be identified, they may have left the company's employ, oreven the country. In any event, any financial penalties would have to berelated to the individual's ability to pay--not to the company's, or to theprofit that may have flowed to the company as a consequence of the illegalactions. Where a prosecution is successful, a company may be left payinglegal costs for an employee, and continuing their salaries while they serveprison terms, but in reality these penalties may be insignificant when setagainst the profits being made.
If the company finds itself in court in countries that do prosecutecorporate bodies, how best can it defend itself when some of its employeeshave been violating the law? If the company has kept information aboutillicit payments to a small number of officials and away from the Board ofDirectors, whether the Board is aware of it or not, no judicial officer islikely to be impressed by the company management's claims of innocence.Legal systems increasingly demand that companies have internal complianceprocedures in place. In doing so, they are following the lead set by moreenlightened corporations.
The USA is assisting in this process. It has developed an excellent modelfor other countries to consider following--the Federal Sentencing Guidelinesof 1991.[15]The Commission which developed these Guidelines was originally establishedto examine the sentencing of individuals, but its greatest contribution tocriminal jurisprudence came when it examined the position of corporations.
Responding to research that showed that the median fine for a corporationaveraged only about 20 per cent of the losses that the offences had caused,the Commission decided that sentences should be governed by the kind ofcompany that was involved; in other words, the 'good corporate citizenship'of the company should be assessed. This decision is not intended to penalisecompanies for bad corporate behaviour, but rather to reward the good. If acompany is convicted of an offence, a fine would normally be about threetimes the size of the loss caused. However, where a company can prove thatit has an effective ethics program in place, the fine can be reduced by asmuch as 95 per cent.[16]
The (US) Federal Sentencing Guidelines state that:
The hallmark of an effective program to prevent and detect violations of law is thatthe organisation exercised due diligence in seeking to prevent and detect criminalconduct by its employees and other agents. The concept of due diligence comprisesseven steps:
There is considerable interest in these Guidelines and the ways in whichthey are fostering ethical behaviour and self-policing in the corporatesector in the United States. There is every likelihood that they will alsofind favour elsewhere, especially since the criminal responsibility ofcompanies is a difficult question in most systems of jurisprudence and thetrend is increasingly towards self-regulation.
It has also been suggested that businesses should undertake an audit of howethical problems are currently being dealt with, to test its behaviour bothagainst external standards and against its own declared values.[17]The European Institute of Business Ethics has developed a "DilemmaTraining Device" which helps organisations to address ethical issues,to discuss them and to find ways of using them to attain the objectives ofthe organisation.[18]
Can ethical companies compete in corrupt market-places? Is it ethical forthem to even try? Are they not courting economic ruin and risking the jobsand livelihoods of their employees? It has been suggested that, in generalterms, a business can be ethically justified in working in a culture whichhas certain unethical features when:
This argument points to instances where official complaints by groups ofcompanies have changed the practice of bribery in some countries and provedto be more effective than efforts by individual firms.
The experience of responsible US corporations also suggests that, even inunethical market-places, the fact that a government is dealing with acompany known to be ethical can, in itself, be a selling-point. "Dealwith us, the corporation is saying, and your own people will know of yourintegrity." US sales staff also claim that being able to quote theexistence of the USA's Foreign Corrupt Practices Act, and their company'spolicy of compliance, can be enough to sweep any talk of kickbacks andsweeteners from the agenda.
However, it would be simplistic to suggest that, in business, profits goonly to those who are ethical. The evidence is plain: large volumes ofbusiness are being won by companies through unethical behaviour which, insome sectors, has transformed competition from being one of competitiveadvantage to one of competitive bribery. It would, therefore, be unrealisticto ignore the impact of the FCPA on responsible American corporations, ortheir wish to see the same restraint applied to their competitors. It isalso the case that large corporations can be in a much better position to beable to walk away from a deal once corruption becomes manifest, than a smallcompany which has invested heavily in the project and has, comparatively,much more to lose.
Best practice dictates that private sector companies should:
Personal contacts in business, as in other walks of life, frequently findexpression in exchanges of gifts and hospitality. However, in business, whenpotential buyers and potential sellers come together, this can become aquestion of something rather more meaningful. The question can quickly ariseas to whether a gift is appropriate, and perhaps, whether it should bedescribed more bluntly as a bribe. For example, when a sales person worksfor a performance bonus, or needs to land an order to preserve his or herjob, the temptations to use all means available (including presenting"gifts" to clients) can be considerable.. It is thereforedesirable for companies to have internal policies and rules governing thegiving and receiving of gifts.
A draft "Gifts Policy" was developed by a firm of Danishconsultants after new management was introduced, who decided that it was inthe firm's best interest to contain practices which they felt were out ofhand. In general, "visible gifts", legal in the country where thework was being carried out, were considered normal business practice andsupported by the company, but "invisible gifts" were consideredbribes and not supported. The only exception to the latter was"unofficial fees to carry out necessary day-to-day duties in connectionwith contracted work (obtain permits, visas, telephone subscription,etc.)". In such a case, however, a note was required to be attached tothe expense claim, detailing the efforts made to avoid it.[20]
The International Chamber of Commerce's Rules of Conduct to Combat Extortionwere first adopted as long ago as 1977. They were revised and brought up todate in 1996 and again, in 1999. The ICC Rules go further than the minimumlegal requirements of many countries. If followed, the Rules would induce asea change in international business behaviour. However, the Rules are stillintended "as a method of self-regulation", and in the hope that"their voluntary acceptance by business enterprises will not onlypromote high standards of integrity in business transactions, but will alsoform a valuable defensive protection to those enterprises which aresubjected to attempts at extortion."[21]
Firms have been happy to sign up, but none have actually felt obliged toobey the Rules because the voluntary nature of the ICC reduces its abilityto police its members and to establish effective monitoring mechanisms.However, the ICC has been responding to criticisms by revisiting its Rulesand looking for ways in which they can be made effective. Understandably,the ICC (as an organisation with a voluntary membership and dependent onsubscriptions) remains cautious about the external monitoring ofcorporations' conduct.
At present Transparency International is undertaking a feasibility study onthe development of a private sector "internal integrity managementstan-dard", an exercise in which the ICC has participated.[22]This is being undertaken with a number of interested corporations, and NGOsfrom a variety of regions. The study is exploring the possibility of astandard which can, if particular companies wish, be independently verified.With a sharp focus on integrity, rather than a broad focus on corporategovernance, and an intention that the standard be verifiable, the initiativeis very different from the exercises underway in other fora dealing withareas of corporate governance and business accountability.
If much of the international activity described in this Source Book has onlycomparatively recently begun to show results, it nonetheless serves todemonstrate a clear and unambiguous recognition of the problem by developedand developing countries alike.
There is substantial debate over the extent to which corporate codesactually alter corporate conduct.[24]
Although codes have become increasingly popular with companies inindustrialised countries, they have by no means always been embedded withinthose organisations. The codes have often been seen as ends in themselves,not as a means to an end.
There have been various studies relating to corporate codes, but many simplyundertake broad surveys of existing codes, rather than analysing the essenceof what makes a code effective. In addition, much research relates toslightly different questions, such as whether general corporate ethicsprogrammes promote social accountability. Nonetheless, some studies do pointto possible factors which may contribute to the effectiveness of codes ofconduct.
One report, Ethical Concerns and Reputation Risk Management[25],focuses on the means chosen to implement business ethical norms, includingthe types of training they provide, which individuals play the greatestorganisational role in promoting business ethics, and whether stakeholdersare involved, rather than assessing the effectiveness of such efforts.
The report found that Values and Mission Statements and Codes of Conductremain the most widely used business ethics practices, with about 80 percent of companies implementing such programmes. These results representsubstantial increases over surveys conducted three years ago when less than60 per cent reported having codes.
Perhaps the most interesting finding of the report relates to the lack ofmanagement systems used to implement codes:
In other words, firms' senior management have tended to supervise thedevelopment of codes, and the codes have had a legal, rather than abehavioral focus.
Some 40 per cent of companies provided training only to selected employees.Of these, less than half related the training to practical application oftheir codes in realistic situations; and fewer still involved a sharing ofparticipants' experiences. Not surprisingly, the survey concluded that theaverage employee in most companies was not nearly as aware of the existenceof the code as were senior personnel.
The study also found that fewer than half of the companies surveyed hadhelplines for raising concerns or hotlines for reporting suspectedmisconduct--and 60 per cent of those with these facilities, reported no usebeing made of them. This is hardly surprising when significant numbers ofcompanies provided no protection for callers or for alleged offenders alike.
The report concluded that many business ethics programmes fail to reflectimportant principles, and that many organisations still grapple with how tomake their employees actually "live" their values and codes.
A different report, prepared by KPMG, on fraud among companies in SouthernAfrica, provides a different perspective on the most effective means ofcombating fraud.[26]Of the 540 companies which responded to the survey, 83% indicated that theyhad experienced an incident of fraud in the prior year. To reduce thepossibility of fraud, the majority of companies surveyed indicated that theywould review and improve controls (83%) and either establish a corporatecode of conduct (46%) or implement a comprehensive ethics program (32%). Therelatively low level of interest in implementing corporate codes or ethicsprogrammes suggests that at the very least, such measures are perceived asnot being particularly effective when compared to bolstering internalcontrols.
In a paper prepared for the 9th International Anti-Corruption Conference inDurban, South Africa[27],Ronald Berenbeim argued that while codes have become widely instituted incorporations, but they have not had the impact which they should have had.Surveys undertaken by his organisation[28]revealed that in nearly 80 per cent of corporations, the board of directorsis involved in the drafting of the codes--so they do not "belong"to staff as a whole. He notes that many corporate codes contain virtuallyidentical provisions prohibiting corrupt practices, and argues that internalcorporate procedures, which require disclosure and accountability (includingwhistleblower protections and other means of reporting of violations), areessential to an effective code.
Another somewhat different study prepared for the Business & Society Journalin 1999 concludes that their analysis did not demonstrate that good socialperformance "leads to" poor financial performance. The study showsthat determining precisely what constitutes an "effective"corporate code of conduct is a difficult question to answer. Does"effective" mean "people behaving ethically", or does itsimply mean that no major scandal has erupted? Or does it only mean that acompany is staying within the confines of the law?
The OECD, now highly active in the field of corporate governance, conducteda survey of 233 corporate codes of conduct in 1998. The survey was limitedto documenting the provision of the codes rather than analysing theaccomplishments or effectiveness of the codes. The results of the surveyindicated that the majority (82%) of codes covered the conduct of thecorporation itself, while comparatively few were codes extended to includethe conduct of contractors and sub-contractors (50% and 22% respectively).In terms of the norms articulated in the corporate codes, only 18% referredto international standards explicitly. Only one of the 233 referred to theOECD Guidelines for Multinational Enterprises, and just two cited the OECDRecommendation on Combating Bribery in International Business Transactions(the precursor to the Convention on Combating Bribery of Public Officials inInternational Business Trans-actions). Other codes merely referred to"international human rights" or "universal" norms.
In the companies surveyed, the monitoring of codes received relativelylittle attention. The majority provided for internal corporate monitoring,and some 40 per cent did not mention monitoring at all. Only a quarterprovided for corrective action, and very few stated that non-compliancecould or would result in termination of a contract or business relationship.
Also in 1998, the London-based Institute of Business Ethics carried out itssecond survey of the use of codes of business ethics. From the responses,the Institute estimated that 57% of the largest UK companies had codes ofconduct, compared with only 18% in 1987. There was wide divergence inapproach between communicating codes internally and externally. Nearly allcompanies (93%) gave their codes some internal communications support. Onlyone third publicised their codes externally. Fewer than half of thecompanies with a code provided training of any kind as to the meaning anduse of codes, and some 30% did not even furnish copies of the code to theirstaff. The results confirmed the impression that for many companies, thedrafting and introduction of a code are seen as being an end in itself. Inaddition, the report found that in many firms, management perceived staff assufficiently steeped in the ethos of the company that little or noinstruction on the practical use of the code was needed.
Generally speaking, research on corporate codes of conduct is incomplete.The research suggests that codes have, indeed, had some positive influence,but such a broad conclusion still lacks a firm empirical base. The researchindicates that the degree to which the code of conduct becomes"embedded", or a part of the corporate culture, will have somepositive effects on employee behaviour. However, determining precisely what"embeddedness" means in terms of organisational structures andmanagerial leadership, remains elusive. The key determinant in achievingorganisational adherence to a code appears to be training, monitoring andenforcement activities--another conclusion still more intuitive thanscientific.
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