Global war on graft shifts to private sector and how firms can eliminate rot

The United Nations Global Compact is an initiative to encourage businesses to voluntarily adhere to ethical standards.

Launched a decade ago, the initiative now has about 7,700 corporate participants and stakeholders in 130 countries, including 297 firms in 29 sub-Saharan African nations.

Africa Renewal spoke with Executive Director Georg Kell about the Compact’s anti-corruption work.

The Global Compact adopted its 10th principle, on fighting corruption, in 2004. In much media coverage of corruption and in some official anti-corruption programmes, there seems to be an assumption that corruption primarily concerns the public sector. Yet you focus on the corporate world. Could you discuss corruption as it relates to both the private and public sectors?

Often there is a blame game. The private sector blames the public sector. The public sector retorts that it is the private sector which is the initiator. The truth is that there is supply and demand and both are complicit.

But it is also true that the more the involvement of government in economic activity in general, the higher the degree of abuse of power and corruption. Several recent reviews have confirmed that.

In principle, if the rules of the game are clear and they are enforced strictly, if there is a distinction between private sector competition on the one hand and rule making and government entities on the other, then there is less opportunity for corruption.

Corruption, experts agree, is a systemic issue which involves society as a whole. It involves both private and public sectors. It involves education, the basic economic system, the regulatory system, how the economy is run and more generally the ethical values which are in place.

Some analysts of corruption in developing countries argue that it is a question of too much government involvement. Others that the involvement is not of the right kind. In Africa, the state is generally very weak, with little effective regulation. Can you comment?

The perfect balance between regulatory efficacy on the one hand and private sector entrepreneurial-driven activities on the other hand is always the ideal.

I don’t think there is one size that fits all. Different economies have come from different historical trajectories and are defined in different ways. But one can say that the clearer the rules of the game and the better that regulation actually works, the less corruption there is.

In most countries today, since the adoption of the UN Convention Against Corruption [in 2003], corruption is subject to criminal law. The problem is effective implementation. That is true not only of corruption but also many public domain issues, be it environmental issues, health and safety and so forth.

The efficiency of public institutions in enforcing and implementing what governments at the highest level have ratified is partly a function of institutional capacity. But it is also a function of priority setting, what is considered important.

What is new today, unlike 10 years ago, is that business is actually calling for clear signals on the rules of the game. Ten years ago, business would pursue a purely liberal agenda and argue that any form of regulation is bad. Today that is no longer the case. They say that we need technical standards that reward good, efficient policies and practices. They say that if corruption enforcement is not working well, not much else will be working either.

Do African businesses share that view?

I was recently at one of our regional meetings of African Global Compact networks — and we have networks in about 15 African countries. To my amazement, all business leaders, irrespective of the country, when asked what their priority was, said that it was reducing corruption and creating an enabling environment for obtaining a license to import, export and so forth.

It is always about payments. They said, “We have to pay so many institutional players and these transaction costs hold us back.” So, corruption is considered priority number one by African business leaders.

They may not say that in public, because they depend on the hand that feeds them. But when speaking as a collective voice they make it very clear that corruption is a serious problem that holds them back. Less corruption and more institutional support would make them more competitive and they would grow faster.

How do you convince a company to stop paying bribes, especially in countries where corruption is widespread and many other companies are also paying bribes or kick-backs in order to get contracts?

This is the basic dilemma. If I as an individual say no to bribery, extortion and corruption and then my competitor gets the business, I will suffer a disadvantage.

The answer to that is two-fold. We must work at a policy level to improve the situation. In the country where I was born, Germany, bribery was basically tax deductible until a few years ago. Only recently have Germany and other OECD (Organization for Economic Cooperation and Development) countries gotten serious about corruption.

But at the corporate level, how do you convince individual companies?

The only way forward is what we call collective action. You mobilize a number of like-minded companies that all agree they would be better off if there is less corruption.

None may want to take the first step. But if you manage to motivate them to act together, at the same time, and possibly with public policy counterparts, then you have a good chance of making a difference. We have done this already in a few countries. One is Malawi.

Have you noticed any differences between foreign firms and national companies?

Foreign companies from the OECD countries are often scrutinized quite closely back home, by shareholders, legislators and the media. So even small infringements can cause quite a scene. African companies face material challenges, including how to improve the regulatory environment, how to overcome deficiencies in energy, transportation and so on.

The focus may differ, but often the process of finding solutions can be very similar. In our individual country networks, often local companies are the majority. But we always favour a mix between the foreign and local, because most of the learning happens through them being together.

African governments are often very eager to attract foreign direct investment (FDI). In the process, are they sometimes less vigilant than they should be?

My colleagues in UNCTAD (UN Conference on Trade and Development) recently developed an argument that there is a risk that countries underbid each other in trying to attract FDI and therefore end up losing their bargaining sense.

To what extent that is true is hard to see. But given the need to create employment and to improve the standard of living for a large number of people, one can understand the desire to attract FDI. With Asian countries, especially China, now major players, that increases the potential supply of investors overall. That is a good thing for African countries, as they have more choices now and hopefully their bargaining position is being strengthened through that.

You mentioned China. There have been criticisms from some in the North that China and India are coming in as investors and sometimes as donors, but not following the same kind of transparency standards that the OECD requires of its members. Does the Global Compact work with state enterprises from China and India?

We are very proud of our strong networks in both China and India. It is quite amazing how fast the learning occurs, and the willingness of major companies of these countries to embrace the compact and its philosophy.

We have for example a network in Sudan, with a strong participation of Indian and Chinese companies. No other companies could do better. Clearly massive investments were made, and when that happens things sometimes go wrong. But the infusion of capital is very welcome, because much of it goes into infrastructure, transportation and the like, which would otherwise not happen.

Reports about large-scale corruption in Africa often point to the role of foreign banks, in helping corrupt rulers deposit their spoils in hidden offshore accounts. The recent global financial crisis has also exposed the rot in many financial institutions. How does the Global Compact view such problems with banking institutions?

The financial crisis was a wake-up call to many. It has driven home the message that long-term value creation and short-term profit maximization are not necessarily the same. The heightened legal scrutiny, whether it is of tax evasion, the abuse of power or corruption, is most welcome. Having a clean finance sector that is not a hand maiden for the abuse of power is of critical importance.

In looking at anti-corruption initiatives in Africa, one often finds that civil society organizations and the media have played key roles. Do you find that it is easier to engage firms in states where there already have been open discussions about corruption?

The notion of transparency and the engagement of different actors is very important. The deeper meaning of fighting corruption is transparency. The more open societies are and the more information flows are supported, the easier it is for this anti-corruption agenda to be taken up.

How does the Global Compact’s anti-corruption agenda relate to its other goals?

Our 10th principle is our most fundamental one, because at its core it means good governance at the corporate level. You cannot achieve clean environmental performance, you cannot achieve good human rights respect if you do not have a clear notion of transparency and disclosure, and clear rules of the game under an ethical framework. It is very fundamental.

On anti-corruption, I am very optimistic that a growing number of companies are embracing this agenda. Not because they are worried that they may be caught and found not to be in compliance. But rather because being ethical does pay off.