The Cost of Corruption

the cost of corruption

“Organizational corruption imposes a steep cost on society, easily dwarfing that of street crime.”
The Normalization of Corruption in Organizations, Blake E. Ashforth and Vikas Anand.

 
 
Organisational corruption is a serious and widespread issue that still plagues many industries today. Corruption is, in essence, the abuse of power, and in some cases, the inducement to carry out an illegal or dishonest act by means of a bribe. From the blatant – and stereotypical – cash-stuffed envelope handed over in exchange for a lucrative contract, to the more subtle undeclared conflict of interest arising out of a company acquisition, corruption can take many forms, but all are unacceptable for legal and/or ethical reasons.

But besides the ethical ramifications of corrupt activities, there is also the considerable effect of the cost that bribes and corruption can have on a company’s bottom line and reputation. Consider FIFA, for example. In 2015, executives from FIFA were charged on several counts of racketeering, wire fraud, bribery, and money laundering. The resulting scandal not only rocked the world of football, but also caused many of FIFA’s World Cup sponsors, such as Johnson & Johnson, Castrol, and Continental, to withdraw their support of the tournament. The result was a huge shortfall in sponsorship revenue (from $1,629m (£1,214m) at the 2014 Brazil World Cup to a forecast $1,450m (£1,085m) for the Russian World Cup) due to companies’ aversion to the reputational risk of being associated with the competition.

In this post, we discuss the different costs that can result from corruption, as well as the vital role of ethics and compliance training in nipping corruption in the bud. First though, we’ll take a look at how corruption is viewed in the EU and what this means for your organisation.
 
 
Attitudes to Corruption in the EU

In a 2017 European Commission survey, in which over 28,000 Europeans from the general public participated, there were some surprising findings in relation to attitudes towards and experience of corruption. Some of the starkest findings (using the EU average) were that:

• 62% view corruption as part of the business culture in their country
• 52% believe that the only way to succeed in business is to have political connections
• 12% personally know someone who takes or has taken bribes
• 22% consider it acceptable to do a favour in return for a service
• 68% think that corruption is widespread within their country

While it’s somewhat reassuring that the majority of respondents consider it unacceptable to do a favour in return for a service, it is still of concern to organisations that a large minority tolerate it – or possibly even pursue it. What’s more, with approximately one in eight people reporting to know someone who has taken bribes, it’s clear that corruption is still a pervasive issue and that companies need to strengthen their ethical culture, ideally by means of comprehensive anti-corruption and anti-bribery training. This, in turn, will help to avoid the potential costs associated with corruption, which are described below.
 
 
Three Types of Cost Caused by Corruption

Although corruption and bribery, in particular, is often thought of as a “victimless” crime, its consequences can be quite detrimental. The three main areas where corruption can have an impact are through loss of revenue/fines/reputational damage; low employee morale; and its effect on society as a whole.

Loss of revenue/fines/reputational damage: As the FIFA example demonstrates, corruption can lead to costs through reputational damage. But companies’ bottom lines can also be affected by fines and penalties. For instance, in 2014, French industrial group Alstom paid over €660 million in fines for falsifying books and records as well as for bribing officials to win power and transportation projects across the globe.

However, in addition to incurring direct fines for committing acts of corruption, companies may be liable to penalties for not having proper anti-corruption and anti-bribery controls in place. In February 2018, UK company Skansen Interior Limited was convicted under the Bribery Act of having inadequate procedures to prevent a case of bribery, with the lack of specific staff training being a key factor in the decision.

Low employee morale: According to research carried out by George Serafeim, Professor of Business Administration at Harvard Business School, one of the biggest costs of bribery for an organisation is the negative employee morale it causes. This is important because it has been found that high-morale companies perform much better – especially on stock markets – than companies that report low morale.

“Bribery is more costly than you might think. If you think of the cost as just fines and regulatory actions, you’re missing a big piece of the puzzle.” – George Serafeim

Serafeim’s findings also suggest that if bribery is committed by a senior executive, it has a much more significant impact on morale than if it were committed by someone in the lower echelons of the company. The message is clear: organisational leaders are role models for employee behaviour and must be seen to be taking the higher moral ground on corruption.

Effect on society: Corruption can affect society in numerous ways. If contracts are awarded to second-rate suppliers, it can lead to substandard products, services, or infrastructure; improper awarding of contracts can also stifle vital competition in an economy and reduce the level of foreign investment; environmental protection measures that are overlooked or waived may further contribute to climate change; and lastly, corruption may undermine a country’s ability to redistribute wealth, causing greater poverty and inequality.
 
 
The Role of Ethics and Compliance Training in Preventing Corruption

A crucial aspect in the fight against corruption and bribery is the presence of a corporate culture of ethics and compliance. And central to this achieving type of culture is the implementation of compliance training programmes that have a strong ethical component. Anti-corruption and anti-bribery compliance training courses are fundamental to explaining the policies and practices that employees must follow in order to be legally compliant. They point out possible risks, such as facilitation payments, which could be seen as a bribe, and clarify what each person’s role and responsibility is in preventing corruption.

However, as discussed in a previous post, some compliance courses may have grey areas (such as the difference between personal and business expenses) that are open to interpretation – or even exploitation! In these cases, employees need to understand the moral underpinnings of compliance policies and procedures. That’s why these courses should also incorporate ethics training that explains a company’s values and standards for behaviour and that highlights how corrupt activities can be reported.
 
 
For more information contact ncullen@interactiveservices.com

By Neil Cullen (Director, Compliance Learning, Interactive Services)