In my prior post on Collective Action, I wrote about the importance of voluntary codes of conduct and concluded that in an era of weak regulation, corporate behaviour would have been significantly worse over the last decades without them.
Still, one has to ask, why is it that the biggest corruption scandals in recent years have come from industries which have made substantial efforts to raise the game through codes of conduct? If you take any of the industries mentioned in my last post — defense, extractive, banking and pharmaceuticals — the names of companies associated with corrupt activities slip off the tongue with embarrassing ease: Finmeccanica, BAe, Weatherford, Barclays, GSK and the list goes on. These companies had mostly signed up to various codes of conduct in their industries and ethical standards in-house — they were market leaders, not companies who rejected the principles of fair-play.
The major difficulty with codes of conduct is how to set them up in a way that will guarantee the desired impact over a number of years.
Here is a case study which provides some useful lessons. The code of conduct was set up, but did not manage to significantly reduce corruption. For reasons of confidentiality, I won’t mention the country, companies or the industry by name.
About five years ago, a small number of market leaders in a high-tech industry supplying to the state sector in an emerging market agreed to set up a code of conduct.
The first hurdle was the intense distrust between the parties. There had been a history of bribery in the market, and at least one of the players had been “outed” and prosecuted. The companies with a clean track record were reluctant to talk with the companies that had engaged in bribery — it seemed to them that this was just a quick way for the company to restore its compliance credentials and whitewash the past. Thanks to a series of joint activities (such as those described in my earlier blogs), sufficient trust was built to enable the project to proceed.
The second hurdle was the fact that only the market leaders agreed to participate. They accounted for a majority market share, but the low-end importers and local producers who played by a whole other set of rules would not join the initiative. The fact that there were only a small number of companies with similar values enabled them eventually to reach agreement. But part of the market was not covered, potentially undermining the whole effort.
Even with common values, the starting points of the market leaders differed considerably. Some were highly compliant with FCPA, others did not believe that they were liable under U.S. legislation. For some it was a nice to do, for others, a have to do.
Furthermore, some companies were supplying directly to end users, bypassing third party distributors, whilst others were selling their products to offshore import agents set up by the client, a particularly high-risk strategy in terms of exposure to corruption. With such different distribution models, it was always going to be difficult to get a truly level playing field.
There was also a lack of agreement between the players about engagement with the government to reduce the risk of solicitation on the demand side. As a result, the government — as the client and the key source of risk of bribery on the demand-side — was never invited to participate.
Five years later, the code of conduct remains in place. Unfortunately, since the code was set up, there have been continuing accusations of foul play among the market leaders.
The lessons learned from this particular case study point to general challenges in setting up effective codes of conduct, especially in emerging markets.
The “Prisoners Dilemma” can be an instructive way of looking at it, as Mike Scher and Scott Killingsworth have recently pointed out. Companies are faced with the options of cooperating to raise the standard of business in their markets, or not cooperating. If they all cooperate, they are all better off because risks and costs are reduced. If none of them cooperate, it’s the law of the jungle, with increased risks and costs.
If a company believes that it will benefit more by not observing the rules of the code, they will “defect.” They will pursue this course of action since the rewards of winning a large deal by foul play are substantially more attractive than the costs of losing it because they have adhered to the rules of the code. For companies working under a voluntary code of conduct within a jurisdiction categorised by weak rule of law, the rewards may be too tempting to resist.
In my final set of posts, we will move to the top part of Collective Action pyramid — Integrity Pacts — to show how Collective Action can support self-regulation to improve market behaviour.
Brook Horowitz is a contributing editor of the FCPA Blog. He’s the CEO of IBLF Global, a not-for-profit promoting responsible business practices worldwide.