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Corruption

What is corruption? As an adjective, corrupt is alternately defined as spoiled, tainted, debased, morally degenerate, etc. As a verb, it means to change someone’s morals and principles from good to bad. In a business setting, corruption is more correctly seen as engaging in an act to give one party an advantage that is inconsistent with the laws and regulations. And remember that corruption may not always be obvious, as these transactions are likely to be layered in such a way as to look like a consulting fee, a preferred supplier agreement, or an exclusive development agreement.

External Corruption

“Inconsistent with the laws and regulations” gives us a very wide playing field. First of all, under whose laws and whose regulations are we operating? Often a company will be dealing simultaneously with the regulations of their home country, which forbids corruption, as well as those of a country in which bribes are considered part of the cost of doing business, and where any company not willing to grease a few palms might as well pack up and go home. But be aware that countries are trying to curtail corruption. The LUBRINCO Group does due diligence and strategic partner location work in Central Europe, and we have been pleased to note increasing concern over the issue in that region. Indeed, by sheer coincidence, the lead story in the July/August 2000 issue of Business Central Europe  is on corruption in Central Europe.

Transparency International has developed a perception of corruption index, where 10 means no bribes are ever expected and 0 means they are always expected. Its survey using that index showed that Denmark gets a 10 and the United States a 7.5. On the other hand, China gets a 3.4, India a 2.9, and Indonesia a 1.7. The survey showed that 66 of the 99 countries studied scored 5 or lower.

So what we see is that a manager of a company is not only dealing with the issue of whether or not to pay bribes, but, also, what competitors are doing. These managers and decision-makers are facing a world where the demands and requirements for paying bribes are as significant as the penalties.

The danger from corruption is a multiple peril:

• You may lose business for not paying a bribe.

• You may suffer severe repercussions if you are caught paying a bribe, with both damage to reputation and significant financial penalties.

• You may gain an advantage if it is disclosed that a competitor is paying bribes.

• You may fall into business disfavor with regulators when you squeal on a competitor paying bribes to regulators.

Bribery is conducted behind closed doors. Since both sides are benefiting and both sides are subject to penalties if the bribe is disclosed, it is very hard to get reliable information on the players. Bribery also encourages dysfunctional relationships. It binds two entities or parties together that in other circumstances would likely have nothing to do with one another. Usually the only outward manifestation is that decisions and money are flowing against known economic interest. As someone said, “It’s like water flowing upriver — you can see it but you don’t know how it is happening.”

Internal Corruption

“As long as they pretend to pay us, we will pretend to work” is a Soviet-era saying about working for state-run companies. A company’s employees may accept external bribes for doing things they should be doing anyway, such as connecting power, turning telephones on, filing requests and bids on time, etc.

To see if any of your employees may be accepting bribes for doing their jobs, you should first look to their motivations for working, for example, to earn a paycheck, to make a difference, to provide shelter to their families. Work environments can vary from relaxed and cordial to brusque and professional, but as long as the employees believe they are being fairly compensated and fairly treated, they will act in a professional manner. Remember, it is the employee’s own internal and unique perception that matters, not the employer’s.

A case in point: A clerk was making $24 per hour sending out requests for proposals (RFPs) to subcontractors and stamping in the corresponding bids. This clerk was being paid about twice the average pay for similar positions at similar companies in the area, and was also the daughter-in-law of the owner. (Yes, it was nepotism, but that’s not our issue in this article.) She was always complaining about the long hours (even though she was paid by the hour) and the work load. She often said to other employees that she had been given better offers by other companies, but that she stayed on out of loyalty to her husband’s father.

Then she began collecting “fees” from the subcontractors. First, the subcontractors who wanted to receive the RFPs needed to be on the mailing list, which cost $50 per month per category on which they were going to bid.

Officially, these fees were to offset the new, more complete, packages being sent to the companies. Next, however, “mailing fees” were established. From these combined fees, her earnings quickly approached $10,000 per month in cash. She then hit upon a new scheme: “late fees.” Although all RFPs had to be submitted by certain date and time, the clerk was allowing some of the bidders to pay a “late fee” of several hundreds — or thousands — of dollars, permitting them to submit their bid late but still remain among those being considered for the project. Finally (and you probably saw this coming), she began opening the bids, calling those whom she knew were willing to pay bribes, and selling them their competitors’ bids. It got so bad that she was earning over $80,000 in cash per month in bribes!

As always, the gross public consumption of luxury goods was the first clue — particularly obvious since both she and her husband worked for the same company. Her father-in-law knew exactly what his employees earned, and he knew they could not afford the new Dodge pickup truck and a Jaguar convertible. When he asked how she got the money for the vehicles, the clerk said that she had won money at an Indian casino. The father-in-law, being suspicious, called the different Indian casinos and asked if his daughter-in-law had won $750,000. The answer was NO.

In the end, the clerk confessed the scheme to her husband and father-in-law and managed to keep her job. And in an effort to cleanse his company’s business practices, the father-in-law quit doing business with all the bribe payers as soon as he could.

The Bottom Line

Giving in to corruption is the same as saying one or all of the following:

• I want dysfunctional business relationships.

• I want suppliers that I have to bribe to work with.

• The reputational risk assumed with bribing people is fun.

• I like bidding in artificial markets where there is no economic reality.

• As a viable company, I like competing with nonviable companies that bribe customers.

• We seek business relations that are unhealthy, unstable, and unreliable.

Business exists to reward the managers, the employees, and sometimes even the owners. Engaging in unethical or illegal behavior is to risk an expense that could eliminate profits or cause the business to fail. As the legal, social, and internal penalties increase on the use of bribes to secure supplies and customers, corruption will have to be dealt with more effectively.

Sadly, in terms of “business penalties,” it is probably better for a company to pay a bribe than to be accused of environmental damages or lose a foreign contract. But this is changing because when a company publicly refuses to pay bribes — of any kind for any reason — they are no longer asked for bribes.

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