How corruption spreads like a virus and what you can do to stop it from infecting your company

20/10/2015

Corruption is a virus

Corruption is a virus

Philosopher and novelist Ayn Rand recognized in her masterpiece “Atlas Shrugged” that corruption leads to the interference of trade and, eventually, to a doomed society.

Several different studies and articles confirm the negative consequences and costs of corruption for a country.

But it does not stop there. As business is part of society, corruption also dooms companies.

The known corporate corruption cases of the past show that it is impossible to control bribery and limit it to just one area or region. Even if corruption is practiced only in receptive sectors and/or countries, it is not a sustainable business strategy.

The infection can begin with one simple bribe

Companies are like living organisms that can be infected by the virus of corruption.

Similar to a viral contagion, corruption will spread throughout an organization if not treated intensively at the onset of symptoms with an antibiotic called “zero tolerance.”

To illustrate this point, let’s imagine that a sales employee pays a bribe to a procurement person at a potential customer’s company to ensure a project win. From this point in the decision-making process, the combination of price and quality plays only a subordinate role.

The winning factor is the bribe.

Inside the selling company, the impact is a decline in the importance of production and project management relative to sales. Management attention and employee focus shifts to sales, as this function is considered most valuable for the company.

In this situation, the selling company ensures business by strengthening relationships through illegal payments.

Production and project management employees are less motivated, as they feel they are no longer valued.

In response, these teams produce lower-quality work. Poor motivation leads to a decreased sense of employee loyalty, which can result in higher rates of theft, sabotage, internal fraud and employee turnover.

Meanwhile, management loses interest in how tasks are achieved, preferring instead to focus only on sales results.

The virus easily spreads from department to department

The growing infection soon spreads to the procurement department. As the internal priority is clearly the “successful” sales department, procurement loses its independence and is now advised by sales.

Procurement is pushed to use certain providers, based on whether the bribery model requires a third party or if the supplier is a family member of the prospective customer. As with the production team, we find the same effects of employee demotivation.

Corruption is not part of a culture, but a learned behavior often used to create a shortcut through complex legal environments. Many companies have an extensive system of guidelines, policies and tools.

Employees who see that bypassing external laws is acceptable corporate behavior may also assume this practice applies to internal regulations.

Conflicts of interest can increase, as internal connections become more important than the quality of employee output.

A common result is that talented employees offered the opportunity to work elsewhere will leave, while less talented employees remain.

In addition to the psychological effects on employee behavior, corruption also affects transparency and internal processes.

Winning a project with a bribe sends the wrong message to the development team, as they can only analyze the relationship between price and quality to the project win rate, but cannot include illegal payments as a key factor.

The infection starts effecting quality of work, competitive edge

Due to this hidden information, the development team wrongly concludes that the company’s solutions are competitive and that investment is unnecessary. In contrast, competitors that work with full transparency foster the development of better solutions.

Over time, the company that succeeds because of bribery loses its competitive edge. To compensate for this weakness, it has to increase the size of bribe payments – a situation that the potential recipients exploit.

Eventually, the bribes are not large enough to justify the difference in competitiveness. And if a significant number of talented employees have left to work at another company, it will be difficult to switch strategies to foster the development of superior products or identify less costly production methods.

By this time, the virus has also infected the bribed company. Because of bribe payments, the procurement employee has selected a sub-optimal solution for the company. Now this company is not using the best and/or the most cost-effective materials for its own production.

It becomes less competitive and no longer offers attractive solutions. A sales employee working for the bribed company needs to find another factor to win business, and may be tempted to offer a bribe.

You can kill the virus

If we see a company as a living organism, then some kind of preventive treatment should be prescribed for this disease.

Compliance workshops can work much like vaccinations. With relevant case discussions and role-playing exercises, employees can learn about potential situations they could face, how to react, and what consequences could occur.

Like an antivirus, this knowledge stays inside the employee and can be activated when needed.

Bureaucracy provokes corruption and vice versa.

To avoid this downward spiral, a company should establish internal processes that are as simple as possible to ensure transparency and employee accountability. Compliance Officers cannot do their jobs only from behind closed office doors.

They must be easy to reach and well-known across the company. Trusted employees can be offered the additional role of “Compliance Promoter,” and IT tools can ensure that an anonymous reporting system is available 24 hours a day.

Compliance training sessions cannot be limited to presentations about rules and regulations. It they are, employees will only behave if they feel controlled.

Instead, companies need to establish a values-based culture where employees understand their role inside the organization and how corruption could affect their job.

In this culture, everyone is equipped to face difficult situations – and not just employees in typical risk groups such as sales or procurement.

Is your company protected against this kind of “corruption contagion”? What kinds of “vaccinations” does your company have in place to stave off bribery and corruption?

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Author: Patrick Henz

Patrick Henz is the Regional Compliance Officer for the Americas at Primetals Technologies. He began his career in Compliance at the end of 2007, when he was responsible for the implementation of the Siemens Anti-Corruption program in Mexico and several Central American and Caribbean countries. He has been President of Honor of Marcus Evans' Latin-American Corporate Compliance Conference 2011 and 2012 in Mexico City and co-founder of the Ethics & Compliance Forum Mexico, including editor and co-author of the Ethics & Compliance Manual, published in April 2014.

disqus comments

  • Brent McNiven CITP, CMC

    Patrick – I agree with your comments and observations on the importance of combating corruption.

    I have worked in some of the most corrupt countries on the planet, and would
    like to add that that while corruption involving bribes are main the focus, we have found that non-financial corruption is probably as or even more common, is the most difficult to detect, and has often had catastrophic impact on FDI projects.

    Large multinational firms usually concentrate on high value / profit projects, and are able to assign whatever level of resources, procedures, protocols and staffing needed
    to identify and control corruption.

    Smaller firms generally have lower value contracts, usually with tight(er) profit margins and must find more efficient ways of dealing with it.

    Corruption that involves direct financial transactions, whether as bribes, bid rigging,
    or preferential awards of contracts leave tracks, and these can usually be discovered assuming that anyone looks hard enough. Most firms concentrate their anti-corruption efforts on auditable methods, and most ignore the softer social capital, networks and community relationships.

    Corruption that involves those in a position of trust misusing it for their own gain, often through backchannel collusion or manipulation of the local system, but who do
    not receive direct financial gain, do not leave auditable tracks, and trying to identify, quantify, and establish a burden of proof is often impossible.

    Examples we have seen include where corruption was used to effectively hijack foreign investments and where locals were able to assume effective control of
    multimillion dollar investments at no cost to them; where corruption encouraged local
    partners to strip out millions of dollars of assets; or as we have seen in several cases, where corruption simply squeezed until the foreign investor went broke and abandoned the project. In none of these cases was any link to financial reward made to those involved.

    In our experience, the best way to combat this type of corruption is not at the corporate policy level, rather on the training and development of the “boots on the ground” front line / in country managers, project managers, and must in all cases involve building strong social capital links with the local communities at all levels.

    Especially for smaller firms who lack the resources of the big players, becoming an influential member of the local community / society and building the social capital to a
    point where it is possible to identify, deflect, and then manage corruption has proven highly effective.

    Unfortunately that is something that has to be developed on a case by case basis, and is not something that corporate directives or forensic audits can hope to accomplish.

    Bottom line is that combating corruption must be a high level corporate priority, but also that it is a complex issue, and while audits and procedures can help, it takes a comprehensive and aggressive program to manage.

    • Patrick Henz

      Dear Brent,

      Thanks for your valuable comments! I agree that the best way
      to protect the company against the described cases is preparation. In global
      companies this can be done with internal local Compliance experts, smaller
      companies can use external resources.

      Compliance is part of the sustainability concept, which includes
      also social responsibility. Social investments foster the respect of local
      stakeholders and reduce corruption risks, but, of course, have to be monitored
      to ensure that such payments not get used for personal benefits.

    • Thank you for the thought provoking insights Brent!