04 Nov 2013  Research & Ideas

The Real Cost of Bribery

George Serafeim finds that the biggest problem with corporate bribery isn't its effect on a firm's reputation or the regulatory headaches it causes. Rather, bribery's most significant impact is its negative effect on employee morale.

 

It's a sad, quantitative fact that bribery runs so rampant in the world that it has become a Darwinian business tool. A July 2013 report from Transparency International finds that more than one in four people paid a bribe in the past year, based on a survey of 114,000 respondents in 107 countries. The World Bank estimates that the equivalent of $1 trillion is offered in bribes every year.

In the age of globalization, it's easy to see how giving into bribery might be competitively advantageous. In fact, research by Harvard Business School's Paul M. Healy and George Serafeim found that firms that launch anticorruption efforts grow their businesses more slowly than firms that don't, especially in regions where bribery is the expected norm.

"If you think of the cost [of bribery] as just fines and regulatory actions, you're missing a big piece of the puzzle."

"We have a pretty good understanding of the benefits of bribery—facilitating entry into a market, for starters," says Serafeim, an assistant professor in the Accounting and Management unit. "But we still have a much more limited understanding about the costs of bribery."

That's why Serafeim recently set out to analyze the negative effects of bribery on corporate performance. The results of his study, detailed in the paper Firm Competitiveness and Detection of Bribery, surprised him. As it turns out, the biggest problem with corporate corruption isn't its effect on a firm's reputation or the regulatory headaches it causes. Rather, bribery's most significant impact is its negative effect on employee morale.

Initiation, detection, and response

Serafeim aimed to find out how bribery affected a firm's operations across four dimensions of competitiveness: its external business relations, its interaction with regulators, its public reputation, and the morale of its employees. (Each of these factors has proven to be crucial to a firm's standing in the competitive landscape.)

He hypothesized that the extent of the damage to a firm would depend on three factors: who initiated the under-the-table payment, how it was detected, and the way the firm responded to the bribe after it was uncovered.

Employee morale drops when a company bribes its way to success.To test the hypothesis, Serafeim evaluated data from the forensic services practice of PricewaterhouseCoopers, which provides global consulting services to companies dealing with potential legal issues. The firm annually surveys thousands of its clients about their respective issues. Serafeim focused on survey answers from 2009 through 2011, during which some 10 percent of respondents (about 500 respondents) anonymously reported that their firm had experienced a bribery incident. Many of the survey takers who had dealt with corruption worked for firms based in countries infamous for rampant bribery, including Russia, Ukraine, and South Africa. But there were also on-the-take reports from firms based in Australia, the United Kingdom, and the United States, where bribery is less common but still existent.

"Bribery is a global phenomenon, and people engage in this type of behavior all over the world," Serafeim says. "There are different magnitudes and different extents of bribery, but everywhere in the world you can find it. The idea that bribery doesn't exist in the developed world is a myth."

The survey included both hypothetical and reactive questions, asking respondents how they believed the detection of bribery would affect the firm and—in cases where it had actually happened—how bribery really did affect the firm.

Speculation versus reality

It turned out that speculation did not match the reality. Respondents guessed that their firm's reputation would be most negatively affected by bribery, followed in speculated impact by business relations, employee morale, and relations with regulators. But respondents who had actually dealt with the problem reported that employee morale was by far more significantly affected by bribery than any other factor.

That's important because studies have shown that employee morale is directly related to a firm's performance, including stock market returns. For instance, the consultancy Sirota recently surveyed 13.6 million employees in 840 companies about workplace morale. High-morale companies (those at which more than 75 percent of the workforce reported "overall satisfaction with their company") had significantly stronger year-over-year stock performance than companies with lower morale reports. These high-morale companies averaged a 15.1 percent improvement in their stock price from 2011 to 2012, compared with a 4.1 percent year-over-year improvement among the lower-morale companies.

Serafeim's findings also indicate that bribery could hurt a firm even if no one outside the organization ever found out about it.

People know each other and talk within an organization, Serafeim observes. "Information is hard to contain within a group of people, even if it's never officially reported," he says. "The lesson for managers is that 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."

As Serafeim had hypothesized, the extent of bribery's impact on all four competitiveness factors depended on who committed the bribe, who discovered the bribe, and what the firm did in response.

On average, cases in which a senior executive committed the bribe had 64.9 percent more significant impact than those in which the briber was lower down on the corporate totem pole, according to the survey results. "Senior management is the ambassador of what the firm stands for—the culture of the firm and what people are incentivized to be doing," Serafeim says. "As a result, it sends a strong message about what the organization stands for."

That said, he notes that respondents reported at least a moderate negative effect even in cases where the bribery wasn't committed by an employee.

"The idea that whatever happens outside an organization is not going to impact the organization—it's actually not true," Serafeim says. "If your customers or suppliers are engaging in this type of behavior, it has an impact on the organization."

With regard to how bribes were discovered, Serafeim found that bribery cases detected by a firm's internal control systems (including tip-offs and whistle-blowers) had a far less negative impact than those detected by outside regulators.

"This sends a strong message that firms that invest in control systems are going to realize benefits," Serafeim says. "You're not just incurring costs by investing in these systems. There are benefits. Besides protecting reputation and morale, it also means that the firm is able to contain and control actions that its business allies or employees take."

And punishing the offending party proved to be good for business. "Dismissal of an employee that initiated bribery or cease of business relations with an outside party that initiated bribery is significantly associated with a lower likelihood of significant impact on a firm's reputation," Serafeim reports in his paper.

One thing that didn't seem to matter: the size of the bribe. Thirty-five percent of the bribes reported in the survey fell under $100,000, and they had just as much of an effect on competitiveness factors as the 16 percent involving amounts more than $500,000. "Size does not matter when it comes to bribery," Serafeim says. "Small or big bribing is bad business in the long term."

About the author

Carmen Nobel is senior editor of Harvard Business School Working Knowledge.

Comments

    • Jim Winkelmann
    • Manager, Blue Ocean Portfolios

    What would you call an election process when the candidate makes financial promises to the electorate? "Vote for me and you will get free _", "If you have a health plan you can keep it your health care plan". Don't these political bribes create the same problems as corporate bribes and are equally demoralizing to the citizens?

     
     
     
    • David
    • President, Industrial Polymer Research

    Lobbying in the US is, in my personal opinion, a legitimized form of legally sanctioned bribery. How does lobbying affect employee morale?

     
     
     
    • Kelley Williams, Jr.
    • Principal, Greenover Group

    I had the same thought as Jim and wonder why we hold our political leaders to a lower standard than our business leaders. Whereas the SEC, not to mention trial lawyers, would be all over a business executive making false claims about earnings, product releases, etc., one in political office seems to get off scot free for the same behavior. Lest one think the political leader's punishment is at the ballot box, that's hardly the same as going to jail or being sued. Moreover, the business executive faces his own ballot box in the form of the company's directors who can call an emergency meeting and remove the offender; the political leader, on the other hand, gets to wait around until his term is up and may or may not be held accountable for his deception.

    Do not misconstrue this observation as being partisan. I find it to be true on both sides of the aisle. Even when a political leader is "only" ineffective and not dishonest it seems he or she gets to keep being ineffective much longer than a business executive would. It makes me wonder why the political markets are so much less efficient than the private sector markets (financial, business, sports, etc.) Are our standards for elected office that much lower? Is the game rigged? Or is there something else going on?

     
     
     
    • Mala Rani
    • Associate Professor, University of Delhi, India

    The findings re-confirm that though paying and getting kick-backs is a global phenomenon,we do accept it to be a good practice.

     
     
     
    • Hugh Quick
    • home, none

    Most of us have used bribery. You can have an ice cream if you behave yourself at Aunty Mary's. Sounds familiar?

     
     
     
    • Col Tensingh
    • Retired military officer, Defence

    Rightly so, the bribe works miracle in ST. In the LT scenario it may bring in disrepute. ST window has come below one year and LT window remains debatable. Cost of something vs bribe again proves the "Invisible hand " concept. Greed of bribe either to give or accept remains under self interest. Root is the psychological problem than economic. It is to do with inner (core) thinking but not the business. Social recognition (outward) may remain as a major reason. A intangible sense of "being great" triggers the bribery cases.

     
     
     
    • Mervyn Extavour
    • Director/President, Accreditation Council of T&T & Nat. Assoc. ofTechnical Tertiary and Professional Educators of T&T.

    This is only a symptom of a wider cancer - it has worked for many businesses in the past, particularly during political campaigns and 'getting the best deal' from a transaction. However, generally the notion of getting mileage out of something in return for favors has been an 'age-old' scourge - check Judas Iscariot - however, I propose to offer solutions through 'Education & Training' and Psychological Management at upcoming academic conferences in Cayman Islands, Antigua and elsewhere, based on research on institutional responsibility of Educators to infuse it into the intellectual programs - to encourage 'moral values' - integrity -and ethical behavior to reduce the incidence of corruption......

     
     
     
    • Lucat
    • executive director

    How does one know that higher moral in an organization is not the result of stock performance and not the cause of it?

     
     
     
    • jim
    • Corporations and franchise operator, long retired

    Doesn't working smarter have something to do with pay?

     
     
     
    • RK Sharma
    • Management
    1. I think your article is pseudo science, have you checked India, also an advice please check it not based on what you know but how actual things happen at ground

    2. So in your opinion how should any firm including Walmart do business in India

    3. Types like your article are pseudo science, it is just like providing data to say that human needs legs to walk, I am amazed at degrading standard of Harvard business school, basically I will say what is the worth of its MBA even, when only thing which happens in real world is , Do the job or you are fired, end of story.

     
     
     
    • Rock
    • owner, SROE

    Reminds me of the valuable article last year from HBS - Are You Paying a Tip--or a Bribe?

    Unfortunately many owners are so savvy in this type of business practice they leave us honest owners in the dust...sigh....

    http://hbswk.hbs.edu/item/7090.html

     
     
     
    • Jeff Lewy
    • retired

    How did the research confirm that the high return at high-morale companies was the result of morale and not the cause?

     
     
     
    • Marco Kimani
    • Operations Officer, Volkan Construction

    It makes me cringe when management researchers attempt to draw simple conclusions about human behavior.

    It can see a scenario in which a department or an individual gets too much credit for project success because she paid the bribe that got the billion dollar contract, causing envy and low moral among her colleagues - but this is a very unusual case.

    Employee morale depends on dozens of factors with synergies that my not lend themselves to direct analysis. And bribery wouldn't even make it to the top ten in my book. Personal moral responsibility in collective decisions is almost zero, and arguably this "group secret sin" may enhance cohesion just like a secret oaths does.

    In conclusion the correlation between bribery/morale is arbitrary at best, so to infer a cause/effect is highly dubious science.

     
     
     
    • Hasan M. Soedjono (MBA 77)
    • Chairman, ALUMNAS (Association of Indonesian graduates from USA)

    I totally agree that the impact is much more than a mere financial penalty, and that a much bigger price is paid in terms of employee morale. As a matter of actual practice in the real world, the question begs itself: "All employees -- or just some (who are in the know)?" Of course, the ones who are in the know tend to be the most important, and over time many values and moods eventually permeate throughout the company. But it is somewhat unrealistic to expect that ALL employees are disheartened in a SHORT period.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    It is aptly concluded in this article that small or big bribing is bad business in the long run. Very true, but the irony is most are more serious of short run results which they want to achieve by hook or by crook. It is a vicious circle where the top managements are appreciative of results achieved without examining whether these were the result of truly ethical actions. That being so, it is difficult though not impossible to do bribe-free business. Business apart, bribe plays a role in personal dealings also as things move at a low or no pace if the service provider's palms are not greased. We have a plethora of laws and rules to control bribery but what happens at the ground level is well-known as revealed by the author. All possible actions need to be taken to control emergence of bribery in the organisation by initiating punitive measures where required. However, this has to be a top-down exercise.

     
     
     
    • Shyamsunder Panchavati
    • Chief Facilitator, Capacity Building & Development

    An orgnization cannot command respect from its people if it resorts to bribery to inflate its results.

    An employee would like to work for an organization that achieves leadership position because of its cutting edge technology and its superior strategy, not by illegal means.

    An organization's professional proficiency needs to be backed by honesty for being accepted as a role model by people working for it..

    Being corrupt also takes away from you the firmness that is required to get work done from your team. A team gives its best for and because of honesty in itw management.

    A corrupt management can only get the work done mechanically from the team. They cannot get involvement & ownership from the employees.

    This in the long run negatively effects the organization in everything.

    The productivity, the revenue, and the bottom lines.

     
     
     
    • Anne Gorman
    • Director, Corporate Impacts Consulting

    A very interesting piece of research. More than relevant in today's environment. Does it also apply to the public sector? especially if it is the recipient of a bribe.

     
     
     
    • Anwar Hashmi
    • Senior Consultant - Global ethics and compliance, Integrity Leadership Partners, LLC

    I entirely agree with the research finding that Bribery and Corruption has a very adverse impact on employees morale. It shakes the confidence of employees in the intention of Companies to run their business in transparent and honest manne.

    Great article indeed,

    Anwar

     
     
     
    • Dennis Nelson
    • Risk & Issue Manager, Internal Control Officer, SFS

    When they illegally or immorally deal with others, what might they do or already be doing to their own employees or any other constituents?

     
     
     
    • oriol
    • Business Intelligence, Invest in Catalonia

    Fully agree with Lucat: "How does one know that higher moral in an organization is not the result of stock performance and not the cause of it?" Albeit with a fair goal of trying to give reasons against bribery, the article fails in its intent, writing instead about something he would like to be. The clue on bribery is always how it disrupts the level playing field in which companies operate. Frankly i don't think that let's say a football team that bribes referees has lower morale because of that. Any of the non bribing teams should in fact not be worried by the cheaters' morale but by how much their actions affect their own chances to win, hence disrupting the institution.

     
     
     
    • Nitin Pujar
    • Principal/CEO, Maven Advisors

    The 50 shades of bribery are another issue that needs to be detailed while discussing this very important behavior around the world. From a 'no-go' bribe that precludes one form doing nay transaction at all to 'baksheesh' or tip which is a pernicious form of extortion, to a genuine 'well done team' end of project party paid through a shadow account...the shades are many. The approach about amount of bribe also needs a different approach for it to be more meaningful: the context of the amount is always very critical...bribe after all is not as simple as good versus evil!!!

     
     
     
    • David Sirota
    • Chairman Emeritus, Sirota Survey Intelligence

    For those writers who question the direction of causality between employee morale and stock market performance: Our analysis indicates that the causality goes both ways: the morale of a workforce has a significant impact on performance and performance has a significant impact on morale. In the best of cases, there is a "virtuous cycle" where they, in a back-and-forth mode, continuously impact each other positively. An example (described somewhat simplistically) of this process is an employee whose satisfaction with his company causes him to treat customers well who, in turn, buy more, and that customer satisfaction and buying behavior is rewarding to employees whose morale is boosted still more. The issue of causality is discussed in some detail in our book, The Enthusiastic Employee: How Companies Profit By Giving Workers What They Want (2nd edition), pp. 85-92.