Corrupting Silence: Companies Must Speak Up Against Bribes

 
 
Does corruption really pay? Paul Healy finds that corruption may not be as lucrative—or as unavoidable—as it may seem.
 
 
by Michael Blanding

In a 2012 Harvard Business School case on corruption at German conglomerate Siemens AG, Peter Solmssen —brought in to clean house —reflects on how people approach a business bribe.

"The stupid ones say, very simply, what are you going to do for me?" says Solmssen, managing board member and general counsel. "Sometimes they'll be a little more subtle and say, 'My wife's going to be in Hong Kong next week, and she's going shopping.' Either you say, 'That's nice,' and you pass on, or you say, 'What store is she going to, and can I give you an account number?' "

In 2006, Siemens rocked the business world with revelations it had been paying bribes for contracts on a massive scale—eventually admitting to payouts in 60 percent of its markets, totaling $130 million to $275 million a year. Shopping trips to Hong Kong were the least of it. For bigger ticket items, Solmssen says in the case, "you get a call from a consultant who knows all about your impending bid and offers to help. The clear message is you are not going to win unless you use me."

“The thing that struck me is how little information there is on corruption because no one wants to talk about it”

When he heard about the Siemens troubles, HBS's Paul M. Healy, the James R. Williston Professor and Senior Associate Dean for Research, saw a unique opportunity to examine an elephant in the room in the business world.

The United Nations estimates that roughly a trillion dollars in bribes is paid annually worldwide. This increases the cost of investment in developing countries by at least 20 percent. And yet, companies are mostly silent on the subject.

"The thing that struck me is how little information there is on corruption because no one wants to talk about it," says Healy, author of the multimedia case Fighting Corruption at Siemens. "In part, that's because it's illegal—no one wants to admit they were breaking the law."

But there is also another unspoken reason for the silence, he says: the sense that it is just the cost of doing business, a necessary evil that must be borne if companies want to seriously contend for contracts in developing countries where the rule of law isn't as well enforced.

In both anecdotal and empirical research, however, Healy has found that corruption may not be as necessary as it is perceived to be. In fact, at the end of the day, bribes may hurt a company's bottom line—and not just after being caught.

The Cost Of Doing Business

Siemens had moved aggressively into developing countries following World War II, when a German company was persona non grata to most of the Western world. Paying bribes to officials in a country became a regular business practice, firmly entrenched in corporate culture— and not against the law in Germany until 1999. The competitive environment and permissive culture both played a role in the future bribery scandal.

"There are three elements that lead individuals in companies to get involved in corruption," says Healy. "First, they feel strong pressure to perform. Second, internal controls within their companies are not that strong. And finally, their companies allow them to rationalize their behavior." Even after the scandal broke, the mid-level Siemens executive who oversaw the bribes, Reinhard Siekaczek, justified them saying, "We did it for the company. It was about keeping the business unit alive and not jeopardizing thousands of jobs overnight."

A financial analysis of the return on such contracts called those beliefs into question. "After completing a thorough audit to identify transactions where bribes occurred, Siemens discovered that many of these problem contracts were not very profitable," says Healy.

The results were more stark for Montreal-based engineering and construction firm SNC-Lavalin, which Healy is researching for an upcoming case study. In a well-publicized incident, SNC-Lavalin allegedly paid a $22.5 million bribe to secure the $1.3 billion contract to construct the McGill University Health Centre in Montreal. The company billed the Quebec government for $191 million in cost overruns, for which it is unlikely to be reimbursed. In other contracts in North Africa, the SNC-Lavalin is struggling to stay in the black.

"They underestimated the risk associated with paying bribes, but they also overestimated what they were going to make on profits," says Healy. "Most companies don't have the luxury of going back and saying what was the profitability of corrupt contracts versus contracts that were clean."

In research conducted with HBS Jakurski Family Associate Professor George Serafeim, Healy found evidence supporting this trend more broadly. In a working paper published this year, the researchers reported that firms' reported anticorruption efforts generally matched up with independent assessments of corruption such as enforcement actions, independent directors, and more rigorous auditing.

Furthermore, relative to firms with high anticorruption rankings, firms with low rankings had higher sales growth in regions associated with corruption—meaning they were more likely to receive contracts in those areas. However, those incremental sales were offset by lower margins and return on equity, negating the benefits of those higher sales.

"This evidence suggests that multinationals that tolerate corruption are able to grow their business and get contracts in corrupt countries. But it appears that those contracts are less profitable," says Healy.

A Necessary Evil?

The experiences of Siemens and SNC-Lavalin also calls into question the assumption that bribery is a necessary practice in dealing in developing markets, says Healy. Despite cleaning up their acts, the companies have continued doing business in countries around the world, including those where they have paid bribes in the past. "Both companies acknowledge that there is clean business and dirty business in every country," says Healy. "Given their new tough stance on corruption, there are some contracts they can't go after, but there is still plenty of clean business they can."

Their experience is supported by companies including GE, Statoil, and Fluor that have drawn a bright line internally against paying to play in foreign countries and that continue to operate successfully in countries where corruption is a problem. Of course, it makes it easier that those companies are industry leaders with unique products customers want regardless of any inducements, says Healy. But he suspects another factor is also at work.

"People know they are not going to pay, and so eventually they stop asking," says Healy. "As Siemens's general counsel told me, 'Once you start paying bribes, you are committed.' You can never look back."

The experiences of Siemens and SNC-Lavalin show that the first step toward changing that outward reputation, says Healy, is changing the internal culture. "Both companies have worked hard to change the tone at the top. It's harder to rationalize corruption if you are receiving a consistent message that we don't do this."

In the wake of the bribery scandal, Siemens eventually paid $1.6 billion in fines to United States and European authorities. But it has also spent over $800 million on internal investigations, dismissed its CEO, fired some 500 employees, and offered amnesty to workers willing to come forward with details of corruption. SNC-Lavalin, too, has fired its CEO and is currently investigating other executives.

Along with the change in tone must also come a change in practices, says Healy, including a tightening of internal controls regarding payments to business partners, a common way to launder bribes to officials. In the case of Siemens, the company changed its policy to require all partner contracts to undergo an approval process with oversight by compliance.

The good news on corruption is that private citizens are coming forward as never before to expose corrupt practices—posting evidence of bribes paid through web-based platforms such as RosPil in Russia and I Paid a Bribe in India. "It's harder to conceal when you have cell phones and social media offering more ways of tracing and communicating such activities," says Healy. (He wrote an article article on such initiatives in the Harvard Business Review with HBS Associate Professor Karthik Ramanna.)

If the most egregious forms of corruption are going to be rooted out, however, it will take more than citizens coming forward. It will take some of the largest corporations in the world breaking their silence as well.

About the Author

Michael Blanding is a writer based in Brookline, Massachusetts

Post A Comment

    • james sinclair
    • Managing Director, Lincoln International
    Your comment "People know they are not going to pay, and so eventually they stop asking," says Healy. "As Siemens's general counsel told me, 'Once you start paying bribes, you are committed.' You can never look back." is spot on. If they know you won't pay they won't ask.
    • Mathews Daniel Kapito
    • Director, Notebook Solutions
    Working in the finance function and as a Tax consultnt I have had an opportunity to face corruption face on.
    If you ask whether I've been corrupt or not? I only can tell you that corruption is expensive and destructive. It take away your integrity, business purpose, vision and leave you paying for it with every penny you have.
    Example, most people who evade tax end up paying more than twice the value, they bribe the offiver who deliberately overcharge knowing they will get a bribe. When caught, they pay penalties in millions.
    If I was to be askesked, I would advise that companies report corruption and avoid it at all cost if they are to succeed in the face of increasing pressures on ethics and good governance.
    • Burnett Hause
    • Adjunct professor, Oregon University
    After teaching (or trying to teach) a master's level course in ethics in six developing countries I was left flabbergasted. Examples and case studies from the daily lives of students were stories where due process, transparency, honesty and fairness were orthogonal to getting business done.

    School children's grades depended on rewarding teachers regardless of student effort or ability. Traffic tickets were paid on the spot or you spend time in jail on a false charge. The construction crew tipples the amount of sand in the concrete mix of cinder blocks guaranteeing shoddy work and unsafe structures. Painters dilute the paint. In a traffic accident the person driving the biggest car was at fault regardless of who ran into you. And there is NO legal recourse. Just bribe the officer or judge and you win. Good luck otherwise. In one country it takes ~20 signatures to get a marriage license and a bribe at each signature - so nobody gets legally married. etc., etc., etc....

    I'm glad to see research supporting the fact that bribes are a hidden tax on business that reduces the bottom line. Maybe if trans-national corporations stick to ethical practices, the locals will begin to act differently.

    But how do you change an entire country's culture where bribery and corruption are the rule from schools to governments?
    • Rob Jones
    • CEO, IngoodCompany LLC
    Corruption is a bigger category, as it often pervades within organizations on many levels and between organizations and their interacting external entities. Bribery is one primary form. The costs of dishonesty are staggering when you begin to add them up, from the cost of "shrink" on grocery store shelves all the way up to the enormous "inducements" that change hands between governments and their contractors. Consumers, taxpayers and shareholders are funding all of it. Business shows no signs of reversing field and trending dishonesty downward, as profits have been sufficient to bear corruption, including bribery, as an immutable cost of doing business. This is a noble article, but the realities are that "getting caught" remains the surest way to change thinking, attitudes and behavior.
    • Aim
    • DSV, KOC
    I am wondering if there is a correlation between erratic/criminal behaviors of a human being (say a child one is raising) and the corrupt money he was fed with. I am thinking people become what they eat and there is no reason this should not be a good research material. This is mainly because people will definitely fear to induce physical or metaphysical pains to their loved ones.

    After all, the person who is in engaged in bribery believes he is doing it for the better good of his family or employees (this is actually similar to God-complexity trap in psychology) and proving him/her otherwise may just solve majority of social issues around the globe.

    Thanks for the good article HBS! I feel like you are becoming one of "us" now.

    Aim
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    Corruption in all forms, bribe included, cannot be supported by any reasoning whatsoever. A corrupt executive tries to tell his management that he was complled to follow what others in that country were doing in order to win projects, etc., is bull shit and something totally unacceptable. The future risks and losses as a result thereof, financial as well as reputational, often lead the corruption-prone companies ultimately to decay. At times huge bribes far beyond the earning capability are paid which obviously lead to dis equilibrium. Honesty, transparency and straightforward dealings are the sin-qua-non of well governed corporates which thrive and survive for ages. Shortcuts cut us short and this MUST be understood properly and not resorted to.
    • Ken Johnson
    • Owner, Ken Johnson Consulting
    One important factor that seems missing, at least from the article, is the distinction between what may be rational at the corporate level versus the individual level. While contracts that require bribes may be less profitable in the long run, (although in may cases, refusal to bribe may result in no contract at all as opposed to a less profitable contract), the decision to bribe or not to bribe is often made by sales staff and sales management who are retained and evaluated on very short run results, often quarterly, and are far removed from the long term profitability of those contracts. For them, the decision is often between bribe now, meet their quota now, get paid their bonus now, and retain their job now, versus not bribing and risking all of that. By the time any long term profitability consequences have occurred, the actual decision maker is often insulated from those consequences because they have been promoted, transferred, left
    for another firm, or just not held accountable by their incentive systems. This is a subset of problems I see frequently where internal reward and evaluation systems are sub-optimized and choices that are optimal for the decision maker are far from optimal for the organization as a whole.
    • N.R.Jothi Narayanan
    • HSE consultant (gas/oil/chemicals), Pallakad-678001-India.
    Irrespective of the category -developed, under developed or developing country, the corruption is uniform but this has been practiced in different forms. UNO has mentioned about the trillions of dollars have been spent in the name of corruption. Agree. Is it possible for UNO to ensure the billions of dollars distributed all over the world in many forms are reaching the affected person? Corruption or bribe or favour -everyone needs quid pro quo for the action they perform.
    In the current world even the religious leader who preaches the morale and ethics is not totally free off the luxury life which automatically accommodates corruption.
    Though the pelf made by corruption gives an ostentatious life in the society to the individual, there is a constant war is going on between his thought (conscience) and his action (whenever he spends a modicum of the pelf every time) till his death.
    To escape from the evil of corruption ,the moulding of one's character has to be formed beginning from childhood by principle. Corrupted society is not born but created by us.
    • Richard Bistrong
    • Owner-Moderator, FCPA Real-World Blogger and Speaker
    An excellent article from a number of perspectives. Having had the experience of real-world corruption and real-world consequences, this work captures many of the realities which exist at the front-lines of international business. As Professor Healy well states, there are three elements: 1. pressure to perform, 2) lack of internal controls, and 3) cultures that allow rationalization. In my experience, if all three are not addressed (and each one has multiple subsets), including business strategy itself as a red-flag, a corporate program of anti-bribery compliance will fail. It is not a two out of three is good enough equation. What this article elevates is that strong businesses which deliver value need not bribe, and that corrupt business is not profitable business. A great number of issues from which to continue the debate. Thank you.
    • Americo Diniz
    • Manager, EY
    I agree with this: "There are three elements that lead individuals in companies to get involved in corruption," says Healy.". I would also add a common "feeling" that says: If I do not accept the game someone will. And in my eyes this is the beginning of the problem. No one company representative will trust that the other company's salesman will refuse the bribe. And doin this it creates a spiral where when you say "yes" hardly can get out. Making winners at all cost...
    • M S S Krishnan
    • Major General (retired), now a Management Trainer, Indian Army
    "...how little information there is on corruption, because no one wants to talk about it". Corruption has been part of trade all over the world from time immemorial. But it is up to the leaders in organizations to decide whether the end justifies the means. I am reminded of a story narrated by Chanakya, the famous Indian strategist which runs as follows. There was a kingdom, where one high ranking official of the kingdom was found guilty of procuring sub-standard horses for the army, obviously at a consideration. When the official was confronted with his misdemeanor by a messenger of the Emperor, he sought the messenger's advice on the future course of action. In response, the messenger quietly placed a dagger in front of the guilty official. In a globalized business scenario, with cut-throat competition, how many companies would be willing to place the dagger in front of erring employees?
    In case morality, ethics and righteousness are not taught from the elementary levels and covered in a big way in Business Schools, we will never be able to see a world free of corruption. Prof Healy has been bold to take up a subject that is never spoken of but silently accepted as routine. A very interesting write-up.