Integrated Efforts with the Public Sector
The primary role of the public sector in the battle against corruption is to reduce opportunities for corruption in public procedures, promote transparency, and safeguard a level playing field for the corporate sector. Priorities include reforms in areas such as public procurement, taxation, and customs. But experience shows that public agencies and regulators can also engage more directly with the private sector and play a critical role in promoting ethical practices by:
• Creating a legal and regulatory framework that provides incentives to corporations for ethical behavior.
• Supporting organizations that participate in the dissemination of good practices.
• Making explicit use of ethics and compliance in public procedures. For instance, in public procurement, bidders may be required to have a rel- evant compliance system.1
Such interventions, which ultimately have the agency or regulator establishing ethical and compliance standards in the country, can be undertaken only by strong and efficient public bodies. The first type has been discussed extensively in previous chapters. Reference to compliance in public procedures such as procurement can be a powerful tool for leveraging agencies but is still underdeveloped.
Hong Kong’s ICAC provides a unique example of public-private part- nership in all these dimensions (boxes 6.7 and 6.8).
Box 6.7. Hong Kong: Public-Private Partnerships against Corruption Hong Kong’s legal and enforcement frameworks have two compo- nents:
• The Prevention of Bribery Ordinance (1971)
• The Independent Commission Against Corruption (ICAC, 1974).
ICAC is independent of any other government branch, including the police, and has considerable latitude to carry out its investigations.
Its work force of 1,300, mostly investigators, is huge by any standard.
Two other important distinctive features of ICAC are:
• A recognition that public corruption and private corruption are entangled and should be dealt with simultaneously. ICAC takes a comprehensive approach toward corruption that addresses not only misconduct by public officials and bribery by private companies but also fraud and corruption in the context of purely private transac- tions.
• An increasing emphasis on prevention. This results in interactions with government agencies and private firms, as well as in the sys- tematic promotion of ethics and compliance systems.
To carry out its prevention mission, ICAC relies on a Corruption Prevention Department and a Community Relations Department. Both are increasingly involved in private sector–oriented activities, which combine dissemination, advice, and regulatory incentives.
An Advisory Services Group (ASG) within the Corruption Preven- tion Department works in collaboration with the investigating unit. It helps companies that are referred to it by the investigators—mostly small and medium-size enterprises—with designing compliance sys- tems. The ASG is also responsible for analyzing patterns of corruption within the private sector. To remedy identified problems, the ASG pre- pares and leads sectorwide and thematic initiatives.
The Hong Kong Ethics Development Centre (HKEDC), created in 1995, is hosted by ICAC; the major business associations in Hong Kong are also actively involved. The HKEDC is Hong Kong’s primary resource center in business ethics. It disseminates manuals and multi- media products and organizes ethics training for companies and pro- fessions. Recently, along with regulators and professional bodies, HKEDC has been promoting professional ethics in areas such as bank- ing, accounting, and fund management.
Box 6.8. Fighting Corruption in the Hong Kong Construction Industry: An Integrated Approach
Hong Kong’s construction industry has been tarnished in recent years by a combination of private and public corruption, resulting in sub- standard quality. For instance, three years ago it was discovered that the foundation piles of some new buildings were not laid to required depths. There were several causes for the problems:
• Inadequate and ineffective site supervision, exacerbated by collu- sion and corruption (mostly excessive socializing) between supervi- sors and contractors.
• A hands-off approach by employers who appointed consultants to manage their projects. As a result, underperforming consultants were not tracked down in time for management action to be taken.
• Lack of independence of materials-testing laboratories, which were appointed by the construction contractors instead of by employers.
• Multilayer, unproductive subcontracting, which meant that the final subcontractors could not realize a substantial profit without resort- ing to substandard work.
Recognizing that the problem called for a large-scale, integrated effort, in 2000 ICAC organized a construction conference attended by industry stakeholders, including private and public clients, profes- sionals (surveyors, engineers, and architects), and contractors. A responsible construction approach was initiated that includes actions to enhance accountability and other administrative control measures.
To promote good practices, the government has implemented requirements that the lead contractors be registered and abide by cer- tain guidelines. A critical element is the commitment to quality super- vision requirements for foundation work, which specify the level of professional input at critical stages of the construction process.
In parallel, a huge ethics training effort has been mounted under the supervision of the Hong Kong Ethics Development Centre. More than 12,000 people (contractors’ staff, public officers conducting super- vision at government project sites, and tertiary students in construc- tion-related faculties) have been trained so far. At the site level, awareness that corruption is a high-risk crime is promoted through various media, from posters to newsletters issued by construction- related trade associations and workers’ unions.
Source: ICAC.
Proponents think that the standard would be a useful tool for bench- marking the business conduct systems of companies and business part- ners.2To allay one of the most frequently expressed company concerns, the EOA states that it “plans to take every possible step to ensure that the management system is not intended for third-party certification.”
The Conference Board, for its part, does not propose standards a priori but instead emphasizes the exchange of information on good practices (see, for example, Berenbeim 1999, 2000).
This latter approach wins more support from senior executives of large companies. They argue that common standards:
• Are too numerous, onerous, and inefficient and generate a welter of confusing requirements that are difficult to manage
• Are drafted with little or no input from the business community
• Do not approach the issue from a process or management point of view
• May lead to third-party certification that is costly without adding value (Berenbeim and Muirhead 2002).
In conversations, senior executives have said that three conditions could make it easier to accept common standards:
• Reasonable reporting and disclosure requirements
• Compliance terms that are open to a broad range of interpretations
• A governing structure in which companies participate.
Companies are open to the implementation of good-practice systems.
Such systems would consist of a series of general principles, suggested but not mandatory performance elements, and pertinent evidence on the existence and effectiveness of the performance elements.
Third-party verification may offer an efficient and relatively inex- pensive way of substantiating that a company has an effective com- pliance system. This process will attest that a company has institutionalized policies and programs that could help minimize exposure to corruption, but it does not determine whether or to what degree a company has engaged in corrupt practices. Companies could find such substantiation useful for sentence mitigation under the U.S. Organizational Sentencing Guidelines or similar standards (for example Australia’s AS 3806). Despite pervasive resistance to third-party verification processes thus far, this approach might gain acceptance through use in due diligence reviews of potential agents and partners and in internal audits that are disclosed because of growing emphasis on transparency.
For the local private sector in emerging and transition economies, cer- tification is probably not a realistic goal for the near future. Less binding procedures for benchmarking, such as scoring by research or commercial organizations (as is being done in Japan), might prove more practicable and effective (see box 6.9).
Investors’ Assessments as a Benchmarking Tool
Investors’ assessments of integrity management can provide a com- pany with an independent benchmark of its own system against rele- vant standards. The increased popularity of socially responsible investing (SRI) provides a framework for evaluating how companies are doing business, with a scope that goes far beyond integrity to address social and environmental concerns. There are now more than 200 SRI funds in the United States, and they are developing rapidly in Europe.
Box 6.9. Business Principles for Countering Bribery
A set of principles developed over a two-year period of discussions by a group of companies, nongovernmental organizations, and trade unions offers support for enterprises in developing effective approaches for combating bribery.
Use of the Business Principles for Countering Bribery, developed by Transparency International and Social Accountability Interna- tional, will enable companies to comply with the OECD Anti-Bribery Convention, the Rules of Conduct to Combat Extortion and Bribery of the International Chamber of Commerce (ICC), and the antibribery provisions of the revised OECD Guidelines for Multinationals.
Field-tested for practical application by a medium-size company in countries perceived as difficult (as indicated by high ratings on the Corruption Perceptions Index), the Business Principles are designed to be used by small, medium-size, and large businesses. They offer advice on difficult issues—for example, facilitation payments, gifts, hospital- ity, and expenses; business relationships with agents and subsidiaries and in joint ventures; implementation practices (training, and internal and external communications); and board and senior management monitoring and review.
Support activities (discussion and orientation) and advice for indi- vidual companies will be available to organizations that elect to use the Business Principles in their management policies and processes.
The SRI standard methodology utilizes negative or positive screen- ing—that is, exclusion of certain industries from the portfolio or, con- versely, selection of certain industries or companies with socially responsible performances. SRI is usually based on outcome (or prod- uct) rather than on processes and does not provide information about the quality of the corporate system of internal control and compliance.
A recent initiative to develop SRI in Japan took precisely the opposite view and promoted an “integrity screening strategy” focusing on integrity management instead of the products and services delivered (box 6.10). This approach yields a rating that makes benchmarking possible and offers a better way of having markets contribute to the promotion of integrity than traditional screening. In addition the methodology is free
Box 6.10. IntegreX: A Breakthrough from Japan in Socially Responsible Investing?
In 2001 a private rating company, IntegreX, was launched in Japan with a view to putting the integrity screening method into practice and helping further promote socially responsible investing (SRI) move- ments. IntegreX methodology uses a screening procedure, R-BEC001, proposed by the Business Ethics and Compliance Research Center of Reitaku University (R-BEC). The procedure is based on a checklist of company characteristics that financial or institutional investors are expected to take into account in their choice of socially responsible investments. The focus is on whether a company is aware of the risks of infringement of relevant laws or codes and whether it is in a posi- tion to control those risks in a reasonable and accountable manner. Its key measures are related to the implementation of an effective compli- ance system.
IntegreX surveyed 3,500 listed companies in Japan to gather data concerning the self-control mechanisms each company has estab- lished to prevent malfeasance by directors, officers, and employees.
Using the results of the survey, the company selected the best 100 companies. According to a report by the Nihon Keizai Shimbun news- paper, released in early July 2002 (Taka 2002), the share value of those 100 companies outperformed that of TOPIX, a broad-based Tokyo Stock Exchange index. The margins became conspicuous especially after 1997, when a number of business scandals broke out. These data show that the performance of ethical companies can ensure stable and sustainable performance in the long run. The growing popular- ity of SRI-related products will likely put pressure on Japanese com- panies to become more concerned about business ethics and compliance issues.
Source: R-BEC.
Share Value: 100 Best Ethical Performers and TOPIX Rating, 1991–2003
0 50 100 150 200
1991 1993 1995 1997 1999 2001 2003
Share index (1991=100)
Best 100
TOPIX
Box 6.11. Anticorruption Action Plan for Asia and the Pacific In East Asia the OECD and the Asian Development Bank took the lead in organizing a number of regional conferences involving governmen- tal and nongovernmental organizations. Following consultations with experts and government representatives, a regional action plan was endorsed in Tokyo in 2001. The plan provides members with an ana- lytical framework that facilitates benchmarking and comparisons and ultimately helps these countries design their next steps. Although the contribution of the private sector has been identified, so far most activ- ities focus on public sector reforms. The plan rests on three pillars:
I. Developing effective and transparent systems for public services II. Strengthening antibribery actions and promoting integrity in busi-
ness transactions
• Effective prevention and enforcement: legislation; antibribery agencies and judiciary; international cooperation
• Corporate responsibility and accountability: promotion of inter- nal controls and compliance; adequate sanctions
III. Supporting active public involvement.
Extensive country-based case studies were discussed through the World Bank’s Global Distance Learning Network. The case studies, which focus on public sector reforms, will be presented in a compan- ion volume to this book.
Source: OECD and World Bank.
from ideological and political considerations—a factor that could ease SRI development in Asia and elsewhere.