BackDoes it pay to fight corruption?
Combating corruption is not easy. It requires strong leadership
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On a recent trip to India, I met with a number of business executives who were concerned about corruption and its toll on the business community and the country. I heard two very different narratives from these executives, who represented both local Indian firms and multinationals (MNCs). The first is that because corruption is so deeply embedded in the Indian culture, it is impossible for businesses to operate without “playing the game". As one MNC executive put it, “when in Rome (or Mumbai), you have little choice but to do as the Romans (Indians) do." However, I heard a very different story from other executives, who argued that if you have the determination to consistently say no to requests for bribes and you have a valued product or service, you can conduct clean business.
How should business leaders think about these seemingly conflicting tales? A recent research project co-authored with my colleague George Serafeim may provide some insight. We examine the anti-corruption efforts of 480 MNCs rated by Transparency International (TI) in 2006-07. Of course, it is difficult to know whether firms’ disclosures represent their actual efforts or are merely PR. But transparency about anti-corruption policies is often cited as an important way to fight corruption.
We found that over the three years following the TI rating, firms with the strongest anti-corruption efforts grew 5% per year slower than firms with the weakest efforts in corrupt countries, consistent with concerns that to succeed businesses have little choice but to pay bribes in corrupt markets. However, growth in corrupt markets for MNCs with the strongest anti-corruption efforts increased operating profits, but lowered profits for peers with weak anti-corruption efforts. The combined effects of these differences in growth and profitability on shareholder value were offsetting, implying that shareholders did not bear a cost from investing in firms that took an aggressive stand against corruption. Similarly, investors did not benefit from investing in firms that did little to deter corruption.
These findings suggest that corruption enables MNCs to grow more aggressively in corrupt markets, but bribes represent a material incremental cost of business. A recent investigation at Siemens confirmed that bribes can constitute a material business cost, 3% of revenues for corrupt transactions. Siemen’s general counsel, Peter Solmssen, argued that once you have a reputation for paying bribes, as Siemens apparently did prior to 2007, corrupt officials will succeed in appropriating much of your profits.
In addition, to differences in future performance, we found that firms with the strongest anti-corruption efforts had fewer subsequent media allegations of corruption. As the Siemens example demonstrates, the legal consequences of being cited for corruption can be significant. The clean-up costs and fines paid by Siemens amounted to nearly $2.5 billion, not to mention the cost of having to focus attention on cleaning up corruption rather than developing new products and growing the business.
If MNCs can say no to requests for bribes without sacrificing profits, then why do some of them do so little to check corruption? Several reasons seem plausible. One is that the problems arise from weak controls and aggressive growth goals for emerging countries where corruption is often a problem, inducing local employees to take the easier road of adopting local practices. A second explanation is that some executives believe that corruption pays and are unwilling to take a stand against it. In contrast, leaders of firms with the strongest anti-corruption efforts have taken a strong stand against corruption, providing a tone at the top that establishes strong norms of behaviour throughout their companies. The lack of a strong tone from the top was widely cited by Siemens employees as a reason for the firm’s problems.
Combating corruption is not easy. It requires strong leadership. Our evidence of questionable financial benefits and increasingly tough regulatory oversight and fines for MNCs with weak anti-corruption efforts should embolden business executives at firms to take a strong, principled stand against corruption.
Paul M. Healy is a professor of business administration at the Harvard Business School.
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