This piece was initially run on Forbes.com.
From Turkey to Egypt, Bulgaria to Thailand and Brazil to India, the rise of an urban, entitled, angry middle class is one of the most striking trends of the last few years. Rebellions have different proximate causes, but protesters are united by a profound sense of disillusionment with self-interested and inefficient regimes. They are also technologically savvy, aware of their rights and economically ambitious. Their countries have benefited to varying degrees from emerging market growth and investment, but their regimes have all failed to evolve politically to meet the expectations of their people. As liquidity tightens and growth slows, this state-level dysfunction is increasingly exposed. It is no surprise then, that a common theme drives all these protests – corruption.
Corruption provides an explanation, both simple and powerful, for failures in government performance, for webs of nepotistic interests supported by foreign investors and for billions of dollars in disappearing public funds. India has had the most explicit response, with the emergence of a successful anti-corruption political party and the viral, cross-border success of the website ipaidabribe.com. But all recent urban protests put corruption near the top of their list of grievances – from the Occupy movement to the Arab Spring.
At the same time, the focus of the anti-corruption movement is evolving. For the last two decades, Transparency International has been the vanguard of the movement, particularly since FCPA enforcement took off in the mid-2000s. Today, the launch of its annual Corruption Perceptions Index kicks up a media frenzy, and governments and corporations pore over and debate its methodology and ratings. Despite the attention, it is an analog approach in a digital age. The ratings provide a snapshot in time, and Transparency International does not investigate cases of corruption by individuals. Corruption 2.0 is characterized by rapidly evolving environments and a growing focus on individual accountability.
Ruling politicians have often eliminated their enemies by prosecuting them for corruption and fraud. But decisions on who to pursue now take place under public scrutiny, and it is becoming easier to trace the parameters of nepotism and graft. The well connected and their multinational business partners have reason to be anxious. Lucrative relationships with the cronies of the Yanukovyches, Mubaraks, Gadhafis and their equivalents have been subject to a new nexus of transparency and political risk.
In 2010, thanks to Wikileaks, Tunisians were able to see a diplomatic cable describing in detail the web of assets of their ruling family, often secured by extortion and expropriation; the resulting anger led to the overthrow of this regime and informed the trajectory of the Arab Spring. A new group of NGOs has become bolder about going after specific people and regimes – Global Witness and Sherpa are obvious examples. A new group of activist journalists in opaque markets (Russia, China, Angola) are flagging specific corrupt interests too, driven by the growth of social media, which allows debate outside government-owned newspapers. The International Consortium of Investigative Journalists has leaked 2.5 million records of beneficial ownership of offshore companies. Individual regulatory investigations have revealed the eye-watering sums of money squirrelled away by dictators and their cronies. Individual citizens have joined the corps of overseers as well, empowered by new technologies and incentivized by Dodd-Frank legislation that financially rewards whistleblowers. Corruption 2.0 means the tools to call Big Men to account are increasingly in the public domain, and it’s happening more and more that people are angry enough to look closely.
These trends have profound implications for the powerful and well connected, for the anti-corruption movement and for international business. Until now, corporate anti-corruption measures have been primarily driven by U.S. regulators (who are still the most active enforcers, despite the plethora of new national anti-corruption laws) and have focused on internal policies and procedures. Responsibility for implementation sits with compliance and is checked by audit, both of which are viewed internally as cost centers that block commercial success. The CEO-driven narrative of “ethics” and “values” does little to disguise the fact that corporations still want to tick the compliance box and let their sales people carry on, unencumbered. The regulatory literature does highlight the need for companies to conduct corruption risk assessments and due diligence on third parties, but there is little guidance on how deep companies need to go and how they should resolve the ambiguities that arise. Dig too deep, and who knows what nasty stuff you might find – so companies are still inclined to stay on the surface. Problems such as repeated commercial extortion are intractable, and there is no clear solution in the compliance literature – so companies declare “no tolerance” of bribe paying, but are reluctant to truly embrace the margin-sucking implications of their valuable equipment sitting with customs for months or the police impounding all their company cars.
Multinationals are starting to recognize that the era of easy wins in emerging markets is over. Winning business by tapping into nepotistic commercial networks is getting more risky. Signing up the childhood friend of the Vice President as a commercial agent used to be a savvy business strategy, but now looks naïve. The public is angry, and empowered regulators in emerging markets are springing up, driven by national political and strategic considerations. It is not a coincidence that the Chinese government targets pharmaceutical and consumer sectors. Public and regulatory scrutiny is increasingly interdependent, and its dynamics are highly unpredictable.
For companies to succeed in the new environment, a far more dynamic, outward-looking and commercial approach is needed. The bar for due diligence has been raised, as have the stakes. Companies need a much clearer-eyed view of strategy and risk tolerance and then to gain a deeper understanding of complex power dynamics and business relationships in the markets where they still wish to operate. Existing corporate compliance frameworks will not hold up now that fighting corruption is everyone’s business.