Fighting corruption has reached new heights on the global agenda, driven by the recognition that corruption fuels inequality, poverty, conflict, terrorism and failures of development.  Governments in India, Brazil, the UK, Canada, China and some other countries have followed enforcement of the U.S. Foreign Corrupt Practices Act by promulgating national anti-corruption laws that focus on the bribery of public officials by companies, generally with sweeping extraterritorial authority. The appropriate corporate response, we are told, is to build anti-corruption compliance programs; regulators even offer the private sector detailed guidance about best practices. All this has spawned a lucrative consulting industry dominated by investigation companies and accounting and law firms – what the Economist refers to as “FCPA Inc.” With little excuse for ignorance, it would seem that enterprises need only adhere to guidance from regulators and roll out the mandated programs.

It’s not working. Compliance officers tell of delayed rollouts, inadequate budgets, company-wide coordination problems and their own lack of organizational influence. Even when companies get past operational issues, the evidence suggests that a “tick-the-box” approach to compliance is inadequate. Many of the companies currently under investigation by the U.S. Department of Justice and the Securities and Exchange Commission already had hugely expensive, state-of-the-art compliance programs. A recent OECD review of successful corruption prosecutions cites involvement by senior management or Chief Executive Officers in more than 50 percent of global anti-corruption cases to date — revealing deliberately unethical decision making by executives who decisively outrank Chief Compliance Officers. This narrative of systemic degradation is at odds with the dominant “rogue employee under the radar” explanation of wrongdoing. It exposes a legal system that has mistakenly, or perhaps willfully, chosen to focus on a misleading proxy indicator of performance: individual accountability.

Much attention has been paid to how external environments affect corporate responses to corruption, and particularly the challenges of operating ethically in low-integrity environments; this is the “that’s-just-the-way-they-do-business-over-there” argument. Emphasis has also been placed on detecting individual propensities for fraud and corruption, most recently through surveillance software solutions. There is far less focus on the organizational system — how groups and teams behave when they might have a corruption problem. This is a significant omission because the influence of group norms and culture on individual behavior is paramount. A review of corruption litigation shows that organizational culture, structures and incentives are among the most powerful factors influencing causing professionals to indulge in systemic corrupt practices.

Here we can draw lessons from the financial crisis, which dramatically demonstrated the inadequacy of quantitative risk and compliance frameworks at restraining banking cultures that foster pathological risk-taking behavior. Before the downfall, control systems abounded in the financial sector. Indeed, rigid and complex risk-management processes seem themselves to have encouraged Board-level complacency, perversely incentivizing sales teams to respond by asserting raw (commercial) power over back-office functions and thwarting meaningful debate about incentives and ethics. Given compelling evidence that the sector’s processes exerted little traction over behavior, commentators have been forced to seek explanations in culture. As a February 2015 article in the Wall Street Journal argued, “Senior officials with the Federal Reserve and other agencies in recent weeks have made it clear that they believe bad behavior at banks goes deeper than a few bad apples and are advising firms to track warning signs of excessive risk taking and other cultural breakdowns. Still, even regulators acknowledge culture is a difficult thing to measure.”

While a successful anti-corruption program requires a strong ethical culture, problems of definition and measurement persist. Guidance for companies published in 2012 states: “DOJ and SEC consider the commitment of corporate leaders to a “culture of compliance” and look to see if this high-level commitment is also reinforced and implemented by middle managers and employees at all levels of a business.” However, neither regulators nor anti-corruption consultants have much to say about what a “culture of compliance” looks like, how to understand whether a problem exists or how to build a compliance culture. Even the concept of organizational culture — generally defined as “the way we do things around here” — is complex and multi-layered, defined by dynamic human behavior, not rigid paper processes. Qualitative and nuanced, behavior resists measurement by quantitative methods or indeed any conventional consulting approach.

In this sense, a “culture of compliance” is an empty vessel that describes an absence of corruption rather than a set of characteristics. Its converse, a “culture of corruption,” is equally hard to define. Corruption varies dramatically in form and is, by definition, covert and hidden. No compliance program can check all its possible manifestations. While corruption can flourish as a top-down, organization-wide phenomenon (think Enron, Petrobras and Siemens), it can be confined to particular divisions or regions. It can even be driven by a “rogue employee,” though the latter is far less common than is customarily suggested.

It has often been held that corruption is inevitable in certain high-risk environments – implying developing countries in particular – but the OECD has shown that the majority of bribes uncovered abroad were paid in highly developed countries. This isn’t just an environmental issue. Understanding a company’s vulnerability to corruption requires an understanding of its culture: how power operates within, what the organization’s effective priorities are and how incentives shape employee behavior. Although anyone who has ever worked for an enterprise understands that paper statements can be meaningless when taken out of context, the compliance narrative all too often excludes consideration of how human beings actually perform in organizations.

With all this in mind, I conducted in-depth, qualitative interviews with 23 experts on anti-corruption and corporate ethics. These prominent lawyers, investigators, academicians and policymakers have significant experience at observing and studying corrupt companies. My questions were simple: What is the culture like in a corrupt organization? Can we generalize about leadership, decision making, incentives, values and behaviors in corrupt organizations? Can we use these findings to understand the characteristics of an ethical culture? Their answers have been varied and fascinating, but a remarkable consistency of agreement emerged across broad themes. All the arguments outlined below were raised independently by at least half the interview subjects. These traits don’t guarantee that an organization will be corrupt — but the more that are in place, the stronger the prediction that an organization is vulnerable.

The Growth Fetish: The Ends Justify the Means

“A company that is focused only on growth, with a huge emphasis on growing revenue and sales, is vulnerable to corruption, as is a company that is growing fast or is very acquisitive.”

“In my experience, companies prioritize business and will do what they need to do to succeed. Managing corruption is more directed at controlling corruption and information about it, rather than deterring or eliminating it. Because of this, it makes no sense to talk about controls in a vacuum.”

“The common denominator is trust. The place to drive a stake in the ground is the mantra about trust. The basic duty of an organization is to earn stakeholder trust, and this is not the same as shareholder trust. When ethics is a problematic appendage — treated as a cost center and viewed as bad for business — there will be corruption.”

Corporations exist to make money, to grow revenue and sales and satisfy shareholders. Financial reporting is driven by a quarterly calendar, and budget targets assume growth by default. Many interviewees felt that an overwhelming qualitative emphasis on growth makes any organization vulnerable to corruption. That vulnerability is enhanced by the extent that a culture emphasizes that ends justify means. Reducing corruption risk therefore requires an active emphasis on values and behaviors — one that considers how growth is achieved, not just whether it is achieved. This requires the active creation of an alternative narrative about the company’s identity and its criteria for success. Fighting corruption requires a long-term commitment to ethics, sustainability and engagement with all stakeholders across society, not just with investors.  This ties in with the concept of “social license to operate,” a term primarily used in the extractives industry, but with wider applicability.

Leaders’ Focus is Selectively Blind, for Plausible Deniability

“There are some companies where there is a lot of denial about the scale of the problem. Leadership behavior at these firms tends to manifest in terms of obsessive rewarding of results, combined with a lack of signalling behavior that the company is willing to walk away from corrupt deals. It’s a lot more than tone at the top — there are lots of arrangements that look ethically neutral but implicitly direct people in the wrong direction.”

“Corruption generally occurs because you get a few who are knowingly conducting the transaction, but more importantly, there are leaders who don’t really care about stopping corruption but don’t want to know about it. People at the very top tend to be quite good at that, and it creates an environment in which corruption is quite likely to happen.”

“Massive complacency is a trait, and that can continue after getting into trouble. Plausible deniability. The idea is ‘just get the deal, and don’t tell me how you got it.’ Also, using competition and the threat of dismissal to take people outside their comfort zone.”

Interviewees agreed with regulators: Leadership is the most critical factor in determining whether an organizational culture is vulnerable to corruption. This is because employees mirror leaders’ behavior, and this leads to the creation of group norms offering “social proof” that corruption is acceptable. In addition to a prevailing emphasis on growth, interviewees mentioned arrogance, complacency and opacity as being leadership characteristics that tend to encourage corruption. A lack of engagement with business conditions on the front line allows leaders to plausibly deny knowledge of corrupt activities. To overcome this, leadership needs to do more than pay lip service to fighting corruption and must actively seek to understand what is going on at the operational level. This, in turn, means taking personal responsibility for activities across the business. Many interviewees felt that leaders purposely encourage opaque systems in order to maintain plausible deniability.

Complex Organizational Systems Need to Emphasize Individual Accountability

“Leaders tend to hoard information — information is power, and power is exercised for the good of the leadership and not of the company. Good news travels up the chain, but the bad news rolls downhill. When a difficult decision is made, the basic dynamic is to avoid accountability so that no one is personally responsible.”

“The capacity to make autonomous decisions tends to be quite limited, and you see that over and over again: Decision making is so fragmented that no individual decision has any value import, but in aggregate it adds up to large-scale harm. Much literature concerns a mythical ethical man making decisions with the facts in front of him; this isn’t real. The realities of hierarchy mean that thriving in an organization involves suppressing bad news and filtering good news up, so it becomes very difficult to surface and deal with ethical lapses.”

“If leadership is not focused on ethics and compliance, they are not focused on HR, financial controls and so on. The failures that lead to corruption are good indicators of failures in other areas.”

Organizational complexity brings its own challenges. The realities of doing business across time zones, geographies and product lines have led to a focus on organizational matrices and shared responsibility. Intuitively, such structures should reduce corruption by increasing information flow. Indeed, interviewees emphasized the risks created by autocratic command-and-control structures, particularly in terms of the inability of employees to share problems with managers for fear of punishment. However, a lack of clear accountability also fosters corruption.  Shared responsibility and empowerment bring many benefits, but they need to be complemented by clear understanding and responsibility for managing individual risks and reporting problems. Otherwise, diffusion of responsibility will encourage everyone to regard corruption as someone else’s problem.

Excessive Local Autonomy Can Lead to Corrupt Subcultures

“Corruption is likely when people are put in high-risk roles with inadequate support. People are naïve about what happens when you put people out in the field. The issue is the level of local autonomy. With high decentralization, people become immersed in a certain cultural milieu, and it becomes entirely normalized. If there isn’t much movement between teams, that can silt up the group identity and make the fortress impregnable. It’s the relationship of structure and social process that’s the sweet spot, rather than it being a causal model.”

“Corruption thrives where there is low control and low transparency. I’d expect it with quite a structured leadership, but one that operates in silos. Double-check the connections between units; the interconnections have to be very high. When there is limited communication between teams, the corrupt leader can just create a parallel structure to take on this role.”

“Leadership is globally dispersed in most multinational organizations, so people look for behavioral cues from people closest to them. There are organizational pockets with particular subcultures, and the mentality is dictated by the environment.”

Reasonably enough, interviewees emphasized the need for an understanding of the local environment and the dangers in having a centralized control function with little knowledge of conditions in remote locations. However, compensating via further decentralization brings its own risks: Where a particular division or region enjoys a high degree of autonomy, this concentrates the risk of dependence on the qualities and character of its administrator. Interviewees also emphasized the dangers to teams whose performance is high while information is hoarded, signalling insufficient oversight. Multinational companies need to balance global consistency with local relevance; both are important in thwarting corruption. In general, though, centralized and consistent oversight is essential.

High Pressure and High Rewards Undermine Ethics

“Tone at the top is not irrelevant, but the issue is how the growth and sales forecasts get rolled down. What people watch is whether management is doing anything to cook the books when they need to, which sets the tone that it’s OK to break a couple of rules to get things done.”

“Prioritizing ends over means is a critical factor driving corruption. After the financial crisis, there was a flash of the blindingly obvious — that money, in and of itself, is a corrupting factor and creates moral distance. It’s interesting that these incentive structures persist, although everyone knows better at this point.”

There was universal agreement that pressuring individuals to meet high sales targets — and rewarding this to the exclusion of behavior or ethics — is a significant causal factor in corruption. Incentive and reward systems tend to be out of the remit of compliance and are based on budgets set at the corporate level, which are then translated into performance-management systems by human resources departments. Sales-based compensation targets set without regard to conditions in the local environment are considered a particular red flag for corruption. Interviewees frequently commented that companies have been slow to alter problematic incentive structures, despite widespread knowledge of their effects. This seems to relate to a – possibly illusory – fear of losing high-performing sales teams to competitors. However, many interviewees both offered and described examples of innovative approaches on incentives, such as: 1) making ethical behavior a key factor in determining executive compensation and 2) rewarding employees who were able to bring innovative approaches to tackle corruption. Both strategies are likely to succeed only if the corporate culture allows open discussion of corruption challenges.

High Performance Creates Mystique and Limits Oversight

“There is fierce loyalty to not turning others in, a strong sense of insider versus outsider. The subculture within the team is very important. If you are not playing with everyone else, you might turn them in, so there is a strong pressure to conform.”

“In an organization, there tend to be some individuals or teams who outperform others, and a mystique often develops around them. The roots of success of such teams might be opaque, but there is limited appetite to question the basis of the results and investigate further. Managers naturally focus on underperformance when prioritizing the need for oversight.”

Interviewees emphasized that, even when there is not a dominant culture that “the ends justify the means,” there is an overall reluctance to question the basis of high performance by teams or individuals. This tends to become self-perpetuating, leaving them increasingly autonomous and empowered. When the basis of success is illegitimate, this can help perpetuate corruption via the natural inclination to replicate the behavior of prominent contributors. The behavior can become normalized and accepted within the team. Interviewees noted that such teams tend to be little-understood and to maintain high boundaries that limit information flow to the rest of the organization.

Urgency and Necessity Undermine Stated Values

“There are techniques to exaggerate the urgency of the situation — the sense that ‘this is what it takes to survive’ — which short-circuits ethical reasoning. The creation of urgency is very important, particularly since compliance and legal teams do not operate on a rapid turnaround schedule. The timing issue short-circuits proper checks and balances. A commitment to values, on the other hand, requires every commercial decision to be taken with these values in mind.”

“The ‘good of the organization’ means meeting this year’s profit targets. There are some environments where you can’t avoid the external pressures and need to consider whether it is realistic to enter this market. People argue that ‘of course, we have to be there.’ But this is assuming necessity as a fact when, in fact, it is never a fact but always a choice. A systemic problem of short-termism.”

Since corruption involves subverting stated company values (as well as laws), it tends to be accompanied by certain values that interviewees believe are concentrated in a sense of urgency and necessity. Companies tend to consider financial results and reporting in fairly short time horizons, so it is relatively straightforward to build a mood of commercial necessity that justifies treating compliance processes as pro forma or essentially insignificant. Although interviewees highlighted other rationales used to “justify” corrupt behavior — including denying the consequences of actions, denying the existence of victims and minimizing the sense of wrongdoing overall — building a sense of urgency was the most frequently cited means to justify the undermining of ethical and compliance commitments.

Language and Social Processes Provide a Legitimizing Function

“The heavy use of euphemisms belittles the magnitude of the crime. They knew they were doing something wrong; they had code names for processes to offshore the bribes.”

“There needs to be more work around giving voice to values, materiality and the locus of loyalty. Mission statements are just aspirational. People mean: What do we claim to uphold? But language is powerful, and there is an opportunity to create an alternative discourse and make ethics an explicit part of the conversation.”

In addition to the sense of necessity, interviewees highlighted the frequent use of euphemisms and argued that this hides a sense of awareness and shame. The use of euphemisms to describe corruption and bribery is almost universal across cultures, reflecting a desire to diminish the impact and sense of wrongdoing. Some interviewees highlighted the need to embed explicit conversations around ethics and values into all decisions, arguing that language is a powerful tool in helping drive behavior in organizations. One interviewee mentioned a company that he had worked with whose executives read its mission statement before making any commercial decision. He described this relatively simple technique as an important procedure for driving group norms in the right direction.

A Culture of Corruption

Overall, the answers from interviewees were highly consistent, citing common characteristics, listed below.  Each one of these characteristics heightens the vulnerability of a team, office or division to corruption.

Strategy: Growth is the primary goal, and all others are irrelevant; competition is high; and the ends justify the means.

Leadership: Leadership is complacent; it hoards information, diffuses accountability and focuses on plausible deniability. Ironically, leaders who preside over corrupt practices are likely to project successfully a self-image of being a high-performing, high-status individual.

Structure: Local devolution and autonomy combines with limited oversight. The group is isolated by circumstance, by design or both.

Decision making and authority: Strongly hierarchical and directive; top down; little consultation; and short time horizons.

Incentives: Discretionary bonuses and targets are unrealistic, set without regard to market conditions or employee behavior.

Values and Beliefs: The workplace will hold a pervasive culture of fear, necessity, insecurity, powerlessness and intense rivalry. The language is of war and sport. Further distancing techniques may exist.

Norms and Behaviors: Low transparency, secrecy, defensiveness and a lack of pride in the organization.

In summary, there are situational and behavioral factors that clearly predict corrupt outcomes. The archetypal corrupt team is based in a location far from headquarters, where it succeeds in meeting unreasonably challenging sales targets under a keenly directive, controlling leader. The team is widely regarded as successful and high-performing, though mystique or confusion attends the basis for its performance. Information is synonymous with power and is tightly held. Individuals in the team are fiercely loyal to each other and are driven by a sense of necessity, insecurity, competition and short time horizons. There is heavy use of in-group language, commonly including euphemisms for misconduct and metaphors of war and sport.

Many companies have teams and leaders like this; front-line and middle management employees can usually identify them with ease. (If the team in question is the C Suite, expect problems for the entire organization, rather than for a particular division.) The individuals leading these teams are probably powerful, high-status personnel who command significant revenue. While the behavioral dynamics in such teams are unlikely to be detected by any conventional compliance process, they are often the root of ethical and corruption problems precisely because they evade attention. By shifting the control focus toward the cultural dimension, we can identify these problems hiding in plain sight. This can, in turn, help target investigative and compliance interventions at the points of highest risk.


Alison Taylor

Alison Taylor is Director of Advisory Services at BSR. She focuses on approaches to sustainability through risk management, strategy, stakeholder engagement, transparency, governance, and organizational change.

Previously, Alison was a senior managing director at Control Risks, where she helped companies operate with integrity, particularly in high-risk environments. She has also worked at Transparency International, PricewaterhouseCoopers, and IHS Global Insight. She has experience in strategic intelligence, market entry assistance, risk consulting, due diligence, internal investigations, enterprise risk management, and ethics and compliance. She speaks and writes regularly on risk and organizational culture. She is a board member of the anti-corruption organization, Not in my Country, and serves on the sustainability committee of the Society of Petroleum Engineers.

Alison holds an M.A. in International Relations from the University of Chicago, an M.A. in Organizational Psychology from Columbia University, and a B.A. in Modern History from Balliol College, Oxford University.


 

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