Corporate Governance:Corporate Governance:An Antidote to An Antidote to CorruptionCorruptionJohn D. SullivanJohn D. SullivanJuly 11, 2006July 11, 2006Washington, D.C.Washington, D.C.

An Affiliate of the U.S. Chamber of Commerce

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The Third Pan-African Consultative Forum on Corporate The Third Pan-African Consultative Forum on Corporate Governance successfully brought together 160 participants Governance successfully brought together 160 participants from 30 African countries dedicated to improving good from 30 African countries dedicated to improving good corporate governance on the continent corporate governance on the continent

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Corruption: MagnitudeCorruption: Magnitude

MagnitudeMagnitude• Corruption costs African countries an Corruption costs African countries an

estimated 25% of its combined national estimated 25% of its combined national income - some $148bn a year. income - some $148bn a year.

Olusegun Obasanjo, President of NigeriaOlusegun Obasanjo, President of Nigeria(BBC 2/17/06)(BBC 2/17/06)

ImpactImpact• Less investment Less investment •• Market Market

uncertaintyuncertainty• Larger informal sector Larger informal sector •• Poor public Poor public

services services • Higher transaction costs Higher transaction costs •• Misallocated Misallocated

resources resources • Higher costs of doing businessHigher costs of doing business• Higher poverty and inequalityHigher poverty and inequality

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Private Sector and Corruption: Private Sector and Corruption: Different ViewsDifferent Views

Private sector as a _________ corruptionPrivate sector as a _________ corruption

• Victim ofVictim of• Direct – extortion, costs of doing businessDirect – extortion, costs of doing business• Indirect – loss of competitiveness, weak market Indirect – loss of competitiveness, weak market

institutions institutions

• Source ofSource of• Public procurement Public procurement • Private-private corruptionPrivate-private corruption• Gaining unfair competitive advantage Gaining unfair competitive advantage

• Solution toSolution to• Mobilizing private sector for reformMobilizing private sector for reform• Say “No” to corruptionSay “No” to corruption• Reform company (internal) and country (external) Reform company (internal) and country (external)

institutionsinstitutions

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The Corruption DilemmaThe Corruption Dilemma

DilemmaDilemma• Although corruption is bad for business,

individual companies that engage in corruption receive a short-term advantage

Approach• It is important to set up a system that makes it

hard for companies to engage in corruption, even if though corruption seems desirable

In other words…• Corporate governance as one antidote to

corruption

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Two Sides of CorruptionTwo Sides of Corruption

CorruptionCorruption

Demand-SideDemand-Side• Checks and balancesChecks and balances• Procurement codesProcurement codes• Independent auditsIndependent audits• Legal reformLegal reform• Simplify tax codesSimplify tax codes• E-government systemsE-government systems• EnforcementEnforcement

Supply-sideSupply-side• Anti-Bribery ConventionAnti-Bribery Convention• Conflict of interestConflict of interest• Transparency in private-Transparency in private-

public transactionspublic transactions• Freedom of informationFreedom of information• Accounting standardsAccounting standards• Corporate governanceCorporate governance

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Corporate GovernanceCorporate Governance

The core values of corporate governance:The core values of corporate governance:

•TransparencyTransparency•AccountabilityAccountability•FairnessFairness•Responsibility Responsibility

- OECD Principles - OECD Principles

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Corporate GovernanceCorporate Governance

Effective corporate governance means that:Effective corporate governance means that:• Board members exercise good judgment• Transparency values are present• Investors receive timely and relevant information• Decision-making is not done behind closed doors• Decision-makers are held accountable for their actions• Managers act in the interest of a company

The bottom line: effective corporate governance makes it hard for companies to provide bribes or other company resources to government officials in exchange for services.

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Internal Controls and Internal Controls and EthicsEthics

TI’s Business Principles for Countering BriberyTI’s Business Principles for Countering Bribery• Political and philanthropic contributions, gifts, hospitality, etc.Political and philanthropic contributions, gifts, hospitality, etc.• Facilitation payments! Facilitation payments!

Implementing the principles requires that:Implementing the principles requires that:• Boards of directors take formal responsibilityBoards of directors take formal responsibility• Effective whistle-blowing channels exist Effective whistle-blowing channels exist • Embedded internal control measuresEmbedded internal control measures• Formal accounting procedures set up that check for briberyFormal accounting procedures set up that check for bribery• Internal communication and trainingInternal communication and training

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Business Principles for Business Principles for Countering BriberyCountering Bribery• Business Principles Business Principles

for Countering for Countering BriberyBribery

• Six-step Six-step implementation implementation process (a how-to process (a how-to guide)guide)

• Self-evaluation to Self-evaluation to assess performance assess performance (in development)(in development)

• Voluntary external Voluntary external evaluation tool (in evaluation tool (in development)development)

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Case StudiesCase Studies• Center for Corporate Governance | Center for Corporate Governance |

Building national capacity to Building national capacity to implement corporate governance implement corporate governance in Kenyain Kenya

• Confecámaras | Transparency Confecámaras | Transparency pacts in public procurement and pacts in public procurement and corporate governance in state-corporate governance in state-companies in Colombiacompanies in Colombia

• ADFIAP | Corporate governance in ADFIAP | Corporate governance in development finance institutionsdevelopment finance institutions

• Egyptian Institute of Directors | Egyptian Institute of Directors | Multi-stakeholder effort to develop Multi-stakeholder effort to develop a corporate governance code in a corporate governance code in EgyptEgypt

• Lebanese Transparency Lebanese Transparency Association | Corporate Association | Corporate governance code for SMEs in governance code for SMEs in LebanonLebanon

Available on CIPE’s Africa regional webpage www.cipe.org/regional/africa

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“Corporate governance is one of the most effective tools to improve the functioning of domestic economies and increase the investment appeal

of African countries.”

-Philip Armstrong, Global Corporate Governance Forum, speaking at the Third Pan-African Consultative Forum on Corporate Governance held in November 2005 in Dakar,

Senegal