policy paper: collective action project business case for public-private dialogue on anti-corruption...

POLICY PAPERCollective Action Project Business Case for

Public-Private Dialogue on Anti-corruptionand Green Economy

The UN Global Compact is the largest voluntary corporate citizenship initiative in the world and offers a unique platform to engage companies in responsible business behavior in the world, through the Ten Principles in the areas of human rights, labour standards, the environment and anti-corruption. It provides access to the United Nations’ broad knowledge base in development issues as well as in mobilizing government, business, civil society, labour organizations and academic institutions to take collective action. Today there are more than 90 Global Compact Local Networks in key markets across the world. The Networks provide an opportunity for members to share experiences, innovative practices and to collaborate for furtherance of responsible business values within country specific contexts.

The Global Compact Network (GCN), India, was formed in November 2003 and registered as non-profit society to function as the Indian Local Network of the UN Global Compact. GCN India is the first Local Network in the world, established with a pan-Indian membership base. GCNI provides an extremely relevant vehicle for Indian business, academic institutions and civil society organisations to join hands towards strengthening Responsible Business Initiatives in India and Internationally.

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Policy Paper - Collective Action Project

PreambleThe 10th UNGC principal states that “Businesses should work against all forms of corruption including bribery and extortion” .

In pursuance of this principal, in December 2010, United Nations Global Compact (UNGC) launched the Anti-Corruption Collective Action Project in five countries – Brazil, Egypt, India, Nigeria and South Africa – with support from Siemens Integrity Initiative Fund.

The aim of the project is to foster a high-impact collective action platform on anti-corruption by facilitating on-going dialogue between private and public sector. The project offers an opportunity for a wide range of stakeholders to explore how collective action can create incentives for ethical business performance.

This policy paper endeavours to holistically find ways and means to explore and address specific issues related to corruption that businesses face in this globalized world. It also attempts to strengthen the efforts of collective action by reaching out to various stakeholders comprising of public and private enterprises, business federations, academic institutions and civil society organizations – so as to address the issue of corruption in all its manifestations.

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List of abbreviationsASSOCHAM The Associated Chambers of Commerce and Industry in India

CAG Comptroller and Auditor General

CAP Collective Action Project

CBI Central Bureau of Investigation

CEO Chief Executive Officer

CII Confederation of Indian Industry

CWG Common Wealth Games

FDI Foreign Direct Investment

FICCI Federation of Indian Chamber of Commerce and Industry

GCN Global Compact Network

GDP Gross Domestic Product

IBLF International Business Leaders Forum

ICC International Chamber of Commerce

IP Integrity Pact

NGO Non-Governmental Organization

PACI Partnering Against Corruption Initiative

SGS SociétéGénérale de Surveillance

SIIF Siemens Integrity Initiative Fund

SME Small and Medium Enterprises

TI Transparency International

UNCAC United Nations Convention against Corruption

UNGC United Nations Global Compact

WEF World Economic Forum

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Context 6

Corruption in India 7

Collective Action Project Business Case 9 For Public – Private Dialogue on Anti-Corruption And Green Economy

Conclusion 9

References 14

Contents

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AbstractCorruption is not a peripheral social concern any longer that public and private businesses can ignore or passively address. In rapidly evolving markets, like India, it is a bottom-line business issue that directly affects companies’ ability to compete. This policy paper sets out opportunities for collective action and highlights a concerted approach for successfully mitigating the multiple risks associated with corruption. The ultimate goal of the Project is presenting a business case for anti-corruption and green economy.

ContextAn analysis of social process needs to be studied in the context of paradigms or theoretical frameworks that try to seek patterns and uniformities in social dynamics. An ethical dilemma occurs in business when the most profi table consequence of an activity necessitates a process that is detrimental to the overall well-being of the society. Many a times, it is found that companies are not willing to take the risk of looking for an ‘alternative way’ as it would mean lessening the profi ts of the company and in all probability increasing the added responsibility of major restructuring and additional costs on the company.

However it has been found that co-operation, collaboration and shifting for an environment friendly approach reasonably benefi t the enterprise. Perhaps the most fascinating argument for bringing ethics into business is the prisoner’s dilemma. A prisoner’s dilemma is a situation in which two parties are each faced with a choice between two options: Either cooperate with the other party or to not cooperate. If both parties cooperate, they will both gain some benefi t. If both choose not to cooperate, neither gets the benefi t. If one cooperates while the other chooses not to cooperate, the one who cooperates suffers a loss while the one who chooses not to cooperate gains a benefi t. The prisoner’s dilemma demonstrates that cooperation is more advantageous than continuously trying to take advantage of others, especially in a playing fi eld wherein the players would meet each other time and again.

According to a survey on bribery and corruption conducted by KPMG , 99% of respondents opined that the biggest impact of corruption on business is its tendency to skew the level playing fi eld and attract organizations with lesser capability to execute projects. This creates ineffi ciencies in the system and increases the cost of operations. It also misallocates talent to rent-seeking activities; lowers quality of products and services; hinders innovation and technological development; hampers development of a market; and drives away investment .

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Corruption in IndiaIndia, with its skilled and relatively low cost labour, coupled with a moderately developed infrastructure, offers an attractive market for foreign investors. According to A.T. Kearney’s FDI Confidence Index 2007 , India is ranked as the second most attractive destination for Foreign Direct Investment (FDI) in the world, with FDI continuing to represent the fastest growing component of GDP. However, corruption hinders foreign direct investment as investors typically avoid environments in which corruption increases the cost of business and undermines the rule of law. Mr. N. Vittal, former Central Vigilance Commissioner states that “If corruption goes down, Indian GDP will grow by 1.5% and FDI will go up by 12%” .

In a study conducted by Transparency International India the Industries particularly prone to corruption were mapped. In the graph given below, scores from 0 to 10 reflect the propensity of companies in different sectors to pay bribes. The score relates to perceptions of the degree of corruption ranges between 10 (highly clean) and 0 (highly corrupt) .

Note: The Industries ranking is drawn from Transparency International’s 2011 Bribe Payers Index.

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5.3 6.1 6.1 6.2 6.3 6.4 6.4 6.5 6.6 6.6 6.7 6.7 6.8 6.9 6.9 7.0 7.0 7.1

Industries Particularly Prone to Corruption

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Corruption is estimated to cost $2.6 trillion annually, an amount equal to more than 5 per cent of global GDP. Each year, over $1 trillion is paid in bribes . These payments undermine fair competition and affect the profitability of businesses operating globally, divert crucial public resources away from their legitimate uses, thereby denying citizens essential public services such as education, clean water, and health care. The recent 2G Spectrum allocations frauds in India alone amounts to 1.76 lakh crores (40 billion US dollars). In a 96-page report tabled in parliament, the Comptroller and Auditor General (CAG) said the presumptive loss to the exchequer through spectrum allocation to 122 licenses and 35 dual technology licenses in 2007-08 was Rs.1,76,645 crores. Further, the report observes that ‘The entire process of spectrum allocation was undertaken in an arbitrary manner, adding to the losses’. In another scam, the Commonwealth Games Fraud amounts to 60,000 crores (13 billion US dollars) . Most of this money is parked outside the country. According to Global Financial Integrity report, India lost a total of $462bn in illegal capital flows between 1948-2008.

In addition to tangible business consequences, corruption exacts significant costs on society. According to Global Financial Integrity report, the illegal flight of capital through tax evasion, crime and corruption have widened inequality in India. Further, in societies where bribery persists and corrupt officials are not held accountable, citizens lose faith in their government. A lack of public trust undermines the rule of law, which can lead to increased crime, reduced safety, and further, instability. In a survey of urban middle-class Indians conducted by the Times of India newspaper last year , 83 percent of the respondents said that corruption was at an all-time high, two-thirds said the government was not serious about tackling it, and 96 percent said it had tainted the government’s image.

CWG COSTS Country Year Costs in Crores

United Kingdom (UK) 2002 2100

Australia (AUS) 2006 5000

India (IND) 2010 60000

United Kingdom (UK) 2014 2200 (estimate)

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BackgroundThe United Nations Convention Against Corruption (UNCAC) entered into force in December 2005 and was ratified by India on May 1, 2011. UNCAC is the first binding global anti-corruption instrument obliging States to prevent and criminalize different corrupt practices, promote international cooperation, cooperate for the recovery of stolen assets and enhance technical assistance and information exchange. As the sole global legal instrument to prevent and combat corruption, both in public and private affairs, UNCAC was designated by the United Nations Secretary-General as the underlying legal instrument of United Nations Global Compact’s (UNGC) 10th principle. The Collective Action Project aims at devising business integrity measures, on the basis of the 10th UNGC Principle, to facilitate companies to operate with UNCAC recommended standards.

The three levels to fight corruption identified by stakeholders globally are:

i. Internal – where a company assesses risks, implements anti-corruption policies and compliance programs and provides guidance to managers

Collective Action Project Business CaseFor Public – Private Dialogue on Anti-Corruption And Green Economy

ctive Ac

tion

Corrupt environment Level playing field

Colle

Collective Action helps to achieve fair competition

Source: Collective Action Project

Collective Action helps to achieve fair competition

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ii. External – shares internal policies, experiences, good practices and success stories with external stakeholders

iii. Collective – Reaches out to industry peers, suppliers and other stakeholders and initiates joint activities to fi ght corruption

Statement of PurposeThe Collective Action Project aims to foster a high-impact collective action platform onanti-corruption by facilitating on-going dialogue between private and public sectors. The project offers an opportunity for a wide range of stakeholders to explore how collective action can create incentives for ethical business performance.

Scope of the Policy:• The policy seeks to scale up existing anti-corruption efforts among stakeholders

by providing knowledge, skills, strategies and resources to promote ethical practices and transparency in business operations.

• Strives to raise awareness amongst business executives, government offi cials and general public about the value of collective action and corporate responsibility in fi ghting corruption.

• The policy also seeks to address specifi c corruption related challenges in the area of environment sustainability.

Objectives of the Policy:• Explore a wide range of corruption related issues both in public and private

business houses.

• Explore and critically review the systems, processes and monitoring mechanisms which are currently existing and established in business houses and among other stakeholders, so as to ascertain how they meet the challenges of the global business environment.

• Promote the creation of a strong business case on anti-corruption among stakeholders.

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Organisational & Implementation StrategyFormulating a strategy for collective action to fight against corruption is not an easy task in itself. This strategy is devised from three perspectives: i) the nature and scope of CAP in India; ii) the composition of Stakeholders involved; and iii) the nature of business dynamics in India.

Collective Action Project (CAP) would attempt to provide an enabling platform at the country level where multiple stakeholders would address issues related to corruption. CAP is a forum to share information and experiences and find ways and means to collectively fight against corruption. As CAP is voluntary in nature, it explores ways to understand transparency issues of public and private businesses. Stakeholder Mapping is an important tool in this regard, which involves concerted efforts to reach out to various stakeholders.

Further focused agendas would be set based on the nature of the business, so that sector specific issues related to corruption, can be appropriately explored and addressed. Meetings / Consultations with business houses would be an important tool to understand their stand on certain issues related to corruption and how leading business houses tackle dilemmas relating to corruption vis-à-vis

environmental sustainability. Organisation of Seminar Series on business ethics, code of conduct, compliance mechanisms, monitoring mechanisms and business case on corruption, periodically among the stakeholders, would be another tool in continuance of collective action against corruption.

Government action is a critical component in creating a level playing field that companies desire. Therefore, networking with the appropriate authorities of the government, on behalf of and along with the stakeholders, with regard to policy changes and compliance mechanisms, that fosters sustainable business, would be an effective tool of the project. A company’s reputation is its most vulnerable asset once corruption is made public.

Platform

Forming Core Group Media

Risk AssessmentTraining Key PersonnelMonitoring & Compliancy

Seminars/Meetings/Consultations Government Action

Business Case againstCorruption

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The threat of negative coverage can be a powerful incentive for companies to ensure they have prevention programmes in place. “The exposure in the media is what gets people’s attention,” says Jean-Pierre Méan, group general counsel for SGS Group, a global certification company based in Switzerland. “People follow what is happening in the news and not necessarily in the courts” . Correspondingly positive media coverage boosts the sales and morale of a company, so, encouraging companies to go public about their stated policy on anti-corruption would be an effective tool of the CAP.

Further, Collective Action Project encourages stakeholders to take up periodic rigorous risk assessments to identify corruption related risks. CAP would assist in the design and implementation of anti-corruption policies and programmes among the stakeholders and would also attempt to identify and develop responses to weaknesses in programmes and enhance corruption awareness by training key personnel. Senior management would especially be targeted as any successful anti-corruption programme must begin with a clear commitment from the top. In addition, compliance officers, representatives from business associations, government departments and agencies, NGOs and SMEs would be invited to the trainings. Also since sales and bids are regarded as areas where companies are particularly vulnerable to corruption, training would be provided to employees in these departments. Further, CAP encourages more and more companies to sign various compliance mechanisms such as Integrity Pacts, Anti-Corruption Declarations, Principle-Based Initiatives, and Certifying Business Coalitions, for a transparent ethical business.

CAP also encourages stakeholders to develop their own monitoring mechanisms as constant monitoring helps companies identify new forms of corruption risks and adapt their programmes accordingly. At Tata Group in India, the anti-corruption strategy is ingrained even in the code of conduct, says Dr Irani: “We have set examples just to drive home the message that anyone who’s found indulging in such practices is immediately, shall we say, acted upon and removed from the organisation.” Thus, the ever-changing nature of corruption makes continuous monitoring essential. Moreover, CAP would strive to promote collective action among major business schools, institutional investors, regional business associations, by sharing with them short guidance documents and anti-corruption workshop modules so as to strengthen their anti-corruption and transparency initiatives.

To enhance periodic monitoring and establish credibility for Collective Action Project, a Core Group is to be formed with representatives from leading companies, non-governmental organisations and experts on the issues of code of business ethics, compliance and transparency. This core group would advise and guide the CAP on ever evolving strategies and project deliverables.

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Siemens: Learning from Costly MistakeThe case of Siemens provides a stark reminder of the high costs corruption can impose on a multinational company. Between 2001 and 2007, the German conglomerate used a large slush fund to pay bribes to corrupt government officials in countries across the globe. These activities involved several of the company’s business units, including a Siemens subsidiary in Argentina, which paid at least $40 million in bribes to win a $1 billion contract to produce national identity cards and $20 million to senior government officials to build power plants in Israel. Following investigations by authorities in multiple countries, including Germany and the U.S., the illegal activities cost the company significant financial resources, as well as an even greater asset, its reputation. The Guardian news-paper reported in 2011: “The scandal has cost Siemens, a symbol of German engineering excellence and corporate probity, not only its reputation and that of former senior executives, but more than [$2 billion] in costs. The company is being investigated in scores of countries around the world, two ex-board members are under criminal investigation, and a senior manager was recently given a suspended two-year sentence.” In addition to incurring legal, accounting, and re-structuring costs, the staggering fine paid by Siemens as a result of its accepting a plea bargain is the largest fine in modern corporate history. Since admitting its transgressions, the company has invested heavily in strengthening its compliance program. According to Sabine Zindera, Vice President, Corporate Legal and Compliance, the company has increased the number of staff working on compliance from 6 to almost 600 and has provided training to 120,000 of their employees during 2011. The efforts that Siemens has taken worldwide to have a robust Compliance system in place has paid rich dividends as it has led to complete turnaround and Siemens has been declared as a leader by Dow Jones Index in Corporate Governance. Siemens is also working with external stakeholders to create tools and resources to benefit the anti-corruption efforts of other corporations.

ConclusionAlmost every company, regardless of size, industry, or country of operation, is exposed to some degree of corruption risk. Some sectors, such as defence, construction and the extractive industries, identified the danger early and began developing management strategies. However, others are just waking up to the risk, often because high-profile enforcement penalties have caught their attention, or because they are seeking opportunities in unfamiliar markets. Companies are also focusing on corruption risk to protect their most vital asset—their reputation—and are developing socially responsible business models expected by investors and other stakeholders.

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One of the greatest difficulties for tackling corruption among the businesses, both public and private, is a heavily-engrained corporate culture. According to Hess and Ford, if corrupt practices are engrained within a corporation‘s daily activities, simply adding more controls or increasing monitoring activity has only limited effectiveness, as it does not address the root of the problem wherein corrupt behaviour and practices are subconsciously rationalized by employees. There is no fast, easy or sure-proof method to change the engrained corporate culture of bribery where it exists. Each business will have to find its own strategy, which has to be monitored continuously. Thus operating in a complex network of mutually-reinforcing and circular relationships, promoting a strategy on multi-stakeholder collective action must be holistic in order to be meaningful and far-reaching, and utilise horizontal and vertical linkages, at the local, national, regional and global level.

Referenceswww.unglobalcompact.org/docs/.../7.../BACtextcoversmallFINAL.pd...

https://www.in.kpmg.com/.../aci/.../KPMG_Fraud_Survey_2010.pdf

http://www.enterprisesurveys.org

http://www.unodc.org/unodc/en/treaties/CAC/index.html

www.atkearney.com/images/global/pdf/FDICI_2007.pdf

cvc.nic.in/cfcichapter.pdf

https://members.weforum.org/pdf/.../BusinessCaseAgainstCorruption...

www.nagrikchetna.com/corruption.pdf

www.unglobalcompact.org/docs/.../7.../BACtextcoversmallFINAL.pd...

www.deccanherald.com/content/.../cwg-rot-sinks-india-graft.html

m.timesofindia.com/PDATOI/articleshow/7485002.cms

SGS is the world’s leading inspection, verification, testing and certification company (Switzerland based company)

www.ethics.org/files/u5/Anti-corruptionFINAL.pdf

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Global Compact's PrinciplesHUMAN RIGHTSPrinciple 1 Businesses should support and respect the protection of internationally proclaimed human rights

Principle 2 Businesses should make sure that they are not complicit in human rights abuses

LABOURPrinciple 3 Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining

Principle 4 Businesses should uphold the elimination of all forms of forced and compulsory labour

Principle 5 Businesses should uphold the effective abolition of child labour

Principle 6 Businesses should uphold the elimination of discrimination in respect of employment and occupation.

ENVIRONMENTPrinciple 7 Businesses should support a precautionary approach to environmental challenges

Principle 8 Businesses should undertake initiatives to promote greater environmental responsibility

Principle 9 Businesses should encourage the development and diffusion of environmentally friendly technologies

ANTI-CORRUPTIONPrinciple 10 Businesses should work against all forms of corruption, including extortion and bribery.

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Collective Action ProjectGlobal Compact Network IndiaScope Complex, Core 5, 6th Floor7 Institutional Area, Lodhi Road, New Delhi-110003Ph No: +91-11-24306486. Telefax: +91-11-24368269Email: [email protected] : www.globalcompactindia.org

Opening Event, 13th February 2012 New Delhi, India

INDIA CEO FORUM ON BUSINESS AND HUMAN

RIGHTS

The India CEO Forum is a two-year Global

Compact Network India ini� a� ve, kindly

chaired by Mr. N. R. Narayana Murthy

Founder and Chairman Emeritus,

Infosys Limited

GCNI Publications
