Business ethics and public interest

Business Ethics and Public Interest

Presentation by Frank Vogl

IV Global Forum on Fighting Corruption, Brasilia, June 8, 2005

Some Key Points in this Presentation:

A radical rethinking of attitudes toward the regulation of business behavior is essential to fight corruption in developing countries. This requires recognition of regulatory enforcement failures and the dangers that more red tape diminishes economic growth prospects and enhances corruption.

A key purpose of fighting corruption is to reduce poverty, which demands economic expansion that requires a vibrant private sector. Aid agencies should find new ways to encourage business development, while being mindful of business malfeasance.

Projects funded by aid agencies to promote good governance are well intentioned, but often have scant impact. Donor agencies must increase their efforts to find ways to bypass corrupt regimes in order to assist the victims of these regimes – this requires greater support for NGOs and new partnerships with business. We need a major expansion of the International Finance Corporation and of other aid agency private sector programs.

This demands, however, trusting business. Scandals underscore that business cannot just say “trust me.” Business must initiate major programs to earn public confidence.

More corporations must recognize that it is in their self-interest to apply a Value Equation that asserts that good ethics yields good business results. In an age of transparency business has nowhere to hide. It needs to apply a 10-point ethics framework that earns trust and incorporates safeguards against rogue behavior.

Multinational corporations dare not pursue a double standard: one ethical standard in their home country and a lower one in developing countries. “Facilitating payments” under the U.S. Foreign Corrupt Practices Act, for example, are bribes and illustrate the unacceptable double standard that currently exists.

Companies must adopt anti-corruption and corporate social responsibility principles and programs (learning from leading enterprises) and apply them with zeal. In return, aid agencies and NGOs should seek to partner with business to build viable new initiatives.

The alternative to heightened voluntary business ethics initiatives and greater support by aid agencies for NGOs and private enterprise is:

still more unenforceable laws, rules and regulations; more red tape and wasted aid in the quest to secure good business behavior; less business investment and growth; and possibly even more corruption.

IV Global Forum – Brazil – June 8, 2005: Frank Vogl

Business Ethics and Public Interest

Presentation by Frank Vogl 1

IV Global Forum on Fighting Corruption, Brasilia, June 8, 2005

Frank Vogl is President, Vogl Communications, Inc. (www.Voglcommunications.com), co-founder and member of the Advisory Council of Transparency International (www.transparency.org), co-founder and member of the Board of Directors of the Partnership for Transparency Fund (www.partnershipfortransparency.info), Trustee of the Committee for Economic Development (www.CED.org), member of the Fellows Program and of the Board of Directors of the Ethics Resource Center (ethics.org).

Introduction

The opening sentence of a lead article on the front page of the Sunday Business section of The New York Times on May 29 read as follows: “Rooting out conflicts of interest on Wall Street has become a full-time job for securities regulators in recent years.” Our topic today could not be more timely. Our focus on this grand stage of anti-corruption at the Global Forum is business behavior and, in particular, the conflicts of interest that are so evident, but so hard to contain.

Across the world we see business enmeshed in myriad activities where conflicts are at the fore. These may relate to business efforts to influence partners and consumers, customs officials, grantors of official permits, politicians, political parties, and governments. We find countless examples where executives have faced conflicts between their own narrow self-interest and the larger interests of the companies that employ them. We have every reason to be worried about business ethics and the endless conflicted entanglements of corporations. This is especially the case in fragile environments where economic growth is precarious, where infrastructure is inadequate and where widespread poverty is a tragic fact of life – namely in the developing countries.

Today, I am going to propose courses of action that challenge the conventional strategies of official bilateral and multilateral aid agencies and many of the governments of the developing countries, and indeed quite a number of non-governmental organizations.

At the outset permit me to thank the organizing committee for inviting me to this conference and I would particularly like to acknowledge Claudio Weber Abramo and his colleagues at Transparencia Brasil. As I prepared this presentation I was pleased to note that we are meeting here on the 10th anniversary of the launch of the first Transparency International Corruption Perception’s Index, which has played a critical role in raising public awareness around the world to the unacceptably high levels of perceived corruption in a considerable number of countries. Finally, let me draw your attention to the work by Daniel Kaufman, Aaart Kray and Massimo Mastruzzi of the World Bank Institute, who with their new report “Governance Matters IV: Governance Indicators for 1996-2204,” have provided us all with an encyclopedic base of information to comprehend corruption’s complexity across the world.

1 Frank Vogl, Vogl Communications, Inc., 1010 Wisconsin Avenue NW, Suite 570,Washington DC, 20007. Tel: (202) 331 8183 Fax (202) 295 9006 [email protected] www.voglcommunications.com

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Connections

The World Bank’s governance indicators leave no doubt that corruption is seen to be pervasive in many of the very poorest countries. In these countries where starvation runs rampant, where clean water, decent healthcare, adequate shelter and even modest schooling is absent for millions of people, we find public officials plundering exceptionally scarce public resources for their personal gain.

In these same countries where corruption flourishes we find, according to the new indicators, that levels of press freedom and public accountability of officials is low; that political stability is often precarious; that government effectiveness and regulatory quality are inadequate; and that the rule of law provides cause for grave skepticism. The data confirms much that we have long known or suspected and underscores the enormous task of fighting corruption.

The indicators highlight the enormous gap between performance in OECD countries (for example, the United States, the U.K and Canada) and developing countries. The Ethics Resource Center, for example, supports a network of business ethics institutes in Colombia, Dubai,2 South Africa and Turkey – countries that are by no means the world’s poorest and which are all increasingly engaged in global commerce. In each of the key six categories that the World Bank clusters together as governance indicators3 we find substantial performance gaps between these four countries as well as between them and the major industrial countries. If we add China, India, Brazil, Mexico and Korea to our sample group – and these are among the most dynamic emerging market economies in the world today – we find that the performance gaps are even more stark. And, if we were to add the poorest countries of the world, then the low levels of performance are so substantial in most cases that one might conclude that fighting corruption is a hopeless endeavor. I am less pessimistic, but this is partly because I believe that aid agencies, NGOs and business can demonstrate the courage to unleash new initiatives that can yield positive reforms and solid development progress.

If ever there was an opportunity for radical new thinking and action by donor agencies in the development arena then it is the year 2005. This year sees brand new leadership at the Asian Development Bank, the African Development Bank, the World Bank, the World Trade Organization, the Organization of American States and the Inter-American Development Bank. This is the year when the G-8 Summit makes development assistance, especially to Africa, its top priority.

The leadership of the donor community and those who most influence their policies need to review anti-corruption strategies, especially as they pertain to the role of business and business ethics. In so doing the I believe consideration should be given to some of the conclusions that I draw from the new research that point to, among other conclusions, that:

2 The World Bank Institute’s governance indicators are not specific for Dubai, but do include the United Arab Emirates.3 Please see the endnote to this paper that draws on the new World Bank research and provides the definitions of the indicators.

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1. There is no simple solution to fit each nation. The variations in the governance indicators from one country to the next highlight the differences between nations and the need to tailor strategies to each individual nation. The dangers of over-generalization are profound.

2. That raising the performance indicators in the governance area is difficult and takes a great deal of time. Aid agencies with their mounting mandates to demonstrate results may find that the anti-corruption field is one where striving to measure the impact of initiatives is difficult indeed. Progress is not only likely to be slow, but often some years of positive developments can be followed by periods of reversals.

3. Even countries with relative poor governance performance can achieve formidable rates of economic growth (see endnote table, for example, for China, Mexico, Brazil, Korea, South Africa). However, one is prompted to suggest that the quality of life of the great majority of the citizens of these countries would be significantly higher if indeed improvement is achieved in the governance indicators.

4. We must be willing to pursue radical thinking and radical action, including challenges to the conventional wisdom, if profound improvements in governance performance, including anti-corruption efforts, are to be attained.

Critical components for fighting corruption including a vibrant private sector

All of our experience, supported by increasing volumes of research, demonstrates that, at a minimum, the fight against corruption demands the following: press freedom; public access to governmental information; means of holding public officials publicly accountable; monitoring of governmental actions including institutionalized checks and balances between branches of government; respect for the rule of law which requires an independent judiciary; effective law enforcement; clearly visible respect for human rights.

Moreover, I venture to suggest that the fight against corruption is virtually hopeless when economies are stagnant and/or depressed. I believe that anti-corruption efforts on a sustained basis are only likely to succeed when there is economic expansion, rising employment, price stability and prospects for future economic growth. This has profound implications for our discussion of business ethics.

The fact is that only those very poor countries that enjoy a vibrant and growing private sector are likely to attain the sustainable economic growth conditions for significant periods of time that are essential if an effective anti-corruption environment is to be established. The choice, therefore, is not whether countries do or do not need the private sector. The choice is how best to encourage the private sector to contribute to the maximum while striving to contain its conflicts and its frequent proclivity to pursue unethical actions.

For too long fear and suspicion of business – general distrust in business – has been the leading edge in development discussions about the roles of corporations in very poor countries. The result has been that strategic thinking has too often started with considerations of ways to

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curb and constrain business for fear of business malfeasance and exploitation. But, I am suggesting today that this has to change. The cause of anti-corruption in the poorest countries requires the building of trust in business’s potential and the creation of incentives to stimulate business investment. Donor agencies and NGOs need to make this a central focus of their planning and action as they work to fight corruption.

False Advice

Strategies to enhance good governance in many developing countries, which so often are formulated in the donor countries, often seek to include regulatory institutions and rules that oversee business behavior. This is understandable. To a degree this is appropriate – but only to a degree. I think that too often the focus is so narrow that consideration of its damaging impact is ignored. But, regulatory strategies dare not result in serious disincentives to business investment, or to the creation of rising mounds of red tape that risk even more corruption.

Time and again experts from bilateral and multilateral aid agencies, together with officials from NGOs, run seminars and promote capacity building programs to encourage the governments of developing countries to define and establish more regulation of business. The amounts of money involved in these approaches, often including the salaries of numerous expatriates are substantial, but these endeavors yield few benefits. I recall, for example, an intensive series of seminars and meetings sponsored by donor agencies to write rules for the establishment of a new stock exchange in an African country – the focus became so dominated by fears of business exploitation that rules were written that went to an extreme in striving to protect potential stock market investors. The result, at the end of the day, was a minimal amount of corporate listings on the exchange, barely any trading volume and – in terms of the fundamental goal of building a stronger capital market – a total failure.

We have reached a point in time where we find in vast numbers of countries veritable mountains of rules and regulations pertaining to business actions and all manner of arrangements for governmental oversight of business actions. But, in very few countries is there meaningful enforcement. Just look at the situation here in Brazil. Look at the stock exchange, which ought to be a major focus for capital development in this huge developing company. But it is not. There are lots of sensible rules and regulations designed to secure transparency and protect minority shareholder rights. In fact, most of the listed companies are still dominated by family owners, transparency is often inadequate and minority shareholder rights are not really enforced. Look at environmental protection in the Amazon, to take another example. There are large numbers of regulations and laws designed to constrain business logging and protect the forests – but the Amazon is being destroyed.

Why should we believe that countries far poorer than Brazil with far less resources and professional expertise to manage governmental regulations should succeed in enforcement, when we see even Brazil falling so short in vital areas?

To use another example let us turn to the most highly industrialized countries that have sophisticated regulatory institutions and highly trained expert public officials. Almost all of these countries have failed to enforce the OECD Anti-Bribery Convention that each of their

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governments approved. We have seen how many of the governments of the richest nations have made secrecy, rather than transparency, the rule when their arms industries have been engaged in foreign sales – sales that frequently have involved corrupt practices. Should we expect anti-corruption enforcement in developing countries to be better than it is in the OECD?

Are development agencies and NGOs adequately mindful when encouraging governments of developing countries to establish new environmental regulations that enforcement is likely to be impossible so long as official inspectors receive barely a living wage and almost always lack the institutional support, the training and the authority to confront powerful corporations?

Are the persistent advocates of labor regulations sufficiently sensitive to the incredible enforcement difficulties in many developing countries related to the new regulations that host governments approve largely to please foreign aid donors and under pressure from international NGOs?

Moreover, how sensitive are the well-intentioned aid agencies and NGOs to the dangers of the regulations that they advocate: dangers to economic growth and to creating new opportunities for corruption?

Frequently, the strategies that are proposed are derived from practices that have been applied in the most developed economies, where business is well established, where business has strong incentives to accept regulatory costs, and where public sector oversight agencies have deep experience. Rarely do any of these conditions exist in the world’s poorest countries.

Let us be crystal clear about the risks of continuing to encourage developing countries to establish more and more rules, regulations and laws to oversee business behavior:

1. If the level of regulatory enforcement is perceived to be too high, then foreign investors will go to other countries where the costs of doing business are less.

2. If the enforcement of new regulations is haphazard and amateur – as it is in most developing countries - then the temptation by business to pay bribes to evade regulations is likely to be considerable.

3. If regulation is indeed zealous then the creative energies of business may become more focused on playing the system, than on innovating to be competitive, profitable and a rising contributor to the nation’s economic growth.

In our efforts to regulate business in developing countries we need to be constantly mindful of the dangers of false advice. I believe that this is a danger today. Our starting point must be how best to attract business to contribute to the economic growth of nations, while being mindful of the dangers of business malfeasance.

Bypassing corrupt regimes and strengthening NGO support

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When we begin by saying that we need to first attract business, rather than saying that we first must regulate business, then we need to consider the broader policy environment in which such a view can be promoted. We are unlikely to be comforted by what we find.

All too often the focus on anti-corruption and the concern about business ethics on the part of aid agencies and NGOs loses sight of the most important of all priorities: the need to define strategies to reduce poverty. For the last 15 years, from the time when a few of us sought to establish Transparency International, and subsequently in the fostering of other organizations, my concern with anti-corruption has been inextricably linked to the broader global development agenda. Corruption represents a critical obstacle to economic growth, development and social and civil justice. Curbing corruption is a key requirement to enhancing the prospects of poverty alleviation and securing human rights.

Aid agencies have political and legal imperatives that drive them to seek to work closely with the governments of developing countries, even highly corrupt governments. Despite efforts to introduce safeguards, the fact is that projects and programs involving such governments fall short of desired objectives. Taxpayers in industrial countries see aid money being wasted and ending up in the private bank accounts of corrupt foreign leaders. Support for foreign aid thus diminishes. The response by aid officials to monitor programs more and more closely and develop reports on results, while laudable, often add to bureaucracy without really adding to poverty alleviation.

We must face the truth – aid involving corrupt regimes is a high-risk endeavor and frequently aid fails to diminish poverty. The time has come for donor agencies to say no. They must become far louder whistleblowers – publicly refusing to grant more and more aid to programs that are managed by corrupt governments.

At the same time, donor agencies must find effective ways to bypass corrupt regimes in order to assist the victims of these regimes – the poorest peoples of these countries. Bypassing corrupt regimes to help the poor involves two paths: the NGO path and the private sector path.

Permit me to digress from my focus on business for a moment to explain the NGO path in this context. Aid agencies need to consider making far greater commitments to support NGOs. Yes, we do see aid agencies bypassing rotten regimes and working directly with NGOs in some desperate countries (for example in Sudan and Zimbabwe) to secure emergency food provisions and health services for the destitute. But this represents a tiny fraction of total official aid flows.

Aid agencies – bilateral and multilateral – need to consider reassessing their relationships to governments and NGOs. I believe they should be far more generous to those NGOs whose skills are proven and whose track records are effective. I believe this approach should apply across the board of development work, from education, sanitation and healthcare to environmental protection and the stimulation of micro-enterprises. We must find ways that are more direct and explicit than heretofore to exclude corrupt officials from aid flows.

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In the area of fighting corruption, we should recognize that at best those external organizations, such as international NGOs and aid agencies, have supplementary roles to in-country domestic civil society anti-corruption movements. Only such national movements can bring about change and ensure that change is sustained. When the people of Ukraine got fed-up they drove the crooks from the seat of government; when the people of Nigeria had enough of the rotten generals, they demanded civilian rule through multiparty elections.

Transparency International’s national chapters, together with many other NGOs in scores of countries today, have the potential to secure lasting change in their nations – they deserve greater support from the international community. They are the front line in the fight against corruption and deserve larger recognition for their courageous work.

The Private Sectors Critical Role

At the same time as donor agencies seek more effective ways to serve the world’s poor and thus examine ways to bypass corrupt governments, so they must pursue a much more dynamic path involving private enterprise.

We need increased cooperation between aid agencies, NGOs and business. We need compacts based on mutual trust and here there should be a clear onus of responsibility on the shoulders of entrepreneurs.

In a survey of perceptions that I undertook for the African Development Bank last year, I found large numbers of prominent politicians across Africa who said that government and aid agencies had failed too often in Africa over the last few decades. Some of these politicians acknowledged that they had been part of the problem. They had believed too greatly in the power of government to secure improvements, while they had been party to the formulation of policies that often weakened the roles and the potentials of business development.

The overly great reliance on government in far too many countries as the engine of poverty alleviation and growth has been a disaster. The poor have frequently been ill-served. Corruption has been too prevalent. Tied-aid has often spawned riches for the contractors and the host authorities, but yielded little for the poor. Projects funded by aid agencies to promote good governance have all too often brought benefits to expatriate experts and local civil servants, but yielded few positive development results.

We need a combination of key actions:

We must provide incentives for more direct engagement by private enterprise in infrastructure development free of governmental red tape, kick-backs and bribes. The International Finance Corporation has exceptional experience in this area and all bilateral and multilateral agencies need to learn from IFC and work together to expand IFC-type programs.

We must find means to support the growth of the private sector in the rural areas of scores of developing countries where poverty is enormous and history reveals scores of

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failed development projects. Here direct partnerships between NGOs and private sector sponsored foundations – with donor agencies serving as critical catalysts – need to be greatly expanded. The example of the work being undertaken through partnerships of business, civil society and donor agencies on HIV/Aids in Africa provides a good model for what should be far more of such activity that can reach the needy and bypass the corrupt.

If we are to strengthen anti-corruption approaches in procurement, in business transparency and in many other vital micro-economic areas, then we should encourage donor agencies to be far more aggressive in financing ventures like the Partnership for Transparency Fund, which in just over three years has provided small grants to over 30 NGOs to work very often with business and government to develop excellent model projects. Business should be more visible in supporting such initiatives and I believe they would be if directly encouraged by donor agencies.

If we are to move towards attainment of the Millennium Development Goals – most notably the halving of global poverty within the next 10 years – then we must maximize the engagement of the private sector.

But, if we are to encourage a far greater role for the private sector in development, then we must be confident that business can be trusted.

The Age of Transparency

Public trust in business has been tested in recent times. Rarely before has it seemed that media in so many OECD countries has been so dominated by news of corporate scandals. If you want evidence to support the argument that business dare not be trusted, then just turn to Enron’s collapse; WorldCom’s bankruptcy; Shell’s false public disclosures of its petroleum reserves; Parmalat’s downfall; assorted corporate scandals in Australia from HIH to National Australia Bank; major fines levied on the leading auditing firms of KPMG and PricewaterhouseCoopers; and the disclosures of malfeasance in mutual fund and insurance companies in the United States.

One might ask, for example, why have so many corporate scandals in the United States been exposed in recent years? There are many explanations, but an important one relates to technology. Embarrassing e-mails at Boeing, Enron, Merrill Lynch, Credit Swiss, Morgan Stanley and scores of other enterprises, have shown how greed triumphed over sound ethics. The hard-drives of corporate computers are revealing secrets that are exposing myriad unethical practices. Thanks to the Internet the ability of corporations to keep information confidential is declining fast.

In fact in this age of transparency there should be no doubt that those corporations and their chief executives who dodge the rules, cheat and exploit, and sail through the business waters without a moral compass, will be found out. They have nowhere to hide.

As we look ahead we should recognize three considerations:

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1. The amount of information available in the public domain about every aspect of the activities of corporations will rise.

2. The number of investigations into wrong-doing will increase.

3. The sophistication of pressure groups seeking to promote new laws, rules and regulations to make corporations behave will no doubt rise as well.

Recognizing the dawn of this new age of transparency provides context for our discussion here. So too does an understanding of the crisis of public confidence in business that now exists.

Corporate America’s Shame

Ever since the collapse of the Enron Corporation in December 2001, the suggestion by business that it can be trusted and that it recognizes that acting with integrity is the path to profit and success has a hollow ring. To be sure, there have always been business scandals. There have been dishonest businessmen since the earliest days of commerce. There have been wretched multinational corporations that have exploited the natural resources of the poorest countries with self-interested ruthlessness. But, over the years the public has not sat still in the face of such behavior. The leading industrial countries evolved laws, regulatory institutions and abundant rules to govern the national and the international approaches of corporations.

As the Soviet Union collapsed and capitalism seemed set to embrace virtually every nation on earth, there was a profound sense of pride in the halls of American business in the ability of corporate America to serve as a global model. U.S. friends of mine in Transparency International hailed the 1977 Foreign Corrupt Practices Act and called on all industrial nations to enact similar legislation, which they did by the end of the last decade under the banner of the OECD Convention Against Corruption.

The shining example of the honest and ethical U.S. multinational corporation was key to the offensive pursued by President Clinton to secure the transition of Central and Eastern Europe to free enterprise and open markets; to forge NAFTA as a vast zone of free commerce; and, to pave the way for China’s entry into the World Trade Organization with the explicit obligation that this vast emerging economy would open its doors to the aspirations of multinational corporations.

Let us not forget how centrally important this U.S. model had become. A number of the largest U.S. corporations have annual sales revenues that are far greater than the gross domestic products of scores of developing countries. GE, Exxon, IBM, GM and numerous others are globally dominating leviathans. They have the ability to marshal armies of lobbyists in national capitals in order to influence trade and investment legislation, a capability which dwarfs the resources that most developing countries can mobilize to influence the rules of global commerce.

The collapse of Enron shook the model of the leading, trustworthy U.S. multinational corporation. The subsequent collapse of WorldCom and a string of other huge U.S. enterprises

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undermined the model. And, ever since, we have seen one corporate scandal after another in the United States. These scandals have diminished public confidence in the leadership of American business both among the American people and across the globe.

Greed and arrogance have brought some of the biggest companies in America to their knees and taken numerous top executives off to prison. The scandals have shown how regulatory authorities often failed in a nation that prided itself on the skill and seriousness of its business compliance approaches. And, if even such sophisticated and powerful regulatory authorities as those in the U.S. have been found inadequate, then one has to question whether national authorities in many other countries that have neither the experience or the skilled experts to match the U.S. levels can achieve much in their nations when it comes to taming corporate tigers. Thus, I come to our discussion here about business ethics and conflicts of interest with many doubts: doubts about the integrity of business matched by doubts about the ability of governments to promote ethical business.

Laws, Rules and Regulations

Earlier I raised questions about enforcement. I am confident that were the international official donor community to take stock of the last eight years of intensive efforts to assist developing countries to pursue the path of good governance, then it would find today a massive surplus of rules and regulations covering business and government and a huge enforcement deficit.

I believe that what is now needed is:

(a) careful review by aid agencies of all of the governance advice they have provided and a recognition of the dangers of over-regulation;

(b) a substantial pruning by governments of the mass of rules and regulations and laws that they have on their books with regard to business practices and, as a result, the establishment of a small priority list that can be well managed and well enforced;

(c) major efforts supported by donor agencies to examine enforcement failures in developing countries of regulations designed to strengthen governance and, as a result, new initiatives to directly enhance enforcement in the absolutely top priority areas;

(d) a full discussion promoted by NGOs and business in the OECD countries of why enforcement of the OECD Anti-Bribery Convention has been so minimal – honest companies have a major vested interest in this because enforcement of the law can strengthen their competitiveness;

(e) the recognition by all concerned in these issues at the international and national levels that a fine balance must be struck between the regulation of business practices and the need to encourage business development; and,

(f) pressure from NGOs and public officials on business to demonstrate that it can be trusted.

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After all the scandals, business can no longer declare, “trust me.” Rather, the onus is now on business to demonstrate that it is acting in ways that deserve praise and that engender public confidence. We must create an environment that encourages business to have ample opportunity to earn public confidence and support.

The Values Equation

In this context, greater effort needs to be mounted from the business schools to the corporate boardrooms to make managers understand that there is a Values Equation. This can be defined as: investing to build trust in corporate leadership, all other factors being equal, yields competitive advantage. Arguing for greater corporate attention to ethics is sound business advice. Too few companies in developing countries and in Central and Eastern Europe adequately understand this. Too few companies across the globe, including in the OECD countries, are putting programs in place that make this Value Equation a living reality. Excellent ethics management is key to sustained corporate profitability and to earning trust.

Lest you have the impression that I am negative about all U.S. corporations, permit me to note several good examples from the U.S. of corporations putting the Values Equation into practice. Understanding this concept has made Johnson & Johnson a great firm. This company lives by its “Credo.” It publishes it each year in its annual report. It ensures that all employees worldwide understand it, respect it and act in its spirit. It does not place the maximization of profit or securing shareholder value at the top of its Credo. It starts by declaring, “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services.”

Or take global oil giant BP, which publishes an annual report on its corporate social responsibility that is candid and thus credible and that secured the following headline recently in The Financial Times: “BP sacked 252 for unethical behaviour.”4

We must understand the Values Equation and put it into practice. Building trust and acting with integrity is not a defensive posture, rather it is something very positive. Acting with integrity is critical to building lasting, strong, efficient companies.

Ray Gilmartin, who recently announced that he is stepping down as the Chairman and Chief Executive Officer of Merck & Company, once wrote that, “People are beginning to realize that ethics and integrity are actually sources of competitive advantage because they inspire trust, not only for the employees but also for customers. Organizations that enjoy a reputation for business ethics and corporate responsibility understand that business ethics are dynamic; they must be a continuing priority.” 5

Jack Welch, when he headed GE, was insistent on the relationship between employee values and business success, as is his successor, Jeffrey Immelt. Commenting on a set of excellent GE corporate results in 2002, Welch declared in the company’s annual report: “Values

4 Financial Times Tuesday April 12, 2005. Page 27. 5 Signed article by Mr. Giulmartin in The Detroit News, June 11, 2003.

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and behaviors are what produce those performance numbers, and they are the bedrock upon which we will build our future.”

Welch argued that competitive corporations could no longer employ multitudes of managers whose job it is to supervise other managers and teams of employees – bureaucracies have to be fought and chains of command have to be flattened. Competitive demands lead to a constant effort to boost the individual productivity of each employee and this is only possible with reduced supervision and greater trust. Such a system, however, can only work when all employees accept and support a common set of corporate values that places integrity at the center. It is what General Motors labels, “Winning with Integrity.”

Doing the right thing in business means being honest, not cheating, not lying, and not pursuing actions that demand secrecy. Doing the right thing demands a sense of fairness and equity. It demands that supervisors demonstrate respect for all employees and for each other. It requires that top executives demonstrate integrity through personal example on a consistent basis. Sometimes it requires companies to make exceedingly difficult choices between losing business while holding true to their ethical cultures and codes of conduct and making that additional profitable deal by setting the ethics code aside.

The Value Equation applies as companies seek to recruit and retain the best and brightest employees. Goldman Sachs noted in its 2000 Annual Report: “Our distinctive culture, which emphasises integrity, entrepreneurship, excellence, teamwork and fairness, has allowed us to assemble the most talented team in the business.” And, “This activity (strengthened overall business operations) is all predicated on our continued ability to attract and retain some of the most talented people in the world. Our culture is the glue that makes this possible.”

A 10 Point Ethics Framework

Every company faces the danger of rogue executives. The best means of guarding against the rogues is the establishment of a strong corporate integrity culture, involving good monitoring and substantial employee training. There is no magic formula, or perfect code of conduct to inspire sound business ethical practice. But, let me suggest that to implement the Values Equation, a company, at a minimum, needs to adhere in its day-to-day business activities to a 10-point ethics framework – this framework can and should be employed by companies everywhere. Chairmen and Chief Executive Officers of companies should make it their personal responsibility to ensure the application of this framework in their companies.

1. Law. Operate in accord with the spirit, not just the letter, of the law.

2. Ethics Code. Place the corporate code of ethics at the center of corporate operations and decision taking and never, under any circumstances, set aside the code to permit special actions by executives (the Enron Board, for example, twice waived the corporate code with a formal vote). The ethics code needs to be comprehensive and thus embrace a full panoply of corporate business compliance standards, workplace ethical norms and a broad range of social responsibility obligations.

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3. Honesty. Demand that all corporate employees, starting with the CEO, are truthful with their colleagues, their customers and when representing the enterprise to the public.

4. Information Sharing. Encourage managers to maximize the sharing of information with their subordinates and encourage transparency at all levels within the corporation.

5. Equity & Employee Respect. Pursue policies of zero tolerance regarding all forms of sexual harassment in the workplace and discrimination on the basic of race, color, gender and age.

6. Whistleblowers. Management and the Board of Directors should ensure that whistleblowers are protected and indeed encouraged. When an employee sees wrongdoing, then she or he should be encouraged to report the malfeasance – at stake is the reputation of the company.

7. Ethics & Corporate Social Responsibility Reporting. Require that senior corporate executives, including a chief ethics officer, report regularly and fully on the operational effectiveness of the corporate ethics code to the Board.

8. Accountability. Demonstrate to shareholders that members of the Board of Directors operate with the clear understanding that they are fully accountable. Boards should be seen to be bending over backwards to ensure honesty in corporate reporting and responding to shareholder requests for information and explanation.

9. Compensation. Formulate approaches to executive compensation that recognize that this is a matter that contains within it key issues of ethics and, in this regard, ensure high levels of transparency in the deliberations of board compensation committees.

10. Citizenship. Understand that corporations, like decent citizens, must operate in ways that serve the core interests of the nation (or nations) where they operate.

Let me say that if donor agencies, as well as the media, civil society and national governments in developing countries, were to focus on convincing locally active businesses to demonstrate that they recognize the value of implementing this framework and are acting on this, then a huge step will have been taken to securing trust in private enterprise.

We would need far less activity around writing ever more laws and business regulations if there was greater public confidence – led and stimulated by business itself – in effective business practices.

Far more will be achieved in encouraging business to implement a series of clear actions that will demonstrate that it operates as a good citizen than can be achieved by ever more compliance laws and regulations and the engagement of ever more officials to monitor business activity. Voluntary approaches to regulating business behavior that are pursued by business itself are essential.

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A Global Dimension

Permit me to elaborate on two aspects of what I consider to be the global dimension of this ethics framework. First, let me focus on aspects of corruption and then more broadly on corporate social responsibility.

A company is a citizen of the countries in which it operates and as such it has societal responsibilities. It needs to demonstrate that it understands this. It needs to show respect for the natural environment and for the human rights of the people it works with. It dare not pay bribes to foreign officials.

Let me again turn to the U.S. situation to illustrate my points because no set of corporations has as great an influence on worldwide public attitudes towards business than those that lead corporate America. Moreover, no single country has as great an influence on the enforcement of anti-corruption laws pertaining to business than the United States.

Corporate scandals, starting with Enron’s collapse, have damaged the standing of the United States in the world. Nobody should be surprised that companies that cook the books at home, lie to shareholders and regulators and have top executives who pocket fortunes irrespective of corporate performance, may be viewed abroad with skepticism and suspicion. Such negative perceptions damage U.S. competitiveness in the global marketplace.

Enron, for example, not only imploded because of domestic fraud, but it has also faced allegations of using bribes in its overseas business operations. In much of the world the issue of corruption tops the list of concerns when business ethics is discussed. Here, perceptions of U.S. corporate behavior leave much to be desired.

Surveys conducted by Gallup International for Transparency International have suggested that U.S. firms are perceived in numerous foreign countries to pay even more bribes to foreign governments than, for example, French, British, Canadian and Scandinavian companies.6 It is possible that this negative view is influenced by the propensity of U.S. firms to use a loophole in the Foreign Corrupt Practices Act. The FCPA says that “facilitating payments” may be made by U.S. corporations to foreign officials and what is meant by this are small payments to customs officials and other middle- and low-level foreign government officials who impose excessive red tape on U.S. business in order to extort small bribes.

U.S. business insisted on maintaining the “facilitating payments” clause in the OECD

Convention and most countries in their national laws accepted this. The U.K. is a very important exception, although like the other participants it has yet to demonstrate that it is serious about enforcement.

The existence of the “facilitating payments” clause sends absolutely the wrong signal around the world about U.S. corporate ethics and the attitude of the U.S. Government in this area. It is very important that the U.S. authorities recognize this.

6 Bribe Payers Index published by Transparency International, the Berlin-based anti-corruption organization with polling data by Gallup International.

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The U.S. law approves actions by U.S. companies abroad that are illegal at home. Imagine the reaction in the United States if German companies started paying small bribes to U.S. customs officials, or Japanese firms gave kick-backs to U.S. immigration officials! Defenders of “facilitating payments” are defending a double-standard: they are saying one set of values should apply in the U.S., but another lower standard is alright overseas.

U.S. corporate lawyers argue that in many developing countries they face extortion requests from customs and immigration officials, and that it is part of the “local culture” to pay small bribes to these officials. I have heard U.S. businessmen argue that it is expected in many countries that they pay bribes to obtain work permits for expatriate executives and local environmental permits and that if they fail to make such payments, then they would have to wait long periods of time to move ahead with their projects. This is nonsense.

American companies would not dream of bribing U.S. immigration officials to secure work permits for non-residents in the U.S., while the wait for such permits usually takes months. U.S. officials do not pay bribes to secure environmental permits for their U.S. operations even though gaining such permits is often a regulatory nightmare.

Across the world “facilitating payments” are seen for what they are: bribes. American corporate lawyers can strive to justify them before the U.S. Justice Department and the Securities and Exchange Commission, but these payments are still bribes and they contribute to corroding the fabric of law, good governance and indeed democracy in scores of nations.

Using “facilitating payments” damages the image of American business. It leaves the U.S. well behind the curve in the global bid for anti-corruption, which has seen the U.K. adopt a tougher law than the U.S. and led companies like Shell and BP to make statements against facilitating payments. Their statements are models.

The corruption issue is critically important around the world as an acid test of corporate

integrity. Too few multinational corporations go out of their way to publicly decry demands for bribes in developing countries, to protest loudly in these countries when they are faced with bribery demands or to use all legal means to refuse paying bribes. Too few multinational companies draw public attention to bribery by domestic competitors. Time and again business leaders in developing countries shy away from publicly standing up against bribery and supporting anti-corruption movements. This needs to change if business is to gain trust and respect.

Securing change will not come through legislation and more regulation. It will come from business recognizing that such attitudes are in their own self-interest. It will come from NGOs who are more active in this area and it will come from support by donor agencies to NGOs and through partnerships with business. To secure this outcome we must work to build new bridges between donor agencies, NGOs and business country by country.

The Sinclair Approach

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Much of what I have just suggested may sound theoretical. There is comfort in clinging to the conventional: to berating business for its conflicts and to emphasize the examples of business bribery. But, my own experience enhances my conviction that a compact with business is not only possible, but a win-win option.

In the early 1990s I was privileged to be asked to join a remarkable American entrepreneur, James Sinclair, in a mining venture in Tanzania. This was a country that for over 20 years had evolved a strong suspicion of foreign corporations and thus been highly reluctant to permit them to develop the nation’s gold, diamond, nickel, copper and other mineral resources. Mr. Sinclair, the Chairman of Sutton Resources of Canada, understood that if his company was to succeed in Tanzania, then he had to earn the trust of the authorities. He also believed that success would result from transparency, honesty and good deeds.

I was an advisor to the Chairman and a member of Sutton’s Board of Directors. We never paid bribes. We demonstrated that we were good corporate citizens. We engaged in long-term philanthropy. We assisted the government to build a global strategy to attract more top quality foreign investment into the mineral sector. We worked hard to prove that we took environmental protection seriously.

Our company went to substantial lengths to underscore our long-term commitment as solid corporate citizens to Tanzania. Mr. Sinclair’s daughter, Marlene, settled in Tanzania and has played and continues to play important roles in philanthropy in the social services area there. Our commitment was the basis for establishing trust and in response we were treated fairly by the Government.

Sutton Resources invested substantial sums and reached the point where it was acquired by one of the world’s largest mining companies, Barrick Gold Corporation of Canada. In recent years Barrick has invested major sums in mining in Tanzania and the success of our company, followed by Barrick’s success, has brought hundreds of millions of dollars of foreign direct investment and seen the growth of a dynamic gold mining industry in Tanzania. And, Mr. Sinclair, who today heads TanRange of Canada, has continued to invest in Tanzania and build a host of exceptionally high value mineral assets with great potential. He has never paid bribes. Nobody asks him for bribes. He has succeeded in building trust and being seen as a sincere partner to a nation striving to develop. His approach and his company are examples of what I believe must be the corporate anti-corruption compact of the future.

This is a compact that respects ethics and the companies that bend over backwards to demonstrate that they walk the ethics walk across the globe. In return, these companies can enjoy respect, not suspicion; they can operate dynamically, not be tied in red tape; they can expand and create employment; not devote their time to bribery and corruption.

This is an approach where, for example, companies across the globe accept and apply the “Business Principles for Countering Bribery,” which are a joint initiative facilitated by Transparency International and Social Accountability International. Indeed, the approach that needs to be taken that combines a resolute no to paying bribes by business with a determined business effort to secure public trust – the James Sinclair approach – is the route that must be

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encouraged. The alternative is ever more regulation that will not be enforced and that will stimulate still greater corruption. This alternative is unacceptable.

Corporate Social Responsibility

In a world where business has nowhere to hide, where trust in major corporations has been so damaged, and where wise firms should recognize the key Values Equation, in such a world it is incumbent on corporations to prove that they are good citizens. This means doing more than just taking a stand against corruption – it requires a comprehensive corporate approach to social responsibility.

Visionary enterprises have enormous opportunities in the developing economies of the world. In many countries there are vast natural resources that could be developed. In many countries there are huge underemployed labor forces, which with the right training, can be brought into modern commerce.

To maximize its engagement, however, business must demonstrate convincingly that it recognizes that it has profound corporate social responsibilities. These start in the communities where it operates. When a company opens a shop, a warehouse, a factory or another kind of installation in a community, then it has obligations to that community. It needs to contribute to the social fabric of the community. It needs to be generous and use philanthropy locally. It needs to demonstrate respect for local government. It needs to ensure that it is sensitive to local customs and traditions and the culture of its community and the citizenry. Only by such means can it start to win trust.

Companies must bend over backwards to demonstrate sincere respect for the human rights of the people it employs – directly and through sub-contracted and affiliated companies. It must ensure that its employees receive decent wages, that employment conditions reflect local traditions, and that labor terms are fully consistent with basic human rights. For example, companies need to demonstrate that they have policies in place that make zero tolerance for workplace injury a reality. Key health and safety standards must be non-negotiable for companies – they are critical to building respect and public trust.

Respect for the protection of the environment is equally essential. Let us be realistic. Only by voluntary actions by companies can meaningful environmental protection be secured in most developing countries. Regulation has its place, but let us be realistic about its enforcement in most countries.

Instead of adding more and more environmental regulations, national governments, assisted by civil society and in many cases by aid agencies, should strive to enter into constructive dialogues with corporations – domestic and international. They should seek to secure voluntary compliance agreements from these companies. Reason, rather than threats – dialogue rather than red tape – will achieve far more. This applies, I believe, to the full range of corporate social responsibility issues.

Key pragmatic approaches

The Equator Principles developed by the International Finance Corporation and leading banks is consistent with the Values Equation that I have highlighted earlier and serves as an excellent model. These Principles recognize that banks engaged in financing infrastructure projects in developing countries also have key responsibilities in the environmental and social areas. The Principles underscore how adherence to high standards of social responsibility is in the self-interest of the banks and their stakeholders, while serving the goals of economic development. The Equator Principles are designed to apply to projects involving a minimum of $50 million and embrace multinational financial services firms.

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A version of the Equator Principles needs to be developed that can win participation from all financial institutions in developing countries and apply to smaller development projects. IFC might take the lead here. We need to encourage to a far greater degree as a core component of development strategy the voluntary participation of corporations in developing countries in meaningful codes of conduct. Let us learn from the excellent example of the Equator Principles.

An increasing number of major corporations are publishing annual reports on their work in the ethics and social responsibility area. This is a trend that needs to be applauded and encouraged. If we had business ethics institutes established across the developing world then I would argue that these new annual reports would be “must reading.” They demonstrate in very practical ways what companies are doing. These are companies that accept the Values Equation, who know that acting ethically serves their business self-interest.

ABN AMRO Holding N.V. of The Netherlands writes in its recently published Sustainability Report 2004, “because banks are part of society, we want our activities to reflect the needs and problems of that society.”7

This report by a leading Dutch bank is an excellent example of what a corporate ethics report should be and a tool to raise public trust in business. It provides in-depth analysis of how the company strives to integrate environmental, social and ethical considerations in its operations. Permit me to give one example as we are here in Brazil. ABN AMRO notes that in 2002 it established a “Brazil Social and Environmental Risk Policy” which it used to screen 2,300 companies last year. Its screening policy was implemented in Banco Sudamericas, which ABN AMRO acquired here in Brazil with a training program that involved over 400 managers and analysts across the bank. The Sustainability Report added that, “The year 2004 also saw our Brazilian Environmental Risk Unit extend the application of the Equator principles to our project financing activities, after analyzing 7 projects in Brazil and other South American countries.”

ABN AMRO and many other companies, from BP to Nike, are deepening their commitments and their hands-on activities in the ethics and social responsibility area because of a variety of pressures. But, these are not pressures from host governments in developing countries, or fears of prosecution in those countries. Rather, these are pressures – first and foremost – from non-governmental organizations across the world. It was consumer groups that led the charge against Nike over alleged exploitation of labor in South-East Asia and the reforms that Nike has introduced have mostly been due to NGO pressures, rather than the host Asian authorities. I want to be very clear – I want to encourage NGOs to continue to mount pressure on business to do the right thing. I believe this is far more effective than ever more governmental actins designed to force business to behave.

Conclusion

We need to see responsible NGOs across the world monitoring corporations and demonstrating that indeed these enterprises have nowhere to hide in this age of transparency. Companies – often under pressure – need to learn it is in their self-interest to seek partnerships and act ethically and accept the validity of the Values Equation. This is the way ahead, rather than an ever-greater tangle of new and unenforceable rules and regulations.

Let me add that the proponents of more rules and regulations often believe that the power of business relative to government is so overwhelming that only through new regulation can the public interest be served. In a letter to the editors of The Wall Street Journal on June 1, 2005, Joan Claybrook,

7 ABN AMRO Sustainability Report 2004 published on March 30, 2005.

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President of Public Citizen in Washington, wrote that in the United States, “We desperately need stronger ethical standards. A good start would be banning all privately funded travel for members of Congress. We should enhance the disclosure system for lobbyists, so that their contacts with lawmakers and senior government officials and all of their expenditures are disclosed on the Internet. We should forbid former members of Congress from lobbying their colleagues for at least three years after leaving office. Finally, an independent office to monitor and enhance ethical standards should be established.”

I agree with all of those recommendations. But, the fact is that we have been at work in seeking to eradicate the loopholes and legislate to guard against business abuse of ethics in government for years in the United States and yet, as Ms. Claybrook’s letter indicates, we still have a long way to go. All developing countries and those in Eastern and Central Europe have far, far further to go. While they need to focus on the most critical priority issues of business ethics regulation, they dare not use the U.S. as a model – they just don’t have the enforcement capacity, nor are they likely to build it in the medium-term, however great the support is for such activity by donor agencies.

We must explore voluntary ways to secure the partnerships that can lead to trust. We must encourage aid agencies, for example, to be constructive in promoting business ethics institutes in many countries in Africa, Asia, Latin America, the Middle East and in Central and Eastern Europe. The Ethics Institute of South Africa and Transparencia Colombia serve as excellent models. These two institutes, sponsored by the Ethics Resource Center in Washington DC and funded in large measure by the Merck Foundation, are doing solid practical work. I believe donor aid agencies can forge business partnerships and be catalysts for creating these kinds of institutes.

More generally, we need to see aid agencies driving new forms of partnerships with NGOs and business that enhance the ability of business to boost public trust. This should become a priority for all aid agencies as they seek, in particular, to bypass corrupt regimes and thereby enhance assistance to the world’s poorest peoples.

Yes, we need radical thinking. We need to always ensure our focus on anti-corruption serves the key goal of enhancing human rights and the condition of the world’s poorest people. To be sure, as we strive to enhance the development contributions of private enterprise we should be ever mindful of the proclivity of many corporations to let greed and arrogance push good ethics aside. But, as we proceed, we dare never lose sight of the limits of enforcement of laws and rules in the area of business behavior and the acute danger that zealous rule-making may lead to less development and more corruption.

Thank you.

(see note on governance indicators on next page)

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Governance Indicators The data on this page is drawn from the World Bank Report: Governance Matters IV: Governance Indicators for 1996-2004, May 2005, by Daniel Kauffman, Aart Kraay, and Massimo Mastruzzi. http://www.worldbank.org/wbi/governance/pubs/govmatters4.html, 05/23/05.

Selected data* (see attached notes for definitions and explanations)

Government Indicators Year U.S. Turkey S.A. China Korea, S IndiaVoice and Accountability 2004 89.3 41.7 72.3 7.3 68.9 53.9

2000 85.3 29.8 80.1 10.5 68.6 62.81996 95.3 37.7 67.5 12 68.1 60.7

Political Stability 2004 60.7 30.6 38.3 46.6 59.7 24.32000 89.1 15.2 42.4 54.5 65.5 371996 86 10.4 16.5 50.6 51.2 18.9

Government Effectiveness 2004 93.8 57.2 74.5 60.1 80.3 55.82000 93.5 52.7 69.9 64 72.6 52.71996 95.5 62 70.4 66.5 78.2 55.3

Regulatory Quality 2004 86.7 48.8 64.5 35 71.9 26.62000 95.2 55.1 52.4 36.9 69.5 38.51996 95.6 71.3 64.1 47 78.5 44.2

Rule of Law 2004 92.3 54.6 60.9 40.6 68.6 50.72000 92.5 59.9 64.2 48.7 73.8 621996 92.2 58.4 66.9 37.3 81.9 56.6

Control of Corruption 2004 92.6 50.7 70.9 39.9 62.1 47.32000 92.5 48.9 75.3 44.6 71 49.51996 90 61.3 78 58.7 76.7 43.3

Government Indicators Year U.K. Canada Mexico Brazil U.A.E. ColombiaVoice and Accountability 2004 94.2 94.7 56.8 55.8 21.8 34.5

2000 92.1 89 55 63.9 30.4 31.91996 91.1 92.1 42.9 59.7 27.7 50.3

Political Stability 2004 71.4 86.9 43.7 43.7 78.2 5.82000 86.7 91.5 43 55.8 86.7 6.11996 89 84.8 34.1 39.6 79.3 9.1

Government Effectiveness 2004 94.2 95.7 56.7 58.2 86.1 512000 96.8 96.2 67.2 47.3 75.8 41.91996 96.6 93.3 55.9 54.7 78.8 64.2

Regulatory Quality 2004 94.1 93.1 68 58.1 79.3 47.82000 96.8 90.4 76.5 64.7 71.7 52.41996 97.8 89 74 60.2 85.1 69.6

Rule of Law 2004 93.7 94.2 45.9 46.9 78.7 29.52000 93 96.3 46 53.5 88.2 29.91996 94.6 92.8 54.2 46.4 79.5 36.1

Control of Corruption 2004 94.6 93.6 48.8 53.2 86.7 52.22000 95.2 96.2 43.5 59.7 77.4 41.91996 94 96.7 39.3 55.3 64 37.3

*Dataset based upon Percentile Rank (0-100), indicating the percentage of countries worldwide that rate below the selected country (therefore higher values imply better governance ratings). Subject to margin of error.Notes on the next page

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http://www.worldbank.org/wbi/governance/pubs/govmatters4.html


Notes:

Definition of Governance Indicators: 1. Voice and Accountability—measuring political, civil and human rights; also includes

indicators measuring the independence of the media.2. Political Stability—measuring the likelihood of violent threats to, or changes in,

government, including terrorism.3. Government Effectiveness—measuring the competence of the bureaucracy and the quality

of public service delivery; also measures the independence of the civil service from political pressures and the credibility of the government’s commitment to policies.

4. Regulatory Quality—measuring the incidence of market-unfriendly policies such as price controls or inadequate bank supervision.

5. Rule of Law—measuring the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence.

6. Control of Corruption—measuring the exercise of public power for private gain, including both petty and grand corruption and state capture.

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Frank VoglU.S. Tel: (202) 331 8183 Fax (202) 295 9006 [email protected] www.voglcommunications.com

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Business ethics and public interest

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