Knowledge@Wharton article on the Principles
A New Strategy for Fighting Corruption: The C2 Principles

Has the general public finally lost its tolerance of corruption in business and government? The Los Angeles Times recently ran the headline, "Corruption, Not Revolutions or Coups, Topples Governments These Days," while an article in a recent edition of the Economist noted that "corruption is now an issue that brings the crowds out on to the streets." In the 1990s, in Italy, Brazil, Pakistan, and Zaire, national governments fell partly due to public uprising against corruption in government. A 1999 Washington Post article helped publicize China's "bean curd bridges" scandal, reporting that in the metropolis of "Chongqing alone last year, 1,600 people died because of shoddy work on construction sites or collapsing infrastructure projects, causing more than $7.3 million in damage."

In their paper, "Fighting Corruption: A Principled Approach," Wharton doctoral candidate David Hess and Wharton legal studies and ethics professor Thomas Dunfee examine the phenomenon of corrupt payments and show why, increasingly in today's global marketplace, companies won't be able to get away with treating bribes as "business as usual." The authors offer a set of norms--the C2 (Combating Corruption) principles—by which companies publicly pledge that they will resist demands for bribes while taking steps to control corrupt payments and be transparent in their international transactions. If many companies endorse the principles, Hess and Dunfee say, "a cooperative anti-bribery system emerges, which may significantly reduce the supply-side of corruption." The C2 principles would "'level the playing field' by insuring that all corporations are abiding by the same rules and that government officials are fully aware of these rules."

According to Hess and Dunfee, several factors are driving the new anti-corruption sentiment in both the public and the business community. For one thing, the many high-profile cases of the 1990s have highlighted the damage wrought by corruption on the part of public officials, particularly in poor nations. Second, the "borderless" global marketplace is bringing national economies and corporations into greater interdependence, and businesses are recognizing that corruption in one region can affect the entire global market. Third, the end of the Cold War has permitted policymakers worldwide to focus their attention on other matters such as corruption. Recent years have seen several multinational organizations take on the battle against bribery, such as the Organization for Economic Cooperation and Development (OECD), the Organization of American States (OAS), the Council of Europe, and the IMF and World Bank. And in 1993 a non-governmental organization, Transparency International, was created expressly for the purpose of combating corruption.

Dunfee considers the publication last fall of Transparency International's Bribe Payers Index (BPI) to be a landmark in the battle against business corruption. The BPI ranks the likelihood of companies from the 19 largest exporting countries to pay bribes. Added to Transparency International's existing Corruption Perception Index (CPI), which annually ranks countries on their level of internal corruption, it brings out in the open--literally for all the world to see--a clear picture of which countries are deeply entrenched in corruption at home and/or abroad. Hess and Dunfee's paper includes a table of 19 countries showing their CPI and BPI ratings. Overall, Sweden and Canada rank as the countries engaging in the least bribery, and China and South Korea in the most. (The U. S. falls in the middle.) The publication of these statistics can be a powerful tool for change, since as Hess points out, "Most, if not all, nations react strongly against being labeled a corrupt country. This is seen by the reaction of countries listed at the bottom of the Corruption Perception Index."

Moral considerations aside, could one actually make a case for some businesses to continue their dirty dealings? Perhaps, say Hess and Dunfee, companies might hold that it is competitively necessary, a viable business strategy. Or perhaps they feel they are respecting local cultural norms, or are unable (or unwilling) to control rogue employees. Taking each argument in turn, the authors counter that the negative consequences of bribery will almost always dominate the positive effects, often leading to lower economic growth and sub-optimal government spending.

And for individual businesses, the cost can be enormous. A 1997 World Bank survey placed the total in "coarse" bribery (which it defined as the use of public power for private benefit) in international trade at $80 billion a year. "I think one reason Transparency International has been formed--and it's gotten a lot of business support--is that most businesses realize that they are significantly disadvantaged by the practice of bribery," notes Dunfee. "It's imposing cost without substantial benefits to the firms. I think many of them would like to have some means of getting out of this vicious circle. It's always been appreciated there was a cost--but now they're realizing just how large a cost."

What can firms do that are trapped in a pattern of paying bribes or have exercised little control over rogue employees? Hess and Dunfee present a uniform set of principles: The C2 Principles. The authors characterize their approach as "Sullivan-like," that is, similar to the principles established by the Reverend Leon H. Sullivan, a member of General Motors' board of directors who in the 1970s tried to alter the practices of U. S. corporations doing business in South Africa.

The C2 principles include pledges to publicly endorse the C2 anti-corruption principles; to establish a written policy against paying bribes and take disciplinary action against employees who violate it; to provide training and support for employees and a system that allows them to report improper payments without fear of retribution; to record all transactions properly and conduct internal audits; to report annually a statement of the firm's policy on corruption and a description of its experience with enforcing the policy; and to require agents and suppliers to affirm that no improper payments have been made. According to Hess, although most of the C2 principles are drawn from existing compliance programs, their proposal takes it a controversial step further: They also call for public reporting of solicitations for payment or, if necessary, private reporting to a social auditor or monitoring organization.

Hess and Dunfee are careful to warn that in order for a C2 program to be effective, "firms should not endorse the principles merely for public relations purposes or merely to emulate other firms in their industry. Endorsement should be done only on a voluntary, sincere and genuine basis." Not only that, but businesses will have to put their money where their mouth is: "Adherence to these principles requires moving beyond merely establishing a code of conduct to proactively guiding the behavior of the corporation's employees and establishing a compliance program to prevent improper payments."

A few companies are already forging ahead in the anti-corruption movement, General Electric and Coca-Cola among them. "GE promotes itself as having a strong FCPA [Foreign Corrupt Practices Act] compliance program and attempts to use that reputation to obtain contracts," says Hess. And eschewing paying bribes seems to be working out well for Coke: An official at Transparency International recently asked: "What leader in any country is willing to risk a public announcement by Coca-Cola that it is quitting the country rather than pay a fat bribe to the head of state? So far, none."

In most industries, however, the question will no doubt become: Who's going to take the first step? Many companies may choose to "wait and see how the wind's blowing before they come in on this," says Dunfee. "But I think the wind is already blowing with some steam. There's a changing public perception of corruption. If you're a late mover, and in the future you're

differentially perceived as being a participant in corruption, it's likely to come back and bite you pretty badly. It's sort of analogous to the tobacco companies 15 years ago: With some legitimacy they said, 'Everybody knows what's going on, that we do a little marketing to children--how could anybody not know? They see the cartoons, they see where we hand out free samples, so it's okay.' But attitudes change, and they got bit real badly. Similarly, those who believe that paying bribes is okay, that the public will understand, may be making a big mistake. The C2 principles provide one way out of this dilemma."