"Fighting Corruption: A Principled Approach."

The following reading is an excerpt (with footnotes removed) from: David Hess & Thomas W. Dunfee, "Fighting Corruption: A Principled Approach, "Cornell International Law Journal, vol. 33 (3): 593-626 (2000).

IV. Seeking a Principled Solution to the Paradox of Bribery

The growing dichotomy between practice and opinion raises difficult issues for firms that are either trapped in a cycle of paying bribes or find themselves subjected to extortionist threats for payments. It also raises the stakes for firms that have devoted insufficient attention to controlling the behavior of potential rogue employees. The issue goes beyond a question of ethical behavior; managers may be neglecting their fiduciary duty to shareholders if they fail to control corrupt payments.

This article focuses on individual firms and the steps they might take to combat corruption. Individual firm action is a vital component of the ultimate mix of policies and strategies that are likely to make a significant difference in the practice of corrupt payments. Firms will become truly serious about the problem only when they have internalized anti-corruption values; only when the idea of resisting corruption is part of the firm's core values will it be likely to control the phenomenon successfully. If the pressure to control bribes is seen as compliance with an external source such as the government, then firms may only be half-hearted in their control efforts.

A. Sullivan-Type Principles for Multinational Corporations

Firms need a unilateral solution that would alleviate the coordination problem facing them as a result of potential defections from an anti-bribery regime. Specifically, a firm's use of the Sullivan-type principles approach, coupled with the new alternatives for social reporting and auditing, can significantly contribute to the reduction of global corruption. This Article focuses on the C2 Principles (for Combating Corruption).

Codes of conduct and sets of principles guide how corporations conduct their business at home and abroad. Almost all corporations have internally developed codes of conduct that govern issues such as discrimination, worker safety, and illicit payments. These codes vary greatly from corporation to corporation, both in their specific provisions and means of implementation. In addition to individually developed corporate codes, outsiders have proposed sets of principles corporations should adopt to guide their behavior in morally troubled contexts. Well-known examples include the Sullivan Principles on doing business in South Africa and the MacBride Principles for conducting operations in Northern Ireland. Other codes exist with respect to businesses' impact on the environment and human rights.

In addition to guiding corporate behavior, these principles promote a unified course of action against particular problems. Working from these models, this Article proposes a uniform set of C2 Principles to guide corporate behavior and assist in combating corruption and bribery. The C2 Principles act as a voluntary public pledge against bribery, as well as a basis for external monitoring of corporate behavior. . . .

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D. The C2 Principles (to Combat Corruption)

The following principles are offered to all firms, wherever situated and whatever their lines of business. In addition, the principles are applicable to all business activities of the endorsing firms. A corporation endorsing the C2 Principles pledges:

1. To disclose publicly and make widely known its endorsement of the C2 Principles.

2. To establish a clearly articulated written policy prohibiting any of the firm's employees from paying or receiving bribes or "kickbacks."

3. To implement the policy with due care and take appropriate disciplinary action against any employee discovered to have made payments in violation of the policy.

4. To provide training for employees to carry out the policy, and to provide continuing support, such as help lines, to assist employees to act in compliance with the firm's policy.

5. To record all transactions fully and fairly, in accordance with clearly stated record-keeping procedures and accounting controls, and conduct internal audits to assure no improper payments are made.

6. To report annually on the firm's bribery and corruption policy, along with a description of the firm's experiences implementing and enforcing the policy.

7. To have the annual report in principle six audited either by an independent financial auditor or an independent social auditor, or both.

8. To require all agents of the firm to affirm that they have neither made nor will make any improper payments in any business venture or contract to which the firm is a party.

9. To require all suppliers of the firm to affirm that they have neither made nor will make any improper payments in any business venture or contract to which the firm is a party.

10. To establish a monitoring and auditing system to detect any improper payments made by the firm's employees and agents.

11. To report publicly any solicitations for payments, or report privately to a monitoring organization or a social auditor.

12. To establish a system to allow any employee or agent of the firm to report any improper payment without fear of retribution for their disclosures.

1. Policies, Procedures, and Publications

Throughout the C2 Principles run the overlapping themes of policies, procedures, and publications. Policies refer to a firm's avowed commitment to refuse to pay bribes and to train its employees to carry out firm policies to that effect. Firms should not endorse the principles simply for public relations purposes or to emulate other firms in their industry. Rather, firms should only endorse these principles on a voluntary, sincere, and genuine basis. Adhering to these principles requires a firm to move beyond merely establishing a code of conduct to proactively guiding the behavior of corporate employees and establishing a compliance program to prevent improper payments.

Principles one through four reflect the required policies. By adopting the principles, a corporation signals its full commitment to combating corruption to its external stakeholders and employees. This is an external affirmation that fighting corruption is a core value of the firm. Establishing this as a core value also requires making all employees aware of the firm's policies and providing appropriate training and support to guide employees in making decisions consistent with those policies. To establish the legitimacy of these policies requires taking disciplinary action against employees who violate them.

The second theme is necessary procedures. Principles five, eight, nine, ten, and twelve establish procedures to control payments inconsistent with corporate policy. These procedures work to control bribery from a variety of angles. First, under principle five, firms need appropriate accounting and auditing practices to ensure that they have authorized and accounted for all firm expenditures. Principles eight through ten focus on controlling common problems firms have in complying with the Foreign Corrupt Practices Act. Agents, particularly those assisting with sales and marketing, often have been the conduits through which firms have made payments. In some circumstances, firms may not have known whether the marketing agents have used part of their commissions and fees to make improper payments to public officials.

Due to these problems, the DOJ's compliance program for Metcalf & Eddy, for instance, requires a committee to review the firm's retention of any agents and to exercise due care to ensure against employing an agent with a propensity to make improper payments. The DOJ's program also requires all agents to sign contracts stating that they will not make improper payments or retain subagents without the prior written consent of a Metcalf & Eddy senior officer. The C2 Principles are consistent with this compliance program in that they require firms to obtain from their suppliers and agents statements to the effect that they have not and will not make improper payments.

Principle ten goes even further, requiring that firms use an auditing system to detect any improper payments. In addition, principle twelve furthers the ability of employees to report any violations without fear of retribution. The establishment of anonymous hotlines can achieve this objective, so that whistleblowers do not have to file reports through anyone in their immediate management.

The third theme, publication, concerns full disclosure of the firm's efforts and performance. Principles one, six, seven, and eleven further this goal. As discussed above, principle one signals commitment to combating bribery to those outside the firm. Principles six and seven provide for external validation of a firm's efforts. Perhaps the most controversial proviso is principle eleven, which requires that firms commit to public reporting of solicitations for payments or, if that is not feasible because of threats of violence or extortion, they report the request privately to a social auditor or a monitoring organization, such as Transparency International. Public disclosure is probably the best way to discourage the demand side of bribery.

2. Coherence and Credibility

To reduce the supply side of bribery, the C2 Principles require coherence and credibility. Coherence refers to a unified approach for combating bribery, such as through the adoption of the same set of principles by many corporations. Credibility requires assurances that each corporation is living up to its pledge through independent monitoring and public disclosure.

A coherent approach provides several significant benefits. It levels the playing field by ensuring that all corporations are playing by the same rules and that government officials are fully aware of those rules. By knowing that its competitors are not paying bribes, a corporation is assured that it does not have to pay a bribe and can compete based on the quality and price of its product or service. The efforts of non-bribe-paying corporations facilitate other corporations' efforts to find honest agents, suppliers, and other business partners, as they are not required to "reinvent the proverbial wheel" on each business venture in a new country or region. Overall, a coherent approach strengthens a firm's ability to operate bribe-free, as "joint refusal of payment of bribes or extortion lessens the necessary courage, cost, and difficulty of refusal to do so individually."

On the demand side, corrupt government officials would know that corporations would deny and possibly disclose their requests for bribes. As seen from the experience with Transparency International's Corruption Perception Index, being known as a highly corrupt country can be highly embarrassing for a country's top government officials, may have financial implications from lowered foreign direct investment, and can spur reforms in that country. This is also supported by the Council of Europe's efforts to reduce corruption by using "peer pressure" to encourage governments to implement necessary reforms.

A coherent approach also provides benefits to the public. Investors, consumers, and other stakeholders of the firm can easily determine if a firm is doing its part to combat corruption and bribery. Without this coherence, an interested stakeholder would have to analyze each firm's code of conduct to determine its approach, if any, to combating bribery.

While a coherent approach requires a significant number of firms independently to adopt the C2 Principles to be fully effective - since only then can the problems of defections and free-riding be overcome - there are significant benefits to each adopting firm. Beyond the cooperative benefits, a firm's endorsement signals to the market that it is taking seriously the moral concerns regarding corruption. Further, any firm attempting to ride on the efforts of others can easily be singled out.

A business principles approach to combating bribery must also be credible. Credibility requires external monitoring and public disclosure. The firm should disclose its policies, performance, and auditors' reports, as well as its pledge to the principles. These could be freestanding reports disclosing the firm's performance, or they could be incorporated into other reports of the corporation. This requirement of the C2 Principles is consistent with current developments in corporate disclosure on social issues. The idea of corporate social auditing, accounting, and reporting (SAAR) is gaining popularity in Europe and the United States. SAAR is similar to financial accounting and reporting, but focuses on measuring the social performance of a corporation in relation to the expectations of the firm's stakeholders.

The Global Reporting Initiative (GRI) is a major international effort to improve the quantity and quality of social reports available to the public. Formed in 1997, the GRI is a collaborative effort of large accounting firms, non-governmental organizations, corporations, universities, and others. It seeks to establish a common framework for corporate reporting that allows corporations and their stakeholders to understand better the link between a firm's economic, environmental, and social performance. A firm's compliance with the C2 Principles easily could be incorporated into reports published under the GRI or some other standard. In addition, a firm's efforts at monitoring compliance could benefit from the SAAR processes a firm must establish to produce a social report.

Whether published as part of a broader social report or as a stand-alone report, a firm should annually provide publications to the widest possible audience regarding its performance with respect to the C2 Principles. For example, making such reports available on a company website would be a cost-effective way for the corporation to provide this information to any interested person. Based on these public disclosures, an entity, such as Transparency International, may compile information on corporate performance.

By making this information public, monitoring mechanisms would emerge in the same way as with the Sullivan Principles. The Sullivan Principles used a system of foundation monitoring. A foundation funded by the signatories of the principles used a third-party agent to monitor the firms' compliance with the principles. Many were dissatisfied with this approach, however, as the monitoring agent did not reveal its system for rating corporations' compliance with the Sullivan Principles. This nondisclosure raised significant doubts about the credibility of the system. To avoid these problems, the C2 Principles require an independent monitoring agent or agents operating under conditions of full transparency. This approach is necessary to ensure that corporations have a compliance program and meet all twelve principles.

An effective monitoring system requires trustworthy information. Beyond issues of disclosure, the increased focus on SAAR also serves to develop the auditing and verification aspects of a social reporting process. When the Sullivan Principles were first announced, corporations and accounting firms had little experience auditing these non-traditional aspects of accounting. While C2 principle five concerns more traditional, accepted accounting procedures, the overall goals of the principles are in line with the developments in SAAR. Organizations such as the Institute of Social and Ethical AccountAbility in the United Kingdom, which is developing auditing standards and an accreditation path for accountants and auditors in SAAR, can provide significant assistance in establishing the credibility of reports filed under the C2 Principles.