"Getting From Salbu to the 'Tipping Point'

The following reading is an excerpt (with footnotes removed) from: Thomas W. Dunfee & David Hess. "Getting From Salbu to the 'Tipping Point': The Role of Corporate Action Within a Portfolio of Anti-Corruption Strategies." Northwestern Journal of International Law & Business, vol. 21 (2): 471-490 (2001).

A. The Role of Corporate Codes

The OECD recently conducted a study of how corporate codes of conduct are used to combat bribery. They examined 246 codes issued by individual firms and business associations. Twenty-three percent of these codes directly address bribery and corruption. This made it the fourth most commonly cited issue, behind labor relations, the environment, and consumer protection. Of the codes addressing corruption, one-third contain only a general prohibition on bribery. Others provide very detailed descriptions of what employees are allowed to do. The aspects of bribery covered also vary significantly. Some codes deal only with bribery to public officials, while others encompass bribery of private employees. Some codes prohibit the giving of bribes but remain silent on the issue of receiving bribes. The authors of the study conclude that there is currently little consensus among corporations on how to define bribery and what to include in their codes of conduct to direct the behavior of employees.

Salbu criticizes the use of overly detailed codes of conduct regarding ethical issues lacking universal consensus. Although Salbu appropriately recognizes the existence of a general consensus that bribery is wrong, he finds less consensus on what actually constitutes a bribe, especially across cultural settings. Salbu argues that corporate codes which rigidly define bribery for multinational corporations may appear to "belittle the idea of ethics" or become yet another example of moral imperialism similar to Salbu's view of the FCPA. We agree that any attempt to control bribery must be sensitive to local traditions. Likewise, any attempt to structure corporate principles on bribery must allow for flexibility at the level of actual practice. We cannot expect firms facing diverse market and cultural environments to follow a unified approach. On the other hand, firms need to be precise and clear in promulgating their own core standards to employees.

We advocate that firms delineate precise boundaries for prohibited conduct within the context of their operations. We realize that philosophers and lawyers may easily quibble over the definitions used, and readily point out hypotheticals likely to produce counter-intuitive results. However, that is not an appropriate test for a corporate definition of bribery. Instead, the question should be whether the definition is capable of producing adequate guidance. The ultimate answer lies in the realm of experience as firms learn whether particular definitions are successful in guiding their employees through corrupt environments.

The benefits of a clearly articulated corporate definition are two-fold. First, a clear definition provides a basis for workplace rewards and sanctions. Employees know what is expected of them, while managers have a basis for discipline and giving raises. Second, written policies made available for review by other firms and interested stakeholders further the dialogue on what constitutes bribery. Over time this should allow a consensus to emerge that takes into account cultural and industry differences.

This section takes a closer look at how this process may evolve by examining current efforts by multinational corporations to define bribery, especially in the gray areas of corruption, which today include facilitation payments, small gifts, entertainment, and travel expenses.

Facilitation Payments. One of the gray areas in bribery is the issue of facilitation payments. These are payments made "to induce public officials to perform their functions, such as issuing licenses or permits." These payments are permitted under both the FCPA and the OECD convention. Salbu identifies the exception for routine government action in the FCPA as a major problem area, arguing that the definition provides firms with little guidance. From an ethical analysis, it may be hard to distinguish between a small payment to a public official to obtain a business permit and a large payment to a public official to obtain a government contract. Some may even argue from a "broken windows hypothesis" perspective, that the law should target such facilitation payments as aggressively as higher-level corruption. Under this hypothesis, the ability of lower level officials to get away with corrupt behavior would encourage higher level officials to believe that they can get away with similar behavior, though at a significantly higher monetary amount and at significantly greater harm to the public. Further, the proliferation of corruption at lower levels of government progresses on to higher levels of government, as corrupt officials are promoted through the system. As a practical matter, however, the OECD recognized that it would be difficult to get all countries to agree to criminalize facilitation payments, or even if they were criminalized, to enforce the law.

This, then, is an area in which corporate action needs to complement governmental response. Through their codes of conduct, firms seek to provide employees with guidance on what is appropriate behavior. One corporate code states:

Even though such payments may possibly be expected in accordance with area customs and legal interpretations, and would confer no improper business advantage on the company, every effort should be made to avoid them ... In the event any such payments are considered necessary, it is imperative that they be correctly recorded and accounted for on the company's books.

An industry-wide norm of accurately accounting for such payments and disclosing them may be one effective means of combating bribery. While this norm is not a prohibition on facilitation payments, it allows other corporations, as well as the local government, press, and citizens, to gauge the level of corruption in the region and potentially spur on necessary reforms.

Business Courtesies. Another category of potentially corrupt payments where consensus appears to be lacking is gift giving, entertainment, and travel expenses. This is an area that causes significant problems for regulators and business persons - both business persons with good intentions and those attempting to pay bribes under the guise of an innocent gift. Salbu criticizes the ICC's guidelines on distinguishing between bribes and gifts. He suggests that such vague guidelines could actually do more harm than good. He argues, and we concur, that the ones most likely to work are those that are carefully considered.

The OECD study on corporate codes found that multinational companies use a variety of definitions to attempt to define allowable gifts and entertainment expenses. These include, "not excessive in value," "within the business norm," "not seen as an inducement of business," "does not violate the law," and "does not damage corporate image." Approximately one-third of codes that deal with bribery require employees to report giving or accepting gifts to their superiors, but this reporting is limited to those gifts that exceed the "business norm."

Our own review of corporate codes finds that some firms are going beyond these general definitions. Boeing Corporation's code of conduct provides an extensive discussion concerning what Boeing employees may appropriately give to federal regulators. Boeing generally instructs its employees to know and abide by the laws specifying what federal employees may legally accept as a business courtesy. Even if a regulatory agent may lawfully accept a business courtesy, however, Boeing policy may prohibit such a gift. One example of imposing stricter standards than federal regulations is:

"Modest items of food and refreshments, such as coffee and doughnuts, may be offered to federal executive branch employees in connection with business activities, provided such refreshments are not part of a meal. Soft drinks and cookies can replace coffee and doughnuts, but other "light refreshments," such as sandwiches, may not be offered to federal executive branch employees."

How much progress will these detailed codes provide in reaching an international consensus on what is an allowable gift? In a previous article, Salbu argues that the subtle differences between what distinguishes a bribe and a gift from culture to culture make it implausible that a uniform set of rules can be developed. We are also skeptical of any claim that one set of rules can be developed to define bribery for all contexts and cultural settings. The process we are describing is not simply a matter of translating "coffee and doughnuts" to the local snack foods of the host country. Instead, these codes should be adapted to the local traditions. Detailed codes of conduct can provide a guide to local traditions and best practices for that industry and/or cultural setting. Firms operating in the US and dealing with federal regulators may look to Boeing's code as a guide for their own behavior in that environment. This process makes explicit perceived local norms. These provide mechanisms to develop an understanding of when local traditions are being followed and when they are being abused to improperly to gain favoritism.

For example, in Korea, it is common to give ttokkap ("rice cake expenses") around the major holidays. This is a centuries-old tradition that developed out of notions of hospitality and gratitude. In several instances - some involving former Korean presidents and chaebol heads - the Korean courts have found that the giving of ttokkap exceeded socially acceptable limits and amounted to bribery. Precisely when ttokkap stops being a gift and becomes a bribe is unclear, however. Even under the Korean legal system it is unclear when ttokkap exceeds the realm of traditional gift giving and enters the realm of bribery. In one case, a presidential secretary was convicted based on the receipt of $ 776,000 in bribes. In the case against him, the police excluded from consideration over $ 2.6 million in payments made to the secretary by various individuals because they were considered ttokkap.

The appropriateness of gifts in certain contexts, such as with ttokkap, may be detailed in corporate codes with the assistance of other corporations based on their experiences, local governments, NGOs, and others. As these codes evolve over time, they may produce consensus standards in a manner analogous to the common law. Through this evolution, rules of conduct may develop to guide the behavior of all corporations operating in a certain country, and may provide guidance that is transferable to other countries as well. In addition, these rules or best practices may be supported by NGOs. In that case, a general consensus on appropriate conduct may develop in the same way as is currently happening with norms of appropriate behavior regarding business practices affecting human rights and the physical environment.

The fact that corporate codes currently lack consensus on how to deal with issues of bribery and corruption demonstrates their potential rather than a major failing. The direction given in these codes reflects the current understanding of what constitutes a bribe in a particular context. The alternative top-down approach to defining bribery is not likely to work. The necessary experience and knowledge does not exist to adequately draft a universal code to apply to multinational corporations wherever they do business in the world. Firms experimenting with the best way to confront bribery allow for the appropriate evolution of anti-bribery norms for different contexts. Obviously, the statement that giving regulators doughnuts is permissible while giving them sandwiches is considered bribery, is not a candidate for a universal rule applicable throughout the world. This rule does, however, provide guidance to other U.S. firms and to multinationals selling to the U.S. government.

In this manner, codes of conduct provide a necessary knowledge transfer mechanism. In determining how to conduct business in South Africa during the early 1980s, many CEOs stated that the disclosure of information under the Sullivan Principles allowed them to learn from the experience of other companies in working towards desegregation and equal opportunity for all. In a similar manner, companies need to share information on combating bribery to allow the best practices to emerge, whether these are universal practices (as many accounting practices may be), or practices specific to a region, culture, or industry.

Corporate Compliance Programs. Success at the corporate level, however, must go beyond definitions and formal statements or codes. Programs that simply focus on compliance with external laws are not likely to have an energizing effect on corporate employees. Merely adopting a strong compliance program has many limitations. Values imposed on the firm from the outside will not necessarily be seen by members of the firm as legitimate corporate values. Pulling in values from outside the firm could even create an adversarial attitude towards those values; "how far can we go without technically violating the law" may prevail as an attitude over "how can we implement an important organizational value?" Lawyers rather than operating or senior staff management may be in the lead. This may also give credence to adversarial attitudes toward the rules.

In contrast, the ideal program would be an anti-corruption program based on a firm culture of integrity. Here the focus is on furtherance of core corporate values that are intolerant of corruption. This broader approach involves senior management, reaches to all employees, is consistent with workplace rules and expectations, and is much more likely to be internalized by employees as a core value they personally respect. It is widely believed that programs with these characteristics are far more likely to be successful in eliminating corrupt actions.

Existing corporate anti-corruption programs also reveal significant variations among firms. A recent study of 151 companies from around the world found that 78 percent of the companies claiming to have a well-developed anti-corruption program distributed a statement of their program to all employees, while 32 percent distributed it to their joint venture partners, 29 percent to vendors and suppliers, and 29 percent posted their statement on their website. The content of these statements also varied. Less than half of these codes' anti-corruption statements clearly acknowledged that adherence to the policy may result in lost business. Less than one-half of the companies provided training sessions for all employees, and only one-quarter of the companies provided employees with case study examples of common ethical dilemmas in international business. There was also variation concerning which company officers are involved in the development, implementation, and monitoring stages of the program.

Ultimately, the key is the role that individual firms can play in a process of experimentation, benchmarking and peer influence. When firms, each in their own context and environment, try different solutions, superior strategies should emerge over time that will help lead the way to the tipping point against corruption. It is in the development of such programs that we expect to see the most significant benefit in the short-term under the C2 Principles. This is an area where standardization of best practices is likely to occur most successfully, and NGOs may play a significant role (and some already are). We turn to these issues in the next two subsections.

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C. The Role of the C2 Principles

We now turn to our specific proposal, a Sullivan-like Principles approach to controlling the supply-side of bribery. The Combating Corruption Principles (or " C2 Principles") establish certain practices and procedures for firms to implement to combat bribery and require these firms to publicly disclose their efforts in this area. As with any anti-corruption strategy, however, the Principles will have little lasting impact without the support of government and civil society initiatives, as well as other private sector reforms.

What is the role of the C2 Principles within a portfolio of anti-corruption strategies? A successful anti-corruption system requires corporate action, government action, and the involvement of civil society. In most developing countries, however, the political and economic institutional support for an effective government program may be severely lacking. In such situations, the role of the private sector may be invaluable. The OECD Development Centre recently organized a conference to investigate the potential of the private sector to combat corruption in developing countries. The conference participants concluded that multinational corporations can be essential players in establishing the necessary political coalitions to support anti-corruption efforts, can assist in educating the public on corruption, can compensate for the lack of resources available to NGOs, and can reduce the need for public expenditures to battle corruption through their own anti-corruption efforts.

A corporate principles approach can assist the private sector in many of these areas. For example, the more firms operating in a certain country that have adopted the C2 Principles, the stronger the political support for reform. The C2 Principles can also work to increase awareness about corruption and its harms.

We propose an even broader role for the C2 Principles. The implementation of these principles can play a significant role in the generation of norms of appropriate conduct surrounding potentially corrupt behavior, both among multinational firms and within host countries. Principle Two requires a corporation "to establish a clearly articulated written policy prohibiting any of the firm's employees from paying or receiving bribes or "kickbacks.'" Although this allows flexibility for firms to define "bribes" and "kickbacks," it also requires some action on the part of the firm. It is not satisfactory to leave the issue of defining bribery to individual employees exercised on an ad hoc basis. A key part of Principle Two is the development of a "clearly articulated written policy." Establishing explicit policies and publishing them for review by local governments, other corporations, and other stakeholders, allows a full conversation to develop on the appropriateness of certain actions within a particular context. Ultimately, a consensus should emerge.

The C2 Principles also allow for anti-corruption norms to spread throughout distribution channels. The Principles emphasize that firms require suppliers and distributors to commit to the core firm's anti-corruption policies. The Conference Board study revealed that only 29% of their featured "program" companies and 11% of other companies distributed their anti-corruption statements to vendors and suppliers. Only 33% of program companies and 13% of other companies even had a statement of supplier status with regard to the core firm's anti-corruption policy. Strategies such as wide-spread adoption of the C2 Principles should improve performance in this critical area.