PRIVATE SECTOR APPROACHES TO FIGHTING CORRUPTION

Ruslan Stefanov

Coordinator of the Economic Program Center for the Study of Democracy, Sofia, Bulgaria

Presentation outline

• Causes, effects, and interrelation of corruption in the public and the private sectors– Traditionally, the public sector is tasked with countering

corruption. Why is the private sector equally important in fighting corruption?

• International conventions to fight corruption and bribery and their implementation

• Private sector approaches to fighting corruption– Corporate governance, corporate social responsibility– Other approaches: codes of conduct, rules of disclosure,

eliminating conflict of interest, etc. Private sector governance is important to reducing

corruption and its negative effects on growth.

The chicken and egg question: Corruption in the public and private sectors

Private sector

corruption

Public sector

corruption

Democracy and markets reinforce each other, as does the quality of governance in the public and

private sectors.

Why is the private sector important in limiting corruption?

• The private sector generates as much as 80 percent of the world’s GDP

• It takes two to make a bribe work• Private/public and private/private sector corruption

• Corporate culture spreads fast in the age of globalization and is important for shaping the emerging markets• Private sector has gained substantial market power

globally, regionally, and nationally Better corporate governance can reinforce the effects of

good public governance.

What if the private sector is corrupt?

• Squandering of resources • Lower economic growth• Indirect tax generating deadweight loss• Exponential negative effect on developing countries

• Lower competitiveness• Lack of level playing field• Skewed choices in public procurement • Opaque and costly business environment

• Negative effects on democracy• Distorted social perceptions of democracy and markets

Economic fallout of corruption

• Weak corporate and public governance makes economic crises longer and more painful – e.g., Asian or Russian financial meltdowns

• In corruption-ridden environments, companies cannot compete fairly and are not resilient

• As the scale of the private sector expands internationally and domestically, economic consequences of corruption also rise

Private sector corruption has similar negative impacts to public sector corruption: fewer jobs and lower growth.

What can governments do?

• Ensure good, open business environment• Businesses should have open and equal access to the government’s ear• Independent business associations should serve as platforms for the

voice of the private sector• The more clarity and predictability in government decisions affecting

the private sector the better

• Provide the right legal environment, rule of law• Whistleblower protection, fair competition, etc.

• Ensure transparent privatization, require good corporate governance, provide legislative base for business associations, small investors, etc.

International conventions

• U.S. Foreign Corrupt Practices Act of 1977• Amended in 1998 by the International Anti-Bribery Act

• OECD Anti-Bribery Convention • Signed by 37 developed countries in 1997

• United Nations Convention against Bribery • Signed in 2005 by 140 countries

• The issue of implementation• Enforcing these rules is especially crucial in large multinationals that

operate in developing countriesAnti-bribery conventions are important in shaping business in

emerging economies, but companies should also have their own anti-bribery and integrity policies.

Higher social expectations from the private sector

Corporate governance

Corporate social

responsibility

Sustainable production

As the world becomes more flat, scrutiny and expectations placed on private companies rise.

Principles of good corporate governance in emerging markets

• The principles of transparency, accountability, fairness and responsibility must act together

• In emerging markets, there should be more emphasis on ownership vs. management • Eastern Europe, for instance, has much more concentrated

management control than the West

• The need to protect minority shareholders’ rights• The need to build corporate governance culture to

overcome the trap of captured “paper” institutions• Compliance requires external scrutiny

Instruments for fighting corruption in the private sector

• Strong business associations• Indigenously created and concerned not just with

protecting the interests of their constituents, but ensuring that they abide by the rule of law

• Codes of conduct• Disclosure rules• Mitigating conflict of interest

No single stand-alone instrument is effective in anti-corruption: complex problems require complex solutions.

Improving corporate governance in risk areas

• In order for anti-corruption measures to succeed, companies (esp. multinationals) must address specific areas of risk:• Procurement• Sales and marketing• Inventory control• Protecting trade secrets• Hiring

• The way large multinational corporations do business in a foreign country is crucial to the way the corporate culture of that country will emerge

Conclusions

• Private sector governance is as important as public sector governance in fighting corruption• Economies around the world have become much more

dependent on private capital flows

• As the markets develop and grow, they need good democratic institutions that support free market mechanisms• Both in the public and private sector

Public and private sector governance is interconnected and mutually reinforcing, since in the long term democracy and markets can only progress

hand in hand.

ENDING