Empowering the employees to curb corruption in private corporations

Empowering the employees to curb corruption in private corporations

Sam Choon Yin (2004)

 

Abstract

Private sector organizations are susceptible to acts of corruption. The problem arises because the principals (owners or shareholders) and agents (professional managers and their subordinates) have conflicting interest. It is well known that powerful investors or shareholders can exert substantial pressure on agents like executive directors to perform better. Particularly significant are the institutional investors like pension funds, insurance companies, banks and holding companies. This article argues that employees can play the same role as these institutional investors to curb corruption in private corporations. Empowering and encouraging employees to speak up can be a useful stimulus to better align the interest of the agents with that of the principals.

 

What is corruption?

In the simplest sense, corruption involves bribery where money is transferred from donors to other persons (like civil servants) so that activities in favour of the donors can be carried out. For example, government officials receive bribes from businessmen to allow their ‘illegal’ businesses to run. But corruption goes beyond bribery as this article illuminates.

In societies where the probability of getting caught and penalty costs are low, the tendency for government officials to act corruptly is likely to be higher. Lack of transparency in government services, low salaries and enactment of bad rules can also increase the chances for government officials to be bribed.

Corruption is often discussed in the context of public sector governance. However, acts of corruption can also take place in private corporations. For example, executive managers may seek opportunities to expropriate company’s funds to pay higher salaries to themselves, furnish their officers with unnecessary electronic gadgets and travel extravagantly in business trips. More managers are also trying to put company’s money into their own pockets through creative or illegal accounting. Some members of the private firms may provide employment opportunities to their relatives and friends without proper screening. They can also offer exclusive contracts to relatives and friends without going through the proper procedures. These are different forms of corporate corruption that can take place in a typical country. Unfortunately, Singapore is not an exception.

 

How corruption can harm private corporations?

In a corrupt environment, the agents deliberately pay themselves excessively in remunerations and fringe benefits with minimal consideration to link the benefits to productivity or performance. The agents may also employ more workers than necessary thus raising the operating expenses unnecessarily. Some of these expenses may be passed on to the consumers in the form of higher price leading to losses in consumer surplus. The organization becomes less competitive as a result. The public also views an organization negatively if nepotism and cronyism are commonly practiced there. They essentially lower the company’s reputation. Loss of business opportunities can result. Furthermore, productivity level of corrupt agents tends to be lower because of their excessive attention paid to enrich themselves in the working place.

If the agents are poorly monitored, the above-mentioned problems can emerge. The result? Lower productivity and shareholders value.

 

Causes of corruption

Low standards of corporate governance are causes of corruption in private corporations. The problem arises because the principals (owners or shareholders) and agents (professional managers and their subordinates) have conflicting interest. While the owners are generally interested in maximizing the firm’s profits, the agents may not posses the same drive. In reality, the latter has a significant control over the use of the company resources. They have direct access to the firm’s resources and their actions may not be in tandem with the notion of maximizing the principals’ interest.

In the case where there is a separation between ownership and control, the principals rely almost exclusively on contracts with the agents to protect their capital and interest. In the contracts, the duty and responsibility of the agents are listed. Other details like the remunerations and other benefits can also be found. The contracts are law-abiding.

What is the problem then? The problem arises when the contracts signed are incomplete. It is technically infeasible for example for the principals to state exactly in the contracts how their agents are to allocate their time during office-hours. It is not possible to state implicitly how the agents are to distribute the company’s profits and in what proportion of the after-tax profits are to be retained. Because of the incompleteness in the contracts, agents can take advantage of the loopholes to maximize their personal benefits at the expense of the principals’ interest.

Adverse selection and moral hazard problems worsen the situation. Agents possess knowledge that is unknown to the principals. They can also hide their actions from the principals.

There are several ways to contain the principal-agent problem. Use of incentive contracts, establishing informal norms and setting independent board of directors are some of the recommendations. This article discusses another alternative. It calls for more active employee involvement.

 

Role of employees

Interestingly, one of the untapped ‘resources’ in raising corporate governance standards is the ‘employees’. It is not exaggerating to say that most of the employees want the organizations they work in to succeed. Workers often feel proud to be associated with a successful company. They will not hesitate to tell others about the organization. The employees are generally well-meaning and right thinking. They want the company to reap the highest returns possible so that they can be rewarded in the process. They do not want other colleagues to affect their job prospects and earning potentials.

If these are true, it is logical to grant the staff the power and ability to voice their concerns. The employees must be encouraged to speak up. They must be given opportunities to make suggestions to further improve their working conditions. Because of their intimacy with things happening on the ground, employees are in a great position to spot ethics-related problems in the company. They can, for example, express their concerns with the board members so that the problems can be looked at and rectified. The company must assure the staff that their interests will be protected after sounding their concerns. Establishing the staff suggestion scheme (with anonymity allowed) through the company’s intranet system is a right approach to move towards this direction. Management walkabouts can also be useful to obtain views from the ground. The executive managers can arrange to meet up with their staff periodically.

 

Whistleblowing

It is relatively more desirable to let the employees sound their unhappiness internally rather than blowing the whistle and letting members of the public know about the problems. This is true at least from the principals’ perspective.

In fact, concerned employees are often encouraged to express their concerns internally first. This is in recognition of the potential private costs that are associated with whistleblowing.[i] Some of these costs include losing the current job, difficulty in getting a new job and losing faith in others such as the government or the judicial system. Some may experience name-calling like traitors and troublemakers. Whistle-blower may also face heavy financial burden as a result of loss of job. Furthermore, whistleblowers may have to bear the legal cost if whistleblowing is proven to be unsuccessful.

Because of these costs associated with whistleblowing, whistleblowers are often advised to do the necessary homework to enhance their chances of success. Hard and soft evidences should be gathered and safeguarded.

Firms should be reminded and warned that whistleblowing is not as alien as in the past. There’s a greater demand for employees to speak up and be heard. The Corrupt Practices Investigation Bureau (CPIB) (http://www.cpib.gov.sg) for example is getting tip-offs and detailed accounts of firms’ wrongdoings from whistleblowers (The Straits Times, 7 October 2003). More calls are also heard from institutions like the Association of Chartered Certified Accountants in Singapore and Corporate Social Responsibility to provide legal protection for whistleblowers. Third parties like the shareholders and watchdogs (like CASE[ii], SPRING[iii] and SIAS[iv]) are more interested in hearing what employees have to say about their organizations.

Whistleblowing indeed imposes unwanted threat to the survivorship of firms. It is well known for example how whistleblower Sherron Watkins had ‘assisted’ in bringing down the Enron Corporation.

 

Independent institutions can assist

Besides the company’s employees, selected independent institutions can exert pressure on the executive managers (agents) to perform better. An independent institution must be free from any business or other relationship with the private corporations which could materially interfere with the exercise of its independent judgment.

To illustrate, let me consider the private education industry in Singapore. Many private schools are seeking the Singapore Quality Class (SQC) award for private education organizations. Launched in February 2003, the SQC award aims to stimulate private schools to excel, upgrade and compete better with other schools in the region so as to capture a larger world market share in educational services. SPRING administers the award. As in September 2003, a total of 38 private educational institutions have achieved SQC status.[v] Attaining the status is not easy. Competition has become keener. The need to upgrade has become greater than ever to achieve the status, and then in retaining it.

The SPRING represents an effective institution to monitor executive managers’ performance in private schools, and motivate them to do better. Constant monitoring forces the managers to care for their stakeholders on a continuous basis. They are also compelled to adopt the best practices and eradicate improper practices in their respective organizations. There is a greater pressure for managers to do better and greater likelihood for incompetent managers to upgrade themselves for fear of losing their positions. Concerned stakeholders like the employees (teachers for instance) and students have an additional avenue to express their anxiety.

In a general sense, the SPRING plays a role quite similar to the stock exchange. The stock exchange checks that all listed companies comply with the listing requirements. Failure to do so (either from the exchange’s own investigations or tip-offs) will render the public listed companies liable to stiff penalties.

Other relevant independent institutions include the SIAS, NTUC[vi], CPIB, IRAS[vii] and CASE.

These institutions provide an avenue for companies’ stakeholders to voice their concerns against any wrongdoings committed by the companies. Because doing so exposes a company’s action (which has yet to be proven wrong) to the public, the company has the incentive to check that this does not happen to itself, thus compelling it to raise its standards of corporate governance in the first place.

Independent institutions effectively remind the company agents that they are being watched. The agents are warned that they cannot act in whatsoever manner as they please.

 

Conclusion

This article reminds us that acts of corruption are not limited to public corporations. Private corporations are equally susceptible to the phenomenon. To remain competitive in the globalising world, it is imperative that the private corporations take steps to eradiate improper practices. Understanding the causes of corruption is useful so that appropriate actions can be introduced to eliminate the root causes. This article argues that the principal-agent problem can and has to be contained. One way is to empower and encourage the employees to speak up as and when ethics-related irregularities are spotted. They should exhaust all internal channels first. If the issues or concerns have yet to be addressed, whistleblowing appears to be a viable alternative. Independent agencies like SPRING, NTUC, CPIB, IRAS, SIAS and CASE are several avenues in which relevant concerns can be directed to. 



[i] Whistleblowers are current and former employees of an organization who disclose what they think as wrongdoings made by the organization. Generally, whistleblowing is justified when organisations engage in activities that can cause unnecessary harm to third parties, in violation of human rights and going against the organizations’ defined purpose. Employees are qualified to be labelled as whistleblowers if the objective for expressing their grievances is moral-driven, and not due to personal reasons. Some observers have argued that whistleblowing is unethical. They argue that employees have absolute obligation to confidentiality and loyalty to their employers. Whistleblowing violates this duty. However, the argument misses the point that firms have a legal and moral responsibility to the society. If the firms are immoral, the society has the right to punish them. The firms’ employees, with their ‘inside information’, are in a very good position to highlight firms’ wrongdoings. The organizations should not fear so much about the complaints if they have done nothing wrong.

[ii] Consumers Association of Singapore (http://www.case.org.sg)

[iii] Standards, Productivity and Innovation for Growth (http://www.spring.gov.sg)

[iv] Securities Investors Association (Singapore) (http://www.sias.org.sg)

[v] See Koh, Jamie (2003) ‘38 Schools Achieve Singapore Quality Class for Private Education Organizations’, Productivity Digest, September 2003 issue, pp. 11-12.

[vi] National Trade Union Congress (http://www.ntuc.com.sg)

[vii] Inland Revenue Authority of Singapore (http://www.iras.gov.sg)