Curbing corruption in private corporations

Curbing corruption in private corporations

Sam Choon Yin (2004)

 

 

Abstract

This article reminds us that private corporations are susceptible to corruption. It is imperative that they curb the problem. Otherwise, the corporations may suffer from lower productivity and shareholders value. It is well known that Singapore is one of the least corrupt countries in the world. It is useful thus for private corporations to learn from Singapore’s experience in dealing with the problem.

 

Corruption can occur in private corporations

It may be useful to begin by defining the term ‘corruption’. In the simplest sense, corruption refers to the abuse of power by an individual to maximize his/her private interest at the expense of others’ interest. For example, government officials receive bribes from businessmen to allow their ‘illegal’ businesses to run. Because these activities escape the detection from the government, economic statistics like national income and unemployment are not likely to reflect accurately the country’s economic status. Policies implemented using these statistics may worsen the problems instead of solving them.

 

Corruption is often discussed in the context of public sector governance. However, acts of corruption can also take place in private corporations. Essentially, they can be treated as a form of an agency problem where company agents do things that are not in tandem with the notion of maximizing the principals’ interest.

 

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 excessively in business trips. 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.

 

More managers are also trying to put company’s money into their own pockets through creative or illegal accounting. Hiding liabilities and inflating profits are getting more common among companies to reward company agents in excess of what they actually deserve to get.

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. The public views an organization negatively if nepotism and cronyism are commonly practiced. This can result in lower company’s reputation and loss of business opportunities.

 

Company agents may bypass certain procedures or reduce the stringency of requirements to permit others to reap private benefit. This is possible for example in loans assessment. A bank manager may grant overdrafts and other banking facilities to the briber without properly checking his/her creditworthiness thus subjecting the bank to unnecessary risk. In another example, a company agent may source for low quality and high priced materials because he/she has received bribes from the seller. The company may mark up the prices to recover the increased cost thus negatively affecting its competitiveness.

 

Furthermore, productivity level of corrupt agents tends to be lower because of their excessive attention paid to enrich themselves in the working place.

 

These are different forms of corporate corruption that can take place in a typical company. If the agents are poorly monitored, the above-mentioned problems can emerge. The result? Lower productivity and shareholders value.

 

Corruption in Singapore

Corruption exists in Singapore albeit rarely. International agencies have ranked Singapore as one of the least corrupt nations in the world. For example, in the World Competitiveness Report 2003 prepared by the International Institute for Management Development (IMD), Singapore was ranked fifth least corrupt economy among 29 countries with population less than 20 million (after Finland, Denmark, New Zealand and Iceland). Transparency International (TI), a fledging non-governmental organization established in 1993, constantly ranked Singapore as one of the 10 least corrupt countries in the period covered (1995-2003). For many years, Hong Kong based Political and Economic Risk Consultancy Limited (PERC) has ranked Singapore as the least corrupt country in the world. Table 1 below briefly documents Singapore’s experience in eradicating corruption.

 

Learning from Singapore’s experience

There are several lessons which the private corporations can learn from Singapore’s experience.

 

Lesson 1: Set up an independent anti-corruption committee

It is useful for private corporations to set up independent committees to spot, investigate and eradicate ethics-related problems. The tasks can be handed over to the Ethics Committees if there are any. An independent board member should head the committee with staff from various departments making up the rest of the team. The committee could report directly to the CEO and its members appointed by the Chairman. Because it is possible for the CEO to be investigated, it is useful to empower the committee and allow it to carry out its investigations despite having views that are in contrary with the CEO. The committee’s terms of reference thus must highlight this provision.

 

Table 1

Curbing corruption in Singapore

Measures

Description

Set up an independent agency, the Corrupt Practices Investigation Bureau (CPIB)

 

The CPIB is mandated to carry out all investigations pertaining to acts of corruption. It reports directly to the Prime Minister. The President approves the appointments of key personnel in the CPIB. Under a provision in the Constitution, even the Prime Minister can be investigated. The probability of catching the offenders is raised accordingly. Proper screening of the CPIB staff is carried out. In Singapore, the incentives and disincentives of doing good and bad are clear and credibly enforced. The public does not hesitate to come to the CPIB, give information and assist in subsequent investigations. The CPIB is confident that it will successfully catch-up with the person engaged in acts of corruption. Discreet investigations are commonly carried out before investigations are done openly.

Increase the penalty cost

Accused are dealt with severely upon conviction to signal the society and court’s disapproval of improper practices. Otherwise, would-be offenders will have a greater tendency to act corruptly. In Singapore, it is wrong to receive and pay for bribes. The government does not hesitate to shame the offenders via the media to further raise the opportunity cost of engaging in corruption acts.

Strong political leadership to inculcate the incorruptible virtue

All MPs, ministers and public officers are expected to set good examples for others to follow. All PAP members are required to declare their family assets to the Prime Minister while the ministers (including the Prime Minister) declare their family assets to the President.

Promote service excellence

Efforts are put in to improve standards of operating procedures (e.g. through the PS21 initiative which, among other things, emphasizes service excellence, greater efficiency in operating procedures and adaptation of the change culture). The government believes that corruption is more likely to thrive in an inefficient administration where agents can take advantage of loopholes to best the system. Advancement of technology is leveraged to minimize direct contact with public officers (e.g. electronic tax filing system is adopted by the Inland Revenue Authority of Singapore).

Pay competitive salaries to the agents

Salary revision exercises are carried out periodically to see that the wage gap between the public and private sectors does not deviate too significantly. Singapore’s public sector adopts the pay for performance principle diligently.

 

The probability of catching the offenders must be increased to lower the opportunity for corruption. Employees for example can be empowered to voice their concerns. Because of their closeness with things happening on the ground, they are in a very good position to spot ethics-related problems. The anti-corruption committee must assure the staff that they are protected against harassment and that fair and thorough investigations will be carried out.

 

The anti-corruption committee can be given more power to scrutinise the actions of the company agents. These include ‘summoning’ relevant persons to assists in its investigations and sending stern warning letters to suspected persons. The key is to make the company agents fearful of the committee.

 

Lesson 2: Increase the penalty cost

The penalties imposed on offenders must be significantly high. The company for example must not hesitate to report the matter to the government authorities and sack the offenders if they are found guilty. It is useful that other colleagues know about the cases so that they are aware of the consequences for acting corruptly. The possibility of being shamed in public can discourage would-be offenders from engaging in improper practices. This is particularly true in the Asian context (including Singapore) where people are generally afraid to ‘lose face’.

Also, the penalties must be made known to all staff. This can be done through the company’s intranet. The penalties must be enforced.

 

Lesson 3: Strong political leadership to inculcate the incorruptible virtue

The Chairman of the Board, CEO and executive managers must set good examples for others to follow. They can constantly appeal to the moral consciousness of their staff and remind them of the benefits of doing good and the negative implications of seeking private benefit at the expense of the principals’ interest. The intention is to inculcate the group norm that acting incorruptly is unacceptable in the organization. Corrupt agents should pay the price like being shunned by their colleagues, and losing their reputation and job if they have violated the corporate and societal norm.

 

Also, executive managers can be requested to declare their family assets periodically to the Chairman. Because of its sensitivity and possibly violation of privacy rights, some may protest against the move. It is essential thus for the measure’s objective(s) to be clearly conveyed to the staff. This should include the intention to safeguard the company interest. Communication must be thorough and substantial. Only top managers should be involved in this exercise. The exercise may be carried out on a voluntarily basis for those who hold less ‘sensitive’ posts. If there is an allegation against the executive managers of assets wrongfully gained, they should be asked to explain how the assets were acquired. If they are not able to explain how they had acquired the assets, the anti-corruption committee for corruption will investigate them.

 

Lesson 4: Promote service excellence

It is well known that service excellence and the need to comply with standard operating procedures are incompatible with acts of corruption. Uncertainties in terms of how things are done are lower since everyone is expected to follow the standard procedures. Accordingly, bypassing standard procedures should be condemned and made easier to detect so that the opportunity for corruption can be lowered. To standardize the procedures, it is useful to leverage on technology. There will be lesser incentives then for a typical person to bribe others since he/she can carry out the tasks himself/herself electronically in an efficient and effective manner.

 

It will also be useful if the committee can establish the company code of ethics to state formally the acceptable standards, procedures and decisions made by the organization, which a majority in the organization is expected to follow.

 

Lesson 5: Pay competitive salaries to the agents

Rational individuals are responsive to incentive and disincentive measures. Paying competitive salaries to the staff can serve as a useful deterrent against acts of corruption. The briber would have to pay a more substantial amount to entice one to act corruptly. Paying competitive salaries also helps the organization to retain competent staff.

To further reduce the incentive for corruption, private corporations can adopt the pay for performance principle with a greater proportion of the staff salaries converted into the variable form. This is useful because individuals are generally marginal thinkers. Additional incentives create additional efforts from the staff to excel in the working place. It is essential however that a good staff appraisal system is in placed so that the staff can be assessed objectively and fairly.  

 

Like in any typical public corporation, the pay structure should be designed in such a way that the staff have to go through a long drawn out process before they are deem qualified for higher compensation or reward (to match with their improved performance). This helps to promote persons of highly developed intrinsic motivation to work in the private corporations while short-term materialistic ones are avoided. Otherwise, improper practices like manipulation of financial statements are more likely to result since the agents will concentrate more of their attention on compensation rather than on effort.

 

Conclusion

It has taken the Singapore government more than four decades of hard work to grant the country the premium of having a clean and almost corrupt free society. Private corporations should realise that they too can attain the status. Studying and implementing the above-stated lessons is the right and essential step to take if they want to remain competitive in a more globalising world.