Companies: Key players in the fight against corruption

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Corruption is infective

Companies: Key players in the fight against corruption Ethical BoardroomBy Sophie Ogilvy – Business Integrity Programme Director at Transparency International UK

 

 

Many articles over recent months have emphasised how the Covid-19 pandemic has revealed companies’ true value systems and CEO priorities.

For some companies that espoused stakeholder capitalism and a purpose-led agenda in 2019, 2020 has shown that this was merely a narrative with little substance behind it. Conversely, for others, the pandemic has demonstrated a true commitment from the top to embedding ‘doing the right thing’ into corporate practice. Ultimately, this pandemic has highlighted more than ever the central role that companies play in our economy, and in our society. As we look towards a sustainable future, addressing the corrosive effects of corruption stands out.

It is estimated that corruption in the form of bribes and stolen money costs the global economy $3.6trillion per year.[1] While we continue to navigate the effects of Covid-19 on the economy and society, ensuring that corporates do not contribute to this loss of resources through corruption is, more than ever, a question of life and death.

Recognising the global nature of many business operations, spanning across several jurisdictions with varying legal requirements, and the current inconsistency of both voluntary and mandatory reporting requirements, we see a strong role for corporates to embrace transparent anti-corruption corporate reporting to tackle their corruption risks and contribute positively to sustainable development.

To help the corporate community and their leaders navigate these inconsistencies and guidance gaps, we have published our flagship research for 2019/2020, Open Business. The report shows how transparency can help reduce, manage and mitigate corruption risks, and calls on companies to recognise the business case for public disclosure around their anti-corruption efforts, review their current level of disclosure and build improvements to practices and disclosure into their strategic business plans.

This does not have to be in contradiction to delivering profit and shareholder return. Indeed, the business case for anti-corruption measures and transparency are strong. For example, the company that embeds strong anti-corruption standards into its business model also reduces corruption risk, the risk of fines and prosecution and the risk of reputational damage. Equally, transparency secures and maintains the trust of consumers, investors and employees, improves reputation – demonstrating that a company has nothing to hide – ensures compliance and enhances competitive advantage.

During this unprecedented pandemic, companies and governments alike have demonstrated how innovative, flexible and quick acting they can be. At the same time, media scrutiny and the actions of some companies to exploit reduced oversight in these times, has shown the importance of strong leadership and a genuine commitment to ‘doing the right thing’. The lasting learning for companies is that it is no longer enough to simply imply that they are doing the right thing; companies need to demonstrate how they are doing the right thing, too.

The role of anti-corruption transparency for the purpose-led company

Addressing the issues the world faces beyond, but not excluding, a global health pandemic, it is clear that in order to meaningfully tackle the range of pressing global environmental, social and governance issues, corruption and bribery cannot be ignored. In fact, given the corrosive effect of corruption on sustainable development, public trust and long-term economic prosperity, tackling corruption sits squarely at the core of responsible business activities. And, it is the role of corporates to ensure that their activities do not encourage or support corrupt systems. Equally, in a time of economic uncertainty, companies that can demonstrate through reporting the strength not only of their governance, but also of tangible data around how they mitigate corruption risks, among others, will garner confidence and support from investors, customers and employees alike.

However, while transparency is increasingly becoming a norm in the corporate world, there is a notable inconsistency between the areas in which companies choose to publicly disclose information.[2] For example, research by the Alliance for Corporate Transparency found that, currently, only 33.7 per cent of companies describe main elements of their anti-corruption programme, that is, processes through which they implement their policies in practice.[3] In an age of ‘green’, ‘white’ and ‘rainbow washing’, companies have a responsibility to ensure that their anti-corruption disclosures are meaningful and not overlooked in favour of shallow and attention-grabbing sustainability commitments and disclosures.

Corporate anti-corruption programme transparency drives internal improvement of policies and procedures: if a company knows that it needs to disclose policies and procedures publicly, it will focus its attention on making sure that these policies and procedures are fit for purpose. In addition, without these meaningful disclosures, external stakeholders are unable to effectively evaluate a company’s anti-corruption programme.

Whilst meaningful disclosures around anti-corruption lag behind environmental and social disclosures, pressure for disclosure around governance and anti-corruption risks is mounting, whether through new legislation, evolving investor requirements or the company’s own need to build trust with employees, customers and the wider public.

Drivers of anti-corruption transparency

Legal obligations concerning anti-corruption, including the EU Non-Financial Reporting Directive, which requires applicable entities to disclose material information on anti-bribery and anti-corruption matters, are advancing corporate transparency.[4] Such legislation advances and demands the normalisation of corporate transparency, however, there is still much room for improvement.

‘While we continue to navigate the effects of Covid-19 on the economy and society, ensuring that corporates do not contribute to this loss of resources through corruption is, more than ever, a question of life and death’

Currently, the directive is under consultation as part of the Commission’s Action Plan on Sustainable Finance, which aims to re-orientate capital flows towards sustainable investments and manage risks stemming from climate change, environmental degradation and social issues.

We believe that this revision, starting with this public consultation, is an opportunity to see proper anti-corruption reporting indicators and other issues we have been calling for in a new version of the legislation. These include specific mandatory elements of disclosure on companies’ anti-corruption programmes, and their implementation and monitoring, as laid out in our report. While legal requirements around anti-corruption disclosures lag, leading companies will recognise this direction of travel and take the front foot in adopting the Open Business principles and disclosing around their corruption risks.

In relation to governance and anti-corruption disclosures, the concerns of influential responsible investors are also increasingly important. As of February 2020, there are more than 2,900 signatories to the United Nations Principles on Responsible Investment.[5] Principles 1, 2 and 3 require signatories to: ‘incorporate ESG issues into investment analysis’; ‘incorporate ESG issues into our ownership policies practices’; ‘seek appropriate disclosure on ESG issues by the entities in which we invest’.[6] These principles highlight the responsible investor drive for disclosures around governance and anti-corruption, as well as environmental and social disclosures.

Many investors therefore expect, if not require, companies to make meaningful disclosures around anti-corruption, in order to adhere to these principles. Investors, such as Hermes Investment Management and Norges Bank Investment Management, are already demanding detailed information from companies on how they manage their non-financial risks, including those related to anti-bribery and corruption. Such requirements further drive the impetus for a transparency norm.

Beyond legislative requirements and investor pressures, there is also a strong business case for corporate disclosure around governance and anti-corruption as stakeholders, including employees and customers, increasingly demand companies not only say they are acting with purpose and integrity but also show how they are doing it. This builds and maintains trust, helps companies to manage their reputation, and enables legal compliance, all of which supports and increases a company’s competitive advantage.

Transparency International UK is calling on companies to embrace transparency and, in some cases, fundamentally rethink the way they disclose details of how they work to combat corruption.

Open Business: Filling the ‘guidance gap’

What has been lacking is clear and comprehensive guidance that recognises the dilemmas companies face when determining what to disclose and how best to do it in a meaningful way. There is also a need to set out clear anti-corruption aspirations for companies as they develop their strategies for the next decade. It is with this in mind that our Business Integrity team undertook extensive research into corporate transparency in anti-corruption and developed Open Business.

What does the disclosure guidance in Open Business cover and why?

We undertook extensive research and identified five key areas that are at high-risk of corporate corruption where corporate governance transparency is vital to business integrity, reduced corruption and, ultimately, sustainable development.

These key areas are:

  • Anti-corruption programme transparency
  • Beneficial ownership transparency
  • Organisational structure transparency
  • Country-by-country reporting transparency
  • Corporate political engagement transparency

A spotlight on beneficial ownership transparency

Beneficial ownership transparency is one of the key measures to tackle corruption. Anonymous companies are used as vehicles for corrupt practices, including money laundering, bribery, and tax evasion. This in turn undermines development as the facilitation of dirty flows of money and tax abuses deprive governments of the necessary resources required to support the rule of law, infrastructure and public goods.Companies: Key players in the fight against corruption Ethical Boardroom

The 2016 Panama Papers and the 2017 Paradise Papers leaks demonstrated that individuals who control assets can remain behind the scenes by setting up anonymous companies and using these companies for tax abuse. These revelations led to investigations in 79 countries and, by 2018, the recovery of more than $500million in taxes by tax authorities. In response, beneficial ownership transparency helps to trace criminals, and reduces the risk of money laundering and tax evasion.[7]’

The lasting learning for companies is that it is no longer enough to simply imply that they are doing the right thing; companies need to demonstrate how they are doing the right thing, too’

We are asking companies to publicly disclose information on their own beneficial owners, to demand more beneficial owner- related information from their companies and to advocate to governments to adopt data standards for ownership disclosure.

Addressing corporate dilemmas to public disclosure

For the readers whose first reaction is that this degree of corporate transparency is not achievable, many challenges against disclosure have already been anticipated. The final section of our report presents responses to some of the challenges that might inhibit companies from disclosing information, including: privacy legislation as a potential barrier to beneficial ownership disclosure; the legal risks of publishing alleged breaches of a company’s code of conduct; competition law as a deterrent to the publication of supplier information; the difficulties of managing differing public disclosure requirements across jurisdictions; and practical difficulties of ABC data collation and publication. The report can be found online, and we invite discussion around the principles presented.

By offering consolidated guidance and outlining our corporate transparency principles, the report enables companies and their leaders to adopt significant steps towards anti-corruption disclosure across the five areas identified.

Open Business serves as a guide for better corporate practice by inspiring companies to become increasingly transparent and demonstrating the commercial benefits of doing so. The question that companies need to start asking themselves is not ‘why disclose?’ but rather ‘why not disclose?’.

 

About The Author:

Sophie Ogilvy is the Programme Director at Transparency International UK which works with companies to raise anti-corruption and business integrity standards in the private sector. Throughout her career, she has successfully implemented sustainability strategies with partners across the private sector, civil society, multilateral organisations and governments. Through multi-stakeholder engagement and subject matter expertise in governance, transparency and responsible business, Sophie has delivered international programmes, working to build strategies around ethics and accountability. This includes extensive experience working in the private sector in Africa and Asia. In her role at Transparency International UK Sophie is delivering the Business Integrity team’s mandate to work with companies and oversee research to improve their Anti-Bribery and Corruption Programmes.

Footnotes:

1.www.weforum.org/agenda/2018/12/the-global-economy-loses-3-6-trillion-to-corruption-each-year-says-u-n [Date accessed: 16/04/2020]

2.www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter [Accessed 6 February 2020]

3.Alliance for Corporate Transparency, 2019 Research Report: An Analysis of the Sustainability Reports of 1000 Companies Pursuant to the EU Non-Financial Reporting Directive (Alliance for Corporate Transparency, 2020), pp. 90

4.https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/non-financial-reporting_en [Accessed 28 November 2019]

5.https://www.unpri.org/signatories/signatory-resources/signatory-directory [Accessed 3 February 2020]

6.https://www.unpri.org/pri/what-are-the-principles-for-responsible-investment [Accessed 4 February 2020]

7.Transparency International UK, Open Business, p. 30 (March 2020) [Accessed 12/03/2020]