Lucy P. Marcus: What Beats Corruption?

LONDON – Corruption is a global scourge, sometimes becoming so deeply ingrained in countries that combating it seems impossible. In January, Transparency International released its annual Corruption Perceptions Index, noting that the problem “remains a blight around the world.”

The International Monetary Fund, for example, has just warned Ukraine that its $40 billion financial bailout could be cut off, owing to fears that corrupt officials will steal or squander the funds. And, during his recent visit to Mexico, Pope Francis called on the country’s leaders – several of whom (including the president and his wife) are embroiled in conflict-of-interest scandals – to fight endemic corruption.

But change is possible, as we have seen in the world of corporate governance in the last couple of years. Not even a decade ago, companies were run from “black box” rooms controlled by a few people whose authority seemed untouchable. Shareholder activists who thought otherwise were regarded as a nuisance – so many dreamy do-gooders who would never change anything. The only thing that would ever matter, “realists” argued, was return on investment, regardless of the cost to people, the planet, or economies.

The realists were wrong. Since the beginning of the year, Berkshire Hathaway’s Warren Buffett and JPMorgan Chase CEO Jamie Dimon have been holding meetings with other business leaders to discuss possible improvements in corporate governance. On February 1, Laurence Fink, the chief executive of investment firm BlackRock, wrote a letter to some of the world’s largest companies in which he issued a stern warning against short-termism and demanded that companies lay out clear strategic plans.

The following day, the corporate lawyer Martin Lipton, a longstanding critic of shareholder activists, released a memo entitled “The New Paradigm for Corporate Governance.” Lipton recognized that long-term active investors are here to stay and that companies need to adhere to higher environmental, social, and governance standards and place greater emphasis on corporate social responsibility.

Similarly, Norway’s sovereign wealth fund recently announced that it will hold companies in its portfolio accountable for their human rights records. And women, once told that gender parity in the boardroom might be achieved within a generation, will benefit from quota legislation adopted in the past year in Italy, Germany, and France.

None of this happened overnight. Change is coming faster now, but only as the result of momentum that has built over time. Whistle blowers would not be silenced, reporters investigated bad corporate actors, and investors were held accountable for their choices (leading them to act like Norway’s wealth fund). The cumulative, mutually reinforcing effect of these and other factors has brought about change that only recently seemed unimaginable.

Clearly, there is still a long way to go; no one is hanging up a “mission accomplished” banner. But the process of change provides a roadmap for the battle against corruption.

There was a time when only a few NGOs voiced concerns about corruption, and every once in a while a couple of brave journalists managed to write about what they, and others, observed. Fighting corruption seemed like a Sisyphean task, with little to show for hard, lonely work.

But those voices have multiplied and strengthened, becoming a more powerful chorus.

Governments are passing stricter legislation, like the UK Bribery Act 2010, and broad oversight mechanisms such as the United Nations Convention against Corruption encourage further legislation and enforcement. Companies are under genuine pressure to adhere to anti-corruption rules, and plenty of high-profile cases – from Walmart’s corruption scandal in Mexico (involving violations of the US Foreign Corrupt Practices Act) to those in the crosshairs of law enforcement now, such as Petrobras, Rolls-Royce, TeliaSonora, and FIFA – should boost deterrence.

And public officials are being prosecuted as well. Guatemala’s former president, Otto Pérez Molina, was forced to resign and was subsequently jailed for corruption. Indonesia’s House Speaker Setya Novanto was also forced to resign, after he was caught attempting to extort money from a subsidiary of the mining company Freeport-McMoRan. And Indonesia’s Special Court for Corruption Crimes has just sentenced the country’s former minister of energy and mineral resources, Jero Wacik, to four years in prison.

Journalism has played a larger role as well. Reporters have gained more knowledge and more outlets to share their stories, including social media. And they are covering people who, in the face of blatant corruption, are no longer willing to be silent. For example, in Moldova, Europe’s poorest country, a billion-dollar banking scandal has spurred a wave of public protests calling for fresh elections.

This is the kind of momentum that signals real change. Indeed, many government officials are taking principled stands. In Ukraine, Aivaras Abromavičius, resigned as Minister of Economic Development and Trade, citing high-level obstruction of anti-corruption measures.

And crackdowns on official corruption do make a difference. Luxury-goods sellers around the world, such as Prada and LVMH, cite China’s curbs on bribery as a reason for weaker sales. Earlier in the year President Xi Jinping said he wants China to be a country where “nobody dares to be corrupt.” (Of course, China’s policy on corruption is not without worrying political overtones in itself.)

Corruption thrives wherever power, secrecy, and repression combine. It is undone by civic mobilization, sunlight, and vigilant enforcement. Those who view it as intractable should take note of the similar process that has begun to transform corporate governance.

Lucy P. Marcus, founder and CEO of Marcus Venture Consulting, Ltd., is Professor of Leadership and Governance at IE Business School and a non-executive board director of Atlantia SpA.

Copyright: Project Syndicate 2016 – What Beats Corruption?