Corruption and the private sector
A flurry of high-profile corruption scandals ranging from BAe Systems to Siemens, Halliburton to Samsung highlights the private sector plays a role at the supply side of corruption and faces a broad range of different corruption challenges. Translating this continuous stream of instances into a solid empirical account of the scale and scope of the corruption in the private sector is as difficult as it is essential for guiding policy reforms.
Measuring and understanding corruption in business becomes even more complex when the focus shifts from bribery to subtle forms of upstream corruption at the business-government nexus. When no money changes hands, but entrusted power is instead leveraged to build positions of influence, both the scale of the problem and the best ways to tackle it become extremely difficult to pin down empirically.
Transparency International has invited more than 80 scholars and practitioners for its 2009 Global Corruption Report to shed more light on these issues. The result is a collection of empirical research that advances our understanding of such vexing corruption issues such as policy capture, price-fixing or self-dealing. Some extremely compelling findings come from academic scholarship. Unfortunately, much of this research rarely catches the attention of policy makers, civil society or the general public, despite its tremendous potential to support the fight against corruption.
Making the elusive visible and tangible: the corruption burden of political connections
Take the risk of policy capture at the business-government nexus as an example. Mara Faccio, of the Department of Finance at Purdue University, collected data on the political connections of large shareholders and top officers of more than 20,000 publicly traded firms in 47 countries. The results are startling and provide compelling evidence that conflicts of interests permeate developing and developed countries alike and require urgent attention by policy-makers. In the United Kingdom, for instance, politically connected firms are estimated to account for almost 40 per cent of market capitalisation – a number that rises to a staggering 80 per cent in Russia (Faccio, 2006).
Academic research also highlights that the undue benefits of such political connections are real, significant and ubiquitous. Eitan Goldman, at the Kelley School of Business at Indiana University, and his colleagues have studied US companies listed on the Standard & Poor’s 500 index and found that those connected to the winning/losing party in national elections realised abnormal gains/losses in their stock market values and were significantly more likely to register an increase/decrease in procurement contracts won (Goldman et al., 2009). Taking a different approach, Faccio estimated the benefits accrued from political connections by analysing more than 100 sudden deaths of senior politicians around the world and documenting a significant decline in the value of firms geographically connected to these politicians. Sharper drops in firm value signalling particularly beneficial links between politicians and companies were experienced in countries with high levels of corruption (Faccio & Parsley, 2009).
Undue corporate influence does not only register at the business-government nexus, but can also occur inside a company when strong managers and powerful large shareholders take opportunistic decisions and enrich themselves at the expense of dispersed and weak minority shareholders. Again, a number of academic studies are instrumental in moving this debate from theoretical concepts to an empirically-substantiated call for urgent action. A survey by Alexander Dyck (Rotman School of Management at the University of Toronto) and colleagues of more than 390 companies in thirty-nine countries, for example, shows that the overall private benefits of holding a controlling stake in a company amount, on average, to a remarkable 14 per cent of firm equity value. In Austria, Italy, Mexico and Turkey these benefits of control exceed a mean of 30 per cent of equity value, reaching as high as 58 and 65 per cent of firm value in the Czech Republic and Brazil, respectively (Dyck & Zingales, 2004).
Guiding the policy response: what works and what does not in strengthening corporate integrity
Recent scholarship has also begun to shed important light on the stakeholders and policies that are most important and effective in tackling corruption in the business sector. A seminal study by Dyck et al. clearly shows that strengthening corporate integrity is not only the duty and accomplishment of business leaders and regulators, but, in their words, ‘[it] takes a village of several non-traditional players’ to provide important checks and balances for detecting corporate fraud.
Dyck and his colleagues looked at all publicly reported cases of corporate fraud in large US companies between 1996 and 2004 and traced the sources of exposure. As it turns out, auditors and analysts, the media and employees all account individually for more than 10 per cent of exposed cases, providing a stark reminder that systemic reform must also focus on helping these stakeholders assume their watchdog roles most effectively (Dyck, Morse & Zingales, 2007).
The same researchers have also demonstrated, in detail, the impact of international media coverage on remedying violations in corporate governance – a link that is often assumed but has rarely been convincingly proven. In analysing almost one hundred corporate governance violations in Russia between 1998 and 2002, they found that those which were featured covered by the Financial Times or Wall Street Journal were almost three times as likely to be reversed than corporate actions that did not attract any media attention (Dyck, Volchkova & Zingales, 2007).
These are just some examples of recent scholarship on corporate corruption and integrity that yield interesting empirical insights. Bringing the fruits of such efforts to the attention of policy-makers, anti-corruption practitioners, businesses and the broader public is a core objective of this new newsletter and the ACRN project. This is an indispensable step towards making the fight against corruption as strategic, facts-based and hard-hitting as can be.
References: Corruption and the private sector
1 M. Faccio, ‘Politically Connected Firms’, American Economic Review 96:1 (2006).
2 E. Goldman et al., ‘Do Politically Connected Boards Affect Firm Value?’, Review of Financial Studies, (forthcoming 2009); E. Goldman et al., “Political Connections and the Allocation of Procurement Contracts”, EFA Meetings, Ljubljana, 2007.
3 M. Faccio and D. Parsley, “Sudden deaths: Taking Stock of Geographic Ties”, Journal of Financial and Quantitative Analysis 33:3 (2009).
4 A. Dyck and L. Zingales, “Private Benefits of Control: An International Comparison”, Journal of Finance 59:2 (2004), 537-600.
5 A. Dyck, A. Morse and L. Zingales, “Who Blows the Whistle on Corporate Fraud?”, Working Paper no. 618 (Chicago: Center for Research in Security Prices, University of Chicago, 2007).
6 A. Dyck, N. Volchkova and L. Zingales, “The Corporate Governance Role of the Media: Evidence from Russia”, ECGI - Finance Working Paper No. 154/2007 (Chicago: Center for Research in Security Prices, University of Chicago, 2006).