Serving as a role model against corruption
By Brook Horowitz,17 May 2006
Anyone who has lived and worked in Russia will recognize the lack of trust referred to by President Vladimir Putin in his state-of-the-nation address last week: "I note that one of the most significant traits of our internal political life is the low level of trust of citizens towards specific institutions of government and big business. ... Despite our efforts, we have not succeeded in eliminating one of the most serious obstacles to our development, namely corruption."
For a growing number of leaders of multinational and Russian companies, corrupt business practices are anathema. For companies wanting to operate according to international standards and rules, the business case for behaving responsibly is compulsive:
As a general rule, corruption is understood not to pay. Going outside the law is inefficient, unpredictable, unprofessional and dangerous. For individual executives, as well as for their companies, the risks are still substantial, and perhaps greater than the benefits. In Russia, where civil servants may have a vested interest, where the law is often applied selectively and where public opinion and civil society are weak, many believe that the business case against corruption does not stand up. This line of argument would suggest that companies are making plenty of money, even with the bribes they have to pay.
The market, however imperfect, seems to work, for the companies, as well as the government.
So what can the business community do about corruption in an environment so apparently not ready for change?
In fact, Russia is not so unique in having a problem with corruption -- indeed, most countries of the world operate in similar conditions. A report published last month by the United Nations Global Compact, "Business Against Corruption," details a number of examples of companies working together to fight corruption in environments no less aggressive than Russias, including in China, Brazil, Mexico and Vietnam.
Companies do not have to stand by waiting for change. There are a number of things companies can do right away to begin changing the culture of corruption, and they can start this process by getting their own houses in order. After all, if a company that has authority over the salaries, the terms and conditions of work of thousands of people cannot influence the behavior of its employees within its own confines, what chances are there of making improvements in society at large?
More and more Russian companies are seeking to attract foreign investment through initial public offerings. To do this, they need to show three years of accounts under international standards and certain minimum standards of corporate governance. Other companies, hoping to attract strategic investors and increase their asset value, need to become more transparent. International law and accounting firms, and lending or investment banks, are playing a critical role in working with these companies to adapt to international business standards and regulations.
Companies that have audited accounts or gone through an IPO can serve as role models to others. Some of these companies are instituting integrity policies within their own companies, appointing independent nonexecutive directors to their boards, and introducing new management systems to make sure that all employees are fully conscious of the rules and conditions of employment.
While it is too early to say to what extent these companies have been successful in improving the integrity of their operations, the institutionalization of management tools is the first step toward creating what might be called corruption-free zones within the structure of companies.
A larger number of Russian companies are now coming into contact with multinationals. Many act as distributors or agents for imported brands, but others are now becoming suppliers, especially to some of the large investors in the Russian market --companies such as Shell, BP, Nestle, IKEA, Boeing, Metro and Auchan are all to varying degrees purchasing Russian goods and services. The multinationals have to operate, even in Russia, according to international standards, and in many cases they have to comply with U.S. law. These companies have a responsibility toward their
shareholders to prove that they are purchasing and selling in an ethical manner. As their presence in the market increases, they will insist that their suppliers and distributors also prove they can manage their commercial relations according to international standards. This is not limited to the problem of corruption -- it is also a question of work conditions, human rights, health, safety and environment, and overall quality control.
Finally, there is the question of how companies can resist when subjected to corrupt practices, especially by government agencies. Surprisingly, despite the overall negative trend, not all is bad news. There are a number of cases that show that when companies are determined to fight back, they can do so. There was a recently victory for justice in the Russian courts -- Japan Tobacco Inc. is challenging a retrospective $100 million tax bill in the courts. Two years ago, IKEA went public on an attempt by a local authority to delay permissions for opening a new store. And a month ago, Motorola and Yevroset brought to public attention the apparently gratuitous confiscation of a shipment of mobile telephones. These exceptions show individual action in the courts and the press can sometimes work.
It can be even more effective when companies work together. Industry-specific groups in electronics and pharmaceuticals are trying to institute codes of practice and lobby together as a sector when one or more of their members are "attacked." In Tomsk and Novosibirsk, where there is a strong concentration of small and mid-sized businesses that are particularly prone to corruption, there are grassroots attempts to bring the business community and the local governments together around this issue.
In the end, companies have a critical role to play in changing the culture of corruption in Russia. It is a question of leadership, professionalism and good management. Just because these are not the values that are prevalent in this society does not mean that they do not exist and that they will not be present in the future. Business leaders can and should take a role in educating their peers, their partners and future generations of managers and employees in new ways of doing business that in the long term will be more honest, more open and above all more rewarding for the individuals concerned, the companies they work for and, ultimately, society as a whole.
Brook Horowitz is the executive director of the Russia Partnership for Responsible Business Practices and representative of the International Business Leaders Forum (www.iblf.ru) in Russia.
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