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March 05, 2009

When Corruption Is the Norm

Ray Fisman
Lambert Family Professor of Social Enterprise
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The New York Times (and others) reported on Tuesday that Morgan Stanley’s real estate man in Shanghai has come under investigation for giving gifts and cash to government officials in order to get in on choice deals in China, likely in violation of the U.S. Foreign Corrupt Practices Act (FCPA).

The Morgan Stanley head office has taken the view that this was the rogue act of a rogue individual, and an internal investigation revealed that “questionable activity was isolated to a discrete set of real estate transactions in China.” This is an unfortunate — yet all too common — reaction to revelations of corporate misdeeds.

Bribery and corruption are global problems that, at least from the perspective of countries like the U.S., remain safely hidden from view. Garth Peterson was a blue chip banker from a blue chip firm, yet anyone involved in land deals in China surely won't be surprised that he was involved in illicit payments to politicians and bureaucrats.

When evidence of pay-offs or favor-seeking surface in such organizations, many of which have explicit public anti-corruption stances, it is seen as a pathological deviation from the legal conduct of business.

Yet Peterson was most likely a typical banker put in a situation where bribe-paying was very literally the norm. Before its company-wide corruption scandal made global headlines, Siemens was an average company bidding on contracts in corrupt countries — rather than a corporation with a rotten culture.

Labeling individuals like Peterson or companies like Siemens as unprincipled exceptions shoves under the rug the deeper problem: informal rules that dictate global commerce. As long as the conversation focuses on catching deviants, we’ll never have an open dialog on changing the norms that bear much of the responsibility.

There is also the need for those higher up in the chain of command to accept responsibility. Local managers are often given conflicting messages. They’re rewarded first and foremost for making big bucks for the company. (It’s interesting to note that Peterson's monkey business only came to light after China’s real estate market went sour.) Of course, this directive may be accompanied by warnings to stay on the right side of laws like the FCPA and to adhere to a corporate code of conduct, but it’s often with a wink and a nudge. The message: do what you can within the confines of the law to maximize profits.

Yet given legal ambiguity combined with innate human ability to rationalize anything from stealing office pens to Enron-style fraud, it’s not surprising that expediency and the lure of promotion or profits rule the day.

What’s to be done? There are certainly efforts underway to change global business culture. One particularly noteworthy example is the Partnering Against Corruption Initiative (PACI) spearheaded by Mark Pieth and the World Economic Forum. PACI focuses specifically on changing the “cultural equilibrium” of business practice by attracting a large number of CEOs to sign on to a public declaration of personal anti-corruption pledge. Shifting the equilibrium will be a difficult process; there will always be “rogue” corporations that are willing to undercut the honest conduct of business. Yet it’s hard to imagine we'll get very far in affecting change unless we can start with an honest conversation.

This article originally appeared on Forbes.com.

Photo credit: theCarol


by Deependra Chaudhry | March 22, 2009 at 10:17 AM

My first reaction to the events mentioned in the article was: Amusement. Amusement over the prevailing confusion amongst various arms of the US Govt. While one arm fights to implement protectionist measures in light of the economic crisis and thus go against the very principles of free trade that are constantly being harped upon, the other is fighting for fair competition. And I thought the Indian govt. administration was in disarray! Nonetheless, I agree that effective mechanisms must be evolved so as to gradually, however long that may be, such practices are eventually phased out and a greater level-playing field is created for economies in general.

by Shilpa Kapoor | March 26, 2009 at 1:21 PM

I'm, afraid to say it's the same in India. "Gifts" make business happen. You could probably conduct business without gifts but it would be very difficult and take a lot more time. I hope soon this will stop and corruption by frowned on by everyone. SK from India Property

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