“Trust, but verify.”
— Ronald Reagan
When the word “corruption” is mentioned, the thoughts of many people run to politics and politicians. However, the dark world of corruption is far deeper and broader, encompassing much more than just political corruption.
In Industry, there are many opportunities for corruption to rear its villainous visage. If we think in terms of industrial economics, there are incentives to engage in corrupt acts in both procurement (input) and sales (output) functions.
Most industrial managers are well aware of the US Foreign Corrupt Practices Act (FCPA) and the UK “Bribery Act 2010.” These laws cast broad nets to ensnare wrongful actors primarily involving bribery or kickbacks in favor of sales or supply contracts, especially involving foreign government officials.
The FCPA and Bribery Act are very serious laws, and managers must fully respect and diligently comply with the provisions of these laws. If you as a manager have any doubts or questions concerning the coverage or details of these laws, you should do some urgent research and if necessary seek professional advice.
The good news is that output side corruption or bribery requires resources. Anyone seeking to engage in output side corruption needs to have some resources at their disposal to realistically execute these corrupt acts. You as manager, assuming of course that you are not corrupt and reject corruption as a business tactic, can effectively protect against most forms of FCPA or UK Bribery offenses by maintaining strict control over budgets, and absolutely refusing to fund or authorize any spending that might directly or indirectly be used to sponsor corrupt acts.
At the risk of oversimplification, management holds the purse strings, and therefore a responsible manager can realistically protect against most if not all forms of output corruption and bribery.
Congratulations, this means that you as a responsible and engaged manager have a very good tools and opportunities to prevent corrupt output acts involving your organization, and hence can realistically protect yourself from prosecution and incarceration.
Unfortunately, this does not mean that you get a free pass on corruption and bribery.
Many industrial organizations have been seriously damaged, and in some cases completely destroyed and bankrupted, due to what I call input corruption.
Input Corruption
Competition for most products and services is fierce, and growingly increasingly intense. Competitors are continuously improving the quality of their products, and are simultaneously driving costs out of their supply chain and internal processes to maximize their competitive strength.
Some competitors, realizing that they are unable or unwilling to compete on a fair and level plane, seek to tilt the competitive odds in their favor.
The dark and secretive world of corruption is, by its nature, difficult to comprehend and understand. The economic incentives of corruption can be significant for the successful participants. This leads to a very creative environment and an incredibly diverse range of corrupt practices designed to benefit the corrupt sponsors and their conspirators in crime.
Industrial Corruption 101
OK, let’s learn about being corrupt.
Virtually every department, position, and activity can be corrupted. However, one of the most common targets for corruption is in the procurement activity.
Suppliers are desperate to sell their products and services. Competition is fierce, and the stakes can be very high. Failure to win an order can mean the failure of the company and ultimately bankruptcy. Even if a supplier is not facing bankruptcy, the pressure and incentives to win an order can be very high.
Procurement corruption can therefore be very lucrative for the participants, and can be initiated by either the purchasing officer or by the supplier. In either case, a kickback incentive is negotiated in favor of a successful purchase order.
Make no mistake, regardless of whether procurement corruption is initiated by the purchasing or supplying organization, the cost of corruption is paid in full by the purchaser, i.e. your organization.
Maintenance or services are another common area for input corruption. Even if the service supplier is competitively selected by a non-corrupt procurement process, ample opportunities exist for corrupt actors to benefit from corrupt practices.
A very common corrupt service scheme is invoicing for excessive or unnecessary services. An inside conspirator, such as a maintenance engineer, agrees to validate invoices and documentation for services in excess of those actually provided, and possibly authorizing unnecessary replacement parts, in favor of a kickback on a portion of the incremental profit earned by the corrupt service supplier.
I find that most honorable managers are quite clueless when it comes to the incredible diversity of input corruption opportunities. I don’t claim to be an expert either. Perhaps only those that have worn black hats in their past can fully appreciate the power and creativity of dark influences.
Believing in Ghosts
You can’t seek a cure unless you are ready to acknowledge the problem.
Many managers have expressed concerns to me that they think they have a corruption problem in their organization. However, they lack evidence, and don’t know what to do.
How can you act when you have no evidence of wrongdoing?
In many cases, acknowledging that corruption possibly or even likely exists within an organization is akin to acknowledging a belief in ghosts. You worry about its existence despite a lack of hard evidence.
Corruption is Corrosive!
You might not have hard evidence of input corruption in your organization. However, rest assured that your staff is aware of its spectral presence. They might not know the details, because dark influences shun the light and leave precious little evidence.
However, the staff quickly recognizes that some people have more disposable income than they should have. They notice secret conversations, when certain individuals frequently go outside to have private mobile phone conversations. They observe favoritism, when it seems like someone is especially friendly with a particular vendor, or becomes very defensive when a vendor change is suggested.
It is also common for staff to wonder why Management doesn’t recognize these same signs. Surely the boss has noticed this same curious behavior. Is the boss incompetent, or is he / she part of the corrupt conspiracy?
Do not allow corruption to corrode your team loyalty, cohesion, trust, and morale.
Anti-Corruption Inoculation
You are the leader of an Industrial Organization. You must protect your organization from Corruption. Don’t wait until you have solid evidence of a crime; you may never be lucky enough to get such evidence.
Your integrity is also on the line. You may not be involved in corruption, you may not support corrupt acts of your staff, your motives may be entirely noble and your heart pure. Unfortunately, your staff has no way of knowing that. Your staff will simply witness the circumstantial evidence of Input Corruption, and you will be blamed for being either complicit or incompetent.
Don’t waste another day. You must implement a pro-active program to eliminate and prevent corruption.
Create an Anti-Corruption Policy: Prepare a clear, concise, written policy. Your policy should:
- Affirm your commitment to operate your business ethically and with integrity.
- Strive to compete on a level playing field and to provide a level playing field for your suppliers to compete to serve the company.
- Prohibit and prevent all forms of corruption and bribery, and to implement programs to promote integrity, honesty, and accountability in the exercise of all responsibilities and duties.
- Implement and maintain internal systems and controls to prevent unethical conduct by employees, ensure good governance, and instill the values of integrity and accountability.
- Provide communication channels for employees and stakeholders to confidentially report suspicious circumstances without risk of reprisal.
Communicate Your Anti-Corruption Policy: You are the boss. You are the leader. You are the moral compass for your organization. You must clearly and strongly communicate that your organization absolutely has no tolerance for any form of corruption.
Do not trust your deputy managers to communicate your policy. Do not take any risk that your policy or your message is diluted during dissemination. Accept this as your responsibility, and discharge it with resolute enthusiasm and sincerity.
Engage Directly with Suppliers: Input corruption cannot occur without the cooperation and complicity of suppliers. Again, do not allow your message the opportunity to be diluted during dissemination.
Be clear, be strict, be honest. State in the most clear terms that your organization values its relationship with its product and service suppliers, and that your success is built upon the success of your relationships with your supply chain. Indicate that your organization places its highest emphasis on honest, honorable, and mutually valuable relationships. Indicate that corrupt acts, no matter how small, have no place in your supplier relationships. Gifts or other forms of incentives, esteem, or gratitude exceeding a token or nominal value are not welcome. Emphasize that any corrupt acts, regardless of form or method, are completely unacceptable and will be dealt with in the most strict and severe manner.
Most importantly, include the anti-corruption statement and Whistleblower Contact Information to allow suppliers to report any corrupt action or inquiry.
I recommend that you establish a multi-tiered communication strategy to ensure that your message reaches each supplier, and that the receipt is validated.
But I have 1,000 suppliers, and even more prospective suppliers … how can I possibly communicate to all of them?
Welcome to the 21st Century. With our diverse digital infrastructure, there is never any excuse for not being able to communicate with one or one million people.
Bidders: With every bid, require your prospective bidders to submit a signed acknowledgement accepting your company’s anti-corruption policy. This should be signed by an authorized director, and I suggest that you also collect signed copies from the manager(s) of the relevant supplier departments. You need to be sure that your anti-corruption message has been received and understood by the people who are in a position to engage in, prevent, or witness corrupt acts.
Suppliers: Each supplier should be required to sign and return your company’s anti-corruption policy at least annually. If a single supplier provides multiple products from different divisions or locations, be sure that each division / location has signed and returned an acknowledgement form.
I also recommend that your anti-corruption policy be clearly referenced on your standard Purchase Order and Purchase Requisition forms. Most importantly, ensure that the whistleblower hotline contact information is provided. You must maximize the risk that a corrupt act or inquiry will be reported and acted upon, to have the best hope of preventing a corrupt act from even being considered.
Quality: Be sure to build your anti-corruption program to eliminate opportunities for evasion.
Most likely your organization has a Quality Department, and follows a quality policy manual that includes supplier qualifications and validation.
I think you can agree that anti-corruption is a quality that you wish to encourage and enforce among your supply chain.
I suggest that you directly involve the Quality Department in receiving, recording, and validating the anti-corruption acknowledgements from suppliers. By diversifying the responsibility for anti-corruption among multiple departments, you significantly increase the likelihood that your system cannot be compromised.
Localized Standards
Today most Industrial facilities are located overseas. Our parent companies insist that we comply with the USA standard “FCPA” or the UK “Anti-Bribery Act”. However, our employees may wonder why they should be seriously concerned with compliance to foreign standards.
We are a sovereign nation, we have our own culture, laws, and standards. Why should we subjugate ourselves to foreign laws and standards?
The simple answer is that your company exists in a globalized business community, and that FCPA and other laws and standards are relevant to your business regardless of where it is located.
However, why limit yourself to compliance only to these important but “foreign” laws.
Most countries and jurisdictions have their own very good anti-corruption initiatives. If you are serious about anti-corruption, I recommend that you seriously look for local initiatives to compliment your FCPA and Anti-Bribery compliance programs.
Here in Thailand, for example, the Thai Collective Action Council against Corruption (Thai CAC) is taking a high profile public leadership position against corruption. The Thai CAC offers membership and certification programs for companies to declare and demonstrate their intent to eliminate all forms of corruption.
By getting your company directly involved with respected local anti-corruption initiatives, you are clearly indicating through both words and deeds your determination to eliminate corruption from your organization.
Risks and Rewards
Ok, perhaps you agree that input corruption is a dark problem that needs to be addressed. You think you may have a problem, and you would like to take some prudent steps to minimize your exposure.
Congratulations, acknowledging the problem is a major step towards solving it.
However, you were looking for a silver bullet, and all I have given you is a new level of bureaucracy to further complicate your business systems.
Thanks a lot!
If you and your team view this as another level of bureaucracy, this program will fail. Frankly, if you allow your team to view any of your internal initiatives and policies as just another level of mindless bureaucracy, your programs are doomed for failure.
Is Safety just another level of mindless bureaucracy? Is Quality and ISO 9000 mind numbing bureaucracy. Do you allow your team or yourself to be seen to be just going through the motions to comply with Corporate edicts without enthusiasm?
You are the boss, and your integrity is always on the line. If you allow your team to think that any program or policy is just a bureaucratic waste of time, you compromise both the program and your personal integrity. You must either defend the policy and ensure that it is implemented in the most efficient, effective manner, or you must fight to eliminate the program. Industry today is too competitive to allow wasteful programs to be perpetuated.
However, if you are an enlightened manager, if you have experienced or witnessed the destructive impact of Input Corruption, you will quickly value the importance of an effective Anti-Corruption program.
Do spoken and written words really make a difference? Absolutely!
The vast majority of your staff want to work for a high quality, honorable, safe company. They will be proud to serve a company that does not allow a few rogue individuals to leverage their positions to generate personal profit at the expense of the organization.
By creating a highly visible, well documented, and rigorously enforced anti-corruption policy, you significantly increase the risk inherent in any corrupt activities. If the risk is too high, potentially corrupt individuals will not seek the rewards to be gained from corrupt acts.
Eliminating the scourge of corruption from your organization is hard, but far from impossible and eminently well worth the effort. Take prudent, pro-active steps to create, communicate, implement, and execute a strong anti-corruption policy.
You can and must inoculate your business to protect it from any and all forms of corruption and corrupt influences.
Frank T.
