India Law Journal

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	Economic Crime, Transparency, Openness and Ethics: Key Issues and Challenges As a result of various headline cases in many jurisdictions there has been considerable consideration of the need for improved governance by all business representatives. In this discussion, Dr. Linda S. Spedding intends to consider certain aspects of transparency, openness and ethics from different perspectives, bearing in mind both the risks and the opportunities presented by the ethics debate. She also expresses her concern over economic crime and other instances of commercial or business theft.
Introduction It has been noted that while standards may be aimed principally at larger organizations impacts occur for the small business sector in practice due to, for instance, enhanced stakeholder interest and awareness, supply chain pressures and other competitive drivers. This is even more the case bearing in mind that small business and small and medium sized enterprises (SMEs) are increasingly involved in international operations and activities and, as a result, exposed to differing regulatory and non regulatory business standards. In view of India’s growing significance and presence in overseas markets in which SMEs are active, practical concerns regarding doing business are a key issue including the need for transparency, openness and ethics having regard also to recent legislation such as the Bribery Act in the UK. The legislation covers the practice of offering, promising or giving a bribe, as well as accepting, soliciting or agreeing to receive an illicit payment. Its provisions cover foreign public officials and exposure to prosecution for failed policies, systems and controls – classed as operational risks within banks and financial firms. Accoring to many commentators the new Bribery legislation will make it far easier for companies and senior management to be prosecuted where bribes have been offered, paid or received. The new legislation will be even wider than the US Foreign Corrupt Practices Act, because it covers business-to-business transactions as well as business transactions with government or state-owned bodies. As a further deterrent, the rules would also raise the maximum jail term for bribery from seven years to 10 years. A company convicted of ‘negligently failing to prevent bribery’ would face an unlimited fine. The UK has an unimpressive history in the prosecution of corruption cases, and has received criticism in the past from the United Nations and the US for failing to properly address the issue. The new rules would outstrip even the present US laws. International Considerations At the outset it should be mentioned that for some time both international public and private organizations have demonstrated an increased interest in ethical issues involving business – principally in the fields of economic crime and corruption. The OECD and the International Chamber of Commerce (ICC) are two well known organizations that have been working to combat extortion and bribery within the global marketplace. Their initiatives also demonstrate and highlight the gradual agreement on some common, world-wide standards for global business operations, as well as the need to be proactive in dealing with such risks. One way forward, it is submitted, is through the evolution and implementation of sound ethical corporate policies. As has been indicated, an awareness of “stakeholder relations” further promotes the practice of good business ethics. Since improved governance has been the call of the day companies are recognizing: the impact of decisions outside their control; and how these decisions could damage the reputation of the company from the public’s perspective. Just as the number of ethical issues appears to have grown with increased public understanding and advanced technology and media coverage business has to consider reputational issues more and more and avoid moral confrontations that might result in their stakeholders' disapproval. Moreover, it is often a matter of sound risk management to consider ethical issues as a priority regardless of the location of the business and the sector in which it operates. The Small Business Challenge Bearing in mind the above, the comparative lack of attention given to the ethical concerns of small and medium-sized businesses is a significant area of concern. It has been noted by various business advisors that there is too much research on business ethics that assumes that all private-sector commercial organizations behave in similar ways or have similar problems. In fact, as been seen in the research carried out by the Forum of Private Business (FPB), which has been a representative body for small business in the UK, whereas over 95 per cent of organizations in most national economies are composed of fewer than fifty people they provide the majority of jobs. Commentators have noted that it is, therefore, surprising that this distinction between large and small companies, which function in different ways, has not been more widely recognized with regard to ethical behavior. Moreover it is surprising that simple behavioral codes of conduct are not in place more often that can enhance the transparency, integrity and performance of the organization as a whole. One clear and simple illustration relates to commercial dishonesty. By way of example, business leaders anxious to discourage skiving, pilfering and scamming at work should first examine their own behavior and ethics. They should, of course, set an example and this example is important for staff morale and conduct in practice. According to the survey entitled “Ethics at Work” by the UK’s Institute for Business Ethics (IBE), only personal telephone calls finds favor with more than half the workforce - all the other 'minor' misdemeanors received disapproval by the majority. Yet practical guidelines reflecting modern day business practice are often missing: for instance it should be mentioned that in a world where people work from home, it is not clear that the pen should be checked in as they leave the office anyway. In another survey reported by the London Times it has been indicated that more than half the workforce think a "bit of fiddling on expenses" is not as bad as fraud and an even larger number think most people lie to their boss on occasions. This is according to the first comprehensive survey of workplace attitudes towards ethical conduct. The survey was carried out by Mori for the IBE. It also found that the vast majority frowned on: taking software home; going sick the day after a party at work; favoring family or friends with contracts; and charging personal entertainment to an employer's account. Moreover this does not only apply to commercial organizations. Just as business is now operating in an era of exacting requirements of corporate governance, as has been discussed in earlier articles it should also be noted that charities today are also similarly impacted. Furthermore those companies that donate to charities should ensure that the non - profit organizations that they support are following correct procedures and responsive to change. The interaction and influence between the commercial and non commercial sectors can be witnessed globally. As has been emphasised in many case studies, issues of transparency and governance include both macro and micro concerns. Developments and comments can therefore extend from the larger organizations to very small organizations in this vast global marketplace. A Case Study: Transparency Certification of the Private Sector (Enterprises) As has been indicated above there has been research and other related practical projects undertaken by respected organizations over ethical business practices for a considerable period. For instance, the initiatives undertaken by Transparency International (TI), which has for some time been working toward more openness, accountability and ethical behavior – as well as transparency - can be considered as regards the debate over the suggested idea of "transparency certification" . TI Business Principles Transparency International and Social Accountability International have facilitated the initiative for the Business Principles for Countering Bribery. These were developed in a partnership project undertaken with a Steering Committee drawn from companies, academia, trade unions and other non-governmental bodies. Business Principles for Countering Bribery Changes to foreign bribery laws and a recent trend towards more vigorous enforcement of such laws have shown that a failure to address bribery can exact a very high cost on companies. The Business Principles for Countering Bribery is a useful and current tool for companies dealing with the challenge and risks posed by bribery. The tool reflects recent developments in anti-bribery practice worldwide and incorporates approaches by business, academia and civil society. Since its initial publication in 2003, the Business Principles have been used by many leading companies around the world to benchmark their own anti-bribery policies and procedures. The tool has also served as a solid basis for the development of other anti-bribery codes and voluntary initiatives “The 2009 edition charts new territory by placing greater emphasis on public reporting of anti-bribery systems and in recommending that enterprises commission external verification or assurance of their anti-bribery program. The Business Principles for Countering Bribery provide a framework for companies to develop comprehensive anti-bribery programs. Whilst many large companies have no-bribes policies all too few implement these policies effectively. We encourage companies to consider using the Business Principles as a starting point for developing their own anti-bribery programs or to benchmark existing ones”. The development of the Business Principles for Countering Bribery, introduced in December 2002, was spearheaded by Transparency International in co-operation with Social Accountability International. The Business Principles are the product of a collaborative effort of a multi-stakeholder Steering Committee drawn from companies, academia, trade unions and non-governmental bodies. It is important to note that the Business Principles have been designed for use by large, medium and small enterprises. It is understood that they apply to bribery of public officials and to private-to-private transactions. The purpose of the document is to provide practical guidance for: countering bribery; creating a level playing field; and providing a long-term business advantage. According to TI this offers an innovative and practical tool to which companies can look for a comprehensive reference to good practice to counter bribery. The hope is that the Business Principles will become an essential tool for businesses and encourage them to consider using them as a starting point for developing their own anti-bribery systems or as a benchmark. It is further understood that the Business Principles have been aimed at a good practice level to attract the widest possible acceptance. As a "living document", the Business Principles are expected to evolve over time to reflect changes in anti-bribery practice as well as the lessons learned from their use and application by business according to TI. A Summary of the Objectives and Impacts of the TI project: It is useful to highlight the key objectives of the TI approach, that is to: promote a more ethical approach to business as a management tool. build mechanisms to promote organizational excellence and to improve corporate ethics. discourage corrupt practices at private SMEs. improve relations between private enterprises and the interest groups they work with in order to raise productivity and enhance the overall business environment. raise the awareness of business people about ethical practices in management. encourage business to make concrete commitments to social responsibility and the development of better ethical practices. promote the consideration of ethical principles in corporate decision-making. develop management models for implementing more ethical practices. This approach may be useful when considering and comparing initiatives and projects of other leading bodies in this field, such as the IBE. Comparative Governance Issues: the UK and the USA In the UK governance generally in the profit and not for profit sectors have been under scrutiny for some time. As with the commercial sector, the voluntary sector is under pressure from all sides to consider a code or framework to bridge the gap between law and good practice. The Enron and WorldCom scandals and the subsequent Higgs Review of the role of NEDs in the UK private sector gave the debate an air of urgency. Although the review considered corporate boardrooms the ICSA has stated that the issues raised are also relevant to charities. Clearly this should not entail a box ticking exercise: there should be practical solutions as a result of a code of practice that provides guidance on: Best practice Recruitment ; and Professional development. There should be a set of expectations in both sectors which effectively says comply or explain. Indeed the corporate-governance debate in the United States has also spread from the for-profit to the not for profit world. Indeed observers such as Eliot Spitzer, the Attorney General of New York State, have suggested that the Sarbanes-Oxley Act should be applied to non profit boards. As regards ethical behavior the proposal relating to the relief from personal liability for trustees has also been well received. Just as is the case over the search for non executive directors, the matter of personal liability has discouraged many from being trustees. The intention is that if a trustee acts honestly and reasonably they will not be personally liable. Nevertheless, as mentioned below, the voluntary sector is generally under pressure to improve governance and, in particular, the role of trustees. There has been some debate regarding the need for a trustee code of practice. Governance and CSR: An Ethical Business Opportunity for SMEs For most organisations concern over economic crime and fraudulent activities is becoming more and more relevant. However, in order to engage the small business sector in this debate in a truly practical manner that links the concepts of transparency, openness and ethics with bottom line issues that go beyond the figures for business theft and impacts upon the behavior of the organisation as a whole, practical arguments are needed. A clear example is in the area of corporate social responsibility (CSR) which has attracted those businesses whose activities identify with CSR, such as the recycling business, or where there are enlightened owners who have a particular interest. Where an SME seeks to create value from its CSR activities it is useful to provide due diligenc procedures as regards any likely non-profit partners. For SMEs in fact a procedure can be followed that can not only assist in improving the ethical behavior of the organisation but also adds value having regard to its price earnings (P:E) ratio. It is straightforward to establish the company earnings, and most executive teams will have a working estimate of the value of their company. It is therefore relatively easy to estimate a P:E ratio, which can be compared with similar companies which are publicly quoted as a rough benchmark. Companies can similarly establish their relative CSR/CR position since the executive team will have a good understanding of what is going on within the company. Benchmarking this against the competition may not be easy, especially if little information is available publicly. However, a quick comparison with one or two publicly listed companies within the sector, who generally publish fuller accounts of their internal activities, will provide a qualitative insight. For an SME this is all that is likely to be required in view of the need to economise in resources. As a matter of business practice and in order to see the benefits of improved business behavior it should also be mentioned that reporting, where it is necessary for an SME, should follow the principle of ‘Minimum and Adequate,’ since deploying any more than the minimum level of resource on this task may not be cost-beneficial. This can change as confidence in the real value of an ethical business policy grows. For SMEs the supply chain pressures related to CSR/CR can also be very relevant. Frequently SMEs are part of the supply chain to larger quoted companies who themselves are seeking to align their suppliers with their CSR/CR standards, policies and practices. For this reason SMEs are advised to use an analysis of their cover of social, ethical and environmental matters and to examine the CSR/CR position of their business – to – business customers, and assess what the implications for the SME might be. It has been demonstrated that those having a superior coverage of CSR/CR matters will generally have a higher market value in comparison with others in their sector. The Opportunity for Ethical Business Strategies The opportunity for business ethics to demonstrate its practical - even bottom line - value and use is growing in this risk laden economic climate. The increased awareness of the public and stakeholders should again be mentioned as major drivers for improved business openness and responsible corporate citizenship. It has been argued by many commentators that: enhanced educational opportunities, coupled with the availability of world-wide information at minimum cost, have provided the public with a greater desire to be involved in decisions affecting their lives. Governments and shareholder groups are demanding transparency and accountability on the part of multinational corporations, given the potential high profile incidents that poor corporate behavior can lead to. Furthermore, campaigning groups are raising a variety of concerns with corporations, which need to be addressed. In the USA regulatory imperatives had also been driving change in business practice in order to reduce corruption, well before the corporate scandals referred to above. By way of example, the promulgation of the Federal Sentencing Guidelines (1991), together with the stringency of the U.S. Foreign Corrupt Practices Act (1977), provided a strong impetus to corporate ethical programmes in the United States. Meanwhile calls for the accountability of issues - other than financial – have been responded to through CSR programmes that have encouraged companies and charities to become more proactive on such issues as human rights and the environment. It is clear that opportunities for business ethics can be found in the willingness of companies to adopt these CSR and ethical policies and approaches that sustain respectable relations with their stakeholders. Practical Concerns Despite the period over which this debate has been taking place there remains the problem – as with the environmental or health and safety policies in the recent past and that can still exist – that there can be a lack of integration of ethics with corporate policy. Generally speaking, insufficient effort is being made to familiarize employees and human resources as a whole with business dilemmas and how to exert moral initiative. To be taken seriously, ethics within the business place must be seen to be of significant value. In addition to bottom line arguments, therefore, this can only be achieved if employees recognize the distinction between right and wrong and are given guidance in the matter. More and more statistics demonstrate, for example, that economic crime commences with dissatisfaction in the workforce. As has been evidenced elsewhere a sound business reputation is critical to successful business sustainability. As part of risk management organizations should ensure that ethical issues are part and parcel of corporate strategy, regardless of size and location and indeed whether commercial or non commercial. Moreover, there is no doubt that the overall lack of ethics topics in corporate training programmes in many business sectors poses another concern in the quest to achieve and maintain high moral business standards. In order to maintain en enlightened workforce the organisation should invest in sound ethical strategies that can mitigate exposure to related risks. From all of the above it is clear that the role of human resources is paramount and that a happy healthy workforce can make a huge difference in practice to the health of the organization. One recommendation that may be made by way of best practice is to include in all training programs from top to bottom and vice versa – ranging from those for directors to new employees programs – with some ethics-awareness element. This could be in the form of a mini-case study. Additionally, training employees to fully understand business ethics relies on competent and qualified instructors. The shortage of these instructors, coupled with the continuing competition between philosophy and management teachers concerned with business ethics, provides another concern when considering the long-term sustainability of responsible business. Creative solutions are possible and it is in the interest of all organizations – profit and non- profit alike - to be part of the solution finding debate.

DR. LINDS S. SPEDDING is an International Lawyer and Advisor and also serves on the Advisory Council of India Law Journal.