After a year in which Department of Justice prosecutions for foreign corrupt business practices fell to their lowest level in nearly a decade, the department is vowing to step up the pace in 2016. And corporate managers who take that pledge seriously have additional reason to intensify anticorruption efforts as a result of new research.
The research, published in the current issue of the American Accounting Association journal The Accounting Review, took advantage of unique access to confidential anticorruption ratings of companies to assess whether bribery pays off in parts of the world where it’s rife. And the research found that, while going along with corruption does substantially boost local sales, its overall effect on a company’s finances is nil — a poor result, given that the practice could trigger damaging media.
“Weaker corruption controls and enforcement allow … firms to generate higher sales growth in high-corruption markets,” wrote the study’s authors, George Serafeim and Paul Healy of Harvard Business School. “Yet, bribes are costly…. The low returns on equity on incremental sales in high-corruption markets for firms [that commit bribery] imply that the costs are not fully recovered through higher prices on corrupt contracts or through scale economies from increased sales.”
In a sample of 480 large multinational companies from 32 countries, those with strong anticorruption programs had average sales growth over three years of 2.6% in high-bribery countries or regions, far below the 14.1% achieved by anticorruption laggards. Yet, that didn’t translate to a greater gain in return on equity for the latter group compared with the former. “On average the sales growth and ROE effects are offsetting,” the authors wrote.
“While the evidence for and against yielding to local bribery practices has been mixed, the conventional wisdom among corporate managers has continued to be that in large parts of the world there really isn’t much choice, a view strengthened by the fact that managerial compensation abroad is commonly based on growth in sales,” comments professor Serafeim.
“Yes, our study does reveal that yielding to local corruption does boost area sales,” he continues. “But our findings should raise red flags even for managers whose actions are dictated by narrow self-interest, since we find these practices lead to increased likelihood of subsequent media exposure potentially damaging to companies and individuals alike.”
Companies that were one standard deviation above the mean in terms of anticorruption diligence (roughly, those in the top 10% or 20%) were 15% to 20% less likely than firms of average diligence to be cited in news stories for corruption, bribery, or financial crime. That difference could be quite considerable: over the course of three years covered by the study, half of the companies in the sample were not cited at all in this way, while 25% were cited in more than five articles.
In carrying out the research, the professors had access to ratings of company anticorruption efforts compiled by Transparency International (TI), a nonprofit organization that garners data from individual firms but restricts itself in its published materials to country ratings and other aggregate information.
TI’s company ratings, which the professors pledged to keep confidential, are based on corporate self-reporting on 14 indicators of anti-corruption strategy, policy, and management systems. Given the possibility that this self-reporting can consist of boilerplate statements or what the professors call “cheap talk,” Serafeim and Healy developed their own ratings based on TI’s estimates and many factors that research has found to be associated with anti-corruption efforts.
Those factors included those related to: (1) regulatory monitoring and enforcement — for example, the level of enforcement in a company’s home country or whether a non-U.S. firm is cross-listed in the United States; (2) corruption risks, such as bribery prevalence in different industries or in companies’ home countries; and (3) company governance, such as the percentage of independent directors.
The professors concluded that TI’s ratings, despite being based on self-reporting, reflect true anticorruption commitment.
Says Serafeim, “This conclusion ought to be of interest to investors, because, even though TI’s company ratings are confidential, they are largely derived from data that are available to the public — namely, information on management and compliance practices contained in company financial statements and sustainability reports.”
The new study, entitled “An Analysis of Firms’ Self-Reported Anticorruption Efforts,” appears in the March/April issue of The Accounting Review.