Anti-Corruption Module 5 Key Issues: Causes of Private Sector Corruption (2023)

This module is a resource for lecturers

Sector- or industry-related causes

While corruption in a business context affects companies of all sizes, some sectors or industries are more vulnerable to corruption than others. For example, given the secrecy and large orders involved, military procurement is particularly vulnerable to malfeasance and the defence industry is therefore exposed to high corruption risks (for a more detailed discussion of this issue, see Module 11 of the E4J University Module Series on Anti-Corruption). A report from Risk Advisory (2019) suggests that, on a global level, the industries most plagued by corruption are oil and gas, construction and development, and infrastructure. There are some variations on the regional level, also reflected in this report. In general, contract-dependent sectors are more vulnerable to corruption; they also have a lower quality of management and lower levels of performance. For example, high-tech industries, which acquire components of their products through a large number of contracts with suppliers, are more vulnerable to corruption and institutional inefficiencies compared to the food industry, where fewer contracts are required and components are available in the retail market (Athanasouli and Goujard, 2015).

Economic causes

While personal gain is often the most frequent cause of public sector corruption, it is only one of the causes of private sector corruption. Where they have occurred, liberalization and deregulation have fostered a market driven by intense competition, leading companies to engage in corruption to maximize operational efficiency, safeguard development and conquer new markets (Pakstaitis, 2019). As companies use corrupt practices to gain a competitive advantage, they create a snowball effect throughout their industries, prompting other companies to engage in similar practices to remain competitive in the market. As noted earlier, corruption undermines competition, because companies that refuse to pay bribes can be excluded from the market. Reduced competition leads to higher prices and poorer quality of goods and services, ultimately harming the consumers (Lee-Jones, 2018).

Unfortunately, corruption can appear to be a workable and effective business practice for survival and growth. If maximizing profit by any means is seen as the sole company objective, then evaluating the potential costs versus benefits of corruption can seem like a legitimate exercise - which may justify corruption. Corrupt practices can become institutionalized to achieve strategic objectives, particularly in periods of economic hardship.

However, evidence shows that corruption can lead to such benefits only in the short term, if at all, and only for a limited number of companies (Hanousek and Kochanova, 2015). Over the long term, corruption is rather a constraint on development and a restricting force on market entry and growth for all firms (Bai and others, 2019; Forgues-Puccio, 2013). A company with a culture of corruption is unlikely to be sustainable as it will be unattractive to principled employees, investors, clients, and other stakeholders. The U4 Anti-Corruption Resource Centre goes even further by stressing "that higher corruption at firm level is strongly correlated with lower firm growth, even in the short term" (U4, 2017 referring to findings of Fisman and Svensson, 2007).

Individual causes and rationalizations

In the private sector, as elsewhere, individuals engage in a series of rationalization strategies to justify their unethical behaviour. According to behavioural science, some people will cheat to gain an advantage if they are able to rationalize their behaviour and still feel good about themselves (Ariely, 2013). Johannsen and others (2016) found that national context, company size, the nature of the company as domestic or foreign, workplace diversity, individuals' gender identity, age, and length of tenure are the key factors that influence rationalizations of individuals in the private sector.

Rationalizations for unethical behaviour are discussed at length in Module 6 and Module 7 of the E4J University Module Series on Integrity and Ethics. For present purposes, the following three common rationalizations and their relevance to the private sector are elaborated upon: "Everyone else is doing it", "It's not my responsibility" and "The end justifies the means".

"Everyone else is doing it."

This rationalization can manifest itself in different situations. First, when unethical behaviour is normalized across a group within a company or in the entire company (or industry), there is no sanction for engaging in the behaviour. Second, the rationale that everyone else (i.e. competitors) is doing it justifies the corrupt conduct. The Alliance for Integrity (2016), a business-driven, multi-stakeholder initiative aiming to promote transparency and integrity in the private sector, points out that among the top ten reasons or justifications that employees give for engaging in corrupt behaviour are: "You don't understand how business is done here" or "If we don't do it, someone else will". When individuals perceive that their competitors are engaging in corrupt practices, they can justify undertaking comparable actions with the rationale of securing the company's well-being as well as their personal well-being, while still feeling that they are a "good" person (Johannsen and others, 2016). This rationalization is also referred to as a "collective action problem" (Persson, Rothstein and Teorell, 2013). The understanding of corruption as a collective action problem is explained in Module 4 of the E4J University Module Series on Anti-Corruption.

"It's not my responsibility."

This statement reflects a denial of responsibility. Individuals rationalize engagement in corruption as being beyond their control. Typically cited reasons for employees trying to deny responsibility are: "I didn't know that was corruption"; "I didn't do it for me; I did it for my organization"; "I don't know how to respond to corruption" (Alliance for Integrity, 2016).

"The end justifies the means."

Corruption can be perceived as generating positive collective effects, because it - however incorrectly - appears to be in the company's best interests. Corruption can also be rationalized because it has positive effects for individuals, such as enabling them to keep their jobs. Business people on occasion also justify corruption as a win-win situation where no one gets hurt (Alliance for Integrity, 2016). This is a particularly prevalent rationalization in smaller businesses (Johannsen and others, 2016).

Corporate culture

Economic and individual causes of corruption can lead to the development of (and be supported by) a corporate culture of corruption. Thus, a culture of corruption is both an outcome and a further cause of corruption. Taylor (2016) explains that a culture normalizes corruption through three processes:

• Institutionalization: the embedding of corrupt practices in company structures and processes;
• Rationalization: self-serving ideologies that justify corrupt practices; and
• Socialization: new employees being socialized into systems and norms that tolerate or permit corruption. Peer pressure can socialize employees into corrupt practices. In the context of private sector corruption, peer pressure refers to actions undertaken by way of an executive or management order (Johannsen and others, 2016).

A corporate culture of corruption is brought about by a multiplicity of factors such as competition and growth orientation, complicated leadership structures, and high levels of autonomy and discretion, with a lack of transparency, accountability and ethics. In such an environment, even "rules and processes put in place to promote integrity may be selectively enforced and easily evaded, as shown in many recent cases under anti-bribery statutes" (Taylor, 2016). For a related discussion on the ways in which psychology, environment and behaviour can influence "moral blindness" and unintended unethicality, see Module 6, Module 7 and Module 8 of the E4J University Module Series on Integrity and Ethics.

To combat and replace cultures that support corruption, increased attention in practice and scholarship has been devoted to the need to foster a corporate culture of integrity. As explained in further detail in Module 11 of the E4J University Module Series on Integrity and Ethics, when a corporation acts ethically, it fosters a culture of integrity that motivates employees individually to act ethically. This contributes to meaningful and purposeful lives for the employees and ultimately to a better society. To achieve such a culture, the business can make use of modelling, mentoring and other activities that promote integrity, as well as the application of values, ethical codes, rules and regulations. In particular, to enable a culture of integrity and demonstrate to employees that the business is willing to "walk the talk", the business should ensure that its performance management and reward systems do not contradict or undermine its positive core values. While there is no one-size-fits-all model, every business should implement an approach that goes beyond a tick-the-box exercise, i.e. beyond compliance with rules and regulations, and towards fostering a positive culture of integrity. Strong ethical values must be at the core of such a programme, and those values must be identified and developed carefully (ideally co-created with various stakeholders). Ethical behaviour should be embedded in all day-to-day operations and communicated in interactions with stakeholders (Hodges and Steinholtz, 2017).

Next: Responses to private sector corruption

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