How can HR prevent corruption?

Analysis

How can HR prevent corruption?

Despite codes of conduct,HR policies and various other controls, many organisations still succumb to corruption. What can HR do to prevent it?

WantToReadMore

Get unlimited access to all of our content.

Despite having codes of conduct, detailed policies and various other controls, many organisations have still been subject to corruption from inappropriate conduct by managers and employees. There are many high-profile examples, a recent Australian example occurring within the banking and financial advice industry.

This article looks at the role of HR professionals in preventing and dealing with corruption within their organisations.

Is corruption increasing?


A recent article in the McKinsey Quarterly journal argued that organisations have become increasingly exposed to potential corruption. There are two main reasons:
  1. Greater exposure to growth opportunities in emerging markets that have a reputation for corruption.
  2. A rising backlash against corporate misbehaviour in many developing markets. Countries such as China, India, Turkey and Brazil have all taken recent action to combat corruption among politicians and corporations and address cultures that may condone or encourage corruption. Countries such as the USA and UK have also enacted legislation against corruption and bribery, for example to make corporations increasingly liable not just for the actions of their employees but also for the actions of intermediaries such as agents, consultants and joint venture partners.
In Australia, there is also a trend towards greater regulation of corporations, aimed at reducing the potential for corruption to occur. The previous Australian government introduced more stringent controls for financial advisers and an attempt by the current government to relax them has so far failed to pass through Parliament.

Types of corruption in business


The article listed four main types: bribes, speed money, extortion and employee fraud.

Bribes

Payments are made for purposes such as gaining contracts, gaining regulatory approval, avoiding import duty or reducing taxation. The payments are not usually made directly (which would usually be illegal), but made in various indirect ways, such as:
  • Through agents or dealers
  • Using slush funds
  • Sponsoring overseas travel
  • Gifts or entertainment
  • Payments to charities or other organisations as directed or recommended by whomever the organisation is trying to influence.
The likelihood that an organisation will be approached for bribes appears to be greatly influenced by its reputation. If the organisation has a history of refusing to offer or pay bribes, it will seldom be approached, but on the other hand.....

An organisation that extensively uses distributors, dealers and other types of resellers needs to be on its guard to minimise the potential for bribes.

Speed money

Also known as “grease payments”, these are (usually) small payments demanded in order to expedite routine transactions. Whereas a bribe pays someone to do something he/she should not do, speed money pays someone to do something he/she has to do, but faster.

Another version of speed money is that the person demanding it will unnecessarily delay or complicate the transaction unless payment is received, so it simply more expedient and cheaper for the organisation to make the payment.

Paying speed money is illegal in some countries, but getting anyone to admit publicly that it occurs is virtually impossible. However, it may be revealed by taking a rigorous accounting approach to checking and approving all payments.

Extortion

This involves making threats to a business or its employees, either of physical or financial damage or even to the lives of employees, unless payment is received or other specified action is taken. Again, it is often considered safer or more expedient to simply pay up.

The McKinsey article suggested that most extortionists are individual “rogues” without back-up, in which case it is often possible to call their bluff. But obviously individual circumstances will differ and expert advice, eg from lawyers or police, should be sought.

Employee fraud

The article claimed that this type of corruption is increasing. It suggested that pressure on employees to meet short-term deadlines and targets, both financial and non-financial, is the reason why. Greed, particularly from senior managers, also contributes significantly via side agreements with customers or partners, kickbacks from vendors and other external parties, commissions, etc.

Preventing corruption: culture is crucial


Corruption is a two-way process, meaning that succumbing to it is a conscious management or employee decision, whether it is initiated within or from outside the organisation. A strong organisation culture is essential to resist the pressures to act corruptly.

The article provides the following advice:
  • Remember the basics, eg compliance
  • Invest in key functions
  • Leadership strongly influences culture
  • Be prepared to tough it out.

Remember the basics

Many organisations allocate budgets for audits and compliance in proportion to their revenue sources. However, some sections of the business may be risky yet (at least in their early stages) bring in less revenue, eg new ventures in emerging markets. The latter may be combined with over-reliance on local management, who may be unfamiliar with the organisation’s compliance practices.

Basically, audit and compliance resources should be allocated according to the degree of risk of corruption, rather than revenue raised.

Other important steps include the following:
  • A formal code of conduct that covers the issues discussed above. Employees should receive training in how to apply it, and regular certification should be considered.
  • Appropriate rules and procedures (eg approval processes) for dealing with customers, for example covering gifts, discounts, travel, entertainment, expenses, contributions to charity, etc
  • Policies that deal with corruption and breaches of the code of conduct, setting out the consequences for employees.
In many cases, it will be appropriate to provide details of the above steps to customers and other stakeholders in the organisation, eg partners, suppliers.

Finally, if there are breaches, the organisation must deal with them promptly and fairly.

Compliance with the above measures should be a condition of employment and referred to in employment contracts.

Invest in key functions


Functions such as financial control, compliance, legal and internal audit need to be adequately resourced, and controlled to the same extent as issues such as headcount, which is often monitored very closely. 

For example, it is very important to understand legislation that affects the business, such as taxation, and have people who are experienced at dealing with government officials and other regulators.

Leadership strongly influences culture

As guardians and influencers of organisation culture, this is where HR also has to step up. Policies, codes and procedures will be ineffective if the behaviour of senior managers is inconsistent with them, as they are role models for everyone else. Therefore, compliance with the policies, codes and procedures should be a key performance indicator for managers.

Breaches often start off small and then escalate, so watch out for items such as inflated expense claims, failure to separate work-related and personal use of assets and equipment. A sense of entitlement with small items is often a predictor of bigger problems.

Employees often become aware of breaches before management does. They will not report them unless they are confident management will take the matter seriously, handle it promptly, and whistleblowers will not be penalised later.

One HR function that may need attention is reference and background checking of job applicants. If an applicant has worked in the same industry or similar jobs, try to verify what sort of reputation he/she has gained with business transactions.

Be prepared to tough it out

There can be adverse consequences for organisations that insist on ethical behaviour. Especially in the short-term, they can lose contracts and tenders, pay higher prices, suffer delays and lack of cooperation from external parties that expected kickbacks, run over budget and take longer to complete projects. There may be internal tensions between field staff and senior managers who are under pressure to achieve results, and scapegoating may occur.

Senior management should openly acknowledge any loss of business that results from being ethical, but continue to make it clear what the expectations in relation to conduct are. There should be no “blamestorming” if losses occur in this way.

Over time, the organisation’s reputation should prevail over these short-term setbacks and costs could actually decrease, eg due to not having to pay bribes and speed payments. There may be indirect benefits as well. For example, there is evidence that job-seekers are now placing greater emphasis on employers’ reputations when deciding which of them to approach for jobs.

Reference

R Venkatesan, Confronting Corruption, McKinsey Quarterly, January 2015.
(Note that prior registration with McKinsey may be required to gain access.)
Post details