Corruption-related Decision-making in the Multinational Business Arena Doctor of Philosophy ...

155 Pages·2006·0.74 MB·English

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Corruption-related Decision-making in the
Multinational Business Arena

A thesis
submitted in fulfilment
of the requirements for the degree
of

Doctor of Philosophy

in the

University of Canterbury

by

Achinto M. Roy

November, 2005
CONTENTS

Acknowledgements

Abstract 1

Preface 3

Introduction 5
Multinational Businesses and Corruption 9
Ethical Principles and Conduct: Value and Utility 12
CRDM and strategy 13

Chapter One: Redefining forms of corruption and
Corruption-related Decision-making (CRDM). 16
Background Literature: Corruption and Bribery 18
Corruption and Bribery in International Business 21
What is Corruption 23
Morals, Ethics and Corruption 26
Bribery 28
Bribes vs. Gifts 31
Lobbying 33
Favouritism and Nepotism 34
Marketing Commission as bribes 34
Facilitating Payments 35
Extortion 36
Corruption: Active vs. Passive 36
Redefining Corruption for the 21st Century Business Manager 37
CRDM or Corruption-related Decision-making 38
CRDM and Ethical Decision-making 39

Chapter Two: Good governance and the CRDM 41
process
Introduction 41
What is Good Governance 41
Current International Laws and Conventions against Corruption in 43
Business
Regional Anti-corruption Conventions 45
The OECD Convention: Good Governance and Economic Development 47
The UN Convention against Corruption, 2003(UNCAP) 49
The Relevance of anti-corruption Conventions to business decision- 51
making
Good governance is ethical decision-making 51

Chapter Three: The Dynamics of Corruption and the 54
need for an Ethical decision-making model
Introduction 54
Factors in a corruption-related decision 54
Mental Models operating in an Individual 57
Decision-makers operate from a position of Positional Objectivity 58
Disrupting the dynamics of corruption 59
Chapter Four: The Theoretical context of the 62
CRDM Model
Introduction 62
The Context of Multinational Business Decisions 62
Corporate Social Responsibility of Multinationals 65
Human Rights and Multinationals 68
Sustainable Development and Multinationals 70
The Overarching Principles in Business Conduct 71
The Principle of Double effect 71

Chapter Five: The CRDM Model 73
Introduction 73
The CRDM Model (Corruption-related Decision-making model) 73
Applying the CRDM Model 75
Rationale for each component of the model 80
Resolving decision-making dilemmas with the Model 83
Communicating the CRDM model 85
Conclusion 85

Chapter Six: The Relevance of CRDM to Enron and 87
Shell
Introduction 87
Background 88
The Shell Example 90
Shell and the Ogoni 92
The Hanging of Ken Saro-Wiwa 95
The Enron Example 98
The Dabhol Power Plant case 99
Fast Track Entry 102
Review by Central Electricity Authority (CEA) 103
World Bank Review 103
Amendment of the Electricity Supply Act,1948 104
Enron’s project costs : incredibly high 104
Impact on Stakeholders and Land acquisition process 105
Enron and Human Rights abuses 106
Allegations of Corruption and Bribery 108
Opposite end of the Spectrum : Companies who resist corruption 110
Conclusion 111

Chapter Seven: CRDM in the wider Business World 112
Introduction 112
The Study 113
The Findings 115
Summary of Findings 120
External Validity of Findings 121

Chapter Eight: CRDM within Business Theory and 123
Practice
Introduction 123
Impact of Business Ethics on Business Conduct 124
Role of Models in Management theory and Practice 125
Shift in Business theory and Practice 127
The Social Legitimacy of Business 128
CRDM as a response to corruption control and society 129
Conclusion 130

Conclusion 131

References 133

Appendices 142
Appendix 1 142
Appendix II 143
Appendix III 144
Appendix IV 145
Appendix V 146
Appendix VI 148
Acknowledgements

Writing a thesis and living as a doctoral student after one has had a professional career is
a challenging task. This was made enjoyable with the constant support and
encouragement from Reshmi, my wife and my two children, Chiraag and Anuraag and all
my pets. I thank my parents, especially my mother, for all the efforts they put during the
formative years of my school and college days spanning over a period of 19 years. To my
father I owe the appreciation of moral issues which is at the very heart of my research
endeavour. If there is anyone who has to be thanked from the bottom of my heart, it is
Prof. Alan Singer who supported me right from the time I came to the University of
Canterbury and did my honours, my masters and this doctoral thesis. He had immense
faith in my abilities all along and was a true inspiration as an academic supervisor. In life
one rarely has the privilege of meeting intellectuals of Alan’s calibre and I had that.

My special thanks to Dr. Peter Perry, my co-supervisor for all the support and guidance I
received. His book was a great help and an eye-opener that “totally successful corruption
is unsuspected corruption” and that in turn implies that our study and knowledge of
corruption is largely based on unsuccessful corruption. A special note of gratitude to Prof.
Ming Singer for the time and guidance she gave in helping me design the survey

undertaken in India.

My sincere thanks to all those who encouraged me and supported me in this journey
including my parents-in-law, my friends and the Department of Management at the
University of Canterbury for their consistent support.

Achinto Roy
Abstract

Corruption in business occurs in situations of a quid pro quo relationship between
public officials and business managers representing corporations. Many a time, such
corrupt situations can harm stakeholder interests. Managers, as decision-makers, in
corruption-related situations may fail to understand the impact of their decisions in
such situation for they operate from a position of “position-dependent objectivity”
(Sen, 2002) focusing on economic objectives usually. They may fail to understand
that their involvement in corrupt acts can lead to violation of fundamental stakeholder
issues such as human rights as in the cases of Shell and Enron (discussed in this
thesis).

The thesis examines the meaning of corruption in relation to its stakeholder impact
and proposes that corporate good governance in corruption-related situations is a
matter of ethical decision-making, exceeding legal compliance. It explores the
decision-making factors that operate within an individual manager while dealing with
corruption-related situations in business and maps an analytical mental model of a
decision-making manager in such situations. The thesis proposes ‘Corruption-related
Decision-making’ (CRDM) as an orderly way of thinking for managers to deal with
corruption-related situations in business.

The CRDM concept is demonstrated through the use of a new Corruption-related
Decision-making model that protects human rights, environmental issues, sustainable
development and any other relevant stakeholder issue that one may wish to include.
The relevance of the CRDM concept and the model was evaluated in a survey of
forty-one multinational companies from Mumbai, India. The survey confirmed that
none of the respondents used any decision-making tools while dealing with
corruption-related situations. The survey revealed that 40 out of 41 companies
experienced rent-seeking behaviour (bribes demanded) in India. Out of these 41
companies, 26 companies ‘usually’ lost business due to non-compliance with bribe
demands and another 9 companies lost business ‘sometimes.’ The survey also
explored the role of ‘fear of loss of business’ in the decision-making process and
found that ‘fear of loss of business’ led decision-makers change stance from a state of
1
passive corruption (facing demand) to a position of active corruption (making an
offer), with 27 companies actually moving from a position of passive corruption to
active corruption. All 41 companies, without a single exception, believed (when
asked) that corruption can adversely affect stakeholder issues such as human rights.

The survey findings confirm the relevance of the CRDM model as a decision-making
tool and as a good practice document in corruption-related situations. The CRDM
model can motivate an internal review of a manager’s persona with a reminder that
ethical decision-making and protection of stakeholder rights is possible in corruption-
related situations. The concept of CRDM is a potential contribution in dealing with
the illegitimate, the illegal and the oppressive aspects of international business.

2
Preface

Sometime in 260 BC, the Indian emperor Ashoka of the famous Mauryan dynasty
fought and won the bloodiest battle on Indian soil. It was the battle of Kalinga1 fought
in Eastern India, to gain control over the land and sea routes to Southern India. The
battle2 left 100,000 dead, 150,000 were taken as prisoners and many times that
number were wounded on either side. After the battle, Ashoka surveyed the
battlefield, littered with bodies of dead and dying men and beasts. Rivulets of blood
flowed into a nearby river changing its colour to blood-red. While Ashoka was
surveying the battlefield, an old man came up to him carrying a small bundle of cloth
enveloping the corpse of a three-year old child. The old man sang praises of glory to
the victorious Emperor and then held out the dead child pleading with Ashoka to
bring the child back to life. The old man went on to say that ‘you O mighty emperor
could take thousands of lives, so surely you can bring back just this one life.’ Ashoka
knew he could not and soon left the battlefield stricken with remorse. This incident at
Kalinga transformed the twenty-four year old Emperor Ashoka, within two years, into
a monk preaching Buddhism and peace. He adopted the path of Dhammapada, the
path of righteousness. Ashoka built monuments all over his kingdom displaying
messages of peace, and in particular at Sarnath, he erected a pillar called the Ashoka
sthamb (pillar) which displays till this day, a slogan borrowed from the Upanishads3
namely: Satyameva Jayate.

Literally translated, it means truth triumphs or truth shall prevail or truth prevails
(modern day India has adopted Satyameva Jayate as the nation’s motto). However,
truth usually prevails only after destruction; because a battle had to be fought,
100,000 lives lost and suffering inflicted on countless more for the moment of truth to
prevail in an emperor’s mind. It happened in 260 BC and has happened again and
again in human history and it continues to happen in our daily lives even today. Truth
usually prevails after destruction, as witnessed in the fraud-induced corporate
collapses of Enron, World.com, Parmalat and other companies during 2001 and 2002.
These events led to the Sarbanes-Oxley Act in USA that aims to regulate corporate

1 Kalinga is the modern day Indian State of Orissa in Eastern India.
2 ‘A History of India’ by Romila Thapar, p.72, 1966 edition, Penguin
3 Group of late Vedic metaphysical treatises – Collins Concise Encyclopedia. Written around 800 B.C.
3
actions as none before. Legislation, whether it is Sarbanes-Oxley Act or the 2003 UN
Convention against Corruption cannot by themselves ensure ethical corporate actions
as is evident from our experiences in recent times. Enron was considered the most
successful company in the energy sector and appeared to meet all legislative
requirements, till it went bankrupt in 2001, with the dubious distinction of being the
largest fraud-induced company failure in US history. Like Enron, some successful
companies meet their Kalinga from time to time with the truth prevailing after
damage has been inflicted on the company and society. Royal Dutch Shell was
considered the most profitable company on earth, yet it faced allegations of human
rights violations in Nigeria due to its corrupt stakeholder practices. Shell is just a
typical case of a very successful multinational that failed to assess the impact of its
own actions or inaction vis-à-vis its stakeholder environment. It is only after Shell
was condemned internationally, during November 1995, that Shell adopted damage-
control measures. Shell, then publicly declared human rights as a significant issue in
business operations, introduced mandatory human rights training for all its executives
and publicised the company’s commitment to honour human rights.4 However, at the
time of writing this thesis, Shell has not been able to win over the Ogoni in Nigeria
nor resume oil drilling operations in the Ogoni region.

4 Shell’s website discusses stakeholder issues such as human rights, sustainable development at length
and displays the UN Declaration of Human Rights as their commitment to human rights issues.
4
Introduction
Corruption in business is amongst the serious problems confronting global society
today. United Nations, World Bank, OECD5, and other international bodies
acknowledge its occurrence in international business. However, corruption is not a
recent phenomenon nor is it a creation of a particular society or civilisation or present
day business operations. The incidence of corruption was observed in all ancient
civilizations. Our holy scriptures mention about corruption and condemn it on moral
grounds (Noonan, 1984). Instances of corruption are found in the recorded history of
ancient Greece, Rome, Egypt, China and India (Noonan, 1984). Corruption continues
to be a part of the contemporary social structures. We hear and read about the
occurrence of corruption on a daily basis, in the media and the works of anti-
corruption bodies such as Transparency International.6 The phenomenon of corruption
cuts across all cultures and continents. Corruption in business conduct is a sub-set of a
wider phenomenon of corruption prevalent in all parts of the world.

Corruption in business usually occurs during the interface between business managers
and public officials. Business managers seek dispensation of favours (both legitimate
and illegitimate) and public officials command the discretion to dispense those
favours. Some examples of legitimate (within law) favours sought by business could
be grant of trading rights, licenses, permits, award of contracts, tenders and
amendment of laws to suit business interest. Illegitimate favours could range from tax
avoidance; suppression of wrongdoing including illegal acts to almost anything that
maybe ultravires the law, but suits business interests. On the other hand, public
officials command discretionary powers to satisfy both the legitimate and illegitimate
favours that business may need. Thus, there is room for trade of these discretionary
powers, for a quid pro quo between public officials and business managers (Rose-
Ackerman, 1978; Elliot, 1997; Harris, 2003). The desire to trade discretionary powers
by a public official has often been referred to as rent-seeking behaviour (Rose-
Ackermann, 1978; Bhagwati, 1982; Klitgaard, 1988, Bardhan, 1997). Likewise, the

5 Organisation for Economic Co-operation and Development.
6 Transparency International (TI) is an international anti-corruption body operating in 60 countries
with headquarters in Berlin. TI extensively researches global corruption and amongst its publications
runs a daily email service, which lists out all reported (in media) corruption and allegations of
corruption worldwide.
5