The Global Challenge of Corporate Corruption

Lack of detailed knowledge about corporate corruption—and how to fight it effectively—is limiting economic growth around the world, according to an Academy of Management Annals article.

More than $1 trillion is paid in bribes each year, the World Economic Forum estimated, and “that corruption reduces global GDP by more than 5%,” according to “Corporate Corruption: A Review and Research Agenda.”

Calling corruption “one of the grand challenges facing global society,” coauthors Armando Castro of University College London, Nelson Phillips of Imperial College London, and Shaz Ansari of the University of Cambridge, wrote that “a third of international resources business managers estimated corruption increases international project costs by more than 10%. Furthermore, corruption can add up to 25% to the cost of procurement contracts in some countries, while moving business from a country with a low level of corruption to a country with medium or high levels of corruption is equivalent to a 20% tax on foreign business.”

For their article, the authors analyzed the five most-cited articles from the top journals in sociology, economics, and political science, as well as 144 articles from the top journals in management, including 12 Academy of Management Review articles, 11 Academy of Management Journal articles, and three Academy of Management Annals articles.

To date, most research into corruption has focused on government corruption and who receives bribes. Castro, Phillips, and Ansari, however, focused on corporate corruption and who pays bribes—the “supply-side” of corruption.

“Usually, we see this in international business when companies are moving abroad. But this can also happen within the same country where the firm is based. It happens in the supply chain, in business-to-business,” Castro said.

Corporate corruption differs from government corruption in three ways, the authors wrote:

“Government bureaucracies differ from companies in terms of culture, incentives, governance, and logic, making the opportunities for corruption, the decision to be corrupt, and the practicalities of acting corruptly, radically different.”

“Unlike governments, firms face competitive pressures that can affect the likelihood of corruption. … Intense competition leads firms to search for any advantage that might help them to beat competitors. … The impression (true or not) that competitors are engaging in corrupt behavior can lead to pressure to follow suit in order to maintain the firm’s competitive position.”

“Companies are often the source of the funds that corrupt governments (or other firms). They function as the ‘supply-side’ in corrupt transactions. … Closely related to this is the fact that the negative impact of the corrupt activity is often on the shareholders of the company, rather than on the citizens of a government.”

“Corporate officers under pressure to hit targets fake the results of safety tests on products to avoid costly changes to products”

“Officials in gambling companies receive bribes to allow illegal bets in the sports industry”

“Company officials pay bribes to a bank to ensure a positive decision on a loan application”

More research is needed to counter corporate corruption, the authors wrote, especially during the economic downturn due to the COVID-19 pandemic: “Consider how disruptive events and economic slowdowns such as the 2008 financial crisis and the coronavirus pandemic in 2020 affect corruption. Booms help corrupt managers conceal corrupt activities, while slowdowns can expose them. Indeed, many corporate corruption scandals (Enron and WorldCom) of the past 20 years emerged in downturns.”

A current example of corruption is “private companies selling overpriced masks and equipment for COVID-19,” Castro said. And “with the building slowdown in the construction sector, some companies might go bust,” creating fertile ground for corruption to flourish in that industry.

Previous research findings recommend fighting corruption through incentives—better pay for government officials or police, for example, “but the reality is much more complex,” Castro said.

The authors identified four different perspectives that have been developed to understand corporate corruption:

Rational actions. “A manager does a cost-benefit analysis of a corrupt act: What’s the cost of being caught versus the expected gain, which can be financial, or a promotion. It’s a bit of an immoral way of thinking, so it overlaps with moral failure,” Castro said. “Some companies get away relatively unscathed when corrupt business practices are exposed,” the authors noted. “For example, the business development team of Airbus (2020) was caught engaging in corrupt acts—in this case, bribery to win contracts—and the company recovered quickly. They paid a fine and, as the news coverage died out, the company's stock price recovered. The firm suffered little lasting damage. On the other hand, Odebrecht, one of the 10 largest construction companies in the world at the time (2014), was caught in a corruption scandal and was forced into selling substantial assets and filing for bankruptcy protection.”

Institutionalized practices. “Certain practices become the legitimate way business is done in this community of organizations and organizations face significant pressures if they deviate from these practices,” they wrote. “For example, it has become common for large corporations to appoint anticorruption agents to safeguard the corporation against corrupt practices. … [But] managers at Siemens, for example, opened several parallel offshore accounts and engaged in corruption at multiple levels despite having anticorruption teams in place.”

Cultural norms. “Culture has been linked to enabling or encouraging,” they wrote. “For example, if gift-giving is part of national culture, does that necessarily translate into a higher propensity to engage in questionable activities at the corporate level such as expensive gifts to curry favors?” “Bribery is universally shameful … In no country do bribe takers speak publicly of their bribes, or bribe givers announce bribes they pay. No newspaper lists them. No one advertises that he can arrange a bribe. No one is honored precisely because he is a big briber or pays a big bribe.” —from John T. Noonan Jr.’s 1984 book, Bribes

Moral failures. “Bribery has long been illegal and publicly frowned upon in Germany. However, until 1995, international (but not domestic) bribes were considered to be tax deductible by corporations, creating a tax subsidy for companies acting in corrupt ways outside of Germany that were considered immoral in Germany. At Siemens, a German multinational conglomerate, bribery was described as its ‘business model’ and ‘line item’ before it got caught and ended up paying $1.6 billion in one of the largest fines for bribery in modern corporate history,” the authors wrote. “Before the new legislation arrived to prohibit this practice, German law shielded corrupt practices abroad by German firms.”

“An executive might pay a bribe to win a contract, and in the short term, the company might win a contract. That might increase its profitability. But once the bribe is uncovered, that will directly affect the shareholders and the reputation on the company. It could result in fines and the ability to get loans. So a bribe can have a short-term benefit, but it will likely have medium- and long-term negative consequences,” Castro explained. “Addressing corporate corruption is about changing the culture within organizations and making sure that they’re not violating international laws.”