"Legalized Corruption" and Business Challenges

Trust in Political and Business Leadership is Broken

Partnering Against Corruption Initiative (PACI) Spring Community Meeting

World Economic Forum

At the World Bank, Washington DC. May 20, 2016.

Financial leaks & Implications for Business and Institutions

Address by Frank Vogl

Julia Vogl "Electric Road" from the Jungle-of-Concrete/Moongate series, Hong Kong, 2015 — **Julia Vogl "Electric Road" from the Jungle-of-Concrete/Moongate series, Hong Kong, 2015**

Ladies and gentlemen it is an honor for me to have this chance to meet with you. At the core of Transparency International’s philosophy has been the concept of constructive engagement between civil society, government and business to find ways to jointly end corruption.

In the mid-1990s, TI’s founder Peter Eigen engaged mining company executives at the World Economic Forum and that initiative led in time to the creation of PACI. At the same time in the World Economic Forum we worked with U.N. officials to help promote the Global Compact.[i] In the late 1990s, I played a role in a constructive effort with leading banks to launch what came to be known as the Wolfsberg AML Principles.[ii] At the start of this century Peter Eigen played a leading role in establishing the Extractive Industries Transparency Initiative.[iii]

The leaks of the Panama Papers to the International Consortium of Investigative Journalists[iv] and a small number of major newspapers is just the most recent development to underscore to the world that corruption thrives and is universal. The availability now of a core database from one Panamanian law firm[v] of millions of documents will provide us with more stories of scandals, more investigations and more prosecutions. It will lead to more business regulations and more compliance costs for business.

To understand what this latest set of financial disclosures really mean you have to look far more widely than the nuts and bolts of the individual stories coming from Panama. You need to have a keen appreciation of the political environment in which your companies operate and the new and far more intense challenges that you all need to face on the anti-corruption stage.

Income inequality is the defining political issue of our time across the world. It is a prime cause of broad public distrust not only with government, but with institutions viewed to be part of the governing establishment, which include major corporations.

Average levels of income, health and education in the approximately 20 natural resource rich countries of sub-Saharan Africa are atrocious.[vi] In some of these resource-wealthy countries the levels of child mortality are the lowest in the world. Why? Because a tiny elite in each country has siphoned off staggering sums of cash received from major multinational corporations – the result has been scarce resources for health, education, sanitation and policing.

The exposure of grand corruption in state controlled enterprises – such as IMDB in Malaysia[vii] and Petrobras in Brazil[viii] have unleashed powerful public protests and calls for justice, accountability and transparency. Underneath these vast public demonstrations is a deep sense that those in the most powerful governmental and business positions have abused the public trust, enriched themselves and impoverished the broad citizenry.

The rising popularity of extreme political parties in Greece, Britain, France, Spain and other European countries is due to a large degree to the failure of post Great Recession economic policies to lift all boats – the wealthier have grown more prosperous, while the average citizens is poorer in real terms than before 2008.

And in the United States, the rise of Donald Trump and Bernie Sanders is explicitly due to the vast gap in wealth and incomes that exists here today. As the Economic Policy Institute has noted: “had all workers’ wages risen in line with productivity, as they did in the three decades following World War II, an American earning around $50,000 today would instead be making close to $75,000. A hugely disproportionate share of economic gains from rising productivity is going to the top 1 percent and to corporate profits, instead of to ordinary workers—who are more productive and educated than ever. This rising inequality is largely the result of big corporations and the wealthy rewriting the rules of the economy to stack the deck in their favor. This has prevented the benefits of productivity growth from “trickling down” to reach most households.”[ix]

A recent report in The Financial Times noted that, “Globalization has been kind to CEOs and harsh on the average worker in all advanced economies.”[x]

Part of the narrative relates to the soaring levels of senior executive pay in major corporations. My data to illustrate this is from Glassdoor Economic Research[xi] that noted that based on a survey of all Standard & Poors 500 companies the average CEO pay was $13.8 million per year, the average median worker pay was about $77,800, and the average ratio of CEO pay to median worker pay was 204. In other words, on average, CEOs earn around 204 times what his or her median worker earns.

Averages can be deceiving of course. For example, the CEO of Walmart, Douglas McMillon’s 2014 pay was $25.6 million, which was more than 1,100 times the average pay of a Walmart worker at $22,600. By the way, Forbes estimates the wealth of the six lead members of the Walton family, who control Walmart, at $149 billion – this is more than the total worth of the bottom 40% of the American people.

In addition, people are understandably angered when they learn, for example, that at BP the chief executive was paid £14m for a year in which the company made record losses.[xii] Or, to take another example, at J.P. Morgan Chase the CEO/chairman was given a significant pay rise by the board in a year when the firm paid absolute record fines running into billions of dollars to the U.S. Justice Department for fraudulent activities. [xiii]

There was a time when business was concerned about such matters – when business leaders said the mission of their enterprises was to serve all stakeholders. There was a time when the most prominent businesses walked the integrity walk. Last week I was a breakfast with the CEO of Nestle and he talked about how his vast firm is promoting the concept of “creating shared value” with society.

It sounds good. Nestle may be the exceptional good guy. But, in today’s world such rhetoric seems to have a hollow ring. A couple of decades ago CEOs started to focus on just one stakeholder - the shareholder. Today, the focus of business, despite what public relations people say, is on maximizing the returns, quarter-by-quarter for shareholders. If you have any doubt about this, just watch the CNBC and Bloomberg TV channels, just listen to the hedge fund managers who take home pay of staggering sums, just watch the approaches of the private equity managers. The formula in business is cut costs, boost productivity and give senior executives a bonus directly tied to the combination of the rise in profits and the gain in the share price.

The result is that in 2014 the CEO of Discovery Communications was paid $156 million – yes, 1,900 times the average pay of workers at his firm.[xiv]

This narrow and myopic view is producing a massive backlash that business has, so far, failed to see. Business looks at corruption issues in terms of compliance and legal regulations, not comprehending that the decline in public trust in the establishment, including big firms, is due to forms of perceived corruption that are distinct from bribe-paying and quid pro quo under-the-table deals. The power of the Panama Papers is that the revelations about individuals and firms cements a sense that the powerful and the wealthy enjoy impunity.

Business is seen to have far too much influence with politicians. It buys and corrupts politicians quietly. It deploys armies of influence-peddlers spending hundreds of millions of dollars to gain access to those at the helm of power. It uses expensive lawyers and other enablers to create offshore financial entities to avoid taxation. It pursues myriad schemes just this side of the law – and sometimes just the other side of the law – to create a world where income inequality has become the most politically destructive force of modern times.

Can you imagine a world where Donald Trump is President of the United States?

Can you imagine a world where UKIP in the UK succeeds with its Brexit campaign?

Can you imagine a world where France’s National Front and Marie LePin hold power?

We’ll, such a world is emerging because governments and big business are seen by the mass of our citizens as corrupt.

In the short-term, politicians and public prosecutors will combine to make life slightly more difficult. New regulations will be formulated and even more compliance costs will be imposed on your enterprises. In the short-term, a few more politicians and business people will go to prison and their prison sentences will be longer than previously was the case.

But there can come a time when the backlash is far, far harsher. We are seeing this in Brazil already. The head of the Odebrecht construction company has been jailed for 19 years for his firm’s complicity in bribery at Petrobras.[xv] That would never have happened had the judges and public prosecutors not become convinced that investigating grand corruption was something that the overwhelming mass of the population supported.

Civil society in Brazil and in a rising number of other countries have successfully mobilized citizens on a sustained basis and on a large scale to demonstrate in support of ending the era of impunity – ending systems that enable top public officials and their business associates to operate as if they are above the law.

Civil society is on the march in an increasing number of countries and creating calls for justice that are being heard across the globe. There are two kinds of reactions – negative and positive. In some countries, such as Russia and Turkey and Egypt, there is a determined effort by the authorities to punish and intimidate civil society and the media and to ruthlessly crush all criticism and opposition. Too often, business is silent as these developments unfold. Too often businessmen argue they must steer clear of politics – nobody believes them and their credibility falls further.

Let me say here that I commend World Bank President Jim Kim for stressing in a recent speech how important it is to support and defend the anti-corruption voices in countries that are increasingly seek to silence them.[xvi]

The other response – the positive response - was evident on May 12 in London when David Cameron hosted the first anti-corruption summit. A dozen heads of state issued national statements at that summit detailing new and enhanced policies to curb corruption. In sum, as the summit statement of principles stressed:

“Corruption should be exposed – ensuring that there is nowhere to hide; the corrupt should be pursued and punished and those who have suffered from corruption fully supported; corruption should be driven out – wherever it may exist.”[xvii]

Let me underscore a crucial point for your consideration. We are at the start of a brand new era in the anti-corruption cause.

The first era – now more than two-decades old, saw the establishment and growth of the anti-corruption civil society movement, a vast rise in research on the issue, sharply increasing media focus on the topic, the attention as a priority to good governance by official aid institutions, and a massive increase in regulation, law and compliance requirements.

The new era is the enforcement era. The pledges have been made, governments have signed-on to all the conventions, business leaders have sworn to be compliant – now, we in civil society have to face the vast challenge of holding you to account, to see all who spoke now walk their talk, to see that the offshore havens for criminals are shut down, that the enablers of money laundering are prosecuted, that bribe-paying businessmen are jailed, that impunity is over.

The question for PACI and its members is therefore quite simple – what concrete actions are you going to take as firms and advocate for business widely to demonstrate that you are walking the anti-corruption talk. Actions must speak louder – much louder – than words because in a world of terrible income inequality the words alone of the 1 percent and big business are widely perceived as having a hollow ring.

Will you publicly denounce Donald Trump who has called the FCPA “a horrible law” and wants to roll it back?[xviii]

Will you tell Putin that you cannot do business in Russia because there is only corruption and no longer the rule of law?

Will you tell your auditors and lawyers to ensure that none of your affiliates and subsidiaries have offshore holding companies?

Will you publicly stress to your shareholders that your company exists to serve all its stakeholders?

Will you ensure that every single employee of your company is given the TI Declaration Against Corruption which starts with the pledge: I will not pay a bribe and then “I will not seek bribes” and then concludes with giving your support to the statement that “All forms of corruption must be ended to secure the basic rights of all people and ensure a world where everyone can live in dignity.