Does exposing corruption work all the time? “(In India) every media outlet seems to have a story about corruption. But in the context of this hyper-transparency, the moral outrage is lost. Additional information on corruption does little to move the needle. So, yes, transparency is a potent tool against corruption particularly when you’re dealing with low aggregate levels of transparency…In high aggregate levels of transparency, the next new story about corruption has to be followed up with real enforcement for it to be effective,” says Karthik Ramanna, Associate Professor of Business Administration at the Harvard Business School. Ramanna is also the faculty for the Leadership and Corporate Accountability-India (LCAI) programme being offered by Harvard Business School in India, later this month. In this interview he speaks to Firstpost about various online attempts around the world to tackle corruption.
What impact does corruption have on economic growth in a country? Can you give us some numbers that research in economics has thrown up?
Corruption has emerged over the last five to ten years as a big issue both in the public discourse as well as among corporate managers, particularly in emerging markets. A 2012 World Economic Forum survey of corporate managers and senior leaders from China, Russia, and India identified corruption as one of the top five issues in each of these countries. However, it’s hard to directly measure , the impact of corruption because you can only observe corruption when it is surfaced in a legal context. But, of course, not all cases of corruption will be prosecuted to the extent that there are limits to legal resources and that prosecutors themselves or the judicial system itself is corrupt. So it’s hard to estimate this beyond surveys.
How much does corruption impact the amount of foreign direct investment and foreign portfolio investments coming into any country?
It is in the long-term interest of any free-market society to have an independent judiciary, an effective legal system, and strong democratic institutions that promote an accountable and trustworthy government. Corruption detracts from those long-term objectives and thus compromises the basis of a free-market system. Corruption might help a foreign investor seek short-term recourse to a problem, but, in the long-run, it destroys the foundation for capitalism and negatively impacts foreign investment. This has been shown in the context of several emerging-market nations.
You have written that “corruption is the top issue in emerging market economies — and transparency is the most potent tool available to combat corruption.” Could you explain that in some detail through some examples?
One of the things I’ve been exploring over the last two to three years is the role of transparency as an instrument of accountability against corruption in different emerging-market contexts. In Russia, where I’ve studied the work of Alexey Navalny and his web platform RosPil.info, transparency seems to have quite a large impact on instances of corruption. In part, I think this is because the aggregate level of transparency in this context is low. In Russia, you’re dealing with a mainstream media environment that generally does not report on public corruption and that is pro-government. In that context, even small amounts of information can have a profound impact. So when RosPil.info releases information about a potentially corrupt government tender, it seems to have an impact in how that tender is re-evaluated or reassessed.
What about a country like India?
Switching to a country like India, where you encounter a hyper-transparent environment, and you have, for all practical purposes, a vibrant, free press, in this context reporting on corruption has almost become a national sport. Every media outlet seems to have a story about corruption. But in the context of this hyper-transparency, the moral outrage is lost. Additional information on corruption does little to move the needle. So, yes, transparency is a potent tool against corruption particularly when you’re dealing with low aggregate levels of transparency. But there seems to be a nonlinearity associated with the way transparency is effective against corruption. In high aggregate levels of transparency, the next new story about corruption has to be followed up with real enforcement for it to be effective.
In a HBR article you wrote that “Private Citizens are also joining the fight against corruption. Some are making the effort via for-profit ventures.” Could you discuss this in some detail with global examples?
Caijing is an example of a for-profit venture that is fighting corruption in China. It is a magazine that is about 15 years old, and was established by a gentleman called Wang Boming who is a very central figure in the development of capital markets in China. Mr. Wang was asked by the State Council, which is one of the highest organs of the state in China, to develop a financial press in the country in the late 90s. And with that charge, he established Caijing. Mr. Wang was educated in the United States and has worked in the media environment in the West. He is committed to a long-term vision of a free and transparent press in China. That being said, he has built his magazine very much on the principle of working with the state rather than opposed to it. The strategy of an organization such as Caijing, which embeds itself as a long-term ally of the government, working to create conditions that make markets work, might be, in fact, the approach that works best.
Could you elaborate on that?
Over the last 15 years Caijing has built a reputation for breaking stories about corruption and corporate governance malfeasance in China, including those involving very senior officials in the country, but has done so in a very deliberate and measured way. It has earned international respect and recognition for its coverage, but at the same time doubts remain about how closely aligned it is with the state. Mr. Wang has in part pursued this strategy because he’s running a for-profit business, which is listed on the Hong Kong Stock Exchange. He very much needs to turn a profit and needs to survive to tell another story another day. This is not a one-shot game for him, this is a long-term game. And in part it’s that sustainability aspect that gets him to work with rather than opposed to state institutions.
One could argue that the long-term profit motive is what has built that sustainability into the organization. The interesting thing about this long-term approach is that Caijing has over time been able to push the limits of subjects that it can acceptably cover. Fifteen years ago when Boming started the magazine, it was hard even to touch local government officials or report on local government officials. Today he can report on corruption at the local government level without much concern about censorship. It’s only if he’s dealing with top national officials that there is some concern around those issues. Thus, there’s been a gradual evolution in a way which Boming would consider progress.
Are there any such examples in India where for profit ventures are fighting corruption?
IPaidABribe is a not-for-profit organization leveraging transparency and both the ubiquity and the anonymity of the internet to bring greater light to petty bribery or what is called “retail corruption.” This is the corruption necessary to turn on your water supply or to turn on your electric supply or to pay your property tax bill. In some ways retail corruption is more dangerous that “wholesale corruption,” the massive bribes paid for public licenses. Retail corruption corrodes not just a few; it corrodes the ethic of an entire nation. Then when in fact citizens do observe instances of wholesale corruption, they appear less egregious. Part of what the website ipaidabribe.com does is to leverage the anonymity of the internet to bring back some shame, if you must, to corruption or to the payment of bribes.
Could you tell us a little more about it?
The purpose of something like ipaidabribe.com is to restore a national consciousness to the idea that bribe-paying is unusual, it is ethically wrong, as opposed to something that is a common and necessary for day-to-day existence. The next challenge for reformers in this area is how to close the loop. What happens after you report your bribe? As I said earlier, when we are in the context of hyper transparency, if you’re dealing with an environment where reporting on corruption is widespread, it’s important to have institutions to close the loop around corruption. It’s important to be able to give people some sense of closure. It’s not simply about saying, “Yes, I paid a bribe,” it’s about how is justice in fact being meted out to the corrupt.
What do you think about the New Companies Bill? Is it fair for a government to mandate that businesses spend an ‘X’ amount of money on corporate social responsibility?
Milton Friedman famously said that the social responsibility of business is to increase its profits. I think that the general spirit of the New Companies Bill is the idea that companies have responsibilities beyond delivering on shareholder profits. This idea is broadly consistent with a lot of the research that has been done since Professor Friedman wrote that article in 1970. In particular, we’ve come to see that there are at times “negative externalities” associated with corporate profit-seeking activity, which is to say that there are costs imposed on labour, on customers, and on local communities from profit-seeing activity. This is especially true in the presence of what we recognize as “institutional voids,” that is when the institutional architecture of the market system is underdeveloped.
Can you give us an example on this?
For example, in India, where courts are clogged and access to justice is notoriously slow, customers and employees often rely on corporate responsibility – rather than legal recourse – for their well being. In this context, unbridled profit-seeking activity could impose significant costs on society. So, it is in the long-term interests of corporations to take a more nuanced view of what their objective function should be. It is not viewed as a distraction or as a luxury, but as something very core to the business. As managers start taking a long-term view on their business, they recognize that incorporating corporate responsibility into corporate strategy is good business and good leadership.
Anything else you would like to add to that?
All this said, the idea of mandating a 2% of net profit expenditure on CSR, as the new law does, strikes me as aggressive in that it’s not clear that every company has tightly developed a way to integrate corporate responsibility into its strategy. It’s not clear that every company has the right ideas and the right vehicles to invest this money on behalf of their shareholders and society. I think about this Act as, on the one hand, recognizing a moral imperative for companies to take their social responsibility seriously, but, on the other hand, potentially opening the door to considerable value destruction by mandating such activity.
Do you think companies are seriously following this or will they find accounting tricks to get around it?
I wouldn’t be surprised if some companies found ways to circumvent this mandate, by pursuing activities that ostensibly seek to serve the public interest, but in practice only serve the interests of, say, family members of founders and managers. I could also see ways in which this sort of mandate could become an avenue to bribe politicians by, for example, contributing to the charities of powerful ministers. There are many ways in which this law could be misused. Again, I think we don’t want to lose sight of the ethical principle behind the law, but we must also recognize that mandating corporate expenditure to this effect might be stepping too far.
The interview originally appeared on www.firstpost.com on November 5, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek