Fraud, Corruption and Corporate Governance

Fraud and Corruption are like radiation. There are all around us, invisible, subtle and we usually aware of them, when irrevocable damage and sometimes total destruction arise. They use the “spider method”: Attract, Entrap, Devour.

In their essence are “asymmetric”. They exist in every socio-economic context, every evolutionary step of Mankind, all eras, people and Gods (in mythology); uncontained by any means, political system or leader. Perhaps they are unstoppable. Nevertheless, there are control measures to contain them, at least in an enterprise level, and one of them is “Corporate Governance”.

Though semantically fraud and corruption are used interchangeably they have different definitions. Fraud is the intentional deception made for personal gain or to damage other individuals and/or entities.

Corruption is, in a sense, a more general phenomenon, as expansion and consolidation of fraudulent practices, and is not defined uniquely, but depending on the country and the political and socio-economic situation that surrounds it. This is because it is really difficult to make a clear, unambiguous and commonly accepted distinction between legality and illegality, between corruption and reward, resulting in "gray areas" larger than the intervals distinctly black or white; thus leading everyone, to interpret and to assess corruption in his/her own unique way, depending on the environment in which he/she lives and moves.

However, it is commonly accepted that the corruption is associated with the use of one's official position for personal and/or group profit and making immoral/non-ethical actions. Indications of fraud are the: bribery, "kickbacks" suspicious transactions/exchanges of “favors”, “interlocking” interests, abuse of power, "protection", "black" labor, abuse/theft of public resources, money squandering, over invoicing/under invoicing, inventory notional costs, abuse, embezzlement, fraud, extortion, forgery, falsification of documents, nepotism, manipulation/deception (people, Authorities, Press), unfair competition, exploitation of "gray zones" and/or bureaucratic details ("loopholes") to cover illegalities.

In any case, corruption is in the orbit of a vicious cycle, which starts from corruption itself, which -due to the high spread degree- leads (up to “forcing” one could say) businesses to engage in unfair practices (e.g. corruption), expands itself, is strengthened by the prevailing perception of size, range and “necessity” corruption, swells -due to the aforementioned perception- and finally is fed back, making unfair practices even more uncontrollable. Corporate Governance could be a catalyst to break this vicious circle.

In general, Corporate Governance is a set of mechanisms and rules, which defines the relationship between all the stakeholders in a company, namely: Management, Directors, Shareholders, and other relevant parties (e.g. staff, providers, suppliers, business partners, customers, consumers, consultants, etc., including the Government, independent and Supervisory Authorities and the Public Administration of the country of operation).  More specifically:

• Describes and defines their relationships,
• Specifies the distribution of rights and responsibilities among them,
• Identifies Principles, Methodologies and Procedures, needed to make corporate decisions,
• Defines the way (framework and structure; organizational, administrative, etc.), through which the company objectives are set,
• Describes the acceptable means, to be used both for the achievement of corporate goals and for monitoring of their effectiveness,
• Specifies control mechanisms/measures to ensure transparency and accountability.

In conclusion, Corporate Governance is a "tool" for better allocation of resources and better enterprise management, ultimately improving business performance, in terms of efficiency and effectiveness, and this is "rewarding".

In fact, as shown by studies (e.g. McKinsey) international investors (institutional or not) prefer to invest more money in companies that have developed a good Corporate Governance framework, as they have higher value in the Market, which leads to higher growth prospects. This involves increasing the access of firms to external finance, and therefore lower capital costs. This may, in turn, lead to improved competitiveness in even greater investment, higher growth and more jobs. This whole "chain" creates "wealth" and closes the circle by “returning” this wealth to the society, since it contributes to reduce the risk of financial crises and the huge economic and social costs that result, the improvement of social and labor relations, as well as development in areas of "corporate social responsibility", such as protecting the environment, supporting common social needs (health, education, sports) through sponsorships, grants, etc.

Consider the issue in "economic" terms; that is "Supply" and "Demand": In the equation of "State- economic” Corruption, the "Demand" relates mainly to the ones "having any kind of relationship" with the State Sector, who endeavor to provide unfair advantages (e.g. “peculiar” rental arrangements) in exchange for" appropriate "payments” ("kickbacks" or “starters” in Greek”). The "Supply" refers to the ones "having any kind of relationship" with the Private Sector, who are looking for, and of course they are willing to pay, in order to get these benefits unduly from previous ones. In general, the Corporate Governance is one of the main tools for controlling the side of the "Supply" in the Corruption equation.

The "Private-economic" Corruption, on the other hand, is more complex and the two most common forms in which it can be found are: Bribery and Professional Fraud. These are located mainly in areas of significant business Functions, such as: Procurement (making contracts/arrangements), Budgeting/Accounting, Financial Transactions (mainly Treasury), Distribution chain, R & D (access to unique/proprietary technical/commercial data - industrial espionage), etc.

Corporate Governance aims to promote honest and responsible behavior to conduct a business, adopting practices that are consistent with the legislative and institutional framework of the country in which it operates, and applying commonly accepted social values. For this purpose, adopt best practices and mechanisms, such as: the International Accounting Standards, Regulations of the Financial Markets Operations, "Property" Audit Methodology, Corporate Disclosure Policy (e.g. for Financial data), Limited access to information, control of capital inflows, etc., so as to enhance the "transparency" and to fight corruption, while reducing negative impacts. The establishment of an independent, company-concerned, Control Council, is also important, so as to represent and genuinely interest of shareholders, anticipate and prevent potential opportunistic behavior of senior executives (and/or "internal" shareholders), who are theoretically more prone to be tempted by the immediate benefit of corruption practices, i.e. money (e.g. cash, bonus) that they bring.

In practice, the most successful way of implementing a sound Corporate Governance is to enhance Business Ethics, by consolidating strong corporate culture where corruption documented condemned as unacceptable moral behavior and not just another issue of Risk Management. In this way, the Corporate Governance marks the creation of a strategic corporate identity oriented to "moral values." In this context, it establishes robust "transparency of payments” mechanisms, so as any cause of corruption (such as bribery, extortion, unfair competition) is disclosed quickly, and becomes directly reprehensible, punishable (by activating mechanisms of accountability and transparency, and sanctions against "participants") and, therefore, "unsustainable".

The main problem in this approach is the universal social acceptance of the double game of risk factors, which may have two "persons", as Janus: to condemn corruption, on a personal level, for ethical reasons, but to supplant the "honor" and the moral, in business activity, justifying any practice for profit. This contributes to the creation of two new cross-powered vicious circles, which create alienation between Society and both Public and Private Sector as:

1. The Society believes that most public functionaries participate in the dishonest practices of the private sector; mostly resulted from top-down pressures derived from common “understanding” between the heads of top management. This fosters corruption furthermore, since they all feel that the corrupt behavior ("all of them are bribed") is more or less given and any attempt to break this vicious cycle is impossible, "Don Quixotism" or "stupidity".
2. The Society does not expect from a private company to be honest but just (dishonest) profit-oriented; mostly resulted from top-down pressures. Throughout this cycle, enterprises are trapped and multiply disadvantaged by being victims of a peculiar "double, two-way blackmailing"; both from Society (due to confidence loss, resulted by the expected corruption behavior) and the Company itself (mostly derived from heads of top management and/or powerful business associations, tapped in the “underground” aid of corruption).

All this contradictory nature of modular relations and interdependencies creates a dialectic, which not only causes corruption but also justifies it, deconstructing the moral-social identity business and neutralizing the effective participation of society, alienating it from the economic-social chain and alternating the scope and nature of its participation.

Of course, all these phenomena and behaviors are reinforced by impunity, which is the most common, in contrast to the occurrence of the related risk, i.e. the obvious economic and moral damage (up to destruction) of individuals and businesses involved in corruption practices compared with the benefits gained.

Could we ever break this perverse relationship between the Companies and the other sectors of the Society ???

The answer is "YES"; with the commitment of all institutional, social and economic factors, which could be performed in many alternative ways, such as:

• Institutionalism: By amplifying the relevant international legal, political, institutional and regulatory framework, including both international and national strategies related to anti-corruption activities.
• Accountability: By increasing the control of Corporate Boards of Directors and its accountability to shareholders; e.g. by the mandatory establishment of an independent Corporate Control Council, in any enterprise, so as to address Fraud and Corruption issues, and by activation of whistle-blowing facilitation mechanisms (including prompt “cover” of internal whistle-blowers).
• Sociability: By obligatory linking of each and every company and/or economic entity with a real and measurable (by using specific metrics) Social Identity, as a metric of enterprise honesty and law-abiding, which would be a KPI (Key Performance Indicator) for State/Government funding and sponsorship. This would facilitate activities related to Corporate Social Responsibility (e.g. charity, promotion of outstanding ethical behavior, enhancement of Corporate Governance and Business Ethics), as essential corporate components.
• Scientific: By sponsorship (not only financial) of an extended professional research, with regards to Fraud and Corruption diagnosis, problems, consequences and solutions. The research should be held by scientific methods and with direct and universal participation of the both private and public/government sector, so as to create sound scientific data to demonstrate that corruption is really harmful to business and their competitiveness and to facilitate the design of optimal solutions (including implementation of efficient Corporate Governance mechanisms).

In any case, perhaps the most important thing to be done is the development of an appropriate corporate culture, which would make clear that: despite the fact that the Board of Directors of each company faces, each and every day, a plethora of risks, especially those associated with corruption and fraud and their potential effects, trying to do the best to prevent them, how they will really react in an actual crisis is the only thing that can either improve or devastated the reputation of the company, as well as the company itself.

Good Corporate Governance is a stable and infallible compass in this way and the critical/determining factor in the creation of sound socio-economic relations between business and society. Enabling sound coordination mechanisms of anti-fraud and anti-corruption campaigns gives the appropriate signal, both to the government and the private sector (companies, firms and/or competitors) that satisfying the demands of corrupted functionaries (government and others) is not a solution, so the best strategy is the de facto condemnation of unfair practices, the honest and clear entrepreneurship, as well as the healthy competition. Otherwise, companies will always be doomed to “star” in an endless “enterprise series” so called "the Mafia methods"...