08 April 2020 by Sophie Ogilvy
What does anti-bribery and corruption transparency look like for a responsible business?
As companies look to 2030, there are calls on companies to recognise the business case for public disclosure around their anti-corruption efforts, review their current level of disclosure, and build improvements to practices and disclosure into their strategic business plans.
2019 saw large swathes of corporate leaders make bold statements around corporate purpose and a significant shift to stakeholder capitalism. The well-cited August 2019 Business Roundtable announcement signalled a significant change from the long-held primacy of shareholders to a commitment from CEOs to meet the needs of all stakeholders. Equally, BlackRock CEO Larry Fink’s most recent CEO letter calls for “accountable and transparent capitalism”, while recent shareholder resolutions and investor engagement with companies demonstrate a commitment by investors to hold companies to account for the roles, they play in contributing to, and solving some of the world’s most challenging problems. Indeed, where companies have not in the past been expected to engage in sustainable development, the role of the large corporate is now to be a global player; accountable to many.
In order to tackle the pressing global environmental, social and governance issues we are all facing in a meaningful way, corruption and bribery cannot be ignored. In fact, given the corrosive effect of corruption on sustainable development, public trust and long-term economic prosperity, tackling corruption should sit squarely at the core of responsible business activities. It is the responsibility of corporates to ensure that their activities do not encourage or support corrupt systems. Being transparent about their activities in this area is critically important – it is no longer enough for companies simply to imply that they are doing the right thing; they need to demonstrate how they are doing the right thing to give reassurance to their stakeholders that they are net contributors, not detractors.
Being transparent is not a new concept for corporates. In fact, transparency is increasingly becoming a norm in the corporate world. Unfortunately, there is a notable inconsistency between the areas in which companies choose to publicly disclose information. For example, whilst many companies make explicit, detailed disclosures related to modern slavery and their environmental impact, a 2018 analysis by the Alliance for Corporate Transparency of companies reporting under the EU Non-Financial Reporting Directive assessed over 100 companies and found that this is not the case when it comes to governance and anti-corruption risks. The Alliance’s research found that “while the vast majority of companies acknowledge in their reports the importance of environmental and social issues for their business, in only 50% of cases for environmental matters and less than 40% for social and anti-corruption matters, this information is clear in terms of concrete issues, targets and principal risks”.
Whilst meaningful disclosures around anti-corruption currently lag behind environmental and social disclosures, there are increasingly more and more reasons for companies to disclose around their governance and anti-corruption risks. Companies have a responsibility to ensure that these disclosures are not overlooked in favour of ‘greenwashing’ and other more attention-grabbing sustainability commitments and disclosures.
Pressure is mounting whether through new legislation, evolving investor requirements or the company’s own need to build trust with employees, customers and the wider public.
A strong legislative environment is one method to ensure companies disclose information. It is notable that companies are currently much more explicit about their modern slavery related risks, than their anti-bribery and corruption risks. In the UK context, this is due to the UK’s Modern Slavery Act 2015 which places prominence on board oversight of Modern Slavery Act statements and which legally requires companies to prominently publish modern slavery statements on their website.
Legal obligations concerning anti-corruption are advancing corporate transparency, including the EU Non-Financial Reporting Directive, which requires applicable entities to disclose material information on anti-bribery and anti-corruption matters. Such legislation advances and demands the normalisation of corporate transparency and leading companies will recognise this direction of travel and take the front foot in disclosing more around their anti-corruption risks.
Moreover, the concerns of responsible investors are also increasingly influential in relation to governance and anti-corruption disclosures. As of February 2020, there are over 2,900 investor signatories to the United Nations Principles on Responsible Investment. Principles 1, 2 and 3 require signatories to: “incorporate ESG issues into investment analysis”; “incorporate ESG issues into our ownership policies and practices”; “seek appropriate disclosure on ESG issues by the entities in which we invest”. These principles highlight the responsible investor drive for disclosures around governance and anti-corruption, as well as environmental and social disclosures. Many investors therefore expect, if not require, companies to make meaningful disclosures around anti-corruption, in order to adhere to these principles. Investors such as Hermes Investment Management and Norges Bank Investment Management are already demanding detailed information from companies on how they manage their non-financial risks related to anti-bribery and corruption.
Employees and customers increasingly demand companies to not only reassure them that they are acting with purpose and integrity, but to show how they are doing this. Through transparent reporting, companies are able to tell their story in a more authentic way. This builds and maintains trust, helps companies to manage their reputation, and enables legal compliance, all of which supports and increases a company’s competitive advantage.
Transparency International UK is calling on companies to embrace transparent reporting of their activities to further combat corruption.
What has been lacking is clear and comprehensive guidance that recognises the dilemmas companies face when determining what to disclose and how best to do it in a meaningful way. There has also been a lack of clarity as to what is desired from companies in terms of anti-corruption disclosures as they develop their strategies for the next decade. It is with this in mind that the Business Integrity team at Transparency International UK undertook extensive research into corporate transparency in anti-corruption and developed Open Business.
We undertook extensive research and identified five key areas that are at high-risk of corporate corruption where corporate governance transparency is vital to business integrity, reduced corruption and ultimately sustainable development. These key areas are:
• anti-corruption programme transparency
• beneficial ownership transparency
• organisational structure transparency
• country-by-country reporting transparency
• corporate political engagement transparency.
Taking beneficial ownership transparency as one of the key measures to tackle corruption, the links between ESG concerns can be shown when, for example, anonymous companies are used as vehicles for corrupt practices including money laundering, bribery, and tax evasion. The facilitation of flows of dirty money and tax abuses deprive governments of the necessary resources required to support the rule of law, infrastructure and public goods.
The 2016 Panama Papers and the 2017 Paradise Papers leaks demonstrated that individuals who control assets can remain behind the scenes by setting up anonymous companies and using these companies for tax abuse.
These revelations led to investigations in 79 countries, and by 2018, the recovery of more than US$500 million in taxes by tax authorities. In response, beneficial ownership transparency helps to trace criminals, and reduces the risk of money laundering and tax evasion. We are asking companies to publicly disclose information on their own beneficial owners, to demand more beneficial owner related information from their companies and to advocate to governments to adopt data standards for ownership disclosure.
Another explored area of disclosure is corporate lobbying and political engagement. Lobbying is a legitimate activity when done responsibly. However, opaque government decision making that favours corporate bottom lines over the public interest has been a key driver behind the lack of public trust in both government and corporates and in undermining government efforts to legislate in the public interest. For example, lobbying by certain sectors has blocked or watered-down key measures to tackle climate change. Transparent communication around the policies and activities which make up a company’s engagement with the public sector build the bridge of trust and demonstrate clearly how a company is acting responsibly in its political engagement.
In short, in order to communicate to all stakeholders a consistent and comprehensive approach to anti-bribery and corruption where a lack of integrity has nowhere to hide, there is a need for more extensive and meaningful disclosure.
For the readers whose first reaction is that this degree of corporate transparency is not achievable – many challenges against disclosure have been anticipated and discussed in Open Business. The final section of our report presents responses to some of the challenges that might inhibit companies from disclosing information including: privacy legislation as a potential barrier to beneficial ownership disclosure; the legal risks of publishing alleged breaches of a company’s code of conduct; competition law as a deterrent to the publication of supplier information; the difficulties of managing differing public disclosure requirements across jurisdictions; and practical difficulties of ABC data collation and publication. The report can be found online and we invite discussion around the principles presented.
By offering consolidated guidance and outlining our corporate transparency principles, the report enables companies to adopt significant steps towards anti-corruption disclosure across the five areas identified.
Open Business serves as a guide for better corporate practice by inspiring companies to become increasingly transparent and demonstrating the commercial benefits of doing so.
The question that companies need to start asking themselves is not “why disclose?” but rather “why not disclose?”.