1. PRIVATE SECTOR APPROACHES TO FIGHTING CORRUPTION Ruslan Stefanov Coordinator of the Economic Program Center for the Study of Democracy, Sofia, Bulgaria

2. Presentation outline Causes, effects, and interrelation of corruption in the public and the private sectors – Traditionally, the public sector is tasked with countering corruption. Why is the private sector equally important in fighting corruption? International conventions to fight corruption and bribery and their implementation Private sector approaches to fighting corruption – Corporate governance, corporate social responsibility – Other approaches: codes of conduct, rules of disclosure, eliminating conflict of interest, etc. Private sector governance is important to reducing corruption and its negative effects on growth.

3. The chicken and egg question: Corruption in the public and private sectors Private sector corruption Public sector corruption Democracy and markets reinforce each other, as does the quality of governance in the public and private sectors.

4. Why is the private sector important in limiting corruption? The private sector generates as much as 80 percent of the world’s GDP It takes two to make a bribe work Private/public and private/private sector corruption Corporate culture spreads fast in the age of globalization and is important for shaping the emerging markets Private sector has gained substantial market power globally, regionally, and nationally Better corporate governance can reinforce the effects of good public governance.

5. What if the private sector is corrupt? Squandering of resources Lower economic growth Indirect tax generating deadweight loss Exponential negative effect on developing countries Lower competitiveness Lack of level playing field Skewed choices in public procurement Opaque and costly business environment Negative effects on democracy Distorted social perceptions of democracy and markets

6. Economic fallout of corruption Weak corporate and public governance makes economic crises longer and more painful – e.g., Asian or Russian financial meltdowns In corruption-ridden environments, companies cannot compete fairly and are not resilient As the scale of the private sector expands internationally and domestically, economic consequences of corruption also rise Private sector corruption has similar negative impacts to public sector corruption: fewer jobs and lower growth.

7. What can governments do? Ensure good, open business environment Businesses should have open and equal access to the government’s ear Independent business associations should serve as platforms for the voice of the private sector The more clarity and predictability in government decisions affecting the private sector the better Provide the right legal environment, rule of law Whistleblower protection, fair competition, etc. Ensure transparent privatization, require good corporate governance, provide legislative base for business associations, small investors, etc.

8. International conventions U.S. Foreign Corrupt Practices Act of 1977 Amended in 1998 by the International Anti-Bribery Act OECD Anti-Bribery Convention Signed by 37 developed countries in 1997 United Nations Convention against Bribery Signed in 2005 by 140 countries The issue of implementation Enforcing these rules is especially crucial in large multinationals that operate in developing countries Anti-bribery conventions are important in shaping business in emerging economies, but companies should also have their own anti-bribery and integrity policies.

9. Higher social expectations from the private sector Corporate governance Corporate social responsibility Sustainable production As the world becomes more flat, scrutiny and expectations placed on private companies rise.

10. Principles of good corporate governance in emerging markets The principles of transparency, accountability, fairness and responsibility must act together In emerging markets, there should be more emphasis on ownership vs. management Eastern Europe, for instance, has much more concentrated management control than the West The need to protect minority shareholders’ rights The need to build corporate governance culture to overcome the trap of captured “paper” institutions Compliance requires external scrutiny

11. Instruments for fighting corruption in the private sector Strong business associations Indigenously created and concerned not just with protecting the interests of their constituents, but ensuring that they abide by the rule of law Codes of conduct Disclosure rules Mitigating conflict of interest No single stand-alone instrument is effective in anti- corruption: complex problems require complex solutions.

12. Improving corporate governance in risk areas In order for anti-corruption measures to succeed, companies (esp. multinationals) must address specific areas of risk: Procurement Sales and marketing Inventory control Protecting trade secrets Hiring The way large multinational corporations do business in a foreign country is crucial to the way the corporate culture of that country will emerge

13. Conclusions Private sector governance is as important as public sector governance in fighting corruption Economies around the world have become much more dependent on private capital flows As the markets develop and grow, they need good democratic institutions that support free market mechanisms Both in the public and private sector Public and private sector governance is interconnected and mutually reinforcing, since in the long term democracy and markets can only progress hand in hand.

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