By Ken D. Johnson and Dana E. Heitz
The article explores how companies can build ethical value chains by addressing corruption through legal compliance and regional awareness. Ken D. Johnson and Dana E. Heitz highlight key frameworks and global case studies, that emphasize that protecting brand equity and fostering sustainability requires integrity, cultural understanding, and proactive governance.
Introduction
In an increasingly interconnected global economy, ethical value chains are a business and moral imperative. They ensure that value chains are equitable and thus sustainable, avoiding undesirable behaviors and actively contributing to the well-being of communities where raw materials are sourced. This approach results in job creation, improved living standards, and long-term development in these regions.
These are laudable goals. However, their success is not guaranteed, and practices such as corruption pose a significant obstacle. Not only can corruption severely hinder companies’ efforts to enrich local communities, but it can also cost companies dearly due to substantial fines and diminished brand image. Understanding and addressing corruption through legal frameworks and compliance initiatives is essential for building and maintaining ethical value chains.
Defining the Ethical Value Chain
An ethical value chain is characterized by practices that ensure fairness and responsibility from the source of raw materials to the end consumer. Some researchers define supply ethics as providing goods and services while adhering to an ethical code. Others go further and emphasize the importance of managing the flow of high-quality, value-for-money materials from innovative suppliers in a manner that meets societal norms. While an ethical value chain complies with the law, a legal value chain is not necessarily ethical. Instead, an ethical approach goes beyond minimal legal requirements to include equitable value chains that ensure economic benefits for source countries, often in the global south, particularly Africa.
According to Achilles, a global leader in sustainable supplier management, critical aspects of ethical supply chains include:
- Freedom of Employment and Association:Ensuring workers can refuse unfavorable transactions without economic coercion.
- Eradication of Child Labor:Prohibiting child labor in all forms.
- Safe and Hygienic Working Conditions:Providing safe working environments.
- Fair Compensation and Working Hours:Ensuring that originators of materials receive fair wages that allow for a decent standard of living.
- Humane and Non-Discriminatory Treatment:Promoting individual development and non-discrimination.
- Anti-Bribery and Corruption:Upholding strict anti-corruption measures.
- Environmental Sustainability:Ensuring the extraction and production processes are sustainable and do not deplete natural resources.
- Community Benefits:Ensuring that business operations benefit the entire community and avoid causing harm.
These principles guide supply managers in making ethical decisions, adding value by promoting fair and responsible practices beyond avoiding unethical behavior. This proactive stance can include community investments, environmental initiatives, and improved worker safety, advancing long-term business viability and social welfare.
Corruption’s Interference with Ethical Value Chain Operations
Corruption significantly threatens ethical value chains by distorting fair practices and damaging integrity. Within procurement chains, unethical practices such as favoritism, bribery, and deception can corrupt negotiations and decision-making processes. Transparency International highlights how corruption hampers economic growth, reduces investment quality, and undermines economic efficiency and productivity. It also distorts tax systems, reduces social spending, and harms human development—ultimately eroding state legitimacy and the rule of law.
For shareholders, corruption can divert talented workers to rent-seeking activities rather than productive endeavors, negatively impacting company growth and resource allocation. Even small facilitation payments intended to expedite processes can have detrimental effects. A World Bank study found that these payments, referred to as a “bribe tax,” significantly negatively impact company productivity.
Corruption also disproportionately affects low-income populations in host countries. Ineffective tax systems facilitated by corruption hinder wealth redistribution and reduce the government’s capacity to provide essential services. Corrupt public officials often divert public spending towards lucrative private projects, away from critical areas like healthcare and education, exacerbating inequality and poverty.
These impacts extend beyond immediate economic consequences. Over the long term, they also harm the health and education of the workforce. Corruption increases bureaucracy by creating more opportunities for small payments and erodes citizens’ trust in public institutions, crippling the rule of law and democratic processes.
Impact of Legal Regimes on Corruption
In the global business landscape, corruption remains a pervasive challenge that undermines fair competition and economic development and can negatively impact shareholder value. Various legal regimes have been established to combat corruption and promote ethical business practices.
U.S. Foreign Corrupt Practices Act (FCPA)
The FCPA prohibits U.S. firms and individuals from bribing foreign officials to obtain or retain business. It requires companies to maintain accurate books and records and implement adequate internal controls. The FCPA has extraterritorial reach, meaning it can apply to foreign companies and individuals if they engage in corrupt practices involving U.S. entities or U.S. “instrumentalities,” such as email or telephone systems.
Section 1502 of the Dodd-Frank Act
Section 1502 mandates transparency in the supply chain, aiming to cut off funding to armed groups involved in severe human rights abuses and corruption. This provision addresses corruption by increasing transparency and accountability in companies’ supply chains which use conflict minerals (tantalum, tin, tungsten, and gold).
German 299 StGB
Section 299 of Germany’s Criminal Code criminalizes giving and taking bribes in commercial practice. Together with other provisions prohibiting bribes and advantages to public officials, the German Code ensures a comprehensive approach to preventing corruption in both the public and private sectors. Unlike U.S. law, German law does not allow for facilitation payments, making it stricter in this regard.
German Supply Chain Due Diligence Act (LkSG)
The LkSG mandates that large companies uphold human rights and environmental standards throughout their supply chains. Companies are required to conduct risk assessments, implement preventive measures, and establish grievance mechanisms. This law emphasizes the responsibility of companies to proactively manage and mitigate risks related to corruption and human rights abuses.
EU Whistleblowing Directive
The Whistleblowing Directive requires companies to develop internal whistleblowing mechanisms, educate employees about these programs, and protect whistleblowing employees against retaliation. It relies on those most likely to be aware of corruption and provides a secure means of reporting it.
EU’s Corporate Sustainability Due Diligence Directive (CSDDD)
The CSDDD aims to foster sustainable and responsible corporate behavior throughout global value chains. Using a risk-based approach requires companies to identify and address adverse impacts on human rights and the environment most likely to arise in their operations and supply chains. With different obligations coming into effect over the next three to five years, the directive emphasizes transparency and accountability, pushing companies toward greater ethical compliance.
UK Bribery Act 2010
The Bribery Act makes it an offense for a UK national or person located in the UK to pay or receive a bribe, either directly or indirectly. The Act covers transactions in the UK or abroad, both in the public and private sectors. Like the FCPA, it has a broad jurisdictional reach. It applies to any person or entity closely connected to the UK, including foreign companies conducting any part of their business in the UK.
Case Studies: Anti-corruption as the Bedrock of Integrity
Again, a legal value chain is not necessarily an ethical one. To achieve a sustainable value chain that effectively minimizes the risk of corruption, companies must go beyond basic legal requirements and develop a strategy which accounts for unique factors, such as the nature of their business and the regions where they, and their suppliers, operate. Several companies illustrate this tailored approach in practice.
ABB Ltd
Swiss-based ABB has implemented robust business ethics standards emphasizing zero tolerance for corruption, continuous employee training, and rigorous monitoring. These standards address conflicts of interest, bribery, and political contributions. Employees are prohibited from accepting gifts that could influence business decisions and offering undue advantages to secure business.
BHP Group Limited
BHP’s Business Conduct Advisory Service provides a confidential platform for employees and external parties to raise concerns about business conduct. Available in multiple languages, this service ensures issues can be addressed outside typical management structures, promoting transparency and accountability.
Fluor Corporation
Fluor’s extensive ethics and compliance program, aligned with the World Economic Forum’s Partnering Against Corruption Initiative (PACI), reflects its zero-tolerance approach to corruption. The company’s support for anti-corruption education, such as the ‘Ethicana’ movie, underscores its commitment to ethical practices in the global construction industry.
Norsk Hydro ASA
Norsk Hydro conducts comprehensive risk assessments and integrity due diligence when entering new markets. The company reviews socio-economic conditions and potential partners’ backgrounds, maintaining high ethical standards while navigating cultural differences in perceptions of corruption.
Petroliam Nasional Berhad (Petronas)
Petronas collaborates with the Malaysian Anti-Corruption Commissioner to provide advisory services and training on corruption prevention. The Corporate Enhancement Programme emphasizes governance, risk management, and ethical business conduct tailored to country-specific issues.
Sasol Limited
Sasol’s Ethics line and dedicated ethics officers ensure that ethical concerns are reported and effectively addressed. The company’s technology-enhanced ethics system allows for strict access controls and improved reporting, fostering a culture of integrity.
Tullow Oil plc
Tullow Oil’s industry partner forums in Ghana, Bangladesh, and Kenya focus on anti-bribery and corruption practices. These forums raise awareness about the UK Bribery Act and Tullow Oil’s Code of Business Conduct, engaging local businesses in ethical practices.
Embracing Anti-Corruption Compliance for Enhanced Shareholder Value and Reduce Reputational Risks
Adopting ethical practices and complying with anti-corruption laws can enhance a company’s corporate image and brand equity, as socially responsible companies often achieve greater financial returns and consumer loyalty. Firms with a quantifiable social responsibility programme have been shown to achieve higher returns on equity, and social performance has been positively correlated with financial returns.
Ethical supply chains also improve product quality, reduce costs, and enhance global competitiveness. Consumers are more likely to buy from companies with a positive reputation for ethical behavior, and companies with deep insight into their value chain have more chances to identify opportunities to increase quality and efficiency. Moreover, ethical practices can motivate employees, foster customer loyalty, and provide a competitive edge in the market.
As companies like Petronas and Tullow Oil are aware, understanding local and regional cultural contexts is crucial for successfully implementing anti-corruption regulations. Bribery and corruption often take on regional dimensions, and companies must navigate these complexities to maintain ethical standards. Engaging with local communities and understanding their unique challenges can help companies implement effective compliance programs and foster long-term sustainability while also providing companies with another opportunity to brand themselves as committed to ethical practices.
Conclusion
Building and maintaining ethical value chains is not just a moral but also a business imperative. Addressing corruption through robust legal frameworks and compliance initiatives is essential for fostering equitable value chains that benefit all stakeholders. By embracing ethical practices, companies can enhance their corporate image, promote brand equity, and contribute to sustainable development in source countries. However, the best-laid plans can go awry in foreign jurisdictions without a deep understanding of and respect for local and regional cultural norms. Cultural knowledge is crucial for successful implementation in foreign jurisdictions, ensuring that anti-corruption efforts are effective and sustainable. Companies must prioritize cultural competence and legal compliance to create and maintain ethical value chains globally.
Dana E. Heitz
