A transparent roadmap to recovery

©Larry Downing/Reuters

Governments must put transparency and accountability at the heart of all rescue and reform measures if they are to regain public trust and investor confidence. Here is why.

As the effects of the global financial crisis reverberate around the world, millions of people face an uncertain future, while valuable progress on such issues as poverty, human rights and climate change is at risk of stalling.

Efforts to steer us out of the financial crisis and back on the road to economic growth have involved unprecedented amounts of money. We have witnessed the biggest corporate bail-outs in history, and leaders at the G20 summit in April announced that countries' fiscal expansion will total US$5 trillion by the end of 2010.

While it is clear that the global financial crisis demands coordinated, bold and decisive action, any steps are likely to be frustrated if they are not grounded in transparency, accountability and integrity. As recently noted in this magazine, the combination of an insatiable demand for high-risk financial products and flawed credit ratings resulted in the markets becoming impenetrably opaque. When this lack of transparency and regulatory failure became apparent, investor confidence disappeared and the markets collapsed.

To restore investor confidence and public trust, governments must ensure that transparency and accountability are at the heart of all rescue and reform measures. The public has a right to know how tax money is being used. All the terms and conditions in bail-out programmes should be fully disclosed. The credibility of governments' efforts is at risk if companies are not required to disclose information on how taxpayer money is being spent. Failure to do so will only result in public mistrust and frustration at a time when support and collaboration are crucial.

The G20 tasked the International Monetary Fund and the newly announced Financial Stability Board to provide an early-warning mechanism to avoid similar crises in the future. Transparency and accountability must be at the forefront of this effort. Civil society must be involved, too, as it is well positioned to provide credible, constructive input and monitoring, and gives a voice to the people most affected by the crisis.

A more consistent and internationally coordinated supervisory and regulatory framework of all financial institutions should include agreed accounting standards and the requirement that financial institutions report all derivative products and off-the-books entities. Action also needs to be taken to prevent conflicts of interest in the activities of rating agencies, and in relationships between financial firms and the public sector. Worryingly, more than half of the 73,132 people from around the world who responded to Transparency International's general public opinion survey, the Global Corruption Barometer 2009, believe that bribery is commonly used to shape public policies and regulations in companies' favour.

The OECD's focus on tax havens and the resulting agreement by several countries to adopt OECD standards are a positive development. However, international cooperation and disclosure need to go further still. Countries should divulge information for corruption investigations, too; those nations that refuse to do so should be listed as non-cooperative.

Companies also have a responsibility to set the ground for sustainable and equitable growth. There is concern that economic uncertainty will lead some executives to cut corners and resort to bribery in order to secure business. However, recent corporate scandals show that rather than securing contracts and lucrative profits, corrupt practices do not pay. Moreover, in the current climate, many businesses cannot afford the associated damaging publicity and hefty fines.

Foreign bribery is a commercial barrier that distorts competition and adversely affects development and the poor. Companies operating in countries where corruption is widespread can no longer cite local conditions as an excuse. In a globalised world, accountability must be guaranteed across borders and reach all the way down supply chains. It is more important than ever for companies to ensure that their anticorruption systems are robust and rigorously enforced, and for all countries to fully commit to the OECD Anti-Bribery Convention.

Transparency International works with multinationals and non-corporate stakeholders to develop effective and practical tools to mitigate corruption risks. For example, the Business Principles for Countering Bribery provides a model of good practice adaptable to different company sizes and settings, while Resisting Extortions and Solicitations in International Transactions (RESIST) addresses companies' vulnerability to solicitation and extortion.

Transparency International has also seen great success with its "integrity pacts" in public contracting. An agreement between a government and all bidders for a public contract, an integrity pact sets out rights and obligations to the effect that neither side will pay, offer, demand or accept bribes, collude with competitors to obtain the contract, or engage in such abuses while carrying out the contract. Violations of these standards result in sanctions ranging from loss of contract, forfeiture of the bid and liability for damages, to blacklisting bidders for future contracts and taking disciplinary or legal action against government employees. In Argentina, a clean and open bidding process, involving an integrity pact monitored by Transparency International, resulted in the municipal government of Morón saving $13 million compared to the costs of the previous four-year contract.

By implementing such tools and honouring the principles of the UN Global Compact and the World Economic Forum's Partnering against Corruption Initiative, companies can send a powerful signal to stakeholders, investors and business partners that they are committed to clean, ethical business.

Good corporate behaviour, though, demands more than being seen to subscribe to the tenets of social responsibility. Management must ensure that transparency, accountability and integrity are instilled at the very core of their operations. For instance, publicly listed financial-service firms in all countries should fully and publicly disclose any shareholdings owned by directors to protect against any conflicts of interest.

Management must also be vigilant that it does not inadvertently encourage corrupt practices. Employee incentives need to be carefully formulated to avoid promoting excessive risk-taking, cutting corners and conflicts of interest. There should also be procedures-and protection-for whistleblowers, since they are often the only people to raise the alarm about malpractice involving an entire team or subsidiary. Above all, the message from senior management must be clear: corruption cannot and will not be tolerated.

Rescue and reform measures must not be limited to the industrialised nations. Experts caution that the economic downturn could have disastrous humanitarian consequences. The UN Millennium Campaign reports that the fight against poverty has been pushed back by up to three years, while the UK's Department for International Development has likened the crisis to a tsunami, warning that 90 million people will be forced into poverty by the end of next year. It is critical that outstanding aid commitments are honoured. The increase in funding to the IMF and World Bank needs to be accompanied by accountability mechanisms and transparency requirements to make sure that aid truly benefits those in greatest need.

The complexity and opacity in financial markets that led to the global crisis should serve as a stark warning. Rescue and reform measures will fall short of their aims if they are not forged in the spirit of transparency, accountability and integrity to the benefit of everyone.

References  

Transparency International (2009), Global Corruption Barometer, Berlin, June. 

See www.transparency.org

See OECD work against corruption at www.oecd.org/corruption    

©OECD Observer No 273, June 2009




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