The implementation of a sound system of corporate governance involves multiple aspects. The following section is limited to the core issues that have an impact on corporate involvement in corrupt practices and, in particular, addresses the challenges previously outlined. Implementation of the measures set-out below can significantly contribute to the creation of transparent checks and balances that can expose corrupt corporate behaviour. The relevance of individual measures will, however, vary from country to country.

In order to address corrupt business activities, companies themselves need to take a clear stand on the issue. The message sent by the executives and board of a company to employees, to business partners and, indeed, the wider public must be unambiguous: corrupt behaviour is not tolerated. This broad commitment needs to be translated into an internal policy that sets out clear guidelines for employees and business partners of what is expected of them.

Appropriate structures should be put in place to monitor compliance and address new issues as they arise. Ideally, these should be integrated into existing management systems. Training with regard to ethical behaviour - as well as ethics programmes in general - should be implemented to ensure that company policy is sufficiently communicated to all employees, as well as to business partners. To be effective, ethics programmes must link cultural and organisational factors, weaving into the corporation’s identity via their alignment with material incentives and disincentives (such as non-payment of bonuses and sacking for gross misconduct).

A company’s internal policies and systems can be developed along the following lines:

• Decide on a no-bribes policy and on implementing a complementary programme;
• Plan the implementation of the policy and programme;
• Develop the content of the programme, including a review of implementation capacity, development of training sessions and preparations for incidents of bribery;
• Implement the programme, including communication of the new policy to employees and business partners and implementation of training programmes;
• Monitor progress, including capturing internal experiences and obtaining external verification;
• Evaluate the programme, including analysing feedback from the monitoring process and deciding on improvements.

(Source: ‘Business Principles for Countering Bribery: TI Six Step Process’, Transparency International: July 2005, http://www.transparency.org/building_coalitions/private_sector/business_principles.html#sixstep)

Supplementing a ‘top-down’ commitment to countering corporate corruption, good corporate governance requires the establishment of ‘bottom-up’ structures, for example through whistle-blowing mechanisms. Adequate protection must be offered to those who wish to come forward to report deviations from ethical corporate standards. This can be done, for example, via confidential telephone services or intranet sites through which employees and business partners can address concerns or pass information. To make such services effective, genuine concerns must be listened to and acted upon in a timely manner by the responsible board committee. The legitimate use of whistle-blowing mechanisms must not provoke material retaliation in the form of stalled promotions or payment of bonuses.

In order to mitigate the potential for an over-concentration of power among executive officers, the quality and quantity of contributions by non-executive board members (and, in the two-tier system, the supervisory board) must be ensured.

Recruitment: Companies can benefit from recruiting directors not only from existing business networks and listed companies, but also from the not-for-profit and government sectors. Recruitment should be based on professional qualifications and experience only, and should occur via a transparent process.

Training: Newly appointed directors need to learn more about their company and should receive appropriate training and a tailored induction.

Information: While managers have a natural informational advantage over non-executive directors, measures to increase and improve the information boards receive should be introduced. Independent non-executive directors should be the first to receive information via whistle-blower mechanisms.

The Enron experience indicates that the existence of apparently independent directors is, on its own, insufficient to prevent fraud and corruption. Non-executive directors can themselves be vulnerable to conflicts of interest. Indeed, over recent years there have been several attempts to hold non-executive directors liable for failing to fulfil their fiduciary duty or duty of care. In principle, however, the presence of independent and challenging minds on the board can help mitigate the power of management to unilaterally set the company’s agenda.

External auditors: reducing conflicts of interest
In order to increase the likelihood that auditors thoroughly check companies’ financial statements, raise possible incidents of fraud and corruption with management and inform the relevant authorities of such incidents, the issue of potential conflicts of interest between auditing and advising/consulting must be addressed.

This means two things: (a) companies should set out clear criteria according to which they award non-audit advisory work to their auditors, specifying the kinds of work that cannot be performed by auditors; and, (b), companies should regularly rotate their auditor in order to avoid dangerously close relationships and loyalties.In the Unites States, the Sarbanes-Oxley Act stipulates that both the lead audit or coordinating partner and the reviewing partner must rotate off the audit every five years.

Furthermore, there is a need to ‘audit the auditors’, possibly by introducing further mandatory or regulatory mechanisms that ensure high quality audit work. In many countries, it is necessary to create institutions to ensure that auditors are professionally qualified to perform audits.

Shareholders can play a significant part in changing corporate behaviour and reducing incidents of corruption and fraud. To do so, they need to be active i.e. they must ask companies for detailed information on their corporate governance systems, develop their own standards with regard to acceptable ethical behaviour and engage with companies that do not fulfil these expectations.

Some experts suggest that institutional investors, such as pension funds, adopt a three-point ‘Global Corporate Constitution’ requiring companies they invest in to: a) fully disclose their impact on society; b) reveal how much they spend on involvement in the elective, administrative and regulatory public processes; and c) obey the law. These three elements form an interrelated and self-reinforcing basis for corporate accountability. (Source: Robert A.G. Monks, The New Global Investors, Capstone: 2001)

Some institutional investors, such as the California Public Employees' Retirement System (CalPERS) in the US, the Universities Superannuation Scheme (USS) in the UK and ABP in the Netherlands, have begun actively using their votes at annual general meetings to hold managements to account. Such active investors, however, still form a small minority.

To this day, corporate disclosure on corporate governance and anti-corruption policies is still relatively limited. Such disclosure should, however, be increasingly demanded as it provides interested parties - including anti-corruption campaigners – with benchmarks that can be used to evaluate the effectiveness of the governance systems of particular corporations.

Governance models

Corporate governance standards require improvement in many countries. Introducing standards that reflect international good practice, but have little relevance to on-the-ground realities is likely to be insufficient. What is required is an evolutionary approach to corporate governance based on continuous improvement. National practices and structures should form a starting point from which realistic objectives can be set. Such an approach requires increased knowledge of decision-making processes and balances of power within companies themselves. Broader and deeper analyses of effective systems of corporate control are therefore required. It is also important to recognise that good corporate governance systems may look very different from country to country.

It is insufficient for companies to raise their standards of corporate governance on an individual basis. Companies operate in the wider context of regulations, rules and laws that strongly influence their ability to implement good corporate governance. Furthermore, international investors usually assess country-wide corporate standards and not only individual corporate approaches. It may, indeed, prove prohibitively expensive for an individual company located in a country with poor investor protection and poor economic development to raise its own corporate governance standards to such an extent that it can improve its investor rating and increase access to capital. (Source: Craig Doidge et al, Why do countries matter so much for corporate governance?, American Economic Association: 2004,http://www.cob.ohio-state.edu/fin/dice/papers/2004/2004-16.pdf)

It is therefore essential to upgrade regulatory frameworks and national incentives for companies to improve corporate governance standards. Particular measures that should be implemented include:

• Statutory basic rules on accounting and disclosure standards;
• Regulatory authority with the power to sanction misbehaviour;
• Sufficient resources and trained personnel to ensure corporate compliance through control and investigation;
• Criminal prosecution of illegal corporate behaviour.

There is now widespread recognition that basic regulatory oversight leads to the improved functioning of markets. Financial authorities that ensure basic standards - and impose fines on those who misbehave - help to ensure a level corporate playing field. Even in the developed world, however, regulatory institutions often lack the resources and human capital to investigate potential rogue companies. To make corporate governance frameworks work, such agencies must be adequately supported to make sure they can actually fulfil their supervisory mandate.

Despite the importance of enhancing regulatory frameworks, however, written laws and formal law enforcement represent only a part of the overall picture. A comprehensive approach to tackling corruption by promoting good corporate governance must also involve the development of corporate standards based on professional values and expertise. If many people genuinely subscribe to the values underpinning corporate governance, then this will promote “voluntary compliance” - a conviction-based, highly diffuse form of compliance that complements more formal enforcement. The task of disseminating corporate governance values (across countries, sectors and company sizes) is an ongoing one and international standards and pressures can help. Business expertise in deploying the various internal management tools and external services (audit, rating systems) is also an important element in tackling corporate corruption.

TI's key recommendations in this area include:

• Translate corporate rhetoric with regard to addressing corrupt behaviour into concrete corporate policies. This should be backed-up by implementation of a system of processes, controls and incentives for complying with company policy.
• Relate corporate remuneration and promotions to financial and ethical performance.
• Enhance whistle-blowing mechanisms. These are crucial in exposing corporate corruption and need to offer credible guarantees of confidentiality and serious consideration of complaints.
• Strengthen the position of independent, non-executive directors on corporate boards. This requires more diverse recruitment, improved qualifications, in-depth training and induction and better information about non-executive directors (or, in two-tiers boards, the supervisory board in general).
• Restrict consultancy and advisory work by auditors only to audit-related or tax-compliance work. A different company should provide all other types of services. Audit companies should be rotated at regular intervals.
• Mobilise shareholders to take an increased interest in how companies are managed and, consequently, in their long term performance and sustainability.
• Increase disclosure of corporate governance practices. Institutional investors, the media and civil society groups should actively engage with companies on these issues.
• Make available to national regulators sufficient resources to check market actors, enabling authorities to spot and punish unacceptable behaviour.
• Complement regulatory frameworks via deepened and expanded professional initiatives that seek to strengthen voluntary compliance with good corporate governance standards.