Memo to Corporate America: Bribery doesn't payApril 26, 2012: 11:43 AM ET
It may be tempting in certain foreign markets to float a little money to key players in order to get business, but studies show it often doesn't pay off in the long run -- even if you don't get caught.
FORTUNE – This week, a spate of U.S. companies have been accused of unscrupulously bribing their way into foreign markets. Adding to Wal-Mart's debacle in Mexico, the Securities and Exchange Commission on Wednesday charged a former Morgan Stanley (MS) executive of bribing an official of a state-owned Chinese company to secure business for the firm. The SEC is also asking four Hollywood studios for information on deals they procured in China. In fact, at least 81 U.S. companies currently face bribery investigations.
The ethical case against bribery is a no brainer. Cheating is obviously wrong. But given the spate of companies embroiled in bribery cases recently, the business case doesn't seem quite as clear.
For many companies, bribery is simply the price paid to enter some of the world's toughest markets -- markets that can be lucrative. It's easy to see how paying off governments might speed up an otherwise slow and complex bureaucratic process. But even if executives never get caught, bribery actually ends up costing companies, studies show.
For Wal-Mart (WMT), bribes allegedly bought the retail giant everything from zoning approvals to reductions in builder fees, helping it build hundreds of new stores at a pace where competitors struggle to catch up, according to the New York Times. If the allegations are true, Wal-Mart appears to have gained plenty from the strategy. Whereas the U.K. is the chain's biggest overseas market , generating an average of 8% sales growth in 2000 to 2010, Mexico's lesser-developed market averaged 12% growth over the same period, according to London-based research firm Planet Retail.
Indeed, the gains are impressive. But it becomes less so once the hidden costs are factored in, according to a World Bank study by Daniel Kaufmann and Shang-Jin Wei. Companies that pay bribes actually end up spending more time negotiating with bureaucrats since the hopes of a pay-off give officials an incentive to haggle over regulations. For instance, in a separate study looking solely at the Ukraine, Kaufmann found firms that paid excessive bribes spent about 30% more time with government officials than firms that didn't.
What's more, companies pay about 10% of their earnings to corrupt officials, according Bloomberg, citing a study released last week by the Business Coordinating Council's Private Sector Economic Studies Center. Corruption ultimately breeds more corruption, as bribes give bureaucrats more incentive to raise red tape and regulatory hurdles, which in turn opens companies up to pay even more.
Of course, the costs are much higher if companies get caught. In 2008, German engineering giant Siemens (SI) paid a record $1.6 billion to U.S. and European authorities to settle charges that it routinely used bribes to secure large contracts and infrastructure projects around the world. At the time, the sum was the large fine for bribery in modern corporate history.
To be sure, while bribery has received more attention recently, it's relevant to look at the broader trend. Globally, the number of cases of bribery has stayed relatively steady over the years, says Kaufmann, former director of the World Bank Institute who is now a senior fellow at Brookings Institution. In 2003, bribes worldwide totaled about $1 trillion, representing 2% to 3% of the global economy. Kaufmann says it's probably around that level today. And while Avon (AVP) and Hewlett-Packard (HPQ) make headlines, only about 20% of bribes from around the world come from multinationals of wealthy countries including the U.K. and U.S., he estimates.
It's likely that there are many more cases that have gone unreported. However, it could also be that the public has started to hear of more cases as U.S. authorities become more aggressive about punishing corporate payoffs. As Fortune's Stephen Gandel pointed out earlier this week, federal officials are pursuing more bribery cases thanks to the Sarbanes Oxley Act of 2002 that effectively requires CEOs and CFOs to certify their companies' financial filings are correct. And that includes reporting bribes.
As it turns out, the culture of bribery and kickbacks is more prevalent in Mexico, China and Russia, at least according to Transparency International's 2011 Bribe Payers Index, which ranks the world's major economies by the tendency of their companies to offer bribes abroad. A high score reflected a low likelihood of bribery. The Netherlands and Switzerland both scored 8.8, the highest of 28 economies. The U.S. came close scoring 8.1. Mexico (7.0), China (6.5) and Russia (6.1) scored the lowest.
It might be easy to assume that bribery is just the way business is done in corrupt states, but at the end of the day, it almost always ends up costing companies more than they realize.