5.3.1 Costs and reputational risk

It has been calculated that in many countries corruption adds ten per cent to the cost of doing business, and that corruption adds as much as 25 per cent to the cost of public procurement. This undermines business performance and diverts public resources from legitimate sustainable development.1 Besides the costs of bribes and facilitation payments, the additional costs include substantial legal and advisory fees, the costs of additional personnel and fines. Due to these added costs of doing business, the advantage of outsourcing production to low-wage countries could easily be negated. Moreover, the investigation and prosecution of corrupt acts diverts managers from doing their jobs, since such proceedings are extremely time-consuming and stressful.

Company experiences show that an accusation of malpractice or corruption can in itself damage a company's reputation, even if a court subsequently determines that the company has not been involved in corrupt practices. It is therefore very important for companies to be quick to counter unfounded allegations by demonstrating to the public authorities or society at large that they have effective mechanisms, policies and internal controls in place aimed at preventing corrupt practices.2 A direct consequence of a damaged reputation is the loss of credibility, i.e. public trust in a company, which will subsequently result in a loss of business opportunities, including the chances of attracting equity and loans on favourable terms. It will also become more difficult to attract and retain talent. People will think that when the company does not apply good financial internal controls, many things will go wrong within its operations. The potential damage that corruption can cause to companies is therefore considerable.

In addition to the above-mentioned risks, there are many other reasons why companies should want to prevent corruption, some of them being the following. Corruption is considered to be one of the factors that result in a reduction of the share price. Investors will be afraid that the quality of management is not good.3 FCPA jurisprudence shows that anticipated mergers or acquisition agreements have been cancelled because due diligence investigations regarding the target company have revealed a corruption-related incident.4 A company's potential liability for corrupt practices clearly constitutes a potential risk for a successor company. Planned joint venture contracts with local companies may also be cancelled if a due diligence investigation were to reveal involvement with corruption on the part of the future jointventure partner. In this respect, a relevant observation is that business models are changing from the traditional in-house production models to new models that are based on a globalised world in which companies through the internet are connected with production units in many countries. These outsourcing, insourcing, offshore production and supply chain models depend on local (joint-venture) partners everywhere in the world (see also section 1.1 supra). Corrupt practices employed by local business partners can therefore potentially negatively impact any company in the business line.

Another form of corruption is private-to-private corruption which disrupts competitive markets. Since corruption increases costs relative to profits, real price competition will be blurred due to the fact that open, fair and transparent competition among potential vendors is rendered impossible. Sellers of goods with better offers or lower prices are possibly outmanoeuvred by others using non-transparent methods. Private-to-private corruption also undermines the corporate loyalty and accountability expected from directors, managers and employees. They are obliged to act for the benefit of their companies, their stakeholders, and in accordance with the instructions of their superiors.5