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The scale of private sector corruption has become not only scandalous but a disincentive to the growth of the global economy. Transparency International 2009 Global Report on Corruption warns that if corruption goes unchecked in the private sector, the sector might become a destructive force rather than a source of dynamic and innovative growth.
The scale, dimension and spread of private sector corruption globally are staggering. Transparency International in its recent 2009 Global Report on Corruption warns that “if corruption goes unchecked” in the private sector which is supposed to be a source of innovative growth across economies, the private sector may turn into a “destructive force that undermines fair competition, stifles economic growth and political development and ultimately undercuts our existence”. The recent shake-up in Nigeria’s banking industry following revelations of misdemeanour bordering on actions that are detrimental to the interests of depositors and creditors, brings home the dimension and magnitude of private sector corruption, which TI defines as the “abuse of entrusted power for private gain”.
While the TI report provides copious evidence of corrupt relationship between private sector operators and the public sector officials as it notes that “two in five polled business executives have been asked to pay a bribe when dealing with public institutions” and that government officials received bribe believed to total between US$ 20 and US$ 40 billion annually, the scale of corruption within the private sector is however worrisome.
The report frowns on the ways and manners managers of businesses who are expected to run these businesses for the long term collective is interests of shareholders, customers, suppliers and relevant stakeholders end up focusing “opportunistically on short term profits that influence their bonuses than on long term profits.”
The astronomic and even illogical growth in CEO compensation in the last two decades is a source of worry an index of the abuse of managerial powers by CEOs. TI 2009 Global Report on Corruption remarks that “the immense growth in executive remuneration is partly due to board of directors ceding to executives interests rather than exerting independent oversight on management in the interests of shareholders”.
The financial crisis that became evident in 2007 showed the extent boards of directors relegated their duties and allowed management of companies to ride roughshod over company affairs, awarding themselves fabulous compensations even when it became apparent “that their risky investment strategies had pushed these companies to the brink of bankruptcy…”
Increasingly it became evident that “when executives award themselves massive compensation packages without adequate oversight they divert company resources into their own pockets”. Between 1993 and 2003 the compensation packages for top five executives of public companies in the USA was up to US$ 350 billon, “absorbing 6.6 per cent of net income during the period”.
Analysts have explained this astronomic growth in CEO compensation packages as the result of the increasing use of stock options in rewarding CEOs. Though such equity based pay option has been encouraged as a means of synchronizing the interests of management “more closely with overall corporate performance”, experts do observe that this equity reward system “is often not so much an incentive device as a somewhat covert mechanism for self-dealing”.
However, the misalignment between executive compensation packages and the long term growth and performance of companies is a source of concern. The Report reveals that between 2000 and 2004 “a sample of sixty poorly performing US companies lost a total of US$ 769 billion in market value; while their top ten managers earned more than US$12 billion”.
The incidence of private sector corruption has become a major issue facing many advanced economies as corporate crimes have in recent times rocked economies across the western hemisphere. The widely reported corporate scandals that affected Enron, WorldCom and Tyco are typical cases of white collar crimes. As at 2005, it was estimated that the total cost of employee fraud or white collar crimes to public companies in the United Kingdom was up to 2 billion British Pounds. In the case of the United States, a 2006 report of the Association of Certified Fraud Examiners estimated that more than $600 billion is lost through white collar crimes.
Though the paucity or near absence of related statistics in Nigeria may not permit any similar estimate, the significant incidence of official corruption in Nigeria’s private sector cannot be disregarded especially when it affects public companies driven by investors funds and banks holding depositors funds.
Taking the case of Nigeria’s banking sector, the present responses of the Central Bank of Nigeria and the Economic and Financial Crimes Commission to the current non-performing loan debacle are merely a reactionary and stop-gap measure. It is necessary that laws or policies meant to alert or forestall corruption in the workplace are created and implemented.
One effective and proven method of forestalling such official malpractice is the adoption of a whistle blowing policy- as a fundamental ingredient of a sound corporate governance practice by public companies in the country. Whistle blowing which is regarded as the “reporting of wrongdoing within an organization to internal and external parties” has attracted legislative attention following the rising incidence of corporate scandals in western economies.
Following the False Claims Act of 1863, the Whistle blowing Act of 1989 and its amendment in 1994, the United States of America enacted in 2002 the Sarbanes-Oxley Act which provides for a mandatory confidential anonymous whistleblower hotline to be made available for use by company staff. Four years earlier, in the UK the Public Interest Disclosure Act was enacted. In Australia, in 2001 the Whistle blowing protection Act was enacted.
Nigeria has had its own fair share of workplace corruption that by now the relevant regulatory authorities should be considering ways of creating a system whereby alert mechanisms such as whistle blowing can thrive. Such method can be deployed effectively to alert internal and external authorities of wrongdoing especially in a public company before it leads to bankruptcy, insolvency or liquidation with attendant widespread economic implications.
In recent times, whistle blowers have attracted public commendation and media recognition. Three women – Cynthia Cooper of WorldCom, Sheron Watkins of Enron and Coleen Rowley of the Federal Bureau of Investigation (FBI) were honoured by Time Magazine in 2002 as Persons of the Year. This was done in recognition of their exemplary whistle blowing roles- which alerted relevant agencies and the public of the malpractices and lapses in their places of work.
If established procedures of whistle blowing were in place, probably the unhealthy practices that rocked the management of the troubled banks would have been open to the relevant agencies much earlier before the recent audit executed by the Central Bank of Nigeria (CBN). However, whistle blowing cannot thrive if the whistleblower is not guaranteed of protection or confidentiality. More importantly, whistle blowing as a tool of corporate governance can only succeed in an environment where the process is clearly established, and in a framework that guarantees protection for the whistle blower. In this regard, the relevant regulatory agencies like Securities and Exchange Commission, CBN, and Corporate Affairs Commission (CAC) and the EFCC should consider including provisions for whistle blowing in the codes of corporate governance and the relevant laws guiding the operations and conduct of public companies.