Corruption: New Insights for Fighting an Age-Old Business Problem

BRIAN KENNY: Did you know that there are over 200 recognized international days? Some are more widely celebrated than others. Earth Day, for example, or International Women’s Day. On the other hand, Asteroid Day and World Toilet day remain pretty obscure. Somewhere on that spectrum lies International Anti-Corruption Day. Established by the United Nations General Assembly in 2003, December 9 is a day to promote the work of the UN Convention Against Corruption, the only legally binding, universal, anti-corruption instrument in the world. Corruption is as old as humanity, with cases documented as far back as the Egyptian dynasties. The World Bank estimates international bribery exceeds $1.5 trillion annually, which is 10 times more than global aid funds combined. And although some might dismiss it offhand as simply the cost of doing business, the effects of corruption on economies and populations is incalculable. Today on Cold Call, we’ve invited professors Tarun Khanna and Geoff Jones to discuss the case entitled, Corruption and Business in Emerging Markets. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents network. Geoff Jones researches the evolution, impact, and responsibility of global business. Tarun Khanna studies entrepreneurship as a means to social and economic development in emerging markets. They co-lead the [Harvard Business] School’s Creating Emerging Markets Project and they just published a book entitled Leadership to Last: How Great Leaders Leave Legacies Behind. Thank you both for joining me today.

TARUN KHANNA: Thank you, Brian.

GEOFFREY JONES: Yeah, pleasure.

BRIAN KENNY: You’ve both been on the podcast before, so it’s great to have you back. We haven’t had you together, but you’ve been working on this creating emerging markets initiative for several years at this point. And we’re going to talk about some of the work that you’ve done there and how it factors into this case and to the book that you’ve written. Why don’t we just dig in. Tarun, let me start with you and ask you what the central issue of the case is and what your cold call is when you discuss this case in the classroom.

TARUN KHANNA: Well Brian, I usually start by asking people their most memorable, discomforting experience with corruption because whether they are from a developed country or a developing country, everybody has encountered it in some way, shape or form. New York city, Chicago, Mumbai, Shanghai, pretty much anywhere you see this and it opens people up, and they start to talk about it and their emotions rise. And you can quickly sense a divergence of views of — this is a fact of life and we need to find ways to get around it. It’s all very well to say that it shouldn’t be here, but it’s here. All the way to, this is a moral imperative and that we have to tackle this and excise this cancer from whichever that society is.

BRIAN KENNY: Geoff, let me ask you why you thought it was important to write this particular case and how it relates to the themes in your new book and to the work that you’re doing in the initiative more broadly?

GEOFFREY JONES: We wanted to use the case to probe a little bit deeper into the phenomenon of corruption, to look at what forms it takes to look at how people respond to it, just to dig a little bit deeper. And that’s what our interviews do. We were blessed that quite a bunch of people were prepared to talk quite openly and actually get into some details about what it is. Apart from just saying there’s a lot of corruption, they’d actually give us examples and how they dealt with it. And I think that’s the real jewel of this kind of material.

BRIAN KENNY: Yeah. And it’s an interesting format for the case because you combine the videos. The videos are part of the case, the preparation that people have to do in addition to reading the case. So we can talk a little bit more about why you chose to do that, but maybe we can just pull the lens back a little bit and talk about how you define the word corruption, as it relates to this content. Tarun?

TARUN KHANNA: So I guess in the most general sense, Brian, it would be the abuse of public authority for private gain in some ways. And that’s an intentionally abstract definition because it allows you to apply it to pretty much any circumstance. Just building on what Geoff was saying earlier, one of the productive parts about the discussions that I’ve had with executives primarily is to run them through a general discussion of what corruption means to them based on their own experiences, lead them through a discussion of an anatomy of corruption, if you will. Then perhaps get to almost a taxonomic discussion of what do you do about it? Ranging from complete avoidance, to engagement, to structural change in society. And you see the entire spectrum amidst our alums and amidst people who participate in the Creating Emerging Markets project in country after country. And it’s that richness of response that allows people to, I think, viscerally decide where they fall on the spectrum, and some learning occurs I think for them. It’s a very animated discussion.

BRIAN KENNY: Geoff, you and I did a case on Cold Call awhile back on United Fruit Company, and corruption factored heavily into that, and of course that takes place in an emerging market. I’m wondering, we know it’s a global problem. We know it exists everywhere. Is the nature of it different in emerging markets than it is in other places? And if so, how?

GEOFFREY JONES: We were quite concerned not to just frame it as a developing country, emerging market phenomenon. I think our very first sentence in the written version of the case says it’s found in both developed and developing countries. I think there probably is a difference in emerging markets and the difference arises from the fact that institutional structures and legal systems are often very fragile in much of the emerging world. And that gives the potential for what’s called in the literature, “grand corruption” or “big scale corruption”, perhaps more so than in many developed countries. And the case I think I can give some examples of that. There’s a Turkish guy, Cem Boyner, talking about the 1990s and he’s head of the Turkish Business Association. He basically says publicly, “the whole government is a giant kleptocracy, the whole place.” And he goes to court and he goes nowhere in court because the legal system also is not functioning as it should. You can find that in developed countries, but not so much. And that’s the kind of corruption I think you often can find, that’s kind of a difference.

BRIAN KENNY: What are some of the consequences of that kind of corruption in these emerging markets and these places that are still trying to get their footing?

GEOFFREY JONES: I think the material talks about multiple consequences. Like in construction and public works, where the bidding process is highly corrupt, you can get a ton of shoddy work. And buildings fall down and all that sort of stuff is happening. Things get done very slowly. Again, one of the guys we have talking, Jerry Rao, who’s building lower cost housing in India, just talks about the horrible process of getting endless permissions and each stage requires — people are asking for some sort of payment. If you don’t give the payment, everything keeps going slowly. Someone else, Suresh Krishna, talks about out how he keeps away from industries in which the government is involved because he knows there’s going to be a lot of corruption. And that means that certain sectors are not getting the talent and the resources they need because people stay away. And that’s the problem with measuring the impact of corruption, I think, because it’s very difficult to capture that cost. It’s something that doesn’t happen because of corruption.

BRIAN KENNY: The case talks about the oil and the wheels, and then at some point corruption shifting from that over to the sand in the wheels of commerce. Tarun, I’m wondering if you can talk a little bit about how you know when transition happens? Is it something that’s that able to be observed?

TARUN KHANNA: I think it’s a bit of a slippery slope. I want to just back up for a second and talk about the consequences more abstractly for a second. There are things that we sometimes see referred to not just in the literature, but we see our executives also refer to it as a transaction cost, as a transaction cost — just an incremental hassle of dealing with — Geoff referred to extra time that it might take. Sometimes entities end up being legally clean, but not factually clean, in a sense, because they are using intermediaries to take care of this greasing of the skids, so to speak. There is enormous inefficiency that creeps in just from the difficulty of getting things done. The more insidious one I think is the one that Geoff alluded to with the Suresh Krishna from the TVS Group interview in India, where large numbers of people, particularly the more I would say technically skilled, it’s a rough correlation in my mind, and say that we just don’t want to deal with this. And we are just going to stay away from entire sectors of the economy. That to me isn’t as visible or visceral as grand corruption, the sort of thing where somebody steals a Boeing or something like that and vanishes into the ether. But it’s every bit as salient, maybe more so, than the outright theft of physical goods. It’s a grand corruption in the sense that it’s grand misallocation of talent in countries where skilled talent is particularly scarce.

BRIAN KENNY: So let’s talk a little bit about where corruption seems to be most prevalent. The case talks about the Corruption Perceptions Index. Maybe you can define that a little bit and give us a sense for where you’re seeing it most prominently?

TARUN KHANNA: So I think a prominent source of these indices is Transparency International, which has a uniform way of asking a set of questions across respondents in different countries, and then ranking the countries. Any such index is bound to be somewhat subject to debate. But I do think it gives you a rough sense of the median response to people’s perception of corruption. And one has to say that the perception matters as much as the reality —

BRIAN KENNY: Sure —

TARUN KHANNA: In many ways, because if I’m sitting in a boardroom in New York and trying to make a decision, the perception is what is influencing people’s willingness to engage in an investment project for instance, in a country in Africa or Asia, Latin America. Perception matters as much as reality,

BRIAN KENNY: I’m wondering if it’s possible to conduct business by the rules in a place where there is grand corruption. If you want to abide by the rules, can you sustain business there? Geoff, any thoughts on that?

GEOFFREY JONES: Yeah. Several of the people we featured in the case have done exactly that. Fadi Ghandour who’s into logistics in the Gulf, dealing as he says all the time with customs, which is a notorious area for corruption. And he talks about how they just say no. And he says that’s important for their business because they’re dealing with international partners who don’t want to get involved with corruption. I’ve got several more examples too. We’ve got Anu Aga of the engineering company Thermax. She talks in detail about taking over a company where there was fair bit of petty corruption. And she manages to turn that around and they actually make every employee sign a statement that they would not engage in corruption. And then as she said, they actually dismiss people if they find they’ve broken it. So it is possible to create a system of norms within the corporate culture where you can operate. Is it easy? Not at all. But we have examples where it is possible.

TARUN KHANNA: There’s a lovely example of Mo Ibrahim, who is a Sudanese telecom entrepreneur who builds Africa’s first continent-wide mobile phone network and really catapult societies into the modern era by that simple act. Simple to say, hard to pull off. But Mo basically insulates the rank and file of a telecom company spread across the continent of Africa from the daily depredations of corruption, by essentially saying, “Anybody who wants to harass these people, please give them my phone number. Have them call me. I’m the chairman of the company, the entrepreneur started it. And I’m going to basically appeal essentially to lean on foreign regulations.” Maybe it’s the equivalent of the Foreign Corrupt Practices Act, or it’s the fact that there’s some really eminent person on the board and he or she just can’t be seen as being corrupt or something like that. He’s trying to create cover for local people so that they don’t get bullied in some ways. And that seems to work. Similarly, I think it was Fadi that Geoff was alluding to from Aramex in the Gulf countries, who says, “We’ve got to subscribe to all these rules and regulations, or I’m about to do a listing in another context. And the listing rules are very stringent, so I can’t do it.” Or “I have foreign investors on my cap table and I just can’t be seen doing this.” And that seems to work as an external crutch to lean on, even though the rules supporting anti-corruption activities in the particular country may be less developed or less end forced. So that seems like a common method to get around it.

BRIAN KENNY: Corruption can’t exist unless two parties are engaged in it. And I’m wondering, what you’ve just described are some business leaders that have really found a way to take a stand on this. Is there a mechanism for them to unite? If they all rejected the corrupt process, could it possibly exist?

TARUN KHANNA: So here’s an example of that, Brian. What you saw in India following 2000 was that the software industry basically embraced what I would call extreme anti-corrupt norms, for the simple reason that all their clients were the Fortune 100 around the world. And they couldn’t pass muster as legitimate business partners without being scrupulously clean. And what’s interesting is that the channel through which that provided cover to other companies was through the stock market because once they were seen as clean, then other companies couldn’t as easily come to the analyst meetings and say, “It’s just how it is in this country” because you had an example to point to, “They’re clean. what’s so different about you?” And that seems to have had quite an effect over 10, 15 years with more and more sectors of the economy becoming relatively much cleaner. Though, as the TVS Suresh Krishna interview points out, there are plenty of areas where there’s still deep and insidious corruption. And then again, the talent stays away, and that’s a disaster.

BRIAN KENNY: So you’ve mentioned several of the people that you interviewed. I’m curious about two things. One is, why did you choose to use this combined method to teach the course and how many people did you interview? What did you learn from those interviews? Geoff, maybe you can start?

GEOFFREY JONES: Well, the project as a whole, I think has got up to 155 interviews —

BRIAN KENNY: Wow —

GEOFFREY JONES: Spread across three continents. So it’s rather a lot. So our perception was that it’s a way to make it more real for students, if they actually see somebody talking about it, than just reading about it. So I think the video material is an asset.

BRIAN KENNY: And they were incredibly open. They were willing to talk about some things that they might not otherwise talk about.

GEOFFREY JONES: Some people were more open than others. It was quite interesting, these differences between.

BRIAN KENNY: Yeah. Do you analyze that at all? Do you attribute that to cultural differences or norms of some sort?

TARUN KHANNA: We haven’t yet gone there, but one thing to remember about this creating emerging markets project is that, by design, we are targeting people who are considered to be iconic entrepreneurs. Iconic, I would say, institutional entrepreneurs. Not just people who are becoming fabulously wealthy, though most of them are. We would say social entrepreneurs or nonprofits, NGOs, things like that around the world. But they’re all by virtue of the definition of being iconic over a long period of time, they’re towards the latter bit of their careers. And I just had the sense that they didn’t really have anything to hide at this point in their careers. They said it like it is and they’ve been incredibly honest. We have Tata Hall here — Ratan Tata gave a spectacular interview where he said, “Let me tell you all my mistakes.” And he just went into them in classic Ratan Tata fashion with great humility and candor and thoughtfulness. And that video is a gem because we play in class all the time.

BRIAN KENNY: So they’re at a point maybe because they’ve accomplished so much and now they’ve got financial security, where they can be candid that way.

TARUN KHANNA: Think people are actually choosing, “Am I going to stay away from corrupt stuff and just avoid it? Am I going to do what Anu Aga said in Thermax industries and put in place these norms that reinforce themselves over a period of time and just become entrenched? Am I going to do what Mo Ibrahim said and appeal to external forcing functions, perhaps in other countries to do this?” Or last category Brian, that we haven’t yet spoken about, is entrepreneurs who actually took on structurally at the economy level. “We are going to do something about this.” Frequently trying to do something like using technology in different ways to induce greater transparency. So we have some wonderful interviews of those kinds of people also in the videos. So I think people decided in their own business and moral compass what approach they would take pretty early on.

BRIAN KENNY: I know you taught the case, Tarun, to one of our executive ed classes. So these are people who are in management or leadership roles of some sort. I’m wondering how they react to it. Is it relatable to them?

TARUN KHANNA: It’s very relatable. I would even say it’s visceral. And to Geoff’s point, showing the video, even if it’s a three- or four-minute clip, which we show in class — so the way the case discussion works is they read a very short paper case and they watch five or six video clips before coming to class. And they’re asked to reflect upon what they learned about corruption in the usual way that we do things, which is through a series of discussion questions, which they meet to discuss in small groups and so on. And then in class, the instructor has the option of using four or five other little video clips, depending on how the discussion flows. But the visual imagery, the emotion, triggers this visceral response. You see the whole spectrum. You see defensiveness, particularly from those of our colleagues, students, who have come from the emerging markets. Sometimes you see defensiveness saying, “And of course, that’s why we’re very careful to say that this is a fact of life, even in Boston.”

BRIAN KENNY: Sure. Yeah.

TARUN KHANNA: So it’s not pointing fingers at any particular society. It’s trying to address academically and practically what are the causes and consequences of corruption. What we could all ,as well-meaning people, do to reduce those costs. But I would say in the main, the discussion is visceral, which is what we wanted it to be.

BRIAN KENNY: Of course. Yeah. We haven’t talked directly about how this ties to the ideas in your new book. So I would love to touch on that. And maybe Geoff, you can start that off by just talking a little bit about when we decided to do this podcast together, I said, “Is there a case that helps to represent some of the thinking in your book?” And you said, “Yeah, this would be a great one.” Why did you decide on this particular case?

GEOFFREY JONES: Well, when we were thinking how to structure the book, we didn’t simply want a traditional management book based around strategy, organization, marketing. We wanted to isolate themes that we thought were very important for business. And so we a devoted whole chapter to the issue of corruption because it is important. We devoted a lot of also time in that book to the issues of responsibility and of values, which links again to the issue of corruption because the people who are standing up against it have a set of moral values and that gives them the strength to do that. So the corruption case very much is related to quite a lot of what we’re trying to say in Leadership to Last.

TARUN KHANNA: The entire project, as Geoff said, has 155 interviews about roughly an hour each. The transcripts are verbatim, accessible to anybody. This is all a public good, so it’s all entirely free. We’ve culled those 150 hours to create hundreds and hundreds of three-to-five-minute video clips that are tagged by topics. And the actual case is an assemblage of some of those video clips to begin to use it. In the book, we select subsets of transcripts from chosen entrepreneurs’ responses to us and collate them by theme. So “managing corruption” would be a theme, and we would have maybe half a dozen or a little bit more excerpts from six or seven different entrepreneurs in different countries, with an introductory essay that Geoff and I wrote. The essays tend to be short, and so the bulk of the book is straight from the proverbial horses’ mouths.

BRIAN KENNY: For the executives that are listening to the conversation today, what do you think they can learn from the leaders and the stories that are told in your interviews and how they handled the challenge of corruption?

GEOFFREY JONES: I think they can learn, first of all, they’re not alone. Others have been there. That’s a good thing. I think they can learn it is possible to say no and have a very viable business. And I think they can learn there are actually benefits, as well as costs to doing that. I think I know Anu Aga talks about the ability for example, to hire talented people who want to work for a good business. So it’s not simply a cost, fighting corruption, it can be a benefit.

BRIAN KENNY: Tarun?

TARUN KHANNA: So our students, Brian, are in positions of responsibility and they have to routinely encounter what I would characterize as intractable issues. And this is one of them. What I found myself reflecting on in teaching this a few times to executives was there’s a moral, philosophical dimension to dealing with this particular intractable issue, which as your introductory comments pointed out, date back millennia. So it isn’t going away. But you can also treat it as an is an investment decision, that you invest in the processes of mitigating or containing the influences of corruption. And I think the somewhat shorter, systematic, but more than anecdotal evidence that we’ve amassed, is that it’s an investment that can pay pretty rich dividends.

BRIAN KENNY: The case is Corruption and Business in Emerging Markets. Geoff Jones, Tarun Khanna, thank you for joining us on Cold Call to talk about it.

TARUN KHANNA: Thank you, Brian.

GEOFFREY JONES: Thank you.

BRIAN KENNY: If you enjoy Cold Call, you might also like our other podcasts: After Hours, Climate Rising, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. Be sure to rate and review us on any podcast platform where you listen to Cold Call. If you have any suggestions or just want to say hello, we want to hear from you. Email us at coldcall@hbs.edu. That’s coldcall@hbs.edu. Thanks for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, brought to you by the HBR Presents network.