David Montero is the author of Kickback: Exposing the Global Corporate Bribery Network.
“[Bribes] are like steroids – everyone’s doing it. And if you don’t do it, you fall behind.”
In the five years I spent researching commercial bribery on four continents, that statement – from an American oil consultant who worked in Iraq – best crystallized how and why kickbacks have become a hidden standard of doing business around the globe.
Opinion: Give and take: What's so bad about bribery?
Like athletes on steroids, firms use bribes to beat their competition, and to artificially grow their market value through illegally obtained contracts. The prize they’re fighting over is the US$4-trillion that governments around the world – particularly in developing countries – spend every year on fat public procurement contracts, money for bridges, roads, telecommunications projects, health-care infrastructure and fighter jets. Bribes ensure them a win and, like steroids, certainly appear to deliver quick results. Research suggests that for every US$1 a company pays in kickbacks, it receives a whopping US$11 in benefit. No wonder companies around the world annually pay US$400-billion in bribes on the low end. They are a good investment – but only in the short term. In the long term, they come at the expense of a company’s innovation, and more importantly, its reputation.
Take the example of Rolls-Royce, known for its prestigious automobiles and aircraft engines. Between 1987 and 2016, the company’s revenue exploded from £2.8-billion ($4.9-billion) to £76-billion, according to The Financial Times. Its success was initially credited to a dynamic combination of superior technology and brilliant corporate management. But a recent criminal investigation by U.S. and British authorities flipped that narrative on its head: Between 1989 and 2013, law enforcement found, the key to success at Rolls-Royce was a global system of bribery. It hired middlemen in at least eight countries, who in turn used shell companies to pay off government officials in India, China, Russia and many other countries. The company’s bribes reaped at least £250-million in profits. But then, in 2017, the company’s fortunes came crashing down: After it agreed to settle charges with U.S. and British authorities, Rolls-Royce paid more than US$800-million in fines, one of the largest such bribery fines on record. Today, its reputation for class is also synonymous with unparalleled corruption.
What was truly striking about that corruption was not just the scale, but that this otherwise highly innovative company chose to compete in a manner that was, well, so un-innovative. Rolls-Royce did not devise a cutting-edge sales strategy to promote its products, coupled with a sustainable business model that included opting out of corrupt markets. It used the same sales method – hiring middlemen, funnelling bribes through offshore shell companies – that unscrupulous corporations have been using since after the Second World War (after Watergate, the Chairman of Gulf Oil testified before the U.S. Congress that his firm had used the system of funnelling bribes through offshore companies beginning in 1958). And because those bribes reaped rewards in the short term, Rolls-Royce opted not to innovate. But, as it learned the hard way, bribes are not only crude and illegal; they are also highly inefficient (studies show that firms waste precious resources arranging and hiding bribery schemes, and that this subterfuge undermines employee morale), often unsustainable (bribes are already illegal in dozens of countries, and global enforcement of anti-bribery laws is at an all-time high) and outdated.
Since the scandal broke, Rolls-Royce’s chief executive, Warren East, has said that the company is now investing significantly in training staff on ethical standards, and building a business model based on fair competition and sustainability. It has refocused its efforts on innovating new products in civil aerospace and has cut out areas of the business that were losing money, such as its civil-marine segment. “I am interested in winning sustainably,” Mr. East told The Guardian. Innovation of that kind – rather than bribes – is what that the company should have invested in a long time ago.
What is also striking is that Rolls-Royce is certainly not alone. Today, nearly one-third of all global businesses use bribes to win government contracts, according to studies by the World Bank. Like Rolls-Royce, many are otherwise the most innovative companies in the world, prized for their research, their technology and the unrivalled quality of their products – companies such as Pfizer, Hewlett-Packard and Panasonic, all of which have settled bribery investigations by paying large fines to U.S. regulators.
Hundreds of recent bribery settlements such as this have exposed that a critical factor driving commercial bribery is a crisis of innovation. Many companies are still trying to beat their competitors the old way, by paying bribes. But hoping to win by doing exactly what your competitors do, even though it is illegal and inefficient, is hardly innovative. And ultimately in business, unlike in sports, it is innovation, not artificial strength, that wins.