Monthly Article

January 2013 Article – Private Sector Corruption

Private Sector Corruption
by Jerry Pacheco

I read with amusement Chinese actor Jackie Chan’s comments in a recent interview that he thinks that U.S. is the most corrupt nation in the world. He blamed corruption in the U.S. for spurring the world financial crisis, with which most of the world is still dealing. Chan’s comments seem to be a defensive reaction to deflect any criticism of his native China as being undemocratic and/or corrupt. Maybe his view of the U.S. is the decadent Hollywood lifestyle perpetuated by the movie star set and entertainment moguls that always seem to be involved in scandals, extra-marital dalliances and brushes with the law.

In reality, neither the U.S nor China rank among the most corrupt countries in the world, based on the inclination of public officials to use their office for their private gain, according to Transparency International, a Berlin organization that tracks corruption around the globe. Perception that corruption exists within the public sector is also tracked and used in the development of an index ranking. According to the 2012 index, the ten most corrupt countries in the world are Somalia, North Korea, Afghanistan, Sudan, Myanmar, Uzbekistan, Turkmenistan, Iraq, Venezuela and Haiti. Conversely, the 10 least corrupt countries on the index are Denmark, Finland, New Zealand, Sweden, Switzerland, Australia, Norway, the Netherlands, and Canada.

The U.S. ranks 19th on the list of least corrupt countries in the world, just behind Japan and the U.K. and one spot ahead of Chile. China ranked as the 80th least corrupt, slipping five places from the year before. Therefore, contrary to Chan’s claims, it appears that the existence of corruption in China’s public sector is far more pervasive compared to the U.S.

While the index is meant to provide a general understanding of the manifestation of corruption in the public sectors of nations, corruption can be just as pervasive in a country’s private sector. When most people think about corruption in the private sector they generally think that this occurs when a private company tries to do business with the public sector and some form of a bribe is either solicited or offered. This type of corruption seems to be the most visible, always being reported in the press, but a more hidden type of corruption exists, rarely caught and seldom reported.

This has to do with supply chain managers for major companies soliciting bribes or kickbacks from suppliers wishing to do business with their company. This is the current case with the Taiwanese company Foxconn, which is the world’s largest outsource manufacturer. It has an impressive list of clients that includes Dell Computers, Apple, and HP. This company, with an estimated one million employees across the globe, is currently investigating whether its supply chain managers routinely engage in pressuring suppliers for bribes and kickbacks in order to do business with the company.

During the years, I have had clients run up against this insider corruption with some of the best and most recognized companies in the world. It is always a sickening feeling, realizing that despite a supplier’s superior products and competitive prices, it might not have a chance to do business with a large manufacturer if it doesn’t play ball with a corrupt supply chain manager who has the final say. I have known some suppliers who bit their lips and submitted to the corruption, knowing that the future of their revenues and employees depended on landing or retaining a supply contract. On the other hand, I have seen suppliers walk away and choose to forgo business rather than get involved in this corruption.

And the corruption is not limited to companies such as Foxconn, that hail from developing countries. When I worked in Mexico City, many of the Canadian companies had a sordid reputation of using corruption to land or to grant business. Just recently, I was talking to one of my friends who is a sales manager for a U.S.-Mexico based supplier. He was trying to do business with a U.S. company that had operations in Juarez and was having a hard time making any progress because the supply chain manager was demanding a kickback, which would amount to about five percent of the total contract – a healthy sum, as this deal was in excess of $1 million.

Bribes demanded by supply chain managers result in a breakdown of the free market system. Companies should be paying for the best products at the best prices. Not only can a corrupt company representative cost his/her company money, but he/she can also create inefficiencies for the company if it is not selecting the most responsive supplier for its needs. This not only affects the company, it also results in higher prices, thus costing the consumer more money.

Most supply chain managers with whom I have dealt are decent, hardworking and honestly represent their company. However, there are unethical people in industry that act with impunity for their own gain. These are the people everybody must keep an eye on and report if corruption guides their moral compass.