Hello, welcome back to our course on corruption. This is week three, lecture two. And today we're going to talk about the affects of corruption on relationships at the individual firm level. In particular, we're going to talk about two types of relationships, internal relationships and external relationships. With respect to internal relationships, let's ask a question, how could a firm stop it's employees from stealing? I don't mean to imply that everyone at every firm steals, but the pen, the time, stealing. Well, one answer and an answer that a lot of people might give off the top of their head would be to put rules in place. To really enforce those rules and to monitor compliance with those rules. We could have a barcode on every pen and pencil. We could have cameras over every worker, we could have a monitoring room, we could have a room monitoring the monitoring room. If we think about that, that's awfully expensive, and it's awfully intrusive, and it prevents people from getting done what we actually want them to get done. Another approach is to create a strong ethical climate, now the word ethical climate is not at all as familiar as compliance and rules. So, let me describe an ethical climate, it's very much related to how norms are embedded in individual people, and it's also related to how the culture of an organization embraces those norms. Let me ask you to try an experiment, and be careful with this experiment. Ask a person, someone you know socially, but not real well, to do something that is both against the law and socially awkward. A gross example of this might be, ask them to spit on you. 99 out of 100 times, what you're going to get is response like this face. You're going to get someone who recoils, who scrunches their face, and whose body kind of says, this is a really awful question. Then, get out of the way and ask that person why they didn't do the act you asked them to do. My guess is their first response will be, something like people don't do that, or I don't do that, or it is wrong. And it's only upon really close questioning that you might get them to recognize that it's actually against the law, or against the rules. Now this experiment is done many times, in many kinds of different ways, and it's done using a variety of questions, what we find is that social norms are far, far more powerful than rules. People tend to think of social norms long before they think of the rules. It's also interesting to note that these social norms are malleable, they can in fact be changed. And if you really feel like pushing with this experiment, arrange beforehand to have a couple of people do the act you're going to ask that third, stranger person to do. If that person observes a couple of other people engaging in that act, how that person feels about social norms will have changed. And it's more likely that that person will engage in that particular behavior. We can change norms, in other words, we can create a healthier, or less healthy, ethical climate. Now, workers at firms with a strong ethical climate are more likely to sacrifice for the firm, and are less likely to get engaged in misbehavior. When we say sacrifice for the firm, we're talking about things like, work longer hours, or miss a holiday, or really concentrate. When we talk about less likely to engage in misbehavior, we're talking about things like, office theft, or taking an opportunity that belongs to the firm. A strong ethical climate, less of this bad behavior, more of this desirable behavior. And we know that there is a relationship between corruption and the ethical climate. We know that the occurrence of corruption, even the observance of corruption, diminishes the ethical climate. Lab experiments have shown that when people in an organization are rewarded for paying a bribe, they're more likely to engage in misbehavior aimed at that firm. We know that when outside, in the real world, the observation of the payment of bribes, or the approval of payment of bribes, diminishes the ethical climate. It renders people more likely to misbehave within that firm. Even the exposure, even second-hand exposure to the payment of bribes diminishes the ethical climate of a firm. And there's a really neat study out of South Africa that found when the flip happened, when there is less tolerance, in fact, no tolerance of bribery within a firm, and that actually resulted in fewer bribes, or no bribes, being paid, the ethical climate improved. And there was less other misbehavior by members of that firm. In terms of external relationships, there are really three kinds of things that we need to talk about, and one is business to business. In general, transnational firms don't want to enter into relationships with firms that pay bribes, or engage in other forms of corruption. A number of studies have found, in fact some of the oldest empirical work in the modern era, was with respect to corruption, have found that in general, looking at it at a large scale, corruption decreases foreign investment into a country. If we break that down, what that means is, transnational firms are less likely to enter in to particular types of relationships with local firms in that particular pollidy. More specifically, a survey by Deloitte a few years ago, and this was a survey of several thousand managers of transnational firms, found that two-thirds of those firms had walked away, had turned down, what otherwise would have been a potentially beneficial relationship with a local firm. Solely because there was suspicion that that local firm had entered into some form of corruption. So when we're talking about external relationships, one critical form of relationship, business to business, is constricted when a firm pays bribes. There's also administrative, or institutional, kinds of restrictions that are placed on firms that pay bribes. Most of the international financial institutions, and certainly all of the major international financial institutions, bar firms from entering into relationships with them, and other international financial institutions, if that firm, or a person in that firm, has engaged in some form of corruption. And that can be a very significant bar. And many governments have similar bans, the United States, China, European Union, all will not do business with a firm that has engaged in corruption. Again, the payment of a bribe severely constricts the type of relationships that firm can enter into. And finally, we don’t want to forget other kinds of stakeholders, particularly customers. Now, there's been less solid research that gives us numbers on this, but we know, anecdotally, that firms that engage in corruption do find some kind of a reaction with stakeholders, particular customers, and this is particularly true when there's been a regime change. Just for example, when the Suharto regime collapsed in Indonesia a number of firms that have very close relationships with the Suharto family, found it extremely difficult to market their products in Indonesia. As global wrath and antagonism towards the phenomenon of corruption increases, and as it becomes more public, what firms have engaged and what types of relationships with corrupt regimes, this is the kind of reaction that can only increase. With respect to external relationships we've got other firms, we've got international financial institutions and governments, we've got customers, and other kinds of stakeholders. In every case, corruption, the payment of bribes, decreases, constricts the amount of relationships we can enter into. In general, with respect to relationships, our internal relationships are damaged when firms engage in corruption, it diminishes the ethical climate. Our external relationships are constricted. There are fewer relationships a firm can enter into. Thank you, and I look forward to our next lecture together.
