Balkan Parliament 2005 Blagoevgrad, October 15, 2005 Corporate Governance as Antidote to Corruption Todor Yalamov Economic Program Center for the Study of Democracy

Plan of presentation The problem of corruption… (Coalition 2000) …in the private sector and organized crime… Possible Responses… (beyond strengthening law enforcement) Good corporate governance (CGI) The role of business associations (Integra) Corporate Social Responsibility (BLF) utilizing business networks (Shell) In focus: CG as A-C Further readings

Corruption in the private sector – the facts Focus in the local news and public agenda – only after recent world financial crises and privatization of BTC Occasional cases of bad corporate governance in privatized companies association with corruption highlighted in the press before that Organized crime… The business assesses corruption in the private and public sphere and equally important and significant… … and unfortunately get used to it. Bribers in the private sector are not less visible and frequent than those in public…...although the size/amount is smaller... … its effects matter for all.

The problem of corruption in private sector compared to public sector is… Source: Vitosha Research

Is it a problem... (% assessed it as “a big/significant problem”) Source: Vitosha Research

Bribes in the private sector (% firms which bribed for…) Source: Vitosha Research

Requests for bribery (% firms being asked for a bribe) Source: Vitosha Research

Buyer – old morale/ethics in a market environment (% SMEs experienced problems with trade partners – confidentiality vs. bribes) Source: Integra, 2003

Effects of corruption in the private sector  Ineffective (re) distribution of resources  low and pro-poor growth;  Low competitiveness;  Instability and volatile business environment  Higher transaction costs;  Investors with higher moral standards will not come in;  Scaling up negative effects during economic crises – lessons learned from Asian crisis;  Long-term negative societal perceptions of entrepreneurs and business and creating and maintaining crony business culture.

Bribes reduce efficiency (% firms ‘often’ lost a contract due to bribery acts of competitors) Source: Vitosha Research

Organized crime and corruption Roots: former security officers and nomenklatura, former sportsmen and criminals Growth factors: embargo to former Yugoslavia Specifics:  Protection  Mediation of business conflicts Key developments:  From violence towards investments and corruption  From large hierarchical structures towards networks

Origin and history  Former sportsmen, security services officers, and criminals  1991 – robberies and racketeering  – protection of business entrepreneurs and smuggling of regulated goods  – smuggling of embargoed goods into former Yugoslavia, nationwide racketeering schemes  Introducing the insurance racket VIS-2 и SIK

Origin and history ViolenceCorruption Organization Market Origin Sporadic Chaotic NoneNeighborhoo d based No participation Widespread Chaotic Low-level policemen Primitive hierarchies Sporadic, protection Private Security Companies Widespread, coordinated Mid-level, prosecution National level Control over some markets Insurance Companies Attempts to limit use of violence High-level politicians Competing groups at national level Control of some markets & investments

Changing nature  The end of the Yugo-embargo and the ban of crime- related insurance companies  Transition to networks and “grey import”  Legalizing businesses and investing black market profits  Control over domestic markets of raw goods  The heroin epidemics

Changing nature ViolenceCorruption Organization Market The Ban Abandoning the protection racket Police, prosecution Fragmented, creating international links Searching new sources of income Legalization TargetedEntire spectrum + Political elites Three levels of networks, internationalizat ion Privatization deals, “special markets” Redistributio n Executions at the highest level Entire spectrum + courts Three levels of networks + hierarchies, regions Monopolizin g markets, domestic and internationa l investments. EU- integration Executions at the highest level Entire spectrum, +EU accessions funds Three levels of networks, redistribution

Organized crime as network and corruption

Possible responses Sound/Good Corporate Governance Transparency/disclosure Limited discretional power Accountability and responsibility Building trust and new institutions (Institute of Directors, proxy voting institutions…) Business Associations Lobby for business environment improvement (deregulation and simplification of administrative procedures) Supporting of investigative journalists Self-regulation – ethical codes Reputational mechanisms – codes of conduct Awareness raising…

Possible responses… (cont.) Corporate social responsibility… Utilizing business networks for fighting corruption (integrity in supply chain management) Changing unit of analyses and object of measures (i.e. tax administration, anti-money laundering departments): Instead of firms – networks

Threats: Lack of firm ethical standards (% firms that will not pay bribe in any circumstances) Source: Vitosha Research

Threats: Disbelief in private sector’s capability to cope with the problem (% firms with respective assessment on the potential influence of ethical codes on corruption) Source: Vitosha Research

Cases in Focus… Convening GAM… Blackmailing through blockage Siphoning Conflict of interests Your experience shows… ?

Further readings Various publications at: Corporate Governance in Development: Bulgaria (only in Bulgarian) – find at

Thank you!