Entreprenuers’ Dilemma

Article By: Ashish Rajadhyaksha

TO PAY A CORRUPT OFFICIAL OR NOT IS THE QUESTION?

Conversation with a friend yesterday veered towards prevalence of corruption in emerging markets and how it adds to cost of doing business there.  That reminded me of my visit to New Delhi, India several years ago when a friend’s factory was sealed due to zoning law changes.  While the courts were reviewing appeal applications, local policemen came knocking to collect their “local assistance” funds so that they would give my friend enough time to either take out his machinery from the factory or continue working under their protection, both good alternatives to immediate lock down ordered by the courts.

Being from the U.S., I was horrified and disgusted to see some low level cops with power to either completely seal the factory and lock up expensive inventory or not depending on how well you treat them.  I wasn’t accustomed to this blatant abuse of power, since in the US as a law-abiding citizen, I wouldn’t dare try bribing a police officer for giving me a speeding ticket.  What happens in our corridors of power in Washington, D.C. is another matter where “campaign contributions” and “fund raisers” somehow influence policies, and whether or not that constitutes corruption at high levels is a debate for another day!

But anyway, this discussion yesterday and that personal experience brought forth an important question that some of the entrepreneurs may face in their business operations:

Should you pay a corrup official & live for another day or Protest and suffer the consequences? 

This certainly poses a huge quandary for any honest person who just wants to work hard and see fruits of his or her entrepreneurship, and there’re valid reasons for both in favor of and against any payoffs.  Presented here first are the usual reasons given in favor of, followed by reasons against making any payments for the sake of the business.

Usual Points in Favor:

• If your business doesn’t grease the palms, your competitors will.  (This is the typical argument).  So we might as well do it, and survive.

• Since business’ revenues and profits support local employment and jobs, local citizens’ groups could be rallied against any future repetitive corruption from the local officials.  Let this one slide!!

• You can make a difference by collective actions rather than being a silent, individual protestor on the sidelines.  Example, Pension plans and socially responsible investors such as CalPers, The Calvert Group, TIAA-CREF and others accumulate company stocks and force managements to change policies rather than just writing protest newspaper articles and blogs.  An entrepreneur could document the handover of funds and file complaints with media and anti-corruption police bureaus.

Usual Points Against:

• Supporting local corruption would further bolster and legitimize these practices, and this will get further encouragement to harass the local population.

• Corruption is a pyramid scheme and is funneled upwards to political leaders who siphon off these funds from the country and take it overseas.  This depletes the local treasury of its revenue source further.  Most prominent examples of outrageous harassment and corruption: General Suharto of Indonesia, Robert Mugabe of Zimbabwe, General Pinochet of Chile. What can really be done to survive under these very extreme regimes is a tough question.

• By encouraging corruption, your company will send a message to its employees that the Corporation will do anything to get and stay in business.  This may undermine your reputation as an honest, upright entrepreneur if that’s important to you.

Now assuming that the local officials do not specifically prohibit and interfere with running of any day-to-day operations and just want their “share of the pie”, I would implement the following programs:

• Get necessary approvals before starting any legitimate work.  Reason:  Corruption generally targets illegal or shoddy work as the officials know that the entrepreneur is doing something illegal and will generally pay off to have the problem go away.  If there’s no problem, no reason to pay anyone.

• Payment of decent, living wages and other benefits to workers as opposed to minimum wages.  Reason:  In most instances where the labor is really repressed, there’re instances of labor problems or someone leaking inside information to outside officials.  If the labor is satisfied with their living conditions, they will unite and convince local officials to go away through their show of force.  E.g.:
Tata Motors’ Nano car project in Singur, West Bengal, India, got stalled because of allegations of corruption and forcible land acquisitions.

• Build bridges with local political parties and communities.  Reason:  Most of the enmity is all local.  These corrupt officials take the anger and frustration on successful businesses who they perceive correctly or not as benefitting outlandishly from repressing the common man (Robin Hood Syndrome).  By being part of the community and not showing-off wealth, an entrepreneur can operate under the radar and work more effectively.

Conclusion:  After reviewing and analyzing reasons for favoring and opposing corrupt practices, I recommend that we make any initial payoffs needed to immediately survive, but change our corporate behavior quickly so that it doesn’t become part of our DNA.  If we get off the high moral horse, pay up and survive, we at least have some legitimate chance of implementing our ideas, and to lobby the government to make at least some progress.  If we decline the “investment”, we’re effectively shut out of the whole process, and the situation may continue without any improvement at all, and we’re the sole losers for it.

 

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