Corruption – a question of perceptions

 A few recent headlines: “Denmark, New Zealand and Singapore top list of least corrupt countries” , “The 10 Most (and 10 Least) Corrupt Countries in the World”, “Israel stalls in rot ranking” . In case you’re wondering, the stories were all about Transparency International, which ranks countries on a scale from zero to ten. Low scores, for example Somalia’s 1.1, indicate severe corruption; high scores, such as Denmark or Singapore’s 9.3, suggest public and commercial life are squeaky clean.

Now 15 years old, the Transparency International (TI) index is probably regarded as the leading tool for measuring corruption worldwide. Which is interesting, because it doesn’t actually measure corruption. Instead, it measures perceptions of corruption. The distinction is crystal clear in the name of the index – it’s the Corruption Perceptions Index, not the Corruption Index – but it’s often blurred in media coverage. Does it matter? In some ways, not really.

Corruption is, by its nature, secretive and can’t be measured directly. (Even detecting it is difficult, not least for tax officials.) So, instead, corruption has to be “measured” through surveys. These usually involves asking businesspeople, international officials and others questions, such as the extent to which they’ve encountered corrupt practices. TI pulls together 13 of the most reputable surveys from around the world, does a lot of number crunching, and produces its index. But, in other ways, the tendency of the media and investors to ignore the “Perceptions” bit of the Corruptions Perceptions Index may matter a great deal.

At the very least, we need to ask whose perceptions are being measured. In many cases, “it’s ‘experts’ or business managers, many of whom live outside the countries they are rating”, argue Charles Oman and Christiane Arndt in a new paper  from the OECD Development Centre . By contrast, it’s rare to hear of the experiences of the man or woman in the street, in part because compiling such data is expensive and time consuming. The paper argues that there are other issues, too, that need to kept in mind when it comes to “governance” indicators, such as the Corruption Perceptions Index and the World Governance Indicators . One is the use of a single “point score”, e.g., Somalia’s corruption rating of 1.1. What does that number actually represent? First, it reflects realities – or at least perceived realities – on the ground. But, of course, reality is complex, and can’t always be represented by a single number.

Nevertheless, says the paper, because of “the well documented tendency of people to believe that numbers are facts” the number can come to be seen as the reality, and may shape important decisions on a country’s future, such as foreign investment. Second, the number represents the output from some tricky statistical calculations. Like most such outputs, it comes with a health warning – in this case a “confidence interval”. In effect, that’s a statistician’s way of indicating that the difference between, say, Somalia’s 1.1 and Myanmar’s 1.4 may – or may not – be significant.

Like any reputable agency, TI clearly indicates the survey’s confidence indicators. However, journalists and investors may be less discriminating: As Oman and Arndt write, “Users tend widely to use countries’ governance scores as if they were accurate to a degree they are not.” So, should we ignore Corruption Perceptions Index? Not at all, but like any survey it has limits. Understanding these can ensure it’s not misused, and so ultimately make it more useful.

Useful links:

Measuring Governance, by Charles P. Oman and Christiane Arndt

Policy Brief No. 39 from the OECD Development Centre

It’s not that I don’t trust you…

You sure?

Last week, German police arrested a forger in connection with the sale of fake paintings to prestigious collections. Forgery is of course a serious problem (or major challenge as we say here) in the art world.

There’s a story that two art dealers came to see Picasso because one of them wanted to sell a picture he claimed was by the great man, while his colleague disagreed. Picasso took one look at the canvas and said it was obviously a fake. The seller was flabbergasted. “But I saw you painting it!”, he protested. Picasso didn’t deny it, but, he explained, “I often paint fakes”.

I’ll leave to you to decide what Picasso meant, but one thing we can agree on is that his attitude wasn’t very helpful to the art market. When artists were considered as just one among many tradespeople producing life’s little luxuries for the rich (pots, pies, poems, pictures, whatever their Wonderfulnesses desired), it didn’t occur to anybody that anything other than how nice it was mattered. That changed with the Renaissance and the notion of individual genius and inspiration.

In Questions from a worker who reads, Brecht laughs at this “great men” approach, asking if Caesar conquered Gaul without so much as somebody to make his dinner for him. Marcel Duchamp did likewise, mockingly claiming that anything an artist put in an exhibition was art, including a bottle rack he’d bought in a department store and then forgotten about (unfortunately, his sister threw it out).

Authenticity and authorship wouldn’t matter so much if vast sums of money weren’t involved. Unlike the art patrons of previous times who liked to show off their acquisitions, many of today’s owners keep their purchases in safes, simply as a highly mobile investment that can be quickly converted to cash.

And art isn’t the only market for recycling money. Charitable status can be abused too, but what will most shock the ordinary, decent citizen is that off the level playing field, various aspects of football attract criminals, as the latest FIFA scandal shows.

In Money Laundering through the Football Sector,  the Financial Action Task Force examined how transfer fees, image rights, club ownership and betting can all be used for illegal purposes such as tax avoidance. The football sector is also used as a vehicle for other criminal activities including trafficking in human beings, corruption, and drugs trafficking.

Restoring trust was discussed at last year’s OECD Forum. That session talked mainly about business ethics, but trust more broadly, including trust in government, will be one of the themes of the coming year as the OECD celebrates its 50th anniversary. Other major topics will include restoring public finances, jobs and skills, and new sources of growth.

Useful links

Financial Action Task Force

OECD work on taxation

OECD work on corporate governance

OECD work on public governance

OECD Forum 2010 Business ethics: restoring trust

Marilyn Achiron of the OECD’s Corporate Editorial Unit contributed this post

Should we read anything into the fact that the three panelists in the session on Business ethics: Restoring trust were all women?

In the face of what discussant Roland Schatz, president of Media Tenor, called a “trust meltdown”, the panelists and other discussants insisted that restoring trust and promoting ethics in business must be a universal issue, and one that must also involve the financial industry. As Amy Domini, founder and CEO of Domini Social Investments said, “The role of finance is pivotal to the success of the planet. If finance is working against the goals of human dignity and ecological sustainability, then governments and civil society will be incapable of achieving those goals.”

Anne-Catherine Husson-Traoré, CEO of Novethic, noted that there are already reams of rules and regulations on ethical business practices, the problem is that they are often not enforced and no sanctions are applied if they’re breached. Agnes Jongerius, president of the Dutch FNV labour union agreed, but argued that new regulations were also needed: “The G20 countries are not delivering what they promised in London and in Pittsburgh,” she said. “They have a very short time to deliver new rules for the financial world, for business ethics, for real corporate social responsibility.” She urged the OECD to strengthen its guidelines on multinational enterprises. “If you have good rules but none are applied, we won’t make the progress we need to make.”

Amy Domini stressed the tactical role that shareholders can play in influencing corporate behaviour. But first they have to assume their responsibility. “Nobody owns corporate America anymore,” she said, citing the preponderance of mutual funds in the US that have no real stake in the individual companies in which they invest. She suggested that European unions, which are far stronger than those in the US, and particularly their pension funds, could drive changes corporate behaviour. “Unions need to have a more robust opinion of their own influence,” she said.

But Edward F. Greene, partner at the law firm Cleary Gottlieb Steen & Hamilton, was not convinced. For him, it was governments and international organisations that could exert the most influence. “If we are going to manage financial institutions, we’re going to have to have much more sophisticated regulators in place and a broader regulatory system to identify and control risk.”

Carla Coletti, the director of Trade, Employment and Development at the International Metwalworkers’ Federation, was passionate: “There is no more time for unilateral good will. Enough public relations; enough window dressing; enough voluntary codes. They are dangerous because they give the impression that something is being done.” She urged ministers who will be meeting at the OECD ministerial council meeting later today and tomorrow to “take bold decisions” to require businesses to accept their ethical responsibilities.