It is true that the transformative power of transparency is not inevitable and that advancements can bring new risks. However, there is also plenty of evidence that the transparency landscape has definitively shifted, and that corporate risk and responsibility practitioners need new tools and approaches.
This is not just about the Panama Papers. Huge data leaks from Unaoil have led to the launch of a regulatory investigation into the firm’s networks and facilitation activities, even though it passed a number of standard third-party due diligence checks. Nestlé made the unusual step of disclosing forced labor in its seafood supply chain after a year-long investigation by Verité. The City of New York has created Checkbook NYC, a tool to let citizens monitor government spending via access to internal accounting data. And the Corruption Research Center in Budapest has created a map of governmental organizations’ contract awards and identified firms that have problematic levels of political influence.
The implications of these developments, among many others, are still playing out in real time, but it is already clear that the way companies currently manage their external relationships will need to transform to address risks in a holistic and integrated way. This means moving beyond a tick-box evaluation of third parties and toward an understanding of where your organization sits within a wider network of commercial and political relationships and how your actions might resonate throughout that network.
The emergence of hyper-transparency, in other words, requires systems thinking.
Standard compliance and audit processes can identify direct, observable evidence of problems but do not assess the underlying drivers of corruption and human rights abuses. On the other hand, models that analyze country risk, such as the Transparency International Corruption Perceptions Index, are too blunt and biased for companies trying to make practical decisions around projects and investments. Companies need a holistic approach to analyze and map both risk and impact, as well as to consider localized political, social, and regulatory forces. Most importantly, companies need to understand the relationships that third parties have with each other, and identify pressure points where legal and ethical violations may occur. The election of a new state governor in a neighboring region may not seem relevant to your operations, but the picture looks a bit different if she is funded by your competitor and closely connected to the new activist NGO lobbying to block your license approvals.
Beyond Supply Chain Audits
This kind of systemic, integrated approach is gathering steam for supply chains, as negative impacts increasingly come to light.
Supply chain oversight has historically been driven by disclosure forms and physical audits of high-risk suppliers. Audits usually include checks of paperwork on labor standards and physical inspections for health and safety. Companies have undertaken this activity on a de-facto voluntary basis, as regulatory activity around human trafficking, forced labor, and human rights violations in the supply chain has been notably weak.
However, as labor rights abuses in the supply chain continue to be revealed, advocacy organizations are taking radical action. For example, the NGO Transparentem is using investigative techniques to compile dossiers of evidence on apparel supply chain labor rights and environmental abuses, which it then plans to disclose to large companies and investors to pressure them into collaborative action. These types of supply chain activism are now bolstered by new laws mandating disclosure of efforts to tackle slavery and human trafficking.
Although compliance processes, and the fear of liability, often work against transparency efforts, the scale and scope of supply chain challenges means that businesses will have little choice but to conduct investigations deep into the supply chain, disclose the results, and drive active collaboration to help address the problems they find.
The Limits of Anticorruption Due Diligence
Things are changing in anticorruption compliance, too. The U.S. Foreign Corrupt Practices Act has been in existence since 1977, and there is a clear consensus among regulators that third-party risk should be managed via investigative due diligence. Due diligence is often based on disclosure forms and verified via searches of public domain information. For high-priority or high-risk business relationships, such as acquisitions, the process may also involve confidential source interviews. These source interviews fill in gaps in the public domain and identify allegations from stakeholders that the company may have paid bribes.
However, the effectiveness of due diligence is increasingly in question. It is the anticorruption equivalent of a factory audit process. Just as factory audits rely on payroll reviews and counting fire hydrants as a proxy for labor rights and safety, due diligence uses an imperfect process to identify evidence of operational bribe payments at the expense of considering the wider risk context of a company's relationships.
For example, politically linked businesses in kleptocratic regimes may be able to avoid demands for operational bribes that would still affect less-networked companies. Demands for facilitation payments, often accompanied by extortion, are a reality in many police, customs, and immigration departments, but it is difficult for companies to admit these are challenges they can’t solve alone, and much easier to either bet on a lack of enforcement, or withdraw from the country altogether.
Systems Thinking for Frontier Market Investments
BSR recently completed a project with a large company that was making a significant direct investment in a high-risk frontier market. Standard practice to ensure responsible investment calls for a siloed approach, where the company’s government affairs team would manage and monitor high-level political relationships, the commercial team would manage investment timelines, the legal team would manage corruption due diligence checks on potential business partners, and the social performance team would map and engage local stakeholders and decide on social investment priorities.
However, we worked with this company to develop a holistic approach, which allowed for a dynamic and predictive response to risk. The company considered a range of scenarios at the country, regional, and local levels and mapped risks, opportunities, and impacts according to these scenarios. The company was able to anticipate dramatic shifts in the socioeconomic environment and identify how the influence of particular stakeholder groups might increase or decrease. And, importantly, the company could conduct its risk management, social investment, and stakeholder engagement on the basis of an integrated strategy that involved global sustainability and risk oversight by both headquarters and the local engagement team.
Solutions for the Emerging Hyper-Transparency Landscape
Innovative and bold responses to the new transparency environment mean that companies should move beyond binary compliance processes and toward network analysis, collaboration, and capacity-building.
The open data movement is designed to provide civil society with contractual and financial data and the means to evaluate it. This movement is gathering steam, and companies need to be proactive in seeking out and assessing the implications of this information. For example, Project Manolo in Peru has enabled the creation of a huge database tracking lobbying activity across government departments—so far, this has been used by investigative journalists, but it is also available to, and useful for, companies. Social media and technology applications allow workers to provide real-time information about their working conditions and grievances. Drones are collecting information on environmental violations and wastewater emissions by factories. Blockchain technology provides transaction information and makes supply chain traceability one step closer to reality. Collaborative efforts, such as the Electronics Industry Citizenship Coalition and Maritime Anti-Corruption Network, are reaching maturity and will be replicated in other sectors.
Hyper-transparency will only gather speed in future. It will not instantly address all our sustainability challenges, and will create further complexities and ethical dilemmas, but it does provide an unprecedented opportunity for understanding and engagement. Companies wishing to prepare will be well served by moving to systems thinking and mapping their stakeholders and value chains using new tools and technologies. This will allow for a much more proactive response to risk and opportunity.