How to Mitigate Corruption in Emerging Markets: The Case of Russia

Russian CEOs are arguably the most experienced managers in the world when it comes to working in corrupt environments. For our analysis, we gathered data from the CEOs and owners of 111 local and international companies operating in Russia. We asked them to assess their experiences with informal practices, including the extent to which their businesses are dependent on informal deals and the strategies they deploy to mitigate business corruption. The list of specific practices and strategies assembled in the pilot interviews and media content analysis has been cross-checked with the existing typologies of corruption in post-communist societies and verified through in-depth interviews. This study presents the outcomes of our analysis, one of which is that companies tend to blame officials for corrupt activities while hiding their own internal corruption from public view. Both are dependent on the industry in which they operate, however. The paper also includes the approach we developed to understand the less reprehensible but more widespread forms of corruption such as collusion, conflict of interest, cronyism and nepotism, fraud, gifts and hospitality, lobbying, abuse of power or office, and influence peddling.


Introduction
world after China, it is also labeled as one of the most corrupt countries. 5 In recent years, the Russian government has undertaken significant anti-corruption efforts in line with Organisation for Economic Co-operation and Development (OECD), World Trade Organization (WTO) and World Bank policy recommendations, but the results of such efforts at company level are far from encouraging.

Business Corruption in Russia
Although the theme of business corruption in Russia has been widely researched in a comparative context (BEEPS), 6 research has mainly focused on general perceptions of corruption and specific forms of corruption such as bribe-taking, which can be measured. In 2010, Russia ranked at the bottom of 22 countries assessed in Transparency International's Bribe Payers Index. However, little is known about other forms of corporate corruption, such as collusion, conflicts of interest, cronyism and nepotism, fraud, gifts and hospitality, lobbying, and influence-peddling which are arguably more widespread.
Such an incomplete picture offers fertile ground for the emergence of popular perceptions of the origins and nature of business corruption in Russia, the most popular being that corrupt government officials at all levels extort rents from innocent businesses, which suffer from bureaucratic red-tape and are forced to engage in shadowy practices.
In [my] region, according to an agreement with the unions, the monthly recommended minimum wage is about USD 180. Both the regional pension fund and the regional administration put pressure on businesses to pay at least that. So that's what I do, I pay my employees USD 180 minimal wage.
Officially. The rest they get in the envelopes. I do it because if I showed the real wage, about USD 750, 13% must be paid in personal tax by employee, another 24% goes for social tax and other payments-roughly, one third has to go to the state. Moreover, I have to pay office rent, depreciation, accessories' cost, electricity bills, Internet bills, etc., so in the end I work with losses. The laws are made so that you have to pay one third just for doing business . . . they [the state] provoke the entrepreneur in some way to make shadow business, not showing all of the income and expenses, making a secret of commerce.
To shed some light on business corruption in Russia, its scope and impact on business, and to understand how business leaders perceive corruption and seek to mitigate its impact, we conducted a survey of business leaders and complemented it with in-depth interviews and executive workshops to frame the outcomes of the survey. We devised an approach based on "slicing" corruption into constituent informal practices, and collected data on 111 companies, which allowed us to gain insights into the workings of firms in endemically corrupt environments. We consider the results of this survey worth sharing.

Empirical Data
The proposed approach allowed us to monitor the occurrence of informal practices in daily business operations, to assess the extent to which informal practices prevail in corporate settings, and to identify blind spots which are not addressed by existing anti-corruption strategies at company level. Informal practices are best defined as regular sets of strategies used by actors for getting things done while navigating multiple sets of rules and constraints, both formal and informal, legal and ethical, written and unwritten. 7 Informal practices adjust to changing legal frameworks and social norms, and evolve to reflect changes in the rules of the game. 8 The data can improve the robustness of the corresponding anti-corruption strategies. We devised a questionnaire for CEOs, owners, and board members that included a list of informal practices defined on the basis of the multi-stage process outlined below.
At the exploratory stage, we examined existing typologies of corruption and conducted a content analysis of the Russian business media in order to identify corrupt practices that correspond to these types. We conducted interviews with Russian CEOs and directors who were asked to comment on their familiarity with each practice, as well as its frequency. While such practices may not be perceived as corrupt by their protagonists, they nourish the corrupt environment indirectly.
For example, one of the executives surveyed, who runs a transportation company, explained that the firm's service centers routinely offer repair and car-wash free of charge for the traffic police because "they have such a small budget for repairing their police cars." The list of specific practices, assembled in pilot interviews and content-analysis of the media, was cross-checked with and adapted from existing typologies of corruption in post-communist societies 9 and informal practices. 10,11 In our test survey, we reserved a space for respondents to add to our list of informal practices. Only two practices were added. In addition to the obvious 11 Types are observed and articulated with reference to degree (petty, administrative, state capture); frequency (routine or extraordinary, exercised by many or by few); motivation (coercive or collusive); level (centralized or decentralized); or scale (predictable or arbitrary). All of these are variations on the theme of deviance and are described in terms that are unlikely to be used by participants in corrupt practices. In a 2006 World Bank paper, which adopts the Transparency International definition of corruption as "the misuse of entrusted power for private gain," economist Stephen Knack (2006) organizes these variations into six dimensions of corruption: by level of political system (central government, provincial, municipal), roughly corresponding to the terms "petty" and "grand" corruption; by purpose of the improper actions, to influence the content of laws and rules ("state capture") or to influence their implementation ("administrative corruption"); by the actors involved in the corrupt transaction-various combinations of firms, households and public officials; by characteristics of a particular set of actors, for example, bribes required for large versus small firms, or for rich versus poor households; by administrative agency or service-tax and customs, business licenses, inspections, utility connections, courts or public education and health facilities; and by the incidence or magnitude of bribes or by the uncertainty they create for businesses and households. Knack, "Measuring Corruption in Eastern Europe and Central Asia." reasons why open choice prompts in survey questions remain unanswered, 12 the low number of additions could be interpreted as support for the sufficiency of the existing list, or for the unarticulated nature of informal practices for those who use them routinely.
In the introduction to the survey, we used the term "informal practices" to refer to sets of strategies commonly used by actors to get things done. We asked the participants to report anonymously to what extent their firm engaged in each practice and strategy, choosing from three possible answers: systematically, sometimes, never. Anonymity was emphasized and preserved, even where it created limitations to our analysis.
As illustrated in Figures 1a, 1b and 1c, a broad range of companies (by size, industry, and ownership structure) was represented in the sample. The most basic, but also the most interesting, result is the relative frequency of informal practices, summarized below in Table 1 Funding of publications in regional press and broadcasts on regional TV and radio 19 61 27 Disregarding "conflict of interest" of regional managers, e.g. their use of companies affiliated with them, recruitment of relatives, etc.

67 26
Selecting vendors/contractors with whom regional managers have informal relationships or arrangements 13 66 28 Extortion of bribes by regional regulatory agencies: tax inspectorate, sanitation service, police, etc.

51 28
Receipt of kickbacks or other informal rewards (e.g. expensive gifts) by regional managers from vendors, suppliers and buyers 5 65 36 Paying for the services of regional regulatory agencies: tax inspectorate, customs, sanitation service, police, fire inspectorate, standardization agencies, etc.

39 36
Using company staff to carry out personal assignments for regional managers (assistance to family members, construction and decoration of housing, organization of holidays and entertainment) 6 61 41 Using informal connections and networks to obtain state orders (state procurement) and loans from state banks 11 49 44 Use of the "telephone rule"-informal pressure on regional managers and verbal instructions-by representatives of federal and regional authorities 7 50 48 Regional authorities' pressure on the company's regional managers to provide funding for their regional programs and projects 13 39 53 Selecting winners of open tenders at the regional level on the basis of informal relationships and arrangements 10 42 55 Paying salaries and bonuses to staff of regional subdivisions in cash without paying social tax 22 29 59 Use of company funds by heads of regional subdivisions to buy expensive cars, telephones, to pay for travel, etc.

460
Paying for or providing services (foreign trips, medical expenses, etc.) to regional executive authorities 9 34 64 Creating informal alliances with other companies in the region to exert influence on regional authorities 2 33 70 Receiving subsidies and tax benefits from regional authorities 8 26 71 Paying exorbitant board of directors' fees to cronies 3 30 75 Paying for or providing services (foreign trips, medical expenses, etc.) to regional legislative authorities 6 26 74 Extortion of bribes by regional authorities 10 23 73 Using informal tools (compromising documents and information, material from security services and krugovaya poruka 13 ) against competitors 7 25 73 Paying police and the prosecution service to open or close criminal cases 8 22 75 Using informal tools (compromising documents and information, material from security services and krugovaya poruka) to manage company staff 3 28 74 Paying for favorable court rulings by the regional courts 10 19 75 Paying for tax audits and other inspections in regional subdivisions with pre-agreed results 4 20 82 Using informal tools (compromising documents and information, material from security services and krugovaya poruka) to exert pressure on regional authorities 6 9 87 Lease of the company's production, office premises or production equipment by regional managers for personal gain 1 12 96 Receipt of commissions or other material benefits from job candidates by heads of regional subdivisions 3 3 99 Needless to say, the priorities that can be determined on the basis of systemically used practices in a cross-company survey and an inner-company survey may differ significantly. We conducted two inner-company test surveys, one in the energy sector and one in the financial one.
The variation in the use of informal practices between companies can be substantial. For example, see the comparison of the prevalence of paying salaries and bonuses in envelopes (that is, in cash) between the cross-company and innercompany surveys in the energy sector data ( Figure 2). 13 Joint responsibility or mutual concealment; Seilschaften in German.

Figure 2: Prevalence of the practice of paying salaries and bonuses to staff in cash
Whereas this energy company seems to be ahead in its compliance with the social tax, it appears to lag behind when it comes to selecting the winners of open tenders on the basis of informal relationships and agreements (see Figure 3). Predictably, as a large company in the energy sector, it suffers more pressure from regional governments to finance their pet projects and programs (see Figure 4). Overall, the findings suggest that the level of penetration of informal practices is sufficiently high to claim that such practices are fairly ubiquitous in the daily operations of Russian businesses. It is important, however, to assess the systemic nature of these practices. We experimented with a number of weighting schemes for systemically used practices, and determined just how different the top ten practices would be if we focused on these systemically used practices. We evaluated the relative importance of each practice by weighting respondents' answers using the following scale: 0 points for "never," 2 points for "sometimes," and 5 points for "systematically." Weighting is essential to identify the most systematically occurring problems for the purposes of inner-company management.
The most systematically used practice scored 278 points (the average score was 156), while the least used practice acquired as little as 24 points (see Table 2).
Practices scoring the highest number of points are excellent pointers for the required change, whereas the lowest scoring practices are a good proxy for a change that has already has taken place. 14 14 We include the least systematically used informal practices in order to illustrate changes that have happened since the transitional period in Russia in the 1990s. Practices listed at the bottom of the table scored high in the content analysis of the media and are still occasionally used, but they have lost their systemic nature and now serve as the best indicators of the effectiveness of the reforms conducted in their respective areas.

Practice Weight Points
Extortion of bribes by regional regulatory agencies: tax inspectorate, sanitation service, police, etc. 6.60% 278 Funding of publications in regional press and broadcasts on regional TV and radio 6.60% 278 Disregarding "conflict of interest" of regional managers, e.g. their use of companies affiliated with them, recruitment of relatives, etc. 6.32% 266 Selecting vendors/contractors with whom regional managers have informal relationships or arrangements 6.24% 263 Paying for the services of regional regulatory agencies: tax inspectorate, customs, sanitation service, police, fire inspectorate, standardization agencies, etc.

6.22% 262
Receipt of kickbacks or other informal rewards (e.g. expensive gifts) by regional managers from vendors, suppliers and buyers 5.22% 220 Using company staff to carry out personal assignments for regional managers (assistance to family members, construction and decoration of housing, organization of holidays and entertainment)

5.06% 213
Using informal connections and networks to obtain state orders (state procurement) and loans from state banks 4.80% 202 Paying salaries and bonuses to staff of regional subdivisions in cash without paying social tax 4.68% 197 Using informal tools (compromising documents and information, material from security services and krugovaya poruka) to manage company staff 2.35% 99 Paying for tax audits and other inspections in regional subdivisions with pre-agreed results 1.90% 80 Using informal tools (compromising documents and information, material from security services and krugovaya poruka) to exert pressure on regional authorities 1.35% 57 Lease of the company's production or office premises or production equipment by regional managers for personal gain 0.97% 41 Receipt of commissions or other material benefits from job candidates by heads of regional subdivisions 0.57% 24 Total 100% 4212

Corruption Mitigation: Business Executives' Perspective
To complement the quantitative survey, we conducted 20 in-depth interviews with the CEOs participating in the study and four executive workshops with senior managers from three companies in the survey. These conversations helped us to identify four typical positions that executives take up in relation to corruption.
The first-toleration-is the most widespread among interviewees: "Because the whole society is corrupt, and unless systemic changes occur, corruption cannot be effectively dealt with and is widely accepted. It is not up to us to promote anticorruption changes; the government should take care of it." The second approach-exploitation-is expressed openly only by a small minority: "Since Russian society is deeply corrupt, corruption should not only be accepted but also proactively used to advance business interests." In other words, the endemic nature of corruption makes it a legitimate instrument for doing business.
The third-avoidance-is also articulated by a small minority: "Even in an endemically corrupt environment, where corruption is generally accepted, it is possible to avoid it and to run a business without it playing a role. Others may suffer from corruption but we can find a way to stay away from it." The fourth-management of corruption-is shared by a select few: "Corruption is a problem and we are working on it, even where we are unable to change the environment." These executives recognize corruption as a major risk and develop specific strategies and mechanisms to mitigate it. The four positions articulated above can be organized into a matrix demonstrating that the majority of executives are not prepared for a full-scale fight against corruption (the percentages were estimated by the interviewers). A range of psychological and technical factors prevent them from taking up the anti-corruption challenge.
Attitudes to corruption Passive attitude Active attitude

Acceptance of corruption as a real risk to business
Toleration (60%) Management (15%)

Non-acceptance of corruption as a real risk to business
Avoidance (15%) Exploitation (10%) To overcome this situation, corporate executives have to adopt what we call "reflective leadership." Reflective leaders see corporate responsibility as inclusive of the courage to confront external corruption proactively and of the will to enforce anti-corruption instruments to deal with the firm's internal corruption. As we have shown in this section, this is a particularly challenging task in emerging markets which are often ridden with endemic corruption.

Managing Corruption: Reflective Leadership, Top-Down and Bottom-Up Approaches
There are two distinct theoretical approaches to corruption management at company level. The first, the so-called top-down, prescriptive approach, is advocated by international organizations such as the UN and the OECD and is The Altering strategy (high regulatory dependence/high level of political resources), which leads to engagement with the government, institutional change and regulatory capture; this strategy benefits both the firm and the economy.
The Avoidance strategy (low regulatory dependence/high level of political resources), which leads to self-restraint, non-investment, and formation of business groups; this strategy benefits the firm.
The Alliance strategy (high regulatory dependence/low level of political resources), which leads to networking and forming joint ventures; this strategy benefits both the firm and the economy.
The Accedence strategy (low regulatory dependence/low level of political resources), which leads to acceptance of the rules of the game proposed by government officials and bribing; this strategy benefits both the firm and the economy.
In his theoretical attempt to organize existing internal corruption mitigation

Corruption Management: Strategic Approaches
Our study has provided some insights into how executives who subscribe to corruption management employ mitigation strategies and choose instruments to achieve their goals effectively. The study identifies at least two distinct approaches to agenda-setting. The first can be seen as universal, and is associated with the etc. One participant at an executive workshop explained: "We went to a training session organized by our British shareholder and heard about some interesting anti-corruption instruments. We became quite excited and implemented them back home, only to realize that that they neither fitted our context, nor produced any impact." The second uses a bottom-up approach for tackling the specific corruption risks associated with informal practices when these are widespread in the company, that is, with a concrete set of objectives in mind. One of the interviewed CEOs framed it as follows: "We spend hundreds of millions on IT and I know that we suffer from kickbacks received by our purchasing managers from vendors. I want to fight this so I have set three goals: reduction of our IT-related costs by 10 percent next year; a review of the list of our IT vendors in order to get rid of companies affiliated with our managers in some way, and uncovering a few cases of kickbacks and making them public." A combination of both top-down and bottom-up approaches would constitute best practice. However, we found that in the majority of cases executives either do not try or, if they do try, struggle, to identify a short-list of damaging practices. We propose a simple yet comprehensive five-step approach to identifying targets of anticorruption strategies.
First, the development of a comprehensive list of practices using in-depth interviews with executives and the content analysis of business publications in the national and regional media. It is essential to keep the original formulation of practices while verifying the list against existing classifications. 27 Second, experts with deep company knowledge (senior executives and business unit managers) should be invited to add to the list of practices, especially where these are specific for their own company. It would be practical to keep the list manageable so that it can be converted into a simple-to-answer questionnaire. Any omission may lead to failure to identify some of the most widespread practices and those that are taken for granted.
Third, once the final list is determined, company employees would be asked to assess whether, in their experience, these practices occur systematically, occasionally, or never. Anonymity of respondents must be assured. A large random sample of firms' employees at all levels of the hierarchy is recommended. From the respondents' point of view, it would be best if the questionnaire was administered on-line or by an outside consultant who does not report directly to the management. The survey would then produce a list of the informal practices most frequently recognized and acknowledged by company employees. This would then form a foundation for the development of specific anti-corruption strategies.
Fourth, the CEO and senior corporate leaders should select a limited number of specific practices they want to target, identify specific goals they aim to achieve with regard to each of them, and select monitoring instruments. The choice of appropriate execution strategies will be discussed in the next section. The proposed instrument allows executives to deal with specific corruption risks rather than corruption in general, to direct limited resources to important targets, to communicate the anti-corruption strategy effectively, and to monitor the change.
The suggested methodology is not without limitations. It is subject to bias, especially when the design of the questionnaire is dominated exclusively by senior executives of the organization who have extensive but one-sided knowledge of their organization. The number of questions in the survey should remain manageable, which implies limited contextualization. Respondents are asked to assess frequency of their experience of informal practices, but where they are not directly involved with the practice, they will inevitably report their perceptions. Although there is normally a perception bias in corruption studies-personal experience of involvement with corruption is reported by far fewer respondents than the omnipresent nature of corruption in general-it is likely to be compensated for by the tendency of respondents to save "corporate face" and to report on a need-toknow basis in the context of the in-house study of the firm. Our coaching and teaching experience shows, however, that the recognition effect of informal practices (when things are named in a familiar way), contextualized design of the questionnaire, large size and diversity of the sample, as well as the genuine willingness of senior executives to target corruption at company level, ensures the success of the exercise.

Corruption Management Strategies at the Company Level
Our research into the specific approaches to corruption mitigation adopted by companies operating in Russia confirmed the relevance of Lange's model of organizational controls. Executives who subscribe to the management of corruption adopt two distinct types of strategies when dealing with it-control and prevention-and use two distinct transmitting channels for their actionsorganizational hierarchies and personal networks.
In the control mode, managers deal with informal practices reactively after these practices have already taken place and damaged the business. For example, the CEO of an oil company publicly fired a successful regional manager for selling gasoline to an informally affiliated company at a lower price. In the prevention mode, executives deal with risks which might hurt the business if they occur in the future and proactively look out for practices that may be indicative of those risks.
For example, the CEO of a mining company issued an executive order prohibiting sales managers from sponsoring foreign trips for government officials.
Hierarchical or formal strategies imply the use of such institutional instruments as executive orders and procedures, codes of conducts, incentive systems, etc.
Network-based or informal tools are unwritten, and are spread through unofficial channels such as personal networks, informal agendas, informal signals, and informal incentives. 28 Our interviewees point out that in addition to formal policies, it is crucial to communicate the leadership's degree of commitment informally. Informal incentives and signals can be very effective in mitigating corruption risks and preventing specific informal practices. One CEO gave us an example of an informal back-up of formally announced policies. He set an example for his regional particular manager had been in the past. According to him, that informal warning had a stronger educational impact than all formal policies and procedures developed to tackle the issue. The combination of two modes and two types of transmitting channels discussed above creates four ideal types of corruption management at company level, as presented in Table 4.

Informal channels (network-based, unofficial, unwritten, non-codified)
Reactive management through informal channels (2) Proactive management through informal channels (4) 3. Proactive/formal. Rotating membership in a tender committee every two years as a matter of policy prevents long-term informal affiliations of its members, bias in decisions, and inflated contracts for affiliated vendors and suppliers of large oil and gas companies.
4. Proactive/informal. Before introducing a new policy with regard to purchasing managers' expenses, a Russian energy company CEO attends a number of meetings with them and discusses the proposed policy off the record. These meetings allow the managers to share concerns, raise important questions, and create awareness, and gives them a chance to adjust their routines in advance of publication of the formal policy.
None of the described types of strategies is superior in delivering effective management of corruption. The choice is dependent on such contingencies as the nature and prioritization of specific corruption risks, the initiators, beneficiaries and cost bearers, the resources available to the CEO, and the corporate culture of the firm. CEOs of companies operating in an endemically corrupt environment need to master all four types and to develop the largest possible arsenal of anticorruption strategies.

Conclusion
In conclusion, let us return to what we consider an effective approach to managing corruption in endemically corrupt environments such as in Russia. Action points for CEOs and other senior business leaders may be summed up as follows: Make corruption management one of the CEO's top priorities. Start by recognizing corruption as a major risk for the company and its stakeholders, and overcome blind spots and lack of recognition with regard to corruption risks. Channel the priority status of the anti-corruption management through both the organizational hierarchy and informal networks.
Use a bottom-up, ethnographic approach to identify specific practices that are particularly problematic. Spend time and other resources investigating which specific informal practices inflict the most systematic damage on the corporation.
Slice the corruption "elephant" into smaller pieces that can be more easily tackled in endemically corrupt environments. Once identified, target these specific practices, not corruption in general.
Combine formal tools and informal influence. Effective anti-corruption strategies are based both on formal tools (such as hotlines, codes of conduct, open tender competition and standard policies and procedures) and informal influence (role modeling, peer pressure and other instruments of informal governance).
Provide training to give people the skills to identify, articulate, measure and manage corrupt practices. Most CEOs mitigating the risks of business corruption in Russian companies agree that making key employees at every level of the organization active participants in the anti-corruption strategy is critical for its success. Conducting detailed surveys on informal practices and providing a platform for discussion of the corruption elephant-in-the-room is an important addition to anti-corruption legal training and integrity education.
A leader's will to control the risks associated with corruption, to go beyond general programs of anti-corruption awareness, and to offer specific skills to identify, articulate, measure and manage corrupt practices can and does work in endemically corrupt environments. The successful and effective implementation of these approaches depends not only on the leader's engagement and attitudes towards this important issue, but also on the framework of the industry in which they work.