When leading international companies are challenged over their business ethics or environmental standards, the ties between these companies and governments mean that the consequences are almost invariably political as well as economic. The huge sums of money involved in major international arms deals, and the secrecy and sensitivity that surrounds them, increases both the temptations and the potential danger-levels of any malpractice. Perhaps it is no wonder then that the terms "arms trade" and "corruption" can appear such natural partners.

In such circumstances, a wider public framework - including codes of conduct and monitoring institutions, both national and international - is essential to ensure that businesses and governments act transparently and ethically. A current high-profile case (involving British Aerospace, the government of Tony Blair, and a lucrative contract to sell arms to Saudi Arabia) is a test-case of the performance of regulators as well as of corporations and politicians.

Michael Hopkins is chair of the International Centre for Business Performance and Corporate Responsibility, Middlesex University Business School, and managing director of MHC International. His books include The Planetary Bargain: Corporate Social responsibility matters (Earthscan, 2003) and Corporate Social Responsibility and International Development: Is Business the Solution? (Earthscan, 2006)

Also by Michael Hopkins in openDemocracy:

"Paths to development: the UN vs private business"
(21 November 2006)

Government, socially responsible?

The story broke in December 2006, when the British prime minister Tony Blair announced that an investigation by the Serious Fraud Office (SFO) into the circumstances of the major al-Yamamah arms deal agreed by the leading aerospace company British Aerospace (BAe) with Saudi Arabia in 1996 - which had long been surrounded by allegations of bribery - was being "discontinued". It was, he said, a tough decision, but one he had to take in the "national interest".

The cancellation was designed to protect a subsequent, £10 billion agreement secured by BAe with Saudi Arabia for seventy-two Eurofighter jets. The Saudis had, it appeared, threatened to withdraw from the deal because of the SFO investigation.

The evolving, entangled story goes way beyond Britain, as Chris Floyd writes: "Slush funds, oil sheiks, prostitutes, Swiss banks, kickbacks, blackmail, bagmen, arms deals, war plans, climbdowns, big lies and Dick Cheney - it's a scandal that has it all, corruption and cowardice at the highest levels" (see "War profits trump the rule of law", Baltimore Sun, 22 December 2006).

As Blair's legacy is increasingly debated in the months before he leaves office, it is inevitable that observers are questioning whether the traditionally business-friendly Conservatives can find a principled alternative to New Labour's corporate understanding of the national interest. (The SFO decision was quickly followed by a draft of the opposition Conservative Party's report on responsible business, which said that "recent scandals such as the BAe-Saudi arms deals investigation, among others, demonstrate a continued need for focus by UK companies on anti-corruption activities".)

More immediately, the British government's inglorious decision suggests that its tolerance of business malpractice is in contradiction with the ethical principles it has proclaimed.

The Blair government's record on business responsibility (also known as corporate social responsibility [CSR]) started well enough after its election in May 1997, with the late Robin Cook's advocacy of an "ethical dimension" in foreign policy and support for the ethical-trading initiative (ETI), an NGO promoting fair trade.

A decade on, the ethical foreign policy lies in tatters after the Iraq debacle, while ethical trade appears to apply only to small-scale trade, not the billions involved in Saudi Arabia. As for corporate social responsibility, the New Labour government even installed a minister responsible for it. This has been a revolving-door post; the latest in a long line of ineffectual CSR figureheads is Margaret Hodge, minister of state for industry and the regions. Her mandate presumably does not cover Saudi Arabia.

Blair claimed that the investigation had to stop because it was not in the national interest to upset the Saudis, and would lead to the loss of thousands of jobs for Britain. He may have calculated that the damage to the image of Britain as a trusted and incorrupt country with which to do business will be mitigated by the passage of time and his own forthcoming retirement. Perhaps, too, he was thinking of his own future (possibly with the Carlyle Group, of which Blair's predecessor John Major was once chairman, and which is also heavily involved in the Saudi deal). If Blair does eventually join this powerful group of US interests, it might help to explain his sometimes bewildering support for President Bush's initiative in Iraq (2003), and the lack of one in Lebanon (2006).

The City, unamused

It is reliably reported that Mark Anson, chief executive of Hermes (Britain's biggest pension fund, which manages the BT pension scheme) wrote to Tony Blair saying that his decision to halt the SFO's inquiry into the al-Yamamah deal threatened the country's reputation as a leading financial centre, and that it would have a high long-term cost for business and markets (see Kate Burgess & Jean Eaglesham, "Hermes enters BAE probe fray", Financial Times, 22 December 2006)

The City, worried about its reputation, has long endorsed good corporate-governance principles. For instance, the Combined Code on Corporate Governance (CCCG) sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders. All companies incorporated in Britain and listed on the main market of the London Stock Exchange are required under the listing rules to report on how they have applied the combined code in their annual report and accounts.

There is also analysis to suggest that good corporate governance can be very profitable. An opinion survey by McKinsey reported that investors view board governance as being of equal importance to financial performance in their decisions. Further, investors across Latin America, Europe, the United States and Asia (over 80% of those interviewed) would be willing to pay more for a company with good board-governance practices.

It is interesting to note (as I have argued in my book, CSR and International Development) that business often seems more pro-active than government itself in terms of governance and their social responsibilities. The McKinsey survey suggests why: poor governance is simply not beneficial for business.

Standards, and more

The basis for most international work has been the Organisation for Economic Cooperation and Development (OECD's) "principles of corporate governance". These cover the rights of shareholders, the equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure and transparency and the responsibilities of the board.

There are two other significant agreements: the Commonwealth Association for Corporate Governance (CACG) principles covering fifty-six countries in the Commonwealth, and the International Corporate Governance Network (ICGN) principles. But there is no single model of corporate governance: systems vary by country, sector and even in the same corporation over time. Among the most prominent systems are the United States and British models, which focus on dispersed controls; and the German and Japanese models which reflect a more concentrated ownership structure.

A meeting of the OECD working group on bribery in December 2006 raised "serious concerns" about the closure of the BAe/Saudi corruption investigation by the SFO. The issue will not go away; the OECD working group will discuss it further in March 2007, alongside a written report from the British government on the country's implementation of the OECD anti-bribery convention.

The logic of this convention is that if (say) a British citizen on a business trip to Saudia Arabia pays a bribe there, he/she could be prosecuted in Britain under British law. In practice, it is very difficult to establish such application of principle, even more so when the politically powerful are involved.

In the past, Helmut Kohl and Francois Mitterrand were tarnished toward the end of their respective, long periods in office, and it should not be forgotten that al-Yamamah was Margaret Thatcher's achievement. The scandals in Italy (like the countries of these other former leaders, an OECD member) under Silvio Berlusconi suggest both that not much has changed and that the OECD convention lacks enforcement mechanisms.

At the same time, NGOs such as Transparency International - with chapters all over the world, Britain included - won't give up. It has added its support to a letter signed by a large coalition of civil-society organisations sent to the British prime minister asking him to re-open the investigation of the al-Yamamah case.

Guides, not rules

The OECD has also drawn up guidelines that constitute a set of voluntary recommendations to multinational enterprises in all the major areas affected by their work: business ethics (including employment and industrial relations), human rights, environment, information disclosure, combatting bribery, consumer interests, science and technology, competition, and taxation.

Governments which adhere to these guidelines commit themselves to promote them among multinational enterprises operating in or from their territories. So far, the adhering countries comprise all thirty OECD member-states, plus nine non-members (Argentina, Brazil, Chile, Estonia, Israel, Latvia, Lithuania, Romania and Slovenia).

This instrument's distinctive implementation mechanisms include the operations of national contact-points (NCPs) - government offices charged with promoting the guidelines and handling enquiries in the national context.

There have been moves to make such international codes of conduct binding. Many transnational corporations would welcome this, since it would help to create a level playing-field when bidding for international business. (As the director of a small company myself, we are surprised at losing bids to seemingly less qualified firms. Since tendering, bidding, and the reasons for the winner's selection are secret, we just have to bite the bullet).

Don't just agree

There is a whole series of agreements, and the numbers and conditions are becoming quite bewildering for companies. Three relatively recent ones are:

• the World Economic Forum-led Partnering Against Corruption initiative, launched in January 2004

• the United Nations convention against corruption, which entered into force in December 2005; it has been signed by 140 countries and ratified by eighty-three, including many developing countries,

• the Extractive Industries Transparency Initiative (Eiti), which was actually set up by the Blair government, and involves companies and governments disclosing how much a company is paying to host governments for oil, gas and minerals.

The Eiti was in part a response to concerns that oil-rich countries such as Chad, Angola, and Niger are ruled by a plutocratic ruling class while most of their people live in great poverty. But one of its problems is that it leads to disclosure of oil-company funds and their route into government coffers, but there is no obligation on governments to say where the money goes.

Where it leads

The record, as a whole, is not good. In Britain, Blair has certainly increased the level of cynicism about the probity of British companies. Elsewhere, research by the World Bank indicates that over the last five-to-ten years, there has overall not been a significant change in the levels of corruption in the world. The World Bank estimates that the total value of bribes paid around the world in a year is about $1 trillion, or about $150 for every person on the planet.

For those who neither pay nor receive bribes, the way ahead is difficult. Eventually, a company known not to pay bribes will reduce its own costs. But in the short- to medium-term, it may not win the bids for work and end up as a non-player. Bribe and be rich, probity and poverty: it can be a hard, sad choice.

In some cases, it may also have become either an opportunity to play the system by observing some rules and ignoring others, or even an active disincentive to good behaviour. The best way ahead is an international law that is actually enforced. That will require an immense act of political will and cooperation, with strong business support.