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Apple patents displayed at the World Intellectual Property Organization. (Denis Balibouse / Courtesy Reuters)
Every day, commercial transactions worth hundreds of billions of dollars and financial transactions worth more than a trillion dollars crisscross the world. From those activities flow the earnings of millions of companies, the wages of billions of people, the products most everyone everywhere buys, and the innovations that improve their lives. Although global trade, in that sense, hits very close to home, the problems that undermine it -- corruption and intellectual property theft -- can seem remote. And in many countries, corruption and disregard for intellectual property rights are just another cost of doing business.
But the damage is huge: in 2010, the United Nations estimated that corruption wipes out more than five percent of global GDP each year. That is the result of more than $1.5 trillion in bribes. According to a 2009 Transparency International survey, nearly two in five business executives have been asked to pay a bribe when dealing with public institutions; half of all businesses executives estimated that corruption raised project costs by at least 10 percent; one in five claimed to have lost business because of bribes by a competitor; and more than a third felt that corruption was getting worse. According to United Nations research, 61 percent of supply chain managers view corruption as the most significant risk to their business after product safety problems.
Intellectual property theft is equally daunting. In 2008, the total worldwide economic value of counterfeit and pirated materials was $650 billion. By 2015, this number is expected to hit $1.77 trillion. To put that in perspective, the U.S. International Trade Commission has estimated that, if protections for intellectual property rights in China (the worst offender) were strengthened to a level on par with those in the United States, the U.S. economy could add as many as 2.1 million full-time workers, U.S. exports of goods and services could increase by approximately $21 billion, and sales to U.S. majority-owned affiliate firms in China could increase by approximately $88 billion.
But the problem is not just the money. For one, criminal networks thrive on counterfeiting and piracy. In addition, counterfeited items often do not work, are highly dangerous, (such as counterfeit medicines and replacement parts for automobiles and aircraft), or can cause significant damage to the environment (in the case of counterfeit chemicals and fertilizers). Even worse, they can create national security problems. A case in point: in 2011, the Senate Armed Services Committee released a report documenting a year long investigation into counterfeit electronics in the Department of Defense supply chain. Among other findings, the Senate Armed Services Committee revealed that counterfeits were found “in assemblies intended for Special Operations helicopters, and in a Navy surveillance plane among 1,800 cases of bogus parts.”
FAIR LABOR LESSONS
In the past two decades, international organizations, including the World Bank, regional development banks, the World Intellectual Property Organization, the World Customs Organization, the World Trade Organization, and the Organization for Economic Cooperation and Development (OECD), have put combating corruption and intellectual property theft at the top of their agendas. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and, more recently, the United Nations Convention Against Corruption, established a global legal framework for doing so. Yet considerable challenges remain in enforcing national and international laws, including limited government resources and corruption among those tasked with enforcing the laws themselves.
Since there are limits to what international organizations can do about corruption and intellectual property theft, it is time to start considering private sector-led programs to promote responsible business practices in the global supply chain. Multinational organizations already have the experience: most companies work actively with companies in their supply chains on quality management, fair labor practices, health and safety measures, environmental production, and, increasingly, anti-corruption efforts.
The private-sector campaign for fair labor is instructive for a number of reasons. Thanks to years of effort, fair labor has become an expected component of responsible business and supply chain management. That was not the case 30 years ago, when the clothing and footwear industry raced to open factories in the lowest-cost markets. A number of U.S. and international groups worked together to draw attention to the poor conditions at those factories, to push for better labor regulations for exporting and importing countries, and to develop voluntary labor standards.
To supplement those new, more stringent regulations and to raise the bar of expectations for a company’s suppliers, multi-national companies began to issue supplier and vendor codes of conduct including protocols for periodic or random audits of factories and facilities. Although the results have been inconsistent, they have at least served to build awareness of labor standards and collect data on working conditions. Companies also share practices and build treatment of workers into their risk assessments. They design improvement plans that can be measured over time. They should now take the experiences that have been effective and apply them to other challenging issues such as corruption.
EASY AS ONE, TWO, THREE
In practical terms, what does this mean for a multinational company looking to promote greater respect for its own and third parties’ intellectual property and the prevention of corruption?
The first step would be to develop a set of principles and policies. Anti-corruption and intellectual property policies are often adopted by a high-level resolution of a company’s board. The Toshiba Group, for example, has corporate-wide policies on such issues as “improper payments” and “intellectual property rights” as part of its comprehensive “Group Standards of Conduct.”
The second step is for the company to develop a code of conduct that goes into more detail about its expectations for its employees, contractors, and others. One rule might be that, in making goods, the company will only utilize intellectual property that it has the rights to. The code of conduct for the Callaway Golf Company, for example, states that “The Company is committed to protecting its own intellectual property from infringement by others, and is also committed to respecting the intellectual property of others.”
Of course, such rules are not effective without good operating procedures, which leads to the third step: a management system that includes comprehensive risk assessments, procedures for training of employees and third parties, rigorous due diligence standards, contracting practices, supplier requirements, security and asset management strategies, recordkeeping, and similar mechanisms to monitor and help to ensure that the company’s policies are understood and implemented. In this phase, a company asks, “How do you know?” questions. For example, “How do you know that one of your suppliers is not illegally obtaining intellectual property that’s ending up in your product?” To address these and other concerns, the General Electric Company’s procedures include extensive supply chain due diligence, including on-site inspection of many suppliers prior to placing orders, and periodic audits thereafter. GE also requires third parties to comply with its supplier program, which calls for suppliers to respect the intellectual property of others, and for their (second-tier) suppliers to conform to similar standards.
The fourth step is the establishment of controls and checks to ensure employees and third parties are following the procedures and that all policies and procedures are regularly reviewed. The results of those reviews must also be reported up the chain to company management. The most effective approach is one that is committed to continual improvement. Many leading multinational companies have already developed and implemented effective management systems and review cycles to meet labor standards and cut down on corruption. There is now a movement towards extending these systems to include the protection of intellectual property.
BACK IN BUSINESS
Given the magnitude of corruption and intellectual property theft problems, companies should be willing to get on board with creating a global marketplace that is more transparent. By doing so, they not only mitigate risks that affect the corporate bottom line -- both in terms of financial losses and potential legal penalties -- they also enhance reputation, credibility, and brand loyalty, all of which builds shareholder value.
As U.S. Secretary of State Hillary Clinton stated in an October 2011 speech in New York, “All who benefit from the global economy must respect the rules of fair competition…. To make the most of open markets, we have to make sure all companies play by the same rules… The rules must apply equally to all companies.” As the world works to lift itself from the Great Recession, likeminded and innovative companies, governments, and NGOs can and should be at the forefront of promoting rules-based global commerce. In taking up this major and necessary challenge, there are also boundless opportunities -- not only for innovative and ambitious businesses -- but also for the workers they employ, the communities where they operate, and the global economy at large. Better business, a level playing field, could thus benefit all economies.