Filter Coffee #022

On Favours, IOUs, Bribery & Corruption

Dear Friends,

Thank you for your comments — they always provide a refreshing perspective on the topics that were discussed. I’d like to cover some of the feedback on last week’s issue.

A reader wondered if there are “truly independent” directors. I would say yes, there are such directors who exercise their independent judgement and thinking when discussing a matter that comes up for approval by the Board. After all, independence is a state of mind and can be experienced only through actions born out of that independence.

While under the listing agreement, the listed entities must have a “woman independent director”, Sec. 149 of the Companies Act is silent on that requirement. That’s the change in law that we discussed when we interviewed Mr. Aga.

It’s great to get such encouraging feedback. Thank you!

Constitution Day: 

My good friend Nataraj suggested that I mention that Constitution Day, or National Law Day, was on 26th November. It has been celebrated every year since 2015 when it was so designated in memory of Dr. Ambedkar whose 125th birth anniversary was in 2015. In fact, it was on 26th November 1949 that the Indian Constitution was adopted by the Constituent Assembly, which then came into force on 26th January 1950 — which we all know now as Republic Day.

Favours, IOUs, Bribery & Corruption: 

I’m sure all of you are familiar with the expression “quid pro quo”, which simply means “favour for a favour”. There’s also another expression “you scratch my back and I will scratch yours”. There may be other synonyms. The point is, that people expect you to return the favour in some form or the other. A favour comes with an invisible string attached! Let us see how this plays out in real life.

In a societal set up, favours done or sought can lead to uncomfortable situations. If someone has done you a favour you may find yourself having to return it on a scale that you find rather challenging. I shall illustrate this with a case:

An IAS officer, let’s call him Raman, sought the help of his college mate, who we’ll call Laxmanan, to get his son admitted to a school of repute. This was done, albeit with some effort on the part of Laxmanan. A few years later Laxmanan approached Raman and requested him to give his son a character certificate. Now Mr. Raman has not seen this boy, let alone be able to vouch for his character. The request was rather innocuous, but Raman was very uncomfortable giving that letter. When eventually he summoned enough courage to politely decline, the frosty look that he got from Laxmanan sent a chill down his spine. No way of telling when their relationship will thaw.

In the West, favours are like IOUs (I Owe You). It is very common when someone does someone a favour they openly say “you owe me one” or the person himself would say “I owe you one”. These IOUs are like timeless obligations and when a person calls in the IOU, the discomfiture with which one ends up honouring that IOU could be such that it is followed by “OK, now we are quits”. That parting shot says it all. So, should one “Neither a favourer be nor a favoured be”? That’s a bit extreme. The test I would recommend is to ask yourself before seeking a favour: “Will this obligate me to do something in return, at some discomfiture?”. The answer may not be easy to come by but this exercise will help you consider options.

There are many who do not expect anything in return for favours done. But returning the favour lightens the chest from a sense of obligation. There are many others who, at every available opportunity, talk about the favours done by them as if to renew that feeling of obligation or perhaps to extend the validity of the IOU. 

A certain kind of ‘quid pro quo’ plays out in a social context. For example, my wife remembers who gave what as a gift at a wedding or birthday and makes sure it is returned in cash or kind on an appropriate occasion with a mark up as if to compensate for the weakening rupee! Same goes for attending a wedding or some other function.

In a contractual context, inducements and incentives play out at different times. Incentive seems pretty harmless, and is seen as a reward for something when accomplished either meets or exceeds expectations. Lawful inducement is also a form of incentive provided to achieve an end result. But inducement may involve an element of fraud if it is used to get a person to do or agree to do something which he would not have done otherwise. Inducement could be in the form of a misrepresentation of facts or could be monetary. In the latter case it partakes the character of a bribe. Incentive seems a much preferred word than inducement, which seems to suffer from an air of suspicion. But one cannot paint inducement as treacherous with a broad brush. Take for instance a case where an applicant is offered stock options and performance incentives if they work for a Company for a given period. That clearly is a bona fide inducement. On the flip side, if you persuade someone to leave their current employer who is a competitor with the promise of rewarding them, it would not exactly qualify for a lawful inducement though there was nothing unlawful. At best, it is a conduct that is lawful but inappropriate.

I asked my friend Ashvin as to what, according to him, might be the difference between incentive and inducement. His immediate response was that while incentive is a kind of reward or encouragement for having done something, inducement is like persuading a person monetarily or otherwise to do something, in which case inducement could be in the nature of a bribe. Interesting perspective.

Speaking of bribery, all over the world, with the exception of a few countries, to get what you are otherwise entitled to, you need to grease someone's palm. Apparently this practice dates back to the Roman era when it was referred to as ‘Ointment Money’. Some might want to know the difference between bribery and corruption, besides both being bad.

Bribery is an act of unlawful inducement but corruption would include a bunch of illegal acts by people who are in a position of power. Are they interrelated? In a way yes. A corrupt official would want his palm greased and the beneficiary bribes him. It would seem that bribes are the quid pro quo. The reluctance to bribe someone and the eagerness to bribe someone are two different dispositions. In the former case, you can be resolute and indignant that you will not give money to get something done which is lawful and which is your entitlement. In the latter case, you may offer a bribe to speed up a process within the legal framework due to certain exigencies. It is speed money. If the bribe is meant to secure something that a person is not legally entitled to, then that would be bribery of the worst form.

Corruption proceeds on a different footing. Take for example a politician who has the authority to transfer or appoint a person or grant some permission under law. If he expects to be paid by an applicant who is unwilling to bribe and yet is forced to give a bribe, then the politician is indulging in corruption.

You may be familiar with the proverbial saying of Lord Acton, a 19th Century politician: “Power Corrupts; Absolute Power Corrupts Absolutely.” It implies that the greater the power, greater the propensity for moral bankruptcy. People in positions of power tend to abuse that power; not necessarily always to extract money but to assert authority and to subjugate people. 

When we say that the system is corrupted, it usually is a top down unethical conduct. When the people at the top of the pyramid expect monetary or other form of gratification, that malaise percolates to each level. But there are other pyramid structures where the top of the pyramid is made to appear pristine like a snow peak but down the pyramid the corrupt practices flourish. There are two reasons for this. One, the men at the top might prefer to wink at these corrupt practices than to perform a cleansing act. The other possible reason is because the men at the top would like to be the unseen beneficiaries of the kick-backs without any risk of any frontend involvement in accepting those bribes.

There are certain other circumstances where the top dog mobilises payments and distributes them among his followers, During an election, for example. It seems like a well structured distribution waterfall.

“Facilitation or Permitted payments’’ are those which are in the nature of small payments or extension of some kind of hospitality in return for hastening an approval or a grant which is lawfully due to the person making such payment. 

There are countries which permit such facilitation payments. But such payment would become a bribe if it is made to deny another person’s lawful rights. For example, a person needs a licence to operate a Bar and makes a facilitation payment to get it quickly. In some countries, this would not constitute a bribe if all other conditions for grant of license have been met. In India, however, this is not the case — such a payment would still constitute a bribe. The United Nations Convention against Corruption (UNCAC) prohibits facilitation payments.

The UK Bribery Act and The Foreign Corrupt Practices Act of USA make bribery a punishable offence. In fact, these laws, and the Prevention of Corruption Act of India, have extraterritorial reach. We can look at these specific Acts in more detail at a later date.

If you wish to know more about the status of facilitating payments in different countries you can visit this GAN’s risk and compliance portal.

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Hamlet is one of the most popular of Shakespeare’s plays. The play has powerful quotes about corruption of various kinds. This famous line spoken by Marcellus, a palace soldier, in Act I, Scene 4 says it all:

“Something is rotten in the state of Denmark.”

Bribing can also happen at home: (please don’t take this seriously)

Son: Dad what is the meaning of ‘metamorphosis’?
Dad: Get me a piece of chocolate from the fridge, I will give you the meaning.
Son: But, your diabetes?
Dad: You too can have a piece, but don’t tell Mom.
Son: Sure Dad. 

And here’s a classic: 

Three old men went to see God.

The first old man, an American, asked God when will his country come out of recession. "100 years," God said.

The American started weeping profusely. "I will not live to see that day"

Second man, a Russian asked God "When will my country become prosperous?"

"Fifty years," came the reply.

Russian too started weeping profusely. "I will not live to see that day"

Finally the Indian asked God, "When will my country become corruption-free?"

God started weeping profusely. "I will not live to see that day.”

That’s it for this Sunday, friends. Please leave your comments here. Until next week, hang on to that mask and maintain social distance. Be a part of the solution and not the problem!