Download global financial integrity systems and global carbon integrity systems

THE INSTITUTE FOR ETHICS, GOVERNANCE AND LAW
(IEGL)
A joint initiative of the United Nations University, Griffith, QUT, ANU, CAI and OP Jindal University State
Patron: Hon Penelope Wensley, AC, Governor of Queensland
EXTENDING THE INTEGRITY SYSTEMS
APPROACH:
GLOBAL FINANCIAL INTEGRITY SYSTEMS AND
GLOBAL CARBON INTEGRITY SYSTEMS
Background
For the last two decades, the primary focus of corruption studies and anti-corruption activism has been
corruption within sovereign states. International activism was largely directed at co-ordinating national
campaigns and to use international instruments to make them more effective domestically. This reflects the
broader fact that, since the rise of the nation state, states have comprised most of the largest institutional
actors and have been the most significant institution in the lives of most individuals. This made states the
‘main game in town’ for the ‘governance disciplines’ – lawyers, political scientists, economists and ethicists.
However, over the last twenty five years, the flow of money, goods, people and ideas across borders has
threatened to overwhelm the system of sovereign states. Much activity has moved outside the control of
nation states at the same time as nation states have ‘deregulated’ and in so doing have transferred power
from those exercising governmental power at the nominal behest of the majority of its citizens to those with
greater wealth and/or greater knowledge in markets in which knowledge is typically asymmetric.
It is now recognized that many governance problems have arisen because of globalisation and can only be
addressed by global solutions. It must also be recognized that governance problems at the national level
contribute to governance problems and the global level and vice versa. This is true of current issues from the
melting Greenland glaciers to a series of ethical and financial meltdowns – the ‘Global Financial Crisis’
(GFC) and the ‘Global Carbon Crisis’ (GCC). It is also true of traditional issues involving interlinked
domestic and international conflict and the toxic symbiosis of foreigners paying bribes to officials, leading to
inappropriate infrastructure decisions, stunted development and in which the unearned profits are shifted,
sifted and deposited in tax havens – items on the G20 agenda.
In dealing with these global governance challenges, the integrity systems approach – especially that adapted
from the National Integrity Systems Assessment (NISA) methodology – is promising.
Transparency International (TI) commissioned me to do an overview paper for the 2008 Athens IACC ‘from
national integrity systems to global integrity systems’. In that paper, I outlined how the application of
integrity systems approach might be applied the GFC and GCC and other global sectoral problems.1 Since
then we have been working on the development of that methodology through a series of papers and projects.
The first major paper after Athens on the GFIS was ‘Adam’s Smith Dinner’2 (). The first on the GCIS was in
a presentation at the 2011 IACC. The Australian Research Council has funded the GCIS work.3 Professor
Justin O’Brien, Professor George Gilligan are I working on the former.
NISA Approach
The integrity systems approach arose out of the recognition that the best way of combating corruption and
promoting integrity is not through a single law and anti-corruption agency (the Hong Kong ICAC model).
First, what is needed is a combination of state institutions and agencies (courts, parliament, police,
prosecutors, DPP), state watchdog agencies (ombudsman, auditor general, parliamentary committees), nongovernmental organisations (NGOs) and the norms (including values and laws) and incentive mechanisms by
which relevant groups live. Secondly, this combination of interconnecting norms, institutions and
mechanisms are primarily directed at promoting the positive goal of good governance rather than merely
containing corruption which is one form of governance failure. This combination has been given various
names an ‘ethics regime’4, an ‘ethics infrastructure’,5 and ‘national integrity system’6. Two methodologies
1
A week later, I was a guest of honour at the World Forum on Ethics and Business in the European Parliament – invited
to speak on ‘Capitalism Quo Vadis?’
2
Keynote at a March 2009 Glasgow conference on 250th anniversary of the publication of Smith’s ‘Theory of moral
sentiments’ later published in McNeil and O’Brien (eds), The Future of Financial Regulation, Hart, Oxford, 2010.
3
Chief Investigators Sampford, Thakur, Maguire, Fisher, Breakey and Cadman.
4
Sampford, C. (1990). Law, Institutions and the Public Private Divide. ALTA keynote, published in Federal Law Rev,
185 (1992); Sampford & Wood (1993) The future of business ethics in Sampford/Coady (Eds.), Business Ethics & Law.
Sydney: Fed Press.
5
OECD, 1996, 2004, 2009. OECD. (1996). Ethics in the Public Sector: Current Issues and Practices. Paris: OECD;
OECD. (2004). Measures For Promoting Integrity And Preventing Corruption: How To Assess? Paper forPub
Governance Ctte; OECD. (2009). Towards a Sound Integrity Framework. Global Forum on Public Governance.
6
Langseth, P., Stapenhurst, R., & Pope, J. (1997). Role of National Integrity Systems in Fighting Corruption Comm L
Bull, 23, 499; Pope, J. (2000). Confronting Corruption: The elements of a National Integrity System (TI Source Book).
Berlin: TI.
were developed for understanding national integrity systems (a) the NIS Country Studies approach –
developed by Jeremy Pope and Alan Doig and (b) the National Integrity Systems Assessment methodology
by Charles Sampford and Jeremy Pope (later joined by A.J. Brown). The former concentrated on the strength
and effectiveness of a set of more or less standard ‘pillars’ found in what were generally thought to be robust
integrity systems. The latter sought to start with the institutions that were there and to map and assess the
interactions between them.
In 2005, Prof Ramesh Thakur (then UNU Senior Vice Rector and UN Assistant Secretary General working
with Kofi Annan on UN reform) suggested that the latter approach might be particularly useful for global
sectoral issues.
Those with an interest in the history of sovereign states and international relations will see the shift from
national integrity systems to global sectoral integrity systems as an unsurprising but highly significant
development. Since the 17th century, sovereign states have been the strongest institutions. Accordingly, the
major governance problems were those of the institutions of national governments. However, global
movements of people, goods, disease, ideas and money across international boundaries threatens to
overwhelm sovereign states7 and new institutional players (international and regional organisations,
multinational companies, global NGOs and global professions) play an increasing role8 .
Conceptual framework
This GFIS and GCIS projects build on the conceptual framework underlying IEGL’s previous work on
national integrity systems and the recognition that governance reform requires a combination of ethical
standard setting, legal regulation and institutional design and the way that ‘institutional ethics’ offers a way
of integrating these elements9 (). A global carbon integrity system consists of the values, norms, institutions,
policy instruments and governance arrangements that have developed since the 1992 ‘Rio’ Earth Summit to
realize the principle of sustainable development agreed therein (see GCISA norms and institutions below).
NISA methodology is informed by an approach to integrity and governance that starts with the fundamental
ethical question – ‘how are we to live?’10 Individual ethics involves individuals asking hard questions about
their values, giving honest and public answers, and trying to live by those answers. If they do, they have
integrity in the sense they are true to the values they claim to stand for. Similarly, Institutional ethics
involves an institution/organization asking hard questions of its value and values, giving honest and public
answers and living by them.11 This more complex institutional process starts with the vital questions that
must be asked of any institution or organisation: ‘What is it for?’ ‘What justifies the institution to the
community in which it operates’ (recognizing that the community gives it the right to operate and takes the
risk that the concentration of power in that institution may be used against that community)? Asking those
questions involves an institutional and collective effort under the institution’s formal and informal
constitutional processes. An institution has integrity if it lives by its answers – by creating mechanisms
which make it more likely that the institution keeps to the values to which it is publicly committed. These
mechanisms might be seen as an institutional ‘integrity system’. Such institutional integrity systems need to
articulate with external institutions and mechanisms designed to ensure that entrusted power is not abused for
personal gain (TI’s definition of corruption) but for its claimed purposes (our definition of integrity). The
larger set of norms (including values and laws), institutions and incentive mechanisms are the ‘national
integrity system’.
Sampford argued in 1990 that business and public sector ethics are essential guides to individual and
institutional action but must be backed by legal regulation, institutional supports and economic incentives to
7
Heine, J. and Thakur, R. ed. (2011). The Dark Side of Globalization. Tokyo: United Nations University Press.
Buchanan, A., & Keohane, R. O. (2006). The legitimacy of global governance institutions. Ethics & Int Affairs, 20(4),
405(433); Castells, M. (2008). The new public sphere Annals of the Am Academy of Pol and Soc Sci, 616, 78–93;
Koppell, J. (2008). Global Governance Organizations: Legitimacy & Authority. J of Pub Admin Res & Theory, 18(2),
177–203; Koppell, J. (2010). World rule: accountability, legitimacy, and the design of global governance. Chicago Uni
of Chicago Press.
9
Sampford, 1990.
10
Singer, P. (1993). How Are We to Live? Ethics in an Age of Self–Interest Melbourne: Text Publishing.
11
Sampford, 1990; Sampford, C. (1994) Law, Ethics and Institutional Design: Finding Philosophy, Displacing
Ideology. 3 Griffith Law Review 1.
8
be effective. This is even more evident in global governance. There are many signatories to broad ethical
statements but limited mechanisms for compliance.12 Global integrity systems may start with the UN and
other global institutions but will need to include nation states, multi-national corporations13 () and
international NGOs as well as recognise the interplay between transnational and multinational arenas14 .
Effective governance will require more extensive international institutions and avenues for cooperation.15
Such systems cannot be built to a single plan. This system must be built up gradually, starting with what we
have, assessing what is needed, and seeking institutional means for securing it.16
Methodology
Of the two major TI sponsored research methodologies to document and assess national integrity systems,
the second methodology, NISAs sought to understand the actual dynamics of an integrity system.17 (). NISAs
map, describe and assess the effectiveness of the entire set of norms, institutions and mechanisms designed
to reduce corruption and enhance integrity. They examine the extent and strength and degree of
interconnectedness (including systemic and non-systemic dimensions), overlaps, conflicts and mutual
supports. As such, it provides a granular evaluation of how an integrity system actually works. As
international integrity systems do not include a centralizing sovereign power and its agencies18 , the NIS
‘checklist’ methodology cannot describe them. The NISA methodology, which starts with ‘what there is’
works well for the very different sets of institutions found at the international level.
Applying NISA methodology to the mapping and assessment of global integrity systems
Weiss and Thakur19 pose a puzzle: ‘How is the world governed even in the absence of a world government
to produce norms, codes of conduct, and regulatory, surveillance, and compliance instruments?’ The
project’s approach builds on NISA methodologies with suitable modifications for international systems and
the international community. It involves a mixture of quantitative and qualitative measures and the
workshopping of results and recommendations with relevant insiders and outsiders.
For the GFIS and GCIS, the research incorporates the following sequence of activities:
1. Identifies the powers of the bodies to be regulated, the ends to which they are supposed to be devoted
and their potential for abuse.
2. Identifies the range of norms, institutions, policy mechanisms and governance arrangements that make
up the relevant integrity system – i.e. that enhance legitimacy, raise ethical standards and improve
performance, ensure powers are used for the purposes for which they are intended, and make their abuse
more difficult. This is achieved through preliminary discussions with relevant scholars and practitioners,
by questionnaires and key informant interviews.
3. Description of each of those norms, institutions policy mechanisms and governance arrangements in
their operational context and document the treaties, rules and codes that govern them and the communal
values that support them (through a mixture of desk studies, workshops and interviews).
4. Comparison of the nature and role of integrity institutions to ostensibly similar state-level institutions.
5. Identify the ways in which these elements interrelate and the various kinds of relationships between them
that make a set of integrity institutions a ‘system’.
12
Jorge, A. & Francis, T. (2008). Assessing corp responsibility as a contribution to global governance. Corp
Governance, 8, 456; United Nations Global Compact. (2011b). Number of Expelled Companies Reaches 2,000. New
York; Weiss and Thakur (2010) Global Governance and the UN: An Unfinished Journey. Indiana University Press.
13
Dahan, Doh, Guay (2006). Role of multinational corporations in transnational institution building. Hum Rel, 59,
1571–1599.
14
Bernstein, et al (2010). A Tale of Two Copenhagens: Carbon Markets & Climate Governance. Mill J Inter St 39, 161.
15
Keohane, R. (2006). Accountability in world politics. Scandinavian Political Studies, 29(2), 75–87; Weber, R. H.
(2010). Multilayered Governance in International Financial Regulation & Supervision. J of Int Ec L, 13, 683–704;
Zürn, M. (2011). Global Governance as Multi–Level Governance in Zürn (Ed.), Handbook on Multi–level Governance
Elgar.
16
Omarova, S., & Feibelman, A. (2009). Risks, Rules, and Institutions. Uni of Memphis Law Review, 39, 881; Pistor,
K. (2009). Sovereign Wealth Funds, Banks and Governments in the Global Crisis Eur Bus Org L Rev, 10(3), 333.
17
See KCELJAG. (2005). Chaos or Coherence? Brisbane: Griffith University/TI; Shacklock et al (2007) An
Assessment of Georgia's National Integrity System. Open Society Georgia Foundation, Tbilisi, Georgia.
18
Rosenau, J.,& Czempiel, E. (1992) eds. Governance without Government: Order and Change in World Politics. CUP.
19
Weiss and Thakur (2010).
6. Identifies the different types of operative norms and meta-norms in play, and the inter-relations between
them. Describe the cross-cutting roles these norms play in the legitimacy and efficiency of the GCIS.
7. Identifies any gaps, duplication or overlaps between them.
8. Uses the above data to map the relevant integrity system.
9. Assesses the strengths and weaknesses of the current integrity system and identify areas of potential risk
to the effectiveness of the relevant global integrity system.
10. Makes proposals for further improvements and reform, concentrating on ways to make existing integrity
institutions and integrity mechanisms (incl. norms, laws, incentives and governance arrangements) more
effective and mutually supportive.
Conceptual Challenges
Attempts to address problems confronting a GFIS or GCIS are hampered by institutional and disciplinary
specialisations, and the complex ways norms interact with the integrity system. Institutional specialisation
reflects the fact that most institutional governance experts focus on one ‘level’ of governance: global,
regional, national, corporate, professional or not-for-profit institutions. However, many of the most
intractable global problems involve mutually reinforcing weaknesses in institutions at the global, regional,
national, sub-national level as well as corporations, professions and NGOs. Climate change involves
weaknesses in the first five levels. Thus solutions to global problems do not lie in new norms or reformed
institutions at any one level but the identification of normative, legal, institutional and governance changes at
some or all levels and their integration into emerging Global Integrity Systems.
This challenge is exacerbated by disciplinary specialisations that generate strongly theorised but limited
conceptions of institutions, their problems and suggested solutions. These can and often do colour views of
the nature of institutional problems and the best means for addressing them. For example, at the broadest
level lawyers look at institutions and see sets of formal norms. Ethicists see informal norms and the values
the institution claims to further. Economists see incentives and disincentives. Political and social scientists
see power relations and complex webs of interpersonal and group relationships. Management theorists see
structures, systems and leadership. Accordingly, institutional problems are seen in the deficiency of laws,
ethical standards, incentives etc. and the solutions are seen as lying in remedying the deficiencies their
disciplines identify. All these partial insights into institutions and their problems are important. Any solution
that ignores them is likely to fail. However, solutions limited to the insights of a single discipline are also
likely to fail.20
This development of NISA methodology takes seriously the norms, institutions and mechanisms operating at
various ‘levels’ of governance, thereby addressing the first of the conceptual challenges outlined above. The
interdisciplinary team and workshops address the second. The GFISA examines norms, institutions and
mechanisms at several ‘levels’ of governance – each of them in need of reform. Examples include:
1. At the level of Global governance: strengthening G20, mobilizing the UN and its ‘unique legitimacy’,
international treaties and other arrangements such as the Global Compact and the Basel Accords.
2. Regional governance: European Central Bank and regional development banks such as ADB.
3. National and sub-national governances – where most banking, competition and financial regulation are
managed. These may be referred to as National or Provincial financial integrity systems (NFIS/PFIS).
4. Professional governance: existing professions such as law and accounting must ensure that their services
are not used to defraud and add risk. Those who wish to professionalize banking and finance must
recognize that professions involve the application of an area of specialist knowledge to further the
interests of the community they claim to serve through achieving clear public goods – indeed, they have
to recognize that finance is a service industry that serves rather than seeks to profit at the expense of the
rest of the community.
5. Corporate governance: Corporations need to remember that the reason why we have not heeded Adam
Smith’s warnings about merchants gathering together and instead made incorporation easy is because
they have argued that corporations benefit the communities in which they operate. Corporations and their
executives must not only repeat this claim but ensure that it is true – first, as a matter of integrity and
second, because of their ‘licence to operate’ along with the privileges of incorporation and limited
liability.
20
Sampford (1994).
We would argue that the overall GFIS should set itself the goal of ensuring that those who are entrusted with
investing funds for others do not abuse that entrusted power to increase their wealth at the expense of those
for whom they invest.21 Similarly, the GCIS should set itself the goal of ensuring that carbon emissions are
properly counted, priced and the price is paid – with any agreed transfers going to the intended beneficiaries.
GCISA norms and institutions include:
1. At the level of Global governance: UN Framework Convention on Climate Change (UNFCCC), the
associated Kyoto Protocol (KP), Durban Platform for Enhanced Action (DP), Agenda 21 and other
related Conventions (Biodiversity, Desertification) and the Statement of Forest Principles; international
treaties on carbon and relevant cash transfers, and the promotion of cross-cultural dialogue on
sustainable versions of the good life’ and strengthening G20, mobilizing the UN and its ‘unique
legitimacy’, via arenas such as the UNFCCC and its related Flexible Mechanisms, Global Compact,
Principles of Responsible Investment, Global Reporting Index, Multilateral Development Banks (MDBs)
and World Bank, Food and Agriculture Organization (FAO)World health Organization (WHO) and the
International Organization for Migration (IOM).
2. At the level of Regional governance: European Union Emissions Trading Schemes (EU ETS) Chicago
Climate Exchange and regional development banks such as the European Investment Bank, Asian
Development Banks (ADB). Regional organizations need to collaborate on environmental issues and in
assisting each other to cope with climate change and climate change displacees.
3. At the level of National and sub-national governances much carbon related policy is implemented
through National Action Plans that may include carbon taxes, carbon trading, clean energy policies. At
this level, finance is either generated by donors or allocated to, and by, recipient countries. These laws,
institutions and incentives may be seen as National or Provincial carbon integrity systems (NCIS/PCIS).
4. At the level of Professional governance: existing professions such as accounting, auditing and
verification/certification bodies must ensure that their services are not used to defraud and add risk, but
to assist their clients not only to comply with environmental laws but become ethical entrepreneurs.
Those who wish to professionalize climate finance must recognize that professions involve the
application of an area of specialist knowledge to further the interests of the community they claim to
serve through achieving clear public goods – indeed, they have to recognize that finance is a service
industry that serves rather than seeks to profit at the expense of the rest of the community. Additionally,
the professional ethos that augments the governance of professions at the national level needs to be
developed for the key global institutions.
5. At the level of Corporate governance: Corporations need to remember that the reason why we have not
heeded Adam Smith’s warnings about merchants gathering together and instead made incorporation easy
is because they have argued that corporations benefit the communities in which they operate.
Corporations and their executives must not only repeat this claim but ensure that it is true – first, as a
matter of integrity and second, because of their ‘licence to operate’ along with the privileges of
incorporation and limited liability. Corporations need to serve their communities and themselves by
finding goods and services that support a sustainable good life for their customers, employees and
shareholders – applying their entrepreneurship to developing new low carbon, zero carbon and negative
carbon industries.
Our studies of GFIS and GCIS recognize:
1. Concentration of power, people and resources within organisations and the need to ensure that those
concentrations realise the benefits that are claimed for the communities giving them a licence to operate.
2. Inevitabilities of asymmetries in knowledge and the fact that the exploitation of these is a feature of all
market and political systems and the basis of much profit making.
3. Inevitability of agency problems and attempts to externalize costs.
4. Dangers of political and business leaders capturing much of the upside benefit but little downside risk.
21
Many within financial intermediaries pursued strategies that focused on the maximization of fees and short-term
profits at the expense of those who entrusted them with their funds contributing to the GFC – see O’Brien J. 2009
Engineering a Financial Bloodbath. London: Imperial College Press.
Global Carbon Integrity System
The GCIS project is more developed and has received major ARC funding. This ARC project seeks to apply
the above approach to the GCIS, with particular emphasis on the three ‘flexible mechanisms’ of the Kyoto
Protocol and its hoped for successor (KP): international emissions trading (IET), Clean Development
Mechanism (CDM), and Joint Implementation (JI), as well as the emerging mechanism for Reducing
Emissions from Deforestation and Forest Degradation in Developing Countries (REDD+ - which seeks to
integrate biodiversity conservation and the sustainable management and enhancement of forest carbon). The
GCIS should set itself the goal of ensuring that those who are investing funds to mitigate greenhouse gas
emissions do not abuse that entrusted power to ‘offset’ carbon at the expense of those countries and market
mechanisms in which they invest. The GFC showed that financial intermediaries pursued strategies that
focused on the maximization of fees and short-term profits at the expense of those who entrusted them with
their funds.22 If we are to avoid a possible future GCC, the GCIS must both set itself the goal of ensuring
that carbon emissions are properly counted, priced and the price is paid (with any agreed transfers going to
the intended beneficiaries), and avoid relegating carbon credits (and associated trading schemes) to ‘junk’
status. This is particularly important to avoid a crisis of confidence, which is incipient, with the everincreasing use of such terms as ‘carbon cowboys’ and ‘carbon mafia’ for market actors, with the potential for
poor practice and corruption that such pejoratives imply.23 ().
Hypotheses suggested by studies of national integrity systems and early work on the GCIS
1.
There are significant variations in integrity systems and there is no one model, Western or otherwise.
2.
While integrity systems tend to perform similar functions, the institutions that perform them may
vary. This emphasises the importance of starting with what integrity mechanisms there are rather
than a theoretical model of what is supposed to work (see discussion of NIS country studies and
NISAs above).
3.
The strength and effectiveness of integrity systems is not merely a function of the strength of the
component norms and institutions but of the relationships between them (what makes it a system). In
effective integrity systems, relationships between the various elements of the system will be rich and
varied – some supportive, some procedural and some involving checks and balances. Ideally,
institutions should be mutually supportive when fulfilling their roles and mutually checking when
they are not.
4.
Integrity systems vary in strength, complexity and systemic effectiveness. But there are almost
always some elements on which to build – and it is better to build on them rather than trash them and
start anew.
5.
Each institution within the GCIS has to understand its role and the roles of others with which it
interacts.
6.
The norms used by each institution must align with the institution’s role and the value the institution
is designed to promote, as well as fulfilling basic ethical desiderata such as democracy and
inclusiveness of stakeholders. The more the norms conform to these two conditions, the greater the
legitimacy of the governance within the institution, and the more effective it will be.
7.
Outcomes such as reduced corruption/GHGs are rarely achieved by a single institution operating
alone but are generally the result of the work of several institutional actors.
8.
Integrity systems do not rely on legal regulation, ethical standard setting or institutional reform but a
mutually reinforcing combination of all three. We consider that a similar mixture of norms,
institutions and mechanisms are needed to prevent a GCC.
9.
Leadership contributes to, but cannot substitute for, an effective integrity system.
10.
The primary function of an integrity system is to promote a positive value (integrity of government
institutions in national integrity systems/facilitation of sustainable development in GCIS) rather than
merely preventing its opposite (a negative value such as corruption/runaway global warming). The
negative goal is necessarily implied by the positive one – if power is to be used in officially
sanctioned ways, it should not be abused by being diverted to other ends.
11.
Institutions are formed because it is widely believed that more can be achieved collectively than
individually by the pooling of power, people and resources. However, such pooled power is not
necessarily used for the purposes claimed (e.g. governmental integrity/sustainability) but abused for
22
O’Brien, J 2009.
Nerlich, B., & Koteyko, N. (2010). Carbon gold rush and carbon cowboys Environmental Communication, (1), 3753; Stolz, G. (2011). Carbon schemes a Mafia ‘honeypot’, The Daily Telegraph 29/11/2011.
23
12.
13.
other purposes (e.g. corruption/charging for unrealized offsets). It is important that that power be
used for the purposes for which it is entrusted rather than abused by creating artificial markets and
off-sets that increase margins, short term profits and bonuses without significantly mitigating GHGs.
In placing power in the hands of institutions, human communities are taking a risk — that the
benefits to be gained from the use of that power for the justified purposes of the institution outweigh
the risks of its abuse. The GCIS needs to address an existential risk to human life on this planet.
Integrity mechanisms and integrity systems can be seen as a form of insurance against that risk.
Institute for Ethics, Governance and Law