Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
Using Stakeholder Accountability to Combat Corruption
in Public Procurement in a Developing Country
Mehran Sepehri1 and Mohsen Ghadiri2
This research is an attempt to shift from the Legal discourse to an
organizational – managerial account of what is being enforced in Iranian
Public Sector and how to improve Corruption through Accountability of
Stakeholders, using grounded theory analysis of in-depth interviews with top
managers. Despite the difficulties of coordinating interviews with the
Governmental organizations which, as expected, were not inclined to be the
case of a research on corruption, three organizations which have been
involved in a lot of Public Procurement contracts, were selected and
meticulously examined to verify their main challenges in curbing corruption.
Area: Contemporary Issues in Management
1. Introduction
Public procurement, one of the largest areas of public spending worldwide, gives public
officials wide discretion. It is unsurprising that it is also one of the government functions
most often vulnerable to corruption. According to TI 2014 CPI report, Iran is still one of the
most corrupt countries in the world. Legal and Managerial measures have not been of
significant effect in improving the standards of Integrity in Iran. This is the case in Public
Procurement, which is a major government expense.
The Organization for Economic Co-operation and Development defines public
procurement “as the purchasing, hiring or obtaining by any other contractual means of
goods, construction works and services by the public sector” (OECD, 2013). Public
procurement represents a considerable part of national GDP. A recent study reports that it
accounts for 12.8% of GDP (and 29% of total government expenditure) on average across
OECD countries, from 12% in Greece to 45% in the Netherlands.
Corruption in public procurement is distinct from corruption in other government functions
due to the involvement of different actors, specific regulatory environment, and extensive
room for discretion in decision making. More than ever before, firms must provide
evidence of their adherence to ethical principles and guidelines. Firms listed on either New
York Stock Exchange or the Nasdaq, moreover, are required to adopt and to disclose
publicly their ethical codes of conduct (Paine et al., 2005).
Every year huge sums of taxpayers’ money are spent by governments on goods and
services. From building airports and stadiums to buying computers for schools and
medicines for hospitals, projects are high value, complex and important. Because
corruption is a covert activity, it is notoriously hard to measure. But corruption in public
1
Dr. Mehran Sepehri, Associate Professor, Graduate School of Management, Sharif University of
Technology, Azadi Street, Tehran, Iran, Phone: +9821-66022755, Fax: +9821-66022759, Email :
sepehri@sharif.edu
2
Mr. Mohsen Ghadiri, Ph.D. student, Graduate School of Management, Sharif University of Technology, Azadi
Street, Tehran, Iran, Phone: +9821-66022755, Fax: +9821-66022759, Email : ghadirimohsen@gmail.com
Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
procurement isn’t just about money. It also reduces the quality of work or services, and it
can cost lives. People in many countries have paid a terrible personal price for collapsed
buildings and counterfeit medicines. At the end result, our trust in our leaders is eroded.
The management of competing stakeholder interests has emerged as a significant topic in
the management literature (Freeman, 1999). One central concern to the ongoing social
responsibility debate is whether organizations pursue the satisfaction of stakeholder
interests for economic reasons or simply because doing so has intrinsic merit (Donaldson
& Preston, 1995). The intrinsic stakeholder commitment model, rests on the assumptions
that firms have a normative (moral) commitment to advance stakeholder interests, which
shapes firm strategy and influences financial performance.
The stakeholder commitment, or accountability, is proposed as the central idea in public
procurement, which can curb corruption and improve the health of procurement outcomes
in public organizations. The qualitative research here aims to discover the elements and
factors in stakeholder accountability and public procurement processes, by using
grounded theory and thematic analysis methods. In-depth interviews with top managers in
selected organizations are used to gather rich qualitative information.
2. Public Procurement
ISO 10845-1 (2010) defines procurement as the "process which creates, manages and
fulfills contracts relating to the provision of goods and services, engineering and
construction works, or disposals". Public procurement, because of its nature and size, has
a significant impact on social and economic development of a developing country
(Arrowsmith, 1995). Its basic requirements are:
Fair: The process of offer and acceptance is conducted impartially without bias and
provides participating parties simultaneous and timely access to the same information.
Terms and conditions for performing the work do not unfairly prejudice the interests of the
parties.
Equitable: The only grounds for not awarding a contract to a tenderer who complies with
all requirements are restrictions from doing business with the employer, lack of capability
or capacity, legal impediments and conflicts of interest.
Transparent: The procurement process and criteria upon which decisions are to be made
shall be publicized. Decisions (award and intermediate) are made publicly available
together with reasons for those decisions. It is possible to verify that criteria were applied.
The requirements of procurement documents are presented in a clear, unambiguous,
comprehensive and understandable manner.
Competitive: The system provides for appropriate levels of competition to ensure costeffective and best value outcomes.
Cost-effective: The processes, procedures and methods are standardized with sufficient
flexibility to attain best value outcomes in respect of quality, timing and price, and the least
resources to effectively manage and control procurement processes.
Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
Promotion of other objectives: The system may incorporate measures to promote
objectives associated with a secondary procurement policy subject to qualified tenderers
not being excluded and deliverables or evaluation criteria being measurable, quantifiable
and monitored for compliance.
Academically, public procurement is a neglected area of study even though governmental
entities and public procurement practitioners diligently worked to improve public
procurement practices (Thai, 2001). Perception of corruption and the actual corruption in
public procurement remains high.
3. Stakeholder Accountability
In governance ethics, accountability is answerability, blameworthiness, liability, and
expectation of account-giving (Dykstra, 1939). In leadership role, accountability is
acknowledgment and assumption of responsibility for actions, products, decisions, and
policies including administration, governance, and implementation within the scope of the
role or employment position and encompassing the obligation to report, explain and be
answerable for resulting consequences (Williams, 2006).
An organization has both informal and formal accountability to stakeholders, and through
them, to the public. Organization accountability takes three main forms:
1. Consultation and communication (informal) through regular contact with primary
stakeholders, transparent working methods and regular reporting procedures;
2. Performance accountability (formal) through the submission of activity reports on an
annual basis, or after every major electoral event, and performance audits and
evaluations to the legislature or government and other stakeholders; and
3. Financial accountability (formal), which entails the regular submission of financial
statements and audits to the legislature or government, among others, to explain
how the funds allocated to the EMB have been used.
4. Literature Review
Ethical Climate Theory (ECT) represented a descriptive map of ethical decision making
and actions within an organization based on philosophical and sociological theory (Victor
and Cullen, 1987). Corruption in government procurement programs is a perennial
problem. Dean Neu, et al. (2015) showed the value of internal controls in government
departments in constraining individuals and promoting ethical conduct. The supply side
severely limits the possibilities of preventing corruption.
Neu et al. (2015) examined the role of internal controls and monitoring practices in corrupt
contexts and how these controls and practices shape the ethics and moral of organization
actors. Their paper proposed that effective anti-corruption practices depended upon an
understanding and analysis of the practices and politics of visibility, and that effective
‘luminous arrangements’ had the potential to discourage corrupt practices and influence
ethics within organizations, thus reducing the extend of future corruptive practices.
Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
In many developing countries, public procurement is not viewed as a strategic impact in
management of public resources (Hunja, 2003). It was treated as a process-oriented,
“back- office” support function often implemented by non-professional staff of the buying
agencies. Consequently, little effort was expended to ensure that the policies and rules
and the institutional framework governing the procurement system were maintained in a
manner that ensured that public funds were used in the most efficient and economical way
and that the system delivered the best value for money.
Auriol (2006) studied capture and extortion in public purchase, showing Capture yields a
dead-weight loss while Extortion does not. Strausz (1998) showed that under asymmetric
information it is optimal to tolerate some corruption. Quayle (1998) in an empirical
examination of the impact of procurement strategy on corporate performance in UK
identified a lack of cross departmental dialogue on strategic procurement. Establishing
framework agreements involves on-going commitment leadership.
5. Methodology
A qualitative research methodology, such as case studies and depth interviews, can be
particularly appropriate during the early stages of investigation of a phenomenon, and can
be used for the purposes of description (Yin, 1994), theory generation (Eisenhardt, 1989),
and to develop rich insights that may be difficult to initially gain through the use of other
research methodologies. Further, Miles and Huberman (1994) contend that a multiple
case study approach allows the researcher to reach a deeper understanding of a
phenomenon and to test to a greater extent the boundaries of their initial findings, and
allowing the creation of a richer theoretical framework (Ellram, 1996).
Traditional research designs usually rely on an extensive literature review leading to the
formation of a hypothesis. This hypothesis is then put to the test by experimentation in the
real world. On the other hand, Grounded Theory (GT) investigates the actualities in the
real world and analyses the data with no preconceived hypothesis (Glaser & Strauss,
1967). Data collection is usually but not exclusively by interviews. Analysis of interview
data in qualitative research tends to result in descriptions of an interpretive view of the
events, whereas GT data analysis involves searching out the concepts behind the
actualities by looking for codes, then concepts and finally categories.
The following diagram, Figure 1, summarizes the elements inserted and responded to in
public procurement in order to curb corruption. The key theme is potential responsibility
towards stakeholders leading to stakeholders' accountability. Several levels of
responsibility are identified and extended. Various challenges, including both internal and
external challenges, in public procurement are recognized. Various key stakeholders are
then listed and reviewed. Such conceptual model is utilized to guide the in-depth
interviews and extract the results. Various feedbacks may be directed to previous stages.
Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
Figure 1, elements inserted and responded to in public procurement to curb corruption
Action Research has become increasingly prominent among the organizational scientists.
Unlike most research methods action research embraces change. Other research
methods study and understand existing organizational and social structures. The action
researcher seeks to create organizational change and study the results (Baburoglu and
Ravn, 1992). This is an interventionist approach that encourages social experimentation.
Indeed they would go further in proposing that this method could be used normatively to
create the future that we want to live in. In the last part of this research, changes are
proposed and investigated in the processes awaiting consequence results.
6. Early Results
From several available cases, 3 companies were chosen for in-depth interviews about the
procurement practices. The companies were public, with a separate procurement
department, handling more than 500 procurement cases, and following public
procurement practices. They paid attention to corruption cases and were successful in
handling corruption complaints. Several top managers were interviewed, which were
coded and categorized, in each company. At the end, 3 main themes were recognized:
Theme 1: Total Weakness and Failure in Organizational Communication.
Accountability Challenges: Increase in vagueness and hesitance due to management fear
of large data.
Process Challenges: Changing initial phases to a secure corner in informal communication
network. Weakening of professional and objective approaches in phases of competition
and implementation.
Solutions for key stakeholders:
Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
Users: Classification of security of confidential data. Increase the roles and responsibilities
of managers and professionals to classify technical and confidential information.
Managers: Definition of formal and regular times and periods for accountability through the
media
by
managers,
auditors,
and
project
procurement
managers.
Professionals: Direct participation of managers and professionals in media accountability,
depending on the subject and the scope of public project procurements.
Media and Activists: Define formal accountability time for managers and professionals.
Judicial Observers: Define formal accountability time for managers and professionals.
Cross-Organization Observers: Define formal and regular of accountability time for
managers and professionals. Gradual enforcement of corruption evaluation through
managers
and
professionals.
Government: Enforce corruption evaluation, dedicated media for public procurement.
Theme 2: Management – Leadership Imbalance in Public Procurement System.
Accountability Challenges: Defining points of accountability and responsibility based on
management interests and organizational readiness. Sensitivity to information access with
risks and need for reward
Process Challenges: Starting risk control from initial to closing. Purposeful and risk averse
access to information in strategic decision making. Enforcement of judicial solutions to
regular accountability.
Solutions
for
key
stakeholders:
Users: Classification of security levels of confidential data. Increasing role of professionals
to
classify
technical
and
confidential
information.
Managers: Changing management evaluations to independent legal & professional ones.
Professionals: Changing internal professional evaluations to external evaluation audits.
Media and Activists: Increase access by media to initial proposals and their evaluations.
Judicial Observers: Changing internal professional evaluations to external evaluations.
Cross-Organization Observers: Changing internal professional audits to external audits.
Government: Increase control authority to obtain & announce base price for various items.
Theme 3: Financial Apathy in Rentier-State Procurement System.
Accountability Challenges: Defining all responsibilities to accomplish organizational and
financial goals. Providing gradual access to information considering security and financial
issues.
Process Challenges: Providing simple and meaningful information to achieve budget
flexibility. Make decision for final selection of supplier with cooperation conditions with
procurement bidding winner.
Solutions
for
key
stakeholders:
Users: Separate evaluation of initial needs assessment from subsequent assessments.
Managers: Receive direct & dedicated reports from managers on project competitiveness.
Professionals: Encourage policies to reveal information on waste & diversion of resources.
Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
Judicial Observers: Receive direct and dedicated needs/decisions consistencies reports.
Cross-Organization Observers: Receive direct and dedicated reports on competitiveness.
Government: Consider directed needs assessment as a waste of resources & corruption.
7. Conclusions
Public procurement is prone to many types of corruptions, and worse to perception of
corruption by the public. Thus, procurement procedures should be subject to many
scrutiny and examination solutions to various stakeholders. This study uses qualitative
research to extract challenges and alternative course of actions to increase stakeholder
accountability and reduce corruption in public procurement in Iran government funded
public projects.
We selected 3 organizations, which had many public projects with various possible
deficiencies in their procurement procedures. From in-depth and detailed interviews with
their key officials, which were coded using grounded and thematic analysis, various
subjects and themes were extracted. Then, for each theme and each key stakeholder, we
discussed and devised related alternative and solutions to increase stakeholder
accountability and reduce overall likelihood of corruption.
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