Risk guidance and anti-corruption language: evidence from corporate codes of conduct

Multinational firms often face challenges doing business in countries where corruption is common practice in the business environment. This study examines anticorruption guidance provided in the corporate Codes of Conduct (CoC). We evaluate if this guidance is consistent with the firm-specific idiosyncratic exposure to corruption, or if corporate ‘tone from the top’ (TTT) uses only broad brush general language ‘impression management’ in an attempt to appear compliant. We also explore the interaction between anti-corruption guidance and audit oversight. Using quantitative textual analysis on a sample of Standard & Poor’s (S&P) 500 firms’ CoC, we develop a measure of anti-corruption language based on the most prevalent topics covered in these documents. We find the positive association between the anti-corruption topics and the firm-adjusted level of corruption risk. That is, the language used varies depending upon idiosyncratic firm risk, suggesting CoC is not simply used for impression management. We also identify a non-linear relationship in which audit oversight is observed as increasingly important in the most severe corrupt settings. Our results could be useful to practitioners and policymakers who may care about the information content of CoC when evaluating a firm’s risk management practices. We also show that when the corruption risk is sufficiently high, the anti-corruption TTT needs to be supplemented by other control activities such as audit oversight.