Can big business clean up corrupt governments in the developing world?

Greased palms, payments under the table. One of the seemingly intractable problems of doing business in the developing world is corruption. But some unlikely nations and corporations are teaming up to tackle it, says Elizabeth McGeveran of F&C Asset Management in Boston. She joined Michael Gallipo, coportfolio manager of small- and mid-cap growth strategies at Citizens Funds in Portsmouth, N.H., for this month's roundtable on ethical investing. Here are excerpts of their comments:

Q: Governments set rules to keep business honest, but why would business try to do the same for government?

Ms. McGeveran: I think there's a myth out there that oil and gas and mining companies benefit from corrupt markets. In fact, corruption is very expensive for companies. When federal officials are lining their pockets with public dollars, you have developing nations that don't have hospitals, aren't building roads - the kind of services and infrastructure that companies need. You also find that in corrupt markets money sometimes gets siphoned off to buy weapons and to fuel internal or cross-border conflicts, which can create very dangerous and even deadly operating environments for companies.

Q: How does the plan work?

EM: Companies make legitimate payments to governments and then the governments publish both what they received and what's in the treasury. And the companies also publish what they've paid. So it allows civil society to compare what's gone into the government coffer and what's exactly there. It's an initiative called the Extractive Industries Transparency Initiative.... There are several pilot countries, about 12 different countries, that have agreed to work with the different oil and gas and mining companies to try out this transparency idea and see how it works.

Q: But the participants include Nigeria, Azerbaijan, Chevron, and ExxonMobil - nations and companies that many ethical investors avoid.

EM: Social investors bring different values and different sets of concerns. If you're concerned about the questions of good government, if you're concerned about how oil and gas and mining revenues may fuel human rights abuses, then revenue transparency is a really important issue for an individual investor. So I think it's always a question of balancing.

Mr. Gallipo: It's always a challenge. One that we wrestled with recently is Starbucks. They announced a licensing deal with Jim Beam to come up with a Starbucks-branded coffee liqueur. We evaluated that very carefully. We actually signed a letter to the company encouraging them to pursue other growth avenues rather than this one. But they pay well above market rates for coffee, which helps a lot of third-world coffee growers. There are lot of business practices they do, including health benefits for their staff, things like that that we really approve of. So, at the end of the day,... we think their overall business practices warrant keeping them in the portfolio.

Q: You invest in small- and mid-cap stocks, Michael, which have outperformed large-cap stocks in the past five years. Is that run over?

MG: You're certainly not going to see outperformance of that magnitude over the next couple of years. But I think you can see the small- and mid-cap sector keep pace and maybe even continue to outperform.

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