Thursday, May 5, 2016

Perspectives on the Panama papers

Reflecting poorly on prescriptions for governance and transparency.

So another clump of mud has been flung at the reputation of free enterprise. This time in the form of tax dodging as revealed in the Panama Papers, reflecting only a small part of a problem that globally could be costing governments more than $3 trillion – a nearly impossible figure to confirm because of the nature of the beast.

It comes at a time when business is being blamed for many global ills, including stark wealth inequalities. This may not be surprising as one of capitalism’s tenets is that private initiative is much more productive than government, encouraging tax dodging as something of a billionaire and corporate sport. The fall out of this event will no doubt continue for months, if not years, to come. Not the least of which will be a further tightening and expansion of prescriptions around governance and transparency. South Africa’s King Reports on corporate governance are among them.

There is something in all these reports that is a reminder of the tale of the King’s new clothes. It is more than a play on the name. The revelation by an innocent question from a child that the King or emperor was naked, reminds one of the question an inexperienced reporter put to another king of sorts: Jeff Skilling, former CEO of the notorious Enron energy trading firm.

His defensive response to the question where Enron’s income was coming from, that he was not an accountant and could not know all about the company, triggered one the biggest collapses of a financial bubble the world had ever seen. In turn there was a feverish rush to enforce all kinds of prescriptions and regulations and a rekindling of animated debate around corporate ethics and social conscience. Mervyn King’s efforts in producing such prescriptions were globally leading edge in this regard. 

This is not a detraction from the value of these efforts, the latest of which is King IV now in the making and due for release in November. Transparency and accountability are fundamental pillars of social order, and no less so when it comes to business which affects all of our lives. Protocols that guide those in authority on ways of achieving them are of indispensable value.

When it comes to prescriptions, regulations and indeed trying to force enterprise to adopt business strategies that focus heavily on them, one could argue that they become highly counter-productive. It is this assumption that justifiably sparks the kind of response one saw to this Moneyweb article on King IV: “just another concrete block shackled to business to hinder it to go forward and do what it is best at viz. business.” 

The simple truth is that there is little, if any evidence that all of these efforts have resulted in a significant reduction in business malpractices. Indeed, in just one – that of executive pay – there is an argument that not only has disclosure not tempered executive remuneration, but has exacerbated it by creating envy among the more modestly paid executives as well as pressure for rank and file wage increases.

An article published by the WEF cites recent scandals just in the last year – Volkswagen, Toshiba, Valeant, Mitsubishi and FIFA – as evidence that corporate governance globally is still simply not taken seriously enough. South Africa has had its fair share of these since all of the hype began decades ago, and now we have the tax evasion scandals revealed in the Panama papers. The real fall-out of these papers for South Africa is yet to come and will seriously challenge the selective and unilateral enforcement of reputational risk.

When one thinks of all of the time, effort and costs spent on ensuring ethical standards, sustainability, accountability and governance, one simply has to question their efficacy. These go much further than the King reports and include sustainability reporting, the high cost consultant driven placebo efforts at establishing Triple Bottom Lines and Balanced scorecards, and interventions on constructing organisational ethical standards and remits. For the most part by far, these efforts are mostly adopted very reluctantly as “have-to-haves” rather than “want-to-haves”.

The gathering of as much information as possible about all aspects of a big organisation is always useful. But compliance with prescriptions or some organisational intervention flavor of the month often leads to information overload. Teams of managers can spend hours filling in forms or data processing for “dashboards”. I have seen meeting room walls “brown-papered” from ceiling to floor until one senior executive wailed: “For heaven’s sake, we are not trying to invade Spain!” Much of this information perishes on its way to the board, where it seldom, if ever, informs company strategy.

In my decades of exposure to business and organisational theory, I cannot recall any case where these efforts have tangibly or even directly contributed to company growth or better overall performance. If there are such cases, they certainly have not made enough impact to encourage their adoption as a sound strategic framework for any business model.  The reasons are simple and two-fold. They do not reflect the real driving force of the business – maximum returns in the shortest time; and for the greatest part, they try to marry quantitative with qualitative metrics in a world dominated by measureable financial outcomes. They then create intolerable contradictions.

Which brings attention back to Skilling’s response, or lack thereof, to a question about Enron’s source of income. If a company or its CEO cannot passionately and clearly demonstrate the tangible value the enterprise adds to people’s lives, its right to exist is highly questionable. When an enterprise sees contribution as its sole purpose, and does it in such a way that reward expectations are met and further contribution encouraged, then it certainly will not need a plethora of prescriptions, rules, and interventions to entrench that behaviour. I have repeatedly argued that value-added, or wealth creation, scientifically reflects that. It is the only accounting measurement to do so. It is doubtful whether a company that is dedicated to adding value to people’s lives and demonstrates that in its behaviour in the market place, will also not reflect that spirit in its relationship with all other interests, including the community at large.

Good companies say they have a contributory purpose; better companies live by and demonstrate it. The best companies coherently measure it. In the main, those that don’t, will be caught out by customers, competition and normal laws. Most enterprises are indeed driven by these forces. It just becomes difficult to see when they constantly have to defend a self-gain money focused ideology.

A passion to make a difference in one’s market unleashes true willingness, without which no amount of prescriptions can prevent bad behaviour. That is particularly so when it is shared by all involved as a common vision.