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Business transparency alone may do more harm than good

It seems a bit odd to be suggesting that transparency can be a bad thing.

Just to be totally clear, I’m not.

But business transparency alone, without institutional reform, could end up doing more harm than good.

Let me explain what I mean.

Let’s say you are fictional oil company PBChevEX.

Let’s say you are committed to the Extractive Industry’s Transparency Initiative and transparency in general.

Laws are coming in (Section 1504 of the Frank Dodd Act in the US for example), and you are determined to go beyond them.

And so, as a result, you declare financial payments, up to and beyond all laws or even voluntary agreements you have signed.

The public in fictional developing country Angeria finds out all about what you pay, and to whom, in their nation.

How could that be a bad thing?

Here’s now.

What if (and this is how it is) the Government you are being so open about paying is incompetant. Or means well, but severaly lacks capacity to govern well, and encourage sustainable small and large scale capitalism.

In that case (Azerbaijan springs to mind as a real example), could you not simply end up contributing to the breeding to cynicism about the notion of government itself?

If we are all fully aware of just how useless our Government is, we become cynical about anyone’s ability to do anything about that. This is serious problem.

An American executive said this to me about ten years ago: “In the US, we may dislike our President. But you guys in the UK, you are cynical in the ability of Government itself to pretty much do anything“.

I see what he meant. Our world-weary scepticism in the UK (hey, if you had and lost the world’s largest empire/footprint in the space of half a century you might feel this too) is well-known and often unhelpful. Being wry and slightly amusing doesn’t get the national debt paid off.

My point here is not to seemingly defend the worst aspects of the British Empire (best of a bad lot is a tough boast) but to make a point about culture.

In the UK, part of our problem is the lack of belief that we can solve problems and win again. This cultural downbeatness (is that a word?) is encapsulated in our football team, ever since the mid-1970’s.

The UK is lucky though. We have a good location, the world’s lingua franca, historical connections and a usually-functioning rule of law. And we have London.

Most countries, particularly developing ones, don’t have any of this.

So if their general public, their voters, become cynical about how money is spent, that could be very dangerous indeed for their development. It would hugely affect social capital and trust. Where these are low, poverty, corruption and unrest are not far behind.

This is why revenue and business transparency, whilst an excellent first step, could backfire on both companies, and the general environment in which they operate, if it becomes the end point for how large companies look at CSR/Corporate responsibility and sustainable development.

Large companies, like it or otherwise, are increasingly seen not only as powerful, but also as potentially dependable in a sea of uncertaintly.

No company wants to see a country go backwards. And so whilst financial transparency is helpful, the next level is far more important in the longer term.

That next level beyond transparency, is contribution to institutional capacity building and sustainable skills development. It’s very complex stuff.

It’s about going beyond creating a sustainable value chain (which can result, on its own, in the creation of islands of excellence in a failing state) about making a contribution, via partnerships, to improving how both states function, and the development of national social capital as a result.

Enough long words. I am essentially saying, in summary, a few simple things:

1) All companies buying from, or extracting value from, emerging economies are feeling the need to be more transparent about their dealings with suppliers and Governments. That’s a helpful trend.

2) Equally, companies are increasingly vulnerable to being accused of not delivering enough value for country X or Y, and risk higher taxes, demands for bribes, bad press, rising wage demands, or even expropriation in the worst cases.

3) Traditional corporate options to mitigate against the risks above are limited. Companies will need to become partners in the development of countries, rather than simply extracting value from them.

4) Whilst transparency helps with home state PR, it doesn’t make much difference in poorer countries if the money is being used badly. In this case, the result of transparency can be increased cynicism in the populace.

5) The only way to make a sustainable difference in the long term in such countries will be for companies to make a lasting contribution to the construction of vital institutions, jobs and overall conditions suitable for development.

6) Beyond job creation, treating employees and customers well, and supplier busines model transformation, this contribution may well have to come at arms length due to the issues that institutional capacity building projects raise around the proper role for business.

7) But that doesn’t mean companies can’t make a difference. For example: BP’s work in Azerbijan, and the work of Business Action for Africa, are examples of how companies, in partnership and with others, can make a substantive difference.

Whilst many companies focus increasingly on transforming supplier business models
, for big companies with long term committments to countries, just doing that is not enough.

Companies will have to be seen to be making fundamental contributions to the strengthening the societies in which they operate in the near future.

Transparency on its own, with a supply chain program tacked on, no matter how well done, is not going to be enough for major actors to protect assets and build credibility in the coming years.

There will be a need to get involved in the difficult, complex and hard-to-change challenges of reforming and improving public governance.

This will need to happen by demonstrating long-term commitment, and using suitably-credible and qualified partners.

It will take the form of providing efficiently-used funding and policy ideas, whilst twisting the arms of politicians and other businesses when needed, and becoming an overall catalyst for progessive national change.

Here’s a report I wrote a few years ago that gives examples of how some companies have thought about this, and taken action as a result:

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