Where responsibility meets risk management

The trend towards bringing non-financial issues 'to the table' in boardrooms, alongside 'core' business strategy, has received much attention in recent years.

This week UK-listed Tullow Oil (a leader in recent successful exploration for new hydrocarbons assets in Africa) announces its intention to disclose project-by-project payments made to partner governments. This is in anticipation of EU disclosure rules, but includes voluntary disclosures that go beyond pending regulatory requirements.

Whatever the firm's strategy, the news underlines the tension sometimes identified between 'first-mover' advantage (when a firm moves ahead of the apparent regulatory trend, reaping the reputational, adaptation and other benefits) and the risks of assuming pre-regulatory obligations not required of one's competitors in a sector where no level playing-field exists.

This post extends the last one's discussion of 'core business' issues, where the operative word in the para above is 'strategy': unless championed by a proactive board, those working on sustainability / enviro, social and governance / responsibility issues have typically found it necessary to devise internal strategies to make their issues considered as part of wider firm strategy.

While vocabulary matters for basic cognitive shifts (such as seeing 'risk' as 'unlocking value'), this endeavour of getting sustainability (etc) issues 'to the table' goes beyond imaginative manipulations of vocabulary, or ensuring these issues are integrated into annual reporting. There is a pressure to express 'non-financial' risk issues in terms of core business value creation, beyond loss mitigation.

For example, those inside firms with global supply chains tend to advance the idea of using 'sustainability' as a lens for 'innovation'. The latter gets the attention of 'core'-minded boards more directly. It is an effort to frame sustainability as core business strategy at least in relation to supply chain systems. The new vocabulary of 'circular economies' is partly a reflection of this (and partly a reflection of common business sense, at least in the long term).

Although not everything that counts can be counted, this pressure to demonstrate value and return on investment is understandable, inevitable, and if anything promises to bring new discipline and rigour to the field of responsible business practices.

There is much talk of business and development practices in Africa 'leapfrogging' stages and bottlenecks, and turning adversity and novelty into innovation, advantage, value. There is much work to be done assessing how the continent's rise might also be a crucible for altered views of what comprises the 'core' of business strategy.

Jo

There are analogies to be drawn for in-house sustainability / ESG practitioners from a recent Accenture report on efforts in the banking and finance sector to get 'dull' risk compliance issues a 'seat at the table' ("hard to earn, hard to retain").

Plenty of guidance exists on how to go about doing this, at least in theory (there's a more heavy-going literature but here's one accessible and recent primer, there's the Harvard project on getting these issues into boardrooms, and here's another from BSR). The challenge in converting ideas into practice (or from the periphery to the core) is not necessarily different from other fields, as noted in this FT piece on the hunger for sustainability subjects in business education.

See also this recent post on this blog on corporate communications.

Public-private partnerships in Africa: presumptions

The dismissal last week of Malawi's entire cabinet (following a procurement fraud scandal) is easily dismissed as yet another corruption headline. But it also provides a hook for a little-mentioned aspect of public-private partnerships (PPPs) -- among the most fashionable concepts and phrases in current African economic and social development.

Although there is a strong scent of doubtful panacea about PPP-talk and often little precision offered on what exactly such relationships entail, there are many obvious advantages to seeking to crowd-in private sector funding and other support for government schemes. (This blog favours greater engagement with the private sector by governments in pursuit of public goals; see for example the previous post, here).

When PPPs are idealised, societies can see big business become more directly involved (than the indirect means of taxpaying) in the co-provision of public goods; for its part, business can envisage greater influence over the roll-out of infrastructure and other projects, reassured -- by the state's involvement in the project -- about its long-term prospects and return-on-investment.

Yet less ink is usually spent on what these relationships require, beyond viable co-financing arrangements, to work.

In particular, current PPP enthusiasm tends to presume that the public sector ministry or department can in fact deliver as a partner. The Malawi story highlights familiar accountability, transparency and integrity problems with many government departments in that sub-region, but the issue will also be one of sheer capacity and the available skills-base.

The issue is important to debates on promoting pro-developmental business in Africa because PPPs assume a class of public servants and regulators capable not only of delivering utilitarian projects but of conceiving and overseeing PPPs that strive to meet public interest (social, environmental and governance) criteria as well as commercial attractiveness ones.

I think that the issue I mean to address is this: 'We often assume that the difficulty is getting business to take the wider issue of public goods seriously; but many firms accept the merits or imperatives of development goals and are often waiting for a government lead and direction; so, what do hopes for scaled-up public-private relationships in pursuit of developmental goals assume about the quality of public servants, rather than just the motivational posture of private firms?'

It would be interesting to see survey data on whether the majority of today's non-migratory young graduates in major African countries prefer a public sector job to a business/corporate one.

It is often assumed that private sector roles attract the more dynamic, enterprising and capable cohorts, while supposedly more secure but lower-paid government jobs attract those who are more risk-averse, have public service motivations, and so on.

In less-developed African countries, as business-government interactions increase around PPP models, one question that will arise more starkly is the potential drain of government talent into corporate teams. Firms may face dilemmas since their instinct to 'poach' an individual may clash with their sense that more will get done on their PPP if the talented individual remains in government. One idea is for the private sector partner to sponsor government counterparts -- as if seconding them -- to ensure these remain in government; this sounds like a recipe for corporate capture of government agencies but, if not too naïve, holds the promise that PPPs can deliver projects without stripping departments of their best staff.

The Malawi scheme was not particularly sophisticated, but does reveal a degree of entrepreneurialism within government agencies that in commercial life would be rewarded, in relevant appropriate circumstances (see this reflection on the upsides of 'corruption as innovation' here). Yet the Malawi conduct is not the sort of 'initiative' and 'innovation' that PPPs require of public servants if PPPs are to make meaningful impact, as a model, on African growth and development.

See a previous post on 'revolving doors' and the private sector's responsibility for public sector integrity as Africa rises.

Jo

The G8 and Africa: trade, tax and transparency

Since the last post earlier this month, the most significant development at the nexus of business and society in sub-Saharan Africa has probably been last week's G8 summit, where the UK government promoted its 'Three-Ts' agenda (trade, tax and transparency).

This weekend a far smaller meeting took place here in Oxford, organised by the University's China-Africa Network (OUCAN) on 'Emerging Powers in Africa'.

The two very different events are related in at least one sense ... efforts in Western countries to regulate for more transparency in the way that companies interact with developing country governments still have some way to go in making a stronger case for such regulations among industry members that must compete with firms from settings, such as China, which do not impose such requirements.

One dimension of the UK government's agenda has been promoting greater transparency by UK-based extractive industry firms on what these firms pay to host governments. Africa accounts for many of the settings where shortcomings in government revenue transparency are a major issue for donors and lenders, local and transnational advocates, and increasingly for firms themselves (often at the behest of their financiers and insurers).

The G8 meeting followed shortly after the European Parliament voted on June 12 on laws (that will take effect in 2015) requiring European oil, gas, mining and logging firms to disclose payments above 100,000 euros made to host governments in relation to accessing or extracting natural resources -- even if the host government's laws prohibit such disclosure. The European regulatory initiative follows the US Dodd-Frank Act (which applies only to US listed entities' disclosure of payments) and reflects many years of 'publish-what-you-pay' advocacy and extractive industry transparency initiatives, the most notable of which was first supported by the British and other governments.

There are many dimensions to this topic, and what follows is only one thought-line.

One does not need to be an apologist for the extractive industries to acknowledge the force of their various arguments questioning such regulations.

One is the risk that Western firms subject to such requirements might be unable to compete for access to resources with less scrutinised, less scrupulous, and perhaps more socially indifferent firms from China and other 'emerging' powers. One can call this the 'Talisman factor', after the Canadian operator that withdrew, partly under pressure at home, from Sudan's conflict-affected oil sector; its concessions were taken up by firms with far less incentives to implement progressive environmental, social and governance norms.

One sees insufficient efforts by regulators (and their political principals at forums like the G8) to develop persuasive lines of argument about the strategic merits of such transparency regimes, in addition to their moral rectitude.

Late last year I blogged on the place of values and principles such as transparency in strategic competition for natural resources (here). It was a post calling for greater suasion on why such transparency regimes matter and why firms should embrace them.

Aside from indisputable matters of principle about the importance of revenue transparency, it is possible to make an argument that regulating for payment disclosures is not materially different from regulating for disclosure of other latent liabilities or political risk triggers. The market appreciates such information and, over time, appreciates those firms that are candid about disclosing material risks.

This sort of persuasion is important since regulatory compliance -- as experience shows and theory argues -- is far easier to secure where an industry accepts that the overall regulatory objective is of long-term value to it as a matter of business strategy (in addition to being warranted on the basis of being a responsible member of society).

That is, in order to get support from CEOs and boards we tend to speak of the need to make the 'business case' for voluntary corporate responsibility outreach. But making a 'business case' also matters for issues of compulsory regulation, because making it improves the prospects of fuller compliance.

The extractive industries are formidable forces when it comes to shaping the content of regulation, which should not be deferential to industry as a matter of course. Yet it seems hard to deny that politicians -- and the academics who advise them -- have not spent enough time acknowledging the commercial-strategic reality of collective action problems and the lack of a level regulatory field when it comes to strategic competition for natural resources. This means that they insufficiently frame moves to regulate revenue transparency in ways that persuade Western firms that these will improve those firms' long-term strategic positions.

Jo

ps -- see also my previous recent posts on taxation and corporate responsibility in Africa (here) and corporates, contracts and clarity (here).

ps -- my colleague Hannah Waddilove blogged last week on the G8 summit in relation to African governments' revenue-raising dilemmas: see here.

Stakeholder rhetoric: ignoring the private sector

A mindset shift is needed to ensure greater engagement by authorities with the private sector in tackling some of Africa's most pressing public interest issues.

One standard criticism of corporate responsibility initiatives is that they only give superficial lip-service to their promise to engage a variety of other stakeholders.

However, this failure to match rhetoric with reality applies in a different and contrary direction: governments and their multilateral bodies dealing with major developmental, governance and security issues often speak of 'engaging all stakeholders' -- only to then ignore the private sector.

This post comes from Rome, where I'm part of a high-level EU meeting considering strategies to respond to organised crime and drug trafficking along the 'Cocaine Route' from Latin America to Europe -- via West Africa and the Sahel-Sahara.

A background paper for the event makes some mention of engaging a "diverse group of stakeholders", but only mentions the private sector at one point in relation to "advocacy strategies" to create a groundswell against organised crime and corruption.

I find it extraordinary that the invitation list for such an event includes no-one from chambers of commerce in key port cities, port and airport logistic firms, banks and others interested in preventing money-laundering, and so on. It is all diplomats and cops -- although some civil society groups are represented, businesspeople and their umbrella groups are not.

Of course, if you define 'multinational private sector' broadly enough, transnational organised crime is par excellence a multinational business activity. It is an illicit one, but large-scale illicit activity is difficult to sustain without passing, at some point, through the licit economy (if only to launder the proceeds of crime). Speaker after speaker here in Rome has highlighted drug traffickers' remarkable innovation and capacity to respond: yet one licit source of resources, capacity and interest (the private sector) is again overlooked as a relevant 'stakeholder' in promoting less corrupt, more crime-free growth and development in Africa.

Innovation in public policy extends to re-thinking who may count as partners or can in some way be co-opted.

This sort of innovation is generally lacking. My doctoral work examined how authorities engaged in post-conflict recovery have tended to ignore the scope for engaging the private sector's capacity to contribute to building peace. From Sudan to Solomon Islands, the problem I found was either authorities' undue ambivalence about engaging the private sector, or ignorance of the potential contributions of businesspeople to achieving public goals.

This sort of mindset leads to the anomaly that one can attend a major conference on international supply chains in drugs without any attendee from the private sector: banks, airlines, ports authorities, shipping firms (and all their insurers -- a node for regulatory influence).

All the 'holistic -- multi-stakeholder' rhetoric rings hollow in such a context.

Jo

See a related previous post, here.

A link to the background paper is here.

Corporate responsibility -- government duty

In terms of corporate responsibility and regulatory debates there is no recent African analogy to last month's shocking Dhaka building collapse that killed over 600 mainly garment workers and injured thousands.

Like much reform generally, momentum on governance reform (by both the private and public sectors) on social impact issues often requires (sadly) a landmark, shock-inducing event.

(Empirically, such events do not necessarily lead to change, although they may add a pulse, perhaps no more nor less, to the general thrust of pressure for change; see this BBC online debate post-Dhaka: here).

There are few African analogies. The 1995 execution of activist Ken Saro-Wiwa (by a Nigerian military dictatorship) is one such event which prompted reassessment of business-government relations and the parameters of corporate influence on host country policy. By contrast, today many of Africa's better-known corporate impact issues are slow-burning ones without particular spike events -- from gas-flaring to toxic waste-dumping to conflict minerals.

That selective list itself illustrates how random or arbitrary it will often be whether a particular sector or issue or firm comes into the corporate responsibility spotlight -- a point made in a recent post on reputational risk, here. (This is not to say firms cannot plan for foreseeable contingencies). Other issues of profound significance, such as climate change, are in some ways too diffuse and unwieldy to fit easily into targeted campaigns by either firms or governments or activists. An expert's briefing published by our firm this last week noted how academic debate takes some issues as squarely within the field of 'corporate responsibility' while others which involve significant social impact by business, and which conceivably could become framed in that way, do not.

One question prevalent in the media and industry since the Dhaka event has been whether this is indeed a 'corporate responsibility in global supply chains' issue, or rather a question of weak government supervision of local statutory standards; enforcing local laws is not a corporate responsibility.

The answer may lie somewhere in between, since through their purchasing conduct foreign corporations and financiers have some capacity to 'regulate' local regulators (especially in weaker governance zones) to ensure these officials enforce their own rules; they also have some potential influence over the local commercial actors who mediate activity in their global supply chains. There are wider forces and considerations at issue relating to local control, global competitiveness and the allocation of responsibility and conscience-calling.

The Dhaka misery and debates on global supply chain integrity are too big for one post, in an Africa-focused blog. (Since I cover South Africa a lot, it is natural to think of the decimation of jobs in that country's garment sector as the ANC tries to promote its 'decent work' agenda in the context of Chinese and other manufacturing competition -- an unenviable task, at which they are at best drifting.)

I have been thinking this week of analogies with the 'aid to Africa' debate, where it is right for aid effectiveness / transformation activists to spare a lot of their energies typically directed at donors, to the behaviour of recipient governments. In the same way, while global brands can wield some regulatory influence over government complying with their own local standards, the responsibility in so many respects lies at home with governments. There is another analogy with aid, one familiar to corporate social investment debates: the more one asks of firms, the more some governments become removed from responsibility and unresponsive to local constituencies.

The challenge as ever -- across regions -- is to move from blame-game to game-changing steps in regulating, within what is realistic in a globalised market, the conditions under which people work.  That includes moving from an either/or approach to responsibility to appropriate apportionment and cooperative approaches to creating shared value and distributing shared risk.

Dhaka's victims fell at the intersection of small, particular regulatory norms (capable of altering local circumstances) with the more universal, amorphous norm which the ANC's emphasis on 'decency' captures. Big firms in Africa can do their brands and workforce a favour by thinking (individually or in sector coalitions) of how, beyond tax-paying, to improve the regulatory competence and integrity of government agencies -- even if the latter should always bear by far the primary responsibility for creating conditions for a more decent life.

Jo

Corporate (re-)entry, sanctions and risk: the Myanmar / Burma example

Geopolitics, universal values and corporate strategies intersect where firms decide to (re-)enter 'transitional' states emerging from relative international isolation.

Previous posts have discussed African settings where bilateral or bloc-mandated sanctions apply (from Sudan and Eritrea in the Horn of Africa, to Zimbabwe and Madagascar in southern Africa), but this week's post looks at Myanmar (Burma).

On April 22 the EU lifted all its remaining trade, economic and personal sanctions on Myanmar (bar the arms embargo) in recognition of its reforms towards greater inclusivity and political space.

So I asked my Oxford Analytica colleague Herve Lemahieu -- who follows the country closely -- a few questions about the issues where risk, regulation, reputation and responsible business conduct meet in post-sanctions Myanmar:

JF: What have been historical (1990s and on) patterns of Western corporate engagement and how quickly is this changing?

HL: “Two decades ago, Western companies were rushing out of Myanmar under pressure from shareholders and activists. Pepsi Cola, Apple, Levi Strauss, Unilver, Texaco, Carlsberg, Heineken, Disney and Hewlett-Packard were just a few of the big names to exit the country following high-profile campaigns. In the mid-1990s and into the early 2000s, Western economic, financial and political restrictions, in place ever since the failed pro-democracy uprising of August 1988, were steadily ratcheted up and bolstered by consumer and civic pressure groups discouraging all trade, investment and tourism.

There is little evidence that this boycott had much more than symbolic value. Twenty years of military rule and Western sanctions allowed a narrow, state-linked business elite to thrive while hitting the general population the hardest. The West lost influence while allowing Asian competitors an open field. Rather than acquiesce in Western calls for sanctions or add to pressure for regime change, Beijing and ASEAN favoured the military regime's own top-down transition and seven-point roadmap to ‘discipline flourishing-democracy’.

Many western observers failed to recognise what the military regime was trying to do during its two-decade rule because it did not conform to categorical ideals of democratisation. However, the integration of opposition leader Aung San Suu Kyi and her National League for Democracy (NLD) into the fold of the country's ‘disciplined democracy’, in which the military remains the most influential de-facto and constitutional powerbroker, has been judged ‘good enough’ for Western businesses to rapidly return to one of Asia’s last remaining frontier markets.”

JF: Are corporate engagement strategies out of line with diplomatic ones, and does it depend on whether Western or other company / government?

HL: “Government and corporate policies are now, broadly speaking, mutually reinforcing. Most Western governments have conceded that sanctions exercised only limited political leverage over the previous military regime, and are opting instead for pragmatic engagement to secure political and commercial goals in the country. For their part, many companies have learned from past experience to become more risk-averse and reputation-conscious as they prepare for market re-entry. However, there are still nuanced differences in the economic diplomacy espoused by different capitals, with varying private-sector implications:

· Japan has led the field in normalising ties and increasing its commercial presence in Myanmar -- something political liberalisation now allows it to do at far less cost to its international reputation.

· The EU has today agreed to follow Norway, Australia and Canada by permanently lifting sanctions, rather than conditionally renewing their suspension.

· That leaves the US the only country to maintain curbs on the country as part of its piecemeal ‘action-with-action’ approach of easing sanctions through presidential waivers.

Corporate and diplomatic strategies still clash in as much as US business leaders have complained that Washington's policies require extensive compliance paperwork and present legal/reputational uncertainty, while European and Asian rivals gain first-movers advantages. Many US multinationals are undeterred, including Coca-Cola, General Electric, Hilton Worldwide, Visa International and MasterCard which have all entered Myanmar in the past six months.”

JF: Is there a case for saying that corporate engagement at this time helps support wider reform / transition in Myanmar? What counter-arguments do you hear among those watching the country?

HL: Some Western politicians and lobby-groups have sought to portray Myanmar’s transition and the resurfacing of ethnic and religious violence as, respectively, evidence of the effectiveness of, and continued need for, conditionally withholding western business activity in the country. However, governments and voters alike are becoming more sceptical of their ability (or indeed the general desirability) to micro-manage political change through blunt economic polices implemented from half-a-world away.

As the logic for broad-brush 'complicity-by-general-association-or-presence' risk starts to recede for corporates re-investing in the country, risk will start to lie far more in particular relationships and actions that firms might take, such as labour relations, community and environmental impacts. Given the absence of well-developed physical, financial and regulatory infrastructure, the challenge will be for corporations to self-regulate, hedge risks, and assess their own ways in which they can contribute to the wider reform process.

Already, we have seen prospective and actual businesses drive the government’s efforts to adopt international standards, from labour rights to financial regulation and environmental protection:

· Nearly 400 government officials were sent to jail on corruption-related charges between mid-2011 and December 2012 (almost as many as political prisoners released in the same period). This includes a crackdown on the endemic practice of accepting or soliciting kickbacks and bribes to award contracts.

· The government is negotiating entry into the Norway-based Extractive Industries Transparency Initiative and will likely remodel its energy contracts according to the voluntary regime’s stringent requirements for financial transparency, environmental standards and corporate governance for the natural resources industry.

· Japanese trading houses – including Mitsubishi, Mitsui, Marubeni and Sumitomo – have spearheaded efforts to diversify away from the extractives sector by investing in the labour-intensive sectors, such as manufacturing, services and agriculture.”

My thanks to Hervé.

The Myanmar outcome came a day after the Bahrain Formula 1 Grand Prix, where the organisers (and indirectly, the sport's many sponsors) were forced to defend their decision to hold the race in the face of a campaign for greater political freedoms in the Gulf state. Politics, human rights and calls for sporting boycotts are nothing new, but there is no doubt that especially brand-sensitive corporates nowadays need to navigate these issues more swiftly, consistently and comprehensively.

For previous posts on this topic, see here (corporate engagement in ‘pariah’ states), here (entering 'closed' complex settings like Ethiopia) and here (reputational risk from mere presence?).

Jo

ps -- of note to a blog on this general subject matter relating mainly to Africa, the US Supreme Court last week rejected Nigerian plaintiffs' arguments that US courts should exercise jurisdiction (under the ATC Act) over claims against Shell for conduct allegedly occuring outside the US. In a future post I'll reflect on litigation strategies in the context of wider efforts to 'level the playing field' for responsible business activities by firms -- whether from the 'West' or 'emerging markets' -- in Africa.

Private innovation, public goods: leapfrogs, short-cuts and pragmatic principles

If they both reflect a kind of innovation, how do we distinguish 'corruption' from 'entrepreneurship' -- and encourage only the latter?

In my day job covering contemporary Africa's political economy, two distinct narratives have consistently high prominence -- and I wonder about the link between them.

One is the hugely debilitating effect of various forms of corruption -- manipulating public goods and processes for private ends. The other is the much-praised capacity of individuals and groups to make ends meet (or even multiply) despite poor or problematic public services and systems; one constantly encounters anecdotes about how this is a continent filled with highly innovative and enterprising people whose irrepressible spirit of commerce and exchange holds great promise whatever the state does or fails to do.(*)

How can we see these as part of the same issue, not as unrelated parallel stories?

Is it possible to find -- in admiring the ingenuity involved in some corrupt or illicit practices -- some silver lining about the scope for more efficient, effective or legitimate relations between those in public office and private firms or individuals? (**) Can the same spirit-of-enterprise that sometimes manifests as corruption be harnessed to increase not constrict public choice? Can the particularised trust that enables corrupt relationships be seen as the same raw material from which one can envisage a richer reservoir of generalised trust in which greater and wider prosperity is possible for more people?

Most literature focusses on how corruption stifles innovation because, for instance, it undermines trust in how a partial state might treat the fruits of any enterprise (see for example Mauro 1995; Mbaku 2007; Anokhin and Schulze 2009; cf. Mironov 2005). But what if at least some of the same creative thinking that goes into corrupt practices is from the same pool or resource of spirit-of-enterprise that might be capable of finding useful good short-cuts or leapfrogs that make government more efficient and responsive and better able to serve the wider public interest? (***)

Thus how do we foster 'good' creativity and innovation by private entities and individuals not just in commerce or social services but also in designing or influencing the provision of public goods such as security, public financial integrity or the rule of law?

You will see that I have no idea! This post involves fumbling about in the hope of stumbling upon the beginnings of a theory that manifests principled pragmatism and looks for ways to see how transactions and relationships that appear illicit and damaging may have lessons in terms of regulating the interface of private interests and public authorisation, which is where corruption occurs. If I find it I will also find a neater name than 'Governance-by-outcome-not-process'. It is in procedures that opportunities for corruption lie; those who seek to short-cut such procedures (for nefarious or even just frustrated reasons) may be telling us something about designing institutions and regulations to minimise opportunities for rent-seeking by officials.

There are familiar balances involved in idealising forms of regulation and governance: for example, one wants public servants to be responsive and pragmatic (accessible and clean), but not too responsive and malleable (accessible but corrupt). Moreover, of course, not all the regulation that matters or works comes from the state. We talk about fostering 'bottom-up' initiatives, but are also typically sceptical about those that come from non-state sources.

But I don't mean this -- rather I mean being prepared to accept (a) that some corruption fosters growth or distribution, or indicates that formal licit approval is too hard for some sectors of the public (ie, corruption could represent a reaction to bad policy, a sign that governance is not working or is requiring anti-social short-cut actions which could instead be investigated and the innovative approaches directed towards pro-social outcomes); (b) some corruption nodes indicate bureaucratic bottlenecks that simply should be relaxed or removed (rather than 'strengthened' by anti-corruption measures) and (c) corruption sometimes indicates that individual actors have found a more efficient route than policymakers prescribe, which may have virtuous implications (see for example Leff 1964; Bailey 1966).

This is all rather undercooked, but represents an attempt to think about how to design systems of governance and development-promotion that instead of requiring innovation in terms of ways to get around regulations, designs regulations that stimulate 'good' short-cuts and leapfrogs that help point officials towards making government both responsive and responsible. I stand ready to be accused of rank naivety...

Jo

* = Often, of course, it is less romantic things at work, and what is cast as 'enterprising' is instead just about survival or subsistence; that is, adversity and necessity -- not just curiosity or the promise of commercial gain -- are a major source of inventiveness.

** = The other point to note is that much of the most damaging corruption (in Africa and around the world) is not particularly innovative: often it is just a blunt and blatant act of taking (or withholding, for example of tax obligations) that does not require strong entrepreneurial skills to find ways around barriers, it only requires weak systems of oversight and accountability. Moreover, from the perspective of those marginalised from their proceeds or benefits, formalised systems of governance may be seen simply as private enrichment systems dressed up as public order. It depends on one's view of the legitimacy of the state and its processes in any one setting.

*** = A somewhat related question is the opportunity cost of anti-corruption and accountability systems -- some (eg Anechiarico and Jacobs 1996) argue, in effect, that effort should rather be directed to supporting 'good' creativity in governance rather than trying to stamp out 'bad' creativity...

'Revolving Doors': the private sector and public service integrity in Africa

African countries' current high growth rates raise a host of governance issues, too.

One contemporary African policy dilemma is to facilitate greater understanding and cooperation across the public-private divide, without familiar problems such as firms 'capturing' (unduly influencing) their own regulators.

Given the pan-continental shortage of skilled management-level staff, one current under-played strategic issue is how to build (and retain) a competent cohort of public sector regulators and policymakers, when local and global firms (and, importantly, state-owned 'private' enteprises) expanding in Africa seek to hire people from the same shallow skills pool.

Related to competency questions are integrity ones when firms seek to hire public servants precisely because of their political / policymaking contacts and influence.

Yet there is nothing new, nor unique to developing countries, about such patterns of moving across to the private sector -- just visit Washington DC's massive defence procurement establishment. Moreover, with all the focus now on the private sector's role in meeting public ends, there are strong arguments for encouraging public servants to understand and experience the private sector better, and vice versa; indeed, in a late-2012 post I wrote to that effect on 'building trust' between government and business -- here. In various other posts I've argued for more flexibility about secondments and business support to developing regulators' capacity (see here, for example, in post-conflict weak governance settings).

Of course, such ideas come with a risk of regulatory capture or corruption. What can Africa learn from Asia in terms of the 'revolving door' -- maintaining integrity and performance when officials move seamlessly between 'private' roles and public office?

My work colleagues have published various insights on these issues -- in relation to India, for example, where conflict of interest arise given how readily ex-officials join semi-privatised or fully private conglomerates. But how -- even without the benefits of public-private movement of staff, or the inevitability of it -- are such issues to be policed in African settings? Western practices do not necessarily offer an example, and non-Western practices may reflect a genuinely different (less rigid) perception of distinct public and private business spheres. Moreover, a recent analysis by one of our firm's experts noted that curtailing the prospects of entering the private sector later in life would deter talented people from joining the public sector in the first place, and why shouldn't they be free to 'cash-in' on their skills if the private sector find these of value?

That analysis looked at the growing tendency towards measures such as insisting on 'cooling off' periods (before taking up a private sector job), or undertakings to refrain from direct lobbying of one's former government colleagues.

In African settings, a company would weigh the reputational risk it faces by hiring from its regulator or relevant ministry with the benefits such person would bring in understanding official positions and postures. From a public policy perspective, the fear is that fast-growing economies see their best and brightest officials poached to the private sector or parastatals, or a very blurred set of networks and lines of influence that, in the long term, obscure the chances of building a more competitive, transparent economy capable of sustaining higher growth and widening it to beyond just a few sectors like mining or oil-gas.

This dilemma (foster greater public-private dialogue, but gaurd against undue influence) will not be resolved easily, if at all.

Jo

Ps -- See here for one interesting read / guidelines on the dilemmas of what is proper in engaging in public-private dialogue. This relates to the wider issue rather than the revolving door dimension of it.

Corporate diplomacy: engagement in 'pariah' states

2012 saw a somewhat unprecedented level of Western diplomatic engagement in Myanmar / Burma. Accompanying this has been a surge of commercial interest in the opportunities apparent in the country's re-opening.

2013 then began with Google's chairman announcing plans to visit a far more diplomatically isolated country, North Korea (despite the US state department's discomfort).

2013 is also the year that I hope will finally see publication of a chapter I co-wrote, albeit on aid not investment, for a book on Principled Engagment in 'Pariah' States (Kinley and Pedersen, eds.).*

The Google-North Korea visit was not necessarily undertaken in a corporate 'pre-entry' capacity, but raises interesting questions not just about diplomatic strategies for engaging with isolated regimes, but for the role of corporate country entry or outreach in such 're-opening' processes or attempts -- whether by state diplomatic design or independent initiative.**

In the continent I cover, Western business activity in a number of countries is constrained by, among other things, the real or perceived reputational or regulatory risks of seeking to enter where US or other sanctions apply in some form or another.

Sudan, Zimbabwe, Eritrea and Madagascar all (I think that's all) to some extent can be categorised as sanctioned and subject to varying degrees of Western diplomatic isolation. The late apartheid era in South Africa, or business activity in Rhodesia after 1965 are obvious African examples of controversial corporate engagement continuing. If, as some think, this year brings the prospect of transformative political change in Zimbabwe, the question could arise inside firm X or Y of whether a more proactive country engagement strategy ought to have been undertaken or planned in anticipation of a more relaxed or less controversial and complex environment for business.

Reach out or hold back?

Such situations raise peculiar issues for firms and for policymakers, ones where private initiative and public interest overlap closely.

Corporate strategies in such situations must balance potential 'first mover' advantage with the potential to miscalculate the extent of transformative change, leading to serious commercial losses or sustained pro-democracy activist campaigning (the latter on the basis that the engagement with a 'reforming' regime lacks a sufficiently principled basis). Moreover, if the firm's move is considerably out of sync with its home state there is also the possibility of limited home country diplomatic support in navigating complex local politics in the receiving country.

Firms like Google whose products or services so directly involve questions of political values and human rights such as freedom of expression have a clear commercial and reputational imperative to develop a clear, consistent and communicable 'foreign policy', for example in situations where more repressive governments seek to very narrowly constrain the company's operations. Such strategic issues are not limited to 'pariah' states, but the extra public attention and diplomatic sensitivities involved in such settings raise the stakes.

This blog post cops out now -- I don't purport to offer a 'solution'.

At the level of state diplomacy, my own instinct tends to lie with principled engagement, given how counter-productive (and damaging to the ordinary citizen) isolation can be. The UN's 2011 'Ruggie' guidelines on business and human rights, among other things, give increasing normative guidance to firms in terms of what the 'principles' might be in 'principled engagement' by corporates in politically isolated states:

* In some situations, a US company (say) that is far more comfortable with country (re)-entry than the US State Department could have a role in contributing to political 'normalisation', and so lead the way...

* ... Yet diplomacy is an art, and there will remain many situations where firms would be well advised to follow their government's lead even if this feels excessively cautious and appears to handicap them relative to competitors from other states.

It will depend on the situation, and the company's exposure in particular to reputational risk: the private sector inhabits a public world. In high-profile 'pariah' country entries, it can quickly become a very publicised world indeed.

Happy 2013!

Jo

Related previous posts include those on 'corporate foreign policy' (here) and on 'business and nationalism: foreign policy attribution' (here).

Here is a link to a paper related to the 'Principled Engagement' project / book.

If you're interested, Jabin's blog (China in India) is here.

* The idea that Zimbabwe, for instance, is a 'pariah' state is one that I find somewhat problematic, not least because such mindsets / categories obscure avenues for principled engagement; it is debateable whether targetted Western sanctions there are having their intended effects, while I am told there are many in Washington who see US sanctions on Sudan as obsolete and retarding a whole generation's development.

** There's a lot to be said about avoiding seeing such settings as vacuums free of transnational business activity or penetration and simply lying waiting for 'entry'. Also, 're-entry' overlooks that many Western banks and firms have never left a place like Zimbabwe throughout its 'isolation', and there's by no means any particular principled reason why they should have done so.

Regulation, values and strategic competition

Public intellectuals should be making a stronger case that anti-corruption laws and other 'values-based' regulation are not disadvantages for Western firms in strategic competition for access to African natural resources.

This week I'm attending the 2nd 'Challenges of Government' conference at Oxford's Blavatnik School.

There Paul Collier will be moderating the session 'Managing Natural Resources for Growth' against the background that resources booms have often driven "inequality, conflict, and stunted political development".

This reminds me that earlier this month Collier wrote an op-ed in The Gaurdian arguing, among other things, that US, EU and other anti-corruption regulations give rival (he meant Chinese) firms competitive advantages in the race to secure mineral, energy and land resources -- but that these rules were a vital part in a strategic conflict of values, as follows:

"The west's economic battle with China will be lost: power will inevitably shift. The battle of values can be won, and if it is won the shift in economic power will be less consequential."

In my next (post-conference) post, I hope to revisit these issues in light of discussion at the Blavatnik event. For now, a few things -- because I think Collier's thought-provoking piece (albeit on a well-trodden 'contest of values' literature) missed an opportunity to be more persuasive. The piece does not make the case for how, in the long term, doing the right thing (in regulating offshore business behaviour) can also be the smart thing (provide long-term strategic advantages to Western firms). I intend to ask Collier whether it is not possible to make an argument addressing firms' strategic self-interest and not just our sense of right. That might help build corporate support for such practices, seen for example as part of longer-term protection of commercial interests from various risks.

The late Karen Ballentine led the best research on the malign problem structure of the lack of a 'level playing field' and collective action problems relating to regulating for more responsible business. Collier ought to have used his op-ed to explain why 'winning' the battle of values would be a significant economic victory, not just (an important) moral one. That is the case he needs to draw out to convince policymakers and regulatees of the strategic importance of such laws.

Moreover -- and a topic for another post -- Collier's argument does not factor in how Chinese firms involved in higher-profile African resources deals might over time face (and are already to some degree facing) a degree of greater regulatory attention from Beijing over their behaviour in Africa. Collier's argument is, in effect, that the West has a moral duty towards African countries to regulate for responsible business conduct. Yet perhaps Collier should write less on what the West can do to 'win' versus China in Africa, and more on what can be done by policymakers to help promote inclusive, transparent and socially-responsible management of African resources, whichever foreign nation seeks to exploit them.

Jo

A previous post reflected on the risk that regulation intended to improve listed companies' social performance might have undesirable consequences -- here.

Collier's piece is here.

Business after conflict

This week in Nairobi (November 28) is an interesting conference 'Business after Conflict' to discuss, among other things, what donors can do to attract and support investment and promote conflict-sensitive business practices in places like South Sudan, Guinea, Ivory Coast.

There is much to be said. Cambridge University Press is next year publishing my book on engaging the private sector in peacebuilding, so for now just a brief thought about one practical idea for conferences like this.

Its a thought we discussed last week (November 22) in London under the umbrella of the Invest in Africa initiative. And it relates, like that initiative, to what major private investors -- not donor or host governments -- can jointly and individually do to improve the post-conflict investment regulation climate and mitigate both the perception and reality of regulatory (and other kinds of) risk in such settings.

Responsible businesses do not wish to operate in a regulatory vacuum, but some post-conflict settings will display serious weakness in regulatory institutions. In such exceptional cases there's an argument for firms helping -- by secondments of their own staff, or sponsored salaries of transitional experts, for example -- to boost the capacity of local government counterparts in (re-)creating and managing a stable regulatory climate.

In my experience, often a big mining firm entering a fragile setting will poach the best local talent to work within that firm's local offices. Yet it might make more sense for the firm to support the government's retention of such staff within the regulator, to improve the framework under which they operate.

Moreover, re-entering or interested firms can work together (and with local chambers of commerce) in such a scheme. Donors [in theory] coordinate in post-conflict settings -- so should firms, even those ostensibly competing. All probably gain from the reduced financing cost, for example, of a setting with a better reputation for regulatory capacity.

Donors and multilateral agencies -- and civil society watchdogs / capacity-builders -- would have a role to play in triangulating such relationships to avoid the risk that business will compromise its own local regulators by capturing these institutions or distorting their activities (or be seen as doing so). Secondees would avoid crowding-out local regulatory talent by gradually handing over roles.

I wrote on this in a previous post on the need to explore ways that good business can help build the environment that good businesses find attractive:

"... Attracting good firms to risky places is hard enough as it is ... it seems sensible to be more flexible about firms (not just donors) ... helping host governments with things like boosting the capacity of local regulators to regulate in a predictable, purposeful way. In such relationships lie many points to leverage for more responsible business conduct, and higher governance standards by public officials."

Jo

The previous post I've quoted from is here.

See the Invest in Africa initiative (founded by Tullow Oil) here.  

Bribery and corruption: OECD work in Africa

Bribery and corruption are very significant issues at the nexus of the private sector’s role and the achievement of public policy goals in sub-Saharan Africa.

In this slightly longer post, Melissa Khemani, an anti-corruption analyst and legal expert at the OECD in Paris, kindly agreed to respond to questions about some current institutional measures on the issue:

JF - Partnership between members of the OECD and the African Development Bank (AfDB) last year led to a new initiative, the Anti-Bribery and Business Integrity Course of Action for Africa. What are some challenges you think it has or will encounter in terms of uptake and implementation by governments in Africa?

MK – In 2011, the members of the Joint AfDB/OECD Initiative agreed to the Course of Action, which sets out a number of measures countries can undertake to help curb the bribery of public officials in business transactions from both the demand and supply side. This was a major accomplishment and reaffirmed the momentum that is building in this region to tackle this form of corruption.

Of course, the biggest challenge now is to turn the rhetoric into reality, and to implement and enforce these policies effectively. Bribery in business transactions is a complex crime, which is difficult to prevent, detect, investigate and prosecute. It requires a coordinated approach from a cross-section of government agencies and non-governmental stakeholders to fight effectively. It also requires a great deal of technical legal and investigative expertise. Cultivating the political will -- which in turn translates into the resources and priority dedicated to fighting this form of corruption -- is the biggest challenge in any country. The objective behind the Joint Initiative is not only to share the 15 years of the OECD’s expertise and experience in fighting bribery in business transactions through the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-Bribery Convention) but to also raise awareness of the economic and social costs of this form of corruption in order to help garner the political will to fight it.

JF – What about on the part of business -- is it partly an issue of awareness-raising, or is there much more to it than that?

MK – Awareness-raising is crucial, not only of the sanctions companies and individuals may face for engaging in bribery, but also for making the ‘business case’ against corruption, especially at this important juncture which is seeing Africa increasingly attract significant foreign investment, and African companies increasingly investing abroad. It is easy to see the short term gain of paying a bribe to obtain a contract. But in the long term, this increases the costs of doing business, and these costs can only be recouped through the delivery of sub-standard products or through higher prices. This is unsustainable for companies in increasingly competitive, globalized markets.

Engaging in bribery also creates business uncertainty, as such behaviour does not necessarily guarantee business to a company; there can always be another company willing to offer a higher bribe to tilt the business in its favour. As a result, bribery may swiftly lead to, in economic terms, a ‘race to the bottom’, where the least desirable and inefficient company may obtain business not on the basis of merit but on the basis of ‘deep pockets’ -- a situation that cannot be sustained over the medium and long term.

Robust awareness-raising also helps set and reinforce the tone of a company’s anti-corruption ethos. All of the companies I have met with which place a very high priority on anti-corruption ethics and compliance have said that one of the most important ways to prevent bribery is to set the ‘tone from the top’ that bribery and corruption is not their way of doing business, it is not in the interests of the company, and employees will be reprimanded for engaging in such conduct. Of course, such awareness-raising must be backed-up by a meaningful anti-bribery compliance infrastructure including, among other things, regular trainings, clear rules on gifts and hospitality, due diligence rules on agents and joint venture partners, and internal whistleblower reporting mechanisms. It is much more than just simply sending out a yearly memo.

JF – There is a lot of talk about the need for a ‘level playing field’ on business integrity regulation. How do you see the role of the OECD in promoting harmonization of standards across OECD members on anti-bribery and corruption in the context of all one hears about the need to compete?

MK – One of the main objectives that underpinned the drafting and signing of the OECD Anti-Bribery Convention in 1997 was to try to ensure a level playing field in international business through international treaty commitments. The idea is that companies should obtain business on the basis of merit and fair competition rather than on having paid bribes. With the OECD Anti-Bribery Convention, 39 of the world’s largest exporting and foreign direct investing countries have enacted and enforce foreign bribery laws.

The rigorous peer review monitoring mechanism attached to the Convention, undertaken by the OECD Working Group on Bribery, plays an important role in ensuring such standards are being equally enforced across member countries. Furthermore, in 2009, the Working Group on Bribery adopted the Good Practice Guidance on Internal Controls, Ethics and Compliance to assist companies prevent and detect foreign bribery. This is the first ever guidance provided to the private sector at the inter-governmental level, and has thus played a very important role in harmonizing minimum standards on anti-bribery business integrity.

JF – The suggestion of those seeing a ‘Beijing consensus’ phenomenon is that increasingly it is / may be state-owned firms we see investing in Africa and its resources. How does this raise problems or possibilities for regulating bribery and corruption?

MK – The OECD Anti-Bribery Convention requires member countries to include state-owned companies within the jurisdictional reach of their foreign bribery laws. As such, these companies should be just as aware of bribery risks and implications as private companies, especially when operating in high risk geographic zones or sectors. I am aware that there are concerns that countries will not enforce such laws against state-owned companies as rigorously. However, the Convention addresses this in part through Article 5, which prohibits considerations of national economic interest to influence enforcement actions, and there have been examples of enforcement actions taken against state-owned companies in member countries of the Convention.

JF – I see talk of a ‘monitoring mechanism’ for the Course of Action. What will happen with that? Indeed, more broadly where do you see the emphasis likely going in terms of the future work of the initiative?

MK – The Initiative has just taken off, and the next step is for the member countries to decide how they wish to implement the Anti-Bribery and Business Integrity Course of Action for Africa. This could take the form of a monitoring system loosely based on the OECD’s peer review mechanism where countries review one another’s efforts to implement the Course of Action and make recommendations. It could also take the form of having certain thematic issues addressed in the Course of Action investigated in more depth, and identify best practices. This is really for the member countries to decide, and it is envisioned to be discussed at their next meeting.

In terms of future work -- again, this is for the member countries to set -- but I would surmise that emphasis will likely be placed on horizontal challenges the countries are confronting; this could include issues concerning anti-bribery enforcement, promotion of anti-bribery corporate ethics and codes of conduct, anti-corruption in national resources extraction, transparency in public procurement, or preventing corruption in development aid-funded contracts, to highlight a few…

[I record my thanks to Melissa, whose responses are reproduced unedited but which do not necessarily represent those of the OECD secretariat, the Working Group, or the joint OECD-AfDB initiative].

This blog will continue to feature occasional interviews. I hope you are enjoying the weekly or fortnightly posts (we’re all saturated in information these days) and feel free to forward the blog to those you think may be interested in it; also, feel free to use the ‘comments’ facility.

Jo