The Emergence of Impact Investing

“How strange it is that a bird, under the form of a woodpecker, should have been created to prey on insects on the ground; that upland geese, which never or rarely swim, should have been created with webbed feet; that a thrush should have been created to dive and feed on sub-aquatic insects; and that a petrel should have been created with habits and structure fitting it for the life of an auk or grebe! and so on in endless other cases. But on the view of each species constantly trying to increase in number, with natural selection always ready to adapt the slowly varying descendants of each to any unoccupied or ill-occupied place in nature, these facts cease to be strange, or perhaps might even have been anticipated.” – Charles Darwin (1859), On the Origin of Species

In recent weeks, there has been a flight of investments out of so-called emerging markets and back into the warmer waters of the  USA, Japan and the UK. It is estimated that around $6 billion fled those markets in the last week alone. These countries vary widely in performance but they are all seen as next stage developing nations and include countries such as Mexico, South Korea, China, India, Brazil and South Africa. Huge sums have poured into these countries over the last six years as a result of (primarily) QE (quantitative easing) in the USA. This is now being “tapered” so the fear of funds drying up begins. Stock markets are down throughout and currencies are weaker against the strengthening developed nations like the $, £, Euro and Yen.

Financial experts believe that these “emerging” countries have the ability to reward normal (if higher risk) investment. Investors constantly seek out businesses that have already established themselves but where the risk / reward ratio is different from the more developed areas. This is the search for wider niches where improved financial rewards can be found.

Investors in such emerging markets do not normally consider the social good of that investment – investment managers are charged with having to return a competitive return to their investors. The “quality” of the investment considers risk and volatility but not the social return. This (understandably) means that emerging economies overall may benefit when money is coming in but (as now) see key projects suffer when the money turns away – as there is no “buy-in” to the investment beyond return on investment. Investors can move quickly back to their safer zones.

Impact Investing

Over the past few years, the finance world (possibly after government badgering) and in its constant search for investment opportunities has built a signpost towards the social quality of investment. It is called Impact Investing and its intentions are notable enough for those such as Sir Ronald Cohen (chair of the G8 Social Impact Investment Taskforce and one of the top venture capitalists of our age) to shout about the potential benefits and opportunities – as he did in his recent Mansion House speech.

Impact investing is an attempt to link financial investment with “social returns”: building non-financial returns into investment criteria so that not only quantity and normal qualitative issues such as risk are taken into account in making decisions but so that a variety of social benefits (less poverty, more jobs for local people, better services) are developed – the typical social return for organisations that have a double bottom line.

In evaluation terms. it provides the investment community’s equivalent of the “cost-benefit analysis” of the 1970’s that was predicated on government (local and national) expenditure and was an accounting tool for evaluating non-financial outcomes and providing a financial outcome to them (outcomes that recent flooding problems in the UK may well have seen exacerbated by as a result of cost-benefit “rules” made hurdles by the UK Treasury).

Impact Investment has emerged as a potential move by the investors to invest in areas that will not provide the highest quantitative return on investment. It may seem to resemble CSR – corporate social responsibility – made by companies but Impact Investment is driven by independent investors that are not trying to offset externalities caused by their businesses. The investment is seen as totally different to donations or companies doing good things (like fundraising efforts by staff) – the typical form of investor involvement in charitable ventures as a return on investment is required.

The Evolution of Impact Investment

The tradition of philanthropic “giving” goes back to before the 19th Century – a period of great wealth for some sections of society that fostered the desire in some to give back some of their wealth to society. In Victorian England, the wealthy would see it as their duty to provide funds for the poor and many trusts and foundations originated in this period. As Government began (mainly after World War One) to encroach on charity territory, philanthropists (already complaining of high taxation) saw it progressively as a government responsibility to look after the worse off in society. This was a natural outcome of the welfare state – where government expenditure grew to around 40% of GDP or more and progressive taxation became the norm in developed economies.

The wealthy have had to develop their own ideas about the part they can play in the so-called “Third Sector” that remains – and which remains a critical part of society – their niche – and (perhaps) especially outside of the original philanthropists’ countries of origin. In the globally connected world of the 21st Century, we see a mirror on the nation state of the 19th Century – instead of each country being split into the well-off and the rest, now it can be seen on a global scale.

Bill Gates is a good example of the modern philanthropist – using his wealth through the Gates Foundation to make real change in the developing world in disease control particularly. This is mainly via the traditional use of donations (on a grand scale) using expertise learned in business to effect change that government-led, top-down schemes or traditional aid money has not accomplished outside of disaster situations.

More recently, as Sir Ronald Cohen voiced in his Mansion House speech, investment is now being applied to social welfare schemes where a financial return is envisaged. This is not a new phenomenon but is now, according to Sir Ronald, the coming investment mechanism for change. As Venture Capital was to business start-ups, so Impact Investment is touted to provide radical change where a social element is involved. This is a move into a new niche – combining, it is said, answers to investors’ search for new opportunities with social benefits.

The Global Impact Investing Network, an organization based in New York outlines four, central aspects of Impact Investment which are:

  • ·      Intentionality – the explicit investment, part of which is for social gain;
  • ·      Investment with return expectations;
  • ·      Range of return expectations;
  • ·      Impact Measurement.

The Impact Investment Evolutionary Niche

The mix of public and private sector undertakings, which followed social democratic principles in so many developed nations after the end of World War II, have seen stresses since the 1980’s – especially as a result of the Reagan / Thatcher period and the libertarian form of market economics that followers of Hayek would pursue. The Keynesian revolution fell out of favour as the mandate to minimize taxation and let the free market do the work came to be the norm – particularly in the English-speaking world. This reversed the tacit agreement that Keynesian economics had formed at the macroeconomic level, whereby government would manage economies to iron out excesses – particularly to offset major downturns or market bubbles. The impact of the change on the micro-economic side was that direct taxation was now reduced and that had to lead to reduced spending and more emphasis on people resolving their own problems.

The financial system melt-down of 2007/8 has exacerbated the problem. In the UK and elsewhere where government debt is deemed to be high there have been major cutbacks. driven by research such as the Reinhart and Rogoff paper which culminated in their book “This Time is Different”. Recently, much research has offered an alternative outcome and  an IMF paper “Debt and Growth: Is there a Magic Thresshold?” seems to refute the evidence. Such cutbacks have severed an implicit bargain with the less well-off and threaten spending on international development (although the UK has maintained its 0.7% of GDP annual promise many other countries have not kept up to their Millennium development goal promises).

Additionally, questions persist about the value of top-down international aid (except for disaster aid). Those like William Easterly (author of “White Man’s Burden” and his new book “The Tyranny of Experts”) have emboldened philanthropists like Bill Gates to enter the social marketplace directly.

This mix of government pull-out on the one hand and social conscience of the wealthy on the other seems like a return to the 19th Century social balance – where government tended towards the minimalist. Hobsbaum in his “Age of Extremes” called this government through “brakes rather than engines”. In this situation, the social requirements that are not likely to be rectified by government intervention grow substantially and require intervention from elsewhere. The environment has changed significantly and, as huge wealth has been generated by the top 1% of society, it has to have outlets for investment.

The New Impact Investment Opportunity

In the 19th Century, wealthy philanthropists set up charities for various reasons. The two most obvious were (1) a view that society should benefit from their wealth (2) a view that by helping others, they could form a better, wealthier society that would entrench the status quo and lead to less dissonance in society.

Up to 1914, this view prevailed but after WWI and the terrors of the slump in the 1930’s, poverty overtook the ability of the wealthy or government to cope. Dissonance was the norm and led, eventually, via fascism and WWII to the Keynesian revolution that was finally allowed to develop.

If we are now back into a position of similarity with the 19th Century, albeit at a much higher GDP level in the developed world, we are also a more global society so that extreme poverty, lack of medical assistance and social deprivation across the world are now closer to us than before and more intertwined with our well-being.

From the second half of the 20th Century onwards, large companies have begun to understand the need to be sustainable and have felt the pressure from customer requirements that tend towards the ethics of the product / service and those behind it. This has led to the development of a substantial focus on CSR (Corporate Social Responsibility) as referred to above. Many large companies have now entrenched the notion of CSR but it remains for most an exogenous criteria rather than an intrinsic and internalised desire or part of the corporate vision or mission. Social good is rarely part of  corporate vision beyond customer care. Harvard Business School still questions the notion in its new course, for example –  “Private Sector, Public Good – what role, if any, does business have in creating social good?”

This question has been asked for many years and the fact that it is still being asked attests to the fact that most companies believe that they are tasked to maximize shareholder returns – hopefully, in the longer term but not always. Social factors remain as “externalities” despite the work of organisations such as TEEB  and its work on natural capital to make companies aware of the burden they can place on society. Publicly traded companies do not receive credit for lower share prices just as bankers asking for lower bonuses for the social good they create. This is a natural outcome of the environment that exists within a market economy focused as it is on goods and services – not public goods or social need.

However, vast wealth has accumulated to individuals in and of the financial sector (and other business sectors) and that sector has been notoriously reticent about social good or direct involvement in social enterprise. CSR within the financial sector is a very low priority (although exceptions do exist, charity fundraising and giving in general form a tiny percentage of sector profitability). The financial sector now has the role of society’s corporate enemy number 1 after the sub-prime generated disaster of recent years. So, while it is clear that many well-meaning philanthropists would enter into social (or impact) investing (as many already provide donations with no financial return expectations whatsoever) it remains unclear why the financial sector (e.g. venture capital companies) should consider lower financial returns offset by some social returns as acceptable – which is the premise that most assume in impact investment.

The answer to this quesion is that, in reality, returns are being generated that are similar to those available elsewhere and it is pretty clear that returns are sought that equate to other forms of investment.

The vacuum in the economic environment provided in part by government not wishing to be involved as much in social activities plus a more widespread belief that private enterprise can achieve more than government is providing the opportunity for venture capital to move quickly into the space provided.

Sir Ronald Cohen was one of the first to see the opportunity. Bridges Ventures was set up by him in 2002 and operates as follows according to its website:

Bridges Ventures is a specialist fund manager, dedicated to using an impact-driven investment approach to create superior returns for both investors and society at-large. We believe that market forces and entrepreneurship can be harnessed to do well by doing good.” and its provides ample evidence of its success.

A recent (“Fall 2013”) study in the Stanford Social Innovation Review by Paul Brest of Stanford Law School and Kelly Born of the William and Flora Hewlett Foundation has shown no lack of desire on the part of impact investors to enter into such investments, but mainly on the basis that they will pick up normal returns on their investment.

While it is clear in many cases that social benefits do occur from such active investment, the ability of such investments to return full amounts is as a result of “I see something that you don’t see” according to David Chen on Equilibrium Capital – as quoted in the Stanford article. This suggests that, for the investor, impact investing is about pushing into new territories but using different knowledge to access good returns on investment.

What is particularly interesting is that the investment community is now willing to invest in such social programmes / projects because it sees, in the main, the opportunity to gain good returns. The investors gain access to the opportunities through social entrepreneurs or charities that uncover them in the same way that venture capitalists uncover pure market-related opportunities that are presented to the venture capital firms.

The Stanford article shows the “frictions” in the market that investors have to overcome (in order to make their returns) as follows:

  • Imperfect information. Investors at large may not know about particular opportunities—especially enterprises in developing nations or in low-income areas in developed nations—let alone have reliable information about their risks and expected returns.
  • Skepticism about achieving both financial returns and social impact. Investors at large may be unjustifiably skeptical that enterprises that are promoted as producing social or environmental value are likely to yield market-rate returns.
  • Inflexible institutional practices. Institutional investors may use heuristics that simplify decision making but that exclude potential impact investments, which, for example, may require more flexibility than the fund’s practices permit.
  • Small deal size. The typical impact investment is often smaller than similar private equity or venture capital investments, but the minimum threshold of due diligence and other transaction costs can render the investment financially unattractive regardless of its social merits.
  • Limited exit strategies. In many developing economies, markets are insufficiently developed to provide reliable options for investors to exit their investment in a reasonable time.
  • Governance problems. Developing nations may have inadequate governance and legal regimes, creating uncertainties about property rights, contract enforcement, and bribery. Navigating such regimes may require on-the-ground expertise or personal connections that are not readily available to investors at large.

These may or may not be specific to social enterprises but it is not sure they are, overall, of a higher risk than other business opportunities. They are different. Having been provided with the opportunities, the assessment mechanisms then will evaluate those opportunities taking into account the “frictions” (including those above) in order to assess the returns and risks – much as would be done in a neutral impact (or more “normal”) investment.

The Reality of Impact Investing

Investing in social enterprises is not new but the emergence of a sophisticated push into social investments by the financial community through impact investing has created a degree of publicity and resulted in an industry with $40bn invested according to a paper recently presented at the World Economic Forum in Davos  – an amount which is growing rapidly (although still a tiny fraction of the trillions invested by the financial sector).

Within the social impact sector, traditional, donation-led financing may gradually move aside as investments with a financial return move in – although the main benefit will be through impact investment taking up the slack that top-down government funding  would have provided and maybe into areas not originally considered or under-funded. It can certainly be argued that such investments (in organisations such as Grameen Bank for micro-financing) seek to reap full returns while providing social benefits as well – even if the social benefits are actively pursued from the outset. The Stanford article suggests that no impact investment is such unless it has an “active” approach from the outset to providing real social returns over and above the financial ones and over and above what would have occurred without the investment. This impact is hard to uncover and measurement is not yet sufficiently in place and does not rule out the imperative of good financial returns (which are quantifiable).

One key question is whether impact investment is anything more than normal investment but with opportunities revealed by a new set of entrepreneurs – the social entrepreneurs – and with a new appetite and understanding for the risks inherent in this new sector. This appetite is emboldened as more of these ventures produce decent returns, as management of the “frictions” noted above are found to be possible and where the investment helps provide such as the “outstanding investment returns by delivering essential services to disconnected communities underserved by global networks.” as found by organisations like Elevar Equity quoted here).

With governments more likely to stand aside and open up spaces for investors, charities and social entrepreneurs have to seek out new financing and are doing so. The availability of serious amounts of investment is real and whether or not these are new and whether or not the investors care too much about whether the social impact is real or not, it has been shown that money is available but that (outside of the traditional donations market and outside of individual and foundation / trust philanthropists who, like a Bill Gates, wants to “do good”) most impact investment will be looking for good financial returns from this new, “friction”-filled investment area – where investment opportunities are brought to the investors by the newer group of entrepreneurs – social entrepreneurs.

This is a nascent environment but it is clear that the investment community is now working with a new form of social entrepreneur that find the prospects and is beginning to acclimatize itself to the specific risks (or “frictions”) that characterize the new marketplace in order to generate good financial returns. It is a marketplace that is being “sold” on the premise that “social returns” + “financial returns” = normal returns. It can be argued that the only element of the returns to be calculated (financial) is not necessarily lower than in other areas and that social returns are just over and above them. Nonetheless, the market is now available and social entrepreneurs have a growing opportunity to take advantage.

“But on the view of each species constantly trying to increase in number, with natural selection always ready to adapt the slowly varying descendants of each to any unoccupied or ill-occupied place in nature, these facts cease to be strange, or perhaps might even have been anticipated.” – Charles Darwin (1859), On the Origin of Species

The G8 at Enniskillen – No Hospitality to Tax Dodgers

Spendthrifts and tax dodgers

Six years on from the bank-induced recession, governments in the G8 are in Enniskillen, Northern Ireland to consider problems that they have failed to solve since the invention of taxation. While not as old as Enniskillen’s oldest building, built by Hugh “the hospitable” Maguire (who died in 1428), it is high time serious politicians acted.

Large sovereign deficits (spendthrifts pre-2007 and financial system saviours post-2007) and the inability of Finance Ministers to take more tax from their citizens has caused some nations to focus their attention after hundreds of years on the anomalies of the corporate tax system. This system enables companies (tax dodgers) to shift their tax burden offshore – away from where they make their money – through transfer prices, royalties and the like to places where the tax burden shrinks to almost nothing.

Margaret Hodge (the chair of the UK Parliament’s Public Accounts Committee – PAC) has pursued a fierce campaign against large companies that have, in her view, not paid their due corporate taxes in the UK.

The HMRC (the UK’s tax collectors) have, for many years, decided to be “pragmatic” and reach deals with those same companies on the basis that tax law is insufficient to compel the larger companies to pay reasonable rates of taxation – and the companies have more and better (and better paid) tax lawyers and accountants than the HMRC could dream of.

The PAC has not accused companies of illegality but has stated often that they should pay tax where they earn profits and has cast doubt on the companies’ honesty and morality. Google claims its sales take place in low tax / tax haven Ireland despite the reality of closing the deals in England – as the PAC has claimed and has brought forth witnesses who have testified to this.

What the debate between public and private sectors have shown is clear (to most of us). It is that corporate taxation is very hard to collect currently and that companies believe they are duty bound to reduce their tax to the minimum possible. For there is no social heart in a company – it is not really a person (even if it is granted that status in law), it has to meet the demands of the legal system and its shareholders (while ensuring its customers are satisfied on the way).

Tax-dodging Companies Have No Afterlife

There is a misinterpretation that great companies can find a soul but we should understand that, while they are all made up of real people, companies (especially large ones) take on a life of their own and are propelled by the dynamics of corporatism. A company knows that it has but one existence – there are no stories of “good” companies going to heaven.

Companies that pursue good CSR (corporate social responsibility) do often have good people working for them but the CSR is there because civil society (which includes a lot of customers – real people) demands it. Sustainability is best developed with a good understanding of the society around the company. This means understanding social responsibility where it is seen to be legally needed or where it will benefit the company in the medium term.

This rarely stretches to paying more tax than is needed. For every Starbucks (frightened by bad publicity to throw money in the direction of HMRC) there are 1,000 Googles and Amazons and Apples. Tax is not for sale and paying tax not required by law does not gain a company angel’s wings.

The Spendthrifts’ dilemma

However, since 2007, there have arisen massive deficits in many sovereign nations’ coffers. Suddenly, there is a need to fill those cavernous holes and the substantial drift in the share of income from individual wage earners to high net worth individuals and companies (companies don’t have a vote – outside of the city of London and there are not that many rich people – even if they control most of the wealth) means that the attention of government has shifted in times of recession.

Angel Gurria, Secretary General of the OECD, said recently that taxing the “man on the street” wasn’t economically desirable or even politically possible, so for many finance ministers the only option was “to cut, cut, cut more, rather than have a proper balance between revenue and the expense”.

He said this while overseeing the signing by more countries of automatic exchange of tax information – Austria, Switzerland and Singapore coming to the table.

However, other than austerity, which is now causing huge unemployment in countries such as Greece and Spain, the only target is corporate. This may be a turning point after hundreds of years – a Clause 4 moment – or it may be just rhetoric.

Spendthrifts chasing tax-dodgers – Tax Havens and Beneficial Ownership

Linking this to the G8 and David Cameron is obvious. Companies are able to avoid tax if they can somehow show that their profits are made outside of the higher tax areas. This can only be done if there are places with very low taxation that will accommodate them – these are the tax havens. Nicholas Shaxson’s excellent book “Treasure Islands” tells the story of these tax havens extremely well and also the appalling impact that they have on the poorest countries of the world.

Developing nations are rife with corruption and the corrupt are big users of tax havens – really, they are laundering their money.  Today’s Sunday Times article on the use of Latvians as front Directors for companies operating scams tells this story.

This is possible because of the secrecy that exists in most jurisdictions. If there was transparency and the only issue was lower taxation, then we would have a real competitive environment. Unfortunately, that is not the situation – although it is changing quietly with projects like the one above. If transparency becomes the norm, then the corrupt and criminal (whether they are terrorists or drug barons) will have far fewer places to go. There is no better place to learn about beneficial ownership than at Global Witness – which has driven this issue from the start – see their “Idiot’s Guide to Money Laundering.” It’s so easy anyone can do it – trouble is, most are!

This is why transparency is so critical and why politicians are attempting to use transparency to open up tax havens – at last – and the end to ownership secrecy.

Once there is transparency, then the next step is to determine where profits are legitimately made. This means that the policing of royalties and transfer pricing cannot be at the whim of large corporates but there has to be international agreements that specify what is allowable. International tax laws should not predetermine rates of tax, but double taxation should not equate to zero taxation – it has to mean that tax is payable in the countries where the business is done.

The final requirement is to ensure that beneficial owners of companies are known by the taxation authorities. Why companies and trusts are allowed to be secret is beyond the comprehension of almost all of us. As Richard Murphy (Tax Research UK) has written, over 500,000 companies in the UK are struck off each year. Around a third never file accounts.  He estimates that the tax lost as a result could be upwards of £16bn per year from companies that trade but do not file accounts or tax returns.

That is in the UK alone.

Can’t Spend, can’t stop spending

Can’t tax, can’t stop taxing

 

The dilemma of western Governments that find austerity too much, too soon and who (outside of those in serious trouble like Greece, Cyprus and Spain) are unwilling to torment their citizens with mass unemployment and soup kitchens is great. This means that the deficiencies that have been all too apparent in corporate taxation for so long are seen as the final option. The 2007 banking-induced calamity has made such huge financial contortions in countries such as the UK and the USA that even the precious not-to-be-disturbed tax havens and secrecy laws are under pressure.

The G8, chaired by the UK and in Northern Ireland (rather than one of the many UK protectorates that operate as tax havens), does provide an opportunity to generate support for the ending of the nonsense that the current corporate tax system provides. Gleneagles (eight years ago) was all about international development and led to significant and positive change (even if not all the promises have been fulfilled). The same pressure and openness about tax havens and secrecy in international finance could lead to more sensible and pragmatic tax systems and, eventually (if pursued vigorously) to far less exporting of illicit funds from developing nations (such funds leave developing countries at a faster rate than aid money is put in). At least $50bn a year is lost to developing nations in Africa alone every year.

This is a great time for Enniskillen – ancient home of Hugh the Hospitable – to be remembered for its lack of hospitality to tax dodgers.

 

See-through Society – transparency

Cleaning Up

Chuka Umuna, the Shadow Business Secretary, recently called for companies in the UK to declare their tax payments to Her Majesty’s Revenue and Customs (HMRC). This followed the widely reported, bad publicity surrounding the minimal tax payments made in the UK by Amazon, Google, Starbucks and many others. Whilst not wishing to name and shame, he believes that all companies should glory in the tax they pay. Justin King, head of Sainsbury’s, one of the big four food retailers in the UK, made a similar statement, suggesting that consumers could make change happen through their custom. International Corporations have been cleaning up by transferring their tax liabilities to low tax regimes and tax havens – they can virtually choose where to pay tax.

Nick Clegg, the leader of the Liberal Democrats and Deputy Prime Minister, states in his most recent letter to LibDem members: “The idea of combining a strong economy with a fair and transparent society is something that will also be seen in an international context this year when we host the G8 in Northern Ireland.”

Transparency is becoming the mantra of the well-meaning in society and many would say “about time, too”. While not the answer to all of societies’ ills, it is a precursor to re-directing society towards solving some of the greatest problems we have – because transparency of key information allows people (civil society) to make informed decisions – either on their own (through the marketplace) or through their government.

Sweeping away the leaves

For years, organisations like Transparency International have campaigned for dramatic improvements in the way governments, publicly owned organisations and companies provide important information. The danger with secrecy (and the UK remains a very secretive country) is that beneath the opacity of information lie secrets that those with vested interests wish to keep hidden. Whilst secrecy is always claimed by Governments to benefit all of us where they wish to enforce it, the evidence is usually to the contrary. The benefits of secrecy accrue to vested interests and results in economic mismanagement at best – at worst, in countries which are, for example, resource-rich and economically poor, it leads to mass corruption, impoverishment of the mass of people, illness and suffering.

Economics and economies thrive on the open availability of good information and only monopolies thrive on secrecy. It is only when information is made available that proper judgments can be made by the mass of participants in the marketplace.  In a world population of billions, markets can only work where information is not controlled from the top down. Stockmarkets and financial markets depend on the freest possible flow of information to the widest audience and there has been a progressive move towards freer access to information along with the spread of technology that enables it to be used. The driving force is the same human one that drives freedom and democracy. There is an inherent motor behind individual freedom and the right to self-govern and the same motor drives transparency because it is with transparency that the potential can be seen and with transparency that informed decisions can be made.

Transparency is not closing your eyes when the wind blows

In the UK, a nation that always appears to be governed by a conservative mindset where change is difficult, where the Official Secrets Act dominates, where GCHQ and CCTV appear ubiquitous, where the challenge to maintain a fairness between an open society and a society that bears down on terrorism often seems so far weighed in the latter’s direction, the motor for transparency often seems to be running in neutral. Conservatism (especially in England) means keeping things the same and with direction from the centre. This often means that vested interests operating from the centre or with the centre will disallow the move towards more openness. The Labour government provided a Freedom of Information Act, for example, to the chagrin of its then leader, Tony Blair., who was and remains a centrist. In a sense the provision of the Act was odd, because Labour remains as much a centrist party as the Conservatives. Nevertheless, the human motor for more transparency was stronger than the urge to opacity in this case – even if the Act is not itself allowing the freedoms desired.

Yet, it was a step towards a more open society and towards transparency that many countries would relish. A free press (the subject of so much discussion following and before Leveson) has helped to unearth the secrecy in banking, for example, that has plagued the UK for centuries. Manipulation of LIBOR, money laundering, sub-prime casino banking and support for tax havens may have helped to make London a key banking centre but it did not insulate the UK from the collapse in 2007 – it made it far worse – and “only when the tide goes out do you discover who was swimming naked” (Warren Buffet commenting on naked transparency). Sometimes, opening our eyes hurts.

Nothing to Hide?

One example of eye strain concerns the opacity of the banks and their cozy relationship with Government (not just in the UK). The secrecy allied to the special relationship has hindered the UK to an intolerable degree. Under Nigel Lawson (one of Margaret Thatcher’s Chancellors) the post-manufacturing society was hailed as the future as banks gained more freedoms and we all kept our eyes closed. Yet, we now see Germany as Europe’s economic motor because of its manufacturing prowess and the revitalization of the British motor industry (although hardly any it owned by Brits) is now lauded much louder than our “success” in financial services. The illusion of banking remains, though – as a key driver of the economy rather than what it really is – a provider of services that should assist the real economy. And the illusion has been propped up by a lack of real transparency which enables banking to remain a secret society.

Transparency is the ability to be strong enough to reveal information because there is nothing to hide. The true strength of transparency is the confidence that it portrays. So, the opportunity for companies and Governments to be open, to be transparent, only exists where there is not much to hide. Clearly, international companies that are paying virtually no corporation tax on sizeable UK earnings have something to hide; clearly, those (companies and individuals) who put money into offshore tax havens or to secrecy jurisdictions may have something to hide.

If banks and individuals had nothing to hide, Wegelin, the oldest Swiss bank, which is closing as a result of its plan to take on all the clients of Swiss banks that had decided to be more transparent with the US authorities over tax evasion would still be open for business. Their clients, who wished anonymity, made their way to Wegelin – which had been founded in 1741. They knew they were doing wrong and Wegelin knew the same – and the bank is closing after a hefty fine from US regulators and after 271 years. Secrecy was in the bank’s DNA – it could not evolve to the realities just beginning to dawn in the 21st Century. It became extinct.

So, lack of transparency in a world with eyes opening can be also hurt and be expensive and the US executive is now proving to be vigilant on  behalf of transparency on a world-wide basis – as is the US Congress which passed legislation in 2010 called Dodd-Frank. Part of this related to section 1504 which requires extractive industry companies registered with the SEC (Security and Exchange Commission) to disclose their revenues and taxes paid on a country by country basis worldwide. This includes all companies registered on the NYSE no matter where they are based. The EU looks to be following this example so that the people of resource-rich, economically poor countries will know how much money their precious natural resources raise in annual income and then can follow through what their Governments do with that money.

However, the American Petroleum Institute and the US Chambers of Commerce (vested interests if ever there were) are trying to fight back and have initiated a law suit in the US to nullify section 1504

How curious that libertarians fight on behalf of secrecy – the proponents of a free market arguing against a main tenet of economics – free information.

Battle lines are being drawn – the light and the dark.

21st Century Schizoid Man, King Crimson’s take on Spiro Agnew, was written in 1969 but the 21st Century does even now witness such schizoid tendencies characterized by corporate and governmental secretiveness, emotional coldness and apathy that typifies the illness. The lack of openness is world-wide and exhibited by the Chinese authorities’ suppression of its Southern Weekly newspaper when an editorial criticizing Chinese leadership was thrown out and one supporting the leadership was superimposed. Anyone reading Martin Jacques book “When China Rules the World” would not be surprised at the suppression. It characterizes the central leadership of this “civilization state” but Jacques argues that we see it too much with western eyes. But, what if we in the West are right and democratic freedom and openness are the motors that drive our human endeavours? What if the Chinese have, for 2,000 years, actually got it wrong. As China grows stronger, the move away from freedom for information will intensify and Chambers of Commerce will battle against laws for transparency that they will argue provides Chinese firms with advantages. This is a battle that has to be fought world-wide.

Our pursuit of progressively greater freedom (whether press freedom, open markets, democracies, freedom of speech) and equality (of race, religion (or non-religion, sex, sexual orientation and more) appears to be the real motor rather than the schizoid tendencies of the centrist control of monopolies, dictators, and vested interests. Transparency is a hugely important base upon which this basic human drive can persist. In a post-2007 world where the risk is that wealth is being driven to the top 1%, the drive for transparency is fundamental.