No Accounting for the End of the World?

Jacob Soll’s book “The Reckoning: Financial Accountability and the Making and Breaking of Nations” makes a good case for economic progress being firmly based on the ability to account for that progress. Although he does not show direction of travel (or cause to effect) with certainty, there is a common sense from his historical analysis from ancient Greece to more recent times in the theory that progress is based partly on an ability to undertake double-entry book keeping. This measures progress but also provides the degree of transparency that ensures “buy-in” from society.

 

This may not be a riveting “eureka” moment for many and Soll’s dallying with more metaphysical comparisons about the debits and credits of a good life being reflected by the righteous in the way that good businesses and people (like Josiah Wedgewood of pottery fame who not just promoted cost accounting but used the principle of accounting to balance their sins and good deeds) do their accounting is somewhat stretched. However, there seems ample evidence that at both a corporate / organisational and national level, economic progress is assisted greatly by the ability to count your profits and losses – to show how progress is being made.

 

Soll refers to corruption in the past that resulted from both poorly kept accounts (at corporate and national levels) and those clever enough to hoodwink auditors and investors through manipulation of accounts.

 

From the analysis, it is clear that investors need good data to make informed decisions and that citizens need to know how governments spend their money – not just for the sake of transparency but to provide worthwhile and useable information. In the majority of developed nations, corporate accounting is subject to GAAP (generally accepted accounting principles) or equivalent; in other countries there is a wide disparity of accounting standards or a lack of them – in Afghanistan, it will hardly be a surprise that there is no accepted principle of accounting and very few qualified accountants from there.

 

Despite the developed world’s professional standards, this does not prevent disasters on the scale of the 2007-8 banking crisis or Enron or a host of other “accounting” failures. Often, auditors don’t see the problems and may even see them and do nothing.

 

On a national basis, the same is true. While it is hard to judge the efficacy of national accounts (which are the subject to revision for many years), it is hard to believe that any country which does not work hard to make its national accounts transparent is one where real economic progress is being made or where opacity is not hiding something sinister.

Back in 2010, Global Witness highlighted this in its report “Oil Revenues in Angola” which documented the problems that Sonangol (Angola’s state oil and energy company which was then considering a public stock listing) had in reporting its revenues. That report, one of the few independent reports in a sector that is riven with corruption, argued for greater transparency, improved systems and independent auditing to the highest standards for an organization through which Angola’s wealth derives. Soll would argue that its secrecy and lack of transparency and independent auditing shows all the hallmarks of a corrupt society. But, pressure on Sonangol to provide more and better information (better accounting) is a key approach.

Numerous, other examples exist in many countries – many where natural resources exist that should benefit the population but where the “resource curse” is made possible by lack of proper accounting to high standards, properly audited and verified.

Similarly, the Dodd-Frank Act in the USA opened up country-by-country reporting to reveal how much revenue was entering such countries. The USA (and hopefully with the EU to follow) are attempting to go around the opacity of nations (and their lack of accounting capability) to find the real accounting data through those that have that ability and are subject to our own norms of accounting – the major energy companies. In this way, good accounting may be accessible by the back door to show citizens of the affected nations just how their Governments provide for them (or don’t).

 

A recent example of this is shown by an analysis made by Richard Murphy (the progenitor of country by country reporting) on recent data issued by Barclays Bank. It shows, through analysis of that data, how Barclays shields its profits from the UK Exchequor.

 

 

 

 

Value accounting – can we properly Account for Natural Resources?

 

One of the latest “opportunities” for accountants is accounting for natural resources – our natural capital. It is believed that if we make up a balance sheet of all our assets (and liabilities) then we will better know by valuing them what impact we are making on them. We naturally sympathize with a society that is striving to understand its failings and what to do about them. There is no question that if it was possible for governments (nationally and internationally) to properly assess value in our natural capital, then we could (somehow) impose some sort of value adjustment to problems caused by companies and governments when doing the things they do that adversely impact our natural capital or trade-off costs and benefits and make better decisions.

 

There is a natural and realistic desire in some governments to properly account for their natural capital. For example, The Scottish Forum on Natural Capital aims to focus on its natural capital and

 

“To deliver on its goals, the Scottish Forum will:

  1. Calculate the monetary value of Scotland’s natural capital and the cost of depleting it. This will involve coordinating experts including accountants, people from business, academics and policymakers.
  2. Communicate to a broad range of businesses and other stakeholders the risk of depleting Scotland’s natural capital and the huge economic value from protecting and enhancing it.
  3. Set up collaborative projects to deliver tangible action to protect and enhance Scotland’s natural capital.”

 

 

The calculation of that value and the link between that and effective action are major challenges. This is because the pricing mechanism for such resources does not exist. Accounting is based on the ability to reach a value determination on goods and services. It is not always right but much of double entry book-keeping methodology is based on market prices – the prices actually paid for goods and services. Market prices provide information on those goods and services that allows a profit and loss account and balance sheet to be derived.

 

Now, even existing and well understood basic accounting is often flawed or wide open to judgement. An example from the recent past: in the days of high inflation, companies (that anyway provide accounts that are usually out of date by the time a user receives them) were encouraged to undertake inflation-based accounting in addition to actual costs. Oil companies still provide two sets of accounts (one takes the data back to the latest oil prices). Which is correct? Neither (although only actual costs are used by taxation authorities)– but, they may be aids to better informed decisions.

 

Accounts are always an approximation of reality. So, for example, accounts show labour costs (the costs of people who work in a business or organization) as costs. Yet, of course, people are only recruited to add value. Unfortunately, there is no balance sheet valuation of the benefits that they can provide. Back in the 1970’s, it was fashionable to consider whether people should have a value assigned to them on the Balance Sheet (much like footballers used to be valued on the Balance Sheets of football clubs). This proposition lasted only a short time and people are not valued on a balance sheet – except in those companies with traded shares where “goodwill” (the difference between the stock value of the company and its balance sheet value) contains an undefinable figure for people. Google’s share price (usually viewed as a multiple of earnings – its P/E which is currently around 30) takes account of its extraordinary people talent – but, in a way that the market is willing to trade – a form of market pricing.

 

When the accounting mechanism is brought to natural capital, it is much harder to “account” for it – there are limited pricing mechanisms.

 

At a micro-level, companies can provide information on where their natural risk lies (e.g. how they source materials upon which they survive, where the risks are and what they are doing about it) but some of this is pricing, much of it is risk analysis. From the latter (just like any risk analysis) actions can be taken to minimize risks and maximize opportunities.

 

Companies also produce “externalities” – they impact the environment, for example, through CO2 emissions, use and abuse transportation systems, can destroy environments. So, clean-up costs need to be established when developing projects along with the minimization of health hazards and environmental degredation. Governments in many countries can work with businesses to save the environment and recast it. In the developing world, this is harder. Many instances occur whereby companies ravish areas of natural beauty and poison locations with the side effects of their production processes and do not pay the consequences. This is often a corrupt bargain but becomes the norm where natural resource extraction and its “value” overcomes the perceived value given to those dependent for their lives and health on the land: from China to DRC, from mining to forestry.

 

The key problem is linking the micro activities to the macro (governmental) responsibility for the environment. The notion of valuation at least focuses the mind. The question is whether valuing natural capital (and the wide range of – usually erroneous – assumptions that have to be made in a non-market priced environment) is useful and whether such valuations can be used to make decisions – even whether there is a use for such decisions on a quantity basis at all. For decisions based solely on price (where all the risks are not taken into account) will be wrong except where there is a market-based pricing formula available (and, of course, perfect pricing relies on perfect information on both sides – which never occurs). We can “see” how Barclays used low tax jurisdictions (see the TJN report referred to above) to shield profits and decisions can, in future, be made as a result. Valuations of natural capital are far more tenuous.

 

The drive to valuing our “natural capital” in business jargon (through pricing) is centering our attention on this critical area. However, at this early stage of natural capital ideas development (although not at an early stage in the degradation of the planet) we should be understanding what we want out of it.

 

What if all the alligators in the world were to be destroyed because enough people were willing to pay the price for alligator skin handbags and shoes? Would this be acceptable because we “paid the price”? Clearly not as the value of preserving such an animal is not easily factored into the price – who assesses it and who sets it when the “value”of having alligators is unpriceable. That is why ivory sales are (in the main) banned. There is no price allowed in the system for the elimination of elephants from our natural environment – we have made a collective decision to try to stop it rather than pricing it.

 

This suggests that the “value” placed on part of our “natural capital” is not quantifiable in business terms – even if the costs of certain degradations (and “externalities”) are.

 

Not only do we need to ask the right questions, we have to start with the answers we want or the history of Easter Island is just repeated on a massive scale.

 

There is a place for good accounting – and good accounting should know its place.

 

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The Business of Sport

                                                                       

The Question: as the gap between elite sport and its fans grows ever-wider, should those who pay for the sport (its fans) expect to have a say, should the communities on which the clubs and associations depend be better treated by those at the top and, if so, how?

Many of us have a love affair with sport – many play it directly and millions watch sport and maybe actively or passively support a team. Sport underpins many of our lives – it makes us fit and provides excitement, motivations, inspiration, team-building and social cohesion.

As the 20th Century went on, professional sport was progressively distanced from the amateur and the fan by its takeover by business interests – initially, the local businessman but later, by international business.

This provides a distancing of ownership from the mass of people that generate the income in an industry that is unlike so many others: where the customers are so involved, often so passionate, often players.

This means that sports authorities (and especially businesses that own the major teams) have a responsibility that is different to other businesses or business organisations. They have a duty of care to their customers around the “game” and how it is played. This opens up the issue of how individuals (or groups of individuals) who are customers can be “played” because of their commitment and what can be done to protect them. There may be lessons for all industries from the examples available.

Business Governance and Sport

Governance in sport impacts many beyond the teams themselves. That is why Deloittes show their involvement in all the following areas :

  • licensing systems for sporting competitions;
  • cost control mechanisms;
  • transparency measures and anti-money laundering;
  • events and/or membership application and selection processes;
  • sporting calendar matters (national and international);
  • regulations in respect of players’ agents;
  • measures to protect the integrity of the competition;
  • independence of clubs – ownership rules and other means of influence;
  • player transfer rules; and
  • ‘football creditors’ rules.

Governance is much wider than this in regard to sport and its impact in  and on society can be shown by three articles in The Independent (Saturday, 18th May) that highlight the difficult interconnections between business and sport (here, England football teams) and the intertwining connection between sport and the community.

·      The first by Chris McGrath attempts to show the worst side (Manchester City’s owners sacking of Roberto Mancini) and the best side (the Portland Timbers superb response to a charity – Make a Wish – for help for an eight-year-old cancer victim).

·      The second (in the business section – Jim Armitage) reflects on the Arsenal blog that shows the support of Doan Nguyen Duc (a wealthy timber merchant from Viet Nam) for Arsenal and questions whether they should take the support (financial and otherwise) from someone that Global Witness (an anti-corruption NGO) says was responsible for much of Viet Nam’s destruction of its forests and the displacement of many people that lived there. He is said to have made the comment: “I think natural resources are limited, and I need to take them before they’re gone”.

·      The third (also in the business section by Simon Read) reports on how Sheffield Wednesday turned down a deal with a “payday lender” which it refuses to name but was said to have offered 25% more than anyone else.

The three articles (I assume “coincidentally” in the same newspaper on the same day) highlight the mistrust of journalists for the businesses behind the clubs but also for the type of ethical questions that the clubs have to consider at this time.  “This time” means at a time when business and the community is undergoing strains and, in football, when the position of a team as part of the community it serves is strained to the full. In the USA, big teams moves State; in the UK, only smaller teams like Wimbledon (now Milton Keynes based) have tried it as fan bases are crucial to the business (even if more revenue than ever is via TV and international support).

Whose business is sport?

It is a long time since amateur sport ruled anywhere (the top tennis players rarely joined the professional circuit until well into the 1960’s; athletics was similar and rugby became professional in the UK in the late 1990’s). In the UK, football was severely structured with maximum wages well into the 1960’s as well and even if clubs were limited liability companies, they were owned by local families who kept them private.

In those days of amateurism, sport was for the community. Players were not paid much (outside the USA) and players were close to those they played in front of, living in the same streets and drinking in the same pubs and clubs.

In the USA, football, basketball and baseball (and ice hockey and the rest) became business pursuits earlier. Europe and the rest of the world (and most sports) have followed. It is now the normal way of life that business had taken over professional sport to the financial benefit of players and (mainly through TV) the income for sport worldwide is now massive.

Whether the Olympics, football (through FIFA and its major tournaments such as the Champions League and World Cup), the Superbowl, 20:20 cricket in India and so many more, sport now generates massive income through its massive fan base and the ability of TV to generate that income. So, there has been a rapid shift by large businesses and entrepreneurs to own sports team and have influence over the organisations that manage sports – such as Formula 1 or baseball or football (of all types).

This income has been generated through the opportunity that sports presents over almost anything else – to transmit excitement visually and aurally through radio, TV and the internet to a mass audience that is entranced by the game played – with an excitement and passion rarely found elsewhere. This mass appeal is now available and reach-able worldwide and with that appeal comes massive advertising revenue (and, with the internet) growth is coming faster.

So, sport (something we all get involved in to some extent) has both appeal as participants and observers (although to a greater extent than anything else, the two are mixed with sport). This appeal is then converted into income for companies that are able to transmit sport into the home – via pay per view, rents and advertising.

Sky in the UK has become a dominant operator (although BT are now incurring on their territory).

Owners of sports teams (especially in football in Europe and all the major sports in the USA) benefit wherever they operate.

The Duty of Sport

Because sport is not just another product and because the “customer” is so involved, there is a chance that sport offers something different. The players are celebrities and, in modern culture, people that youngsters look up to (rightly or wrongly). More people know David Beckham than any politician or scientist – it is a (maybe unfortunate) fact.

This means that businesses involved in sport (and that means the sports clubs and managing organisations themselves) have opportunities to involve themselves with society that is not there for other businesses. Not only that, but they have a duty because of the nature of their business and for their own protection.

This duty can be said to be to serve the community that provides them with the income they derive. This is not about BSkyB or BT doing some CSR. They are the middlemen in all this – the means of transmission. No, this means the sports entities themselves working out how much their “community” means to them and how much they should give back to that community. It can be done.

A good example is Arsenal Football Club that has set up the Arsenal Foundation and, in turn, developed real partnerships with Save the Children (its international charity) and Willow Foundation (a national charity). I have an interest here in that I am Chief Executive of Willow Foundation – which provides special days for seriously ill young adults.

Arsenal is an international business these days but has worked out that it also has local roots and its Foundation works in the local community and with Willow on a national scale. With Save the Children, it operates internationally. At its recent Annual Ball, Arsenal Foundation raised over £300,000. That maybe small compared to the Football Club’s annual revenue of £226 million in 2011, but it is a start. Moreover, the time and effort of the club and those within it (like Arsene Wenger – an Ambassador of the Foundation) are worth a lot.

However, the balance sheet is patchy on sport’s involvement with their support base and through them with the community. There is no real driving force that connects through the massive distance that exists between them. While the same distance exists between many businesses and their customers (banking is a very real example, but the same can be said of energy companies and so many others), there is a very real difference in sport that is both for bad and for good.

The Sporting Difference  – and Opportunity

The business sector has been buffeted by recession and, in such a recession, business leaders and their companies are vulnerable to attack from other sections of society. So, the tax avoiders like Apple, Google, Starbucks and others (all under attack by newly-zealous politicians in the UK and the USA along with the tax havens that they employ) are not just seeing their potential tax bills increase. Their relationship with customers is also under attack that can lead to reduced sales. This may not be the case for Google (now so big and dominant that it may no longer care) but others may well feel the pain.

In the sporting arena, it is easy to see a large array of problems: FIFA and football corruption, allegations on racism across the world, NFL alleged behind-the-scenes collusion on player wages (the NFL is a not-for-profit – which may surprise) and the general disbelief that ordinary fans have with the salaries that players “earn”.

Football in the UK is an example of the changes that have taken place in the last forty years where salaries of £100,000 per week are not unusual (Gareth Bale is negotiating £200,000 a week at Tottenham) and the difference between that and the average wage in the UK of around £25,000 per year is stark.

Taking all this together, sport (as epitomized by the 2012 Olympic Games in London) can be magnificent but clubs and sports organisations have to take notice of the communities upon which they rely. The piecemeal CSR and charitable work should be as competitive as their sport rather than resisted or an afterthought – or done just for publicity.

Sport is a collective experience – whether in teams or the association between individual sports stars and their fans. This provides an opportunity to seal the gap between the stars and the fans that small groups of supporters on their own can never fill.

The link between the stars / clubs / associations (the elite) and the fans / amateur groups has always been a struggle. It is for each club to decide how it deals with the community upon which it depends. Some ensure the players get into the community – at Tottenham Hotspur in London, Ledley King and Jermaine Defoe are well-known for the time they spend with young, inner-City kids and clubs. Other set up Foundations and / or develop relationships with charities (usually connected in some way to the work they are doing or the area they are in).

Heading for Rollerball?

Deloittes produce an annual report on the top football teams – with the last issued in January of 2013.

No one (that I can see) assesses annually the contribution that sport and teams make in society or the potential for that contribution – let alone any analysis on the work individual clubs perform.

Business seems now to be the only driver – which is a Rollerball outlook on sport – a dystopian future that may well be here already. Made in 1975, the film showed the world in 2018 as corporate-controlled where sport was the controller – like 1984 with sport instead of three political blocs fighting each other.

So the Question: as the gap between elite sport and its fans grows ever-wider, should those who pay for the sport (its fans) expect to have a say, should the communities on which the clubs and associations depend be better treated by those at the top and, if so, how?

Bodies such as Sport England, the Department for Culture, Media and Sport and the major associations of all the sports and clubs discuss the wide range of benefits and opportunities that exist. Because it is hard to measure the impact of sport and the part played by big corporations in sport (it is not something easy to measure like GDP), the real impact of large corporations on communities and people in the UK is not assessed.

Like the problems of measuring the benefit of a woodland or a river, our focus on numbers (and scores) misses the potential for large sports organisations to do good – and the result is that newspapers see the Rollerball potential.

The Government has set up a Natural Capital Committee to measure the value of natural capital in the UK. It  just published its first Annual Report

Because of its enormous impact on society and people, one response may be to set up an equivalent in the area of Sport – to assess the benefits and problems associated with the business of sport and the benefits to society, people and communities in ensuring that Sport is well managed for the benefit of as many as possible and that Businesses in Sport gives back to society sufficient of the benefits it derives from those communities and show how they take those communities into account. We would then get to see an Annual Report on the state of sport in the UK.

Education and Equal Concern

I was at two contrasting events this week that provided strong connections.

The first was the Annual Prize Giving at Ashmole Academy, where I am Chair of Governors / Directors. Our guest of honour was Professor A C (Anthony) Grayling – one of this country’s best-known philosophers and writer on ethics through books such as “Liberty in the Age of Terror”. He has also recently opened the New College of the Humanities (NCH) in London – a new private university.

The second was the inaugural meeting of the Board of Directors of Future Brilliance Limited – a not-for-profit set up by Sophia Swire, a courageous and hugely talented woman who has spent much of her life working to improve the lives of Afghans. Future Brilliance – Afghanistan has already begun work to provide business skills training and business opportunities to young Afghans and has a focus on especially improving access to woman for education and business in Afghanistan.

Education

I introduced Anthony Grayling to parents and students and quoted from his book mentioned above – a quote he himself had taken from Ronald Dworkin’s “Sovereign Virtue”:  “Equality must be understood in terms of the equal concern for its citizens that any legitimate government must show  – equal concern is the sovereign virtue of political community: without it government is only tyranny” and equality of resources or opportunities, giving everyone a fair start in making something of their lives.”

The concept of “equal concern” for all is not about providing everyone with the same standard of living but a desire to provide everyone with the same opportunities. It is up to the individual how they exploit those opportunities.

Anthony Grayling gave an excellent talk to our students. He described how we only have around 1,000 months to live and 2/3rds are spent sleeping and shopping or similar. That leaves just 1/3rd of our lives to do something meaningful. He believes that we should use our time in education to broaden our knowledge, ask questions, to develop the enquiring mind.

This was brought home by Sir James Dyson’s comments about education – where he decried the reading of French lesbian poetry as his example of a liberal, humanities-based education rather than one focused on science and engineering. Michael Gove defended the former. Anthony Grayling provided a very good set of reasons for ensuring that the humanities gain equal concern.

At Ashmole Academy, we have developed the ability to help students pass the exams they need and at the right level to gain acceptance to Russell Group Universities (and a large percentage do this in science and maths) but also produce individuals ready and equipped to face the world. Ashmole is non-selective and provides equal concern for all students – providing that equality of opportunities that gives everyone a fair start in making something of their lives. If only that was true of the whole education system in this country – where there is a major disparity between independent (alpha schools) and maintained sectors (although we believe Ashmole now challenges that assertion) and between good maintained schools (beta) and those who struggle (epsilon) for any number of reasons – see https://jeffkaye.wordpress.com/2012/05/13/the-fight-over-education/  We do not have equal concern yet borne out by the equality of opportunity.

Equality of Opportunity

However, in the UK we are blessed when compared to the range of destructive problems that exist in countries like Afghanistan. The problems are well known but the solutions are tough to consider let alone implement. In 2014, US and UK troops are expected to leave and it is there will be a major exodus of the brightest and best as the Taliban threat grows.

Sophia Swire has been working in Afghanistan for some time to improve the lives of those working to make the most of their lives. I met her at Global Witness – an anti-corruption NGO – when she was working with the World Bank. The Future Brilliance task is to develop young Afghans to benefit from the huge potential that their natural resources offer them by building their skills and business base within a code of ethics and good governance.  The US and UK are now working to provide financing in the next two years to help this process before they pullout – to work to get traction amongst the people who have been traumatised by the Taliban and by war and, to an extent, by aid programmes.

What is clear is that the country is also beset by corruption and a weariness that people struggle to shake off. This weariness is because the various governing classes, whether politicians, tribal chiefs or Taliban, have a view of leadership that we find out of date. There is no equality of concern. Concern is primarily for those already in leadership positions and a country that develops this manner of leadership will not break out from its current trauma.

Beyond this, of course, Afghanistan has a view of women (in general) that we see as 16th Century. Religion-blamed customs keep women from education and business in most cases. Like Malala, the young girl shot by terrorists in Pakistan, young women struggle to be allowed any freedoms – whether for the right to be educated or to enter into business. Again, customs deny equal concern for its citizens.

As A C Grayling highlighted in his book “Liberty in the age of Terror”, in the West, we have fought hard for centuries to secure basic human freedoms such as those enshrined in the Universal Declaration of Human Rights. In this country, we have witnessed the strain that terrorism has wrought as freedoms have been whittled away for the cause of security. But, human rights have to be based on equal concern for all. In a world that is now so interlinked, it is impossible to close our eyes at the problems in other countries. To a large extent, their problems are ours. Terrorism affects us in the UK in heavier security that reduces our freedoms. It is better to also work towards improvements in those countries where terrorism is bred. Acknowledgement human rights and of economic improvement are crucial not via handouts and aid (except in emergencies) but through the use of focused assistance to bolster the ability to help themselves and to relentlessly work to rid the country of corruption.

To succeed, government has to show equal concern for all its citizens – to provide the fair start – and it has to start with education (both boys and girls) and lead into business and wider, governmental responsibilities.

In the UK, education for all must be an equal concern as we struggle to get our worst schools anywhere near the level of acceptability. The same struggle (but, with horrendous consequences of failure) exists in countries like Afghanistan. “Equal concern is the sovereign virtue of political community: without it government is only tyranny.”  Whether in education at home or in the fight against terrorism abroad, the same ethical principle is true. In the global economy, it is essential that everyone has “a fair start in making something of their lives.”

Hard Times – from 1854 to 1504 (Dodd-Frank)

Masters and “Quiet Servants”

Charles Dickens wrote “Hard Times – For These Times” (usually known as “Hard Times”) in 1854. This was a bleak analysis of mid-19th Century factories and the mechanistic drive for material reward.

The world of the Industrial Revolution saw immense material improvement within a 19th Century mindset that saw business develop on the back of “resources” – whether they were natural resources (like coal) or human resources – Dickens’s “quiet servants”. Resources were resources and how they were discovered, whose they were, the conditions under which they were mined, how they were shipped or the conditions under which they were placed into the manufacturing process were not much of a consideration.

Britain and other developing nations of the time grew wealthy on their own drive, ingenuities, financing and trading and manufacturing instincts but the whole process would have collapsed if access was not obtained to raw materials from the rest of the world and the use of “human materials” from all over (including their own countries). The terms “human resources” is still with us along with natural resources – but the “quiet servants” grew louder.

Gradually, from 1833 when Britain enacted laws that children under nine should not work in factories, throughout the second half of the 19th Century and into the 20th, our human resources (people working in factories and mining, for example, in the industrializing nations) campaigned and secured rights over income, health and safety, length of the working day and age restrictions.

Developed countries worked out that, to work well and succeed, we had to develop ways that we all could share to some extent in the benefits that material gain provided. This is the basis of free and fair societies based on successful economies.

From nation to global

The last thirty years has seen a vast shift from developed nations using the rest of the world merely to buy from and sell to, to a shift to manufacturing and now development and R&D throughout the world. Trade has grown internationally and the so-called integrated “global economy” is in place. We are no longer merely the industrialised west and the under-developed rest, but an inter-connected web of nations within one, world economy.

Yet, the strains are clearly showing. Allied to the vast changes in internet communications (similar to the vast increase of communications that shaped 18th Century politics and the 19th Century – the telegraph and the phone), all peoples of the world now see themselves as part of this world (or global) economy in the same way that 19th and early 20th Century factory workers saw themselves vis a vis factory owners. They then, understandably, demand rights and safeguards.

This is now happening on a world scale as we develop our global nation (economically).  The changes are profound and, if done properly, will be of enormous benefit.

21st Century Responses

This week saw the approval after two years of the US SEC (Security and Exchange Commission) of articles 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The two measures could have major implications for all of us in that (properly implemented) they set a real standard for the globalized economy in two, crucial areas:

  1. the willingness of all of us to buy items cheaply no matter how the raw materials were obtained
  2. the willingness of all of us to buy items from wherever in the world, no matter what corruption was employed in their provision.

Article 1502 refers to the mining of key raw materials in Africa such as tantalum, tungsten, gold and tin. It will (after an implementation period) require all suppliers and manufacturers to state that their products do not contain raw materials that financed war or bloody conflict. So many years after blood diamonds were headlined, there is now a statute that demands that companies step back and consider what they are buying. Manufacturers that buy such raw materials have had to count the cost of reputational disaster if they continue to sidestep basic human responsibilities in this global market. Now, there will be a legal imperative in the USA.

Article 1504 is the Cardin-Lugar rule which sets rules for country-by-country reporting of companies in the extractive industries concerning the revenues and profits they make in all countries where they do business (on a project by project basis).

Both articles require all companies that are listed in the USA to comply (although not immediately), wherever those countries are based. The European Union is expected to pass similar laws.

The implementation of the two articles will help to drive change on a global scale, where individual nations (e.g. where the resources are extracted) are unable to do so. Why? For several reasons:

  1. Developing nations (especially resource-rich and economically poor) are prone to corruption and often unable or unwilling to enact these laws themselves;
  2. Developing nations (especially in parts of Africa) use resource revenues to fund conflicts and wars;
  3. Corporations operating in those areas need to show global sensibilities – where treatment in their overseas subsidiaries and employees is brought up to levels that we believe are credible and reasonable. It is hard to do that without legal change as competition is too high to expect corporate ethics (whatever that means) to work on its own.

To Ayn Rand libertarians Dodd-Frank is an economic travesty and many in the US are waiting for Romney and Ryan to get elected and reverse these laws. That would be the travesty. It is enough that in developing nations, the gaps between the rich and the rest are widening; it is enough that nations like Greece are now collapsing economically. There is potential for real strife in nations where inequality is too widespread.

But, we now live in a global economy where we are all dependent on each other. That means simply that best practice (that works on a national scale) has to be introduced globally wherever feasible. The intricate balance of trade, manufacturing, design and the need for natural resources (as well as the need to work together on climate change issues or disease control, for example) dramatically increase the need to treat the global economy as one economy – which it is. This means that national rights have to be respected but that is not enough.

Article 1504, for example, takes the trust element away from many nations like Equatorial Guinea, where the leadership is a kleptocracy and where riches from oil revenues do not go to the people in any meaningful form. Country by country reporting will, eventually, put an end to opaque deals between companies and those who have taken over the ownership of natural resources in those countries by showing transparently what profits are made and revenues generated on a project by project basis. Citizens in those countries will begin to be able to see how those revenues are used or not. Information is valuable and a first step to more equitable conditions.

21st Century Ethics

As we enter the fifth year of the post-sub prime recession (with economic collapse in Greece and high youth unemployment in Spain), we remain much more concerned with ourselves than with people and nations thousands of miles away. The change that global economics has wrought, however, is that we can no longer ignore the plight of those so far away even if we (wrongly) wish to do so. Their plight is ours just as the impoverishment (economically and educationally) of our inner cities is a blight and our plight.

The Chinese view things differently, of course. A thousand years of relative impoverishment has left it hungry for economic growth and its hunger leads it to plunder the natural resources of Africa. China’s legalist centre, its Confucian heart and its loathing of western imperialism means that it is content to leave governance issues aside. Its own internal corruption (the corruption of a centrist and legalist government, where bribes are the common currency of the status quo) means that it is unlikely to require good governance in return for its acquisition of raw materials. In fact, its non-linkage of governance requirements gives China a distinct trading advantage in Africa.

It is to be hoped that this is a short-term business expedient and a long-term mistake for the Chinese. Just as the best manufacturers in the 19th and early 20th Century were leaders in improving conditions for their employees (notably, Henry Ford who wanted his own staff to be able to afford to buy his cars) and just as the US spearheaded safety rules in the 20th Century, it is likely that the best companies will understand that improving the safeguards overseas (whether in their own companies or those of suppliers) will be important, medium-term investments.

Reputational loss is now potentially huge (as Apple realized when suicides at one of its biggest suppliers in China, Foxconn, began to rise and changes in working practices were required by Apple). The raw materials that we require for so many of the goods that we buy are obtained under horrendous conditions in Africa. It is not just blood diamonds but all those naturally occurring elements that the SEC has just regulated into law.

In addition, the country-by-country reporting will shine a light on the regimes that take in billions of dollars of income and disburse so little to their people. Pressure will mount from outside and inside.

Organisations like One, Transparency International, Global Witness and Enough and the Publish What You Pay coalition deserve huge credit for a relentless drive over many years to enact such positive changes. The US Congress deserves huge credit for bringing it into law in the powerhouse of the US economy. The EU should follow and they should all work within the OECD and elsewhere to ensure that these measures, providing an ethical underpinning to the global economy, are made global.

We live in a globalized economy and comparative advantages should be developed through intelligence, hard work and ingenuity – not via the impoverishment or hardship of our global neighbours.  The bringing into implementation of Dodd-Frank’s articles 1502 and 1504 suggests that the global economy is waking up to the fact that our “quiet servants” deserve respect wherever they are – close to home or further away. The global economy (and climate change and air travel and the internet….) means we are all neighbours now.

From Euro Chaos to Chasm

As Greece Votes

I was on an ethics panel this week – organized by CGMA and Accounting Magazine. This has been arranged to discuss the outcome of CGMA’s recent survey “Managing Responsible Business” http://www.cgma.org/Resources/Reports/Pages/ManagingResponsibleBusiness.aspx

This survey explored the range of issues around business and doing things properly – ethically. It found that most businesses tried to, CEO’s were handing down responsibility for this to other staff, the ability to do so changed by country and there was real pressure not to in some countries.

With elections in Greece on Sunday and the Euro in everyone’s mind, the issue of business ethics seemed mighty small in comparison.

Ethics – moral rectitude, the rules of conduct – are not just about business. It is from society that ethics emerge and it is the destruction of the rules of good conduct that has tipped Europe and many other parts of the world into an economic, political and financial chasm. It is a chasm that threatens our way of life and, deep inside that chasm, there is not a lot of light.

The Chasm is not just a Banking one

 

We are continuously being told by our politicians that the current banking crisis can be resolved with large amounts of cash. The latest attempts are the £100bn on offer by the Bank of England of low rate loans to banks to regenerate lending in the UK and the €100bn on offer to Spain to prop up their banks.

In the chasm, sticking plasters don’t work.

Banking liquidity is not the problem anyway. The problem that banks have in Spain, for example, is solvency – their very being is at stake not their ability to lend in the short-term. They were over-stretched by awful decisions ten years ago to lend to get-rich-quick property schemes that were doomed and, when the tide went out, were shown to be naked. Borrowers across the western world were too highly geared – over-leveraged. While companies have managed to get their act together, individuals have not and while savings are higher, they are still, by normal standards, far too over-leveraged – which is still leading to house price reductions everywhere but London (where funds are rushing in from all corners of worse of countries).

But, the banks are hiding behind the problem in front of them – national insolvency. The transfer from nations (i.e. taxpayers) to banks has been enormous and continues. Well over a trillion dollars was poured into the US banking system and the same in Europe. The estimate is that this needs at least to be doubled. National solvency is at stake throughout Europe (west, south and east especially) and the austerity programmes now in place are a testimony to them.

Like the 1930’s, this is leading to massive unemployment and a risk that the chasm into which nation by nation is being thrown will swallow them whole. In Europe, the answer, we are told lies with Germany – they should assume the debts of all the others with Eurobonds – a financial answer to a financial problem.

But, the chasm is bigger than this.

The Chasm is engulfing Politics, Economics and Finance

Behind the financing of banks and the insolvency of nations lie the root causes. These are the disenfranchisement of the mass of people in most nations – disenfranchised not by their inability to vote every few years but by the paucity of choices on offer.

Greece offers a great example of a nation in economic chaos but the causes and the choices open to the people there are not often recorded.

Whoever read Michael Lewis’s “Boomerang” will understand some of the corruption that underpins the chaos. It is endemic and led by a political elite that have rampaged through the economy and gouged out any life from it. At the same time as The President of Equatorial Guinea is about to meet with four NGO’s (including my former employer, Global Witness) to discuss the rampant corruption inside his country, who is meeting with who to ensure that Greece can emerge with some dignity from its corruption?

Who can blame voters for, at last, running away from Pasok and into the arms of Syriza – the main concern is not the Euro, it is the corruption of the political elite and complete lack of trust in any politicians. The whole political class is tainted.

Outside Greece, the same is true to some extent in Spain and in Italy, where technocrats (unelected) now rule. The paucity of choice for voters – why vote for politicians when they are all the same and as corrupting and corruptible as each other?

The euro problem is much deeper. It is not just about emulating hard-working Germans, it is about serious change needed throughout Europe where leadership is absent or tainted by nations that are corrupt, unable to raise taxation, where the cash culture is rampant. This is true in Greece, Spain, certainly southern Italy and elsewhere. Why would Germany want to pick up the tab for this when the problem is chasm deep – not the surface banking or financial issue that has been painted?

The Ruling Class

In democracies, we are supposed to be able to vote out political parties that do a bad job. What happens when the whole political class is damned? The whole electorate is disenfranchised as a result.

This is true throughout the Eurozone – political parties have joined forces with other powerful elites to seemingly run countries – now, it is clear they have run them into the ground or, worse, into the chasm where conventional politics, economics and finance are drowning.

The ruling classes – politicians of all political persuasion, big business, the public sector – decided to run off with the benefits and have left the rest behind. Somewhere those funds reside in tax havens, well away from the hands of civil society. If it was all about harder effort, there could be some light ahead, but the problem is so deep that it will take years of real change and real hurt to recover to anywhere near where countries thought they were until recently.

From Chasm to ……what?

The European dream of one country living under one flag, which to many is a nightmare, is not a new one as the wars of the twentieth century showed. Now, a war just as savage is being fought – but a war where the fighting is hidden and where the soldiers don’t even realize they are in the trenches. Greek citizens and the young in Spain (where 50% are out of work) probably realize the consequences of the post-war European experiment. Many others don’t yet, but soon will.

Papering over a crack or two is relatively easy. Papering over a chasm is impossible,

The core problems of societies need to be resolved – corruption has to be ended, taxation has to be collected, public servants have to serve the public, politicians have to be credible and respected and people have to believe that if they work hard they stand a chance of being successful. For banks to function, they need finance; for businesses to succeed, they need markets and finance; for an economy to succeed, it needs good business but also a society that works – and that is not riven with insidious corruption of people and dignity.

Many African states (with massive natural resources) are corrupt and wealth is held by small elites. We did not believe that the corruption in Europe was on the same scale and, indeed, it is not the same – but the scale may be greater and just as endemic.

Solutions will not be found purely through the injection of more money into a chasm – the chasm has to be filled first or cleansed at least. Liberal democracy was supposed to be the best solution (the best worst solution). The 21st Century struggle may not be against the same totalitarians as in the last century (fascists and communists) and, hopefully, it may not be sullied by war and death, but, metaphorically, it will be just as bloody and won’t be complete until political elites are brought down to earth and civil society gets inside the tent.

Do we Value the Charitable Sector?

As the Coalition Government slips worryingly through its third year, the value given to the Third Sector (or the Civil Society) is more uncertain. The Big Society is being challenged as it has not been for many years through financial austerity in national and local government. This has had a dramatic impact on charities in the UK that have been set up to serve the community and who rely on government (national and local) income. In Osborne’s last budget, charitable giving has been hit hard by limiting that which is tax allowable to £50,000 in any one year for individuals.

The charitable sector is strong in the UK, but threatened by this reduced government spending, reduced spending by companies and potential reductions in individual giving as we tumble back into recession.

The variety of charities is vast – from those set up to further medical research, those working to improve health and welfare, those set up to do international development, social clubs and societies, sports clubs and a host of others. Even schools are charities under UK law. This makes it hard to understand the role they have in society.

However, they stand alongside the Governing sector (government) and the products and services sector (business) and the fourth sector or fourth estate – journalism. Maybe that’s also where many NGO’s lie these days – funded to do investigations into society as newspapers once were. The fourth estate now contains many NGO’s – the likes of ONE, Enough, Global Witness, parts of Greenpeace, Oxfam, Save the Children, Amnesty and many others – where charitable work continues alongside the investigations and journalism and lobbying.

The Charitable Sector – Filling the (Massive) Gap

The role of charities is therefore complex – even if in the minds of most funders it is primarily to provide help to those sectors of society that are left out by the State and by the remainder of civil society. Charities exist to drive funds and assistance locally, regionally, nationally and internationally where it is deemed that government does not, cannot or will not.

Whether it is DEC (Disasters Emergency Committee) or similar assisting in emergency international funding, or Oxfam or Save the Children, or local hospices, each has been set up by individuals who saw a gap in care and raced to fix the problem. The whole area of social business has also sprung up in between business and charities. The roles are evolving as niches appear where need is believed to occur – it is a complex and adaptive system that is constantly evolving.

Each society is developing its own way from the bottom up – very few governments are sufficiently totalitarian to impose its blueprint on its people. In North Korea, this may be so but elsewhere government and business leave gaps that the market cannot satisfy and that civil society attempts to fill.

If the role of the charity sector (outside of the fourth estate incumbents) is to fill the gaps that business and government leaves – because they identify the need first, provide funding that is otherwise unattainable, provide better expertise, more focused concern or whatever other motivation – then how should society be developing to maximize its positive effectiveness? While this note focuses on the UK, it is as relevant to the international community.

Valuing the Charitable Sector

 

It is now time that government in the UK (and elsewhere) took a long, hard look at the charity sector and saw it as a real sector of the economy. The last budget was a good example of how taxation and benefits were structured towards businesses and individuals and where civil society (or the Third Sector) was seen as a peripheral activity. This was a slight on that sector.

The seemingly thoughtless and throw-away issues such as the limit of £50,000 on tax-free giving was typical of government not seeing the organized part of civil society as being defined in any special way. It is surely time that civil society – the charitable sector – is defined as separate from the business and individual taxed community and that we establish a set of income and expenditure statements from government that shows clearly how well or badly we are doing in that sector – at least in money terms. This would then clearly show how well or badly governments are also doing.

At the time when the Natural Capital Committee under the newly appointed Dieter Helm is calling for an accounting for natural resources / natural capital, it is time for the charitable sector to be similarly “valued”.

Impact Valuations – What does this mean?

On a basic level, an understanding of the tax taken from the sector (mainly through VAT, plus income tax and national insurance – both company and individual – paid to staff) should be provided annually at least by Government – maybe the office for National Statistics. That can be set against the tax benefits that may arise through gift-aid benefits for those who provide funds to charities. At the very least, an Annual Report should be made by Government (almost a CSR report) but verified and commented on by Charities Commission and maybe more independently-minded organisations). This would be completely different to the current Charities Commission Annual Report – which is a micro-analysis of how it spends its £29.4m. The report has to be a macro-economic one.

Stage two would be an analysis of the sector’s public “goods” – a value of the huge and positive impact that charities have in the UK and internationally. This will be its “Impact” at a macro-economic level.

If natural assets can be “valued” (providing an accounting value as Dieter Helm wants), then so can charitable activities. This is being demanded by many funders before (certainly trusts and foundations) before they fund charities, while individual givers often want to know more about an individual charity beyond the “gut-feel” instinct that propels them to give.

This macro-economic valuing would give the charity sector an independence. It would mean that civil society could begin to understand just what contribution the charitable sector provides in terms that begin to be understandable.  Nick Hurd, the Minister for Civil Society, would have a far more meaningful brief. Currently, he sits in the Cabinet Office (under Francis Maude) – but, the brief is very wide and less economically focused than it should be. The key, of course, is how we go beyond pure economic modeling (our GDP of quantity not quality) to measure the benefits we receive from natural capital / assets (which the NCC is set up to assist with) and from civil society itself.

Just as the value of education is not the money that the government spends on education per head (based on the Academy where I am Chair, £9.35m of income is spent on 1450 students – a “value” of £6,448 per annum – although at least this has some calculative affect. Even here, of course, the cost is reduced by the government’s take of income tax from staff, National insurance from staff and schools), so the value of charities should be assessed and the (often adverse, sometimes positive) impact of government intervention should be made known.

This is not a simple task, but a critical one. As we enter a world of real austerity (especially in Europe), we are underestimating the cost of cost savings on society – at best, we ignore them.

We are well into the 21st Century – time we thought in 21st Century terms and valued those things that materially contribute. The NCC may be making a start with natural capital: it is a good time to start making real progress on valuing the macro-economic benefits of our charitable sector – before it is too late.

Sudan – China’s Supply Chain Gang

George Clooney got arrested yesterday – outside the Sudanese Embassy in Washington, DC. He was freed with a $100 fine – but he (and his journalist father) have brought some attention to the awful situation in Sudan / Nuba / South Sudan.

I was in Khartoum in 2010 on behalf of Global Witness, an NGO that campaigns against natural resource funded corruption and conflict. The Sudanese had reacted badly to a report we had written on how oil resources were being corruptly handled against the interests of the South Sudanese – who have since gained independence. Around 98% of the income is from oil.

At the conference organized in Khartoum by the Sudanese Government – and aimed at rubbishing the Global Witness report – the oil companies were represented (Chinese at the forefront) along with the Government and oil ministries. The conference was aimed at whitewashing the Sudanese of corruptly taking more than their fair share of the oil under the oil sharing agreement.

Since then, Bashir’s Government has been syphoning off South Sudanese oil (which has to run through Sudanese pipelines).  Because Sudan is made up of various tribes, fighting over territory and natural resources remains continuous and high-risk. As in many countries, economic well-being is a necessity to ensure that such conflict is minimized. In a country riven by wars and dependent on one natural resource, oil, oil management and an ending of the rampant corruption in Sudan and South Sudan are critical.

19th Century Boundaries

Sudan is a nation with boundaries set up in the 19th Century by Empires that adored straight lines and cared little and understood less about the tribal affiliations or histories of those lands. Kept together by undemocratic and repressive regimes, corruption and conflict were devices developed to hold strong elites in power. Corruption is now rampant throughout the region and conflict is often seen not just as a means to take over territory but to keep populations focused on the enemy so as to distract them from internal strife and to motivate all against a common foe.

Decisions taken many years ago by foreigners have destabilized the region and insinuated a corrupt regime and continuous conflict into it. The new colonizers, though, are the Chinese. As George Clooney states, the Chinese oil companies (really the Chinese Government) have invested over $20bn in Sudan / South Sudan so that 6% of their oil needs back home can be fed. They have styled their colonialism on the back of “no involvement” in politics or in the affairs of the Sudanese. Confucian disinterest in the affairs of a nation so far away means that the west’s plans (certainly since the end of WWII) to link economic prosperity (mainly through aid) with improved governance are now foundering as the new colonialists (extracting vast quantities of natural resources) care nothing about governance.

21st Century Payback – China at the centre

Following the demise of the League of Nations after WWI (a bastion of 19th Century borders), the United Nations was created to establish peace worldwide. How will the 21st Century be reshaped to deal with the enormous economic changes taking place whereby dominant nations from the 20th Century are being progressively sidelined in those areas of greatest economic need and highest risk of conflict?

China despite its size and annual economic growth remains a poor country where 70% of its people are poor by international standards. It is determined to grow itself to a level where its people are comfortable and where the political system is salvaged. This means that its supply chain (especially its natural resource supply chain) is seen as merely that – it doesn’t matter that nations who have the natural resources so badly needed for economic growth in China are corrupt and riven by war as long as the Chinese can minimize supply disruptions. This may have been OK in the 19th Century but is not sufficient now where elites are enriched in the supplier nations on the back of corruption and conflict.

The key to the crisis in Sudan and the key to making a real change to 21st Century struggles against corruption (and its impact on poverty, hunger and disease), against conflict and against world-changing disasters like climate change is ………China.

Whether or not China is dominant in terms of its economy – and it is still much smaller than the USA – it has the power of veto and, more positively in terms of persuasion.

China can free the Supply Chain Gang

Whilst economic strength moves to China at great speed, the Chinese government has to take account of the fact that its customers and suppliers and itself are completely interdependent. China will probably over time become the most interdependent nation on this planet. Its huge population and increased momentum for economic growth will encounter limits that the current Premier, Wen Jiabao recently acknowledged. Increasing “reform and openness” are critical to further economic progress, he said recently in Beijing.

As out-going Premier he will not in the future have the power he currently possesses and Chinese power is entangled in many ways so that his words may not bear fruit. Nevertheless, there is some reason to believe that the government in China may seek to adapt as time goes on – because economic progress is vital to secure the political power base. At the same time, it is possible to see that (with the right pressure) Chinese attitudes to its customers and suppliers may be reformed to more than purely customer / supplier status. China is not a corporation and the competition for natural resources is not merely a supply chain activity – there are lives at stake within the supplier communities, not just shareholders and shareholdings.

Sudan and South Sudan are examples of so many things – countries dependent on a natural resource which is dissipating that basic wealth to a foreign country so that a core of wealthy and powerful government cadres get wealthier while thousands live in poverty, disease and in war zones. While China treats Sudan and South Sudan on a supply chain basis, no change can exist – and this same treatment is expanded wherever China works to secure supplies.

The Clooneys and Amnesty International and Enough (as well as organisations such as Global Witness) are working hard to free the Sudanese and South Sudanese from the terror of war. It is also a crucial case for expansion of China’s role in natural resource extraction and dependency. China can change the way the world works by relaxing is grip on pure supply economics and allowing its huge economic strength to persuade its suppliers that good governance is a worthwhile benefit along with the extraction of its natural resource wealth.

Holes in the ground – whether the result of mining, oil extraction or graves dug to bury the dead from conflicts – are no use, merely the result of the supply chain gang effect. It is a good time for China to take its global responsibilities more seriously. It will be around for a long time – it should be seriously acting on how it lives within the global neighbourhood. The traditional Chinese view that you should follow the local custom when you go to a new place is outmoded – especially when local customs are keeping elites in power, corrupted and financing conflicts.