Opportunities and threats of transparency in the extracting industry

Why you should be transparent – and why not

This Article was published first on reputationaffairs.com.

The Internet made the world more transparent, transparency creates credibility, credibility increases reputation – and a good reputation is the essence in todays’ age of the internet. The formula of this cycle is easy to understand. But is it also correct? What if transparency complicates business, what if published information is misunderstood, and what if your stakeholders prefer to withhold information? Will transparency suddenly become a curse rather than open, good intention? This article shows the importance but also the consequences of transparency in the often-criticized extractive industry.

Transparency is the “Swiss army knife of policy tools”. A description that is often made – and not without good reason. Transparency challenges the privacy of companies and state sovereignty over and over again. Invoked in many highly critical areas such as security, financial policy, economics, corruption, human rights, and the environment, to name but a few. Thus, industries involved in all these areas are the most challenged. This applies, among other sectors, to the raw materials industry – regardless of whether gold and diamonds are extracted, oil drilled, or gas shipped to foreign countries: this is about safety for employees and the environment, about technological leadership, about human rights – and about money. A lot of money.

Being a winner thanks to transparency

Particularly in developing countries and emerging markets, the management of natural resources can generate revenues that are important for economic growth and social development. However, failure to disclose information on these revenues can lead to mistrust, weakening of administrative and governance standards, or even conflict. If it leads to conflicts or disregarded human rights standards, bad publicity is awaiting around the corner for the companies involved; damaging their reputation, followed by financial losses. Transparency with regard to the management of raw materials is an important prerequisite for ensuring that a country’s natural resources benefit the population. Because publicly accessible information promotes an informed debate on the management and use of natural resources. This way, the citizens of a country may hold accountable those being responsible in politics and businesses. Local politicians may show how they deal responsibly with the environment, international companies show that they behave legally, economically and (hopefully) morally correct, and the home countries of the involved companies may check that international standards are being observed.

Many companies are pro-transparency…

When it comes to transparency, involved companies often have to balance interests, because many of them advocate disclosure of the money flows to promote their own credibility, especially in their countries of origin – mostly OPEC countries – where commodity traders often have to listen to a lot of criticism. Transparency helps to reduce prejudices, correct misinformation and fight fake news. The own employees stand behind the company, and the cooperation with NGO’s becomes easier and more fruitful for both sides. At Exxon Mobil for instance, this is expressed as follows:

“We are committed to sincere and ethical behaviour and to fighting corruption by promoting transparency initiatives. In the countries where we do business, we are actively committed to signing transparency agreements to disclose government revenue. In detail, these are: Azerbaijan, Chad, the joint development zone of Nigeria/São Tomé and Príncipe, Kazakhstan and Nigeria.” ExxonMobil, 2019

ExxonMobil proved that these are not just empty words when back in 1998 they led a consortium of Western oil companies asking the World Bank to jump on board for a planned pipeline project in Chad and Cameroon. The idea was that the Bank’s involvement offset the reputational risk posed by investing in a conflict-prone, undemocratic country through a project drawing high levels of NGO attention. The bank agreed to draft a plan on how Chad should manage its future returns. In addition to protections of the environment and local communities, the resulting legislation required transparent and development-focused revenue expenditures monitored by oversight bodies which included civil society, legislative, and international members (Gillies, 2010).

… but are being slowed down by governments

Yet, implementing transparency does not always achieve its desired outcomes. Studies have found that despite the EITI auditing requirement (I’ll explain this later), member states (and companies) may not produce complete and reliable data (Van Alstine, 2014).Also, the lack of a strong and educated domestic civil society that can actually understand “transparency” may hinder the effectiveness of revenue transparency. In many countries, residents do not even know which rights they actually have. Thirdly, there is no scientific evidence that a transparent cash flow actually contributes to better and more resource-oriented growth. And finally, there are also quite trivial reasons why governments have little interest in transparency: corruption, money laundering and self-enrichment occur again and again. In order to counteract these unpleasant aspects, global initiatives have been in place since the late 1990s to achieve greater transparency – By the way: at the same time, the term CSR (Corporate Social Responsibility) became increasingly popular.

International initiatives

The Extractive Industries Transparency Initiative (EITI) is probably the best-known and largest global initiative for greater financial transparency and accountability in the collection and disclosure of revenues from natural resource extraction. The standard is implemented in some 50 countries around the world by governments in collaboration with business and civil society. Information on tax payments, licenses, production volumes and other important data relating to the extraction of energy and mineral resources must be disclosed. Many large corporations are active members of the initiative, including Swiss based Glencore for example:

“Glencore is committed to high standards of corporate governance and transparency and welcome increased transparency around the redistribution and reinvestment of such payments. We seek to maintain long-term, open, transparent and cooperative relationships with tax authorities in our host countries.” Glencore, 2019

Of course, there are countless other organizations and social movements promoting more transparency. For example, Transparency International, which fights corruption worldwide. And “Publish what you pay” (PWYP), founded from an alliance of London-based NGOs, including Global Witness, Open Society Institute, Catholic Agency for Overseas Development (CAFOD), Oxfam GB, Save the Children UK, and Transparency International UK, now includes more than 650 civil society organisations in over 50 countries.

In summary: Transparency yes, but…

Ironically, some companies are afraid that too much transparency will make them vulnerable because their value chains are complicated. This can lead to public shaming, which in turn creates complex reputational dynamics. For instance, a company could perceive that bad press scares off consumers, attracts legal investigations, lowers employee morale, and threatens shareholder confidence. Nevertheless, the benefits of transparency clearly outweigh and will become even more important in the future. Because “not to inform” is much more likely to cause negative publicity. And in the age of the Internet, a multinational company can simply no longer afford this.

Sources

Gillies, A. (2010) ‘Reputational Concerns and the Emergence of Oil Sector Transparency as an International Norm’, International Studies Quarterly. Oxford, UK: Blackwell Publishing Ltd, 54(1), pp. 103–126. doi: 10.1111/j.1468-2478.2009.00579.x.

Van Alstine, J. (2014) ‘Transparency in Resource Governance: The Pitfalls and Potential of “New Oil” in Sub-Saharan Africa’, Global Environmental Politics, 14(1), pp. 20–39.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s