World Economy

The War on Secrecy

April 1, 2016  • Lucy P. Marcus

LONDON – What do the recently released Panama papers, ExxonMobil, and a Canadian mining company operating in Guatemala have in common? They are all cases in which powerful individuals and organizations tried to obfuscate, deceive, or hide behind a front. And they are all cases in which that effort didn’t work.

The global uproar triggered by the Panama Papers – 11.5 million files taken, apparently by computer hackers, from the world’s fourth-largest offshore law firm, Panama’s Mossack Fonseca – is likely to continue for some time. The files’ release has revealed the extreme, and sometimes costly, lengths that individuals go to hide their assets and avoid taxation. What has been uncovered thus far ranges from legal but ethically suspect use of tax loopholes to efforts to stash or launder money gained through corruption or other illegal activities.

The reaction has been swift, harsh, and almost universally excoriating. Already, the prime minister of Iceland has been forced to resign, after it was revealed that he held stakes in offshore companies with his wife. Relatives of senior Chinese officials, including President Xi Jinping, as well as members of Russian President Vladimir Putin’s inner circle, have been implicated as well.

Xi and Putin may have little to worry about. But the sheer hypocrisy of government officials proclaiming the need for austerity and encouraging public sacrifice for the sake of long-term prosperity, while secretly avoiding that effort, is a galling violation of trust in democratic countries. If their offshore shell companies and bank accounts are legal, why go to so much trouble to be secretive? And if secrecy is legal, what is wrong with it?

Meanwhile, corporate secrecy has placed ExxonMobil in the crosshairs of the attorneys general of New York, Massachusetts, and the Virgin Islands, and many more states are waiting in the wings. The investigation is focusing on whether the company knowingly made false statements about climate change, starting from the 1980’s.

Internal documents indicate that Exxon, and later ExxonMobil, knew about the damaging effects of climate change but revealed no information to investors or the public. In fact, the company’s public statements – including as recently as last year – routinely dismissed the risk of climate change. When given an opportunity to come clean and operate transparently, ExxonMobil opted for obfuscation.

In Canada, Hudbay Minerals is embroiled in a lawsuit that could open the door to real consequences for companies that offload onto subsidiaries all responsibility for their overseas operations. Instead of applying their home countries’ ethical requirements and standards in the countries where they operate, Western companies draw a veil of subsidiaries, contractors, and supply chains over behavior that consumers and investors would consider reprehensible. Hudbay Minerals is being sued over an episode of mass rape and property destruction in Guatemala, after soldiers and people claiming to be security officials from the company that owned a local mine arrived in a small village with orders to evict its residents.

The case is seemingly complex, as it involved multiple owners, numerous subsidiaries, and an array of jurisdictions. But the principle at stake is simple: A parent company must be held responsible for overseeing the actions of those representing it. Creating layer upon layer of ownership to preserve secrecy must not continue. And it will not if a three-prong approach is embraced. Call it the carrot, the stick, and fresh air.

The carrot – the inducement to behave ethically – should be to recognize and reward those who admit past mistakes and demonstrate the will and an effective strategy to correct them. The stick – punishment of misconduct – requires stricter enforcement of legal and ethical requirements, whether concerning tax avoidance and evasion, or the ability to hide behind subsidiaries. And fresh air takes the form of reporting, whether drawing attention to wrongdoing in local communities or deep investigative reports, like the extraordinary global effort by the hundreds of journalists who cooperated in bringing the Panama Papers to light.

This approach must not be turned into a marketing exercise by companies, government officials, or media companies. Instead, the repudiation of secrecy should resemble a truth and reconciliation process, with wrongdoers providing a full public account of their behavior, perhaps accompanied by testimony from victims.

Most important, if corporate boards – and the lawyers, bankers, and accountants who advise companies and individuals – are to be vigilant about legal and ethical compliance, they must believe that they will be held accountable for their actions. Once everyone gets the message that secrecy carries unacceptably large risks, they will act in ways that minimize those risks. Whether they like it or not, it is time for our leaders to behave in ways that are good for them – and us.

Lucy P. Marcus, founder and CEO of Marcus Venture Consulting, Ltd., is Professor of Leadership and Governance at IE Business School and a non-executive board director of Atlantia SpA.

Copyright: Project Syndicate 2016 – The War on Secrecy