Corporate Sustainability Reporting

Interesting report (thought I don’t know how important);

“Tomorrow’s Value asks the question: How far has the value lightbulb switched on in corporate brains and boardrooms? On current evidence, the answer is that the links between the evolving sustainability agenda and wider market opportunities are now better understood — with a small number of companies reporting the relationship with value in increasingly interesting ways. Partly as a result, some parts of the financial community are gearing up their use of non-financial, extra-financial and/or sustainability disclosures to better understand emerging environmental, social and governance risks. Nonetheless, our expert panel concluded that most companies are still missing an important opportunity to communicate with financial analysts and institutions.”

Via PSD Blog - Less is more Madonna?

“The concept of materiality has long been part of the legal and financial worlds, yet it is now featuring much more prominently in the ESG (environmental, social, governance) arena.”

Related Concept;
The concept of materiality is derived from the field of financial auditing, where it is defined as, ‘the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement’. Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information, Financial Accounting Standards Board (FASB).

Bribery Awareness Handbook

A new publication from OECD, The OECD Bribery Awareness Handbook for Tax Examiners;

Tax inspectors may be an eagle-eyed lot, but in today’s global, technology-sophisticated world, their job has become extra challenging. The OECD’s 1996 Recommendation on the Tax Deductibility of Bribes to Foreign Public Officials is designed to discourage international corruption by disallowing bribes that take the form of tax-deductible expenses, for instance. But it is up to the tax officials in each country to ensure compliance, and to screen for illegitimate claims. The trouble is how to identify a payment that may be a bribe. Is it easy to distinguish between a fraudulent invoice and a real one, or to detect payments to fictitious employees, or illicit transfers to offshore bank accounts?

The OECD has designed its Bribery Awareness Handbook for Tax Examiners to help officials answer such questions. It describes various bribery techniques, provides indicators of bribery, suggests interviewing techniques and gives examples of bribes previously identified in tax audits. For instance, a fictitious business may be used for transferring funds, or indirect payments to public officials may be made via a law firm for ostensible legal services. The handbook also includes a checklist and, to help facilitate the monitoring of trends and assessing risks, it provides a standardised form allowing the tax examiner to give feedback to his headquarters...

Although the existence of legislation denying the tax deductibility of bribes is a strong deterrent to bribery of foreign public officials, says the OECD, the practical implementation of such legislation should not be neglected. The deterrent effect of these legislative changes depends crucially on the measures put in place to ensure that taxpayers are complying with the law.

Some examples of corporate slush funds from the Handbook;

- The usual practice in schemes operating in the foreign arena is for the domestic parent corporation to use a foreign subsidiary, a foreign consultant, or a foreign bank account to “launder” funds so that cash could be generated and repatriated back to the domestic parent to provide a slush fund for payments to domestic public officials. The funds would not be repatriated of course if the payment were made to a foreign public official.

- Slush fund generated by rebates from a foreign legal consultant: The foreign legal consultant, who also performed legitimate consulting services for the domestic corporation, over bills the company and then transfers the money back to the treasurer in cash.

- Officers and/or key employees are paid additional compensation based on their promise that they will contribute either a percent of the bonus or the net amount (net of income taxes) as a political payment or bribe payment.

- Corporate over-capitalisation: Real or personal property is acquired by the business entity for more than fair market value. The excess is rebated or “kicked back” and used by the promoter of the scheme to make the contribution to the political organisation or the payment to the public official.

- Contributions are paid to law firms which act as conduits by depositing the funds in trustee accounts from which they are disbursed to the political campaign committee designated by officers of the contributing corporation or to a public official.

OECD Q&A on Russia

Q. This morning's Financial Times has a report that the US government is undertaking a national security review about Roman Abramovich's bid for US company Oregon Steel. Should Western governments worry about the ties between Russian investors and the Kremlin?Ashley Robert, Beijing

A. The concern with the Abramovich deal is part of a larger one that faces many governments in many countries. The real issue is not that western governments should be worried about whether or not major Russian investors are close to the Kremlin. In any country, governments are likely to be concerned about the activities of state-controlled companies in there jurisdictions if the governments have reason to believe that those companies are not operating on commercial principles, for commercial reasons, if the companies are active in sectors that perform functions that are important to national security, or if they believe that home-state support may give those companies a competitive advantage. This general problem takes on a new twist in the Russian case, because the line between state and private sectors is not always so clear – some formally private companies in Russia do appear to be owned de facto by state institutions. More generally, beneficial ownership of many large Russian companies is still unclear or has only recently been clarified. In the case of Evraz Holding, it would be difficult to suggest that it was other than a private company and its ownership structure is well known, but the US authorities nonetheless remain concerned about its possible or actual ties to the Kremlin. Having said that, we would also observe that such political/security concerns are sometimes the cloak for anti-competitive or protectionist lobbies: while governments may sometimes be right to be concerned about the activities of foreign parastatals in their jurisdictions, they do their citizens no favour if they use such concerns to protect particular domestic interests or to impose ideologically-motivated barriers to foreign economic activities. Regulatory ‘due diligence’ clearly has a role to play but it should not used as a vehicle for protectionism.

- Ask the economists: Russia - will the boom bust?

Related;
Russia: Gassing the Neighbors
The Rise of the Corporate State in Russia
Russian Energy Policy and the New Russian State

Malcolm Gladwell on Enron

“In the spring of 1998, Macey notes, a group of six students at Cornell University’s business school decided to do their term project on Enron. “It was for an advanced financial-statement-analysis class taught by a guy at Cornell called Charles Lee, who is pretty famous in financial circles,” one member of the group, Jay Krueger, recalls. In the first part of the semester, Lee had led his students through a series of intensive case studies, teaching them techniques and sophisticated tools to make sense of the vast amounts of information that companies disclose in their annual reports and S.E.C. filings. Then the students picked a company and went off on their own. “One of the second-years had a summer-internship interview with Enron, and he was very interested in the energy sector,” Krueger went on. “So he said, ‘Let’s do them.’ It was about a six-week project, half a semester. Lots of group meetings. It was a ratio analysis, which is pretty standard business-school fare. You know, take fifty different financial ratios, then lay that on top of every piece of information you could find out about the company, the businesses, how their performance compared to other competitors.”

The people in the group reviewed Enron’s accounting practices as best they could. They analyzed each of Enron’s businesses, in succession. They used statistical tools, designed to find telltale patterns in the company’s financial performance—the Beneish model, the Lev and Thiagarajan indicators, the Edwards-Bell-Ohlsen analysis—and made their way through pages and pages of footnotes. “We really had a lot of questions about what was going on with their business model,” Krueger said. The students’ conclusions were straightforward. Enron was pursuing a far riskier strategy than its competitors. There were clear signs that “Enron may be manipulating its earnings.” The stock was then at forty-eight dollars—at its peak, two years later, it was almost double that—but the students found it over-valued. The report was posted on the Web site of the Cornell University business school, where it has been, ever since, for anyone who cared to read twenty-three pages of analysis. The students’ recommendation was on the first page, in boldfaced type: “Sell”.

-OPEN SECRETS; Enron, intelligence, and the perils of too much information
Via Mahalanobis

Related;
Here’s the Enron report mentioned above (browse down the page);

"As shown in Table 2, the 8-variable Beneish model shows that that Enron may be manipulating its earnings. We get a M-score of -1.89 for Enron, which is greater than the standard M-score of -2.22 used to gauge the likelihood of manipulation. The most significant factor contributing to the M-score manipulation statistic is the SGI. After close examination we were not concerned by the fact they were growing too fast because the sales increase comes from the recent acquisition of PGE. Additionally, the GMI shows deteriorating margins, the AQI shows increasing amounts of ‘soft’ assets, DEPI shows depreciation expense slowing down, and LVGI indicate rapidly increasing leverage. However, further examination of these indicators showed no cause for concern.”

The Detection of Earnings Manipulation
Experts and Overconfidence
Solving Mysteries
How to Bring Our Schools Out of the 20th Century

Does Corporate Governance Matter?

Working paper of the day- Does Corporate Governance Matter? A Crude Test Using Russian Data by Bernard Black;

“Does a firm’s corporate governance behavior affect its market value? In most empirical tests in developed countries, firm-specific corporate governance
actions have little or no effect on market value. These weak results could
reflect limited variation among firms in governance practices.

In contrast, the corporate governance practices of Russian firms vary widely, from quite good to awful. I test whether corporate governance behavior affects the market value of Russian firms using (1) fall 1999 corporate governance rankings developed by a Russian investment bank for sixteen Russian public companies and (2) the “value ratio” of actual market capitalization to potential Western market capitalization for these firms, determined independently at the same time by a second Russian investment bank. The correlation between ln (value ratio) and governance ranking is striking and is statistically strong despite the small sample size: Pearson r = 0.90 (p < .0001). A one-standard-deviation improvement in governance ranking predicts an 8-fold increase in firm value; a worst (51 ranking) to best (7 ranking) governance improvement predicts a 600-fold increase in firm value. My results are tentative, due to the small sample size. But they suggest that a firm’s corporate governance behavior can have a huge effect on its market value in a country where other constraints on corporate behavior are weak.”

Related;
National Council on Corporate Governance (Russia)
Blogs- Governance Focus, Corporate Governance News