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OPINION

Everybody knows...

Everybody knows...
November 16, 2016
Everybody knows...

"Everybody knows that the dice are loaded, Everybody rolls with their fingers crossed," he sang. Sure, and everybody knows central banks contrive to fix money-market interest rates; everybody knows company bosses flatter profits when that helps inflate their bonuses; everybody knows the world's most powerful mining houses bribe their way across the impoverished world.

True, I exaggerate, but sometimes - maybe too often - that's how it seems. In a week when corruption and dishonesty elbowed their way to the front of the financial news, first up - and grubby - was the allegation that the Bank of England tacitly approved of rigging Libor interest rates; grubbier still was the alleged involvement of some former bosses of Tesco (TSCO) in manipulating their company's accounts; grubbiest of all was the admission that the UK's biggest mining group, Rio Tinto (RIO), illicitly paid £5m to help land an iron-ore concession in west Africa.

What distinguishes these three instances from most of the rest is that they have been identified. By that point they can no longer bring benefit to their perpetrators. But the issue for investors is how they should respond to the possibility that the company in which they invest is less than squeaky clean (it just hasn't been exposed yet). Should they run a mile? Or should they justify their complicity in a venture that may not be 100 per cent kosher with the thought that nothing has been proved yet, or - closer to venality - everybody else does it, so that's okay.

If you believe the assessment of Transparency International, a Berlin-based organisation that labels itself "the global coalition against corruption", there is no debate. Each year it discusses how openly the world's leading companies disclose their affairs and 2016's report says: "Well-run companies with high levels of integrity and transparency are more likely to maintain their edge in a global marketplace where unfair or opaque business practices are increasingly a threat to success."

That sounds unequivocal. Actually, it's very debatable. It would be nice if it were true, but there is limited evidence that it is. At the extremes, some listed companies - Russian oil company Rosneft (LSE:ROSN), for example - are clearly penalised for their close ties to corrupt regimes. Even though Rosneft's share price has almost doubled this year as the oil price makes a stuttering recovery, the company's equity still has a market value of just 1.1 times its £38bn book value. Mostly, however, it's tough to show that companies whose operatives play fast and loose with best corporate practice - and even with the law - suffer for it.

Besides, peering in from the outside, investors can rarely do better than deal in shades of maybe. It does not help that corruption comes in the same hues. Extortion is obvious. When, say, a local politician threatens to escalate a labour dispute unless he is paid off, it's obvious what's happening. The company's dilemma is simply whether or not to pay, knowing that it can't disclose the fact.

So-called 'facilitation payments' are more subtle; so subtle, in fact, that in some circumstances it is legal for US companies to make 'speed money' payments in accordance with that country's Foreign Corrupt Practices Act. It's a factor that such payments - individually at least - barely qualify as corporate loose change.

That description hardly fits the £5m that Rio Tinto put into an escrow account for a French fixer to help it land the Simandou iron-ore concession in Guinea in 2011. Yet perhaps Rio's main mistake was that it ran into someone whose demands were both blatant and excessive - he rejected $7.5m and held out for $10.5m. Had he been smart enough to ask for payment to go to a private charity of his choice, then perhaps Rio's current boss, Jean-Sébastien Jacques, would have felt it less imperative to 'fess up to the UK and US fraud cops.

At least, Mr Jacques' dilemma would have been nuanced and that's partly because it remains debatable whether corruption is a big problem. Certainly there is a paradox to resolve: if corruption is so awful, why are there such high levels of overseas investment in east Asia where corruption is rife? Possibly because, as various studies have shown, corruption is most disruptive when it is unexpected. Put that the other way around, when graft is predictable - organised, systematic even - then dealing with it is just another cost of doing business; some other expense that gets lost in the accounts.

In Rio's case, it does not help that it's also alleged its bosses only told the authorities after they had been confronted by a French news website even though they had known about the payments for some months. If so, that simply fits with the notion that expediency usually comes before morality.

Of course, Rio's bosses can no longer hide behind that fact of life. But, most of the time, companies and investors can. Whether they do so is up to them. If they want, they can take their cue from Leonard that "everybody knows that the fight was fixed, The poor stay poor and the rich get rich". It's a cynic's code and it's hardly uplifting, but it's the spirit of the times. Everybody knows that, too.