Senator Sam Dastyari’s speech in the Senate on 5th March has exposed what we have known for too long. Australian investors are exposed to bribery and corruption risks and it is time something is done about it.
In November 2012, I authored a paper for the Association of Superannuation Funds of Australia on the development of Australia’s capital markets. The discussion paper stated:
ASFA believes that the superannuation system has a role to encourage the development of the ASX in a way that facilitates future investment as part of its role to deliver to the public good.
A recent focus of the ASX has been to target listings in the resources sector. An example of this is that the ASX now has 15 listed companies from Mongolia principally due to the on-the-ground engagement of the ASX in Mongolia. ASFA notes there are a significant number of ASX-listed resource companies that are active globally, with 186 companies actively exploring or producing in Africa alone.
The fact that Australian companies are active on a global basis provides investors with an ability to gain exposure to the global economy. However it also introduces risks that must be managed. The superannuation sector understands the importance that environmental, social and governance (ESG) factors can play in delivering long-term investment returns. Over the last five years a significant number of APRA-regulated superannuation funds have signed up to the United Nations Principles for Responsible Investment.
A great deal of work is being done by these funds to build their capacity to understand and manage ESG risks across their portfolios. ASFA is concerned that small and medium cap companies are particularly exposed to human rights risks when operating in developing and under-developed countries. In the US the Securities and Exchange Commission (SEC) has been required to issue new rules around disclosure practices for resources companies that operate in conflict zones. There is an international body of work around this focused on the Extractive Industries Transparency Initiative that requires countries to disclose revenues from resources in order to stop bribery and corruption in developing countries. The SEC move, which came from a Congress directive, will in the end set a new standard for disclosure of resources companies. Given the dominance of resources companies in the ASX, the SEC model could be considered in the Australian context.
ASFA is concerned that there has been insufficient attention paid at both a market, regulatory and policy level on the implications of encouraging a diversified capital market. The long-term impact of concentration risk is that in order to achieve portfolio diversification, superannuation funds will allocate new funds outside of the ASX. To the extent that concentration risk increases, this has the potential to have a long-term impact on the allocation by the superannuation sector to Australia’s capital market.
The challenge that Australia has is that ASX is a listed company in its own right, and is subject to competition pressures in its businesses including trading, clearing and settlement means that it seeks new listings to earn revenue. The reality over the last decade has been that mining listings have been a major area of opportunity. The ASX must compete with other listed markets, particularly Toronto, for new listings. The recruitment of Mongolian mining companies for instance is no accident but the result of targeted activities of the ASX.
My argument in the past is that Australia’s superannuation sector and the ASX have had aligned interests. The growth of the superannuation has supported the growth of the ASX. In the coming decades it is likely that superannuation will out-grow the ASX and super funds will increasingly seek investments offshore. This is a reality and in terms of investment diversification can be a good thing, but even if this does happen, we still need to ensure that the ASX is able to present a pipeline of future investment opportunities. I have been critical of the ASX in terms of its focus on mining listings because it doesn’t align with superannuation fund needs for a diversified market.
But the focus on securing new mining listings also brings risk into the ASX, which super funds as asset owners ultimately bear.
The main risk from bribery and corruption is not at the top of the ASX where our leading miners in the main have good practices in place to manage risks. It is at the bottom of the ASX, amongst the small cap miners.
An argument amongst investors has been that this end of the market doesn’t matter as super funds don’t invest a great deal in small cap miners.
This misses the point. The importation of bribery and corruption risk in the bottom of the market is a reputation risk for the whole of the market. Whether we invest in a small cap miner in Mongolia or not, it is in the interest of all investors to ensure that they operate according to global best practice.
The problem that we have is that unlike the US, we don’t have an active cop on the beat that actively prosecutes. In the case of the US SEC there were 8 prosecutions in 2013, 5 in 2014 and already 2 in 2015.
In his speech Senator Sam Dastyari identified the key problem which is that ASIC does not take responsibility for foreign corrupt practices but leaves it to the Australian Federal Police, whose investigations are not subject to public accountability.
My recommendation is that the Federal Government provide funding for ASIC to establish a dedicated Foreign Corrupt Practices division. This should be part of legislation that gives ASIC responsibility for investigation and prosecution, in cooperation with the AFP, of bribery and corruption.
Congratulations to Senator Sam Dastyari for blowing the whistle on this issue. The upcoming Senate Economics Committee inquiry will provide an opportunity for investors to stand up and demonstrate that bribery and corruption is a material issue.
SEC Enforcement on Foreign Corrupt Practices Act
Association of Superannuation Funds of Australia
Development of Australia’s Capital Markets