I try not to wax too philosophical in my columns, nor take such a macro-economic view of events that I lose sight of the relevance to compliance officers. Sometimes, however, as we all struggle to answer that eternal question, “Does fighting for ethical business standards really matter?” a perspective comes along that answers the question so well you can’t ignore it, no matter how divorced it is from the mundane daily challenges of corporate compliance.
Which brings us to the Nevsky Fund.
At the beginning of January the Nevsky Fund issued one of the most astonishing statements I’ve ever seen from an investment fund: that it no longer saw any feasible way to make money for investors. So after 15 years of quite respectable performance, the fund was closing, liquidating its holdings, and returning the cash to investors.
The fund’s final letter to investors ran to 25 pages, identifying one pillar of long-term investment strategy after another and then knocking each one down with withering complaints about regulatory and corporate behaviors that have left those pillars crumbling. Here are some of excerpts:
- “Data releases have become much less transparent and truthful at both a macro and a micro level… This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe.”
- “Corporates have also responded to greater market scrutiny since the [Global Financial Crisis] to disclose less not more, on the basis that the less they reveal the less often they can be proved wrong by regulators, investors or law courts.”
- “Assuming we can obtain trustworthy data we then apply logic to produce our forecasts. The validity of this process becomes questionable if economic policy makers do not themselves apply economic logic and in a transparent manner… surely never has so much of the world been governed by leaders where the logic of that peculiarly parochial yet multi-headed beast—nationalism—trumps all.”
The rest of the letter is a tour of macro-economic trends, from global warming to labor force participation to corporate debt to commodity prices. Much of it makes sense to me; other parts are more suited for financial theorists who graduated from Wharton. Thankfully the average compliance or risk professional doesn’t need to digest every detail on every page. The crucial thesis for us here in the corporate compliance world is simply this: that sloppy regulation and lack of transparency have real economic consequences. And that is why fighting for ethical business standards really is important.
Take China as one example, and the fiction that its economic growth is anywhere near the 6.9 percent Chinese officials announced earlier this month. Growth in that country is not 6.9 percent. We have no idea what the actual GDP growth is in that country, and most likely the officials in Beijing don’t know the actual number either—because of corruption. Boards of Chinese companies take on projects they know will not make money, to placate Communist party officials. Audit firms turn blind eyes to that wasteful spending rather than issue going-concern warnings. Chinese banks pretend the loans they extend to those companies will be repaid when everyone knows the loans will not. And then we all act shocked when reality intrudes and stock markets shake around the world.
So if you want to shut down some cynic who says corruption and low standards “are just part of the culture” and not worth fighting against, point to this week’s Dow Jones averages. Because what we’ve seen this week is the natural result of that terrible attitude.
I put much of the Middle East in that same category: ethically lazy, with boards or governments that go for easy choices rather than a discipline that nurtures long-term growth. Now they are seeing the consequences of those bad habits, because technology has finally unlocked a long period of cheap oil—and the Middle East (principally Saudi Arabia) keeps pumping even more oil, because it doesn’t know what else to do for a living. Because governments in that part of the world never made the rule of law an imperative, that would force corporate boards to be disciplined and find ever more versatile ways to grow.
And to be clear, my views are not just some preachy pro-Western screed. (OK, they may be preachy.) You don’t need to be a Western democracy to succeed at ethical business. Singapore is a fantastic example of the benefits of behaving ethically, and it is neither Western nor democratic. But its leaders long ago did see the sense in rejecting corruption as part of its culture. Businesses and Singaporean workers have reaped the benefits ever since.
The Nevsky Fund’s farewell letter is not light fare. It leaves you wondering, and worried, about how much of the world will pull itself out of the economic and political funk we are in. I look at places like China and the Middle East, and I haven’t the faintest clue how they will do it without radical social upheaval. But I do know that no matter what, having a stronger, more ethically rigorous culture for business helps.
So no matter how many cynics might say all our efforts are pointless—they are wrong. They could not be more wrong about anything.