Transparency Is Good For Markets, BP Edition
November 28th, 2012
flickr / The Prime Minister’s Office
We often approach transparency laws from an anti-corruption, anti-tax evasion perspective here on the Task Force blog. But recent transparency regulations, like the recent oil, gas, and mining rules made active this month by the Securities and Exchange Commission, are also good for business. They will provide investors, creditors, and other financial actors with clear, verifiable, easily accessible data in which to make decisions. This will make markets more efficient, leading to better economic outcomes for all.
Suzanne Ito of Revenue Watch highlighted the relationship between transparency and good investment decisions earlier this month, after news broke that BP would be fined $4 billion by the U.S. Department of Justice for criminal charges stemming from the 2010 Deepwater Horizon oil spill. While much of the relates to other violations of the law that were wrapped up in the spill, Ito notes,
Notably, the oil company will pay an additional $525 million to the Securities and Exchange Commission (SEC) to settle charges that it “misled investors by misrepresenting and omitting material information” about the rate at which oil was flowing into the gulf. Robert Khuzami, Director of the SEC’s Division of Enforcement, said in a statement:
The oil spill was catastrophic for the environment, but by hiding its severity BP also harmed another constituency—its own shareholders and the investing public who are entitled to transparency, accuracy and completeness of company information, particularly in times of crisis. Good corporate citizenship and responsible crisis management means that a company can’t hide critical information simply because it fears the backlash.
If I were a BP shareholder, I would be pretty angry right now. The company that I own a piece of was deliberately misleading me about how much oil they were pumping out of the ground, and as a result will pay $525 million in fines rather than spending far less money simply disclosing the accurate numbers. And even worse, BP was banned today from pursuing new government contracts in the Gulf of Mexico. Maybe I should have bought Chevron stock instead.
In any efficient market, I should have access to the information to make that decision. The new regulations passed by the SEC alone are not going to provide me this information in every case, but will significant increase what a potential investor will know about large, publicly-traded oil companies. Right now, I may know that X oil company is striking a large deal to develop fields in Kenya, but I don’t know how much they are paying for it or who in Kenya they are dealing with. Now, I’ll know that X company paid $Y for a deal, and will be able to ask the right questions about the future of their business.
This doesn’t stop at Dodd-Frank-style oil, gas, and mining transparency, which mandates that companies in those industries publish all payments they make to governments for the public to see on a project basis. The Task Force advocates for full country-by-country reporting for all multinationals. This would mean that every multinational company would publish its taxes paid, sales, number of employees, profits, etc for each country in which it operates. Presently, we know that a large, publicly-traded company makes a certain amount of profit and has a certain amount of revenue, but they are encouraged to hide their costs and revenue in a complex series of profit-shifting pass-through subsidiaries. This makes it very difficult for markets to figure out precisely how a company is making its money, and what it is doing with it.
