Transparency and Berkshire

By Stephen Benz - July 30, 2012 | Tickers: BRK-B, GS, HBC, STO | 0 Comments

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Transparency International, a non-governmental organization that promotes corporate transparency and accountability, recently released a report assessing the largest worldwide 105 public companies.  The companies were measured on three metrics: public reporting on anti-corruption programs, organizational transparency, and country-by-country reporting.  I was genuinely shocked to find that Berkshire Hathaway (NYSE: BRK-B) was ranked #101 on this list, just above China Construction Bank.  The study is not a critique of the practices of these companies; it only evaluates what information is publicly available, so no conclusions should be drawn on whether Berkshire is failing to practice business ethics.  Nonetheless, I am intrigued that the company many hold in reverence would find itself near the bottom of such a list.  I’ll delve into the details of the study to try to gain more insight.

Reporting on Anti-Corruption Policies

13 questions were developed using the Transparency International – UN Global Compact Reporting Guidance on the 10^th Principle against Corruption.  Questions cover topics such as publicly stated commitments to anti-corruption, definitions of inappropriate gifts and travel expenses, policies against facilitation payments, and the disclosure of political contributions.  Financial companies as a whole performed poorly on this metric, and Berkshire ranked 18 of 24 of this group.  The breakdown of scores is not explained for each company, but nearly all financials failed to publicly extend anti-corruption policies to intermediaries and third parties and do not publicly prohibit facilitation payments.  It’s important to note this is only based on publicly available information, and is not an assessment on compliance.  To drive that point home, the highest ranked financial was HSBC Holdings (NYSE: HBC), the company currently dealing with a major money laundering scandal.

Organizational Transparency

Eight questions focused on the disclosure of related entities, including subsidiaries, associates, joint-ventures, and other holdings.  Of interest, eight financial companies received the maximum score, none were American companies.  Berkshire was in a six-way tie for the worst score among financials, all American companies.  The only American bank that wasn’t in this group of lowest scores was Goldman Sachs (NYSE: GS), although it only earned 50% of the maximum score.  The top tier was dominated by European companies.  While the anti-corruption measurement is arguably dubious because it lacks the insight of privately published policies, the issue of public disclosure of related entities is pretty cut and dry. 

Country-by-Country Reporting

Are country-specific sales, capital expenditures, income, and taxes disclosed for each foreign country in which a company operates, either directly or through subsidiaries?  Nearly every financial company scored a zero in this section.  As a matter of fact, none of the 105 companies studied scored above a 50%, and only Statoil (NYSE: STO) scored a 50% (Statoil earned the highest overall score, by the way).  The argument for publishing this exhaustive data is that it would empower those countries, especially developing nations, to demand more benefit from the companies operating within their border.  An example in the study is Mozambique, a resource-rich African nation that exempts mining companies from corporate taxes and import/export duties.  Because these companies do not publicly disclose their revenues from Mozambique operations, the populace is not informed and is thus unable to pressure the government for change.

Chance for Redemption?

All of the companies studied were given two months to provide feedback on the methodology and offer corrections to the data.  Roughly half responded, but Berkshire did not.  This publication doesn’t change my investing thesis for Berkshire, but it does offer a contrarian view to my notion that the company sits head and shoulders above the rest with respect to corporate responsibility and accountability.  I do not doubt the practice of these values at Berkshire, but unless I find a compelling argument that increased transparency would put the company at a significant competitive disadvantage, I would very much like to see Berkshire's performance significantly improved the next time this study is conducted.          

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