Naughty world, good deed

The Financial Reform Act surprisingly includes the long-awaited requirement for natural resource companies to publish what they pay to kleptocrats.

Amid the encircling gloom,  a surprising good deed that wasn’t picked up by the sphere at the time. It deserves much more play than it’s been getting. IMF in-house blogs may not be widely read, but you’d expect more traction from a White House press release.

Go to HR 4173, now Public Law 111-203,the Dodd-Frank Wall Street Reform and Consumer Protection Act (pdf, text). On page 845 (sic), you find Section 1504,  “Disclosure of payments by resource extraction issuers”.

Money graf:

… Not later than 270 days after the date of enactment …. the Commission [SEC] shall issue final rules that require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals…

This is the fruit of  a decade-long campaign by NGOs focussing on corruption in oil and mining. especially Global Witness and Transparency International, gradually picking up influential supporters: George Soros, Tony Blair, Richard Lugar, the European Parliament, and even some major players in the industry, like Newmont Mining and Statoil. In the end a group of senators (Cardin,  Durbin, Feingold, Johnson, Leahy, Lugar, Schumer)  shoehorned this little change into the enormous financial reform bill. Nothing to do with the last financial crisis of course, but it makes a sort of sense as part of the general clean-up.

The problem is a classic one of collective action. If you are a normal oil company (and not like the former Elf-Aquitaine deeply corrupt and spook-ridden yourself), you should have nothing against publishing the amounts you pay the governments of host countries. But look what happened to BP in Angola in 2001: they announced their intention to do just that,  and got a letter from Sonangol, the Angolan state oil company, threatening loss of the concession. Reproduced here, pages 41-42. It was copied to BP’s competitors just to make the point clear. BP caved in, wouldn’t you? But now they have no choice. Oil and mining companies will face embarassing meetings with officials in Angola, Equatorial Guinea, Kazakhstan, the two Congos, Burma, places like that. Good.

The target here isn’t common-or-garden corruption: a Gucci attaché-case of banknotes here for the Minister, a free shopping trip to Paris for his wife there, a consultancy for a nephew or two. In fact, this will likely increase by substitution. We are talking here of the organized looting of billions, flowing into private armies and police forces, palaces, giant offshore nest eggs, and networks of patronage. In Angola, the siphon at one time was sucking in up to 40% of GDP (according to a Transparency International paper for an OECD conference in 1973). For the looters, section 1504 is not only a financial disaster but an existential threat, as the numbers will be used by domestic opponents, democratic and otherwise. Stand by for fireworks.

The only real reason oil and mining companies should worry is partial coverage. Won’t they lose concessions to companies from countries that allow concealment?  It shouldn’t be too difficult, given all the positive noises that have come out of international summits for years, to secure similar measures within the OECD. Russia and China will be harder. But it’s a good sign that the Hong Kong Stock Exchange introduced a similar transparency measure in June, presumably with a nod from Beijing. Good pragmatic thinking: unconstrained kleptocracies make for unstable partners.

Why now? This was a sound idea ten years ago. Maybe the Gulf oil spill just weakened the oil and mining lobby enough to tip the balance, on an issue that was never life-and-death for them.  We can be sure the hidden lobbyists for the kleptocrats were fighting hard against the reform to the end. Maybe it was displacement activity: Dodd, Frank and company realized the core financial reform was weak, and grasped at an extraneous one to salve their consciences. Anyway, good work by Lugar and friends.

Caught in the Rye

You have to feel someone saddled with the name “Holden Karnofsky,” but his conduct ought to (won’t, but ought to) put paid to the notion that the non-profit world ought to be automatically grateful for the attention of refugees from the for-profit world.

I always feel sympathy for the victims of child abuse, and naming a child “Holden Karnofsky” certainly qualifies as at least extreme neglect. Still, while victimization can help put an offense in context, it’s not actually an excuse.

Karnofsky made some quick bucks in the hedge-fund biz and then started a non-profit called Givewell whose mission was to evaluate other non-profits. The press, which always falls for the idea that people in for-profit business are basically smarter than people in non-profit enterprise or government and that therefore whenever a businessperson condescends to visit the NFP or governmental slums he ought to be treated with extreme respect, gave Karnofsky’s project huge amounts of hype without ever inquiring into whether it was actually doing a competent job.

In the meantime, it turns out that Karnofsky was using sock-puppetry to boost his outfit and tear down its rivals, until a sharp-eyed MetaFilter participant noticed identical IP addresses from someone who asked a question and someone who answsered it. Rather embarrassing, you’d think: an enterprise devoted to causing transparency in others surely ought to be transparent itself. But, so far, not embarrassing enough to cause the organization to fold or to generate resignations.

Obviously, given the size of the NFP world there’s a desperate need for some sort of external, or at least externally-validated, scorekeeping. But the old question keeps arising: Quis custodiet ipsos custodes?

Hat tip: My sister Kelly, the Nonprofiteer

“Independent” Boards for Non-Profits?

Over at the Volokh Conspiracy, Todd Zywicki points to an article suggesting some “common sense” reforms to the governance of non-profits. Some are indeed “common sense,” but others are not. The one that jumps out at me is: “greater separation of governance from fundraising so that board members are appointed for their expertise and engagement on governance, not merely as a reward for their largesse…” This seems like an exceptionally bad issue to legalize. It may indeed be a good idea for some non-profits to select more, or even all, of their board members on the basis of “expertise.” This may especially be the case for large, well-established organizations like operas or art museums, which may be better thought of as “public trusts.” But what of smaller, more entrepreneurial, “start-up” stage non-profits? These sorts of organizations may not have the kinds of networks that would allow them to get “experts” to be on their boards, and they may need to place large donors on their boards in order to get the funding that will allow them to get off the ground. In addition, contributors who give a very large sum of money to a start-up non-profit may have a very understandable desire to obtain a place on the organization’s board in order to ensure that their money is spent in the way that the organization’s leaders have told them that it will. That is, exchanging contributions for a board seat can be thought of as a very effective way of enforcing “donor intent,” and eliminating this mechanism may lead to a considerable drop in funding, since there will be no institutional mechanism for solving the principal-agent problem associated with non-profit contributions. This is a case where I see very little need for a legal solution–let non-profits design their boards however they see fit, allow different models to emerge, and let contributions flow to the organzations whose board governance seems best to those asked for funding. Finally, what’s a libertarian like Todd doing suggesting, or even hinting at, a one-size-fits-all legal-regulatory solution anways?