CORPORATE GOVERNANCE, ETHICS, CORRUPTION & ACCESS TO CAPITAL – Myron

Betshanger

Corporate Governance, Corruption and Access to Capital – Myron. D. B. Betshanger

The latest publicised Research Reports on the Top Business Risks facing the mining and metals

industries indicate that Capital allocation and access to capital have rocketed to the top of the business

risk list for mining and metals companies globally. These "capital dilemmas" threaten the long-term

growth prospects of the larger miners at one end of the sector, and the short-term survival of cash-

strapped juniors at the other end. According to Mark Elliot, Ernst & Young's Global Mining and

Metals leader,:

“For larger miners, the rapid decline in commodity prices in 2012, rampant cost inflation and falling returns

have created a mismatch between miners' long-term investment horizons and the short-term return horizon

of new yield-hungry shareholders in the sector. "Many years of high growth in earnings, cash flows and

capital appreciation has attracted a different group of investors to mining, investors with short-term

investment horizons who are not as comfortable with the sector's longer-term, and often counter-cyclical,

development, investment and return horizons.”

While the Ernest and Young report no doubt raises important issues around the most significant

business risks facing the mining and metals industry globally, the question which the report does not

raise nor attempt to answer is, to what extent perceptions of poor corporate governance and continued

corruption contributes towards the difficulties of mining and metals companies to access capital.

THE INTERNATIONAL CALLS FOR GREATER TRANSPARENCY

The year 2013 has seen the calls for greater transparency in the international extractive industries,

including mining and metals, being firmly set on international policy agenda with the coming into

operation and enforcement of Section 1504 of the U.S. Dodd-Frank Act. While the former has

particular application to mining and metals companies registered and having operations in the U.S. it

does have extraterritorial jurisdictional impacts in that it requires any U.S. company to disclose it

financial payments to any foreign government in which it has operations, whether directly or indirectly

through partnerships, investments, joint ventures, in which such US company has a substantial

shareholding or controlling interest.

On the international arena, the G8 Group of Nations has, during the organisations April/May

2013 Summit in Ireland, agreed on the development and implementation of new rules regarding

financial transparency in the international extractive industries. The European Parliament has

taken the leading role in this regard and has on 24 May 2013, by a 98% vote, agreed on rules

which would force any company listed on any of the European Union member states stock /

securities exchanges with interests in the extractive industries, including oil, gas, mining and

metals and logging, to disclose all financial contributions made to foreign governments in which

they are having operations or planning future expansion of operations. This call for greater

financial transparency in the extractive industries is also firmly set for discussion as an agenda

point of the upcoming G20 Summit in September 2013 in St. Pietersburg, Russia. Indications are

that the G20 countries will adopt similar transparency rules to be implemented by individual

member states.

INTERNATIONAL ANTI-CORRUPTION LAW ENFORCEMENT

The past decade has witnessed a proliferation in international anti-corruption law enforcement with

countries such as the U.S.A., Canada, The UK, Germany and Australia taking a leading role. Recent

developments has seen Russia, China, Brazil and India all stepping up their anti-corruption efforts.

Over the past few years we have also witnessed an increase and more aggressive enforcement of the

Foreign Corrupt Practices Act (FCPA) by the U.S. Department of Justice (DOJ) and the U.S. Securities

and Exchange Commission (SEC) of both anti-corruption and anti-trust laws with a number of

multinational corporations (MNCs) and individual directors and senior management members either

being the subject of investigations, prosecutions or sanctioned. The penalties imposed on corporations

for their involvement in foreign corrupt activities has risen sharply and has seen record high fines

imposed on companies such as Siemens, Daimler-Chrysler, and the like, while individuals have seen

sentences of imprisonment of varied periods being imposed. We have also witnessed the fines imposed

by the U.S. DOJ on Parker Drilling (US $ 15million) when the latter company entered into a Deferred

Prosecution Agreement (DPA) with the U.S. DOJ. And more recently we witnessed an Siemens senior

executive arrested and detained in the US for his alleged role in the Siemens FCPA violation.

In China, for example, the UK drug manufacturer, GlaxoSmithKline, is the subject of an on-going

investigation that have seen the company’s Head of Finance being prevented from leaving Beijing as a

result. Not too long ago, March 2010, we witnessed 4 of Rio Tinto’s staff members in China sentenced

between 7 and 14 years imprisonment for among others corruption (bribery).

The U.K. Bribery Act of 2010, which came into effect recently, has some of the most progressive, and

according to some, strictest liability provisions for corporations and individual directors and company

officers alike, namely, “Failing to Prevent Bribery” which carries an unlimited fine.

More recently and perhaps of greater significance is the establishment of the International Foreign

Bribery Task Force between the U.S. UK, Canada and Australia as part of a new trans-border

agreement to combat foreign bribery.

“What has this to do with the South African Mining Industry’s Top Business Risk, namely, Access To

Capital ?

The statement that “Corruption Kills” has particular relevance to the current difficulty of South

African mining companies ability to access capital. The persistent national and global perception of the

prevalence of corruption in South Africa have had and continues to have an adverse impact on the

South African mining and metals industry and indeed our country’s economy at large. We have

witnessed international rating agencies such as Standard & Poor, Global Financial Integrity and

Transparency International continuously down grading South Africa’s economy over the last 5 years.

The net result of this is that South African mining companies with international operations faces the

risk of an ever evolving tangled web of possible investigations and prosecutions for allegations of fraud

and corruption. As international anti-fraud and anti-corruption measures are being more stringently

applied and international investors become more circumspect about the risks to which their investments

are being exposed, it becomes increasingly difficult to obtain the necessary capital through investment

funding to fund expansion projects and so to create new employment opportunities and increase profit

margins. For example, in the US the increasingly stringent application of the country’s FCPA has the

effect that investment firms and private investors having become increasingly weary as to where they

invest their funds for fear of investigation and criminal prosecution under FCPA provision by the US

Department of Justice and the Securities Exchange Commission.

No doubt this have an impact on the mining and metals industry’s ability to obtain much needed

investment funding for expansion projects, increased production outputs and so maintain profitability

in our operations as well as our ability to create and sustain sustainable employment opportunities. This

is one of the contributing factors which makes obtaining direct foreign investments increasingly difficult

and contributes to what may be described as a “legitimate flight of capital” from South Africa as

investors both domestic and foreign seeks out more secure locations for their investments. And it is for

this reasons that Ernest & Young’s forecast of “Business Risks Facing Mining and Metals Industry in

2013” places “Access to Capital” at the top of the risks facing mining and metals companies in South

Africa. Simply stated, the costs of corruption and fraud for the South African mining and metals

industry is threatening to severely harm the industry in its entirety.

It is against this background that I venture to introduce some “new” and perhaps innovative

corporate governance “best practices” that has seen the light in countries such as the US, UK

and Canada.

NEW BEST PRACTICES IN CORPORATE GOVERNANCE

1. BOARD LEVEL –COMPLIANCE AND ETHICS COMMITTEE

Leading multinational corporations in the US and UK has established a standalone Board Ethics and

Compliance Committee consisting of various stakeholders, including non-executive directors, senior

management and labour, which

provide the Board of Directors with direct oversight over the company’s ethics and compliance function

and which makes provision for real-time responses to compliance issues. The Compliance Committee

also provides the Board

with relevant and continued information which are necessary for risk-based strategic decision-making.

The Board is thereby in a better position to set the company’s risk appetite and risk tolerance and has

direct inputs in the ethical

and compliance culture of the organization.

2. ENPOWERING THE CHIEF COMPLIANCE OFFICER.

Separating the functions of the Chief Compliance Officer (CCO) from that of General Counsel (in-

house legal counsel) and/or the Company Secretary and escalating the CCO position to C-Suite level has

proven to be an effective

manner in enhancing and monitoring ethics and compliance for a number of reasons. More importantly

it demonstrates to regulators, law enforcement agencies and investors that the company is proactive in

its ethics and compliance

regime thus making it an attractive and safer haven for investment funds. Companies that have

implemented this corporate strategy has seen an increase in not only risk management but also in

investment funding and thus able to

acquire greater capital funding at reduced rates and so are able to engage in future expansion projects.

3. ESTABLISHMENT OF REGIONAL COMPLIANCE COUNCILS

Depending on the scale of a company’s international operation, a number of multinational corporations

(MNCs) has also established “Regional Compliance and Ethics Councils” to implement, monitor and

reports on all major

compliance and ethical risks facing the corporations in the various regions of the globe in which

it operates. This provides greater assurance to the Board and Senior Executives that the

company’s ethics and compliance program is in

fact implemented in a consistent manner throughout the organizations business units throughout

the globe.

4. BUSINESS UNIT COMPLIANCE OFFICERS AND COMPLIANCE CHAMPIONS

Embedding Compliance Officers within each business unit as a separate function from internal

auditing to implement and monitor the organization’s compliance and ethics program has been

proven as an effective means to ensuring

the effectiveness of a compliance program. It also enables real-time responses to threats facing

the company and may contribute in stirring enhanced investor confidence in the corporation.

Embedding compliance champions within each functional department and training these non-

compliance personnel members greatly contribute towards ensuring that a company’s ethics and

compliance program, especially its anti-

corruption program are more acceptable by lower tier employees and this mitigating risks

associated with non-compliance to laws and regulations.

While no singular solution can address all the risks associated with the international corporate

environment and given the slow recovery of the international markets after the 2008 Global

Financial Crisis coupled with the growing call for financial transparency in the international

extractive industries and increasing international and national anti-corruption

enforcementactions, the above “best practices” in corporate governance may assist in pacifying

and perhaps enhancing positive investor sentiment in the South African mining and metals

industry, thus making Access To Capital less of a business risk facing both large and junior

mining companies.

I, as many other, have engaged in research into the Chamber of Mining as the voluntary body

for mining in South Africa. I have in this research discovered a very disconcerting lack of a

properly constructed industry-wide “Ethical Code of Conduct” which clearly sets out the

industry’s expectations as regards what may be regarded asproper ethical business conduct

expected from its individual member companies. While most individual mining companies do

have such ethical codes which contain clearly stated anti-fraud and anti-corruption provisions,

the constitution of the Chamber of Mines does not. This, ladies and gentleman, exposes The

Chamber and indeed the mining industry as a whole to reputational risks which may arise from

the fraudulent and/or corrupt conduct engaged in by any of its members. Critics to the

introduction by the Chamber of such an Ethical Code of Conduct may point to the fact that the

Chamber is a voluntary association of mining companies, but the latter fact should not prevent

the Chamber of setting standards of ethical conduct for its members. In fact, the King III Report

on Corporate Governance makes the development, implementation and continuous improvement

of an “Ethical Code of Conduct” part of the whole corporate governance initiative aimed at

improving transparency, accountability and responsibility within corporations and industries.

It is against the background of all the foregoing and the theme of this event that I venture in

introducing to this conference for discussion and debate the topic of “International Best

Practices In Combating Fraud and Corruption” - with specific reference to the approach

adopted by The International Bank For Reconstruction and Development, popularly known as

“The World Bank” and the strategies and guidelines expounded in the United Nation’s Global

Compact’s 10th Principle Against Corruption.

I therefore wish, firstly, to draw attention of the conference to the approach adopted and implemented

by the World Bank on the basis of the recommendations made by the Volcker Commission of Inquiry. I

am not going to expound with great detail into the latter commission report save to say that it

recommended to the World Bank the establishment of an independent and impartial integrity

department which it recommended be elevated to the position of Vice Presidency within the Bank and

with direct reporting responsibilities to the President of The World Bank in order to ensure its

independence and impartiality.

Since its establishment the Vice Presidency Integrity has done well to ensure the integrity of the

World Bank in projects it funded and the World Bank’s Integrity Vice-Presidency has, as part of

its broader mandate, the mandate to investigate allegations of fraud and corruption committed

by any of the Bank’s employees as well as contractors and service providers of The Bank relating

to any development project funded by the Bank or in which it has a substantial interest.

In execution of its mandate The World Bank’s Integrity Vice-Presidency has entered into cross-

debarment agreements with other regional development banks, the IMF and other international

organisations and financial institutions. In terms of these cross-debarment agreements any company

who is contracted to any of these banks, financial institutions and/or the World Bank and which makes

itself guilty of engaging or having engaged in any fraudulent and/or corrupt activities will be debarred

from participating in any project involving that regional development bank, financial institution or the

World Bank.

A further implication of this type of agreement is that such contracting company is automatically cross-

debarred by all other members of the cross-debarment agreement. In addition to the afore mentioned,

and since the World Bank has, similar to the South African Chamber of Mining, no prosecutorial

powers, the World Bank, through its Vice Presidency, makes use of a referral system by means of which

it refers cases of corruption to the national authorities having jurisdiction either over the “corrupt”

company/contractor involved or the national authority of the territory in which the World Bank-funded

project is situated.

The efforts made by the World Bank’s Vice Presidency-Integrity have, since the inception of this

program, seen a significant reduction in the prevalence of fraud and corruption in World Bank-funded

projects. It has further seen a number of international companies who engaged in fraudulent and/or

corrupt activities in World Bank related projects debarred, cross-debarred and successfully prosecuted

by either their national authorities or the authorities in the countries where such corruption either

occurred or where the project is or was situated. Also significant is the financial recoveries made by the

World Bank from company contractors for their involvement in corruption and fraud in World Bank

related projects, either as restitution or as fines forming part of the sanctions implemented by the

World Bank or civil procedures the Bank instituted against such wayward contracting companies.

Admittedly and as pointed out earlier, the South African Chamber of Mines and its member companies

do not have any prosecutorial powers and may at the moment lacks the necessary resources to initiate

proper investigations into allegations of fraud and corruption to which both the Chamber as well as its

members are being exposed to on a daily basis.

The Chamber of Mining, as regulator of the South African mining industry suffer reputational

damage as a result of the corrupt and fraudulent activities committed by its individual member

companies with no real defensive or preventative mechanism at its deposal. The repercussions of

even the perception of corruption or fraud in the mining and metals industry has far wider

consequences as can be determined with any great certainty. It’s negative effects can impact on

wholly innocent players in the sector as well as the wider economy as such perceptions of fraud

and corruption are often (very) unfairly imputed to the industry as a whole or even the country

as a whole and as such makes life difficult for everybody else.

By analysing the Volcker recommendations and adopting a similar strategy or approach as the World

Bank, the South African Chamber of Mining and its individual member company no longer have to be

“totally defenceless” against the prevalence of fraud and corruption that seem to dog the industry. By

establishing a similar “Integrity Department” within theChamber Of Mining, the mining and metals

industry can acquire the tools to effectively combat, eradicate and prevent fraud and corruption.

The establishment of a fully and professionally staffed, adequately funded and resourced independent

Integrity Departmentwithin the South African Chamber of Mining with reporting responsibility to the

President of The Chamber Of Mining has a plethora of positive spin-offs of which the following are of

the most important:

Enhancing the overall business integrity of the South African mining and metals industry.

Ensuring fair and honest competition among members of the Chamber of Mining.

Enforcing compliance with the Chamber of Mining’s Code of Ethics by both its members

as well as non-member contracting parties.

Ensuring and enhancing compliance with industry standards, legislation, regulation and

government policies by member companies of the Chamber.

Providing assistance to member companies in establishing, implementing and reviewing

the adequacy, relevance and operational functionality of their internal anti-corruption

and anti-fraud programs.

Providing investigative assistance and protection to individual member companies against

exploitative practices, fraud and corruption.

Investigating and reporting on allegations fraudulent and corrupt practices by individual

member companies, their directors, executive management.

Cooperating with national law enforcement agencies in the investigation of corruption

and fraud within the mining and metals industry.

Creating and maintain a Register on instances of fraud and corruption within the mining

and metals industry and developing best practices aimed at the prevention and combating

of corruption and fraud.

Provide an independent and impartial review function in respect of new applications for

membership to the Chamber of Mining.

Facilitate the entry into cross-debarment agreements between individual members within

the Chamber of Mining.

Provide a central point for the development and implementation of anti-corruption and

anti- fraud educational and training programs which are specific to the mining and

metals sector

It may perhaps be time that both the South African Chamber of Mining as well as its individual

member companies become members of and subscribe and implement the anti-corruption measures

expounded in the United Nations Global Compact’s 10th Principle Against Corruption. By becoming a

member of the UN Global Compact, the South African Chamber of Mining and its individual members

may be able to tap into a plethora of international business opportunities.

The UN Global Compact and its 10 Principles lay done specific standards with which its members have

to comply. Although this may be seen as unnecessarily complicating the international commercial

environment there are a number of benefits which the Chamber of Mining as well as its individual

members may reap from it, the following being the more important:

1. Enhanced business reputation equates to enhanced profits and better business opportunities. By

being a member of the UN Global Compact and implementing the guidelines expounded in its 10 th

Principle Against Corruption, the South African Chamber Of Mining and its individual member

companies can enjoy the support of an international organisation in fighting corruption and fraud.

2. This will enhance the business integrity and reputation of the South African Mining and metals

industry and of individual companies and as such they may be exposed to greater investment

opportunities,

An enhanced business integrity program often attract greater numbers in investor funding as

investors becomes more confident that the mining and metals industry is a less risky haven for

the investment. This enhanced investor confidence may directly be translated into greater capital

availability and the ability of mining companies to improve production outputs, increased

revenue, sustainable profit margins and the creations of new long-term sustainable employment.

3. An enhanced business reputation brought about by a vigorous and rigorously applied anti-

corruption and fraud program will actively assist in rejuvenating a sluggish economy and enhance

the opportunity for greater economic growth.

I thus strongly suggest that we strongly look into the possibility of adopting similar measures as those of

the World Bank and become members of and subscribe to the Global Compact’s 10th Principle Against

Corruption as well as implementing the latter organisation’s Anti-corruption and fraud guidelines

within the South African mining and metals industry in order to-

(a) Effectively combat, eradicate and prevent fraud and corruption,

(b) To enhance the Business Ethics and Integrity of our mining and metals sector as a whole,

(c) To enable our mining and metal companies to attract greater direct foreign investment,

(d) To enable our mining and metals companies to be greater players in the international mining and

metals industry and so be able to increase their ability to earn foreign capital, and

(e) To enable the South African mining and metals industry and the Chamber of Mining to deliver on

its mission of unearthing the vast mineral resources in this country to the improved wealth of every

South African citizen.

I believe that all this is possible by taking a proactive and positive stance against fraud and corruption

and I am more than ready to place my bottom dollar as wager that our mining and metals industry will

raise to the challenge and actively and effectively lead the battle against corruption and fraud and not

only that, I do firmly believe that the Chamber Of Mining will be at the forefront in this battle as it has

done on so many occasions in its illustrious history.

Myron Duncan Burton Betshanger

Mobile: +27 740 780 3862 / +27 76 228 6088

E-mail: betshangermyron2@gmail.com

LinkedIn: http://www.linkedin.com/pub/myron-duncan-burton-betshanger/37/219/1b8

@myronbetshanger