Glencore in the DRC: Building a case for shareholder activism

Over the last year I've become somewhat intrigued by Glencore and other physical commodity traders. Part of that interest comes from my work on commodity speculation, and the fact that much of the analysis around that issue has focused on investment banks and hedge funds rather than the companies that actually deal in physical commodities. Part comes from my fascination with figuring out how the global trade system works. Glencore has the added draw of being a notoriously opaque and secretive company, with a controversial and swashbuckling ex-captain who made a name for himself by doing deals that no-one else would do. Trying to figure out how their vast commodity operations work is a detective mystery if ever there was one.

In May 2011 they went public and listed on the London Stock Exchange. That means they sold ownership stakes to investors via the UK market. Technically speaking though, they only sold about 12% of the company, and technically speaking, they're not based in the UK. Rather, Glencore is based in the Canton of Zug in Switzerland, which is, to use the words of the Canton's publicity team, renowned for 'its business-friendly mentality'... which is to say... um... low taxes. For tasks other than tax accounting, Glencore has other cosy offices, like the one in London, on Berkeley Street, next door to the Sainsbury’s that I used to buy salads at back in 2010.

Stirring the copper kettle

Anyway, last week I published an article about Glencore in The Ecologist, after spending some time digging into some of their operations in the Democratic Republic of Congo. The editor put in a byline which kind of sums it up: "Moves by unknown shell companies to control lucrative natural resources may have cost Democratic Republic of Congo $1 billion in lost revenue, as UK-listed mining company Glencore under pressure to explain deals"

Sounds pretty interesting right? If you want more detail, take a look at the article, but basically it concerns two mines in Katanga Province - Mutanda and Kansuki - that Glencore co-owns and operates. Back in early 2011, their business partner in the deals - the Congolese state-owned mining company Gecamines - sold off its stakes to two shell companies listed in the British Virgin Islands, associated with a controversial diamond dealer called Dan Gertler, allegedly at a big discount. This is by no means a new story - it first emerged back in July 2011 - but it’s a story that’s been seriously underreported and one that remains unresolved. In September IMF expressed concern, and a UK MP called Eric Joyce continues to try raise awareness about these, and other deals in the DRC copper-belt (see map below).

CHECK OUT THIS AMAZING KATANGA COPPER MAP ON GOOGLE

I wanted to write about the Mutanda / Kansuki issue to help keep it in the public eye. I also noticed that most reports to date have focused on the DRC companies involved. I wanted to ask another question: How much does Glencore know about what went on?

So I did ask that, but when I phoned Glencore, it appeared they didn't think much of my query. I got to chat to Glencore's main media spokesman, a pleasant guy called Simon Buerk (who incidentally used to work as the spokesman for Shell, so I guess he’s pretty well practised with inquisitive journalists asking probing questions). Simon was actually very open and took substantial time to chat to me whilst driving on a Swiss highway. His message, as quoted in the Ecologist article, was simple: Glencore is aware of the accusations against Gecamines, but these deals involve parties external to Glencore and therefore it is irrellevant to ask their opinion on it.

It’s a line which I find difficult to accept fully. It’s true that Glencore is not legally responsible for the actions of its business associates, but can we not argue that they have a moral duty of care to their shareholders to make sure every deal they’re involved in has very robust overall governance? If nothing else, the highly non-transparent manner in which the deals took place should immediately raise concerns among the public, and shareholders, especially when it concerns the DRC, a country notorious for poor institutions. Can Glencore assure it's shareholders that they're associated with business partners that uphold robust governance standards?

Taking ownership

Then again, most of Glencore's shares are held by the company management, and a handful of institutional investors (which include Abu Dhabi based Aabar Investments, the sovereign wealth fund of Singapore, and BlackRock). Whilst the institutional investors could be encouraged to ask questions, it's difficult to get such organisations to do so. On the other hand, if I buy some Glencore shares, I become a part-owner of the company, with a theoretical right to raise my concerns with the management, who I would technically-speaking employ (see my earlier post about my experiences doing this with Centrica).

So, last Saturday I attended the FairPensions Shareholder Activism training day held at Amnesty UK's Shoreditch offices. It was attended by a whole range of people from civil society organisations, looking to use the power of owning shares to push forward progressive causes, whether it be countering tar sands in Canada, questioning arctic oil drilling, or combating tax avoidance. For my part, I took the opportunity to workshop some potential questions to ask Glencore management at their annual general meeting.

An interesting question to ask the executives would be something like this: "Recently UK MP Eric Joyce and the IMF raised serious concerns about the sale of stakes in mines you co-own in the DRC. Joyce, and others, claim that your initial partner in the mines secretly sold their stakes to shell companies associated with a person closely connected to the DRC president Joseph Kabila, and did so at hugely discounted prices. This raises the issue of what due dilligence processes you have in place when entering into joint ventures with partners in countries known for high levels of political risk. My questions to you are 1) Are you aware of these allegations related to your business associates, and 2) What procedures do you have in place to assure shareholders that the company will not be exposed to potential future damages arising from reputational risk and politically-imposed penalties and fines?"

I'd probably need to get the question more precise and I suspect the answer would be pretty generic, but that’s not the point. Glencore undoubtedly has a strong response, but the fact of the matter is that nobody has yet challenged them, and if there is one thing that I believe as a general principle, it’s that it’s always preferable to challenge power than to not challenge it.

Hey guys, can I call you StrataCore?

That's going to be all the more important now that Glencore has announced a probable merger with XStrata, which would create a commodity behemoth unlike any we've seen before (The press are calling them Glencore Xstrata, but I bet they'll call themselves StrataCore). Glencore specialises in commodity trading, and XStrata specialises in physical mining, and whatever the combined entity gets called, both companies think that there is great potential for 'synergies'. In particular, there will be increased potential for ‘geographical arbitrage’, which is a fancy way of saying the company will have superlative ability to source low price commodities whilst selling them in places where the prices are much higher. It plays into the hands of Glencore's core business model, which revolves around its ability to make money off global commodity market inefficiency (Indeed, the original way Glencore founder Marc Rich did this was by doing deals in places where commodity prices were depressed by political isolation or turmoil, a skill that requires aggression and significant exposure to gatekeepers who are politically exposed).

XSTRATA 'HEADQUARTERS' in ZUG - YEAH RIGHT

If nothing else, Glencore and XStrata will have synergies in the Canton of Zug, where both companies are 'based'. The combined entity will be able to share a mailbox, and a tab at the local pub.

The Safe Deposit Box: Creating a Financial Wikileaks

If you were a bank employee with information about wrongdoing in your division, would you be happy to approach your senior management about it? The Whistleblower Improvement Act of 2011 would require just that, making financial whistleblowers report their concerns to company management rather than approaching government agencies directly. The act has been backed by Rep. Michael Grimm, a former FBI agent who spent a couple years undercover trying to bust dodgy stock brokerages for securities fraud. You’d think that experience would make him attuned to the problems of financial crime, but Michael Smallberg of POGO argues that “Rep. Grimm’s legislation would hobble SEC and CFTC enforcement, chill the flow of high-quality insider tips, imperil the safety and livelihood of whistleblowers, and give law-breaking companies an accountability escape hatch”.

WHO'S SCARIER? Your workmates, or Rep. Grimm?

I don't know enough about the proposed legislation to hold any definite views, but in any case GovTrackreckons that there’s only a 2% chance of the bill being passed. The greatest barriers to whistleblowing though, are social, not legal. It’s the threat of being shunned by colleagues, or passed over for promotion. Occasionally an employee just doesn't care about the social fallout, as in the case of Greg Smith’s public letter about Goldman Sachs, but more often than not they do. A life built around workplace social networks can act as a shield against speaking out against it. Potential whistleblowers doubt themselves, or don’t want to be seen as the one to spoil the party (Check out Joris Luyendijk's interview with a whistleblower). Legal support mechanisms do exist for whistleblowers, there’s little in the way of internal cultural support.

The Case for a Financial Wikileaks

That's why I reckon it's very important to have leak sites. They protect employees (to some extent) from senior management retribution, but also provide a way to bypass the social barriers to speaking out. Financial whistleblowers can currently make use of various leak sites (check out the Leak site directory), and regulatory agencies such as the FSAand the Serious Fraud Office do provide mechanisms for them. Wikileaks has previously been used for financial leaks regarding Julius Baer and Barclays, and in 2011 there was speculation that they were going to release a bombshell on Bank of America, based on emails obtained by Anonymous (In the end the emails ended up on bankofamericasuck.com and here, apparently showing dodgy dealings at a BoA subsidiary called Balboa, obtained via a leaker who claimed the bank was trying to cover it up).

DON'T MIND US, WE'RE JUST OBSERVING

Wikileaks though, has mostly made a name for itself in exposing political controversy. People don’t predominantly think of it as the place to go for corporate wrongdoing, and corporate disclosures on the site run the risk of being drowned out by the drone of government abuse. A group that does specialise in corporate disclosure is Anonymous Analytics, a wing of Anonymous specialising in "Acquiring information through unconventional means" (AKA hacking and subterfuge), and presenting it in the form of faux financial research reports. They made a stir last year for exposing potential fraud at Chaoda Modern Agriculture, a Hong Kong company that AnonAnalytics claimed was “overstating its cash balance, exaggerating its revenue, and falsifying its financial statements.” Last week they 'initiated coverage' on Huaboa International, calling it a 'pump and dump scheme with the primary objective of enriching its chairwoman'. AnonAnalystics specialises in 'primary research', but for a while it offered a dropbox facility for would-be whistleblowers. They recently shut that down, apparently because they were unable to deal with the volume of tips, comments and emails they received. Sounds like they need some more staff.

It's not just about crime
Organisations like AnonAnalytics are focused on overt cases of corporate fraud and headline grabbing controversies. Nevertheless, while having channels to expose criminality is important, there are many other equally valid reasons to create a leak site. Wikileaks release of the diplomatic cables, for example, didn't really reveal anything that controversial, but were fascinating because they offered a rare window into the internal culture of diplomatic life, the petty squabbles and power dynamics. It provided huge amounts of material for academic researchers and journalists to gain a better understanding of an otherwise opaque and closed area. There are very few such windows into the financial sector, and to date people have relied on various works of literary pop finance (e.g.Liar's Poker), and once off curiosities such as the Goldman Sachs Elevator Gossip twitter account to get mini-leaks about financial culture.

The Safe Deposit Box: A Tool for Transparency

JP MORGAN: DOWNLOAD INTERNAL STRUCTURE

It seems that there may be a case for a specialised financial leak site. Here's my back-of-the-envelope sketch for the Safe Deposit Box, a site focused on improving transparency in financial institutions (e.g. banks, funds) and commodity trading outfits, by providing a channel to encourage internal leaks. It could be curated by individuals with financial expertise, such that information leaked could be vetted for accuracy and presented correctly (something that non-specialist leak sites might not be able to do effectively). The site could be split into two divisions with different purposes:

1. A whistleblowing section to allow financial employees to expose dubious behaviour, such as instances of financial crime, market manipulation, insider trading, and rogue trading.
2. A transparency initiative focused on shedding light on the inner workings of financial institutions. This section would encourage employees to contribute information such as organisational structures, divisional strategies, risk exposures, compensation, and other info that helps to break the near impenetrable wall of secrecy large financial institutions frequently enjoy.

Many people intuitively understand the value of division 1, but division 2 is more tricky to justify. What's the point of transparency for transparency's sake? I would argue that banks and other financial institutions have huge political clout, and yet most citizens have almost no insight into their workings and strategies. For example, do most residents of Chicago have any idea of how a Morgan Stanley consortium came to be owning the city's parking metres? At a larger systemic scale too, it’s the very opacity of financial transactions that leads to increased systemic risk, which in turn impacts broader society. Providing a channel for financial employees to shed light on their organisations would thus have 1) a democratic empowerment benefit and 2) a research and regulation benefit, providing more material for citizens, academics and regulators to understand and monitor the sector.

The transparency initiative could be split into specific research domains that are of particular concern to researchers, campaigners and regulators. For example, domains could include:

• A high-pay transparency programme to gather leaked payrolls, compensation reports and other material to help in monitoring financial incentive systems
• A tax haven programme to gather lists of subsidiaries, offshore transactions and other material to help shed light on international tax avoidance systems
• A loan transparency programme to gather info on loan portfolios of corporate banking divisions, thereby helping to monitor socially and environmentally irresponsible lending
• A programme gathering info on banks' dealings with Polically Exposed Persons, authoritarian regimes, and dodgy individuals
• A systemic risk programme gathering info on prop trading levels, interbank risk exposures, and shadow banking systems
• A programme collecting info on poor customer service (Aka. treating clients as muppets)

I wouldn’t want to be too flippant about this. After all, in encouraging breaches to confidentiality this does border on illegality. Confidentiality though, is frequently used to block attempts to research real issues of concern. For example, in my research into the potentially damaging effects of commodity speculation, I hit a brick wall in trying to find out how much banks make in their agricultural commodity trading desks. They simply don't report it, and refuse any requests for the information. I'm of the opinion that it would be good for society to have some basic info in that regard, to assess whether this is a problem. Similarly, in my research into Glencore in the DRC, I’d love to find out the beneficial ownerships of the shell companies they do business with there. Is there any back office employee in Glencore who wants to send that to me?

SO NEAR, YET SO FAR: A TREASURE TROVE OF INFORMATION

I understand the problems of breaching confidentiality, and I know that leak sites are far from perfect. There are major issues of how such a site would be structured and who would have access to the leaked info. Would you use a (structurally and politically) centralised Wikileaks structure, or something more decentralised like OpenLeaks (set up by Wikileaks defectors, but still yet to launch). Is it better to promote something more conciliatory and collaborative, more like Wikipedia, to allow people with financial expertise to contribute knowledge? All these questions are worth asking. What I do know though, is that financial secrecy tends to benefit a pretty small swathe of society, whilst affecting a huge swathe, and I'm sure many financial workers would love an opportunity to spread the love by spreading the knowledge.

Then again, I have suspicion that such a site might attract the small problem of the financial blockade.