During the FT Global Commodities Summit, held in Lausanne in April this year, Greg Page the CEO of Cargill Inc made an impassioned plea for greater transparency in his sector. His point of view was that commodity merchants would be subject to tough and inappropriate regulation if the accepted wisdom concerning this secretive, opaque and price manipulative industry is allowed to persist.
The economic crisis of 2008 has already led to a significant increase in the regulation of financial and corporate activity, particularly regarding governance, accountability and transparency. What are the likely consequences in Switzerland resulting from the attention being given to the commodity traders? Today they remain very discreet, but will the giants of this industry be forced to disclose more information on their financial and operational activities?
Background report for Swiss Federal Council
Faced with this growing public disquiet, the Swiss authorities, worried about Switzerland’s international reputation, produced a background report on the commodity industry for the Federal Council. The report summarizes the key issues and produced recommendations to the Federal Council to address challenges deemed relevant. There is a clear expectation that all companies should conduct themselves responsibly, and with integrity, in complying with human rights, environmental and social responsibility standards but stops short of recommending sector specific regulation. The recommendations of the report do underline the need to improve transparency concerning the use of derivatives, money laundering, tax evasion, physical commodities trading, the flows between companies and governments, as well as the physical flows of the commodities themselves.
How to improve transparency?
However the recommendations, for the time being, are limited to encouraging consideration of these issues. This means that, in Switzerland, the sector has a window of opportunity to explain its perspective and improve transparency with a view to neutralizing the calls for new legislation. But time is short and although the process has started, the multiparty dialogue is challenging to manage and a consensus is not easy to reach.
To live up to the stakeholders’ expectations industries need to develop policies that address the relevant and current issues of the industry with focus on the most material interests and concerns of stakeholders. These policies need to be legally watertight, defensible towards stakeholder and compatible with other codes and existing initiatives. Excellence can be achieved when a code goes even further, by setting new and progressive standards that are challenging, proactive and inspire other organizations. Independent Assurance is key with regards to credibility and enhancement of reputation.
To companies, the benefits of transparency are not always straight forward. Some of the requirements are perceived to be expensive with no return on investment at all. Some might also fear, being more transparent could even mean facing more troubles as adhering to voluntary standards would make them liable to a wider public. But working on transparency has some clear advantages for companies and management too, supporting amongst other the improvement of processes, internal awareness and increasing confidence in disclosed information. More and more companies understand that long-term value is enhanced by embedding long-term sustainability considerations into their business strategy, and by fully disclosing their progress to investors. This will help allocate capital to more sustainable, responsible companies and strengthen the long-term sustainability of the financial system.
Opaque business models will face increasing public scrutiny – the discussion around commodity trading, where confusion around the value creation of market participants has fueled social concerns, is one example. Credible clarification of the business model and how a company creates value will help to build trust and avoid unnecessary regulation.