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Anti-Corruption Measures for Institutional Investors

November 22, 2016

Handshake with money

Discussions of transparency are more widespread than ever before, especially in the areas of environmental, social, and corporate governance (ESG). ESG principles are becoming integrated into corporate/institutional investor policies; however, amidst all discussion of transparency and accountability, anti-corruption efforts seem to be lagging behind, despite the broad consensus that such measures are important. 

In this regard, institutional investors play an important role in the efforts against corruption and corporate wrongdoing. They are uniquely positioned to incentivize businesses and organizations to create and adopt sound investment policies and corporate governance standards. In addition, many large institutional investors have evolved into complex systems of fund management, complete with their own set of corporate governance needs and issues. 

Global Events Show the Need for Anti-Corruption Efforts

Corruption at high levels can create a massive waste of resources and losses, even for entire economies and governments. For instance, consider the following statistics from recent corruption incidents:

  • Malaysia recently experienced irregularities of nearly $4 billion in connection with 1Malaysia Development Bhd. (1MDB), a Malaysian state fund. An estimated $731 million was allegedly diverted to the personal accounts of Prime Minister Najib Razak.
  • Nigeria’s government has recouped over 2 trillion naira ($6 billion USD) in the past 12 years in looted federal money.
  • China has punished more than one million officials for corruption over the past year. An additional 409 people were detained overseas just this year.

Corruption also has more broad, far-reaching effects besides shareholder losses. For example, the Brazil Petrobas scandal has created intense political unrest as well as overall economic policy paralysis. Thus, corruption can create overall economic disruption as well as deterrence of potential investment opportunities. 

Integration of Anti-Corruption Measures into Strategies and Policies

One way to increase transparency regarding anti-corruption policy is to integrate specific measures directly into financial strategy and planning. Carlos Santiso, head of the Institutional Capacity of the State Division, Inter-American Development Bank, identifies three ways large investors can do this:

  1. Credit agencies should integrate corruption as a main determinant of sovereign risk. Lending and borrowing rates can often be influenced by the perceived index of corruption for a given region. That is, investors are far less likely to invest in areas where instability and volatility are disrupting economic growth.
  2. Philanthropic foundations should incorporate corruption as a key concern within their investment policies. In particular, investment strategies need to align more explicitly with the mission statement of such foundations; this can help provide more direction regarding which companies to invest in or divest from.
  3. Sovereign wealth funds should integrate corruption risk into sovereign wealth investment strategies. Such investors must balance shareholder value with other concerns, such as societal values and government priorities. As such, integrating anti-corruption policies with investment strategies can help provide funds with robust, well-rounded approaches to investment.

Thus, a key strategy is to integrate corruption risk factors directly into investment policies and strategies at the outset, rather than as an afterthought or as an addendum to current operations. That way, investors can align anti-corruption efforts with the specific investing goals for the organization. While this may seem like a challenging and daunting task, as mentioned, such integrations are already being made for other investment factors, particularly those associated with renewable energy

Addressing Corruption: Additional Steps

Part of the anti-corruption efforts also includes raising awareness of risks through action outside of board meetings and planning phases. For instance, participation in global conferences and outreach summits can help educate shareholders. In many industries, such as the pharmaceutical industry and cybertech industry, fraud and corruption mechanisms are constantly evolving at a high pace. Thus, it is important to stay abreast of new developments in such fields. 

Lastly, institutional investors can take a more forward approach by actively participating in securities class actions. Cases where an institutional investor is acting as a lead or co-plaintiff generally result in larger settlements, are dismissed less frequently, and can lead to more impactful corporate governance reforms. 

In seeking outside assistance with such class action settlements, institutional investors essentially have three options: 1) rely on their custodial bank to file claims; 2) retain a third-party filing service; or 3) retain a law firm to assist with filing and monitoring. 

While each option has its own merits, law firms are typically better equipped to provide more detailed reporting and claim recoveries than other options. If you have any questions, concerns, or disputes regarding issues like anti-corruption policies or corporate governance, contact us at Kessler Topaz. Our team personally discusses all relevant facts and legal options with clients so they are best positioned to protect their rights and interests.