Financial regulation and oversight
The finance sector is the quintessential example of the corporate capture of the State. Despite enormous challenges, this sector is also rife with innovation by CSOs, entrepreneurs, and regulators who seek to establish a new economic paradigm for the common good. At the core of these efforts is how to center the consumers, rightsholders, and other stakeholders impacted by finance so as to make our economic system work better for them. Main Street in addition to Wall Street, as it were.
In Runaway Train, we highlighted several innovations and recommendations worth noting. For a completelist of innovations and opportunities,including by civil society, scholars, policymakers, and financial mechanisms and tools, see Chapters V and VI:
We — corporate accountability advocates and the rightsholders, social movements, and CSOs that we accompany — are well positioned to drive the development of an evidence-based narrative about financialization and the harm caused by private capital to people and planet across key sectors and geographies, as well as mainstream alternatives and solutions. A shared understanding of privatization, financialization, and private capital — including how this is occurring on our watch, where specific actors fit into the investment chain, and how they affect human rights and the environment — has the potential to spur urgent action among rightsholders, advocates, the media, and stakeholders. Essential to this will be justifying the urgency and feasibility of solutions to policymakers, regulators, institutional investors, and other stakeholders. Ultimately we should track and expose private capital, hold its owners and investors to account, advocate for necessary legislative and regulatory changes, and build power among affected and interested stakeholders.
As the world recovers from the pandemic there is an opportunity to advance this work through rights-based policies instituted during the economic recovery. We can enforce laws and close loopholes while leveraging emerging corporate disclosure requirements, due diligence guidelines, and developing movements across the world. There is a clamor at grassroots and policy levels — which has only grown louder during the pandemic — to address the role of private capital in surprise medical billing, predatory lending, housing evictions, deforestation, and fossil fuels. We’re unlikely to get this opportunity again during our lifetimes.
Another opportunity is for cross-fertilization between movements and organizations, most of whom face or will face the effects of financialization on their work. For example, in 2020, climate justice campaigners made previously unimaginable gains by convincing large asset managers and insurance companies to ringfence or divest from coal and other fossil fuels. Those learnings can be applied horizontally to other movements campaigning against those same actors. Similarly, some pension funds have divested themselves of private prisons or harmful technology companies, while other advocates have targeted these same funds for their limited partnerships in private equity and hedge funds preying on single-family rental housing. Private capital is at once ubiquitous and pernicious and, from our unique vantage point as corporate accountability advocates, we can guide rightsholders, partners, and funders to efficiently use limited global resources and capacities as we learn from and collaborate with each other to rein it in.
Other examples ofopportunities, strategies, and innovations include:
- Transnational collaboration among financial intelligence units:During theZondo Commission investigation in South Africa, the Government of South Africa lacked a lot of information about the financial transactions of the Gupta family’s accounts and businesses in offshore jurisdictions and tax havens.The sense is that the Commission only uncovered the tip of the iceberg insofar as how the Guptas used the international banking and financial system to capture the South African State.
One recommendation is to improve thetransnational collaboration of financial intelligence units and prosecutorial authorities between onshore and offshore jurisdictions and tax havens.“Worldwide, almost all countries have set up Financial Intelligence Units (FIUs) to investigate suspicious financial transactions in the fight against crime and terrorism. FIUs need to collaborate with each other as these transactions often cross national borders. (…) Lagerwaard concludes that the transnational collaboration between FIUs is made possible by the legal grey zone within which FIUs are able to operate fairly autonomously and independently. ‘The combination of the relatively informal nature of international agreements and the relative autonomy of FIU operations enables FIUs to share information worldwide,’ explains Lagerwaard.”
Furthermore, investigative journalism can play a crucial role in providing significant information for addressing grand corruption and capture, especially in the early stages of investigations by public authorities. To harness the potentially valuable information from journalistic stories and activate formal legal processes, it is imperative to bridge the ‘healthy distance’ between journalists and law enforcement. This collaboration is essential to strengthen anti-corruption capacity.
- Lobbying reform:The ambiguity of current legislation and enforcement leaves too much gray area where corporations can, in effect, capture the legislative process.We must establish guidelines for the financial sector on how it can interact with the State.For example, before, during, and after the legislative process, how does the financial sector — businesspeople, companies, investors, business associations, and lobbyists — operate in violation of human rights? For example, in Uganda, the private sector has supported legislators to pass legislation against the LGBTI community, which is blatantly corporate capture.Whether directly or indirectly, willfully or unknowingly, companies and investors contribute to legislative capture that impacts negatively on people and planet.
- Institutional investors and limited partners:According to the Investor Alliance for Human Rights (IAHR), “By fueling the economy and businesses within it, shareholders pose risks to the broader interests of society in the same way portfolio companies might. In response, authoritative global standards such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises have since 2011 established that all companies, including investors, have a responsibility to respect human rights throughout their operations and broader value chains. Investors also have fiduciary responsibilities for ensuring that portfolio companies respect human rights since where there are the most severe risks to people and planet, there are material risks to business, including reputational harm, financial loss, and legal liabilities.
A distinctive characteristic of institutional investors is that they may hold shares in a wide range of companies, across many sectors and different regions. This increases the risk that investors may be directly linked or contribute to a wide range of adverse human rights impacts. While investors are not responsible for providing remedy when only directly linked to human rights harms, they in all cases have a responsibility to: (1) develop and embed their own human rights policies, (2) assess and prioritize the most severe risks to people throughout the investment lifecycle, (3) build and use their leverage to influence investee companies to prevent, mitigate, and where appropriate address adverse impacts, (4) track outcomes, (5) disclose their policies and practices, (6) provide remedy when they have caused or contributed to abuses, and (7) engage with impacted stakeholders (meaning rights-holders, their credible representatives, and expert organizations) all along the way.
Investor leverage can be exercised in a number of ways, including through investment decision-making that factors in environmental, social, and governance (ESG) performance; positive and negative screens; engaging in company dialogues and multi-stakeholder platforms; filing shareholder proposals that seek to promote responsible business conduct and voting in favor of such proposals when put forth by other investors; and engaging government institutions and other standard-setting bodies on policies and standards that create enabling environments for responsible business conduct.”
- Improved oversight of dividends and share buybacks:In many ways, the debate over dividends and share buybacks is one about short-termism versus long-termism, and about a shareholder economy versus a stakeholder economy.Should profits be returned to investors or reinvested in the company? Should the company buy back its own shares at a low price or instead reinvest its cash in practical value creation, ideally considering broader stakeholders beyond shareholders?
According to Conectas, “There is a need to put pressure on governments to regulate practices such as the distribution of dividends and share buybacks and to ensure that profits are also shared for the benefit of society, either through compulsory taxes or pre-distributive mechanisms. Real and transparent accountability mechanisms should also be pushed for and encouraged, allowing shareholders to have control over and/or awareness of companies’ practices and the potential risks that their violations and damage can cause so that they can use their power of influence and their aversion to risk for responsible corporate behavior. (…) In addition, measures are important in the sense of (i) a mandatory and transparent approach to human rights due diligence; (ii) duties, responsibilities and fiduciary obligations for executives and directors that guarantee the pursuit of the general public interest; (iii) minimum rules for corporate remuneration and dividend distribution; and (iv) respect and dialogue with workers’ unions and labor confederations. These measures should be encouraged at a global or at least regional level. For countries in the Global South, with less strength to stand up to the pressures and influences of big business, such measures could represent something utopian or even dangerous (company flight and trade isolation) if they try to be imposed unilaterally.”
In August 2022, U.S. Senator Elizabeth Warren (D-Mass.) and others included in the momentousInflation Reduction Act— an omnibus climate and health bill — a 1% excise tax on share buybacks, effective 2023, which penalizes companies that return cash to investors to bolster their stock price. “Democrats say that instead of returning cash to shareholders, big companies should use the money to increase employees’ wages or invest in the business. They are hoping the excise tax — it’s projected to bring the government an additional $74 billion in revenue over 10 years — will cause a major shift in corporate behavior. But some experts are skeptical that the tax will work as intended. They note that businesses have other methods for rewarding shareholders, raising the prospect that legislation aimed at halting one corporate stock practice could instead facilitate another, with new and unpredictable effects on the economy.”
Globally, the trend has been to liberalize share buybacks through legislation. If anything,the opportunity for corporate accountability advocates is to push for excise taxes similar to those in the U.S. on countries worldwide.
- Banking regulation:Though banks in general make for easy fodder for transparency and accountability critics, one positive example is banking regulation inChile,where the industry is highly regulated from an anti-monopoly perspective, ensuring sufficient competition. Banks in Chile are the exception, where economic concentration and wealth inequality prevail, and initiatives to further tax corporations and the rich have failed. According to Heraldo Muñoz, “Starting with the crisis of 1982, in which the State assumed the cost of the debt, but at the same time, as a consequence, important regulation of the banking sector was achieved that has prevented more crises that have hit other countries.”
The Organisation for Economic Co-operation and Development (OECD) states that, “In Chile, financial services are regulated and supervised by different institutions according to the type of financial service. The Superintendence of Banks and Financial Institutions (SBIF) and the Chilean Central Bank are in charge of banking, the Superintendence of Securities and Insurance (SVS) is in charge of securities and insurance, and the superintendence of Pensions (SP) supervises the pension system and unemployment insurance. The institutional arrangements regarding the resources and independence of some of the Superintendencies have been questioned in the past, although some authorities have recently been strengthened in certain areas. Chile applies strong banking secrecy provisions, but reforms are underway to allow international exchange of bank information for tax purposes.”
- Independent and professional regulators:Whether from a banking and financial perspective in terms of forensic accounting know-how, to technical and technological abilities to understand digital commerce and algorithms, regulators across the board are out-gunned and out-matched by the ability of the private sector to capture and drain the best talent.How can we expect anti-capture or anti-monopoly regulators to effectively regulate — and in real time — the abuses that they find if they don’t have the legislative tools, technical know-how, or resources to properly investigate violations.
From one perspective in South Africa, “Much of the corruption involving private sector professionals is a result of the state’s failure to establish a professional public administration. These professionals have not acted in a vacuum; they worked together with government officials for mutual benefit. A public administration that prevents patronage-based appointments, insulates officials from political interference and maintains high professional standards would be less vulnerable to exploitation. Such a public administration would not need to outsource key professional functions and would be better equipped to manage contracts with private sector professionals when it does need to hire them. Our state institutions [in South Africa] should be staffed by civil servants who are considered professionals with all the relevant standards and responsibilities highlighted in this chapter. The National Implementation Framework towards the Professionalisation of the Public Service, published for comment in 2021, could show a way forward if carefully implemented.”