By Brian Posner, Executive Chairman, Curation Corp.
For years, politics has generally played a secondary role in the considerations and deliberations of corporates, directors, and investors. Of course, there have always been issues of great importance concerning trade, taxes, regulatory oversight, etc. And, I am not suggesting that any of these, individually or collectively, was immaterial. However, with the conclusion of the impeachment trial of US President Donald J. Trump, a previously unforeseen and unimagined political element has emerged as a significant risk factor for all stakeholders: reliance on the rule of law.
This is not a political commentary about the president, his administration, or the Republican Party (despite every urge to make it so). This is about an increasing number of “straws in the wind” that, at the very least, cause one to pause and wonder, “what if?”. What if one cannot rely on certain generally accepted norms, let alone codified rules? What if contractual and property rights are suddenly at risk of being redefined indiscriminately by the state? What if corrupt actors infiltrate and demand a role in the process of strategic planning and capital investment? What if our system of democratic capitalism is replaced by a crony capitalist model like that found in China and Russia? And, critically, what does this mean with regard to the financial returns investors will demand when putting capital at risk?
The rule of law has long been accepted as a given among Western developed nations. It is among the primary reasons, if not the reason, behind the overall success of these economies in the post-war period. As the United Nations notes, “the rule of law and [economic] development are strongly related and mutually reinforcing.” There is really no debate here. This is a de facto reality, supported by empirical evidence.
The rule of law is sufficiently accepted and expected that it is not even mentioned as a risk factor for public companies. In a search of SEC filings via the Sentieo database, only one company — Barrick Gold — referenced the rule of law as a risk factor. Note that the specific risks Barrick highlighted were the “lack of certainty with respect to foreign legal systems, corruption and other factors that are inconsistent with the rule of law,” as well as the “risks relating to political instability in certain jurisdictions in which Barrick operates.”
Given the evolution of global financial markets, capital investment, and corporate governance over the last few years — including, notably, the emergence of “stakeholder capitalism” as a legitimate and meaningful movement — arguing the rule of law should be considered a risk factor may seem misplaced. The notion of “purposeful profitability” and all it entails is clearly in direct conflict with that of crony capitalism. However, it is a mistake to discount the omens before us.
How do we overlook reports the president wants to strike down the Foreign Corrupt Practices Act, the 1977 law that prohibits companies operating in the US from bribing foreign officials, including effective confirmation of this objective by Treasury Secretary Larry Kudlow?
Do we ignore calls by the president to boycott various media outlets? The threats levied at manufacturing companies, such as Harley Davidson and General Motors, seeking to expand overseas? The seemingly retaliatory act against Amazon (and its CEO and Washington Post-owner, Jeff Bezos) in awarding a significant Department of Defense contract to a less offensive competitor?
And, regarding the impeachment trial itself, how does one reconcile the actions of the US Senate — previously considered “the world’s greatest deliberative body” — with its decision not to hear evidence in a trial? Regardless of one’s views on the proceedings, the legal gymnastics to reach this conclusion is extraordinary — and it did not go unnoticed. Minutes after the Senate voted on Friday to subpoena neither documents nor witnesses, Toomas Hendrik Ilves, the former president of Estonia, tweeted, “’Great! No more tedious US lectures on rule of law, fair trials, evidence, equality before the law, transparency, corruption, free and fair elections’ — [said] some 130 governments around the world right now.”
The rule of law, among other things, demands the protection of property and contract rights, as well as business and government relations free from corrupt acts and intent. Absent these criteria, how and where a company chooses to allocate its capital will likely change significantly. More so, the returns that corporate directors and investors demand and expect will also be fundamentally altered. Simply, the greater the risk of investment — real or perceived — the higher the required return on that investment.
The issue before all stakeholders — corporates, directors, and investors, in particular — is whether continued adherence to the rule of law should be accepted as an inviolable fact and, if not, what that would mean. If there is some non-zero probability one cannot rely on the rule of law then, by definition, the risk to the enterprise has increased. Hence the emergence of this previously unconsidered risk factor.
I am not predicting the demise of the rule of law. But yellow flags are being waved. At the very least, corporates and directors must consider the possibility that the cost of doing business in the US may increase materially due to the rise of crony capitalism and a chipping away at property and contractual rights. While not preordained, it is a risk that needs to be considered when allocating capital. It is a factor that simply cannot be ignored by any stakeholder.
“Don’t it always seem to go / That you don’t know what you’ve got ’til it’s gone”
– Big Yellow Taxi, by Joni Mitchell
A version of this column was originally published on 9 February 2020 by Curation Corp. The views expressed are solely those of the author.