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Last week OpenCorporates was in Basel at the Financial Stability Board‘s workshop on Global Legal Entity Identifiers (LEI) for corporate entities, as a member of the advisory panel.

It’s worth giving a sentence or two’s background here for those who aren’t familiar with this – and that’s probably everyone who’s not part of the global financial regulatory community or concerned with identifying corporate entities in the financial community.

The core idea of the global LEI is to allow all participants in financial activity to get a unique id that could be used to identify them in financial activity anywhere in the world, in any activity. This stems from the desire to reduce systematic risk such as those that nearly brought down the entire financial system post-Lehman’s. Part of this clearly requires the surfacing and publishing of the relationships between different companies within the same corporate group, sometimes called a corporate hierarchy, though we’re actually taking about a web of corporate entities, rather than a hierarchy as such.

The workshop was conducted under Chatham House Rules, and so we can’t share any papers or attribute quotes, but we can touch on some of the general discussions, including the one on why collecting this hierarchical information was potentially problematic.

This is because some companies – and in fact some company registers, especially secrecy jurisdictions – consider this information to be confidential. Specifically, to quote a paper by Linda Powell of the Federal Reserve Board et al, “A common reason provided for why a relationship between entities should not be public is that releasing the ownership data to the public could harm the competitive advantage of an entity.”

We were speaking on one of the panels regarding the scope of the work, and when it was our turn to speak, this was one of the key issues we addressed. We said, in short, that this was nonsense. We couldn’t think of a single legitimate reason why a company would refuse to publish its corporate structure.

First, this is not about legitimate commercial confidentiality but about protecting incumbents’ power, position and, often, legacy business models.

Second, this is often as not about evading scrutiny – from society, from shareholders, and from regulators. Make it difficult enough to understand the hundreds or thousands of complex legal entities making up a global corporation such as BP, and you can do what you want. This is not how a responsible company should behave, and not a reason for keeping this secret.

Third, if it is does reduce a company’s competitive advantage, that’s a Good Thing, because this is one competitive advantage that is positively harmful. Competitive advantage should be about coming up with a better way of doing something, taking a risk on a new product and reaping the benefits, having a closer relationships with your customers, and so on. Not obscuring the public record so that it’s impossible for the wider world to understand who they’re doing business with, competing with, investing in or regulating. (Encouragingly this got a excellent response from the workshop attendees.) I think we know where this ends up (Enron, CDOs?), and it’s not in a good place.

Fourth, this lack of transparency, enabled in part by company registers restricting information about companies to those who can afford the high prices, forces all companies to play the dodge the regulator/tax/public scrutiny game. This reduces the attention spent by good companies on real-world innovation and being a good corporate citizen, and forces all into a game of regulatory arbitrage, playing jurisdictions and regulators against each other to force them to a race to the bottom that leaves companies able to act outside the law.

[It's worth remembering that company are artificial legal entities formed and sanctioned by the state, and that limited liability companies are ones where the cost of failure is borne not by the owners but its customers, suppliers, workers and society at large.]

Finally, as the World Bank’s compelling Puppet Masters report makes clear, this opacity of corporate structures is precisely the fertile ground which allows corruption and organised crime to flourish, as this cloak of ‘corporate confidentiality’ is used to hide all manner of illegal, criminal and anti-social behaviour.

So the next time a large corporation says they can’t or won’t publish the information about their corporate structure ask them just what they’re trying to hide.

p.s. In the spirit of full disclosure, Chrinon Ltd, the company behind OpenCorporates is 90% owned by Chris Taggart, 10% owned by Rob McKinnon and has no subsidiary companies or parent companies.

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