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service “ relate to the scrutiny of government spending and not the
scrutiny of government revenues.
Indeed, the premise of the EITI that revenue transparency provides
benefits for implementing countries and investors is unproven and
speculative, given that existing research focuses on government
spending “ not revenue transparency. Studies on transparency that
found positive benefits of transparency focused on the transparency of
spending and actual outcomes of spending. Previous research meas-
ured the transparency of individual countries according to quantita-
tive indicators such as macro-economic forecasts (Gelos and Wei
2005), the publication of International Monetary Fund reports on
the macro-economic performance of countries (Glennerster and Shin
The governance challenge 155

2003) and the quality of government budget documentation (Alt and
Lassen 2006a,b). All of these studies imply that the quality of
decision-making on spending is crucial, in terms of complying with
international norms and accounting standards, publication and inde-
pendent verification of government budgets and the actual outcomes
of decision-making. Not a single study quoted earlier focused specif-
ically on the transparency of revenues; indeed, there appears to be an
assumption among researchers that transparency of revenues is a
secondary concern. In summary, there is no scientific basis for the
assertion that revenue transparency leads to better social or economic
Lessons from successful resource-rich countries further suggest that
improving the quality of government spending provides the key to
addressing governance challenges. It has been found that the eco-
nomic success of resource-rich countries such as Botswana, Indonesia,
Malaysia and Chile had a common characteristic: prudence in spend-
ing extractive revenues. A study by Paul Stevens graphically por-
trayed the approach of successful countries:

When money was spent, it went on productive activities. Conspicuous
consumption and gigantomania were constrained although not
entirely absent. Much of the revenue trickled down to the private
sector boosting savings and investment. (Stevens 2005)

Prudent spending was supported by government policies that
helped to insulate countries from the negative effects of the resource
curse such as revenue stabilisation funds, and policies that helped to
stimulate the private sector in other parts of the economy. As a result,
these countries have been able to grow other economic sectors, in
particular, manufacturing. Statistics demonstrate that the per capita
GDP growth in non-resource sectors was high in the four countries
mentioned above (Stevens 2005).
The EITI initiative is unlikely to duplicate the success of Botswana
or Chile because it does little or nothing to improve the quality of
156 Beyond Corporate Social Responsibility

government spending. From this perspective, policy initiatives by the
World Bank and the IMF have greater likelihood of success precisely
because they deal with government spending. The World Bank
initiative in Chad focused on spending, as mentioned earlier.
Similarly, the IMF encourages the publication of country reports
that deal with broader transparency and the quality of governance
in government finances; these include Reports on the Observance of
Standards and Codes (ROSCs) which summarise the respective
countries™ observance of standards and codes related to auditing,
banking supervision, corporate governance, and monetary and finan-
cial policy transparency, among others. Indeed, one quantitative
study on transparency specifically found that the publication of IMF
reports such as ROSCs contributes towards better informed markets
and lower costs of borrowing for governments in participating coun-
tries (Glennerster and Shin 2003). In contrast to the World Bank and
the IMF, the EITI does not deal with issues of wider transparency and
governance of public finances and is unlikely to yield similar positive
In addition to its narrow focus, one key dilemma of the EITI is that
(in the words of one oil and gas sector insider) it ˜shifted the respon-
sibility back to government™. The EITI focuses on the co-operation
between the UK Government and host governments in developing
countries; the initiative does not assign an active role to oil, gas and
mining companies in improving governance. The failure to assign a
clearer role to companies constrains the pressure on host govern-
ments, because the UK Government or the World Bank sometimes
have less influence over host governments than the multinational
In summary, the main governance initiative in the oil and gas
sector “ the EITI “ has serious shortcomings and is unlikely to
duplicate the success stories of countries such as Botswana or Chile.
It also fails to draw on the companies™ resources in influencing
governments, which we discuss in the next section.
The governance challenge 157

Undermining governance through corporate activity

Most oil company executives tend to reject the notion that they could
play a constructive role in helping to address governance issues, and
they have a legitimate concern over corporate involvement in the
political process. However, such a stance denies the reality that (1)
multinational companies already intervene in the political process to
attain corporate objectives (e.g., lobbying for new legislation) (Frynas
et al. 2006; Shaffer and Hillman 2000); (2) corporate activities such as
tax avoidance and lobbying may be contributing to governance failures
(Henriques 2007; Utting 2007); and (3) under certain circumstances,
multinational companies may benefit commercially from governance
failures in developing countries (e.g., non-enforcement of certain gov-
ernment regulations or the ability of companies to negotiate more
profitable agreements with governments) (Frynas 1998).
It has been suggested that the most effective business method for
influencing political outcomes is collective action through organised
interest groups. A vast literature demonstrates the impact of business
interest groups on policy making (Mitnick 1993; Olson 1965;
Schattschneider 1935). In addition, companies use many different
methods of political influence, including political donations, PR
and expert advice, which can yield them many business benefits
including corporate influence over government policies, better infor-
mation and reduced uncertainty (Getz 1993; Hillman and Hitt 1999;
Keim and Zeithaml 1986).
Oil companies are members of interest groups including industry
associations such as the American Petroleum Institute, single issue
groups such as the Global Climate Coalition and cross-industry
lobbying groups such as the European Round Table of Industrialists,
which in turn influence government policies. In line with the influ-
ential theory of collective action (Olson 1965), oil companies are
likely to have high political power because there is a relatively small
number of big players in the industry that wield high economic
158 Beyond Corporate Social Responsibility

power. Thus, the American Petroleum Institute is more influential
than, for instance, a small business association. Large multinational
oil companies are also powerful enough to single-handedly affect
political outcomes in a country. At the extreme, a single company
that has a dominant economic position in a country can be partic-
ularly influential, as exemplified by BP in Azerbaijan (see above).
Companies often use that influence to attain corporate goals.
Previous research by the author of this book points to the competitive
advantages that oil companies can strategically draw from the polit-
ical process (Frynas 1998; Frynas et al. 2006).
Firms are able to influence the institutions that affect them not
only through involvement in the political process, but also by influ-
encing technical standards, sources of funding or the media. For
instance, in technical committees, subcommittees and working
groups of the International Organization for Standardization (ISO),
representatives of interest groups including firms and consumer
bodies are treated as equal partners in shaping the agenda of the
ISO. Among other things, multinational companies actively worked
on developing the new ISO 26000 CSR standard. Indeed, an oil
company manager from Exxon “ W. James Bover “ became chairman
of ISO™s technical committee on petroleum products and lubricants.1
The example of the ISO may thus help to partly explain the corporate
preference for voluntary agreements rather than formal government
regulation, which allows firms to negotiate relatively favourable
standards. In addition to the ISO, business lobby groups have played
a formal role in a number of important international fora, which
allowed them to gain influence over the political process related to
social and environmental issues (see Table 6.4).
At this point, it should not be assumed that the use of influ-
ence by oil companies automatically has a negative impact. Indeed,

For the list of technical committees, see the ISO website at www.iso.ch/meme/

memento.html (accessed 12 November 2000 and 7 June 2006).
The governance challenge 159

table 6.4: Level of formal access for business interest groups

Level of
access Method of access Example
High Official function ISO standards
Advisory function US delegation in GATT
Moderate Consultation Kyoto Protocol
Expression of opinion World Bank Extractive Industries Review
Low No access

corporate political activities can encourage higher social, environ-
mental and governance standards. For instance, it has been shown
that lobbying by firms can help towards more stringent environmen-
tal regulations (McWilliams et al. 2002).
However, the actions of companies often have negative political
consequences. It has been argued, for instance, that oil companies in
Azerbaijan ˜have (inadvertently at times) backed the Aliev govern-
ment™s intimidation of dissidents through outright bribery, patroniz-
ing only government-favoured media or businesses, and eschewing
extended contacts with the political opposition™ (Chen 2007, 43). A
suggestion of a meeting with opposition politicians in Azerbaijan was
met with ˜less than no interest™ by the oil companies (Gulbrandsen
and Moe 2005, 59). One scholar noted that ˜the warm and cozy
relations of the Azerbaijani government with trans-national oil com-
panies ensure the flow of funds at the expense of state and democracy
building in the country™ (Valiyev 2006, quoted in Chen 2007, 44).
In many oil-producing countries such as Libya and Venezuela, oil
revenues have been shown to prolong authoritarian rule (Karl 1997;
Vandewalle 1998). For instance, it is no coincidence that some of
Africa™s longest-serving heads of state come from oil-producing coun-
tries, including Bongo in Gabon (the country™s president since 1967), dos
Santos in Angola (1979), Obiang in Equatorial Guinea (1979) and
Qadaffi in Libya (1969). Indeed, statistical analysis conducted by
Michael Ross on 113 countries over the period 1971“97 provided evidence
160 Beyond Corporate Social Responsibility

that oil and gas exports are strongly associated with authoritarian rule. In
general terms, the study suggested that extractive exports concentrated
in the hands of a relatively small number of actors have anti-democratic
effects, while “ for instance “ more ˜decentralised™ agricultural exports
have not. Michael Ross concluded that ˜the oil-impedes-democracy
claim is both valid and statistically robust™ (Ross 2001, 356).
Corporate political activities may also have a negative impact
through influencing social policy. As Peter Utting “ Deputy Director
of the UN Research Institute for Social Development “ has pointed
out, companies often use their political power to advance causes that
have negative societal consequences, such as weakening of labour
rights, tax avoidance or privatisation of basic services. Utting noted:
Many of the world™s largest corporations and business associations
actively promote CSR while simultaneously lobbying forcefully for
macroeconomic, labour market and other social policies associated
with forms of labour market flexibilisation, deregulation, and fiscal
˜reform™ that can result in the weakening of institutions and systems of
social protection. (Utting 2007, 701)

Whether they are a force for good or bad, companies clearly use political
influence, which in turn affects governance. Therefore, the controversy
is not merely about the legitimacy of firms influencing government but
rather about the actual manner of using political influence and about
the transparency of firms regarding their political activities. Even if
companies have done nothing wrong, by not disclosing their corporate
lobbying activities they open themselves up to allegations that they may
have something to hide about their political involvement or that they
only intervene in the political process when it suits them.
A leading recent book on corporate transparency suggests that
even the most transparent companies remain less than open about
topics such as corruption and lobbying. The book notes: ˜The extent
of voluntary disclosure of lobbying activities by companies is very
limited, to the extent that currently it is rare to find any voluntary
reporting on lobbying expenditure or activities (Henriques 2007, 154).
The governance challenge 161

Company reporting on corruption is also very limited, even by com-
panies with highly developed codes of conduct. Henriques specifi-
cally points to the examples of Shell and BP. Shell, for instance, limits
corruption reporting to the number of ˜violations™ explicitly reported
to the audit committee of the board of Royal Dutch/Shell, and
providing specific figures for Nigeria. However, as Henriques points
out, the company fails to report on the nature of legal prosecutions,
the use of agents or whistle-blowing “ all of which are crucial to
understanding both the problem of corruption and the company™s
ability to deal with the problem.
A 2008 report by Transparency International on the oil and gas
sector supports the general findings by Henriques. The report ana-


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