Is Governance Assurance Illuminating all the Shade?

As Costa Rica begins to focus a lens upon illicit relationships between construction majors and contract-issuing government departments, with a few more names likely being added to the lists of sanctioned firms, many opportunities will arise for those in governance circles to learn valuable lessons, none more-so than in the scrutinising of government (read investee) contracting processes.

As Carlos Segnini, the former Costa Rica Minister of Public Works and Transport so expertly explains in response to the ongoing corruption scandal, seemingly benign but substantial contracting governance process gaps were hidden in plain sight:

“Whoever manages the hiring process, although they have a limited margin by law, also has light and shade. As many issues are technical, they can know what one company has and another does not and thus narrows the margin of participation” adding “From there, it already lends itself to favors (…) or it filters the cartels in advance so that companies can prepare” (Source: AFP/TicoTimes).

The flow of capital from development banks to government entities and onwards to executing contractors within Central America does not do so without reasonable scrutiny, passing through many layers of ESG safeguards, intended to assure against unwanted outcomes, including the corruption that is currently being exposed.

If safeguards are there to assure positive ESG outcomes, it is reasonable to conclude, at a high level, from the significant negative governance outcomes revealed by OIJ on Monday morning, that these safeguards are weak and unfit for purpose.

Serious investment stakeholders should be uncomfortable with a glossy that says all is going great: organisations are imperfect, the law is often imprecise, risks are tolerated, technology fails, priorities change, humans are not infallible, and so on. A robust set of ESG safeguards should think nothing of identifying significant and material issues during, say, investment due diligence, if the right mix of expertise, experience, tenacity, verification and steadfastness are applied.

With the clarity of hindsight, the challenge to the ESG community in this region is to assert its credibility, and convince the investment community that ESG safeguarding and assurance processes are value-adding, through which we will identify the meaningful gaps, weaknesses and shortfalls at a process level, well before such gaps result in major negative ESG outcomes. Robust assurance will never know what negative outcomes were prevented.