Integrity risk in Private Equity: Beyond ESG Box-Ticking | Rupert Evill, Ethics Insight | Ep. 91

Speaker A: You remember that ethics seminar you took at business school? No. Neither do most people. It's not really why people go to business school or into business, but perhaps that's a mistake. Because ethics, properly understood, isn't about being nice. It's about making sure that the way you pursue your own interests doesn't ultimately undermine the system you depend upon. And over a long enough time horizon, that's in your self interests, too. Profit is an extraordinary powerful signal. It tells us that someone somewhere values what you're producing, but it isn't a flawless one. You can make money while destroying value elsewhere. You can exploit an information advantage, externalize, uh, a cost, or take a risk whose consequences won't appear for years. That's where ethics comes in. Not as an ESG policy sitting on a website, but in the thousands of decisions investors, executives and board members make every day. Because ultimately, the. The question isn't whether businesses should make a profit. Of course they should. The more interesting question is what kind of profit are you making? And what are you leaving behind in order to make it? To discuss this topic, I'm joined by Rupert Evel, who has spent 24 years helping investors spot ethical risks before they become scandals and before they destroy value. Rupert, welcome to Fundshack. Business ethics can be a, uh, somewhat nebulous topic. What does it mean to you?

Speaker B: Nebulous and boring, which I think you summed up. I started this business seven years ago, and potentially the name. I might have changed it if I was doing it now. Because you've seen a lot of how ethics has become some sort of grandstanding topic, or as you already highlighted, something to bury in an ESG policy. So I had a friend who describes sustainability and ethics as basically the paramilitary arms of marketing, which I think is a fair description of where we're at. Yeah, so the way I look at it is, um. I mean, integrity is maybe a broader, better word. So the integrity of your decisions and the, and the issues you take. Sorry, the, the choices you make and the consequences of them, which you've already highlighted. Uh, but the. All of that has to sit in a context. So the. And, um, that context will be what you do, where you do, how you do it, et cetera, but also the. Your risk appetite, what you're here to do. And I entirely agree with you that ethics in some void is doomed to failure when it's allied to your business objectives and when it's in your enlightened self interest. That's where generally we can have most traction. So if you're In a business that heavily relies on customer loyalty then it's probably going to make sense to treat them well. Um, whereas if you're Ryanair doesn't seem to be so important. So I think ethics is a very relative thing depending on what you're doing.

Speaker A: Yeah, presumably the easy end of the spectrum is where it is in your enlightened self interest. And in that case, presumably what you're doing is just um, highlighting the fact that there's a difference between short term and long term gains. Because otherwise people would just do it.

Speaker B: Yes, exactly. I mean the first thing is the way I look at it is kind of three Cs. There's context, controls and culture. And the, the context is the questions that people love to complicate but really can be distilled down to what do you do, how do you do it, who do you do it with, where? And that will help frame everything that follows and right size it and in that environment, well, what are the sensible controls. So rather than talking abstraction if we, let's uh, pick a hypothetical. So at the moment there's quite a lot of energy, energy transition work going. So let's say you're somewhere in Western Europe, you're considering an investment, uh, the options might include a company that's uh, going for some big offshore wind concessions versus one that does residential and industrial solar. And so same industry, same country, very, very different risk profile. In one you have sort of high government exposure, you have off takers and tariffs and government policy and those sort of variables present risk. You've got significant capex and big turbines that you've then got to do big installations offshore. So it's a big project with big issues. But once you're set up there's a sort of to predictability on the other side. We've seen a hell of a lot of um, these sort of smaller providers, particularly in the PV space, who've just come and gone flash in the pan because they're not really doing anything, they're just buying stuff from China and getting other people to install it. So your risk profile there and your differentiators are very, very different. And so I don't think of risk or ethics or integrity is entirely context dependent. So the controls for 1 versus 2 have to be very different and the culture in the business needs to be reflective of that.

Speaker A: That is I think one of the problems with some of the systematic top down approaches to ethics like ESG probably being the most famous one at the moment, which is that it is essentially uh, an abstraction of an abstraction and it is context free. And so it all comes down to uh, the application of your, of your what, your values.

Speaker B: Honestly, the. Don't get me started on esg. I think it's um, there's a big discomfort amongst some, not all about talking about there's trade offs, those three things. We never really talk about the G if we're honest, which is where I live a lot. And um, they're never talked as in real terms. They're not like a zero sum game. So you can have environmental so called benefits that also have drawbacks that then will have negative impacts. And so in this country for example, we take the big debate at the moment about the North Sea oil. So some will say well net zero environmental, um, needs should predominate and you go okay, fine. But to pretend that this country, I mean look at around us all half of the stuff in this room has come from petroleum products, uh, and the energy we're still buying from other people. So we're offshoring the E risk in many senses and the social aspects that come with that. The human rights issues and even the renewables, like the end of life on the fiberglass for the wind turbines or the silicosis in the PV panels. These things are complex. And the people I enjoy working with are the ones who look at that entire world and go well what actually matters to our constituents and that's all of our stakeholders. What's in our enlightened self interest, let's start there and let's just do a proper job and let's stop worrying about reporting with 44 or however many different ESG frameworks there are now. Um, I appreciate it's difficult because there's certain investors mandate it and one of the big pain points I see, particularly on co investments is where you have multiple competing standards. I spoke to a circular economy company recently and they said we have four investors at the moment. They each send us different ESG disclosures. One's a spreadsheet, one requires some online form, one's in some other format. And so I spend half my time filling out ESG forms. I don't have time to manage risk.

Speaker A: Do you think that type of box ticking has any value?

Speaker B: No, none whatsoever. I think it's um, Honestly I think it's a racket. Like the, a lot of, you know, it's that cliche that something starts as a cause, becomes a business, turns into a racket. But the, the, the intentions behind esg, I'm sure in many people who were ideating it were probably pretty noble. It's just become, and I think it's accelerated by AI. So I caught up with, um, one of our closest, uh, customers earlier and they were telling me how adversarial some of the streams of other streams of due diligence are becoming. Because you've got the aification where we sort of lost the art of brevity, succinctness and relevance. We're not doing the context, controls and culture to sort of Pareto principle to find the 20% of areas that create 80% of exposure. So there's these sort of poor companies having these monstrous questionnaires and disclosure requirements, and then the, that asymmetry has been matched on the other side. So what I'm seeing sometimes now is you'll have the poor company who's given like 500 questions around ESG, they then go and take that into Claude or whatever it is, and they go, right, what policy suite do I need to meet these to get the investors off my back? So then they generate an absolute wall that sort of pebble dashes the data room. And then you got consultants being paid a fortune to sort of read through that when we all know they're also sticking into AI. So you're just entering this complete vortex and what's been totally lost is the gap between and doing. You're going to have every framework under the world. It doesn't matter if you don't know what it is or how to implement it. And it's not right sized to your context, your controls and your culture.

Speaker A: So what's the antidote to that? And, um, what are the systematic obstacles to that antidote?

Speaker B: To spend a bit more time at the start to, uh, delineate between that offshore versus retail, the company and what actually might be a credible risk in each of those scenarios. And also to consider not just most due diligence is retrospective. You know, any skeletons in their closet, does it look good now? You're about to change that company irrevocably. You're going to stick a bunch of money in it. It's going to introduce moral hazard, it's going to introduce pressure and decisions they've never had to make. Scale decentralization. The founder group, which is maybe being quite tight, suddenly decentralized. So the, there needs to be a fair amount of effort, which is ultimately still a fraction of what's going on in most due diligence cycles, to get that contextual piece right. Uh, and what's the barrier to that? Um, it's the Mark Twain quote. I didn't have time to write you a short um, letter. So I wrote you a long one instead. It's just easier to continue in this cycle and to outsource it to a bunch of consultants. And it's that old adage, nobody gets fired for hiring IBM. So if whatever, you know, whatever stream like reputable law firm for legal due diligence, reputable Big four for whatever, if they've signed it off, we're good. And it's uh, also the I'll be gone, you'll be gone. If you have a pouring culture within your investment organization, uh then, and people are incentivized on closing, not on sort of proper maturation and sensible exits and companies that are actually viable, then it's going to perpetuate because it's. You have a sort of, a lot of vested interests.

Speaker A: Yeah, I think the Mark Twain quote hits it on the head because when you were talking about Claude, speaking to Claude, I was thinking, well as someone that's responsible for governing a business, what I want is just very succinct, high quality narrative reporting. Just tell me what I need to know. Because it's normally a relatively small amount of factors that contain the majority of the risk in any situation, isn't it?

Speaker B: 100%. Yeah. If you can't fit the action plans onto one PowerPoint slide in 10 to 12 font, if that gives people a framework into a table, then you haven't really done your job very well. But particularly well. I should caveat that. Sorry if you're making. Most of my time is with people investing in kind of growth stage companies. So if you're investing in like a massive listed company. Okay, a bit different but the um, as a general rule, uh, because that forces you into a prioritization but also to think about the force multipliers, what can we introduce that has a cascading effect on positive. So for example, a very simple and easy one which is actually accelerated by AI is to develop a stronger speak up culture. Because the data we have for uh, what's called occupational fraud, which is basically everything from corruption, money laundering through to embezzlement, greenwashing, the whole lot. There's an organization that kind of accredits all the investigators in that space called the association of Certified Fraud Examiners. Every two years they do this big report where they send us all the other members get sent questionnaires about investigations we've done and in real detail it takes a while to complete and they give you cpe, which is why you do it. And uh, that every Year you have thousands of bits of investigative data for the past 20 years. I think I'm correct in saying that the number one detection mechanism for these issues is tips, as they call it. So that's speak up, whistleblowers, people coming Forward and uh, 50% of those tips are coming from outside the organization. So if you create a culture where people feel like they can say this doesn't look right, that's your um, even more interesting data is that of that 43% that tends to bring down the losses by around half and the duration from about 18 months on average to less than 12. So setting up a speak up framework you can do in an afternoon with AI Now.

Speaker A: So as a leader you want whistleblowers

Speaker B: because 100% you want them. Yep. Your best early warning indicator of. Well, uh, actually if you're a good leader, you want them, Right?

Speaker A: Yeah. And um. But you want them to come to you.

Speaker B: Oh yes. Yeah. That's why it's important to have the, a framework that is accessible to people inside and outside the organization.

Speaker A: Right? Yeah, yeah. Because whistleblower in my mind is more like someone that goes to the regulator. But you're talking about uh, an environment of, of kind of openness whereby you can raise some, something with someone who might not necessarily be your direct manager or something like that.

Speaker B: Yeah, I mean ideally you'd have a culture where that were possible, but often we know it's not.

Speaker A: Yeah.

Speaker B: And so the, the um, I'm not suggesting it's like you're creating some snitch culture or something, you know, because we grow and when we at school you learn the hard way that that's not. What I'm suggesting is more where one where people can come forward if they see something that's wrong or in, that's gonna, that is gonna cause potential harm. Uh, because if that I generally believe from what I've seen. So I spent the majority of the early part of my career as an investigator and what I saw in that situation was the number of times that people wake up and choose violence, that they really want to be a baddie is in the minority. Um, the majority of these issues is people under pressure, making very poor decisions and then compounding on it. So if you want to arrest that more quickly, then one of the better ways is to take away that pressure, uh, by giving people an avenue to come forward.

Speaker A: So you framed that as being part of culture. Can you create a culture in a top down way? How does culture come about?

Speaker B: Again, very contextually dependent. So you know before we went on we were talking about past work. And so I've worked in cultures like Japan where you would deploy something very different to say Denmark. Uh, so you have to consider where you're operating first in terms of flatness of hierarchy, comfort of speaking truth to power, etc. Etc. Um, I would argue uh, the Japanese model, everyone thinks it's very top down. The idea gets trickled down for feedback that goes back up. And so I saw that model work quite well where the top doesn't just issue an edict, it goes, this is our general direction of travel. Let's gather some sort of softer feedback as it cascades through the chain and then you come back up and you start to get better solutions. And sometimes they're very tactical. So I remember working with a, ah, renewable energy company that had locations that were pretty um, inaccessible from a sort of a mobile phone. So having some uh, speak up line that's Internet based is not much use until you get Starlink or something. So sometimes it's a very tactical solution that makes it easier for people to come forward. Other times it's about um, a slower communication of what sits on the other side. Because I don't know about most of your listeners, but most people from what I would guess will go through the whole of their career without having to be involved in an investigation either as a witness or someone coming forward. It's a very intimidating thing to do that. So the way a lot of organizations just lawyer themselves out of communication, they are so terrified about feeding back. Uh, and also the challenges of doing investigations that people just, they have no trust in the system. They just think it's this sort of nebulous speak up box that maybe HR is going to come and, and do a botch job on. And also there's a lot of data that whistleblowers generally suffer retaliation. So it's not um, a simple thing. But if you know what you're doing, you can, in sort of three to six months with relatively little cost, you can really start to change the integrity within your organization, particularly decentralized ones.

Speaker A: Can you give me one example of how I could go about that? If I've just been placed as a CEO in a business and I'm a bit worried that there is a very hierarchical structure and I'm not going to find out about problems until it's too late. How do I go about changing that culture so people don't feel like Jerry

Speaker B: Maguire and you know, uh, so you would need to communicate the independence of the people overseeing so if you're in a larger organization, maybe that's audit and risk committee and making sure you've got someone on there that's a real independent heavy hitter that people would trust, uh, uh, from the top down point of view, then you would need to get the delivery system right. So is that like QR codes as people go onto a site which might work for construction or retail or places where people aren't on their laptops. It's going to be different for say a services organization. So you get the communication, um, media, uh, correct. And then it's a, instead of doing your one hour ethics seminar, uh, you have interactive sessions with people where you're actually in that time or at that allotted time where you start to demystify the process but also open up the topic. Because most employees, it's not their first job, uh, they would have heard or seen something in past roles. So you can sometimes kind of start to break down the barriers by asking people to um. These are some of the risk areas we've got on our risk assessment. Do you think that could happen here? Have you seen it happen in the past? Blah, blah, blah, what would prevent it? And so you just turn it into a constructive sort of two way process where people can start to voice what they see as issues within the business. Because the frontline folks are going to have a way better idea than that CEO.

Speaker A: Uh, so you can change the culture top down over the course of months.

Speaker B: You can. Yeah, yeah. I mean I'm again I'm working many with growth stage companies so the, and that's intentional. I, earlier in my career I was working with some of the sort of the mega multinationals and in that setting. Yes, hard m. Yeah, very hard.

Speaker A: One of the things that you, you said earlier was that um, when you invest in a company you change it. And I think that's a very interesting idea because you know, when people think about due diligence they're thinking about, you know, retrospect, retrospectively what's happened, you know, what information can I get. But as soon as you invest you're actually dealing with a different beast. What's the mindset that you need to be thinking about this before you've invested?

Speaker B: Again, it will depend a little bit on is it an equity, what level of state, what level of influence do you have? Board representation? Those things are going to have um, relevance. So you know, if you're one part of a large syndicated loan, then kind of good luck affecting uh, change. But let's assume for argument's sake that you have some level of, kind of influence over the company or some level of oversight. At least that investment is for a purpose. Sometimes that purpose is expansion. Uh, which means they're going to, they've, what they've done so far has been with a level of familiarity. They've learned lessons. They're now going to be doing things where they're less familiar, they're less on home territory if you like, which opens up greater exposure, more of a target on your back. Maybe they're going to be making a big splash which is going to attract regulatory or other attention. Maybe they're going to have management changes which is going to bring in the human factor. And nobody calls baby ugly because the founder and I speak as somebody running your own business. You get quite protective of it and now that's going to be no longer the case. Maybe you've got certain KPIs and targets. So for the investor, um, I know I'm m not giving like a one size fits all answer, but that's kind of the point. I think you just future cast a little bit or if this investment starts to do what it's intended to do, what does that context look like? Ah, so if I give you um, a very stark practical example, I know most of your audience focus on Western Europe, but sometimes it's easier to give something, or the States something a bit outlandish because it makes a point. So we were working with a um, company that does pharmaceutical runs pharmacies and distribution across large swathes of East Africa. They buy most of that from China and India. Some of it's not great. So they wanted the investment to do the manufacturing themselves. Uh, that opens up a whole different world that they've not done before. Suddenly everything from the very tactical things like you're bringing in opioids and fentanyl, which are the constituents that go into say pain meds and in areas where Al Shabaab and other terrorist organizations, organized criminal groups, corrupt officials, et cetera. So on a very tactical level, these guys have never had to deal with those type of bad guys right through to well, how do you actually run an EPC contract in a massive manufacturing facility? How do you handle all of the safety standards and the rigor that comes with that? It's one thing to basically be selling someone else's product. So that's maybe a stark example, but it gives an idea that you need to kind of break it down into the um, what I would call maybe the human level. So management changes, et cetera, expansion, decentralization, Levels of control, the operational sort of tactical stuff, and then, um, depending on the investment, the sectoral and political and other context.

Speaker A: See this is one of the reasons I wanted to speak to you because I knew you had emerging market experience. And if I was to speak to just a UK ethics person, they'd basically be a sustainability person talking about carbon emissions. But if you're working in the emerging markets, I think you probably are exposed to much more murkiness.

Speaker B: Yes and no. Uh, I agreed broadly, but after the time away, I was in Asia for 12, 13 years. I moved back. A friend of mine had moved back a year before, so a few years back and he said, uh, I never thought that the experience I had of sort of dysfunction and corruption in Southeast Asia would be so helpful to navigate the UK and 20s. 20s. But the, so you know, we, there's, there's some cynical people, for example, I mean, yes, sort of things like corruption are much more naked and violence, um, is more systemic in many emerging markets. But it just is, it's. There's this great phrase in Southeast Asia which is same, same, but different. And um, in uh, mature markets it's the laundering or the, the upstream versions of that naughtiness, if you like, that are more of an issue. So when, you know, I was working in London from 2001 to 2010 through the, the 2008 crash, and we saw some really dodgy shenanigans with sort of former Soviet Union, Middle east, et cetera, money and how that had been earned coming through. You also have a political system where, uh, in the States is now even pretty ridiculous, where you can pay $100,000 a month to get the premium truth social account. So you get sort of market moving news early. So what was considered, I guess the blurring between business and politics is, um, it's got worse in emerging markets, I would argue. And it's just the difference between fast food restaurant and a fine dining restaurant. So in an emerging market, it's a fast food restaurant. You pay your bribe, you get your service, you pay for the burger. In um, the west, you get served by the politicians and then when they come out of office, suddenly they're multimillionaires. How did that happen? So it's uh, just a different model, the way the influence is exerted. And um, obviously we're talking at a high level, but I guess, yes, it really helped to be in emerging markets in places like Myanmar and Vietnam and all these places when you start seeing really bad things happen and you're investigating. But, um, It's a supply chain. So to give you one example, I was uh, asked to go in by a Japanese finance house into uh, the Mekong region, so Cambodia, Lao, Myanmar, in about the early 2010s, because they were very concerned about North Korean sanction busting and uh, smuggling of weapons and money. Uh, that was obviously against their national interest. And when we started to pull at that thread, particularly in Cambodia, we saw the precursors to the fraud villages and towns that now exist all over that region where people are human trafficked into the scam centers, but the people feeding that was a really weird mix of pretty much every organized criminal group. So we were in Cambodia and we were there to find, um, the Lazarus Group based in North Korean, uh, organized criminals and others. And we started to find the Bratva, the Russian ones, the Sakur Korinita, the Italians, even Nigerian 419 scammers. And so there was an ecosystem. For some it was about money laundering. For others it was, um, getting out of the parts of organized criminal activity that are very difficult and manual to do. If we're talking about them operationally into something that's more, um, sustainable, which is continual fraud. And nobody cared. Uh, we were trying to sort of raise the flag there. Nobody really cared about this thing called fraud. Fast forward now, 15, whatever years later, uh, fraud is the world's third biggest economy and it's industrialized. And so these organized criminal groups, we just don't see them in emerged markets. And the fraud, we um, know it's happening and we see it's happening. And grannies get defrauded here, there and there. So my point is that everything else is globalized. So has, so have the bad guys.

Speaker A: I'm going to come back to my question, but just on fraud, because that's amazing. It's the third largest industry, you're saying.

Speaker B: Third largest, largest economy by some. So if, particularly if you're wrapping in cyber criminality, the estimates, and it's all estimates are, uh, that it's, you know, it's basically after the US and China in terms of the amounts it's generating per annum.

Speaker A: If you're a company of any size in the west, you're dealing with like ransom kind of ransomware stuff all the time.

Speaker B: Yeah. And you're probably just, you're plain vanilla misrepresentation, misappropriation, misstatement. Frauds are still going to be taking anywhere from 1 to 5% of your revenue. That's the data. I mean it's very hard, but the data sources I'm relying Here are BDO, PwC, ey people who do these surveys. So the ACFE, the Association of Certified Fraud Examiners in their last report that one I mentioned earlier, the average loss is $1.5 million. Some it can go much larger like Wirecard level. But it's um, for a growth stage company. The thing that I find a bit crazy if we're taking it up a level is pretty much every company I come across will have some big, you know, the big scary policies around like I don't know, corruption, human rights, money laundering, anti bribery. None of. Yeah, anti bribery, exactly. None of them have a clue about fraud. So to put it very cynically, in this country we have the UK Bribery act, uh, it's very poorly prosecuted. So on average there's about 0.7 cases per annum prosecuted. So it targets companies of a certain size. So if you say that companies with over 5 million turnover, there's about 40,000 of them in the UK, 40,000 of you. And uh, there's a 0.7 chance that one of you will get dinged for bribery. And if we're being really cynical, bribery is often to get a benefit. So I pay a bribe, I win a contract. So you're telling me that our risk framework for integrity risk is purposed towards that level of likelihood event while we ignore the world's third biggest economy? It's nuts.

Speaker A: Yeah, that's just bad risk management.

Speaker B: Really bad.

Speaker A: Yeah. But it does mean that I can accept tickets to twicken them with slightly clearer conscience. Um, yeah. And so there's also an ethical question around paying. So when we talk about fraud, we're not really talking about internal fraud, we're talking about scams, aren't we?

Speaker B: No, we're talking about both. I mean that's, I think part of the reason we don't talk about it is the industry, the fraud industry. Industry is very bad at. Right. Sizing it to the organization. And also we have a real squeamishness about recognizing the pressures and the rationalization within an organization that might lead someone to commit. There's often a demand on the supply side for that fraud. Someone inside has been complicit and that creates a squeamishness around sort of tackling it. So I think there's a problem with those of us involved in working anti fraud that have been pretty bad at explaining what it is in a way that's relevant to your particular organization on the one side. And then there's a general kind of uh. Well, I saw it a live Example it's a UK company, fairly sizable. They were notified by the police of a fraud involving organized criminals. And their main reflex, because I was sat in with the. You had C suite people in there, head of risk, head of this operation, uh, cfo. And um, all they really wanted was a report from the Big four that says we did what we reasonably could because they just want to show compliance with the uh, Economic Crime and Corporate Transparency Act. There wasn't actually a real desire to root it out. It was strange.

Speaker A: M. Compliance with the law is a very different thing to integrity. Mhm. Which is how you describe business ethics. And so that makes me think, well it gets difficult then because if you define ethics as risk management,

Speaker B: doesn't uh,

Speaker A: it really become anything that you can get away with within the letter of the law?

Speaker B: Yeah, because we could. We should argument again. It's um, I don't have hard and fast rules because some laws are really uh, nuts. Like they, you know, take some of the tax laws in this country. So in some instances the just adhering to the strict letter of the law will be commercially sensible. My argument uh, is more around what activities could significantly deleteriously impact your organization and start there. So that when the. I'm lucky that I get to work with pragmatic smart clients, a lot of them from the Nordic and Western European region who. What they want from me is to. Right. Size it to the business. What could really actually derail this business? What sits on their critical path, what is really important to them. That's what we're going to safeguard. Uh, yes, it'd be lovely for us to reach some sort of panacea where everyone's all sort of Care bears and hug each other. But it's not going to happen. So let's affect change in the area that is most material.

Speaker A: Yeah, yeah. So I was speaking with someone this morning about the reality of deal making and how at a certain point, um, good faith often goes out the window and people just um. What's the word? When you gazump people, you gazump people at the last minute. And so venture capital firms do this. The founders and buyout firms do this to sellers and LPs do it to other. It's rife. And there's a part of me that is quite sad about that, but maybe it's a naive part of me because that's the game. But I'd like to think that I'm playing a game that is, um, I don't know, has a sense of good faith, is iterative Enough that reputation matters. But it sounds like mainly in M and A and in trading markets it's just that's not it at all. You get every edge you possibly can within the letter of the law rather than the spirit of the game let's

Speaker B: say uh, that's an interesting one. I mean you see a broader cross section than I do. I would have thought that's quite a short term game to play uh particularly in an area where the barriers to um, knowledge uh um sharing are coming down. So I know organizations for example that are um, starting to get traction where founders are able to see ratings for VCs. Ah. So you know if you have a reputation for being a particularly sort of sharkish that's the, the and I appreciate that at the moment the you know markets shift soft and hard and so at the moment there's not a whole world of investments so they, you, you maybe have power if you're an investor to kind of kick um, your potential um investee. But it's also the extent to which you can do that with someone presumably you're meant to have a close working relationship for the next however many years until exit. So I think it's um, uh the phrase I've heard is kind of a fair exchange and just having we know that both sides are going to try and to withhold a little bit and keep their cards close to their chest that's part of the game. And the. I went back midway through my career to do studies in behavioral analysis which the intention was to make me a better investigator. But its main application now is often in those uh, discussions with the founder team where you can see who's withholding what and who's uh. And so um, there is a real strategy and it's a bit like poker. There's an element of sort of everyone knows what they're doing. If it's at that level, yeah fine. If you're actively trying to gazump or exploit I would imagine that that's not a particularly sustainable strategy in the long term but maybe I'm wrong.

Speaker A: So when it comes to due diligence are there any common obstacles uh that you come across? Um, let's say when a venture firm is assessing a founder led business a couple of things.

Speaker B: So most of us when we start a business we almost, it becomes part of us so there's an identity attached to it. So you have to deal and tread very sensitively and act as a kind of bridge between the investor and investee to win the trust of that founder and the future looking due diligence helps there by the way, because you can start to talk to them about, look, we know you've done a great job to get this far. You mean consider for investment, make them feel good and then you sort of help them. It's not cynical, it's a truth. But you go in the future, here's some of the things we're going to come up against. And then you can ask questions and observe behaviors of others. So one of the common ones is um, uh, so how do people come to you with problems? And then you often get, oh, my door is always open, we're like a family here. And you go, that's amazing. So when was the last time someone came through that door? And my favorite one of those was ah, ah, about seven years ago. I was like, right, okay, well tell me more. He goes, yeah, yeah, it's just, you know, some woman complaining about harassment. And um, you could see everyone else on the call just in whites of their eyes looking horrified. I was like, and what happened with that? Some woman, uh, concerned about harassment. And he said um, oh, it was nothing. And I was like, and you've not heard from anyone since? And you've grown now to like sort of multiple countries and 500 people. And so then we know, at least we know what we're dealing with. We know that the management team have a broken line to the front line. So that's something we. It doesn't mean the deal doesn't go ahead or it's a big red flag. It's just something that's going to need to be corrected. And similarly the um. You also often come across that I'm an exited founder. I did this really well somewhere else. So I met a um, founder team as part of a diligence that they were in circular economy and they had done all their disclosures and there was all this stuff around money laundering and gifts and hospitality. Uh, as I spoke to them I was like, oh, okay, so your big business before was healthcare, right? And they're like, yeah, yeah, healthcare. Did you just kind of port your whole risk framework from healthcare? And they're like, yeah, yeah, we pretty much. Okay, makes sense. You realize you've now got one off taker essentially, uh, or you know, a couple. So the money laundering flow isn't quite the same and that giss and hospitality, while very relevant to surgeons, is perhaps less relevant to bin men. And so they're, you know, they're not going to be asking for Monaco Grand Prix tickets. So it's, I Mean, you're obviously doing it a bit less facetiously than this, but it's the helping, uh, them understand that even though it worked really well in the past. And then the most tricky bit is the family founder type company, ah, where it's like, we know each other, we trust each other. And well, if you think of every family I've ever met, they're full of kind of secrets and sort of factions. So you can get into some tricky areas around conflicts of interest, related party transactions, succession, et cetera. So it's better to kind of just start to sow the seeds with that earlier.

Speaker A: If you're a CIO with a portfolio of control positions in businesses, what is it that you'd want to see with regards to integrity issues? What's the advice that you'd give?

Speaker B: And what don't you want to get an idea of general cultural health? That you have all kinds of data. You'd have everything from, um, staff turnover, speak up data, absenteeism, seepages, losses, whatever it is, um, lost days. And, um, I'll go on a rant about employee surveys if I go there, but any data feedback you have from employees is your general canary in a coal mine. Data is this are the people. Because if the asset in the organization is fundamentally the people, whether they're writing code or as a hospital, you need to make sure that the people are broadly on track and aligned with the mission. So that you'd look for those indicators. If it's a supply chain heavy, uh, organization, then you're going to look at much more sort of tangible lead times, loss, delays, uh, blah, blah, blah. So I think the, an easier example is an anecdotal one from, um, a Japanese organization and that they have. This is one of the big trading houses I worked with a few years back. They have a lot less regulatory scrutiny than we do in the west, which helps. But they found out an issue in one of their subsidiaries and they came to us and said, is this particular issue common? It was to do with corruption. We said, yeah, unfortunately it is. And then they said, um, we said, do you want any help with it? And they're no, no, no, no, no. We'll call you in three months. And so three months later, go in for the next meeting. So we asked, of our 11 subsidiaries in that region, nine, uh, of them are experiencing very similar issues. I said, wow, okay, that sounds bad. I go, do you want any help now? No, no, no, no, no. And so we came back another three months and eventually they just did this long Diagnostic where they started to pull in all kinds of data right down to, um, you know, people turning up drunk on forklifts and basically anything that indicates a kind of a cultural ill health. And they developed a quite smart, what I would call like the graffiti and broken windows approach to risk and ethics, which is when you start to see certain early warning indicators, you know that the bigger problems are coming, so that's when to do the intervention. Because these things are connected. If you work in an organization where bad conduct is permissible, it's corrosive.

Speaker A: You mentioned when I said, well, you know, in emerging markets you see a lot of murkiness. And you said, actually a lot of it is applicable to the developed world. And to be honest, I, uh, that's kind of the direction I was going. Because my feeling in the developed markets is there is plenty of corruption here. It's just, uh, it's much less visible, it's more sophisticated, possibly just because of the intangible nature of most of our economies. Um, but I also think there is this dynamic between it's the politicization of corporations and the corporatization of politics. And that makes things, I think, very tricky because, particularly if you view integrity as risk. Because one of the best ways you can manage your risk for certain businesses is to influence the regulator is to do what Farm has done.

Speaker B: Uh-huh.

Speaker A: Which is to create this revolving door between the regulator and your industry. And that way it's deeply corrupt, but it's just a great business. And also it's sustainable. You can't say it's not sustainable. Big Pharma sustained their profits for 100 years. And so I try and put myself in the shoes of a big Pharma CEO, uh, or even an employee. It's difficult for me to make the case as an officer of that business that having very, very good connections with the regulator is a bad thing.

Speaker B: Yeah, I agree. Um, and I remember working for a big healthcare company in a previous job and it was American and we were going around Southeast Asia where they were trying to bang the drum about ethics. And uh, we were in Vietnam and uh, somebody had the courage to put up their hand and say, look, you're telling us we've got to hit these super aggressive targets because it's growing 6% GDP per annum. Um, it's a big growth market. That's going to mean interfacing with state owned entities, then notoriously corrupt. And then the line from on top was, oh, we don't tolerate corruption because, well, that's kind of my point, you pay two and a half times the American consumer pays two and a half times what they do in Europe for your products. You have X thousand lobbyists in Washington. So why are you here lecturing us on corruption? So there is, I think there's more pushback starting to come. You have um, again, knowledge being shared. You've got the issues, including like the case that's going on in the States at the moment where people will turn violent around these things, where it gets too aggressive, the sort of the backlash to Fauci, et cetera. So I'm not saying all of the stories are uh, accurate, but they are indicative again, that do I think it will continue for the foreseeable future? Yes. Uh, do I think there will be some who fall by the wayside when they're exposed and there'll be some sacrificial, um, some bloodletting, if you like, within that industry. Yep. Uh, but I think, um, the bit that I would always point to is I spent part of my role. Well, a significant part of the role when you're operating emerging markets is an understanding of political risk. So what works now might not work under future administrations. And so to give one example, the telemedicine, which is an area that's particularly poorly regulated. I worked with an organization and the government didn't want telemedicine to take off because it was poaching the small number of, you know, they were fighting for doctors like many places are, and those doctors could go and earn more just being in a call center, essentially. So the way the government dealt with that regulation was they said every telemedicine facility has to have a medical designation, be designated as a hospital. And so the uh, I spoke to this company and said, well, how are you going to get around that? And they go, it's okay. We, you know, we paid some health officials to come and designate our, ah, sort of call center as a hospital. And so m. That will serve for now until somebody comes in and goes, no. And we're seeing it in other areas. So in agriculture there's um, all kinds of sort of different rules that people use, clever ways to get around that regulation. And I think it's a bit of um, if you've got huge scale and huge lobbying power, then you're playing by different rules. But if you're backing a growth stage company that's banking a significant amount on being able to play regulatory chicken as a way to be successful, I'd say back businesses that succeed despite not because of, um, because they're the ones that are, um, if you can succeed despite a corrupt setup, then you're a really good business.

Speaker A: Have you ever looked into the kind of rare earth metals? Because I understand a lot of that stuff comes out of the drc, which has. And that's an example of a country where you can abide by the letter and the spirit of the law and still behave appallingly because, you know, child slave labor and so on. And yet we pretty much rely on that country for an enormous amount of our electronics and EVs and so on. It's difficult to know what to do about that.

Speaker B: It is. So there have been all kinds of suggestions including quantum dot tracing, but the main problem is you lose. So if I think about it from the point of view of an investigator, so chain of custody. And you uh, lose chain of custody of the evidence when it gets um, goes into a refinery or some form of smelting and upscaling. And most of that's happening in Kazakhstan and China and good luck having oversight there. So good luck with them going, oh no, this is the Aussie rare earths, we're not going to mix that with your conflict rare earths, don't worry. Apple, um, so yes again if you're intel or Dell or Apple, maybe you can go down your supply chain and send someone with a clipboard to try and uh, look at the soil sampling and make sure that that came from Canada or Australia and not from the drc. But I think we all know it's rubbish. Yeah.

Speaker A: So I'm assuming your clients, a little bit like my podcast guests, they're self selecting people that speak well, often say yes to coming on. And I think with uh, your business, I would imagine it's people that are predisposed to have a kind of a conscience as an organization that are more likely to take your services. Or do you get some really kind of mainstream private equity firms as well generally that's true.

Speaker B: The mainstream folks often ask really fun questions though like, you know, so I remember working with uh, some of the private equity um, firms particularly going back, way back. And I've worked with them since. But in the 2008 period where everything was going to hell, some of the smart ones worked out that we were going to go out as a population in this country, for example, we were going to go out less, go on less holidays. And so where are we going to do our sort of treating ourselves? And so, well, we'll go to Waitrose and treat ourselves on a Friday night and get some sort of Posh this or that. And so they just started buying up uh, uh, a lot of the sort of the fair trade and this type of the luxury sort of consumables that you could take home and feel less awful about the fact you've now got negative equity. And so the questions they would ask would often be really interesting. Like husband and wife started it. Um, we think that the marketing's not so important. We've got great connections with supermarkets. What's really tricky in this business if it's fair trade, let's say, is the supply chain, the relationships of suppliers, um, but where they're located logistically is a nightmare. Uh, would we cause uproar if we move the factory? And so you get these very tactical questions around these sort of sustainable brands. And so I kind of got blackballed recently by a journalist because I really don't like the whole sanctimoniousness of impact and there's a lot of BS in it. And it's an environmental publication and its thesis was, is environmental, um, ESG being polluted by these dirty private equity companies that also have defense and oil and gas investments. And my response was grow up. If you've been able to make money in very regulated, very tricky sectors like those, uh, you're probably going to have way more discipline than a lot of the impact investors I see who are just uh, they're like almost, if you're being generous, you might say a naivety that oh, because it's good, nobody's going to want to screw it up, which is absolute rubbish. And so they bringing in some investors that have had some battles and some scraps into so called impact sectors would be really good. And to emphasize my point, fraud in just the UK's renewable energy sector is estimated to hit about 30 billion by the end of this decade. So the good people are doing a terrible job of stopping bad things from happening. So I'm not averse to someone that's got a very ruthless um, attitude to it. I'm not, you know, I'm not talking about like asset strippers and that, you know, but people who have operated in other areas. And also I think there's this very sort of, there's a sanctimoniousness about what should, what is an impact market? What can we. So defense is causing a lot of headaches for people at the moment. Oh, we shouldn't be invested. Well, you know, if you go to someone like Vietnam or Ukraine, both places have spent time in and know people there, they quite want the defense to protect themselves from a pretty unpleasant neighbor. So it's m. The Impact space. Um, I was at a conference earlier this year and one of my, you know, a good contact of mine was on a panel and he said, look, it's just such rubbish. There's so much emperor with no clothes, smoke and mirrors and all this kind of stuff in this sector. So much sort of greenwashing. So many people pretending they're things they're not. Can we just all call bullshit on this? And he, uh, got the biggest round of applause of the whole day.

Speaker A: Yeah, so that doesn't surprise me. I sometimes think that virtue is least often found where it's advertised 100%, if

Speaker B: I think through the entirety of my career. Uh, some of the really the best people to work with have been in so called ugly industries, going through really tough times where they're trying to navigate it and trying to do the right thing in difficult circumstances. And without a doubt the two worst organizations I've ever worked with, one of them was a massive charity which I used to give lots of pocket money to as a kid, and they were horrific. So I entirely agree. There's a sort of, there's a big posturing element to impact investment, which is, uh, you know, you even speak to the big associations and say, so I don't see anything in your, you know, your conferences and your newsletters around management of risk. And they go, well, we work in Impact, you know, we're doing God's work. You know, they're like, well, not everyone is aligned with that, particularly if you're doing it in complicated places.

Speaker A: It doesn't surprise me what you say about the charity. And I think the reason that so many charities are so, uh, hopelessly mismanaged and also corrupt is that they don't have, they don't have the profit motive. And profit has been demonized. And it is a flawed metric. But I think it's an extremely important signal, as I said in my introduction. And without it, you're entirely dependent upon, uh, values which can very quickly just become the political whim of whoever happens to be in charge. And so I think people that manage charities have a very difficult job precisely because they don't have that, that profit motive to kind of backstop their strategy.

Speaker B: Yeah, I would agree. And also there's a, you know, there's an element, and it's been a reckoning that I've had in running my own business where if you want to do certain things that are important to you in terms of sort of from a Personal point of view. So our family, uh, background, you know, ah, has a lot to do with agriculture and um, forestry. And so that's the sort of a passion area if I want to have any change, uh, impact or in that space. You need to make money, so you need to be good at making money to make those changes.

Speaker A: Yeah. Uh, what changes would you like to see in agriculture? What interests you?

Speaker B: Regenerative, uh, in the sense that the um. The. I mean it gets accentuated when you have kids, but the. And we were living in Asia for a long while. We're getting hold of good quality ingredients is pretty tough. And so you have that sort of the bioavailability, nutritional aspect, but also then the uh. Like what we're seeing at the moment in regenerative systems, you're gonna have greater storage of water in the soil, which is gonna increase drought tolerance, but also fire resistance, et cetera. And um, just the. We live in the countryside and overlook a bunch of monoculture fields. And just seeing what the farmers. And it's not their fault they're incentivized to do this, but to see what they have to spray on it and do to it, to just make it work is not a particularly viable system. And there's this sort of misnomer that we have to have massive sort of monoculture crops to feed a growing population, which I think is a little bit misguided. There's a lot more to it than that.

Speaker A: Yeah, that's a fascinating topic because I think there's a growing awareness that it doesn't have to be like that, but we're kind of all trapped in this supermarket system, aren't, um, we. And it's not just us, it's America. It's the Western world really.

Speaker B: And it's the transition. And then there's big Ag and there's um. My brother works in sort of regenerative agriculture on the fundraising side and he has some of the SPBs that they've done have been to do with transitional finance because that's the first step. You've got to, uh. These people are not farmers. Not operating on exactly massive margins, if any at all. And so there's got to be incentives. But then you have the Monsantos and the other big ags who are not aligned with that. So it goes back to your farmer point, which I think if I was going to make an overall ethical observation about Asia versus coming back to the west is in the west, we've got to get over ourselves a bit and stop always thinking, um, about our own individualism and think a bit more sort of longer term and take personal responsibility and start to do the things that just pick that one thing that you actually care about. And so back to go, sort of in a circularity from your 500 ESG question is, I'd far prefer that organizations go, you know what we're going to, this is in our interest, whatever it is, um, clean water. So we're going to focus on seeing how we can impact that in our environment for the next three years. And that's going to be the thing. And if we each took one thing and saw it to conclusion, we might have better outcomes rather than this kind of endless box ticking posturing.

Speaker A: Well, Rupert, I think that might be a good place to leave it. Thank you very much.

Speaker B: Well, thank you for having me. It's been a pleasure.

Speaker A: It's been very interesting. Thanks.