====== Tunnelling ======
Tunnelling is a deceptive and often illegal practice where a company's controlling shareholders or senior managers divert corporate assets or profits for their personal gain. Think of it as insiders secretly digging a tunnel to siphon away the company's treasures, leaving the other investors, known as [[minority shareholders]], with a devalued and plundered business. This isn't just about taking cash from the register; it's a sophisticated form of theft that can be disguised through complex corporate manoeuvres. These actions directly harm minority shareholders by transferring wealth that rightfully belongs to //all// owners of the company into the pockets of a select few. Tunnelling undermines the very foundation of fair markets and trust, making it a critical risk for investors to understand and identify.
===== How Does Tunnelling Work? =====
Insiders have a playbook of tricks they can use to tunnel resources out of a company. While the schemes can be complex, they usually fall into a few common categories.
==== Asset and Transaction Games ====
This is the most direct method. Insiders use their influence to orchestrate deals that benefit themselves at the company's expense.
  * **Unfair Asset Sales:** The company might sell a valuable asset, like a factory or a brand, to another private company owned by the controlling shareholder for a ridiculously low price.
  * **Overpriced Asset Purchases:** The reverse can also happen. The company buys an asset from an insider's private entity at an inflated price, effectively funnelling cash directly to the insider.
  * **Transfer Pricing:** In a group of companies, one entity might sell goods or services to another related entity at non-market rates to shift profits to a privately-owned part of the empire.
==== Unfavourable Financial Agreements ====
Money itself can be tunnelled through questionable financial arrangements.
  * **Shady Loans:** The company might provide large, interest-free (or very low-interest) loans to its controlling shareholders or their other businesses, with little expectation of ever being paid back.
  * **Excessive Payments:** This includes paying exorbitant fees for "management consulting" or "advisory services" to entities controlled by insiders, even when few real services are rendered.
  * **Exorbitant Compensation:** While high pay for great performance is normal, tunnelling occurs when executives award themselves and their cronies unjustifiably massive salaries, bonuses, and perks that drain company resources.
===== Why Should a Value Investor Care? =====
For a value investor, tunnelling isn't just a minor issue; it's a deal-breaker. The entire philosophy of [[value investing]] rests on buying a business for less than its real, underlying worth, or [[intrinsic value]].
Tunnelling directly attacks and destroys that intrinsic value. The cash, assets, and profits siphoned off by insiders are value that will never reach you as a minority shareholder. It’s like buying a share in a treasure chest, only to discover the captain has a secret trapdoor to empty it before you get your cut.
This practice is the ultimate sign of poor [[corporate governance]] and untrustworthy management. Legendary investor [[Warren Buffett]] has famously stated he only invests in businesses run by able and **honest** people. Tunnelling is a five-alarm fire signalling that management is not working for all shareholders. No matter how cheap a stock seems, if the people in charge are actively stealing from the company, you're not getting a bargain—you're buying a ticket on a sinking ship.
===== Red Flags to Watch For =====
Spotting tunnelling requires a bit of detective work. While you might not find a signed confession, you can look for clues in a company's reports and behaviour.
  * **Persistent Related-Party Transactions:** This is the biggest red flag. Scrutinize the annual report for frequent and significant [[related-party transactions]]—deals between the company and its managers, directors, or major shareholders. While not always sinister, they demand extreme skepticism.
  * **Opaque Corporate Structures:** Be wary of companies with a dizzying maze of subsidiaries, especially if many are located in offshore jurisdictions with weak disclosure laws. Complexity can be used to hide questionable fund transfers.
  * **A Dominant Owner with Absolute Power:** When a single founder, family, or controlling shareholder has an iron grip on the board of directors and executive suite, there are few checks and balances to stop them from helping themselves.
  * **Weak Legal Protections:** The risk of tunnelling is often higher in emerging markets where laws protecting minority shareholders may be less developed or poorly enforced.
  * **Illogical Business Decisions:** If a company consistently makes decisions that don't seem to maximize profit for all shareholders—like buying a failing company owned by the CEO's brother—it's time to ask who is //really// benefiting.