Business Respect - CSR Dispatches No 110 - 13 May 2007

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An email newsletter with news and discussion focusing on corporate social responsibility globally, looking at the companies in the news and the emerging issues. Linked to the website at http://www.mallenbaker.net and produced every two weeks.

In this issue, we consider whether private equity takeovers mean the end of corporate social responsibility.

In the news:

Feature articles on the internet:

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Topics:

Want to read a hyperlinked version of this issue? You can find one on the website at http://www.mallenbaker.net/csr/nl/110.html.

Copyright 2006 Mallen Baker. All rights reserved. For information on how to subscribe, go to http://www.mallenbaker.net/csr/nl/subscribe.html

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Welcome

During the last two weeks, Business in the Community ran a major climate change summit hosted by the Prince of Wales and bringing together 1200 businesses, it launched the CR Index in the UK's Sunday Times with a reception of CEOs, and ran a two day conference in partnership with the good folks at Ethical Corporation. All of which should go some way to explaining why there has been a gap between this issue of the newsletter and the last one. Normal service will be restored when we can figure out just what normal service is anyway these days!

One of the subjects discussed at the conference was the growing focus on private equity. It's a theme we pick up in this issue, with some initial reflections on what people are saying in the rise of public concern about the sheer value and number of private equity takeovers in recent months, and what this might mean for the corporate social responsibility of the acquired companies.

For my monthly column at Ethical Corporation this month, I also spent a little time reflecting on the sad fate of Lord Browne whose impressive business career unravelled during the last month. Personally, I am convinced he will be remembered for the significant achievements at BP and his environmental leadership. There will be plenty wanting to work with him in the future to capitalise on the respect he carries still within the business community and to benefit by his qualities.

Mallen Baker
mallen@mallenbaker.net

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CSR News 13 May 2007

Google shareholders reject censorship motion

A majority of Google shareholders has voted against a motion to end the self-censorship of the company's Chinese search portal.

Google said that it appreciated the spirit of the proposal, but recommended shareholders to vote against because applying a "rigid set of rules" would not advance the cause of free expression.

Amnesty International praised the motion. Its UK campaigns director Tim Hancock said: "Google can't claim on the one hand that freedom of expression is central to its mission, and on the other provide a censored product in order to increase its earnings and prominence in the Chinese marketplace".

Survey: Americans disapprove of companies performance on CSR

A majority of Americans from all sides of the political spectrum have said that they would look towards legislators to correct poor CSR performance by US businesses, according to a recent survey.

96 percent of Democrats, 80 percent of Independents, and 65 percent of Republicans — say that it is either very or extremely important for Congress to ensure that companies are addressing social issues.

Over three quarters of the respondents to the survey, which was carried out by Fleishman-Hillard and the National Consumers League, said US companies had poor records on CSR, with a big focus on sectors such as energy, food, chemicals and pharmaceuticals as needing more oversight by authorities.

“The generally lukewarm perception of U.S. corporations on social responsibility, along with the prevailing belief that Congress may need to get involved, could lead to increased oversight of the private sector on Capitol Hill,” said former U.S. Sen. Jim Talent.

US: Purdue Pharma guilty of marketing deceit

Purdue Pharma, which makes painkilling drug OxyContin, pleaded guilty to charges that it misled doctors and patients over false claims that the drug was less able to be abused than other similar substances.

The company was fined $600m, one of the largest amounts for such a charge of product 'misbranding'. Three senior executives are also to pay $34.5m in fines. The action came after significant rates of addiction and crime related to the drug had been witnessed in parts of the US. The company had previously won lawsuits brought by former patients claiming that they had become addicted to the drug.

The case is just the latest example of misbranding actions brought by the Justice Department against pharmaceutical firms. Bristol Myers-Squibb pleaded guilty during the same week for making false statements relating to anti-clotting drug Plavix.

Starbucks reaches deal with Ethiopia

Starbucks has reached a deal with the Ethiopian government to recognise the importance of Ethiopia's speciality coffee beans in its marketing.

Ethiopia and UK campaigning NGO Oxfam had attacked Starbucks previously for what they claimed was action to block attempts to trademark Sidamo, Harar and Yirgacheffe coffee beans - an accusation which Starbucks denied.

The US National Coffee Association had argued that trademarking the beans could lead to the coffee beans being priced out of the market.

Oxfam welcomed the move as a step forward for the trademarking plans.

Apple makes green pledges

Apple computer, which has been criticised by environmental groups over its green credentials, has announced that it is to stop using toxic and hazardous chemicals in manufacturing.

Apple said it had already done a lot to clean up its manufacturing processes and aims in future to remove arsenic from displays by the end of 2008, and to stop using polyvinyl chloride (PVC) and brominated flame retardants (BFRs) by the same date.

Greenpeace praised the company for deciding to phase out these chemicals before other computer manufacturers, but said it coudl do more to improve its approach to recycling.

China: Heavy industry drives pollution increase

China is seeing growing pollution caused by the burgeoning investment in heavy industry, according to a recent study in Washington. The growth of steel, aluminium and cement plants has started to reverse longstanding progress in energy efficiency.

The report suggests that although China's future challenges will be consumption-led demand for energy, at the moment the surge of growth has been from industry. China is forecast to surpass the US this year as the largest emitter of CO2, although it remains far behind in terms of its per capita emissions.

The Chinese government has set targets to improve energy efficiency and to reduce pollution. The study shows how difficult these targets will be to meet.

KFC wins trans fat lawsuit

A US federal court has thrown out a lawsuit brought against Kentucky Fried Chicken over allegations that it failed to tell customers it used oils containing trans fats.

The case was dismissed by US District Judge James Robertson, who said that the plaintiff had not shown that the trans fats in question had actually caused him to suffer any ill effects.

Trans fats, which have been used in the past to enhance flavour, are now thought to raise levels of cholesterol in the body, increasing the risk of heart disease.

KFC has recently announced that all of its US restaurants are now using oils which are free of trans fats.

Rolls Royce to leave Sudan

Aerospace firm Rolls Royce has said that due to the worsening humanitarian conditions in Darfur, the company will pull out of the Sudan.

The company has said that it will not seek new business in the country - it currently supplies engines to oil firms based there - and it will gradually withdraw from existing contracts.

Rolls Royce does not have any direct presence in Darfur, nor does it undertake contracts with the Sudanese government.

Hamish Falconer of the UK's Sudan Divestment campaign welcomed the move, and described it as a challenge to other companies that remain in the country.

Japan: Shinsei to be ordered to end misleading ads

The Fair Trade Commission is to instruct Shinsei Bank to end a series of misleading advertisements, the first time Japan's FTC has made such an order to a bank.

Adverts distributed by the bank for derivative products in the form of leaflets at branches have been held to have been against advertising law. The most expensive option of four different plans was printed in large type whilst three lower rates were not printed at all.

According to the FTC, the materials did not provide customers with enough information about possible downsides of the products in terms of higher risk for higher yielding funds.

France: Total chief executive investigated for corruption in Iran

Christophe de Margerie, the chief executive of Total, has been placed under judicial investigation as part of a review of alleged corruption involving the company in Iran.

The allegations involve alleged illegal payments made to gain a natural gas deal in 1997. The judicial investigation is the first stage that may lead to eventual prosecution.

Total has said that it retains confidence in Mr de Margerie and believes that nothing improper will be discovered by the inquiry.

BP under fire over safety culture

A new report has given the strongest criticism yet of the 'unsafe culture' at BP which led to the explosion in 2005 at a Texas refinery that killed 15 people.

The US Chemical Safety Board report says that poor safety standards were a big factor in the explosion, with such elements as cost-cutting at the Houston plant leading to ageing equipment that needed upgrading.

The Texas City blast was America's worst industrial accident in more than a decade. BP has set aside $1.6bn for legal claims arising as a result. The company's reputation as a well-run company and a champion of the environment has suffered enormously as a result.

BP bought the Texas refinery when it merged with Amoco in 1998. Soon after, according to the report, the company ordered a 25 percent cut in fixed spending at its refineries. All levels of management, including the board, were held to be at fault for the resulting problems.

Since the incident, BP has created an advisory board to oversee US opeation and has committed to keeping executives better informed on safety issues.

Australia: AGL to become first major company to take up carbon trading

AGL, the major energy company, is to join the Chicago Climate Exchange in order to benefit from steps it has already taken to cut greenhouse gas emissions. The move seems likely to embarrass the Australian federal government which has resisted policy moves on climate change.

The company says it has invested almost $2bn in renewable energy during the last year, with more investments planned for the near future including the largest windfarm in the southern hemisphere in Victoria.

Members of the Chicago Climate Exchange are able to trade emissions allowances, enabling AGL to benefit from its progress on renewables by selling capacity to companies that have not yet been able to develop equivalent infrastructure.

The Australian government has resisted either setting up a trading scheme of its own or ratifying the Kyoto Protocol.

CSR FEATURES from the Internet

Giants take on the climate - 8 May 2007 FROM Financial Times

ConocoPhillips, the third largest US oil company, is calling for a mandatory national framework to address greenhouse gas emissions. To demonstrate its commitment, the company has joined the US Climate Action Partnership, a business-environmental leadership group advocating strong national legislation to require big reductions of greenhouse gas emissions.

Read full story

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Private equity - Agents or destroyers of responsible business?

Article by Mallen Baker

It has entered the popular consciousness in some areas of debate around corporate responsibility that there is a new breed of powerful barbarian at the gates. Good, socially responsible companies are being taken over by private equity vultures and stripped of assets and any semblance of values for short term gain. But the debate is now being joined with some vigour in defence of private equity actors.

The charge made by trade unions recently in the UK that private equity firms destroy jobs and wealth has been contradicted by a recent survey published in the Financial Times showing that, for instance, the 30 largest private equity deals made between 2003-4 have created 36,000 new jobs in the UK. Yes, badly run companies that have too many unproductive people may see jobs shed. But if this makes the company more financially sustainable, it means that the company is in a better position to grow in sustainable ways. As a result, private sector job growth in the UK has seen 9 percent growth in private equity owned companies, compared to just 2 percent in plcs.

This is important. The version of corporate responsibility that most businesses would recognise and aspire to comes first of all from a business case – and the realisation that so-called social responsibility that serves to make a business unprofitable is no such thing, since it destroys value and jobs. That is not the end of the argument, of course.

So where are the real pressure points? It is true to say that there is nothing inherent to the private equity model that should mean that privately owned businesses must be inherently less sustainable or less responsible than plcs. If we believe our business case for corporate social responsibility, it is about building and retaining trust with customers, attracting and retaining talented staff, and establishing a good corporate reputation that supports positive relationships with suppliers, government and regulators. None of these business case arguments inherently apply more to the public or private model of ownership.

In some cases, one can see that the model can be very positive. For instance, the TXU deal that saw private equity firms make their $32 billion deal dependent on the firm cancelling 8 out of 11 coal fired power stations on environmental grounds.

There is no doubt that there are plenty of examples when it has gone wrong. Private equity firms have destroyed value, have strangled companies, have laid waste to external relationships. Making poor decisions and suffering the consequences is not a phenomenon unique to the private equity world, however.

Private equity firms buy companies in order to turn them around and then sell them back into public ownership. It is not in their interest to destroy value or corporate reputations in doing it.

What is true, however, is that – out of the glare of public scrutiny – the very smart people that have made a success out of the private equity game have not had such an early opportunity to understand which of the elements of this arcane CSR agenda are really about the ability to generate long term cash flows, and which therefore count when valuing the business. They are sceptical, because flawed arguments based on wishful thinking are the sorts of things they pride themselves on being able to see through – precisely why they get to pick up businesses that the market has undervalued.

But the growth in public scrutiny is already leading this to change. And – as ever – those businesses that succeed in what they do by being fast and operationally efficient have the potential to surprise the critics with the speed they can move once they understand what needs to be done.

What needs to improve is the understanding by the private equity stars of the role of healthy relationships between business and key stakeholders, and the value of values – even in a business that you’re going to own for a few years. Nothing fluffy. Nothing philanthropic. But something to do with sustainable and responsible wealth creation.

What we don’t need is government intervention to restrain a model that genuinely creates wealth in a world that needs wealth creation. What we will, and should, see is a greater requirement for transparency and accountability in how the sector goes about its business. This will follow whether the sector likes it or not, because its increasing size and reach into very well known public branded companies will increase its profile and demands.

And let’s not be distracted by elements of the debate which really are not to do with what the businesses do.

In amongst all the logical argument, swapping of fact and inference, one shouldn’t ignore one other factor that is frankly also part of the dynamic here. The senior partners in the best private equity firms make a LOT of money. The sort of money that if plc executives were given there would be universal uproar and votes against at AGMs, regardless of success or prosperity. Is it right for individuals to make so much money? Warren Buffett may choose to become a leading global philanthropist, but when so few follow in his footsteps isn’t it just an obscene concentration of wealth in the hands of a few? A number of people think so, and some of the vociferous nature of the debate is fuelled by envy.

This is a perfectly valid question to debate – the limits of personal wealth in a moral society - but it is a different debate. The two should not be confused.

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In the news from the latest issue

Nepal: Relatives of killed workers sue US firm KBR for trafficking

US: Proposed Alaskan mine survives people's vote

Merck accused of dressing marketing up as science

Australia: Business lobby group warns over carbon trading

India: Tata Motors threatens pull-out from West Bengal

US: Climate change resolutions making impact on companies

Japan: Details of carbon labeling confirmed

Canada: Wal-Mart has union contract imposed

India: Rising protests against factory building

US: Fraud will cost firms $994bn this year

US: American Airlines accused of safety breaches

Ghana: Call for companies to help clear up electronic waste

US: Disneyland demonstration over hotel worker benefits

Uzbekistan: Major retailers call for end of child labour in cotton

... more news stories

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Business Respect - most recent edition added on 17th August 2008