Business Respect - CSR Dispatches No 55 - 4 May 2003

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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 the controversy around executive remuneration.

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/55.html.

Copyright 2002 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

It seems as though the occasion of the Annual General Meeting has now become one universally to be feared by business management. Whereas in the past one might have been unlucky enough to have a few marginalised protestors making ill-tempered interventions in a way guaranteed to provide a spectacle but little else, now companies are getting serious flak as concerns around social responsibility make the mainstream.

Not only are some of the shareholder resolutions around issues such as human rights and the environment now often getting respectable votes - of a size that would have caused a sensation in previous years. But more directly, some matters of governance are forcing their way onto the agenda - and as often as not passing irrespective of the board's recommendations.

Such a case, for instance, has been the move at Avon, passed with over 80 percent, to introduce governance reforms. So also, there has been a proliferation of motions concerning executive pay. This is one of the most difficult areas for socially responsible business practice. So few areas are so intuitively and obviously wrong as far as the population are concerned, and yet such an article of faith for those who aspire to business leadership. We touch upon some of these issues in this edition, and may come back to them in due course.

Just time left, then, to review the current state of the website - which in contrast is all about whether the fact of pricing goods low can be the principal tenet of a company's social responsibility. It currently stands as follows:

The most important social responsibility a company like Wal-Mart can observe is
Keeping its prices low 82 (16.3%)
Treating its employees well 132 (26.24%)
Minding its impact on local communities 289 (57.46%)

503 people have voted so far - which makes it the most popular vote to date. Still time to make your views known, however!

Mallen Baker
Vanessa Wood
editors@mallenbaker.net

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CSR News 4 May 2003

ChoicePoint collects detailed information on foreign populations

ChoicePoint, a data-gathering company, is being paid millions of dollars by the Bush administration to collect personal information on the populations of foreign countries, according to The Guardian newspaper. The activity has created controversy, with some governments alarmed that the records may have been illegally obtained.

The company received at least $11m from the US Department of Justice last year to supply data, mostly on Latin Americans, which may include details such as tax records and blood groups. The government in Mexico has begun an investigation into the activity, and police in Nicaragua have raided two offices suspected of providing the information.

ChoicePoint could be liable if providers of information are shown to have broken local laws. This could lead to lawsuits against the US government where data can be shown to have been made accessible.

The company has denied any wrongdoing, saying that all its information is collected legally.

Ecuador: ChevronTexaco fights $5bn oil pollution suit

ChevronTexaco's subsidiary Texaco Petroleum dumpted oil-laden water into unlined pits, estuaries and rivers in Ecuador between 1971 and 1992, according to a $5bn suit against the company. ChevronTexaco is due to begin its defence against the charge during the next few days.

People living near the fields, which are now operated by the state firm Petroecuador, say that the oil pollution destroyed sources of drinking water and caused major health problems in the area. The company denies the charges, saying that discharges had been fully treated and could not have created the harm described.

"It is important to remember that oil operations are ongoing in the region, so how can anyone say that TexPet is the one responsible for any current impact," said ChevronTexaco spokeswoman Maripat Sexton. "TexPet was committed to ensuring that there was no lasting impact to its operations."

The case may last as long as two years.

Japan: Astrazeneca under fire for cancer drug deaths

Astrazeneca has said that it stands by its lung cancer drug Iressa in the face of growing controversy in Japan after authorities there said it had been linked to a further 69 deaths, bringing the total in Japan to 246.

Iressa is a drug used as a last resort by people who have already undergone unsuccessful chemotherapy or radiotherapy. Side effects of the drug's use can include interstitial lung disease.

In once typical case reported by The Japan Times, Mitsuko Chikazawa died at the age of 31 from the lung damage side effects, leading her father to consider filing a compensation suit. "I do not want the death of my daughter, who suffered so much from the side effects, to be wasted," Chikazawa said. "I have to do something so there will be no more victims of the side effects."

According to the company, one percent of people worldwide who have been treated with the drug have developed the lung disease while 40 percent of patients have seen benefits including their tumours shrinking or a relief in symptoms such as shortness of breath.

Avon shareholder governance motion passes with 80 percent vote

A shareholder resolution calling for the annual election of directors which had been opposed by the company's board has been passed at the company's AGM with over 80 percent of shareholders in favour - the largest vote of its kind.

Timothy Smith, Senior Vice President at sponsors of the motion Walden Asset Management said: "This vote ranks as one of the top ten votes ever in U.S. corporate history, where the resolution was opposed by the Board. This vote of the 'post-Enron era' is a sign that shareowners are taking their rights and responsibilities seriously and are using their voice and vote to press corporations to adopt more effective corporate governance principles and to act as responsible corporate citizens."

Avon CEO, Andrea Jung, responded to the vote stating that there had been a "groundswell" supporting this position, that the Board's Governance Committee would review this issue with the utmost seriousness, and would report back to shareholders.

Avon was also questioned for its use of a potentially dangerous chemical, Parabens, in products and representatives of breast cancer organisation challenged the company to ensure that more money from its breast cancer walks went to the organizations and communities in need. Last year, Avon dropped the firm that organised the breast cancer walk after hearing criticisms that too much money had been kept for administrative expenses.

Morgan Stanley CEO lack of contrition earns S.E.C. rebuke

The chief executive of Morgan Stanley, Phillip Purcell, has been criticised by the Securities and Exchange Commission (S.E.C.) for comments made to institutional investors where he downplayed the recent settlement of $50m. The settlement, made without admitting liability, followed charged filed by the S.E.C. for misconduct.

The rebuke was delivered via a letter from the S.E.C. chairman William Donaldson, where Purcell's comments were described as reflecting "a disturbing and misguided perspective on Morgan Stanley's alleged misconduct".

The letter went on to point out the seriousness of the charges against Morgan Stanley, which included charges that the company paid other firms to provide research coverage, and compensated its research analysts partly on the degree to which they helped generate investment banking business.

Mr Donaldson suggested that the reported comments called into question Morgan Stanley's commitment to legal compliance.

Australia: Fund managers hinder good corporate governance

The obsession of fund managers with short-term results and share prices is obstructing good corporate governance, according to Peter Costello, Australia's treasurer speaking of the impact of the HIH Insurance scandal.

Mr Costello, speaking to the Organisation for Economic Co-operation and Development forum, said that fund managers are often rewarded by returns which gave them incentives to pump the stock. He encouraged investors to use managers who charge a fee rather than those that take an equity position to avoid conflicts of interest.

"I am not sure that the managers themselves learnt how to distinguish between their own incentive and that of their clients. I think also the tendency became very short-term. Quarterly returns, quarterly rating. Nobody was interested in long-term investment and I think that undermined the idea of the company" he said.

KFC to introduce animal-welfare standards

KFC, the US chicken restaurant chain, has announced new standards described as guaranteeing humane treatment for its birds. The company has also requested a federal government review of slaughthouse methods for poultry.

The company is the latest to respond on welfare issues following a targeted campaign by People for the Ethical Treatment of Animals (PETA). However, unlike with previous announcements, the move was dismissed by PETA.

The new standards apply to the birds' housing, nutrition and transportation to the slaughterhouse, and will be pushed down the supply chain. The company has described them as marking the first time the industry has set farm-level poultry welfare standards.

"KFC is committed to the humane treatment of poultry used for our products," said KFC President Cheryl Bachelder. "Our new guidelines will strengthen KFC's animal welfare practices."

PETA, meanwhile, declared itself to be "disgusted that KFC would attempt to deceive compassionate consumers". It went on to charge that the company was ignoring its own advisory board's recommendations that it adopt further reforms.

"These industry 'standards' do nothing to allow chickens to have anything resembling a natural life. Instead, they allow for the drugging and breeding of animals to make them grow so quickly that they can barely stand and are in constant pain from splintered limbs, from being slammed into crates when inspectors aren’t watching, from having their beaks seared off, and from being sent through the slaughter process while still conscious" it said in a statement on its website.

Enron: Broadband business was 'an illusion'

US Federal prosecutors brought indictments against eleven former Enron executives which included charges that the company's broadband business had been largely an illusion. The move brought to eighteen the number of people charged with crimes arising from Enron's business activities and introduced a shift in focus for the Enron scandal.

The broadband indictment accuses Enron of having celebrated its creation of technology that was not yet a reality, and in so doing falsely driving the company's share price up. The entire senior management team of the broadband division is included in the indictment.

Sudan: Sweden's Lundin Petroleum pulls out

Just two months after signalling that it would not follow Canada's Talisman in withdrawing from the Sudan, Lundin Petroleum has finalised the sale of its interest in the Sudan to Malaysia's Petronas for $142m.

Lundin denies that the move was prompted by the growing pressure over human rights, saying that the sale was purely profit-driven. The sale is subject to approval by the Sudan government, but is expected to go ahead within the next two months.

Lundin said that the proceeds from the sale would be used to further develop the company's production and reserve base.

Campaigners have long argued that oil company revenues help to fuel the conflict in the Sudan between the Sudanese government and opposition forces.

BP and BAKU consortium attacked for breaching OECD Guidelines

A coalition of environmental groups has used the ministerial meeting of the Organisation for Economic Cooperation and Development (OECD) to issue a statement accusing the BP-led consortium of breaching the OECD guidelines of corporate responsibility in its push to build a pipeline between Azerbaijan and Turkey.

The NGOs argue that the coalition has exerted 'undue influence' on the regulatory framework for the project, sought or accepted exemptions relating to social, labour, tax and environmental laws, and undermined the host government's ability to mitigate serious threats to the environment.

"While violating agreed international norms, the BTC consortium has the gall to expect taxpayers to support this project through public financing from the World Bank and export credit agencies," said Heike Drillisch of WEED in Germany.

The pipeline is to be completed by 2005, and will export up to a million barrels of crude a day from the Caspian Sea to the Turkish port of Ceyhan.

Kuoni drops Myanmar travel under pressure

Travel group Kuoni has announced that it is to remove Myanmar from its 2004 travel brochure following protests from human rights campaigners in the UK.

According to the Guardian newspaper, Sue Biggs, managing director of Kuoni UK, has ascribed the action to 'recent events in Asia' and low public demand.

Campaigners from the Burma Campaign, however, view the move as a significant victory.. Kuoni had, they said, been ignoring requests to meet until the company had been added to a 'dirty list' and given significant publicity as a result.

The Burma Campaign is continuing to target other companies, including Austrian Airlines / Lauda Air and PricewaterhouseCoopers. (The Guardian)

Two million workers die each year

The International Labour Organisation has said that around 5,000 job-related deaths occur each day - around 2 million per year. In addition, employees suffer approximately 270 million occupational accidents. The figures also include some 12,000 child labourers who die from work-related causes.

The figures have been released by the ILO in a new booklet 'Safety in Numbers', summarising current world knowledge about the toll of workplace illness, injury and death. It suggests that around $1,250,000 million annual losses to global gross domestic product are caused by the accident rate.

In addition, the report says that costs borne by society due in part to work-related accidents and diseases include early retirements caused by disability which, on average, shorten working life by about five years; absenteeism that varies from 2 to 10 per cent, depending on sector and type of work; unemployment that may stem from impairment of working capacity due to illness and affects an average of one-third of all unemployed people; and poverty at home caused by the partial or full loss of income, especially among women workers.

Companies need to create a 'safety culture' to improve workplace occupational safety and health.

GlaxoSmithKline cuts AIDS drugs prices

Just days after Calpers, the California Public Employees Retirement Scheme, called for GlaxoSmithKline to cut its price of HIV/AIDS drugs for developing countries, the company has announced that it is to do just that.

The company has reduced the price of Combivir by nearly 50 percent to 90 cents per day. It said that the reductions have been made possible by continuing improvements to the manufacturing process leading to economies of scale.

"These price cuts demonstrate our commitment to making vital medicines
more affordable through sustainable preferential pricing," said Jean-Pierre Garnier, CEO of GlaxoSmithKline. "In June 2001, when we expanded our access programme, we promised to continue to find ways to reduce costs and pass those savings on to patients. We did that in September 2002, and today we are again delivering on our promise."

GSK's not-for-profit prices on AIDS drugs covers a wide range of customers in the Least Developed Countries - a total of 63 countries.

Sean Harrigan, President of the Calpers Board of Administration said: "Glaxo should be commended for this move. It is a significant step forward for the company. We asked the company to examine the price of their AIDS therapy drugs and offer the lowest possible price without long-term harm to the company. Glaxo has answered with good news that will help advance the HIV work in the world's poorest countries while considering the financial health of its shareholders."

Jean-Paul Garnier went on to call for others to do their share in addressing the problem. "Improved healthcare in the developing world can only be delivered if the significant barriers that stand in the way of better access are tackled as a shared responsibility by all sectors of global society -- governments, international agencies, charities, academic institutions, the pharmaceutical industry and others. The forthcoming G8 meeting in Evian presents an early opportunity for the developed world to demonstrate its commitment and leadership in addressing this global challenge."

CSR FEATURES from the Internet

Campaign Finance, Corporate Nigeria And Social Responsibility - 30 Apr 2003 FROM This Day (Lagos)

The N2billion donated by the NGO group known as Corporate Nigeria is peanuts for them as a Stock Exchange assessment of their financial portfolios and AGM Reports will show. Let us distinguish between two groups.

One is true Corporate Nigeria, CN, meaning all Companies and Corporations in Nigeria including those quoted on the Stock Exchange. The other is Corporate Nigeria, the NGO, referred to here as CNNGO, which has 2billion to spend on Corporate Social Responsibility (CSR) and has devoted that sum this year to democracy enthronement.

Read full story

Ethical investment is a rare commodity at the expense of the bottom line - 27 Apr 2003 FROM Scotland on Sunday

Much as it goes against the grain to praise the legal profession in any way, I was reminded earlier this week of one of the benefits of the profession. A company called Meridian Gold Inc, based in Reno, Nevada, bought 550 odd acres of land in Argentina with the intention of mining gold. Meridian had intended to spend about $400m developing the site and to pay good wages to 400 local people into the bargain. The stronger gold price, coupled with the cheap peso, would seem to make this an interesting venture, but work has been stopped by protesters.

My first and rather cynical question would be about the identity of these protesters. Are they really locals, or has a protest group descended on the place in order to protest on the locals’ behalf? It would be a pity if activists had been bussed in, after all, the choice between being poisoned to death or dying of poverty should surely be left to those who will actually do the dying, rather than some unelected spokesperson.

Read full story

Major US companies doubt Global Compact credentials - 22 Apr 2003 FROM Business Day

Four years ago, Kofi Annan, secretary-general of the United Nations (UN), addressing the Davos World Economic Forum in January 1999, challenged business leaders to join a "global compact of shared values and principles" and give globalisation a human face.

Annan argued that shared values provided a stable environment for a world market and that without these explicit values, business could expect backlashes from protectionism, populism, fanaticism and terrorism.

Read full story

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Executive remuneration and Corporate Social Responsibility

Article by Mallen Baker

It seems that there has been something of a minor revolution in what shareholders are prepared to accept from business management. In particular, the protests about perceived excessive levels of executive remuneration have swept the recent round of AGMs like the corporate equivalent of SARS.

What are the rules here? Is this the last bastion of corporate greed, or is there simply no response to demands made in this area that would constitute a body of best practice within the terms of corporate social responsibility?

The arguments are straightforward. Senior directors earn absurdly more than the other workers in their business. Sure, they work hard - but not that hard. Their value has been defined purely by what the market will bear - and because remuneration committees are peopled by other company directors who have an interest in the market norm being constantly raised, so the salaries and benefits just spiral upwards.

Every now and then, you will hear a beleaguered director complain about the intense scrutiny, perhaps arguing that nobody gives the equivalent attention to the amount that rock stars earn - people who don't work so hard, and who don't support businesses who employ thousands of other livelihoods.

Of course, it is a false comparison. Rock starts earn only in proportion to the number of people willing to buy their records. Their salary isn't set by a committee of their chums without reference to their success or popularity.

The real fuel for the complaints of the last few months has been the apparent lack of a link between success and reward. Some of these executives seem to be granted great fat pay-offs, even if during their tenure the stock price has plummeted to depths never imagined. "We don't mind rewarding success" some people say, "but not failure". Interestingly, this principle didn't stop considerably controversy over the package awarded to Jack Welch, seen by many as one of the most successful senior managers ever. This does seem to raise the question whether the issue of success or failure is really at the heart of this controversy, or whether it is simply the feeling that the sums now involved are just disproportionate to any measure of what one person's contribution can be worth.

So within all that, we have a few issues:

1. How much is it decent for the successful senior executive to earn? Should there be a formula, such as a percentage of the average wage in the business, or reference to a going market rate? If a senior executive is removed by whatever process, they may often find that they won't work again, at least not at that level. Should that level of risk be recognised within the remuneration, or not?

2. How should the market standards be set? Clearly, the perception today is that the current system of remuneration committees has simply served to constantly drive up expectations - and all senior directors would obviously aspire to be in the top quartile on the pay scale. Is there an alternative mechanism that could be acceptable to business that would reward excellence whilst restraining the upward spiral?

3. How should success be measured? It's all very well to focus on the share price, but the general approach to running a quality business should be on putting in place the fundamentals for sustainable and responsible wealth creation, retaining staff and building trust. There are times when, with the best will in the world, share price will fall because the market is unsettled for other reasons. So long as the business fundamentals are strong, those who are with the company for the long term should not suffer. So measuring success and failure should not be so quick a process.

By and large, the business-led movement for corporate social responsibility has avoided all this like the plague. You do not persuade senior business leaders to take CSR seriously whilst leading with demands - that many perceive to be driven purely by envy - for them to receive substantially less benefits. And although I tend to believe that most aspects of CSR are best developed by the businesses - responding to the expectations of their stakeholders whilst preserving the processes that make the business successful - there is a strong argument that this is one of those areas that could never be taken forward on a business-led basis.

The trouble is, it isn't easy to envisage what alternative routes there might be that would work. Many of the groups who make the most noise about executive remuneration project a general anti-business stance - they clearly do not value the work that the CEO does, and frankly are not quick to differentiate between a good one and a bad one.

Likewise, public legislators are probably the very worst people to wade into this territory. The record of knee-jerk legislation drafted in response to an outcry has not been good.

Logically, the people best placed to hold the business leaders to account, as you might expect, are the shareholders. The problem is that the shareholders have been disconnected from the fundamentals of the business for so long, they have only themselves to blame if they now find aspects of the businesses not to their liking.

For decades, owning shares in companies has become a game of chance - a way to make money quickly from assets and processes that you briefly own, but take no responsibility for. The fact of ownership without the responsibility of ownership is exactly what has created businesses that have been able to thrive financially without an eye to some of the fundamentals of risk and sustainability - leading to problems later.

Since executive leaders aren't held to account by shareholders on how they establish the fundamentals for sustainable wealth creation, it shouldn't be surprising that there are no mechanisms for aligning remuneration according to these goals. Perhaps the way forward would be for remuneration committees - in addition to business peers, to have representation from other reasonable, pro-business stakeholders whose role would be to measure the CEO's success against criteria set for sustainable wealth creation - measured in terms such as employee retention, public trust, as well as financial performance.

Of course, business leaders won't voluntarily go down this road - it's just a little bit too close to the extreme view that directors should be responsible to all stakeholders, not just shareholders. That isn't a practical way of running a business. But since the shareholders currently fail to look beyond the short term to what constitutes real successful performance, what other way would there be?

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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

To make any comments / suggestions re. this site, please contact mallen@mallenbaker.net
Business Respect - most recent edition added on 17th August 2008