Trusteeship and Corporate Responsibility: does the share market react the way it should?

In the past few weeks I have written articles that relate to the effect of the BP oil spill in the Gulf of Mexico, and what it means for corporate social responsibility. I have made the argument that Corporate Social Responsibility (CSR) programs are failing society, and that the current financial system doesn’t allow or encourage large transnational corporations to behave in a greater ethical manner (see my article Corporate Social Responsibility: is it a myth? http://wp.me/pS6DN-2w).  When I presented this argument it was put to me by some that profit is not the only determinant of corporate policy, and that corporations with CSR programs are competing with each other to strive to achieve greater responsibility.  Do I agree?

I do agree in principle with this point, there are some corporations who strive to perform in an ethical manner, and if we look to the Indian transnational corporation The TATA group, we can see some great community and employee welfare programs that have been developed along the principle of Trusteeship. Trusteeship is an ethical principle advocated by Mahatma Gandhi in India, at the beginning of the 20th Century, which encourages businesses to act in a way that is good for the community, society and the national good.  However, I don’t believe there are enough examples of this attitude in the corporate world.

Most large corporations are principally concerned with profit making, and I don’t have an issue with this, if it is done with ethical principles employed in this pursuit of profit.   As I have mentioned previously financial markets appreciate and reward profit making behavior, and when the share price increases, so too does the value of the company. This is another principle driver in corporate decision making: creating shareholder value. Unethical behavior can affect the share price, particularly when it impacts upon profitability such as with BP with the loss in profit due to the oil leak in the Gulf of Mexico (see BP oil Leak: is this an indicator of disasters to come? http://wp.me/pS6DN-2c).  There are also ethical Shareholder groups that are investing in the market to encourage greater ethical corporate behavior, but at this stage I believe their impact on the share price is minimal.  However, corporations are still ultimately rewarded by the financial markets for profit making activities, regardless of the ethics of how the profit is achieved.

Two events in the past 24hours illustrate this point for me. Goldman Sachs overnight came to a settlement with the US Securities and Exchange Commission (SEC) over the sale and marketing of the toxic mortgage securities that were partly responsible for the collapse in the global financial system.  The agreement was for a payment of US$550 million and reform of business practices related to the sale and marketing of such securities.  Goldman Sachs was of course one of the banks to have ultimately benefitted from the collapse of competitor banks, sweeping in and buying up distressed assets at bargain basement prices.  It can hardly be suggested that they have behaved in an ethical manner, and especially not in a responsible manner. So what was the response of the financial markets to this news? The share price went up 4.43% in the hours leading up to the announcement, as rumors spread, and then jumped another 5% when the news was made official.

The second example was BP, who after 12 weeks of oil leaking into the Gulf of Mexico, and adversely affecting the livelihoods of millions of people who live on the gulf coast, were able to place a cap over the leaking oil well. This cap has stopped the leak for the moment, and there is ongoing monitoring of the seabed and well to ensure that no blow out will occur. Now this is good news at last for the people of the Gulf of Mexico.  Once again when news of this successful capping of the well reached financial markets it resulted in an increase of 8% in the share price.

Corporate decision making in much of the western world is driven by profit, profitability, and shareholder value. The share price movement in Goldman Sachs and BP illustrate this point as far as I am concerned.  I am sure that Mahatma Gandhi would be most concerned with the behaviors of corporations like these, as they certainly are not adhering to the principle of trusteeship.  If we want Corporations to behave in ethical and responsible ways, then we need to reconsider how we reward companies on the stock exchange.

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Corporate Social Responsibility is it a Myth?

We live in the world of transnational corporations, who are invested in multiple markets all around the globe.  The age of Globalisation has seen global citizens demand corporations don’t live above the law, and are held accountable for their actions. In the past few decades, we have seen the re-emergence of the Super-Corporate Entity. These corporations are huge, have tentacles that stretch around the world, have employees from multiple cultures and nations, are intimately engaged in political discussions in numerous jurisdictions….. and in general have made a lot of money.  But what has this to do with Corporate Social Responsibility (CSR)? Well as global citizens we have ‘demanded’ that corporations behave in an ethical and accountable manner as we the citizens of the world would be expected to behave. Life is more than just pure profit, and we expect our corporations to reflect this world in which we live.

The problem with Corporate Social Responsibility is primarily in the name itself. Corporations are not social enterprises, the do not have core functions to have parties, go to the pub with a mate, or ensure that societies are cohesive. Corporations, particularly in the western world, have a core function of making a profit. The bigger the profit the better. This is essentially the need for Greed. The more the merrier, and as long as the profit is attained within legal boundaries then all is good.  In a society, if a ‘real’ person was acting this way, totally greedy, and self absorbed, only interested in the accumulation of wealth and power, then as a society we would probably not like them very much.  Of course there are some people out there who are like this, but be honest…you think they are a not nice people, and if you don’t need to see them you wouldn’t. So if Corporations can’t be social, how can they be trusted to be responsible?

Now don’t get me wrong, I do believe in CSR programs and statements by large Transnational corporations, I do believe they have value, but I don’t believe they go far enough to truly satisfy the expectations of global citizens.  As I mentioned before corporations are profit seeking enterprises, and so their core function is to achieve profitability. In the last few decades, some large corporations have had brand damage due to poor ethical practices, such as Nike with the use of Child Labour,  ExxonMobil with the Alaskan Oil Spill, and many other examples of brand damage due to a CSR failure. This brand damage has often resulted in substantial losses, and that affects profitability. What happens when profitability goes down? The share price goes down. This is the problem.

Transnational Corporations are highly dependent upon share valuations.  So anything that erodes profitability will be damaging to the share price. Spending more money on CSR, is an expense, which may affect profit negatively, and therefore the share price.  The recent BP Gulf of Mexico Oil disaster is a prime example. It appears as if BP have not acted in an illegal manner, they have operated exactly as required under government regulations, and minimum operating standards.  However, questions have been raised as to whether BP operated to best practice standards, in the development and management of the Oil Rig and Well.  The BP CEO recently suggested that the risk to this Oil platform of collapse was one in one Million. If they had constructed the well in a more rigorous manner, a more “responsible” manner, then the risk may have been one in one billion. The cynic would suggest that BP has now decided to merge the CSR budget with the Marketing budget, in order to get the best message out there about how they will help clean up the mess. It is now about managing the Brand, not necessarily about managing the environmental disaster.  BP is also taking a hit to the share price, so there is some corporate karma out there….but this is too little too late. How many other examples is there that we don’t know about where minimum standards have been employed to ensure profitability, and nothing has gone wrong? Does this make the cost cutting search for profitability ethical? and what value do we place on this corporate behaviour?

If we want Corporate Social Responsibility to be important to Transnational Corporations then we need to develop a financial system that rewards corporations for spending on environmental management, corporate responsibility, and ethical practices. Until we do this, we will continue to see large corporations make decisions that are determined by the ultimate profitability and the share price that follows.

BP Oil Leak: Is this an indicator of disasters to come?

The recent BP oil leak disaster in the Gulf of Mexico is undoubtedly an environmental disaster that will have severe consequences for marine and coastal life in the area. The disaster occurred in April 2010, when there was a catastrophic malfunction on the oil platform which created an explosion which ultimately resulted in the death of employees on the rig and the eventual melting and collapse of the platform. What are we to make from this event?

This disaster is different from the Exxon Valdez oil spill in Alaska twenty odd years ago, in that the breakup of that crude oil tanker in the formerly pristine wilderness environment was contained to a limited area. Of course that “limited area” is still now suffering the costs of this disaster, through among others, the loss of the sustainable fishery as viable economically. The difference in the case of the BP disaster is that the “leak” is from an oil seam beneath the seabed in the Gulf of Mexico, so not only is the oil covering the surface of the water, it is spread through multiple layers of the marine ecosystem. The Environmental impact is instant and widespread, and the longer the leak continues the more widespread the damage will become. Oil deposits are already affecting the shorelines of four American states, and subsequently the economic sustainability of the communities that rely on the Gulf for their livelihoods. This is all bad news for BP, for although ExxonMobil were held responsible for the clean up as in the case of BP, the economic compensation claims were limited to only a few communities. BP is already responding to claims from hundreds of communities along the Gulf. Many more people are directly affected in the Gulf of Mexico than were affected in Alaska.

The Oil rig and platform that ultimately was destroyed was a state of the art platform that essentially “floated” above the oil well. The oil well was in a deep water and so as a result required a flexible drilling platform to deal with the currents and wave movements in the Gulf of Mexico. In years past a drilling operation of this kind would have been economically unviable. However with Oil prices rising to above US$100 a barrel in 2008 before the GFC, and expected to return to that level once the global economy recovers, these wells are now economically viable. Deep water wells of this kind taping Liquid Gas and Oil are now becoming more common around the world. So does this mean there is the likelihood of more disasters of this kind?

In 2010 we have already seen a leak on a oil and gas exploration platform off the North West Australian coast, and these rigs are by their nature in risky environments. The BP have already declared that the risk of this Gulf of Mexico leak event occurring had been one in one million. This is not that high and they have suggested that the industry needs to reduce the risk level to one in one billion or one trillion. Indeed they should!

This environmental disaster will result in significant damage to the BP brand and probably the company’s profitability as well. Don’t be surprised if BP is total transformed in the coming year due to this event. BP have already accepted responsibility for the disaster, and are responsible for the financial claims of citizens effected, responsible for the cleanup, and Bloomberg press have suggested responsible for $1 million a day in royalties. How many companies can afford this sort of financial effect?

We need to learn from this disaster, in terms of managing environmental risk, as well as managing political and financial risk – they are all related in this disaster. Companies need to heed the consequences of disasters like this, and ensure that they do not themselves make decisions that in due time will be seen as risky. As a society we need to consider the true impact of our thirst for petroleum products. The more we consume, the greater the desire to tap these hard to get oil and gas seams, and if that is the case we open the likelihood of more disasters like this to come in the future.

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