Corporate social responsibility - It's not all about the money? Right?

Corporate social responsibility is becoming an increasingly important objective for businesses. It refers to the efforts made by a company to behave ethically and contribute to the welfare of society.

In addition to contributing to the welfare of the state, acts of corporate social responsibility can grant companies with lots of positive publicity, however, alternatively acts of unethical business practice can have adverse effects on a company’s public persona.

A company that has recently suffered lots of negative press as a result of its unethical practice is Primark. The clothing retail giant has been reported throughout the media regarding the poor working conditions in some of its manufacturing facilities overseas.

‘Primark tops list of unethical clothes shops in poll that shames high-street brands’ – (Brand Republic.com, 2005).

An article on the CSR European website suggests that corporate social responsibility is becoming increasingly more important in the eyes of the investors, apparently CSR is significantly effecting many people’s investment decisions. Corporate social responsibility is therefore an element of business that must be considered to those wishing to maintain a positive image in the public eye, although, as stated in the Primark example, a firm’s CSR may not have as significant effects on a company’s financials as previously thought...

In 2008, the firm was targeted by BBC Panorama who produced a documentary on the company’s use of sweatshops abroad. The documentary sparked lots of negative media attention to be focused on the company and yet, despite this, the unwanted publicity doesn't seem to be enough to deter people from shopping there..

‘Primark profits soar 35%’ – (The Guardian, 2010).

In a seminar I attended recently, hosted by Niamh Brennan regarding her new paper; ‘the dirty laundry case’ she explained the efforts made by Greenpeace to stop the use of toxic chemicals in the production of sporting attire by some of the major sporting brands. Public displays and press releases carried out by Greenpeace to create awareness of the issue obviously had the desired effects as all of the manufacturers targeted withdrew the use of such chemicals within weeks of the campaign.

However, had the companies failed to comply would the company have suffered financially?

Everyone can show disgust and pass judgement on such poor manufacturing standards but if it keeps the cost a new outfit to below £10, do people really care?

‘Primark sales rise despite cost pressures’ – (BBC News, 2011)

Apparently not.

In 1994 John Elkington designed a system that could be used to provide full measure of the ‘financial, social and environmental performance of the corporation over a period of time’ (The Economist, 2009). He called the model the triple bottom line. The model focuses on the three ps:

- Profit
- People

- Planet

 

The models aims to evaluate the ‘people’ and ‘planet’ factors using measures such as: the excessive use of hydrocarbons and the exploitation of cheap labour.  Although these factors can prove difficult to measure, an increasing awareness of the social and environmental impact of business practice has led to many companies improving their ethical and environmental standards.

Nike and Tesco have been amongst some of the bigger firms that have been made to improve their ethical standards, particularly in countries like Bangladesh and Mexico where labour conditions are largely unregulated often leading to exploitation of workers.

I agree that such practices are very difficult to measure, for example; BP has recently had huge issues measuring the extent of the spill in the Gulf of Mexico. Obviously, there’s the cost of oil that was wasted but then also environmental damage, damage to wildlife, to the welfare of the fishermen and other people that make their living from working in the Gulf, the cost of the 11 men that lost their lives, the list goes on…

Although you cannot really put an accurate calculation to such factors, the increasing transparency and responsibility firms are taking regarding the ethical implications of their operations is leading to a fairer and more environmentally friendly world.

Hopefully this increasing awareness will lead to the growth of more organisations such as: The Fairtrade movement that focuses on giving farmers and suppliers from around the world a fairer wage. The group was started in 2006 and has shown promising growth ever since. I understand there’s a long way to go to significantly reduce the amount of exploitation and corruption of workers and environmental standards in the world, but at least the examples shown here indicate quite a promising start.

Sources used:


Whitehead, J. (2005) 'Primark tops list of unethical clothes shops in poll that shames high street brands', The Republic.com Website, [Online]. Available at: http://www.brandrepublic.com/news/532319/ (Accessed: 24/03/11).

The Guardian. (2010) 'Primark profits soar 35%', The Guardian Website, [Online]. Available at: http://www.guardian.co.uk/business/2010/nov/09/primark-profits-up (Accessed: 25/03/12).


BBC News. (2011) 'Primark sales rise despite cost pressures', The BBC News website, [Online]. Available at: http://www.bbc.co.uk/news/business-12237010 (Accessed: 24/03/12).


The Economist. (2009) 'Triple Bottom Line', The Economist Website, [Online]. Available at: http://www.economist.com/node/14301663 (Accessed: 24/03/12).

The Credit Crunch

Since 2007 terms such as; recession, economic depression, the double dip, the credit crunch, the downturn, the business cycle, have been on the lips of the nation but what actually is a recession?

In economic terms a ‘recession’ refers to a period of two consecutive quarters of negative economic growth. However, over the past few years the UK has seen a period of economic contraction for ‘a record six consecutive quarters’ (The Telegraph, 2010).

So where did it all go wrong?

There is much disagreement amongst economists regarding when signs for the recession officially started with some people believing the cracks were beginning to show way back in 2001, others specify the date to be 9^th August 2007. On this date the French Bank BNP Paribas halted withdrawal from three of its largest investment funds because it couldn’t accurately calculate the value of their securities.

The announcement knocked 3.4% off of BNPs share price and 1.9% off the European stock index (Bloomberg, 2007).

Economists believe on that date the first domino fell.

For years prior to 2007 lending from banks had been on the increase, loans, mortgages and credits were given out far too easily, often to people that couldn’t afford the repayments. The turn of the millennium saw the dot-com bubble burst and a terrorist attack on the world trade centre. As a result the US Federal Reserve reduced interest rates making credit cheaper, this resulted in an increase in public borrowing in the forms of mortgages and loans.

These loans were then securitized by the banks, pooling all of the loans together to form collateralized debt obligations (tranching). These “CDOs” appeared to be an attractive investment and were given credit ratings that did not truly reflect their risk of investment. Many were given AAA credit ratings which, according, to the Moody credit rating agency deems the investment: prime, maximum safety, high grade, high quality. As the CDOs began to default and become worthless, banks stopped leading to one another, in some US market segments liquidation completely evaporated, this made it ‘impossible to value certain assets fairly regardless of their quality or credit rating’ (Bloomberg, 2007).

One of the first major signs in the UK of the recession was the Northern Rock fiasco. Due to the reduction of lending amongst banks Northern Rock couldn’t secure any loans and as a last resort took financial backing from the Bank of England. As this information seeped through the media it triggered a run on the bank with thousands of savers heading to their nearest Northern Rock to essentially, empty their accounts. ‘Faith in British banking was being destroyed’ (BBC News, 2007).

Since then things simply got worse, UK manufacturing starts to decline, house prices fall, in April 2008 the UK announces its officially in a recession after ‘a run of 63 successive quarters of growth stretching back to 1992’ (Telegraph, 2010), we began to see many household brands buckle under the weight of heavy losses:

Even now, five years down the line some high-street giants are struggling to survive, HMV is set to close an addition 60 stores throughout 2012 in response to declining sales, Game announced to its shareholders just this week that it is desperately struggling to survive and on the 12^th March the company’s shares fell a shocking 65%!

So what now?

The Bank of England predicts that there is a 1 in 10 chance of the country entering a double dip recession, this would have shocking effects on the economy and could de-rail any recovery plans outlined by the government. I fail to see any solution presenting itself in the near future, the record figures for unemployment in the UK means there’s a significant lack of spending and the economy is suffering as a result.

However, in February 2012 the UK services sector (that makes up two thirds of the UK economy) has seen significant growth indicating that dreaded ‘double-dip’ could be avoided. Furthermore, we have seen a lot of stores on the high-street closing down but there are many that have thrived despite the recession, Primark for one has seen an increase in share price regardless of the state of the current economy, Dominos Pizza has also seen growth as families are cutting back on going to restaurants, opting for this cheaper alternative.

Regardless of these few anomalies the future is looking bleak; economists believe it could take up to 2016 before the country manages to haul itself out of recession. George Osbourne believes were in an economic crisis equal to, if not even more severe than the crisis suffered during the 1930s.

Could the recession have been avoided? Perhaps if the rating agencies had scrutinised and justified the credit ratings given to CDOs more thoroughly, even prior to that surely the banks should’ve implemented stricter codes of conduct when allocating loans and mortgages? I understand these were not the sole principles that got us into this mess but they certainly contributed and somebody has to take blame, if anything just to ensure that it doesn’t happen again.

Sources used:

The Telegraph (2010) 'The Story of the Recession', The Telegraph Website, [Online]. Available at: http://www.telegraph.co.uk/finance/recession/7077504/Story-of-the-recession.html (Accessed: 18/03/12).

Bloomberg (2007) 'BNP Paribas Freezes Funds as Loan Losses Roil Markets', The Bloomberg Website, [Online]. Available at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aW1wj5i.vyOg (Accessed: 18/03/12).

Mergers and Acquisitions –Is bigger always better?

Over recent years it appears that the use of mergers and acquisitions is becoming a popular strategy for companies looking to; grow, achieve economies of scale, diversify, increase the value of the firm or even simply feed the egos of CEOs. However, despite the good intentions of M&As, research suggests that the majority usually have depreciative effects on a firm and often result in a decline of shareholder value. What is it then that causes this negative impact? Surely an increase in growth and market power, partnered with the additional motives for M&As would improve business performance?

Take Daimler-Benz and Chrysler for example, Chrysler at the time dominating the American market deemed ‘the most profitable automotive producer in the world’ (Dartmouth Business School, 2002). Meanwhile, Damiler-Benz on the other side of the Atlantic, one of the biggest car manufacturers in Europe, struggling however to penetrate the American market.

The idea was perfect, a $37bn deal; a “merger of equals” American and German engineering giants united under one banner. The company were listed on the NYSE under the symbol DCX, the Chrysler CEO predicted “Within five years, we'll be among the Big Three automotive companies in the world” (Martelin, 2008).

However, unfortunately for them business is never that simple and it wasn’t before long that the cracks began to show…

The main reason believed for the downfall of the firm was the clash of cultures between the two. The autocratic Germans, relentlessly issued orders from Stuttgart to Detroit on all business matters, constantly trying to dominate. It was often believed that the Germans saw the ‘merger’ as more of a ‘takeover’.

Tensions ran high between workers, the Americans often earned up to four times the amount compared to their German counterparts. As the cracks deepened executives became more open about their opinions.

Daimler-Benz executives had been reported to utter snide comments about their partners; “I’d never drive a Chrysler” (Dartmouth Business School, 2002). The Americans retaliated with equally petty jabs all channelled through the media, directly in the public eye.

The cultural differences between the firms were obvious. Although both had the same goal, each had their own way of achieving it. The Germans ran a very tight ship, focusing on precision and uncompromised quality at any cost. Whereas the Americans were more focused on keeping costs low, as a result both had very different ideas on manufacturing standards.

I think the firms were simply incompatible; both were part of the same industry but operated in different markets. To use Warren Buffet’s metaphor of the princess and the toad in this circumstance we had two princesses, neither of which was willing to act the toad. Had either company identified the significant cultural differences between the two before the merge perhaps the multi-billion pound loss may have been avoided.

When considering a merger it essential to consider the human integration factors. Simply adding A+B doesn’t always equal C, on paper, from a financial view it may look an obvious choice but in reality are the firms really compatible?

However, mergers and acquisitions are not all doom and gloom and if thoroughly researched with a strong post-merger strategy both parties can benefit significantly. Take Disney and Pixar for example, Disney bought the animation studio back in 2006 for $7.4 billion a figure believed by a lot of analysts to be significantly overpriced. However, since the acquisition Disney’s stock price has climbed 28% generating wealth for its shareholders (The NY Times, 2008). The new company has gone on to produce films that have made staggering figures in the box office with the film ‘Cars’ hitting $460m in ticket sales.

I believe the success of the acquisition is down to the level of detail and dedication the management team took in carefully uniting the two corporate cultures. Strong communication between management and employees was essential to the success ensuring that everyone had a voice. Pixar even went to the extent of drawing up a list of elements that it would not have changed, for example the company’s health care, employee’s e-mail addresses etc. a list of which Disney were happy to oblige.

Sources used:

Finkelstein, S. (2002) ‘The DaimlerChrysler Merger’, Dartmouth College Website, [Online]. Available at: http://mba.tuck.dartmouth.edu/pdf/2002-1-0071.pdf (Accessed: 09/03/12).

Martelin, N (2009) ‘Daimler-Chrysler Merger Case: Rationale of a failure’ GRIN Verlag oHG: Munich

Barnes, B. (2008) ‘Disney and Pixar: The Power of the Prenup’, The New York Times Website, [Online].  Available at: http://www.nytimes.com/2008/06/01/business/media/01pixar.html?pagewanted=all (Accessed: 09/03/12).

FDI - Corporate tool or exploitive device?

It is common for companies in the modern business world to trade on a global scale. Improvements in travel and technology, a reduction of trade barriers and increase in foreign direct investment have all contributed to the success of globalisation.

The term foreign direct investment “FDI” simply put; refers to the process in which a company invests in a foreign country. These foreign investments can be categorised into two forms:

Greenfield investment – This literally refers to a company purchasing a “green field” in a foreign country and building new operational assets from the ground up on their newly acquired land. This is seen as very beneficial to the host country particularly if it’s a developing country as often large sums of capital are injected into the foreign economy to purchase or expand facilities. An example of this is the Hyundai case. In 2006 the company purchased land in Nosovice a village in the Czech Republic and built a brand new manufacturing plant, the first ever Hyundai plant to be constructed in Europe, creating 3,000 jobs for local people. The investment cost the company approximately €1bn, obviously such a large investment had a positive impact on the Czech economy. It apparently helped curb unemployment ‘by up to 2.5%’ (EIROnline, 2006) in the region and triggered significant growth in the country’s GDP.

International Mergers and Acquisitions – This method refers to the purchase of assets already owned by a foreign company. According to an article in the FT; companies in Northern Asia are set to ‘lead the way’ with this form of FDI due to ‘limited growth opportunities and higher costs’ (FT, 2011) in their home regions. An example of this occurred in 2011 when Japan’s largest pharmaceutical company Takeda purchased Germany’s Nycomed for $13.7bn. The acquisition of the German firm displays Takeda’s interest in global expansion, providing a ‘ready-made’ doorway into European markets, ‘Takeda said the deal would make it the world’s 12th largest drugmaker globally’ (FT, 2011).

Due to the economic and trade benefits of FDI, governments are often creating policies to encourage it. For example, the North American Free Trade Agreement ‘NAFTA’ was an agreement made between the United States, Canada & Mexico to remove barriers of trade between the three regions in order to encourage FDI. FDI then obviously has huge benefits; creating jobs, improving economies, providing opportunity for companies to grow on a global scale. However, it is not without its problems…

The growing trend of FDI is that it usually occurs between more economically developed countries. This is due to a variety of different reasons; less developed countries often have poorer infrastructure, weak market strength and unstable political problems. As a result, many avoid investing in these countries; however for some firms this cannot be avoided. Shell the oil and gas producers for instance must invest in operations in countries they identify significant oil reserves. Throughout previous years there have been several incidents of the kidnapping of Shell employees in Nigeria by armed groups claiming ‘to be fighting for a fairer share of Nigeria’s oil wealth’ (Donovan, 2010). The victims are usually released after a few days often after a ransom has been paid by the firm. It is examples such as this one that makes companies reluctant to invest in less developed countries despite the fact that it is these countries that would benefit most from FDI.

However, there have been some circumstances where corporations have opted to invest in less developed foreign countries to exploit cheap labour; this has often raised large ethical issues. In 2000 a case arose regarding the use of child labour in a Nike and GAP manufacturing facility in Cambodia. An investigation team discovered girls as young as 12 (three years younger than the legal working age of 15 in Cambodia) were working in these facilities, this unethical practice goes against the corporations’ strict code of conduct and yet it is occurring in their foreign factories. When the girls were questioned on their working conditions they stated that ‘they all work seven days a week, often up to sixteen hours a day’ (BBC News, 2000) receiving pay well below the minimum wage. However, it appears that these children have become reliant on this wage, one of the girls interviewed states: “I didn't want to come here - But we're very poor so I had to come” (BBC News, 2000).

Places like Cambodia are therefore in need of foreign direct investment but with stricter policies that encourage better working hours and decent wages for all employees. These changes could significantly improve their employee’s way of life. In addition, reasonable wages would lead to an increase in public spending, boosting the economy. However, unfortunately it is not that simple, for example, if companies like Nike and GAP were forced to pay a decent minimum wage etc then perhaps there would be no financial gain in investing in Cambodia in the first place.

The advantages of FDI are evident in the case of Botswana. The country’s economic policies promoted a ‘free market’ as a result, foreign direct investment was one of the key driving factors that boosted the country’s economy and allowed it to increase from the status of less developed to middle-income country. Economic growth has lead to a reduction in poverty within Botswana. In addition, throughout previous years the country was ranked the least corrupt country in Africa by ‘Transparency International’ (a non-government organisation that monitors political corruption) and achieved the highest credit rating for an African country by Poor and Moody’s investment services.

FDI is a powerful tool that can vastly improve a region’s economic growth, help reduce unemployment and allow investment in factors such as infrastructure. All these factors will lead to further FDI as the host country becomes more appealing to investors, providing mutual benefits to both parties. However, as demonstrated in the Nike and GAP case, often human rights have been exploited at the hands of FDI and all for what? So people in Western markets can enjoy cheaper trainers and hoodies, company executives can get richer, all whilst the poor, remain poor.

Sources used: 

EIROnline. (2006) ‘Hyundai plans major Greenfield investment’, European Industrial relations observatory on-line website, [Online]. Available at: http://www.eurofound.europa.eu/eiro/2006/04/articles/cz0604029i.htm. (Accessed: 01/03/12).

Whipp, L. & Jack, A. (2011) ‘Takeda Completes Nycomed Purchase’, The Financial Times Website, [Online]. Available at: http://www.ft.com/cms/s/0/cf277228-81a1-11e0-8a54-00144feabdc0.html#axzz1nsq1ydNC. (Accessed: 01/03/12).

Donovan, J. (2010) ‘Three British workers kidnapped in Nigeria’, RoyalDutchShellPlc.com website, [Online]. Available at: http://royaldutchshellplc.com/2010/01/13/three-british-workers-kidnapped-in-nigeria/. (Accessed: 01/03/12).

BBC News (2000). ‘GAP and Nike: No Sweat?’, BBC News Website, Available at: http://news.bbc.co.uk/1/hi/programmes/panorama/970385.stm (Accessed: 01/03/12).