The ethics of private equity Let the barbarians in! Sustainable Living Hows Unilever doing? Class-action against Chiquita A difficult ethical balanceJuly-August 2011 www.ethicalcorp.com Corporate sustainability in Switzerland On the rise?
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Ethical Corporation • July-August 2011 Contents 3Contents4 What’s on the web Briefing: private equity4 Letter to the editor 12 Poachers turned gamekeepers5 From the editor 14 3i – engaged investment 16 KKR – active management EthicsWatch 6 Low-cost medicine Healthy developments 19 Peter Knight We need to work together 7 Chiquita p34 A clean start for Unilevers plan? Colombian court case continues 20 CRwatch 8 Cairn Energy Country briefing: Switzerland Barbie in a bind Proceeding against Greenpeace 23 Running like clockwork 9 Revised OECD guidelines 22 China column 25 Responding to changing business Now for the hard part environment Manufacturers staying put? 28 Secret society? 29 NGO home10 Mallen Baker Making mistakes isn’t always wrong 30 Light touch authorities 31 Chemicals Health risk hysteria Strategy and management 34 Unilever Sustainable Living success? 38 Oil and gas A new contracting chain approach 42 Ray Anderson Why innovation can be the solution p23 Swiss-style ethics Review 45 Academic news 46 Report: Deutsche Post DHL 47 Report: BP 48 New books 49 People on the move 50 CEO interview with Laurent Abadie, Panasonic Europep11 Private equitys ethical development p7 Repercussions continue for Chiquita
4 EthicalCorp.com Ethical Corporation • July-August 2011 What’s on the web The new-look Ethical Corporation website always has more analysis for magazine subscribers In the latest of his series View from the Middle, big companies can indeed be harnessed to solve was the result of unethical behaviour. Advance Aid’s Howard Sharman analyses a new some of the world’s most intractable develop- report from Accenture Development Partners, ment problems. Jane Burston from Carbon Retirement continues which suggests that in an increasingly converging her regular series of comment pieces on the world, companies will play an ever-larger role in In an online opinion piece, the Institute of carbon markets by asking what protection solving complex development problems. Business Ethics’ Simon Webley suggests that carbon offsetting is providing for the most Sharman argues that ADP’s report – Convergence while companies have established business ethics vulnerable communities. When the Clean Economy: Rethinking International Development programmes, more work is required to fully Development Mechanism was established it in a Converging World – provides some solutions integrate them into corporate culture. Sharing was meant not only to reduce carbon emissions that can take corporate responsibility activity well some findings from a new IBE survey into but also provide a means for sustainable beyond the “dabbling with doing good” that business ethics practices – which has been development in those areas vulnerable to the passes currently. updated every three years since 1995 – Webley impacts of climate change. But the dominance, Sharman highlights some of ADP’s radical says that in 2010 up to 80% of FTSE100 companies Burston argues, of rapidly industrialising countries thinking, including that shareholders could best had codes of ethics, up from around 60% in in the global carbon offset markets has led to be served if the companies that they own engage 1995. However, surprisingly, only 60% of compa- some critics questioning whether this aim of fully with solving development problems. Procter nies in 2010 provided training in business ethics sustainable development is being achieved. Gamble, for example, has four billion for all staff, a drop of 10 percentage points from And, she points out, up to two-thirds of projects customers already, giving it massive power and the previous survey in 2007. Cutting back in this currently generating revenue from offsets are influence to drive change. He believes that the way is, Webley argues, short sighted, especially not actually contributing to a net reduction in drive and innovation, and financial muscle, of when you consider that the recent financial crisis emissions. n Letter to the editor SABMiller’s tax position of $117m, or 0.4% of GDP . Within that figure, total tax economy-wide contributions were $46m, or 1.1% of Ghana’s total tax income. In addition, for every Andy Wales from SABMiller responds to allegations made in person that we employ in Ghana, a further 20 jobs are supported in the June issue the economy, a total of nearly 18,000 jobs. We believe that sustainable enterprise and employment is the best way to alleviate poverty. Achieving this involves consideration of all our article [NGOs: Transparent tax reporting, Ethical the ways that private sector investment can benefit local Y Corporation June 2011] refers to allegations made about SABMiller ’s tax practices, but offered us no opportunity to communities. respond. SABMiller strongly refutes the allegations made in ActionAid’s Andy Wales report. We do not engage in aggressive tax planning in any part of Group Head of Sustainable Development our operations, and the report includes a number of flawed and SABMiller plc inaccurate assumptions. In the 12 months to 31 March 2011, SABMiller ’s total tax contribution in Africa (including South Africa) was approximately $2.1bn. And our contribution to the countries in which we operate is much greater than the taxes we contribute. Editor’s note: A revised version of the story to which Andy Wales refers is now Professor Ethan Kapstein of Insead has found that our available online. We accept that the original story lacked balance and are happy to businesses in Ghana add economy-wide value (in terms of revise and update it. household income, tax revenues and company profits and savings)
Ethical Corporation • July-August 2011 From the editor 5Welcome to the July-August 2011 issue his month we investigate the world of private equity funds. month, we focus on how Unilever has progressed with its highlyT Renowned for secrecy and being ruthless asset strippers after aquick profit, we ask if the industry’s reputation is fair. The picture, ambitious Sustainable Living Plan, which was launched in a blaze of publicity last November. While the company has achieved someas is often the case, is not as clear as common perceptions have it. good early progress, questions remain about how it will encourage There are instances where private equity firms can manage their its supply chain and other partnersportfolio companies with good ethical and sustainable practices that to fully engage. We’ll be keeping apublicly-listed companies might find more difficult. And where poor close eye on how this develops oversocial or environmental records, or ethical reputation, are a problem, the coming months.fixing them can be an essential part of the value creation process. Also in strategy and management For the private equity sector, though, the focus is always on making we have an essay from Interface-money from investments. But as sustainability is good business, FLOR founder Ray Anderson, whoencouraging such an approach is one of the improvements that savvy demonstrates why his description ascompany managers need to encourage. See what you think from p11. a radical industrialist is a fitting one. Our country briefing this month is on Switzerland. The country’s And the writers of a new report fromreputation for discretion and secrecy is seemingly a little other- the International Institute for Envi-worldly in a business environment where companies are under ronment and Development shareever-more pressure to be transparent. But, as we show from p23, the some of the results of their investiga-country’s neutrality has meant Swiss companies have, by and large, tion into how to manage oil and gasdeveloped with a keen sense of human rights. The presence of many industry contracting chains.of the world’s largest development and relief agencies, with head- Among the stories considered in EthicsWatch, we examine thequarters in Switzerland, has had an albeit limited impact. But, Swiss latest developments in the Chiquita class-action lawsuit, broughtconsumers have been traditionally demanding in terms of product by Colombians who blame the company for making payments toquality and environmental impact. paramilitary groups in the 1990s. And elsewhere we have the usual However, questions remain about the legacy of discretion. While comment and analysis from our regular columnists and an inter-Swiss banks are losing their reputation as repositories for assets of view with Panasonic Europe’s CEO Laurent Abadie.the world’s dictators, and many Swiss companies are genuinely We don’t publish in August, so will be back with our Septembercommitted to greater openness, the secrecy that local laws allow issue, which will include an in-depth investigation into the PRmany corporations remains a concern. industry. It will make interesting reading. From p31 we have an investigation into dangerous chemicals. As always, don’t hesitate to contact us if you have anyWhile we need to be fully aware of the potential toxic effects of comments on this or any other issue.chemicals we use in everyday products and processes, much of thehysteria whipped up by an excitable media does not always agree,it seems, with the scientific facts. Is there a more sophisticated wayof approaching chemical use, which has the appropriate safe-guards, but also a more balanced view of the risks? Leading a heavyweight strategy and management section this Ian Welsh Publisher: Toby Webb Contributors: Ray Anderson, Ellie Austin, Mallen Baker, email@example.com Oliver Balch, Jeni Bauser, Elaine Cohen, Jon Entine, Editor: Ian Welsh Paul French, Stephen Gardner, Paul Hohnen, Peter Knight, firstname.lastname@example.org Judy Kuszewski, Claire Manuel, Eric Marx, Ian Welsh, Contributing editors: Mallen Baker, Brendan May Emma Wilson Business Intelligence for Sustainability Sub editors: Sarah Burton, Gareth Overton People on the move Advertising and sales: Oliver Bamford Design: Alex Chilton Design 7-9 Fashion St, London E1 6PX UK email@example.com firstname.lastname@example.org | +44 (0) 20 7375 7518 email@example.com | +44 (0) 20 8834 1354 Subscriptions: +44 (0) 20 7375 7575 Editorial: +44 (0) 20 7375 7213 Subscriptions Corporate subscription Ethical Corporation is printed by Four Way Print Ltd on Green Coat plus paper, which ISSN 1758-1575 firstname.lastname@example.org | +44 (0) 20 7375 7575 packages from £495 comprises 80% recycled and 20% Forest Stewardship Council certified source material.
6 EthicsWatch Ethical Corporation • July-August 2011 EthicsWatch Wal-Mart wins Retail mammoth Wal-Mart breathed a sigh of relief in June when the Cheaper medicines, Chiquitas court case, Arctic exploitation and OECDs revised guidelines United States Supreme Court, in a narrow 5-4 vote, dismissed a class DNY59/ISTOCKPHOTO.COM action against it brought by 1.5 Analysis: low-cost vaccines million female former employees. The workers had accused Wal-Mart Health benefits of gender discrimination in setting pay levels and granting promotion, By Claire Manuel arguing that female employees are For companies prepared to cut the costs of paid on average 37 cents less per their medicines for the developing world, hour than their male counterparts. there’s more in it than a warm glow of The justices decided there was no doing good systematic discrimination, and the women should bring cases individu- ublic and private donors from around the P world have pledged more than £2.6bn to help immunise more than a quarter of a billion ally if they felt they had been wronged. However, a study for the New York Times seemed to show a children in developing countries by 2015. Profits fund research bias in Supreme Court decisions in Joining in the fun, UK prime minister David favour of big business, with the Cameron pledged £814m at the Global Alliance “GSK is committed to increasing access to our current justices finding for companies for Vaccines and Immunisation (Gavi) medicines and vaccines for people, no matter in 61% of cases, compared with an conference in London in June, while Bill Gates where they live. We believe this is the right average of 42% over the period pledged £600m on behalf of the Bill Melinda thing to do and that it will contribute to our dating back to 1953. Gates Foundation. business success in the long term.” A number of drug manufacturers have also For GSK, it is not an act of philanthropy, Holding action committed to lowering prices on vaccines Pamba says. The company is changing its A Chilean court has put on hold a against some of the major killer diseases in the business model “to enable us to make our controversial project to dam two rivers developing world. India-based firms Serum medicines and vaccines as affordable as possible in the southern region of Patagonia. Institute and Panacea Biotec have committed to to as many people as possible in developing The project, a joint venture between price cuts on their pentavalent vaccines, which countries, in a sustainable manner”. Chile’s Colbun power firm and Italy’s protect against diphtheria, tetanus, pertussis For companies such as GSK, it is essential to RENELO/ISTOCKPHOTO.COM and hepatitis B, among other illnesses. achieve a balance between profit-making and GlaxoSmithKline has offered to provide the sustainability. “It is important to ensure we rotavirus vaccine to Gavi at $2.50 per dose, or make enough profit to be able to deliver a $5 to fully immunise a child – a 67% reduction return to our shareholders and to continue to in the current lowest available public price. invest in RD to discover the vaccines of Merck has also announced that it will offer its tomorrow and provide jobs for our employees, rotavirus vaccine to Unicef at discounted prices. while increasing access to our medicines and vaccines in the developing world,” says Pamba. Dam wrong? Good for business This means implementing a tiered pricing Gavi’s Ariane Leroy says that, rather than being structure, with prices aligned to a country’s Enel, would construct five hydroelectric purely a charitable exercise, there are business ability to pay. stations on the Baker and Pascua benefits for manufacturers that wish to A tiered pricing model means that rivers, which are considered pristine participate. Gavi strongly believes in the companies can make larger profits in developed ecosystems. The proposals to dam the principle of lowest sustainable pricing, so countries. They can then re-invest in research rivers have provoked massive protest in that multiple manufacturers have an incentive and development for new products. In other Chile. The court ordered the suspension to develop and supply products for Gavi words, RD is funded by tiered pricing from of the project while it considers countries, Leroy says. “As companies that developed countries. appeals against the Colbun/Enel plans produce these vaccines become more efficient But safeguards are required to ensure that from environmental groups and some over time, they are able to reduce the unit cost low-cost vaccines don’t find their way to the members of Chile’s senate. of production.” black market. GSK’s precautionary measures In addition, the high volumes purchased include monitoring for unusual sales activity, UK looks really offshore through Gavi funding enables manufacturers and using only trusted distributors. “This can, for wind power to benefit from economies of scale, which can of course, only go so far but we believe that the All parts of the British Isles came further decrease their price offers. potential benefit of low-cost vaccines for people together in mid-June to work on Allan Pamba, director of public engagement in developing countries outweighs the risk,” wind and wave power. Under a deal and access initiatives at GSK, agrees. He says: Pamba says. n signed in the British-Irish Council, the Republic of Ireland, the United
Ethical Corporation • July-August 2011 EthicsWatch 7Kingdom, the Isle of Man and theChannel Islands will aim to get more Analysis: Chiquita company ever to do so,” Loyd says.interconnected so that windy days In 2004 Chiquita sold its Colombian opera-are not wasted and renewable power Serious legal banana tions at a loss. Then in 2007 the companycan be shared. UK energy ministerCharles Hendry says the agreement skins remain agreed to pay a fine of $25m for violating US anti-terrorism laws.will help Ireland in particular to By Ian Welsh, editor Marco Simons, legal director for EarthRightsbecome a renewable energy exporter. Chiquita may yet lose a class action lawsuit International, a human rights and environ-“Ireland’s energy demand is only related to its former operations in Colombia mental NGO that has been closely involvedslightly larger than that of Yorkshire with the Colombians bringing the action he long-running saga surrounding against Chiquita, says “Chiquita’s extortionand Humberside [and] there hasbeen little incentive to exploit theresource,” he says. T Chiquita’s former operations in Colombia argument appears to be factually untrue” and has taken a new turn. In early June a Florida that the company “sought out and paid the judge ruled that class action lawsuits against paramilitaries in exchange for security”. DRIFTLESS STUDIO/ISTOCKPHOTO.COM the fruits giant will be allowed to proceed. Simons argues that if Chiquita had indeed The action has been brought by family been subject to extortion then it should have members of Colombians who were killed or immediately informed the authorities and tortured by terrorist groups. The plaintiffs then, if it were impossible to operate without allege that payments Chiquita made to para- paying terrorists, take steps to wind down its military groups in Colombia mean that the Colombian operations. “Duress is not a company has responsibility for the atrocities defence to complicity in murder,” he says.To become a more common sight? committed by these groups. Loyd counters that the company didn’t Chiquita had asked the court to dismiss the want to abandon its “people and commit- Separately, Hendry has claims, stating that it had been the victim of ments”, that Chiquita had wanted to workannounced that more power compa- extortion. While the judge granted the within the law and protect its employees.nies will be exempted from two UK company’s motion to dismiss claims for When the law changed, “it became apparentgovernment schemes, the Carbon damages related to that there was not a ZABELIN/ISTOCKPHOTO.COMEmissions Reduction Target and the terrorism, the plain- solution”.Community Energy Saving tiffs can continue with The Rainforest AllianceProgramme, both of which require claims for damages had been working withfirms to help their customers achieve against Chiquita for Chiquita in Colombia andenergy-efficiency savings. Companies torture, war crimes had certified a number ofwith 250,000 customers or fewer – and crimes against the company’s farms.up from 50,000 – will not have to humanity. Chris Wille, Rainforestparticipate. The extended exemption One thing is not in Alliance’s chief of sustain-will help smaller suppliers “grow and dispute: the company able agriculture, saysencourage new players into the did make payments to that Chiquita’s farmsmarket”, Hendry says. Colombian paramili- “were paragons of good tary groups. But Sometimes it’s hard to argue management, both envi-Workers united Chiquita spokesman ronmentally and socially”.A number of major Indonesian Ed Loyd says these were made purely to He says that the farms were models of ethicalsportswear factories and the brands protect the company’s staff. “Throughout the harmony and “islands in a sea of violence”. Willethat they supply, including Adidas, 1990s our employees were massacred. On one admits that Rainforest Alliance would notNike and Puma, signed up to an occasion, four were butchered in front of their have certified Chiquita’s farms if it had beenagreement in June to guarantee colleagues; on another 28 were murdered as aware that the company been breaking anyfreedom of association rights for they travelled to work on a bus.” Colombian laws.workers. The deal was brokered by So what’s next? Chiquita says it willIndonesian trade unions, backed by A price worth paying? robustly defend the class action. “We havethe Play Fair campaign. It will imple- Faced with such violence, Loyd says, the faith in the justice system,” Ed Loyd says.ment the Clean Clothes Campaign’s company took the view that making payments Simons argues that “despite Chiquita’sprotocol on freedom of association, demanded by paramilitary groups was a price $25m payment to the US government, thewhich states that factory workers it had to pay to protect employees, and began victims of its conduct have received nothing”.should be able to form unions, to do so in the mid-1990s. The real losers seem to be Chiquita’s formerand be given time and facilities to A change in the law in 2001 meant that these employees. Whatever the rights or wrongs oforganise their activities. The agree- payments became illegal in the US, and in 2003 any “protection”, they had certainly beenment would fill a gap because Chiquita realised, Loyd says, that it was not benefitting from the company’s progressiveIndonesian law “does not cover able to protect its employees legally and volun- labour code. The local labour unions hadtechnical implementation of freedom tarily disclosed the details of the payments to strongly lobbied the company to retain itsof association”, an Indonesian trade the US Department of Justice. “We are the only Colombian operations in 2004. nunion representative says.
8 EthicsWatch Ethical Corporation • July-August 2011 No Silvio lining Analysis: Arctic activism land’s Bureau of Minerals and Petroleum Italians have given prime minister website. Silvio Berlusconi another knock by High latitudes, “If you did publish a response plan for the rejecting a nuclear restart and water high stakes Arctic, it would be immediately revealed that there is no way you could clean up a spill privatisation proposal. In referen- dums held side by side in June, a that would not result in enormous environ- huge majority of 96% voted down By Eric Marx mental damage,” counters Greenpeace’s plans to allow more private sector UK oil firm Cairn Energy is betting big on Charlie Kronick. participation in water management, new riches pouring forth from the Arctic, Cairn’s response plan includes the hiring of and for water prices to be set in order but campaigners see the venture as a two state-of-the-art drilling vessels and some to allow a guaranteed return on dangerous gamble with the environment of the world’s leading iceberg and ice manage- investment. Meanwhile, 94% of ment operators. Cairn’s Ellie Goss says the plan mirrors those of the most stringent regu- ollowing BP’s Gulf of Mexico oil spill, envi- lations required of Norwegian North Sea F ronmental campaigners have made Arctic drilling a key battleground – with the west operators, but specifics on how Cairn would actually attempt a cleanup in the event of an coast of Greenland the frontline in a fight to oil spill are not available. turn public opinion against British oil and gas Cairn is thought to be paying $500,000 a day firm Cairn Energy. to hire the Leiv Eiriksson, one of the largest oil Twice this year Greenpeace protesters have platforms in the world, and is reported to have tried to delay drilling off the Greenland coast invested about $1bn in drilling operations to be by boarding Cairn vessels, prompting the performed over the next two years. company to obtain a court injunction imposing whopping £1.76m-a-day fines. And then more drilling? Commentators are questioning the tactic, The stakes could not be higher – for Cairn and Not been a good year for Silvio however, noting a history of bad publicity back- the industry as a whole. This is the first such firing against extractive companies perceived venture in years and if the operation proves voters said no to proposals that to be squashing individuals and organisations successful, others will soon follow. Though a would have seen Italian nuclear trying to express their views. At issue is not 2008 US Geological Survey projects a power stations reopened. Nuclear whether Cairn has the mammoth 52bn plants in Italy have been mothballed JIRI REZAC/GREENPEACE right to pursue a court barrels of oil equiva- since the Chernobyl catastrophe in remedy, says Dan Litvin, lent, only a fraction of the 1980s. Completing a disastrous of the sustainability that is likely to be day for Berlusconi, Italians also consulting company exploited at economi- rejected legal immunity for govern- Critical Resource. cally viable costs. ment ministers. These sorts of injunc- Moreover, the BP tions could make it Macondo disaster has Dole queue difficult for activists to do rightly focused atten- US banana giant the Dole Food a lot of direct protests, tion on the risks of Company has agreed to settle the Litvin says. “But the deepwater drilling in claims of about 5,000 Central and main point is there’s a the Arctic – a region South American agricultural workers, bigger picture here with extreme climates according to lawyers representing which is the long-term that make the Gulf of the plaintiffs. The workers alleged debate about drilling in Mexico look like a their health was damaged by the Greenland and the walk in the park. use in the 1970s and 1980s of the Arctic.” He argues that For now, at least, pesticide dibromochloropropane the only thing that will the time for dialogue (DBCP) on Costa Rican, Honduran solve that is engagement seems over. “I did this and Nicaraguan banana farms. and – wherever possible Greenpeace’s Naidoo getting stuck in because Arctic oil If finalised, the agreement would – taking on board the drilling is one of the bring to an end a long-running legal legitimate points made by some of the activists. defining environmental battles of our age,” battle, which has been through One of the activists’ demands – the publica- said Greenpeace executive director Kumi various stages of appeal, dismissal tion of the company’s spill response plan – is a Naidoo, moments after his arrest for scaling and allegations of malpractice. The legitimate area for discourse given the distrust yet another Cairn oil rig. law firm representing the workers, that will arise if information of this sort is kept The action came exactly one week after Provost Umphrey, says the details of private, Litvin argues. the injunction, a legal move that – at least for the settlement are being negotiated. Cairn says Greenland authorities require now – seems not to have accomplished its Other lawsuits against Dole and Dow the plan to be kept confidential, citing Green- objective. n Chemical, which has also been sued over DBCP, are ongoing.
Ethical Corporation • July-August 2011 EthicsWatch 9Transparent investmentMore than 500 capital management Analysis: revised OECD guidelines updated guidelines as good sustainable businesscompanies and investment funds that practices and corporate responsibility are linkedare signatories to the United Nations A positive step to support for open markets. The guidelines arePrinciples for Responsible Invest-ment (PRI) will be required to forward important in that they complement trade and investment negotiations.disclose information about their Dr Roel Nieuwenkamp, managing directorinvestment decisions, under a for trade policy and globalisation at the ministryrevision of the PRI rules. The PRI of economic affairs, agriculture and innovationsays it will consult on changes to By Paul Hohnen and Ian Welsh in the Netherlands, chaired the negotiations.the way it collects information from OECD’s new guidelines for multinationals He says the most important challenge forsignatories, and will impose manda- will prove challenging companies is that they “now have to work ontory disclosure of responses from 2013. credible due diligence systems to identify and oes the adoption of new corporate respon- manage the risks of causing or contributing toAt present, about 44% of investorsanswering the survey agree to publi-cation online of their responses. The D sibility guidelines in June reflect a new level of commitment by OECD governments? adverse impacts”. This, he argues, will require some serious effort.PRI is backed by the UN Environment It certainly would seem so. Nieuwenkamp believes that even leadingProgramme and the Global Compact, While the Guidelines for Multinational multinationals “in the vanguard of corporateand has signatories from 45 countries Enterprises remain voluntary and non-binding SKYNESHER/ISTOCKPHOTO.COMwith more than $25tn of assets under for business, they contain a renewedmanagement. commitment by governments to promote them through their respective National ContactSoy standard Points. In addition, what OECD describes asBrazilian soy producer Gruppo Maggi new and tougher processes for complaints andhas become the first company to be mediation have been put in place.given Round Table on Responsible OECD commentators say there are threeSoy certification. The round table was main reasons why the adoption of newlaunched in 2006, but only approved guidelines is significant.the principles and criteria for respon- First, it is a high level recognition of thesible soy in June 2010. Gruppo Maggi responsibility of governments to refresh andoperates in Brazil’s Mato Grosso reiterate their expectations of private sectorregion and produces 400,000 tonnes social and environmental performance. Theyof soybean annually, a relatively provide the most comprehensive guidancesmall proportion of the world total. on what constitutes good business practice, and are the only ones that governments SIMAZORAN/ISTOCKPHOTO.COM have cooperated on and undertaken to promote. Worth celebrating? Second, the revised guidelines contain a number of new elements that reflect the responsibility” are not yet ready with “good changes in the business environment since the risk-based due diligence systems”. Beyond the previous revisions in 2000. These include a leaders, he says the mainstream has a lot to do section on human rights (largely reflecting “to implement the basics of responsible supply work by the UN secretary-general’s special chain management”. representative John Ruggie), the need to The OECD Watch network has welcomed exercise due diligence in supply chains, and the changes to the guidelines, but says the references to reducing and reporting on implementation procedures “fall short of greenhouse gas emissions. what is needed” to ensure that the guidelines are effective. Rather, the updated guidelines Multistakeholder input should have contained “investigative powers Third, the guidelines are important because they and the ability to impose some kind of sanction were the product of a multi-stakeholder process, when the guidelines are breached”. OECDSoy certification conundrum involving inputs from representatives of Watch says the National Contact Points will government, business, unions and NGOs. Given need to commit to resolve disputes andThe round table says its certification the difficulties some other intergovernmental help those adversely affected by companystandard “meets the global goals of processes have had in recent years – look at misconduct.sustainability”, but Greenpeace has the UN climate negotiations for example – Underlining this, Joris Oldenziel, acriticised it for promoting deforesta- the outcome for the OECD guidelines is most negotiator on behalf of OECD Watch, says he istion, and not distinguishing between welcome. going to wait and see “whether the update willgenetically modified and conven- OECD insiders are pleased about the make a real difference ”. ntional soybeans. n
10 Columnist: Mallen Baker Ethical Corporation • July-August 2011 EDSTOCK/ISTOCKPHOTO.COM Business success Why we need to fail more gracefully Mallen Baker explains why companies need to be free to make mistakes for ultimate success very successful endeavour is Maybe it’s the news media that E built on a history of failure. That is pretty much universally true is a key factor. You only have to listen to someone like John throughout human history. But we Humphrys on the BBC’s Today have become intolerant of failure – programme to see how relentlessly Learning from mistakes breeds high-flying success and that is a big problem. focused on finding someone to Prof Yotaro Hatamura at the blame some journalists have up with reasons why those names University of Tokyo is the founder, become. deserved to go. of all things, of the Association for If something goes wrong on Tony Hayward of BP comes to the Study of Failure. Rather handily, your watch, then if you’re in charge mind. Andy Hornby of HBOS is Tepco – owner of the Fukushima you should pay for it with your job. another. In another sphere, Sharon power plant – is a member. If you’re a CEO of a global Shoesmith of London’s Haringey He has set up a “failure knowl- company, and there’s a big accident Social Services. All of these were edge database” focusing on 1,175 you’ve got to go. Or if you get leaders who were respected by accidents and isolating whether two, God forbid even three, poor their peers before events made it they were caused by design flaws, quarters in a row. unacceptable to show them support human error, or changes in use that In the public in public. arose over time. It has identified Private benefits sphere, our For me that is a key defining that the latter element is a far more This is why privately run busi- response to feature. There are other leaders common factor in engineering nesses can, sometimes at least, who are well known by their peers failure than previously realised. provide the best model. Richard failure is almost to be arrogant, obnoxious, and And, of course, that is the point. Branson has failed many times – we guaranteed blind to factors that fall outside The reason for setting up such a only know about some of those their own ego. These leaders often database is the simple truth that if failures because he has talked about to breed more more directly create the circum- you don’t learn from failures, you them in his autobiographies. But he failure stances for their departure because will keep failing in pretty much the is known principally for his they demonstrate that it was their same way over and over again. successes. Of course he was free to own poor leadership that created In sport, we accept failure. Every learn from his failures and move the problem and they have no tennis player who wins one of the on. Nobody was in a position to capacity or humility for learning major tournaments and gains entry sack him when it happened. the lessons of failure. to the sport’s elite group of top He still had to learn, because if Step up Fred Goodwin. Say “hi” winners only got there having lost he hadn’t then sooner or later his Chuck Prince. This is not about hundreds of times. And after every businesses would have failed. excusing bad leadership. Some loss, the good ones would look at In the public sphere, our people do deserve to be kicked out. why they had lost, what they response to failure is almost guaran- And it’s not just about leaders – needed to add to their game, what teed to breed more failure. We take but the whole workforce. There’s a they needed to improve. a boss who has “failed” and cast TED talk by Sir Ken Robinson on Up and coming tennis youngsters them aside. The main criteria for education, where he identifies how are hungry to play the best players. their replacement is that they the lack of fear of failure is a key part Sure, they might fantasise about should be free from the taint of of what makes creativity possible. causing the big upset and rocketing failure themselves. So by definition, But it can’t be achieved if to fame in one single game. But more we put someone in position who holding businesses to account realistically, they know that by being hasn’t learned the lessons the hard means finding new vehicles for the beaten by the best players, they will way. blame culture. n learn exactly how they need to You might agree with the improve their game to achieve that contention that this is wrong in Mallen Baker is founder of Business Respect and level themselves. theory – but I bet if we start putting a contributing editor to Ethical Corporation. In business, and in civil society, names into the frame you will start COLUMNIST: email@example.com we do not have such a culture. to instinctively and intuitively come MALLEN BAKER www.businessrespect.net
Briefing: private equity12 New sustainability champions?14 Case study: 3i16 Case study: KKR MARTIN MURÁNSKY/DREAMSTIME.COM
12 Briefing: private equity Ethical Corporation • July-August 2011 ALUXUM/ISTOCKPHOTO.COM Buyouts Have the uber-capitalists become agents for sustainability? By Mallen Baker The old view of private equity investors as ruthless asset strippers is due an update t wasn’t so long ago that private equity businesses management, business opportunities and growing Fixing an ESG I were classified by some as the “barbarians at the gate”. Rapacious capitalism at its worst, busily investor demand, with more than 330 asset managers signing up to the PRI. problem can be part of the value snapping up much-loved high street brands and There are many who say that, at least on the risk cynically stripping out everything that could not be management side of the equation, this is not such a creation process used to bump up short-term value before selling it new agenda for private equity. back into the market. Ludo Bammens, director of corporate affairs Then the era of cheap debt came to a close, and for KKR, says: “Environmental assessment has suddenly the flow of buy-outs dried up. The critical always been a part of the due diligence process. stories did likewise. Recent protests against Black- But in recent years it has become important to carry stone Group over the collapse of elderly care home this out in an increasingly thoughtful and profes- operator Southern Cross seemed almost nostalgic. sional way.” Things have moved on considerably. The private equity companies have begun to show some real Making choices changes on what the sector routinely describes as How much can ESG issues influence whether a ESG (that’s environmental, social and governance) private equity firm chooses to invest in a company? issues. And they have risen robustly to defend the It all depends on how material those issues are to sector’s business model against charges that it is whether or not the value of the company can be inherently bad for society. increased. Bammens says it can play a key part. In the wake of the financial crisis, the focus has Over the course of a year KKR will examine “a been on responsible investment, and the potential thousand potential investment opportunities”, of for ESG issues to become a significant factor in real- which only 2% will actually go forward. The ising the value of investments. company’s ESG diligence team reviews all the At the launch of the UN Principles for Respon- investment proposals as part of a filtering process. sible Investment (PRI) in 2009 at a private equity Simon Havers, chief executive of Baird Capital industry conference in London, a survey showed Europe, says there is a simple two-part test that that 71% of the attendees agreed that ESG factors Baird will apply to a prospective investment. “First, could affect the sale price of a company at exit. This is the company’s reputation irremediably shot? reflected a considerable change in attitude over a Second, is it in our capability to solve it? We would short period. avoid prospects that have the wrong answer to The British Private Equity and Venture Capital either of those two.” Association (BVCA), which conducted the survey, The test allows for the fact that a smart private identifies a number of drivers for responsible invest- equity investor can use the process of fixing an ESG ment among its members. These include risk problem as part of the process of value creation.
Ethical Corporation • July-August 2011 Briefing: private equity 13 FOODANDWINEPHOTOGRAPHY/ISTOCKPHOTO.COM Baird demonstrated this when it bought PaddockHoldings from its founder in 2006. Baird was inter-ested in the company because it saw that it was“operationally undermanaged”. This included apretty poor health and safety record. Paddock hadform both on non-reportable accidents (relativelyminor) of which it had significant numbers, andreportable accidents (major). During Baird’s ownership, substantial changeswere made, including putting in a more effectiveoperations director. Non-reportable accidents werecut by two-thirds. No reportable accidents tookplace during the course of Baird’s ownership. When Paddock Holdings was sold by Baird in2010, it had shown a 2.7-fold return on investment.That would certainly have been lower had it been acompany still showing poor compliance on healthand safety. Indeed, given that the buyer wasSwedish multinational Assa Abloy – a company thatvalues its own corporate reputation – it might nothave been sold at all. Doughty Hanson focused particularly on envi-ronmental improvements when it took overSpanish bus and transport company Avanza in 2007. Cutting accidents adds corporate value
14 Briefing: private equity Ethical Corporation • July-August 2011 IMAGESBYTRISTA/ISTOCKPHOTO.COM Case study – 3i’s activist approach 3i has focused on the social responsibility and environmental agenda for a long time. Nevertheless, the issues have gained prominence in the past few years. The company was formed just after the second world war, and from the start it framed its mission in terms of the social value of helping companies to grow. It developed a strong corporate culture and set of values – to the degree that it was behaving in some ways more like a listed company (for instance, in its reporting and disclosure) even before it eventually chose to go public in 1994. Patrick Dunne, 3i’s communications director, recalls this from his arrival at the company 25 years ago. “When I joined back in 1985, one of the first things I remember was being taught about the values of the firm and how we do business.” Dunne believes that the company’s listed status has been a factor. “One of the benefits of being a FTSE 100 company since 1994 has been that we have learned from our peers in other sectors, particularly through membership of organisations like Business in the Community, of which we were a founding member.” 3i has an activist approach that means it is very engaged in what responsible business practice means at every phase of the investment cycle. It encompasses initial fundraising, investment decisions, stewardship of portfolio companies once investment has taken place, and then the final exit. In particular, when 3i is looking at investment decisions it explicitly builds in an assessment of corporate responsibility issues – with an option to pull the investment if the management team seems unable to achieve compliance with 3i’s standards in a reasonable time. That said, Dunne says that often 3i’s reputation means the issue does not even arise. He says: “It has been a deliberate part of 3i marketing to be clear about the high standards we expect in corporate responsibility and governance. It becomes self-filtering, Success comes from good management practices as companies will often only approach us for investment because they are confident that they match up to those criteria.” companies obviously varies depending on the percentage stake Once the investment has taken place, formal portfolio reviews we own, but we have an energetic approach to engagement and take place every six months, which will include environmental, sharing best practice.” social and governance issues. As well as engaging its portfolio companies, 3i also focuses on its The company encourages sharing lessons learnt across the own performance as a corporate entity. It has an active carbon portfolio. Dunne says: “If you go through the full cycle of invest- reduction programme for its own operations, builds environmental ment we are actively engaged on being clear what responsible considerations into its procurement policies, and is a founding practice is. The degree of influence we have with portfolio sponsor of the European Venture Philanthropy Association. It carried out a review that identified a range of investments for deal-breaking problems, towards impacts related to fuel efficiency and climate recognising how ESG issues can be a driver of value in change, as well as water conservation, land impacts, the portfolio businesses of private equity companies. and health and safety issues. Havers says this has become more significant in Working with the management board, it devel- recent years. “There is a raised level of awareness oped a plan covering investment in a new, modern that attending to sustainability issues is good for the fleet of vehicles with much more efficient engines, profits of the portfolio company,” he says. better fuel management overall and reductions in Tom Rotherham, associate director private equity waste generation and water use. for Hermes Fund Managers, agrees. He says: These cases demonstrate how things have moved “General partners should be willing to consider on from a due diligence process of screening potential whether there is a value-creation angle in this, not
Ethical Corporation • July-August 2011 Briefing: private equity 15just risk management. If that happens, then the make sure that ESG gets attention at the board level The mainprivate equity community can take ownership of of portfolio companies. If you have this, thenthe ESG agenda rather than having it thrust upon “action will cascade down”. responsibility forthem. If not, some investors will conclude that Others have taken more of an activist approach. the private equitygeneral partners need regular oversight.” General 3i, for instance, has mapped out the full investment company is topartners are the investment professionals who process and developed a clear approach to what itmanage a private equity firm, as opposed to invest- expects. 3i communications director Patrick Dunne make sure thement partners who don’t have an executive role. says: “The degree of influence we have with port- governance is folio companies obviously varies depending on theEffective oversight percentage stake we own, but we have an energetic rightBut Rotherham has a few words of caution to add approach to engagement and sharing best practice.”about how far the private equity owners should Sharing best practice among the wider portfolio oftake things. He says there is a risk that general owned companies is also the approach practised bypartners draw the wrong conclusion and think they KKR, which has its “green portfolio”. With theseneed to do all the ESG work themselves. Rather, it companies, it works to select key practices for improve-should be the portfolio company management ment, establish targets and develop action plans.where ESG is managed. “General partners just need But all this activity around ESG issues would still,to make sure it’s being done effectively,” says arguably, be only window dressing if those earlyRotherham. In other words, board effectiveness is criticisms that the private equity business model isreally the key area of focus. somehow inherently unsustainable were shown to Simon Havers agrees, and says the main respon- be valid. If it is really the case that the mission ofsibility for the private equity company is to make private equity is the enrichment of the few bysure the governance is right. He argues that private loading businesses with unsustainable debt, that is aequity companies need to have systems in place to serious problem. Corporate Governance and Business Ethics Corporate governance and business ethics are areas of rapidly growing importance in which Birkbeck has a pre-eminent research position. Our courses are designed for those wishing to engage Apply now critically with the issues of business and society, and be involved The School of Business, Economics professionally in corporate governance. and Informatics has a wide range Course teaching in management, business organisation, strategy and of undergraduate and postgraduate research methods is underpinned by the work of the London Centre for courses available to start Corporate Governance and Ethics, a leading centre for research and October 2011. policy advice. For further details visit: MSc Corporate Governance and Business Ethics www.bbk.ac.uk/business/ MSc Management with Corporate Governance prospective-students PG Cert in Corporate Governance and Business Ethics MRes Corporate Governance and Business Ethics Birkbeck offers prestigious, internationally recognised University of highest quality. For further details email firstname.lastname@example.org www.bbk.ac.uk/management 020 7631 6689 London’s evening university
16 Briefing: private equity Ethical Corporation • July-August 2011 TONY BAGGETT/ISTOCKPHOTO.COM Case study: KKR’s value-driven approach If there is any single private equity company that could be described as a sustainability leader, it is probably KKR. The company attracted attention in dramatic fashion in 2007 when it bought the Texas-based energy supplier TXU and promptly announced that it would be scrapping all but three of the 11 new coal-fired power stations that had been planned, investing instead in wind power alternatives. KKR founding partner Henry Kravitz said at the time: “We have developed a new vision with management of how we can turn TXU into a more innovative, customer-centric, environmentally friendly company.” It was the moment when NGOs such as Environmental Defence switched from being combatants to being partners. For KKR, it was still an equation about value. It hadn’t suddenly caught tree-hugging fever. The company had accepted the arguments about big changes coming in how climate change would affect energy production – at a time when few in the US wanted to hear that message. Now KKR has distinguished itself further by taking an active management approach to a broader range of its portfolio compa- nies. It has become one of the few private equity companies to produce an environmental, social and governance report. It also has a “green portfolio” website that details the work it A trusted UK brand in private hands has done on a number of its companies. It provides a set of analytical tools to help portfolio companies assess and track falling into private ownership – and many observers were improvements and use the website to report progress. wondering whether such deals would mean an end to those To date, it estimates that the green portfolio initiative has companies’ corporate responsibility and sustainability saved 345,000 tonnes of carbon, reduced waste by 1.2m tonnes programmes. and, most importantly from the point of view of some investors, Richard Ellis, CSR director at Alliance Boots, says this defi- saved $160m in costs. nitely was not the case with KKR. “Before the acquisition, I When the company chooses to make an investment, it personally assumed there was huge scepticism in the private develops a 100-day plan on key goals to realise the value of the equity world on this agenda. But since then, I have found that so investment. If ESG issues are identified as being important in long as you’re able to treat sustainability as a normal business driving value, they are built into the planning process at this stage. discipline, these are very smart people who get it.” For instance, according to KKR’s ESG report, the 100-day plan Ellis says the move into private equity ownership has resulted for its investment in Oriental Brewery included programmes to in no change to Alliance Boots’ corporate responsibility reduce energy use and greenhouse gas emissions. programmes. KKR, he argues, sees the long-term value of sound One of the defining moments for KKR came when it acquired management of this area. He says: “I think the Boots example has a 50% stake in Alliance Boots. At that time, the availability of been influential, with KKR committed to sharing best practice cheap credit was seeing a number of such well-known names across its portfolio companies.” This version of what private equity is all about is of CSR for pharmacy giant Alliance Boots, viewing dismissed by many practitioners as a caricature. the relationship through the other end of the tele- Ludo Bammens says KKR’s ownership model scope. “It is easier to do some of these things with actually has a number of real pluses from the point private equity than with a plc,” he says. This means of view of sustainability. the company can look to the longer term and “First, it is a model for active ownership. We can doesn’t need to be worried about shareholder divi- drive a topic effectively,” he says. “Second, it is dends. actually more long term. We hold companies on One former chief executive of a top plc who average for seven years, which gives you time to subsequently moved into private equity says the really do something. Third, we have a large port- equation is not a simple one. “You definitely have folio of companies and that gives us the opportunity more freedom to act under private equity owner- to build a community of best practice. So what’s ship,” he says. For instance, companies can take a learned – for instance – within Alliance Boots can be shorter term hit in order to create value in ways that shared with the rest.” plc cannot. And as the private equity company is His message is echoed by Richard Ellis, director looking to sell the business at a profit, if it’s sitting
Ethical Corporation • July-August 2011 Briefing: private equity 17 GASPR13/ISTOCKPHOTO.COM Goin’ fishin’ How far can companies really push the boat out on sustainability once they join the port- folio of a private equity firm? At a time when the viability of fish stocks is a serious global question, it seems that the answer is “all the way”. On the one hand there is Carlyle Group. When it bought China Fishery Group – one of the world’s largest fishing companies, its due diligence process highlighted concerns around the viability of fish stocks in the future. As a result, it committed to a full scale review of the sustainability of the fish stocks upon which the company depended, and its current compli- ance with fishery quotas and other regulations. More significantly, it looked at how the company could play its part in advancing the Marine Stewardship Council certification process for relevant fisheries in its sphere of influence. China Fishery has now formed a corporate social responsibility committee, with external figures associated with sustainability issues as they relate to the marine environment. Carlyle is not the only private equity firm to face up to the challenge. When Birds Eye Iglo was bought in 2006 by Permira from previous owner Unilever, it was in difficult times. It hailed from a non-strategic part of Unilever’s Less cod, more pollock empire, and had been allowed to lose direction. It had some track record on sustainability – having been taken a lot further. involved in the initiation of the Marine Stewardship Council – but Under the banner of Forever Food, Birds Eye has embarked on had come under fire from Greenpeace for sourcing some of its an environmental programme of considerable ambition, covering cod from the Baltic, where the legality of supplies could not be areas such as climate change, sustainable sourcing, waste, water assured. and packaging. Glenn says the Forever Food brand takes a long- But perhaps closer to the top of Permira’s priorities was the standing commitment and seeks to give reassurance to fact that the company was under-invested, losing money and customers. It has been developed in partnership with NGOs launching 70 new products a year of which only one or two including WWF. would survive. Former Walkers marketing director Martin Glenn Birds Eye has appointed a head of sustainability to make sure was installed to turn things around. That meant cutting costs, the programme stays on track. closing factories and throwing the poor quality brands overboard. It is likely that Birds Eye Iglo will be floated back onto the What was not jettisoned, however, was the company’s market again in the not too distant future. Improving the sustain- commitment to sustainability. An early commitment was to ability of the product roster is something that new shareholders reduce the amount of cod in fish fingers, replacing it with more will want to see. And that in itself is a sign of just how important sustainable species such as pollock. This approach is now being such factors have become.on serious risk, then it won’t be able to do this. market they find people don’t much value the social“Environmental risk is now a big deal,” the former and environmental aspects, then they won’t, either.”plc head says. It will take society showing that it values the right But for all the action by some of the big names, things, before private equity companies will respond.this former chief executive believes we are still near How much difference did the financial crisisthe beginning on the journey. He argues that sustain- make? He says there has been something of a mindsetability is not high up the agenda for the vast majority change. “Private equity companies now need toof the private equity industry. “They will focus on deliver real business improvement, not just apparentanything they see as genuinely driving financial improvement. Flipping quickly is not happening.”value but if, at the point of floating back onto the Tom Rotherham notes the same phenomenon,
18 Briefing: private equity Ethical Corporation • July-August 2011 ARSENIK/ISTOCKPHOTO.COM KKR’s aim is to integrate ESG thinking into the sector investment teams The financial crisis changed minds highlighting that at the point when the flow of debt and renewable energy. This will come about dried up, private equity companies started holding through smart “market spotting” rather than a on to portfolio companies longer. They increased values-based conviction for “doing the right thing”. the number of operational people they hired and, But Ludo Bammens says it has to be applied to all Rotherham believes, the focus returned to building sectors. “Sustainability has to be mainstreamed better companies. through your portfolio. It isn’t just about making specific investments, for instance, in clean tech,” Operational improvements he says. He suggests that there is “an inverse relationship With this in mind, he sees part of KKR’s next between the cost of debt and the amount of effort challenge as being to get the issues out from the sole general partners make on operational improve- ownership of compliance teams. KKR’s aim is to ments in their portfolio companies. When debt integrate ESG thinking into the sector investment returns, it is not clear why focus won’t once again teams so it is “fully a part of their own thinking and drift away from operational improvements.” not something that is purely the realm of the dili- His conclusion is a sobering one. “Did we learn gence team”, Bammens says. the lessons of the crisis? When it comes to perma- But there are big questions still on the horizon. nent change in how companies operate, the answer One former senior head within a private equity has to be no.” company sounds a pretty big alarm bell. Simon Havers believes that at least one relevant He believes that from an overall corporate respon- point has been picked up. “The lessons have been sibility point of view, people are going to increasingly learned that when the storms hit you need to have ask whether the societal value these businesses create made lots of friends before.” And private equity is going to too few people. He expects people’s stan- companies are starting to talk about stakeholders in dards of living will continue to decline, because “we ways they hadn’t previously. built our wealth on the backs of foreign resources and So, what are the trends for the future? More labour in a way which can no longer be done.” integration. This will mean that the questions about the huge There will certainly be more instances of private incomes of a few will get tougher. Needless to say, equity companies putting their bets on some of the that is one issue that private equity is not going to technologies of the future, clean tech companies address voluntarily. n