1. Human Rights: How to execute it right?
GBUS 3020 Case Analysis: Auditing for Human Rights
Freeport-McMoran Cooper and Gold in Papua
Jasper Yip | Kenneth Wu | Alexander She | Nikika Lee
24 November, 2011
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Freeport-McMoRan Copper and Gold in Papua

2. An analogy: Auditing and operations are intertwined …
Oasis Airlines • Long-haul low-cost airline based in Hong Kong
• Ceased operations after an accumulated loss of HK$ 1 billion
within 2 years
Business Theories Airline Industry
Business Model Performance Evaluation
• Deficit Auditing /
Consulting
• Cut cost
• Add value
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3. Our thesis today is …
Stated Commitment Action Evaluation
Underlying model Auditing
We ask ourselves:
Why auditing, instead of how to audit?
We answer the question:
Auditing is not valuable, unless reforming the underlying model.
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Freeport-McMoRan Copper and Gold in Papua

4. Background of FCX
1 FCX is a global company engaging in copper and gold mining.
2 FCX faced pressure from allegation in human rights abuse in
Papua Province, Indonesia.
3 FCX responded to the pressure by requesting ICCA to conduct
a third-party Human Rights Audit
Source: Case Study
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5. FCX’s responses
Criticism Response
1 Insufficient knowledge of • Improve effectiveness of training programme
HR policies • Revise its human rights training curriculum
2 Providing military • Discontinue this practice
personnel using PTFI
roads
3 Violation of Indonesian • Gray area in certain aspects
labor laws
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6. Let’s look at one news happened recently…
“Worker unions have
complained they are
the lowest paid
among all of
Freeport’s global
mining properties”
“The week of
suspended
operations in July
caused Freeport to
lose about US$30
million per day in
lost revenues.”
Source: Asia Times. Freeport loses Midas touch in Indonesia (Oct 27, 2011).
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7. Auditing and improvement are not an identity...
Auditing
2005 2011
1 Military abuses • Continue military
• Drive the military
violence
around
• Military allegedly
• Under-table bribes
funded by FCX
2 Labour • Violation of • Lowest paid
Indonesian labour among all FCX
law global mines
3 Environmental • Pollute the local • Destroy marine life
abuse landscape near mine
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8. How Human Rights are practiced in FCX?
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9. Our thesis today is …
Stated Commitment Action Evaluation
Underlying model Auditing
We ask ourselves:
Why auditing, instead of how to audit?
We answer the question:
Auditing is not valuable, unless reforming the underlying model.
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10. Tata Steel is a true success of CSR in the mining industry.
• One line of the business of Tata Group,
the largest Indian conglomerate
• Highly recognized in India with its
community and national contribution
• Exemplary contributions:
– Retain 3 to 20% of its net profits
for community development
– Align company’s policies with the
SPICE (Society, Partner,
Investors, Customers and
Employees) spirit
Source: Forbes Indian (Nov 1, 2011). Tata Steel: An Unbeaten Track Record.
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11. When benchmarking Tata Steel against FCX …
1 Size of the Operating profit of $23.6 Operating profit of
company billion (2011) $18.982 billion (2010)
• United States • United States (Arizona,
2 Scale of • S. America (Brazil Colorado, New Mexico)
production • Europe • S. America (Peru, Chile)
• S. Asia (India, Iran, • Europe (Spain)
Bangladesh, Vietnam) • S. Asia (Congo, Indonesia)
Similar in both size and scale
Source: Annual Report 2010.
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12. They receive different perceptions of brand image …
3 Lines of business • Steel • Copper
• Steel-related product • Gold
• Silver
Both belong to the exhaustive industry.
How about the response to their mega project?
Mega steel plant in Grasberg mine in
Kalinganagar state, India Papua province, Indonesia
4 Perceptions of • Awarded with ‘UN • The community
brand image Global Compact City’ remained poor
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13. Kalinganagar in India progressed from the poorest region in
India to …
GDP per capita
Rank State / Union territory
(US$, 2009)
35 Bihar 343
34 Nagaland 453
33 Uttar Pradesh 551
32 Manipur 602
31 Assam 626
30 Madhya Pradesh 631
29 Jharkhand 680
18 Dadra and Nagar Haveli Territory 1,050
India (average) 1,087
17 Arunachal Pradesh 1,090
2 Chandigarh Territory 3,668
1 Goa 3,745
Kalinganagar (city):
US$3,100
Source: UN
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14. Poverty in Papua remains serious …
The Papua’s poverty
remains higher than the
national average.
50
46.0 41.5 40.8
40 44.4 37.0
41.8 40.8 41.3 39.3
Poverty rate (%)
38.7 38.7
30 35.0
19.1
20
18.4 18.2 17.4 16.7 16.7 17.8 16.6 15.4
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Papua Papua Barat National
Source: Central Bureau Statistic (BPS)
Extracted: World Bank (2009). Spending for Development in Papua.
Source: Central Bureau of Statistics (BPS), various publications.
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15. The living conditions of the community has no obvious
improvement
Value Rank in Papua
(out of 29)
Human Development Index (BPS) 2006 60.1 21
Population (BPS) 2006 50,766 20
Net Enrollment Rate for Primary % (Susenas) 2007 86.7 21
Net Enrollment Rate for Junior % (Susenas) 2007 47.2 14
Net Enrollment Rate for Senior % (Susenas) 2007 23.8 20
Household with access to safe water % (MoH Survey)
20.8 19
2008
Household with access to electricity % (Susenas) 2007 47.6 16
Extracted: World Bank (2009). Spending for Development in Papua.
Source: BPS, Susenas, MoH Survey.
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16. What is ‘understanding the local needs’?
Relationship
1 Trust
2
Employment
3 Cooperation
Empowerment
Embracement 4
Enhancement
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17. ‘Localized’ ideas, ‘Localized’ people
Economic
rehabilitation
Employment
Social
Empowerment rehabilitation
Embracement
Enhancement
Cowherd to
Office Assistant Entrepreneurial
of Maa Pickles
Women Self-
Help Group Right to
Information (RTI)
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18. Enhanced collaboration among 4 parties is required
Freeport
Local Local
Local workers
government community
Empowerment, Embracement, Enhancement
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19. FCX - Workers: Open up two-way communication channel
Capitalize the local specialties
Local expertise
Local
Freeport workers
Global
resources
Motivate local workers towards FCX’s goals
• Provide financial and social support
• Provide incentive schemes
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20. FCX – Local government: Initiate regular meetings
Problems Solutions
1 Human rights • Clarify stance against human right abuses
• Provide human rights training
2 Security force • Avoid government’s interference over operations
• Increase use of private armed security providers
Improve mutual understanding
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21. FCX – All stakeholders: Encourage engagement on
discussing security arrangements
Empower human rights compliance officers
Freeport
• Ensure human rights violations are resolved
timely
Local Local
workers government • Hold regular forums to facilitate interactions
• Keep FCX informed of human rights performance
Local Local and
communities Int’ NGOs of relevant public security forces
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22. Reforming the underlying model brings value to auditing.
Stated Commitment Action Evaluation
Underlying model Auditing
We ask ourselves:
Why auditing, instead of how to audit?
We answer the question:
Auditing is not valuable, unless reforming the underlying model.
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23. Recommendations on improving HR audit
Criticism Recommendation
1 Insufficient awareness of • Human rights-aware
environmental abuse approach
2 Staff unwilling to • Qualified and experienced
disclose details investigation team
Short time spent on • Timely and regularly audit
3
investigation
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24. Mining Industry is experiencing an unprecedented global
expansion …
… 60% of total recent exploration expenditure is directed at developing regions
Total exploration spent (US$ millions)
Developed regions 7 200
Developing regions 8% United States
Mining companies are
operating internationally … 11% Australia
5 600
Global mining Countries of
8%
companies operation 19% Canada
13%
26 3 900
8% 19% 18% ROW
15%
7 16% 4% Asia
2 300 20%
4% 16% Africa
16% 7%
17 15% 17%
22% 4%
11% 16%
4% 24% Latin America
17% 23%
19 22%
24%
2003 2004 2005 2006
Extracted: McKinsey (2009). Achieving Sustainable Development in Mining
Source: Bloomberg, MEG
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25. But we forgot one question: why auditing?
One extra stakeholder: NGOs One extra stakeholder: The government
No.of NGOs in consultative status with UNESCO
3000 2 new agreements ECOWAS
2500 per year Account Ability 1000
No. of NGOs
2000 registered with Initiative for Responsible Mining Assurance
UNESCO tripled Council for Responsible Jewellery Practices
1500
from 1995-2007 Towards Sustainable Mining
1000 Partnering Against Crime initiative
500 Kimberly Process
0 Equator Principles
Intergovernmental Forum on Mining, Minerals and Metals and
1940 1950 1960 1970 1980 1990 2000 2010 Sustainable Development
Extractive Industry Transparency Initiative
International Council on Mining and Metals
One extra stakeholder: FIs Diamond Development Initiative
Communities and Small Scale Mining
Equator Principles FTSE 4 Good
A financial industry benchmark for determining, Cyanide Management Code
assessing and managing social & UN Global Compact
Voluntary Principles on Security and Human Rights
environmental risk in project financing Millennium Development Goals
2000 2005 2009
Extracted: McKinsey (2009). Achieving Sustainable Development in Mining
Source: : Google; Factiva, McKinsey Survey, Equator Principles website
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26. Summary: Redefine the purpose of human rights audit,
localize the commitment in human rights
Case Study: Tata Steel as the role model
Stated commitment is based on the local situation
Universal standards Local situation
Stated Commitment Action Evaluation
• Professionalism
Auditing • Methodology
Multilateral security agreements Local workers Global CSR
• Companies are operating
Top Management internationally
• Increasing expenditure from
developing countries
Local government
Local communities Local and Int’ NGOs
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27. Supplementary slide:
Corporate Human Rights Reporting: Analysis of Current Trend
Areas for Improvement
• Presenting clear maps within human
rights reports
• Collecting and sharing baseline data
in reports on local communities
• Adopting best practice in disclosure
on employee and community
grievance mechanisms
• Exploring “traceability” in supply
chain reporting
• Developing proactive approaches to
human rights reporting
Source: United Nations Global Impact /GRI/Realizing Rights, 2009)
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28. Supplementary slide:
Guide to Human Rights Impact Assessment and Management
• This interactive online
tool
• Designed to provide
companies with
guidance on how to
assess and manage
human rights risks and
impacts of their business
activities
Source: United Nations Global Impact /IFC/IBLF, revised 2010)
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29. Supplementary Slides
Overview and Investigation of Tata Steel in Kalinganagar
Details of the project: http://kalinganagar.tatasteelindia.com/
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30. Supplementary Slide
Impacts: Orissa Project (2005)
• Posco and Govt: “2,000 people
(400 households) to be relocated”
• 2001 census: “30,000 farmers to
lose lands and livelihood”
• Of the 4,004 acres identified for
the project, 2,958.79 acres is
technically “forestland”, but
people have lived in these lands
for generations, hence the above
discrepancy.
• Main livelihood: Betel vineyards,
cashew, paddy, coconut, supari,
kewra, pisciculture.
• Govt and POSCO claim creation of
48,000 jobs
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31. Supplementary Slide
Orissa Project (2005): Criticism and Responses
Criticism Response
1 Job-ability mismatch • Increase compensation
• Provide more employment (48,000 jobs after
project start, 467,000 jobs in construction
phase)
• Set up Woman Self-Help Groups
• Empower SME entrepreneurship among locals
2 Insufficient skill sets • Provide language and skills training
Language barrier
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32. Supplementary Slide
10 Principles of UN Compact City
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33. Supplementary Slide
Example: SME entrepreneurship
Source: CNBC, India’s No.1 Financial News (http://www.moneycontrol.com/news-topic/tata-steel-parivar/video-kalinganagar-tata-steel-
parivar-members-attain-un-millenium-development-goals_1oTFLBwkbvw.html)
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34. Supplementary Slide
Example: Woman empowerment
Source: Tata CSR Report 2008-2009 (http://www.tatasteelindia.com/corporate-citizen/pdf/csr-08-09.pdf)
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35. Reference
Business Leader Initiative on Human Rights
http://www.blihr.org/randa.html
Corporate Human Rights Reporting: Analysis of Current Trend
http://www.globalreporting.org/NR/rdonlyres/4C5DB4C6-5084-4A84-BE51-
0D134B3B5A2E/3605/Human_Rights_analysis_trends.pdf
Human Rights and Business Dilemma Forum
http://human-rights.unglobalcompact.org/case_studies/security-forces-and-human-rights
Core values of Freeport Mcmoran
http://www.fcx.com/envir/wtsd/pdf-wtsd/2008/PTFI_2008/intro.pdf
Freeport abuses at the Grasberg gold mine
http://www.freewestpapua.org/docs/risky_business.pdf
http://www.twnside.org.sg/title/mine-cn.htm
The politics of power: Freeport in Suharto's Indonesia
http://books.google.com/books?id=CpT_HleBbEMC&printsec=frontcover#v=onepage&q&f=false
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