Ethics in Services Marketing

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_______________________________________________________________ Report Information from ProQuest September 26 2014 02:07 _______________________________________________________________

26 September 2014 ProQuest

Table of contents

1. Investors in Need of Social, Ethical, and Environmental Information........................................................... 1

Bibliography...................................................................................................................................................... 14

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Document 1 of 1 Investors in Need of Social, Ethical, and Environmental Information Author: Hummels, Harry; Timmer, Diederik ProQuest document link Abstract: In this contribution we will briefly discuss the shareholders' need for social, ethical and environmental information and the efforts of corporations to address this need. Looking at three cases, we will raise some doubt with regard to the adequacy of corporate SEE reporting to meet the needs of shareholders. We will discuss the following three cases: BP's investments in Azerbaijan, Nike's management of its labour conditions, of child labour and security issues, and Monsanto's production of genetically modified seeds. [PUBLICATION ABSTRACT] Links: Check for full text via 360 Link Full text: Headnote ABSTRACT. In this contribution we will briefly discuss the shareholders' need for social, ethical and environmental information and the efforts of corporations to address this need. Looking at three cases, we will raise some doubt with regard to the adequacy of corporate SEE reporting to meet the needs of shareholders. We will discuss the following three cases: BP's investments in Azerbaijan, Nike's management of its labour conditions, of child labour and security issues, and Monsanto's production of genetically modified seeds. KEY WORDS: social, ethical and environmental information, investments, SEE reporting, Nike, BP, Monsanto More than a fiduciary responsibility The responsibilities of a company surpass the maximisation of shareholder value. Although the fiduciary responsibility is highly important, a company also has to consider and balance the social, ethical and environmental (SEE) interests of its stakeholders. In order to assess and balance a company's SEE performance stakeholders need information. In this contribution we focus on the role and relevance of non- financial information - and more in particular SEE-information - in a shareholder's investment decisions. Some shareholders take SEE information into account because of ethical principles they hold. If an investor does not want to get involved in human rights violations, corruption, unfair market practices, child labour or genetic modification - just to mention a few - the least he needs to do is obtain sound information on a corporation's SEE performance. Investors that do not have ethical objections to a company's activities or behaviour might, nevertheless, also be interested in this type of information. But then it must be clear that the information is relevant for the assessment of the financial risks and returns of their investments. As the past has shown, shareholders that do not possess adequate SEE-information may be open to financial risks that can lead to lower returns on their investments. In this respect, assessing SEE company data may even become a fiduciary responsibility for investment managers who manage the money of private or institutional clients.1 This means that SEE information is not only relevant to that group of investors usually denoted as ethical investors, socially responsible investors or sustainability investors. It may be relevant to all investors. In this contribution we will briefly discuss the shareholders' need for social, environmental and ethical information and the efforts of corporations to address this need. Looking at three cases, we will raise some doubt with regard to the adequacy of corporate SEE reporting to meet the needs of shareholders. We will discuss the following three cases: BP's investments in Azerbaijan, Nike's management of its labour conditions, of child labour and security issues, and Monsanto's production of genetically modified seeds. The shareholder perspective Shareholders have a stake in the company's financial affairs and therefore have a legitimate right to know what the management has done - or plans to do with the money. That right becomes increasingly important now that

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the economy has slowed down and the stock prices have fallen. Investors, trying to implement their right to know, need sufficient relevant information on the corporation's (financial) state of affairs and they need that information in time. This right exceeds the investors' right on financial information on a quarterly or a yearly basis. Since the SEE performance of a corporation may directly impact on its financial position, the corporation has to provide sound SEE information to its investors. Some of the required information comes from the company itself - e.g. in the company's SEE report. There is a clear trend in the production of Social Reports by multinational companies, often on the basis of the format provided by the Global Reporting Initiative. In addition, information comes from universities, NGOs, multilateral organisations such as the UNDP, and other public sources. A recent example of relevant social information comes from an NGO campaign targeting among others Anglo-Dutch multinational Unilever. Hindustan Lever Ltd. (HLL), Unilever's subsidiary in India, is allegedly involved in the use child labour in the production of cotton and cottonseeds. No less then 25,000 children are employed by Paras Extra Growth Seed - in which HLL has a 26% minority share. Two orientations towards SEE information The information shareholders require is not the same for everyone. The continuum of shareholder orientations range from those with a (strictly) ethical orientation to those with a (strictly) financial orientation. Ethical investors do not solely or even primarily focus on the financial implications of unethical or unsustainable behaviour or activities of the companies they invest in. Their prime focus is the (undesirable) character of the behaviour or activities itself. Examples of undesirable behaviour or activities are human rights violations, corruption, genetic modification, discrimination, child labour, living wages, or environmental degradation. Taking these issues into consideration we distinguish between two types of ethical investors: the principled and the consequential investor. 1. Principled investors are those for whom a violation of their principles is a sufficient reason to exclude these companies from their investment universe. 2. Consequential investors are those for whom a violation of their principles is not a sufficient reason for exclusion. The decision to exclude a company depends on the company's action program to prevent violations in terms of: a clear set of business principles, a code of conduct, management systems, employee training programs, a clear approach to monitoring, auditing and reporting, and a company's accountability. The difference between the two ethical approaches can be illustrated on the basis of the Unilever case mentioned above. The principled shareholder might find HLL's involvement in child labour practices a sufficient reason not to invest in the parent company - or to divest if he holds Unilever shares. The only information he needs refers to the question: is this company involved in child labour and does it therefore violate my principles? The consequential investor, on the other hand, requires more information before he decides to divest or not to invest in a company for ethical reasons. He needs to know whether a company has taken effective steps to prevent becoming involved in child labour issues. Does the company have a code of conduct, what does it do to implement this code, does the company monitor the implementation of the code, does it provide sufficient training to its employees, and does it report the progress the company is making in this respect? In the Unilever case, this investor needs to have information on the efforts by both the parent company and the subsidiary to prevent their (future) involvement in employing children. What does Unilever do to counter its involvement in hiring children and what actions does HLL take? What alternatives do they offer - if any - to the children involved? What actions do they take to lessen the burden of debt bondage?2 Financially oriented investors are not likely to be impressed by NGO information on the Unilever child labour case. It is not clear whether the NGO campaign will lead to financial repercussions for HLL or the parent company. Of course, there might be some mentioning of reputation risk, but what is the capital or value at risk when Unilever's reputation is damaged? Will this be material? For investors with a strict financial orientation

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SEE information is only relevant to the extent that it impacts a company's financial bottom line. In order to assess the Unilever case a financially oriented investor needs more information on the financial consequences - in terms of increasing risks and declining returns - of an inadequate SEE performance. A good example to clarify the difference between an ethical orientation and a financial orientation comes from the tobacco industry. Some investors do not want to invest in the industry for ethical reasons. To many others, however, a tobacco investment is simply an uncontrolled financial risk. Not only has the industry settled a claim of more then US$200 billion in 1998, recently the five largest tobacco companies were also accused of running a criminal enterprise. The U.S. Justice Department is now claiming US$289 billion - an amount allegedly coming from the profits of the tobacco companies ever since these companies began their fraudulent activities in 1954. And the department is not the only one that is after the money of big tobacco (see box below). Philip Morris at risk Philip Morris is warning a downstate Illinois judge could force it into bankruptcy, jeopardising billions of dollars in tobacco settlement money set to go to cash-strapped states through 2025. In April 2003 Judge Nicholas Byron ordered the nation's biggest cigarette-maker to post a $12 billion appeal bond to cover a $10.1 billion judgement, plus interest, during the appeals process. The bond is more than twice the company's $5 billion operating income for last year. As a result of Byron's order, Standard and Poor's has warned it might lower Philip Morris' credit rating to junk status and said the company might have "to consider bankruptcy as an option." As a result of the public discussion on the industry's behaviour the Investment Committee of one of the world's largest pension funds, CalPERS, decided on October 16, 2000 that it would sell more than $525 million in tobacco company stocks. Investment Committee members in favour of the tobacco divestment defended their decision by underlining "the prudence of the divestment strategy". They argued that "while the price of stocks may fluctuate, bankruptcy is a continuing threat to those invested in the tobacco industry" (SRI World Group Inc., 2001). SEE information for shareholders: The cases of BP, Nike and Monsanto In order to take informed investment decisions investors need company information. Some of the information comes from outside sources, such as the government, multilateral organisations, NGOs, et cetera. The bulk, however, comes from companies themselves, either directly or indirectly through brokers, analysts, and other information providers. One can ask whether the currently available information is sufficient for shareholders as a basis for their decision making - in particular for financially oriented investors. In this contribution we will shed some light on this question using three examples: * BP's investments in Azerbaijan, a country known for its corruption; * Nike's management of its supply chain - and more in particular its dealing with poor labour conditions, child labour and its reliance on local police forces to repress protest; * Monsanto's investments in genetically modified seeds. We will argue that even companies that have dealt with some serious social ethical and environmental problems in the past, do not provide information to (financially oriented) shareholders that is sufficient for them to take sound decisions. British petroleum The business relationship between British Petroleum and the government of Azerbaijan goes back to 1992. Since then contracts have been signed to develop the Azeri Chirag Gunashli (ACG) oilfields3 and to exploit the Shah Deniz contract area. These contracts have made BP the leading foreign oil company in the area. Its close relationship with the current government also implies a business risk. According to Transparency International Azerbaijan is one of the most corrupt countries in the world4 and BP the relationship between the government and the oil company is seen by the local population as one that is being smeared with bribes and "facilitation payments". BP denies the allegations and declares that corruption is not in its interest:

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Many people see big business as a source of corruption, but we see corruption as not only ethically wrong but also bad for business and damaging for society.5 BP prohibits its managers and staff to accept or pay all forms of bribes. According to its code of conduct: BP will never offer, pay, solicit or accept bribes in any form, either directly or indirectly.5 In the beginning of 2002 BP has intensified its efforts to ban corruption, according to a recent speech by John Brown, the CEO of British Petroleum: One of our standards of behaviour is a prohibition on bribery which extends now to a prohibition on all facilitation payments. (...) To deliver against that standard we have begun to improve the transparency of what we do across all our operations. (...) Publishing those details is not, as some people have suggested, to interfere with the way in which funds are spent. It is simply about showing where the money is going. (Brown, 2002) Prohibiting or discouraging the payment of bribes or facilitation payments - as BP knows - is a necessary, but not a sufficient condition to fight corruption. Therefore the company uses an assessment centre (IFAN) to investigate allegations of corruption. Senior managers are expected to inform the VP General Auditor or the VP Security about any incident that may result in a loss of US$100.000 or more. Smaller incidents should be reported to IFAN. In addition, BP requires senior management to report on the implementation of its code of conduct, as well as on compliance with the code. In 2001 IFAN reported approximately 400 cases of fraud, theft and bribery. Nike In its mission statement Nike expresses it wants to do business in a responsible way, leading to sustainable financial growth. The company is determined to build its business with all of its partners based on trust, teamwork, honesty and mutual respect - and it expects all of its business partners to operate on the same principles. In the company's Code of Conduct Nike indicates what this means: NIKE designs, manufactures, and markets products for sports and fitness consumers. At every step in that process, we are driven to do not only what is required by law, but what is expected of a leader. We expect our business partners to do the same. NIKE partners with contractors who share our commitment to best practices and continuous improvement in: * management practices that respect the rights of all employees, * minimizing our impact on the environment, * providing a safe and healthy work place, * promoting the health and well-being of all employees. Contractors all over the globe must recognise the dignity of each employee, and the right to a work place free of harassment, abuse or corporal punishment. Decisions on hiring, salary, benefits, advancement, termination or retirement must be based solely on the employee's ability to do the job. There shall be no discrimination based on race, creed, gender, marital or maternity status, religious or political beliefs, age or sexual orientation. Although Nike believes it is doing the right thing, it does not deny that things do go wrong sometimes. Research by the Indonesian Atma Jaya Catholic University shows the company is involved in:6 harassment, especially verbal harassment, denial of various forms of legally mandated leave, worker complaints about overtime, pay, the quality of food and other provided benefits, and in two specific incidents, worker concern that denial of sick leave may have contributed to worker deaths.7 A second report - on the business practices of Nike supplier Kukdong International in Mexico - does not read as a recommendation either: through its supply chain Nike is involved in poor working conditions, violations of labour rights, wages that are sub-standard, harassment of its workforce, and so on. Nike takes these reports seriously. On the basis of the research findings the company has intensified the monitoring of its suppliers. In its 2001 Corporate Responsibility Report Nike indicates: One cornerstone will be the independent monitoring of 10% of our factory base each year by monitors certified

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under the Fair Labor Association, whose protocol is the most rigorous we have seen. (Nike, 2001b) Also in the area of child labour Nike is facing some difficulties. The company admits that both the international standards as well as its own are crystal clear: Nike contractors should not employ anyone under 18 for the production of shoes and no one under 16 for the production of clothes. In daily practice, upholding the standard at all times appears to be difficult, if not impossible. In Cambodia, for instance, the Red Khmer regime was not only responsible for the killing of millions of lives, but it also destroyed Cambodian population records. For companies operating in Cambodia it is therefore hard to verify the age of a child on an objective basis. Official documents are often a fraud, since they can be bought for little money on the corner of every street. This has brought Nike to follow a new procedure: Nike and locally trained monitors (...) reviewed all 3800 employees and than had face to face interviews with workers whose age was suspect. Even at the end of that process, there was no absolute assurance we had got it right. (Nike, 2001b) Nike's Corporate Responsibility Committee reviews company compliance with diversity, labour and environmental codes. Monsanto "Cremate Monsanto". In 1998, Indian farmers in the Karnataka region were out to stop Monsanto from producing genetically engineered cotton and to induce the government to ban field tests of genetically modified seeds and crops. In front of TV cameras and news reporters genetically modified cotton fields were burned by farmers and sympathising NGOs. The upheaval in India was not Monsanto's only conflict with local stakeholders and NGOs. Also in the United Kingdom the company struck the wrong tone when it tried to introduce genetically modified products in the British market. When criticised by the NGO community for its blunt behaviour former Monsanto CEO, Bob Shapiro, defended his company saying: Our confidence in this technology and our enthusiasm for it has, I think, widely been seen - and understandably so - as condescension or indeed arrogance. Because we thought it was our job to persuade, too often we forgot to listen ... We're now publicly committed to dialogue with people and groups that have a stake in this issue. We're listening, and we'll seek common ground whenever it's available and to the extent that it is available.8 According to Shapiro, the dialogue must meet, however, some basic requirements: The underlying premise of dialogue is pretty straightforward. In this case, it is that there are both real benefits to the use of biotechnology and at the same time there are real concerns about its use. If you don't believe that there are real benefits, then there is no room for dialogue. (Shapiro, 1999) Although Monsanto may want to clarify its position on genetic modification in a dialogue with NGOs, the multilateral organisations, single issue groups and even governments are often focusing on broader issues, such as the role and responsibility of business in society. Even Monsanto's Martina Bianchini recognises this need for a broader discussion: We have a societal problem that is much deeper than biotech ... The deeper question is how should this technology be introduced in society and what role should consumers, NGOs, stakeholders, etcetera, play in its introduction and policy making?8 On its corporate website the company indicates that it is the "a leading provider of agricultural products and integrated solutions for farmers".9 The company produces Roundup, the world's best-selling herbicide, as well as other herbicides. It provides farmers and other seed companies with biotechnology traits for insect protection and herbicide tolerance: With our unique combination of products and our unparalleled innovation in plant biotechnology, we create integrated solutions that bring products and technologies together to improve productivity and to reduce the costs of farming. We manage our business in two segments: Agricultural Productivity, and Seeds and Genomics. The company pledges to be a good corporate citizen delivering high-quality products that are beneficial to its

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customers and society. In addition, it states that it protects the environment based on a notion of effective stewardship, while at the same time showing respect to its employees, communities, customers and other key stakeholders.10 Clearly the company is aware of the fact that its products not only benefit society but also impose risks on that same society. The company's policies and practices in the field of genetic modification "are based on factors that involve risks and uncertainties". These risks come from, among other things, "social, legal and political developments, especially those relating to agricultural products developed through biotechnology"10 or the company's exposure to lawsuits and liabilities relating to regulatory compliance including product quality, environmental contamination and antitrust. For that reason the company provides information on, for instance, the safety of its products.11 Information for ethically oriented investors How useful or relevant is this information on the SEE performance of the companies involved for investors? In other words, does SEE information help investors to make sound investment decisions? We will consider this usefulness and relevance of this type of information along the three lines we distinguished: principled investors, consequential investors and financial oriented investors. A sufficient reason for exclusion The information on BP, Nike and Monsanto clearly demonstrates their involvement in bribery and facilitation payments (BP), child labour and poor working conditions (Nike), and genetic modification (Monsanto). To the credit of these companies we have to say that they never try to deny or cover up their involvement. On the contrary, Nike acknowledges hiring children, Monsanto's core products all deal with genetic modification, while BP only discourages facilitation payments but does not prohibit them: In early 2001, BP's stance on such payments received a lot of attention in the public domain.We said, in a UK parliamentary hearing, that whilst facilitation payments are discouraged in BP, our policy allows them to be made at local management discretion.12 For principled investors this information usually suffices to exclude the companies from their SRI investment universe and their SRI portfolios. The companies engage in activities excluded in the investor's Statement of Investment Principles and therefore - as a logical consequence - the investor will not consider buying these companies' stocks. Not a sufficient reason for exclusion The simple fact that a company demonstrates behaviour or is involved in activities that are excluded by investors is not a sufficient reason to sell a company's shares or bonds - or not to consider investing in that company. As we said earlier such a decision would be based on additional information regarding the company's business principles, code of conduct, management systems, employee training programs, monitoring, auditing and reporting, as well as the company's accountability. To this group of investors the following information on BP is relevant: We have accepted that our position to this should be strengthened to re-enforce our overall strong anticorruption stance. In February 2002, we introduced a new policy that makes it clear that BP staff anywhere in the world should not make facilitation payments from now on.12 Likewise, the information Nike provides on improving labour conditions and pushing back the hiring of children13 is highly important for consequential investors. Nike claims to do the utmost to improve working conditions and to drive back the hiring of children. To support that claim the company refers to its contracting of suppliers, to its social audits, and to the corrective measures Nike takes when a contractor fails to live up to its contract. There is no way, however, according to Nike, to prevent the company from becoming involved in labour or other social issues in the global economy. The best Nike can do is to minimise the chances of becoming involved. Monsanto appears to be very convinced about the nature and quality of its products and about the way they are

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produced. On its corporate web-site the company particularly stresses the benefits to their customers and to society of their products. Although Monsanto acknowledges the SEE risks involved in the production process and in the resulting products, the company does not provide substantial evidence to support its SEE claims. Nor does Monsanto proof that it takes its SEE challenges seriously. Looking at the (absence of) company data on the SEE performance of BP, Nike and Monsanto, we conclude that the data provide information that is relevant to principled and consequential investors. Information for financially oriented investors How relevant and informative are the SEE data to investors with a financial orientation? Do the data help this type of investors to assess SEE related financial risks and returns? Disclosure of financially material information is crucial to protect the interests of investors and to support the effective and efficient functioning of the financial markets. In general, companies must disclose any material information. The Securities and Exchange Commission (SEC) defines materiality as: "information that a reasonable investor would be likely to consider important in the context of all the information available".14 Not disclosing material information is considered equivalent to misleading an investor. According to SEC Regulation S-K (item 303) a company should disclose known future uncertainties that may materially affect financial performance. The Management Discussion and Analysis (MD&A) ruling is to: give the investor an opportunity to look to the company through the eyes of management by providing both a short and long-term analysis of the business of the company. (SEC, 1987) This means that: The firm shall disclose where a trend, demand, commitment event or uncertainty is both presently known to management and reasonably likely to have material effects on registrant's financial condition or results of operations. (Repetto and Austin, 2000, p. 7) Disclosing this information is not only in the best interest of the shareholder, but also in that of the company itself, according to Repetto and Austin (2000). Firms that are more transparent "suffer fewer adverse market impacts when outside information becomes available" (Repetto and Austin, 2000, p. 3). Transparency may reduce market uncertainty and volatility. BP BP hardly discloses SEE data that enables its investors to assess to what extent the company's SEE performance materially affects its financial performance. Financially oriented investors usually have questions regarding: 1. The risks of losing contracts * What are the chances that BP's 'contract of the century' will be terminated as a result of a change of government in Azerbaijan? * What is the estimated damage in case the company looses its contracts? * Is it possible for BP to insure the risk of losing its contracts and does it make sense to do so? If so, did BP do it? 2. Compliance * Are BP's measures to prevent and counter bribery and facilitation payments effective in reducing the company's commercial and financial risks? * Do the measures contribute to the company's reputation? * Does the company's policy to drive out bribery and facilitation payments improve or worsen its chances of winning future commercial projects? * What are the likely (financial) results of BP's openness in communicating the sums of money involved in commercial transactions? * What do the measures say about the quality and reliability of management? 3. Social effects

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* What impact will the company policies and practices have on corporate branding? * What are the likely financial consequences of a lack of consumer trust? * What are the (dis)advantages of BP's policy in respect to its NGO-relations? On face value the financial risks of the Azerbaijani population perceiving BP to be bribing and smearing appears to be small. The worst-case scenario is one in which the company will be fined and the responsible managers will resign. In addition, the company may suffer a loss of reputation. Referring to a survey by Interbrand Mansley (2002) estimates the market value of the oil companies' reputation at US$20 billion. Although BP's reputation is likely to be damaged if the company is perceived as violating the public trust, the incurred loss will only be marginal. More serious than the reputation risk is the political risk. Replacing or overthrowing the current government may seriously damage the position of the company in the country and may result in expropriation. Taken on the whole, however, this risk is small. The importance of the ACG field compared to the total of BP's operations is limited, which might explain BP's reluctance to publicly disclose information on the political risks in Azerbaijan. Another likely explanation would be that disclosure would mainly benefit BP's competitors and therefore would not be in the material interests of its own investors. Nonetheless, BP does offer information on its social and environmental efforts in Azerbaijan. On its corporate web-site BP explains: BP's programme of social investment in Azerbaijan, initiated in 1992, has marked us out as a leader in contributing to key community needs and to the development of civil society in Azerbaijan. The most vulnerable groups have benefited from our support, including refugees, disabled people, victims of natural disasters and homeless children. As examples of our social investment programme we have facilitated the construction of a community centre, provided educational materials, supported the retraining of war veterans and promoted environmental and road safety education.15 Whether the investments are an adequate and sufficient answer to the BP's risk exposure in Azerbaijan cannot, however, be determined in advance. Nike In its Corporate Responsibility Report FY 2001 Nike proudly claims to have greatly improved working conditions in the footwear industry: There are more than 200.000 footwear workers working in safer factories today because of all the hours spent getting the toxic solvents out of factories, testing the air changing the work practices, and then re-testing. The cost to Nike of making improvements to its social and ethical responsibility is substantial. Not only does the company have a department of Corporate Responsibility, but it also invests in development, implementation, and evaluation of its SEE policies. The precise amount of money involved, however, remains unknown which makes it difficult to assess the added value of Nike's SEE programmes. Concerning the risks of producing footwear and clothes in the United States the company states: Our international operations are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, export duties, quotas, restrictions on the transfer of funds and, in certain parts of the world, political instability. (...) We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such developments occurring. We believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers outside of the United States. If events prevented us from acquiring products from our suppliers in a particular country, our footwear operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe that we could eliminate any such disruption within a period of no more than 12 months, and that any adverse impact would, therefore, be of a short-term nature. We believe that our principal competitors are subject to similar risks.16 The likelihood of being materially affected by social upheaval regarding the company's child labour practices, its

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poor working conditions, or security issues, is apparently not perceived as a risk. In its 10K report, Nike does not discuss the effects that may arise from conflicts with NGOs, labour unions, multilateral organisation and possibly consumers. That Nike is exposed to social risks is a fact, which is illustrated by Klein (1999). The company derives a significant part of its market value from its brand value. Its main products are not shoes of sportswear but the company's image. As Nike founder Phil Knight once commented: For years we thought of ourselves as a production oriented company, meaning we put all our emphasis on designing and manufacturing the product. But now we understand that the most important thing we do is market the product.We've come around to saying that Nike is a marketing-oriented company, and the product is our most important marketing tool. (Willigan, 1992) Nike's image and the market value that is related to it is, however, partly dependent on the company's social performance. The company becomes vulnerable when it looses its credibility with the general public, NGOs and consumers, as shown by a 13year old activist coming from the Bronx. When given the opportunity by a Fox News reporter he looked straight into the camera and said: "Nike, we made you, we can break you" (Klein, 1999). It is therefore a surprise to see that the company apparently does not appreciate the risks associated with its SEE performance and report on these risks in its 10-K report. Even if the company's SEE performance does not materially affect the company's financial performance, it makes sense for Nike to inform its investors about consequences of the company's exposure to SEE risks and the cost involved in its CSR policies, practices and reporting. At the moment Nike's Corporate Responsibility reporting does not offer the investor any information on the financial consequences of Nike's CSR operations.17 Monsanto According to Robert T. Fraley, Monsato's Chief Technology Officer, the company currently offers corn growers three biotechnology traits: YieldGard Corn Borer, Roundup Ready corn, and YieldGard Rootworm Corn. Roundup Ready corn has the potential to be used on 20 million acres in the United States by the end of 2005, up from less than 8 million acres during 2002. The prospects for YieldGard Rootworm corn are also promising. This product will help farmers control the corn rootworm, which costs U.S. corn growers an estimated $1 billion annually in lost yield and insecticide costs.10 According to the recent Monsanto Investor Risk Report by Innovest "the firm has above average risk exposure and less sophisticated management than peers" (Innovest, 2003). Although the company warns its investors that its actual performance and results may differ materially from those described or implied by the company's own forward-looking statements, the risks may be more substantial then what is suggested in the company statements. Factors that could cause or contribute to such differences include, among others, domestic and foreign social, legal and political developments, and the company's exposure to lawsuits. According to Innovest contamination of food products by Monsanto's GE pharma crops could bankrupt the firm. The report argues that Monsanto faces domestic market rejection of its products, foreign market rejection, environmental environmental and human health risks, and strategic risks. Domestic market rejection A clear example of domestic market rejection is the removal from the U.S. market of genetically engineered (GE) potatoes in 2001 following McDonald's, McCain's and Burger King's refusal to buy these potatoes. Foreign market rejection Over 35 countries - among which are major food markets like China, Korea, the European Union, and Japan - restrict GE imports and/or require companies to label foods containing GE ingredients. "GE concerns have caused U.S. corn exports to Europe to fall from $305 million in 1996 to $2 million in 2001. Exports to Korea have fallen from $300 million to $85 million." (Innovest, 2003, p. 8). Environmental and human health risks Genetic engineering pollution and contamination are inevitable since it is not possible to prevent seeds from being spread by the wind or other natural causes. The financial risks related to contamination are substantial as

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the StarLink case demonstrates. Innovest reports: "In 2000, Aventis' StarLink corn, a GE product not approved for human consumption, was found in many different food products. Following recalls of over 300 corn products, Aventis spun off its CropScience division. (...) So far, the StarLink disaster has cost Aventis nearly $1 billion. Yet, StarLink contamination is still occurring and could occur indefinitely. As a result, it is impossible to predict the ultimate cost to Aventis. Contamination costs could put Monsanto and other firms into bankruptcy, leaving society to deal with GE contamination problems." Strategic risks Monsato's focus on GE products poses strategic risks to investors. The patent for its star product, Roundup, has been expired, weeds begin to grow resistance to Roundup, Monsanto faces difficulties in opening new markets, and, of course, the company faces contamination and rejection issues. Innovest concludes: With Enron and other financial disasters, the financial community apparently bought into company stories without looking much below the surface. Since Monsanto's stock price has fallen by more than 50 percent over the past two years, it cannot be said that this is completely true in this case. However, in light of the issues and risks noted above, the firm may still be overvalued. Monsanto could be another disaster waiting to happen for investors. (Innovest, 2003, p. 12) The importance for the investor Investors with a financial orientation are looking for an answer to the question: "What gives the management of a company the right to develop and implement SEE policies if these policies are not in the financial interest of the shareholders or required by law?" According to Friedman (1970) there is no such right. The management is spending someone else's money if it were to reduce the company's returns by developing and implementing these policies. Although there is more to say about Friedman's argument, he definitely has a point in raising the question whether managers are justified to develop SEE policies for the sake of the public interest, NGOs, consumers, employees or other stakeholders. As we tried to demonstrate above BP, Nike and Monsanto do not offer sufficient information on the financial implications of their decisions to manage (or not to manage) relevant SEE topics. The corporate reports of BP, Nike and Monsanto do not provide the investor with sufficient information to assess the use, value and quality of the SEE related decisions the companies have taken. They do not disclose information "that a reasonable investor would be likely to consider important in the context of all the information available". In other words, the companies are not transparent and by not being transparent they might impose financial risks on investors. That places the investors in a vulnerable position. Of course, the investors themselves are also to blame. They have only begun to appreciate the value of SEE information to assess company risks and the impact SEE risks have on their investment portfolios. Only a few (institutional) investors are taking SEE information into account when assessing the financial risks of their investment decisions. A small minority takes SEE information into account when deciding on their investments - but very often only in terms of a separate mandate. Institutional investors do not integrate SEE information in their core investment processes - and that even counts for most of the leaders in the field. Conclusion In this contribution we have briefly discussed the shareholders' need for social, environmental and ethical information and the efforts of corporations to address this need. We have argued that there is information available on the SEE performance of companies. However, we have looked at three cases in order to raise some doubt with regard to the adequacy of corporate SEE reporting to meet the needs of shareholders. For investors with an ethical orientation there is (some) relevant information available to assess whether the company meets the investors' principles or the investors' consequential calculus. Investors with a financial orientation, however, are worse off. They are usually not able to assess the material consequences of company activities and behaviour in socially or politically sensitive areas. Disclosure of financially material information is

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crucial to protect the interests of investors and to support the effective and efficient functioning of the financial markets. It is also required by SEC Regulation S-K (item 303). Not disclosing material information is considered equivalent to misleading an investor. This brings us to the conclusion that companies should make a distinction between the various categories of investors and attune the investors' need for information and the factual information it discloses. The current reporting often misses this point and is not adequate and sufficient for (financially oriented) investors to use in their investment processes. Companies should therefore reconsider their current SEE information processing and start to disclose information that is geared to the needs of the (financially oriented) investor. Acknowledgements The authors would like to thank the anonymous JoBE referees for their constructive comments. Sidebar Child labour in Andhra Pradesh A new system of employing female children as "bonded labourers" has come into practice on hybrid cottonseed farms in south India in recent years. Local seed farmers, who cultivate hybrid cottonseeds for national and Multinational Seed Companies, secure the labour of girls by offering loans to their parents in advance of cultivation, compelling the girls to work at the terms set by the employer for the entire season, and, in practice, for several years. These girls work long days, are paid very little, are deprived of an education and are exposed for long periods to dangerous agricultural chemicals. It is estimated that nearly 450,000 children, in the age group of 6-14 years, are employed in cottonseed fields in India, in which Andhra Pradesh alone account for about 247,800. This figure surpasses the total number of children employed in industries such as carpet, glass bangles, diamond polishing gem polishing and limestone put together in India. The number of children employed in farms producing and supplying seed for these MNCs is estimated to be around 53,500. Out of 53,500 children, HLL accounted for 25,500, Syngenta 6500, Mahyco-Monsanto 17,000, Advanta 3000 and Proagro 2000 (Davuluri, 2003). Footnote Notes 1 Referring to the U.S. ERISA and the U.K. Myners report Robert Monks argued recently that institutional shareholders have a duty to engage with a company in which they hold shares concerning the company's corporate governance. What counts for corporate governance, we argue, may also apply to issues concerning the company's SEE performance - particularly if this performance materially affects the company's financial performance (cf. Robert, 2002). 2 The second (consequentialist) approach is usually more in line with regular investment decision making then the first (principled) approach. Investors don't look back but tend to look at a company's potential for generating future revenues - while minimising their risks. In like manner the consequential approach takes a company's potential to minimise future violations of the investor's principles as the key issue in the investment process. He wants to invest in companies that minimise his exposure to SEE risk. 3 BP described this deal as "the contract of the century". 4 Azerbaijan ranked 84th out of a total of 91 countries. 5 http://www.bp.com 6 Although the research was commissioned by Nike it can be considered independent. 7 The research, which was commissioned by Nike, did not find any evidence of Nike's direct responsibility or involvement in the death both workers. See also Nike (2001a). 8 Quoted in Bendell (2000). 9 http://www.monsanto.com/monsanto/layout/about_ us/default.asp 10 www.monsanto.com

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11 http://www.monsanto.com/monsanto/layout/our_pledge/transparency/prod_safety.asp 12 http://www.bp.com/company_overview/review_ 2001/hse_social.asp#13 13 Recently, as a result of the critique that firing children is not a good alternative, many companies are not developing a program in which children are being hired under the strict condition that the work is in part-time, under healthy and safe conditions, and accompanied by an educational program. 14 Quoted in Repetto and Austin (2000). 15 Source: http://www.bp.com/environ_social/case_ studies/casp_mid_east/index.asp 16 Nike: 2002, 10-K report, source: http://www.nike.com/nikebiz/invest/reports/ar_02/downloads/10k.pdf 17 This is not the place to discuss Nike versus Kasky. This court case has prevented Nike from publishing its second Corporate Responsibility Report or to disclose further SEE information through its corporate web-site. References References Bendell, J.: 2000, Terms for Endearment, Sheffield, 106. Brown, J.: 2002, Leading to a Better World (Harvard University, Cambridge, MA). Davuluri, V.: 2003, 'Child Labour and Trans-National Seed Companies in Hybrid Cotton Seed Production', in Glocal Research and Consultancy Services, Hyderabad, Andhra Pradesh (available at: http://www.indianet.nl/cotseed.html). Innovest: 2003, Monsanto and Genetic Engineering: Risks for Investors, New York. Klein, N.: 1999, No Logo, New York, 374. Nike: 2001a, Corporate Responsibility Report, 34. Nike: 2001b, Corporate Responsibility Report, 29. Repetto, R. and D. Austin: 2000, Coming Clean (World Resources Institute, Washington). Robert, A. G. M.: 2002, 'Legal Regimes and their Impact on Corporate Engagement', in Understanding pension fund corporate engagement in the global arena, Oxford. SEC: 1987, Concept Release on Management Discussion and Analysis of Financial Conditions and Operations, Release No. 33-6711, 52 FR 13717. Shapiro, R.: 1999, Greenpeace Business Conference, London. SRI World Group Inc.: 2001, Sustainable and Responsible Investment Strategies. A Guide for Fiduciaries and Institutional Investors, Brattleboro, VT (available at: www.ishareowner.com). Willigan, G. E.: 1992, 'High-Performance Marketing: An Interview with Nike's Phil Knight', Harvard Business Review, July. AuthorAffiliation Harry Hummels is Chairman of EIBE/Institute for Responsible Business at Universiteit Nyenrode, The Netherlands Business School. He also holds the position of Professor of Socially Responsible Investing. In addition, Harry Hummels is head of SRI at ING Bank in The Netherlands. His articles have been published in the Journal of Business Ethics, the Journal of Values-Based Management, and Science and Engineering Ethics, and Praxiology. Diederik Timmer is junior researcher at EIBE/Institute for Responsible Business at Universiteit Nyenrode, The Netherlands Business School. AuthorAffiliation Netherlands Business School, Universiteit Nyenrode, Straatweg 25, 3621 BG Breukelen, The Netherlands E-mail: [email protected]

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Subject: Studies; Business ethics; Corporate responsibility; Social investing; Location: United States, US Company / organization: Name: Nike Inc; Ticker: NKE; NAICS: 316219, 424340, 315228, 315239, 339920; DUNS: 05-095-7364; Name: Monsanto Co; Ticker: MTC; NAICS: 325188, 325199; DUNS: 00-626-6803; Name: BP PLC; NAICS: 324110, 447110; Classification: 2410: Social responsibility; 9130: Experimental/theoretical; 3400: Investment analysis & personal finance; 9190: United States Publication title: Journal of Business Ethics Volume: 52 Issue: 1 Pages: 73-84 Publication year: 2004 Publication date: Jun 2004 Year: 2004 Publisher: Springer Science & Business Media Place of publication: Dordrecht Country of publication: Netherlands Publication subject: Business And Economics, Law ISSN: 01674544 CODEN: JBUEDJ Source type: Scholarly Journals Language of publication: English Document type: Feature Document feature: references ProQuest document ID: 198201392 Document URL: http://search.proquest.com/docview/198201392?accountid=87314 Copyright: Copyright Kluwer Academic Publishers Jun 2004 Last updated: 2014-08-09 Database: ProQuest Central

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Bibliography Citation style: APA 6th - American Psychological Association, 6th Edition

Hummels, H., & Timmer, D. (2004). Investors in need of social, ethical, and environmental information. Journal of Business Ethics, 52(1), 73-84. Retrieved from http://search.proquest.com/docview/198201392?accountid=87314

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