Good Honest Dollar $$

Map showing Nigerian states within the Niger Delta (Image via wikipedia)

Murder.
Brutal repression.
Razing of villages.
Air bombing campaigns reducing villages to rubble.
Arrests and subsequent hangings without due process.
Endemic corruption at various levels of government.
Broken promises of oil revenues being shared with locals.
Eviction from property with negligible compensation.
Forced abandonment of crops such as cocoa, cotton, rubber and groundnuts.
Oil spill cover ups
Gas flaring near villages
Waste dumping.
Ethnic rivalries.
Destruction of farming and fishing.
Impunity for environmental and human rights abuses.
Internal displacement of around 10,000 internal refugees.
Endemic poverty and people growing poorer since the 1960s

Have I left anything out?

Things have not exactly turned out the way they should have in the Niger Delta –  where the 1960s discovery of oil was supposed to bring great wealth and abundance.

Granted, not all of these problems are the sole responsibility of Royal Dutch Shell Corporation. Nor were they caused entirely by Chevron, Nigerian National Petroleum Corporation or any of the other firms which operate in the Niger River Delta region – governments have had a fair part to play.

But given the extent of the debacle surrounding the region over recent decades, you can hardly expect locals to love the multi-national oil giants. And it is hard to escape the conclusion that some of the problems which the oil industry faces – sabotage of operations and kidnapping of workers, are their own doing to some extent.

(Refer articles here and here for more information about the social and environmental problems over the past few decades associated with oil production within the Niger Delta Region)

 
Real business problems and a management lesson
As well as being a human and environmental tragedy, the Niger Delta debacle highlights a key management lesson for the oil industry: look after the local people and environment or suffer the consequences.

To be sure, if it weren’t for the direct impact upon operations, it would be easy for big oil management to avoid paying a great deal of attention to the impact of their operations from a social and environmental perspective, be it in the Delta or anywhere else.

But big oil is concerned. Militant activity, including the sabotage of production facilities and the kidnap for ransom of oil workers, has long had serious operational implications. In April, security concerns forced Shell to completely shut down operations. As recently as October, the company was still producing only 120,000 barrels per day in the region, compared to 300,000 prior to a surge in activity.

More broadly, as at October, that same surge had caused total production in the region, which has capacity of 3.6 million barrels per day, to sink to 2.2m b/d (refer article).

Add to this the financial cost of ransom for kidnapped staff (from what I have read, big oil almost always pays up), and it becomes more than clear that the problem is not one which oil companies can ignore.

 
Why big oil should be proactive
Granted, big oil is not the sole cause of this mess. Indeed, most of the problems relate to government and military abuses, and in no way can Shell or anyone else be held accountable for these.

(That said, some of the problems, such as waste dumping and oil spills and cover ups, can be directly blamed on big oil. And there are other problems still, such as the destruction of farming and fishing, with regard to which oil production is no doubt a significant and directly contributing factor)

Granted, also, that whilst no doubt the vast majority of those involved in the sabotage of the oil fields have legitimate grievances, some are simply thieves and professional criminals.

Nevertheless, the troubles of the Niger Delta region highlight the need for oil firms to undertake pro-active measures to prevent or minimize any adverse social or environmental impact in areas in which they operate.

Due to post length issues, I will not go into the specifics about what kind of action companies like Shell should take in this regard (I may share a few of my thoughts on this in a later post, and suggestions from readers are certainly welcome). For now, suffice it to say that steps to eliminate waste dumping and prevent further damage from accidents and oil spills would be a welcome step, as would investing within local communities and the local region (outside of those investments which directly relate to operational requirements) so that local residents could see some real community gains flowing from big oil’s presence.

Rather than getting into the ‘how to,’ my main point here is to empathize the need for a proactive approach in this area.

The big picture is simple – production problems in the region won’t stop until social and environmental problems stop.

Clear also, is the lesson for big oil: look after the local people and environment – or suffer the consequences in kidnapped staff and lost production.

It is extremely difficult to make an informed assessment as to whether Stern Hu or any of his colleagues really did breach Chinese law relating to industrial espionage and state secrets.

But the level of concern expressed within the international business community about events surrounding his detention and that of three of his colleagues in recent weeks is more than justified, and the detentions will rightly be seen as a great big red warning flag for business leaders in China.

 
Three extremely troubling aspects of the case
Mr. Hu, an Australian national who is Anglo-Australian mining giant Rio Tinto’s general manager for iron ore in China, was detained on July 05 by Chinese authorities along with three other Rio employees (of Chinese nationality) for bribery and stealing of state secrets.

As is often the case with China, the case has been conducted in a manner of extreme secrecy, and reliable information is extremely difficult to obtain. Accordingly, it is not possible to make any kind of informed assessment as to whether the allegations have any merit or otherwise.

And that brings me to the first of three extremely troubling aspects of the case from the point of view of the international business community: 

•   Poor handling of the case.

Perhaps it is not unusual to see lack of any form of transparency or accountability on the part of the Chinese government with regard to its handling of criminal investigations and associated legal proceedings.

But given the importance of this case, both from a point of view of China’s reputation within the international business community and from the point of view of it’s bi-lateral relationship with my home country of Australia (a key supplier of raw materials to the country), it is certainly fair to say that the case could have been handled better. Much better.

Alas, the case has been handled poorly. Despite Hu being an Australian citizen, the Australian government was only notified of his arrest three days after the detention took place. In addition, the New York Times reports that as of Friday July 17, more than ten days after their arrest, none of the accused had been allowed access to a lawyer.

Moreover, the case has been shrouded with secrecy. Chinese officials have released very little information at all, and the international community have had to rely almost solely upon a trickle of unverifiable information from the Chinese official English newspaper.

This may be standard practice from the viewpoint of the Chinese government, but it is no way to conduct a case where the global business and investment community is watching and bi-lateral relations with an important supplier are bound to be affected.

Senior staff of multi-national companies, it seems, fare little better than political dissidents when it comes to the treatment which they receive under legal proceedings within the Chinese legal system. 

•  Timing and context of the case.

As the New York Times duly notes, given the circumstances and background surrounding this case, the suspicion the detention of Hu and his colleagues represents a form of payback is difficult to avoid.

Prior to his detention, Hu has been the lead negotiator for Rio in annual price negotiations regarding the supply of iron ore to Chinese steel mills – negotiations which have (unusually) drawn out over several months and are believed to have become increasingly difficult. In addition, it is only a few months rejection on the part of Rio of an offer by Chinese state owned company Chinalco to purchase a twenty per cent stake in the company.

It is no secret that the Chinese government is not particularly happy about either of these developments, and regardless of the merits of the case, any idea that their arrests have no relation to these developments would appear to be very hard to swallow indeed.  

•  Have commercial negations become state secrets?

Consider what Chinese authorities are apparently claiming as evidence of espionage – files discovered on Rio computers, including Hu’s containing information about the activity Chinese steel mills including outputs, sales, purchasing plans, stocks of raw materials and schedules of production (refer article).   

Isn’t it more than conceivable that this type of information might well have been volunteered by the mills themselves in the ordinary course of ongoing commercial relations? Does this mean that possession of ordinary business information could now potentially represent a breach of the ‘Law Guarding State Secrets?’ (The scope of this opaque law was extended in March to cover commercial and industrial espionage)

Questions such as these present due cause for a considerable level of concern amongst execs whose regular business involves dealings with state owned enterprises in China.

In short, the international business community should be very concerned about the detention of Hu and his fellow Rio employees.

Very concerned.

The recent announcement by Wal-Mart of its intention to adopt a more stringent approach toward its supply chain in terms of labor and environmental standards represents a positive step in the right direction.

Now comes the hard part – verifiable and lasting improvement on the factory floor.

 
Wal-Mart’s strategy
On October 22, the company outlined a renewed strategy designed to produce significant improvement in terms of the management of its supply chain from a social and environmental perspective.

The centerpiece of this strategy is a new supplier agreement, to be phased in over a three year period beginning in January 2009. Under the new agreement, suppliers will be required to:

• Certify (a) compliance with all relevant laws and regulations in areas in which they operate and (b) adherence to strict social and environmental criteria;
 
• Conduct their own audits, as well as co-operate with (sometimes unannounced) audits from company representatives or independent auditors;
 
• Provide the name and location of every factory which they use in the manufacturing process; and
 
• By 2012, source 95% of all manufacturing inputs from suppliers which receive the highest ratings in relation to social and environmental practices.

In addition, the strategy also includes a range of targets relating to energy efficiency and product quality and safety, with particular emphasis upon its Chinese operations.

(Refer company announcement and International Herald Tribune article for more details)

 
Lessons from Nike
Associate Professor Chris McDonald, author of The Business Ethics Blog, draws a comparison with Nike. By all means, this is a valid comparison – Nike once had a poor reputation from the point of view of labor practices within its supply chain, but its reputation has improved considerably over recent years due to improvements in public transparency and accountability.

Nevertheless, the comparison with Nike raises three interesting issues:

 
• Wal-Mart’s efforts, at least in terms of public accountability and transparency, do not appear to be as extensive as those of the sporting goods manufacturer.

Nike currently provides full public disclosure in relation to (a) the location of supplier factories; and (b) the aggregate results of audits into labor conditions at supplier factories.

The announcement by Wal-Mart does not state whether or not such information will be publicly disclosed. If not, the general public will not have means by which to verify any claimed improvement in supply chain practices.

 
• Wal-Mart’s problems go beyond its suppliers.

Whilst the problems at Nike relate predominately to its external contract manufacturing practices, those at Wal-Mart extend further, and include alleged poor labor practices in the U.S.

If the company is serious about improving its reputation, it must address all of these issues, not just the issues which pertain to its supplier base.

Moreover, responsibility for improvement cannot be simply transferred to suppliers. Wal-Mart itself has a responsibility to adopt proactive supply chain management initiatives, including the training of suppliers in terms of best practice operating proceedures. Perhaps the most important action which the company could take is to cease placing unrealistic cost and time pressures upon its supply chain – suppliers must be provided with the opportunity to make improvements in operating practices without compromising the viability of their operations.

 
• Accountability is one thing, results are another.

As noted in an earlier post, whilst Nike has made significant improvements from an accountability viewpoint, its progress in terms of verifiable improvement on the factory floor has been very disappointing, with problems occurring frequently in terms of excessive overtime, poor occupational health and safety practices and failure to pay legal minimum wages.

Wal-Mart must go beyond Nike and demonstrate a substantial level of verifiable improvement at the level of the factory floor. Until this happens, no improvement in its corporate reputation will be justified.

 
Summary
Wal-Mart is to be commended on its positive initiatives, particularly its new supplier agreement.

Now comes the hard part – results on the factory floor.

(Olympic movement flag - image via Wikipedia)

Few sporting events generate as much public attention for their sponsors as the Olympics.

Nowadays, however, not all of that attention is positive. The twelve most prominent sponsors, including General Electric, Coca-Cola and McDonalds Corporation, stand accused of being complicit in human rights abuses in China by (correctly) ignoring calls to speak publicly about such abuses in the lead up to the games.

In April, Human Rights Watch (HRW) noted that it has witnessed an increase in human rights abuses in the lead-up to the games. These included violations of media freedom as well as intensifying persecution of Chinese human rights defenders, in addition to the ongoing crackdown in Tibet.

In response, HRW called for Olympic sponsors to take undertake six specific action steps, which are broadly aimed at pressing the Chinese government to address key human rights issues.

Corporate sponsors should act on the second step, which calls on them to certify that their own operations in China do not entail human rights abuses. All twelve major sponsors have made public commitments in support of human rights. They should uphold these commitments and conduct their own business affairs accordingly.

But that is as far as they should go.

To be sure, the Chinese government deserves criticism, and United Nations, foreign governments and human rights organizations should apply pressure upon China to improve its human rights record.

But there are three key reasons why corporate sponsors should refrain from involvement in this activity.

 
• Corporate sponsors are business entities, not governments or the UN.

They are not elected representatives of the international community and as such, they have no mandate to involve themselves in political issues.

Accordingly, corporate sponsors should refrain from any political engagement unless the issue concerned has a direct  impact upon their business operations.

 
• The Olympics is a sporting event, not a political event.

It is a global celebration of the skill, ability, dedication and commitment of world class athletes. 

The role of Olympic sponsorship is to support athletes. It does not entail engagement in political activity of the host country.

 
• Action speaks louder than words.

The most powerful way in which Olympic sponsors can make a statement is to ensure that the fundamental principles of human rights are upheld within their own operations.

Positive action on the ground says a great deal more about commitment to human rights than mere public criticism of governments.

In summary, Olympic sponsors have a responsibility both to provide full support to athletes and to ensure that their own operations are free from human rights abuses.

But public criticism of sovereign governments is the preserve of others, including the UN, foreign governments and other international agencies.