Good Honest Dollar $$

Over recent years, the way in which annual general meetings (AGMs) are conducted in my home country of Australia has been the subject of a considerable volume of criticism, and calls for an overhaul of the way they are conducted have intensified.

However, I do not support these calls.

Whilst not perfect, I feel that AGMs in their current form are worthwhile – predominately for shareholders but also for companies as well. 

 
AGMs under fire
Last week, James McKenzie, chairman of Australian retail company Pacific Brands, became the latest voice in calls for a complete overhaul of shareholder meetings in Australia, according to a report in the Australian Financial Review (AGMs: Nice place for a cup of tea and a bite to eat, May 15, 2010).

McKenzie believes the U.S model, which relies more on proxy votes, is more effective.

“What I like about the American AGM system is that you don’t get 250 people stacked in a room for probably not the right objectives – i.e. free food and a cup of tea afterwards, asking silly questions ..”

“.. The Americans do it all by proxy.”

He is not alone. According to the report, two-thirds of directors at the Australian Company Institute of Directors annual conference in Christchurch, New Zealand, agreed that the AGM was no longer an effective place of communication with shareholders.

(Note: Though the above quote refers to the American system, my comments here relate solely to Australia and do not, in any way, represent a critique of current U.S practice in this area)

 
Some criticisms valid ..
To be sure, some areas of complaint are valid.

AGMs do cost money and take up management time. And occasionally, the process is subject to abuse – either by interest groups trying to push their own agendas, or by individual shareholders using the meeting as a forum to make unsubstantiated allegations.

 
.. but they do have value
Nevertheless, AGMs are worthwhile, and their value extends well beyond scrumptious sandwiches and snacks.

This is so for a number of reasons:

 
• Those ‘frivolous’ questions are important.

To be sure, some questions and comments may seem inconsequential in the broad scheme of things.

But they are important to those who ask them. And it is important that all shareholders, regardless of the size of their holding, have an effective forum to ask questions, voice frustrations or concerns, and challenge directors on areas of performance or behavior.

 
• For shareholders, there is real value in meeting senior staff.

Equally important is the ‘mingling’ which takes place after the formal part of the meeting.

In my own case, I have only ever been to one AGM: that of Australian chemicals and mining services outfit Orica Ltd last year.

Most likely the process of meeting myself and other small shareholders did not seem overly consequential from the viewpoint of directors and senior managers on that occasion.

But it was important to me. This was my one chance to meet the key people behind my investment, and having sat in on the presentation and met some of those in charge, I went home that day feeling a great deal more comfortable about where my money was placed.

 
• They do promote accountability.

There is something special about face to face meetings, and the idea of directors having to account for themseves in person does up the ante a notch in terms of accountability.

For one thing, the corporate ‘spin doctoring’ often associated with other forms of communication is not so easy face to face. And it becomes more difficult for directors to gloss over or ignore legitimate concerns about performance or behavior in a forum where they are subject to direct challenge from shareholders.

Besides, the idea that any individual shareholder can be physically present during and participate in proceedings regarding board elections and company resolutions does promote confidence in the idea that the whole thing is properly transparent and above board. This is still the case even where proxies account for large portions of the vote.

 
• An investment in stakeholder relations

But most importantly AGMs do not just benefit shareholders; well run, they benefit the company as well.

AGMs represent an unparalleled opportunity to exhibit professionalism; to articulate vision, strategy and direction; and to respond in a constructive way to any legitimate investor concerns.

All this does wonders for investor relations (not to mention public relations), and I would certainly have thought that the benefits of a successful meeting would be more than sufficient to justify the costs involved – particularly given the importance of shareholders as a stakeholder group.

In their current form, AGM’s in Australia are not perfect. But they do have value, and I do not support calls for an overhaul with regard to their proceedings.

Oh, and keep that free food coming – those doughnuts, muffins and fresh sandwiches are delicious!

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In a recent discussion, I highlighted some of the underlying factors which contributed to the recent debacle surrounding Toyota and problems relating to unintended acceleration in some of its vehicles.

Today, I would like to focus on the company’s response – where it was lacking and why.

 
A tardy response
Toyota’s corporate response to the crisis fell short in three key areas:

 
1) Belated nature of apology.

Given the dates of the first two recalls (November 2, 2009 and January 27, 2010 – refer Wikipedia), consumers have every reason to wonder why they had to wait until February 5 this year to receive an apology.

This delay was unacceptable, and served as a clear indication of just how far behind the eight ball management was on this issue.

 
2) Mixed signals.

In September last year, the public were told that the problem related to floor mats, and that 3.8 million vehicles would be affected.

Then, on January 21, it was the sticky pedals – an embarrassing admission (which came only after it was proven that some crashes weren’t caused by floor mats) given previous denials that mechanical problems had anything to do with it. This affected an extra 2.3 million vehicles in the U.S.  (The next day, a further 1.8 million vehicles were recalled in Europe and 75,000 in China – refer Wikipedia).

Finally, as a separate issue, consumers were told on February 09 about problems with the anti-lock braking system in the Prius hybrid model – apparently the result of a software glitch.

The inconsistent nature of these signals does not inspire confidence on the part of consumers or the general public.

 
3) How far back does it go?

But worst of all are lingering questions about how far back the problems go, what the company knew and why action wasn’t taken sooner.

According to FairWarning, Toyota noticed sticky pedal problems in August last year – months before the recalls. Worse, though they have continually denied problems in this area through eight separate investigations, a CBS News report indicates that the company was aware of electronic problems causing some cars to ‘surge’ unexpectedly as far back as 2005. And finally, according to Wikipedia, there have been 21 deaths believed to be associated with the pedal problem since 2000.

Why, the public asks, is action being taken only now?

 
Why the poor response?
The reasons behind the deficiency of the response have been the subject of a significant degree of media discussion in recent months.

No doubt a range of factors were at play:

 
• Human error.

First and foremost, let’s not forget the role of basic human fallibility in all of this.

Belated as the response was, any ideas about foul intentions or the deliberate placing of driver safety in jeopardy are not credible. Instead, Toyota simply failed to grasp the significance of the problem – a basic error of judgment.

Toyota is not the first company to suffer from misjudgment of these proportions – nor will they be the last.

 
• Expectations and pressure.

Notwithstanding the above point, the momentum associated with expansion of the magnitude which the company experienced over the past decade (it replaced GM as the world’s top selling automaker in 2008) created a great deal of expectation regarding continued growth in sales volume.

The resulting pressure undoubtedly made it difficult to be open with the general public about safety issues and mechanical problems, less an overly candid approach in this regard jeopardise sales momentum.

 
• PR Strategy.

Another factor, according to PR Week, may be a general lack of awareness on the part of many Japanese firms, including Toyota, about the whole concept public relations.

I don’t think this is particularly significant. Whilst it is true that the company’s handling of this whole affair has been less than exemplary, any problems relating to PR management are merely scratching the surface.

The real issues and underlying problems go deeper – much, much deeper.

 
• Cultural issues

As they did with the cause of the problems (refer previous discussion), cultural issues no doubt played a part in the company’s poor response.

Traditional Japanese culture places a lot of emphasis on the concept of ‘face’, whereby any loss of public face strikes at the heart one’s identity and must be avoided at all costs, especially for those in a position of seniority or authority. For senior management of such a revered organisation, the embarrassment associated with public acknowledgement of mistakes or problems of this magnitude (which would be bad enough for anyone) cannot be underestimated.

Reluctance to speak openly about these kinds of problems extends to middle and lower level employees as well – lest they cause embarrassment to their seniors (not to mention their corporate identity, to which their own personal identity is so closely tied).

Moreover, deep down, it may have been difficult for Toyota management to acknowledge that they really had a problem. Problems associated with denial in this regard are not limited to Toyota or Japan in particular, but the Japanese do seem to experience a particular degree of difficulty in this regard.

Perhaps this is partly a function of the Japanese obsession with craftsmanship and quality (and the subsequent embarrassment when things are not up to scratch). Or possibly it could spring from their drive to avoid confrontational situations – with a resulting temptation for uncomfortable matters to be swept under the carpet.

Whatever the reason, this sense of deep-down denial could well go some way toward explaining why Toyota management failed to grasp the magnitude of the situation.

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(Google Headquarters in Beijing - Image provided by M Weitzel via Wikipedia)

Given the complexity of the moral, ethical and business-case considerations involved, there are no easy or straightforward answers to the dilemma confronting Google with regard to the future of its Chinese operations.

But given the recent security breaches, the pendulum has swung a long way, and the case for leaving China – from both ethical and business case viewpoints – has surely grown much stronger in recent weeks.

 
Google’s announcement to review it’s Chinese Operations
As most of you will already be aware, Google released an announcement on January 12 to the effect that the company’s operations in China are under review, following: (a) the discovery of a highly sophisticated and targeted cyber attack on the firm’s corporate infrastructure, with the primary goal of accessing the accounts of dozens of human rights activists in China and elsewhere; and (b) a decision that the company is no longer willing to censor search engine results in China.

Although not saying anything to pre-empt the outcome, the announcement does make it clear that partial or complete withdrawal from the country is a serious prospect.

 
Previously, the company’s operations in China were OK …
Prior to the discovery of the attacks, Google’s approach toward China appeared to be sensible and pragmatic.

To be sure, the censorship of search engine results to which the company agreed in 2006 did go against one of the basic fundamental principles of the online world (freedom of expression and information flow).

But it was necessary. Without agreeing to censorship, operating effectively in China would have been virtually impossible (prior to the agreement, Google’s uncensored engine, Google.com, had apparently been blocked by the Chinese government on an intermittent basis – refer article), and any stand made by the company regarding censorship would almost certainly have cost it the chance to properly exploit opportunities within the country – a price which surely would have been too high given the size and potential of China as a market.

And from the viewpoint of Chinese netcitizens, any Google service, albeit a censored one, was better than none at all prior to the censorship agreement when the service was so frequently blocked.

 
… but the security breaches change everything
But recent events have shifted the pendulum a long way, and both the ethical and business cases for leaving have become much stronger.

Even now, ethical considerations are a long way from clear cut. Any withdrawal on the grounds of censorship would hurt Google’s Chinese staff and customers much more than it would the Chinese government. And even despite the recent attacks, human rights activists in China would almost certainly be safer using online services from Google than those provided by domestic Chinese firms.

Still, the company does now have to think long and hard about whether or not it can be confident about the secure provision of some services, especially in light of the apparent sophistication of the attacks. Given this, along with ongoing reservations about censorship, the moral case for withdrawal has grown stronger.

So too has the business case. Most obvious is the risk of backlash in rich world markets. Already significant given the contention surrounding the censorship issue, the risk to Google of backlash associated with the continuance of operations in China is bound to intensify, especially if netcitizens remain unconvinced about its ability to provide Chinese services without jeapoardising the security of human rights activists.

This matters. China represents only a tiny portion of Google’s worldwide operations (see below), and the effect of the company’s strong moral pulse as a source of competitive advantage in western markets should not be underestimated.

(Google’s Chinese operations derive about $300 million in revenue, compared to an aggregate figure $22 billion for its global  operations – refer article)

Besides, Google’s experience in China has always been problematic. The company’s market share in its core search business is languishing at fifteen percent (refer article), and outside of search, many of its other businesses continue to experience problems relating to government censorship (at present, You Tube, Picasa and Blogger are all blocked – refer article).

Add all this up and there might just be a fair case for withdrawal anyway – even if it weren’t for ethical considerations.

 
Conclusion
There are no straightforward answers to the questions facing Google over the future of its Chinese operations.

But for now, the pendulum has swung in favor of an exit – whether partial or complete.

Factories within the Kaesong Industrial Complex (image via Wikipedia)

It’s probably not all that usual for a business ethics blogger to argue against a significant wage increase for full time workers in poor countries whose monthly salary is a paltry seventy five American dollars per month.

But when the majority of the increase (which would take the monthly wage to $300) would flow not to the worker but to one of the most repressive governments on earth, this is certainly one increase which I would could certainly not support at all.

 
About the increase
The increase relates to workers at the Kaesong Industrial Complex (shown above), an industrial park in North Korea located approximately six kilometers north of the border between North Korea and South Korea. The park represents a specially designated area whereby South Korean companies are allowed to operate within North Korean territory, utilizing the plentiful supply of low-cost labor from the North.

On a tour a few weeks ago to the DMZ, a heavily fortified and controlled area representing the border between South Korea and North Korea, our tour guide was telling us that North Korean workers employed at the park currently earn the equivalent of USD$75 per month.

However, in a somewhat extreme measure, the North Korean government is now demanding a four hundred per cent increase in this amount, to take the monthly wage up to $300.

 
Problem is, it’s all going to government coffers
Under normal circumstances, I would fully support wage increases for those who are poorly paid.

Those workers who perform an honest day’s work should be entitled to receive a fair and equitable level of financial reward for their effort. I have absolutely no idea what would be considered a good level of income by North Korean standards, but even if the workers got to keep the majority of their earnings, I could not imagine that earnings of $75 per month would represent a fair level of compensation compared to the value of the services which the workers provide.

Just one problem – little, or any of the increase will actually go to the workers.

Of the seventy-five American dollars per month that workers at the complex earn now, our tour guide informed us that the North Korean government takes seventy dollars, leaving just five dollars – yes, that’s right, just five American dollars per month, to be kept by the worker.

The workers keep only a tiny portion of what they earn now and it is highly unlikely that they will keep much of the benefit from any ‘wage increase.’

Instead, the vast majority of this increase, if it does indeed occur, will flow through to the coffers of the North Korean government – helping to finance a regime which appears to be hell-bent on the development of weapons of mass destruction and whose human rights record is not a great deal better than Sudan, Zimbabwe or Myanmar.

This cannot be supported under any circumstances. Wage rises which flow through into genuine benefits for workers and their families in poor countries can easily be supported on social grounds. But not ‘wage rises’ which merely mean more money for bomb making oppressive governments, and I certainly hope that the North does not receive its demands in this regard.

(Refer article for further information on this topic)

Few investors who entrust their money to fund managers of any form would want to see their funds directed toward companies which are complicit in terms of mass genocide in countries in which they operate.

In this regard, a March 26 announcement by TIAA-CREF, a large investment firm in America, that it is stepping up efforts to combat genocide in Darfur, represents a positive initiative which should be welcomed within the investment community.

 
The announcement 
Targeting five specific companies in which it holds stock, TIAA-CREF has demanded that the companies concerned:

(a) engage in constructive dialogue with the TIAA-CREF, in which the investment firm will encourage them to take proactive and meaningful steps toward the objective of eliminating genocide and suffering within the Darfur region; and

(b) demonstrate an acceptable level of achievement on an ongoing basis with respect to the above goal.

According to the announcement, the fund manager intends to divest itself of holdings in any of the target companies whose response is not satisfactory with respect to either step.

(The five firms being targeted are PetroChina, CPNC Hong Kong, Oil and Natural Gas Corporation, Sinopec and PETRONAS)

TIAA-CREF is not demanding that the firms in question necessary discontinue their operations in Sudan, although that is one option available for target firms that wish to avoid divestment.  As an alternative, target firms that wish to continue operations in the country can still avoid divestment by undertaking reasonable steps to ease the suffering of the Sudanese people.

 
Do companies take these requests seriously?
Apparently so.

Since 2006, TIAA-CREF has engaged twenty-two firms in discussions in order to encourage them to avoid any form of complicit support with respect to the genocidal Sudanese government.

These discussions have produced results – ten of the companies involved have since either ceased operations in Sudan or committed to appropriate humanitarian initiatives.

As a (nearly) $400billion financial services company, it appears that TIAA-CREF has quite an impact, and that its investee firms sit up and take notice when it makes demands about social responsibility.

 
Shouldn’t funds pressure companies to leave Sudan altogether?
I don’t think so, although there is a fair case for it.

On one hand, by continuing to operate in Sudan, and thus paying taxes (and no doubt bribes) to the Sudanese government, companies are effectively helping to fund a regime that sponsors genocide and other human rights abuses on an unbelievably massive scale.

By discontinuing operations, the companies concerned would no longer contribute funding to such an appalling regime.

On the other hand, it is difficult to see how leaving Sudan would help ease human suffering. After all, the regime is hardly likely to stop genocide just because a few companies discontinue operations, not to mention the plight of workers, who would suffer from loss of employment (admittedly a highly exploitative employment arrangement).

Rather than leaving the region, I would have thought that by undertaking humanitarian initiatives within the region, companies would have a more positive impact upon the lives of those who suffer from the appalling situation there. It is easy to see how programs to help improve education, health and water supplies have a direct positive impact upon the lives of people in Darfur.

In contrast, any benefit which the people of Darfur would derive from companies divesting in Sudan is less clear.

 
Summary
TIAA-CREF’s announcement represents a positive initiative in terms of the contribution of the global investment community toward the goal of eliminating genocide and suffering in Darfur, and should be warmly welcomed by the global investment community?

 
Over to you
Do you think fund managers should pressure companies in which they invest to cease operations in Sudan altogether? Or is requiring such firms to contribute toward humanitarian initiatives an even better idea?