Good Honest Dollar $$

There are a number of lessons to be learned from the current disaster surrounding BP and the oil spill in the Gulf of Mexico.

The most obvious (and most important) of these relate to the importance of disaster management planning and disaster prevention strategies.

But one interesting facet of the debacle is how some public statements made by the company have been well intended yet served only to inflame public anger.

Three examples stand out:

• Chairman Carl-Henric Svanberg’s declaration, made after a meeting with President Obama on June 16, that, “We care about the small people”;
• Chief Executive Tony Hayward’s lament last month that, “I want my life back“; and
• Hayward’s earlier comment about the size of the spill being ‘tiny’ compared to the size of the ocean.

 
Fine intentions, bad wording 
Each of the above statements were made out of good intention. Svanberg was simply trying to assure residents in affected areas that the company was taking their concerns seriously. Hayward, too, was trying to apologise for the disruption which the spill had caused to people’s lives.

But none were appropriate. Rather, each served only to cause offence.

Rightly so, too: references to ‘small people’ are rarely well received (Svanberg later recognised this apologised for his comment), and Hayward’s choice of words was dreadful – especially in light of the death of the eleven workers and the impact of the spill on so many lives. As for Hayward’s earlier comment about the size of the spill – that pretty much speaks for itself.

To be fair, given the extent to which BP execs have been under the pump, it was perhaps inevitable that some poorly worded statements were going to come out. And it should also be acknowledged that not even the best worded of statements would have done much given the magnitude of this disaster.

But that is no excuse. Well intended though they might have been, none of the above statements were appropriate. It is right that they backfired.

(It is also right, given the scale of the disaster and BP’s poor handling of the situation, that public anger against the company continues to grow.)

The lesson is clear: efforts to soothe public anger can easily have the opposite effect – especially in a crisis situation.

Choose your words carefully!

 
P.S. I cringe whenever I hear terms like ‘small people’ or ‘little people.’ Regardless of how well intentioned they might be, these terms are patronising and offensive. They have no place in good English usage.

No matter who they are or where they come from, each and every person is important. So too is each and every family, community, region or country. No one should be thought of otherwise and good language usage should reflect this.

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After a spate of worker suicides, questions must surely be asked about labour conditions at the Longhua complex in southern China operated by the Hon Hai Precision Industry Company (also known as Foxconn), the world’s largest contract manufacturer by revenue.

Most importantly:  should Apple, Dell, HP and others move their business elsewhere?

I don’t think so – at least not at this stage.

 
Background
According to the UK Telegraph, at least sixteen workers have attempted suicide this year at the plant.

Sadly, twelve of these have resulted in deaths.

The number of suicides is not statistically exceptional. According to the Wall Street Journal, the overall suicide rate in China is around fourteen per 100,000 people. At that rate, given the plant’s workforce of around 400,000, you would expect around fifty or sixty deaths in any given year.

Nevertheless, the sudden spate of these tragic events – most of which have occurred over the past two months – has raised alarm bells. Hon Hai’s customers, which include Apple, Dell, HP, Nokia, Motorola and Nintendo, are facing intense scrutiny with regard to there involvement with the firm.

 
Don’t take business elsewhere – yet
Still, western electronics firms are not likely to abandon such an important supplier.

Nor should they at this stage – neither business case considerations nor ethical considerations support this.

Let’s look at each of these in turn:

 
• Business case.

As the world’s largest contract manufacturer, Han Hoi has made itself integral to the manufacturing process of many of its customers. Extracting them from the supply chain, according to the Wall Street Journal, would be possible but difficult.

From a business case perspective, these operational concerns no doubt far outweigh PR considerations associated with the recent publicity surrounding these events.

 
• Ethical considerations.

Nor do ethical considerations themselves make a strong case for taking business elsewhere.

Reports about working conditions at the plant vary. On a BBC forum, for example, Bruce Blanche, a Canadian consultant in Shenzhen, describes prison like conditions and cites reports of workers being doing more than 100 hours per month. On that same forum however, workers at the plant, whilst agreeing that work conditions are intense, describe the factory as ‘top notch’ and ‘very good.’ And labour rights activists, according to the Wall Street Journal, say that whilst conditions are not good, they are improving and compare favourably with those of many other factories in China.

Given the mixed nature of these reports, it is far from certain that working conditions would be better with alternative suppliers – at least within China anyway.

 
A better way – send in the inspectors
But that is not to say that Apple and others should do nothing.

Apple, HP, Nokia and Dell, Motorola and Nintendo all say they have been in contact with Foxconn management and are investigating practices with regard to these incidents. Steve Jobs, for example, says that Apple is “All over this.”

Good. That is exactly what should happen. Foxconn should not be dumped, but it does need a wake up call. The arrival of workplace inspectors from Apple and others on their doorstep should get the message across.

Contract suppliers should only be dumped where work conditions are downright atrocious.

In contrast, in cases like Foxconn, where work conditions are tough but not atrocious (by Chinese standards), the factory shows signs of improvement, and extraction from the supply chain would have significant operational implications, suppliers should not be dumped but instead be worked with.

Foxconn should be cajoled, worked with and woken up.

They should not be dumped at this stage.

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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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(Image by U.S. Coast Guard via Wikipedia)

It’s a pity when an otherwise impressive management performance is ruined by a disaster.

But that is exactly what has happened at BP.

Prior to the oil spill in the Gulf of Mexico, Tony Hayward and his team had done a tremendous job of improving practices and restoring the reputation of the previously poor performing and accident-prone multi-national.

But now, his credibility has been (rightly) damaged. 

 
A huge rebuilding effort …
As described by Guy Chazan in the Wall Street Journal, prior to recent events, efforts on the part of Tony Hayward and his management team to restore the fortunes of the BP had been exemplary.

After taking the helm in 2007 (at a time when the company had been plagued by poor management, allegations of impropriety and an appalling safety record), Hayward immediately set about turning things around. Operations were simplified, costs were cut, production levels were boosted and worker injury rates were reduced.

These efforts paid off. Last October, the company announced a $4.7 billion third quarter profit – well above analyst expectations. And in January this year, BP’s market capitalisation overtook that of Royal Dutch Shell for the first time in three years.

 
… but Deepwater changes everything
Alas, much of that has now been undone, and the credibility of Hayward and his team has been severely damaged.

Rightly so, too. And rightly so for a number of reasons:

 
• Magnitude of the disaster.

Consider this: eleven workers missing (presumed dead); seventeen injured; more than four-hundred species under threat; and an estimated financial impact of $2.5 billion to the fishing industry and $3 billion in tourism along Florida’s pacific coast (refer Wikipedia) – that’s a catastrophe by any standards.

To be fair, it must be acknowledged: that we do not know the extent to which (if any) these events were preventable; that some accidents do occur even where reasonable precautions are taken; and that the company does seem to be doing everything they can to stop the leak.

Nevertheless, no management team can preside over a disaster of this magnitude with their reputation intact.

 
• Previous assurances.

In a 52 page document which BP submitted to the federal Minerals Management Service in 2009, the company gave assurances that:

“… it was unlikely that an accidental surface or subsurface oil spill would occur from the proposed activities…” 

and that even in the event that an accident occurred;

“.. due to the distance to shore (48 miles) and the response capabilities that would be implemented, no significant adverse impacts are expected.”

You can’t go giving assurances like that without significant consequences to your credibility when damage of this magnitude occurs.

 
• Pre spill precautions.

Related to that are issues associated with pre-spill precautions.

Specifically, although the rig had a blowout preventer installed, it was not fitted with remote control triggers in case of emergency.

Apparently, though these devices are mandatory for offshore drilling in countries such as Brazil and Norway, this is not the case in America. Nevertheless, the cost of having them (approx $500,000 – refer Wikipedia) looks pretty paltry against both impact of the spill, both in terms of the direct cost to shareholders and (more importantly) the social, environmental and economic cost from a broader perspective.

 
• Lack of preparedness.

Judging by responses in a Wall Street Journal online discussion forum, most folks seem pretty satisfied that the company is genuinely doing all it can to stop the leak.

Still, management don’t seem to have much idea what to do, and questions must surely be asked about why they did not have effective procedures in place to deal with events like this.

 
Credibility rightly affected:
Hayward has made a pretty good effort, and it’s a shame to see the reputation of his team destroyed.

But you can’t preside over anything like this without severe credibility damage.

After the events of the recent years, news of the SEC action against Goldman Sachs has not done much to help public perceptions of either the investment bank itself or of Wall Street in general.

(On April 16, the SEC announced its intention to charge the investment bank with ‘Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages.’ For a detailed background, read the SEC media release and Goldman’s response)

Here’s my two bob’s worth on all of this:

 
• Goldman are not (yet) guilty.

In the court of public opinion, it appears that some have made up their minds – guilty.

This viewpoint does have some logic. The SEC investigation ran for more than a year, and charges would not been have bought about in absence of a plausible case.

Nonetheless, these types of conclusions are pre-mature. For one thing, the SEC proceeded only reluctantly [apparently they were split three-two on whether to proceed (refer article)], inferring that the case is not watertight. Moreover, the case is genuinely in dispute, and only those close to the transaction in question have any idea what really went on.

Suspicion about the big end of town is natural. But by itself, it is a weak basis on which to infer guilt.

Goldman are only guilty if and when they are proven to be so in court.

 
• Goldman are not necessarily morally guilty.

Legally guilty or not, weren’t their actions immoral?

Not necessarily. At least not with regard to the transaction to which the SEC action relates.

It is true that Goldman did arrange a transaction whereby one of their clients (hedge fund Paulson & Co) would profit from a deterioration in the US housing market.  To many, this seems galling – Paulson stood to gain from the pain of ordinary Americans.

But there is nothing inherently wrong about this, nor are there any problems with Goldman facilitating the efforts of their client in this regard. Investors are well within their rights to bet for or against the market as they please. That’s simply part of the normal, healthy functioning of the market.

 
• The real problem is disclosure.

But there might be a problem in the area of disclosure.

Was information Goldman provided to ACA and IKB entirely truthful and accurate? If so, they have done nothing wrong. If not (as the SEC alleges), then their conduct was unprofessional, unethical and almost certainly illegal.

That’s what it boils down to – disclosure. Nothing more, nothing less.

(Along with Paulson and Goldman itself, ACA Capital Management and IKB were the other investors involved in the transaction to which the charges relate)

 
• Goldman will bounce back.

In spite of all its troubles, the $3.5 billion profit which they announced on April 20 provided a fair bit of comfort for management – profits of this magnitude tend to do that.

The announcement served to underscore an important point: for Goldman, problems associated with the allegations are manageable, serious though they are.

With around $73 billion in shareholder funds (refer article), Goldman should be able to handle any financial penalties associated with the case (investor losses totaled around $1 billion).

And damage associated with the ‘guilty’ verdict in the court of public opinion may be overstated. Provided Goldman continues to deliver the goods for clients, they won’t go away – nor will the firm’s top talent.

Therein lies the biggest danger: a loss of confidence in the firm on the part of clients themselves. But even this should be manageable and a mass exodus seems unlikely.

Goldman seems to have a history of being able to bounce back after the storms.

Though it may suffer a few bumps and scratches, it will almost certainly ride out this one pretty much intact.