Mining conflict down under, how to balance boards and better investor stewardship

Australian community conflict

Life in the small agricultural town of Yarloop in Western Australia has for generations been slow and quiet. “Lifestylers” looking to escape city life once flocked here. But the population has nearly halved over the past two decades. What happened? They struck gold (well, bauxite and alumina).

US-based mining giant Alcoa set up a processing plant. On the one hand, the refinery is a roaring success. It produces about 13% of the world’s alumina and delivers export earnings of about A$2.8bn (£1.8bn).

Less successful is its record in local relations. Community conflicts have dogged the project. But not because of a lack of willingness on Alcoa’s side: the company has sought to follow best practice guidelines on health and safety, community engagement and environmental management. It just hasn’t had the effect promised in the textbooks.

This intriguing paper uses this all-too-common case study to interrogate current corporate responsibility management approaches to community-corporate relations. What it finds is two very different perspectives on what “CSR” means. The company interprets the term in traditional economic terms; namely, social contributions such as employment, tax revenue and philanthropic expenditures. Residents understand the term more broadly; ie retaining their social wellbeing.

Try as it might, this basic clash in interpretations predestined Alcoa’s efforts to failure. Ignoring rather than engaging local detractors closed the door to the hope of mutual understanding.

The authors’ findings are important for at least two reasons. First, they chime with the growing opinion that the “rational economic mindset” of the business community regarding corporate responsibility is “bounded or blinkered”. Second, it questions the effectiveness of current stakeholder dialogue. “Problem definition, issue selection and directions for conflict resolution were defined by like-minded people sharing similar values,” the authors conclude.

Fringe stakeholders found themselves excluded. It is time for companies to rethink stakeholder prioritisation, where managerial discretion arbitrates between various stakeholder claims. Instead, what’s needed are new social contracts based on open public debate that specify companies’ social and environmental obligations up front.

“Living Downwind From Corporate Responsibility”, Martin Brueckner and Mohammed Abdullah Mamun, A European Review, Vol 19, Issue 4, October 2010.

Board diversity delivered

Diversity occupies sacred cow status in the corporate responsibility debate. How can equality of race, gender or ethnicity ever be a bad thing? They can’t.

But corporate responsibility advocates go further. Active diversity policies, they say, will produce measurably better results for a company. This well-researched analysis of recent studies on board diversity dares to rock the boat. The relationship between diversity and financial performance, it suggests, “has not been convincingly established”.

Fortunately, that is not where the paper ends. Diversity stats are on the up. In 1973, only 7% of Fortune 1000 boards had any directors from on ethnic minority. Today, 78% have at least one minority director.

There is no need to wind back the clock. Diversity can improve decision-making. In addition, it can build a company’s reputation. Only, however, when the issue is well managed. Tokenism on diversity will not carry muster. Nor will corporate commitments that lack accountability.

Corporate responsibility practitioners will find the last section of particular interest. Rhode and Packel consider three sets of strategies – individual, legal and institutional – to increase board diversity.

At the individual level, they point to mentoring and networking programmes as a credible way forward. Quotas feature as one of the more controversial legal recourses. As for institutional investors, ideas include new requirements from investors regarding new board appointments. A thought-provoking paper.

“Diversity on Corporate Boards: How Much Difference Does Difference Make?”, Deborah Rhode and Amanda Packel, Stanford Law School, Working Paper No 89, September 2010.

Investor stewardship

Pension funds and insurance companies had nothing to do with the recent financial collapse, right? Strictly speaking, that’s correct. Their hands are clean. Yet, given their influence over the financial market – in the UK, they own 70% of the stock market – they cannot be guilt-free. An overly passive approach to corporate governance and a focus on short-term returns enabled – if not caused – the crisis.

Little surprise, therefore, that we are hearing increasing calls for institutional investors to become better “stewards” of the companies they invest in. A case in point is the new UK Stewardship Code. This isn’t about investors managing the affairs of investee companies. But it is an invitation to engage management in an “intelligent, substantive and constructive fashion”.

How so? This short, punchy paper lays out four strategies: revamp performance metrics (ie away from merely short-term results), reduce intermediaries (especially “funds of funds”), rationalise portfolio holdings (“resource-intensive engagements” are tricky with portfolios running to hundreds of companies) and refine the passive-investing model (shifting from a focus on low-cost to a focus on good stewardship). Fail to act as responsible owners and regulations limiting shareholder rights could be around the corner.

“How Institutional Investors Should Step Up as Owners”, Simon Wong, McKinsey Quarterly, September 2010.

Campus news

Villanova University in Pennsylvania has launched a Waterhouse Family Institute. The academic institute aims to explore the ethical dimensions of communication and its role in creating social change.

Information-gathering for the next Beyond Grey Pinstripes, the benchmark league table for corporate responsibility content in university syllabuses, has begun. Submissions should be made via the Aspen Institute.

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