Sustainablog

This blog will cover some news items related to Sustainability: Corporate Social Responsibility, Stewardship, Environmental management, etc.

28.7.04

China News: Panic over rumoured need for SA8000 accreditation

China News: Panic over rumoured need for SA8000 accreditation
23 July 2004
James Rose

The internationally accepted labour standard, SA8000, has become the focus
of panic among Chinese businesses as rumours spread that those wanting to
do export to the West will need it.
Chinese business circles have been buzzing with rumours that the US and
Europe will make a lack of SA8000 accreditation a “deal breaker” from May
next year as China continues its negotiations to move into these markets
for its exports.

The local press is claiming that the move is another trade barrier erected
by Western economies to block cheaper Chinese imports.

Reports from the Chinese media suggest that many business leaders have not
heard of the standard, developed by the New York-based Social
Accountability International.

Many are apparently making anxious enquiries about the labour standard.
Stephen Frost, of the City University, was quoted in the Straits Times as
saying: “These guys are genuinely concerned. It’s a really serious issue
for them, and even after they were told that the rumours were not true,
they were asking if it was worth their while getting the certification
anyway.”

The rumour mill continues to grind away, with the China Daily reporting
only this week that Chinese companies have lost international orders on
their failure to adhere to SA8000.

Most of the concerns centre on costs, particularly for smaller businesses.
Chinese media have put the cost of compliance at around $47,000 per
company.

But concerns also focus on the relatively poor labour standards common in
China. Even those accredited have been caught out. In 2001 a number of
SA-accredited companies were visited by the US-based National Labor
Committee and were found to be seriously remiss in labour standards.

A report produced by the Shenzhen-based Institute of Contemporary
Observation found that that only six out of 200 business leaders in the
economically sophisticated coastal regions of China had heard of SA8000,
when they were surveyed between 2001 and 2002.
by James Rose

World News: Banks and NGOs discuss implementation of Equator Principles

World News: Banks and NGOs discuss implementation of Equator Principles
21 July 2004
Alex Blyth

Sixteen financial institutions, all of which have adopted the bank-led
Equator Principles, have met representatives of 13 non-governmental
organisations to review progress on the implementation of the principles
and discuss other concerns.
The Principles were launched a year ago with the intention of establishing
common environmental and social standards for project finance.

The NGOs raised the following issues:

- inconsistency of implementation by different banks
- lack of information about implementation
- how to ensure consistency of risk categorisation for different projects
- how to monitor environmental impact after project financing
- disclosure of environmental assessments on high risk projects
- the possibility of NGO involvement in training or environmental
assessments

Representatives of ABN Amro, Barclays, Calyon, Citigroup and West LB
described what each of those banks has done to implement the Equator
Principles.

Representatives of the International Finance Corporation summarised the
training it has done for 365 bankers from 13 banks so far.

NGOs and banks said the meeting was a success. They will hold another
meeting in January 2005. In the meantime a smaller working group of banks
and NGOs will work on:

- the use of the equator-principles.com website as a source of information
on implantation practice
- transparency and reporting
- how and when NGOs can get involved

Simon McRae, investment policy campaigner at Friends of the Earth, said:
“The banks are still investing in dodgy projects, and I’m concerned that
the Equator Principles might not be enough to stop them doing it. However,
it’s a step forward and we have to take it in good faith.” He described
the meeting as “open and reasonably productive” and said ABN Amro,
Barclays and Citigroup were taking a clear lead in implementing the
principles.

www.equator-principles.com

Analysis: Corporate responsibility in Japan: evolving and unpredictable

Analysis: Corporate responsibility in Japan: evolving and unpredictable
23 July 2004
James Rose

While Japanese corporate culture may still return to the tragi-comic lows
that lie scattered in its past, notions of corporate responsibility have
now taken root. James Rose investigates.
For much of the long and distinguished history of the modern company in
Japan, terms such as accountability, transparency and responsibility have
been anathema. The nature of Japanese business is, traditionally, an
extension of the cultural condition known as “face”– the practice of
presenting an acceptable façade to a deeply conformist, often
pathologically conventional audience. It’s a culture embodied in the
vernacular term for the Japanese Annual General Meeting: it’s known as the
“shah shan” (“clap clap”), because of the perfunctory form of the meetings
and the willingness of the Japanese shareholder to applaud anything the
board comes up with. This has meant that Japanese businesses have been,
and still are, characterised by serial non-disclosure and murky
transactions and sometimes downright shady dealings.

The shape of Japanese corporate culture need not have developed as it has.
Kuniko Okuwaki, president of communications company Hill and Knowlton, has
argued that corporate social responsibility is actually ingrained in
Japanese society via its Confucian foundations. “A traditional Confucian
ethics-based society, along with conventional beliefs in lifelong
employment and corporate seniority, formed the basis of uniform practice,”
he writes.

“These deep-rooted values, which guaranteed that business partners
received an equal share of the profits, went hand in-hand with loyalty to
one’s employer. Needless to say, those times are now long gone.”

And how. In recent times, the context has been changed by a range of
scandals and exposures that have worn down the image of the Japanese
company and forced it to consider its place in wider society.

Stakeholders awake

The Japanese economic crash in the 1990s, coupled with the rise of
communications technology and the spread of “24/7” information highway,
has put increased pressure on Japanese bosses and the corroded and often
nefarious corporate culture that has been entrenched since the early part
of the 20th century.

Banker and author Callum Henderson wrote in his 2000 book “Asian Dawn”
that “the Japanese shareholder has been robbed blind for too long … For
too long, Japan’s companies have not been accountable to the people who
actually owned them, and that includes minority shareholders … Citizens of
Japan awake!”

Landmark cases, such as the Lockheed bribes scandal in the late 1970s,
(where a channel of bribes to win contracts for a national airline was
shown to be running between the US multinational and the Japanese
government), and the banking loans crisis of the late 1990s (where major
banks were plunged into massive debt brought about mainly by poor, often
incestuous, commercial loans and shoddy credit checks) have woken up many
Japanese stakeholders to the problems in their midst.
There are indeed indications that Henderson’s call has been heeded.

Government Support

Like all good crises, the collapse of the Japanese banking system, under a
mountain of bad debts, has brought about a cleanout of what was a very
dusty system. The Japanese government, under pressure from international
investors, as well as from its own constituents, began the dissembling of
the traditional Japanese business system by, among other things, ensuring
that banks booked the actual price of their long-held cross-shareholdings,
not at the cost of their purchase but at the cost at the time of
reporting. This led to sell-offs of under-performing assets that had
hitherto been kept in deference to the hallowed business network model
made famous in Japan. According to figures from the Nomura Research
Institute, in 1992, before the banking crash, 46% of all shares in Japan
were cross-held (where company A holds shares in company B, and B has
investments in A). In 2002, that figure had dropped to 27% and is still
falling.

This has led to the Japanese corporation becoming more beholden to
shareholders than bureaucrats or corporate peers.

The government has also got involved at the level of governance
mechanisms. According to figures from the Tokyo Stock Exchange, the
largest growth area in the distribution of shareholders has been in the
“non-Japanese” sector – foreign institutional investors.

As a result, Japan’s Commercial Code has been updated to reflect changing
expectations, especially from US and European investors in the wake of the
Enron scandal and the Sarbanes-Oxley Act. But it’s not just the foreign
institutions that are taking off the gloves in Japan. Local fund managers,
such as M&A Consulting, founded by Yoshiaki Murakami, former senior
official at the Japanese Ministry of International Trade and Industry, are
also becoming notably more pushy and cantankerous shareholders than have
hitherto been seen in Japan.

This has led to reforms in the structure of corporate boards and an
increased awareness of governance and related corporate responsibility
issues. For instance, Japanese boards have often comprised a number of
largely redundant directors who are there more for their networking
credentials than their business or industry acumen. Recently, Japanese
companies have been cutting the size of their boards, according to a paper
by Seki Takayama, head of corporate governance research at Japan Investor
Relations and Investor Support.

A new shareholder era?

Out of all this has emerged the active shareholder in Japan. While Tokyo
Stock Exchange figures show that retail shareholders in Japan own less
proportionally than they did 40 years ago, their mind-set is decidedly
different: they are more likely to find fault with their companies, and
less willing to accept shoddy governance and management practices. Among
the most significant shareholder groups to emerge in recent years is the
Kanunbashi (shareholder) Ombudsman, formed in 1993. An independent,
non-profit organisation, KO has become a visible presence on the radar of
major companies in Japan amid efforts to help minority shareholders voice
their concerns via shareholder meetings, media “name-and-shame”
strategies, legal action and proxy campaigns.

KO focuses on big companies such as Sony, Toyota and Mitsubishi, using
members’ fees as funds to buy shares and to generate shareholder support
to change corporate culture. At Toyota, for example, KO negotiated a
change of date in the company’s AGM (in Japan it is common for big
companies to hold all their meetings on the same day to limit shareholder
attendance). At the food company Snow Brand, which became caught up in a
nationwide food poisoning incident in 2000, the group was able to get the
general manager of the country’s largest consumer group on the board. The
fact that the new director was a woman added to the groundbreaking nature
of this shareholder campaign.

KO chairman Professor Koiji Morioka says the actions of the group are
significant, despite its small size. “We have some influence. While it is
difficult to change the culture totally, we can make some progress. We
have succeeded in changing corporate policies and attitudes,” he said.

Most recently, KO has spearheaded a shareholder and legal campaign at
Mitsubishi, and in particular in the subsidiary Mitsubishi Heavy
Industries. The campaign takes Japanese shareholder activism to a new
level as it may be said to be the first really adversarial campaign, in
contrast to other more “helping hand” forms of shareholder activism. The
issue is the decision by MHI to offer funds to bail out the troubled
parent company, which has become mired in a major faulty-vehicles cover-up
since 2000, and has suffered massive financial losses as a result. While
KO argued that using shareholders’ funds to bale out Mitsubishi Motors was
akin to dropping their money into a black hole, it eventually resigned
itself to the decision, given that MHI stood to lose double the amount
concerned if the parent group went under.

While this may suggest that Japanese stakeholders are still meek, KO’s
Morioka was quick to point out that the action was not a backward step. He
said: “MHI still has to bear heavy responsibility in management,
governance and compliance, especially to secure motor safety. If they
fail, they will face further protest.” Morioka also said that further
lawsuits on product liability issues were not out of the question.

Corporate responsibility and Japanese companies

While the trends are identifiable, it is fair to ask to what extent
Japanese companies are really approaching corporate responsibility with
genuine intent.

One indicator might be the predominance of Japanese companies on the
latest review of eligible companies undertaken by the FTSE4Good index. In
March this year, 75 new companies were added to the index. Of these, 37
were Japanese, more than from any other country. The new companies
included some big names, such as Hitachi Chemicals, Canon, Ricoh, Nikon
and Sumitomo Chemical.

Another angle might be the uptake of socially responsible investment in
Japan, as this indicates to what extent the investment community is taking
matters of environmental and social risk seriously. A report from Japanese
market analysts Daiwa Investor Relations shows that recognition of
socially responsible investment is very high at 90%, which is slightly
higher than was reported only in late 2003. It showed that 61% of
investors and corporations surveyed said they thought socially responsible
would become established as a mainstream issue but, perhaps paradoxically,
only 21% said social responsibility affected their investment decisions.
The latter figure confirms there’s still some way to go before corporate
responsibility is fully integrated into the Japanese business culture.

Beyond the statistics, the state of corporate responsibility in Japan is
best assessed by looking at the actions of companies. At one level, the
establishment of a Council for Better Corporate Citizenship by the
heavyweight Japanese Business Federation (known as the Nippon Keidranen)
in the late 1990s was a significant moment that it forced even the
massive, usually arrogant and closed-door big corporations to take note.
And they have. As the FTSE4Good review suggests, many Japanese companies
are raising their game. Now around 70% of major Japanese companies produce
environmental and/or social reports, the highest proportion in the world.

A number of companies have set very high benchmarks, particularly in
environmental areas. It is now common for instance to see major
electronics companies such as Sony spending large sums and research time
on developing environmentally friendly electronic products, such as
Fujitsu’s new biodegradable laptop casing.

Others, such as Suntory Brewery, have found ways to incorporate
sustainability models into their day-to-day operations. Suntory, founded
in 1899, has followed a three-pronged business model, planning along the
lines of one-third for society, one-third for customers and one-third for
the business. Among other things, the company has achieved outstanding
results in environmental sustainability programmes over the past few
years. Among the achievements are a 100% recycling of factory by-products
and industrial waste; a marked decrease in the weight of containers,
reducing raw materials use by up 2400 tonnes a year; 80% recycling of
glass and paper waste; the preservation of forest reserves at company
plants to ensure water retention; and a reduction in CO2 emissions per
unit of production to almost 50% of 1990 levels. The company is also
spending a considerable amount changing its ubiquitous vending machines –
about 450,000 dot the country’s rail stations and pavements – to more
eco-friendly ones.

Mitsubishi Motors has come to corporate responsibility from another angle.
The company has been entangled in a long-running scandal over cover-ups of
faulty vehicles parts manufactured and sold by the company, which led to a
number of road accidents, including some fatalities. The company has
admitted that for many years it knew about the problem but did not recall
the cars containing the defective parts, choosing instead to keep the
matter quiet in the hope of protecting its reputation. When the scandal
broke in 2000, the company’s stocks plummeted. Executives have been
arrested for professional negligence, and the once-mighty multinational
now teeters on the brink of collapse.

The company’s recent reaction to this near-fatal slide in its credibility
tells us something about the state of corporate responsibility in Japan.
In May this year, the new chairman, Yoichiro Okazaki, made a detailed
statement on how he believed his company was going to surge back into
favour with investors, customers and its other stakeholders. While this
plan contained all the requisite financial hieroglyphics and spreadsheets,
a central component in the recovery package was an ethics policy. An
ethics policy is not so strange for Japanese companies, but its placement
at the core of the company’s bid to survive is a salient moment in the
evolution of Japanese corporate responsibility. The company knows its
future is bound up with perceptions of its ethical culture and in
retaining its “licence to operate”. By highlighting its weaknesses in this
area, the company is ensuring it must improve its corporate responsibility
culture, and be seen to improve, or it will die. As the chairman said,
“this plan is our last chance for survival as an automaker”.

As the Japanese business sector deals with its mortality after decades of
“miracle” growth, such admissions of culpability and ultimate
responsibility can only add to the advancement of its unique, complex, and
often shadowy business culture. While Japanese corporate culture may still
return to the tragi-comic lows that lie scattered in its past, the notions
of corporate responsibility have taken root and it will be more difficult
now to remove them than it would to accept their presence. However, a
final caveat: Japanese corporate culture is nothing if not unpredictable.
Watch this space.
by James Rose