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


The Balanced Scorecard and Corporate Social Responsibility: Aligning values for profit

The Balanced Scorecard and Corporate Social Responsibility: Aligning values
for profit

Access the original article with graphs on the CMA website.

(Embedded image moved to file: pic03248.jpg)CMA Management Magazine, 4
November 2005 - CSR reporting has grown over the past few years, but the
information provided by those reports isn?t always used for strategic
advantage. Tying values and measures to a Balanced Scorecard could be the
way to make good intentions more profitable

The corporate social responsibility (CSR) movement has been gathering
momentum for the past 10 years. This growth has raised questions ? how to
define the concept, how to measure it, and how to make good on its
promises. The Dow Jones Sustainability Index created a commonly accepted
definition of CSR: ?a business approach that creates long-term shareholder
value by embracing opportunities and managing risks deriving from economic,
environmental and social developments.? This definition encompasses a broad
range of corporate values and concerns, including reputation, transparency,
social impact, ethical sourcing, profitability and civil society ? the list
goes on. As a result of the interdependent nature of CSR, integration of
its values remains a challenge for many organizations.

One of the fundamental opportunities for the CSR movement is how to
effectively align consumer and employee values with corporate strategy to
generate long-term cognizant benefits ? a better understanding of precisely
with whom, what, when, where, how and why an enterprise makes a profit or
surplus. CSR requires more holistic strategic thinking and a wider
stakeholder perspective. Because the Balanced Scorecard is a recognized and
established management tool, it is well positioned to support a
knowledge-building effort to help organizations make their values and
visions a reality. The Balanced Scorecard enables individuals to make
decisions daily based upon values and metrics that can be designed to
support these long-term cognizant benefits.

A simple definition of a Balanced Scorecard is ?a focused set of key
financial and non-financial indicators.? These indicators include both
leading and lagging measures. The term ?balanced? does not mean equivalence
among the measures but rather an acknowledgement of other key performance
metrics that are not financial. The now classic Balanced Scorecard, as
outlined by Robert Kaplan and David Norton, has four quadrants or
perspectives ? (i) people and knowledge, (ii) internal, (iii) customer and
(iv) financial.

For example, increased training for employees (people and knowledge) can
lead to enhanced operations or processes, (internal) which leads to more
satisfied customers through either improved delivery time and/or lower
prices (customers), which finally leads to higher financial performance for
the organization (financial).

As CMA Canada?s Management Accounting Guideline Applying the Balanced
Scorecard states:

Managers can use the Balanced Scorecard as a means to articulate strategy,
communicate its details, motivate people to execute plans, and enable
executives to monitor results. Perhaps the prime advantage is that a broad
array of indicators can improve the decision making that contributes to
strategic success... Non-financial measures enable managers to consider
more factors critical to long-term performance.

Cause and effect: CSR?s competitive advantage

Bob Willard?s book The NEXT Sustainability Wave outlines a starter set of
10 major market forces that are driving the need for organizations to
address CSR in a credible manner. Willard?s 10 major forces are divided
between mega-issues and the stakeholders who are demanding change. These
forces are motivating companies to change their behaviour and use CSR as a
strategic instrument. The 10 major forces are:

Five Mega-Issues:
1. Climate change
2. Pollution / health
3. Globalization backlash
4. The energy crunch
5. Erosion of trust

Five Demanding Stakeholders:
1. "Green" consumers
2. Activist shareholders
3. Civil society / NGOs
4. Governments and regulators
5. Financial sector

Willard goes on to explain how these forces create increased exposure and
awareness to business challenges and opportunities. The actual effect of
these challenges and opportunities was recently identified in KPMG?s
International Survey of Corporate (Social) Responsibility Reporting 2005.
This report surveyed more than 1,600 companies worldwide and documented the
top 10 motivators driving corporations to engage in CSR for competitive
reasons, which are:
1. Economic considerations
2. Ethical considerations
3. Innovation and learning
4. Employee motivation
5. Risk management or risk reduction
6. Access to capital or increased shareholder value
7. Reputation or brand
8. Market position or share
9. Strengthened supplier relationships
10. Cost savings

By creatively responding to these market forces, and others generated by
the CSR movement, organizations can reap considerable benefits.

There are many examples of how companies are being affected by CSR drivers
and motivators. The following three examples are just a brief sample of the
myriad CSR performance motivators that are top-of-mind for executives.

1. Working with stakeholders

Driver number six in KPMG?s list access to capital or increased shareholder
value, acknowledges that organizations able to identify, understand,
mitigate and report their business risks have a competitive advantage when
raising capital. A good example of this is the Carbon Disclosure Project
(CDP ?, which was developed, implemented and is
monitored by a group of institutional investors representing in excess of
US$20 trillion in capital. For the past three years, the CDP has polled the
FT500, which represents the world?s 500 largest companies, requesting a
response to a climate change questionnaire. ?Companies failing to respond
or providing weak responses... will invite particular scrutiny from the
investment community,? said James Cameron of the CDP. According to the CDP,
its institutional investors use the questionnaire results to assess company
plans and performance for addressing the potential risks and opportunities
of climate change.

2. Cultivating green consumers

Ethical considerations, KPMG?s second driver, is directly linked to the
Lifestyles of Health and Sustainability (LOHAS) market. LOHAS describes a
US$226.8 billion marketplace for goods and services focused on health, the
environment, social justice, personal development and sustainable living.
The consumers attracted to this market have been collectively referred to
as cultural creatives and represent a sizable group in the U.S.
Approximately 30% of the adults in the U.S., or 63 million people, are
currently considered LOHAS consumers. These consumers represent a
substantial amount of buying power since they tend to have higher
disposable income and are willing to seek out products and services that
meet their CSR values and corresponding ethical concerns. Examples of
products in this marketplace include organic foods, hybrid vehicles and
fair trade coffee. It?s also important to note that LOHAS consumers bring
their CSR values to their workplaces.

The strategic shift of organizations from a niche market (focused
differentiation strategy) for green consumers to a broader appeal is
occurring, which can be illustrated in a generic manner.

LOHAS Consumers reward enterprises that demonstrate the values they seek
(buy products and speak positively) and punish organizations that do not
(refuse to buy products and speak critically about). In essence, these
consumers/employees pay close attention to how their values align with
producers of goods and services, their employers and even the charities
they support.

The move to a broad market differentiation strategy can be achieved through
extensive knowledge of green consumers, as well as the fulfillment of their
information needs through appropriate reporting. At the same time, moving
to a cost leadership strategy involves the effective and efficient use of
resources, as the next example will illustrate.

3. Banking on the bottom line

The first and last of KPMG?s drivers, economic considerations and cost
savings, reinforce the old adage ?you can?t take the top line and put it in
the bank; you can only put the bottom line in.? An added benefit of a CSR
reporting focus is the ability, through it, to understand, measure and
improve the use of resources.

For example, reduction in use of energy and materials will provide an
enterprise with improved bottom line performance and a competitive
advantage through a lower cost structure. The first two of the ?three Rs?
(reduce and re-use) can lead to substantial savings for organizations that
implement an effective performance measurement system. The Scottish
Environmental Protection Agency recently estimated that businesses in
Scotland could increase their annual profits by as much as $2,000 per
employee through the introduction of aggressive waste reduction, energy
efficiency and recycling programs.

CSR reporting requirements

The opportunity to grow the top line through green consumers in the LOHAS
marketplace comes with the price of increased transparency ? this customer
group demands the necessary data to make informed decisions. Interested
stakeholders, such as employees, regulators, investors, and
non-governmental organizations (NGOs) are pressuring organizations to
disclose more and more CSR information. Companies in particular are
increasingly expected to generate annual CSR reports in addition to their
annual financial reports.

CSR reporting measures an organization?s economic, social and environmental
performance and impacts. The measurement of CSR?s three dimensions is
commonly called the triple bottom line (TBL). The Global Reporting
Initiative (GRI) is the internationally accepted standard for TBL reporting
(See ?Managing and reporting sustainability? in the February 2005 issue of
CMA Management for more information). The GRI was created in 1997 to bring
consistency to the TBL reporting process by ?enhancing the quality, rigor
and utility of sustainability reporting.?

Representatives from business, accounting societies, organized labour,
investors and other stakeholders all participated in the development of
what is now known as the GRI Sustainability Guidelines. The guidelines are
composed of both qualitative and quantitative indicators. The guidelines
and indicators were not designed, nor intended, to replace GAAP or other
mandatory financial reporting requirements. Rather, the Guidelines are
intended to complement GAAP by providing the basis for credibility and
precision in non-financial reporting.

One of the key benefits for an organization using a Balanced Scorecard is
improved strategic alignment. In their fourth annual CSR report, one
company made an unexpectedly candid comment: ?We strongly believe in the
business case for corporate responsibility and reporting. However, there is
more work to be done to more precisely quantify the benefits of these
activities to our business.? The Balanced Scorecard can be an effective
format for reporting TBL indicators, as it illustrates the cause-and-effect
relationship between being a good corporate citizen and being a successful

The CSR virtuous cycle

Enterprises can use the combination of the Balanced Scorecard and CSR to
help create a competitive advantage by letting decision makers know if they
are truly entering into a CSR virtuous cycle ? a cycle in which economic
and environmental performance, coupled with social impacts, combines to
improve organizational performance exponentially.

How is this accomplished? A company could begin to compete on cost
leadership as a result of improved technology and effective and efficient
processes, which leads to improved ecological protection, which results in
better risk management and a lower cost of capital. Alternatively, a
company could differentiate itself from its competitors? values and
performance as a result of its community building activities, which can
improve corporate reputation, result in improved brand equity, creating
customer satisfaction, which increases sales. The move to a broad
differentiation strategy can also be achieved through extensive knowledge
of green consumers and leveraging their information needs through
appropriate CSR reporting to improve brand equity and reputation. These
examples are designed to illustrate the interrelationship in an
organization?s triple bottom line.

Several organizations have already recognized this powerful combination and
have adapted or introduced a Balanced Scorecard that includes CSR elements
to successfully implement strategy reflective of evolving societal values.
Dow is one such company.

Dow?s CSR-Balanced Scorecard

Dow realized in the early 1990s that it could and should improve its
social, environmental and financial performance. The company?s early focus
(over an initial 10-year period) was on opportunities and challenges most
commonly associated with environment, health and safety (EH&S). Dow
achieved many of its early objectives by focusing on the low-hanging fruit.
In 2003, the company began to create another series of initiatives to
address opportunities and challenges over another 10-year period. These
initiatives were created and refined after the company made a significant
effort to consult with stakeholders to better understand internal and
external expectations, with a specific emphasis on CSR. How to accomplish
and measure their success was a major question the company had to answer.
Dow?s answer to this challenge is clearly communicated in its 2003 Public

To bring more balance into how we measure our success and progress on the
integration of the Triple Bottom Line, Dow will launch a Balanced
Scorecard.... The scorecard is published for employees, is updated
quarterly and is the basic internal measurement tool for our progress on
the Triple Bottom Line.

Dow uses the GRI methodology to create, monitor and measure its broad
progress towards sustainability and specific corporate social
responsibility commitments. Why is this important? If Dow really believed
that sustainable development is a business priority in the 21st century,
then it had to translate strategy into action. Dow chose to use Balanced
Scorecard and CSR reporting to help accomplish this important task.

The figure below demonstrates how the Balanced Scorecard can be either
introduced or adapted to strategically align an organization?s values with
specific market forces. A variety of GRI indicators were selected and
paired with Bob Willard?s 10 market forces to demonstrate the wide range of
values that can be addressed through the Balanced Scorecard.

(Embedded image moved to file: pic27968.gif)

In a best case scenario, companies that either adapt and/or adopt a
Balanced Scorecard that includes CSR elements could compete on either cost
leadership or differentiation, or both ? a very powerful combination that
will enable them to enter the CSR virtuous cycle.

Is it actually possible to enter the CSR virtuous cycle? In response to
intense public criticism about labour conditions in its factories, Gap
Inc., for instance, fundamentally changed the way it manages labour issues.
Is Gap?s record on labour issues perfect? No, but it is much improved as a
result of protests from activist shareholders and the civil society
movement. When asked why Gap would pursue improved labour standards in its
factories, in February 2005, Dan Henkle, Gap?s vice-president of global
compliance, stated that ?not only labour standards in factories (improve)
but also every other dimension of what?s really important: overall
productivity, quality, absenteeism, turnover rates in factories, it?s
really all connected.?

As identified earlier in this article, values play a large role in the
decision making process for green consumers. How truly important are values
to organizations? Jim Collins in his book Good to Great: Why Some Companies
Make the Leap and Others Don?t identified that the companies he and his
team classified as ?great? had a few common characteristics. One
characteristic was a vision to make a difference, rather than simply making
a profit. Another characteristic was shared values. It didn?t matter what
the values were, rather that there were shared values.

Many management accountants are familiar with the Balanced Scorecard, thus
have a tool at their disposal to help them navigate the sometimes foggy
worlds of strategy and CSR. The Balanced Scorecard can help organizations
strategically manage the alignment of cause-and-effect relationships of
external market forces and impacts with internal CSR drivers, values and
behaviour. It is this alignment combined with CSR reporting that can enable
enterprises to implement either broad differentiation or cost leadership
strategies. If management accountants believe there will be resistance to
stand-alone CSR initiatives, they can use the Balanced Scorecard to address
CSR opportunities and challenges. Management accountants have the skills
and tools to lead their organizations towards a CSR virtuous cycle of
cognizant benefits, understanding precisely how and why their company?s
profits are made.

David Crawford, CMA, CCEP, ( is the market and technical
services manager at Manitoba Product Stewardship Corporation. Todd
Scaletta, CMA, MBA, ( is an educator and partner
with Scoperta Solutions, a management consulting company located in
Winnipeg, Manitoba.

The authors wish to thank Bob Willard for his assistance in the preparation
of this article.

Business-oriented think tank predicts dire economic consequences of Kyoto Protocol

Business-oriented think tank predicts dire economic consequences of Kyoto

(Embedded image moved to file: pic16838.gif)Greenwire, 8 November 2005 -
European economic development will suffer significantly by 2010 as
countries strive to meet Kyoto Protocol targets, according to a report
published yesterday by a pro-business think tank.

Gross domestic product in Britain, Germany, Italy and Spain could suffer
and at least 200,000 jobs in each country could be lost, said the
International Council for Capital Formation.

"The findings of our research suggest that an alternative approach [to
climate change] is urgently needed for both the developing and developed
world," said Margo Thorning, Managing Director of ICCF.

ICCF also predicted average increases of 26 percent in electricity prices
and 41 prices in gas prices by 2010 (Stuart Penson, Reuters, Nov. 7).

The report projected that by 2010, Spain's growth will have fallen by 3
percent, and that Italy's will shrink by 2 percent. "No country will want
to sacrifice its economy in order to meet this challenge," British Prime
Minister Tony Blair said last week (Richard Black, BBC News online, Nov.
Download a copy of the report.


Disaster management - Corporate America to the rescue

Disaster management - Corporate America to the rescue

Many businesses delivered the “right stuff” in the wake of September’s hurricanes, possibly earning themselves a long-term role in disaster recovery and preparedness
Business acts as saviour for some
Business acts as saviour for some

When back-to-back hurricanes ravaged the US Gulf Coast last month, welcome offers of assistance poured in from around the world. Federal relief services, which many argue fell down on the job, were pressed into service. But in the critical hours just after Katrina – the first catastrophic wallop of the region’s one-two punch from Mother Nature – struck, it was Corporate America that took the lead to meet victims’ and rescuers’ most immediate needs.

Most disaster recovery observers, including many of its staunchest critics, say Wal-Mart, the mega-retailer that to so many is the perennial poster-child for bad corporate behaviour, has set the bar for how to fashion a well-designed and executed disaster response at lightening speed.

Doing it the Wal-Mart way

Wal-Mart, usually under attack for its size and reach, suddenly became a hero. The company mobilised relief supplies to the tune of 1,500 trucks dispatched to the region within hours of the storm’s passing. The water, batteries, diapers, infant formula and more than 100,000 meals and other supplies Wal-Mart’s truckers delivered were a welcome sight for remote communities and rescue workers alike, who had waited days, sometimes weeks, for US Federal Emergency Management Agency assistance to materialise.

Wal-Mart, like many other companies, took responsibility for locating, sometimes rescuing, housing, temporarily funding and reemploying, its more than 34,000 workers displaced by the storm – most within only days.

In some communities Wal-Mart supplied police forces with food, clothing, shelter and even weapons and bullets to thwart looters. The $15 million the company contributed to the Bush-Clinton relief fund, as well as $1 million it donated directly to each of the Red Cross and Salvation Army, opened the floodgates of corporate donations.

By the end of September, according to the US Chamber of Commerce, corporate giving had reached $792 million, topping already unprecedented business generosity following the September 2001 terrorist attacks and the Asian tsunami crisis in 2004-05. Some predict that contributions, especially in light of the additional destruction and suffering wrought by hurricane Rita, will ultimately top $1 billion.

Countless others, including FedEx, Pfizer and Home Depot, rose to the unprecedented challenges of the catastrophe with comparable finesse.

A business approach

Many businesses such as Wal-Mart did more than just pledge cash. Commercial airlines and shipping companies stepped up to fly evacuation missions and to bring in needed supplies, drug companies provided much-needed prescription medicines and healthcare supplies, phone companies worked to restore emergency communications and drink-makers rushed canned and bottled water to the region.

FedEx lived up to its “when it absolutely, positively has to get there overnight” motto by pre-positioning Red Cross supplies and its own stash of 30,000 bags of ice, 30,000 gallons of water and 85 home generators, so it could move in quickly to support its employees after the storm passed. The company also stepped in to help the military establish emergency communications, using one of its own radio antennas that an employee noticed was intact during a news-camera sweep of rooftops in New Orleans.

There are countless similar stories throughout the US business community.

Bad apples

But despite many US corporations’ philanthropic deeds, something most American companies routinely make the biggest slice of their corporate citizenship efforts, companies are taking advantage of the circumstances. Some watchdogs say a small number of businesses are lining up to profit from American taxpayers with high-priced services through hastily arranged, no-bid, “Iraq-war-style” government contracts.

A $236 million, six-month contract between the federal government and Carnival Cruise Lines for three ships to provide emergency housing for evacuees and relief workers has drawn particularly harsh fire. And expensive, no-bid deals with construction companies and civil engineering firms to try to shore up New Orleans’ levee system and restore basic infrastructure are coming under fire as “disaster profiteering” on the backs of taxpayers.

Time for a privatised response?

Few observers deny that city, state and federal governments were ill-prepared for a catastrophe of the size of the combined devastation of hurricanes Katrina and Rita.

Paul Light, a non-resident senior fellow of governance studies at the Brookings Institution, says Katrina underscores the urgent need to build “a robust national preparedness and response system that can bend and flex to the unique circumstances of natural and human-caused catastrophes”. He suggests that homeland security chief Michael Chertoff’s recently proposed reorganisation of the agency is a step in the right direction to allow government to respond to emergencies more effectively.

But with many American businesses, some sporting their own meteorologists and emergency operations centres, being lauded for their pre-emptive planning and positioning of both relief supplies and the tools necessary to get their own operations back up and running, many critics are beginning to question whether business could do a better job than public agencies in preparing and responding to such disasters.

Strong future responses, Light advises, will rely on four pillars: alertness, agility, adaptability and alignment with other organisations. And few would dispute those are the kind of qualities shown by the companies that responded best in the midst of hurricane recovery.

Even former president Bill Clinton has urged Congress to learn from Wal-Mart on things such as employee relocation. The company has already testified before Congress on the future importance of the use of electronic medical records and an emergency federal prescription drug plan in the response to national emergencies.

But Sandra Waddock, a professor of management and senior research fellow at the Boston College Center for Corporate Citizenship, cautions against “setting up a system where we depend on businesses to respond”. She says the government excels at being attuned to the public good and understands what needs to be done, as well as the basic ground rules, laws and societal norms.

Companies, Waddock agrees though, should be involved in designing future responses; they often know more about logistics and other aspects of disaster response than the government does. It is a prime example, she says, of where public-private partnerships can be really useful.

Business, by and large, got it right after Katrina and Rita. Now the government can get it right by engaging the expertise of US business before the next crisis, allowing it to respond with the finesse and speed of the likes of Wal-Mart and FedEx, while avoiding no-bid contracts with disaster profiteers.

Useful links:

Retailers head back to ethics school: Some of the UK?s leading retailers are sending their managers back to study ethics in their company supply chains

Retailers head back to ethics school

Some of the UK’s leading retailers are sending their managers back to study ethics in their company supply chains
ETI: improving conditions
ETI: improving conditions

“Capacity building” is a favourite term of consultants, NGOs and companies engaged in trying to encourage responsible business, particularly in the developing world.

In plain English, it means teaching and educating mangers, community groups, trade unions and government officials so they are up speed on the latest ethical issues.

Now, some of the UK’s leading retailers are sending their managers back to study ethics in their company supply chains, to build a little “capacity” of their own at home.

A new training course on supply chain ethics, run by the Co-operative College in Manchester in association with the Ethical Trading Initiative, is the result.

They say charity begins at home, no doubt this not a bad place to start for business managers too.

While around half of the UK’s big retailers are members of the Ethical Trading Initiative, a body of trade unions, companies and NGOs designed to share good practice on ethical supply chains, much of the knowledge these firms have on managing complex supply chain issues is only held within their corporate social responsibility teams.

Now some of them want to spread that learning a little wider, and educate mainstream business managers on what can happen when, say, lead times are shortened or product design changes at the last minute.

Complexity counts

This is simple to do in the fast moving UK fashion world, but, says Dan Rees, long time director of the Ethical Trading Initiative, it can have unforeseen results further down the supply chain.

For example, he says, a Christmas rush or sudden bulk order for a certain product is often the reason factory owners in places such as China make their workers undertake overtime, perhaps breaking the buying company’s code of conduct on working hours and conditions as a result.

So the idea behind the new training scheme is show company buyers, designers and technologists the results of their actions on workers in the supply chain.

The ETI’s work is financially supported by the UK’s Department for International Development. At the launch of the new training scheme on October 31st at the House of Commons, Baroness Amos, the leader of the House of Lords, talked about how UK company “commitments must be backed by action” on supply chain issues.

“Consumers want to be assured that the foot we eat and the clothes we wear come from reputable sources”, she said.

After some seven years of work between ETI members on ethical supply chain issues, the desire for more rigorous independent training came from the members, says David Gibson of the Co-operative College, a training institute in Manchester which dates back to 1919 which will host the training courses.

So far the pilot training scheme has had 36 participants to date, from companies such as Marks and Spencer, Sainsbury and Inditex who have also provided some cash to fund the scheme via their ETI membership fees.

M&S leads, again

Julia Dobson, an ethical trade manager at Marks and Spencer, says the desire for such a course has come out of a growing awareness among retailers wanting to improve workers conditions in the supply chain that “auditing alone does not bring about sustainable change”.

M&S, she says, wants to put workers “centre stage” and have its technologists and buying managers learn about supply chain issues together with NGOs and trade unions on the training course.

M&S, Sainsbury’s, and the Spanish firm Inditex, which owns Zara, have sent managers on the course so far. Monsoon has also been involved in its development, says Julia Hawkins of the ETI. In 2006 ETI members will pay around £2000 per business manager that completes must of the course, according to Steve Kingman at the Co-operative College.

M&S has become a leading light in both the ETI’s work and in the UK’s corporate social responsibility scene in general. Monsoon, too, is often seen as company that well grasps some of the ethical supply chain challenges faced by UK retailers in light of the changes wrought by the last decade’s globalisation. And Sainsbury’s is often seen as the supermarket among the UK’s big four – Tesco, Asda and Morrison’s being the others – that is most interested in tackling ethical supply chain issues.

But the work done by these companies still leaves a great deal of the UK High Street retailers who do much less on ethical supply chain issues. Some, such as Tesco, Asda and Morrison’s, are ETI members, while many others are not.

Not so fast...

Despite the fact that some high street names are beginning to engage in serious staff training on ethical supply chain issues, many others are less caring and not engaged, according to some of the campaigning NGOs.

Recently both Tesco and Asda have been the subject of campaigns by ActionAid and War on Want with regard to their supply chain conditions in places such as South Africa. The NGOs say that workers are kept on temporary contracts and are not paid enough to live properly, amongst other problems.

It may be a while yet before more than half the UK’s high street begins to train their managers on globalisation and its impacts on workers, but training courses such as the ETI’s may show some of the way forward.

Useful links:

Human rights - Act, don?t just react: It is time companies negotiated host government agreements to meet international human rights

Human rights - Act, don’t just react
EC Newsdesk
2 Nov 05

It is time companies negotiated host government agreements to meet international human rights standards at the outset
Better human rights standards in the pipeline?
Better human rights standards in the pipeline?

The relationship between multinational investors and their host governments are once again in the spotlight. In a new report, Amnesty International argues that so-called “host government agreements” allow companies to “side-step the rule of law”.

Criticising in particular the ExxonMobil-led consortium building the Chad-Cameroon pipeline, Amnesty says: “The investment agreements governing the project risk seriously undermining the ability and willingness of Chad and Cameroon to protect their citizens’ human rights.”

The criticisms are similar to those levelled by Amnesty in 2003 against the agreements between the Baku-Tbilisi-Ceyhan pipeline consortium and the Turkish government.

At the time, BP’s answer to Amnesty’s criticisms was to institute a “human rights understanding” that was signed by all the BTC consortium members – a “deed poll” that addressed a number of issues. For example, it protected the right of the three host governments to regulate in the areas of human rights, health, safety and the environment without fear of claims by the BTC consortium; it protected the right of third parties injured by the BTC project to bring claims in domestic courts; and it protected the three host governments of Turkey, Georgia and Azerbaijan from fear of paying compensation to restore the “economic equilibrium” of the BTC project as a result of legislation, required by international human rights, labour or health and safety laws in force in the host countries.

Although Amnesty broadly welcomed BP’s move, it nonetheless made it clear that, in its opinion, human rights issues should be included in host government agreements in the first place. It said: “The Deed Poll is an after-the-fact attempt to correct something that should have been incorporated from the beginning.”

In both its 2003 and 2005 reports, Amnesty is scathing about the lack of transparency surrounding host government agreements: it points out that human rights are less likely to be compromised “when the legal agreements behind them are subject to public scrutiny”.

Openness opposed

However, as BP’s experience in Angola demonstrates, attempts at transparency can undermine the whole basis for business in a country. In 2001, BP announced it would publish details of payments to oil-rich governments worldwide. The Angolan government responded harshly, threatening “contract termination” for “disclosing information … of a strictly confidential character”.

Privileged legal relationships between companies and governments are not new. The energy industry has for years relied on a system of “production-sharing agreements” to regulate who pays for and gets what in oil and gas extraction projects. However, as more and more companies start to operate in emerging markets, host governments and other high-level contracts between companies and national governments are likely to become more widespread.

From the corporate perspective, this is principally a matter of risk management. Countries such as Chad, Azerbaijan and other developing markets do not have legal systems in which companies have any confidence. If a contractual dispute arises in a developed country, then the local legal system is likely to treat the case equitably and fairly. Such an expectation, many corporate lawyers would say, would be ludicrously optimistic in emerging countries.

The problem is that corporate risk management systems are set up to look primarily at “traditional” risks – interest rate and currency fluctuations, reliability of a host legal system and so on. Such systems might identify that a country is, for example, politically unstable, but they are not set up properly to take account of social and political issues. This is a problem that has been identified by those looking at the role of companies in conflict-prone zones.

In other areas of business, leading companies have become reasonably adept at using increasingly sophisticated processes of stakeholder dialogue to understand the societies they are working in and the expectations others have of them. They need to mobilise these techniques to understand human rights issues in countries where they intend to operate.

In the final analysis, if the process of negotiating and instituting host government agreements is to respond to the criticisms from Amnesty, companies are going to have to change the way they identify and manage risk. If companies have learned anything over the past decade, it is that their behaviour on human rights forms an integral part of their reputation and licence to operate. Not to take this into account when negotiating host government agreements is not just bad for the rights of local people, it is also commercial suicide.