Sustainablog

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

18.2.06

Busy bodies: Fund managers' promise to rein in errant executives is a good marketing pitch. As a strategy, it is unproven


Busy bodies
Feb 10th 2006
From The Economist print edition



Fund managers' promise to rein in errant executives is a good marketing pitch. As a strategy, it is unproven




“THINK like an owner” is a dictum that has helped win Warren Buffett 40 years of adulation as a beacon of wise investment. For a new breed of “activist” investor who also thinks like an owner—though of a particularly demanding sort—it has so far generated more controversy than praise.

Activist investors have sought to influence companies ever since the bursting of the South Sea Bubble led to calls for company directors to be hanged. But activism has taken on fresh vigour of late, as hedge fund managers and their staider counterparts at pension funds have sought new ways to justify their handsome fees. For their part, investors are susceptible to the activist pitch—and who wouldn't be, seeing as it holds out the promise of a way to emulate the success of private-equity groups, which have often made huge profits from buying underperforming companies on the stockmarket, reinvigorating them and selling them on. There are just two hitches: activism is stirring up resistance among managers and nobody is sure if it is a way to make money.

Activists come in many stripes: short- and long-term; threatening and engaging; discreet and very, very public. Two of the most prominent have been decades in the activist game, or something like it. This week Kirk Kerkorian, who used to be described as a corporate raider in the 1980s and is now a “minority activist”, helped persuade General Motors to cut its dividend by half, slash executive pay and take his man on to the board of directors (see article). Similarly, Carl Icahn and his financial advisers at Lazard this week unveiled their scheme to revive Time Warner, a media conglomerate that would sooner have nothing to do with them (see article). For every Kerkorian and Icahn are dozens of lesser-known Johnny-come-latelys scheming away at funds in New Jersey and Mayfair.

On the face of it, activists have a decent case to make. Vigilant investors are one answer to the “agency costs” imposed by managers who abuse the power granted to them by shareholders to line their own pockets (see article). Activists can also be a source of radical ideas—Mr Icahn, for instance, would split Time Warner into four and take $20 billion out of the business. They can be especially powerful if they draw on managers from industry with an appetite for taking risk outside a corporate environment (the sort of people who have been hoovered up by private-equity groups). And as a means of influencing corporate control, activism may compare to hostile takeovers or management buy-outs, but without the transaction fees or, necessarily, the disruption to managers.

But not everyone looks so kindly on activists' handiwork. Earlier this month, the state legislature of Pennsylvania hurriedly passed a bill making it harder to remove directors of any firm incorporated in the state. The idea was to protect the managers of Sovereign, a local bank, now under siege from hedge funds upset at not having had a say in whether the bank can sell a big stake in itself to Spain's Banco Santander Central Hispano, which they think is bad for shareholders. Mr Icahn has drawn criticism from some of America's grandest chief executives for his relentless attacks on Dick Parsons, Time Warner's chief. The German business establishment was outraged last year when activist investors secured the removal of Werner Seifert as chief executive of Deutsche Börse after they scuppered its bid for the London Stock Exchange.


Punters and proprietors

Even investors have reason to pause before falling for the activists' blandishments. That is because the evidence supporting activism is mixed. A study, published this week at the London Business School by four European academics, concludes that investors expect intervention by activists to pay. Working with British examples, they estimate that in the days after announcing an “activist event” companies benefit from a five or six percentage point rise in share price above what would normally be expected. But other work is less sure. A report in 2001 by Jonathan Karpoff, an American academic who looked at a range of data, found that in the long run, “shareholder activism...has negligible impact on share values and earnings.”

Which is why any regulator tempted to follow Pennsylvania's ill-starred example should think again. If activism tends to make companies more efficient, then regulation will be counterproductive and fraught with unintended consequences. If, more often than not, activism fails, share prices will tend to fall. In that case, shareholders would have no need of legislation to kill off investor activism: they are quite capable of that by themselves.

15.2.06

Survey: Canadian Companies See Clear Benefit to Disclosing Climate Risk


Survey: Canadian Companies See Clear Benefit to Disclosing Climate Risk

GreenBiz.com, 7 February 2006 - Canadian companies surveyed by The Conference Board of Canada are taking action to reduce carbon emissions not just to protect the environment, but for economic advantages, according to a new report.

"Companies need to come to grips with the challenge and risks of climate change, and the substantial costs and benefits of reducing carbon emissions," said David Greenall, author of the report, Carbon Management Strategies of Canadian Industrial Emitters: Competing in a Carbon-Constrained World.

"Successful companies will reap benefits such as reduced costs, enhanced productivity and higher profits. Those that cannot reduce emissions economically will put shareholder value and long-term competitiveness at risk," he added.

The report is based on a survey of 60 medium-sized and large electricity generation, mining and manufacturing companies on issues related to the implementation of the Kyoto Accord and Canada's "Large Final Emitter" legislation. Among the key findings:

  • 84% of respondents feel their companies moderately or strongly understand how a carbon-constrained future will affect them;
  • 63% have assessed how emissions regulations might affect their financial positions;
  • 83% indicate that they will meet their compliance obligations by maximizing energy efficiency, investing in new technologies or purchasing emissions reduction credits;
  • 72% of respondents say their boards of directors have a high level of understanding of carbon-related business risks and opportunities.
"One of the biggest challenges to managing carbon emissions is uncertainty about regulatory and policy issues. Companies are looking for clarity and certainty about what their emissions constraint will be, how a domestic emissions trading market will function, and what the post-2012 climate change policy framework will look like," said Greenall.

Survey results also suggest several areas for corporate attention. In particular, given their responsibility for assessing and managing material financial risks, chief financial officers need to be part of carbon management strategies. In addition, securities filings should provide better information to help investors make sound investment decisions that incorporate environmental factors such as carbon emissions.

Air pollution policies save billions of dollars– UNEP


Air pollution policies save billions of dollars – UNEP

Environmental Finance, 9 February 2006 - Policies to reduce air pollution can save governments billions of dollars, according to data compiled by the UN Environment Programme (UNEP) for its GEO Year Book 2006.

The book presents a survey of the global environment and is the third in an annual series. This year's edition includes a special section on energy and air pollution.

Several examples compiled for this chapter show the economic benefits that can be achieved by air pollution programmes. Among them is the US Clean Air Act, which the US Environmental Protection Agency has estimated will save around $690 billion between 1990 and 2010 – six times the cost of implementing the regime. The majority of these savings are expected to come from a reduction in premature deaths and lower health care costs, says UNEP.

A study by the World Bank, also mentioned in the book, estimates that a 10% reduction in ozone in Mexico City would reduce productivity losses and medical costs by $493 million annually.

"The world is crying out for more energy in order to lift people out of poverty and deliver the internationally agreed Millennium Development Goals. But we know that we cannot rely on the energy structures of the past if we are to deliver a healthy environmentally stable world," says Klaus Toepfer, UNEP's executive director.

"We need to urgently diversify the world's energy and electricity-generation base, we need to promote energy efficiency, we must foster more efficient and cleaner fossil fuel use alongside renewables and we must bring power to the rural areas."

Michigan Invests $2-Billion to Become Alternative Energy Research Hub


Michigan Invests $2-Billion to Become Alternative Energy Research Hub
13 February 2006

Author:
Alejandro Bodipo-Memba
Provider:
Detroit Free Press


Feb. 13--The State of Michigan is racing to become the nation's first alternative energy research hub, as Americans grapple with President George W. Bush's recent statement that the United States is addicted to foreign oil.

The initiative calls for investing up to $2 billion in research, development and business incubation and could create thousands of jobs for engineers and other technically skilled Michigan residents if it's successful.

And, given the president's mandate to wean the country off foreign oil, public and private interests in Michigan are pushing aggressively to ensure that the Great Lakes State is the hub for research in alternative energy.

"We want Michigan to be the state that lays claim to this emerging sector," said Gov. Jennifer Granholm, who pointed out the need to focus on alternative energy research during her State of the State address in January. "To take advantage of that legacy of research and development in the auto industry is a huge opportunity for our state."

Michigan, the automotive capital of the world for the past century, plans to spend $2 billion in bond money in the next decade to ensure that it becomes the nation's alternative energy epicenter. Close to $400 million of Michigan's tobacco settlement revenue in 2006-07 will go to support the program that involves research and development in alternative energy, life sciences, advanced manufacturing and homeland security. About $50 million in grants will be available each year from fiscal year 2006 through fiscal year 2011. State development departments will administer the money.

In fact, much of that money will be earmarked for non-transportation ventures that promote cleaner heating and cooling of homes and businesses.

As a key component of the governor's 21st Century Jobs Fund program, research into alternative energy and renewable fuels is expected to be the hallmark of a new high-tech workforce in Michigan. Among the technologies being examined are:

Hydrogen fuel cells: Fuel cells use stored hydrogen and oxygen from the air to produce electricity to power cars, trucks and stationary products. Fuel cells are virtually pollution free because they create only water vapor as exhaust.

Biodiesel: This is a domestic, renewable fuel technology for diesel engines. It comes from natural oils like soybean oil that can be combined with petroleum-based diesel fuel and used in existing diesel engines with little or no modification.

Ethanol: An alcohol-based additive made from corn and other agricultural products that can be blended with gasoline to promote greater fuel efficiency and cleaner emissions.

Solar: Solar panels capture the energy in sunlight. Solar power can be used in vehicles and households. Sunlight can be converted into electricity, too.

Nuclear: Primarily used to generate electricity, nuclear power is considered by some to be a cleaner form of energy compared to fossil fuel-based materials. The major concern, however, is whether nuclear power is safe enough to utilize more widely.

When asked about the possibilities of nuclear power being part of the future of alternative energy sources, Granholm said, "I think everything should be on the table, as long as it's safe and it's clean and its energy won't result in an accident."

Michigan's efforts to explore futuristic energy sources became more urgent after the president's State of the Union speech last month. In that speech, he named breaking America's addiction to foreign oil as a major priority for the nation.

NextEnergy model

The model for Michigan's rise to the top of the alternative energy sector is the public-private partnership that started NextEnergy in Detroit.

NextEnergy is a nonprofit research-and-development incubator focused on high-tech and alternative solutions to current energy problems.

Since it started in 2001, during the administration of Gov. John Engler, NextEnergy has become Michigan's premier example of how the state's economy is becoming less dependent on automotive companies and more diversified to boost its fortunes.

The 40,000-square-foot facility is near the campus of Wayne State University, in one of Michigan's 11 SmartZones that offer tax incentives to lure technology companies.

The U.S. Department of Energy gave the NextEnergy Alternative Fuel Infrastructure funding to test and demonstrate emerging fuel production and storage systems for vehicles and on-site power -- alternatives such as hydrogen, natural gas and bio-synthetic fuels.

"If we're serious about reducing large amounts of oil, transportation is the place we should be looking," said Jason Mark, a transportation analyst with the Union of Concerned Scientists in Berkeley, Calif. "I think we are one of a handful of places in North America that is focusing a significant amount of attention on this," said Jeff Mason, senior vice president for technology at the Michigan Economic Development Corp. "Michigan is one of the top states that is focusing its attention and investment dollars on research and development of emerging industries such as alternative energy and renewable fuels."

If the $2-billion investment in future energy technologies comes to fruition, it could create about 72,000 jobs in the alternative energy field, according to Granholm and some industry projections. The governor didn't elaborate on the timetable for the estimated job expansion.

Michigan ranked fifth in the nation for alternative energy research because eight of the top 250 alternative energy companies are here, according to a 2004 survey conducted by Plunkett's Renewable, Alternative & Hydrogen Energy Industry Almanac. The companies were Consumers Energy, DaimlerChrysler AG, Delphi Corp., Dow Chemical Corp., Energy Conversion Devices, Ford Motor Co., General Motors Corp., and United Solar Ovonic.

Meanwhile, 17 of the 250 companies had a significant technological presence in the state. In terms of overall investments states made for studying alternative energy sources, Michigan ranked eighth, with $17.37 billion in expenditures.

Currently, Michigan has 51 biomass plants, 12 photovoltaic facilities and seven wind-powered plants operating, and five ethanol plants are being built around the state.

"Whether it's corn production or other types of products that could be converted into ethanol, we clearly can be competitive and have market potential with ethanol," Mason said. "I think we can compete in that arena."

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Copyright (c) 2006, Detroit Free Press

Distributed by Knight Ridder/Tribune Business News.

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14.2.06

Sao Tome and Principe - Breaking the oil curse


Sao Tome and Principe - Breaking the oil curse
Richard Abdy, Middle East & Africa writer
13 Feb 06

Their future at stake
Their future at stake


Sao Tome is poised to become an affluent oil power. But can the tiny west African archipelago avoid the problems surrounding hydrocarbon exploitation that have blighted so many of its neighbours?
Since it was discovered in 1995 that Sao Tome is sitting on huge offshore oil reserves – estimated to be between six to 10 billion barrels – there have been many predictions that this tiny island could become an African El Dorado. With a population of around 170,000, the expected oil windfall could virtually turn every islander into a millionaire.

US oil giants Chevron-Texaco and ExxonMobil have won most of the concessions to develop the offshore fields. Chevron-Texaco is expected to begin exploratory drilling sometime in early 2006. If all goes well production may start soon, probably in 2008.

Sao Tome and Principe, to give the archipelago its full name, and Nigeria, under the Joint Development Authority (JDA), are together managing the offshore oilfields located in their overlapping maritime border in the Gulf of Guinea. Under a treaty agreed in 2001, 40% of the oil revenue from the zone will go to Sao Tome and 60% to Nigeria.

Carlos Gomez, chairman of the JDA, says this form of co-operation in managing a vital resource that has historically fuelled regional tensions and conflicts is in itself remarkable.

These are, indeed, heady times for the impoverished former Portuguese colony, which has mainly depended on cocoa, tourism and subsistence agriculture.

Bureaucrats and business people are all talking up the prospect of Sao Tome succeeding in the daunting task of managing its oil resources more wisely than its tragic neighbour, Nigeria.

There are ambitious plans to use the oil revenues to build two free trade zones and turn the west African archipelago into a regional oil, shipping and manufacturing hub. But all these dreams could easily turn into a nightmare – as has happened in many oil-producing African states – if the central issues of transparency and corruption in the oil business are not urgently addressed.

Avoiding corruption


An army of top-notch consultants and experts have been streaming to the islands to advise the government on ways of avoiding the oil-driven corruption and economic distortion that have been the bane of most African oil states.

“Oil can be a blessing or a curse. The idea here is to avoid the curse,” says Rafael Branco, the director of Sao Tome’s National Petroleum Agency.

Jeffrey Sachs of Columbia University is one of a group behind efforts to help Sao Tome create mechanisms that would enable the country spend the oil windfall more prudently and efficiently. The focus has been on laws that would compel oil companies to make public all the details of their deals. The Oil Revenue Law was approved by parliament in 2004 and Chevron-Texaco has already signalled its intention to abide by it. Other oil companies are likely to follow suit.

David Goldwyn, an oil and gas management consultant with Goldwyn and Associates in Washington believes this is critical for the oil companies too. He says their reputation is at stake, and shareholders and investors care about transparency issues.

But allegations of underhand dealings in the auctioning of the oil blocks have been coming in thick and fast, since the exercise began in 2004. In fact, a judicial probe has just uncovered that companies bidding for the licences to the oil blocks made irregular payments to officials. It even went further, dismissing the whole exercise of awarding licences as “seriously flawed”. A Nigerian-funded company, EHRC Energy, registered in the US, is claimed to have been the main beneficiary of some of the irregular awarding of the licences.

With such an inauspicious start, some doubt Sao Tome can succeed in tackling the corruption menace that threatens to undermine the nascent oil sector.

William Easterly of the World Bank is downbeat and says there is a “huge pattern” in Africa of oil wealth being squandered or being used to finance white-elephant projects. “All sorts of people start circling like sharks, trying to get their hands on the money. Unfortunately … the money does not reach the ordinary people,” he says.

The Chad model


At the behest of multilateral financial institutions and donor nations, Sao Tome has created a National Oil Account. All revenues will be deposited into this for the benefit of future generations. And, a regulatory body will monitor spending.

The World Bank and the IMF have been the main proponents of this idea and had persuaded another African state, Chad, to open such a trust fund for future generations.

The Chad experiment has been very short-lived, however, with the Chadian parliament voting in December 2005 to scrap the fund, effectively breaching the accord with the World Bank.

Sao Tome now has the unique chance of proving many of the pessimists wrong. Can the island break the vicious pattern of corruption and underdevelopment that has disfigured many countries endowed with oil?

Africa is now at the centre of a great oil rush by the big powers: USA, China and India. As Duncan Clarke, an oil and gas specialist with Global Pacific & Partners, says, the “African oil locomotive has arrived at the station”. The oil sector is poised to overtake many other traditional industries upon which the continent depends.

Will tiny Sao Tome seize this historic chance of breaking the curse of oil, or will it, two decades down the line, be still trapped in the mire of poverty? That is the question.

Useful links:

www.eitransparency.org
www.publishwhatyoupay.org/english