Top 10 Corporate Responsibility Stories of 2012

This year may have lacked the huge catastrophes that have dominated the corporate responsibility headlines of the last couple of years (such as BP's oil spill in 2010 or TEPCO's nuclear disaster at Fukushima in 2011), but 2012 has probably been more packed with serious incidents than any of the previous years. We had real trouble putting these in any kind of order and even getting down to just a top 10 of big stories was tough  - and meant we had to jettison a few favoured good news stories about corporate responsibility just to be able to capture all of the bad news. So it nearly became the Top 15 Corporate Irresponsibility Stories of 2012. But in keeping with tradition, here's our view of the top 10 of the highlights and lowlights of a jam-packed year of corporate responsibility stories. And if you think we've got it wrong, or want to change up the order a bit, do add your comments below.

1. Apple's supply chain odyssey
If there is one thing that seems to be guaranteed now, it's that the tech giants will be at the forefront of the corporate responsibility agenda for the forseeable future. If nothing else, it's simply a function of their size, power and ubiquity. In 2010 we had Google facing human rights issues in China; last year was Facebook's privacy battles. And this year, Apple's ongoing supply chain issues really exploded into the public consciousness, thanks in part to the New York Times stories that kicked off the year. Worker suicides, factory fires, poor labour conditions - none of this was exactly new, but one way or another 2012 saw Apple take over from Nike (and tech take over apparel) as the poster child of inhumane supply chains. Apple reacted fast once the tide had turned, but for many it was too little, too late. Even their own internal audits provided evidence of widespread breaches of their policy. As the bad news rolled in, the company that so-often seemed immune to criticism started to show signs of serious reform. Instead of secrecy, it started moving towards greater transparency, joined the Fair Labor Association and initiated third party inspections, and now reports monthly on the working hours of over a million workers. In what may turn out to be the most significant move yet, the company has begun manufacturing some of its Macs not in China, but in the US.

2. The LIBOR scandal
2012 was a bad year for a finance sector that seems increasingly incapable of holding onto whatever public trust is left after the financial crisis and its aftermath. Whilst the US regulators' continued clampdown on insider trading gained yet more scalps, most prominently former McKinsey head Rajat Gupta, it was the arcane field of inter-bank lending rates that dominated the financial front pages. Most of us probably didn't even know what a LIBOR was until this year, but revelations of deliberate fixing of interest rates among major banks in Europe during the late 2000s means that we all now know more than we want to. First, the CEO of Barclays was forced to resign in the wake of investigations by UK regulators. Now, the Swiss bank UBS has agreed to pay $1.5bn in fines to the Swiss, UK, and US regulators for manipulation of interest rates that according to Britain’s Financial Service Authority, was so “routine and widespread” that “every LIBOR and EURIBOR submission, in currencies and tenors in which UBS traded during the relevant period, was at risk of having been improperly influenced to benefit derivatives trading positions.” Investigations continue, and it is clear that other banks and possibly brokerages will be drawn into the fray. Perhaps the major legacy of the scandal though will be the startling picture it has provided us of the "horribly rotten, comically stupid" alternate moral universe that traders inhabit.

3. HSBC's money laundering fine
If the LIBOR scandal wasn't enough, HSBC's record breaking $1.9bn settlement with US regulators for money laundering in Mexico really capped a year that demonstrated how readily financial services companies could deliberately flout the rule of law, and bypass their own control systems with impunity. The HSBC settlement followed similar (though smaller) money laundering settlements against foreign banks including ING and Credit Suisse. What was particularly remarkable with HSBC was the fact that despite having strong evidence the authorities elected not to indict the bank out of fears of possible financial collapse.  The message? Four years on from the financial meltdown, some financial institutions are still too big to fail ... but their licence to operate looks increasingly at risk.

4. Bangladesh factory fire
The death of 112 workers in the Tazreen fashions factory fire of November marked probably the saddest moment for corporate responsibility in 2012. It also provided a powerful reminder that the global apparel industry still had not got its house in order regarding working conditions in the product supply chain, despite two decades  of codes of conduct and factory audits. Tazreen was making clothes for global brands such as Wal-Mart and Sears, who remarkably did not even know that their products were being manufactured there. All in all, a devastating wake-up call for the world of supply chain monitoring.

5. Lonmin mine shootings
Described by the BBC as the bleakest moment faced by South Africa since the end of Apartheid, the shooting of 34 striking miners by police at the Lonmin Marikana platinum mine demonstrated the escalating difficulties of doing business in the global mining industry and in an increasingly fractious South Africa in particular. Lonmin tried to remain above the security crisis, which in total claimed some 44 lives, but a company that not so long ago had the highest CEO:average worker pay gap on the FT 100, operating in one of the most unequal countries on the planet was bound to breed resentment.  Unfortunately the more fundamental reform required to significantly ease the tensions at Marikana looks unlikely.

6. Wal-Mart's Mexican corruption scandal
Wal-Mart wasn't the only company put under the corruption microscope in 2012. Canadian engineering firm SNC Lavalin, among others, was another high profile casualty of increased vigilance among national prosecutors. But the Wal-Mart de Mexico story makes it into our top ten a) because it marked such a sudden reversal of fortune for the company after its much vaunted CSR makeover of the past few years; b) because retail, unlike construction, is rarely a site for major bribery.  Many of the facts are still to come out, but a devastating investigation by the New York Times points to Wal-Mart's Mexican business being a "an aggressive and creative corrupter", systematically using bribery to obtain store permits for its rapid expansion and subverting democratic processes and regulatory safeguards in the process. Critically, the company was also found to have deliberately hushed-up the problem to protect its burgeoning reputation, closing down an internal investigation in 2006, and failing to report any of the illicit payments to the authorities. Suddenly all those nice sustainability initiatives don't look quite so pretty.

7. The BBC's Newsnight sex abuse fiasco
With the fallout of the News International phone hacking scandal still very much a part of the UK media landscape, the last thing the sector needed was a scandal at the most trusted media organization of them all, the BBC. But when the 2011 decision to terminate a Newsnight investigation into sex abuse claims against the recently deceased, former BBC presenter Jimmy Saville came to light this year, it because clear that something was wrong at the redoubtable British media organization. It was left to a rival broadcaster to finally break a story that has since become probably the largest serial sex abuse case in UK history. The BBC then spiraled further into disaster when Newsnight broadcast sex abuse claims against an unnamed senior establishment figure that were very quickly discovered to be untrue. The Director General of the BBC resigned amid the panic and confusion whilst a subsequent report into the BBCs handling of the Saville investigation labelled the organization "incapable and chaotic" with a culture of distrust. It's better than "immoral and deceitful", but hardly a ringing endorsement of responsible management.

8. Starbucks' "voluntary" tax payment.
After bubbling away for a few years, 2012 was really the year that tax justice broke into the mainstream consciousness. Campaigners have targeted various companies over the years, but when the spotlight fell on Starbucks, along with Amazon and Google, for their failure to pay tax on millions of dollars of profits in the UK, activists, politicians and consumers called for change. Not that any one suggested that any of the companies had broken the law, merely that such aggressive tax avoidance didn't align with many people's conceptions of fair play. Starbucks' offer to make a "voluntary" payment of $30m to make up for the shortfall suggested that they could read the message in the coffee grinds about where the debate was headed - towards greater expectations placed on companies to be "good citizens". But clearly the onus is also on politicians to beef up the rules ... rather than just criticize companies who are able to take advantage of their shortcomings.

9.  The Super PAC election
The US election was one of the big news stories of the year, and one of the main corporate responsibility issues swirling around the election was about the role of corporate money in politics. This was the first US national election since the 2010 Citizens United legislation which effectively removed any cap on political donations by companies. No surprise then that the election was the most expensive in history with corporate money aggressively channelled to candidates through super PACs (political action committees). Even though this was expected to benefit former hedge fund boss Mitt Romney, Obama came out ahead, perhaps demonstrating that money can't always buy elections. But when even the Harvard Business Review blog starts carping on about getting corporate money out of politics, you know that a tipping point could be fast approaching.

10. BP oil spill aftershocks
Just because it was our no.1 story two years ago, that doesn't mean the BP oil spill isn't still telling us something new about corporate responsibility. This year, we saw the company slapped with a record $4.5bn fine from the US Justice Department after it admitted to criminal responsibility for the explosion that led to 11 deaths on the Deepwater Horizon well. The company could still face a bigger fine following a civil suit for the damages caused by environmental pollution. But maybe the most significant aftershock of the spill was the decision by the US Environmental Protection Agency to suspend BP from bidding for federal contracts over their "lack of business integrity". Although it's still unclear how long the suspension will last, this suggests a potentially significant shift in the government's strategy for dealing with irresponsible companies. Or maybe it just means that BP didn't get its lobbying strategy right!


Photo copyright meteo. Reproduced under Creative Commons Licence

Microcredit as loan sharking?

Microfinance - the design and delivery of specialist financial services to poor consumers - doesn't often make it onto the front pages of the global media. So it was no surprise that the front page story about microcredit on the International Herald Tribune (and the New York Times) today ended up focusing on some of the industry's more unsavoury elements. Prime among these are the sky high interest rates that some microcredit organizations charge their low income customers - in Mexico, for instance, the average rate is currently some 70%, although the global average is around 37% (which is still considerably higher than rates for "normal" lending). Neil MacFarquhar, the NYT reporter lays the blame squarely on the takeover of microcredit by "a raft of banks and financial institutions", which he claims has got microfinance advocates "wringing their hands over the direction it has taken" and created a "fracas over preserving the field's saintly aura"

Such debates about the direction and financing of microcredit are hardly hot off the press. In fact, in our recently published Business Ethics textbook, we've written a case on Microfinance ("Targeting the poor with microfinance: hype or hope for poverty reduction?") that deals with exactly these concerns. Now we like to claim the book is cutting edge, but we don't expect to break the news ahead of the New York Times. Still, MacFarquhar's critique is timely in some respects in that it does at least put an important debate around microfinance in the mainstream at last. And it helps put to rest a little of the unabashed enthusiasm that tends to accompany a lot of discussion about microfinance. But in other respects, the article is rather uneven in its criticism and probably rather misses the point with its castigation of banks.

There are in fact three quite distinct issues at stake here. The first concerns what a fair price for poor consumers to pay might be in terms of interest rates. Microcredit consumers almost by definition represent a higher cost to serivce for financial institutions because they are difficult to reach and do not fit the existing banking infrastructure. As we say in our case, "providing financial services to the poor may not be as risky as once thought, but it remains expensive because of the large numbers of small transactions that need to be processed and the considerable resources that need to go into developing education and outreach services." This is why much microcredit began as a nonprofit exercise funded by donations. But when it comes to for profit providers, are lenders bound by a "fair price principle" that may not be in evidence in other markets? Isn't the fair price what consumers are willing to pay? Well, not exactly. Fair prices are those that are transparent, understandable, and where customers have an opportunity to switch. These are conditions that are not always met in microcredit markets, suggesting that some kind of addition protections may indeed be necessary to prevent exploitation.

The second issue is about what it takes for microfinance to really take off and go mainstream. First we derided banks for ignoring poor people. Now that microcredit organizations have shown that it can be profitable (and relatively low risk) to target them, we still deride the banks for greedily entering the market. But in reality, few large banks have yet to take up microcredit with much enthusiasm. And even those that have, typically only have a small percentage of their business accounted for with microloans. Despite what MacFarquhar hints at, microfinance is still not a big bank phenomenon and much of the microfinance world is still looking to further its inroads into the commercial sector to prove that its not just charity but actually good business as well.

And firnally, the third major issue is whether microfinance actually has any major effect on poverty reduction. This "fierce debate" as MacFarquhar terms it, is a crucial one for the long term complexion of microfinance, because without substantial impacts on poverty, microfinance has far less attraction to the development world (though it will stay in vogue for the finance industry whilst it maintains it sheen of profitability mixed with principles). And the truth is, the definitive answer to that one is still not apparent. In our case, we put it like this:

"The evidence on the impact of microfinance on poverty alleviation is limited. In part, this is simply due to the relative youth of the industry, as well as the very real problem of providing any definitive correlations given the range of variables involved in determining poverty levels. Despite numerous case studies of successful initiatives, hard empirical evidence is lacking.At best, the existing evidence seems to suggest that, on average, microfinance reduces vulnerability and dependence among client groups, even if it doesn’t necessarily make them richer."

Critics therefore suggest that efforts should be targeted at other approaches to poverty reduction whilst advocates, even in the absence of hard evidence, still endorse the more organic, inclusive and bottom-up approach to develoment represented by microfinance. This argument isn't likely to go away any time soon, but the need is clearly there to develop more sophisticated impact assessment tools to gauge its effectiveness.

So the upshot is, the picture is probably rather more messy than the New York Times presents it, but also somewhat more nuanced. Microcredit is not about big banks versus nonprofit providers battling for the heart and soul of a "saintly" practice, but about a form of lending that can and will be practiced in a variety of ways to serve a variety of ends.