Transocean the Unethical Company of 2010

The drilling company behind the 2010 BP disaster has issued the agenda for their annual meeting (Transocean_2011)and it is somewhat of a horror to see. The executive committee thinks that they did such a good job in 2010 that they have granted themselves over 43 million USD in compensation. Based on the 9,3 billion USD the company had in revenues in the same year. On top of that they took a substantial amount of money out as part of their long-term incentive plan.

Mr. Newman (President and Chief Executive Officer) . . . . . . . . . . .$5,400,000

Mr. Rosa (Chairman of the board). . . . .  . . . . . . . . . . . . . . . . . . . . . .$1,500,000

Mr. Brown (Executive Vice President, Legal & Administration).  .$1,500,000

Mr. Bobillier (Executive Vice President, Asset and Performance). $1,500,000

Mr. Toma (Executive Vice President, Global Business). . . . . . . . . . $1,200,000

Ms. Richard  (Senior Vice President, Human Resources and Information

Technology)…… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……$1,200,000 

For the compensation of non-employee directors for 2010 was 4,254,066 USD.

A long-standing reputation for safety

So did Transocean learn anything in the past year? Well when investigating the document they issued it could be interesting to look at how they precise themselves in the area of safety. And behold there is a paragraph in the executive summary on the high lights of 2010.

“We are the world’s largest offshore oil and gas drilling contractor and the leading provider of drilling management services worldwide. We provide drilling services, including the equipment and personnel for operations, to our customers—the oil and gas companies throughout the world. We have a long-standing reputation for safety and for being able to manage and deliver on extraordinarily complex offshore drilling projects in challenging environments. Our vision is to be universally recognized for innovation and excellence in unlocking the world’s offshore resources.”

I think that the people they asked about safety can’t have been the US government, all the residents along the Mexican gulf including the local fishermen nor can they have asked all the scientists, experts or NGOs that have been involved in the clean-up.

This statement just shows displays the complete arrogance of Transocean and its executive board about the people they are affecting. In my mind (and I think in a lot of others) they should be sued until the end of days for what they have done.

Keeping your money safe

But luck-be-hold the board and executive committee have already taken this into account by proposing that shareholders should not be able to sue them for their activities in 2010. Or formulated as an agenda point it look like this:

“Agenda Item 2: Discharge of the Members of the Board of Directors and Executive Management from Liability for Activities during Fiscal Year 2010.

As is customary for Swiss corporations and in accordance with article 698, para. 2, item 5 of the Swiss Code of Obligations, shareholders are requested to discharge the members of the Board of Directors and our executive management from liability for their activities during fiscal year 2010.

The pending shareholder derivative claims allege the breach by our directors of their fiduciary duties based on allegations that our directors failed to monitor safety risks, including risks related to the Company’s blowout preventers, and made misleading statements regarding the Company’s safety risks, the safety of the blowout preventers, and the Company’s financial condition. In addition, other allegations have been made against us in investigations and other contexts that are publicly available and could form the basis of similar claims against our directors and executive management.”

So if any critical shareholder world be out there thinking about sue the company for its mismanagement and poor governance in 2010 then forget about it.

A final insult

These statements just underline the ethical perceptions that the top of the company has on all its stakeholders.

“We will never forget the brave crewmembers of the Deepwater Horizon, nor will we cease in our efforts to ensure such an incident never occurs again. The lingering pain of the Macondo tragedy reinforces our efforts to conduct operations in an incident-free environment, all the time, everywhere.” And “It remains our view that Transocean is contractually indemnified against all claims stemming from the environmental and economic impacts of the hydrocarbons spilled into the Gulf of Mexico from the Macondo well after the sinking of the Deepwater Horizon.”

I hereby nominate Transocean management and its executive board of directors as the unethical company of the year for their outstanding performance in avoiding all decency and totally ignoring, and disregarding their key stakeholders.

SRI Investments strategies according to Oxfarm

Recently Oxfarm issued a report on Responsible Investments a two year project with the participation of a wide range of portfolio companies, institutional investors etc. They have done a thorough job on analyzing and investigating the impact that responsible investments have, or should have on poverty reduction. There is no doubt that intuitional investors would, if they pooled their forces, have a significant impact on poverty reduction worldwide. As Oxfarm states they are a Rights based organization, meaning that they believe that investors should take responsible for their investments impact in relation to Social, Environmental issues. This of cause also means that they believe that organizations have a obligation to act and respond responsible towards their stakeholders.    

I have quoted the issues that Oxfarm have identified in relation to institutional investors for you to see.      

• The lack of oversight by asset owners of the manner in which their investment managers take account of environmental, social and governance issues – and how they impact on poverty and sustainable development outcomes in their investment practices;

• Short-termism, in particular the striking disconnect between the very short-term horizons of most institutional investors and the much longer timeframes required for the realization of poverty reduction and development goals; and

• The general lack of transparency within the investment community, most notably in the context of this project, the lack of information from the majority of investors on their approaches to responsible investment.

I think that the Oxfam report highlight several issues that investors, civil society and governments are fazing in these difficult times.

As governments have fewer funds to allocate to development projects in general NGO are increasingly looking for other actors to take over some of the roles that they used to have. Oxfarm wants Institutional investors to take a greater role in the reduction of poverty but they want to have governmental oversight of the allocation. I see this as a symptom of the crisis in the development world. In Scandinavia alone we have seen a dramatic decrease in development projects over the last ten years. More and more projects are being cancelled or have their activities significantly decreased. As a example is Nicaragua which used to be one of the major contributors of both Danish and Swedish aid in different forms now are the activities close to zero.

I think that Governments and civil society should think twice before they ask the market to help them out. Governmental oversight might be a very good solution on paper but in reality it would still be under the influence of the market. Oxfarm might believe that institutional investors constitute an endless money stream that can be used for the common good. But in the end of the day pension funds will be responsible to the people who have put their hard earned pension money into their pot in the hope that there would be money for their retirement. If the intuitional investor can’t make that promise come true they will cease to exist no matter how many poor they have saved along the way.

Oxfarm wants governments to regulate investors’ ability to invest on short term basis. In the market for investments are institutional investors some of the most long term strategist around. They usually invest in companies that they believe will be around in ten or twenty years because they will not need the money anytime soon. People save for their pensions from around the time that they leave school but they do not need the money before they are well into their sixties. This gives a lot of time for the institutional investor to think long-term. However…

  1. This will favor companies that are already established on the market which are mainly big companies.
  2. It makes it hard for small companies to raise funds if they do not have an already established track record.
  3. It means that companies who have large institutional investors as their major owners will tend to be more conservative.  

Institutional investors are among the wealthiest organizations in the world. They can virtually make and break companies with their recommendations and investment strategies. Companies who can attract intuitional investors are usually never out of cash as long as the company is well governed. But they leave small and middle size companies alone, who in turn, will lack capital if the “short-term” investor is not there to take a risk.

Oxfarm claim that companies taking a CR approach will be more profitable in the long run. I do not know what the long run means in this context, but there is no evidence that companies who have a CR focus are more profitable or make a sounder investment. As I have blogged about before there are actually more risk associated with a CR approach to investments. There are, however, other good and legitimate reasons for investing socially responsible but more money is, at the moment, not one of them.

I would love to see more transparency from institutional investors and for them to open their portfolios for scrutinizing. I’m sure that we will find that ethical screening can mean a great deal of different things. One of the greatest obstacles is that there is no consistent way for organization to report on their portfolios so there is no way for outsiders to really get a glimpse into the “boiler room” so to speak. One of the reasons is that institutional investors rarely micro manage their own funds. They leave it to portfolio managers who will do investments based on the guidelines issued by the institutional investor. Most of the time one manager will have between 1000 and 2000 companies under his/her care. The manager might be specialized so that they know and are experts in a specific region or screening process. One Institutional investor might have several portfolio managers from different companies working for them and basically trust them to micro manage their fund based on a specific risk profile, screening products and estimate on return. Creasing transparency in such a environment is next to impossible as there is competition between different portfolio companies and they invest a great deal of their own funds in producing in-depth analysis which will give them a competitive advantage.         

The question is Oxfarm wrong in their analysis and recommendations? No, not really. It just comes down to that they are “a Rights based organisation” and they will of cause see the world based on how their own perceptions nothing more and nothing less. If NGO’s and CSO’s want to change the business world they will need to know how the market functions based on knowledge and not belief, it is as simple as that. You can find the full report following this link.

Essential SRI strategies

There are three basic ways that one can approach ones strategy in relation SRI portfolio management. These strategies cover most of the issues that you as a investor want to know about and should help you narrow down your approach.

1. Negative Screening. You know what you do NOT want to invest in and this will form the basis of your strategy. As a investor negative screening will keep you away from certain stock based on your ethical preferences. This screening could include not investing in Tobacco, firearms, mining, etc. If you are looking for fund managers who provide you will negative screening options then there are plenty on the market and this is by far the most common approach to SRI investing. Normally these kinds of funds will create returns in par with other portfolio companies not related to SRI.

2. If you want a more hand on approach you can try to a conduct positive screening approach. Positive screening requires more work as you need to know more about the companies and organisations that you invest in. It could be that you screen for companies that help people to live in affordable housing or companies that invest in R&D in relation to green technology. In most cases it will take more of an effort for you to get to know your portfolio companies and how their strategic opportunities looks like. It is hard to say of positive screening will ensure better returns, however, it will reduce the social risks your portfolio is potentially exposed through just because you know your companies and their behaviour from other approaches then purely economical.

3. Shareholder activism. You want to change the world, you know that the language of business is money and they most salient stakeholder of all is the shareholder. Therefore you have chosen to buy stock which gives voting and not least speaking rights are the general assembly and you (or your fund manager) show up at the general assembly in order to confront board and management with the decisions they have made and not least there impact.   

The kind of portfolio screening that you choose will relay on how you want to work with your portfolio and not least how you perceive risk. Starting from the top is positive screening the most common and least “hands on” approach. You provide guidelines for your portfolio manager and she or he manages your shares accordingly. The second, negative screening enables you to have more control but it also requires more work. There are some portfolio companies that provide positive portfolio screening but they might not meet you personal preferences and you will under all circumstances be on the lookout for new companies that might be included. The last one is really for people who want to make a difference and change corporate behaviour. There are plenty of examples of shareholder activism and it has led to changes in corporate behaviour that being said it requires time and considerable effort to be an effective shareholder activist.