Corporate Social Responsibility

The term Corporate Social Responsibility (CSR) has an abundance of definitions, which are often biases toward specific interests (Dahlsrud, 2006).  However, Altschuller et al. (2008) believe

The field of corporate social responsibility (CSR) comprises a wide array of diverse issue areas, standards, initiatives, and both hard and soft law mechanisms, all of which seek to define the nature of corporate responsibility and accountability for human rights, labour rights and environmental issues.

Go back two decades, and CSR was just a theory passed between academics.  Now it is such a big thing for huge multinational companies, there are whole departments devoted to the way in which the organisation conducts itself in society, be that a specific country or the world media.  CSR ensures that stakeholders of an organisation are treated ethically or responsibly.  Hopkins (2007) describes the ‘ethically or responsible’ term as; “treating stakeholders in a manner deemed acceptable in civilized societies.”

Back in the 1990’s, Nike Inc was accused of using suppliers that mistreated workers.  And 2012 has seen Apple Inc, the world’s most valuable listed company, accused of poor working conditions among its low cost suppliers (Forbes, 2012).  However, I’m sure, that in the countries that both of these ‘suppliers’ are/were based, this type of abuse happens frequently, and almost acceptable in their society.  However, once the international media from the developed countries gained access to this type of information, there was global uproar, especially for the Nike Inc case. 

Well, what does this show? Principally, it shows that large multinational corporations are continuously in the media spot light regarding their CSR activity.  Consequently, needing a whole department dedicated to ensure they are conducting business activity ethically.

Socially Responsible Investing (SRI) is an investment process that integrates social, environmental and ethical considerations into investment decision making (Renneborg et al., 2008). Back in 1999, a merger took place between the two huge motor giants, Nissan and Renault, which highlighted a key example of SRI.  Renault was brought in (or should I say Carlos Ghosn), in order to turn Nissan into a profitable organisation and reduce its mountain of debt, $11 Billion.  The reason for this debt is not important, what is important, is the fact Nissan actually had plenty of money, but it was locked up in non-financial investments.  The two main reasons of non-financial investments were down to trying to gain, loyalty and cooperation from their supplier base.  These two reasons are built in throughout the Japanese culture, highly influenced by ‘Confucianism’ (high family values) and are known as Kieretsu partnerships. 

This clearly represents SRI within a large well-known global industry.  This specific example highlights what can happen when poor SRI is evident.  However negative this example may portray SRI as, it is crucial to understand that often SRI can be done strategically for the better good of organisations.

Altschuller, S., Feldman, D., Blecher, L. (2008) ‘Corporate Social Responsibility’, The International Lawyer, 42(2), p. 489 -547.

The Path to the.....

'The Credit Crunch'... a term that brings a lot of apprehension both on a personal and business level.  The cut backs, the job losses, the stock market drop all negative memories yet to dissolve.  2007 -2008 was when the global economy was struck by the tidal wave, that was the recession.  But what was the reason behind it? Surely, with all the academics, and historical events, someone would have seen this coming? Obviously not.

According to Paul Mizen (2008), one of the key reasons for the economic disaster was ultimately down to the US of A.  In the beginning few years of the millennium the American housing market saw a Boom, and became the driving force of the economy.

 A combination of low interest rates and large inflows of foreign funds helped to crete easy credit conditions (BBC News, 2008).

This is where it became quite easy for people to take out mortgages, and as more and more of the population acquired mortgages, the demand for property increase, fuelling the increase in house prices. Mortgages lenders were asked to find more potential home buyers in turn for bonuses and other incentives. Why was this? The fundamental word is...Greed. Since it was a good time and property prices were soaring, the only aim of most mortgage firms was to give loans to as many potential customers as possible. This resulted in many consumers with low incomes and bad credit history able to acquire mortgages for houses that, realistically, they couldn't afford. And then...POP.....the bubble burst.


The initial driving force of the ever strengthening house market was put into reverse gear. A surplus of houses could only mean one thing, not enough demand, so prices began to fall.  

10.4% of total homeowners had zero or negative equity as of March 2008. (economy.com)

This then lead to banks selling the homes of the owners that could not afford the repayments, this further effected the house prices, for the worse. With house prices reducing, as well as the demand, this resulted in the banks loosing profitability etc. So how does an american housing market problem turn into a global economy?


This whole process is only relevant when the term 'Subprime loans' comes into play.


Many big fund investors saw subprime loans as an attractive investment opportunity and invested heavily into.  This resulted in the growth in this fresh new market and the development of CDOs. The selling and then re-selling of these CDOs didn't immediately take effect and the sheer confusion was not clear.  However, all this confusion eventually took effect, and resulted in banks recording record losses.  All down to the mortgages being considerably higher than the price of the house, and in turn the banks having to write this off as losses.  And?
Well, all the huge financial corporations had invested heavily into failing product, and to make matters worse, the confusion about the complexity of CDO ment that know one truly knew how much they were set to loose.


The link below shows just how devastating the process was to huge banking corporations.


http://news.bbc.co.uk/1/hi/sci/tech/7557526.stm


This began the domino affect which effected the majority of markets throughout the world, resulting in......The Global Recession. 

Mergers and Acquisitions…

After evaluating FDI last week, I have been introduced to another way in which businesses’ can expand their operations: Mergers and Acquisitions (M&A).  But how does this effect shareholder wealth?

From reading an interesting article on ‘The Economist’, my understanding of why mergers occur has grown.  The article discusses the reason for the decline in some of the biggest electronic companies such as Sony, Panasonic, Fujitsu, etc.  Since 2000 these firms have lost two-thirds of their value, for reasons that they could have controlled, through mergers. One of the main reasons for these vast losses is down to the type of market they are in. With many of these companies making more or less the same product, The Economist highlights, 

The overlap is inefficient: it duplicates research and development, reduces economies of scale and destroys pricing power.  This practice clearly wastes huge amounts of capital, which leads to less competitive power.  This has been seen by the likes of Samsung and Apple who are currently more innovative.  However, why haven’t any of these companies merged with any others? Surely, it could cut their losses and therefore restore shareholder wealth.

With the Car market being highly competitive Peugeot and Citroën have seen that in order to better their competition, they decided to merge and become PSA Peugeot-Citroën. Not only has this merger been successful, Fiat have now commented about getting involved, due to competition from the powerful car giant Volkswagen who have 23.3% of Europe’s market share.  If Fiat were to join the merger, then all companies involved would massively benefit with the increase in power, thus becoming more competitive towards the strong competition of Volkswagen.

In regards to acquisitions, primarily it depends on which company we are focusing on, be that the company acquiring or the company being acquired.  From the lectures this week, I have learnt that companies pay a premium for well performing companies, which was demonstrated with the example of the Exxon-mobile deal. By understanding this in regard to shareholder wealth, the shareholders of the company being purchased for this high price often benefit from an increase in share price.

However, what about a poorly performing company? If an acquisition takes place where the company is poorly performing, the price agreeable may be considerably lower than the current value of the business, obviously negatively affecting the current shareholders investment. But, in some cases, could it be argued that if the acquisition of an inadequately performing business is saving shareholder wealth, from possible bankruptcy?

The main reason that drives most M&A’s is the idea of synergy. Why have the core capabilities of one organization when you can have two.  Investopedia.com highlights that  -

One plus one makes three: this equation is the special alchemy of a merger or an acquisition.  This concept believes that by the combination of two companies, the value of this is greater than them separate, in regards to their shareholders.

Foreign Direct Investment

FDI is a measure of foreign ownership of domestic assets such as factories, land and organisations. Foreign direct investments have become the major economic driver of globalisation, accounting for over had of all cross-border investments (BBC, 2011). FDI has become a major source of finance inflows for both developed and developing economies. The purpose of this blog is to understand the different types of FDI and show evidence in relation to current affairs.

From reading a journal written by Qui. L. and Wang. S. (2011), there are two different types of FDI; Greenfield and Brownfield investment. “Greenfield FDI refers to investments that create new production facilities in the host countries (e.g. starting a new plant), whereas brownfield FDI refers to cross-border mergers and acquisitions.”

Reported in the news this week is a relevant and interesting story, Fiat plans to invest $1.1bn in Russia (BBC News, 2012). The plan for this investment is a building of a plant in order to produce 120,000 cars a year for the Russian and nearby economies. The acronym BRIC, refers to Brazil, Russia, India and China, which are in a similar stage of economic development. The point being, many multinational companies are keen to invest in these countries, due to the advancing economies. The Russian government website, ‘Invest in Russia’, boast a GDP of 8.1% (2007), which far outperforms international growth rates. Another claim, is that they have one of the largest consumer markets, with around 140 million people, ‘whose income is increasing every year.’ Furthermore, Russia links Europe with Asia and also borders the North American continent. The government website continues to brag interesting facts about why Russia is so investable, however, fails to mention it is a cheaper investment alternative than the more developed countries, such as UK, the US and Japan (For more information – visit http://invest.gov.ru/en/why/reasons/).

This is prime example of ‘Greenfield investment’, however the question that need to be answered is, will it benefit the Russian economy?

With the current unemployment figure at 6.6% (January 2012), the new manufacturing plant should create more jobs for the economy. However, this could result in job transfer (relocation of employment), instead of actually generating new jobs. The obvious outcome is that the Russian economy as a whole will benefit from this prime example of FDI ‘Greenfield investment’.

Before Fiat planned to invest $1.1bn in to the Russian economy, Fiat were interested in a ‘Brownfield’ type investment with a Russian company Sollers. The original plan was to create a joint venture, which they hoped to produce 500,000 cars per year, as a result of. However, the Russian company opted to replace Fiat with Ford. Evidently, Fiat would have benefited greater by attaining the joint venture with Sollers, due to the sheer difference in manufacturing numbers. However, the main focus is that Russia has gained vastly with the joint venture between Sollers and Ford as well as Fiat investing a substantial amount into the economy.

Some would ask, why have Fiat still entered into Russia after losing such a crucial contract to its competitors. Well, according to an article published by Reuters (2012), Russia’s car industry looked set to overtake Germany as the biggest in Europe before the global economic crisis took effect. Apparently, four foreign carmakers and their partners have now agreed to invest $5 billion on local manufacturing.

So if the Russian car manufacturing industry is so popular with investment, who else will soon be investing in Russia? Would you invest in Russia?

Qui. L. and Wang. S. (2011). FDI Policy, Greenfield Investment and Cross-border Mergers. Review of International Economics. Volume 19, Issue 5, pages 836–851, November 2011