Do companies need to behave better?

March 5, 2018

Do companies need to behave better? 

Last week saw the market for transport in London rocked by news that Uber would not have its license renewed to operate in the country’s capital city. The company has 21 days to appeal, and with its deep pockets, it’s easy to imagine just how thorough the defence will be - both from a legal and publicity standpoint. You can’t buy shares in Uber - it’s is privately held - but in the last quarter alone the company lost an eye watering $645 million and purports to be worth in the region of $70 billion. But are we now reaching a tipping point in corporate culture? It seems as if investors are increasingly putting how a company behaves towards staff and consumers in the spotlight - rather than simply focusing on the profits it can generate for shareholders.

We look at four companies where bad corporate behaviour has hit hard, arguably been easy to see coming - and often left shareholders out of pocket as a result.

Lonmin is a mining company operating out of South Africa but with its shares listed on the London Stock Exchange. A series of labour disputes have however been singled out as cause for the company’s share price to struggle over the last five years. In 2012, 3,000 workers walked off the job. In police attempts to break the strike, some 34 miners were killed. In 2014 the company faced more industrial unrest as workers demanded improvements to pay. The strike action lasted six months and is reported to be the longest such strike in South African history. In 2008, competitor Xstrata offered £33 a share for the company which management dismissed out of hand as being opportunistic and undervaluing the business. By the time of the 2012 massacre, shares were down at £5 and now they trade around the 70p mark. Admittedly, metals prices have been falling and operating costs are rising, but investors are showing little love for this stock as questions over management culture surface. 

Sports Direct the UK ‘athleisure’ retailer may be the place to go for a cheap pair of trainers, but the company has also found itself embroiled in a labour relations issue after a ‘Victorian workhouse’ style culture was uncovered at the company’s massive warehouse in the Midlands. Zero hours contracts and employing staff through third party agencies all made for a very lean proposition when it came to costs, but as news of the way it worked with staff spread, it seems that customers started to walk away. Yes, some of the company’s woes were driven by the collapse in the value of the pound, but when competitors like JD Sports were making headway at the same time, again it’s evidence that how a company takes its role as a corporate citizen will have the potential to influence the share price.

BP found itself in the headlines - and its share price in the gutter - after the 2010 Deepwater Horizon oil spill. But should have investors been braced for this seemingly inevitable incident? Certainly the scale of the spill is seen as being a one-off, and the company was fined heavily as a result, but most critical is the fact BP had a lousy safety record in the decade preceding the disaster, seemingly paying out fines ($373 million between 2005 and 2010) as a mere cost of doing business, rather than treating them as an instruction to do better. Research showed that between 2007 and 2010, BP refineries in Texas and Ohio accounted for 97% of all the “egregious, wilful” violations which were handed out by the Occupational Safety and Health Administration. BP had 760 such reports against it - Exxon had just one. With the benefit of hindsight, the company’s performance before the Deepwater Horizon spill would have been a clear indicator that all was not well. 

Ryanair tells a similar story. The company may have pivoted in its approach to customer service a few years back with an initiative to be ‘nice’, but again the stories as to how they treat their staff are well known. Pilots typically don’t work for the airline but are instead contracted through agencies, and whilst the hours they work are tightly regulated, the company often sends them to work in bases at the opposite side of Europe - with travel being at their own cost. The boss - Michael O’Leary - has even said his “pilots are very well paid for doing an easy job”.  Unsurprisingly, many flight crew have left for rival airlines and with pressing staff shortages, the airline was left with no option but to cancel hundreds of flights, leaving customers in the lurch. The company’s shares are down 13% since this story started to unfold - the question is despite the low costs, will customers be willing to book with the airline again, when they risk being left out of pocket for hotels, car hire or missed meetings.

Corporate citizenship is likely to be a term we see used with increasing frequency in the years ahead. There may be no such thing as a physical ‘social license’ to operate, but there does seem to be a metaphorical one. As we’ve seen in the examples above, investors should be wary of this - and the early warning signs that all might not be well.