EIDHR - Training on Monitoring International Mechanisms

July 2010

Module 3 International corporations, and their human rights

obligations

Indigenous Peoples Links (PIPLinks)

http://www.piplinks.org

Plan of presentation

1. Explanation of key words & concepts

2. Structure of a company and of the industry, including industry bodies

3. Globalisation & role of financing

4. State obligations - companies and human rights

1a. Keywords & concepts

• Capital / Capitalisation – Money, or total amount of money possessed by a business, especially when used to produce more wealth

• Corporation - A way for companies to organise (to be ‘incorporated’. A corporation is created by a corporate statute, defined in its home country. It is a separate legal entity distinct from its management and shareholders.

• Multinational company (MNC) / Transnational company (TNC) - Business company which has production and/or distribution operations in several countries, via subsidiaries, holding companies etc.

1b. Keywords & concepts

• Globalisation – used in this case as economic globalisation - is the integration of national economies into the international economy through trade, investment (finance) and migration

• Commodity – Something that is bought or sold – refers to real items, such as gold, coal etc.

• Commodity super-cycle – Theory that prices for commodities will, despite fluctuations, keep rising over time

2a. Size of the mining industryKey financials (source Price Waterhouse Cooper)

2008

$ billion

2007

$ billion

%

Change

Revenue (money earned) 349 284 23

Operating expenses 208 164 27

Adjusted earnings before tax (EBITDA)

141 120 18

Net profit 57 66 (14)

Net operating cash inflows 104 83 25

Capital expenditure 66 48 38

Net debt 115 106 8

Distribution to shareholders 29 37 (22)

2b. Structure of mining industry

• The industry is huge. In January 2010 the world's biggest 100 mining companies had a US$2 trillion market value.

• There is a split between major (big) companies & junior (small) companies – with some mid-tiers (medium sized)

• Commodity super-cycle was a huge time for mergers & acquisitions – with the major companies growing bigger

• The world’s big three – BHP Billiton, Vale and Rio Tinto - comprise 26% US$2 trillion

• See tables of comparison…

2c. Top 10 Multinational companies in 1995

Company Nationality Capital ($bn) %share in top 100

BHP Australia / UK 24.08 8.35RTZ UK / Australia 13.62 4.73Anglo-American UK (SA) 12.38 4.30CVRD Brazil 9.17 3.18Barrick Gold Canada 8.90 3.09Alcoa US 8.28 2.87CRA Australia 7.97 2.76Alcan Canada 6.65 2.31Placer Dome Canada 6.03 2.09Western Mining Australia 5.90 2.05

Source:James Cappel Global index, 1995

2d. Top 10 Multinational companies in 2010

Company Nationality Capital ($bn) %share in top 100

BHP Billiton Australia/UK 209.11 10.45Vale (CVRD) Brazil 165.70 8.28Rio Tinto (RTZ) Australia/UK 135.45 6.77Shenhua China 83.70 4.18Anglo American UK (SA) 60.99 3.05Suncor Canada 58.15 2.91Xstrata UK/Switzerland 57.13 2.85Barrick Canada 40.98 2.05FreeportMcMoRan USA 37.87 1.89NMDC India 37.20 1.86

Source: Barry Sargant, Mineweb – January 2010

2e. Where companies are spending money on exploration

Mining fever In the global search for minerals, companies consider South America the hottest destination. Liberalization of mining in the 1990s, sale of government mines, cuts to local regulations and large areas of virgin land have made this region particularly attractive.

3a. Structure of a mining company

• Corporations are considered in law to be a separate “person” or legal entity: they enjoy the same rights as people

• However, corporations do not have a conscience, and their motives are entirely driven by their financial performance – their “bottom line.”

• Issues like social, cultural and environmental performance will only matter if they affect the finances of the company

• When a company engages in Corporate Social Responsibility (CSR) it is to support the “bottom line”

3b. Public / private companies

• A private company raises its money from “private” sources (e.g. company founders or families or ‘sophisticated’ investors including pension funds or hedge funds). De Beers or Glencore are private companies

• A public company sells shares to the public via stock exchanges and similar public financial markets. People who invest in shares of the company (whether private or public) are called shareholders. Most mining companies are public (& include Anglo American & Xstrata)

• People who lend money to the company in the form of debt are called creditors. These are mostly banks. They will receive interest on the loan, while shareholders will receive dividends if the company is in profit.

3c. Structure of a public mining company

Voting control (AGM) Dividends Interest

Non-executive (exec) Loans

Executive

Shareholders

Board (led by Chair)

Management (led by CEO)

Staff

Creditors (banks etc.)

Subsidiaries

3d. Shareholders• Shareholders are theoretically in control of a public company

(however in practice this is often weakly implemented)

• They will buy shares through one or more stock exchanges (that may, or may not be, in the home country of the corporation). The foundation document of the corporation and the stock exchange in question will set out the rules for shareholders and company

• Generally shareholders will get to vote on company policy and practice once a year at an Annual General Meeting (AGM), where the board are voted in & allotted power to run the company

• Very often shareholders will be nominees (often banks, who effectively hold the shares for other unknown actual owners, known as “beneficial shareholders”). It is the nominees who can vote, but often don’t – so it is a weak link

3e. Subsidiaries• Corporations often form and own other corporations, which

are called “subsidiaries” (if they own over 50% of the voting shares) or affiliates or related companies (if they own a lesser portion)

• These subsidiary companies are considered to be corporate persons separate and distinct from the parent – and they can often be in different countries, e.g. TVI Pacific in Canada and TVI Resource Development (Philippines)

• Many mining companies incorporate a separate entity to manage each mine, if not each country. There can be an endless chain of subsidiaries, affiliates and related companies, incorporated in many different places/countries.

Corporate Set-up of the Lafayette Group of Companies

LMI100% LML Owned Local Subsidiary

LML100% Foreign

F&N100% LPI-Owned

RRPI100% LPI Owned

RRMI40% LPI, 60% RRHI (with nationality requirement)

RRHI40% LPI60% F&N

100%

40%

60%

40% 60%

Source: Rapu Rapu FactfindingCommission Report based on 2005 General Information Sheets of RRPI,RRMI, RRHI, LPI & F&N. 19th May 2006

3f. Example of structure - Lafayette

3g. Majors - BHP Billiton• Recent capitalisation is US$209bn - BHP Billiton's London price is

currently near £21.00 a share. It has a vast array of interests.

• During its latest three financial years (to 30 June), BHP Billiton produced cash flows [real money income] totalling US$25bn

• BHP Billiton's base metals division posted underlying profits of US$8bn during the financial year to 30 June 2008, before crashing down to US$1.3bn for financial 2009

• Underlying profits from nickel crashed from US$3.7bn in 2007 to a loss of more than US$800m in 2009. Rumours it will leave nickel all together, but definitely moving out of local ‘laterite’ nickel, with the selling/closing of Australian refineries (Ravensthorpe & Yabulu)

• BHP Billiton has been looking to merge with Rio Tinto

3h. Majors - Vale

• Based on national Brazilian iron ore production (on indigenous land), and is still the world’s biggest producer of iron ore pellets, and second largest of nickel (behind Russia’s Rusal)

• Company was privatised in 1997, and changed its name from CVRD in 2007 (after acquiring Canada’s second largest company, Inco for $18.9bn). Left it with huge debt, which is still a problem for its stability/viability

• Although it prides itself on a good CSR policy, the company has recently been locked in a series of strike actions (especially in Canada), with international mining unions

3i. Majors - Xstrata

• Founded in 1926, but it was really created in 2002 when it was listed on the London Stock Exchange (to be the public vehicle for private trading company Glencore, which is still the biggest shareholder)

• Has had a meteoric rise by mergers – including Falconbridge and MiM. It looked at buying Anglo American but pulled back.

• Expansion has also left it with a big debt (but did not stop CEO Mick Davis making $8million on selling his shares in October 2009)

• There are many campaign issues with the company around the world – including Colombia, Argentina, Chile, Canada & Australia. There are Swiss & London groups concerned with the company.

3j. Majors & the Philippines

• BHP Billiton pulled out of its last mining operation in 2009 (although still has off-shore oil exploration)

• Rio Tinto pulled out of the Philippines in 1999 (leaving much of their exploration areas to likes of TVI & Oxiana/Royalco). They met with President GMA in London in September 2009

• Anglo American confirmed it was withdrawing from the Philippines in April 2010.

• Although Vale is still talking about investing in the Philippines, it only leaves Xstrata with serious interests

3k. Junior companies

• There are a large number of juniors, the majority registered on the Toronto (Canadian) Stock Exchange (TSX), then Australian Stock Exchange (ASX) & London’s Alternative Investment Market (AIM)

• There are plenty of new companies being speculatively linked to Philippines (including Metals Exploration and European Nickel from UK, CGA and Rusina from Australia and Philippines Metals & MBMI from Canada).

• Based on past experience much of this will be speculation

• There is an attempt to legislate to control Canadian juniors after many problems – struggle still ongoing

4a. Mining industry bodies - GMI

• The idea of ‘Sustainable Mining’ was work of the Global Mining Initiative (GMI), leading up to the World Summit on Sustainable Development (WSSD or Earth Summit in Johannesburg in 2002

• The founders of GMI included BHPBilliton, Rio Tinto, Anglo American, Freeport McMoRan, Western Mining and Newmont (biggest companies at the time)

• The outcome was to feed into the WSSD process and resulted in the questionable insertion of the term “sustainable mining” into the post WSSD plan of action

4b. Mining industry bodies - MMSD

• This led to a supposedly ‘multi-stakeholder’ Mines Minerals & Sustainable Development Initiative or MMSD (based at an NGO in London) – but the idea came from a meeting in meeting of GMI in Davos, Switzerland

• MMSD was widely criticised and boycotted by Indigenous Peoples organisations, NGOs with expertise on the issue and mines affected communities as its framework, objectives and structure were all set by industry

• It produced a final report called Breaking New Ground in 2002, see http://www.iisd.org/mmsd/)

4c. Mining industry bodies - ICMM

• The International Council on Mining and Metals (ICMM) was established in 2001, to continue this work

• Is is also based in London, and has 19 mining company members (including all the majors) & 30 mining associations.

• It produces regular publications, on issues like human rights and complaints mechanisms. It represents the industry in international meetings and pushes multi-stakeholder engagements

4d. Return of ‘CSR agenda’

• During the financial crisis CSR in the mining industry was mainly ‘downgraded’ (no representatives came to Manila meeting on Indigenous Peoples in March 2009)

• It is now ‘back with a vengeance’ - 2010-11 to be the years that ‘sustainable mining’ will be discussed at the UN Commission on Sustainable Development

• ICMM is working on a number of initiatives, including a flawed process on engagement with indigenous peoples – industry is really challenged by FPIC

• Climate change increasingly a big issue for industry & the major players have shifted from a denial position to damage limitation

5a. Globalisation & role of financing

• There has been a massive increase in the amount of money being invested around the world, and in how inter-linked it has become thanks to new trading rules, deregulation and liberalisation

• Much of this is truly ‘private money’ (in unregulated areas such as hedge funds or derivatives trades) that is often based on pure speculation. This new private money is a real challenge to campaigners, as who it belongs to is often truly private (hidden)

• Hedge funds are private funds, who partly exist to effectively bet on the stock-market (through different instruments, including betting shares will lose value, called ‘short-selling). Derivatives are effectively bets laid on the future prices of commodities

• Estimates of the size of the derivatives market was $600 trillion in September 2008.

5b. Globalisation & role of financing

• Globalisation is a threat, but globalisation and new technologies have made companies more vulnerable to organised international protest and opened up “ethical investment”. This is the globalisation of activism

• There are different types of finance – these can roughly be broken down into private (personal) and public (state / tax-payers) financing.

• Most financing is private - $178 billion was loaned by private banks for mining between 2001-6, as opposed to $8 billion by the World Bank

5c. Types of private finance

• These can roughly be broken down into shareholder investment (equity – or stocks and shares), who make up the bulk of company capital, and lenders (via direct loans or bonds)

• They are made up of the companies themselves (for ownership or ‘buy-back’), banks, pension funds, professional equity (investment) funds. Then there is individual or truly private money (including shady hedge funds & derivatives, which is effectively the unregulated, hidden, sector)

• The growing size of all this private finance has created a ‘wall of money’ that led to risky investments, and eventually the financial crisis of 2008-9

5d. Types of private finance

• These can roughly be broken down into shareholder investment (equity – or stocks and shares), who make up the bulk of company capital, and lenders (via direct loans or bonds)

• They are made up of the companies themselves (for ownership or ‘buy-back’), banks, pension funds, professional equity (investment) funds, and individual or truly private money (including shady hedge funds & derivatives – the unregulated sector)

• Much of this unregulated sector is often pure speculation or difficult to monitor – estimates of the size of the derivatives market was $600 trillion in September 2008. This has created a ‘wall of money’ that led to the financial crisis of 2008-9. This new private money is a real challenge to campaigners

5e. Types of public finance

• There is multilateral public and national public investment

• Multilateral public money, is primarily through development banks, which include the World Bank and the Asian Development Bank

• National investment can be direct via state-owned enterprises (SOEs), for instance the governments of China or India, or increasing nationalisation in Latin American countries like Venezuela. There can also be tax benefits, subsidies & hidden support for infrastructure.

• Also governments are indirectly controlling, primarily by becoming shareholders, with ‘sovereign wealth funds’ (ironically mostly created by extractive industry profits). These include ones listed in Abu Dhabi, China and the Norwegian Pension Fund

5f. Insurance

• Mining companies also need to insure their projects, so will have insurers. Very often the insurers will have a keen interest in environmental and social issues (as they will pay out for any problems)

• Insurance can be private (via private insurance companies) or public. Public insurance tends to be ‘political risk insurance’ – from likes of World Bank’s Multilateral Investment Guarantee Agencies (MIGA) or via start Export Credit Guarantee agencies

5g. Commodities

• Companies are very vulnerable to constant changes in the price of commodities (their products)

• Commodity markets in 2009 had their strongest year since 1973 (but from a very low base after the financial crisis) – it is basically about people snapping up bargains and not wanting to invest in stocks

• Allegedly the commodities super-cycle, which ran from early 2002 to peak out between mid-2007 and mid-2008, has largely resuscitated itself over the past year.

5h. Commodities

• Copper, lead and zinc have each risen by more than 100% in dollar terms during 2009

• There is a belief the copper price will hold as supply is still fundamentally tight. However, no-one is really sure of stocking levels in China & rumours are that they are over-stocked having bought up at bargain prices

• Over 2009 gold prices have rocketed to record heights close to $1,200 an ounce (& have gone up to $1,500) an ounce. Gold does not follow clear rules of supply & demand, and people are buying as a ‘hedge’ against inflation

• However, at least some commodities are rumoured to be ‘bubbles’ – platinum, uranium, lithium, rare-earths

5i. Industry recovery from financial crisis

• Industry has bounced back from low point in late 2008, but it is very precarious. It is important that the lows were very low – so this is only a relative recovery, mostly based on opportunism

• Surprisingly not many small companies went bust – although predicted by Frasier Institute (half the companies on TSX) & many were close (TVI is a good example)

• Most companies are still badly in debt – industry as a whole estimated to be over £50bn in debt, which is a weak position (although have been winners & losers)

• The economic recovery is tentative – it relies on government subsidies, government borrowing & at present Chinese (& Indian) growth/stability

5j. Financial research

• Research on companies, their bankers, shareholders and financiers is essential (& much can be done via Internet)

• However, it can be complicated and frustrating. The main banker who holds the accounts for a mining company may not be its biggest lender, some lending could be for the company and some for projects or done in consortiums.

• Even where shareholders are publicly available they may be nominees

• There are good guides, research tools and researchers to help – notably Cornerhouse “Campaigners Guide to Financial Markets”

6a. State obligations, companies and human rights

• There is a particular frame-work for business and human rights

• This is being developed by John Ruggie, the UN Secretary-General’s Special Representative on Business and Human Rights

• There has been a growing correlation globally between the extractive industries & human rights abuses, and it is getting worse

• Because of this there have been growing interest and numbers of people working on the issue

6b. Mining and human rights abuses

• The extractive industries are extremely vulnerable to human rights and environmental risks. John Ruggie, noted that the sector accounts for two thirds of the cases of alleged human rights abuses reported by non-governmental organisations (NGOs).

• Examples include: • the current assault of the Indian Government on ‘naxalites’ in

the tribal areas in the North-east of the country• Arrests and harassment of anti-mining activists in China &

Vietnam• Riots & community confrontations in Peru & Ecuador• Recent murders of activists in El Salvador & Mexico

6c. State obligations - companies and human rights

• Internationally only States (governments) have human rights duties imposed on them by international law (as covered in earlier modules)

• Companies have to obey the laws of their home countries, and countries they are operating in, but in theory they have no other obligations (although they say they respect them – and join voluntary initiatives like the UN Global Compact)

• In 2004, the UN Commission on Human Rights debated draft Norms on Transnational Corporations and Other Business Enterprises. These tried to impose (secondary) obligations on companies, which vehemently resisted them

6d. Special Representative on B&HRs

• This led to an impasse, and in 2005 the UN Secretary General, Koffi Annan, appointed John Ruggie (a Harvard Law Professor) for a 3-year term as his Special Representative on Business and Human Rights to further investigate the issue

• In June 2008, Professor Ruggie presented a policy framework, called the Protect, Respect and Remedy framework, and his mandate was extended until 2011 to create practical recommendations on how it should be implements

• Ruggie does not hear individual complaints, but if you copy in his office information will feed into his work (& may be quoted in reports etc)

6e. Protect, Respect and Remedy

• This provides three differentiated but complementary pillars:-

• the state duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation, and adjudication

• the corporate responsibility to respect human rights, which in essence means to act with due diligence to avoid infringing on the rights of others

• greater access for victims to effective remedy, judicial and non-judicial

6f. Implementing the framework

• Although there are still arguments over the framework, things have moved on to try to implement it, and various initiatives have started to assist

• These include work on a set of guiding principles on the corporate responsibility to respect and related accountability measures (various initiatives including those by ICMM & OECD)

• Reviewing obstacles to accessing justice and sharing on mechanisms – including Wiki site (http://baseswiki.org/)

• There are other initiatives including creating human rights impact assessments (HRIAs) & supporting legal cases

End thoughts

• “Of all those expensive and uncertain projects which bring bankruptcy upon the greater part of the people that engage in them, there is none more ruinous than the search for new silver and gold mines” - Adam Smith - The Wealth of Nations (1776)

• ”Corporation: An ingenious device for obtaining profit without individual responsibility.” - Ambrose Bierce