Phil Mattera

Mubadala Brings Good Things to Light?

Mubadala Development Company, an investment fund controlled by the government of the Emirate of Abu Dhabi (photo), announced Tuesday that it was forming an extensive partnership with U.S.-based industrial powerhouse General Electric. The fund, which said it intends to become one of GE’s top ten institutional investors, will collaborate with the company in areas such as commercial finance, development of clean-energy technology, aviation maintenance and oilfield services. The finance joint venture alone will involve a combined investment of $8 billion.

We’ve gotten used to wobbly U.S. financial institutions such as Citigroup and Merrill Lynch turning to sovereign wealth funds for infusions of capital. Are we now going to see major U.S. industrials do the same? GE, which is not ailing like the financials, will no doubt insist that it is not being propped up by Mubadala but is simply exploiting common areas of interest with the fund.

Even if the arrangement is not an indication of financial weakness, it is another sign that GE is abandoning its status as a U.S. company. The process has been underway for quite some time. Twenty years ago, then-CEO Jack Welch was describing GE as “boundaryless,” and he used the company’s global reach, among other things, to weaken labor unions. Welch—known as Neutron Jack because, like a neutron bomb, he eliminated workers while allowing buildings to remain standing—was also notorious for his statement that factories would ideally be built on barges so they could be readily transported to wherever labor costs were lowest.

Over the past decade, GE has made massive investments abroad, opening not only production facilities but also research & development centers in countries such as India and China. Meanwhile, it is dumping major U.S. operations such as its century-old home appliance business.

The results can be seen in the company’s financial statements. A decade ago, GE bragged in its annual report (p.39) that it “made a positive 1997 contribution of approximately $6.3 billion to the U.S. balance of trade.” The company’s 2007 report does not even mention how much it exported from the United States, while disclosing (p.99) that only 35 percent of its property, plant and equipment is now located on American soil.

So, while GE dazzles us with its “eco-imagination” ads touting its commitment to renewable energy, the company is hooking up with a tiny Middle Eastern country that is awash with petrodollars. American workers and communities, meanwhile, are left to pick up the pieces.

No Love for Nukes

An op-ed in Monday’s Wall Street Journal is headlined “Let’s Have Some Love for Nuclear Power.” A few environmentalists such as James Lovelock have adopted the same stance. John McCain has proposed a major expansion of nuclear power capacity, and Barack Obama has indicated he is also willing to consider the idea. Yet proponents of a nuclear renaissance may want to pay more attention to what has been going on in Vermont before they travel too far on the industry’s bandwagon.

The Green Mountain State is experiencing an uproar over a proposal by Entergy Corp. to extend the operating license of its Vermont Yankee nuke. The generating plant began operation in November 1972 and thus will be 40 years old when the current license expires in 2012. Entergy wants permission to keep the plant going for another 20 years.

This does not sit well with many Vermonters, who are concerned that VY, as the state’s newspapers refer to it, is already showing signs of deterioration. This week a federal panel is hearing testimony in a challenge to the license extension filed by an anti-nuke group called the New England Coalition. The challenge, which is being supported by the State of Vermont, centers on technical issues such as Entergy’s assumptions about metal fatigue.

Although the current hearing will not address them, VY has been plagued by a series of other operating problems, including an incident last year (photo) in which part of a cooling tower collapsed and caused a leak of thousands of gallons of water, though Entergy said that no radioactivity was released. The company put the blame on rotting timbers that had not been inspected properly. Earlier this month, a new cooling tower leak forced Entergy to reduce VY’s output to less than 50 percent of capacity. Nuclear Regulatory Commission Chairman Dale Klein told a Senate committee recently that Entergy has failed to keep up with industry knowledge on cooling tower failures.

Entergy has also been getting grief from state lawmakers, who are in a powerful position based on the fact that Vermont, unlike other states, gives its legislators veto power over nuke license extensions. Earlier this year, the legislature passed a bill tightening Entergy’s obligations to a fund that would pay for the eventual decommissioning of the nuke. This was prompted by concerns that a plan by Entergy to place ownership of VY in the hands of a new entity would make the fund less secure and increase the chances that the state would end up paying much of the shutdown costs, projected to be at least $800 million. Gov. Jim Douglas has voiced concerns about VY’s license extension, but he vetoed the decommissioning-fund bill. An angry Vermonter showed his displeasure with the veto by throwing a cream pie in the governor’s face at a Fourth of July parade.

Vermont may have its unique practices when it comes to nukes, but the contentious situation there is a taste of what can be expected if the nuclear industry – and particularly a company such as Entergy – continues trying to build new plants or extend the life of existing ones into old age.

An Encyclopedia of Corporate Abuses

If today’s ubiquitous feel-good corporate advertisements are to be believed, big business wants nothing more than to improve the lives of all the world’s peoples. A very different perspective appears in a 68-page report recently submitted to the United Nations Human Rights Council. The study—prepared by the Corporate Accountability Working Group of the International Network for Economic, Social and Cultural Rights (ESCR-Net) with the assistance of 40 non-government organizations from around the world—describes more than 150 cases in which “business enterprises have had significant impacts upon the enjoyment of all types of human rights.” The report ends with a series of recommendations for more effective United Nations action on these problems.

Here are the areas covered by the report with a sample of the cases cited in each:

LABOR RIGHTS – Allegations of child labor at Bridgestone rubber plantations in Liberia. Allegations of the use of forced labor by Brazil’s Amaggi Group in clearing fields for soybean production. Charges that companies such as Wal-Mart and Toyota violated trade union rights of workers. Reports that workers in Indonesian sneaker factories supplying firms such as Nike “received minimal compensation while working in humiliating conditions and living in extreme poverty” (p.7). Various cases of unsafe working conditions, gender discrimination and race discrimination.

ENVIRONMENTAL RIGHTS – Reports of high rates of infant mortality, birth defects, childhood leukemia and other forms of cancer in areas of the Ecuadorian Amazon where Texaco (now Chevron) operated between 1964 and 1992. Charges that a mine owned by Placer Dome in the Philippines “caused severe pollution of the sea, bay and rivers, slowly poisoning people and their food source” (p.11). Reports that AngloGold Ashanti contaminated water supplies used by people living near its mining operations in Ghana.

RIGHT TO LIBERTY & SECURITY OF PERSONS – Reports that private security contractors such as Blackwater have killed and wounded innocent civilians in Iraq. Cases in which companies such as Occidental Petroleum allegedly provided logistical support for the Colombian Air Force in an attack on a local village. Numerous cases in which companies supported abusive governments.

RIGHTS OF INDIGENOUS PEOPLES – Allegations that the rights of the Shuar people in Ecuador were violated when Arco Oriente, and later Burlington Resources, “disregarded the objections of the community’s elected leadership to the company’s petroleum exploration activities” (p.18).

RIGHT TO HOUSING – “The homes of the Grand Bassa community in Liberia were demolished, according to the Centre on Housing Rights and Evictions (COHRE), its farms and crops destroyed, ancestral burial plots and secret shrines desecrated in order to provide for the operations of Liberia Agriculture Company” (p.21).

FREEDOM OF EXPRESSION AND RIGHT TO INFORMATION – Charges that Western internet companies such as Yahoo assisted Chinese authorities in investigating dissidents. Allegations that Electricité de France “failed to provide complete assessment studies on potentially serious impacts from the construction of the Nam Theun Dam” in Laos (p.26).

RIGHT TO AN EFFECTIVE REMEDY – Numerous cases in which victims of corporate abuses were unable to obtain remedy in their national courts. Charges in Brazil that “Shell had not undertaken activities ordered by a judge at the federal court…to stop dumping chemical waste, clean up contaminated areas, decontaminate drinking water sources and take steps to protect workers’ health” (p.31).

Given the multitude of cases cited by the Working Group report, the amount of detail provided on each is quite limited (though there are ample endnotes). Nonetheless, the document serves as a veritable encyclopedia of the many ways in which corporate activities around the world—especially in poorer countries—can undermine the broad economic, social and civil rights of various populations. This is not a report about which companies will issue press releases to highlight their inclusion.

Note: An excellent resource for tracking abuses of the sort mentioned in this report is the website of Business & Human Rights Resource Centre.

Volkswagen Test Drives New American Worker

It took 20 years but Volkswagen is finally going to try making cars in the United States again. Today the German automaker announced plans to invest $1 billion on a production facility in Chattanooga, Tennessee that will turn out vehicles for the North American market. The move is seen as the only way the company can, given the strong euro, hope to increase its meager U.S. market share.

The initial coverage of the announcement I saw did not mention the circumstances under which VW abandoned its previous U.S. manufacturing initiative. In April 1978 the company opened an assembly plant in Pennsylvania to produce its Rabbit model. A few months later, the workers, represented by a newly formed local of the United Auto Workers, shocked the company—as well as their parent union—by staging a wildcat strike to protest the fact that they were being paid less than their counterparts at the plants owned by the Big Three. Stopping production of the Rabbit, the workers chanted “No Money, No Bunny.”

The workers eventually returned to work, but labor relations at the plant remained tense as the UAW, compelled by members of the local, pressured the company to narrow the wage gap. VW was also confronted with a lawsuit charging that it discriminated against black employees. Finally, in 1988, VW gave up and closed the plant.

It appears that VW is being more cautious this time. It has followed in the footsteps of other foreign automakers that have located their U.S. plants in Southern right-to-work states or other areas with low union density. Thus is Toyota in states such as Kentucky, Alabama and Mississippi; Nissan in Tennessee and Mississippi; BMW in South Carolina; Mercedes in Alabama; Kia in Georgia; and Hyundai in Alabama. The scarcity of unions may be the real commonality that Tennessee Gov. Phil Bredesen had in mind when he said today that VW chose his state because of “shared values.”

The Southern states have rewarded foreign car companies not only with non-union labor but also with lavish economic development subsidies—in many cases more than $100 million per plant. Volkswagen’s package from Tennessee is still being negotiated. Gov. Bredesen today said only that the deal is “complicated,” which should probably be taken as code for “extravagant.”

Government giveaways and docile labor: Volkswagen may not have had it so good since the era when the People’s Car was born.

Bailing Out Bondholders While Investors Sink

This weekend’s announcement that the Treasury Department and the Federal Reserve will take steps to shore up Fannie Mae and Freddie Mac put a stop, for now, to the rapid decline of the shareholder-owned/government-sponsored entities (GSEs). Yet the nature of the federal intervention is raising questions about whether different groups of stakeholders are getting equal protection.

The greatest tension is between those who hold shares in Fannie and Freddie and those who hold bonds. In theory, the intervention would help both groups by allowing the GSEs to borrow more from the federal government, which would also, if necessary, purchase equity positions in the firms. Yet these capital infusions are being viewed more as a boon to existing bondholders by reducing the odds of a default while doing little to directly help shareholders whose stock has fallen in value by about 90 percent over the past year. The Wall Street Journal’s Deal Journal blog website argued today that the bailout of Fannie and Freddie, like that of Bear Stearns earlier this year, “leaves shareholders starving.” The Journal itself reported on Saturday that Treasury Secretary Henry Paulson (photo, taken earlier) was adamant about not bailing out shareholders.

Apparently, helping shareholders creates a “moral hazard” (de-sensitizing them to risk) while protecting bondholders is considered essential to protecting the financial system. There may be practical reasons why creditors have to be given preference over investors, but it’s instructive to see who comes out ahead or behind with that approach.

According to Fannie Mae’s most recent proxy statement, its largest shareholders are two money managers: Capital Research Global Investors (12% of shares) and Capital World Investors (11.3%). The two are both arms of Los Angeles-based Capital Research and Management, which oversees investments for the huge American Funds family of mutual funds.

According to the subscription service Vicker’s Stock Research, which assembles data reported by institutional investors, many of the other largest investors in Fannie and Freddie are mutual funds and their parent companies—including Fidelity, Vanguard and Lord Abbett. Vickers also shows that public pension funds, which provide retirement benefits to state and local government employees, are also big investors in Fannie and Freddie. For example, the New York State Common Retirement Fund had holdings worth a total of about $93 million in the two GSEs as of its most recent quarterly report.

Getting information on Fannie and Freddie’s bondholders is not quite so easy. But the Council on Foreign Relations has found that a massive amount of such debt is held by foreign central banks—especially those of China and Russia, with about $512 billion between them.

So this is what it has come to: the federal government will do whatever it takes to protect the “confidence” of foreign central banks while allowing the retirement savings of working Americans to be ravaged by the market.

Pickens’ Self-Serving Energy Plan

What are we to make of the Pickens Plan? This week, long-time oil investor and corporate raider T. Boone Pickens (photo) put forth a proposal to greatly reduce American dependence on foreign oil. At the heart of the plan is a call for large-scale expansion of wind energy to allow the country’s natural gas now being used for electricity generation to serve instead as a cleaner fuel for cars, trucks and buses.

Writing in the Wall Street Journal, Pickens says: “I believe this plan will be the perfect bridge to the future, affording us the time to develop new technologies and a new perspective on our energy use.” While the call for a massive commitment to wind energy is generating excitement among some environmentalists, the idea of devoting enormous resources to natural-gas-powered vehicles seems a lot more dubious.

Pickens, whose net worth is estimated by Forbes at $3 billion, has the resources to drown out the naysayers. He has vowed to spend some $58 million to promote the plan.

But is he really advocating an idea–or simply advancing his own interests? Pickens controls Mesa Energy, which plans to spend up to $10 billion building a gargantuan wind farm in rural Texas whose value would be greatly enhanced amid the national effort that 80-year-old Pickens is proposing. His BP Capital hedge fund is heavily invested in natural gas as well as oil.

It’s amazing how many of the hundreds of news articles written about the proposal in the past two days have failed to mention Pickens’ vested interests, while the Associated Press quoted him as making the following preposterous statement about his plan: “I don’t have any profit motive in this. I’m doing it for America.” Back in April he was more candid when speaking to the Guardian about his wind farm investment: “Don’t get the idea that I’ve turned green. My business is making money, and I think this is going to make a lot of money.”

We should also be wary of Pickens because of his other bold initiative: buying up water rights. Just last month, those exploits were the focus of a story in Business Week whose cover (left) depicted him as the water equivalent of the ruthless oil tycoon of the movie There Will Be Blood. It will be a sad state of affairs if we let wheeler-dealers such as Pickens set the agenda for the future of our resources. Sustainability cannot be based on cornering the market.

Is the SEC Putting Itself Out of Business?

Where are the rightwing crackpots denouncing “world government” when you need them? The New York Times reported over the holiday weekend that the Securities and Exchange Commission (SEC) is preparing a series of proposals that would weaken its own control over U.S. financial markets by, among other things, allowing American companies to opt for oversight by foreign regulatory bodies. The step would reportedly be presented as way to enhance the competitiveness of U.S. companies abroad and encourage more foreign investment here.

Critics worry, with some justification, that the move amounts to a transnational form of deregulation, given that securities oversight overseas is generally much less stringent than in the United States. The change could effectively abolish the Sarbanes-Oxley controls that were put in place by Congress after the collapse of Enron and other corporate scandals earlier this decade. The Times quotes Duke Law School securities expert James D. Cox as warning that the shift to international rules amounts to “outsourcing safety standards.” Picking up on the story today, the Washington Post suggested that a vote on the use of international standards could come in a few weeks.

Ceding control to foreign regulators is just one of the ways in which the SEC seems to be chipping away at its own authority. Yesterday, the agency announced it had reached agreement with the Federal Reserve to share information and cooperate more closely. That sounds reasonable, but it comes after the Fed shunted the commission aside and took control of the Bear Stearns crisis back in March. Since then there have been prominent articles, such as one on the front page of the Wall Street Journal, playing up the criticism of SEC Chairman Christopher Cox.

And then there’s the fact that in March Treasury Secretary Henry Paulson proposed an overhaul of the financial regulatory system that gave a diminished role to the SEC. Paulson’s plan has gone nowhere, but it added to the impression that the SEC’s star is waning.

The SEC is hardly a flawless agency, but the alternatives would probably be significantly worse in terms of investor protection and corporate accountability. As much as some of us harp on the limitations of SEC disclosure rules, for instance, there is a lot less transparency abroad. The only other country, to my knowledge, that requires companies to reveal a significant amount about their operations and their finances, and then makes those filings available at no cost on the web is Canada, with its SEDAR system. Allowing U.S. companies to follow foreign rules may or may not help their competitiveness, but it will in all likelihood allow them to operate with a lot less scrutiny.

Shareholder Litigation Not Yet Extinct

Once feared class-action lawyers Melvyn Weiss and William Lerach have been disgraced after pleading guilty to charges of paying off plaintiffs, but the type of lawsuit they promoted—the shareholder derivative action—is not extinct. It has just come to light that the Coca-Cola Company recently agreed to pay $137 million to settle such a suit in which plaintiffs led by two union pension funds accused the soft-drink company of artificially inflating sales figures to boost its stock price.

The case, in which Lerach (photo) was originally one of many lawyers involved, was filed in October 2000 in federal court in Atlanta (Northern District of Georgia, Case No. 00-cv-02838-WBH; later consolidated with another action). The lead plaintiff, the Carpenters Health & Welfare Fund of Philadelphia, held about $80 million in Coca-Cola stock at the time. The company dismissed the charges as “ridiculous” in a press release and later claimed in its 10-K filing that it “has meritorious legal and factual defenses and intends to defend the consolidated action vigorously.”

At the center of the case were allegations of “channel stuffing” (pressuring bottlers to make large purchases of concentrate beyond their needs) and failing to write down the value of impaired assets in places such as Russia and Japan.

Coca-Cola has not made it clear why it decided to settle a case it had fought for nearly eight years. The capitulation was all the more surprising in that it occurred shortly after the company prevailed in Delaware Supreme Court in another derivative suit brought by the Teamsters in 2006. In that case, the union charged that Coca-Cola used its control (35%) over its largest bottler, Coca-Cola Enterprises (CCE), to maximize its own profits at the expense of CCE’s shareholders.

The company also faced a lawsuit brought against it and several affiliates in federal court in Miami concerning the murder of trade unionists at Coca-Cola bottling plants in Colombia. The company got the case dismissed, but it is still being challenged by the tenacious Campaign to Stop Killer Coke (which uses the provocative photo above on its website), the aim of which is to pressure Coca-Cola to get the bottling plants to end their alleged cooperation with Colombian paramilitary groups believed to be behind the murders.

Disclosure Issues Bedevil Climate-Change Debate

Big business is talking more these days about the need to reduce greenhouse gas (GHG) emissions. Even long-time global warming denier Exxon Mobil feels the need to publicize what it is doing in this regard. Claims of reductions in GHG are not, however, meaningful unless those emissions are being estimated consistently to begin with.

A study issued yesterday by the Ethical Corporation Institute raises questions about how much we really know about the volume of GHG being generated by large corporations. According to a press release about the report (which is available only to those willing to fork over more than 1,000 euros), there are “staggering inconsistencies in how companies calculate and verify their greenhouse gas emissions.” The report found, for instance, that companies responding to the fifth annual Carbon Disclosure Project questionnaire used more than 30 different protocols or guidelines in preparing their emissions estimates. The report, it appears, surveys this potpourri of measurement techniques but does not attempt to resolve the differences.

The absence of consistency has not prevented the Carbon Disclosure Project from trying to use current reporting to understand the larger framework of GHG trends. In May, the Project issued the first results of its Supply Chain Leadership Collaboration, an initiative in which large companies such as Nestlé, Procter & Gamble and Unilever urge their suppliers to report on their own carbon footprint. It is unclear how much effort is made to ensure these results are reported in a uniform manner.

Along with the need for improved GHG reporting, there are growing calls for companies to disclose the liability risks (and opportunities, if any) associated with those emissions. Recently, a broad coalition of institutional investors and major environmental groups once again urged the U.S. Securities and Exchange Commission to clarify the obligations of publicly traded companies to assess and fully disclose the legal and financial consequences of climate change. The statement was aimed at reinforcing a petition filed with the SEC last year on climate-change disclosure.

Climate-change liability risks no longer exist just in the realm of the theoretical. Lawsuits have been filed against the major oil companies for conspiring to deceive the public about climate change—including one brought in the name of Eskimo villagers in Alaska who are being forced to relocate their homes because of flooding said to be caused by global warming. Famed climate scientist James Hansen recently declared at a Capitol Hill event that oil and coal company executives could be guilty of “crimes against humanity.” If that isn’t a risk worth reporting, what is?

Newly released RAND report on Iraq Misses the Boat on Contractors

A RAND Corporation report written in 2005 but withheld until this week paints an unflattering portrait of U.S. government planning for postwar Iraq. The Army, which commissioned the report, reportedly kept it under wraps to avoid antagonizing then-Defense Secretary Donald Rumsfeld.

The 273-page document also looks at the role of contractors in the initial period after the U.S. invasion (through June 2004), but for some reason it is much gentler in its treatment of the private-sector participants in the disastrous reconstruction effort. The report notes the slow progress in restoring Iraq’s oil industry and its output of electricity, but the contractors in charge of those efforts—KBR for oil and Bechtel for power, with additional work on electricity commissioned from Washington Group International, Fluor and Perini—are not directly blamed. Instead, the Coalition Provisional Authority and U.S. Agency for International Development come out looking bad, and delays are attributed to the poor security situation.

There is, however, one company that RAND does not handle with kid gloves—Bechtel, in connection with a school building contract. Military commanders, the report says, “complained that school reconstruction under the Bechtel contract was proceeding too slowly, that work was sometimes substandard, and that subcontractors were overpaid” (p.227).

RAND can perhaps be excused for largely missing the boat about contractor screw-ups in Iraq, given that the main revelations came to light after the study was drafted. It was right after RAND completed its research that Stuart W. Bowen Jr. (photo), the special inspector general for Iraq reconstruction, issued the first in a series of scathing audits about both the contractors and the agencies that were supposed to be overseeing their work.

The RAND report reinforces what we know about the shortcomings in the U.S. government’s handling of postwar Iraq, but it will take another account to tell the whole story of the role of contractors in that debacle.