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Archer Daniels Midland, GrainCorp and the liability firewall

Joe Hockey has a big decision to make by December 17. jcburns/Flickr

The Coalition government is split over the controversial bid for GrainCorp by American commodities trading giant Archer Daniels Midland (ADM).

Treasurer Joe Hockey has found himself torn between upholding his own free-market ideology and the demands of the Nationals to protect core agricultural assets used in the export of grain. Needless to say Hockey has a difficult decision to make by December 17.

Executives of GrainCorp and ADM have also thrown their hats into the debate about what is best for Australian export competitiveness.

While much of the controversy has surrounded what foreign control of our agribusiness means, few have questioned whether ADM, with its chequered history of corporate responsibility, is the type of company we want operating in Australia and how this takeover may impact the corporate responsibility of GrainCorp.

ADM is famous for price fixing and is mentioned in almost every textbook or article written on the subject. This is because in 1993 many of its senior executives were indicted for colluding in the lysine market. It turned out to be the biggest antitrust case in US history (and inspired the making of the film The Informant! with Matt Damon). As a result the Vice-Chairman at the time, Michael Gross, went to prison and the company was fined US$100 million. Later, in 2005, ADM had to pay an additional US$400million to settle a class action antitrust suit.

Ian Pinner, the president of ADM’s grains division, faced heated questioning by a senate committee in relation to this history. He told the ABC subsequently:

“The history is there and its publicly available and people are knowledgeable of it. The ADM I work for today is a great business, we have the highest standards of integrity … the history is exactly that”.

Mr Pinner is right. ADM’s corruption led to landmark policy changes in antitrust law and its enforcement, which has made it a lot harder for companies like ADM to offend subsequently.

Against this dark backdrop limited attention has been paid to ADM’s more recent run-ins with the law. In 2001, the company was the subject of a number of major US federal law suits in relation to air pollution, in which it was fined US$1.46 million and required to spend an additional US$1.6 million on control upgrades.

Subsequently, in 2003 ADM tried to avoid mandatory requirements to make more pollution control upgrades and had to pay another US$4.5million in penalties and $6million to support various environmental projects.

So what does this mean for Australia and for the proposed takeover of GrainCorp, in particular for its corporate social responsibility?

Unfortunately, GrainCorp has been quite slow on the uptake in relation to CSR, showing little accountability for social issues or environmental impacts. Despite its size and extensive operations GrainCorp has not published a single comprehensive or assured report on its emissions or social initiatives.

The perception is that large multinationals like ADM have standardised environmental control systems across countries, in which case ADM may “lift” the accountability of GrainCorp, promoting better management and reporting of its social performance.

But the research shows a very different picture, suggesting that under foreign ownership GrainCorp has less reason to improve its engagement with social and environmental issues and may, in fact, reduce its performance in these areas.

One of the issues is that under the US Tax Reform Act of 1986 firms are able to construct a liability firewall between themselves and their subsidiaries. As a result of this legal arrangement parent companies have moved their polluting activities to their subsidiaries and these have been found to have significantly higher rates of pollution than their parent companies.

The situation is even worse when subsidiaries operate overseas. Research shows that the greater the geographic distance between a subsidiary and a host company the less likely that the subsidiary will engage in corporate social responsibility. This is because these distant subsidiaries are unlikely to have positive reputational affects in the host country. GrainCorp’s social responsibility is unlikely to impress ADM’s American stakeholders.

Of further concern is the more recent finding suggesting that, in order to appease the rising expectations of local stakeholders, parent companies transfer their more irresponsible behaviour to their overseas subsidiaries.

The research suggests that as a subsidiary of ADM, GrainCorp’s social responsibility will be focused on American, rather than Australian issues. It seems likely that there will be less ability for local stakeholders to influence GrainCorp in relation to its social responsibility.

Australia is by no means a pollution haven for companies like ADM. But the takeover may contribute to a situation in which we relinquish some of our power to pressure GrainCorp to improve its social and environmental performance and respond to the concerns of local stakeholders.

When Joe Hockey considers the deal, what will be the principle that guides him? Ideology, politics, or the national interest? If, as many speculate, there will be conditions on ADM as part of the takeover then surely improving GrainCorp’s social and environmental accountability should be one of these, lest it follow in the footsteps of its new parent.

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