Application Assignment Week 07 – The cost of ignoring CSR

There may still be a few companies out there that do not fully believe there is a link between a company’s financial strength and corporate social responsibility (CSR).  The readings this week argue that there is link between the financial health of a company and its CSR practices.  The Economist article by Daniel Franklin summarizes corporate social responsibility as, “companies meaning (or seeming) to be good” and states that academic reviews have determined that “there is in fact a positive link between companies’ social and financial performance” (p. 1 & p. 5). While companies continue to struggle to determine whether or not they want to spend a lot of time, effort and resources on CSR, some companies are forced to tackle CSR related issues and develop a strategy in order to continue operation. After reading this article about a mining company’s struggle in Peru, more companies might be convinced that CSR is something worth investing in.

Here is a link to an article about Newmont Mining Corporation and their struggle with opening a new gold and copper mine in Peru called Minas Conga.

http://seekingalpha.com/article/819811-will-newmont-mining-sink-on-minas-conga-debacle

Newmont is a large global mining company, mining primarily gold, with some copper production as well.  Being in the natural resources extraction industry, Newmont is forced to engage with a variety of stakeholders and must also obtain government consent for operations.  As a result, the company is somewhat forced to engage in CSR practices and adopt the “license to operate” methodology (Porter & Kramer, 2006, p. 4). However, as Porter & Kramer (2006) also point out, the license to operate strategy is fundamentally weak in that it focuses on the tension between business and society rather than interdependence. The tension between Newmont and the citizens and government of Peru is extremely evident in this situation; the tension finally erupted in protests and forced Newmont’s withdraw from the project.

Newmont was hoping to open the new Minas Conga project in Peru, but had place the entire project on hold because of stakeholder concerns and social unrest. In fall 2012, Newmont announced that they would have to stop work on the project due to the amount of social unrest. Local residents were concerned about water pollution and other environmental impacts the mine might have on the area. When their concerns were not satisfactorily addressed, protesters mobilized and sought support from other stakeholders in the area, including the Peruvian government. Anti-mining sentiment spread throughout Peru and generated a lot of negative attention for Newmont both in Peru and internationally through various media channels. Newmont no longer has a license to operate for the Minas Conga project.

Newmont had invested about $5 billion in the Minas Conga project and it was the only new large gold project in the company’s near future. The company had promised shareholders that it would meet production targets of seven million ounces by 2017, but had to announce to shareholders that they would no longer be able to deliver on this goal.  The loss associated with the Minas Conga project also forced the company to re-evaluate the Hope Bay project in Canada and, as the CEO mentions, had a negative impact on their stock price.  However, as the article also points out, Newmont is still able to generate cash flow without Minas Conga which means the project’s failure may not have as big of an impact on stock price as some may anticipate.  Today, Newmont’s stock price is about $8.00 per share higher than it was when the article was posted in Aug. 2012.  Yet, the protests and failure of the project still severely stunted the company’s growth and Newmont will have to continue to scramble to make up for the loss.  

The company’s failures in this region not only impact Newmont, but also have far reaching implications for Newmont’s other operations, as previously mentioned with the re-evaluation of the Hope Bay project in Canada, and other companies in the mining industry.  While some investors are still somewhat optimistic that Newmont may be able to recover, the incident was a significant blow to Newmont’s reputation in Peru and South America which could negatively impact future attempts to mine in the region.

Newmont’s difficulty in Peru is just one recent example of how companies have ignored CSR or stakeholder concerns and paid a severe price for it.  As Franklin mentions in his article in The Economist, “None of this means that CSR has suddenly become a great idea…but in practice few big companies can now afford to ignore it” (p. 1). I suspect there are quite a few companies who would agree that the cost of CSR is small if the activities result in the success of a $5 billion project.   

References –

Frangold, C. (2012, Aug). Will Newmont mining sink on Minas Conga debacle? Seeking Alpha. Retrieved from http://seekingalpha.com/article/819811-will-newmont-mining-sink-on-minas-conga-debacle

Franklin, D. (2008). Just good business: A special report on corporate social responsibility. The Economist, January 19, 1-14.

Porter, M. & Kramer, M. (2006). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 1-13.