Understanding The Financial Crisis--For Kids and Grownups

Hamada Equation

STAKEHOLDER ROLES : COMMUNITY IN CSR

This year, Best four companies with CSR Reputation–Microsoft, The Walt Disney Company, Google and BMW–tied for the No. 1 spot.

Community = those members of society who are aware of, concerned with, or in some way affected by the operations and output of an organization.
   - As a community CSR my major concern is to make sure CSR of any company takes into account increased populations & scarce resources to ensure that global development is sustainable.

* Google
- Google has been criticized for the high amount of energy used to maintain its servers, but was praised by Greenpeace for the use of renewable source of energy to run them. Google has pledged to spend millions of dollars to investigate cheap, clean, renewable energy, and has installed solar panels on the roofs at its Mountain. Google also invested $39 million in wind power
- Invest in social entrepreneurs who are using technology to crack the code on the world’s toughest problems. Last year we invested in tech-based efforts to expand access to clean water, stop wildlife poaching, prevent the horrible practice of human trafficking and reduce poverty worldwide.
- Responding to natural disasters, tutoring kids in computer science or helping nonprofits collect real-time impact data
- In the past three years, Google has donated over $353 million in grants worldwide, approximately $3 billion in free ads, apps and products, and Googlers have volunteered approximately 6,200 total days of employee time to support nonprofits (a total of 150,000 hours).

	Issue	Indicator	Questions
Google	Intellectual Property & Privacy	Data on violation of privacy and ownership, as a community stakeholder, I need to have a guarantee that my information is safe, and intellectual property is preserved within a trusted company like Google.  Example: Privacy International has raised concerns regarding the dangers and privacy implications of having a centrally located, widely popular data warehouse of millions of Internet users' searches, and how under controversial existing U.S. law, Google can be forced to hand over all such information to the U.S. government.[56] In its 2007 Consultation Report, Privacy International ranked Google as "Hostile to Privacy", its lowest rating on their report, making Google the only company in the list to receive that ranking	How is the company keep on improving its terms that state, “You retain ownership of any intellectual property rights that you hold in that content?.”
	Abandonment of Unbiased Ranking for Google Shopping	Google has effectively abandoned its "Don't be evil" motto and that small businesses will be unable to compete against their larger counterparts. There is also concern that consumers who didn't see this announcement will be unaware that they're now looking at paid advertisements and that the top results are no longer determined solely based on relevance but instead will be manipulated according to which company paid the most	How can google help out, the community to effectively be able to shop based on better ranking from the google ads?
	Potential for Data Disclosure	-          Data Leaks (2009) On Google docs - Cookies (2007 updated for cookies to expire every 2 years) - Tracking through IP address, Doing so will help distinguish this legitimate server-side traffic from traffic which doesn't come from an end-user.	How can the company improve its services to meet demand, and conveniences without risking data disclosure to unintended users?

* BMW
- Preventing intercultural conflict and social instability is another global challenge. As a company that is active in over 140 countries, intercultural understanding is an integral part of our day-to-day work.
- It focus in Social Commitment: Resource Efficiency, Intercultural Innovation & Social Inclusion, and Road Safety.
- The focus of the Sport for Development Organization Magic Bus is on working with children affected by poverty and isolation. Outdoor and sports activities allow these children to play in an age-appropriate manner, to discover themselves and to develop their abilities.
- Emergency Aid
- Teacher Training Program for Primary school
- BMW Group engages in recyc­ling management throughout material life cycles.
Environmental Protection is outstanding!! http://www.bmwgroup.com/e/0_0_www_bmwgroup_com/verantwortung/svr_2012/umweltschutz.html

BMW	Issue	Concerns	Question
	(CO2) emissions	London 2012 Olympics, BMW does not deny that the cars are powerful. Indeed, the models that will be used during the Games are on average twice as powerful as the fleets of some mainstream mass-market manufacturers.	How the company did improve the status of its cars (CO2) emissions over time?
	Security Issue	There has been complains on BMW Security involving tampering with keys / locking programs of cars. This issue could risk accidental lock in the car	It’s more of a costumer concern, but it is community concern on safety especially when it comes to luxury cars locking programs. How does BMW deal with such issue in terms of better production and guarantee security to its users?

* My Role as a Community stakeholder is to make sure these two companies takes into account the increased populations & scarce resources to ensure that global development is sustainable.
- I have analyzed the two companies Google and BMW, and found out that their CSR have touched my three main pillars of concerns as a community stakeholder.
1. Economic progress – Local skill network, partnership
2. Social Justice – Aspiration, training, giving out local jobs
3. Environmental Protection – Involve Volunteer activities, recycling done by BMW for manufacturing process,

* Feedback:
- Analyze the companies based on:  Bottom-up CD programs which emanate from the grassroots level and closely involve community members are more successful than those that are developed top-down.

- General Questions
Based on Philanthropic Issue:
1. Is the firm the neighbor of choice?
2. Is the firm investing in Community Relation Program?
3. How does the firm sustain trust with in the Community?
      - How do companies that produce products (cars) that pollute have a positive reputation for social responsibility?
    - Does the firm have any Volunteerism program?
  - Does the firm invest on Strategic Philanthropic or Caused-related Marketing?

Based on Economic Issue:
4. How does the Economy affect Corporate Relation within the Community?
5. What roles does the firm play in the economic development program for the community?

Based on Legal Issue:
6.  Does the firm abide to the local laws in the community?
  Concerns about whether and how the company fit into existing communities, especially communities that threatened by Urban sprawl and small towns working to preserve a traditional way of life?

Based on Ethical Issue:
7. Does the firm provide leadership in tackling community problems?
8. Is the firm participating in CSR as part of the global trend or is it updated part of the business plan? 

Conclusion: There is no doubt these two companies deserve to be 

Walmart :Future is sustainability

Walmart :Future is sustainability

* Plenty of criticism regarding its treatment of employees, suppliers, and economic impact on communities

1. Relationship with Supplier stockholders

    - 20% improvement in the energy efficiency inside the top 200 factors in. China      by 2012
  - Eliminate defective merchandise from Walmart supply chain.
  - All suppliers must source 95% of their production from factories that receives the highest ratings on environment and social practices.
Note: pressures to achieve these standards will shift more of a cost burden into suppliers.
    - Walmart ranks as China's eighth largest trading partner. (At the expense of US jobs)

2. Employees
  - criticized for its low wages and benefits
  - failing to provide health insurance to more than 60%  of its employees.
    -Many part timers are not eligible
Improved : health benefit package, raised pay tied with performance 

Unions have been discouraged by Sam Walton since it's foundation
- To grow in China, it appeared necessary to accept union. (forced by ACFTU)

3. Work place conditions and Discrimination
  - allergen denying employees lunch break and rest breaks. Which costed $649 million to settle 63 such lawsuits
- granted class section status to a sex discrimination lawsuit. (Plaintiffs claimed that Walmart discriminated against them regard promotions, pay, training, and job assignments.)
- Good received recognition for its good treatment of female workers. (3years)

4. Illegal Immigrants
- Several Walmart contractors’ higher undocumented workers from Mexico, Eastern Europe etc.

5. Sweatshop workers
- 2003 hired an anti-sweatshop expert to expand its global inspection program.

6. Ethical Leadership issues.
- Resignation of a board of director coughing 2005, due to theft of $500,000 in form of Bogus expense, unauthorized gift cards, reimbursement
- the 2nd highest ranking Walmart executive and candidate for CEO = poor leadership, corporate governance, and ethical culture of Wal-Mart

7. Environmental issues
  - EPA has cited Walmart for violating storm water regulation and air quality restrictions. 
- Greatest environment concern = Urban Sprawl
The construction of Walmart can stress a city's infrastructure of roads, parking, and traffic flow.

*SUSTAINABILITY 360
Working on recycling, waste improvement, energy & social impact
- Reduce greenhouse gases by 20% by 2012
- design new prototypes 25-30% more efficient by 2009
- Developing and implementing innovative energy- efficient technology 
-Reduce amount of packaging by 5% by 2013

SUSTAINABILITY LEADERSHIP
-  100% renewable energy
- new stores have "daylighting"
- manage energy consumption by centrally controlling the heating & cooling system.
- sell more green products
- reduction of phosphates (water pollutant) -growth of algae
- get associates involved with Personal Sustainability Project (PSP)
- Walmart Sustainability Live Better Index = measure how ecofriendly products are faring with consumers. Based on states, consumer demand for products.
- 10% of job growth in US will be in "green-collar" by 2032.

* Savings by going green  = cost-effective + secured the goodwill of many environmental conscious consumers.

* IMPROVE ETHICS AND SOCIAL RESPONSIBILITY
  - contributed significantly to disaster management projects eg. Hurricane Katrina
- increased spending on employee health insurance.
- Coughlin Scandal
- Lee Scott,(2008 most Influential person in Business Ethics) recognized as leader in investing in clean energy.
- Reputation of low prices.
- Improving living standard for customers’ worldwide - charitable donations
-Leadership advantage pod affordability.
- Donating to social service program eg.Nassau country.
- Walmart Money card, a reload able visa debit card to help lower income consumers who don't use traditional checking accounts.

* Financial Crisis 2008-2009 May enhanced Walmart reputation.

MONSANTO : ATTEMPTS TO BALANCE STAKEHOLDER INTEREST

* produce 90% of the world Genetic Modified (GM) seeds

* Positive: 
  - It is creating solutions to world hunger by generating higher crops yields and hardier plants which can survive weeks of droughts, ward off weeds, and kill invasive insects.
- 1994 Monsanto introduced the 1st bio technical product to win regulatory approval
- New Monsanto switched emphasis from chemical to food
- FDA has proclaimed that GM food is safe to consume.
- FDA claim "No significant difference has been shown between milk derived from rBST-treated and non rBST treated cows.
- To prevent resistance, farmers are supposed to vary herbicide use, practice crop rotations, and create refuges by mixing the field with non-genetically modified crop to avoid increase in the new race of super bugs.

* Negative: 
  - Monsanto has been covering up decades of environmental pollution.
  - Released toxic (PCBs)  of nearly 40years into a creek in Alabama, Anniston
  - Monsanto Leaders knew about this since the 1960s
  - Health concern: Allergenicity of GM products
  - Critics see Monsanto as trying to destroy African agriculture practices by introducing the newly genetic engineered modified seeds which are not organic.
- Environmental concern: Roundup herbicide = used in conjunction with the hearty GMO seeds can be harmful to birds, insects and amphibians.
Note: Roundup doesn't create health risk for humans
- BOVINE GROWTH HORMONE Concerns (rBST)
  : Cause concerns on many stockholders who fear Posilac may cause health problems in cows and in the humans who drink their milk.
  : Public outcry, led to many grocery and restaurants stop purchasing rBST treated milk
  : Monsanto quote influencing AFACT whose effort to pressure the government to pass law forbidding the use of labels that states milk is free of rBST ,Monsanto stress on the label to contain FDA message

- Contamination of organic seeds with GM seeds by bumblebees, insects & wind.
-  Possibility of weed and insect resistance to the herbicides and pesticides on Monsanto crops. (Super weed/ super bugs)

*DEALING WITH ETHICAL ISSUES

  - Bribery issues
  - Patent: Under terms of the patent, farmers using Monsanto seeds are not allowed to harvest seeds from the plants for use in upcoming seasons.
    (its new concept to most farmers and not realistic)
  Thus cost Monsanto to employ investigators from law firm to investigate suspected violations.

CORPORATE RESPONSIBILITY AT MONSANTO

- Giving millions of dollars in. Programs to help improve the communities in developing countries. (Monsanto Fund)
- Provide employments
- Address the key issue of exponentially increase in population to demand of food, and scarcity of land.
- Goal = to improve farmers lives in a way that will help them become self-sufficient
  "Unique business proposition that rewards farmers and share owners."

FUTURE OF MONSANTO

1. Safety issues: improve agriculture system.
2. Environmental issues
3. Code of ethic to avoid organizational misconduct
4. Competition: Pioneer Hi-Breed International = using pricing strategy, & seed sampling to attract price conscious customers.
5. Opportunities: new innovations that could increase its competitive edge as well as provide enormous benefits to farmers worldwide

HEDGING WITH FUTURES EXAMPLE

* A Company plans to issue $10,000,000 of 20-year, semi-annual coupon, bonds

    in March 2010  (It is now September 2009) to finance its capital expenditure

    program. Interest rates would be 9% if the bonds were issued today. If interest

    rates were to go up, bonds prices would decline bringing less money. How can

    the company protect itself against rising interest rates?

*  Use short hedge, i.e. sell futures contract short!

*  Table 23-2: Future Prices (Treasury Bonds: $100,000; Pts. 32nds of 100%, semi-

    annual, 6% coupon; Last)

                 September 2010      118’25

                 March 2010              116’17

                 June 2010                115’17

*  Each March contract has the price of 116’17, or 116+17/32, or 116.53125% of

    par. The total value of one contract is thus 116.53125% of $100,000 or

   $116,531.25. Since the company wants to issue $10,000,000 of bonds, it will sell

   $10,000,000/$116,531.25 = 85.81 contracts (rounded to 86) for delivery in March.

   The total value of 86 contracts is 86x$116,531.25 = $10,021,688, which is

   very close to the bond value the company wants to issue. In addition, the 

   company will put up 86x$900 = $77,400 in margin money and pay brokerage

   commission. 

*  Should the interest rates go up by March, the company will REPURCHASE the

    futures contract at lower cost, thus offsetting the loss from financing the bond

    issue at higher interest rates! The hedge against increasing interest rates

    will work!

*  NUMERICAL EXAMPLE: In March 2010 the interest rates on bonds are up by

   100 basis points (100 basis points is 1%) to 10% (vs. 9% in September 2009).

*  What will happen to the value of company’s bonds? It will have to pay 10%

    yield on bonds with 9% coupon. The bond issue will bring only $9,142,046 for

    a LOSS of: $10,000,000 - $9,142,046 = $857,954.

    [n = 20x2 = 40; i = 10/2 = 5; PMT = 10,000,000x0.09/2 = 450,000; FV = 10,000,000;

     Calc. PV = 9,142,046]

*  Alternatively, the LOSS can be calculated as follows: 1% higher coupon will

    result in higher interest payments of $100,000 or $50,000 semi-annually.

    [n = 20x2 =40; i = 10/2 = 5; PMT = 50,000; FV = 0; Calc. PV = 857,954]

*  What will happen to the value of the futures contract? The settlement price was

    116.53125% of par, or $1,165.3125 per bond. What is the implied yield on that 

    bond?

    [n = 20x2 = 40;  PMT = 1,000x0.06/2 = 30; FV = 1,000; PV = - 1,165.3125;

     Calc. i = 2.3572]

                                     Annually   2x2.3572 = 4.7144%

*  If interest rates rise by 1%, the yield on Treasury bonds will have to increase

    from 4.714% to 5.714% and the value of the futures contract will drop to

    $103,383.17 per each contract.

    [n = 20x2 = 40; i = 5.714/2 = 2.857; PMT = 100,000x0.06/2 = 3,000; FV = 100,000; 

     Calc. PV = 103,383.17]    

    With 86 contracts, the total value of the position is 86x$103,383.17 = $8,890,953.

*  The company will now close its position, i.e. it will REPURCHASE the contract

    in the futures market for $8,890,953. The same contract was earlier sold short

    for $10,021,688. The company made the GAIN of $10,021,688 - $8,890,953 =

    $1,130,735 on its short position.

 *  OVERALL Gain = GAIN on short position – LOSS on its bond =

                               =  $1,130,735 -  $857,954 = $272,782

*  Not included here are the commissions, opportunity costs and the margin

   money.

*  NOTE: If the interest rates went down, the company would have a LOSS on

   futures position, but a GAIN on its bonds (they will be sold with lower coupon

   rate)!!    

Credits : Prof. Peter Dzadzic, and MBA Student, Lulu Mero