Why Relations Between Companies, Trade Groups Make Investors Wary

The Right Chemistry

Why Relations Between Companies, Trade Groups Make Investors Wary

Investors have been increasingly pressuring companies to disclose their relationships with trade associations, including political contributions, driven in part by the concern that the associations take advocacy positions on public policy that are contrary to the best business and reputational interests of the companies.

Last month, investors filed shareholder resolutions at Accenture, IBM, Pepsi, JP Morgan, UPS, and Pfizer, all of which hold seats on the Board of Directors of the U.S. Chamber of Commerce. The resolutions ask the companies' own boards of directors to report on oversight of corporate political expenditures and on "risks and responsibilities associated with serving on boards of and paying dues to trade organizations when positions of the trade association contradict the company's own positions."

The chamber website states its board determines its policy positions on business issues and directors help implement and promote its policies and objectives. Noting that the chamber has worked against legislation and regulation on climate change and financial reform, the investors argue that a company official serving on the chamber's board can lead to the company being "widely perceived as supporting its policies and programs, which can have a negative impact on a company with a strong reputation for good governance and corporate responsibility." This is but one example of how working through or providing funds via a trade association has significant implications for a company.

Another recent striking example of a disconnect between a company's interests on a specific issue and the position of its trade association stems from Eastman Chemical Company's engagement with the American Chemistry Council (ACC), the major trade association of the U.S. chemical industry. The ACC has been in the trenches fighting state legislative bans on polycarbonate baby bottles containing the chemical Bisphenol A (BPA). Over the ACC's opposition, bans have been enacted in seven states.  BPA is a key ingredient in polycarbonate baby and sport bottles and is a health issue because of scientific studies raising concerns  about, among other things, its impact on the brain, behavior and prostate gland.

During the closing days of the current congress, Senator Dianne Feinstein introduced an amendment to the proposed Food Safety Act to enact a federal ban on polycarbonate baby bottles containing BPA. After strenuous negotiation a bipartisan accord was reached to allow the amendment to be voted on. But, according to media reports, at the last minute the ACC intervened and the bipartisan agreement was scuttled.

The ACC Board of Directors sets ACC policy, provides overall strategic direction and approves advocacy priorities and the council's annual budget. The chairman of the ACC's board in 2010 is J. Brian Ferguson, who also serves as executive chairman of the board at Eastman Chemical Company. In the world of alternatives to BPA, Eastman is best known for having created a copolymer marketed as Tritan.

When major American retailers stopped stocking polycarbonate baby bottles in 2008, Tritan was a readily available substitute for replacement product lines. Tritan was also used as a drop-in substitute by major manufacturers of plastic sport bottles for health-conscious consumers. Because BPA has been found in scientific studies to be a hormone-disrupting  (or "endocrine disrupting") chemical, Eastman has publicized independent laboratory studies that show Tritan is not an endocrine disruptor.

Eastman has benefited immensely from the dramatic shift in the market place in the last two years. The company anticipates selling out   production from its initial Tritan production facility by the end of 2010 and is expanding capacity. By contrast, in October 2010, the company announced it was divesting its more traditional PET plastic business. This was the latest of a series of corporate steps to divest PET assets, which had suffered losses totaling $150 million over four years.

The ACC has successfully fought off a national ban on BPA, but markets have spoken and baby and sport bottles emblazoned with stickers saying "BPA-free" are the order of the day. The European Union has just banned polycarbonate baby bottles containing BPA and, since Eastman obtained approval of food contact uses for Tritan there, it is well-positioned to grab a sizeable share of the baby bottle market in Europe.

Eastman Chemical issued its inaugural sustainability report in June 2010. When doing so, Jim Rogers, Eastman President and CEO (and newly elected to the ACC board beginning January 1, 2011) commented, "Our goal is to consistently demonstrate we are an outperforming chemical company by delivering value-creating growth. We believe that sustainability in particular provides a tailwind for us in achieving this growth." The company declared a goal of having two-thirds of revenues from new product launches offering sustainability benefits (e.g., safety, ability to reduce carbon footprint, or renewable raw material sourcing) compared with existing alternatives in the market.

Eastman's "Our Sustainability Journey" devotes 10 pages to innovative sustainable products. A full page is devoted to Tritan, which "helps Eastman customers showcase the sustainability and other competitive advantages of using BPA-free … Tritan." Another half page of the report is devoted to a halogen-free film used for packaging Method Baby Products. The rapidly growing Method brand is renowned for both stylish packaging and low-toxicity products.

Eastman obviously is benefiting tremendously from businesses' and consumers' interest in more sustainable products generally and in alternatives to BPA in particular. At least with respect to Tritan, for which Eastman has been expanding production capacity, the ACC's opposition to regulatory bans, while protecting the interests of ACC members who produce BPA, works opposite to Eastman's capitalizing on markets' thirst for BPA-free products.

The ACC nominally supports reform of the 35-year-old federal Toxic Substances Control Act. But environmental health advocates involved in legislative negotiations over proposed revisions allege that in practice the ACC is throwing wrenches in the works of reform. They contend the ACC is working to undercut legislative proposals that will speed the removal of older more toxic chemicals in the marketplace and accelerate their replacement with newer, less toxic ones.

See, for example, the blog by Environmental Defense Fund's Dr. Richard Denison, "Not Playing Nice: The American Chemistry Council Solidifies its Claim to Being the 'Industry of No."

Greg Babe, the president and CEO of Bayer Corporation and Bayer MaterialScience, a member of the ACC's executive committee and board of directors, has observed that U.S. chemical industry employment has declined by more than 20 percent in the past two decades and the largest new plants are mainly built overseas.

The chemical industry is understandably very protective of its legacy capital investments for existing chemicals. That said, Eastman's focus on outcompeting other companies by creating more sustainable products underscores the potential of an alternative model for sustaining and growing the domestic chemical industry -- one premised on the hastened, systematic elimination of the most toxic chemicals currently on the market and substituting less toxic ones.

In a letter to Congress in September, investors contended that adopting strong federal policy reforms will:

•    Stimulate and reward innovation in products and industrial processes

•    Promote the international competitiveness of American business

•    Bolster productivity and reduce health care costs

•    Reduce overhead costs to business from managing toxic chemicals

•    Lower market risks to companies and shareholders

The ACC's opposition to meaningful federal policy reform generally and particularly to regulatory action against BPA undermines Eastman's interest in marketing sustainable products that compete with and ultimately will replace "legacy" products. The sustainability tailwind driving Eastman's market growth will be substantially fortified by enactment of significant reform of federal toxic chemicals policies, even if such changes disadvantage other chemical companies circling the wagons to protect their legacy chemicals.

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