The State of Children's Rights and Business
Ignoring Children’s Rights is Risky Business for Investors
Global Child Forum
Children and children’s rights rank highly in the eyes of the public, the media and governments. Companies that harm children may suffer both financially and reputationally as a result. Investors in these companies may also suffer financial loss. In this article, Global Child Forum has compiled real-life examples of these scenarios. The underlying data for the Global Child Forum 2021 benchmark is available for investors seeking to better understand and avoid social and children’s rights related investment risks. Please reach out to Matthew Goodwin, Sustainable Finance Manager at Global Child Forum to find out more.
Most serious investors recognise by now that considering environmental, social, and corporate governance (ESG) criteria in investment valuations and assessment can generate long-term competitive financial returns and positive societal impact. Conversely, a failure to integrate ESG factors leads to increased exposure to various risks. And when ESG risks do materialise, they tend to be very costly.
Yet ESG risks, perhaps especially those related to children’s rights or human rights in general, are not always easy to assess. They are also often interconnected, raising adjacent social issues, and impacting reputations in addition to causing financial stress. The effort to untangle these risks is worth it, however, given the dire consequences of disregarding them: fines, bad press, legal action, business disruption, public scrutiny, difficulty in recruiting staff and boycotts from consumers, to name just a few.
Gone are the days when businesses and investors could treat the repercussions of social negligence or misconduct as mere externalities. Companies are not operating in a vacuum and failing to consider the way they affect vulnerable groups of society, such as children, through their actions, or inaction, are increasingly being reflected in their bottom-line. A prudent investor cannot afford to overlook these material risks. By using Global Child Forum’s benchmark data investors can better understand the social and children’s right related risks of their investments and avoid these costly investments.
What better way to understand the financial implications of disregarding children’s rights, than through real-life cases? The Global Child Forum has collected a sample of such cases, each illustrating a different way of breaking the social contract between business and society and its consequences. In the case of Tiger Brands, failing to safeguard its young customers’ safety and health means that the company is yet to regain both its financial losses and the confidence of investors. With a backdrop of costly legal battles, investors in Aspen Pharmacare Holdings faced the consequences of the company’s business decision to maximise bottom-line at the price of children’s lives. A third case, involving InterContinental Hotels Group, goes beyond product safety and fair pricing to illustrate reputational damages caused by a failure to set up the right moral safeguards, to avoid becoming the silent witness of children rights violations.
Tiger Brands: Will the share price ever recover?
In March 2018, Tiger Brands, one of Africa’s biggest manufacturers of food and beverages, caused the world’s largest listeriosis outbreak that killed more than 200 people and left thousands sick. Among those hit the hardest were pregnant women and very young infants. The company exacerbated the situation by being slow to respond and, by the time Tiger Brands started acting, the damage to the company’s reputation and to its bottom line was already serious.
Providing guidance to the financial markets shortly after the outbreak, Tiger Brands admitted that the listeriosis debacle could cost them more than US$ 67.5 million. Closing two processing plants and destroying recalled products and raw materials alone amounted to more than US$ 30 million. The costly lawsuits and class actions brought by both those who survived bouts of listeriosis and by the families of those who did not would, of course, add to the bill.
Investors, unsurprisingly, reacted to the news immediately and sharply. The company’s share price nose-dived on Johannesburg Stock Exchange and continued to slide for weeks, dropping more than 40% by the end of that year. Fast forward to the present, and the stock is still hovering at around half the price it traded at prior to the outbreak of listeriosis.
Three years after the deadly outbreak, as Tiger Brands struggles to recover from the financial and reputational doldrums, investors are still treating the company with mistrust. As late as in July 2021, upon recalling a batch of canned vegetable products over a leak risk, the markets were quick to shave close to US$ 150 million from Tiger Brands’ market capitalisation. Shareholders’ negative reaction to the recent recall was exacerbated by the listeria contamination scandal still looming in the background.
While any supply chain issue may trigger negative reputational and financial consequences and often a related share price correction, this example shows how a company such as Tiger Brands is not only a corporate entity. It is also a major social agent. Supplying food to the population, including its most vulnerable members, comes with added responsibility. Failing to recognise the duty to place its customers’ safety and health above all else has cost the company a long-term discount on the share-price that investors apply when appraising its value.
Aspen Pharmacare Holdings: Excessive pricing for children’s cancer drug leads to penalties
Pharmaceutical companies undergo the highest level of scrutiny when it comes to safety and health. These risks are well known and extensively scrutinised by governmental agencies and investors alike. Another aspect of the social responsibility of the healthcare industry however lies in pricing, an area where profitability may come at the expense of society’s well-being. Or in the most prominent example, at the price of children’s lives.
In 2016, South African pharmaceutical giant Aspen Pharmacare Holdings, was caught in a bitter controversy involving children’s health. The company was accused, particularly in Europe, of having fixed unfair prices for life-saving medicines, overcharging patients suffering from leukaemia, the most common cancer in children and teens. Allegedly, Aspen hiked up the prices of the cancer medicines for which patent protection had expired decades earlier by nearly 1500%.
Apart from seriously tarnishing the company’s reputation, the financial losses, in terms of penalties imposed on Aspen by European authorities, were significant. The Italian Competition Authority (ICA) was first to react, slapping the company with fines of € 5.2 million for abusing its dominant position.
On the heels of the Italian decision, the European Commission (EC) opened a formal investigation in May 2017 to determine whether the company had indeed engaged in excessive pricing. The case became widely publicised. For the first time, authorities had a chance to prove such a misbehaviour within the pharmaceutical industry. This case also represented an opportunity for Executive Vice-President Margrethe Vestager, the EU’s chief antitrust enforcer, to send “a strong signal to other dominant pharmaceutical companies not to engage in abusive pricing practices to exploit our health systems.”
From an investor perspective, the long-drawn investigation by authorities has been a drag on the company’ performance. With Aspen possibly facing fines of up to ten per cent of its worldwide turnover, shareholders applied discounts both to future earnings estimates and price multiples due to the increased risk.
The EC closed the investigation in February 2021. Explicitly disagreeing with the preliminary findings, Aspen negotiated its way out the potential indictment by making some very costly commitments to address the concerns raised by the authorities. Most significantly, the company agreed to reduce its net prices for the six cancer drugs in Europe by on average 73% for ten years.
InterContinental Hotels Group: The cost of a damaged reputation
Companies may face yet another type of duty to society, beyond the safety of the products and services it supplies or their fair pricing. Scandals can also erupt when products and services are used for immoral purposes, especially when the situation involves children and take place under the watchful gaze the company’s staff.
In 2019, leading global hotel brand InterContinental Hotels Group (IHG) came under the scrutiny of the public and, most importantly, investors, for tacitly allowing others to commit children rights violations. A litigation petition against twelve major hotel companies, including IHG, filed by New York law firm Weitz & Luxenberg on behalf of thirteen women, claimed that the independently owned and operated hotels had been wilfully ignoring warning signs that sexual exploitation was taking place on their premises. Moreover, many of the plaintiffs claimed that they were minors when the alleged trafficking occurred.
The extensive media coverage that followed the allegations came hardly as a surprise. Sexual exploitation and violence, especially when children are involved, is a crime that no business or investor wishes ever to be associated with. To mitigate the effects, the hotel group had to invest massively in various measures to improve its policies and processes while repairing the brand’s image. To this date, although the petition to create a multidistrict litigation panel was denied, individual cases continue, alongside the associated legal and financial exposure.
It is hard to estimate with any amount of precision the financial damage that investors in the company have suffered due to this particular scandal, as it was soon overshadowed by the COVID-19 pandemic, which has disproportionately affected the travel and leisure industry. Any business, however, will suffer from having to face several challenges simultaneously. For fundamental investors evaluating the worth of a company, scandals have always been red flags. What is at stake is not only the current damage, be it reputational or financial, but the lack of checks and balances and the mismanagement that led to the issue in the first place. Companies that manage human rights, and children’s rights, proactively are, presumably, in a much better position to tackle any current and future crises and therefore, all else being equal, certainly deserve a favourable risk adjustment relative to their less conscientious peers.
As these examples demonstrate, due to their inherent vulnerability, children and their rights rank high in the eye of the media, the authorities, and the broader public. Companies may suffer from any scandal, but the involvement of children increases the risk of scrutiny, and they should therefore pay potential children-related issues an added layer of attention. The financial consequences at stake are simply too significant to ignore. Operational and legal costs aside, failing to protect children or harming them in any way leaves deep scars on a company’s reputation.
Ultimately, investors too bear the cost of these regrettable events, and it is therefore their responsibility to evaluate these risks, embed them into asset valuations before they materialise and demand from the companies that they care. Children’s rights violations, when exposed are often the tip of the iceberg; a sign of a substandard corporate culture in general, which investors should bear in mind when conducting their due diligence process. The benchmark data collected and analysed by Global Child Forum and Boston Consulting Group can be used by investors to understand and avoid social and children’s rights related investment risks. As ESG considerations are increasingly becoming an integral part of the investment analysis and have the power to sway investment decisions, responsible investors would be wise to dedicate a special focus to this sub-set of the ‘S’ aspect.
Unfortunately, examples of companies disregarding or violating children’s rights in various ways still abound. Through this thorough benchmarking study, Global Child Forum strives to provide reliable and comprehensive information, helping investors better understand, and ultimately uncover this type of risks in the firm belief that armed with knowledge, they will be able to make better investment decisions. This way, Global Child Forum hopes that, led by investors, companies will shift their focus from short-term bottom-line maximisation to more long-term and responsible decisions, thereby drastically reducing the number of business-related children’s rights violations in the future.