The Regulatory and Economical Environment - Article Example

BOC operates four lines of business, ly the Process Gas Solutions (PGS), Industrial and Special Products (ISP), BOC Edwards, and Gist. The Process Gas Solutions business includes all areas of the tonnage and liquefied gases business as well as the production plants. The Industrial and Special products includes the broadly based business in cylinder gases as well as relevant equipment and services. BOC Edwards includes gases, equipment, and services supplied to semiconductor manufacturers and general vacuum products supplied to other types of industries. Gist includes supply chain services and management mainly in the UK (Lines of Business online). The four environmental factors that are particularly influential on profitability are the technological environment, the economic environment, the legal environment, and the social environment. Being a capital-intensive business, BOC's profitability hinges on its sustained investment in technology to develop new products and services across all businesses and novel uses for existing products, as well as to design efficient methods for manufacturing industrial gases such that economies of scale could be achieved (Annual Report and Accounts 2005: Group Profile, 16; Annual Report and Accounts 2005: Risk Factors, 39). For example, for its PGS business segment, better plant reliability has led to a 16 per cent improvement in total revenue and an 11 per cent increase in total adjusted operating profit for the first half of 2006 (BOC Interim Report 2006, 2). Other than plant reliability, investment in new production facilities will also affect the profitability of PGS as such investments are critical in securing long-term supply contracts (Annual Report and Accounts 2005: Group Profile, 18). For the ISP business, BOC is planning the construction of a helium production plant in Australia. When completed, it will be only one of its kind in Australia (Annual Report and Accounts 2005: Group Profile, 20). This monopoly of the Australia market should be beneficial to profits. Furthermore, state-of-the-art technology to efficiently use power has delivered tremendous savings (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 31). Technology can also be viewed from the perspective of its customers. Technological developments in industries where customers operate can increase the profitability of BOC. For example, success with major flat panel fabs in Korea has led to a soar in materials consumption and equipment demands, which brings about the strong vacuum equipment market share (Annual Report and Accounts 2005: Research, Development and Information Technology, 36; Merrill Lynch Chemicals Conference, 12). On the economic front, energy costs are particularly influential on profits, especially for PGS (BOC Interim Report 2006, 2) and ISP (BOC Interim Report 2006, 2). Domestic revenue depends on the manufacturing economy and pension costs (BOC Interim Report 2006, 2), while revenue and profit in the US and Canada hinges on demand from the oil and gas sector in the western region (BOC Interim Report 2006, 2). Exchange rate movements are also particularly influential on profitability (Annual Report and Accounts 2005: Operating Review, 40; BOC Interim Report 2006, 3) since BOC operates worldwide such as the UK, US, Europe, China, Asia, Australia, and Africa (Annual Report and Accounts 2005: Group Profile, 18; BOC Interim Report 2006, 2-3). Lastly, BOC is affected by the semiconductor business cycle as manufacturers in the semiconductor industry form the bulk of BOC Edwards' customer base, and BOC Edwards' profitability is directly influenced by the demand of these manufacturers for vacuum equipment, services and industrial gases (Annual Report and Accounts 2005: Risk Factors, 38) There are many factors in the legal environment that are particularly influential on BOC's profitability. These factors include compliance with accounting, safety, health and environmental regulations and laws. They are discussed in the following paragraphs. Profit is affected by pension costs and the Sarbanes-Oxley compliance costs (BOC Interim Report 2006, 3). BOC has to comply with the Sarbanes-Oxley Act because it is registered in the US, but being a complex and diverse business operating worldwide, the cost of such compliance is very high. According to Rob Margetts, the Chairman of BOC, the compliance costs amount to around 10 million in 2005 and will continue at the same level in 2006, before the costs reduce (Annual Report and Accounts 2005: Chairman's Statement, 4). BOC makes and sells products that are potentially hazardous, some being stored at very low temperature or under pressure, and some having toxic or flammable properties. Consequently, BOC has to reduce the risk of injury to people through its products (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 28). For example, BOC's profitability would be affected by lawsuits pressed by those suffering from the adverse effects of manganese in welding fumes (Annual Report and Accounts 2005: Chairman's Statement, 5). To ensure compliance with the laws, BOC collaborates with its suppliers through a "supplier evaluation, selection and performance appraisal system". Suppliers are classified based on two dimensions, namely supplier risk and product risk. The high-risk suppliers are required to include an ethical purchasing clause in the contracts with BOC (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 27). To avoid lawsuits, BOC also has a screening procedure to make sure that clients have the ability to deal with hazardous products safely (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 27, 29). Customers are provided with safety advice online to help them recognise risks and hazardous practices and adopt best practice to comply with the law (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 28). Employees are equipped with training and equipment to ensure that nobody gets injured (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 28). For example, BOC's businesses in Asia and Africa introduced SiteSafe, a method for implementing safety systems, standards and behaviours. SiteSafe encompasses many components such as workshops to encourage visible leadership among management and a number of "safety through empowerment" seminars encouraging employees to identify hazardous behaviours. Road injuries are also reduced through driver training, procedures, and tools. A campaign was launched to reinforce the message of the ban on mobile phones while driving and the wearing of seatbelts. At Gist, safety rails were rolled out for the protection of drivers when coupling tractors to trailers and stability systems were put in place on all high-sided double-decker trailers to minimise the risk of rollover (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 29). Although such programmes are expensive to implement, they will reduce the cost of lawsuits and minimise lost workdays (Annual Report and Accounts 2005: Risk Factors, 38; Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 29). Another factor in the legal environment that will affect profitability is the management of employee health to comply with local laws and regulations. There are many health hazards, including exposure to noise from gas compression activities and from cylinder handling, exposure to some gases filled into cylinders, exposure to chemicals used in metal cleaning and painting operations, and ergonomic and manual handling risks. BOC's occupational health (OH) and hygiene function provides a worldwide service aiming to remove work-related health hazards and to make sure that employees can work and perform their duties safely. Again, a series of training, manuals, videos and safety data sheets are available to achieve workplace health. OH also reviews all business units and provides information on the key health issues and the methods to minimise or remove these health hazards. Moreover, employee health effects are monitored through local occupational health checks globally. Some are internal and others are outsourced to professional OH providers. In some areas, "well-person" health checks are conducted for employees and specific checks are performed for employees working in hazardous activities. Information on employee health issues is also collected and analysed, with the objective of counteracting the costs of poor health and helping actions to be set in the important aspects. In the south pacific area, a method has been developed to hasten the diagnosis and treatment of employees suffering from ill health, thereby speeding up rehabilitation. As in the case of safety programmes, though such health programmes are costly to implement, they reduce lost workday, lawsuits, and employee liability insurance costs, such that they are much lower than industry benchmarks (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 30). There are also environmental laws and regulations to adhere to. Examples include the management of greenhouse gas emissions, energy efficiency, vehicle transport, hazardous waste, and water conservation (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 27, 30). Though it might be costly to manage environmental issues, such as accreditation programmes as well as supplier assessment, selection, and appraisal, BOC has been very successful in this respect and no prosecution for breaches of environmental laws were incurred in 2005. The cost of such prosecution might have been greater. Moreover, efficiencies in energy consumption not only comply with the laws and are beneficial to the environment, lower manufacturing and purchase costs and lower product prices are also achieved at the same time (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 31). Lastly, the social environment is another aspect that will influence profit. BOC runs a corporate responsibility programme to engage employees at all levels of the organisation to support social issues that matter to them. An example is the joint giving scheme. BOC extended medical oxygen and other practical help to countries around the Indian Ocean that had suffered from the disastrous effects of the tsunami in countries where it operate. Besides, as part of the joint giving scheme, BOC matches two-to-one employees' donations to the relief effort for both the tsunami and hurricane Katrina. BOC also played its role as a good corporate citizen when the Pakistan earthquake struck in October 2005. Just for the tsunami alone, the community of BOC donated over 570,000 (Annual Report and Accounts 2005: Chairman's Statement, 5). BOC states in its 2005 annual report that it has finished the work to comply with one new set of requirements, the Combined Code on Corporate Governance, and is forthcoming on the other two, namely switching to International Financial Reporting Standards (IRFS) and meeting the provisions of the US Sarbanes-Oxley Act. Moreover, with effect from 2006, it will publish an operating and financial review (OFR) as part of the group's annual report. The purpose of the OFR is to help the shareholders evaluate the strategies and the probability of their success. Other than external checks and reporting requirements, high standards of integrity and transparency are achieved by a strong and independent group of non-executive directors. It has an excellent and pervasively implemented set of Code of Conduct and a management team committed to the principles of accountability, collaboration, transparency, and stretch (Annual Report and Accounts 2005: Chairman's Statement, 4-5). The Code of Conduct, implemented in 2003, is a set of legal and ethical standards that are applicable to all employees and to contractors of BOC (Annual Report and Accounts 2005: Employees, 23). The code lays out the "safety, environmental, social, legal and ethical" aspects that employees are required to adhere to. The chief executive takes ownership of the code while BOC's businesses implement it. However, the chief executive may delegate the management of the code to the executive management board and the day-to-day management to a code advisory group. (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 26). Annual sustainability plans incorporate the code within the businesses and make it visible, accessible, and relevant to employees. The Code of Conduct telephone helpline has been expanded to include 49 countries and publication material has been created to announce the telephone number in each country. BOC has a strict policy of non-retaliation to protect employees wanting to voice their concerns (Annual Report and Accounts 2005: Employees, 23). The board of director also frequently reviews the management of the group's social, environmental, and ethical risks. These have been incorporated into the company's general risk management programme. Every year, the group's performance is benchmarked against criteria set by the UK's Business in the Community (BiTC). To be as transparent as possible, BOC publishes its detailed submission to BiTC and the independent evaluation of its performance on its web site (Annual Report and Accounts 2005: Chairman's Statement, 4-5). The BiTC's corporate responsibility index evaluates companies' performance against a broad range of environmental, social and ethical measures (Annual Report and Accounts 2005: Social, Environmental and Ethical Performance, 27). Moreover, the performance of each director is assessed annually and independent external review of each director is performed biannually to ensure that the directors contribute positively. Works Cited Annual Report and Accounts 2005: Chairman's Statement. The BOC Group. 23 August 2006 [http://www.boc.com/investors/annual_and_quarterly_reports/2005/report/chairmans_statement.pdf] Annual Report and Accounts 2005: Employees.. The BOC Group. 24 August 2006 [http://www.boc.com/investors/annual_and_quarterly_reports/2005/report/employees.pdf] Annual Report and Accounts 2005: Group Profile. The BOC Group. 23 August 2006 [http://www.boc.com/investors/annual_and_quarterly_reports/2005/report/group_profile.pdf] Annual Report and Accounts 2005: Operating Review. The BOC Group. 24 August 2006 [http://www.boc.com/investors/annual_and_quarterly_reports/2005/report/operating_review.pdf] Annual Report and Accounts 2005: Research, Development and Information Technology. The BOC Group. 24 August 2006 [http://www.boc.com/investors/annual_and_quarterly_reports/2005/report/research_development_it.pdf] Annual Report and Accounts 2005: Risk Factors. The BOC Group. 24 August 2006 [http://www.boc.com/investors/annual_and_quarterly_reports/2005/report/risk_factors.pdf] Annual Report and Accounts 2005: Social, Environmental and Ethical Performance. The BOC Group. 24 August 2006 [http://www.boc.com/investors/annual_and_quarterly_reports/2005/report/social_environmental.pdf] BOC Interim Report 2006. The BOC Group. 23 August 2006 [http://www.boc.com/investors/annual_and_quarterly_reports/2006/interim_2006.pdf] Lines of Business. The BOC Group. 23 August 2006 [http://www.boc.com/investors/lines_of_business/index.asp] Merrill Lynch Chemicals Conference. 1 December 2005. The BOC Group. 23 August 2006 [http://www.boc.com/investors/financial_calendar/ml_conf_1-12-05.pdf] Read More