Bp Plc and Corporate Social Responsibility - Case Study Example

Bp Plc and Corporate Social Responsibility Introduction The oil industry has been blamed for numerous evils in the global society, not only because of the inflation and recession that high oil prices bring about, but also for their wholesale impact on the environment and the global warming phenomenon. BP plc, formerly British Petroleum and BP Amoco, one of the world's biggest companies, has attempted to assume a leadership role in promoting the society and the environment through its commitments under its corporate social responsibility as a simultaneous strategy to advance its long-term financial objectives. This paper attempts to analyse the a company's stance on issues such as worker safety and the protection of the environment and its effect on stakeholder perception and decision making, particularly among investors. The contents of BP's social and environmental report The social and environmental reporting of BP plc outlines and discusses the accomplishments of the firm in the areas of social and environmental improvement in the countries and communities served. It also contains the aims that it sets to achieve in the future. While operational excellence generates financial returns, the company believes that long-term enduring growth depends on its being a responsible global citizen that continually gains the support of all stakeholders. Thus social and environmental responsibility is linked up with responsibility in the operational and financial areas and deserving of the same amount of dedication. ] Specific areas where attention of he company is focused are the improved safety of all workers and contractors, regarding which in 2002 the company was proud to have made real progress. In addition, it had decided to end all political contributions in countries where it operates. Facilitation payments, otherwise allowed by some countries such as the United States, countries where multinationals have their headquarters, have been stopped. Finally, the firm had set new and higher targets on greenhouse gas emissions. In other to achieve the above aims, the Annual Report of BP plc emphasizes the need to manage the social and environmental impact of its operations worldwide – in the established oil fields in the North Sea and Alaska as well as in new areas in China, Russia, Indonesia, and others. It also lays emphasis on what the company stands for as articulated through its policies and commitments with regard to health and safety, the environment and ethical conduct. Issue: Whether companies should publish such reports. There is no law or regulation that requires any company or all companies to publish their social and environmental reports, as appropriately in free countries this matter is left to the discretion of the firms concerned. It is obvious, however, that some companies publish them as part of their Annual Reports, in advertisements, and through press releases seeking to gain favor with public opinion. The oil industry in particular does not have much leeway in terms of product differentiation in order to gain customers and improve market share, but they can improve sales through the fostering of a good public image. Publishing or reporting information about their corporate social responsibility is an effective way to achieve this. Publicising its social and environmental policies and programs can yield some benefits. We believe that it can improve or protect a company's institutional and brand image. The published reports should be characterized by clarity and sincerity and should communicate an earnest intent of the company and its officials to be judged on the basis of consistent and consonant behaviour. In its relations with all stakeholders, the firm's credibility and prestige can be reinforced, as a consequence of which it can probably increase its access to capital, earn the high regard of investors, and gain better cooperation and support other stakeholders. Furthermore, with the increased integration and consistency of its CSR strategies, the firm or its spokespersons can better deal with pertinent queries or issues that are raised. Internally, it can improves commitment by and communication among all levels of the organization. The disadvantage of public reporting regarding a firm's social and environmental responsibility is that it will have to mobilise its resources -- and allocate a substantial amount of its budget -- to ensure that it is able to comply with its publicly known pronouncements. Failure to back up its words with consistent behaviour can have a double whiplash that will require considerable efforts towards damage control affecting its credibility and reputation. BP's CSR record: Facts and data. The oil industry is beset by two major issues: damage inflicted by the oil firms' operations on the ecosystem and global warming. Since the Exxon Valdez oil spill, there have been numerous accidental spillage of oil or chemicals in many parts of the world, most of which were of minor significance. In 1997 was headlined the Southern California oil spill that soiled several miles of beaches and killed birds. The following year, in Nigeria, over a million gallons of oil were released from a pipeline. Also, in that same year, an Amoco-owned pipeline in the Gulf of Mexico created an oil slick over several hundred square miles with serious consequences on the ecosystem. The oil industry is also a big contributor to global warming through its production process. While at the outset the members of the industry were divided on the issue of whether their activities caused global warming, BP , in 1997, was the first to agree that there was a cause-and-effect relationship and resolved to take action. Although in the past many years, BP prided itself of its corporate social responsibility, the renewed focus in 1997 through its departure from the views of the Global Coalition on Climate Change indicated a new resolve. Its branching out into the manufacture and sale of solar energy proved that the company wanted to mitigate its contribution to the to global warming through efforts to solve the problem. We go forward to roughly a decade later. It came as a surprise that in 2007, reports were released about the fact that money and profits were more valued than worker and environmental safety, a fact that may have accounted for the 2005 explosion of an oil refinery in Texas City, where some 15 people were killed. Serious safety lapses also occurred earlier causing the pipeline leaks in Alaska. A lot of the goodwill that the company had built up during the past decade or so had apparently vanished. Despite the setbacks, BP continues in its role as advocate of reducing greenhouse gas (GHG) emissions and in its investment in alternative energy, investment that is considered to be the highest of the major integrated oil and gas companies. It also leads the industry in espousing human rights, a commitment that is difficult to carry out and protect as it requires continuous vigilance and responsiveness. According to the Dow Jones Sustainability Index BP in January this year is ranked second only to HSBC Holdings in terms of long-term economic, environmental and social criteria among the largest socially responsible companies in the world.. There is no empirical research we have been able to access about investor attitudes towards the oil industry and BP''s actions about corporate social responsibility, particularly with regard to social and environmental impacts of their operations. It is important to note, however, that most individuals, and a cross section of investors, would feel good about the companies they are investing in if they promote the social good, safeguard and defend the ecology, and cooperate with the efforts to control global warming, among other areas of concern. Investors know that if their investee company is doing well in these areas, the regulators would not impose fines (which affect earnings) and would ensure that it will continue play a constructive role in society as a global corporate citizen. Financial Analysis of BP plc Data from the Annual Reports of the company were obtained. The income statements, balance sheaets, and cashs flow statements for the years 2008 and 2009 were analyzed in terms of ratios in order to discover companies using the measures of profitability, liquidity, solvency, cash flow adequacy, and market strength. (The Internet data providers have failed to provide updates of BP's financial statements in their pages.). Because of a reduction in the level of current liabilities in 2009, the current ratio improved to 1.14:1, as against 0.95:1 in the previous year. BP has improved its liquidity with more than $10 billion in net working capital. Both receivables turnover and inventory turnover have declined slightly, denoting slackened control over these assets while net income fell. Net income dropped nearly $5 billion as the turnover ratios slipped, indicating less efficiency in asset management. The return on equity decreased from 24 percent in 2008 to 16 percent in 2009. The long-term solvency measures show reduced gearing as the debt/equity ratio slid from 1.48:1 to 1.33:1 over the one year period, due to the increase in equity coupled with a decrease in debt. Long-term debt as a component of total capitalisation, however, remained constant at 42 percent. Cash flow adequacy and other cash flow measures show declines. In fact, by the end of 2009, the company had a deficit in cash flow after deducting dividends and net capital investments of nearly $1 billion, in contrast to a free cash flow level of nearly $5 billion in 2008. It is expected that this is a transitory situation that management can overcome as the world economy improves. Despite a drop in earnings per share, the market price of the stock continued to rise, indicating that investors believed that the company had good future prospects. Dividends were being paid on regular basis, and in 2009, the dividend payout rose because dividend per share was maintained at roughly the same level as the year before despite a drop in earnings. The very high P/E ratio should prompt investor caution about investing in BP now. This is so because in the recent month or so the market price went up despite the earnings drop of 2009 The following table shows the computations of the financial ratios. BP PLC TABLES OF FINANCIAL RATIOS A. Measures of liquidity Liquidity ratio Formula Computation 2009 Ratio / Coverage, 2009 Computation 2008 Ratio/ Coverage 2008 Current ratio Current assets/ Current liabilities 67,653 / 59,320 1.14: 1 66,384 / 69,793 0.95: 1 Quick ratio (Cash +Marketable securities +Receivables)/ Current liabilities 45048 / 59,320 0.76 :1 49563 /69,793 0.71: 1 Receivables turnover Net sales/ Ave. Accounts receivable 239,272/ 29,531 8.1 times 361,143 / 29,261 12.4 times Ave. days' sales uncollected Days in year/ Receivable turnover Days in year / 8.1 45 days Days in year / 12.4 29 days Inventory turnover Cost of goods sold/ Ave. inventory 219713 /22,605 9.7 times 331814 / 16,821 12.3 times Ave. days' inventory on hand Days in year/ Inventory turnover Days in year / 9.7 38 days Days in year / 12.3/ 29.7 days B. Measures of profitability Profitability ratio Formula Computation 2009 Ratio / Coverage, 2009 Computation 2008 Ratio/ Coverage 2008 Profit margin Net income/ Net sales 16,759 /239,272 0.07 21,666 /361,143 0.06 Asset turnover Net sales/ Ave. total assets 239,272 / 235,968 1.008 times 361,143 /228,238 1.58 times Return on assets Net income/ Ave. total assets 16,759 / 235,968 0.07 21,666 /228,238 0.1 Return on equity Net income/ Ave. shareholders' equity 16,759 /102,113 0.16 21,666 / 92,109 0.24 C. Measures of long-term solvency Long-term solvency ratio Formula Computation 2009 Ratio / Coverage, 2009 Computation 2008 Ratio/ Coverage 2008 Debt to equity ratio Total liabilities/ Shareholders' equity 133,855 /102,113 1.33 : 1 136,129 / 92,109 1.48 : 1 Interest coverage ratio (Income before income taxes +interest expense)/ interest expense 26,426 +1,110 //1,110 24.8 times 35,239 +1,547 // 1,547 23.8 times Long-term debt / Capitalisation ratio Long-term debt / (Long-term debt + shareholders' equity) 74,535 /(74,535 + 102,113) = 176648 0.42 : 1 66,336 / (66,336+ 92,109) = 158445 0,42 : 1 D. Measures of cash flow adequacy Capital adequacy ratio Formula Computation 2009 Ratio/ Coverage 2009 Computation 2008 Ratio 2008 Cash flow yield Net cash flow from operating activities/ Net income 27,716 / 16,759 1.65 : 1 38,095 / 21,666 1.75 : 1 Cash flows to Sales Net cash flows from operating activities/ Net sales 27,716 / 239,272 0.12 38,095 / 361,143 0.11 Cash flows to Assets Net cash flows from operating activities/ Ave. total assets 27,716 /235,968 0.12 38,095 / 228,238 0.17 Free cash flow Net cash flows from operating activities -dividends -net capital expenditures 27,716 -(10,483)-(18,133)= 28616 -900 38,095 – (10,342)- (22,767) = 33109 4986 E. Measures of market strength Market strength ratio Formula Computation 2009 Ratio 2009 Computation 2008 Ratio 2008 Price- earnings ratio Market price per share/ Earnings per share 55/.87.54 39/1.11.56 Dividend yield Dividend per share/ Market price per share (10,899) Dividend 0.57/ 55 (10,767) Dividend 0.55/39 Dividend payout Dividend per share/ Earnings per share 0.569 /87.54 0.554 /111.56 No. of shares is derived as follows. Divide net income by earnings per share. Divide dividends paid by the result. Net income 16,759,000,000 21,666,000,000 EPS cents 87.54 111.56 No. of shares 19,144,391,135 19,420,939,405 Dividend/share 0.569 0.554 Source of data: 55 39 http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Report_and_Accounts_2009_Financial_Statements.pdf Bibliography Baron, DP 2003, Business and Its Environment. Upper Saddle River, NJ: Prentice Hall http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Report_and_Accounts_2009_Financial_Statements.pdf Read More