Environmental Factors Affecting Chemical Business Profitability - Essay Example

Imperial Chemical Industries Plc. (ICI) is one of the world's major specialty chemicals and paints businesses with products and ingredients developedand manufactured for a wide range of markets (Annual Report and Accounts 2005, 0; Investor Relations: Our Business, online). The four environmental factors that are particularly influential on profitability are the technological environment, the economic environment, the legal environment, and the political environment. Two factors in the technological environment are influential on profitability. First, equipment and system failures can disrupt operations and profitability (Annual Report and Accounts 2005,149). Second, ICI operates in competitive markets. If ICI is unable to compete effectively by developing innovative and protected technology that enables it to react effectively to its competitors, it could lose customers and its profitability could be influenced. The technology could either be innovative products that satisfy customer needs and wants or technology that offers cost competitiveness (Annual Report and Accounts 2005, 149; Science & Technology, online). A few factors in the economical environment are influential on profitability, especially since ICI operates worldwide in over 50 countries. They include domestic and international recession, tariffs and trade barriers, exchange controls, fluctuations in national currencies, foreign exchange exposure, and cyclical fluctuations of the industries and economies in which its businesses operate (Annual Report and Accounts 2005, 149-150; Investor Relations: Financial Performance: Risk Management, online). There are many factors in the legal environment that are particularly influential on profitability. They arise from worldwide operation, exposure to consumer markets, rules governing fair competition and corporate governance, and contractual obligations. ICI worldwide operation requires compliance with a range of foreign laws, regulations and standards that are expensive. Moreover, the difficulty of enforcing legal claims and agreements through some foreign legal systems will also affect profitability. Lastly, unforeseen changes in local laws, regulations, and standards in developing countries could affect ICI's profitability (Annual Report and Accounts 2005, 150). ICI's exposure to consumer markets exposes it to legal risks, regulation and potential liabilities from product liability claims asserted by consumers, which could have an adverse effect on profitability. A significant proportion of ICI's products is sold directly or indirectly to end-user consumers, even if ICI does not itself provide these products directly to consumers. Specifically, the laws and regulations to which ICI are exposed are environmental, health, and safety. Environmental, health, and safety laws and regulations include those concerning pollution, the health and safety of employees, protection of the public, protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. These regulations and standards are becoming increasingly stringent. ICI is also subject to inspections and monitoring by the relevant enforcement authorities. ICI also requires relevant permits and approvals for its operations that require compliance with their terms and which may be subject to renewal, modification and, in some circumstances, revocation. Violations of applicable laws, regulations and standards, could result in losses in the form of damages, fines or other sanctions, increased costs of compliance as well as reputational damage (Annual Report and Accounts 2005, 151). With regard to environmental laws and regulations, ICI is subject to soil and groundwater remediation, that in the future may require it to take action to correct effects on the environment of prior disposal or release of chemical substances. With regard to safety and health laws and regulations, The Glidden Company (Glidden), a wholly owned subsidiary of ICI is a defendant in a number of lawsuits in the United States. These lawsuits seek damages for alleged personal injury caused by lead pigment based paint or the costs of removing lead pigment based paint. An alleged predecessor of Glidden manufactured lead pigments until the 1950s and lead pigment based consumer paint until the 1960s. Glidden is currently a defendant in three active suits and is also named in one unserved case (Annual Report and Accounts 2005, 151; Sustainability Review 2005). Failure to comply with regulations governing fair competition is another factor in the legal environment that will affect profits. In July 2004, ICI received a request for information from the European Commission relating to alleged cartel activity in the European Methacrylates market. In ICI's case, the allegations concern a period starting in 1995 and ending when it sold its Acrylics business in 1999. During 2005, the Commission issued a statement of objections, alleging that ICI's former Acrylics business was involved in breaches of European competition law. During January and February 2006, a number of purported class action lawsuits were filed, currently in the US District Court for the Eastern District of Pennsylvania and the US District Court for the District of New Jersey, on behalf of purchasers of methyl methacrylate who claim to have suffered anti-trust injury as a result of alleged cartel activity (Annual Report and Accounts 2005, 151). Failure to comply with corporate governance requirements could also have an adverse effect on ICI's profitability (Annual Report and Accounts 2005, 151). There are also a number of contracts relating to businesses that ICI exited as part of its disposal programme which have not been novated to the purchasers of these businesses. The extent to which ICI will be required in the future to incur costs under any of the indemnifications, warranties, guarantees or contracts referred to above or any similar contractual provision which the Group entered into in connection with its disposal programme, is not predictable and, if the Group should incur such costs, the costs could have an adverse effect on results of operations, cash flow and financial condition. (Annual Report and Accounts 2005, 112, 150). Other contractual agreement that could impact ICI's profitability includes acting as a guarantor to Teesside Gas Transportation Ltd (TGT) jointly with Enron Europe Ltd (Enron), which has filed for bankruptcy. (Annual Report and Accounts 2005, 112). The factors in the political environment that can affect ICI's profitability are terrorist attacks (Annual Report and Accounts 2005, 150) and social and political risks arising from international operations (Annual Report and Accounts 2005, 150). ICI is committed to high standards of corporate governance. ICI adopted the principles contained in Section I of the Combined Code on Corporate Governance issued by the Financial Reporting Council in July 2003 (Combined Code) (Annual Report and Accounts 2005, 35). Currently, the Board comprises eleven Directors: the Chairman, the Chief Executive, four Executive Directors and five independent Non-Executive Directors (NEDs), including the Senior Independent Director. These individuals demonstrate a range of business, financial and global experience and expertise from a variety of commercial sectors and public life, which is vital to the successful direction of a multi-national company. The Board is balanced, both numerically and in experience, so that no individual or small group of individuals can dominate the Board's decision making. Clear responsibilities are also defined for each board member such that a counter-check and balance mechanism is achieved (Annual Report and Accounts 2005, 35; Investor Relations: Corporate Governance: Audit, online; Investor Relations: Corporate Governance: Nomination, online; Investor Relations: Corporate Governance: Remuneration, online). The Board has assessed the independence of the NEDs against the criteria set out in the Combined Code and the New York Stock Exchange corporate governance rules, save that in the case of the latter, the Board has not sought to enquire into the interests of Directors' family members other than their spouse. On this basis, the Board has concluded that all the NEDs and the Chairman are independent in character and judgement (Annual Report and Accounts 2005, 35). All Directors are subject to re-election by shareholders at least every three years. Subject to satisfactory performance, NEDs are normally expected to serve two three-year terms, commencing with the first Annual General Meeting after the date of their appointment and they have no entitlement to compensation (except in relation to fees and expenses due at the date of termination) if the appointment terminates prior to the end of the three-year term for any reason. There may be circumstances where NEDs are invited to remain on the Board after the expiry of their second three-year term for a further period of up to three years. Any such invitation will be subject to the Director in question standing for annual re-election by shareholders (Annual Report and Accounts 2005, 35). In accordance with ICI's Articles of Association, the Directors and Officers of the Company are all indemnified out of the assets of the Company to the extent permitted by law in respect of liabilities incurred as a result of their office. In addition to the general indemnity contained in the Articles, the Company has also put in place a specific deed of indemnity setting out in greater detail the terms and conditions of the Company's indemnity. The Company also purchases and maintains a directors' and officers' liability insurance policy. The Board believes that these arrangements are in the best interests of the Company, to enable it to attract and retain high quality Directors and Officers. Neither the Company's indemnities, nor insurance, provide cover in the event that a Director or Officer has acted fraudulently (Annual Report and Accounts 2005, 36). The principal Board Committees, which report to the Board, are the Nomination Committee, the Remuneration Committee and the Audit Committee. The Remuneration and Audit Committees meet at least quarterly and the Nomination Committee meets as and when required. The Nomination Committee is responsible for proposing new appointments of Directors to the Board and reviews succession plans and arrangements for the Board and EMT. The Remuneration Committee determines, on behalf of the Board, the Company's policy on the remuneration of the Chairman, Executive Directors and the most senior management of the Company. The Committee determines the total remuneration packages for these individuals, including any compensation on termination of office (Annual Report and Accounts 2005, 36). The Audit Committee helps the Board in the discharge of its responsibilities for corporate governance, financial reporting and corporate control. The Audit Committee also monitors the Group's whistle-blowing procedures, making sure that sound arrangements are in place for employees to be able to raise, in confidence, matters of possible impropriety, with suitable subsequent follow-up action (Annual Report and Accounts 2005, 37). The Audit Committee has established a policy which is intended to preserve the independence of KPMG Audit Plc, when acting as auditor of the Group Accounts. This policy governs the provision of audit and non-audit services by the auditor and its associates. It identifies certain non-audit services which the auditor is prohibited from providing. Certain defined categories of permitted service are approved by the Audit Committee on an annual basis and the Chairman of the Audit Committee may approve additional categories, subsequently ratifying these with the Audit Committee at its next meeting. Audit and non-audit engagements are also subject to formal authorisation procedures based on the level of fees involved, with major engagements requiring authorisation by the Committee (Annual Report and Accounts 2005, 37). In accordance with the Turnbull Guidance on internal control, the Board confirms that there is a process for identifying, evaluating and managing the significant risks to the achievement of the Group's strategic objectives (Annual Report and Accounts 2005, 37). Board effectiveness is achieved by training during induction and continuing development and formal evaluation of the board (Annual Report and Accounts 2005, 38). As a consequence of its US listing, the Company is required to comply with the provisions of the Sarbanes-Oxley Act 2002. The Company continues to monitor its legal and regulatory obligations arising from Sarbanes-Oxley (Annual Report and Accounts 2005, 38) In November 2003, the SEC approved new NYSE corporate governance rules for listed companies. Under these rules, as a NYSE listed foreign private issuer, ICI must disclose any significant ways in which its corporate governance practices differ from those required to be followed by US companies under NYSE listing standards. ICI has also addressed these differences in its annual report (Annual Report and Accounts 2005, 38-39; Investor Relations: Corporate Governance, online). ICI also upholds high ethical standards, evident in its Code of Conduct (the Code). A confidential, independently operated, whistle-blowing service is also provided to encourage staff to report any suspected non-compliance (Annual Report and Accounts 2005, 39). Communications with shareholders are given top priority. Periodical financial reports are available to the shareholders conveniently. Shareholders have the opportunity to receive documents such as the Notice of Meeting, form of proxy, the Annual Report and Annual Review in electronic form via the Internet rather than in paper form through the post. Shareholders may also appoint proxies electronically. The key office bearers also make it a point to meet major investors personally when appropriate (Annual Report and Accounts 2005, 39; Investor Relations: Information Request, online). In addition, the Board commissions an independent survey of investor views covering both the UK and US on a biennially that provides valuable feedback from investors. Lastly, individual shareholders have the chance to question the board either at the Annual General Meeting or by leaving written questions for response at the company (Annual Report and Accounts 2005, 40). Works Cited Annual Report and Accounts 2005. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ici-ir/download/Financial_Reports/2005_annual_report.pdf] Investor Relations: Corporate Governance. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-ir/corporate/differences.htm] Investor Relations: Corporate Governance: Audit. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-ir/corporate/audit_committee.htm] Investor Relations: Financial Performance: Risk Management. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-ir/financial/risk.htm] Investor Relations: Corporate Governance: Nomination. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-ir/corporate/nomination_committee.htm] Investor Relations: Our Business. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-ir/business/business.htm] Investor Relations: Corporate Governance: Remuneration. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-ir/corporate/remuneration_committee.htm] Investor Relations: Information Request. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-ir/InfoRequest.jsp] Science & Technology. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-technology/index.htm] Sustainability Review.. Imperial Chemical Industries Plc. 28 August 2006 [http://www.ici.com/ICIPLC/ici-she/2005/pdf/ICI_sustainability_review_2005.pdf] Read More