Prevent Business Takeovers that Cost Society Billions through a Societal Cost Benefit Assessment

Copyright AkzoNobel 2017

The Dutch perceive that the ‘barbarians’ are standing at the gates: their Crown Jewels Unilever and AkzoNobel, frontrunners in global sustainability, are at risk of being taken over by foreign multinationals. The Minister of Economic Affairs Henk Kamp, came up with an answer for the Dutch government: a mandatory respite for the target in case of an attempt at a hostile acquisition. This can be helpful where it stimulates careful decision making. However, it does not solve the core problem: a takeover can be attractive to a group of shareholders and yet damaging for society as a whole. Hence, what is (also) needed is a societal takeover test.

The proposed respite does not protect against patient buyers waiting their chances, short term oriented shareholders of the target or business executives who are themselves happy to sell their company.

Mega takeovers can have huge societal costs as a result of amongst others rising prices, job losses and a loss of sustainable production. The problem is that shareholders who now often have the final say but do not bear these costs; it is society that bears this burden. If the idea of the free market is to deliver welfare to society, then it must be corrected if it fails in doing so. In a well-functioning economy, there is no place for takeovers that at the end of the day result in a damaged society. This principle is already recognized in the competition law that protects consumers and it is time to widen the scope to all stakeholders. Time is here of the essence, now that we face on top of everything, the looming consequences of climate change.

The solution to the problem of potentially harmful takeovers, is the introduction of a mandatory societal test: takeovers should only take place if they do not create harm to society. Whilst in the past it was a challenge to obtain a reliable test, we now have the tools and means to conduct a Societal Cost Benefit Analysis (SCBA) of a takeover. In this approach, all the effects of a takeover for stakeholders are assessed and, wherever possible, expressed in euros, to be validated by stakeholders. Such an analysis enables us to trade off the advantages and disadvantages as objectively as technically possible. This test can take place under the supervision of the Enterprise Division of the competent court (Ondernemingskamer in the Netherlands) or an independent acquisition commission as a societal equivalent to the British take-over panel.

For the case of AkzoNobel-PPG, we produced a first estimate of the costs and benefits of the takeover for shareholders, employees, consumers and the climate. The effects for shareholders are highly uncertain, but overall large take-overs do not work out well for this group. Employees and consumers can experience severe deceptions: job losses and price increases.

The environment can potentially suffer considerable damage as well. AkzoNobel is known to give special consideration to sustainability. If AkzoNobel’s performance on sustainability should fall to the level of PPG, the societal costs of CO2 emissions – amongst which flooding, food scarcity and deceases due to climate change – could increase in monetary terms up to 7 billion euros.

The four effects together are expected to cost society 6 billion euros. This preliminary analysis contains substantial uncertainty: these four effects could cost society as much as 30 billion euro and could even be slightly positive (5 billion euro in the most optimistic scenario). The total effect of the takeover could be much greater as we left out many issues such as pollution, resource use and the net fiscal consequences.

 AkzoNobel infographic English

In the case of AkzoNobel and PPG, a mandatory societal test may come too late given the through-put time of new legislation. However, the investors and business executives involved currently in the potential takeover all have the responsibility to consider the societal costs and benefits. The board of AkzoNobel should not agree to a possible takeover if the societal costs are large or unknown. Furthermore, the Dutch Enterprise division of the court could possibly stimulate for the SCBA to become part of the conversation.

As a community, we should no longer accept billions of losses, to serve only a few financial players. Society should have the final say, and a societal test for takeovers is long overdue.

Dr. Adrian de Groot Ruiz is Executive Director of True Price and Prof. dr. Dirk Schoenmaker is Professor Finance at the Rotterdam School of Management and Senior Fellow at Bruegel.

The original article was published in de Volkskrant (In Dutch) on May 24 (page 24).

Valuing the hidden costs of production in the palm oil sector

PalmOil_banner

A recently published report on palm oil demonstrates how natural and human capital accounting can be used to understand and reduce the environmental and human impact costs of palm oil production. Palm oil is the world’s most popular vegetable oil, widely used in the food, personal care, chemicals and energy sectors. Over 56 million tonnes of palm oil was consumed in 2013 and this is expected to double by 2050. Its popularity is due to palm oil’s high productivity, low market price, and versatility compared to other vegetable oils.
However, the rapid growth of palm oil production in some countries is having serious environmental and social impact costs due to carbon dioxide emissions and air pollution from using fire to clear rainforest and peatland for new plantations, water pollution and harm to health from applying fertilizers and pesticides to crops, methane released from palm oil mill effluent processing facilities, land property rights violations during land expansion and substandard wages and working conditions.
The report was commissioned by TEEB as part of a series of studies for its agriculture and food (TEEBAgriFood) project. True Price and Trucost worked together with TEEB on this report to improve business decision making. Read the full report here.

Alliander’s Integrated Impact

Belangrijkste impacts van Alliander2

True Price has mapped the impact of all activities of Alliander, the largest energy network supplier of the Netherlands. We looked at impacts on six capitals: financial, produced, intellectual, environmental, social and human capital. For this, we used our Integrated Profit and Loss tool and worked together with Ecofys.

Alliander has set itself high ambitions with respect insight into their impacts, both positive and negative. In 2016, Alliander and True Price, together with Ecofys, started with the quantification and monetization of Allianders impacts, such as the impact of CO2 emissions or the employment of people with a distance to the labor market.

The calculations of the impacts have been published in Allianders annual report and a seperate impact report. Please read the annual report (in Dutch) here and the impact analysis (in Dutch) here.

The road to a true price

Nederland Voedselland

Read this interesting blog ‘the road to a true price’ by Reinier de Adelhart Toorop and Eise van Maanen from True Price (in Dutch): http://nederlandvoedselland.nl/artikel/op-weg-naar-de-echte-prijs

The content, in short: As far as sustainability policy goes; what is counted, counts. For example: meat tax, flight tax, payment for the use instead of ownership of a car. To be able to achieve this, calculations are necessary. The ‘true price’ can help with this; what would the true price be if all natural and social externalities were taken into account.