BOARDROOMS AND ESG RISK – A CASE STUDY

ESG is a hot topic for investors and boardrooms in 2021. However, if you listen to the mainstream narrative around ESG investing it would be easy to forget what the last two letters stand for. Discussion of ESG is almost always centred around companies’ environmental impact and rarely features other relevant issues such as human rights, modern slavery or bribery.

To demonstrate the value of online, open source investigations in ESG due diligence, we examined the “SG” footprint of one of the largest suppliers to the world’s most iconic footwear brands.

An ESG nightmare beneath the surface of a major manufacturer

Our investigation begins at the Yue Yuen shoe factory in Dongguan, a manufacturing hub in Guandong province, China in April 2014. The company was in the midst of a major strike by workers demanding better pay, social insurance and housing fund contributions, which attracted the attention of global news outlets.

Yue Yuen is the manufacturing arm of Taiwanese Pou Chen Corporation. Pou Chen describes itself as the world’s largest footwear maker, supplying some of the largest names in the industry and employing thousands in factories across South East Asia.

Our analysis revealed that even prior to the 2014 strike, Pou Chen had a poor track record in the treatment of its workers. A 2012 Financial Times article details how Pou Chen denied legally-required overtime compensation to roughly 4,500 workers for many years at one of its Indonesian facilities. The article also refers to allegations of abuse at another Indonesian facility, first described in a Jakarta Post article in 2011. Despite this original article being taken down, we were able to access a screenshot saved on the internet archive.

After the widely publicised 2014 strike, it would be reasonable to assume that human rights would be Pou Chen’s top priority. Apparently not – the Corporate Human Rights Bench Mark (CHRB) published Yue Yuen’s 2019 scoresheet online, in which the company scored just 17.4 points out of 100.

By conducting online searches in Chinese and Vietnamese, we established that there had been further strikes and protests at the company’s Vietnamese facility in 2018 which were documented in news and on social media (below). Most recently, Vietnamese news outlets confirmed that production was suspended for two days at a Yue Yuen factory in April 2020 for failing to enforce social distancing measures.

Digging Deeper – We uncover tax evasion

Pou Chen’s current Chairman of the Administration Management Department and Executive Director of Yue Yuen, Lu-Min Chan, appears on the offshore leaks database three times. One of these leaks was in the Panama Papers, in which he is linked to an entity called “Symphony Holdings Limited”. This suggests Chan may have used Symphony Holdings as a shell corporation to help him evade taxes and sanctions. Additional Yue Yuen senior executives  also appear on the database.

Continued investigation revealed further historic corporate governance scandals at Yue Yuen. Significantly, in early 2017 Pou Sheng International Ltd, a subsidiary of Yue Yuen, fired its then-CFO for publishing false sales data. Not only did the scandal lead to the resignation of the company’s CEO – it also led to Pou Sheng shares plunging more in a day than they had done since 2008, tumbling almost 37%.

Assessing a company’s social and corporate governance policy requires more than the standard “box-ticking” exercise of the current ESG Ratings system. Unlike environmental impact, social and corporate governance ratings cannot rely on quantitative data and rather require a holistic approach that incorporates boardroom intelligence.