Commentary by Tobias Webb

Responsible business reporting has made great strides over the seven year period I have been reading non-financial documents produced by large companies. Sectors deemed by many to be controversial, such as defence, alcohol and gambling continue to face, and report on, complex and difficult issues with varying degrees of transparency and consistency.

The tobacco sector is no exception. Indeed, given the nature of the product and the risks inherent in consumption of tobacco, non-financial reports by the industry are of particular interest to those engaged in notions of the meaning of responsible business. Such reports can raise important societal questions which in many cases remain to date largely unanswered.

For example, how does a company in the tobacco sector approach transparency about its business growth strategy? In detail, how does a company such as Imperial reconcile corporate sales goals with a public commitment to be focusing marketing efforts on having customers switch brands, rather than persuading non smokers to begin smoking?

This is a difficult question considering the product remains legal across the globe, and tobacco marketing efforts are in some nations closely scrutinised by regulators. The answer to this is not clear. But alongside the debate about whether tobacco companies should be permitted by regulators to focus major efforts on reduced harm tobacco products, it remains the most salient issue that the industry will likely need to address in coming years. This is not to say other issues, such as child labour, chemicals use, climate change, corporate governance and human capital are not important.

Imperial’s five strategic areas of focus: carbon management, portfolio balance, supplier standards, local accountability and policy evidence are all appropriate and admirable. However, the question of responsible growth, and what this might mean, is not addressed in this 2008 report. The acquisition of Altadis, particularly viewed considering the consolidation occurring in the global industry in recent years, represents an important opportunity for Imperial Tobacco to reflect, and report on, responsible growth plans. In short, next year’s report should consider in much more detail the notion of responsible growth in the industry beyond acquisition strategy.

In reviewing this latest corporate responsibility report I have looked at past reports and past reviews for guidance, and focus some comments on Imperial’s progress regarding these. But the main points of this commentary are focused on what is in – or not in – the 2008 report.

While the 2008 report represents a considerable step forward for Imperial on past years – the company has made excellent progress in certain areas. But there are weak points. These must be addressed in future if Imperial is to be said to be consistently improving its corporate responsibility performance.

First though the good news. Imperial is rightly proud of the improvements the company has made in key areas of operating a responsible company. The key numbers here are in the areas of health and safety, energy consumption and CO₂ emissions, all important areas for any organisation to focus on. The fact that “lost time” across the company due to accidents is down by 20% for 2007 is an impressive achievement. In any organisation, some accidents are regrettably inevitable and unpreventable, and to show such an improvement in just a year is commendable.

Secondly, Imperial has reduced energy consumption by 18% during 2007. From both a shareholder and environmental perspective, this is an important efficiency. Linked to this, a third area the company has done well in is with regard to carbon emissions. In 2007, CO₂ emissions were down by 26%. This is again impressive, and it will be of great interest to readers of 2008’s figures in this area to see how, if possible, such a rate of progress has been maintained.

In considering how this reporting might be improved for 2009, the following areas appear to need addressing to improve Imperial Tobacco’s corporate responsibility reporting:

Lack of discussion about corporate governance

How is the board informed on progress, and how does it set strategy? There is a lack of information in the report about this. This is a common error by companies in corporate responsibility reports. Yet corporate governance is really far more important than what passes for CSR in many companies, since it directly impacts strategy. Much more detail on how board members are informed, and set strategy on CR should be included in future reports.

The integration of Altadis into Imperial

There is a lack of discussion about the challenges to be faced in this major acquisition. The language used in the report is rather vague and woolly and it is hard to know what is meant by some of the text of the report. This may be due to the acquisition being relatively recent. However, if this is the case, it should have been explained, and more detail should have been offered on how the integration is likely to affect CR areas from human capital to anti-corruption monitoring and enforcement, an area not well covered in the report.

Stakeholder engagement

Past reviews of Imperial’s CR reporting have consistently noted that stakeholder engagement appears weak. In the 2008 report some improvements have been made. For example, there is good detail on Imperial’s approach to dealing with governments, but with regard to other stakeholders there is a lack of information about how stakeholders were “mapped”, engaged and how their views impacted on strategy and tactics.

Child labour and development

The case studies in this report are useful, add colour and give a sense of how a company such as Imperial can be a force for good in communities. However, a lack of real detail in this area concerning the challenges of sourcing from and operating in, developing nations needs improvement. What are the big issues the company faces from governments in poorer nations, and what is it doing about them? The report could be much stronger in this area.

Suppliers and the supply chain

Some important areas here are not explained, such as why not all factories, given the limited number, could not be audited. The report says that some countries where suppliers are based could not be visited, due to high security risks. But product is apparently shipped from these unspecified countries. Yet, according to the report, they are too risky to be visited by consultants. This does not make much sense and should have been explained in much more detail. In general, the fact that only 70% of suppliers have been “visited” (does this mean audited against a corporate code of conduct?) is odd, given the limited scope of Imperial’s supply chain. The reasons why this is the case should be explained in the report.

With regard to child labour in the tobacco supply chain, the report is unclear as to the extent of the problem. The reader should be given much more context concerning the nature of the problem and detail on what exactly Imperial and its NGO partners are doing to tackle this issue systematically. How big a problem is it? Do suppliers see it that way? How are children used, and what has the industry done over the last decade to tackle this? This information is missing. Without this context, it is very hard for the reader to understand what progress should look like. There should be a discussion about the roles and limitations of what tobacco companies can do on this issue.

Talking to and auditing suppliers is important. But there is no information in the report about what plans, ideas and notions of supply chain capacity building are underway. For example, it is well known that in many cases suppliers would like to improve, but they, and local NGOs and government agencies, lack the capacity to develop sustainable improvements. Companies such as Imperial have the financial clout to help fund NGO and supplier capacity building programmes on issues such as child labour. But the report does not contain any discussion of this.

The supply chain farmer case studies are interesting, add useful colour to the report and show what could also be done on helping suppliers meet overall code of conduct and policy implementation requirements. Arguably, helping medium-sized supplier companies become better managed businesses will do more for social and economic protection in poorer nations than single micro finance projects, valuable though these are.

Finally, in the area of supply chain, the report says that “It remains difficult for our African factories to dispose of hazardous waste safely, as reliable disposal services are absent in many African countries. We currently hold this waste in secure storage, using suitable controls such as secondary containment, restricted access and appropriate ventilation.” Yet there is no information concerning what then happens to such dangerous waste. This is a weakness in the report and should be explained in detail.

There are other areas of this report that could also have additions made next year. For example, the report notes that some redundancies as a result of the Altadis integration will be required. Next year the report should provide a link or further information on how its packages and retraining offers to employees are structured, and how they compared with comparably sized companies or “best practice” in responsible retrenchment. This may be because negotiations are ongoing with works councils and more information should be given in the next report.

In conclusion, this report does represent some good corporate responsibility progress for Imperial Tobacco. There is clearly a structure in place within the company for data gathering and a focused CR and policy team. The report does contain some excellent areas where improvements have been made. Notably these are around health and safety and the environment. Imperial should be proud of its achievements in these areas. Nevertheless, more information on the areas of weakness highlighted above, and in particular some discussion about corporate governance structure, and in particular corporate growth strategy and its consequences for marketing tobacco products should be included in future reports. It is important for a tobacco company to face tough questions head on. The coming years of CR reporting represent a significant opportunity for Imperial to do this.

Tobias Webb

Tobias Webb is co-director of the Ethical Corporation Institute (ECI). He is the founder of Ethical Corporation, a media company based in London which publishes a magazine of the same name, hosts business conferences and produces reports on business ethics issues. Tobias also founded ClimateChangeCorp.com in 2007, an online magazine on business and climate change. He lectures on corporate social responsibility at Birkbeck College, University of London, from where he graduated with an MSc in Corporate Governance and Ethics. He also recently co-chaired the UK Conservative Party’s working group on responsible business. The final report of the group was published in March 2008 and has been adopted as Conservative Party policy on responsible business. Note that the Ethical Corporation Institute was paid by Imperial Tobacco for this commentary.