Chocolate Is Bittersweet: How Sustainability Practices Affect Shareholder Value

Chocolate Is Bittersweet: How Sustainability Practices Affect Shareholder Value
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An excerpt from my chapter (32) in The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Boards, edited by Dr. Richard LeBlanc, and published by Wiley, 2016.

Natural disasters due to climate change, violence and terrorism in volatile regions, increasing scarcity of food and water, wealth inequality and poverty, and the spread of deadly disease are expected to continue to threaten lives, property, and prosperity in the twenty-first century. Only multinational corporations have the vast resources, global footprint, and incentives of the marketplace to solve these and the world’s other greatest social, environmental, and economic challenges. Importantly, the responsibility to ensure that companies and their management pursue opportunities to mitigate global risks and find solutions through innovation lies squarely with boards of directors.

Chocolate candies evoke mouthwatering scents and tastes, and the joys of holidays, childhood, and romance. Global Cocoa is also a $90 billion a year industry (Earth Security 2015), dominated by three cocoa trading and processing companies and five chocolate manufacturers (Terazano 2014). The industry forecasts 30 percent growth in demand, from 3.5 million tons of cocoa annually to more than 4.5 million in 2020. This should be great news for the chocolate business. Unfortunately, however, production has plateaued, leading to a short- fall by 2020 (Earth Security 2015).

The cocoa industry has itself to blame for the threat to its sustainability and profitability. Long-term corporate disregard for climate change, obsolete farming practices, and the human rights of millions of smallholder farmers, threatens future crops, production, profits, and reputation. Farmers are abandoning their aging cocoa trees—never having received fair trade prices for cocoa from these trees—for more lucrative crops such as palm oil and rubber. Additionally, children have been used as slave labor in harvesting cocoa for decades. Reports by the International Labor Rights Forum (ILRF) indicate that as many as 1.5 million “trafficked children are often abused by landowners and are rarely paid” to harvest cocoa beans (Nicholson 2014).

This old way of business ultimately yielded bad results for the chocolate industry. It relied on an unsustainable supply chain and egregious human rights violations that consumers, employees, and investors condemned. Failings of the old way could affect sales and share value. With strong profit incentives, the chocolate industry is only recently making meaningful changes, through partnerships with NGOs such as the Rainforest Alliance, Fairtrade International, and UTZ Certified. Chocolate manufacturers have established new programs to build schools, certify beans, and train farmers to improve farm productivity through sustainable farming, although according to the ILRF it will take more to “target poverty, the root cause of child labor” (Nicholson 2014).

In 1998, a new fair-trade company, Divine Chocolate Limited, pioneered an innovation that benefits the farmers, their communities, and the industry. The company is co-owned by a cooperative of 85,000 smallholder farmers who grow the cocoa beans. The farmers hold 45 percent equity in the global company, sit on the company’s board, and sign off on business plans. According to a report by The Earth Security Group, “Divine Chocolate has shown that the increased integration of a farmer organization into the business value creation process can play a significant role in driving change. However, in order to reach the needed scale, similar innovations must be replicated by the larger players in the industry” (Earth Security 2015).

For chocolate companies, addressing labor and human rights, fair trade, and environmental sustainability is not just about doing the right thing. It is essential to grow shareholder value.

Increasingly, investors recognize the link between such social responsibility and profits, whether it’s cocoa beans, soap, tea, chemicals, pharmaceuticals, extractives, or financial services. Some boards—and the CEOs they hire—realize that to build shareholder value, corporate responsibility must be integral to mission and strategy.

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