July 4, 2013

New allegations of human rights abuses, high leverage, dangers of outsourcing – risks ahoy!

Mondelēz continues to pile on risk. The company obstinately refuses to respond to the IUF and its members around the world regarding allegations of serious human rights violations in North Africa, most recently reported on by Agence France Presse when the IUF organized an international press conference in Geneva. The story was widely diffused in electronic and social media in North Africa and the Middle East. Improvised “spin” substitutes for human rights due diligence and corrective action.

Since then there have been new and disturbing reports of abusive practices.

A worker at the Mondelēz Tang factory in Pakistan was recently killed while waiting to return home after working two consecutive 12-hour shifts. Muhammad Zohaib, 19 years old, suffered fatal injuries while preparing to go home on June 5. Near collapse from exhaustion, he was crushed outside the factory gate when the van used to transport workers to and from the factory suddenly reversed. Muhammad Zohaib was a contract worker - there are no permanent production workers at this factory producing one of the Mondelēz billion-dollar 'power brands'. Tang is made there by 150 precarious workers employed through the labour agency HRS Global and supervised by Mondelēz 'management officers'.

The factory operates 24/7 with two 12 hour shifts. Workers are often required to work a second shift, i.e. 24 hours, with minimal breaks. It was after such a double shift that Zohaib was struck by the van and died of his injuries.

Since Zohaib was employed continuously for 4 months he was legally entitled to automatic registration for government medical/accident/death benefits schemes. But he had no medical insurance at the time of the accident because he had not been enrolled in these mandatory schemes. For this reason he was denied medical treatment at the first medical center to which he was brought after the accident. He died from his injuries when he was eventually transported to a hospital.

Mondelēz has not only outsourced employment, production and quality control – the factors which led to the Belvita biscuit recall in North America last year – it has outsourced responsibility for ensuring the most basic human rights of those who produce its branded products.

These practices are certainly not winning Mondelēz any goodwill in politically volatile parts of the world like Egypt, Tunisia and Pakistan. The company can now add Lebanon to this growing list of countries in which reputational risk is linked to human rights risk.

On May 17, Mondelez announced they were closing a 50-year old profitable chewing gum factory in Beirut, putting over 100 workers out of work. After deceiving the workers’ union for six months about the future of the plant, one month’s notice of closure was provided and the announcement was made in the presence of armed civilian guards. Production is to move to Egypt, where the company smashed the union last year by firing 5 union leaders in Alexandria.

The union has since learned that the company had leased new commercial premises for its sales office (all that will be left in Lebanon) six months earlier, adding to the popular anger. The deceitful and brutal closure – carried out in violation of international standards – has been widely covered in the Lebanese media.

Financial Times investigation of Cadbury risks closer scrutiny of Mondelēz
Mondelēz has not made many friends in the UK, where the then-Kraft CEO Irene Rosenfeld twice snubbed requests from MPs to answer questions about the Cadbury takeover. The bitter taste of the company’s arrogance remains. Following high-profile lashings of companies like Starbuck’s and Amazon, Mondelēz may be the next target for public anger in the UK at vanishing corporate taxes.

The UK Financial Times on June 21 reported on the results of an extensive investigation into the use of complex tax avoidance schemes by Cadbury prior to its 2010 takeover by the then Kraft Foods Inc., now the "global snacks powerhouse" Mondelēz.

Operations with code names like "Martini" were concocted in which shell companies traded improvised financial instruments disguised as loans to generate fictitious interest charges. The result of this engineering left Cadbury paying a mere GBP 6.4 million in taxes on UK operations with GBP 100 million in profit on turnover of over a billion pounds.

Not long after the Cadbury acquisition, Kraft transferred its European headquarters to low-tax Switzerland, where the parent company can book the sale of manufactured products as low-tax 'royalties' deriving from ownership of intellectual property.

The Financial Times investigation stops in 2010, with the takeover by Kraft and the transformation of Kraft into Mondelēz. With corporate tax avoidance emerging as a major political theme in the US, it is only a matter of time before Mondelēz comes under closer scrutiny. The results are likely to be interesting, to say the least.

Tax-deductible debt was a key pillar of the Cadbury tax schemes, and the financial engineers who engineered the Kraft/Mondelēz split had plenty of experience with it. Kraft’s 2012 Annual Report filed with the US stock market regulatory agency, SEC, shows total long-term debt of over USD 19 billion, with interest payments of USD 11.19 billion on net revenue of 32.35 billion. Interest is draining cash flow at Mondelēz, yet the current management team finds space for a buyback scheme devoted exclusively to boosting executive compensation. CEO Rosenfeld’s compensation was boosted by 31% last year to over USD 28 million, while CFO David Brearton earned USD 5.9 million, an increase of 63% in what was, on balance, a disappointing year for the company. Mondelēz performance continues to disappoint – unsurprising for a company which is reducing investment, piling on debt and outsourcing production and quality control.

Risks ahoy!

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April 2013
March 2013
The International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers' Associations (IUF)