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The Effect of Environmental Activism on the Long-run Market Value of a Company: A Case Study

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Abstract

This paper investigates the impact of activism on a large, powerful corporation in Tasmania. Gunns Ltd was a large woodchip processor in Tasmania that fought a long-running battle with environmental activists regarding Gunns’ logging and processing activities. The study focuses on events in 2004–2005, when Gunns applied to build a pulp mill in rural northern Tasmania and began a legal case against activists. The research question is whether there is clear statistical evidence that these events were important, as is widely believed, in the ultimate failure of Gunns in (Annual Report 2011, Gunns Ltd, Tasmania, available from: http://www.asx.com.au [11/04/14]), just 6 years after being the largest and one of the most financially successful Tasmanian companies. We use a mixed methods approach that combines a detailed narrative informed by theory, to examine issues of corporate social responsibility (CSR) and ethical behaviour, with an econometric time series analysis of the impact of activism on the market value of Gunns. Our analysis supports the contention that the events in 2004–2005 played a significant part in the decline of the long-run market value of Gunns over the subsequent period, through to its failure in 2011. We discuss the underlying causes for Gunns’ failure in terms of agency, stakeholder, legitimacy and leadership theories. Research frequently assesses effects such as those in the Gunns’ case through solely qualitative means. This paper integrates a quantitative analysis into a detailed qualitative narrative and theoretical interpretation of events, to provide additional precision to its findings. It contributes to research in CSR and the impact of activism.

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Notes

  1. A share split of 4:1 took place on 5 November 2004. The adjusted price continued to rise on the ASX until 1 January 2005.

  2. The qualifier ‘apparently’ is necessary here because the gearing ratio reported as being 35 % in the 2005 financial statements had been restated, presumably because of the IFRS changes, to be 40 % (see page 28 of the 2006 Annual Report and the notes thereto).

  3. The costs and damages awarded against Gunns over the duration of the case were, however, much higher, and the ultimate decision to end the case was described by the company, by then under new leadership, as a “commercial” decision (Swales 2010).

  4. Gunns’ major financier, the ANZ Bank had withdrawn from funding the pulp mill project in May 2008.

  5. There is, in general, no guarantee that such a function exists. However, we find that the log transform is a suitable function for our purposes. The approach used in the paper is discussed in detail in Alexander et al. 2012

  6. ‘Well-specified’ in this context means that the error term \(\varepsilon_{t}\) is ‘white noise’, approximately Gaussian and uncorrelated with the independent variables (so that the latter really are ‘exogenous’).

  7. These are a parameter or parameters measuring the long-run relation in the levels of the variables and a parameter measuring the speed of adjustment of any imbalance (’error’) between the two variables at a particular time.

  8. It is not clear how much of this increase was due to the quite speculative and complicated method of determining the net market value at which these assets were disclosed in the financial statements (e.g see Note 14 of the Gunns’ 2001 Annual Report).

  9. This is the view expressed in the Administrators’ Report.

  10. Most of Gunns’ woodchip exports went to Japanese pulp mills.

  11. The correlation between woodchip and pulp exports is approximately 1.

  12. These particular currencies are relevant because 70 % of Gunns woodchip exports were to Japan at this time and contracts were typically denominated in US dollars. The Yen and the US Dollar were 62 % correlated in levels and 78 % correlated in changes over the period 1993–2011.

  13. Another possible confounding element in this analysis is the adoption by the company of international accounting standards in their annual reports for the year ending 30 June 2005, which led to some prior year amounts being restated. There was a reduction in equity of Gunns group due to these changes of just under A$60 million, mostly from what was described as a change in taxation methodology. This was about 50 % of the reported net profit for the year after tax and about 8 % of the net book value of assets. However, this was less than a third of the increased ‘equity’ resulting from revaluing freehold land during the year and the impact on reported net profit for the year was small. The net effect of these non-transaction-based adjustments on market sentiment is unknown. However, research into the impact of these changes on Australian firms does not suggest it is likely to be a material factor in explaining share price movements, and we assume that, in the absence of evidence to the contrary, they were not responsible for the falling market value of the company in 2005.

  14. All data series from 1993–2012 test non-stationary by augmented Dickey–Fuller tests (ADF). First differences in all variables except book value test stationary.

  15. With respect to heteroscedasticity, serial correlation, normality and tests of functional form.

  16. The results are given for the exchange rate of the A$ against the yen, but the results are similar if the A$ against the US$ is used instead.

  17. The identity of the regressor variables determined by the testing down process was robust to a variety of different pathways for determining the variables to be included in the model. In particular, it agrees with result of the complex, automated testing down procedures provided in OxMetrics PcGive’s single equation time series modelling package.

  18. There are elements of most other types of legitimacy (pragmatic and cognitive) and position (maintain and repair) in the relationships of the entities and stakeholders we consider. However, we focus on those which appear of immediate import, for reasons of space.

  19. Hampshire has long been the preferred option for the pulp mill by environmentalists (Ford 2013).

  20. The evidence for this failing lies in Gay’s guilty plea to insider trading in the 2012–2003 court case (Ogilvie 2013).

Abbreviations

ABS:

Australian Bureau of Statistics

ADF:

Augmented Dickey-Fuller

ADL:

Autoregressive distributed Lag model

ASX:

Australian stock exchange

CSR:

Corporate social responsibility

ECM:

Error correction model

ELT:

Error correction term

GFC:

Global financial crisis

RPDC:

Resource planning and development commission

TAP:

Tap into a better Tasmania

TWS:

Tasmanian wilderness society

VSC:

Victorian supreme court

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Lewis, R., O’Donovan, G. & Willett, R. The Effect of Environmental Activism on the Long-run Market Value of a Company: A Case Study. J Bus Ethics 140, 455–476 (2017). https://doi.org/10.1007/s10551-015-2686-1

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