Mark Brandon is the Managing Partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Saturday, November 25, 2006

SEC Probes Ford Motor's (NYSE: F) Ties to Syria and Sudan

On Friday, the Associated Press reported that the Securities and Exchange Commission sent a letter to Ford Motor inquiring about the non-disclosure of it's ties to Syria and Sudan. The SEC contends that these operations constitute material risk to shareholders and should therefore be disclosed. The company states that, since its operations comply with the law, the information is not material, and therefore does not require disclosure in the company reports. Given the lawyer-like response, an examination by the social investment crowd is in order.

The allegations center around the activities of Ford subsidiaries Land Rover, Volvo, and Jaguar, as well as Mazda, in which Ford owns a one third stake. Both Syria and Sudan are on the State Department list of terror-sponsoring states. U.S. Companies are not prohibited to conduct business inside Syria as long as the Syrian government is not a party to the transaction. Sudan, on the other hand, requires an exemption issued by the U.S. government, putting that genocidal regime in the same league as Iran, North Korea, and Cuba. A loophole exists for products that contain less than 10 percent U.S.-originated components. Pardon the pun, but this loophole is large enough to drive a Ford Truck through it.

Anyway, Ford claims that is dealership in Syria is authorized, and it meets the U.S. origination requirement. As for Sudan, a U.K.-based distributor of vehicles has dealerships in Sudan for Land Rover, Volvo, and Jaguar. Since these products also meet the U.S. origination requirement, and the distributor is not subject to U.S. law, Ford claims that this, too, is within the law. As for Mazda, which also does business in Sudan, Ford claims that since it is a separate legal entity and Ford is a minority stakeholder (owning one third of the shares), the Japanese company is also not subject to the U.S. sanctions. Nonetheless, Ford benefits from these operations to the tune of $50 million a year, according to its own figures. Since this is a drop in the bucket compared to its $177 billion in sales, it could not possibly be considered "material".

I, personally, find Ford's defense to be correct on all counts. The operations conform to the letter of the law, and $50 million is not a material amount requiring disclosure. Still, even children know that what is legal and what is right and moral are often different things altogether. Socially responsible investing is about rewarding companies who embrace the latter.

Of course, even this position opens up more cans of worms. Every social investor has his or her own definition of social responsibility. For example, Wal Mart (NYSE: WMT) is a beacon for the crowd that seeks companies that provide opportunity for minorities. At the same time, it is a pariah for the environmental crowd. Fannie Mae (NYSE: FNM) is a darling to the community investment fans, but for the corporate governance adherents, few companies are worse. Ford has always been a labor-friendly company. They have even been making substantial progress on the environmental front with their embrace of Hybrids and E85 ethanol. So, even these revelations require one to re-examine what is important in your own definition.

On a related note, the press could do more to expose these multinationals doing business with our enemies. For all of the invective that our Vice President receives over his tenure at Halliburton (NYSE: HAL), not much of it is about that company's subsidiary which is currently helping Iran build its oil infrastructure. This relationship was ongoing during Cheney's tenure as CEO. Schlumberger (NYSE: SLB) is also able to help the Iranians, thanks to the subsidiary loophole. That company has a Dubai-based shell company to get around the rules. The company's address is nothing more than a mail drop. These are but two of the most egregious examples.

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