sharing in governance of extractive industries
by Rachel Davis, Managing Director, Shift*
This is the 3rd blog from the How is industry adjusting to persistently lower commodity prices? What does it mean for good governance prospects? GOXI mini-series
With the fall in many commodity prices, extractive companies are under significant pressure to cut budgets across their operations. It might seem appealing in response to cut back on activities to manage external stakeholder-related risks; yet this is precisely the moment when companies should be embedding the relatively low-cost activities that help to prevent conflict and build sustainable relationships with local communities. Doing so now can only bring dividends in the future.
In 2014 my colleague Dr. Daniel Franks (now running the UNDP’s ACP-EU Development Minerals Programme) and I published the results of our research into the costs to extractive companies of company-community conflict. The findings drew on our analysis of 50 publicly available cases of sustained company-community conflict around extractives projects and 45 confidential interviews with leaders in the sector. Recognizing that such conflict has significant costs for local communities, governments, and regional and national economies, our research focused on the costs to extractive companies themselves as part of the business case for greater attention to company-community relationships.
We found that extractive companies routinely fail to identify and aggregate the full costs arising from conflict with local communities, such as higher security costs, stoppages in production, staff-related costs, and re-permitting delays. Yet the actions that those same companies take to try and prevent such conflict show up as direct costs. To be clear, we are not talking here about a company’s social investment spend, but about its efforts to prevent and address conflict with local communities (such as retaining professional community relations staff, conducting human rights due diligence, and maintaining effective grievance mechanisms). This leads to a perverse picture of the negative “costs” of building sustainable relationships with local communities that can be particularly risky when low commodity prices mean that cuts have to be made.
Our research found that the greatest costs of conflict, in terms of scale, were the costs of lost opportunities for expansion or for new projects. While these kinds of costs may appear less pressing in a period when companies are delaying or suspending projects and plans, relationships with local communities cannot be put on hold while prices recover. Our research also explored the most frequent and the most often overlooked costs of company-community conflict. These were, respectively, the costs of delays and interruptions in production due to conflict, and the indirect costs resulting from the diversion of staff time to managing conflict, especially senior management time, including in some cases that of the CEO. These indirect costs may be even harder for asset managers and other senior staff to absorb right now, given the pressures they are under to do more with less right across the board.
Interestingly, the World Bank’s survey of extractive company staff identifies one potential “upside” of the current situation: the additional time available to build more sustainable relationships with local communities due to project delays or suspensions. This tracks with the findings in our research that the time needed for such relationship-building (“social time”) is often in direct tension with short-term production targets connected to technical or financial objectives (“technical time”). Yet it is technical time that typically drives asset managers’ key performance indicators. This leaves community relations practitioners struggling to make the internal case for the necessary social time to address community-related risks.
As the Bank’s survey shows, company staff are all too aware that local communities’ expectations do not fall just because commodity prices do. Communities expect that responsible extractive companies will manage their negative impacts by preventing and addressing harm to people – a baseline expectation we now have of companies everywhere, whatever sector they are in. Therefore, whatever the market conditions, understanding of the true costs of company-community conflict can help those inside extractive companies better make the case for allocating adequate resources to prevent conflict and build more sustainable relationships with local communities.
* Shift is the leading non-profit center of expertise on the UN Guiding Principles on Business and Human Rights. Founded in 2011, Shift works globally with businesses, governments, civil society and international organizations to embed the Guiding Principles into practice. See www.shiftproject.org.
 Rachel Davis and Daniel M. Franks, Costs of Company-Community Conflict in the Extractive Sector, Corporate Social Responsibility Initiative Report No 66, Harvard Kennedy School, 2014.
 The title of this post includes a direct quote from one survey participant.
 This expectation is reflected in the corporate responsibility to respect human rights, set out in the UN Guiding Principles on Business and Human Rights. The Guiding Principles were unanimously endorsed by the UN Human Rights Council in 2011 and have informed the development or revision of a number of other international standards, including the IFC’s Performance Standards.
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