From tons of tainted frozen meat stranded on container ships offshore from Hong Kong, to illegal deforestation, and a corruption scandal causing 33 of 36 Brazilian meatpacking plants to temporarily close, the past weeks have wreaked havoc at JBS SA (OTCQX:JBSAY), the largest meat processing company in the world.
Yet earlier this year, the two Batista brothers, sons of the founder of the Sao Paolo-headquartered company, were poised to enter the US capital markets with an IPO on the NYSE, a great step forward for this family, which started its business in 1953 with a few herd of cattle.
So what went wrong? Is this a short-term misstep in an overall well-framed vision to become a dominant global meat player, a champion of the renaissance of Brazil's agriculture? Is JBS primed to access prosperous consumer markets in the US and Europe and the dynamic growth markets of Asia and the Middle East?
Reality shows a different picture. Despite dominating the Brazilian market in Brazil, and steady growth of 8% in beef and veal demand in one of its leading export markets, China, over the past two years, JBS's stock shredded 42 percent over the same time period.
Brazil, in fact, stands to lose between 5 and 10 percent of its share in global meat exports, or US $1.5 billion, according to a preliminary estimate from Agriculture Minister Blairo Maggi, as a result of the bribery scheme involving JBS and federal sanitary inspectors.
Rather, the tainted meat fiasco and the continued illegal deforestation of the Amazon epitomize a management with little understanding of markets, or of shifting dynamics and the role of corporate stewardship to sustain competitive leadership.
For a business to become a champion in its industry, it needs to drive on a vision of innovative, sustainable best business practices, reinforced by a backbone of strong corporate governance. To do this, a company must consciously manage both its stakeholders - its investors, its employees and the community in which it operates - and the natural capital that it relies on and is accountable for. In JBS's case, this includes forested land. Failing to implement such stewardship leads to missed market opportunities and ultimately a loss of competitive advantage.
Yet JBS's overall inability to capitalize on a unique opportunity to establish sound environmental, social and governance (ESG) practices to lead to a sustainable competitive advantage is not an isolated case. IOI Corp. (OTC:IOIOF), for example, failed to align its business practices with its commitment to source sustainable palm oil through the Roundtable on Sustainable Palm Oil (RSPO), which lead to a loss of contracts with major consumer companies.
Business as usual, ignoring ESG issues, is not an option anymore. This is especially true for the consumer facing companies - that is, the big food brands - that source from companies like JBS and IOI, as well as the banks that fund them.
HSBC, after much negative press coverage, driven by environmental campaign groups, agreed early this year to strengthen its lending and investment policy to include 'No Deforestation, No Peat and No Exploitation' (NDPE) to all players along the supply chain of agricultural commodities, specifically in Palm Oil.
Clearly, investors and capital markets can play a role in preserving and revitalizing high conservation value forested areas, and preventing harmful child labor, forced labor, and violation of rights of local communities in regions where an increasing share of the world's food supply is grown.
As stewards of their clients' and constituents' financial assets, investors have a responsibility to ensure that their portfolio companies improve ESG business practices in order to enhance their expected financial return. The reason is simple: inattention to environmental and social impacts leads to loss of competitive advantage and market opportunities, as well as increased operational costs and costs of capital. These present material financial risks embedded in portfolio companies. In contrast, companies with best-in-class ESG business practices keep on compounding economic and financial returns.
Meanwhile, the Batista brothers contemplate their future with less certainty. Their company's entry into the US capital markets is in jeopardy and they have an operational imbroglio to disentangle to regain the confidence of both their customers and their investors. The Chinese market growth prospects remain very attractive and the US and European markets will remain prizes for companies that implement smart and sound best in class sustainable business practices.
If JBS does not address corporate governance, its illegal and environmentally destructive cattle supply chain practices, and the increasing demand from consumers looking for safe and deforestation-free beef, the company will continue to face a challenging competitive environment. This is especially true with Australian meatpackers taking advantage of the tainted meat crisis to gain market share in the Asian markets. The negative impact of JBS's missteps on revenues, profitability and return on investments will dampen valuation, and remain a drag on stock returns in the long term.
It is up to JBS to show the way and implement the right sustainable business practices to command a large share in the plates of global consumers.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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