ESSA

ESSA

De Beers and Alrosa


Natalya Turkina

By

September 9th, 2012


Corporate Social Responsibility in diamond mining companies.


Girls’ Best Friends: Generous Unsustainable Responsibility vs. Moderate Sustainable Responsibility

Mining industry has a big impact on many economies. In many cases mining becomes not only a city-forming industry, but even a main pump of budgets of all levels. Mining is one of the most polluting industries in the world, and has a significant number of negative environmental and social externalities Thus, it is one of the most extensively regulated industries. Sustainable development of mining companies is one of the major tasks both for governments and companies themselves.

Diamond mining is a unique industry, which can make many groups of people wealthier: companies that were the first and the quickest in development of the deposit, governments enjoying additional incomes from taxation, and people who live and work in “places of luck”. Currently there are eleven major diamond producing nations with Botswana (the largest diamond producer, by value, in the world) and Russia (the second largest diamond producer, by value, and the biggest producer, by volume, in the world) among the leaders, where two of the biggest diamond mining companies operate: De Beers in Botswana (about 45% of the global diamond market share) and Alrosa in Russia (about 25% of the global diamond market share). De Beers is a private company (85% belongs to Anglo American plc. and 15% – to the Government of the Republic of Botswana); Alrosa is a state-owned company (90% belongs to the Russian Government, 10% – to minority owners).

If we compare these two companies in terms of funds allocated for financing various social programs (maintenance of local infrastructure, education, hospital expenses etc.) and by degree of incorporation of CSR (corporate social responsibility) into the overall corporate strategy, ownership structure seems to influence the likelihood and formalization of CSR practices. For instance, the average Alrosa’s annual spending on social programs in absolute terms is much higher than that of De Beers. It is worth noting that financial performance of these two companies during the global economic crisis was slightly different, and whereas De Beers managed to maintain its profitability and reached 583 million US dollars of pre-tax profit in 2008, Alrosa had losses of 1225.43 million US dollars in the same year. However, Alrosa still carried the social burden in forms of a number of responsibilities in front of local communities and institutions. In other words, the social function of Alrosa is undeniably more noticeable and it carries it out even during the most difficult for the company times.

At the same time, over the last 5 years the company has gradually abandoned non-core assets due to financial difficulties and as part of preparation for a future IPO of approximately 14% of shares, which will take place in late 2012/early 2013. It is hardly criticized for this decision. Changes of De Beers’ social costs over this period are more or less predictable and correlate with changes in its pre-tax profit. Although, there were many cases for critique of De Beers (e.g. forceful relocation of indigenous Bushman people in Botswana; conflict diamonds followed by the Kimberley Process), the company shows its development in this sphere by following up results in their annual CSR reports (whereas Alrosa does not provide us with any type of CSR report).

Thus, two companies, being the biggest players in the global diamond market, show us two different approaches to CSR practices. Both are responsible because there is simply no choice due to obvious interests and power of states: mining in Botswana takes place through the mining company Debswana (a company from the De Beers Group), a 50–50 joint venture with the Government of the Republic of Botswana, and mining in Russia is undertaken by a state-owned company with 90% of all shares. However, in the first case we can observe a market-oriented approach of a socially responsible, sustainable company, whereas the second company represents a “branch” of the Government carrying part of functions and responsibilities of the latter. This is unsustainable in terms of financial performance and, moreover, with social and environmental responsibilities that are difficult to measure, fully due to lack of reporting.

In conclusion, it seems that private owners know much more about sustainable development of the company and proficiently incorporating CSR principles into the corporate strategy without jeopardizing its financial performance, than institutional shareholders who may finally lead a company to a critical point when the first affected stakeholders will be workers and local communities.

Appendix

Graph 1

 

Graph 2

References:

http://www.alrosa.ru/

http://www.debeersgroup.com/

 

 

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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