Activists Seeking to Shut ‘Loopholes’ in Divestiture
Local and state governments throughout the United States are facing new calls for tighter sanctions against companies operating in South Africa, after a recent flurry of well-publicized but partial corporate departures from the racially segregated nation.
The new efforts were prompted by the decisions late last year of IBM, General Motors, Coca-Cola and Exxon to sell their South African operations but retain licensing, franchising, direct sales or other business links with their former subsidiaries.
Although the moves technically qualify as “disinvestment,” critics claim the steps just barely satisfy the letter--let alone the spirit--of pension-fund divestiture programs and state and municipal “selective contracting” laws aimed at penalizing companies operating in South Africa.
Increasingly, the critics are working to convince public agencies to close the “loopholes” in their sanctions by including indirect economic interests in their definitions of “doing business” in South Africa.
“Just because companies have changed the nature of their investment in South Africa doesn’t mean they’ve gotten out,” says James Cason, of the American Committee on Africa, a New York anti-apartheid lobbying group.
“Third-party arrangements allow companies to do business as usual in South Africa, and the whole purpose of these ordinances is to penalize those companies operating there by preventing them from doing business as usual here,” said an aide to New York City Council member Ruth Messinger, who has called for a tougher South Africa policy in that city.
In Los Angeles, Mark Fabiani, Mayor Tom Bradley’s legal counsel, said his office is looking at including companies with indirect links to South Africa on the list of those whose stocks are barred from city pension-fund portfolios.
Los Angeles already has what is widely considered to be the nation’s toughest selective contracting ordinance. Such laws limit the amount of business that a local government can do with a company operating in South Africa.
Los Angeles includes such indirect business ties as licensing, franchising and sales agreements on the list of activities disqualifying a company from receiving a municipal contract.
In Sacramento, Assemblywoman Maxine Waters (D-Los Angeles), author of California’s pension-fund divestiture bill passed last year, is considering introducing a selective contracting bill for the state, according to an aide. The bill, the aide said, would not permit the state to give contracts to companies operating either directly or indirectly in South Africa.
Closing a Loophole
And in San Francisco, which also has a tough selective contracting law, county supervisors moved quickly to close a loophole in an ordinance last year after discovering that it permitted the city to rent a port berth to a freight line operating in South Africa.
“They want the ordinance to have the effect that it was designed to have: not doing business with companies that do business in South Africa,” says Burk Delventhal, a deputy city attorney.
The moves toward stricter and more tightly defined sanctions add a new dimension to the debate over corporate divestment by focusing attention on the form that such actions should take.
Instead of being satisfied with a much-publicized announcement of a subsidiary’s sale, critics of the South African regime are now looking at the buyer of the subsidiary, how the sale is being financed, whether the former subsidiary will be operated by existing management and whether the U.S. corporation will continue to sell its products to the new company.
“The appropriate test for 1987 is not just whether a corporation owns assets and has employees in South Africa as it used to be. Now it’s whether they have management contracts, franchising and licensing agreements,” said Timothy Smith, executive director of the Interfaith Center on Corporate Responsibility, a New York-based coalition of church groups that has been lobbying U.S. companies to divest their South African holdings.
‘History Has Moved Quickly’
“It’s part of the continuing process, an evolution,” Smith added. “History has moved quickly in the last year.”
Today, five anti-apartheid groups leading the U.S. divestiture movement are scheduled to release new guidelines for judging whether companies have ceased operating in South Africa.
In addition to direct investments, the definition of doing business in South Africa includes holding franchising, licensing, management and credit agreements with entities in that country. Further, companies with more than 5% of their stock controlled by a South African company are considered to have operations in that country.
The new guidelines were drawn up by the American Committee on Africa; the American Friends Service Committee, a Quaker organization; the Interfaith Center on Corporate Responsibility; TransAfrica, a Black American lobby on Africa; and the Washington Office on Africa, another anti-apartheid group.
49 Firms Pull Back
In 1986, reported the Investor Responsibility Research Center, 49 U.S. companies sold or announced intentions to sell their South African operations, 10 more than in 1985. Investor Responsibility is an independent, Washington-based nonprofit research firm that monitors American investment in South Africa for its institutional clients.
Still, many of products made by those companies will remain readily available in South Africa.
Coca-Cola, which plans to complete the sale of its subsidiary later this year, says it intends to sell its syrups to the buyers for final production and bottling. Further, a spokesman said the company also will continue selling its syrups to more than a dozen other franchise bottlers in South Africa.
IBM, which also hopes to sell its South African subsidiary later this year, said the new company will act as a manufacturer’s representative and distributor for its full line of computers. In addition, a spokesman said, IBM expects to finance the sale of the operation by taking back a note from the buyers.
General Motors sold its plant to a group of investors, headed by former GM executive Bob Price, and will continue to supply parts and equipment to allow the factory to build its old product line. GM also retains an option to repurchase the subsidiary in the future.
Concern for Employees
Almost without exception, these companies cite concern for their former employees as the reason for continuing involvement with their former subsidiaries. They criticize the anti-apartheid activists as having a narrow, all-or-nothing view of a subject fraught with subtlety and complexity.
Eastman Kodak Co., which has earned the highest marks from anti-apartheid activists for its divestment plans, will close its South African plant completely this year and withdraw its products entirely from there. However, the company acknowledges that all the 466 plant employees, about 60% of whom are nonwhites, will lose their jobs.
“We could have just shut the door, but it would have meant even more unemployment in South Africa,” said a spokesman for General Motors, which had about 3,000 employees in the country. “We didn’t want to add to that misery.”
However, such explanations have encountered a cynical reception in some quarters, including Los Angeles.
‘Profiting From Apartheid’
“Simply a different form of economic involvement is not necessarily a lesser form,” said Fabiani of Mayor Bradley’s staff. “These companies are still doing business there. They are still profiting from apartheid.”
Fabiani said that General Motors, IBM and others with similar business links to South Africa would be disqualified from receiving certain contracts from the city solely because of those remaining economic ties. The city’s ordinance covers only those contracts not subject to the competitive bidding process, about 10% of the $1-billion worth of contracts awarded each year.
Despite the rather small percentage of business covered by the ordinance since it took effect last August, at least five suppliers have been disqualified for their South African ties. These include the brokerage house of Salomon Bros., which had hoped to underwrite a municipal bond offering; the accounting firm Price Waterhouse, which sought a consulting contract, and three construction firms.
Perhaps the most publicized disqualification was handed out to Fluor Corp., the Irvine engineering and construction firm which had been scheduled for the contract to oversee construction of an addition to the city’s convention center.
30 Workers Block Pact
Although Fluor sold its South African subsidiary in December, Bradley has said that the company’s continued employment of about 30 workers in that country is enough to keep it on the list of disqualified contractors.
“The ordinance requires the total and complete end of business ties with South Africa before the company can again be eligible to receive city contracts,” Bradley wrote to Fluor officials.
In another widely acclaimed case, a company, which had already sold its South African subsidiary, agreed to sever its remaining ties to win a city contract.
With its Los Angeles engineering subsidiary, Daniel, Mann, Johnson & Mendenhall, facing disqualification for a $12-million construction management contract, Ashland Oil agreed last year to cut all its business links to South Africa, including the export of its Valvoline-brand motor oil.
As a result, the Ashland subsidiary won the contract to oversee the improvements to the Hyperion sewage-treatment facility, a huge project expected to be worth substantially more in contract fees over the next 12 years.
‘See City’s Point of View’
“We can see the city’s point of view,” says James Ebright, corporate counsel for the engineering subsidiary. “If a company is conducting business the same (way), mere disinvestment wouldn’t do what the city wants.”
The financial clout that selective contracting laws can exert over corporations has spurred anti-apartheid activists to rank their continued passage as the priority for 1987. Such laws are in effect in 28 cities, six counties and two states, according to the American Committee on Africa.
“Selective purchasing laws pack a wallop,” says Marcy Murningham, president of Mitchell Investment Management Co., an investment advisory firm based in Cambridge, Mass. “They really hit the bottom line.”
However, pension-fund holdings continue to be significant targets for the anti-apartheid movement. At the end of 1986, more than 245 institutions had South Africa-related restrictions in their investment policies, representing a total portfolio value of more than $260 billion, according to Mitchell Investment.
Because investment funds were among the first vehicles used by the anti-apartheid movement, their South Africa sanctions tend to be less strict. Activists on this front are aiming at inserting tough, new teeth into their bite, including requirements that companies sever all business links to that country.
For example, in Los Angeles, pension funds are required to divest stock of companies with 25 or more employees in South Africa, a test that allows the funds to own shares of IBM, General Motors or any company with indirect business ties to that country.
The definition displeases Fabiani, the mayor’s legal counsel, who says that he may soon start pushing for a change in the rules governing the city’s $9-billion worth of pension funds.
