When Companies Reap What They Sow: Disaster

Editor's note: A previous version of this article stated that the Williams Companies' olefins plant was run by CF Industries, but the facility is run exclusively by Williams Companies. CF Industries had no involvement in the accident at that facility. The Motley Fool regrets the error.

Sadly enough, modern shareholders have often ignored future dangers, choosing instead to focus on short-term, here-and-now profits and returns. However, several incidents this year have made it clear that it's a terrible way to handle one's investments, and one that can easily and eventually hurt future growth in a big way.

If shareholders don't demand better environmental oversight and risk management with their votes, they could face disaster. This is not just about crippled profits; it's also about the fact that hurting people and the planet can bring about a real -- and justifiable -- world of hurt on companies and industries.

The total toll of tragedy
Ceres, a nonprofit that unites businesses and investors on climate change and other sustainability challenges, recently provided a rundown of 2013 proxy season victories. Some major companies have made big commitments to improve their green credibility, and many shareholder votes showed increasing demand to address such issues.

One of the shareholders proposals that Ceres highlighted sought urgent response to recent tragic incidents. It's unfortunate that sometimes good comes from tragedy, but in this one case, the majority of shareholders actually did respond appropriately with their proxy votes.

Fertilizer concern CF Industries (NYSE: CF  ) hit news headlines in the worst way earlier this year. In June, an explosion at its Louisiana plant killed one and injured others. In a less high-profile incident that occurred a few miles away, a Williams Companies  (NYSE: WMB  ) olefins facility suffered an explosion that killed two and hurt dozens of others.

According to The LA Times, this Louisiana area has lovely monikers such as "Cancer Alley" and "Bhopal on the Bayou". (Here's a Fool.com piece that highlights the long-running, sad, and still unresolved story of India's 1984 Bhopal disaster, associated with Union Carbide, which was later sucked up by Dow Chemical.)

To shine even more of a spotlight on the $10 billion fertilizer industry -- an industry that most Americans probably didn't previously think much about, even though it's crucial -- an April explosion killed 15 people, injured 150 others, and resulted in $100 million in damage to the town of West, Texas.

According to a detailed write-up by The Washington Post, such explosions are extremely rare. But when they do occur, they are serious and sometimes horrifying. One of the ominous things about the April disaster was that the operators at the retail facility where it occurred did not believe such a disaster was even possible.

In addition to unexpected outcomes that could cause immediate damage to lives and surrounding towns, there are ecological ramifications to think about too. The Post piece also cited Mother Jones writer Tom Philpott, who pointed out that environmental liabilities can include excess nitrogen escaping into streams that feed into the Mississippi, resulting in damaging algae blooms, greenhouse gas emissions, and damage to soil.

With many serious issues like this, shareholders have in the past ignored the concerns until something happened that makes it impossible to sweep them under the rug anymore.

In CF Industries' case, investors responded in a big way at the company's annual meeting; an amazing 67% voted in favor of a sustainability report from the company.

The perfect storm: industries besieged on all sides
There are copious reasons why the shareholder response at CF Industries is completely justified on every level.

Obviously, these disasters had to have broken the hearts of many of the residents of the affected areas. Of course, whether "corporate people" have true hearts and souls or not, the ramifications go far beyond public grief and outrage.

Some of the victims of the Texas explosion want to include CF Industries in lawsuits due to the possibility that, in some way, it was part of the supply chain of ammonium nitrate, the rare but obviously dangerous substance.

This could affect bottom lines beyond near-term financial damages. Although the company denies its involvement, it does disclose in its quarterly filing that the regulatory environment affecting the industry could change in a big way because of situations like this one.

How prescient. On Aug. 1, President Obama specifically ordered more stringent federal rules on how fertilizer plants work with ammonium nitrate, so the heat is most definitely on.

And here's the part that should be incredibly jarring in our currently contentious political climate: Politicians on both sides of the aisle support increased government oversight. The substance is potentially dangerous on many levels. The Department of Homeland Security wasn't aware of the situation, yet ammonium nitrate was used in both the 1993 World Trade Center attack and the 1995 Oklahoma City bombing.

Growth with responsibility
The structures of publicly traded companies do give managements and boards the keys to the castle, so to speak. However, shareholders are owners and have every right to take managements and boards to task for failing in their duties, which include addressing future dangers and certainly not ignoring future risk potential.

According to recent news headlines, many investors aren't even paying much attention to what's been going on with CF Industries. They point to a "cheap" industry -- some of the companies that will be affected by, say, more stringent regulations and calls for far better risk awareness may pay dearly for not paying enough attention.

The fact that nearly 70% of CF Industries' existing shareholders voted for a sustainability report is a good sign despite a tragic situation. Shareholders can and should demand responsibility and long-term thinking instead of waiting for the worst to happen. The challenges currently facing the fertilizer industry due to issues like this one display how quickly companies' shaky, near-term structures can crumble around them.

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Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2013, at 7:03 PM, DAG1996MF wrote:

    Gimme a break. This is supposed to be an investment site, not a site for tree huggers to whine about industry before driving away in their SUV and tossing their Starbucks styro-foam cup out the window while gossiping on their iPhone.

    This article has nothing to do with investing. If it did, the author would know that, despite occasional tragic accidents, most of the companies mentioned have been outstanding investments for many years before the accidents and continue to be after the accidents. Accidents happen and people get hurt. Get over it. The fact that people die in car accidents every minute does not mean that cars need to be outlawed. There is a reason the people who work in oil fields, chemical plants, coal mines, etc. make more in a year than many people make in their lifetimes, and the people who CHOOSE those lines of work are well aware of that reason.

    Corporations exist for one reason and one reason only ... profits. If they make those profits within the bounds of poorly formulated or non-existent laws, it is not the fault of a corporation when that lack of appropriate parameters results in tragedy. So, if you want to bash something, try your retired congressman living on a yacht in the south of France who convinced ignorant constituents to allow them to deregulate most U.S. industries 20 years ago so they could line their own pockets ... effectively eliminating most regulatory protections for both the environment and workers under the BS spin of "no more big government" (aka deregulation). Or, perhaps try your current congressman who spends literally all of his taxpayer-funded time voting 40 times to make sure Americans less fortunate than he can't get healthcare, instead of on regulations to improve environmental and worker protections in the industries that hold this great nation up.

    The bottom line is the first rule of investing is to remove emotion and understand that it is about making money, nothing else. Politics, not investment markets, is the channel through which citizens could insure that industry is sufficiently responsible in that endeavor of making profits that investors get some ... if, and only if, we were collectively smart enough to do so. Again, politics and investment markets are two different things ... the two are confused at one's own peril.

  • Report this Comment On August 14, 2013, at 8:01 AM, hawkise wrote:

    Profits for one group is often Losses for another. As Bayou fishermen or select Indian business owners could tell you. One group of businessmen have no right to deny any other groups the ability to make profits by ruining the landscape.

    The Texas explosion COULD have been caused by the Vol FD by placing water on burning Ammomium Nitrate. This action rarely ends well. (See Texas City disaster). That may or may not been a training failure.

    If that storage area was akin to your back yard would you insist on rigorous training for the Fire Dept. Volunteers? Even if said Volunteers were compensated for that particular schooling?

    If a Union Carbide (Now DOW) skimped on Valves and training at a plant next to were you live would you complain?

    If you were a local fisherman in the Mississippi in Arkansas would you be upset if the Market refused your catch?

    How many distance Runners are from rural China by Beijing. Are the shoe companies selling go faster running shoes there?

    I live on the Gulf Coast. On July 3rd, 2010 I was on leave from the Navy visiting home and determined Eastern South Dakota was busier than Gulf Shores, Al. Some businesses folded that year and were not compensated by BP made much worse by the Govt processes. (When BP was running the compensation process claims were being paid)

    and last but not least thanks to the Lame Media to juice up their Advertising revenue screamed the Gulf was dead helping keep the tourists away

    I bought into the artificial low on Real Estate so I profited.

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