On Being Innocent, Ethical or Cynical

As things turned out, I was mistaken. A few short years later, I joined the Board of the Ethical Property Company, on which I proudly served for four years until earlier in 2011. Although we were never perfect, I was amazed at how the business was able to stay profitable, pay dividends, grow successfully and remain true to the tenets laid down by Jamie and the rest of the Board, now enshrined in a living document called the “Quintessentials”; designed to ensure its ethicality. The company did what it said on the tin: it ran an ethical property company.

It is against this background that I saw the article by James Ball of the Guardian, about Innocent, the drinks company,(“We are Innocent. Smoothie maker says charity bottled cash for best interest rate”, 26th May, 2011). The article raised serious questions about business ethics, conflicts of interest and how firms exploit the language of the social economy in different ways.

The article made several claims – I should point out, I have not independently researched and verified these:

1) Innocent promises to donate 10% of its profits to a charity, primarily through its own organisation, the Innocent Foundation. However, the charity has received nothing from Innocent since 2008, primarily because the company has not made a profit in that time.

2) Despite being profitable in 2007, Innocent “clung on to the lion’s share of the donation pledged to the foundation from 2007, a year in which the company made record profits.” Innocent enjoyed profits of £8million, but donated only £650,000 to the foundation plus another £100,000 given to Age UK. This scarcely could be said to amount to the promised 10% although the article does acknowledge that in previous years Innocent did donate more than 10%.

3) £520,000 donated to the charity was retained in Innocent’s bank account as a loan from that charity whose trustees are Innocents three directors: Adam Balon, Richard Reed and Jon Wright.

Innocent has grown rapidly over the years, and at the end of 2009 Coke increased its stake in the company to 58% at a valuation of £180 million. Anyone thinking I have any issue with the company concerning its success, has clearly not been a regular reader of this blog. We at ClearlySo are more inclined than most to celebrate those who achieve commercial success as well as social impact and, if one leads to another, like The Body Shop’s ethical orientation increasing its sales or market share, we feel delighted at the discovery of such a “win-win” situation.

But there are elements of the tale which, if true, I find deeply troubling and raise questions which should concern anyone with an interest in the social business and enterprise (SBE) sector.

Firstly, the £520,000 loaned back to the company by the foundation, rather than invested in good works. I could not find, in the article, a clear justification for the failure to spend the money. All foundations will need to place their endowment somewhere, before money can be spent. Even so, should the foundation really have lent the money to the business? The charity explains that the loan benefits the charity because it got a better rate (2%) than it could have received from a bank. I suspect this is true, as banks pay appallingly low rates of interest, but is the extra 1% really worth it in this case? Moreover, can Innocent really borrow money elsewhere at 2%? I would have doubted it. Innocent is a young business making losses since 2008, according to the article: I do not think it could have raised money at these rates.

Should Innocent not have paid the foundation something close to what it would have had to pay in the market for funds? Does a foundation not deserve to be compensated for the incremental risk it takes? The article points out that the company accepts that if Innocent went broke, the foundation would become a regular creditor, but says “there has been no point where the company could not, or would not, pay that money if needed.”

If the directors are the three co-founders of the business, how does this look? Does it not raise questions of a conflict of interest? Is this really the right governance mechanism to have in place? I am familiar with SBEs that have foundations attached. We generally take the view that it is prudent to be excessively cautious in such cases because of how things might be perceived.

The article states that the company claims that the benefit of the loan from the foundation is small, which it clearly is. My question then is: “why do it?”. According to the article at the end of 2009 the company had £32 million in the bank. Why on earth then is the loan from the foundation still outstanding? Ball writes that the Innocent spokesperson claims that “£520,000 will be transferred to the charity over the next three years”. Why three years?

Now it needs to be said that Innocent announced it will be making a voluntary contribution of £250,000 to the foundation in 2011; this is despite the fact that it is not expected to make a profit, so technically not obliged to make any contribution. Also, Richard Reed, one of the co-founders, has said that the firm has donated £473,000 to Age UK between 2008 and 2010, so the noble inclinations of the group have some support. Furthermore, ClearlySo has previously accepted Innocent as a listed social business, by virtue of its contribution to healthy living, in terms of its ingredients.

However, when you choose a name like “innocent” or “ethical” you need to work doubly hard to prove you can deliver on your promises. As a company which is marketing itself on an ethical basis you can expect to be held up to a higher standard of behaviour than most and this is not unfair. Firms branding themselves in this way are taking a social orientation and can benefit from such positioning: for example, by securing custom that is targeted at ethical firms. Such customers insist on the highest possible standards of behaviour. For this reason, extra care needs to be taken. Innocent needs to get this right, or perhaps change its name.