AIDS is risky business: examining the effect of the AIDS crisis on publicly traded companies in South Africa and the implications for both South African and U.S. investors.

• Author: Salomon, Martha L.

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND A. The Effect of HIV/AIDS on South African Business B. Reporting Debate in South Africa 1. Prevalence Reporting Processes and Concerns a. Physical Testing b. Actuarial Projection 2. Constitutional Concerns a. Discrimination b. Constitutional Health Care Guarantees III. THE JOHANNESBURG STOCK EXCHANGE'S NEW LISTING REQUIREMENT A. The King Code B. Global Reporting Index C. Is Disclosure Good for Business? 1. The Cost of Implementing HIV/AIDS Programs 2. Gold Fields: An Example of AIDS Reporting at Work IV. THE SOCIALLY RESPONSIBLE INVESTMENT INDEX V. SOCIAL REPORTING DEBATE A. What Is "Materiality"? 1. SEC Disclosure Rules and the Need for Reform 2. The Williams Approach to Social Disclosure B. Implementing a Disclosure Requirement: Hess' Plan of Action VI. ARGUMENT A. Social Reporting Is Material to U.S. Investors B. South Africa as a Case Study for Materiality C. The SEC Has Authority to Introduce Social Reporting Requirements 1. The SEC Has Authority to Require Social Disclosure on Issues That Will Have a Material Financial Impact on the Health of a Company 2. The SEC Has Authority to Require Social Disclosures Even if There Is No Material Financial Impact on a Company 3. How to Implement a Social Disclosure Requirement VII. CONCLUSION ABSTRACT

The Author explores the implications of the AIDS epidemic for South African businesses. She discusses the financial impact of the disease on shareholder investments and what measures can, and should, be taken by South African businesses to assess the extent of the financial damage and to help prevent and treat infected individuals. The Author focuses on a new listing requirement recently passed by the Johannesburg Securities Exchange in South Africa that requires companies to implement corporate governance and responsible HIV/AIDS policies as a prerequisite for listing on the Exchange. In addition, she discusses a new "Socially Responsible Investment" index that the Exchange has launched in an effort to enhance corporate social accountability with regard to the disease.

The Author further analyzes the discourse surrounding social disclosure regulations in the United States and the potential impact the proposed regulation may have on this discussion. She addresses the current "materiality" standard imposed by the SEC and discusses how the new AIDS regulation crosses the lines of both financial and social materiality. Finally, the Author argues that the SEC can require companies to engage in social disclosure on matters that would be considered material to both fiscally and socially responsible investors. In particular, AIDS reporting is a matter of the utmost concern for the investor in international corporations and meets the SEC's "materiality" standard. The Author concludes that the SEC should require international corporations in countries with high AIDS infection rates to disclose their AIDS policies.

1. INTRODUCTION

   George Galley, a small business owner in Botswana, is thrilled to get a contract with Debswana, a joint venture between Botswana's government and South African mining giant DeBeers. (1) With his modest staff of 168 workers, he is ready and eager to begin construction of single-sex barracks for Debswana's mining employees. (2) Galley, however, is surprised to learn that before he can begin one iota of work on the project, he must demonstrate that he has a rigorous AIDS policy in place for his small company. (3) At first Gailey sees this requirement as an expensive hassle for his modest venture, but after losing ten employees to AIDS, he is a recent convert to the idea of corporate AIDS involvement. (4)

   In South Africa, the debate rages over how much involvement companies should be required to have in the prevention and treatment of AIDS in their workforce. Some companies, like DeBeers, are shouldering some of the responsibility on their own and have enough market power to pressure smaller players into compliance as well. Still, there are many complicated issues surrounding policies like these. Are companies like DeBeers discriminating against smaller contractors who cannot afford to implement rigorous AIDS programs or who may not have a significant infection rate among their workforce? Are AIDS programs cost-effective, and if not, should companies nonetheless implement them in the name of social responsibility? Where does the government's responsibility toward infected citizens end and the responsibility of the employer begin? What is the best way to implement an AIDS program in light of concerns over employee privacy and human rights?

   The Johannesburg Stock Exchange (JSE) has answered some of these questions in favor of affirmative obligations for employers by requiring listed companies to document their compliance with the King Code on Corporate Governance. (5) The Code requires that companies report the steps they are taking toward AIDS prevention and treatment. (6) The new listing requirement has created a stir among South African business managers, as it marks the first time a stock exchange has explicitly required disclosure of "social" (i.e., non-financial) data. The debate is ongoing over whether this constitutes a slippery slope toward capital controls on private businesses or whether it stands as a beacon of social responsibility in an effort to curtail the devastating effects of AIDS on one of the world's hardest hit communities.

   Part II of this Note examines the recent history of the effect of AIDS on South African businesses and the practical and constitutional concerns surrounding disclosure of AIDS-related data. Part III addresses the JSE's decision to require compliance with the King Code and the anticipated effects on listed companies. This section will look at the experiences of companies that are already engaged in AIDS-related prevention and treatment programs. Part IV will discuss the new "Socially Responsible Investment" index recently launched by the JSE and the potential effects this may have on businesses' attitudes toward the AIDS epidemic. Part V examines the debate surrounding social reporting in the United States, and in particular the proposals of Professors Cynthia Williams and David Hess for implementing social reporting requirements. Finally, Part VI of this Note argues that South Africa's new requirements address an issue that should satisfy the Security and Exchange Commission's (SEC) definition of "materiality" and, thus, the United States should follow South Africa's lead in implementing social reporting regarding AIDS. Specifically, the SEC should focus on international corporations with workforces derived primarily from areas with a high prevalence of AIDS.

2. BACKGROUND

   1. The Effect of HIV/AIDS on South African Business

      HIV/AIDS in South Africa has been called an "epidemic of shattering dimensions." (7) Now the single greatest cause of death in the country, the disease affects every facet of life, including business. (8) In the decade beginning in 2000, it is projected that there will be 5.23 million AIDS deaths, 1.53 million AIDS orphans, and that average life expectancy will drop by sixteen years. (9) Businesses in South Africa now share the serious consequences with a country in which roughly five million people are HIV-positive, about 11.7 percent of the population. (10) Four of the most prominent businesses (all diamond and precious metal mines) in South Africa estimate that twenty-five percent of their workforce is infected with HIV/AIDS. (11) The disease may be increasing the cost of doing business in South Africa by as much as eight percent. (12) One mine estimated AIDS-related death costs are as high as U.S.$18,500 per employee hired. (13) Several mining companies estimate losses as a result of the disease at two to five percent of profits. (14) In light of these figures, heavy-hitting investment banks are eager to acquire information regarding the financial consequences of HIV/AIDS in their investment plans. (15) Deutsche Bank, Dresdner Bank, and HSBC Holding have all expressed the need to take this information into account in their "financial forecasting, asset allocation, stock selection and risk underwriting." (16) Rival gold-producing regions such as North America, Australia, and New Zealand are looking like safer alternatives for many investors who are worried about the costs of AIDS incurred by sub-Saharan mines. (17) Chris Thompson, executive chairman at South Africa's Gold Fields mine notes that "[i]t is difficult to quantify the number of punters who have decided against buying Gold Fields shares because of the perception of the effects of the disease on South Africa's workforce." (18)

   2. Reporting Debate in South Africa

      Indeed, investors are increasingly insisting that companies report on the impact of AIDS. Still, it is unclear what is the best way to go about satisfying investors' concerns. One of the most hotly debated issues concerning HIV/AIDS reporting is whether companies need to take account of, or disclose, the prevalence of AIDS in the workplace.

      Acquiring the data necessary for AIDS prevalence reporting is no simple task. The JSE lists more than 460 companies and is the fourteenth largest stock exchange in the world. (19) In preparation for a potential prevalence and financial cost/loss reporting requirement, the JSE decided to assess the practicality of such a process by testing 210 volunteers from its own staff. (20) Of those tested, four were HIV-positive. (21) JSE President Russell Loubser told Dow Jones Newswires that the Exchange "wanted to go through the same sort of process that other organizations will have to experience down the line." (22) However, the prospect of that same physical testing on such a large scale raises potential human rights issues. Some argue that a purely actuarial analysis would suffice to satisfy a reporting requirement. But this raises many potentially unacceptable uncertainties. (23)...