The Body Shop Scrutinized

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Franklin Research’s
A Publication of Franklin Research’s Insight September 15, 1994

This entire issue of Insight has been subsumed by an update on the Body Shop. Since Franklin’s Insight published our brief sell recommendation on the stock in July, vast numbers of words have been printed and broadcast in North America and Europe on the company’s social profile. As we go to press today, much of what Insight has to say will have been said.

Body Shop Scrutinized
Faces Allegations on Social Performance
By Joan Bavaria, Eric Becker and Simon Billenness

Dear Reader...

we independently investigated, we verified some of Entine’s claims. As 1994 progressed, we also became concerned about the growth prospects of the Body Shop’s stock. In early June, Franklin’s Insight lowered its stock recommendation to a “hold,” citing a rise in the stock’s price and expansion plans by a competitor. At an early June Social Investment conference in Toronto, Jon Entine discussed the results of his research on the firm. On June 14, callers to Franklin’s Insight’s weekly hotline heard that Body Shop stock had been further downgraded from a “hold” to a “sell” recommendation. On June 17 and on June 22, Franklin Research & Development Corporation sold all 45,950 of its clients’ shares in the Body Shop. The following July 15 issue of Franklin’s Insight stated: “Last month we lowered Body Shop to a hold based on concerns that its major competitor [Bath & Body Works] was accelerating its growth in the U.S. and Europe. Given this concern and fears that a fairly negative upcoming magazine article may put some near-term price pressure on the stock, we are lowering our rating to a sell.” For a while all was quiet. Then on August 19, Financial Times reporter Andrew Jack wrote about Franklin Continues on page 2

In the twelve years of publishing this newsletter, the Insight staff has never been as troubled or overtaken by an issue. In the end, we were determined to print this story, to publish as much of the truth as we could uncover and verify ourselves, and to avoid the sensationalism and name calling that has characterized the “Body Shop Affair.” The question that is being asked now is whether the story will be permanently damaging to socially responsible investing or socially responsible businesses. It doesn’t have to be if we in that community keep our wits about us. We can use this to grow stronger and better. This, from Insight’s vantage point, has definitely proved to be a learning experience. We have learned that we must be more diligent in checking company claims. We have also learned that we have limitations in our research capacity, if we didn’t know that already. The fact was underscored that a stronger tradition (if not requirement) for honest disclosure on various social issues is needed. It is too easy to subtly construct images, whether deliberContinues on back cover

In the past few weeks the British press has focused on the Body Shop’s social record with an intensity normally reserved for the Royal Family. Since the story broke, Body Shop’s stock has fallen from almost 250 pence to a low of 205 pence. Recently, the stock has recovered to 216 pence. Two main questions emerge from this debate: • Why did this issue reach such a boiling point? • What is the Body Shop’s social record?

How The Story Started...
In September 1991 Franklin’s Insight profiled the Body Shop, awarding the company our highest social ratings. However, since then, we have received information that challenges our initial assessment of the company. A German newsletter noted that the Body Shop uses non-plant derived ingredients in its products. A British animal rights organization criticized the company’s animal testing policy. Early this year, investigative reporter Jon Entine provided us with considerable information about apparent contradictions between the Body Shop’s image and its actual record on social issues. As...
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