Ethics, Governance and Sustainable DevelopmentBUSA 7010

SAPPI LIMITED /
Ethics, Governance and Sustainable Development /
MBA FT Syndicate 4 /

Dear Syndicate 4:

  1. Fascinatingly, it appears harder than expected to pull the extremely strong individual assignments into an even stronger syndicate assignment. The causes are easy enough to identify: time and page constraints. I thought the assignment well-researched and well-organized: given the pressures of space. Oddly, I found the writing far less compelling than it was in individual assignments: lots of multiple, run-on clause sentences. It could have used a draft and a redraft and then another redraft. Again: Time.
  2. Here is what I liked, and what still left me wondering:
  1. The section on ethics seemed strong: it suggested that SAPPI’s paper policy (no pun intended) was not particularly well implemented. You rightly identified this problem as one of (ethical or) organizational culture. You also note that the ethical problems exist at three levels: (a) the individual employee’s lack of understanding, (b) the failure to produce company codes in any language but English, and (c) the questionable land/equity swaps with Lereko engineered by SAPPI’s management and board. Do you think such implementation programmes as the ‘learnership course’ you suggest would address these concerns? (Good idea for a start.) How does one ensure that those learnership lessons become embedded in the company? (Just a question.)
  2. One tension that went unexplored – though made evident in the text – was that SAPPI has done (from what you say) a reasonable job in terms of building community relations and social development. I am left uncertain by the assignment as to how you would benchmark that commitment. Your assignment, as it stands, makes that hard to gather. SAPPI – on your account – does not look particularly green (pun intended). That seems odd given their reliance on an ever shrinking water table and the pressure that will invariably come from civil society at large and other businesses over this scarce resource. How does SAPPI plan to deal with this very real, very serious and immediate (a decade or so) threat to their daily operations?
  3. Your placement of SAPPI between greenwashers and greenbranders seems about right. The company that the syndicate describes seems rather supine with respect to many of the kinds of issues that we discussed in class in ESG. For example, on your account, SAPPI contends that conflicting tribal loyalties makes community engagement difficult. That may occasionally be true – but so true as to make community relations (beyond farmers and communities working directly with SAPPI) impossible?
  1. Although the writing could have been cleaner, and stronger, I did not experience a whole lot of ‘piffle’. It made for a quick, if less than elegant, read. [It is hard to write with one person let alone 4 or 5 – I know, because I co-author all the time.] The irony of this syndicate assignment -- as opposed to better part of the individual assignments that make it up –is that it doesn’t feel quite as strong or tight or exciting. I wonder whether the critical reading that appears up front could have been pulled through the text more effectively – you did so on ethics and your greenwashing and greenbranding analysis (which I found more compelling this time around.) Is there more secondary literatureabout SAPPI and paper and pulp producers out there? Must be.
  2. That said, you cover all the bases. I hope that you will be satisfied with a 75.

Shapshap

Stu

This document seeks to provide a case study of SAPPI limited in terms of their commitme /

Table of Contents

Introduction

Literature Review

Ethics

Code of ethics

Governance

Sustainable Development

The environment

Company Overview

Ethical Behaviour

Empowerment – Lereko Investments (Pty) Limited

Corporate Governance Structures

Codes, The Law and Best Practices

King III

Reported Deviations or Non Compliance

Unreported Deviations or Non Compliance

Corporate Governance Structures

Compliance with human rights codes

United Nations Global Compact

Commitment to alternative business models

The land reform in practice

Sappi’s partnering with communities

Environmental policies

Legislative landscape for the Paper and Pulp Industry in South Africa

Climate Change

Energy source for the pulp mill

Independent environmental standards and certification

Sappi’s contribution to environmental sustainability through research and development

Corporate Social Responsibility programmes

Stakeholder Theory

Corporate Citizenship

Conclusion

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Introduction

The world has witnessed an apparently growing trend of untoward business practices – from brazen fraud at Enron, WorldCom and Lehman Brothers, to accusations of child labour abuse by Nike to environmental disasters brought on by BP’s clear negligence in the Gulf of Mexico oil spill situation. Such events lead one to question whether Milton Friedman’s proposition that “the business of doing business is business” is sufficient to govern multinational corporations in an increasingly global economy.Unethical business practices, and essentially unethical decision making, has deleteriously affected employees, shareholders, management, suppliers, customers, surrounding communities and the environment. The consequences of unethical behaviour and unethical business institutions can no longer be ignored and the relevance of ethics in business can no longer be denied. The question is no longer whether ethics or values should play a role in business decisions, but how ethical codes and practices can most effectively to do it (Hartman & DesJardins, 2011). We now need to move away from the Friedman model of doing business to one in which organisations display a genuine commitment to ethical behaviour and to the various stakeholders who are impacted in the general course of running business.

The objective of this assignment is tocritically analyse an organisations business processes in the form of a mini-case study; and to perform this in a manner that will evaluatetheir ethical behaviour, their compliance with human rights codes, their corporate governance structures, their commitment to alternative business models, environmental policies and their corporate social responsibilities programs. We have selected Sappi as the company of choice for our assignment and have focussed our analysis on their South African operations. The paper and pulp industry in South Africa generates considerable employment and income for the country. For this reason, it is important that business and policy makers implement initiatives to ensure the sustainability of the industry, stakeholders and the environment from which it draws resources.

Literature Review

Ethics

The ethical culture of an organisation can be proactive or reactive in nature. The proactive approach embraces continuous engagement with the external and internal environment in an effort to identify ways of improving the way business is done. In comparison a reactive approach focuses primarily on compliance with legislation, codes and guidelines in order to avoid penalties. Although an organisation should take a proactive stance with respect to its environment – firms must, at a minimum, begin by creating structures that ensure compliance with both legal sanctions and codes meant to secure an on-going license to operate. The ethical default position for most businesses is thus an attitude of “have to” rather than “want to” (Van VuurenCrous, 2005).

Research suggests that ethical behaviour in organisations is a function of both individual characteristics and contextual factors (Meyers, 2004 in Ardichvili, Mitchell & Jondle, 2009). Business ethics is defined by Rossouw & Van Vuuren (2004, p. 4) as “identifying and implementing standards of conduct that will ensure that, at a minimum level, business does not detrimentally impact on the interests of its stakeholders”. Attention to ethics in the workplace sensitises leaders and staff to how they should act.

Code of ethics

The Code of Ethics can be defined as a document or agreement that stipulates morally acceptable behaviour within an organisation (Rossouw & Van Vuuren, 2004). Introducing a Code of Ethics communicates to stakeholders that the organisation has adopted norms of appropriate behaviour and adheres to and values high ethical standards (McKinney, Emerson & Neubert, 2010). Research by McKinney et al.indicates that an ethical culture can be developed through the institutionalisation of an ethical code.

Rossouw and Van Vuuren (2004:216) have identified that a Code of Ethics in an organisation can:

Raise ethical awareness and expectations by establishing standards of morally acceptable behaviour.

Prevent unethical behaviour by stipulating that specific conduct will not be tolerated.

Promote ethical behaviour by articulating the ethical values that should guide members of the organisation in their actions and decisions.

Provide guidance in ethical decision making.

Promote organisational integration and co-ordination by rallying people around specific ethical values that will strengthen commitment to the organisation.

The implementation of the Code of Ethics is as critical as the adoption of a code in the establishment of an ethical culture. Communication within a firm is a fundamental element in the successful implementation of the process. Furthermore, transparency and participation increases the normative legitimacy of the code and the likelihood of greater adherence. (Rossouw & Van Vuuren, 2004)

Although a code is a step in the right direction, organisations need to be aware that without individuals capable of moral reasoning and in possession of judgement skills, the code of ethics will largely lack efficacy when the firm and its employees must make ethical decisions.Kohlberg’s model of moral development (in Trevino, 1986) which has been developed and tested over the last twenty years emphasises the cognitive or reasoning aspect of ethical decision making. It emphasises how the cognitive processes of moral decision making become more complex and sophisticated with development, such as education and training.It is evident from Kohlberg’s research that it is possible for individuals to be taught ethics and move to a more developed sense of moral judgement[UotW1].

Governance

Compliance and voluntary frameworks for governance have been used to good effect in South Africa and the country has gained some prominence in international circles for how we handle our corporate governance responsibilities.(eStandardsForum, 2009) The King I, II and III Reports have been instrumental in encouraging corporate integrity, enhancing listing requirements on the JSE Securities Exchange, and improving banking sector regulations and the public sector. The King Codes are voluntary and principle-based and require companies to apply the principles or explain their actions. This flexibility means that companies may implement alternate practices that still address the overarching corporate governance principles exemplified in the Code (fairness, accountability, responsibility and transparency).

The King Codes and Reports have paved the way for more stringent regulatory requirements if only because they fell short of creating the intended widespread change in the corporate landscape. The Companies Act (no 71 of 2008) aims to tackle this shortfall by focussing on corporate governance(Bouwman, 2011) and has led to an update of the King II Code. Subsequent to approval of the Companies Act; the latest King Report and Code were released – King III. Most of the principles set out in King III focus on the legislative duties of the board of directors in fulfilling their responsibilities and performing their functions on behalf of the company. It hopes to ensure that company directors act in the best interest of their companies while exercising the appropriate level of skill, expertise and diligence. The Companies Act is much broader in scope; but utilises the principles set out in King III in its efforts to institutionalise fairness, accountability, responsibility and transparency. It does so most effectively by piercing the corporate veil and forcing directors to accept direct liability for their actions and thenegligent, fraudulent and reckless trading actions undertaken by their firms.

The Companies Act is a complete rewrite of the Companies Act of 1973 and covers various aspects of corporate governance in much detail (Ernst&Young, 2009); however, it is not a stand-alone structure and stresses compliance with the Bill of Rights in the constitution. The Acthas a broad scope in that it is not constricted to economic development and seeks to employ governance structures that promote development of the social life of South African citizens in addition to their economic development.

Organisations in South Africa cannot ignore international norms; and these have been defined in the United Nations Global Compact. The United Nations Global Compact was formed to provide a framework for corporate citizenship in the world economy. (UNGC, 2008) Its aim is to “align business operations and strategies everywhere with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption.”(Refer to Appendix B)South African compliance and voluntary frameworks closely mirror the UNGC; and organisations that are found to be compliant with these frameworks will also likely be UNGC compliant.

Sustainable Development

The concept of sustainable development focuses on two primary concepts: (1) triple bottom line accountability that speaks to the conflicting imperatives of environmental protection, economic development and community participation; and (2) the idea of inter-generational equity. This complex concept first gained real traction in 1987 in a report by the World Commission of Environment and Development (also known as the Brundtland Commission). The commission described sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.(Bader, 2008; Feris, 2008). Of course, the commission’s concerns are not of such recent vintage. Indeed, they can be traced back well-before the modern environmental movement began with Rachel Carsen’s seminal work “Silent Spring.”

The 1992 United Nations Conference on Environment and Development held in Rio de Janeiro added substance to the skeleton framed by the Brundtland Commission by exploring the relationship between environmental and developmental goals. The World Summit on Sustainable Development held in Johannesburg (2002) began the move away from exploring the concept as a theoretical framework towards emphasising its practicality. (Bader, 2008) The meeting of these world bodies on issues surrounding sustainability entrenched the concept as a general principle. The challenge since then has been how best to translate this principle into practice. Many organisations have been proactive on this front and have introduced environmental and sustainability management systems ahead of legislative requirements in the hopes that these initiatives will identify them as good corporate citizens.

Today’s thinking on sustainable development embraces three key elements: environmental sustainability, social sustainability and economic sustainability. The IUCN Programme (2005-8) and the United Nations Global Compact (UNGC) have adopted this triple bottom line framework.(Adams, 2006)The UNGC’s current environmental focus is informed by the United Nations Environment Programme (UNEP). Since inception in 1973, UNEP has contributed to the formation of collaborative initiatives (eg,Multilateral Environmental Agreements (MEAs)) that have addressed issues such as the threat to bio-diversity, the lack of integrated regional and global planning, and the greater need for the enforcement of international environmental law. (UNGC, 2011)

“The UN Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment and anti-corruption.” (UNGC website, 2011)

Traditionally, corporate views on sustainable business were very reactionary. They looked at their inputs to determine what products were harmful to the environment and tried to find greener alternatives that could function at the same or better levels.

In 2002, William McDonough and Michael Braungart introduced the concept of the triple top line in their article titled “Design for the Triple Top Line: New Tools for Sustainable Commerce”. While the triple bottom line (Elkington, 1994) remains a useful tool for integrating sustainability into the business agenda, the new triple top line approach changes the focus on business, product and process development from being a damage limitation exercise to one geared towards creating safe, quality products right from the start. The article states that a business strategy focused solely on the bottom line can obscure opportunities to pursue innovation and create value in the design process. This new design perspective creates triple top line growth through products that enhance the well-being of our natural surroundings while simultaneously generating economic value (McDonough & Braungart, 2002). McDonough & Braungart suggest that business can become genuinely sustainable by adopting processes that support a triple top line approach.

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Academic literature and the IUCN suggest that to be truly sustainable in business means to find the optimal convergence of 3 discreet and often conflicting pillars: economy, society and the environment. See Figure 1a below. Where these interlocking circles converge, sustainability is ostensibly achieved. But it’s important to note that Figure 1 is a diagram, and not a geometrically accurate description of the real world and mankind’s potentially constructive role in undoing the damage that it has done in all three spheres.W.M. Adams however, uses this interlocking circles model below to demonstrate where we are now – as opposed to where we should be in theory. His model calls for greater integration and the need to redress the balance between the three dimensions of sustainability (Figure 1 c).