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Corporate Citizenship

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Contents in brief
Preface

Part 1 Context
Chapter 1:Introduction to corporate citizenship
Chapter 2:Sustainable development and climate change
Chapter 3:Evolution of corporate citizenship
Chapter 4:Rationale of corporate citizenship

Part 2 How
Chapter 5:Responsible leadership
Chapter 6:Risk management in corporate governance
Chapter 7:Strategic management and competitive advantage
Chapter 8:Stakeholder engagement
Chapter 9:Management of business ethics

Part 3 Implementation
Chapter 10:Sustainable procurement and supply chain management
Chapter 11:Operations and logistics management
Chapter 12:The human resource function and corporate citizenship
Chapter 13:Marketing management
Chapter 14:Financial management

Part 4 Critical perspectives and conclusion

Chapter 15:Conclusion

Index
Table of contents
Part 1Context
1Introduction to corporate citizenship
1.1Introduction
1.2Corporate citizenship defined
1.3Corporations, companies and business
1.4Corporate citizenship with a capitalist stance
1.5Our approach in this textbook
1.6Structure of this book
1.7Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

2Sustainable development and climate change

2.1Introduction
2.2The emergence of sustainable development
2.2.11968 – Club of Rome
2.2.21969 – International Union for the Conservation of Nature (IUCN)
2.2.31972 – United Nations Conference on the Human Environment
2.2.41974 – World Council of Churches (WCC)
2.2.51980 – World Conservation Strategy
2.2.61983–1987
2.3Conceptualising sustainable development
2.3.1The systems theory
2.3.2What is sustainability?
2.3.3What is development?
2.3.4Defining sustainable development
2.4The elements of sustainable development
2.4.1The core elements of sustainable development
2.4.2Interconnections of the elements of sustainable development
2.5Society’s ecological footprint
2.6Views of sustainability
2.7Responses to the challenge of unsustainable development
2.7.1Rio Summit 1992
2.7.2The Millennium Declaration
2.7.3World Summit on Sustainable Development (WSSD),
Johannesburg 2002
2.7.4Rio+20 (The Future we want)
2.7.5United Nations Sustainable Development Summit (the post-2015
Agenda) and the Sustainable Development Goals (SDGs)
2.8The future of sustainable development
2.9Climate change in the context of sustainable development
2.9.1Climate change defined
2.9.2Climate change facts
2.9.3Strategies for addressing climate change
2.9.4Corporates taking climate action
2.10Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

3Evolution of corporate citizenship

3.1Introduction
3.2The changing role of corporates
3.3Variables influencing corporates to change
3.3.1Globalisation
3.3.2Advances in technology and a radical transformation of the world
of work
3.3.3Increased power and demand from customers
3.3.4The growing importance of intellectual capital and learning
3.3.5The changing roles and expectations of workers
3.3.6Increasing corporate power and responsibility
3.3.7Political changes
3.4Corporate citizenship
3.4.1Defining corporate citizenship
3.4.2The history of corporate citizenship
3.5Facilitating corporate citizenship: A framework
3.6Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

4Rationale of corporate citizenship

4.1Introduction
4.2The moral drive for corporate citizenship
4.3Defining morality and ethics
4.4Ethical theories
4.4.1Consequential ethical theories
4.4.2Non-consequential ethical theories
4.4.3Contemporary ethical theories
4.5Doing good to do well
4.6Corporate citizenship and legislation
4.6.1The role of legislation in business
4.6.2Categories of laws and regulations that govern corporate activities
4.6.3Legislation and ethics
4.7Corporate citizenship and corporate financial performance
4.7.1What is meant by financial performance?
4.7.2Social responsibility and financial performance – the arguments
4.7.3Evidence of social responsibility influencing financial performance
– an academic review
4.8Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

Part 2How
5Responsible leadership
5.1Introduction
5.2Defining management
5.3The levels and functional areas of management
5.4Defining leadership
5.5Management versus leadership
5.6Leadership approaches
5.6.1Leadership traits approach
5.6.2Leadership styles approaches
5.6.3Contemporary leadership approaches
5.7Responsible leadership
5.7.1Values and value creation in corporations
5.7.2Leadership responsibilities with respect to key stakeholders
5.7.3Responsible leadership in action
5.8Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

6Risk management in corporate governance

6.1Introduction
6.2Background to corporate governance
6.3Defining the concept and primary goal of corporate governance
6.4Principles of corporate governance
6.5Risk management framework
6.5.1Risk management culture
6.5.2Risk management strategy
6.5.3Risk management structure
6.5.4Risk management process
6.6Principles of risk governance
6.7Contextualisation of the principles of corporate governance in terms of
corporate citizenship
6.8Corporate governance principles for a government
6.9Conclusion
Multiple-choice questions
Discussion questions
References

7Strategic management and competitive advantage

7.1Introduction
7.2The interface between strategic management, corporate citizenship and
sustainability
7.2.1Strategic management process
7.2.2Corporate citizenship
7.2.3Sustainability
7.3 Embedding sustainability into the strategic management process: the goal
of a sustainable corporate
7.4Strategic direction
7.5Strategic analysis
7.5.1The internal environment
7.5.2The external environment
7.6Sustainability embedded business models and strategies
7.6.1Business model innovation for sustainability
7.6.2Sustainability – an integral part of strategic choice
7.7Sustainability – an integral part of strategy implementation
7.7.1Leadership
7.7.2Culture
7.7.3Structure
7.7.4Reward systems
7.7.5Policies and procedures
7.7.6Training and education
7.7.7Stakeholders
7.7.8Technology
7.8Strategy performance management and control
7.9Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

8Stakeholder engagement
8.1Introduction
8.2Emergence of the stakeholder concept
8.3Who are the stakeholders of corporations?
8.4Stakeholder identification
8.4.1Benefits of stakeholder identification
8.4.2Approaches to stakeholder identification
8.5Stakeholder prioritisation
8.6Stakeholder engagement
8.6.1How to engage stakeholders
8.7Stakeholder relationship management
8.7.1Shared value
8.7.2Social capital
8.7.3Stakeholders as part of a network
8.8Influences of external stakeholders on corporates
8.8.1Business, government and the public
8.9Influences of internal stakeholders on corporates
8.9.1Employee related legislation
8.9.2Employees: the key to sustainability
8.10Stakeholder engagement issues
8.11Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

9Management of business ethics

9.1Introduction
9.2Ethics
9.3Business ethics
9.3.1An introduction to business ethics
9.3.2The levels of business ethics
9.3.3Arguments against and drivers for business ethics
9.4Regulation and business ethics
9.5Managing business ethics
9.5.1Formal management of business ethics in organisations
9.5.2Informal management of business ethics
9.6Organisational cultures
9.6.1Levels of organisational culture
9.7Corporate ethical culture
9.7.1Components and characteristics of an ethical culture
9.7.2Strong and weak ethical cultures
9.7.3Virtues in an ethical culture
9.8Ethical behaviour model
9.8.1Individual characteristics (A in Figure 9.3)
9.8.2Ethical beliefs and sensitivities (B in Figure 9.3)
9.8.3Ethical intuitions (C in Figure 9.3)
9.8.4Theory of planned behaviour (D in Figure 9.3)
9.8.5An issue’s moral intensity (E in Figure 9.3)
9.8.6Organisational characteristics (F in Figure 9.3)
9.8.7Ethical intentions (G in Figure 9.3)
9.9Ethical decision making
9.9.1Nine-step ethical decision-making model
9.10Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

Part 3Implementation
10Sustainable procurement and supply chain management
10.1Introduction
10.2Creating value through supply chain management
10.3Corporate social responsibility and procurement
10.4Selection of suppliers and awarding contracts
10.4.1The importance of selecting the right suppliers
10.4.2The selection process
10.4.3Developing suppliers
10.4.4Long-term relationships with suppliers
10.5Procurement and supply chain management in the public sector
10.5.1SCM Framework
10.5.2Bid committees
10.6Ethical aspects in procurement and supply chain management
10.6.1Rules for ethical procurement transactions
10.6.2Areas of unethical conduct in procurement
10.6.3Measures to prevent unethical conduct
10.7Environmental responsibility in procurement and the supply chain
10.8Conclusion
Multiple-choice questions
Discussion questions
References

11Operations and logistics management

11.1Introduction
11.2The five Rs of sustainable supply chains
11.3Sustainable operations management
11.3.1Objectives of sustainable operations management
11.3.2Sustainable operations management in practice
11.4Sustainable logistics management
11.4.1Transport
11.4.2Outsourcing of logistics: third-party logistics providers
11.4.3Reverse logistics
11.5Conclusion
Multiple-choice questions
Discussion questions
References

12The human resource function and corporate citizenship

12.1Introduction
12.2Corporate citizenship within the HR context
12.3Human resource planning and corporate citizenship
12.4Staffing (recruitment, selection and appointments) and corporate
citizenship
12.5Development of human resources and corporate citizenship
12.6Utilisation of human resources and corporate citizenship, including
performance management
12.7Career development and corporate citizenship
12.8Recognition and rewards and corporate citizenship
12.9Employee health and wellness, as well as occupational health and safety
and corporate citizenship
12.10Employment relations and corporate citizenship
12.11The added-value debate from an HR perspective and corporate
citizenship
12.12Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

13Marketing management
13.1Introduction
13.2Linking marketing philosophies and corporate citizenship
13.2.1Marketing philosophies
13.2.2Social marketing
13.3Customers’ wants and needs
13.3.1The conscious customer
13.3.2Consumer protection in South Africa
13.4NGOs and marketing
13.5The traditional marketing instruments and corporate citizenship
13.5.1Product decisions, branding and packaging
13.5.2Pricing and corporate citizenship
13.5.3Where to sell (distribution and logistics in the supply chain)
13.5.4Marketing communication, advertising and PR
13.6Ethical and cause-related marketing
13.6.1Ethical marketing
13.6.2Cause-related marketing
13.7Conclusion
Multiple-choice questions
Discussion questions
Additional reading
References

14Financial management
14.1Introduction
14.2The financial management function
14.2.1 Defining financial management
14.2.2The fundamental objective of financial management
14.2.3The ethics of maximising corporate value
14.2.4The focus of financial management
14.3Corporate citizenship and the finance function
14.3.1Responsible investment
14.4Responsible financing
14.4.1Responsible financing from a corporate viewpoint
14.4.2Responsible finance from a financier’s viewpoint
14.5Responsible distribution of profits
14.6Integrated reporting
14.7Conclusion
Multiple-choice questions
Critical-thinking questions
Additional reading
References

Part 4Critical perspectives and conclusion

15Conclusion
15.1Introduction
15.2Summary of the key points
15.3The initial premises
15.3.1Milton Friedman and the Holy Grail of the business case
15.3.2When the business case breaks down
15.4Conclusion
Multiple-choice questions
Discussion questions
References

Index
Preface
Corporate citizenship is a prominent international issue and has become a research
priority in various sciences, especially the management sciences. Contemporary
corporations are no longer expected only to perform financially, but are also expected to
have an ethical relationship of responsibility between the corporate itself and the society
in which it operates and performs its business activities. Corporate citizens have various
rights (separately from the human rights of its owners, managers or employees), but with
these rights come various responsibilities and obligations. These responsibilities and
obligations revolve around two aspects. First, a corporation has a legal and moral
obligation towards the economic, social and natural environments within which it
operates. Second, a corporation also has an investment and sustainability obligation to
protect, preserve and enhance the wellbeing of the economic, social and natural
environments in which it operates. A corporation is expected to consider the impact that
it has on the economic environment within which the community operates. Furthermore,
it must consider the environmental, social and governance impact it has on the
community in which it conducts its business. Thus, corporates play an important role in
delivering citizenship rights to citizens – a role much larger than corporate charity. This
being said, we adapt the Matten and Crane (2005)1 definition of the term corporate
citizenship in this book, namely ‘the role of the corporation in administering citizenship
rights for individuals’.
The real question is ‘How?’ ‘How can corporates be good corporate citizens?’ Corporate
leaders play an undeniably important role in a corporation’s road to administering
citizenship rights for individuals. Corporate leaders are expected to be ethical and
responsible – they must use the corporate’s strategic and operational planning to ensure
that a sustainable business is being developed. They are also expected not to compromise
the natural environment, but rather to consider the effect of the corporation and its
strategies on the social, economic and natural environment. Furthermore, sound
corporate governance, stakeholder engagement and business ethics are critical for
corporates striving to practice good corporate citizenship.
The road to being a good corporate citizen does not end with strategic managers and
leaders – it needs to cascade down to all levels and all functional areas of management.
Environmental, social, ethical and governance issues should also be considered in the
management of procurement and the supply chain, operations and logistics, human
resources, marketing and corporate finance.
We trust that the reader will find value in how we present corporate citizenship and
the conceptualisation, implementation, and evaluation of corporate citizenship practices
within the four key functional areas of business that we present in this book.

Tersia Botha
September 2016
1Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended theoretical
conceptualization. Academy of Management Review, 30(1):166–179.
PART 1
Context
chapter
Introduction to corporate
citizenship
Neil Eccles and Tracey Cohen 1
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Define corporate citizenship
•Understand how corporates can administer citizenship rights through their core
business
•Understand the general economic viewpoint from which corporate citizenship is
addressed in this book
•Outline the key elements and functions that support the practice of corporate
citizenship as covered in this book
KEYWORDS AND CONCEPTS
-administering of citizenship rights
-citizenship
-core business
-corporate/corporation
-corporate citizenship
-pursuit of profit

OPENING CASE SCENARIO

Woolworths leading the way as a responsible retailer – responding to

sustainability issues in the retail industry
In recent years, environmental and social sustainability issues in the global food and
clothing retail industry have fallen under the spotlight.
In food retail, there was the horse meat scandal in the UK in 2013, when donkey
and horse meat masqueraded as beef or lamb in some major retail stores.1 A year
earlier, consumers in South Africa were enraged to find fish listed as endangered on
the International Union for Conservation of Nature (IUCN) Red List on the shelves of
some retailers.2 Also during this period, the CNN Freedom Project exposed the
sourcing of cocoa for chocolate production as anything but sweet. According to this
project, roughly 40% of the world’s supply of cocoa comes from plantations in the
Ivory Coast, where much of it is produced using child labour and modern forms of
slavery.3 With the exposure of unethical farming of livestock; irresponsible clearing of
indigenous tropical forests to make way for palm oil and other monocultures; and the
sometimes gross exploitation of suppliers and labourers in the supply chain coming
to the fore, the food retail industry has had more than its fair share of challenges in
recent years.
Clothing retail has also not escaped scrutiny, particularly in relation to working
conditions in the garment supply chain. There were the high-profile scandals relating
to Nike in the early 2000s4 and Gap in 2007.5 The 2013 collapse of the Rana Plaza
factory in Bangladesh that killed 1 134 people and injured hundreds of others,
reminded the world in the harshest possible way that issues of worker safety and the
true cost of cheap labour and ‘fast fashion’ are far from resolved.6 Beyond these
supply-chain labour issues, clothing retailers have not escaped the gaze of
environmental activists. The production of cotton, the world’s most widespread
profitable non-food crop, provides income for more than 250 million people
worldwide and employs almost 7% of all labour in developing countries. 7 This is a
good thing, right? But did you know that it takes 2 700 litres of water to produce a
single t-shirt?8 To create and maintain cotton fields, often the conversion or
destruction (deforestation) of natural habitats occurs. Further impacts include soil
erosion, pollution and water contamination from fertilisers and pesticides.9
The above issues have financial, environmental and social implications, and touch
on the fundamental rights of people across the world. Retailers, who are in the
business of selling food and clothing, ought to consider these implications.

Woolworths: South Africa’s poster child for retail sustainability? 10, 11

Woolworths (Pty) Ltd is a large retail chain that originated in South Africa and today
operates in many parts of Africa, the Middle East, and in Australia. It trades through
more than 400 stores and employs around 31 000 people worldwide.12 The Group
publicly attributes much of its success to its uniquely engrained sustainability
principles.
While caring for its communities and the environment have always been part of
the Woolworths Group’s stated ethos, the Group’s Good Business Journey (GBJ),
which sets ambitious sustainability targets, was officially launched in 2007. GBJ is
the Group’s official commitment to good corporate citizenship. This is practised by
embedding a consideration of environmental, social and governance issues into their
core business with a view to seeking opportunities emerging out of these to
administer rights to citizens in the jurisdictions in which the Group operates.
Woolworths’ sustainability efforts are directed by the vision ‘to be the most
sustainable retailer in the Southern Hemisphere’. The Group believes that this vision
will be achieved through its passion and commitment towards achieving and
maintaining the highest standards through sustainable business growth – being
responsible and profitable simultaneously. This is done within the context of the
changing environmental and social needs in the countries in which they operate.
With good governance structures in place, the GBJ drives growth, change and
diversity, and underpins the sustainability initiatives of the Group across eight focus
areas. Integral to its business operations, the focus areas include ethical sourcing,
sustainable farming, water scarcity, energy, waste, social development,
transformation, as well as health and wellness.
Woolworths continues to draw local and global recognition for its sustainability
initiatives. In South Africa, Woolworths has been included on the Johannesburg
Stock Exchange (JSE) Socially Responsible Investment (SRI) Index. On the the
international stage, the Group is one of five South African corporates to be included
on the Dow Jones World Sustainability Index. Woolworths has also won awards at
the International Loyalty Europe, Middle East and Africa (EMEA) Awards, including,
Best Loyalty Programme of the Year (EMEA) and Best Corporate Social
Responsibility Initiative linked to loyalty (both awards were linked to the MySchool,
MyVillage, and MyPlanet customer loyalty cards).
Woolworths’ claim is that, by considering the relevant environmental, social and
governance (ESG) issues, the Group will achieve long-term sustainability and
profitability.
1.1Introduction
Climate change, natural and man-made disasters, pollution, poverty, inequality, lack of
ecosystem respect, rising numbers of endangered species, fast-depleting natural
resources, the increasing human population, poor ethical conduct, human rights abuses,
ignorance, greed, irresponsible development and investments, corruption, lax regulation
and weak governance, corporate scandals and global financial crises – these are some of
the many issues confronting society in general and, in the context of this book, the
business world in particular.
Whilst society, consisting of governments, the business world, non-profit
organisations (NPOs), non-governmental organisations (NGOs) and other collective
groups of citizens has purportedly been moving towards addressing these issues, one
might well ask the question: Have these moves been adequate? Or have we taken one step
forward and five steps backwards? Has society become numb to issues such as poverty
and human rights abuses? Has greed and corruption become commonplace in business?
These are rhetorical questions. The persistence (and, in many cases, increasing
intensity) of these issues presents us with the only possible answers: Our collective
efforts have not been adequate; in many cases, we have taken five steps backwards; our
numbness towards poverty and human rights abuses persists; and greed and corruption
are indeed commonplace, especially in business.
Increasingly, the occurrence of these problems is becoming generalised across regions.
In other words, the problems are either evident within most nations, or alternatively
simply transcend national borders. Even the stark historical divide between developing
and developed nations is, in many instances, beginning to evaporate with the onward
march of globalisation. And even where the problems remain local, the increasingly
global character of corporations means that it is becoming much more difficult for
corporations to avoid media exposure. In short, these issues are significantly impacting
the business landscape.
What then do corporates need to do to adjust to the changing business landscape and
do they need to adjust the corporate role? Might corporate citizenship be the answer?
This textbook is titled ‘Corporate citizenship in South Africa and beyond’. So what is
corporate citizenship and where does the idea come from? We deal with these questions
in much more depth in Chapters 2, 3 and 4 of this book. However, it is necessary at the
very outset to present the definition of corporate citizenship upon which this book is
grounded.
1.2Corporate citizenship defined
We have elected to follow Matten and Crane’s 13 conceptualisation of corporate
citizenship and for the purpose of this book in general define it as the:

‘role of the corporation in administering citizenship rights for individuals.’

There are two features of this definition that appeal to us:

•First, it is grounded in a thorough consideration of the idea of citizenship with a
specific emphasis on the liberal political-economic tradition that characterises most
industrialised societies. And this provides a critical contextual framework for much
of what is considered in this book.
•Second, it specifies emphatically that corporate citizenship is not about corporates
as citizens,14 but rather that it is about the roles that corporates might play in
administering citizenship rights to citizens.

Implicit in the understanding of ‘roles’ is the fact that corporate citizenship encompasses
much more than corporate philanthropy and social investment – corporate charity if you
like – which tended to be the focus of earlier manifestations of corporate citizenship.
Instead of this narrow or ‘limited’ 15 scope, corporate citizenship, according to the
definition that we have chosen, embraces the fact that business activity in general (that
is, core business activity) has the potential to influence the administering of
citizenship rights enormously.
But what are citizenship rights? Following Marshall’s categorisation of these, Matten
and Crane16 describe three different classes of citizenship rights as characterising the
liberal political-economic tradition: social or positive rights; civil or negative rights; and
political rights. Social rights would include things like the right to education, health care,
and housing. Ultimately, these relate to welfare, which must be provided. Civil rights
would focus on the protection of citizens against intrusions on their freedoms. So, things
like freedom of speech, thought and religion would fall into this category. Very
importantly, the protection of private property rights would typically be a civil right.
Finally, political rights include all of the rights necessary to allow citizens to participate
in the formulation of public policies and practices by which society is governed. Things
like the right to vote would be included here.
As Matten and Crane17 argue, historically the administering of these rights has typically
been the responsibility of governments. However, for a variety of reasons, not least of all
the process of globalisation, corporations are increasingly finding themselves not only
best placed to administer some of these rights, but also expected to administer them in
exchange for social legitimacy and the licence to do business.
Example
Administering citizenship rights through ethical trade
Many social and civil rights of citizens are mediated through work. The social right to earn a
dignified wage; the social right of children to have time to be educated before entering into
the workplace; the civil right of citizens not to be forced to work; the civil right not to be
discriminated against on the basis of arbitrary things like race, gender or sexual orientation
are all examples. However, as we have already seen in the opening case scenario in this
chapter, many participants in the clothing retail industry have been complicit in the recent
past in the violation of many of these citizenship rights rather than in their administration.
Woolworths, however, through its Good Business Journey position statement on responsible
sourcing,18 makes firm commitments regarding the protection of these and other citizenship
rights through 13 principles. It also outlines its basic approach to fulfilling these principle
commitments with particular emphasis on managing its supply chain. In this way,
Woolworths (on paper at least) is seeking to contribute positively to the administering of
citizenship rights. But it is also minimising its exposure to the risk of consumer boycotts like
the ones experienced by other retailers in recent years.

Example
Administering citizenship rights through packaging management
In much the same way as the protection of property rights would be deemed as a civil right,
citizenship rights in relation to the environment would also typically be defined as civil rights.
An example of a formal expression of such rights would be section 24 of the Constitution of
the Republic of South Africa (1996) which states that:

‘24. Everyone has the right—

(a) to an environment that is not harmful to their health or wellbeing; and

(b) to have the environment protected, for the benefit of present and future generations,
through reasonable legislative and other measures that—

(i) prevent pollution and ecological degradation;

(ii) promote conservation; and

(iii) secure ecologically sustainable development and use of natural resources while
promoting justifiable economic and social development.’

As described in the opening scenario in this chapter, there are many ways in which retailers
interface with the administering of such environmental rights both directly, and through their
supply chains. One very important way is through their practices relating to packaging. With
regards to the issue of packaging, Woolworths recognises environmental, social and indeed
financial dimensions.19 From a financial perspective, reducing packaging to a minimum
typically means saving money. From a social perspective, effective packaging means less
wasted food. From an environmental perspective, less packaging means less resource use
on an input side and less waste as an output. With this in mind, in its Good Business
Journey, Woolworths formally makes a number of explicit commitments in relation to
packaging that might be thought of as enabling the administering of citizenship rights in
relation to the environment in particular.

DILEMMA
Consider the following extract from Woolworths Holdings Limited integrated report of 2014:

‘Much is done throughout the group through The Good Business Journey. The Date
Expired Foods Programme in Woolworths generated R424 million worth of food given
to needy institutions, and that is after our staff have been offered product at half price.
We also contributed R52 million through our MySchool programme to schools and
other charities.’20

Are these examples of Woolworths administering citizenship rights through its core
business? Or are they merely philanthropic (charity) initiatives of donating food and money?

1.3Corporations, companies and business

Having presented the basic definition of corporate citizenship, it is now necessary to turn
to our basic conception of a ‘corporation’ or ‘company’. In this book, we typically use the
terms ‘corporation’ or ‘corporate’ in preference to ‘company’. The only reason for this
convention, however, is that it is the word ‘corporate’ and not ‘company’ that is found in
the phrase ‘corporate citizenship’. To all intents and purposes, we
view corporations and companies as synonymous and define them in the capitalist
sense as privately owned entities ultimately engaged in the pursuit of profit for the
owners.
Beyond specifying this ultimate character of a corporation (privately owned and
pursuing profit), we really do not limit our consideration in any way. For instance, while
the term ‘corporation’ is quite often associated with large, often multinational, businesses
we do not consider the understanding of corporate citizenship presented here to be
limited to these. Collectively, small businesses can have a great impact on an economy, on
society and on the environment.
Example
The potential influence of corporations
In 2012, small, micro and medium enterprises (SMMEs) contributed more than 45% of South
Africa’s total GDP.21 In the same year, however, multinationals such as Royal Dutch Shell,
Exxon Mobil, Walmart Stores and British Petroleum (BP) each had revenues exceeding
South Africa’s entire gross domestic product (GDP). Due to the sheer magnitude of major
global corporations operating across multiple countries, their individual and combined
influence and impact on society and the environment is huge. This calls for a growing
expectation and need for corporations of all types and sizes to step up and play a bigger role
in society.22 Despite the type or size of a business, it is clear that collectively (in the case of
SMMEs) and solely (in the case of large multinationals) businesses are powerful entities that
can be a force for good in driving socio-economic development; or, they can be a hindrance
if they are only interested in pursuing profit (usually for a minority group) at social and
environmental costs.

The principles and practices that are outlined in this book ought to be generally useful,
irrespective of the size of the entity involved. Any tendency in the chapters that follow to
disproportionately use large global corporations to illustrate principles or practices is
simply based on the global recognition that these enjoy.
1.4Corporate citizenship with a capitalist stance
Our decision to opt for a traditionally capitalist definition of a corporation is very
important. It must be noted that much of what has been written about corporate
citizenship to date has been framed as a rebellion against strongly capitalist shareholder-
focused notions of corporations as expressed by the likes of Milton Friedman in his
famous 1970 New York Times Magazine article entitled ‘The Social Responsibility of
Business is to Increase its Profits’.23 Friedman has almost always been framed as the
villain in the corporate citizenship story.
Our definition of a corporation, however, implies that in this book we do not do this.
In fact, quite the contrary. The basic premise underlying most of this book is that
corporations are indeed principally engaged in the pursuit of profit for the owners and
that any activities that corporates might undertake under the banner of corporate
citizenship (that is, administering citizenship rights to individuals) must be consistent
with this ultimate purpose.
1.5Our approach in this textbook
Our goal here is to craft a book with a particular emphasis on the practice of corporate
citizenship. In other words:
•our understanding of corporate citizenship as the roles that corporates might play
in administering citizenship rights to citizens; and
•our understanding of corporations as privately owned entities ultimately or
principally engaged in the pursuit of profit for the owners.
Our focus for most of the remainder of this book is on describing how corporates have in
the past, and might better in the future, practically execute their citizenship role.

In order to achieve this, we have adopted what we think is a rather innovative approach.
This approach is based on the anecdotal observation that corporate citizenship as an idea
has moved from a fringe position as little as ten years ago, to a much more mainstream
business consideration today. Recognising this, we have elected not to assemble a group
of corporate citizenship experts to write the book. Instead we decided to invite a group
of experts in various fields of management science to apply their minds to the tasks
corporates might face in executing their particular corporate citizenship roles.
1.6Structure of this book
This then brings us to the structure of this book. We have divided the book into four
sections. The chapters of the book are structured to complement one another, as well as
to be read and referred to individually should the need arise. Although the emphasis of
the book (as we have already stated) is on practice, in Part 1 we elaborate on the
necessary context for corporate citizenship. This comprises five chapters:
•In Chapter 1, we introduce corporate citizenship.
•Chapter 2 unpacks the concepts of sustainability and sustainable development. We
look at environmental, social and economic issues of sustainability at a macro level
and aim to develop an understanding of the tension and alignment between these
issues. We trace the problem of our historical and recent development, and highlight
the fundamental social need to pursue sustainability to ultimately attain the future
we want. Chapter 2 has absolutely nothing to do with corporates! It simply sets out
what citizenship rights might entail and the challenges that might be confronted in
the administration of these. It defines the opportunity space for the practice of
corporate citizenship.
•Considering the foundational issues laid in Chapter 2, Chapter 3 looks at business
as a response to the challenge of sustainable development. We first take an in-depth
look at the historical development of corporate citizenship, the differing
perspectives and various approaches. In so doing, we interrogate in much more
depth than we have done in this chapter (Chapter 1), the definitions of corporate
citizenship and the similarities and differences of related concepts.
•In Chapter 4, we present the social imperative for corporates participating in
corporate citizenship (the administration of citizenship rights to citizens). We also
interrogate that rationale for corporate citizenship far more comprehensively. While
we do discuss the ethical rationale to a very limited extent, the focus in this chapter
is most definitely on grounding our rationale in the capitalist definition of the
corporation that we have assumed in this book.

In Part 2 we begin to think about ‘how’ we can ‘do’ corporate citizenship. We consider
the capabilities of business that are essential for corporate citizenship roles to be
successfully incorporated into the key functional areas of business. This section
comprises five chapters:
•We start out this section with the recognition that transforming the ‘why’ into the
‘how’ inevitably requires leadership. Chapter 5 explores the meaning of the terms
‘management’ and ‘leadership’ and the differentiation between these terms. Various
traditional and contemporary leadership approaches are examined, focusing on the
most recent development in the field, namely responsible leadership. The chapter
concludes with a discussion of the practice of responsible leadership.
•Sound corporate governance is critical for businesses striving to be good corporate
citizens. Chapter 6 walks us through a brief history of corporate governance and
frameworks. The author presents the principles and processes of good corporate
governance, risk management, reporting and assurance. The chapter demonstrates
the link between corporate governance, ethics, stakeholder engagement and
leadership and illustrates how the corporate citizenship architecture should be
governed.
•The authors of Chapter 7 present an overview of sustainable strategic
management; they incorporate corporate citizenship considerations in strategy
formulation and implementation; they consider the implications of embedding
corporate citizenship in business strategy; and, finally, they present the role of
corporate citizenship in achieving a competitive advantage for a business.
•Chapter 8 on stakeholder engagement is a vital contribution to this textbook as it
considers the relationship between business and its stakeholders. Without such
stakeholders, business would not exist. The authors identify the various
stakeholders and materiality issues when prioritising stakeholder groups. They
illustrate the stakeholder engagement process, present the tools for effective
stakeholder engagement and relationship management, and touch upon the
consequences of inadequacies in such. Stakeholder engagement from a management
perspective is also considered.
•Operating within ethical realms is essential for good corporate citizenship. Chapter
9 presents the considerations for the effective management of ethics. The chapter
includes the fundamentals and principles of personal and organisational ethics,
ethical decision making, as well as formal and informal tools required to manage
ethics within the corporate culture.

In Part 3 of the book, we critically consider the conceptualisation, implementation, and

evaluation of corporate citizenship practices within four key functional areas of business.
Upon integrating the corporate citizenship spirit within each functional area, authors
consider the environmental, social and governance issues that are continuously changing
in terms of character and priority. This section too comprises five chapters:
•Procurement and supply chain management is covered in Chapter 10. The authors
explain ethical procurement, the criteria for selecting suppliers and the influence a
business’s procurement function may have on said suppliers. The authors look at the
growing impact of public procurement and the role of procurement as a tool to
change socio-economic roles is touched upon.
•Chapter 11 is based on operations and logistics management. These functions offer
a broad range of opportunities to capitalise upon as businesses aim to be
good corporate citizens. In this chapter, new product development, third-party
logistics, as well as waste and carbon management are discussed.
•The implications of corporate citizenship for the human resource function within a
business are presented in Chapter 12. Inclusions in this chapter are recruitment
practices and workforce retention, employee wellness, remuneration, training and
development, talent management, occupational health and safety, discrimination,
labour laws and employee rights and other workplace issues that address the
evolving contract between business and its internal stakeholder group.
•Chapter 13 considers the implication of corporate citizenship on the marketing
management function. This involves looking at marketing philosophies, new needs
and wants of consumers, a contemporary view of the essential ‘Ps’ in marketing
(including product, price, place and promotion), the Consumer Protection Act 68 of
2008 and other essential elements of marketing which will increase a business’s
corporate citizenship status.
•Chapter 14 looks at the financial management function. In this chapter, the authors
will look at the financial implications of implementing corporate citizenship. These
implications are considered from both an investment and a finance perspective.

Finally, in Part 4 (entitled Critical perspectives and conclusion) we wrap up this book.
We do this in one chapter:
•Our decision to premise this book on a shareholder centred definition of a
corporation à la Milton Friedman is not without its problems. In Chapter 15 we
critically reflect on the implications of this premise. This is clearly somewhat at odds
with our otherwise instrumental and pragmatic approach to this subject. However, it
is necessary to at least acknowledge potential shortcomings of the approach that we
describe. We also, in Chapter 15, by way of conclusion reflect back on the ground
covered in this book.
1.7Conclusion
Human society is facing enormous sustainability challenges, challenges relating to the
delivery of fundamental rights to increasing numbers of citizens around the world today
and into the future. Some of the more pressing of these challenges were listed explicitly
in the opening line of the Introduction to this chapter but this list is certainly not
exhaustive. As these challenges become more generalised and prominent around the
globe, it is absolutely obvious that corporations, as increasingly powerful social
institutions, must be part of solutions if effective solutions are to be found. This
imperative throws up both challenges and opportunities for corporations. Mitigating the
challenges and grasping the opportunities associated with administering citizenship
rights is the work of corporate citizenship. This book aims to lay the foundation for
understanding corporate citizenship, and to provide the knowledge and tools that will
equip corporates to fulfil their potential in terms of administering citizenship rights while
remaining true to their core purpose of delivering profit to owners.

Multiple-choice questions
1.Which one of the following scenarios represents the best example of corporate
citizenship as defined in this chapter?
a.A large IT company donates 10% of its profit to the Save the Rhino campaign.
b.Following a devastating flood, a pharmaceutical company donates 10 tons of
antibiotics to prevent an outbreak of cholera.
c.An insurance company sets up a fund that allows its employees to donate up
to 2% of their annual income to local charities.
d.A bank introduces a very profitable micro-finance division that provides
micro businesses with start-up capital and in so doing helps to address the
unemployment problem.
e.Every year the employees of a large paint manufacturer go and paint local
schools instead of having a Christmas function.
2.In the capitalist sense, the primary purpose of a business corporation is to:
a.create jobs for people
b.deliver profits to the owners
c.make whatever it is that the business makes
d.be responsible citizens
e.contribute to economic growth

3.Climate change potentially threatens the wellbeing of billions of humans. Which

one of the following responses would represent an example of a corporate
citizenship response to climate change for a corporation that manufactures cars?
a.Donate money to a research institute that specialises in the development of
more fuel-efficient engines.
b.Deny the existence of climate change.
c.Invest in research and development of more fuel-efficient cars in anticipation
of growing demand for these in the market.
d.Donate money to a research institute that specialises in presenting skeptic
views on climate change.
e.Adjust the onboard computers of your cars to make them appear to be more
fuel-efficient.

4.Using children as a cheap source of labour can be very profitable but denies these
children the right to be children, and the right to education. There have been
various incidents of this reported in the clothing manufacturing sector. Which one
of the following would represent an example of a clothing retailer channelling the
political rights of citizens to express their unhappiness with this practice?
a.Lobbying governments in regions where child labour occurs to put in place
policies preventing the practice
b.Donating a percentage of the proceeds from the sale of their garments to
Greenpeace
c.Setting up a monitoring team to ensure that garment suppliers are not using
child labour
d.Donating money to an NGO that develops online educational systems that
might be delivered to children who are working
e.Selling t-shirts that say: ‘Not made by little hands!’

5.The right to health care is a basic social right that is often denied to people who
are poor. How might a pharmaceutical firm seek to address this problem through
corporate citizenship?
a.It is very difficult for a pharmaceutical firm to help address this as it needs to
generate profits and poor people can’t afford to pay cost price for the drugs they
need, let alone any margins.
b.It can donate a certain proportion of its proceeds to NGOs that deliver basic
health care to poor people.
c.It can partner with government to sell large volumes of drugs but with smaller
margins to keep the costs down.
d.It can start a ‘for every ten you buy we’ll donate one’ scheme.
e.It could start a generics division that can supply drugs that are no longer
patent protected at a fraction of the original cost.

Discussion questions
1.List three companies that you think are excellent corporate citizens and explain
why you feel that this is the case with reference to the definition of corporate
citizenship presented in this chapter. Then list three companies that you think are
bad corporate citizens and, again, explain your choice.

2.In this book we follow Matten and Crane’s (2005) definition of corporate
citizenship as the ‘role of the corporation in administering citizenship rights for
individuals’. Think about examples of citizenship rights that are not being
adequately administered. Describe these and then explain how corporates might be
able to play a constructive role in addressing this inadequacy as part of a corporate
citizenship programme.

3.A basic premise of this book is that corporations are principally engaged in the
pursuit of profit for the owners and that any activities that corporates might
undertake under the banner of corporate citizenship must be consistent with this
ultimate purpose. Critically reflect on this premise. Does it make sense? Are there
any limitations inherent in it?

Additional reading
•Aßländer, MS & Curbach, J. 2014. The Corporation as Citizen? Towards a New
Understanding of Corporate Citizenship. Journal of Business Ethics, 120:541–554.
•Carroll, AB & Buchholtz, AK. 2012. Business & Society. Ethics, Sustainability and
Stakeholder Management. 9th edition. Cengage, Stanford.
•Crane, A, McWilliams, A, Matten, D, Moon, J & Siegel, DS. 2008. The Oxford Handbook
of Corporate Social Responsibility. Oxford University Press, Oxford.
•Friedman, M. 1970. The social responsibility of business is to increase its
profits. The New York Times Magazine, September 13.
•Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended theoretical
conceptualization. Academy of Management Review, 30(1):166–179.
•Sison, AJG. 2011. Aristotelian Citizenship and Corporate Citizenship: Who is a
Citizen of the Corporate Polis? Journal of Business Ethics, 100:3–9.
•Waddell, S. 2000. New institutions for the practice of corporate citizenship:
Historical, intersectoral and developmental perspectives. Business and Society
Review, 105(1):107–126.

References
1.The Guardian. 2015. Abattoir boss fined £8,000 over horsemeat charges. [Online].
Available: http://www.theguardian.com/uk-news/2015/mar/23/uk-abattoir-
boss-peter-boddy-fined-horsemeat-charges 23 March 2015 [25 April 2015].
2.Rondganger, L. 2012. Red-listed fish on chain store shelves. [Online].
Available: http://www.iol.co.za/dailynews/news/red-listed-fish-on-chain-store-
shelves-1.1324265#.VVXOLPmqpBc [25 April 2015].
3.McKenzie, D & Swails, B. 2012. Child slavery and chocolate: All too easy to find.
[Online].
Available: http://thecnnfreedomproject.blogs.cnn.com/2012/01/19/child-slavery-
and-chocolate-all-too-easy-to-find/ [24 April 2015].
4.Locke, RM. 2002. The promise and perils of globalization: The case of Nike.
[Online]. Available: https://ipc.mit.edu/sites/default/files/documents/02-
007.pdf [11 December 2015].
5.The Guardian. 2007. Child sweatshop shame threatens Gap’s ethical image.
[Online].
Available: http://www.theguardian.com/business/2007/oct/28/ethicalbusiness.i
ndia [11 December 2015].
6.The Guardian. 2015. Two years after Rana Plaza, have conditions improved in
Bangladesh’s factories? [Online].
Available: http://www.theguardian.com/sustainable-
business/2015/apr/24/bangladesh-factories-building-collapse-garment-dhaka-
rana-plaza-brands-hm-gap-workers-construction [27 April 2015].
7.WWF. Nd. Sustainable agriculture: Cotton. [Online].
Available: https://www.worldwildlife.org/industries/cotton [27 April 2015].
8.World Wildlife Foundation. 2013. The impact of a cotton t-shirt: How smart
choices can make a difference in our water and energy footprint. [Online].
Available: http://www.worldwildlife.org/stories/the-impact-of-a-cotton-t-
shirt [27 April 2015].
9.WWF. Nd. Sustainable agriculture: Cotton. [Online].
Available: https://www.worldwildlife.org/industries/cotton [27 April 2015].
10.Woolworths Holding Limited. 2014. Woolworths Holding Limited 2014:
Integrated report. [Online].
Available: http://www.woolworthsholdings.co.za/investor/annual_reports/ar201
4/whl_2014_integrated_reprt1.pdf [26 April 2015].
11.Woolworths Holdings Limited. 2014. Woolworths Holdings Limited 2014: Good
business journey report. [Online]
Available: http://www.woolworthsholdings.co.za/investor/annual_reports/ar201
4/whl_2014_gbj1.pdf [26 April 2015].
12.Woolworths Holdings Limited. 2015. Corporate Profile: Overview. [Online].
Available: http://www.woolworthsholdings.co.za/corporate/profile_overview.asp
[26 April 2015].
13.Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended
theoretical conceptualization. Academy of Management Review, 30(1):166–179,
173.
14.Waddell, S. 2000. New institutions for the practice of corporate citizenship:
Historical, intersectoral and developmental perspectives. Business and Society
Review, 105(1):107–126.
15.Ibid.
16.Ibid.
17.Ibid.
18.Woolworths Holdings Limited. 2015. Woolworths Holdings Ethical Trade
Positioning Statement. [Online].
Available: http://www.woolworths.co.za/images/elasticera/New_Site/Corporate/
responsible_sourcing_position_statement.pdf [11 December 2015].
19.Woolworths Holdings Limited. 2015. Woolworths Packaging Position Statement.
[Online].
Available: http://www.woolworths.co.za/images/New_Site/Corporate/packaging.
pdf [11 December 2015].
20.Ibid.
21.UCT Graduate School of Business. 2012. Lack of entrepreneurship threatens to
empty Africa’s breadbasket. [Online].
Available: http://www.gsb.uct.ac.za/Newsrunner/Story.asp?intContentID=282 [10
May 2015].
22.Strategy Dynamics Global SA. 2013. Corporate clout 2013: Time for responsible
capitalism. p. 17. [Online].
Available: https://www.globaltrends.com/reports/?doc_id=500539&task=view_de
tails [30 April 2015].
23.Friedman, M. 1970. The social responsibility of business is to increase its
profits. The New York Times Maga
chapter
Sustainable development and
climate change
Tersia Botha and Tracey Cohen 2
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Understand the emergence of sustainable development
•Conceptualise the term sustainable development
•Develop a foundational knowledge of the elements of sustainable development
•Understand the implications of society’s ecological footprint
•Differentiate between the various views on sustainability
•Provide an overview of the responses to the challenge of unsustainable
development
•Defend the future of sustainable development
•Understand climate change within the context of sustainable development
KEYWORDS AND CONCEPTS
-Brundtland Report
-climate change
-climate change adaptation
-climate change mitigation
-development
-ecological footprint
-economy
-environment
-environmental movement
-society
-strong view of sustainability
-sustainability
-sustainable development
-systems theory
-weak view of sustainability

OPENING CASE SCENARIO

Shaping the future we want

Imagine the future, an ideal future for all. A world with thriving ecosystems, where all
life is lived with dignity. A society where poverty has been eradicated, everyone has
access to quality education and health care, modern energy and sanitation systems.
A society that is equal in all spheres; is prosperous, and where there is justice,
freedom and peace.
But with the current unsustainable resource exploitation and increasing unequal
wealth distribution – is there a chance that humankind will reach that future? Or, is
the reality that the global industrial civilisation could collapse in coming decades?
The rise and collapse of civilisations is a recurrent cycle found throughout history.
History holds records of great civilisations that were susceptible to collapse.
Examples of this include the fall of the Roman Empire, and the equally advanced
Han, Mauryan, and Gupta Empires, as well as advanced Mesopotamian Empires.
These civilisations are testimony to the fact that even advanced, sophisticated,
complex and creative civilisations can be both fragile and impermanent. Great
civilisations were not built in a day, and neither did they collapse in a day.
Civilisations decline and ultimately fall due to internal erosion over time. By
investigating the dynamics between humankind and the nature of the past cases of
collapse, the most prominent interrelated factors that explain civilisational decline
(and which may help determine the risk of collapse today) include population,
climate, water, agriculture and energy. These factors can lead to collapse when they
converge to generate two crucial social features, specifically the stretching of
resources as a result of the pressure placed on the ecological carrying capacity, and
the economic stratification (separation) of society into rich elites and poor masses. 1
Currently, there are high levels of economic stratification, where resources are not
equally distributed throughout society, which can directly be linked to
overconsumption of resources. This overconsumption is based largely in
industrialised countries (which includes people from almost every country around the
world, but mainly concentrated in the Westernised nations).2 For example, the United
States has less than 5% of the global population, however, it uses at least a quarter
of the world’s fossil fuels (burning 25% coal, 26% oil and 27% of the planet’s natural
gas).3
Sustainability analysts cite the future as being less predictable, more volatile and
more crowded than ever before. The playing field will be disrupted in radical and
unexpected ways – these disruptions are occurring rapidly in weather patterns (and
climate change), geopolitics (the effects of human and environmental geography on
the economy, politics and state power), market demands and technology – shifting
the face of sustainability.4
Has humankind learnt from the past? Or will we continue to make the same
mistakes?
2.1Introduction

Corporate citizenship was introduced in Chapter 1, as a concept through which the

business activities of corporates have the potential to greatly influence the
administration of citizenship rights. The chapter also noted that, in order for corporations
to survive (and thrive), they need to understand the changing business landscape and
how environmental, social and governance (ESG) issues are a means of addressing these
rights. For corporates to ensure that their practices are sustainable, they need to
effectively consider the ESG issues in all the business functions. Ideally, corporates should
not only look at the challenge of unsustainability. Rather, corporates should view
sustainability as an absolute necessity and an opportunity as well as a driver of
innovation in their practices. In order to do this, it is imperative that corporates
understand the notion of sustainable development. Therefore, in Chapter 2, we take the
conversation further by unpacking the concept of sustainable development. The
environmental, social and economic issues related to corporate citizenship (as discussed
in Chapter 1), are addressed in this chapter at a macro level and aim to develop an
understanding of the tension and alignment between these issues.
Sustainable development is a multi-dimensional concept. Although a thorough
discussion of the concept is provided further in this chapter, for now it will suffice to
define it as follows:

‘development that meets the needs of the present without compromising the ability of
future generations to meet their own needs.’5

This definition of sustainable development contains two key aspects. First, it includes the
concept of needs, particularly the essential needs of the world’s poor to which priority
should be given, as well as the needs of society at large. Second, it includes the idea of
limitation, imposed by the current state of technological and social environment’s ability
to meet present and future needs. For more than a quarter of a century, sustainable
development has been on the international agenda. However, it is only in recent times
that the concept has gained popularity. One reason for this is the fast pace of technological
advances during the past 30 years, which increased the availability of information to us
today. The availability of information enables us to measure the impacts and
consequences of our actions leading to unsustainable development more accurately than
before. Furthermore, the realities of various issues such as the impact of environmental
degradation, climate change, rising inequalities, and increasing scandals can no longer be
denied.
You might have heard the statement ‘we need 1.5 earths to meet the demands we
currently make on nature’ before, since it is often mentioned in the sustainable
development debate. This statement is true, since our current demands on our natural
environment are increasing at an ever accelerating and unsustainable rate. Biodiversity
is often used as an indication of the state of the natural environment, since it refers to the
diversity of micro-organisms, plants and animal species as well as the ecosystems within
which they interact and live.6 The latest available World Wildlife Fund for Nature
(WWF) Living Planet Report reveals that biological diversity (also referred to as
biodiversity) is decreasing sharply, with an overall decline of 52% between 1970 and
2010.7 That is more than half of the planet’s biodiversity in just 40 years! But what does
a decrease in biodiversity really mean for the natural environment, the economy, and
humanity? As society and the economy develop, we are eating into our natural capital,
making it more difficult to sustain the needs of future generations. 8
In this chapter, we will first discuss the emergence of sustainable development,
followed by a further conceptualisation of the concept. The elements of sustainable
development, society’s ecological footprint and various responses to the challenge of
sustainable development will also receive attention, followed by a brief discussion of the
future of sustainable development. This chapter will conclude with a brief discussion of
climate change within the context of sustainability.
Before we turn our attention to the emergence of sustainable development, we need
to clarify the concepts ‘developing’ and ‘developed’ nations or countries. For decades,
countries around the world were broadly classified into two categories, based on their
economic development, namely developing and developed countries or nations. These
two categorisations are based on a number of criteria ranging from per capita income to
life expectancy and literacy rates. Developing countries are the less-developed countries
with lower ratings on these statistical criteria.
2.2The emergence of sustainable development
The concept ‘sustainable development’ can be traced as far back as some 300 years ago
to seventeenth-century Europe.9 This section, however, will cover the recent history from
1945, the post-war (World War II) development era.
The motivating power behind the establishment of the post-war international
economic system was the task of reconstructing what had been damaged during World
War II. This development was supported by institutions such as the International Bank
for Reconstruction and Development (a member of the World Bank Group established in
1944) that offers funding to developing countries. This time of ‘progress’ led to optimism
and a greater hope for a braver world and progressive international ideas. However, this
period of development also led to inequalities, widening gaps between rich
(industrialised and developed) and poor (under-developed and developing) nations as
well as social inequalities within nations. 10
The United Nations (UN) was established in 1945, the year after the establishment of
the International Bank for Reconciliation and Development. A key priority of the UN was
to ‘achieve international co-operation in solving international problems of an economic,
social, cultural, or humanitarian character and in promoting and encouraging respect for
human rights and for fundamental freedoms for all without distinction as to race, sex,
language, or religion’.
As can be seen from the above priority, the initial focus of the UN was on social and
economic matters. While improving people’s wellbeing continues to be a main priority of
the UN, the global understanding of development has changed over the years – from a
focus on social and economic matters, to a focus on the natural environment. 11 By the late
1960s, growing evidence showed that economic development was taking place at a rate
that was unsustainable for society as well as the natural environment. With large-scale
industrial pollution, the growing threat of nuclear radiation and mass destruction of
ecosystems becoming evident, great concern was triggered about a ‘global environmental
crisis’. As this awareness heightened globally, it was clear that a modern environmental
movement had begun.12 This movement criticised the social and economic development
paradigm that had been pursued since 1945. Activists for environmental sustainability
may have initially been viewed as pessimists, but their efforts were not in vain as their
messages gave rise to research into environmental sustainability, which eventually
gained momentum. In what follows, the emergence of sustainable development from
1968 to today will be discussed.
2.2.11968 – Club of Rome
In 1968, a small group of professionals from a variety of disciplines met at a villa in Rome.
The idea of the gathering was to discuss the dilemma of prevailing short-term thinking in
international affairs. In particular, the concerns regarding unlimited resource
consumption in an increasingly interdependent world were discussed.
It was then that the Club of Rome was founded, initially as an informal, non-profit
association. The Club grew to be more formal in nature, and to date has published over
33 reports concerning the future of humanity. 13
– International Union for the Conservation
2.2.21969
of Nature (IUCN)
The internationally active civil society organisation, the International Union for the
Conservation of Nature (IUCN), met in New Delhi, India. The IUCN voted to draft a
programme that would demand a new, ethically responsible manner of dealing with the
biosphere and its living resources, further connecting it with the struggle against poverty
in the countries of the global South.14
– United Nations Conference on the Human
2.2.31972
Environment
The United Nations Conference on the Human Environment took place in Stockholm,
Sweden. This was the first major international gathering to take place, discussing
sustainability at a global level. It was there that the United Nations Environmental
Programme (UNEP) was established, with a ‘mandate to encourage economic growth
which is compatible with the protection of the environment’. 15
1972 was a significant year magnifying the environmental issues society faced. As an
outcome of the Club of Rome, the book titled The Limits to Growth (LTG) was published.
The team behind the book were initially seen as grave doomsayers. However, the tone of
the book was optimistic; stressing that one could reduce the damage caused by exceeding
ecological limits, if early action was taken. The LTG warned that development was
occurring at an unsustainable rate. It reported that the then use of resources and
consequent emissions would lead to global ecological constraints and resource scarcity,
and that this would have a significant influence on global development in the twenty-first
century. The LTG illustrated how growth in population and natural resource use interacts
with a variety of limits. While the limits to growth may appear in many forms, the
publication focused primarily on the planet’s physical limits – limits in the form of
exhausting natural resources and the finite (fixed/restricted) capacity of the earth to
absorb emissions from industry (as well as agriculture). 16
2.2.41974 – World Council of Churches (WCC)
The World Council of Churches (WCC) met in Bucharest, Romania, to explore solutions to
the environmental crisis, whilst simultaneously addressing the question of justice. A co-
author of the Club of Rome Report and participant at the conference proposed the
formulation of the ‘ecologically sustainable society’, which was accepted a year later at a
plenary meeting in Nairobi. The WCC then adopted its new model of a ‘just, participatory
and sustainable society’.17
2.2.51980 – World Conservation Strategy
The outcome of the IUCN plenary meeting held in New Delhi in 1969 was released. This
document became the joint work of the IUCN, the UNEP and the World Wide Fund for
Nature (WWF) and took ten years to compile. The document was released and presented
to the global public in February 1980, titled the World Conservation Strategy. The
introduction to the document explained, ‘for development to be sustainable it must take
account of social and ecological factors, as well as economic ones.’ The World
Conservation Strategy defined conservation as ‘the management of human use of the
biosphere so that it may yield the greatest sustainable benefits to present generations
while maintaining its potential to meet the needs and aspirations of future generations’. 18
2.2.61983–1987

Sustainable development, as a concept, officially emerged in the 1980s whilst considering

scientific perspectives on the interdependence of society and the environment. At this
point, much of what had been envisioned by the mandate developed at the Stockholm
conference in 1972 had not yet been addressed. Therefore, in 1983 the United Nations
(UN) convened the World Commission on Environment and Development
(WCED),19 which was instructed to formulate a global agenda for change. The commission
was chaired by Gro Harlem Brundtland, Madam Prime Minister of Norway. The outcome
of the commission was released in 1987 with a report titled Our Common Future, also
popularly known as the Brundtland Report. This was a landmark report that advanced
the understanding of global interdependence as well as the relationship between
economics and the environment, which was initially introduced by the World
Conservation Strategy.20 Today, the Brundtland definition is still the most widely
accepted definition of sustainable development and we will explore it further in the next
section.
2.3Conceptualising sustainable development
In order to understand the concept of sustainable development, we will first focus on the
systems theory, which will place the concept into perspective. Thereafter, we will
establish the meaning of ‘sustainable’, followed by a discussion of ‘development’. Lastly,
we will provide a clear definition of the term ‘sustainable development’.
2.3.1The systems theory
Systems theory originates from the work of biologist Ludwig von Bertalanffy, which was
called ‘General Systems Theory’ (GST). The principles of the theory have grown and have
been applied to various other areas, such as linguistics, sociology, ecology, organisational
theory and management, human resource development, education, computer science,
biology and many more. Von Bertalanffy believed that a general systems theory should
be an important regulative device in science. He also observed that certain characteristics
appeared in all disciplines:
•In all disciplines, one needs to study the whole ‘organism’. Within this context,
‘organism’ refers to the ‘whole’ that consists of various parts, each with its own
function, structure and relationship to the other parts.
•The organism has the tendency to strive for a steady state or an equilibrium.
•All systems are open. This means that the organism is affected by the environment
within which it exists, and it also affects the environment.

There are many examples of the application of the general systems theory. Systems
psychology, for example, is a branch of psychology that studies human behaviour and
experience in complex systems. Systems engineering is another application, which can be
viewed as the application of engineering techniques to the engineering of systems, as well
as the application of a systems approach to engineering efforts. The general systems
theory can also be applied to corporates, which, similar to other organisms, comprise
many parts that make up the whole. These parts are, for example, employees, teams,
processes and procedures, systems and structures. All these parts are interdependent
and work together to achieve the corporate’s goals and objectives. The corporate is also
dependent on the environment for supplying resources or inputs (such as human
resources, physical resources, capital and information) that are transformed within the
organisation, offering the outputs (products and services) to the environment. Applying
the systems theory to corporates, it is important to note that corporates also strive to
remain in balance and that corporates are open systems – they are affected by the
environment and the environment is also affected by corporates. Furthermore, all the
resources (or inputs) that corporates take from the environment, are limited, whilst the
needs of the consumer in terms of the outputs offered by corporates, are unlimited. This
brings us to the application of the general systems theory to sustainable development,
which will be highlighted in our discussion that follows.
2.3.2What is sustainability?
The Brundtland Report marked the point of departure for the sustainability debate. In its
most simplistic form, sustainability means to maintain, to keep being, to preserve and
to support, with structures to hold on to. To be sustainable means to sustain resources
and the uses thereof, to avoid meltdown and failure. 21
Sustainability cannot simply be implemented. It is an all-inclusive design, with present
and future considerations – looking at the long term, and the ‘big’ picture. Sustainability
connects the three dimensions of ecology, the economy and social justice. These three
dimensions need to be connected in a gentle manner. For example, society relies on the
economy for employment, goods and services, and it relies on the environment for the air
we breathe, the food we eat and the water we drink. The economy relies on the
environment for natural resources and it relies on society for human capital. While the
environment does not need society, nor the economy for its existence, in order for an
economy to flourish in the long term, and for humanity to continue its existence, the
environment relies on society and the economy to respect and protect it. This connection
fosters new patterns of production and consumption, patterns that are compatible with
the bearing capacity of the ecosystems, in order to reduce humanity’s footprint on the
environment. It is a survival strategy and a call for new civilisation design – we already
have the necessary intellectual resources, the technologies, and the sensitivity for the
values of human rights and human dignity. 22
Sustainability can be seen as a science. It can also be described as an emerging field of
research dealing with the interactions between natural, social and economic systems, and
with how those interactions affect the challenge of sustainability. 23 Sustainability is also
multidisciplinary and should not be limited to specific fields, such as biological sciences
and geography. It is a concept that pertains to engineers (who design our infrastructure),
entrepreneurs (who develop innovative solutions to societal problems), investors (who
have the responsibility of investing society’s hard earned money in the right institutions),
and governments and policy makers (to ensure structures such as legislation are put in
place to protect society, the environment and business competitors). Lastly,
understanding sustainability in business management is a priority to ensure that
sustainability is embedded throughout all the functions of business.
The general systems theory can be applied to the three dimensions of ecology, the
economy and social justice. Each of these dimensions can be viewed as open systems.
Each of these dimensions is also dependent on all the other systems, with a tendency to
remain in balance. Any action by any part of the system that will lead to a state of
disequilibrium, will lead to other actions with the aim to return to a state of equilibrium.
Sustainability, therefore, requires a balance in terms of each of these dimensions.
2.3.3What is development?
Development as discourse emerged as a set of theories and practices that influenced the
post WW II evolution of the developing world. To develop means to grow, mature,
progress, improve, advance and to change.24 To an ecological economist however, growth
is different from development, where growth is quantitative (meaning an increase in size
or an increase in production that can be measured in quantity), while development is
qualitative (meaning an improvement in the quality of goods and services, with or
without growth).25 Within the context of sustainable development, it is important for us
to realise that the qualitative and quantitative measures are of equal importance. For
example, we should not only consider the quantity of the resources provided in our
natural environment, we should also consider the quality thereof. To state this practically
– it is good to have a secure income, but what if the air in your part of the world is unclean
and polluted?
The Brundtland Report explains ‘development’ more precisely within the context of
sustainable development,26 and we will look at this and ‘sustainable development’ more
closely in the next section.
2.3.4Defining sustainable development
To understand the compilation of the definition for sustainable development that will be
used in this book, let us take a look at some considerations and important statements of
the Brundtland Report.
The Brundtland Report was released in 1987. During this time, a paradigm shift
occurred. Where the focus in the past had been on various social concerns (such as
inequality, social injustices and poverty), it now moved to a focus on the environment.
Various environmental problems (which also vary in terms of urgency and complexity)
were identified. Examples of these are global warming, threats to the earth’s ozone layer,
degradation of the environment and deserts that consume more and more agricultural
land. Although some members involved in writing the report felt that it should only focus
on environmental issues, Brundtland stated in her introductory message that focusing
only on environmental issues would have been a grave mistake. The main reason for this
statement is that the environment is part of a complex system and cannot be separated
from human actions, human needs and human ambitions. Therefore, the environment can
never be analysed in isolation and separately from the system in which it plays an
important role. The use of the word ‘development’ has also been seen in isolation by
many, thereby giving it a limited focus of what poor (developing) nations should do to
become richer (become ‘developed’). Many participants in the international arena were
of the opinion that ‘development’ was a concern for specialists involved in issues such as
‘developing assistance’ in ‘poor nations’ needing the development.
Brundtland broke it down by stating that ‘the environment is where we all live;
and development is what we all do in attempting to improve our lot within that abode.
The two are inseparable.’27 In other words, the natural environment constitutes society’s
home (abode), and it is in our (society’s) nature to continue to improve our livelihoods in
this home. As we improve these livelihoods, we develop and use the environment as a
means to do so – therefore, development cannot be separated from the environment –
which brings us back to an application of the systems theory!
Development issues must be seen as essential, even for the political leaders of
developed countries. For these countries, their development paths are unsustainable as
natural resources are being used faster than they can be replenished. In addition, the path
to their development can be attributed to the use of cheap and often exploited labour
from developing nations. Although termed ‘developed’, the reality is that developed
countries still continue to improve and therefore continue to develop. Most developed
nations have great economic and political power, and as a result are often seen as
benchmarks and examples for developing nations. For this reason, developed nations
need to be more mindful of their development decisions as they may influence the
decisions of developing nations and could consequently determine how society
progresses into future generations.
Developing countries need the environment to improve their livelihoods. To relieve
the deepening poverty in the developing world, action is needed by politicians and policy
makers, to ensure that environmental resources are safeguarded and managed
respectfully, leading to sustainable human progress and survival.
Consequently, Brundtland defined sustainable development as follows:

‘Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.’ 28

The term ‘needs’ in the above definition refers to essential needs, or the satisfaction of
basic needs. Development is thus placed in the context of the struggle against poverty,
and the relationship and contrast of wealth between the rich countries in the North and
the poor countries in the South of the globe (the so-called north–south justice). In the
same breath, the report emphasises that the current and future bearing capacity of the
ecosystem must define the limits of technology and civilisation. This means that the
standard that is used for economic activity must not be the globalised markets, but rather,
the standard used should be the permanent bearing capacity of the ecosystems.
The Brundtland definition of sustainable development covers two basic dimensions
that can also be referred to as pillars – the social dimension (human needs), and the
environmental dimension (the imperative to preserve the ability to provide ecosystem
services). However, the economic dimension is missing from the definition. As a central
issue in the report, economic growth is viewed not as a goal for its own sake, but rather
as a means for achieving the key aim of satisfying needs while recognising the ecological
limits established and shaped by society. 29
When one comprehensively reads the Brundtland Commission’s report, it brings to
light the context within which the definition of sustainable development has been created
– that is, a focus on development and/or growth to meet society’s ever-changing needs,
in a sustainable manner.
Sustainable development can be seen as a visionary paradigm that
governments, corporates, and civil society have accepted as a guiding principle over the
past 20 years. While progress has been made on sustainable development metrics, and
improved corporate and NGO participation in the sustainable development process, the
concept still remains elusive and implementation has proven difficult. Despite everything
we know about the consequences of development at its current rate, and while we have
the vision to be sustainable, unsustainable trends (such as overfishing, deforestation,
exploitation of ‘cheap’ labour in developing countries and poor governance) continue.30
The next section will focus on the three elements of sustainable development.
2.4The elements of sustainable development
The issues presented in the previous section can be characterised into three elements of
sustainable development (also known as the three pillars of sustainable development):
society, the environment and the economy. This section first explains each of these
elements in more detail, followed by a discussion of the interconnectedness between
these elements.
2.4.1The core elements of sustainable development
Society
The term society refers to people living in a particular country or region as a nation,
where they share customs, common traditions, values, laws, activities and
interests.31 Humanity in its entirety is society.
From the stage of early civilisation, the scale and pace of society’s interventions
increased with each development and elaboration of civilised life. As society developed,
the tempo of development quickened. From the seventeenth century, every index of
growth, including population, energy, use of food supplies, minerals consumed and
urbanisation – began to increase.32
Consider the growth of the human population. World population edged up from the
levels made possible by neolithic agriculture to perhaps 400 million by the fall of Rome.
Over a thousand years later, in about AD 1600, it reached the first billion. Thereafter the
acceleration increased as a result of rising production in farms and factories as the
Industrial Revolution gathered momentum and was followed by a steady fall in the death
rate, particularly in the infant mortality rate. The second billion arrived after only 300
years, in 1900. The third billion took only 50 years and the fourth billion was reached by
1980, taking only 30 years.33
The human population today is over 7 billion people. Of the 7 billion, 2.2 billion people
live on less than US$2 per day, which is the average poverty line in developing countries
and a common measurement of deep deprivation. 34 Those people who live on the
equivalent of US$2 per day to pay for food to eat as well as non-food items, such as clothes
to wear and shelter to live in, are considered to be living on the poverty line; those people
living on less than the equivalent amount are considered to be living in poverty. While
the equivalent of US$2 was R30 in 2016, the latest update of the poverty line in South
Africa was estimated by Statistics South Africa (Stats SA) as living below R25,50 per day
or R779 per month. According to Stats SA, 27 million people (of a population of 53
million) live below the poverty line in South Africa. This means, just over half of the
country’s citizens live in poverty.35
Issues that humanity face include poverty, unemployment, inequalities between
gender, race and religion, inequalities among and within generations, between the rich
and poor, disease, extreme hunger, infant mortality, limited or no access to education;
injustice; discrimination and violence and effects of corruption and poor governance. As
far as poverty is concerned, consider the following facts.
The Human Development Report of 2014 indicated that people in most countries have
been doing steadily better in human development. Efforts around the world have led to
advances in technology, education and incomes hold greater promise for longer, healthier
and more secure lives. Globalisation has brought about positive gains. However, on a wide
and great scale, there is also a sense of precariousness (danger or risk) in terms of
livelihoods, personal security, in the environment and in global politics. Health and
nutrition are examples of aspects of human development that can quickly be weakened
or taken away by an economic slump or a natural disaster. Assault and theft can leave
people physically and psychologically impoverished. Unresponsive and corrupt state
institutions can leave those in need of assistance without any. These are critical aspects
that all add to individual and community vulnerability. Although poverty reduction has
been reported, more than 15% of the global population (2.2 billion people) are either
near or living in multidimensional poverty (like development, poverty can also be
multidimensional, with metrics such as deprivation in health, education and standard of
living, taken into consideration alongside the monetary measures of
poverty).36 Furthermore, 80% of the global population lack comprehensive social
protection, 12% suffer from chronic hunger, and nearly half of all workers (which is more
than 1.5 billion people) are in informal or precarious employment. 37

The environment
The environment is quite a broad term and can be seen as many things to many people.
Within the context of sustainable development, ‘environment’ refers to the natural
environment – the biosphere in which humanity and all other life on earth exists. It
includes the earth’s land, oceans, and atmosphere, ecosystems and biodiversity that give
life. The environment makes up natural capital, which is everything in nature that
provides human beings with wellbeing including natural resources, environmental
amenities and the pollution absorptive capacity of the environment.
There are a variety of fundamental environmental issues that include climate change
(which will be discussed in great detail in section 2.9), natural resource wastage and non-
renewable energy sources, stress on biodiversity within ecosystems, and pollution that
has wide- ranging and severe impacts on the environment, as do toxins and chemicals.
Environmental problems are not only local problems, the issues are geographically
interconnected in a global manner.
Society and the economy rely on natural resources and they should therefore be
managed and protected by politicians and decision makers, rather than rapidly exploited.
This is necessary for a sustainable future.
Environmental changes affect the other pillars of sustainable development – human
wellbeing depends on natural resources, which include water, arable land, fish and wood
as well as ecosystem services such as pollination, nutrient cycling and erosion control.
Therefore, putting ecosystem services at the core of planning and managing activities of
governments, corporates and development institutions that depend on natural resources
brings economic and social benefits. 38

The economy
The term ‘economy’ is used when referring to a community’s system for using its
resources to produce wealth. The basic economic problem seeks to find answers to the
following three fundamental questions:
1.What should be produced from resources to increase the wealth of the
community?
2.How should these be produced?
3.For whom should these be produced?

Economic growth is normally associated with an increase in productive capacity. In other

words, doing more with less, or using limited resources to gain the greatest possible
satisfaction of people’s unlimited needs. Traditionally, increases in capital
stock, advances in technology and improvement in the quality and level of literacy were
considered to be the principal causes of economic growth. However, sustainable
development has brought in additional drivers of economic growth factors to consider,
which will be discussed below:39
•Energy. Economic growth in modern society has been driven primarily by the
combustion of fossil fuels. Almost all of our buildings and activities within them
depend on electricity, mostly generated by burning coal. Our food is produced with
the help of petroleum-derived fertiliser and petroleum-powered machinery, which
then require more petroleum to transport through the supply chain to eventually
reach the consumer. Cities and suburbs in the developed world are organised
around infrastructure built for automobiles when oil was cheap and plentiful. We
live in a high-energy civilisation driven by a finite supply of fossil fuels, which have
negative effects on the environment, such as global warming, oil spills, acid rain and,
in general, air quality deterioration.
•Consumption. Society has developed an innate desire to acquire goods and services
that have assumed a central position in contemporary culture. Furthermore, much of
what is consumed consists of disposable, short-lived products that increase the rate
of production and the flows of materials and waste. This consumption-driven
economic growth has in a large part contributed to the destruction of the ecological
and social fabric.
•Globalisation. Globalisation is seen as a controversial driver of economic growth. On
the one hand, it has positive effects on wellbeing and economic health, up to a
certain level. On the other hand, beyond a certain threshold, globalisation can
contribute to social injustice and environmental harm.

The following section will focus on the interconnections and potential trade-offs between
society, the environment and the economy.
2.4.2Interconnections of the elements of sustainable
development
The various elements of sustainable development are all related and connected to each
other.
Figure 2.1 illustrates the interconnectedness between these elements.

Figure 2.1: Interconnectedness of elements of sustainable development

The elements of sustainable development (the economy, the environment and society)
should be viewed in no particular order, meaning that the one is not more important than
the other. Furthermore, these elements should be balanced, so that one does not destroy
the other. Every decision that we make, every project that is considered, should be done
in a sustainable context, meaning that we should strive to link economic, social and
environmental parts of the society to strengthen it in totality. Each element of the
overlapping circles is interconnected to demonstrate the interaction between all areas of
life.
To act in a sustainable development fashion, where the three elements are balanced
and interconnected, a major transformation in three areas is needed, namely (1) growth
in population; (2) how humans consume materials and resources; and (3) the role of
technology in sustainable development. These are discussed in more detail below:
1.Growth in population. Statistics pertaining to population growth were discussed
in section 2.4.1. We know that the current rate of population growth and/or growth
rates in consumption of resources cannot be sustained. We also know that the
larger the population of a society and/or the larger its rate of consumption of
resources, the more difficult it is to transform the society to a condition of
sustainability. Therefore, population growth needs to be transformed.
2.How humans consume materials and resources. We have indicated numerous
times in this chapter that the current human consumption of material and
resources cannot be sustained. In order to transform this situation, environmental
limits need to be defined in no uncertain terms. Furthermore, attention needs to be
given to aspects such as the more effective and efficient use of materials and
resources; the reduction of waste; the prevention of pollution; educating society in
terms of the sustainable use of resources and materials; and changing the
perception, attitude and behaviour of the society towards a more ethical and
responsible use of resources.
3.The role of technology in sustainable development. The development of new
technology and technology transfer need to be mindful of the effects thereof on
sustainable development. The focus should be on a win-win situation for the
environment, society and the economy. Sustainable development does not mean a
return to some sort of pre-industrial lifestyle. It’s about getting a better quality of
life, not worse, where the key is to use technology to ensure sustainable
development.
DILEMMA
Water – essential to life
Water is essential to life on earth, to everything in life – health, agriculture, food, energy,
transportation, nature, leisure, and pretty much all the products used on a daily basis. Well,
aren’t we lucky that over two-thirds of the earth’s surface is covered by water?
Yes and no. Despite the vast quantity of water on earth, the majority of this water is held
by the oceans. This leaves only 0.5% of the world’s water resources available to provide for
the freshwater needs of our planet’s ecosystem and population. Unfortunately, this water is
not evenly distributed around the globe. No more than 10 countries possess 60% of this
water supply.
In many cities around the world, groundwater is being used at a much faster rate than it is
being replenished, while poor maintenance of aging water networks waste more than 40% of
its water supply through leaks and cracks. While water is being wasted in some parts of the
world, other parts still lack access to fresh water supply. 40
The Water Project website (http://thewaterproject.org) reveals some statistics of the
‘water crisis’:
•783 million people do not have access to clean and safe drinking water (37% of those
people live in sub-Saharan Africa).
•In developing countries, approximately 80% of illnesses are linked to poor water and
sanitation conditions.
•Almost one out of every five deaths under the age of five worldwide is due to a water-
related disease.
•Approximately 64% of households rely on women to get the family’s water when there is
no water source in the home. Girls under the age of 15 are twice as likely as boys to be
the family member responsible for fetching water. The average container for water
collection in Africa, the jerry can, weighs over 20 kg when full.
•Over half of the developing world’s primary schools don’t have access to water and
sanitation facilities. Without toilets, girls often drop out of school at puberty.
•Globally, 443 million school days are lost each year due to water-related diseases.
•The United Nations estimates that sub-Saharan Africa alone loses 40 billion hours per
year collecting water; the same as an entire year’s labour in all of France!

Consider your personal situation regarding access to fresh water and take note of the
amount of water you use per day.
The dilemma box above paints a daunting picture of the worldwide availability of
sufficient water resources. In many countries, water conservation programmes are
implemented to address this issue. One such country is Singapore and the box on the next
page provides an overview of the governments’ endeavours (and huge successes) in
water conservation.
In the next section, we will focus on the impact of society’s actions on the natural
environment, referred to as society’s ecological footprint.
2.5Society’s ecological footprint
Society’s ecological footprint revolves around the relationship between society’s
current economic model of development and the impact is has on the environment.
From our previous discussions, we now know that economic development is taking
place beyond the limits of the planet. Meadow, Randers and Meadows 41 refer to this as
the overshoot. This overshoot usually occurs unintentionally, in other words,
accidentally.
In most instances, an overshoot may cause little harm to the environment. However,
occasionally the potential for catastrophic overshoot does arise. A possibility of such an
overshoot is our planet’s accelerating population growth and its materialistic economy,
which is surpassing the support capabilities of the earth. This relationship between
humanity’s demands on the planet and the planet’s actual capacity to provide for those
demands, is phrased the ecological footprint (EF). The EF is ‘a measure of how much
biologically productive land and water an individual, population or activity requires to
produce all the resources it consumes, and to absorb the waste it generates, using
prevailing technology and resource management practices’. 42
The EF is calculated by the amount of land that would be required to provide the
natural resources consumed by a population and to absorb their wastes. To calculate the
EF, a mathematical approach is required, which was first presented by Mathis
Wackernagel and his colleagues for the Earth Council in 1997. It was later adopted by the
World Wide Fund for Nature (WWF), which now provides data on the ecological footprint
of more than 150 nations in its annual Living Planet Report.43
According to the 2014 Living Planet Report (the most recent publication at the time of
writing this book), populations of mammals, birds, reptiles, amphibians and fish, have
dropped by 52% between 1972 and 2010. By measuring the rate of their demise, it acts
as a barometer of what we are doing to the earth, our only home. 45
Example
Water conservation in Singapore44
Singapore has a land area of 714.3 km 2. Although surrounded by oceans, Singapore lacks
natural resources, especially water, to sustain a growing population (from 3.04 million in
1990 to the current 5.18 million). Singapore’s government implemented a water conservation
programme, focusing on both the supply and the demand for fresh water.

Water supply
With the lack of natural fresh water and the country’s limited water catchment areas, the
government managed to increase water supply with the help of its neighbouring country,
Malaysia. Initially, 80% of Singapore’s water came from Malaysia. This over-reliance on
Malaysia, became a weakness for Singapore. With this in mind, Singapore’s government
implemented the following programmes to increase the country’s water supply:
•Local water catchment areas. Water catchment areas have been developed from half to
two-thirds of Singapore’s land area.
•Imported water. The government succeeded in reducing the country’s water imported
from Malaysia from 80% to the current 40%.
•NEWater. NEWater treats used water with reverse osmosis, making water recyclable.
Four plants of NEWater are currently used, producing 30% of the nation’s water needs.
•Desalinated water. Desalinated water comes from sea water and is also based on
reverse osmosis. Water desalination provides 25% of the country’s water needs.
•Sanitation. Waste water in Singapore was, until 2010, collected through a sewer system
that included 139 pumping stations. The stations pumped water to six waste water
treatment plants. These will gradually be decommissioned while a new system, the Deep
Tunnel Sewerage System, becomes operational. The latter consists of a 48 kilometre-
long, deep tunnel sewer that runs below ground and channels water to a reclamation
plant. Most of the treated used water is discharged into the sea, while some of it is
further purified into NEWater. The amazing feature of the deep tunnel is that it works
entirely on gravity – eliminating the need for pumping stations and reducing the risks of
overflows.
•Storm water management. A storm water drainage system is used, consisting of public
roadside drains and major canals and waterways that are carefully maintained. Since its
implementation, this system has reduced the flood-prone area of the country drastically.

Demand for water

Singapore’s government implemented various initiatives to lower the nation’s demand for
water. For example, the aim of the water conservation awareness programme is to decrease
per capita domestic water consumption, which proved to be a very successful programme.
The country’s per capita domestic water consumption has decreased from 165 litres per day
in 2003, to a current 150 litres per day. The government’s target is a consumption of 147
litres per day by 2020 and 140 litres per day by 2030. Various educational programmes were
launched, focusing on educating the public on water conservation.
The ‘barometer’ mentioned above, is just one of the many indicators reflecting
humanity’s heavy demand upon the planet, it reflects that we are using nature’s gifts
(resources) as though we had more than just one planet at our disposal. We are taking
more from our ecosystems and natural processes than can be replenished! How could
this not jeopardise our future? Nature conservation and sustainable development go
hand-in-hand. It is not only about preserving biodiversity and wild places, but also just as
much about safeguarding the future of humanity – our wellbeing, economy, food security
and social stability – indeed, our very survival.46
As stated in the introduction, with humanity’s current demands on nature each year,
we would need 1.5 earths in order to meet these demands. Humanity’s demands include
the following: renewable resources that we consume for food, fuel and fibre; the land
which we build on, as well as the forests we need to absorb our carbon emissions. For
more than 40 years, humanity’s demand on nature has exceeded what our planet can
replenish. The ecological footprint (which measures the area, in hectares, required to
supply the ecological goods and services we use) outstrips our biocapacity (which is the
land actually available to provide these goods and services). Humanity’s demand has
exceeded the planet’s biocapacity, which is the amount of biologically productive land
and sea area that is available to regenerate these resources. With this overshoot, which
continues to grow, it is becoming more and more difficult to meet the needs of an ever-
growing global human population, never mind meet the needs (in terms of just space) for
other species that we share this earth with. Adding to this complex situation, is the
uneven distribution of resources between developing and developed nations. For
example, people in industrialised countries are consuming resources and services at a
much faster rate than those in developing countries. 48
Example
Footprint facts47
At the start of this section, we explained the ecological footprint (EF). While we discussed
the EF in general, there are various ways in which the EF can be measured. Footprints can
be measured globally, regionally, at an individual level, or based on specific activities to
produce a product or a service. Furthermore, the EF can be broken down into more specific
metrics such as a water footprint and a land footprint.
•More than half of the total EF is attributable to the global carbon footprint.
•Agriculture accounts for 92% of the global water footprint (humanity’s growing water
needs and climate change are intensifying the challenges of water scarcity).
•The dual effect of an increasing population and a footprint per person will in turn multiply
the pressure placed on the earth’s ecological resources.
•The EF per capita of high-income countries is five times more than that of low-income
countries.
•When importing natural resources from other countries, biodiversity loss is effectively
being outsourced. According to the Living Planet Report, high-income countries appear
to show a 10% increase in biodiversity, while middle-income and low-income countries
appear to show declines in biodiversity of 18% and 58% respectively. This could be
attributed to high-income countries extracting resources from middle-and low-income
countries.
•Countries with a high level of human development tend to have higher EFs – their
challenge is increasing human development whilst at the same time, keeping their
footprint down to globally sustainable levels.
•The earth has planetary boundaries with regulating processes that keep it in a stable
state where life can thrive. Crossing these boundaries could cause irreversible
environmental changes. Three boundaries have already been crossed, biodiversity loss,
climate change and nitrogen. Nitrogen is essential to global food security but nitrogen
pollution has severe impacts on aquatic ecosystems, air quality, biodiversity, climate and
human health.
This ‘overshoot’ has been possible, for now, but the sum of all human demands no
longer fits within what nature can renew – the consequences have lead and are
continuing to lead to diminished resource stocks and waste is accumulating faster than it
can be absorbed or recycled. For example, the carbon concentration in the atmosphere is
growing; to prevent an overshoot, this carbon concentration could be reduced by
increasing efficiencies in the use of resources and energy through technological
innovations.
Our economic prosperity and our wellbeing are reliant upon the natural capital
provided by a healthy planet. It may appear as though protecting nature is a luxury in a
world where so many people live in poverty. However, Marco Lambertini (director
general of WWF International) assures us it is the opposite. For many of the world’s
poorest people, protecting nature is a lifeline. However, despite the differing economic
standings between developed and developing nations, we are all in this together – we all
need food, fresh water and clean air to live healthy lives. 49
How do we recognise the needs and aspirations of people, and ensure the right to
economic development, all the while protecting the environment? The authors of this
book aim to answer these questions in their respective chapters.
Given what we have learnt about society’s ecological footprint (EF), the example box
on the previous page illustrated some of the realities of society’s footprint on the earth.
In the preceding sections, the emergence and elements of sustainable development
were explained and we have discussed the implications of the ecological footprint. In the
next section, attention will be given to the various views of sustainability.
2.6Views of sustainability
Many questions about sustainability as a science are being asked continuously, whether
by philosophers, corporate managers, civil society, government, or even the layperson or
someone hearing about the ‘concept’ as a ‘thing’ for the first time. One way to understand
why the questions regarding sustainability are being asked, is to understand different
views of sustainability. In this case, we look simply at the weak and strong sustainability
debates. The debate around the weak and strong views of sustainability science covers
the question of whether natural capital should be regarded as substitutable or as
complementary to human capital. Within this context, human capital refers to produced
capital such as infrastructure, labour and knowledge. Natural capital covers the stock of
the environmental assets such as fossil fuel, biodiversity and other ecosystem structures
and functions relevant for ecosystem services. These broad views are presented by
Hopwood, Mellor and O’Brien and are addressed below: 50
•Weak sustainability. This view sees natural and human capital as substitutable with
each other. In other words, human capital can substitute natural capital. An example
of weak sustainability could be the mining of coal and using it for the production of
electricity. The natural resource (coal) is replaced by a manufactured good
(electricity). The electricity is then in turn used to improve domestic life quality and
for industrial purposes.
•Strong sustainability. Natural capital is vital to human existence. The strong
viewpoint of sustainability states that human capital cannot be a substitute of the
multiple processes applicable to natural capital. This viewpoint further states that
human capital and natural capital should be seen as complementary and not as two
variables that are interchangeable or substitutable. This viewpoint also accepts that
there are certain functions that the natural environment performs that cannot be
duplicated by humans. The ozone layer is a good example of a variable in the natural
environment (which is crucial for human existence) that is almost impossible for
humans to duplicate. By the same token, photosynthesis and the water cycle are
variables in the natural environment that cannot be duplicated by humans, although
both variables are crucial for human existence.

Viewers of strong sustainability may wish to pursue this paradigm for a number of
reasons:
•The loss of some natural capital may be irreversible.
•There remains considerable ignorance, uncertainty and risk attached to the way in
which natural capital works (for example, there is ongoing research of the global
carbon cycle) – in other words, we cannot be entirely sure what the damaging effect
will be. This takes into account the precautionary principle that simply states: if you
are not sure whether you can fix it, don’t break it.
•There is evidence suggesting we are more averse (opposed) to losses in utility than
we are keen to gain it. This implies that we are highly averse to losses in natural
capital functions that directly provide us with utility. This includes, for example,
basic life support such as drinkable water and clean air.
•The ethical argument for non-substitutability that suggests that increased future
consumption is not an appropriate substitute for natural capital losses.

In his inaugural address in 1961, USA President JF Kennedy said:

‘For man holds in his mortal hands the ability to end all forms of human poverty and
all forms of human life’
J.K. Kennedy

This address reveals a great paradox of our time. On one hand, we have invented
incredible technologies (for example, the internet which has created global connectivity
and vaccinations against deadly diseases). With the power of these technologies, it makes
it possible to foresee the end of extreme poverty, control of disease, and success in the
battle against hunger. On the other hand, these technological opportunities and successes
could threaten our very survival, if poorly guided, governed and implemented. 51
The following section focuses on the responses to the challenge of sustainable
development.
2.7Responses to the challenge of unsustainable
development
Earlier in this chapter we presented a brief history of the sustainable development
movement. This section covers the response to the challenge of unsustainable
development since 1992.
2.7.1Rio Summit 1992
The United Nations Conference on Environment and Development (UNCED), also known
as the Earth Summit, was hosted in Rio de Janeiro, Brazil, in 1992. The primary output of
the UNCED was Agenda 21, a comprehensive plan of action to be taken locally, nationally
and globally in every area in which humans impact on the environment.
Agenda 21 addressed the problems pressing at the time of meeting and aimed at
preparing the world for the challenges of the next century. It reflected a global consensus
and political commitment at the highest level on development and environment co-
operation, with the notion that special attention should be given to the particular
circumstances facing economies in transition. 52
2.7.2The Millennium Declaration
By the year 2000, implementation of the actions set out in Agenda 21 had not yet been
sufficiently addressed. In September 2000, the United Nations Millennium Declaration
was adopted by the 189 Member States of the United Nations. This declaration embodied
a number of specific commitments, which aimed at improving the ‘lot of humanity’ in the
new century. Amongst other commitments, the Millennium Development Goals (MDGs)
were developed and are presented below: 53
• Goal 1: Eradicate extreme poverty and hunger
• Goal 2: Achieve universal primary education
• Goal 3: Promote gender equality and empower women
• Goal 4: Reduce child mortality
• Goal 5: Improve maternal health
• Goal 6: Combat HIV/Aids, Malaria and other diseases
• Goal 7: Ensure environmental sustainability
• Goal 8: Develop a global partnership for development

Each of the above goals had a set of targets and indicators for development, to be realised
by the year 2015, allowing a 15-year time-frame for their achievement. The eight goals
represent a partnership between the developed countries and the developing countries
determined, as the Millennium Development states, ‘to create an environment – at the
national and global levels alike – which is conducive to development and the elimination
of poverty.’ 54
While the MDGs were not entirely achieved by the year 2015, Ban Ki-Moon, the
Secretary General of the UN noted that the global mobilisation behind the MDGs produced
the most successful anti-poverty movement in history. The landmark commitment of the
MDGs entered into by world leaders in 2000, was to ‘spare no effort to free our fellow
men, women and children from the abject (hopeless) and dehumanising conditions of
extreme poverty’. This commitment, translated into the framework of the MDGs and
practical steps that have enabled people across the world to improve their lives and their
future prospects.55
DILEMMA
The following extract is taken from section 1.1 of Agenda 21 (United Nations Division for
Sustainable Development, 1992).

‘Humanity stands at a defining moment in history. We are confronted with a

perpetuation of disparities between and within nations, a worsening of poverty, hunger,
ill health and illiteracy, and the continuing deterioration of the ecosystems on which we
depend for our wellbeing. However, integration of environment and development
concerns and greater attention to them will lead to the fulfilment of basic needs,
improved living standards for all, better protected and managed ecosystems and a
safer, more prosperous future. No nation can achieve this on its own; but together we
can – in a global partnership for sustainable development.’

Almost 25 years later, do you believe Agenda 21 was ambitious or not ambitious enough?

2.7.3World
Summit on Sustainable Development
(WSSD), Johannesburg 2002 56

At the WSSD, the representatives from around the world reaffirmed their commitment to
sustainable development, with a determination to ensure that their collective strength
would be used for constructive partnership for change and for the achievement of the
common goal of sustainable development. The conference recognised the importance of
building human solidarity, urged the promotion of dialogue and co-operation in the
world, regardless of race, disability, religion, language, culture or tradition.
2.7.4Rio+20 (The Future we want) 57

Twenty years after the Earth Summit, world leaders returned to Rio de Janeiro for the
Rio+20 United Nations Conference on Sustainable Development (UNCSD). At this summit
in 2012, the 2030 Agenda for Sustainable Development was drafted, only to be signed-off
at the United Nations Sustainable Development Summit in 2015. This agenda is a plan of
action centred on people, the planet and prosperity, as well as seeking to strengthen
universal peace in greater freedom. It is recognised that eradicating poverty in each of its
dimensions and forms (which includes extreme poverty), is the greatest challenge and a
crucial requirement for sustainable development. The agenda resolves to free the human
race from the oppression of poverty and hungers to rectify our wrongs and protect the
planet for a secure future.
As an outcome of the Rio+20 Summit and included in the 2030 Agenda for Sustainable
Development, the areas of critical importance for humanity and the planet were
summarised into five key areas, also called The 5 Ps. The 5 Ps have been placed in a table
as presented in Table 2.1.

Table 2.1: The 5 Ps - Key areas of importance for humanity and the planet58

The 5 Ps The Agenda is determined to…

end poverty and hunger (in all forms and dimensions) and to ensure
People that all human beings can fulfill their potential, in dignity, equality and
in a healthy environment.
Planet protect the planet from degradation, (including) through sustainable
consumption and production, sustainably managing the earth’s natural
resources and taking urgent action on climate change, so that it can
support the needs of the present and future generations.
Prosperity ensure that all human beings can enjoy prosperous and fulfilling lives
and that economic, social and technological progress occurs in
harmony with nature.
Peace foster peaceful, just and inclusive societies, which are free from fear
and violence. Sustainable development cannot be without peace and
there can be no peace, without sustainable development.
Partnership mobilise the means required to implement the 2030 Agenda through a
revitalised Global Partnership for Sustainable Development, based on
the spirit of strengthened global solidarity, focused in particular on the
needs of the poorest and most vulnerable and with the participation of
ALL countries, ALL stakeholders and ALL people.
Source: From 70/1. Transforming our world: the 2030 Agenda for Sustainable Development.
Resolution adopted by the General Assembly on 25 September 2015. © 2015 United Nations.
Reprinted with the permission of the United Nations.

The outcome documents were built upon the foundations laid in the Stockholm
Declaration of the United Nations Conference, the Rio Declaration and reaffirmed
commitment to implement the Rio Declaration, Agenda 21, the Plan of Implementation of
the WSSD, and other plans and programmes of action committed to by the many UN
conferences which took place the world. The main document was titled the Future we
want, it contained the newly formulated Sustainable Development Goals (SDGs), which
will be presented in brief in section 2.7.5 below.
2.7.5United
Nations Sustainable Development
Summit (the post-2015 Agenda) and the Sustainable
Development Goals (SDGs)
These goals were signed into agreement by the UN General Assembly in New York at the
United Nations Sustainable Development Summit 2015 (also referred to as the United
Nations Summit for the Adoption of the post-2015 Development Agenda). This summit was
held during September 2015, and the SDGs came into effect on 1 January 2016.
In 2015, governments, institutions, corporates, and citizens came together to embark
on a new path to improve the lives of people everywhere, where decisions made ‘will
determine the global course of action to end poverty, promote prosperity and wellbeing
for all, protect the environment and address climate change.’ A new sustainable
development agenda and a new global agreement on climate change was adopted. The
actions resulted in the new SDGs. 59
There are 17 SDGs that comprise 169 detailed targets, demonstrating the scale and
ambition of the new worldwide agenda that seeks, among other ambitions, to build on
the MDGs and complete what they did not achieve. This includes realising the human
rights of all people and particularly to achieve gender equality (which includes the
empowerment of all women and girls).60
The 17 SDGs are presented in Table 2.2 below.61

Table 2.2: Sustainable Development Goals

Source: Reprinted by permission of The United Nations; Project

Everyone https://www.project-everyone.org/ and Trollback and
Company http://trollback.com/

The next section concludes our discussion on sustainability, by focusing on the future
thereof.
2.8The future of sustainable development
At the time of writing this book, it has been 28 years since the official ‘launch’ of the term
‘sustainable development’. While the traction in accepting and understanding the concept
has been slow, perhaps it was unrealistic creating a time-frame to implement the needed
changes on such a challenging and complex issue. The needed systematic changes will
require a revolution in the way that the world does business. This will have an impact on
lifestyles and consumption patterns – in both developed and developing nations. A totally
new development path is needed – one that is truly concerned with equity, poverty
alleviation, reducing resource use, and the integration of economic, environmental and
social issues in decision making. Moving to this new path will require the following:
•Considering wider social, economic and geopolitical agendas. Many of the needed
decisions and actions will take place outside the environment/community in the
fields of energy, security, trade and investment, and development and co-operation.
It will mean breaking down silos and looking at growth in an integrated perspective.
•Fundamentally shifting how we develop and evaluate the health of economies. New
metrics are needed to measure and report on the interconnectedness of various
agendas such as trade, finance, environment and food.
•Moving to actual implementation with real accountability. Concrete action is
needed that includes measureable activities.
•Encouraging transparency and accountability in actions. The impact of actions
should be measured, not just what actions have been taken. A new path must be
performance based.
•Using partnerships between government, business and civil society. These
partnerships should be used to identify and test new approaches, and to scale up
promising ones.
•Effectively communicating sustainable development successes, policies and
learning. A communications vehicle that has effective access points will help kick-
start and maintain implementation of sustainable development.

The last section of this chapter looks at climate change within the context of sustainable
development.
2.9Climate
change in the context of sustainable
development
In section 2.3.1 of this chapter, the systems theory was discussed, highlighting the fact
that corporates can be viewed as open systems, utilising inputs from the environment,
transforming it into outputs in the form of products and services, which are then made
available to customers. Corporates are therefore dependent on the environment to be
sustainable. Changes in the environment affect corporates, governments, nations and
individuals. Climate change is only one of the changes that occur in the environment,
affecting our lives as we know it. However, the effects of climate change are so significant,
that we need to single it out in terms of sustainable development. In this section, we will
first define climate change, followed by present day climate change facts. We also explain
strategies for addressing climate change, followed by a discussion of ways in which
corporates can participate in climate action.
2.9.1Climate change defined
A change in the average long-term weather conditions or weather patterns (such as
average rainfall and temperature), when these changes last for extended periods of time
(typically decades or even longer) is referred to as climate change. When changes in
weather conditions and patterns occur over shorter periods of time (such as a year or
even a few years, but less than a decade), these do not constitute climate change.
Changes in weather conditions and patterns are mainly caused by two factors – human
activity and changes that might have occurred as a result of the earth’s natural processes.
However, the term climate change is used to refer only to changes in weather conditions
and patterns caused by human activity. For this reason, climate change has become a
synonym for the term ‘anthropogenic global warming’, which refers to the production of
greenhouse gases emitted by human activity. It is important to note that the term ‘global
warming’ refers to an increase of the earth’s temperature. Climate change, on the other
hand, refers to global warming and it includes all the other factors that are causing
increasing levels of greenhouse gas level effects. Swedish scientist Svante Arrhenius
(1859 – 1927) was the first person to conduct research into climate change caused by
human activity. In 1896, his research indicated that the onset of the Ice Age 2.5 million
years ago can be explained by human activity. His work was the first research that
connected the levels of atmospheric gases with the surface temperature of the earth.
2.9.2Climate change facts
Scientists agree on a number of facts pertaining to climate change. The following list
provides an idea of these points (and is certainly not an exhaustive list of facts):
(i)There is consensus on climate change. The scientific consensus in terms of climate
change is that the earth’s climate is changing and these changes are in large part
caused by human activities, and are largely irreversible. Many independent
scientific organisations and individuals worldwide also agree that the human
activities causing climate change are posing significant risks to a broad range of
human and natural systems. There is also consensus that climate change is
primarily caused by excess greenhouse gases from human activities. Lastly, there is
also consensus that nations, corporates and individuals should take action in order
to reduce the future risks and consequences thereof. To curb climate change,
countries have signed a variety of agreements to try to reduce carbon emissions.
The Kyoto Protocol, signed by 192 countries since 1997, aims to hold the average
temperature increase below 20 C by cutting carbon output.62
(ii)There is evidence that proves that the earth’s temperature is increasing and
causing other changes in the natural environment. This evidence indicates that (1)
the global average temperature increased by more than 0.8°C over the last century;
(2) rising global temperatures have been accompanied by other changes in weather
and climate, for example, changes in rainfall and more intense rain as well as more
frequent and severe heat waves; (3) the planet’s oceans and glaciers have also
experienced changes, and oceans are becoming warmer and more acidic, ice caps
are melting, and sea levels are rising. 63
(iii)Human activities are mainly responsible for the climate changes observed today.
The earth goes through natural cycles of warming and cooling, which are caused by
factors such as changes in the sun and volcanic activities. Scientists observed these
changes closely and concluded that the warming we experienced in the past 50
years cannot be explained by these natural forces alone. In contrast, the warming
that is observed is consistent with the warming properties of four principal
greenhouse gases that humans are adding to the atmosphere: carbon dioxide,
methane, nitrous oxide and the halocarbons (which is a group of gases containing
fluorine, chlorine and bromine). These gases accumulate in the atmosphere,
causing concentrations to increase over time. For example, carbon dioxide has
increased from fossil fuel used in transportation, building heating and cooling, and
the manufacturing of cement. Deforestation releases carbon dioxide and reduces its
uptake by plants. An increase in methane is a result of human activities related to
agriculture, natural gas distribution and landfills. An increase in nitrous oxide is
caused by activities such as the use of fertiliser and the burning of fossil fuels.
Lastly, an increase of halocarbon gas concentrations is causing ozone depletion,
mostly as a result of refrigeration agents and in other industrial processes. 64
(iv)Too much carbon dioxide can hurt us. Carbon dioxide is a necessary ingredient
for plants to perform photosynthesis. Carbon dioxide is also a critical element of
our atmosphere. However, if too much carbon dioxide is added to the atmosphere,
global temperatures will increase, leading to climate changes that can harm plants,
animals and humans.65
(v)Climate change has an impact on society, the corporate sector, professions,
industries and individuals.66 As a society, we have structured our lives around
historical and current climate actions. We are accustomed to a normal range of
conditions and may be sensitive to extremes that fall outside of this range.
Similarly, the corporate sector is structured in such a way as to provide society
with products and services that are needed, in the conditions to which we are
accustomed. Corporates are therefore also sensitive to extremes that fall outside
this range. Some types of professions may also face considerable challenges from
climate change. For example, professions that are closely linked to weather and
climate, such as outdoor tourism and agriculture, will likely be more affected than
others. Climate change also has an effect on industries, such as the insurance
industry. Insurance is one of the primary mechanisms used to protect people
against weather-related disasters. We also rely on insurance to protect our
investments in real estate, agriculture, transportation, and utility infrastructure by
distributing costs across society. It is projected that climate change will increase
the frequency and intensity of extreme weather events, which will in turn increase
losses of property and cause costly disruptions to society. Individuals are affected
by climate change in a number of ways. For example, we have a great appetite for
meat, which is a major driver of climate change. Reducing global meat consumption
will be critical to keep global warming below the danger levels. Livestock accounts
for 15% of global emissions, which is equivalent to exhaust emissions from all the
vehicles in the world. A shift towards lower meat-eating patterns could effect a
quarter of the emission reductions that we need. Some groups in our society will be
affected more by climate change than others. Climate change may especially impact
on people who live in areas that are vulnerable to coastal storms, drought, and sea
level rise, or people who are poor. Society, corporates, professionals, industries and
individuals are also greatly affected by changes in legislation pertaining to climate
change. For example, new legislation requires corporates to have policies and
procedures regarding their manufacturing processes and management of waste in
place, and to actively aim to reduce greenhouse gases (as explained in (iii)
previously) released in the atmosphere through their everyday business activities.
Society, workers, clients and governments also scrutinise corporates to ensure that
these policies and procedures are implemented.

Since the first research conducted in 1896, science has made a huge contribution towards
our understanding of climate change, its causes, and the current and potential impact
thereof on humans, corporates and nations. This understanding will make it possible for
decision makers to factor it in other large challenges facing nations worldwide. One such
challenge is sustainability or sustainable development, and we need to investigate
climate change in the context of sustainability. In the following section, we investigate the
various strategies that can be implemented to address climate change in the context of
sustainability.
2.9.3Strategies for addressing climate change
Climate change can be addressed by following two strategies: climate change mitigation
and climate change adaptation.

Climate change mitigation

By following a climate change mitigation strategy, the extent of climate change is
limited through reducing greenhouse gas concentrations. This mainly entails a reduction
and conservation of oil, gas and coal, which are the fossil fuels that are used in
transportation, heating and cooling systems, agriculture, and the generation of electricity
by humans. The main aim of a climate change mitigation strategy is to transform the
global economy that is currently fuelled by carbon-based sources of energy. How is this
done? Renewable and alternative energy sources are used to replace carbon-intensive
fuels – which is the key to decarbonising the current energy infrastructure. Alternative
energy sources are already available. These sources produce energy at costs comparable
with coal and natural gas. For many corporates and nations, research in alternative
energy sources that will improve the effectiveness and availability of such technologies,
is a priority.
Climate change mitigation strategies should be complemented by climate change
adaptation strategies. Climate changes that are already occurring (climate change facts
were discussed in section 2.9.2 of this chapter) are predicted to increase in future –
forcing corporates and nations to combine climate change mitigation with climate change
adaptation strategies.

Climate change adaptation

A climate change adaptation strategy refers to changes in the way society lives in
response to climate change. Society can make changes regarding its ecological, social and
economic systems. Also, society can change traditional processes and practices as well as
structures in order to (i) limit the potential damages caused by climate change; and (ii)
reduce the vulnerability of communities, regions and individuals. Climate change does
not only constitute threats – it can also lead to new opportunities that individuals and
corporates can benefit from.
Examples of climate change adaptation in various sectors, which may occur at the
population, community, corporate or personal levels of the sector, are provided below: 67
•Human health. Many diseases and health problems may be exacerbated by climate
change. These can be effectively prevented with adequate financial and human
public health resources, including training, surveillance and emergency response as
well as prevention and control programmes. The effectiveness of adaptation to these
changes will depend on the level of financial resources, the effectiveness of
governance and civil institutions, the quality of public health infrastructure, and the
pre-existing burden of disease. Therefore, it would be important to conduct research
in this field in order to understand the associations between climate, weather,
extreme events and diseases.
•Insurance and other financial services. Changes in the frequencies and intensities of
extreme weather events will have an impact on financial and insurance services over
the short term. Over the longer term, increasing risk due to climate change, may lead
to a greater demand for insurance and other financial services. However, it will
require the development of new financial risk management products. For example,
the terms and conditions of insurance policies, the structure of insurance premiums
and the requirements needed to be insured, might need to be changed. The
variability of loss events would lead to greater uncertainty that will lead to higher
risks, leading to higher costs and insurance premiums. It may also lead to various
other adaptations on the part of the insurers, such as the non-renewal of policies,
cessation of new policies, limiting maximum claims and raising deductibles.
•Human settlements. Human settlements in developing countries are most affected
by climate change. Urban managers of corporates in these countries very often have
little capacity to deal with some of the issues they experience in these environments,
such as lack of proper housing, lack of sanitation, and intermittent access or
complete lack of access, to water and electricity. This creates an unfortunate
situation in which dealing with climate change risks is simply beyond their means or
priorities seeing as they have more immediate issues to deal with. Lack of financial
resources, weak planning and weak institutions, and inadequate planning are all
barriers to adaptation in human settlements. Corporates can and should play an
important role in these human settlements – many of their employees and other
stakeholders might live in these communities. Corporates should administer
citizenship rights to their stakeholders through, for example, paying their employees
a proper remuneration to improve their physical living environments. Corporates
can also play a role in organising and funding educational programmes in these
communities in order to empower their employees and the community in which
they operate as a whole, to improve their living conditions.
•Coastal zones. Coastal communities and marine-based economic sectors with either
low exposure or high adaptive capacity will be least affected by climate change.
Communities with less economic resources, poorer infrastructure, less-developed
communication and transportation systems, and weak social support systems, have
less access to adaptation options and are thus more vulnerable. Climate change
adaptation strategies in this sector should be incorporated into coastal zone
management, disaster mitigation programmes, land-use planning, and sustainable
development strategies. The adaptive capacity of coastal systems to perturbations
(changes to the normal or regular state of the climate) is related to coastal resilience
– including the technical, institutional, ecological and socio-economic components.
Enhancing resilience is an appropriate adaptive strategy to implement, given future
uncertainties and the desire to maintain development opportunities.
•Ecosystems. There are possibilities for adaptation strategies in agriculture,
including crop changes and resource substitutions. Adaptations in agriculture will
not happen without considerable transition costs. Various studies reveal that
climate change impacts on plant growth stages, it affects migration patterns of
animals, and it threatens the survival of many species and also the quality of water.
Strategies to protect our vulnerable ecosystems from climate change will be costly.
Researchers are, for example, working on the development of ways to assess the risk
of near-coastal species and their habitats, development of ways to predict
vulnerability of wetlands and water quality, the development of models to assess the
effects of climate change on the availability of water and watershed alterations.68 All
of these interventions are very costly and also time consuming.
•Commercial forestry. This is also adaptable, and adaptations are expected in both
land-use management and product management. Adaptations in developed
countries will fare better, while developing countries will fare worse, simply because
developing countries do not have thenecessary funding and infrastructure to make
the required adaptations.
•Water resources. Water action is at the heart of climate action. Many techniques
exist to assess and implement adaptive options. In section 2.4.2 of this chapter,
water conservation in Singapore was discussed, highlighting various initiatives in
this country that resolved their water supply challenges. In South Africa, we face
similar problems that require adaptation strategies. These strategies can involve
management on the supply side (for example, altering infrastructure) and on the
demand side (for example, decreasing the demand for water or the reduction of
risks associated with the availability of water). Water managers need research and
management tools aimed at adapting to uncertainty and change, rather than
improving climate scenarios. Corporates in particular, need to engage in research
aimed at reducing their water consumption in manufacturing and other processes.
Waste water can also be recycled by corporates, adapting to the effects of climate
change.

The need and capacity for climate change adaptation strategies differ between different
regions. In Africa, for example, adaptive measures would enhance flexibility and have net
benefits in water resources (irrigation and water reuse, groundwater management and
desalinisation), agriculture (crop changes, technology and irrigation) and forestry
(regeneration of local species, energy-efficient cooking stoves and sustainable
community management). Without climate adaptation strategies, climate change will
reduce the wildlife reserve network significantly by altering ecosystems and causing
species emigration and extinctions. A risk-sharing approach between African countries
(in other words, spreading the risk between the various countries) can strengthen
adaptation strategies, including disaster management, risk communication, emergency
evacuation, and co-operative water resource management. The enhancement of the
adaptive capacity in Africa, requires the incorporation of climate adaptation within the
broader sustainable development strategies.
Climate change mitigation and adaptation can significantly reduce the negative
impacts of climate change. These strategies are important parts of societal response to
global climate change, and require the commitment of nations, governments,
professionals, corporates and individuals. Planned, anticipatory adaptation has the
potential to reduce vulnerability and realise opportunities associated with climate
change effects and hazards.
The last section pertaining to climate change focuses on how corporates can and
should contribute to climate change mitigation and adaptation.
2.9.4Corporates taking climate action
At the Paris climate conference (COP21) in December 2015, 195 countries adopted the
first-ever universal, legally-binding global climate deal. Political leaders demonstrated
their ambition to hold the global average temperature to well below 2° C above pre-
industrial levels and pursuing efforts to limit the temperature increase to 1.5° C. This
clearly demonstrates the political will to address the climate change threat. COP21 also
highlighted the role of corporates in tackling climate change now more than ever in
history.
Corporates worldwide are putting measures in place to anticipate for, and adapt to,
climate impacts. If done properly, this process brings numerous benefits to corporates,
as listed below:
•Business action improves corporate image. A corporate engaged in climate action
will create a favourable and positive image towards all its stakeholders.
•Business action better aligns corporate actions with the environmental interests of
corporate owners, employees, suppliers, customers, and all other stakeholders.
•Business action reduces costs. For example, adherence to changed legislation will
result in no legal costs. The recycling of waste water is also an example of reducing
costs.
•Business action may increase a corporate’s return on investment. The adaptation of
new and innovative manufacturing processes, the goodwill of stakeholders, and the
adherence to new legislation will improve the financial performance of corporates,
thereby increasing return on investment.
•Business action reduces dependency on uncontrollable costs. The implementation
of new business models, minimising the negative effects of climate change, will
reduce the corporate’s dependency on uncontrollable costs. For example, solar
energy will reduce dependency on traditional energy suppliers.
•Business action leads to more effective management of corporate liabilities. The
implementation of new business models will also lead to more effective
management of liabilities, since corporates will be less dependent on uncontrollable
costs, they will adjust their risk profile and risk management strategies, to mention
only a few.
•Business action expands market share through new products and/or services.

All the benefits listed above will lead to a corporate that will have the means and
resources to expand its market share through new (and innovative) products and/or
services.
The question that now arises is how can corporates take climate action? Essentially,
climate action revolves around (i) business strategy integration; (ii) engagement of
employees; and (iii) greenhouse gas (GHG) reduction projects and targets. These are
explained in more detail next.

Business strategy integration

Climate action should form part and parcel of a corporate’s strategic planning, execution
and control processes. Business strategy should consider and connect climate change to
risks, opportunities, processes and procedures. One approach to factoring climate change
into business strategy is by establishing an internal price on carbon, known as carbon
pricing. Carbon pricing charges those who emit carbon dioxide for their emissions. That
charge, called a carbon price, is the amount of money that must be paid for the right to
emit one ton of carbon dioxide into the atmosphere. Carbon pricing usually takes the form
of either a carbon tax or a requirement to purchase permits to emit, generally known as
cap-and-trade, but also called ‘allowances’. Putting a price on carbon can encourage low-
carbon growth and lower greenhouse gas emissions. Corporates should advocate the
importance of carbon pricing to all stakeholders through their policies. Carbon pricing
refers to putting a price on carbon emissions that helps shift the burden for the damage
back to those who are responsible for it, and who can reduce it. Instead of dictating who
should reduce emissions where and how, a carbon price gives an economic signal and
polluters decide for themselves whether to discontinue their polluting activity, reduce
emissions, or continue polluting and pay for it. 69 Progress over time (in other words, the
corporate’s success in limiting its carbon price (thereby limiting the amount and value of
payments due to high carbon emissions), or decreasing its carbon taxes and permissions
should be communicated in public corporate reports. Walmart, an American
multinational retail corporation that operates a chain of hypermarkets, discount
department stores and grocery stores, is an example of a corporate successfully
implementing carbon pricing. When making key environmental business decisions,
Walmart needed to rethink the simple payback model of a specified number of years to
ensure that they are making the right decisions. Simply put, the payback model
determines the number of years that it will take a corporate to earn back the amount
invested in a project. For example, if US$5 million is invested in a project and Walmart
calculates that the project will earn US$1 million per year, the payback period is five
years. The company was one of the first retailers to embed a shadow cost of carbon in all
carbon mitigation investment decisions. The actual carbon price that they set is flexible
to allow it to change over time as external factors change, thus ensuring their appraisal
model remains world class. Walmart acknowledges that the financial implications of an
international agreement on climate change depends greatly on its structure, scope and
the way it is carried out by the corporate. The structure may be taxation, where
corporates need to pay a tax to emit, or a cap-and-trade scheme, where corporates need
to purchase a permit to emit. The scope of the agreement refers to the industries that are
regulated by the agreement. In order to calculate the potential direct cost of carbon
pricing to Walmart, the company applied a comprehensive carbon pricing system across
all of their markets and covered the entire retail industry. Walmart assumed a carbon
price of US$18 per ton, and concluded that the potential direct costs to the company will
be US$104 million. While this additional cost is primarily seen as a risk, Walmart’s early
action on emission reductions represents a competitive advantage over other retailers
that have not performed such projects. 70

Engagement of employees
A top-down and bottom-up approach to engaging employees is recognised as an effective
tactic for addressing climate change. Corporates should have a board committee that
oversees corporate initiatives on climate and the environment. Employees could be
incentivised to assess, manage and implement corporate strategies and programmes (as
formulated by top management) that have a positive impact on the environment. BASF,
the biggest chemical producer in the world, embraced this approach by providing
monetary rewards to executive officers and employees who reach emissions and
efficiency targets. Research and Development project leaders and marketing executives
at BASF are also compensated for developing or selling new products for climate
protection and adaptation. Intel, an American multinational technology company and one
of the world’s largest and highest-valued semiconductor chipmakers, is another example
of a company that embraces incentivising employees by linking the achievement of
sustainability metrics to employee salaries.

Create greenhouse gas reduction projects and targets

Lastly, corporates need to set tangible targets and significant greenhouse gas reduction
projects. PepsiCo is a multinational food, snack and beverage corporation, and a leader in
greenhouse gas reductions. Since 2010, PepsiCo’s delivery fleet has reduced greenhouse
gas emissions by more than 55 000 metric tons, while reducing its diesel fuel usage by
23%, partly through using more energy-efficient trucks.
Microsoft, a multinational computer technology corporation, has pledged support for
a new project focused on greenhouse gas reduction, called the Climate Neutral Now
Initiative. This project allows corporations and individuals to set and track zero-impact
targets for emitting gases and increases the availability of renewable energy.
2.10Conclusion

In this chapter, we took a brief look at the history of humanity’s rate of social and
economic growth and environmental destruction. This revealed that the current
economic system, which has driven development, has been doing so at an unsustainable
rate. This prompted the call for the concept ‘sustainable development’. This chapter
unpacked the concept and the interrelated elements of society, the environment and the
economy (people, planet and profit), and we set out to understand the tensions and
alignments between these elements. We then looked at the global response to sustainable
development highlighting the fundamental social need to pursue sustainability to
ultimately attain the future we want. Climate change was discussed in the last part of the
chapter, highlighting the facts surrounding climate change, strategies for addressing
climate change and corporates taking climate action. In Chapter 3, we will address the
emergence of corporate citizenship.

Multiple-choice questions
1.The systems theory can be applied to all disciplines, including studies pertaining
to ‘sustainable development’. Which one of the following is not a characteristic of
all disciplines?
In all disciplines:
a.One needs to study the whole ‘organism’, where ‘organism’ refers to the whole
that consists of various parts.
b.Each part of the ‘organism’ has its own function, structure and relationship to
the other parts.
c.All systems are closed and can function independently.
d.The ‘organism’ has the tendency to strive for a steady state or equilibrium.

2.Sustainability organically connects the following dimensions:

Aecology
Beconomy
Cpolitics
Dlaws and regulations
Esocial justice

a.A B
b.A B E
c.B C D
d.C D E

3.‘Sustainable development’ is:

a.Primarily a characteristic of developed countries, where resources are enough
to support the wellbeing of these nations.
b.More important for developing countries and their need to improve their
standards of living.
c.Development that meets the needs of the present without compromising the
ability of future generations to meet their own needs.
d.Development that focuses on the goals of corporates to earn sustainable
profits for their owners.

4.Sustainable development has brought in additional drivers of economic growth

that countries and corporations should consider.
These drivers are:
a.energy, consumption and globalisation
b.technology, profit, social responsibility
c.changes in the world of work, privatisation, consumption and doing business
across borders
d.advances in technology and the changing environment

5.The ____ view of sustainability sees _____; whereas the _____ view of sustainability
points out that _____.
a.strong; natural and human capital as substitutable with each other; weak;
human capital cannot substitute natural capital
b.weak; natural and human capital as substitutable with each other; strong;
human capital cannot substitute natural capital
c.weak; the replacement of humans with technology as a means to sustain
diminishing resources; strong; humans cannot be replaced by new technologies
d.strong; the economy, ecology and social environment are of equivalent
importance; weak; the economy is more important than the ecology and social
environment in nations

Discussion questions
1.Define the term ‘sustainable development’ and explain the different elements it
comprises.

2.Explain the implications of society’s ecological footprint.

3.Define the term ‘climate change’ and explain the implications of climate change
on sustainable development.

Additional reading
•Ward, B & Dubos, R. 1972. Only one earth: The care and maintenance of a small
planet. George J. McLeod Limited: Toronto.
•Brundtland Report: http://www.un-documents.net/our-common-future.pdf
•Agenda
21: https://sustainabledevelopment.un.org/content/documents/Agenda21.pdf
•Elkington, J. 1997. Cannibals with forks: The triple bottom line of 21st century
business. Capstone Publishing Ltd: Oxford.
•Hopwood, B, Mellor, M & O’Brien, G. 2005. Sustainable development: Mapping
different approaches. Sustainable development, 13:38–52.

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29.Enders, J & Remig, M. 2014. Theories of sustainable development. Routledge: New
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32.Ward, B & Dubos, R. 1972. Only one earth: the care and maintenance of a small
planet. George J. McLeod Limited: Toronto.
33.Ibid.
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2016].
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poverty-index-mpi [22 March 2016].
37.United Nations Development Programme. 2014. Human Development Report
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39.Robertson, M. 2014. Sustainability: Principles and practice. Routledge: New York.
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update. Earthscan in association with the International Institute of Environment
and Development: USA.
42.WWF. 2014. Living Planet Report: Species and spaces, people and places. [Online].
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eport/ p. 164. [22 March 2016].
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update. Earthscan in association with the International Institute of Environment
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46.Ibid.
47.Ibid. Reproduced by permission of WWF. 2014. Living Planet Report. WWF
International, Gland, Switzerland.
48.Ibid.
49.Ibid.
50.Hopwood, B, Mellor, M & O’Brien, G. 2005. Sustainable development: Mapping
different approaches. Sustainable Development, 12:38–52.
51.The Earth Institute, Columbia University. 2015. The age of sustainable
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54.Ibid.
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Nations summit for the adoption of the post-2015 development agenda. Sixty-ninth
session (A/69/L.85)
58.United Nations General Assembly. 2015. Draft outcome document of the United
Nations summit for the adoption of the post-2015 development agenda. Sixty-ninth
session (A/69/L.85). p. 3.
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Nations summit for the adoption of the post-2015 development agenda. Sixty-ninth
session (A/69/L.85)
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Sustainable Development Goals. [Online].
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63.Ibid.
64.Ibid.
65.Ibid.
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man.pdf [22 March 2016].
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development and equity. pp. 900–901.
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change-research [22 March 2016].
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Available: http://www.worldbank.org/en/programs/pricing-carbon [29 March
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2013.pdf [22 March 2016].
chapter
Evolution of corporate
citizenship
Tersia Botha and Tracey Cohen 3
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Explain the changing role of corporates
•Explain the variables influencing corporates to change
•Discuss the term ‘corporate citizenship’
•Explain the history of corporate citizenship
•Explain a framework for facilitating corporate citizenship
KEYWORDS AND CONCEPTS
-citizenship
-civil rights
-consumer markets
-corporate citizenship
-corporate philanthropy (corporate social investment)
-corporate power
-corporate responsibility
-corporate social responsibility
-corporation
-equivalent view of corporate citizenship
-extended view of corporation citizenship
-First Industrial Revolution
-Fourth Industrial Revolution
-globalisation
-intellectual capital and learning
-limited view of corporate citizenship
-misconduct
-political rights
-power and responsibility
-role and expectations of workers
-Second Industrial Revolution
-social rights
-sustainable development (sustainability)
-technological advances
-Third Industrial Revolution
-United Nations Global Compact
-citizenship
-civil rights
-consumer markets
-corporate citizenship
-corporate philanthropy (corporate social investment)
-corporate power
-corporate responsibility
-corporate social responsibility
-corporation
-equivalent view of corporate citizenship
-extended view of corporation citizenship
-First Industrial Revolution
-Fourth Industrial Revolution
-globalisation
-intellectual capital and learning
-limited view of corporate citizenship
-misconduct
-political rights
-power and responsibility
-role and expectations of workers
-Second Industrial Revolution
-social rights
-sustainable development (sustainability)
-technological advances
-Third Industrial Revolution
-United Nations Global Compact

OPENING CASE SCENARIO

Unilever
Unilever, founded in 1930, is a British-Dutch multinational corporation with
headquarters in the Netherlands and United Kingdom. The corporate operates in the
consumer goods industry, offering food, beverages, cleaning agents and personal
care products to its customers. In South Africa, we are familiar with most of
Unilever’s brands such as Axe, Dove, Omo, Flora, Knorr, Lipton, Lux, Sunsilk,
Rama, Magnum and Hellmann’s. It is listed in London, trading as Unilever plc, as
well as in Rotterdam, trading as Unilever N.V. Although it is listed as two companies,
Unilever operates as a single business with four main divisions: foods, refreshment,
beverages and personal care.
Unilever has operating companies and factories on every continent except
Antarctica. It has diversified its products numerous times, acquired other companies
and also sold some divisions. Unilever has always been an excellent example of a
corporate that changed in accordance with changes in its management environment.
The corporate is also a pioneer within the context of corporate citizenship, as evident
from the following:
•Commitment to sustainable sourcing. In May 2007, Unilever became the first
large-scale corporate to commit to sourcing all its tea in a sustainable manner.
The corporate employed the Rainforest Alliance, an international non-
governmental organisation (NGO), to certify the corporate’s tea estates in East
Africa. Rainforest Alliance was also employed to certify other third-party tea
suppliers in Africa and other parts of the world (a third-party tea supplier is a
supplier that is not owned nor controlled by Unilever). Unilever’s aim was to have
all Lipton Yellow Label and PG Tips tea bags sold in Western Europe certified by
2010, followed by all Lipton tea bags sold globally by 2015.
•Commitment to using free-range eggs. In 2011, Unilever announced its intention
to switch to 100% free-range (cage-free) eggs for all products that it produces
worldwide.
•Commitment to a ‘Sustainable Living Plan’. In 2010, Unilever launched its
‘Sustainable Living Plan’, which unveiled its plan to decouple business growth
from its impact on the environment. The corporate published its plans to do the
following:
–Halve the environmental footprint of its products by developing new ways of
doing business that will ensure that the corporate’s growth does not come at
the expense of the world’s diminishing resources.
–Help one billion people to improve their health and wellbeing, by taking
action in mostly developing countries over the next ten years. The corporate
wants to change the hygiene habits of one billion people in Asia, Africa and
Latin America so that they wash their hands with Lifebuoy soap at key times
during the day – helping to reduce diarrhoeal disease, the world’s second
biggest cause of infant mortality. The corporate is also engaged in making
safe drinking water available to half a billion people by extending sales of its
low-cost in-home water purifiers from India to other countries.
–Source 100% of its agricultural raw materials sustainably. Unilever was
criticised in 2008 by Greenpeace UK, for buying palm oil (used in the
production of food and non-food products) from suppliers that are damaging
Indonesia’s rainforests. Unilever, as a founding member of the Roundtable for
Sustainable Palm Oil, responded by publishing its plan to obtain all of its palm
oil from sources certified as sustainable by 2015. Unilever claims to have met
these goals in 2012 and is encouraging the rest of the industry to become
100% sustainable by 2020.1
–Halve greenhouse gas emissions, water and waste used, not just by the
corporate and its direct operations, but also by its suppliers and customers.
•Commitment to use degradable particles in personal care products. A large
number of personal care products contain micro plastics. A position paper
published in August 2012 by the North Sea Foundation, the Marine Conservation
Society, Seas at Risk and the Plastic Soup Foundation, indicated that micro
plastics are in the sewage of water treatment installations. From there, they can
reach the marine environment. Micro plastics are found in all seas and oceans of
the world.2 They can enter organisms such as fish, lobster and oysters, and
thereby enter the food chain. Eventually, this could affect human health. The
presence of micro plastics in personal care products, such as facial cleaners and
toothpaste, are a new source of pollution and producers of such products should
return to using organic degradable particles, exactly what Unilever committed to
do in 2012.
•Commitment to boost smallholders’ livelihoods, strengthening their supply chain.
Unilever relies on a network of thousands of smallholder farmers to supply many
of the ingredients that make their products. The corporate acknowledges that the
success of these smallholders is as vital as their own success. Unilever is
committed to helping smallholders improve their yields and transform their
livelihoods as part of the corporate’s overall ambition of ensuring that it has a
successful business with a positive social impact. In 2015, Unilever developed
the Enhancing Livelihoods Fund, to enable investment in innovative projects in
their supply chain that improve agricultural practices and the livelihoods of
smallholder farming communities, with a specific focus on empowering women. 3
•Commitment to deliver world-class capabilities in Africa. Unilever’s commitment
to Africa, is to accelerate innovations that drive growth and continuous
improvement in quality and service for consumers. Unilever has agreed to new
partnerships with several global packaging suppliers, bringing global capabilities
and investment to South Africa specifically. The partnership will enable Unilever
to accelerate the introduction of product innovations with world-class quality and
create new jobs.4

Source: Reproduced with kind permission of Unilever South Africa Proprietary Limited and
group companies.

3.1Introduction

The opening case scenario illustrates Unilever’s commitment to sustainability and the
corporate’s concern for a better future for all. Building a sustainable organisation in the
twenty-first century has become a progressively more important and complex necessity.
As presented in Chapter 2 (Sustainable development and climate change), societal
complexities, environmental destruction, the drive for economic growth and the
intricacies between the elements have always been present. However, the threats to a
sustainable future have only become a priority on business agendas in the last three or
so decades, and momentum has slowly gained traction in the last fifteen years as the
threats and their consequences for businesses and the economy have become
increasingly evident.
Chapter 2 revealed some shocking realities pertaining to the state of society, the
environment and the economy – the three broad elements of sustainable development.
Although businesses contribute to the economy, society and the environment in a
multitude of positive ways, it would appear that much of this positive impact has
occurred alongside some negative trade-offs. This has been evident in the form of
corporate scandals and misconduct involving unethical and irresponsible business
practices, heavy pollution, exploitation of human rights and, sometimes, through
practices with good intent, but with ill-fated and unintended consequences. Examples of
misconduct by corporates in the environmental, social and governance spheres are given
on the next page.
While there is a growing awareness that corporates have an important role to play in
meeting society’s need for sustainable development, it needs to be understood within the
context of an important point – corporates are both part of the solution (contributing to
the wealth of the society), and the problem (negative effects on society and the
environment). Unfortunately, the manner in which corporates have been contributing to
the problem, has been on the rise in recent decades. The (mostly unintended) negative
consequences form the basis of an important question: Is the way in which corporates
operate in the current economic system and current natural environment occurring at a
sustainable rate? Corporate citizenship is a means of responding to the challenge of
unsustainable development. It is a means of linking corporates, society, the economy and
the environment to ensure that corporates operate in a sustainable manner.
Furthermore, corporate citizenship also addresses ethical conduct by corporates.
In this chapter, we will first explain the changing role of corporates from the First
Industrial Revolution to the current one. The environments in which corporates
performed their business activities underwent huge changes and management needed to
adapt to those changes. We also focus on the variables that influenced corporates to
change in the past and that are still forcing corporates to change now. As corporates
responded to the changes, the need to conceptualise the term ‘corporate citizenship’
arose. We therefore define the term ‘corporate citizenship’ and provide an overview of
the history of the concept. Lastly, a global framework is provided for facilitating corporate
citizenship.
Example
The BP oil spill (environmental sphere)
On 20 April 2010, an explosion on the Deepwater Horizon Macondo oil well drilling platform
started the largest marine oil spill in US history, releasing millions of barrels of oil into the
Gulf of Mexico.
The fallout from this catastrophe included the tragic loss of 11 workers’ lives, harm to the
health of many Gulf coast residents, and an ecological and economic disaster that is still
unfolding. We are still learning the full extent of the environmental damage, but federal
agencies have estimated that the harm will last for generations.
On 4 April 2016, the court approved a settlement with BP for natural resource injuries
stemming from the Deepwater Horizon oil spill. This settlement concludes the largest natural
resource damage assessment ever undertaken.5

Groundwater contamination poisoning the health of a community (social sphere)

You may have watched the 1990s movie called Erin Brockovich, starring Julia Roberts.
Roberts acted as Erin Brockovich, who fought for justice for people living in the town of
Hinkley (California, USA), as they did not have the know-how or resources to fight for
themselves. The Erin Brockovich movie is based on a true story that revealed how Pacific
Gas & Electric’s (PG & E) unethical practices poisoned the community of Hinkley. For over
30 years, the groundwater in Hinkley had been contaminated through leakages and the poor
conduct of PG & E’s operations. The people of Hinkley were drinking this contaminated
water, resulting in many life- threatening medical conditions amongst them. Brockovich
helped expose the malpractices of PG & E that was forced to pay out an injury settlement of
US$333 million (almost R5 billion) in damages to over 600 Hickley residents. 6

African Bank (governance sphere)

African Bank Limited (ABL), commonly referred to as African Bank, is a commercial bank in
South Africa. On 10 August 2014, ABL was placed under curatorship by the South African
Reserve Bank, after it warned of massive losses and said it needed about R8,5 billion in new
capital to save the bank. Shortly after the announcement of this requirement, the share price
fell to one-twentieth of the value it held a month earlier, in July 2014. Over and above
financial losses, redeployment and the retrenchment of staff became a reality for the bank.
The reason for the bank’s collapse was poor governance. In the few years before 2014,
African Bank had been providing loans that were not backed by assets, as well as providing
loans to people who could not afford them, resulting in a fine of R300 million imposed on
ABL in 2013.7

3.2The changing role of corporates

The world is changing – climate change is a reality, temperatures are rising, water
shortages are more frequent, and food supplies are increasingly scarce. Furthermore,
populations are growing rapidly, increasing the challenges pertaining to basic hygiene
and sanitation, and stretching the planet’s resources even further.
There is no ‘business as usual’ anymore. The old economic systems are no longer fit
for purpose, the way that corporates are managed and the role of corporates in society
has changed tremendously. But why? Why do corporates change? Why is there a
fundamental shift away from the traditional models of doing business to a new kind of
model that did not exist a decade or two ago?
In Chapter 2 of this book, we explained the systems theory and how it relates to
corporates. Let us recap briefly. According to the systems theory, the corporation is an
open system because it does not operate in isolation – it depends on its external
environment to provide inputs and resources. Furthermore, the external environment
depends on corporates to provide products and services, to create jobs and to contribute
to the wealth of society. There is a particular and complicated interaction between the
system (the corporate) and its external environment. In this context, the ‘external
environment’ refers not only to the natural or physical environment, but it includes all
sub-environments and variables surrounding the corporation that have an influence on
it. For example, the economic, technological, political/governmental, natural, social,
cultural and competitive sub-environments. The latter refers to competition, suppliers,
labour unions and all the intermediaries in corporates’ competitive environments.
Therefore, any changes in the external environment will affect the corporation. In order
to survive and be sustainable, corporates need to anticipate environmental changes,
respond to and adapt to them. The reason why corporates worldwide are changing is that
the environments in which they operate have changed. Furthermore, the pace of change
is accelerating. As corporates are changing, managers need to adapt their managerial
styles and approaches in the management of these corporations.
Many corporate leaders and executives worldwide believe that we are today on the
cusp of a Fourth Industrial Revolution. Let us briefly look at revolutionary changes since
the 1700s:
•First Industrial Revolution. The First Industrial Revolution, which began between
1760 and 1820 and ended in 1840, was spurred on by the use of water and steam to
power machinery.
•Second Industrial Revolution. The Second Industrial Revolution (also known as
the Technological Revolution) began between 1840 and 1870, and lasted until the
beginning of World War I (1914–1918). The second revolution replaced water and
steam with electrical power. Between the second and third revolutions, World War
II took place (1939–1945). After World War II, much of what had been destroyed
during the war needed to be reconstructed. This development took place at a rapid
rate and resources were being extracted from the earth and used for construction as
though they were infinite or neverending. This was done as quickly and cheaply as
possible, without taking into account the social consequences of the process.
Corporations and industries flourished, the rich were in a position to get richer,
while the poor got poorer; gaps in wealth inequalities between countries and within
countries widened.
•Third and Fourth Industrial Revolutions. The Third Industrial Revolution is the
Digital or Information Technology Revolution (which began in the late 1950s until
the late 1970s). The Fourth (current) Industrial Revolution is described as an
extension of the third, using a combination of computer hardware, robotics and
massive computing power to expand information technology beyond just computer
software. Developments in previously disjointed fields such as artificial intelligence
and machine learning, robotics, nanotechnology, 3D printing, and genetics and
biotechnology are all building on and amplifying one another. Smart systems in
homes, factories, farms and entire cities are helping to overcome challenges, ranging
from supply chain management, to sustainability and climate change. 8 The example
box below provides an example of a change occurring in the digital revolution,
affecting all countries, including South Africa.

The developments and changes from the First Industrial Revolution to the current one,
forced corporations and management to also change. The changes and transformation
brought about by the third and fourth revolutions were so swift in pace, and so profound
in social, geographical, cultural and economic implications, that it also raised serious
problems, not only for corporations, but also for individuals in our society. Look at the
example pertaining to the switch from analogue to digital terrestrial television
worldwide. This not only affects the government, who is responsible for managing the
change process, but also corporations and individuals. The example box on the next page
provides another example of the impact of the changing environment on the workplace.
Example
Digital terrestrial television in South Africa
Currently, terrestrial broadcasting in South Africa is broadcasting in an analogue format. The
country has started the process of migrating broadcasting signals from analogue to digital.
The broadcasting of terrestrial television in digital format is known as digital terrestrial
television (DTT). The migration process is the result of the International Telecommunications
Union resolution, which states that countries in Region 1 (including Europe, Russia, Africa,
the Middle East and the Islamic Republic of Iran) should migrate their broadcasting services
from analogue to digital.
Terrestrial television uses a network of transmission towers to relay the signal across the
country. Each transmission tower has specific area coverage, and it is the network of
coverage that provides television signals across the country. The broadcast signal is sent to
the various towers and if one is within the area covered by a tower, one will be able to
receive the broadcast services via a terrestrial aerial. In analogue television, one channel
(SABC 1 in South Africa) uses a dedicated frequency to broadcast, due to the large amount
of bandwidth that the analogue signal requires. In digital television, the signals are
compressed. The fact that signals can be compressed, allows more channels to be
broadcast in the same bandwidth that one current analogue channel uses.
The main reason why South Africa and other countries all over the world are migrating
from analogue to digital television is to release valuable bandwidth that can be used for other
services, for example broadband mobile services. Bandwidth is, like all other resources,
needed by nations, corporations and individuals. Bandwidth is scarce and needs to be
utilised in the best possible way.

Source: South African Government. 2015. Digital migration. [Online].

Available: http://www.gov.za/about-government/government-programmes/digital-
migration; http://doc.gov.za [8 April 2015].

Example
The impact of robots replacing humans in the workplace
More and more corporations are utilising robots, which replace humans, in the workplace
today. Industries that are most likely to be affected by this technology are health care,
transportation and logistics, customer service and manufacturing (especially in the car
manufacturing industry). Robotics is also used widely in the medical industry, where it has
been used to conduct neurological, orthopaedic and general surgery. This trend is expected
to increase in future, due to the various benefits thereof. Examples of the benefits of this
technology are that robots could assist with dirty, dull and dangerous tasks, leading to an
increase in productivity and worker safety. However, there are also many risks involved and
being a ‘good corporate citizen’ requires that corporates also investigate and address the
risks associated with robots in the workplace. Robot technology could increase productivity
in the workplace. This increase could give rise to higher employer expectations of human
workers and, in turn, to increasing injury risk. The biggest risk in using robots is probably
when robots replace workers, and employers are forced to give workers notice of layoffs,
pay severance and retrain employees.

The discussions and examples provided above highlight the fact that it has become more
and more important to focus on the relationship between corporates and the (changing)
environment in which they operate. What is needed, is a shift in business thinking.
Although corporates are, and should be, profit-seeking institutions, they now also have a
greater purpose and a sense of responsibility towards society, the environment and the
economy(ies) in which they operate (not to mention that these responsibilities should
assume good ethical practices and sound governance). Corporates need to respond to the
challenges of unsustainability and the opportunities presented on the road to achieving
sustainable development.
The Unilever opening case scenario illustrates a few of the innovative changes that the
corporate underwent since it started in 1930. Some of these innovations have been a
reaction to changes in its business environment. For example, Unilever’s decision to
source 100% of its agricultural raw material sustainably was made after it was criticised
by Greenpeace UK for buying palm oil from suppliers that are damaging rain forests.
Other changes were proactive. For example, Unilever develops new ways of doing
business that will ensure that the corporate’s growth does not come at the expense of the
world’s diminishing natural resources. In the 1930s during the First Industrial
Revolution, the corporate may have been less concerned with regards to their effect on
the physical environment (nature) and therefore sourced natural resources in the
quickest and cheapest manner. However, seeing as the environment started to change,
the effects of climate change became more prevalent, their consumers became more
concerned about the environment and government started to take action against
companies who source their resources in an irresponsible manner. Unilever made some
necessary and positive changes to the manner in which they conduct business to ensure
that they do not inflict unnecessary harm on the environment or their employees and
customers.
As the world moved from the First Industrial Revolution, through the second and third
to the current one, various factors influenced corporates to change. These variables are
discussed in the next section.
3.3Variables influencing corporates to change
A number of variables have a definite influence on corporates to which they need to
adapt. In this section, we will focus on the following variables: (i) globalisation; (ii)
advances in technology and radical transformation of the world of work; (iii) increased
power and demands from customers; (iv) the growing importance of intellectual capital
and learning; (v) changing roles and expectations of workers; (vi) increased corporate
power and responsibility; and (vii) political changes.
3.3.1Globalisation
Today, corporations operate under increased pressure to do things faster, in greater
quantities and at cheaper prices. Consequently, there exists tremendous pressure to cut
costs, increase profitability and give their shareholders (investors) higher returns.
Because of these pressures, businesses have grown, not just within their own national
borders, but also beyond it. Operating beyond borders offers corporations additional
opportunities to keep costs low, for example, by operating in countries where labour
costs are significantly lower. These actions, although cost effective and profit inducing,
could have a downside – globalisation may also come at the cost of social and/or
environmental elements, as evident from the example below.
In our opening case scenario, we saw that Unilever has operating companies and
factories on every continent except Antarctica. The influence that Unilever has on the
wellbeing of many consumers globally is immense. Apart from a global consumer base,
its operating activities, especially in factories, have a profound influence on the natural,
economic and social environments in the countries that it operates in. One of the
corporate’s goals is to improve the health and wellbeing of one billion people by taking
action in especially developing countries over the next ten years.
3.3.2Advancesin technology and a radical
transformation of the world of work
The Second Industrial Revolution is also known as the technological revolution. Since this
revolution, technological advances have been the primary force in transforming the
world of work – as indicated in section 3.2. In section 3.2, we also discussed replacing
humans with robots in the workplace. This advance, and many other technological
advances, force employers and employees to change. For example, there might be a need
for employees to retrain in order to adapt to these changes. Employers may need to adapt
their expectations of employees, they may need to change production and manufacturing
processes, and they may need to change their policies in terms of the management of
injuries in the workplace.
Over and above changes required from corporates, management and employees,
industries will also be affected by technology, forcing them to change. The World
Economic Forum (WEF) published an analysis on the technological and sociological
drivers of employment. The report entitled The future of jobs validates the accelerating
power of technology on global employment trends, and also highlights concerns that job
growth in certain industries is still outpaced by large-scale declines in other industries.
Furthermore, the report highlights specific technologies that will, over the short term,
have the biggest impact on the transformation of the world of work, namely mobile
internet, cloud technology, cheaper computing power and large-scale data storage. Over
the longer term, hardware and physical technologies like robotics are expected to
contribute most to the transformation – forcing industries to adapt to these changes. The
World Economic Forum report provides us with an indication of the changes in the actual
jobs per job family (indicated in thousands) for all countries surveyed. 9
The changes per job family, indicate that job opportunities in certain industries will
decline. In these industries, workers and corporates will be affected and they need to
adapt to this. The table also indicates that the actual jobs that workers perform are
changing. Jobs related to office and administrative work; manufacturing and production;
construction and extraction; arts, design, entertainment, sports and media; legal; and
installation and maintenance are expected to decrease. Jobs related to business and
financial operations, management; computer and mathematical work; architecture and
engineering; sales and related jobs; and education and training are expected to increase.
It is imperative for workers to update their knowledge and skills to enable them to
perform new jobs. Corporates need to adapt to these changes and constantly reorganise
to support workers and to adapt to changes in jobs that need to be done.
In our opening case scenario, Unilever illustrated its adaption of new technologies.
Unilever was a pioneer in the adaptation of new technology in its industry. Since the
corporate was founded in 1930, it has diversified its products numerous times, acquired
new companies, and sold some of its divisions in order to adapt to new technology. For
example, Unilever is engaged in making safe drinking water available to half a billion
people by extending sales of its low-cost in-home water purifiers from India to other
countries.
3.3.3Increased power and demand from customers
Technological advances, especially in terms of new communication, transportation and
information technologies, allow customers to compare prices, quality, availability and
modern features between various corporates and their product/service offerings.
Moreover, consumers are increasingly using social media platforms, such as Facebook,
Twitter and even SnapChat, to communicate real-time reviews of services or products of
different corporates, which are of either a positive or negative nature. As corporate
misconduct is unveiled, it is exposed via these platforms, bringing it to the immediate
attention of a potential customer or interested stakeholder. Consumers are more
educated than ever, they ask questions such as where their clothes come from, how
products are made, how their food is produced and where their pension funds are being
invested. A significant and important survey, The Nielsen Global Survey on Corporate
Social Responsibility, was conducted in 2014 to assess, among other things, how
passionate consumers are about sustainable practices when it comes to purchasing
considerations. The outcomes of the survey unequivocally showed that consumers across
60 countries say that they prefer, and are willing to pay more for, products and services
provided by corporates that are committed to positive social and environmental impact.
The survey indicated that ‘It is no longer a question if consumers care about social impact.
Consumers do care and show they do through their actions. Now the focus is on
determining how your brand can effectively create shared value by marrying the
appropriate social cause and consumer segments’. 10
Looking at Unilever, the corporate implemented various plans to address the
increased power and demand from its customers. For example, the corporate is
committed to sustainable sourcing, to decrease its environmental footprint and to
contribute to the social wellbeing of various countries, especially developing nations. In
2010, the corporate also unveiled its plan to decouple business growth from its impact
on the environment.
3.3.4The
growing importance of intellectual capital
and learning
During the First and Second Industrial Revolutions, the critical factors of production were
mostly land, labour and raw materials. The challenge to corporates during these
times, was to use these production factors to create products and services that were more
valuable than the sum of their parts. The key factors of production have, however,
changed drastically since the Third Industrial Revolution – intellectual capital has
become a critical resource of corporates. Fewer people are doing physical work and more
people are engaged in knowledge-based work. We indicated in section 3.2 that robots can
replace many tasks previously performed by humans. We also suggested that retraining
of employees will be a priority of corporates, and as such, retraining must focus
increasingly on the development of the intellectual capital of employees, and less on
doing jobs that computers and robots can perform. Also, it has become increasingly
important for corporates to ensure high staff retention levels – when employees resign,
they take their intellectual capital with them, leaving a gap that needs to be filled and
trained. Nothing can impede the performance of a work team more than low retention
levels. Sir Richard Branson (business magnate, entrepreneur, investor, philanthropist
and founder of the Virgin Group that consists of more than 400 companies) stated the
following: ‘Train people well enough so they can leave; treat them well enough so they
don’t want to’.11 This quote exemplifies the challenge to corporates and it also
encapsulates its corporate citizenship responsibility towards employees.
3.3.5The changing roles and expectations of workers
As society moved from the First Industrial Revolution to the current one, the roles and
expectation of workers also changed and continue to do so. In the previous section, we
indicated that intellectual capital became a critical resource for corporates. The
‘knowledge workers’ discussed in the previous section, actually ‘own’ the means of
production – if they leave the corporation, they take the knowledge with them. Another
side of the same coin is that the actual job that workers perform is constantly changing.
The expectations of workers are also changing, which emanate from the different
generations of people working in most corporations. The different generations of society
can be broadly categorised as follows:
•The ‘Silent Generation’. This generation was born between 1925 and 1942, which
was also when World War II occurred. One of the theories for the title ‘silent’ is that
the children who grew up during this time worked very hard and kept quiet. Also, it
was commonly understood that children should be seen and not heard. This
generation did not ‘rock the boat’. The conditions in which these children grew up
were complicated by war and economic downturn. They experienced the Great
Depression (1929–1939) and their attitude towards life and work differs a lot
compared to all other generations. This generation has been described as being
highly ambitious and having a great need for achievement, power and status.
•The ‘Baby Boomers’. This generation was born between 1943 and 1960. Baby
Boomers were responsible for major social changes worldwide while they were
teenagers and many are nearing retirement now. This generation grew up in a
wealthier environment than the previous generation, and they challenge traditional
ways of doing things – this also includes challenging traditional ways of doing things
in the workplace. Baby Boomers tend to think of themselves as a special generation
– even in the workplace, and that they are very different from the previous
generation.
•‘Generation X’. Generation X was born between 1961 and 1980 during the digital
revolution. This generation grew into adulthood with a sense of world-weariness
and many of them earn more than their parents and are active, happy and family
orientated. They require a work-life balance and a fair remuneration from
employers.
•The ‘Millennials’, also known as ‘Generation Y’. This generation was born after 1980
and are now in their early careers in the midst of a slow economy and high
unemployment rates. Generation Y workers have a different approach to and
different expectation of their work and employers than any of their predecessors.
Generation Y workers are empowered by their ability to master the newest
technology. Generation Y workers challenge the conventional way of doing things
and they are constantly seeking new and better ways of doing things. Attracting and
retaining young talent is critical to the success of any corporate. Furthermore,
engagement and retention will become even more important than it is today. In
order to become a corporate that young people choose to work for, corporates need
to understand what Generation Y workers expect from their employers. The Harvard
Business Review published the results of a recent online survey conducted amongst
global corporate leaders to determine their views on organisations becoming an
employer of choice. The results indicated that 82% of the respondents agreed that a
corporate’s greatest asset is its talent; 79% agreed that a high level of employee
engagement has a direct influence on the bottom line (in other words the profits
generated by the corporation); 70% indicated that the key to a sustainable business
model is relying on shared values and benefiting society, the environment,
customers and shareholders, whilst 59% agreed that good corporate citizenship is
good business.12 These findings confirm the importance of corporates engaging in
sustainable matters in order to attract and retain skilled employees, and, at the same
time, attract customers. This brings us to the next variable that influences
corporates to change, namely an increase in corporate power and responsibility.
3.3.6Increasing corporate power and responsibility
More often than not, we view the daily news headlines only to read about yet another
large corporate, business or political leader being exposed for unethical practices or for
breaking the law. Unethical practices lead to harsh consequences. Millions, if not billions
worth of revenue is lost, fines are received and legal costs are encountered, the
corporate’s image is tarnished and its share value significantly decreases. In some
instances, unethical practices may even lead to the demise of the corporation.
In Chapter 2, we illustrated the immense influence corporations have in society –
especially multinational corporations. As corporates grow and get bigger, their revenues
and returns become bigger. With increased returns, comes an increase in power. With
that power comes a bigger responsibility. Furthermore, corporations are acting beyond
their own national borders, with operations in countries all around the world, having
tremendous geographical reach and often power not too dissimilar to the states in which
they operate. As such, corporations are powerful entities who need to be part of the
solutions, if effective solutions are to be found. They can be a force for good in driving
socio-economic development; or, they can be a hindrance if they are only interested in
pursuing profits, which often come at a social and/or environmental cost.
Unfortunately, instead of seeing corporates exercising their power responsibly, what
we usually see is the opposite. Even well-known and respected corporations, whom we
trust with our personal information, our health and our money, let us down. Why is this?
Is it true that corporations, no matter the nature, are only seeking to make a profit, despite
the social and environmental costs? Is it more important to take short cuts to achieve
efficient revenue creation and cost cutting, without considering what the implications for
society or the environment are?
Milton Friedman (the economist and Nobel Laureate) published an essay titled ‘The
Social Responsibility of Business is to Increase its Profits’. The essay was published in The
New York Times Magazine in 1970 and came to be one of the most famous pieces of work
debating the notion of corporate social responsibility, which is still referred to today.
Friedman’s main argument was that the social responsibility of a business is to make a
profit (full stop). If the business succeeded in making a profit, it would then be able to
fulfil its social responsibility of employing people in society with a decent wage and it
would be able to pay taxes to the state that could provide the services required by society.
Let us consider Friedman’s argument. Is the responsibility of a corporate to make
profit for its owners? The answer is yes! Is it the responsibility of a corporate to engage
in philanthropic activities with their owners’ (shareholders’) money? It depends. While
responsibility in the corporate sense can seem ambiguous, and mean different things to
different types of organisations, we like to think of responsibility being everything that a
corporate does and how it does it. For example, Unilever’s products are used by two
billion consumers around the globe on any given day, and the corporate sees this as a
great opportunity to create change with its sustainable business model, while at the same
time, making the best profit possible. The model ensures that workplace rights and
opportunities are improved and women get a fair deal; people’s health and wellbeing are
a priority; all their agricultural raw material come from sustainable sources; and the
environment is safeguarded for future generations. Good practices are seen in the design
of their products, the selection of their suppliers and ensuring sound quality and
governance structures. With Unilever’s vast operating scale and global presence, it is a
benchmark of a corporate using its influence and power responsibly.
Two simultaneous and seemingly contradictory trends are evident when it comes to
corporates and their influence. On the one hand, corporates are criticised for what is
deemed as excessive business power, to such an extent that the rights of citizens and the
powers of governments are weakened. On the other hand, corporates make assertions
that they are taking on greater responsibility for society, for example by creating job
opportunities, in line with the expectations of citizens and governments. The following
factors contribute to an increase in corporate power and responsibility:
•Increasing privatisation. Although governments have in most instances retained
their regulatory, fiscal and organisational capacities, corporations have become
responsible for more facets of citizens’ lives than they were previously. For example,
services such as energy, mass or public transportation and telecommunications
which, in many countries, were once delivered by governmental organisations are
now being delivered by private corporations. Increasing privatisation has had the
effect of increasing the corporate sector’s share of gross national product and
employment, as well as the corporates’ pivotal role in policy areas, which were
previously regarded as fundamentally political. For example, the investment in and
performance of transport and utility companies; and access to and use of natural
resources such as water, oil and gas. In South Africa, water privatisation is a
contentious issue, due to the history of the denial of access to water and poverty.
Nonetheless, water privatisation is taking various forms. For example, municipalities
are involving the corporate sector in the provision of water and sanitisation services
through, among other things, short-term contracts and specific services such as
wastewater treatment.
•Creating new consumer markets. Consumers do not always dictate what is or what
should be available in consumer markets. Corporations often create new consumer
markets. Steve Jobs, founder of the Apple Company, believed in a simple fact:
‘Everything around you was made up by people that were no smarter than you. And
you can change it. You can influence it. You can build your own things that people
can use.’ Jobs definitely practised what he preached – the Apple Company set out to
change the world with innovative computers and gadgets, again and again and again
– creating new consumer markets that the consumers themselves never even
imagined. Apple products revolutionised the way we work and play and listen to
music. It transformed entire industries and created new kinds of computing. 13
•Increasing cross-border activities. Corporations operating locally are moving from
small or medium in size, to large and have grown more conspicuous (visible or
noticeable) as they operate on an international platform in other countries. This has
become more apparent with vast increases in national foreign direct investment.
With globalisation and the liberalisation of trade, corporations can experience
opportunities to increase growth, stabilise performance, exploit new investment
opportunities and increase their market power.
•Assuming greater roles in the delivery of public goods. Internationally, corporates are
assuming greater roles in the delivery of public goods and services. Examples of
such goods and services are education, pensions and security. Governments are
encouraging corporations to contribute to wide governance activities. The example
box in section 3.2 about the migration from an analogue terrestrial television to a
digital one, provides a good example of governments that rely on corporates for
certain products and services. When migrating to digital terrestrial television, the
current plan is that a set top box will decode the digital signal to enable the channels
to be displayed on television sets. The set top box will be plugged into television
sets, and is also referred to as a decoder. The South African government will provide
free decoders to more than five million television household owners of lower
income, and have contracted corporates in the private sector to manage the
installation of these decoders.14

From the discussion above, it is evident that the power of corporates is increasing at an
accelerating rate. However, with greater power corporates are taking on greater
responsibility for society, in line with the expectations of citizens and governments.
Governments are reducing some of their modes of exercising authority (especially in
developing countries). An example can be found in the oil industry in Nigeria where
Nigerian oil corporates are undertaking responsibilities that would typically be offered
by the Nigerian government. However, these corporates contribute to the social,
economic and environmental problems of Nigeria, when they should be exercising their
responsibilities such as the protection of worker rights and the environment. This
phenomenon is often seen in other developing countries. Lax governments and
legislation in these countries are often seen by foreign corporations as an opportunity to
save costs and maximise their profits. However, these corporations should not abuse
their power. Instead, they should pursue their profit goals not at the expense of the
environment, neither at the expense of society. In other words, these corporations should
pursue their corporate goals while contributing towards sustainable development. They
should act in ways that serve the best interest of society and act with precaution when
considering the impact on the environment; which brings us to the notion of ‘being a good
corporate citizen’.
In our opening case scenario, Unilever is illustrated as a corporate that certainly does
not contribute to the social, economic and environmental problems, but rather a
corporate that exercises its responsibilities and that serves the best interests of society.
There are numerous examples of this: Unilever is committed to sourcing all its tea in a
sustainable manner; they switched to 100% free-range eggs for all products that they
produce worldwide; they are developing new ways of doing business that will ensure that
the corporate’s growth does not come at the expense of the world’s diminishing
resources; they source all agricultural products sustainably; and they limit greenhouse
emissions, water and waste, not just by corporate’s direct operations, but also by its
suppliers and customers.
3.3.7Political changes
The government of a country is a major role player in the management environment of
corporates, since it influences corporations primarily as a regulating force. The policies
and laws of the ruling political party, and the changes to these policies and laws, have a
direct influence on the way that corporations operate. In the example box on the next
page, an example is provided pertaining to changes in the political landscape of South
Africa affecting all South African corporations as well as any other corporation abroad
conducting business in South Africa.
The changing role of corporates as we have discussed in this section, leads to the
important point that corporates should exercise their responsibilities as corporate
citizens, contributing to the answers and solutions of social, economic and environmental
problems of society. We focus on the conceptualisation of the term ‘corporate citizenship’
in the next section.
3.4Corporate citizenship
In this section, we will first define the term ‘corporate citizenship’. Thereafter, the
emergence of corporate citizenship will be discussed.
3.4.1Defining corporate citizenship
Before we present the concept of corporate citizenship, let us break down the two key
words (corporation and citizenship) which, when merged, present the concept of
corporate citizenship:15
•The corporation. Generally, corporations are regarded as the most prominent
organisations of contemporary capitalism, partly because of the employment,
production, investment and wealth for which they account. They are generally
understood to be (but not limited to) non-governmental profit-making businesses
with the following characteristics:
»Ownership. Corporations are owned by shareholders who have a financial
interest in the corporation. Owners have the potential to share in the profits
made by the corporate, but are also at risk of losing money should the corporate
not do so well.
»Management. Corporations are managed by managers who act as agents of the
owners of the corporation. Management is responsible for co-ordinating the
efforts of employees to accomplish the goals of the corporation by using the
available resources as efficiently and effectively as possible.
»Legal identity. A corporation is authorised to act as a single entity (legally a
person) and recognised as such in law. The legal identity of the corporate is
distinct from that of its owners.
»Governance. The term ‘governance’ refers to all the processes of governing,
whether undertaken by government, a family or a corporation. A variety of
entities (known as governing bodies) can govern. A corporation is a governing
body, recognised as a legal entity by a government. A corporation’s governance is
the way the rules, norms and actions are produced, sustained, regulated and held
accountable.
The above characteristics are generally applied to traditional corporations. However, a
number of big corporates are known as privately owned (in other words, the shares in
the corporates are not traded through stock exchanges such as the Johannesburg Stock
Exchange). In South Africa, Reutech Radar Systems is the largest private company,
developing and manufacturing ground and naval search and tracking radar systems and
subsystems for the South African National Defence, as well as for clients in the defence
export market. Mining radar sensor systems, utilised in open-cast mining operations, are
also supplied internationally.16 Other big corporations are exclusively institutionally
owned, for example, by banks or governments. In South Africa, Telkom is an example of
a state-owned corporation. For the use of the term ‘corporate’ or ‘corporation’ in this
textbook, we also refer to corporations as privately and institutionally owned
businesses devoted to making a profit. The key thing to note here is to make a
financial profit for its owners.
Example
Political landscape
Prior to 1994, the National Party was the ruling political party in South Africa and it
implemented an apartheid policy. After the transition from apartheid in 1994, the new South
African government, with the African National Congress as a ruling party, created an entirely
different landscape influencing the way that corporates operate. The new government
decided that a direct intervention in the redistribution of assets and opportunities was
needed, and developed an integrated Black Economic Empowerment (BEE) programme.
The main aim of the BEE programme was to resolve the economic disparities created by the
previous government’s apartheid policy. In its 2001 report, the BEE Commission stated that
the Integrated National BEE strategy will launch South Africa on a course of sustained
economic growth. The commission also stated that the domination of business activities by
white business and the exclusion of black people and women from the mainstream of
economic activity, are causes for great concern for the reconstruction and development
process in South Africa. The BEE policies therefore aim to make it easier for black people to
gain access to capital for business development. Furthermore, the BEE Commission stated
that (i) the democratic government must ensure that no discrimination occurs in financial
institutions, and that state and parastatal institutions should provide capital for the attainment
of BEE objectives; (ii) the democratic government must also introduce tender procedures,
which facilitate BEE; and (iii) special emphasis must be placed on training, upgrading and
real participation in ownership. The BEE programme was implemented in 2003, and has
been criticised for benefitting only a narrow spectrum of previously disadvantaged groups.
This led to the introduction of a modified BEE programme, called the Broad-Based Black
Economic Empowerment (or B-BBEE) programme. It is important to note that the term
‘black’ is used as a generic term in the B-BBEE programme, referring to black Africans,
coloureds and Indians. The government also gazetted sector scorecards (whereby
corporates are rated based on their performances in terms of the implementation of the B-
BBEE programme) for various sectors of the economy. Legislation in terms of B-BBEE was
developed through numerous task teams. Codes of Good Practice were developed as a
standard framework for the measurement of broad-based BEE across all sectors of the
economy.
Source: Dti. Nd. Economic
empowerment. http://www.thedti.gov.za/economic_empowerment/docs/Inside.pdf [6 April 2016].

What are the social responsibilities of corporates? Carroll17 developed a widely cited
corporate social responsibility model conceptualising four types of corporate
responsibilities:
1.Economic responsibility to be profitable
2.Legal responsibility to abide by the laws of society
3.Ethical responsibility to do what is just, right and fair
4.Philanthropic responsibility to contribute to various kinds of social, educational,
recreational or cultural purposes.

•Citizenship. The dominant understanding of citizenship in most industrialised

societies is located in the liberal tradition, where citizenship is defined as a set of
individual rights. Liberal citizenship comprises three different aspects of
entitlement: social, civil and political rights. Social rights consist of those rights
that provide the individual with the freedom to participate in society, such as the
right to education, health care and various aspects of welfare. Civil rights refer to
those rights that provide freedom from abuse and interference from third parties,
such as the right to own property, exercise freedom of speech and engagement in
free markets. Political rights refer to an individual’s active participation in society,
and include aspects such as the right to vote. ‘Citizenship’ as explained by these
rights, refers to the rights of an individual. At first glance, it is hard to make sense of
‘corporate citizenship’ from this perspective. However, Matten and Crane, who are
regarded as pioneers in conceptualising the term, established the relationship of
corporations to citizenship in the context of the recent (Fourth Industrial
Revolution) shifts in business-society relations, where corporates take over many of
the roles and actions previously associated with governments.
•Corporate citizenship. The history of corporate citizenship will be explained in more
detail in the next section. As indicated in Chapter 1, we have elected to follow Matten
and Crane’s18 seminal conceptualisation of corporate citizenship and define it as the
role of the corporation in administering citizenship rights for individuals. The
depiction of citizenship for corporations is rather contested. For many, the
association of corporations with human virtue (citizenship) is unacceptable because
corporations are not people and therefore cannot be citizens. Such sceptics’ fears of
the corporation and citizenship association will lead to inappropriate expectations
being made of business. Others argue that the concept of citizenship is appropriate
for consideration of the power and responsibility of corporations for several
reasons, such as:
»Corporations use the term ‘corporate citizenship’ as one of the several
synonyms for their greater social responsibility.
»‘Citizenship’ is a concept that is specifically concerned with social relations of
power and responsibility (by which many of the current debates about
contemporary business-society relations are surrounded).
»The notion of citizenship is at the core of extensive debates about societal
governance of which corporations form a key part.

Based on these arguments, corporate citizenship (CC) has emerged as a prominent

concept in management literature, addressing the evolved business-society relationship
and the changing role of business. The history of corporate citizenship is addressed in the
next section.
3.4.2The history of corporate citizenship
The idea of using the citizenship metaphor emerged as early as 1886, when the US
Supreme Court ruling attributed equivalent rights to corporations as to natural persons
in relation to the Fourteenth Amendment of the US Constitution. Researchers such as
Melé19 made reference to papers addressing corporate citizenship dating back to the
1960s and 1970s. One of the earliest articles suggesting the metaphor was published in
1943 in the Journal of Marketing entitled ‘Are chain stores good citizens?’ Matten and
Crane, renowned authors in the field of corporate citizenship, stated in a world-renowned
article in 2005, ‘Corporate citizenship: Toward an extended theoretical
conceptualisation’, that the term has emerged as a prominent term in management
literature dealing with the social role of corporates, especially since the 1980s, in other
words, during the Fourth Industrial Revolution. A landmark in this process, has been the
joint statement on ‘Global Corporate Citizenship – The leadership challenge for CEOs and
Boards’ that was signed during the World Economic Forum in New York, in January 2002,
by CEOs from 34 of the world’s largest multinational corporations. These included, for
example, Coca-Cola Company, McDonald’s Corporation and Philips.
As corporates become more and more aware of the significant changes in their roles
and responsibilities in society (as highlighted in the preceding sections in this chapter)
and as more and more questions arose in terms of the nature of these changes, the need
to sharpen our conception of what corporate citizenship is and what it is not, became a
big need in management research and literature. Also, corporate citizenship has been
introduced into the corporate social responsibility discourse (which we explained in the
previous section) in the last few years, and corporate citizenship has been added as a new
term to the debate surrounding the social role of businesses. In what follows, we will
examine the conventional views of the term, followed by the extended view thereof as
developed by Matten and Crane.

Conventional view of corporate citizenship

This view comprises two approaches, which Matten and Crane20 called the limited and
the equivalent view:
•Limited view of corporate citizenship. According to this view, corporate citizenship
is regarded as a discretionary activity of corporates, making a choice to ‘put
something back into the community’ (which brings us back to the systems approach
as explained in Chapter 2 of this book). For corporations, corporate citizenship is
depicted as motivated by self-interest – corporations recognise the fact that their
contributions towards building a stable social, environmental and political
environment, ensures profitable business. This view focuses mainly on the direct
physical environment of corporations, resulting in a focus on the local community.
The limited view also sees the contribution of corporate citizenship to the processes
and rules of its social environment – thereby maximising the corporates’ self-
interest. Proponents of the limited view, ultimately see the contributions of
corporate citizenship to the debate on business-society relations in its economic
character as an approach to long-term maximisation of self-interest through
corporate investment in the processes and rules of the corporates’ social
environment. The biggest criticism of the limited view of corporate citizenship is
that it has not explained, nor conceptualised, the notion of citizenship involved in
philanthropy.
•Equivalent view of corporate citizenship. This view does not address nor define any
new role for the corporation, and it is more general in scope. Essentially, this view
defined corporate citizenship in the same way that corporate social responsibility is
defined, consisting of four aspects: economic, legal, ethical and philanthropic, as
highlighted in the previous section. In the equivalent view of corporate citizenship,
there again tends to be little, if any, serious reflection on the notion of ‘citizenship’
and explaining the reasons for this phraseology in a business context.

Due to the limitations and critique against the conventional view of corporate citizenship,
Matten and Crane developed an extended theoretical conceptualisation of the term,
which helps us to understand the significant changes in the corporate role and the nature
of these changes.

Extended view of corporate citizenship

The purpose of the extended view of corporate citizenship is to establish the
relationship of corporates to citizenship in the context of the recent shifts in business-
society relations, where corporations take over many of the roles and actions previously
associated with government. In our opening case scenario, Unilever took over some of
the roles of governments. For example, Unilever is taking action in mostly developing
countries to improve the health and wellbeing of these nations. The corporate is also
committed to helping smallholders to improve their yields and transform their
livelihoods as part of the corporate’s overall ambition of ensuring that they have a
successful business with a positive social impact. The corporate is also committed to
Africa, and aims to accelerate innovations that drive growth and continuous
improvement in quality and service for consumers, and to create new jobs.
At this point, it is important to note that the extended view of corporate citizenship is
not simply about corporate social policies and programmes that might (or might not) be
adopted in the same vein as corporate social responsibility (as discussed in section 3.4.1).
The extended view aims to focus on the effective functioning of liberal citizenship – where
we define liberal citizenship as the corporate uptake of governmental functions to render
corporate involvement in ‘citizenship’.21 There are various reasons why corporates need
to take up functions traditionally performed by governments, of which globalisation (as
discussed in section 3.3.1) is probably the most important reason. Another reason is that
corporations have tended to partly take over (and are sometimes expected to take over)
certain functions with regard to the protection and facilitation of the rights of citizens,
formerly expected of governments. An example in the South African context is the various
security corporations providing protection at private homes and offices.
Matten and Crane22 suggest three ways in which governmental and corporate roles in
administering citizenship are changing:
1.Governments cease to administer citizenship rights. An example of this is
corporates improving poorly resourced schools and neighbourhoods.
2.Governments have not as yet administered citizenship rights. Examples of this are
corporates that improve the working conditions of labourers or finance the
schooling of child labourers.
3.Where the administration of the citizenship rights may be beyond the reach of the
government. An example can be found in pension funds and life insurance that are
linked to international capital markets. Investors that invest their money in such
products, rely on these markets to protect their property – which is beyond the
control of governments.

Against all the arguments listed above, the extended view of corporate citizenship defines
the concept as follows:
‘Corporate citizenship describes the role of the corporation in administering
citizenship rights for individuals, where these rights refer to the social, civil and
political rights of individuals’.23

This definition reframes corporate citizenship away from the notion that the corporation
is a citizen in itself (as individuals are), and towards the acknowledgement that the
corporation administers aspects of citizenship for other constituencies. The latter refers
to stakeholders (such as employees, owners, customers and so on), as well as wider
constituencies with no direct relationship with the corporate. An example of such a wider
constituency is Unilever that aims to help reduce diarrhoea, which is the world’s second
biggest cause of infant mortality in Africa, Asia and Latin America.
There are two features of the extended view, the definition which we will use for this
book (as presented in the introduction of the textbook) that are important. These include:
•First, the extended view is grounded in a thorough consideration of the notion of
citizenship with a specific emphasis on the liberal political tradition that
characterises most industrialised societies (in other words, citizenship characterised
by three dimensions of civic rights – social, civil and political rights).
•Second, the extended view specifies emphatically and clearly that corporate
citizenship is not about corporates as citizens, but rather that it is about the roles
which corporates might play in administering citizenship rights to citizens. Implicit
in the understanding of ‘roles’ is that corporate citizenship encompasses much more
than corporate philanthropy and social investment – corporate charity if you like –
which tended to be the focus of earlier manifestations of the term.

The last section of this chapter focuses on providing a framework for facilitating
corporate citizenship. In other words, we provide a framework for corporates
administering the rights of individuals.
3.5Facilitating corporate citizenship: A
framework 24, 25

The United Nations Global Compact (UNGC) was initially proposed in 1999 by Kofi
Annan, the former UN Secretary-General, as a call to companies around the world to align
their strategies and operations with ten universal principles. These principles are themed
into the four broad areas of human rights, labour, the environment and anti-corruption,
and are presented in detail in the example box on the next page.
The Global Compact has provided a leadership platform for the development,
implementation and disclosure of responsible and sustainable corporate policies and
practices. It does so by supporting companies to:

‘1. do business responsibly by aligning their strategies and operations with the ten
principles on human rights, labour, the environment and anti-corruption; and’

2. take strategic actions to advance broader societal goals, such as the UN Sustainable
Development Goals, with an emphasis on collaboration and innovation.’ 26

Since the official launch of the UNGC in the year 2000, almost 8 500 companies (both
small enterprises and multinationals) from 162 countries have become signatories to the
Global Compact, committed to integrating the ten principles into their strategies and
operations.
As a voluntary initiative, the UNGC sees itself as more of a guide dog than a watch dog
and as such, therefore relies on public accountability, transparency and disclosure to
complement regulation and to provide a space for innovation and collective action.
Since businesses have been a key driver to globalisation, they can, facilitated by the
UNGC, help ensure that markets, commerce, technology and finance advance in ways
which benefit economies and societies everywhere, as well as contribute to a more
sustainable and inclusive global economy. Furthermore, participation in the UNGC has
the following benefits linked with it (as cited by the UNGC):
Example
The ten principles of the UNGC

Human rights
•Principle 1: Businesses should support and respect the protection of internationally
proclaimed human rights; and
•Principle 2: make sure that they are not complicit in human rights abuses.

Labour
•Principle 3: Businesses should uphold the freedom of association and the effective
recognition of the right to collective bargaining;
•Principle 4: the elimination of all forms of forced and compulsory labour;
•Principle 5: the effective abolition of child labour; and
•Principle 6: the elimination of discrimination in respect of employment and occupation.

Environment
•Principle 7: Businesses should support a precautionary approach to environmental
challenges;
•Principle 8: undertake initiatives to promote greater environmental responsibility; and
•Principle 9: encourage the development and diffusion of environmentally friendly
technologies.

Anti-corruption
•Principle 10: Businesses should work against corruption in all its forms, including
extortion and bribery.

Source: United Nations. Nd. United Nations Global Compact. The ten principles of the UN Global
Compact. [Online]. Available: https://www.unglobalcompact.org/what-is-gc/mission/principles [8
February 2016].

•Adopting an established and globally recognised policy framework for the

development, implementation and disclosure of environmental, social and
governance policies and practices
•Sharing best and emerging practices to advance practical solutions and strategies
to common challenges
•Advancing sustainability solutions in partnership with a range of stakeholders,
including UN agencies, governments, civil society, labour and other non-business
interests
•Linking business units and subsidiaries across the value chain with the UN Global
Compact’s Local Networks around the world – many of these in developing and
emerging markets
•Accessing the United Nations knowledge of and experience with sustainability and
development issues
•Utilising UN Global Compact management tools and resources, and the opportunity
to engage in specialised workstreams in the environmental, social and governance
realms.
DILEMMA
The UNGC in Africa: Thinking globally and acting locally
While the business landscape in sub-Saharan Africa is marked by great opportunities, it is
also affected by a complex set of challenges, for example, the basic development issues
such as poverty, corruption and education. Awareness of these issues is growing and the
private sector is realising that it can play a pivotal role in Africa’s development. The private
sector can fulfil this role by contributing to core development needs, thereby supporting
market development, which the business needs to thrive.
The UNGC has adopted a long-term strategy to better connect with the growing private
sector in Africa, and has done so in collaboration with African CEOs. As an outcome of this
collaboration, a strategy document was released in 2014, titled ‘Partners in Change: UN
Global Compact Advancing Corporate Sustainability in Africa’. This document has become
the foundation of the UNGC’s work in sub-Saharan Africa, with the objectives quoted as
follows:
•Build greater awareness of responsible business practices in sub-Saharan Africa;
•Align business needs and objectives with UN development goals, such as poverty
alleviation, anti-corruption and infrastructure development; and
•Provide opportunities to innovate business solutions that address Africa’s key
development issues.

A Global Compact Local Network (GCLN) was launched in South Africa in 2007. GCLNs
represent a platform for the participating stakeholders to advance the UNGC principles at a
local level. South Africa’s GCLN is housed and facilitated by the National Business Initiative
(NBI), which is a voluntary coalition of corporates operating in South Africa and working
towards sustainable development.
South Africa has 75 signatories of the UNGC. Included in this list of corporates are:
Discovery Limited, Sun International, Woolworths Holdings, Cliffe Dekker Hofmeyr Inc, Royal
Bafokeng Platinum Limited, South African Airways, Investec Group, MTN Group Limited,
Edcon, Mondi, Pick n Pay, Richards Bay Coal Terminal Company Limited, Sappi Limited,
Sanlam Ltd, Unilever South Africa Pty Ltd, Coca-Cola Sabco Pty Ltd, Exxaro Resources
Ltd., Deloitte South Africa, Nedbank Group, and Sasol Ltd.

Of the list of signatories in South Africa (or your country of residence), select one or two of
the corporate participants. Is there evidence on the corporate’s website indicating their
commitment to the UNGC? Is the participant practising corporate citizenship fundamentals?

Source: United Nations. Nd. United Nations Global Compact. [Online].

Available: https://www.unglobalcompact.org/engage-
locally/africa; https://www.unglobalcompact.org/engage-locally/africa/south%20africa [8 February
2016].

The UN believes that corporate sustainability begins with a corporate’s value system and
a principled approach to doing business. What this means is to operate in ways in which
the essential responsibilities (at the bare minimum) in the areas of human rights, labour,
the environment and anti-corruption are met.
The UN Global Compact is a global framework that facilitates global thinking and local
action. The dilemma box above outlines the UNGC’s presence in Africa with questions for
you to research.
3.6Conclusion

Sustainable development is considered a vital aspiration of society, which we have

referred to as the social case for corporate citizenship. This chapter presented the
increasing power and responsibility of corporations and the consequential impact on
society and the environment, a force for good or a force for bad. We presented the
emergence of corporate citizenship as a response to the changing business-society
relations and as a mechanism to drive the sustainable development agenda. We laid the
conceptual foundation of corporate citizenship, elaborating upon Matten and
Crane’s27 definition of corporate citizenship, where corporate citizenship is defined as the
‘role of the corporation in administering rights for individuals’. We presented the UNGC
as a global framework and facilitator of corporate citizenship; we opted to use this
framework as it is one of, if not, the most widely recognised facilitator of corporate
citizenship. We also looked at Milton Friedman’s famous New York Times
Magazine article as an example of an opposing view of corporate citizenship, which was
instrumental in the development of debate and conceptualising the rationale for
corporate citizenship. This brings us to Chapter 4, the rationale for corporate citizenship,
where the business case for corporate citizenship will be presented.

Multiple-choice questions
1.Business leaders worldwide believe that we are today at the cusp of a Fourth
Industrial Revolution, with the following characteristics:
a.Artificial intelligence and machine learning, robotics, nanotechnology, 3D
printing and genetics and biotechnology are all building on and amplifying one
another.
b.Smart systems are used in homes, factories, farms and entire cities.
c.Resources are extracted from the earth for construction as quickly and
cheaply as possible.
d.Water and steam are used to power machinery.

2.Which one of the following variables does not have a definite influence on
corporates to which they need to adapt?
a.globalisation
b.a radical transformation of the world of work
c.decrease in the demand and power of customers
d.intellectual capital and learning are becoming more and more important

3.Corporates have employees from various age generations. The _____ workers are
empowered by their ability to master the newest and latest technology, they
challenge the conventional way of doing things and they are constantly seeking
new ways of doing things.
a.Silent Generation
b.Baby Boomers
c.Generation X
d.Generation Y

4.Various factors contribute to an increase in the power and responsibilities of

corporates. Which one of the following is not such a factor?
a.decreasing privatisation
b.new consumer markets
c.increasing cross-border activities
d.assuming greater roles in the delivery of public goods

5.The extended view of corporate citizenship defines the concept as follows:

a.‘Corporate citizenship is a discretionary activity, making a choice to put
something back into the community’.
b.‘Corporate citizenship consists of four aspects, namely economic, legal, ethical
and philanthropic’.
c.‘Corporate citizenship is the efforts of corporates towards building a stable
social, environmental and political environment’.
d.‘Corporate citizenship describes the role of the corporation in administering
the citizenship rights of individuals’.

Discussion questions
1.Explain the changing role of corporates.

2.Explain the various factors that influence corporates to change.

3.Provide an overview of the history of corporate citizenship.

Additional reading
•Friedman, M. 1970. The social responsibility of business is to increase its
profits. New York Times Magazine, 13 September 1970.

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10.Nielsen. 2014. Global consumers are willing to put their money where their
heart is. [Online]. Available: http://www.nielsen.com/us/en/press-
room/2014/global-consumers-are-willing-to-puttheir-money-where-their-heart-
is.html [4 February 2016].
11.MTD. 2014. How to keep your best talent loyal and committed. [Online].
Available: http://www.mtdtraining.com/blog/howto-keep-your-best-talent-loyal-
and-committed.htm#sthash.st9S2F80.dpuf [2 February 2016].
12.Harvard Business Review. The employer of choice: How will corporate
citizenship and sustainable shared values create a new competitive edge? [Online].
Available: https://hbr.org/resources/pdfs/comm/siemens/hbr_siemens_report.pd
f [2 February 2016].
13.Tech Radar. 10 ways Apple changed the world. [Online].
Available: http://www.techradar.com/news/computing/apple/10-ways-apple-
changed-theworld-1136277 [8 February 2016].
14.South African Government. 2015. Digital migration. [Online].
Available: http://www.gov.za/about-government/government-
programmes/digital-migration [8 February 2016].
15.Moon, J, Crane, A, Matten, D. 2008. Corporate power and responsibility: A
citizenship perspective. In Corporate Citizenship, contractarianism and ethical
theory: On philosophical foundations of business ethics. Conill, J, Luetge, C &
Schoenwalder-Kundtze, T (Eds). Ashgate Publishing Limited: Surrey.
16.Reutech. 2016. [Online]. Available: http://www.reutech.co.za/ [2 February
2016].
17.Carroll, AB. 1979. A three-dimensional model of corporate social
performance. Academy of Management Review, 4:497–505.
18.Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended
theoretical conceptualization. Academy of Management Review, 30(1):166–179.
19.Melé, D. 2008. Corporate social responsibility theories. The Oxford Handbook of
corporate social responsibility. In: Crane, A, Matten, D, McWilliams, A, Moon, J &
Siegel, D S. Oxford University Press.
20.Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended
theoretical conceptualization. Academy of Management Review, 30(1):166.
21.Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended
theoretical conceptualization. Academy of Management Review, 30(1):172–175.
22.Ibid.
23.Ibid.
24.United Nations. United Nations Global Compact. [Online].
Available: https://www.unglobalcompact.org/engagelocally/africa [8 February
2016].
25.United Nations. 2014. Corporate sustainability in the world economy. [Online].
Available: http://www.unglobalcompact.org/docs/news_events/8.1/GC_brochure_
FINAL.pdf [8 February 2016]
26.United Nations. United Nations Global Compact. [Online].
Available: https://sustainabledevelopment.un.org/content/documents/2149Impa
ct%20Transforming%20Business.pdf [8 February 2016].
27.Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended
theoretical conceptualization. Academy of Management Review, 30(1):166–179.
chapter
Rationale of corporate
citizenship
Ireze van Wyk 4
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Understand the moral drive for corporate citizenship
•Define ethics and morality
•Understand the most prominent ethical theories
•Understand that adage ‘doing good to do well’
•Explain the role of legislation in corporate citizenship
•Explain the relationship between corporate citizenship and profitability
KEYWORDS AND CONCEPTS
-consequential theory
-discourse ethics
-egoism
-ethics
-ethics of duty
-ethics of justice
-ethics of rights
-feminist ethics
-modern ethical theory
-morality
-non-consequential theory
-post-modern ethics
-regulation
-utilitarianism
-virtue ethics

OPENING CASE SCENARIO

Corporate citizenship at Nedbank

Nedbank recognises the vital role that it, as a bank, plays in building a strong and
thriving nation. It believes that improved success and future business prospects
depends on a flourishing society. Therefore, Nedbank commits itself to good
corporate citizenship, contributes to building a strong South African nation, ingrains a
culture of diversity and transformation, and leads as a green bank.
Nedbank’s citizenship is reflected in its social and relationship capital. It has a
strong relationship with its stakeholders – including the community that it operates in.
During 2014, Nedbank engaged with its communities in a number of key elements,
requirements and pressing issues, namely:
•Strengthening the social fabric of South Africa. South Africa’s social fabric
constitutes the country’s state of health and education, employment, feeding,
housing, sport, public transport, labour relations, religion, policing and crime.
Nedbank encourages a culture of active citizenship and, during 2014, 28% of its
staff members participated in voluntary programmes. These programmes deliver
a direct positive impact to communities across South Africa. Nedbank has eight
programmes in which staff can volunteer. Programmes include the ‘Angel Tree’
and the ‘Caring for Communities’. The ‘Angel Tree’ programme collects
Christmas gifts from staff which are re-distributed to community-based charities,
while the ‘Caring for Community’ programme assists identified schools to build
vegetable tunnels, rain-harvesting tanks, and solar cooking.
•Rebuilding trust in the financial industry. The 2008 US financial crisis, as well as
past corporate scandals in general, have had a negative effect on consumer and
investor trust. In 2014, reckless lending was exposed at African Bank, causing
further damage to consumer and investor trust in financial institutions – and the
industry as a whole. Nedbank’s continuous research indicated that trust in the
financial industry is gradually being rebuilt. In order to build trust, Nedbank has
focused on driving ethical behaviour in staff, giving appropriate financial advice to
clients, providing excellent client service and stringently protecting client
information. By 2014, 97% of Nedbank’s staff members acknowledged their Code
of Ethics and Code of Conduct policies.
•Playing a meaningful role in society. During 2014, Nedbank advanced R54
billion to retail clients, lent R1,5 billion into affordable-housing projects and R113
million to enterprise development. Nedbank ensured that 80% of its procurement
spend in 2014 was local.
•Funding corporate social investments (CSI). Nedbank makes a significant
contribution towards many issues (in the social, environmental and economic
realm, such as inequality and social upliftment) facing SA. During 2014, Nedbank
spent a total of R151 million on CSI across all of its community-support focus
areas. Nedbank, for example, addresses unemployment through its commitment
to skills development and job creation. It has skills development programmes
focusing on hospitality, winemaking, electrical engineering, plumbing, carpentry
and furniture-making as well as a small-enterprise development programme.

Nedbank also recognises the importance of ethics and good governance in

entrenching good corporate citizenship. The key notes from the chairman’s review,
Dr Reul Khoza, continuously highlighted the importance of ethics and governance.
He maintains that Nedbank’s strong performance and positioning in 2014 have been
reinforced by strong ethical principles and benchmarking themselves to world-class
governance standards. He added that a greater focus on governance and ethics is
required to create a better life for all South Africans.1
4.1Introduction

As highlighted by Nedbank’s chairman, ethics play an important role within the bank and
in corporate citizenship. One of its key community engagement elements includes
managing the ethical behaviour of employees and having a Code of Ethics and Code of
Conduct policy. An analysis of the integrated reports of other corporations (for example
Absa, FNB and Standard Bank) reveal a similar situation. More and more corporations
are communicating with their stakeholders regarding what they are doing in terms of
corporate citizenship activities – which include reporting on ethical drives within the
corporation and investing back into the communities in which they operate.
In this chapter, we focus on the rationale for corporate citizenship, by first explaining
the moral drive for corporate citizenship. We define ethics and morality, and differentiate
between the most prominent ethical theories, namely the consequential, non-
consequential and contemporary (or modern) ethical theories. Having a clear
understanding of ethics and morality, we then move on to explain the adage ‘doing good
to do well’. Legislation plays an important role in the ethical conduct of corporates,
therefore we also explain the relationship between corporate citizenship and legislation.
The last part of this chapter focuses on the relationship between corporate citizenship
and the profitability of corporates.
4.2The moral drive for corporate citizenship
Encouraging a culture of active citizenship amongst employees and playing a meaningful
role in society are two examples of how Nedbank is contributing towards society, as well
as contributing towards issues facing South Africa (such as Nedbank’s commitment to
skills development and job creation, which addresses South Africa’s high unemployment
problem). Some organisations get involved with community upliftment (such as
providing basic sanitation or basic farming and health education to communities and
previously disadvantaged individuals) or development programmes, while others
contribute towards disaster relief or charities. All of these actions are based on a moral
ground that justifies an ethical result. These actions are considered the ‘right’ or ‘moral’
thing to do.2
In Chapter 3 (The evolution of corporate citizenship), the concept of corporate
citizenship was categorised according to the Matten and Crane 3 analysis, namely the
limited view, an equivalent view and the extended view, which we are using throughout
this book. The moral (or philosophical) justifications for ethical results are also evident
within these three views of corporate citizenship.
The limited view of corporate citizenship defines an organisation’s philanthropic role
and responsibilities, whereas the equivalent view of corporate citizenship aligns
corporate citizenship with corporate social responsibility (CSR). According to Carrol,
philanthropic responsibilities (giving back to the community) are desired by society,
while ethical responsibilities (within CSR) are expected by society. 4 The notions of both
of these responsibilities are grounded in ethics and morality – as it is considered as the
right or moral thing to do.
The extended view of corporate citizenship, as defined by Crane and Matten, highlights
the ethical foundation more effectively. This perspective clarifies the ethical expectations
that are increasingly placed on corporations and provides a more critical view on the
social role of corporations. In addition, the political role of corporations emphasises the
demand for corporate accountability – a more modern business ethics thinking. 5
However, the strongest motivation for organisations to integrate ethics into their
business practices originates from pressure coming from various stakeholders – which
includes society and shareholders. Malpractice has led to an increased focus on the ethics
and the ethical behaviour of organisations. 6 Having a responsibility towards multiple
stakeholders, managers of an organisation need to take the organisation’s and all these
parties’ interests into account.7 Moreover, stakeholders are concerned with the ethics of
organisations.8 Therefore, an organisation should not just behave ethically towards
society and the community that they operate in, but they should also have an internal
drive to build an ethical organisation. In essence, ethics must become part of the DNA of
an organisation – while operating within society.
In the following section, we look at the moral foundations of corporate citizenship,
focusing on fundamentals such as morality, ethics and ethical theories. This is not a book
on philosophy, however, ethical theories provide a foundation in the development of
business ethics. It has an important role and practical relevance in evaluating ethical
issues that modern organisations may need to face and manage 9 – both internally and
externally.
4.3Defining morality and ethics
Morality concerns individual or collective behaviour and how individuals should behave
– in their own capacity and towards one another. Morality is the underlining values (or
an individual’s principles) on which decisions are based on. Examples of underlying
values include integrity, honesty, fairness and consideration towards others. Waiting
one’s turn in a queue, rather than ‘jumping the queue’, and not cheating on a spouse are
indications of an individual’s underlying values and principles.
Ethics, on the other hand, is the philosophical study of morality; therefore it involves
the application of morals to decisions.10 Ethics (or moral philosophy) is defined as a set of
moral principles, norms or standards that directs individual behaviour. 11 In the business
setting, ethics provides moral principles, norms or standards that direct business
conduct. Business ethics will be discussed more comprehensively in Chapter 9 of this
textbook.
What makes ethics and morality complex in the business environment, especially
within a global economy, is that moral standards can differ from society to society. 12 In
the case of Bolivia (see dilemma box below), there are conflicting standards – in one
society child labour is acceptable, while in another it is illegal.
It raises the question as to what is considered ‘ethical’ in the business world
specifically, and which corporate behaviour is appropriate – especially when an
organisation wants to develop and maintain good corporate citizenship status. For
centuries, ethical theories were developed and refined by philosophers and economic
politicians. These theories attempt to determine what is ‘right’ or ‘ethical’. We will now
take a closer look at some of these theories.
4.4Ethical theories
Various ethical theories – or approaches – can be used to examine moral issues in
business and society.13 Ethical theories offer explanations that connect acting justly with
the achievement of a ‘good’. The ‘good’ is taken as the ultimate ‘end’ of a right and wise
action – or the summum bonum.14 In this book, we’ll focus on consequential, non-
consequential and modern ethical theories that can assist in reaching the summum
bonum. Consequential and non-consequential theories are western modernist (or
normative) theories and generally provide a rule of principle that can be applied in a
given situation. Hence they are absolute. Modern, or contemporary ethical theories, tend
to be relativistic and claim that morality is context-based and subjective.15
DILEMMA
According to the 2015 World Report on Child Labour, 168 million children are trapped in
child labour, while 75 million young adults (aged 15 to 25) are unemployed. In 2014, Eritrea,
Somalia, Democratic Republic of Congo, Myanmar, Sudan, Afghanistan, Pakistan,
Zimbabwe and Yemen were identified as countries where child labour is most prevalent. In
these countries, children work to supplement their family’s income. However, child labour is
also evident in countries with strong economies such as Russia, due to a lack of properly
enforced child labour laws.16
In 2014, Bolivia legalised child labour. Children as young as 10 years of age are allowed to
work if they are (1) enrolled for school and (2) have consent from their parents or
guardians.17
Consider the following three questions:
1.Child labour is legal in Bolivia – is it still unethical for Bolivia to employ children even
though it is legalised? Answer this question from a Bolivian perspective (where child
labour is legal), and from a South African perspective (where child labour is illegal).
2.A brick distributor firm, operating in countries where child labour is illegal, buys bricks
from Bolivia. The brick distributor is not employing the children directly and only
purchasing from countries that do make use of child labour, so is the brick distributor
violating the laws of its country?
3.What rights are being limited considering the extended corporate citizenship
perspective?

4.4.1Consequential ethical theories

What makes an action or decision right or wrong? A common answer is ‘its
consequences’. Consequentialists believe that the ‘good’ is determined by the
consequences that follow the specific behaviour. Therefore, consequential theories are
primarily concerned with the consequences of a decision or action. The consequences
determine whether a decision or action is right or wrong. The questions now are: ‘Which
consequences are morally important?’ and ‘Which are good consequences and for
whom?’18 Whose good are we looking at? We have two answers – the egoism’s and
utilitarianism’s answer.

Egoism
The egoism theory states that one should maximise one’s own good and
happiness.19 This theory equates morality with self-interest and maintains that an act is
morally right if it best promotes the decision maker’s interest. The theory further states
that one can indirectly have interests in others and promote their wellbeing, if such
actions or behaviours would maximise what is good for oneself. 20
Thought processes such as ‘I will not steal, as I will get a criminal record’ and ‘I will not
lie about a particular matter, as it will negatively impact how my community sees me’ are
basic examples of reasoning within this theory’s parameters. This theory receives the
most criticism – especially since it aligns morality with self-interest. What is best or good
is defined by each individual, and their self-interest. Self-interest could include physical
wellbeing, power, pleasure, fame, career satisfaction, a good family life and wealth.
Criticism of this theory holds that egoists are inherently unethical, short-term oriented
and will take advantage of opportunities.21 Furthermore, a problem occurs when the good
for one person directly conflicts with what is good for another. 22
One can argue that it is within an individual’s best interest to act ethically, when
considering the long-term impact of one’s decisions. To ensure ‘ultimate happiness’ one
will avoid unethical behaviour because of the consequences. Fraudulent activity can
result in lawsuits, fines and deterioration in company reputation – something that takes
a long time to rebuild. The decision maker will then avoid such consequences. Ultimate
happiness could also involve charitable deeds or helping others – as it may make an
individual satisfied. The long-term perspective, and allowing for the wellbeing of others
– in maintaining one’s own self-interest – is referred to as enlightened egoism.23

Utilitarianism
The utilitarianism theory is concerned with the overall good or happiness of an action
or behaviour for the greatest number of people.24 Hence, behaviour or an action can be
considered good or right if the consequences result in the greatest overall good, for the
largest number of people. This theory involves identifying the parties that will be affected
by a decision, and then determining the possible costs and benefits for each party (in
essence, conducting a cost-benefit analysis). Table 4.1 on the next page illustrates a cost-
benefit (or pleasure-pain) analysis on the use of child labour in Bolivia.
In our simplistic example, decision 2 would be considered the most ethical decision as
it provides the greatest amount of good for the greatest amount of people. However, the
main problems with this theory are:25
•Subjectivity. This theory requires creativity, and assessing consequences such as
pleasure and pain. These consequences depend mainly on the subjective perspective
of the individual who carries out the analysis. An individual might identify more
‘pleasures and pain’ (of benefits and disadvantages) associated with a particular
decision, than what another individual would, hence the problem of subjectivity. Our
cost-benefit analysis (Table 4.1) included the party ‘government’. Facing the same
dilemma, and conducting the same cost-benefit analysis, an individual might have
overlooked ‘government’ as a party involved in the decision.
•Quantification challenges. It is difficult to assign costs and benefits to every
situation. In a business transaction, costs and benefits may be easily identified.
However, cost and benefits in assessing pain and pleasure pose challenges. For
example, with child labour it is easy to determine ‘costs’ (cost of child labour versus
cost of adult labour) and benefits (access to cheap labour, lower costs per units, and
additional income for poverty stricken families). However, how would one quantify
the costs and benefits when considering, for example, the morale of the workforce in
brick manufacturing firms or the psychological impact of child labour on the
children and families?
•Distribution of rights. Assessing the greatest good for the greatest number of people
can overlook the interest of minorities. Democracy is perhaps the best way to
illustrate this challenge. A ruling party will always act in the best interest of the
majority, however, it does happen that the minority’s (in the form of language,
culture and nationality) interest can be overlooked. In schools, English as a teaching
language will be decided upon if the majority of children use English as their first
language, overlooking those children who do not use English as their first language.

Table 4.1: Utilitarian analysis (or cost-benefit analysis)

•Act and rule utilitarianism. Due to the limitations of the theory – especially
considering the challenge of ‘subjectivity’, the theory was refined and act and rule
utilitarianism emerged. Act utilitarianism focuses on a single action and/or
situation. The moral judgement is then based on the amount of pleasure and pain
that the single action or situation causes. It therefore looks at the single situation.
Looking at child labour (the act) in Bolivia (the specific situation), one can argue that
it will be good for the families if their children are allowed to work given their
circumstances – it is legal, children must still go to school, and it would provide
income relief for poverty-stricken families. Without the additional income, the
families could perhaps no longer pay for school fees, food and necessities. Therefore,
act utilitarianism can argue that child labour is morally correct in Bolivia. Rule
utilitarianism focuses on classes of action. The question asked is: ‘What is the
underlining principle of action that will produce more pleasure than pain for society
over the long-term?’ The rule utilitarianism looks at the situation in principle –
allowing the possibility to establish principles that one can apply
to all situations.26 Considering the long-term consequences, the rule utilitarianism
approach will look at, for example, a company’s reputation, fines, psychological
effects on children and possible ramifications for Bolivia’s economy (for example,
boycotts from around the world). This approach can argue that these long-term
considerations outweigh the benefits, making child labour morally incorrect. Hence,
a principle (child labour is incorrect in principle) can be established and applied in
similar situations.

This theory closely aligns itself with the notions of stakeholder theory. The utilitarianism
theory requires that one must identify ‘parties’ affected by the decision, and evaluate how
the decision ‘affects identified parties.’. It allows for the inclusion of broader society and
ask how business operations, activities and conduct impact society (including
considering the environment and society). The stakeholder theory (discussed in more
detail in Chapter 8), maintains that organisations should take into consideration the
interest of stakeholders (affected parties) and not just shareholder interest, as
organisational processes, decisions and transactions affect stakeholders (either
positively or negatively).27 Stakeholders include shareholders and extend towards
parties such as the government, customers, employees, society and suppliers. 28 Examples
of how stakeholders are affected are:
•Customers are negatively affected by harmful products, or products that do not
have the correct labelling (for example, a warning that the product contains peanuts
traces is missing).
•Society and employees are negatively affected if an organisation should shut down
(products and services are no longer available, and the resulting unemployment), or
engage in heavy pollution.
•Society and employees are negatively affected if an organisation engages in heavy
pollution or waste.
•The government (and tax payers) are negatively affected if an organisation
(involved in unethical dealings) must be bailed out. The South African Reserve Bank
(SARB) bailed out African Bank in 2014.

Therefore, this theory also substantiates the social role and responsibilities of an
organisation in their pursuit of maximising profits. In governing citizenship rights, and
scrutinising their own conduct, organisations should engage in those activities that will
lead to the greatest amount of good for the greatest number of people.
4.4.2Non-consequential ethical theories
Non-consequential (or deontological) ethical theories are based on basic universal ethical
rules or moral principles that determine right and wrong. 29 The two non-consequential
theories are ethics of duty and ethics of rights and justice.
Ethics of duty
This theory is based on moral duties that specify certain ways in which individuals should
act. Kant, who pioneered this theory, saw humans as rational actors, implying that they
are independent moral agents capable of making their own rational decisions regarding
right and wrong. He also viewed morality as the same for everyone everywhere. For Kant,
morality concerned certain eternal, abstract and unchangeable principles (or a
priori moral laws) and used three imperatives to highlight what ought to be done by
individuals.30
The first imperative is to act as if the maxim of one’s action by one’s will would become
a universal law (will for yourself what you would like to will for others). This imperative
checks if the action could be performed by everyone, universally, and reflects the aspect
of consistency. If a person decides to break a promise because it no longer suits him or
her – can that be a universal law (can people be allowed to just break promises when it
suits them?) Such a rule (to break promises when one pleases) will dilute the very nature
of a promise. Murdering can also not be made a universal rule as there will be a possibility
of no people left on earth. Therefore these actions are seen as immoral. The second
imperative is to act in a way that treats humanity fairly. Humans have value, and should
be treated as an ‘ends’ and never as ‘a means to an end’. This imperative checks that
human dignity is not ignored. For example, human resources are used by companies to
produce and provide goods and services. This doesn’t mean that their staff can work in
immoral working conditions and environments. This imperative would also object to
using people in medical trials or experiments and research studies without their consent.
The third imperative is to act in a way that is regarded as universally lawgiving (would
‘your law’ also be universally accepted). This maxim’s aim is to ensure objectivity. For
example, an individual has decided to end his mother’s life. It is her last wish (to die) and
it would relieve her from her painful and terminal illness (also known as assisted suicide).
The individual has decided that, under these specific and dire circumstances, this can be
applied universally (maxim 1), and that it would be more humane to end her life (which
is also her wish) (maxim 2). Hence, for this individual, assisted murder passed maxim 1
and maxim 2. The last maxim asks the question: Can it be universally lawgiving? In other
words, would other individuals, universally, come to the same conclusion (maxim 3)? A
‘test’ (for maxim 3) is to ask oneself: ‘Would you like it if your family and friends find out
about your decision?’ and ‘Would you feel comfortable if your deed is the headline in
tomorrow’s news-paper?’ The ‘ethics of duty’ theory has certain problems associated with
it, namely:31
•Undervaluing outcomes. Consequences, or outcomes, are not properly assessed in
this theory, as it’s not a fundamental part of the theory. It may be included, or maybe
not. Child labour can be argued by an individual as immoral as it should not be
applied universally (maxim 1); it deprives children of their dignity (maxim 2); and
other societies (globally) feel the same about child labour as a practice (maxim 3).
However, there are consequences of banning child labour – for argument’s sake, the
additional income had previously paid for the child’s education, food and/or
necessities. These consequences are sometimes not considered by individuals in the
decision-making process.
•Complexity. The imperatives formulated by Kant can be difficult to apply,
and requires some abstraction. This level of intellectual analysis required to apply
Kant’s imperatives, should not be taken for granted in every case.
•Optimism. Kant’s theory is optimistic. His view of individuals as rational actors and
morality is seen more as an ideal than a reality.

Ethics of rights and justice

Ethics of rights
Closely associated with ethics of duty is ethics of rights and justice. This theory
concerns the notion of ‘natural rights’. It is concerned with basic rights, such as the right
to life, freedom and privacy to which individuals are entitled. It is therefore a decision
maker’s duty to respect these rights. The theory states that a decision or action is right
when it respects the rights of individuals. Although a very common and important ethical
theory, the main problem with this theory is that it is based on western views, or western
morality. Applying or imposing these views on societies with a different cultural and
religious belief could cause friction.32

Ethics of justice
When considering individual’s rights – especially within a social context – one must also
address and respect fairness. Justice concerns fair treatment of individuals with a fair end
result (everybody gets what they deserve). The theories of justice seek to achieve fairness
in terms of procedures and outcomes. It has been a key feature in debates on globalisation
and sustainability – with the main concern being on social and economic justice.
However, the biggest challenge with this theory is balancing fair procedures and fair
outcomes.33 For example, in South Africa, broad-based black economic empowerment (B-
BBEE) is aimed to fairly distribute the employment of previously disadvantaged groups
in the workplace. However, this could impose an unfair procedure on the employment
practices of companies – since ‘over-representative’ groups could be excluded in the
screening process.
4.4.3Contemporary ethical theories
Due to the various challenges and limitations of the western modernist theories, more
contemporary (or modern) perspectives regarding ethics emerged. The contemporary
ethical theories discussed in this book are virtue ethics, feminist ethics, discourse ethics
and post-modern theories.

Virtue ethics
Virtue ethics seeks to comprehensively describe character traits (or virtues) that
constitute a good human life.34 Central to this theory, for Aristotle, was ‘happiness’ –
virtuous behaviour is an internal part of a good life. For example, a happy sales
representative would be happy about meeting his or her target sales for the month when
this success was obtained in a virtuous manner. 35
Virtues are the traits that allow individuals to behave in ways that would develop their
highest potential, lead to happiness and enable them to pursue the ideals they have
adopted.36 Honesty, truthfulness, tolerance, integrity, patience, courage, self-control,
fairness and reliability are examples of virtues (traits). An individual would, for example,
stand for and believe in fairness (hence, they have adopted the virtue of fairness). They
would in all areas of life promote fairness and act accordingly.
Virtue ethics shifts the focus towards who an individual is – as opposed to how an
individual should act (it claims that individuals act in and from character – based on traits
that have been deeply ingrained and conditioned). For example, former and late
president Nelson Mandela was seen as a man of virtue – standing for and promoting
selflessness, forgiveness, peace and justice.
Traits become ingrained and conditioned through a variety of factors. Over the years
adults’ character and traits are formed by parents, schools, religion, friends, society
and working environments. If the virtue ‘integrity’ is deeply ingrained, a person with
integrity will act, for example, according to these traits.37 This theory looks at the
character and integrity of an individual, making an action as right (or good) based on the
kind of person or the person’s virtues. Hence, virtue ethics claims that good behaviour
comes from good people.38
One of the challenges is that this theory requires a fuller description of an individual
and his or her life before one can decide if his or her action is ethical. Another challenge
concerns which society’s or community’s (or person’s) ideals of good practice to consider
and consult.39 When reasoning within this theory’s parameters, two questions should be
asked: ‘What actions will make me a better and happier person?’ and ‘What will a virtuous
person do in this situation?’

Feminist ethics
The previous theories have a predominantly male influence – meaning that males
pioneered those schools of thoughts.40 It is said that males and females have different
attitudes towards social life (for example, females tend to be more ‘caring’). 41 Hence,
the feminist theory of ethics, views ethics from a more feminine perspective. This
theory argues that woman (females) have different attitudes towards organising social
life, compared to men. These differences affect how ethical issues and dilemmas are
handled. It views moral issues as conflicts of responsibility in relationships to be resolved
through personal and subjective assessment. 42 A moral decision is therefore one that
nurtures and maintains relationships (or connectedness), and acts or decisions that could
harm a relationship pose a moral issue. A lie, for example, will harm the relationship
between two business partners, and therefore lying is seen as unethical. Rather than
using principles or rules (for example, ethics of duty, which is more objective) to solve a
moral problem, this theory states that care (which is more personal and subjective) is
needed for others and in relationships. 43 These relationships include corporate, social and
personal relationships or networks.
This theory stresses the importance of emotions, intuition and feeling in solving moral
issues. As opposed to the more traditional theories (which focus on fair results), the
feminist theory’s goal is to achieve harmony, empathy and integration – and to maintain
healthy relationships with regards to ethical issues. 44
Applying this theory to moral issues, involves considering the relationships of affected
parties, and how one can maintain harmony in those relationships. In the Bolivian case,
feminists might not argue against child labour based on the rights that the practice
violates (which is based on western morals) – as long as the relationships in the families
and in the business setting (between supplier, buyer, customers and society) are still in
harmony (meaning it still functions well). Feminists, however, might object to child
labour due to the suffering and distress of the children – in forcing them, exploiting them
or if they are pushed beyond their physical or mental capacities (being ‘caring’ toward
the children). Hence, from a feminist perspective, if no relationship is harmed, but there
is suffering, then the action is unethical. In our example, and given the limited
information, there must be a healthy relationship (which is in harmony), and the welfare
of children must be kept intact (no exploitation, no distress, no forcing) for child labour
to be argued as ‘ethical’.

Discourse ethics
All of the previous theories discussed so far looked at human behaviour from different
perspectives – the values that direct their behaviour and decisions, and assumptions that
are prescriptive (of what is considered as right or wrong). The utilitarian perspective
looked at, for example, behaviour that would result in the greatest amount of good, and
considers that as moral. The ethics of duty perspective emphasises universal principles
that guide human behaviour, while the feminist perspective emphasises care and
connectedness. The problem is that not all individuals share the same perspectives on
various issues.45 This is particularly evident in organisations with a diverse workforce –
where individuals from different cultures have different perspectives and ideals. For
example, a marketing team decided to include a mascot in the new product campaign and
an animated dog was suggested. Based on religious beliefs, a Christian team member
might have no problem with the chosen mascot, while a Muslim team member might
object, as dogs are seen as unclean in their specific Muslim community. Due to this
challenge, discourse ethics emerged.
According to discourse ethics, there should be a process of norm generation through
rational reflection. Norm generation refers to the process of establishing a rational ideal
discourse about a specific problem.46 It is the procedure of parties getting together to
settle a conflict, solve a problem and provide a solution for a specific situation that is
accepted by all parties. Therefore it involves the time and energy taken to interact with
one another and for each affected party to share their argument – and to then reach a
mutual agreement on a specific norm that will be applied in the situation (norm
generation).
Jurgen Habermas, who pioneered discourse ethics, stated that for discourse ethics to
be effective, parties need to be sincere in their efforts, willing to find truth and remain
open towards achieving a consensus. This would bridge the different values, cultures,
traits and ideas that individuals would otherwise strongly regard as right and wrong. As
soon as a difference of opinion or misunderstanding occurs, then the agreements are
called into question. 47
Discourse ethics closely aligns itself with the stakeholder theory. Within the business
setting, there are numerous parties that are affected by business decisions. Society,
customers, suppliers, investors and shareholders are all affected by decisions – both good
and bad. Conflict arises when business decisions are not accepted by all parties – and
discourse ethics could be used to solve the problem. Shareholders of a Bolivian firm
would, for example, not find wrong in buying goods from another firm that employs
children (given that they meet the requirements, for example, children must still go to
school). However, it has come to their attention that their stakeholders (employees,
investors and customers – both local and international) have concerns regarding this
practice. Discourse ethics would want these shareholders and stakeholders to meet and
discuss the matter to reach mutual agreement. With regards to openness, it would mean
that parties who are against child labour rethink this matter, as it is legal in Bolivia, and
those who are in favour of child labour rethink this matter, as it illegal in other parts of
the world. A mutual agreement between both parties for this possible contract to exist,
for example, could be that (i) only children, 16 years and older, may work; (ii) numbers
of work hours may not exceed two hours per day and (iii) the work must be age-
appropriate and not cause physical harm. These three ideals are the ‘generated norms’.
The challenge with applying this theory is that norm generation can be a very time-
consuming process. In addition, if one party objects and a mutual agreement cannot be
made, then a moral decision hasn’t been reached.

Post-modern ethics
Post-modern ethics encourages individuals to question everyday practices and rules.
They should rather listen to, and follow their own emotions and inner convictions about
what is right or wrong in a particular situation. 48 This theory is best understood when
thinking of the world, the nature of truth and claims by different communities to truth,
and then to scrutinise or challenge beliefs on what is reality and what is knowledge. In
essence, this theory questions what is widespread ‘belief’. Therefore, any truths or beliefs
are partial and local.49 The notion behind this theory is to follow your own emotions, inner
convictions and gut feelings about what is right and what is wrong. 50
The challenge inherent in this theory is that one needs to be in the situation or
have experience of the situation in order to truly tap into one’s emotions and feelings and
question the practice.51 It is easy to merely form an opinion about, for example, abortion
(based on one’s beliefs, religion or culture), but to truly question whether it is to be
regarded as moral or not, would be to go to an abortion clinic and talk to the women and
families in those situations. If an individual has not been exposed to child labour, then
that individual needs to travel to Bolivia and talk to the communities, families, children
and firms affected by this practice.
The ethical theories discussed in this section can guide organisational behaviour,
however, they are contradictory. Looking through the discourse, feminist and the
utilitarian ethics lens, child labour might be regarded as moral (depending on the
individual’s reasoning), while the ethics of duty lens might regard it as immoral. So there
are contradictory results and singling out a theory will result in a bias decision. So what
is an organisation to do? For example, to buy or not buy from Bolivian firms who employ
children?
These theories provide different views on what is right. In addition, the ‘end’ (or what
is considered as ‘good’) of various theories differs from one ethical theory to
another.52 Therefore, the best approach would be to evaluate and take into consideration
all the theories, as opposed to singling out a specific theory. This would assist in better
insight, and a better variety of considerations, when facing ethical problems, issues and
dilemmas.53 In Chapter 9, a decision-making model is provided that illustrates how all of
the ethical theories assist a decision maker to apply ethical reasoning and judgement.
This process and reasoning (on the various ethical theories) is particularly necessary
to develop the ethical sensitivity and moral development of any decision maker – and to
ultimately engage in behaviour and actions that are considered ‘more ethical’. Ethical
theories are meant to encourage decision makers to think about ethics and the various
perspectives of each lens – in order not to ‘miss’ or ignore aspects that a decision maker
would otherwise not have thought about, such as thinking about human dignity/rights,
universal principles (ethics of duty), and not just looking at consequences. Ethical
theories are guidelines towards reaching a ‘more’ ethical decision within a business.
Sometimes this would involve choosing between two wrongs, with your choice being ‘the
more ethical option’ of the two wrongs.
In the Bolivian child labour example, we could argue two wrongs: The one camp argues
this practice as wrong, based on the basic rights of children and their dignity. The other
camp argue that stopping child labour in Bolivia is also wrong as it affects the dignity of
the families involved negatively (limits poverty stricken families even more from basic
necessities such as food, health and education). Using the ethical theories, we can argue
the morality of this practice from a consequential viewpoint (looking at the outcomes
concerning everyone involved) and non-consequential viewpoint (looking at the
correctness of actions and human right and dignity, for example). This would ultimately
allow a decision maker to make a ‘more ethical’ decision – or to take a more ‘ethical
stance’ regarding a matter. Chapter 10 will discuss the implication of ethical theories in
organisational decision making in more detail.
Table 4.2 provides a summary of the ethical theories discussed in this section.

Table 4.2: Ethical theories

Consequential ethical Non-consequential ethical Contemporary ethical

theories theories theories

Egoism Ethics of duty Virtue ethics

Utilitarianism Ethics of rights and justice Feminist ethics
Discourse ethics
Post-modern ethics
4.5Doing good to do well
Unethical conduct and numerous corporate scandals, harm the trust of customers and
investors. It can also have negative consequences for organisations, such as fines or
penalties, and a detrimental impact on a company’s reputation. 54 Unethical conduct also
has an impact on society.55 In 2014, African Bank was accused of reckless lending, which
ultimately led to South Africa’s Reserve Bank bailing it out. The repercussions of this
ethical scandal on society includes several furniture stores closing down (aggravating the
already high unemployment rates in South Africa), investors losing money, and cancelled
bond sales. In addition, Moody Corporation lowered South African institution’s
creditworthiness (which increases borrowing costs for banks). 56
On the other hand, society is increasingly applying pressure on organisations to be
ethical in the way in which they conduct business. Consumers’ and supplier’s purchasing
decisions are influenced by the ethics of organisations. For example, some consumers will
not purchase a product from a firm, where there are concerns about the way the products
were made.57 According to an ethical consumer website, current and/or past boycotts
were called on Adidas for the use of kangaroo skin in some types of football boots,
Amazon for its tax avoidance practices and KFC for animal welfare reasons. 58 In 2004 and
2005, religious groups called for boycotts on Proctor and Gamble and Microsoft over their
support for gay rights and marriages.59
Business activities would be difficult, or nearly impossible, if corporate directors were
unethical in their conduct or deceitful, if buyers and sellers could not trust each other and
if employees refused to help each other. 60 Business activities should therefore maintain
basic ethical standards such as honesty, trust, collaboration, reliability and fairness. 61 In
principle, and for profit and survival, good behaviour (or ethics) is good for
organisations.62 See how unethical practices led to boycotts, which in return impacted
these corporations’ bottom line (sales) and investments in the example box on the next
page.
The example box emphasises that doing what is good (ethically and morally correct)
means doing well (or to succeed or to prosper in a certain area – such as profitability,
culture, productivity and competitive advantage). The best way to elaborate this
viewpoint (doing good to do well) is to look at it from a variety of perspectives. Below,
we will discuss the following perspectives: (i) the financial and economic perspective; (ii)
the reputation, relationship, morale and productivity perspective; (iii) the corporate
culture perspective; (iv) the customer trust and loyalty, investor confidence and public
acceptance perspective; and (v) the investor decision perspective.
(i)The financial and economic perspective. According to this perspective, doing good
means saving money on lawsuits, settlements, fines and consumer boycotts
associated with illegal and/or unethical behaviour. 63 In South Africa, Pioneer Food,
Tiger Brands, Premier Food and Foodcorp were found guilty of bread price fixing in
2007 for the period 2003–2004. Pioneer settled on a penalty of nearly R1 billion.
Premier Food, Foodcorp and Tiger brands co-operated and were fined over R195
million, R45 million, and R90 million respectively. 64 Some organisations (such as
Enron and Worldcom) went bankrupt due to unethical behaviour. Organisations
can avoid boycotts (which secures sales and profit margins) when they act
ethically. For example, if managers know that child labour or apartheid is an ethical
issue, and regarded as undesirable by their customers, then avoiding business
transactions with firms engaging in those practices would avoid possible boycotts.
Uzbekistan (see dilemma box on the next page), for example, avoided further
boycotts by prohibiting child labour. Unethical practices can also have an effect on
an economy. During 2008–2009, the USA experienced a financial crisis that was the
starting point of a global economic crisis. The main cause of this crisis was that
44% of all home mortgages were susceptible to default. Above-prime loans were
issued to individuals who did not qualify for loans at traditional lenders and hence
had a reasonable chance of defaulting, but could repay the loan over a longer
period (loans referred to a sub-prime loans). Furthermore, the two government-
sponsored initiatives, known as Freddy Mac and Fanny Mae, which offered
affordable housing loans to members of the public, failed to inform investors about
the sub-prime loan risks they faced (the high risk of these loans defaulting). In
2007, the credit boom ended and the housing bubble burst, which led to the
world’s worst financial crisis.68
Example
Uzbekistan cotton
There was a time when child labour was practised in Uzbekistan – however, it is no longer
permitted. In 2014, Uzbekistan made efforts to eliminate the worst forms of child labour, but
was also complicit in the use of forced child labour in the cotton sector. While the central
government made concerted efforts to prevent forced child labour in cotton production,
Uzbekistan received an assessment of no advancement by the US Department of Labor in
its Child Labor and Forced Labor Reports because of government complicity in forced child
labour, particularly at the local level. Although there was no evidence of a large-scale,
centrally co-ordinated, forced mobilisation of children, some local officials, in more than an
isolated incident, continued to mobilise children during the cotton harvest. This has led to
calls for boycotts on cotton produced in Uzbekistan. 65

Products from Israel

The Boycott, Divestment and Sanctions movement called a boycott against Israeli products
and firms supporting the country. It claims that the Israeli government is guilty of practising
racism and has discriminatory policies. The movement aims to exercise economic pressure
on Israel until they conform to International Law and Universal Principles of Human Rights. 66
Woolworths trades with Israel, and this has led to South African unions speaking out
against the corporation. South African unions such as the education and health workers’
union Nehawu, teachers’ union Sadtu, police and prison civil rights union Popcru,
communication workers’ union CWU and the metalworkers’ union Limusa and Saccawu
threatened to lobby, through the Government Employees’ Pension Fund (GEPDF) and the
Unemployment Insurance Fund (UIF) for the Public Investment Corporation, to divest from
Woolworths. The DEPF accounts for nearly 90% of assets managed by PIC, and PIC hold a
16.4% stake in Woolworths.67
(ii)The reputation, relationship, morale and productivity perspective. Doing good
means avoiding costs associated with deterioration in relationships, damaged
reputations, decline in employee productivity and an increase in absenteeism. 69 A
poor reputation is probably the most obvious consequence of unethical behaviour
– and it deters prospective customers and business partners. 70 Literature and
research studies emphasise that organisations with good morale have less
absenteeism compared to those organisations with poor or fair morale. 71 Unethical
behaviour also impacts employee productivity negatively. One American study in
particular indicated that 36% of employees in America indicated that ethical lapses
caused them distractions.72
(iii)The corporate culture perspective. According to this perspective, doing good
also ensures integrity and fosters a better corporate culture. 73 Ethical behaviour
and integrity from managers and leaders (managers doing what is good) fosters a
strong ethical culture, which in return promotes ethical behaviour within
organisations. This is also evident within Nedbank. In its Integrated Report for
2014, Nedbank stated the following:

‘with a focus on building a unique and appropriate culture, starting with our
executive leadership team and cascading to management across the organisation.
This has resulted in staff morale and culture metrics today being close to world-
class levels’.74

Hence, it recognises that in building a unique and appropriate culture (which

include ethical values), starts with their executive leadership team. Numerous
studies have found that a strong ethical culture has a positive effect on employee
behaviour and decision making. Chapter 9 discusses this in more detail. The
benefits of ethical behaviour in the workplace (which will also lead to areas of
success) include the protection of organisational reputations, maintaining public
acceptance and investor trust, minimising loss of productivity levels and lowered
absenteeism.75
(iv)The customer trust and loyalty, investor confidence and public acceptance
perspective. Ethics have an impact on customer trust and loyalty, investor
confidence and public acceptance.76 In the opening case scenario, one of Nedbank’s
focuses is to ‘rebuild trust in the financial industry’. This is because the 2008
financial crises (and the unethical conduct of the corporations involved) have
negatively affected consumer trust and investor confidence. Organisations need to
build trust with their stakeholders – they need to build trust, for example, with
their customers and business partners, alliances and society and it’s essential for
the operations of any market.77 Trust also has a positive impact within an
organisation, as trust is important for effective communication, team work, and the
general relationship between managers and subordinates. Trust also enhances
employee commitment and productivity.78
(v)The investor decision perspective. Ethics influence investor decisions. Doing good
and engaging in socially responsible practices can lead to investments from
prospective investors. Chapter 14 will elaborate more on this. ‘Ethical investing’ is
an example of ethics influencing investor decisions. Some investors choose not to
invest in ‘sin industries’ (for example, the tobacco industry). These investors would
actively seek out companies who are involved in social responsibility initiatives to
invest in. In the opening case scenario, Nedbank’s engagement with its
communities makes it a favourable investment decision for these types of
investors.

Nedbank is a good example of a company that is doing well while doing good. Its good
corporate citizenship status is evident when looking at its ethical business activities and
community engagement. The latter (community engagement) goes well beyond what is
legally required of Nedbank. In this section, we focused on various perspectives that
justifies our argument that doing what is ethically and morally correct, means doing well.
In the following section, we turn our focus to the relationship between corporate
citizenship and legislation, specifically legislation that provides the ground rules for
sound and responsible business activities. The following section will look into the role of
legislation in guiding ethical corporate behaviour.
4.6Corporate citizenship and legislation
In addition to the ethical foundation of corporate citizenship, the extended view of
corporate citizenship, as defined by Crane and Matten,79 also highlights a ‘legal’
foundation. Organisations are ‘legal entities with rights and duties’. Crane and
Matten80 emphasise that organisations should administer civil rights, social rights and
political rights (it is their duty). There is legislation that also assists organisations to (and
ensure that they do) administer these rights. The following sections will address
legislation and its relation to corporate citizenship.
4.6.1The role of legislation in business
Established by governments, legislation is the minimum standards for responsible
behaviour. Legislation is society’s codification of what is right and wrong. 81 Simply put,
legislation is the body of rules that governs and directs individuals or groups of people’s
(for example, in an organisation) behaviour and the relationships between individuals.
Within these rules, basic freedom (relates to civil and social rights), rights and protections
are stipulated.82 An example where legislation governs a relationship (or behaviour)
between individuals is South Africa’s labour law (governing certain behaviour between
an organisation and employees).
There are also laws that specifically regulate business conduct, as it is believed
businesses cannot always be trusted to do what is right in certain situations (such as
consumer safety and environmental protection). This is evident when looking at the news
on issues concerning consumer protection, boycotts, petitions, and environmental issues
(such as pollution). See the example box below for a practical example of consumer
protection issues.
Many laws have subsequently been passed in response to business abuse (for example,
fraudulent activities, excessive pollution, and exploitation of human and environmental
resources) and consumer demands (for more ethical products, behaviour and
conservation initiatives). 86 These laws establish the basic ground rules for sound and
responsible business activities and they serve five basic purposes. The purpose of
legislation is summarised in Table 4.3. These purposes inherently would lead to sound
and responsible business (and individual) conduct and activities.
Example
Labelling
There have been numerous label-related scandals in the past. In South Africa, the
Foodstuffs, Cosmetics and Disinfectants Act 54 of 1972 controls the sale, manufacture,
importation and exploitation of food products, cosmetics and disinfectants. It makes
provision for food safety and hygiene, and restricts products that are harmful or injurious to
human health or products that contain prohibited substances. The Act also ensures that
products are correctly labelled, and an analysis of foodstuffs. 83
In 2013, major South African supermarkets were exposed in a ‘meat-label’ scandal when
a study found that nearly 60% of 139 meat products tested included DNA of animal species
not listed on the food labels.84 In 2015, Woolworths recalled certain ice-cream products as
the products were not labelled with a necessary peanut allergen warning.85

Sources: FAO. FAOLEX. Foodstuffs, Cosmetics and Disinfectants Act. 2016. [Online].
Available: http://faolex.fao.org/cgi-
bin/faolex.exe?database=faolex&search_type=query&table=result&query=ID:LEXFAOC085626&form
at_name=ERALL&lang=eng [29 June 2016]; News24. 2015. Woolworths recalls ice-cream products.
[Online]. Available: http://www.health24.com/Medical/Allergy/Allergy-triggers/Woolworths-recalls-ice-
cream-products-over-incorrect allergy-labelling-20151013 [15 January 2015].

Table 4.3: Purpose of legislation pertaining to sound and responsible business activities

Purpose Explanation

Imagine the chaos and confusion if there weren’t legal boundaries.

Maintaining Laws maintain order – and prevent unlawful conduct.
order

Influencing In preventing unlawful conduct, laws therefore influence individual

conduct and business conduct. Laws either enforce or prohibit conduct. In
South Africa, anti-competition tactics are prohibited by law, while
companies are required, by law, to disclose financial statements.
Honouring When entering into a contract, businesses and individuals make
expectations commitments in terms of resources, time and capital. Laws honour
and enforce these contracts.
Promoting Due to unfair employment practices, laws were written to promote
equality equality. Examples of laws that promote equality in South Africa are
the Promotion of Equality and Prevention of Unfair Discrimination
Act 4 of 2000 and the Employment Equity Act 55 of 1998.
Being the Not all individuals agree on matters and share the same ideas on
mediator how individuals, business and societies should be managed. Laws,
therefore, act as a mediator, or compromiser, and combine the
different views of individuals into one united view. The aim is to
either partially of completely satisfy all parties, and to reach a
compromise between conflicting ideas.

Source: Compiled from Jennings, MM. 2012. Business: Its legal, ethical and global environment. 9th
edition. Stamford, CT: Cengage Learning; South Africa. Department of Justice and Constitutional
development. Equality for all. [Online].
Available: http://www.justice.gov.za/EQCact/docs/2011eqc-a5-booklet.pdf [01 July 2015].

Through legislation imposed on business, not only is the correct behaviour stipulated,
but the rights of citizens are administered. Legislation plays a role in managing the
relationship between individuals (citizens) and corporates as administrators of
individual rights. Regulation sets out the minimum rules and boundaries that makes a
corporate into a provider (of social rights), enabler (civil rights) or channeller (political
rights) of citizenship rights. The legislation mainly encompasses four categories of laws
and regulation that govern corporate activities, namely:
1.Regulation of competition
2.Protecting of the consumer
3.Promotion of equality
4.Safety and protection of the natural environment. 87

We will now look at each of the categories in more detail.

4.6.2Categoriesof laws and regulations that govern
corporate activities
1. Regulation of competition
Rivalry amongst corporations for customers and profits can, in certain cases, lead to
questionable practices. Large corporations also have more advantage over others –
especially over the smaller business. Large corporations have access to more resources,
and can capitalise on economies of scale (cost per units are lower as they produce on a
larger scale, compared to a small business who produces on a smaller scale, and therefore
smaller business’s products can’t always compete with larger organisations). In addition,
some corporations’ competitive strategies focus on weakening a competitor – thereby
weakening competition in the market. Competition deteriorates when firms limit healthy
competition (for example, raising entry barriers so that new competition can’t enter the
market). See the example box above for a practical example.
Example
Price fixing in the oil industry 88
In 2012, it was reported that South African oil companies were accused of price fixing. You
can read more about the story
at: http://www.newstatesman.com/business/business/2012/10/shell-and-bp-accused-
collusion-south-africa. This one example highlights the power and advantage large
corporations have, the questionable practice they engage in for profits and how that can
weaken competition.
As a result, laws have been passed to regulate competition. These laws were
established to prevent anti-competition practices aimed at reducing or restricting
competition among corporations.89 Reducing or restricting competition is to, in some
way, hinder healthy competition deliberately. These practices are known as anti-
competitive behaviour and include price fixing, predatory pricing (a firm setting their
prices so low as to force a competitor out of the market) and rigging bids (to agree in
advance who to award a contract to). Rigging is achieved by setting a pre-determined
price on a tender, limiting other firm’s chances of competing. 90
Based on international best practices, South Africa has a regulated competition regime.
The Competition Act 89 of 1998 provides for various prohibitions on various anti-
competitive conduct. The Act’s main purposes are to promote (i) economic efficiency,
adaptability and development; (ii) employment and general socio-economic welfare; and
(iii) a greater spread of ownership within the economy. The Act also provides consumers
with competitive prices and product choices; it ensures equitable opportunity to
participate in the economy for small business and aims to increase opportunities for
South Africa to participate in world markets. The Competition Amendment Act 1 of 2009
introduces measures such as criminal sanctions against top managers who participated
in or consented to cartel conduct and leniency provisions that protect whistle-
blowers.91 Penalties (fines) and prison sentences are examples of criminal sanction (it is
a form of punishment when a corporation did not abide by the law). Leniency provisions
are made towards corporations (also involved in the unlawful act) who blow the whistle
on the other parties involved.92 In the price-fixing scandal, Premier Food, Foodcorp and
Tiger brands co-operated and were fined less than Pioneer Foods (who did not co-
operate). This is a form of leniency for the retailers who co-operated.

2. Protection of consumers
By law, businesses are required to provide consumers with accurate information about
products and services. For example, warning against possible peanut ingredients assists
consumers who are allergic to peanuts, and the indication of halaal products assists
specific religious consumers with better (and safer) purchasing decisions. Businesses
also need to follow safety standards. 93 The South African Bureau of Standards (SABS) is
an example of a statutory body that promotes and enforces national standards in South
Africa. The SABS was established in terms of the Standards Act 24 of 1945. 94
There are various laws that protect consumer’s rights in South Africa, of which one is
the Consumer Act 68 of 2008. This Act mainly promotes a fair, accessible and sustainable
marketplace for consumer products and services, promotes national standards relating
to consumer protection and prohibits unfair marketing and business practices. Other
laws aimed at protecting consumers are the Electronic Communications and
Transactions Act 25 of 2002 and the Protection of Personal Information Act 4 of 2013: 95
•The Electronic Communications and Transactions Act focuses on, for example, the
promotion of universal access to electronic communications, promotes transactions
and the use of electronic transactions by SMMEs, and prevents abuse of information
systems. The Act also prevents barriers to electronic communications and
transactions.
•The purpose of the Protection of Personal Information Act of 2013, for example, is
to ensure the safeguarding of personal information and regulate the manner in
which personal information may be processed. 96
In the opening case scenario, Nedbank emphasises that it is ‘stringently protecting client
information’. In its 2014 Integrated Report, Nedbank discusses the Protection of Personal
Information Act and its intention to meet with the requirements of this Act. 97

3. Promotion of equality and safety

These laws promote equity and safety in the workplace and are aimed at protecting the
rights of minorities, women, senior citizens and people with disabilities, and the safety of
all workers.98 Examples of laws aimed at promoting equality and safety in South Africa
are the:99
•Basic Conditions of Employment Act 75 of 1997. Stipulating, for example, basic
requirements of employment and rights of employees in terms of work hours,
overtime hours, night shifts, average hours of work, meal intervals, pay, leave, work
on Sundays and public holidays and termination of employment.
•Employment Equity Act 55 of 1998. This Act focuses on promoting equal
opportunity and fair treatment in employment, and implementing affirmative action
measures.
•Labour Relations Act 66 of 1995. This Act’s main purpose is to advance economic
development, social justice, labour peace and democracy in the workplace.
•Occupational Health and Safety Act 85 of 1993. Stipulating, for example, that
employers must ensure the safety and health of employees in terms of their working
conditions.

When looking at South Africa’s history relating to employment, unethical practices such
as slavery, forced labour (which began in 1652), cheap labour, job reservations, poverty
wages and oppressive laws (apartheid) are evident. 100 Today, these unethical practices
are prohibited by laws.

4. Protection of the natural environment

These laws came into pass largely as a response to concerns over business’s impact on
the environment – such as toxic waste in the air and water.101 In South Africa, various laws
are aimed at protecting the environment. Examples of a few of these laws are tabled on
the next page.
The laws listed in Table 4.4 set out the minimum standards for responsible behaviour,
implying that it is insufficient to cover the entire field of human conduct. All human
conduct therefore cannot be regulated – there is a risk of ineffectiveness in applying
business laws. Laws have loopholes, in some countries there is a lack of law enforcement
and corruption that prevents the constant application of laws. 102
The questions that now arise are: ‘If the minimal standards of the law aren’t enough –
what can supplement regulation?’ and ‘What mechanism is there that will assist towards
good, and sound conduct from corporations?’ We will briefly focus on ethics again – and
its relationship with legislation to answer these questions.
4.6.3Legislation and ethics
Organisations are powerful creators of wealth, and some organisations exploit this
power.103 Examples of organisations that have misused their powers include Enron,
WorldCom, Satyam Computer Services and Parmalat. Let us not forget the previous
examples of food retailers and oil companies who have misused their power.
Table 4.4: Laws in South Africa, aimed at protecting the environment
Focuses on the conservation of plant and animal
National Environmental biodiversity (and the soil and water upon which the
Management: Biodiversity plants and animals depend).
Act 10 of 2004 (NEMBA)

National Environmental Focuses on the conservation of soil, water and

Management: Protected biodiversity.
Areas Act 57 of 2003
National Environmental Focuses on the prevention of pollution and
Management: Waste Act 59 ecological degradation, consequently protecting the
of 2008 environment and people’s health.
National Environmental Focuses on the conservation of the coastal
Management: Integrated environment, natural coastal landscape and
Coastal Management Bill seascape attributes. It also ensures that any
(2008) (and amendments) development and use of natural resources from the
coastal environment is socially and economically
justifiable and ecologically sustainable.
National Veld and Forest Focuses on the conservation of soil, water and plant
Fire Act 101 of 1998 life through the prevention and combatting of fires
(veld, forest and mountain fires).
Source: Rhodes University. 2015. Environmental Legislation and Policies. [Online].
Available: https://www.ru.ac.za/environment/resources/envirolegislation/ [15 January 2015].

These companies were caught up in corporate scandals and alleged illegal activities.
Their activities were also unethical. However, not all unethical behaviour is illegal. For
example, in South Africa (and other countries such as America) it is not illegal to cheat on
your spouse; however it is seen in certain cultures and societies as unethical. Likewise,
not all legal activities are necessarily ethical. For example, in South Africa’s apartheid
regime, organisations were obliged to follow racist practices (it was ‘legal’), however it
was unethical.104
The scope of ethics include the law, however it also includes ethical standards not
codified by the law. This emphasises that the overlap between ethics and the law is not
complete.105 Figure 4.1 depicts this overlap and ‘incompleteness’.
As illustrated by Figure 4.1, the scope of ethics is broader than the scope of law. Unlike
the law, ethics cover every aspect of human conduct. Therefore ethics exceeds the law.
We’re in no way suggesting that the law has no significance, ethics merely continues
where the law stops.
In lieu of the relationship between the law and ethics, organisations ought to always
consider both their legal responsibility as well as their ethical responsibility (what is legal
and ethical). Take Bolivia for example. One of the questions asked in the example box was:
‘A brick distributor firm, operating in countries where child labour is illegal, buys bricks
from Bolivia. They are not employing the children, so are they violating the laws of their
country?’ This is an example where legislation falls short (and questions the civil and
social rights of children), and ethics steps in.
Nedbank states that it does its part in adhering to legislation (for example, the Personal
Information Act). It is also maintaining its corporate citizenship through ethical
behaviour (such as promoting ethical standards in their workplace) and going beyond
what is required of it – and engaging with communities. As seen in the chairman’s report,
Nedbank did well – with a strong performance and positioning for 2014. Organisation
success (here we refer to profitability) remains important for organisations, while doing
what is right (legally and ethically). Therefore, the last part of the chapter focuses on
corporate citizenship and profitability.
Example
Examples of corporate scandals

•Enron (2001) •Enron’s downfall was due to the fact that the company
lied about its profits and other shady dealings.
•Worldcom •Worldcom was found guilty of an $11 billion accounting
(2002) scandal that cost company shareholders and employees
billions of dollars.
•Parmalat (2003) •The Parmalat scandal involved the disappearance of
more than $10 billion in declared assets. This is referred
to as one of the largest scandals in corporate history.
•Satyam •Satyam’s chairman and founder reflected false profits for
Computer years and confessed to £1 billion in fraud.
Services (2009)
Sources: Compiled from BBC News. 2002. Enron scandal at-a-glance. [Online].
Available: http://news.bbc.co.uk/2/hi/business/1780075.stm [16 January 2016]; Chapman, S. 2009.
Satyam fraud scandal: Timeline. Blow-by-blow account of Satyam saga. [Online].
Available: http://www.computerworlduk.com/tutorial/infrastructure/satyam-fraud-scandal-timeline-
1982/ [16 January 2016]; Crawford, K. 2005. Ebbers gets 25 years. [Online].
Available: http://money.cnn.com/2005/07/13/news/newsmakers/ebbers_sentence/ [16 January 2016];
O’Rourke, M. 2004. Parmalat Scandal Highlights Fraud Concerns. Risk Management, 51(3):44.

Figure 4.1: The overlap between ethics and the law

Source: Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about how to do
it right. 5th edition. Hoboken, NJ: Wiley. © 2011. Reproduced with the permission of Wiley,
permission conveyed through Copyright Clearance Center, Inc.
4.7Corporate citizenship and corporate financial
performance
In our opening case scenario, the important role of ethics and corporate citizenship was
highlighted at Nedbank. In addition, Nedbank showed strong financial performance and
the bank was well positioned (as measured by market capitalisation, a measure used to
classify a company’s size according to the total amount of shares outstanding) amongst
its competitors in 2014.106 A question arising from many academic and management
practitioners is whether there is a positive relationship between corporate citizenship
and corporate financial performance. To answer this question, we first need to elaborate
on the term corporate financial performance. Thereafter, we can examine the various
arguments regarding the relationship between corporate citizenship and financial
performance.
4.7.1What is meant by financial performance?
Traditionally, corporate financial performance was used as a subjective measure of
overall organisational success and provides an indication of how well a corporate can use
its assets from its primary mode of business and generate revenues. The term is also used
as a general measure of a corporate’s overall financial health over a certain period of time
(normally a financial year). In this way, a corporate’s financial performance can be used
to compare itself with other similar corporates in the same industry, or to compare
various industries with each other. Various financial ratios can be used to measure
corporate financial performance. In most instances, the annual financial statements
(statement of profit or loss and other comprehensive income, statement of financial
position, and statement of cash flow) of the corporate are used in these calculations.
Financial ratios specifically aimed at measuring the profitability of a corporate are
applicable here. Four ratios are normally used. First, the gross profit margin on sales
indicates how much money is generated after direct costs of sales have been taken into
account. Second, the net profit margin indicates how much money is generated after all
costs (direct, overhead costs, interest paid and taxes) are taken into account. 107 Third, the
return on total assets measures the profitability of the corporate as a whole in relation to
the total assets employed. The last ratio, the return on equity, measures the profitability
of the equity employed.
Although the measurement of corporate financial performance remains an important
measure of success, it has also become important for corporates to also focus on its non-
financial performance indicators such as its corporate social responsibilities. In Chapter
14, we elaborate on non-financial performance (focusing on economic, social and
governance) measures, but for the purpose of this section, we focus on financial
performance to answer the question: ‘What influence does corporate citizenship have on
the bottom line?’ – or corporate financial performance.
This is a challenging question. Following Crane and Matten’s108 extended view on
corporate citizenship (also discussed in Chapter 3), they highlight the following:
1.‘Corporate citizenship (CC) has emerged as a prominent term in the management
literature dealing with the social role of business’109
2.‘… we critically analyse the conventional use of CC in the academic and practitioner
management literature’110 – referring to the limited view on corporate citizenship
and equivalent view of corporate citizenship.

This emphasises that social responsibility has been, until Crane and Matten’s extended
definition, a way of employing the terminology of corporate citizenship. Therefore, in
order for us to evaluate whether corporate citizenship influences corporate financial
performance, we need to include studies that focused on social responsibility and
financial performance in our analysis. Bear in mind that social responsibility still links to
the extended view of corporate citizenship and to the organisation’s role in administering
social rights. In lieu of this, we will use the term social responsibility (as an element of
corporate citizenship as per the conventional use). The following section addresses the
arguments concerning social responsibility and financial performance.
responsibility and financial performance –
4.7.2Social
the arguments
Looking at our opening case scenario, it is clear that Nedbank is investing in social
responsibility initiatives. Nedbank, for example, encourages a culture of active citizenship
and during 2014, 28% of staff members participated in voluntary programmes. These
programmes included a ‘Caring for Community’ programme, which assist
identified schools to build vegetable tunnels, rain-harvesting tanks and solar cookers. Do
these social investments (like the investments by Nedbank) have an actual effect on
financial performance? Surely, not investing in social responsibilities, would mean more
profits, seeing as the corporate would not be spending money on these issues?
There are three perspectives on social responsibility and financial performance to
keep in mind; namely social responsibility (1) has a negative influence on financial
performance, (2) has a positive influence on financial performance, and (3) is equivalent
to financial performance.

1.The perspective that social responsibility has a negative influence

on financial performance
This perspective maintains that engagement in social responsibility activities increases
costs, and increased costs (with the same level of income) will lead to a decrease in
financial performance. This view is particularly based on Milton Friedman’s argument on
a corporate’s true purpose – which is to maximise profits for shareholders. Friedman
asserts that the only social responsibility that corporates have is to increase profits (or
shareholder wealth). If a manager were to invest in ‘other social’ issues (such as
donations or upliftment programmes), then that manager is spending ‘shareholder’
money – money that would have increased profits.111 Friedman’s view has received much
criticism. While Friedman maintained that ‘the business of business is business’, others
believe that ‘the business of business is everyone’s business’ – ‘everyone’ being
stakeholders.112 Duschinsky suggests that Friedman’s view is outdated and that the
business world has subsequently changed.113 In Chapter 3, we explained the factors
contributing to a changed business world, such as globalisation, advances in technology
and the radical transformation of the world of work, increased power and demand from
customers, the growing importance of intellectual capital and learning, the changing roles
and expectations of workers, and increased corporate power and responsibility. We also
indicated in Chapter 3, that consumers, investors and workers favour corporates who
invest in the upliftment of society, the fair treatment of employees and ensuring they have
a positive influence on the environment.

2.The perspective that social responsibility has a positive influence

on financial performance
The positive perspective is grounded in stakeholder theory which suggests that corporate
social performance is positively related to financial performance as it appeals to
stakeholder interests and the organisation’s reputation. 114 Taking into account the
interest of stakeholders (and not just shareholders) is seen as important, as failure to do
so can be detrimental to those stakeholders – and ultimately shareholders, and the long-
term survival of the organisation.115 Stakeholder interest, in particular, has become
important for encouraging corporate citizenship in South Africa. Society (or community
groups) challenges South African organisations on whether they are upholding the
constitutional rights of citizens. 116 This is evident when looking at the #FeesMustFall
campaign that started in 2015, where students demanded more affordable education
(ensuring their right to education). The example box on the next page provides two
examples of corporates that have failed to take the interest of stakeholders into
consideration, and the consequences (for both stakeholders and the organisation)
thereof.
Corporate reputation, which is vital to the success of the corporate, is viewed as an
intangible organisational asset. In addition, reputation is built by the organisation and
upheld in the perceptions by stakeholders 117 (whom organisations ought to take into
consideration). A good and sound reputation (amongst all stakeholders) is also perceived
to give an organisation a competitive advantage.118 Purchasing and investment decisions
are often based on the reputation of an organisation. 119 Customers would, for example,
boycott an organisations who has engaged in amoral activities (amoral activities affect a
firm’s reputation negatively). Nike (and its reputation) in the 1990s serves as a good
example. Nike received bad publicity for poor working conditions and low wages, and
incidents of workforce abuses and child labour in Indonesia. Bad media publicity (and the
resulting bad reputation) resulted in protests (at the Barcelona Olympics in 1992 and
amongst college student in 1997) and public outrage around the country (America). In
1998, Nike faced a weak customer demand and ruthless criticism, while the company’s
name (Nike) became synonymous with slave wages, forced overtime and arbitrary abuse.
Nike’s attempt to rectify the matter and malpractices, and to restore its reputation,
started to pay off in 2004 when human rights activists started to acknowledge Nike’s
attempts to engage in sound and responsible practices.120 Hence, an organisation can
maintain and/or attract sales and investments in the organisation by means of a good
reputation and by appealing to the interest of stakeholders.
Example
Enron (an American energy, commodities and services company) was found to be involved
with fraudulent activities and disregard for shareholder interest. The company closed,
resulting in massive job losses.
Read more about the story at: http://www.nytimes.com/2001/12/04/business/enrons-
collapse-investors-plenty-pain-go-around-for-small-investorsfunds.html
African Bank was involved in reckless lending that resulted in the closure of some
Ellerines stores and a bail – out by the South African Reserve Bank.
Read more about the story at: www.bdlive.co.za/business/retail/2014/11/05/african-
banks-ellerine-owes-creditors-r1.3bn- documents-
show and http://www.bdlive.co.za/business/financial/2014/08/11/embattled-african-bank-
gets-bailed-out

3.The perspective that social responsibility is equivalent to financial

performance
The equal perspective views social responsibility and financial performance in synergy.
This perspective maintains that high social performance leads to better financial
performance, which again leads to better social performance. In a study done by Waddock
and Graves, they indicate that better financial performance may lead to improved social
performance, and better social performance leads to increased financial
performance.121 Orlitzky, Schimdt and Rynes tested this theory and their findings suggest
this virtuous circle.122 They maintain that there is indeed a credible link from corporate
financial performance to corporate social performance, as organisations who perform
better financially would receive higher corporate social performance ratings (they are in
financial positions to invest more into corporate social performance), and consequently
have larger impacts (can invest more resources into a community in terms of money or
people volunteering, hence have a larger impact on the community) and outcomes (can
achieve larger outcome, for example number of people skilled, number of vegetable
tunnels built, or number of volunteers) due to the size of their investments).
In order to evaluate the various perspectives above, and to have a better
understanding of the relationship between social responsibility and financial
performance, we need to look deeper into research studies, and also investigate real-
world practice.
4.7.3Evidence of social responsibility influencing
financial performance – an academic review
Numerous studies have been conducted to determine the relationship between corporate
social responsibility (CSR) or corporate social performance (CSP) and financial
performance. We are particularly interested in meta-analyses on corporate social
responsibility and financial performance, as these analyses focus on numerous studies,
over a period of time, which have all attempted to determine such relationships. Two
meta-analysis studies are worth mentioning. In these studies, the terminology Corporate
Social Performance (CSP) was used. CSP includes the corporate social responsibility
activities, processes and programmes that organisations would engage in to meet their
social responsibilities.123
It is important to understand how the academic review emphasises the influence CSP
has on financial performance. The academic review specifically looked at CSP and
corporate financial performance (CFP); and in both studies distinctions were made
between CSP and CFP. Both studies divided CFP into three subdivisions and identified a
variety of CSP strategies under four measurements. This allowed the two studies to
determine how the specific CSP measures influence specific CFP subdivisions. Table
4.5 depicts these subdivisions and measurement strategies.
On the basis of these subdivisions and measures, an overall relation between CSP and
CFP could be established. Table 4.6 summarises the meta-analysis studies and the
findings.
Evidence from these two research studies indicates that CSP (or CSR) positively
influences CFP. In addition, these studies indicated that specific factors (such as
reputation) have a more substantial effect on CSP. Reputation indexes, for example,
would have a more substantial effect on CSP, while social disclosure (what the firm
reveals in terms of its social performance) appears to have a less substantial effect on
CFP. Both studies were cognisant of moderators that might influence the findings.
Moderators that could influence the findings are risk, size and industry, and the
methodology (in the various studies) employed. For example, the relationship between
CFP and CSP might vary if one compares it between large and small organisations. In
addition, different methodologies were employed in the studies under review – which
could also influence the findings. Hence, there is a call for future research to look into
these matters. However, based on the findings of the two meta-analysis studies, the
following implications for management were suggested:
•Managers can afford to be socially responsible, as market forces do not, in general,
penalise organisations who are high in CSP.
•Use CSP as a reputation lever. Organisations who are particularly high in CSP can
benefit from public endorsements (authorisations). The JSE’s CSI Index is an
example of a form of public endorsement, boosting these companies’ reputations
(especially the top SCI performances).
•Be attentive to third-party perceptions (market analysers, society and the media).
As with Nike, third-party’s perceptions (activists, protestors and the media) had a
detrimental effect on its reputation.

Table 4.5: CFP subdivisions and CSP measurement strategies

Corporate Financial Performance (CFP)
Subdivision Scope of subdivision
Market-based Market-based subdivision included investor rate of return and share
price – an indicator of an organisation’s market value.
Accounting- Accounting-based subdivision included accounting rates of return
based indicators, and looked at return of assets (ROA) and return on equity
(ROE) – indicators of an organisation’s management/internal
efficiency.
Perceptual Survey responses on the soundness of the financial position, wise
indicator use of corporate assets and financial goal achievement relative to
competitors.

Corporate Social Performance (CSP)

Measurement Scope of measurement strategies

strategies

CSP disclosure CSP disclosure is the information that organisations are

revealing with regards to their CSR engagements and how
they are performing in these engagements. In South Africa,
these CSPs are disclosed in integrated or annual reports.
Nedbank, for example, stated in its integrated report that it
wants to fund corporate social investments (an CSR
engagement). During 2014, it spent R151 million on CSI
(Corporate Social Investment) across all of its community
support focus areas (indication of its performance).

In both studies, the researchers did a content analysis on

annual reports, letters to shareholders and other
organisational disclosures in order to draw interpretations
about organisational underlying social performances.
CSP reputation Numerous reputation indices have emerged. In South Africa,
indices the ‘Best Companies to work for’, and JSE’s ‘CRI Top
Performers’ are examples of such indices. Other reputation
indexes (CSR specific) are the Global Reptrak and the Fortune
Corporate Reputation Index.

In both studies, reputational indices such as Moskowitz

tripartite ratings and Fortune magazine ratings of an
organisation’s responsibility towards society and the
environment were analysed.
Social audits, CSP Processes of CSR include environmental assessment,
processes and stakeholder management and issues management.
observable Observable outcomes include social impacts, social
outcomes programmes and social policies. Social audits are formal
reviews of an organisation’s social initiatives and
engagements (such as charity donations, volunteer activities,
energy usage and transparency). Third parties conduct social
audits. In South Africa, the JSE SRI index is an example of a
social audit (done by a third party – the JSE) which evaluates
economic, social and governance (ESG) issues addressed by
organisations.
Managerial Includes the values and principles inherent in an organisation’s
principles and corporate culture. At Nedbank, for example, they identified
values integrity, respect, people-centredness and innovation (pushing
beyond the norm) as values that they foster within their
company and company’s culture.
Sources: Orlitzky, M, Schmidt, FL & Rynes, SL. 2003. Corporate social and financial
performance: A meta-analysis. Organization Studies, 24(3):403–441; Allouche, J & Laroche, P.
2005. A meta-analytical investigation of the relationship between corporate social and financial
performance. Revue de Gestion des Ressources Humaines, 57:18–41; Wood, DT. 1991. Corporate
Social Performance Revisited. The Academy of Management Review, 16(4):691–718; Reputation
Institute. 2016. About RepTrak. [Online].
Available: https://www.reputationinstitute.com/reputation-measurement-services/reptrak-
framework [14 March 2016]; Fortune. 2016. Fortune 500. [Online].
Available: http://fortune.com/worlds-most-admired-companies/ [14 March 2016];
Investopedia. 2016. Social Audit. [Online].
Available: http://www.investopedia.com/terms/s/social-audit.asp [14 March 2016]; Nedbank
Group Limited. 2014. Integrated report for year ended 2014. [Online].
Available: https://www.nedbank.co.za/content/dam/nedbank/site-
assets/AboutUs/Information%20Hub/Integrated%20Report/2014/NedbankIR2014.pdf [15
March 2016].

Table 4.6: Overall findings of meta-analyses studies

Sources: Orlitzky, M, Schmidt, FL & Rynes, SL. 2003. Corporate social and financial
performance: A meta-analysis. Organization Studies, 24(3):403–441; Allouche, J & Laroche, P.
2005. A meta-analytical investigation of the relationship between corporate social and financial
performance. Revue de Gestion des Ressources Humaines, 57:18.
4.8Conclusion

In this chapter, we focused on the rationale for corporate citizenship, defined ethics and
morality and differentiated between the most prominent ethical theories. Against this
background, we explained the adage ‘doing good to do well’ and evaluated the role of
legislation and corporate citizenship. The latter part of this chapter focused on the
relationship between corporate citizenship and corporate financial performance.
Considering the arguments on corporate citizenship and financial performance, we
emphasise that corporations can (and should) engage in good corporate citizenship – and
benefit from it when evaluating corporate financial and overall performance.

Multiple-choice questions
1.Choose the definition that best defines ethics:
a.Set of moral principles, norms or standards that directs individual behaviour
b.Offers explanations that connect acting justly with the achievement of a ‘good’
c.Is the underlining values (or an individual’s principles) that decisions are
based on
d.Concerns individual or collective behaviour and how individuals should
behave

2.Which one of the listed questions below relates to the Ethics of Duty perspective?
a.Does the action benefit me?
b.How would a person of integrity act in this situation?
c.Does the action treat the stakeholder with respect and dignity?
d.Will the action result in the greatest amount of good for the greatest amount
of stakeholders involved?

3.Which one of the scenarios represents a challenge for a decision maker when
considering the utilitarianism perspective?
a.Balancing fair procedures and fair outcomes
b.Not taking consequences into account, or underplaying them
c.Being short-term orientated and taking advantages of opportunities
d.Allocating quantities to abstract concepts such as emotions to determine costs
and benefits

4.Which one of the following options is not an implication for management

considering the influence corporate social performance has on corporate financial
performance?
a.Managers can afford to be socially responsible.
b.Managers can use corporate social performance as a reputation lever.
c.Managers can use social audits to boost company performance.
d.Managers should be attentive to stakeholder perceptions.

5.According to the findings of Orlitzky, Schimdt and Rynes, and Allouche and
Laroche, which of the following relationships are correct?
a.Reputation indices strongly correlate with corporate financial performance.
b.Market-based measures indices strongly correlate with corporate social
performance.
c.Environmental performance indicates a smaller correlation with corporate
social performance.
d.Managerial principles and values are strongly correlated with corporate
financial performance.
Discussion questions
1.Refer to the ethical theories discussed in the chapter. If you had to choose any
one theory to make an ethical decision, which one would it be? In your discussion,
address the following points:
a.Build an argument that justifies your chosen theory.
b.Look at the disadvantages of your chosen approach.
c.Include the key points (questions or principles) that you should always
consider in your chosen theory.

2.Compare the arguments on corporate citizenship and profitability in your own

words and formulate your own argument on corporate citizenship and
profitability. Substantiate your argument by finding two research studies that
correlate with your thinking.

3.Summarise the academic evidence on corporate citizenship and profitability in

one short paragraph. Your summary should include evidence from three additional
articles that substantiate the academic review on social responsibility and financial
performance. In addition, your summary should include the management
implications that the evidence highlights.

Additional reading
Articles:
•Little, AD. The Business Case for Corporate
Citizenship: http://www.csrwire.com/pdf/Business-Case-for-Corporate-
Citzenship.pdf
•Visser, W. 2005. Corporate Citizenship in South Africa: A review of progress since
democracy. Journal of Corporate Citizenship, 18:29–38.
•De Colle, S & Werhane, PH. 2008. Moral Motivation Across Ethical Theories: What
Can We Learn for Designing Corporate Ethics Programs? Journal of Business Ethics,
81:751–764.

Company profiles:
•Nedbank’s 2014 integrated
report: https://www.nedbank.co.za/content/dam/nedbank/site-
assets/AboutUs/Information%20Hub/Integrated%20Report/2014/NedbankIR201
4.pdf

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how to do it right. 5th edition. Hoboken, NJ: Wiley; Crane, A & Matten, D.
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globalization. 3rd edition. New York: Oxford University Press.
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how to do it right. 5th edition. Hoboken, NJ: Wiley.
30.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
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40.Ibid.
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44.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
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45.Ibid.
46.Ibid.
47.Fardelle, JA. 2008. The recovery model: Discourse ethics and the retrieval of the
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50.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
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51.Ibid.
52.Deigh, J. 2010. An introduction to ethics. New York: Cambridge University Press.
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73.Weiss, JW. 2009. Business ethics: A stakeholder and issue management approach.
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75.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
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76.Forcada, JW, Groe, GM, Keller, R, Lindberg, A, Vickers, MR & Williams, R. 2006.
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77.Melé, D. 2009. Business ethics in action: Seeking human excellence in
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78.Pucetaite, R, Lamsa, A & Novelskaite, A. Building organisational trust in a low-
trust societal context. Baltic Journal of Management. 5(2):197–217.
79.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. 3rd edition. New York: Oxford University
Press.
80.Ibid.
81.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
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82.Jennings, MM. 2012. Business: it’s legal, ethical and global environment. 9th
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83.Ecolex. Nd. Legislation: Record details (return). [Online].
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FAOC085626&index=documents [15 January 2015].
84.Mail and Guardian. 2013. Major supermarkets exposed in meat-labels scandal.
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85.News24. 2015. Woolworths recalls ice cream products. [Online].
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20151013 [15 January 2015].
86.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
8th edition. Stamford, CT: Cengage Learning.
87.Ibid.
88.Ward, A. 2012. Shell and BP accused of collusion in South Africa.
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shell-and-bp-accused-collusion-south-africa [15 January 2015].
89.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
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90.Australian Competition and Consumer Commission. Nd. Anti-competitive
behaviour. [Online]. Available: https://www.accc.gov.au/business/anti-
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91.South Africa Info. Nd. South Africa competition law. [Online].
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on-policy.htm#.VXV62kYpp2A [8 June 2015].
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93.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
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94.SABS. Nd. Giving you the quality edge. [Online].
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95.Acts Online. 2013. Consumer Protection Act, 2008 (Act No. 68 of 2008). [Online].
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96.Acts Online. Electronic Communications and Transactions Act, 2002 (Act No. 25
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97.Nedbank Group Limited. 2014. Integrated report for year ended 2014. [Online].
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98.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
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101.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
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102.Melé, D. 2009. Business ethics in action: Seeking human excellence in
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103.Forcada, JW, Groe, GM, Keller, R, Lindberg, A, Vickers, MR & Williams, R. 2006.
The ethical business: Doing the right things in the right ways, today and tomorrow.
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104.Melé, D. 2009. Business ethics in action: Seeking human excellence in
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105.Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about
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106.http://www.investopedia.com/articles/basics/03/031703.asp [10 March
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107.NI Business Info. Nd. Measure performance and set targets. [Online].
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108.Matten, D & Crane, A. 2005. Corporate citizenship: Towards an extended
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109.Ibid.
110.Ibid.
111.Friedman, M. 1970. The social responsibility of business is to increase its
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769.
PART 2
How
chapter
Responsible leadership
Tersia Botha
5
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Differentiate between the terms ‘management’ and ‘leadership’
•Distinguish between the various approaches to leadership
•Explain responsible leadership
•Explain ‘values’, a ‘value system’ and ‘value creation’ in a corporation
•Explain the practice of responsible leadership
KEYWORDS AND CONCEPTS
-areas of management
-Blake and Mouton’s leadership approach
-charismatic leadership
-contemporary leadership approaches
-Fiedler’s leadership approach
-Hersey and Blanchard’s leadership approach
-leadership
-leadership approaches
-leadership styles approach
-leadership traits approach
-levels of management
-Likert’s leadership approach
-manager
-management
-path-goal leadership approach
-responsibilities of management
-responsible leadership
-responsible leadership in action
-servant leadership
-stakeholder
-Tannenbaum and Schmidt’s leadership approach
-transactional leadership
-transformational leadership
-value creation
-value system
-values
OPENING CASE SCENARIO

Johnson & Johnson1

James Burke’s biggest career challenge came, as chairman and CEO of Johnson &
Johnson (J&J), in 1982 when seven people died in the Chicago area after taking
cyanide-laced, extra-strength Tylenol capsules, a pain reliever sold by J&J
subsidiary McNeil Consumer Products Co. The most prominent, and by now
legendary, example of good crisis management remains J&J’s handling of the
Tylenol disaster. James Burke’s actions in the weeks after the first death, which was
reported on 30 September 1982, have been the subject of case studies in numerous
business schools and management texts, not to mention the impetus for a new sub-
speciality in public relations. Burke not only preserved the reputation of his highly
respected consumer company, but he saved the Tylenol brand. At no point did he try
to back off from the company’s responsibility in the incident, even though it was later
proven that the tampering had occurred at the retail level. ‘When those people died,’
says Burke, ‘I realised there were some things we hadn’t done right. Responsibility
for that incident had to be, in part, ours. It wasn’t easy to take responsibility but it was
clear to us, to me especially, that whether we could be blamed for the deaths or not,
we certainly could have helped to prevent them. How? Through packaging. The fact
is that the package was easily invaded. You could take the capsule out, open it up,
put the poison in and then put the capsule back together. It was easy to do. I felt,
and still feel, that it was our responsibility to fix it.’ Burke’s conviction, and his total
commitment to the safety of the customer, led the company to spend $100 million on
a recall of 31 million bottles of Tylenol, which before the tampering, had been the
country’s best-selling over-the-counter pain reliever. The recall decision was a highly
controversial one because it was so expensive. There were plenty of people within
the company who felt there was no possible way to save the brand, that it was the
end of Tylenol. Many press reports said the same thing. But Burke had confidence in
J&J and its reputation, and also confidence in the public to respond to what was
right. It helped turn Tylenol into a billion dollar business. Within eight months of the
recall, Tylenol had regained 85% of its original market share, and a year later, 100%.
The person who tampered with the Tylenol was never found. In 1984, J&J replaced
capsules with caplets, and in 1988, the company introduced gel caps, which look like
capsules but cannot be taken apart.
Source: Reproduced with permission of Reyna S Dominitz.
5.1Introduction
Corporations, whether profit seeking or not-for-profit, have one goal in common, namely
to create value for their stakeholders over the short-, medium- and long-term. Various
inputs, such as capital, natural resources, human resources, information and so on, are
used to create value. Traditionally, a corporation’s success has been determined and
based on its financial, performance and corporate reporting has focused on this.
However, stakeholders in twenty-first century corporations require much more from
these corporates. It is widely recognised that a corporate’s responsibility is much wider
than realising a healthy profit. The opening case scenario outlining Johnson & Johnson’s
handling of the Tylenol crisis in 1982, clearly illustrates this statement. According to
Mervyn E King,2 Chairperson of the International Integrated Reporting Council,
corporations are responsible for and should report on the resources used by the
corporation, its ongoing relationships with key stakeholders; its business model; its
output being its products and services; and the impact that its products or services have
on society, the environment and its key stakeholders, such as customer satisfaction.
These requirements are only possible through responsible leadership in corporations.
This chapter first explores the meaning of the terms ‘management’ and ‘leadership’
and the differentiation between these terms. Various traditional and contemporary
leadership approaches are examined, focusing on the most recent development in the
field, namely responsible leadership. The chapter concludes with a discussion of the
practice of responsible leadership.
5.2Defining management
Often we hear statements such as; ‘Something is wrong with the management of this
company. We are never paid on time, we keep running out of stock and customers are
complaining about our service’ or ‘We need to seek advice from management since we could
not solve the personnel problem in the section’ or ‘The management of the company was
fired because of the waste material that was dumped in a river’.
Who is corporate management and what are the responsibilities of a manager? A
manager can be defined as an individual who is responsible for a certain group of tasks,
or a certain subset of the corporation. A manager has a staff of people reporting to him or
her. The manager is responsible for the successful execution of the tasks assigned to his
or her section to contribute to the overall goals and objectives of the corporation.
Together with other managers of the same corporation, they make up the corporate
management team, responsible for attaining the vision, mission, goals and objectives of
the corporation.
What are the responsibilities of corporate management? One good answer came from
the late Peter Drucker, whose name stands out above all others in the century-long
history of management studies. Drucker 3 divided the responsibilities of
management into five basic tasks:
1.The first task is to set goals and objectives for the corporation. This is referred to
as the planning task of the manager, which also involves determining what needs to
be done in order to meet corporate goals and objectives.
2.The second task of a manager is to organise, which involves an outline of the
tasks and activities that needs to be done. Jobs need to be designed and assigned to
employees and worker relationships need to be defined. Finally, organising also
involves the development of a corporate design or structure.
3.The third task of a manager involves communicating and motivating staff. The
manager creates a team out of the staff assigned to him or her through decisions
such as remuneration, placement, and promotion.
4.The fourth task of a manager involves the development of people. The
development of people has taken on added importance in the new economy.
5.The fifth and last task, identified by Drucker, is the measurement of performance.
The corporate manager needs to establish appropriate standards and measures,
and analyse actual performance and take appropriate action.

The tasks of a manager, as explained above, will be performed by all managers, at

all levels of management and in all functional areas of management.
5.3The
levels and functional areas of
management
Corporate managers function at various levels of a corporation. A small corporation may
have only one layer of management, whereas a large corporation may have multiple
layers of management. In general, corporations have three layers of management: top-
level managers, middle-level managers and lower-level managers.
Top managers are responsible for the corporation as a whole and decide with whom
final authority and responsibility for executing managerial tasks resides. Top managers
formulate the vision, mission, overall and long-term goals and strategies for the
corporation. They are responsible for designing the broad organisational structure,
leading the corporation and controlling it. They determine the values and corporate
culture of the corporation.
Middle managers are responsible for smaller departments or sections in a corporation.
They formulate medium-term goals for functional areas, organise and control these areas.
Middle managers implement the policies, rules and procedures as formulated by top
management. Middle managers are typically the corporate marketing, financial, human
resources, procurement, and operations managers.
Lower managers are responsible for smaller segments of the departments or sections
in a corporation. They plan over the short term, and focus on day-to-day activities that
need to be performed to attain departmental and ultimately organisational goals. Lower
managers apply policies, procedures and rules. They focus on attaining high levels of
productivity, organise the subsections, motivate individuals in their sections and control
the outputs of these individuals.
Our next question is: ‘Who are the corporate leaders and what are their responsibilities?’
5.4Defining leadership
Leadership is a topic that has fascinated researchers for a very long time. Consequently,
various definitions of leadership are found in literature. Quite simply, a leader is one who
leads. In this simplistic definition, we find a wide range of implications of what makes a
person a leader and the nature of leadership. First, to be a leader, there need to be
followers. Without followers, the term ‘leader’ is just an empty title. The second
implication of this definition is that a leader is out front, setting the pace, determining the
standard and direction of movement. Third, the definition also implies that a leader is not
necessarily an individual – it can be a group, a corporate body, an industry or even a
country. How often do we hear that Johnson & Johnson is the ‘leader’ in the
pharmaceutical industry, that Microsoft is the ‘leader’ in the computer software industry
and that the United States is the ‘leader’ of the free world? These entities are leaders in
exactly the same way as individuals are leaders – they have followers, they set the pace,
they are going to where others want to go. In short, they lead! 4 Our definition of
leadership says nothing about having to be the boss, in other words, being a manager
appointed in a formal position, to be a leader. Some managers do lead their followers well;
other managers do not lead at all. Being a manager does not necessarily mean that the
person is a leader. Also, the definition says nothing about having to be a subordinate in
order to be a follower. Following a leader is an act of choice – a free will – as opposed to
being pushed, pulled or prodded. Positions of authority in an organisational setting are
often called ‘leadership positions’, thereby creating confusion between management
authority and leadership. However, leadership and management are not the same.
How does leadership differ from management?
5.5Management versus leadership
Although management and leadership share many similar characteristics and outcomes,
the two terms also differ in many ways. Management and leadership are complementary
qualities that are inexorably (inevitably) linked to each other.
The manager, on the one hand, is a person appointed in a formal position in an
organisation. A manager commands subordinates because the position gives him or her
the right to command. A subordinate obeys the manager because he or she is
contractually obliged to obey. Leadership, on the other hand, originates from a
relationship between the leader and the follower. A leader may command because the
follower allows him or her to command. A leader influences, inspires, motivates and has
various responsibilities as a leader.
As an expert in leadership and organisational change, John Kotter 5 argues that
corporations need both managers and leaders to be successful. Managers are needed to
deal with the complexity in their corporations, by performing essential managerial
functions of planning, organising and controlling in a management environment
characterised by constant change. Leaders are needed to take a corporation into the
future, finding opportunities that are coming in faster and faster. Leaders are needed to
successfully steer the corporation towards the accomplishment of its vision and mission,
ensuring the buy-in of people, empowering people and producing useful organisational
change. Not surprisingly, leadership is one of the most researched topics in business
management. In the next section, we will focus on leadership approaches and the most
prominent research in this field.
5.6Leadership approaches
Leadership approaches can broadly be categorised in the leadership traits approach,
leadership styles approaches and the contemporary approaches to leadership.
5.6.1Leadership traits approach
The history of leadership can be traced back to the traits theory – a conceptual model
that aimed to identify and analyse the personal qualities of a leader. Behind the basic
traits theory was the belief that one is born to lead, and that certain traits or
characteristics distinguish leaders from non-leaders. Furthermore, researchers believed
that once these traits are identified and isolated, potential leaders could be recognised
early so that the process of electing, appointing, promoting and elevating a person to
leadership could be more effective. The approach could also avoid the frustration of
elevating a person to leadership who could not lead. Research into the traits approach
continued into the 1960s, although the popularity thereof began to wane significantly in
the beginning of the 1940s. Research showed a weak link between traits and leadership.
With the traits theory on the wane, the need was felt to search for a model to replace this
approach. Ohio State University is recognised as the place where the search for an
alternative commenced in 1945, continued at the University of Michigan in 1950. Out of
this research came what is known as the leadership styles approaches, theories that
dominate the literature to this day.
5.6.2Leadership styles approaches
The leadership styles approaches evolved out of the desire to replace the belief that
managers are born, with a theory that shows that leaders can be made. These theories
were successful in achieving acceptance and dominance in the literature of management
and leadership. They also underwent a shift in focus from what makes a person a leader
to that which makes a leader effective. The most prominent leadership styles approaches
are briefly discussed below.

Likert’s behavioural approach to leadership

Studies at Michigan during the 1960s, under the guidance of Likert, identified two basic
forms of leadership behaviour, namely a task-orientated leader behaviour and employee-
orientated leader behaviour. A task-orientated (or autocratic) leader is mainly concerned
with the careful supervision and control of subordinates to do their work and to perform
on an acceptable level. An employee-orientated (or democratic) leader focuses more on
motivation and participative management to get the work done, while focusing on people,
their needs and their progress.
On the basis of Likert’s approach to leadership, the leadership grid was developed by
Robert Blake and Jane Mouton in 1964.

Blake and Mouton’s leadership grid

The leadership grid has two axes, with the task-oriented leadership style situated on the
horizontal axis and the employee-oriented leadership style situated on the vertical axis.
Five different leadership styles are then identified:
1.First, an impoverished leadership style is identified, where leaders portray
minimum effort to get the work done and show low concern for production and a
low concern for people. Such a leader will only work to meet deadlines and as a
result disharmony and disorganisation will prevail.
2.Second, an autocratic leadership style, where leaders demand performance with
minimum consideration for people and a high concern for production. This
leadership style is also called dictatorial – employees’ needs are not taken care of
and they are simply a means to an end. This style is associated with strict policies
and procedures, high labour turnover and poor staff morale.
3.Third, middle-of-the-road leadership, where leaders accept adequate performance
with a combination of concern for people and concern for production. Neither
employee nor production needs are met following this leadership style.
4.Fourth, the country-club leader illustrates a high concern for people and
sound relationships, with little concern for production or getting the job done. This
is a collegial leadership style, where the leader believes that good treatment of
subordinates will lead to self-motivation and will find people working hard on their
own. The disadvantage of this style is the fact that a low focus on tasks can hamper
production and lead to unsatisfactory results.
5.Fifth, team leadership is identified as being an ideal leadership style, where
leaders portray a high concern for people and production. Achievement is attained
by workers who are motivated and happily pursue the goals of the corporation. The
leader believes that commitment, trust and respect are key elements in creating a
team culture that will result in high employee satisfaction and production.

Tannenbaum and Schmidt’s continuum of leadership behaviour

A further study in the attempt to develop an ideal leadership style was conducted by
Tannenbaum and Schmidt in 1958. Their research led to the development of a continuum
of leadership styles between the extremes of a task-oriented and employee-oriented
leader. The continuum presents a series of leadership styles that can be used in various
situations, where each style has a degree of authority that can be applied by the leader as
well as the corresponding degree of freedom within which followers can act.
To complement the trait theory, the leadership grid and leadership continuum,
researchers started to identify factors in every situation that have an influence on the
effectiveness of leadership. Researchers realised that a leader’s success can only partially
be attributed to their traits and behaviour. The success of a leader is primarily
determined by how their traits and behaviour satisfy the needs of their followers and the
situation. Leaders need to have the ability to change their style and approach to fit the
situation. The most prominent leadership approaches focusing on this, are Fiedler’s
contingency model, Hersey and Blanchard’s leadership model, and Robert House’s
path-goal theory.

Fiedler’s contingency theory of leadership

Fiedler’s theory postulates that successful leadership depends on the match between the
leader, the follower and the situation, and how well his or her style fits the situation. An
individual’s personality is relatively stable, though it can be changed. Fiedler suggests
that, in order to improve effectiveness, the situation should be changed to fit the leader.
This is called ‘job engineering’ or ‘job restructuring’. The box on the previous page gives
examples of situations and the most appropriate leadership style that fits these
situations.
Example
•Leaders are needed in natural disasters such as a fire or flood. In these situations, the
tasks are unstructured and the person who emerges as a leader to direct the team’s
activities, does not know his or her followers personally. A task-oriented leader is the
most appropriate style in these situations.
•Generally, blue-collar workers want to know exactly what is expected from them, what
they are supposed to do and when they are supposed to do it. Their work environment is
usually highly structured. In this situation, a task-oriented leadership style is the most
appropriate one.
•A relationship-oriented leadership style can be appropriate in an environment where the
situation is moderately favorable or certain. For example, research scientists do not like
leaders to structure their tasks for them. They like to follow their own creative leads to
solve problems. In this situation, a considerate style of leadership is preferred over a
task-oriented leadership style.

Hersey and Blanchard’s leadership model

Hersey and Blanchard’s leadership model is based on the assumption that the most
effective leadership style for a particular situation is determined by the maturity of the
followers. Hersey and Blanchard developed four leadership styles that are needed from
a leader: telling and directing, selling and coaching, participating and supporting, and
delegating.
1.Telling and directing. Following this leadership style, the leader defines the tasks
of his or her followers and closely supervises them. Inexperienced and first-time
employees, who generally lack competence, need this type of leadership style.
2.Selling and coaching. Following the selling and coaching style, the leader still
defines and assigns roles and tasks of his or her followers, but the leader is more
receptive in getting ideas and suggestions from followers. This style is suited for
less experienced subordinates who still need guidance and supervision by their
leaders.
3.Participating and supporting. Following this style, the leader gives much control
and minimal supervision to his or her followers. Experienced followers, who still
need emotional support from leaders, will benefit from such a leadership style.
4.Delegating. In a situation where followers have the ability to resolve their own
problems and have the ability to work in groups and teams, a leader can adopt a
delegating style.

Robert House’s path-goal theory

The leadership approach developed by Robert House in 1971 (and revised in 1996) is
one of the most respected approaches to leadership, postulating that it is the leader’s job
to assist his or her followers in attaining their goals and to provide them with the
necessary direction and support to ensure that their goals are compatible with the overall
vision, mission and goals of the organisation. The term ‘path-goal’ is derived from the
premise that effective leaders help clarify the goals of their followers, the path they need
to follow to achieve the goals and to ensure that these goals are aligned to organisational
goals.
Research into leadership is still continuing and moving in various directions. New lines
of enquiry are opening in an effort to construct an ultimate leadership approach. Some of
the contemporary approaches to leadership are discussed below.
5.6.3Contemporary leadership approaches
Charismatic leadership
Charisma can be defined as having an appeal that draws people and that helps an
individual to have power over followers. Winston Churchill, Gandhi and Nelson Mandela
are often referred to as charismatic leaders. Within a business management
environment, charismatic leadership can be defined as the guidance provided by one
or more individuals in a corporation seen as heroic or inspiring and who have therefore
been granted organisational power to make dramatic changes and extract extraordinary
performance levels of followers. Charismatic leaders have traits such as self-confidence,
vision and the ability to articulate the vision, strong convictions about the vision,
unconventional behaviour and environmental sensitivity. Jack Welch might be one of the
best examples of a charismatic leader in business. He was born in 1935, and started his
career as a chemical engineer in 1960. In 1981, he became the youngest chief executive
officer in General Electric’s history. As a leader, Welch went out of his way to develop
positive relationships with General Electric employees and customers. He talked
informally with followers. At the same time, Welch did not hesitate to cut costs and lay-
off employees he viewed as poor performers. His leadership style engendered a sense of
value and pride in the organisation.

Transactional leadership
Transactional leadership is often called managerial leadership. It focuses on the role of
the leader in terms of supervision, organisation and group performance. The
transactional leader promotes the compliance of his or her followers through rewards
and punishments. These types of leaders are not looking for change. Instead, they prefer
to keep things the same, and pay attention to followers’ work in order to find errors and
deviations. Transactional leaders exchange tangible rewards for the work and loyalty of
their followers. One of the best examples of a transactional leader in business is Bill Gates.
He was born in Seattle in 1955, where he met Paul Allen at the Lakeside School, where
they both developed computer programs as a hobby. In 1975, Gates and Allen started
Microsoft, and by 1975, the company made a gross profit of US$2,5 million. In 1985,
Microsoft launched Windows, which is a world-class product earning revenues of billions
of dollars for the company. As a transactional leader, Gates is very concerned with new
product developments, he asks difficult questions from his followers until he is satisfied
that the teams are on track with the company’s stated goals.

Transformational leadership
A transformational leader enables his or her organisation to make a dramatic shift. He
or she motivates and inspires his or her staff by establishing a clear vision of the future
state and defining the processes required to achieve it. Leadership traits typically
associated with transformational leaders include confidence, courage and vigour. This
type of leader correctly anticipates market demand and creates competitive products.
Transformational leaders introduce disruptive ideas and change the way the rest of the
world functions. The best examples of transformational leaders can be found in the
entertainment industry. Jack Dorsey of Twitter and Mark Zuckerberg of Facebook
developed social media technology – they recognise how to apply technology use to social
connections.
Table 5.1 provides a comparison between transactional and transformational
leadership.

Servant leadership
Servant leadership is often viewed as a leadership philosophy and a set of leadership
practices. The servant leader shares his or her power with his or her followers, puts the
needs of others first and helps followers to develop and perform as highly as possible.
Larry Spears identified ten characteristics of servant leaders: listening, empathy, healing,
awareness, persuasion, conceptualisation, foresight, stewardship, commitment to the
growth of others, and building community: 6

Table 5.1: Transactional versus transformational leadership

Transformational leadership
Transactional leadership

Transactional leaders portray a Transformational leaders portray a proactive

reactive leadership style. leadership style.
Transactional leaders perform Transformational leaders focus on
leadership within the prevailing organisational change and the implementation
organisational culture. of new ideas and new ways of doing things.
Transactional leaders use rewards Transformational leaders use higher ideals and
and punishments to achieve high moral values to achieve organisational
organisational objectives. objectives.
Transactional leaders focus on Transformational leaders focus on the interest
self-interest. of the organisation.
1.Listening. Listening is probably the most important skill required from the
servant leader. The servant leader needs to be committed to listening intently to
others, listening receptively to what is being said and what is not.
2.Empathy. The servant leader should strive to understand and empathise with
others and to accept and recognise them for their uniqueness. The most successful
servant leaders are those who have become skilled empathetic listeners.
3.Healing. The healing of relationships is a powerful force for transformation and
integration. Servant leaders should have the ability to heal relationships.
4.Awareness. General awareness and self-awareness strengthens the servant
leader. Awareness helps one in understanding issues involving ethics, power and
values. It lends itself to being able to view most situations from a more integrated,
holistic position.
5.Persuasion. Servant leaders should have the ability to rely on their ability to
persuade their followers to make certain decisions, rather than on their positional
authority. This characteristic probably offers the clearest distinction between the
traditional authoritarian leadership style and that of a servant leadership style.
6.Conceptualisation. Servant leaders need to be able to see the big picture, to dream
big and to nurture their dreams. They need to see and think beyond the day-to-day
realities.
7.Foresight. Servant leaders need to be able to foresee the possible outcome of a
decision/problem/situation. This characteristic enables the servant leader to
understand the lessons from the past, the realities of the present, and the likely
consequence of a decision for the future.
8.Stewardship. The servant leaders should have the ability to hold their institutions
in trust for the greater good of society. Servant leadership, like stewardship,
assumes first and foremost a commitment to serving the needs of others. It also
emphasises the use of openness and persuasion, rather than control.
9.Commitment to the growth of people. Servant leaders should be committed to the
personal and professional growth of each and every individual in the organisation.
10.Building the community. The servant leader should recognise the need to build
the community and make it a better place to live in.

Responsible leadership
The term ‘responsible leadership’ is becoming more and more common across the
global corporate community. But it comes in many different guises, such as responsibility,
employee engagement, corporate social responsibility, resilience and compliance.
Responsible leadership is about making business decisions that take into account all
stakeholders, such as shareholders, employees, business partners, suppliers, the
environment, the community and future generations (stakeholder engagement will be
discussed in detail in Chapter 8). Responsible leadership is a social-relational and ethical
phenomenon, occurring in social processes of interaction.
The leadership approaches and styles that we have discussed thus far focus on the
relationships between leaders and their followers in a corporation, where followers are
the subordinates in the corporation. Responsible leadership, however, goes beyond this
notion, and takes place in interaction with a multitude of followers as stakeholders, inside
and outside the corporation. In the next section, we will discuss responsible leadership
in more detail.
The example box on the next page illustrates leadership misconduct, affecting the lives
of numerous individuals, organisations, shareholders, clients, business partners,
industries, countries and various other stakeholders. Disasters like these force us to think
and implement new leadership styles, addressing the importance of all stakeholders to
the corporation. One such approach is the responsible leadership approach.
Example
Losing trust in today’s leaders
Today’s leaders act in a global, complex, interconnected and constantly changing business
environment. Furthermore, they have to lead in a business environment that is undergoing a
crisis in trust, lost over the years because of environmental disasters, accounting scandals
and ethical misconduct. The following two examples relate to an environmental disaster and
an accounting scandal.

Environmental disaster: Shell Nigeria 7

Shell Nigeria, whose joint ventures account for more than 21% of Nigeria’s total petroleum
production, started its business in the country in 1937 when it was granted an exploration
license. In the 1990s, tensions arose between the native Ogoni people of the Niger Delta
and Shell. Ogoni people were concerned that very little of the money earned from oil in their
land was getting to the people that lived there. Furthermore, the environment was damaged
by recurring sabotage of pipelines operated by Shell. Large protests were organised against
Shell and their government. Consequently, Shell withdrew its operations in the Ogoni areas.
A 2001 Greenpeace report mentioned two witnesses that the company and the Nigerian
military ‘bribed’ by promising money and jobs at the facility. Shell gave money to the military
and was blamed for contaminating the Niger Delta with oil. In December 2003, Shell Nigeria
acknowledged that the conflict in the Niger Delta makes it difficult to operate safely and with
integrity and that it sometimes feeds conflict by the way it awards contracts, gains access to
land and deals with community representatives. Shell declared that it intends to improve on
these practices.
The most significant environmental damage from oil and gas operations in the Niger Delta
is through crude oil theft and sabotage of facilities resulting in oil spills, as well as illegal
refining. The spills are sometimes made worse because communities occasionally deny
access to verify the spill and stop the cause of the leak. Unauthorised third-party interference
with pipelines and other infrastructure was responsible for around 85% of all oil spill
incidents from SPDC-JV facilities in the Niger Delta in 2015.
On 25 March 2014, Shell Nigeria declared a force majeure (clause freeing the company
from contractual obligations due to a circumstance beyond its control) on crude oil exports
from its Forcados crude oil depot, which stopped operations due to a leak in its underwater
pipeline. While it struggled repairing the pipeline, Shell announced a force majeure on
Nigerian crude oil exports.

Accounting scandals: Enron8

The Enron Corporation was an energy company based in Houston, Texas. The Enron
scandal, revealed in October 2001, has been the subject of case studies in numerous
business schools and management texts and is probably the most quoted case study on
mismanagement and corruption. The scandal resulted in Enron going bankrupt, together
with the de facto dissolution of Arthur Andersen, which was one of the five largest audit and
accountancy partnerships in the world.
Kenneth Lay founded Enron in 1985. Jeffrey Skilling was hired a few years later. He
developed executives who, by the use of accounting loopholes, special-purpose entities, and
poor financial reporting, were able to hide billions of dollars in debt from failed deals and
projects. Chief financial officer Andrew Fastow, and other executives, misled Enron’s board
of directors and audit committee on high-risk accounting practices.
Enron shareholders filed a $40 billion lawsuit after the company’s stock price, which
achieved a high of US$90,75 per share in mid-2000, plummeted to less than $1 by the end
of November 2001. The US Securities and Exchange Commission (SEC) began an
investigation, and rival Houston competitor Dynegy offered to purchase the company at a
very low price. The deal failed, and on 2 December 2001, Enron filed for bankruptcy
under Chapter 11 of the US Bankruptcy Code. Enron’s $63,4 billion in assets made it the
largest corporate bankruptcy in US history until WorldCom’s bankruptcy the next year.
Enron’s compensation and performance management system was designed to retain and
reward its most valuable employees, but the system contributed to a dysfunctional corporate
culture that became obsessed with short-term earnings to maximise bonuses. Employees
constantly tried to start deals, often disregarding the quality of cash flow or profits, in order to
get a better rating for their performance review. Additionally, accounting results were
recorded as soon as possible to keep up with the company’s stock price. This practice
helped ensure deal-makers and executives received large cash bonuses and stock options.
Enron’s management was compensated extensively using stock options, causing it to create
expectations of rapid growth in efforts to give the appearance of reported earnings to meet
Wall Street’s expectations.
Many executives at Enron were indicted on a variety of charges and some were later
sentenced to prison. Enron’s auditor, Arthur Andersen, was found guilty in a US District
Court of illegally destroying documents relevant to the SEC investigation which voided its
licence to audit public companies, effectively closing the business. By the time the ruling was
overturned at the US Supreme Court, the company had lost the majority of its customers and
had ceased operating. Employees and shareholders received limited returns in lawsuits,
despite losing billions in pensions and stock prices. As a consequence of the scandal, new
regulations and legislation were enacted to expand the accuracy of financial reporting for
public companies.
The mismanagement behind Enron’s fall can be attributed to a variety of ethical causes,
centered on executive greed and a lack of corporate social responsibility.

5.7Responsible leadership
As stated earlier, today’s leaders act in a global stakeholder society, in which corporations
are expected to be responsible and accountable not only to shareholders for financial
performance, but also to be accountable and responsible to all stakeholders for the
corporate’s impact on the economy, the environment and society at large. In order to be
viable and sustainable over the long-term, leaders need to ensure that they act
responsibly and build (or in some cases rebuild) not only the trust of shareholders, but
also the trust of all other stakeholders. Responsible leaders should be delivering on the
‘triple bottom line’ and create value for all stakeholders. Triple bottom line is an
accounting framework with three parts – social, environmental and financial dimensions.
This is also called the pillars of sustainability.
Such a view on the responsibility of leaders, which often is referred to as ‘stakeholder
theory’, starts with the assumption that values are necessary and explicitly a part of doing
business.9 In what follows, we first focus on values and value creation in corporations,
followed by a discussion of the responsibilities of a leader towards the key stakeholders
of a corporation. Thereafter, we investigate the various roles that the responsible leader
needs to play in successful corporations. We conclude our discussion of responsible
leadership with a discussion of responsible leadership in action.
5.7.1Values and value creation in corporations
A person’s values can be defined as the principles that will determine his or her her
behaviour in various situations and his or her judgement of what is important and correct
behaviour in life. A person’s values will determine how he or she wants to behave –
consequently, it will also define his or her ethical actions in life. A value system goes one
step further, and can be described as a set of connected (or interdependent) values.
Therefore, a person’s value system will be the collection of all his or her connected values.
This value system will provide the individual with a reference for what are acceptable,
important, consistent values, actions and behaviour. This value system will then
determine the individual’s behaviour. Over time, the public expression of personal values
that groups of people find important in their day-to-day lives lay the foundations of law,
custom and tradition. A corporation can be such a group and needs to identify and define
a set of values that represent the ethical ideals of the corporate.
Leaders play an essential role in determining the values and a value system for their
corporate. The values of the corporation should be the basis upon which the vision,
mission, goals and strategies of the corporation are built. Effective and efficient
corporations identify and develop a clear, concise and shared meaning of values/beliefs,
priorities and direction that everyone understands and can contribute to. Once defined,
organisational values will impact every aspect of the corporation, every decision that is
made, every action that is taken. What is even more important is that a leader should
ensure that organisational values are supported and nurtured.
The values of a corporation will contribute positively to the success of the corporation,
only if the following occur:
•The corporation’s vision, mission and goals are grounded in its identified values.
•All members of the organisation demonstrate the corporate’s values in action in
their personal work behaviours, in every decision that they make, in every
contribution that they make and in all their personal interactions.
•The personal priorities in the daily working life of every person are guided by the
corporation’s values.
•Organisational rewards and recognition are structured to reward and recognise
those people whose outputs embody the organisational values.
•All members of the corporation actively participate in a corporate-wide, value-
based, shared culture.
5.7.2Leadership responsibilities with respect to key
stakeholders
Leaders have a responsibility with respect to the following stakeholders: 10
•Employees. Responsible leaders mobilise people and lead teams across business,
countries and cultures to achieve performance objectives that are derived from the
strategic objectives of the corporation. In doing so, they coach and mentor
employees to achieve objectives in an ethical manner. They ensure the
implementation of employment regulations and standards; that working conditions
are humane, safe, healthy and non-discriminatory; that the needs of employees for
recreation, work-life balance and meaningful work are addressed. Jack Welch,
named by Fortune Magazine as the ‘Manager of the Century’ and by the Financial
Times as ‘one of the three most admired business leaders in the world today’, said
the following about his job as chief executive officer of General Electric: ‘My job was
developing talent. I was a gardener providing water and other nourishment to our
top 750 people. Of course, I had to pull out some weeds, too.’
•Clients and customers. Responsible leaders ensure that the products and services
meet the needs of their customers, that it is safe and that real and potential risks are
openly and transparently communicated. The leadership of James Burke in the
Johnson & Johnson opening case scenario, illustrates a leader who acted responsibly
towards the corporate’s clients.
•Business partners. In their day-to-day activities, leaders are in contact with various
business partners. A business partner is any individual or organisation that has
some degree of involvement with the organisation’s (or leader’s) business dealings,
such as the organisation’s suppliers. Responsible leaders ensure that their business
partners adhere to ethical, environmental and labour standards. Moreover,
responsible leaders ensure that their business partners are treated fairly and
ethically. Woolworths is an excellent example of a corporate that ensures that its
suppliers adhere to ethical and environmental standards. Woolworths
acknowledges that 87% of the world’s fish stocks are either overexploited or fully
fished (according to the 2012 United Nation’s Food and Agricultural Organisation
Report). The state of the ocean’s fish stocks is a worldwide concern and overfishing
will continue to affect marine life unless action is taken. Therefore, Woolworths is
committed to procuring all its seafood from sustainable fisheries and responsible
farming operations. Woolworths is working with local and international seafood
sustainability and certification programmes to ensure that all its seafood is
responsibly sourced and traceable back to the ship that caught it or the farm that
raised it. Furthermore, Woolworths has various programmes aimed at increasing
awareness of these issues and to assist customers to make informed choices when
they buy these products.11
•Social environment. Responsible leaders foster contributions to society. This can be
in the form of passive actions (such as charity and corporate donations), and active
engagement for the wellbeing of communities. Responsible leaders should also
endeavour to train and develop their staff in their understanding of the
responsibilities of their corporations in society. BMW South Africa is an example of
an organisation that is actively engaged in terms of the wellbeing of its community.
Through the BMW SEED Science programme, the company addresses issues related
to access and equity in science, maths and technology education for children whose
language of instruction in these subjects is not their mother- tongue.12
•Natural environment. Responsible leaders are sensitive to the world in which they
operate and assess the impact their corporation’s decisions and actions will have in
the natural environment. They ensure that production processes are
environmentally friendly, they use green technology wherever it is possible, and
they recycle material and save energy. BMW South Africa invested in a corporate
social investment project called the SEED (School’s Environmental Education
Development) project, aiming at increasing environmental awareness amongst
South African children. The project, initiated in 15 schools in the Ga-
Rankuwa, Mabopane and Soshanguve communities in 1996, now touches the lives of
children in over 50 schools in Atteridgeville, Mamelodi, Mpumalanga, KwaZulu-Natal
and the Eastern Cape, as well as those of their teachers, parents and friends. The
results of the project are overwhelming. Communities have taken responsibility for
improving and conserving the environment in which they live. They have also learnt
important skills such as co-ordination, project management and presentation. Solid
proof of the impact this project is having can be seen in the way that vandalism at
the schools has declined and in the way this positive attitude towards the
environment has gone beyond the schools and carried through into peoples’
homes.13
•Shareholders. It is important that we first distinguish between the terms
‘shareholder’ and ‘stakeholder’. A shareholder is a person or entity that owns shares
in a company. Shareholders are entitled to vote for the board of directors and a
small number of additional issues, they receive dividends from the company and
share in any residual cash if the company is sold or dissolved. Stakeholders, on the
other hand, represent a substantially broader group, including anyone having an
interest in the success and failure of the organisation. This group can include
shareholders, but goes beyond shareholders to also include creditors, customers,
employees, local community and the government. Stakeholders will be discussed in
detail in Chapter 8. Since shareholders own shares in a company, responsible
leaders protect the investment capital of their shareholders and ensure an adequate
return on their investment. They respect the rights of shareholders, provide them
with timely information on the performance of the organisation. Furthermore, they
show due diligence with respect to their own and others’ insider knowledge. They
prevent any moral wrongdoing and act responsibly with regard to their own
compensation packages. Since the 1980s, executive pay relative to that of an average
worker’s wage has risen dramatically in the US and also in many other countries.
Some observers are of the opinion that this rise is a natural and beneficial result of
the competition for scarce managerial talent that can add to shareholder value.
Others are of the opinion that this phenomenon is socially harmful and is brought
about by social and political changes that give business executives greater control
over their own remuneration. Executive remuneration is an important part of
corporate governance, and the responsible leader should acknowledge that.
Corporate governance will be discussed in more detail in Chapter 6.
•Government. In any country, the government of the country tries to preserve the
community and improve its conditions. In this respect, corporations have to extend
its co-operation to the government. The responsible leader will obey laws as
determined by government, pay taxes, provide inputs to government in terms of
technical economic financial or political importance for framing appropriate
policies, take up governmental projects and contracts, offers its leaders to assist
government and work on different governmental committees. Lastly, responsible
leaders can also participate in politics. One of the most renowned successful
business people who is also actively involved in politics is probably Cyril
Ramaphosa. He studied law and obtained his B Proc degree in 1981 at the University
of South Africa. After completing his articles, he joined the Council of Unions of
South Africa as an advisor in the legal department. In 1982, Ramaphosa started the
National Union of Mineworkers. He became the Secretary General of the African
National Congress in 1991 and head of the negotiating team of the ANC in
negotiating the end of apartheid with the National Party government. Following the
first fully democratic elections in 1994, Ramaphosa became a member of
parliament; he was elected the chairperson of its Constitutional Assembly on 24 May
1994 and played a central role in the government of national unity. After he lost the
race to become President of South Africa to Thabo Mbeki, he resigned from his
political positions in January 1997 and moved to the private sector, where he
became a director of New Africa Investments Limited. Ramaphosa was appointed
Deputy President by Jacob Zuma on 25 May 2014. Ramaphosa was made Leader of
Government Business in the National Assembly, responsible for the affairs of the
national executive in Parliament; the programming of parliamentary business
initiated by the national executive, within the time allocated for that purpose; and
ensuring that Cabinet members attend to their parliamentary responsibilities. 14
5.7.3Responsible leadership in action
Contemporary leadership is embedded in a global stakeholder society (in other words, a
society where leaders need to take stakeholders around the globe into consideration) in
which corporations need a licence to operate and are expected to act as good corporate
citizens. In order to do so, responsible leaders need to play various roles. Maak and Pless
identified the following roles that the responsible leader needs to play: 15
•The responsible leader as a steward. A steward is a person who looks after the
passengers on a ship, an aircraft or train. Contemporary corporates need to perform
and survive in a more complex environment than ever, and need the stewardship of
responsible leaders to look after them. These leaders need to have a global
perspective on managerial challenges, a social and moral radar to assess the social,
ecological and cultural environment to steer the corporation through challenging
waters. They also need to cope with conflicting stakeholder expectations and ethical
dilemmas. Lastly, the leader as steward needs to guard the values and value system
of the corporate and protect the personal and professional integrity of the
corporation.
•The responsible leader as citizen. Corporations are expected to use the minimum
inputs to create maximum outputs, to be effective and efficient and perform
financially well. At the same time, corporations are expected to contribute to a
thriving community and a good society. Therefore, corporations need leaders as
active citizens that recognise that both these goals are connected to each other. A
thriving community needs flourishing businesses and businesses can only flourish in
a healthy community and healthy customer base.
•The responsible leader as visionary. Leaders play an indispensable role in
formulating the vision, or desired future, of their organisations. There is nothing as
powerful as a shared vision that appeals to followers and all stakeholders, in the
success of a corporation. A responsible leader will ensure a responsible vision and
build on an ethically sound notion of balanced values that will lead to a sustainable
business, ensuring financial success and the wellbeing of nature and society.
•The responsible leader as a servant. In section 5.6.3 we defined a servant leader as a
leader that shares his or her power with his or her follower, puts the needs of other
first and helps followers to develop and perform as highly as possible. Servant
leadership has profound implications for the responsible leader. A
responsible leader should serve others, which requires attentiveness, humility and
modesty on the one hand, and on the other, it requires a willingness and desire to
support others and to care for their interest and their needs.
•The responsible leader as coach. Coaching can be defined as any training and
development in which a person, called the coach, supports a learner in achieving a
specific personal or professional goal. Coaching may also mean an information
relationship between two people, of whom one has more experience and expertise
than the other, and offers advice and guidance as the latter learns. In times of
ongoing change, the responsible leader needs to facilitate the development of their
followers, enables them to learn, and supports them in achieving their objectives.
The responsible leader needs to integrate and motivate followers from various
backgrounds to work together, and to share and realise a common vision.
•The responsible leader as architect. The term ‘architecture’ (derived from the
Latin architectura which means origin, art, and craft) refers to a process and the
product of planning, designing and constructing buildings and other physical
structures. Architectural works are often perceived as cultural symbols and as
works of art. Like an architect, the responsible leader needs to plan, design and
construct organisational structures that support the ethical and effective
achievement and monitoring of the triple bottom line and the realisation of the
corporate’s shared vision. For example, they design and implement a moral
infrastructure through an ethics code, policies, guidelines, business principles and
audits; and they ensure that human resources management systems such as
recruitment, remuneration, promotion, disciplinary and grievance procedures are
based on moral values. Lastly, responsible leaders ensure that all systems are
integrated, co-ordinated and aligned to the corporate’s shared vision and overall
goals and objectives.
•The responsible leader as storyteller and meaning enabler. An effective tool to
support the creation of meaning and sense making in corporations, is storytelling.
Leaders can use storytelling widely to spread the corporate’s vision of a socially,
culturally and environmentally friendly business that aims to make a difference in
the world.
•The responsible leader as change agent. Leaders have the enormous responsibility
to act as change agents, by initiating and supporting change in their corporations
towards a value-conscious and sustainable business in a stakeholder society.

Conflicting stakeholder expectations and ethical dilemmas are a reality in responsible

leadership.
5.8Conclusion
In this chapter, we differentiated between the terms ‘management’ and ‘leadership’. We
explained the leadership traits, leadership styles and contemporary approaches to
leadership, and concluded the chapter by focusing on responsible leadership, which is
required from all leaders in contemporary corporations.
This chapter lays the foundation for a discussion of the importance and practice of
corporate citizenship in all functional areas of management.

Multiple-choice questions
1.Which of the following are responsibilities of a manager according to Peter
Drucker?
ASet goals and objectives for the organisation.
BOutline tasks and activities that need to be done.
CCommunicate and motivate staff.
DAdminister the rights of citizens.
EDevelop people.
FMeasure performance.
GDetermine remuneration based on performance.
a.A B C D
b.A B C E F
c.B D E F G
d.C D F G

2.The determination of corporate values and corporate culture, is the responsibility

of _____.
a.middle managers
b.functional management
c.top managers
d.first-line managers

3.Which of the following statements about leadership is incorrect?

a.Leadership originates from a relationship between the leader and the
follower.
b.A leader inspires, influences and motivates his or her followers.
c.A leader is a person appointed in a formal position in a corporation.
d.A leader may command because the follower allows him or her to command.

4._____ leadership is about making business decisions that takes into account all
stakeholders, such as shareholders, employees, business partners, suppliers, the
environment, the community and future generations.
a.Transactional
b.Charismatic
c.Responsible
d.Transformational

5.According to _____, the most effective leadership style for a particular situation is
determined by the maturity of followers.
a.Fiedler
b.Robert House
c.Hersey and Blanchard
d.Tannenbaum and Schmidt

Discussion questions
1.Define the terms ‘management’ and ‘leadership’ and differentiate between the
meaning of these terms within a business context.

2.Distinguish between the various leadership approaches.

3.Explain responsible leadership within a business context.

Additional reading
•Maak, T & Pless, NM. 2006. Responsible leadership in a stakeholder society – a
relational perspective. Journal of Business Ethics, 66:99–115.
•Neuland, E, Oliver, G & Venter, D. 2002. Strategic implications of the World Trade
Centre Attack. Pretoria: Protea Book House.
•Szekely, F & Knirsch, M. 2005. Responsible leadership and corporate social
responsibility: Metrics for sustainable performance. European Management Journal.

References
1.Susi, R. 2002. Effective crisis management. [Online].
Available: http://iml.jou.ufl.edu/projects/Fall02/Susi/tylenol.htm [3 August 2015].
2.PWC. 2013. The value creation journey: A survey of JSE Top-40 companies’
integrated reports. p. 5.
3.Drucker, PF. 1986. Management: tasks, responsibilities, practices. New York:
Truman Talley books. pp. 32–38.
4.Halliman, RW. 2014. Understanding leadership: Let’s put the horse before the
cart. American Journal of Management, 14(4):68–74.
5.Harvard Business Review. 2013. Management is not leadership. [Online].
Available: https://hbr.org/2013/01/management-is-still-not-leadership [23
September 2015].
6.The Journal of Virtues & Leadership, 1(1):25–30, 2010, © 2010 School of Global
Leadership & Entrepreneurship, Regent University.
7.Shell. 2015. Oil Spill Data. [Online].
Available: http://www.shell.com.ng/environment-society/environment-
tpkg/remediation.html [19 September 2016]; CNBC.com. Shell faces further suit
over Nigerian oil spills. [Online].
Available: http://www.cnbc.com/2016/03/02/shell-faces-further-suit-over-
nigeria-oil-spills.html [17 August 2015].
8.The Motley Fool. 2015. Enron Scandal: A Devastating Reminder of the Dangers of
Debt. [Online].
Available: http://www.fool.com/investing/general/2015/06/21/enron-scandal-a-
devastating-reminder-of-the-danger.aspx [17 August 2015]; The Economist. 2002.
Enron the real scandal. [Online].
Available: http://www.economist.com/node/940091 [24 July 2016]; Investopedia.
Nd. Enron; The Fall Of A Wall St Darling. [Online].
Available: http://www.investopedia.com/articles/stocks/09/enron-
collapse.asp [24 July 2016].
9.Freeman, RE, Wicks, AC & Parmar, B. 2004. Stakeholder theory and the corporate
objective revisited, Organisational Science, 15(3):364–369.
10.Maak, T & Pless, NM. 2006. Responsible leadership in a stakeholder society – a
relational perspective. Journal of Business Ethics, 66:99–115.
11.Woolworths. 2015. Our commitment. [Online].
Available: http://www.woolworths.co.za/store/fragments/corporate/ [17 August
2015].
12.BMW. Nd. The environment. [Online].
Available: http://www.bmw.co.za/products/automobiles/
bmw_insights/environment.asp [17 August 2015].
13.Ibid.
14.The Presidency. Republic of South Africa. Deputy President Cyril Ramaphosa.
2016. [Online]. Available: www.thepresidency.gov.za/pebble.asp?relid=17464 [17
May 2016].
15.Maak, T & Pless, NM. 2006. Responsible leadership in a stakeholder society – a
relational perspective. Journal of Business Ethics, 66:106–112.
chapter
Risk management in corporate
governance
Jacobus Young 6
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Contextualise the principles of corporate governance in terms of corporate
citizenship
•Understand the background of corporate governance
•Define the concept and primary goal of corporate governance
•Explain the principles of corporate governance
•Explain the risk management framework
•Discuss the principles of risk governance
•Explain the corporate governance principles for a government
KEYWORDS AND CONCEPTS
-business analysis
-business owners
-corporate governance
-credit risk
-internal audit
-legal risk
-liquidity risk
-market risk
-operational risk
-reputational risk
-risk evaluation
-risk exposures
-risk financing
-risk governance
-risk identification
-risk management
-risk management framework
-risk management process
-risk management strategy
-risk management structure
-risk mitigation and control
-risk monitoring and reporting
-strategic risk
OPENING CASE SCENARIO

The case of the Sudanese President Omar Al Bashir and the Rule of Law
President Omar Al Bashir has ruled as president of Sudan since a military coup over
25 years ago. As a result of investigations by the International Criminal Court (ICC),
President Al Bashir stands accused of serious international crimes commited
principally in the Dafur region. Two warrants have been issued for his arrest, in 2009
and 2010, related to charges of war crimes, crimes against humanity and genocide.
The warrants were forwarded to all countries party to the Rome Statute, including
South Africa, (the first African state to sign the Rome Statute), with a request that
they co-operate and have President Al Bashir arrested and surrendered to the ICC.
When President Al Bashir arrived in South Africa to attend the 25th Assembly of
the African Union in June 2015, the government took no steps to arrest him, taking
the stance that President Al Bashir enjoyed immunity from such arrest, despite the
two warrants.
According to the Supreme Court of Appeal of South Africa judgment, this was
inconsistent with South Africa‘s obligations to the Rome Statute and therefore,
unlawful.
The High Court ordered that Al Bashir be prohibited from leaving South Africa and
the following day, ordered his arrest. Immediately after this order was made, counsel
for the government told the Court that President Al Bashir had left South Africa
earlier that day on a flight from Waterkloof airbase.
The affidavit failed to explain how a head of state, using a military air base
reserved for the use of dignitaries, could leave the country unobserved. The Director-
General said that President Al Bashir‘s passport was not among those shown to his
departmental officials.
Either the representatives of government set out to mislead the Court and counsel
in giving instructions, or the representatives or counsel misled the Court. Whichever
is the true explanation, the judgment described this conduct as disgraceful.1
In terms of the principles of good corporate governance, this action by the South
African government is in breach of the ‘Rule of Law’, which is a dimension of the
World Bank’s governance indicators.
According to the World Justice Project,2 the Rule of Law refers to a rules-based
system in which the following principles are upheld:
•The government and its officials and agents are accountable under the law.
•The laws are clear, publicised, stable, fair, and protect fundamental rights,
including the security of persons and property.
•The process by which the laws are enacted, administered, and enforced is
accessible, fair, and efficient.
•Access to justice is provided by competent, independent, and ethical
adjudicators, attorneys or representatives, and judicial officers who are of
sufficient number, have adequate resources, and reflect the makeup of the
communities they serve.

It seems that in this case, the South African government acted in such a way that
they breached the Rule of Law in that government officials acted in a non-
accountable way. It is also clear that the government ignored a basic principle of
sound governance, which could lead to a disrespect of the country’s juridical system
and processes. This can consequently result, first, in a downgrading of South
Africa’s rating as a country with sound corporate governance principles. Second, it
can cause a total motion of non-confidence in the government resulting in further
disarray in terms of sound corporate governance principles.
6.1Introduction
There are various approaches to ensure the establishment and implementation of
sound corporate governance and it is important that there is a clear understanding of
the concept. According to Ngoepe and Ngulube, 3 corporate governance could be
approached through a number of functions such as auditing, compliance, corporate
citizenship and risk management. It is therefore imperative that there is a close
working-relationship between these functions. However, the objective of this chapter is
to focus on the principles of good corporate governance and how it relates to risk
management in order to conceptualise it in terms of corporate citizenship objectives and
the responsibilities of corporates.
The principles of good corporate governance play a crucial role in a country’s triple
bottom line (social, environmental and economic responsibilities). For emerging
countries, these principles should be clearly stipulated and be well-known to all citizens
in order to ensure an effective code of conduct. These principles should, furthermore,
serve as the basis for a country’s values and standards of living. Should a country,
however, falter in the adherence to the principles of good corporate governance, it could
negatively affect its social, economic and environmental objectives that subsequently
could prevent the development of the country resulting in unnecessary major risk
exposures.
This chapter aims to confirm the basic principles of good corporate governance, its
relation to risk management and how it can contribute to an organisation’s corporate
citizenship responsibilities. The framework of this chapter is reflected in Figure
6.1 above.

Figure 6.1: Framework of corporate governance

Source: Author’s own.

The understanding of corporate governance and its underlying principles will provide
a platform for this chapter. It is closely linked with the roles and responsibilities of senior
management or the board of directors of corporates, who are ultimately responsible for
the formulation of business strategies. An element of sound corporate governance is a
suitable risk management framework. In turn, a risk management framework will
support and add value to effective corporate governance. In addition, a risk management
framework of components, that is, a risk management culture, risk management
strategy, risk management structure and a risk management process. Risk
management is a relatively new concept which is an essential part of an organisation’s
culture. A risk culture could ensure an integrated approach between strategic and risk
management processes and could add value to the achievement of business objectives. It
is imperative that a risk management process is embedded in an organisation. This
ensures that the risks are proactively identified and preventative control measures
defined to eliminate or minimise the risks to corporates. In order to manage the risks
faced by corporate organisations, it is essential that there is clarity between various risk
types. Different risk types require specific management approaches that are orchestrated
by their underlying risk factors. Once the risk types are clarified, they can be managed
according to specific principles of risks and ethics. These principles can be related to the
triple bottom line responsibilities of the economic, social and political factors. To ensure
the effectiveness of these factors, it is essential that the public (government) and the
private (corporate) sectors work together to be able to ensure contributions towards the
sound principles of corporate citizenship.
Each of the abovementioned concepts will be reviewed in more detail in this chapter;
however, it is firstly important to take a brief view of the history of corporate governance.
6.2Background to corporate governance
Corporate governance has been around for ages, although the term is fairly new and was
seldom used until the 1990s. According to Mongalo,4 the foundation of corporate
governance was laid down in the nineteenth century with the transformation of company
law, which saw the introduction of a Joint-Stock Companies Act in 1844. Then, certain
corporate governance concepts came to the fore such as the appointment of the secretary,
clerks and servants, holding periodical meetings and appointing a chairman to preside.
In addition, companies were obliged to have account books and a balance sheet that had
to be produced to the shareholders by the directors of the company. 5 During the
nineteenth and twentieth centuries, there were various developments in governing
companies, especially in how to distinguish between ownership and management. A
primary reason for this separation resulted from the increase in shareholders (owners of
capital of the organisation) as well as their diverse geographical locations, which caused
their physical links with the management of the organisations to become more remote. 6 It
became important to split the ownership and management of an organisation, meaning
that shareholders depend on directors (management) to manage their organisation.
Similarly, and from a country’s perspective, citizens rely on the elected government to
manage the country according to sound governance frameworks and principles. Since the
1990s, various commissions and reports on corporate governance investigated and
reported on relevant issues to establish platforms for governance frameworks. Some of
these commissions are mentioned below:
•Cadbury Committee on Financial Aspects of Corporate Governance – United Kingdom
(UK) 1992. This report is based on the work done by a UK–commissioned committee
under the chairmanship of Sir Adrian Cadbury in 1992 to investigate corporate
failures and scandals in the UK. According to Mongalo, 7 this report emphasised the
importance of independent non-executive directors on the board of directors. It also
advised on the importance of audit committees and the split in the roles of the
chairperson of the board and the chief executive.
•Greenbury Committee on Directors’ Remuneration – UK 1995. The Greenbury report
followed the Cadbury report in 1995 under the chairmanship of Sir Richard
Greenbury and emphasised the importance of the remuneration of committees in
boards of directors.
•Hampel Committee on Corporate Governance – UK 1998. This committee drafted a
report that reported on the implementation of the recommendations made by the
Cadbury and Greenbury reports. Following this, the London Stock Exchange drafted
a combined code based on the previously mentioned called ‘the Yellow Book’ that
included guidelines to corporate governance for listed companies.
•King Report on Corporate Governance (King I). This report under the chairmanship
of Judge Mervyn King was published for the first time in 1994, commonly known as
King I. This report named the Code of Corporate Practices and Conduct, was aimed at
the Johannesburg Stock Exchange (JSE) listed companies. Following on this report
was the King II report in 2002, which concentrated on the following primary
principles of good corporate governance:
»Discipline. Involves commitment by a company’s senior management to adhere
to behaviour that is universally recognised.
»Transparency. The ease with which an outsider is able to analyse a company’s
actions, economic fundamentals and the non-financial aspects pertinent to the
company’s business. As such, it measures how good management is in making
information available to reflect the true situation of the company.
»Independence. Includes the extent to which mechanisms have been
implemented to minimise or avoid potential conflicts of interests, such as
composition of the board of directors and board committees.
»Accountability. Involves the allocation of accountability to decision makers.
Mechanisms must exist and be effective to allow for accountability. This provides
investors with the means to query and assess the actions of the board and its
committees.
»Responsibility. This allows for corrective action and penalising mismanagement
regarding the management of the company. While the board of directors is
accountable to the company, it must act responsibly towards all stakeholders.
»Fairness. All systems within the company must be balanced in considering all
interested parties and the future of the company. The rights of various groups
must be acknowledged and respected.
»Social responsibility. A well-managed company will be aware of, and respond to,
social issues and placing a high priority on ethical standards. 8
»King III Report. This report was published in 2009 identifying the following
elements relating to a code of governance principles and elements: ethical
leadership and corporate citizenship; boards and directors; audit committees;
governance of risk; governance of information technology; compliance with laws,
rules, codes and standards; internal audit; governing stakeholder relationships;
and integrated reporting and disclosure.

The King III report will be discussed in more detail in the following sections in order to
deal with the goals and principles of good corporate governance as it relates to ethics and
risk management.
6.3Definingthe concept and primary goal of
corporate governance
Corporate governance is not only a theoretical business concept anymore. It can safely be
regarded as the backbone of running a country or a business. Many authors and
institutions attempted to define the concept of corporate governance; however, it seems
that the growing interests and developments keep on changing and influencing the
definition of the concept. Therefore, it might be necessary to accept the fact that the
concept of corporate governance remains adaptable and could change according to
changing environments and views. Anand 9 supports this view by stating that instead of
focusing on corporate governance as a phrase with a concrete definition, it is much more
effective to think of it as a state of mind, a concept that is fluid and adaptable to the
changing face of commerce. However, in order to demarcate the relevant issues
surrounding the concept, it is necessary to take a look at some views. According to
Barac,10 corporate governance can be described as the structures, processes, cultures and
systems that stimulate the successful operation of organisations. Corporate governance
could be regarded as a partnership of shareholders, directors and management to
provide wealth creation and economic wellbeing to the wider community of stakeholders
and society.11 The Basel Committee on Banking Supervision12 defines corporate
governance as a set of relationships between a company’s management, its board, its
shareholders and other stakeholders which provides (1) the structure through which the
objectives of the company are set; (2) the means through which those objectives are met;
and (3) the monitoring of the organisation’s performance.
The primary goal of corporate governance can be regarded as the process to
implement systems and processes by which corporations can be directed and controlled
to the benefit of all stakeholders. Stakeholders will be discussed in more detail in Chapter
9. For now, it is important to note that the term ‘stakeholder’ refers to any person,
organisation, social group or the society at large that has an interest in the organisation
and/or its activities. Anand13 states that the goal of good corporate governance is to
establish an effectively organised management structure and activity system that will
facilitate the corporation’s ability to meet the needs of shareholders. Mensah14 states that
the external drivers of good corporate governance are laws, rules and institutions that
provide a competitive playing field and discipline the behaviour of insiders, whether
managers or shareholders.
Mongalo15 cited Sir Adrian Cadbury who stated that corporate governance is
concerned with holding the balance between economic and social goals and between
individual and communal goals. According to King II, 16 it is acknowledged that corporate
social and environmental responsibility is essential in corporate governance. The
ultimate aim for corporates is to act in a socially and environmentally acceptable way,
thereby taking account of the interests of other stakeholders in corporate decision-
making.17 In addition, good corporate governance contributes to business success by
making leadership aware of the importance of making sound decisions that involve the
trade-off between the risks and returns of investments, and of making the business
responsible and accountable with integrity throughout the organisation. 18 However, in
order to achieve the goal of corporate governance, it is necessary to establish the
principles that could be used to guide and to judge sound corporate governance against.
These will be discussed in the next section.
6.4Principles of corporate governance
Hilger19 states that there are various codes and principles that have been developed to
define what is meant by good corporate governance practices, such as the Cromme Code
in Germany or the Sarbanes-Oxley Act in the USA. Most of these codes seem to
concentrate on the focus areas of ownership structures, shareholder rights and financial
transparency. According to Rossouw,20 the national codes all emphasise the ethical
nature of good corporate governance, and special emphasis is placed on the fact that good
corporate governance is based on the following fundamental values:
•Transparency. Transparency mostly refers to financial transparency. Informing all
stakeholders of the financial state of the business which will provide assurance of a
profitable business. It can, furthermore, provide assurance as to the positive
contributions of the effective risk management framework of the organisation.
•Accountability. Accountability reflects the overall involvement of top management
in order to ensure that the organisation is managed according to sound values and a
code of ethics.
•Responsibility. Responsibility indicates that all employees are responsible for their
individual actions which contributes to the success of an organisation.
•Integrity and honesty (probity). Integrity and honesty of all employees are essential
values that will create a sense of trust amongst all role players and establish a
positive business environment for employees and investors.

Ethical behaviour can be regarded as a crucial underlying factor for good corporate
governance. In this regard, Hendrikse and Hendrikse 21 state that directors and
management must commit to behaviour that is internationally acceptable and recognised
as morally correct and proper. This commitment should be reflected in the business code
of conduct and ethics. In addition, they22 state that ethics is the practice of aligning human
life, individually or collectively or institutional structures and practices according to basic
standards of conduct. According to Redmond, 23 a code of conduct is most useful if it
demonstrates the kind of behaviour the organisation would like to see in all areas in
which business is conducted. It is also based on what could be a legal defence for the
organisation and its employees should some aspect of business be challenged in a legal
context. A code of business conduct (including ethics) must ensure that directors,
management and employees are committed to act in the best interests of all stakeholders
of the organisation.24 As such, the code of ethics, as part of the overall code of business
conduct, should incorporate the following (non-exhaustive list):
•Guidelines for fair business activities
•Ensuring confidentiality
•Compliance with laws and regulations
•Eliminating procedures for conflicts of interest
•Guidelines for intellectual honesty, integrity, trust and respect
•Value statements and standards for the organisation.

The King III report plays an important role in corporate governance in South Africa.
In section 7.2, we indicated that it identifies various elements. For the purposes of this
chapter, the two elements that will be highlighted are (1) ethical leadership and
corporate citizenship; and (2) the governance of risk.
The principles identified for the first element (ethical leadership and corporate
citizenship) are the following:
•The board should provide effective leadership based on an ethical foundation.
•The board should ensure that the company is and is seen to be a responsible
corporate citizen.
•The board should ensure that the company’s ethics are managed effectively. 25

In terms of the second element (governance of risk), King III 26 outlines the following
principles relating to the responsibilities of the board of directors:
•The board should be responsible for the governance of risk.
•The board should determine the levels of risk tolerance.
•The board should be assisted by the risk committee or audit committee in carrying
out their responsibilities.
•The board should delegate to management the responsibility to design, implement
and monitor the risk management plan.
•The board should ensure that risk assessments are performed on a continuous
basis.
•The board should ensure that frameworks and methodologies are implemented to
increase the probability of anticipating unpredictable risks.
•The board should ensure that management considers and implements appropriate
responses.
•The board should ensure continuous risk monitoring by management.
•The board should receive assurance regarding the effectiveness of the risk
management process.
•The board should ensure that there are processes in place enabling complete,
timely, relevant, accurate and accessible risk disclosure to stakeholders.

According to King III,27 it is the legal duty of directors to act in the best interests of an
organisation. The above-mentioned governance principles will assist the board to
manage an organisation according to what is best for that organisation. 28
Having dealt with the background, concept and underlying principles of corporate
governance, the next section deals with the risk management framework as indicated
in Figure 6.2.
6.5Risk management framework
According to Alvarez,29 one of the greatest challenges in today’s business environment is
the establishment of a risk management framework that encompasses the many facets of
management. It is important to determine exactly what the organisation wants to achieve
in developing and implementing a risk management framework. Blunden and
Thirwell30 state that a framework for risk management makes the practical
implementation of governance possible and determines how an organisation can identify,
assess, measure, monitor and manage its risk exposures. According to the International
Organisation for Standardisation,31 a risk management framework can assist an
organisation in managing risks effectively through the application of the risk
management process. However, before implementing a risk management process, it is
imperative to establish a risk management framework in terms of the relevant
components thereof. Typical components of a risk management framework are
illustrated in Figure 6.2.
Each of the components as indicated in Figure 6.2 will now be discussed in more detail.
6.5.1Risk management culture
The first component of a typical risk management framework entails the establishment
of a risk management culture for the organisation. According to Young, 32 a typical risk
management culture consists of basically two components, namely the value-adding
activities; and the primary principles for managing risks. It is essential that management
ensures a proactive approach to prevent the potential negative effects of risk incidents or
to minimise the potential effect should a risk event occur. Therefore it is necessary to
identify the value that risk management can add to the organisation. One of the primary
determinants is that the cost of risk controls should not exceed the actual value of the
controls.
Example
Should tellers at a bank branch regularly experience a shortfall during reconciling the cash, it
might require a control measure. A typical control measure could be the appointment of a
supervisor to monitor the procedures in order to prevent these shortfalls. However, should
the actual cost of appointing such a supervisor be more than the actual losses (shortfall in
cash), then the cost of this control will exceed the cost of the risk and make this control
measure unacceptable. It would therefore be necessary to identify other control measures to
address the regular shortfall in cash where the cost of these controls will not exceed the
actual loss.

Figure 6.2: Typical components of a risk management framwork

Source: Author’s own.

In terms of the principles of risk management, it is important that each organisation

should identify these principles of risk management in order to guide the actual
management of the risk exposures. Examples of good risk management principles are the
following:
•Establish a common understanding of the risk management terminologies.
•Total involvement in risk management at all business levels of the organisation.
•Establish a risk management process.
•Embed a bottom-up risk reporting process from the lowest operating levels to top
management and a top-down communication process where managers provide
feedback on the reports they received.33

Once a risk management culture has been embedded in the organisation by means of risk
management policies, processes and procedures, the risk management strategy should
be incorporated into the strategic management processes of the organisation.
6.5.2Risk management strategy
According to Young,34 a risk management strategy sets the overall tone and approach for
managing the risk exposures. An objective of the organisation’s risk strategy should, for
example, include an expression of its risk appetite, which can be defined as the risk the
organisation is prepared to accept and tolerate. It is therefore important to include an
organisation’s risk strategy in its overall strategic planning process. This would ensure
that the risks inherent in the business activities and processes are identified and
understood, and can be managed within established parameters of the risk appetite.
Furthermore, it will provide the means for management to make better business
decisions, through a balanced focus on the trade-off between the risk and return on
investments.35
6.5.3Risk management structure
Once the risk management strategy process has been determined, the next issue is the
establishment of an appropriate risk management structure(s) within the organisation.
A risk management structure is an organogram that shows the various risk management
positions responsible for risk management. It is also necessary to take note of the roles
and responsibilities of various role players in risk management. The main role players
are the following:
•Board of directors and senior management
•Business managers/risk owners
•Risk managers
•Internal audit.

These role players actively participate in risk management and there should be a clear
distinction between their roles and responsibilities. According to the Basel Committee on
Banking Supervision,36 the board of directors and senior management have the following
responsibilities with regard to risk management:
•Set the organisation’s tolerance for risks.
•Ensure the establishment of a framework for assessing risks.
•Develop a system to relate the risks to the organisation’s capital level.
•Establish a method of compliance with internal policies.
•Adopt and support strong internal controls, written policies and procedures.
•Ensure that management effectively communicate these policies and procedures
throughout the organisation.37

The board of directors play a crucial role in the governance of risk. Although they are
ultimately responsible for the risk management of the organisation, the
actual management of risks lies with the business managers or the risk owners.
In general, the responsibilities of business managers or risk owners are the following:
•Set the organisation’s strategy and formulate the overall objectives.
•Provide leadership and direction to senior managers.
•Set broad-based policies and develop the organisation’s risk appetite and culture.
•Take actions and make decisions concerning the businesses’ risks and ensure
communication of key policies and the reporting processes that will be used.
•Record details of risks, controls and priorities.
•Manage risk incidents and loss events and the lessons learned.
•Take and allocate accountability for risks, controls and treatments.
•Monitor risk control activities to ensure that the control measures are effective.
•Monitor progress against the risk management strategy. 38

The risk exposures must be managed by those members who are the closest to the risk
exposure. For example, employees working in a mine should manage the risk exposure
they face, for example, a rock fall. They will have to ensure that they manage the control
measure to prevent a rock fall, for example, putting adequate supporting poles in place.
It is not possible to manage all the risks at top management levels, but rather at the lowest
levels within the organisation. It is furthermore not the responsibility of the risk
managers to actually manage the risks. According to Swenson, 39 risk managers are
aligned alongside line managers and usually perform an administrative and advisory role
regarding risk management functions. For example, risk managers advise operations
managers, marketing managers and financial managers.
The last important role player in risk management is internal audit. The primary role
of internal audit is to provide top management with the assurance that risks are being
managed according to the approved strategy, risk policies and procedures. They play a
crucial role to ensure the effectiveness of risk policies, identified risk control and
mitigating measures. Edelblut and Murdock40 summarise the role of internal audit as
follows:
•Evaluate the relevance of policies and procedures.
•Assist in the implementation of a framework for internal control and governance.
•Assist management in the development of anti-fraud programmes that will codify
the organisation’s fraud deterrence, prevention, detection and investigation efforts.
•Report audit observation – a key requirement for internal auditors that aims to
provide timely, useful, relevant and feasible recommendations regarding risk
management.
•Assist in training employees to meet the challenges associated with risk and
provide value-adding services during the risk management process.

Considering the important role and responsibilities of risk management, it leads to

conceptualising the typical three lines of defense for a business regarding risk
exposures. Figure 6.3 illustrates a typical approach regarding the three lines of defence.
Figure 6.3 indicates that the first line of defence is the business owners. They are
responsible for achieving the business objectives and managing the relevant risk
exposures. Risk management is the second line of defence. They are responsible for
monitoring the risks and identifying new risk exposures which must be addressed by new
risk management policies and processes. They are also responsible for reporting on any
new emerging risks and for ensuring that the organisation as a whole can mitigate and
control these risks in a timely manner. The third line of defence is internal audit (as well
as external audit). They are responsible for providing independent assurance to top
management that the identified risk exposures are being managed and for advising
management on corrective measures if required. The board of directors has the final
responsibility and accountability of risk management. According to Blunden and
Thirwell,41 the board is responsible for all aspects of risk management, such as the risks
undertaken and managed by the business, ensuring that there is proper oversight of the
risks and making sure that financial statements and internal risk processes are audited.
In order to explain the three lines of defence, an example of a risk exposure relating to a
bank can be used as in the example box.

Figure 6.3 Three lines of defence of a business against risk exposures

Source: Author’s own.
6.5.4Risk management process
The next important component of a risk management framework is the risk management
process. According to Young,42 a risk management process is a structured cycle of
activities that provides management with the assurance that all risks are being managed.
These activities should identify the risks, and evaluate identified risks in order to develop
mitigating and control measures. Further activities are the risk financing as well as the
risk monitoring and reporting processes. Figure 6.4 provides an indication of the typical
activities of a risk management process.
Example
A bank is exposed to the risk of being robbed. Here, the first line of defence lies with the
employee directly exposed to this threat, for example, the teller. The teller should be trained
to be able to either prevent the robbery or to ensure that the losses are minimised should a
robbery occur. This can be regarded as the first line of defence. The second line of defence
involves the risk manager who should ensure that the risk of a robbery is identified and that
adequate control measures are identified to prevent such an event. Finally, the third line of
defence is the responsibility of the bank’s internal audit, who must provide assurance that
the identified and implemented control measures to prevent a robbery are adequate.

Figure 6.4: Activities of a typical risk management process

Source: Author’s own.

The first step is a business analysis, this entails an analysis of the business strategies
and processes with the aim of understanding the nature of the business. The second step
is to identify the inherent risks that could have a negative influence on the successful
achievement of the business objectives. During this activity, it is necessary to identify the
overall risk types as well as the contributing risk factors. Examples of the risk types and
risk factors are illustrated in Table 6.1.

Table 6.1: Examples of risk types and the underlying risk factors
Risk type Risk factor
Operational risk – the risk of a loss •People risk – risk exposures due to
due to internal problems resulting from people related problems.
people, systems, processes or external •System risk – risk exposures due to
events. technological related problems.
•Process risk – risk exposures due to
problems related to business
processes.
•External risk factors – risk exposures
due to external factors not under the
control of the organisation, such as
natural disasters.
Market risk – the risk of losses suffered •Interest rates – risk exposures due to
as a result of market fluctuations. the negative influence of changes in
interest rates.
•Exchange rates – risk exposures due
to changes in the exchange rates of
currencies of different countries.
•Price risk – the risk exposures due to
changes in the price of commodities.
Credit risk (default risk) – the risk of •Interest rates – risk exposure due to
losses due to the non-performance of a the negative influence of interest rate
borrower in repaying a loan according increases.
to the agreement. •Inflation – risk exposure due to the
influence on the value of money as a
result of inflation rates.
Reputational risk – the risk of a loss of •Branding – risk exposure due to a
money or customers due to a negative negative influence on the image of the
influence on the brand of an organisation.
organisation.
•Bribery and corruption – risk exposure
due to the negative influence or the
involvement of the organisation in
fraudulent actions.
•Customer service – risk exposure due
to poor customer service or
substandard products.
Liquidity risk – the risk of a company •Interest rates – the risk exposure due
being liquidated due to being unable to to a negative effect of interest rates on
settle credit accounts (liabilities). an organisation’s liquidity.
•Settlement risk – the risk exposure
due to an organisation not being able
to settle its debt at a given time.
Legal risk – the risk of an organisation •Claims – the risk exposure due to
suffering losses due to penalties and customer claims as a result of poor
fines as a result of breaching regulatory service or inadequate products.
requirements. •Fines and penalties – the risk
exposure due to paying fines and
penalties resulting from a breach of
regulations.
Strategic risk – the risk of a loss due to •Business decisions – the risk
the incorrect or inadequate business exposure due to poor business
decisions. decisions.

After identifying the risks, step 3 in the risk management process entails an evaluation of
the risks to determine the potential influence on the business. The evaluation process
aims to either quantify (measure) or qualify (assess) the risks in order to define
mitigating and control measures, which form part of step 4. These measures must protect
the organisation against the risk events should such an event occur. Risk control
measures should be defined in terms of the assessment of the risks. These could be
classified into four risk control decisions, namely (1) accepting the risk as part of the daily
business processes; (2) defining specific control measures which are usually related to a
cost, for example, buying a virus protection system to protect the systems against viruses;
(3) acquiring an insurance policy from a third party for a specific risk exposure, meaning
that the effect of a risk event will be transferred to a third party for a specified premium;
and finally (4) to incorporate a procedure which endeavours to avoid the risk exposure
in totality.
The next step (step 5) is to determine the costs of the risk controls during the risk
financing activity. Here, it is important to ensure that the cost of controls does not exceed
the loss if the actual risk event should occur. This step also involves the determining of
insurance requirements for those potential business losses where the organisation wants
to share a loss with a third party such as an insurance company at a certain premium. The
organisation can also decide to allocate capital as a reserve to ensure that the
organisation can cope with a potential catastrophic loss, which could cause the business
to close down. The aforementioned financing activities can serve as an input to determine
the risk appetite of the organisation, which can be defined as the amount of risk an
organisation is prepared to accept as a loss and still remain a going concern.
Chapman43 supports this definition by stating that risk appetite can be defined as the
amount of risk a business is prepared to tolerate at any point in time. A business’s
tolerance will be a reflection of its capacity to absorb risk.
Finally, a risk management process includes continuous risk monitoring and
reporting, which aims to determine the effectiveness of each activity of the risk
management process. The purpose is to ensure that new emerging risks are identified
proactively to ensure that the organisation addresses it timeously. Another important
aspect of risk monitoring is communication. All stakeholders need to be aware of the risks
for the organisation as well as the mitigating and control measures. Risk reporting forms
a crucial component of risk monitoring and the overall risk management process.
According to Ong,44 the objectives of risk reporting are to inform management about their
risk experience, trigger actions and resource allocations where necessary, as well as
assure management about the effectiveness of the risk management process. However,
risk reporting also includes external risk reporting to stakeholders. For example, banks
are obliged to do regulatory reporting to the South African Reserve Bank. Another form
of risk reporting is disclosure of risk management. This entails providing risk information
to the public that could assist potential investors to make informed decisions.
In section 6.4, the principles of corporate governance were discussed and we
highlighted two elements, namely (1) ethical leadership and corporate citizenship; and
(2) the governance of risk. Having looked at the components of a risk management
framework, we can look at the practicality involved in the principles of the governance of
risk in more detail. This will be dealt with in the next section.
6.6Principles of risk governance
The primary principles of corporate governance, specifically relating to risk
governance and ethical leadership, require organisations to incorporate specific
functions, systems and processes. Therefore, the relevant principles (based on the King
III principles of good corporate governance mentioned earlier) can be linked to specific
activities or requirements stipulated in Table 6.2.

Table 6.2:Principles and requirements to ensure good corporate governance relating

to ethical leadership and risk management

Governance principle Activities/Requirements Rating

1.The board should provide The board should:

effective leadership based on •ensure that the business strategy
an ethical foundation: and operations lead to a sustainable
•Ethical standards business;
•Triple bottom line •manage the impacts of the strategy
responsibilities on triple bottom line responsibilities
•Code of business conduct (economy, society and the
environment);
•ensure an ethical approach at all
times;
•consider the organisation’s impact
on internal and external
stakeholders; and
•define the organisation’s business
values in a business code of
conduct.
2.The board should ensure The board should:
that the company is and is •consider the financial performance
seen to be a responsible and business actions of the
corporate citizen: organisation, society and the
•Corporate citizenship environment;
•Compliance •add value to protect, enhance and
invest in the wellbeing of the
country’s economy, society and the
environment;
•ensure that the organisation’s
performance and interaction with its
stakeholders is guided by the
Constitution and the Bill of Rights;
•ensure that collaborative efforts
with stakeholders are embarked
upon to promote ethical conduct and
good corporate citizenship;
•ensure that measurable corporate
citizenship programmes are
implemented; and
•ensure that management develops
corporate citizenship policies.
3.The board should ensure The board should ensure that:
that the company’s ethics are •the organisation has an ethical
managed effectively: corporate culture;
•Ethical standards •the organisation has embedded
•Risk culture ethical standards as well as control
•Risk management measures to ensure that it is
process adhered to by all internal and
external stakeholders;
•ethical risks and opportunities are
incorporated in the risk
management process.
4.The board should be The board should ensure that:
responsible for the •the development and
governance of risk: implementation of risk management
•Risk governance policies, processes and systems are
•Risk policies adequate;
•Risk training •risk reports include the
•Risk reporting effectiveness of the risk
•Risk monitoring management;
•the board’s responsibility for risk
governance is expressed in the
board charter;
•continuous board training
programmes include risk
governance;
•the risk management policies and
strategic plans are approved;
•the implementation of the risk
management plan is reviewed at
least annually; and
•the implementation of the risk
management plan is monitored
continually.
5.The board should determine The board should:
the levels of risk tolerance: •set the levels of risk tolerance
•Risk strategy annually;
•Risk appetite •approve the risk appetite; and
•monitor that risks taken are within
the approved tolerance and appetite
levels.
6.The risk committee or audit The board should:
committee should assist the •appoint a board risk committee;
board in carrying out its risk and
responsibilities: •evaluate the committee’s
•Risk governance performance annually.
•Board risk committee
7.The board should delegate The board should:
to management the •ensure that the risk strategy is
responsibility to design, executed by management by means
implement and monitor the of risk management systems and
risk management plan: processes;
•Risk governance •ensure that management is
•Risk management accountable for integrating risk in
•Risk management the day-to-day activities of the
process company; and
•ensure that the Chief Risk Officer is
a suitably experienced person who
has access and interacts regularly
on strategic matters with the board
and/or appropriate board committee
and executive management.
8.The board should ensure The board should:
that risk assessments are •ensure that risk assessments are
performed on a continual performed regularly according to the
basis: risk management strategy;
•Risk assessments •ensure that risks are prioritised and
•Key Risk Indicators ranked according to the order of
•Scenarios importance;
•Loss incidents •ensure that prioritised risks are
•Risk register managed according to a Key Risk
•Communication (bottom- Indicator management process;
up and top-down) •ensure that risks are managed from
a bottom-up and top-down approach
involving all role players; and
•ensure that a risk register is
updated based on the risk and
control self-assessment process,
loss incidents and risk scenarios.
9.The board should ensure The board should:
that frameworks and •ensure that a risk management
methodologies are framework and processes are in
implemented to increase the place to anticipate unpredictable
probability of anticipating risks; and
unpredictable risks: •ensure that the components of the
•Risk management risk management framework are
framework known to all role players.
10.The board should ensure The board should:
that management considers •ensure that management regularly
and implements appropriate updates the risk register in terms of
risk responses: new risks and control measures;
•Risk control and
•ensure that management
demonstrates to the board that the
risk exposures are managed and
opportunities exploited to the benefit
of the overall performance of the
organisation.
11.The board should ensure The board should:
continual risk monitoring by •ensure the continuous monitoring
management: of risk management according to the
•Risk monitoring approved risk management process;
and
•ensure that the responsibility for
risk monitoring is clearly defined in
the risk management plan.
12.The board should receive The board should:
assurance regarding the •ensure that management provides
effectiveness of the risk assurance to the board that the risk
management process: management plan is integrated in
•Risk monitoring the daily activities of the company;
•Internal audit and
•ensure that internal audit provide
an independent assessment of the
effectiveness of the risk
management processes and control
measures to the board.
13.The board should ensure The board should:
that there are processes in •ensure that unexpected risk events
place enabling complete, are disclosed in integrated risk
timely, relevant, accurate and reports; and
accessible risk disclosure to •ensure that their views on the
stakeholders: effectiveness of the risk
•Risk disclosure management process are disclosed
in the integrated risk report.
Total rating
Source: Adapted from King Committee on Corporate Governance. (King III). 2009. The King
Report on Corporate Governance for South Africa. Pretoria: Institute of Directors in Southern
Africa.
Example
Table 6.2 can be used to evaluate the implementation of the principles of good corporate
governance relating to ethics and risk management. The following rating scale can be used
to determine the level of compliance, for example:
1 = Non compliance
2 = Compliant to a degree
3 = Fully compliant
Fill in the rating in the column provided. Add the ratings and assess the result against the
categories below:
Result
0 – 15 = Unacceptable
15 – 25 = Acceptable
26 – 39 = Excellent

6.7Contextualisation
of the principles of
corporate governance in terms of corporate
citizenship
To ensure an organisation’s contribution towards corporate citizenship, it is crucial to
adhere to sound corporate governance and the subsequent triple bottom line
responsibilities, namely environmental, social and economic responsibilities. According
to Hendrikse and Hendrikse,45 the triple bottom line concept is used to capture the set of
values, issues and processes that organisations must address in order to minimise the
harm resulting from their activities and to create economic, social and environmental
value. They further state that organisations that are optimising their returns, in the best
interests of shareholders, are in the best position to contribute to sustainable
development, economic growth and national prosperity.46 Therefore, it can be stated that
the implementation of principles for sound corporate governance could ensure success
for the organisation. This can result in the achievement of sustainable successes for the
community and the economy as a whole. In other words, sound corporate governance
principles can ensure a positive approach and contribution to an organisation’s corporate
citizenship responsibilities.
The implementation of the principles of sound corporate governance can benefit the
organisation as well as society in terms of their triple bottom line responsibilities.
Examples of these benefits are reflected in Table 6.3.

Table 6.3: Benefits of sound corporate governance to triple bottom line responsibilities

Triple bottom Benefits to the organisation Benefits to community

line factor (Corporate citizenship)

•Profitable organisation •Contribution towards the

Economic factor •Corporate growth employment rate
•Financial compliance •Wealth creation
•Corporate competitive role •Contribution to the
player in the economy country’s gross domestic
•Acceptable for external product (GDP)
investments •Contribution to a sound
•Growth of customer base tax base
•Growth of shareholders •Contribution towards an
•Good reputation increase in the export of
goods and services
Environmental •Contribute to the national •Customer care relations
factor environmental objectives •Active participation in
•Attracting external the community activities
investments by complying with •Reduced environmental
global environmental problems
objectives
•Positive contribution to the
organisation’s bottom line
objectives by effective waste
management.
Social factor •Increase in the reputation •Increased employee
brand welfare
•Reduced workplace injuries •Increased safe and
•Increased positive working healthy working
relationship with employees conditions
•Motivated labour force •Fair compensation
•Increase in qualified •Increased quality goods
employees and services
•Reduced absenteeism •Increased support in
formal and informal
training

Incorporating sound corporate governance principles in support of the triple bottom line
factors can have a positive effect on the organisation, the employees and the overall
wellbeing of the country. However, it is of paramount importance that these initiatives
are also incorporated into the governance principles for the country. The last section of
this chapter will briefly discuss a number of principles regarding good corporate
governance that are important at a country’s government level.
6.8Corporate governance principles for a
government
According to the United Nations Economic Commission for Africa, 47 sound economic
governance is regarded as being primarily dependant on the strength of its institutional
framework; the flexibility, manoeuvrability and resilience to the changing political,
economic and social development; and the ability and competence of the personnel to
make rational decisions. Therefore, it is clear that the triple bottom line responsibilities
start at the highest governance level of a country, namely the government. For a
government to ensure good corporate governance, they should ensure the following:
•Ensure the capacity to manage resources efficiently, appointing capable staff in
management positions
•Formulate, implement and enforce sound policies and regulations
•Be monitored and be held accountable
•Ensure and have respect for the rules and norms of economic interaction
•Be unimpeded by corruption and other activities inconsistent with the public
trust.48

The World Bank used the following Worldwide Governance Indicators to capture six key
dimensions of governance:
1.Voice and accountability. The extent to which a country’s citizens are able to
participate in selecting a government and enjoying freedom of speech.
2.Political stability. The likelihood that the government will be destabilised or
overthrown by unconstitutional means such as terrorism and politically motivated
violence.
3.Government effectiveness. The quality of public services, the degree of
independence from political pressures, the quality of policy formulation and the
creditability of the government’s commitment to such policies.
4.Regulatory quality. The ability of the government to formulate and implement
sound policies and regulations to promote private sector development.
5.Rule of Law. The extent to which agents have confidence in and abide by the rules
of society and the quality of contract enforcement, property rights, the police and
the courts as well as the likelihood of crime and violence.
6.Control of corruption. The extent to which public power is exercised for private
gain, including corruption.49

These governance indicators are used for a survey to establish a broad cross-country
comparison to evaluate trends over time. Each indicator is ranked on a percentage scale
of 0 – 100%. According to surveys for 2011 to 2014, the BRICS (Brazil, Russia, India, China
and South Africa) countries were rated as indicated in Figures 6.5, 6.6, 6.7 and 6.8 on the
following pages.

Figure 6.5: Governance Indicators for Brazil: 2011 to 2014

Source: The World Bank: The Worldwide Governance Indicators (WGI) project: World Bank
Survey. [Online]. Available: http://info.worldbank.org/governance/wgi/index.aspx#doc [4
February 2016].

The best performing indicator for Brazil is voice and accountability, while the control of
corruption is on a downward slope since 2011. The poorest performing indicator is
political stability.

Figure 6.6: Governance Indicators for South Africa: 2011 to 2014

Source: The World Bank: The Worldwide Governance Indicators (WGI) project: World Bank
Survey. [Online]. Available: http://info.worldbank.org/governance/wgi/index.aspx#doc [4
February 2016].

From a South African perspective, the best performing indicator is voice and
accountability. The indicators which are performing below average are control of
corruption and political stability.

Figure 6.7: Governance Indicators for China: 2011 to 2014

Source: The World Bank: The Worldwide Governance Indicators (WGI) project: World Bank
Survey. [Online]. Available: http://info.worldbank.org/governance/wgi/index.aspx#doc [4
February 2016].

The governance indicators for China are mostly under average with government
effectiveness scoring the highest and voice and accountability the lowest.

Figure 6.8: Governance Indicators for India: 2011 to 2014

Source: The World Bank: The Worldwide Governance Indicators (WGI) project: World Bank
Survey. [Online]. Available: http://info.worldbank.org/governance/wgi/index.aspx#doc [4
February 2016].

India scored above average for the indicator of voice and accountability, while political
stability and regulatory quality are the lowest rated indicators.

Figure 6.9: Governance indicators for Russia: 2011 to 2014

Source: The World Bank: The Worldwide Governance Indicators (WGI) project: World Bank
Survey. [Online]. Available: http://info.worldbank.org/governance/wgi/index.aspx#doc [4
February 2016].

Russia also scored well below average with government effectiveness and control of
corruption on an upward trend and political stability rated as the lowest.
A comparison of the BRICS countries for 2014 is reflected in Figure 6.10. We can see
that South Africa’s average performance is higher than the other countries, followed by
Brazil. Political stability is the one governance indicator, which seems to be problematic
for all countries.

Figure 6.10: Dimensions for Governance Indicators for BRICS Countries 2014
Source: The World Bank: The Worldwide Governance Indicators (WGI) project: World Bank
Survey. [Online]. Available: http://info.worldbank.org/governance/wgi/index.aspx#doc [4
February 2016].

Although South Africa’s ratings are generally better than the other BRICS countries, there
are recent trends and incidents which could negatively influence its rating in the future.
Examples of these are the following:
•South Africa is facing an increasing number of labour strikes, especially
unprotected strikes. These strikes are lengthening and leading to greater negative
impacts on companies, the employees and the country. In 2012, these strikes
claimed the lives of 45 people and hundreds were injured during a wage-related
strike at Marikana (Lonmin mine). According to John Brand, this sparked further
strikes across the mining sector in South Africa. Although the strikes became more
violent, the police remained passive, and a general failure on the part of the
government to effectively end the strikes could have a negative effect on the rating
for government effectiveness.50
•The ongoing saga of the Nkandla project and the unauthorised spending of public
funds where it was alleged that President Zuma and his family were unfairly
enriched out of state coffers when building and upgrading his private estate. This
could also negatively affect the dimension of controlling corruption with the legal
conclusions in favour of the public.
•Another concern is the rising violence in political circles. An example was the
involvement of police during a parliament session in February 2015, where
members of parliament were removed by force. This could also negatively influence
the rating of government effectiveness.

These examples and many more could negatively influence the current effectiveness of
South Africa’s corporate governance and consequently hamper the economic growth and
wellbeing of the community. As such, it is crucial that all role players take cognisance of
the principles of good corporate governance and implement them to ensure that the
country remains an economically viable option for foreign investors. This will then mean
that corporate organisations and the government will contribute positively to the
enhancement of their triple bottom line responsibilities.
6.9Conclusion

This chapter provided a brief background to the history of corporate governance and the
meaning of the term. During the review, various approaches and principles for sound
corporate governance were identified. It was found that these principles are usually
incorporated into an organisation’s code of business conduct. However, this chapter
focused on risk management and ethics and those concepts were discussed in more
detail.
A typical risk management framework was analysed and explained in terms of its
components, namely risk culture, strategy, structure and process. Based on the King III
report, the principles for the governance of ethics and risk were analysed and linked to
specific requirements and actions for organisations. These principles are an integrated
part of the overall principles of good corporate governance.
In addition, the principles were linked with an organisation’s contribution to their
triple bottom line responsibilities in terms of the economic, social and environmental
factors. The sound governance principles in terms of the triple bottom line factors were
also analysed to identify the benefits for an organisation and the community as a whole.
These can be seen as the potential contribution towards good corporate citizenship.
Finally, the corporate governance principles were linked to a government’s
contribution towards the triple bottom line. It was found that sound corporate
governance starts at the highest level of a country, namely the government. The World
Bank’s rating of specific criteria for good corporate governance was used to compare the
BRICS countries. The results of the last survey in 2014, favoured South Africa, however,
there are various incidents that could negatively affect the next survey.

Multiple-choice questions
1.Choose the most appropriate definition for operational risk:
a.The loss due to inadequate risk controls.
b.The loss due to inadequate internal processes, people, systems or external
events.
c.The loss due to an incorrect business decision.
d.The loss due to fluctuations in interest rates.

2.Choose the most correct statement regarding risk reporting:

a.A form of risk reporting is disclosure of risk management. This entails
providing risk information to the public, which could assist board members to
make informed decisions.
b.A form of risk reporting is disclosure of risk management. This entails
providing risk information to the public, which could assist potential
investors to make informed decisions.
c.A form of risk reporting is disclosure of risk management. This entails
providing risk information to the public, which could assist internal risk
managers to make informed decisions.
d.A form of risk reporting is disclosure of risk management. This entails
providing risk information to the public, which could assist internal auditors to
make informed decisions.

3.Choose the most correct statement regarding a code of business conduct:

a.A code of business conduct (including ethics) must ensure that the public is
committed to act in the best interests of all stakeholders of the organisation.
b.A code of business conduct (including ethics) must ensure that risk
managers are committed to act in the best interests of all stakeholders of the
organisation.
c.A code of business conduct (including ethics) must ensure that directors,
management and employees are committed to act in the best interests of all
stakeholders of the organisation.
d.A code of business conduct (including ethics) must ensure that customers are
committed to act in the best interests of all stakeholders of the organisation.

4.Which of the following most accurately reflects the components of a typical risk
management framework?
a.A typical risk management framework should consist of the following
components: a risk management strategy, risk management structure and a risk
management process.
b.A typical risk management framework should consist of the following
components: a risk management culture, risk management structure and a risk
management process.
c.A typical risk management framework should consist of the following
components: a risk management culture, risk management strategy, internal
audit structure and a risk management process.
d.A typical risk management framework should consist of the following
components: a risk management culture, risk management strategy, risk
management structure and a risk management process.

5.The board of directors play a crucial role in the governance of risk. Although they
are ultimately responsible for the risk management of the organisation, the
actual management of risks lies with the:
a.business managers or the risk owners
b.board of directors
c.internal audit
d.compliance officers

Discussion questions
1.In terms of the principles of sound corporate governance, distinguish between
the concepts of accountability and responsibility.

2.Explain the factors of operational risk management.

3.Discuss the triple bottom line factors with regards to the benefits to corporate
citizenship.

References
1.The Minister of Justice and Constitutional Development v The Southern African
Litigation Centre (867/15) [2016] ZASCA 17 (15 March 2016). [Online].
Available: http://www.justice.gov.za/sca/judgments/sca_2016/sca2016-
017.pdf [3 September 2016].
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15(2), Art. #575, 8 pages. [Online].
Available: http://dx.doi.org/10.4102/sajim.v.15/2.575.
4.Mongalo, T. 2003. Corporate Law and Corporate Governance: A Global Picture of
Business Undertakings in South Africa. New Africa Books (Pty) Ltd. Cape Town.
5.Ibid.
6.Ibid.
7.Ibid.
8.King Committee and Commission on Corporate Governance. 2002. King II Report
on Corporate Governance for South Africa. Draft for Public Comment. Pretoria:
Institute of Directors in Southern Africa.
9.Anand, S. 2008. Essentials of Corporate Governance. John Wiley & Sons, Inc.
Hoboken, New Jersey.
10.Barac, K. 2001. Corporate Governance in the Public Sector. Auditing SA. [Online].
Available: http://www.saiga.co.za/publications-auditingsa.htm [28 February
2012].
11.Hendrikse, JH & Hendrikse L. 2004. Business Governance Handbook. Principles
and Practice. Juta & Co. Ltd. Cape Town.
12.Basel Committee on Banking Supervision. 2015. Guidelines: Corporate
governance principles for banks. Bank for International Settlements.
13.Anand, S. 2008. Essentials of Corporate Governance. John Wiley & Sons, Inc.
Hoboken, New Jersey.
14.Mensah, S. 2003. Corporate governance in Africa: The role of capital market
regulation. Presented at the 2nd Pan African Consultative Forum on Corporate
Governance, Nairobi, Kenya, 13-21 July, 2003.
15.Mongalo, T. 2003. Corporate Law and Corporate Governance: A Global Picture of
Business Undertakings in South Africa. New Africa Books (Pty) Ltd. Cape Town.
16.King Committee and Commission on Corporate Governance. 2002. King II Report
on Corporate Governance for South Africa. Draft for Public Comment. Pretoria:
Institute of Directors in Southern Africa.
17.Mongalo, T. 2003. Corporate Law and Corporate Governance: A Global Picture of
Business Undertakings in South Africa. New Africa Books (Pty) Ltd. Cape Town.
18.Hendrikse, JH & Hendrikse, L. 2004. Business Governance Handbook. Principles
and Practice. Juta & Co. Ltd. Cape Town.
19.Hilger, S. 2010. The relationship between corporate governance and firm
performance revisited: Where do we stand? Journal on Corporate Ownership and
Control, 7(3), Spring 2010. Virtus Interpress, Ukraine.
20.Rossouw, G.J. 2005. Business Ethics and Corporate Governance in Africa.
University of Pretoria. Sage Publications.
21.Hendrikse, JH & Hendrikse, L. 2004. Business Governance Handbook. Principles
and Practice. Juta & Co. Ltd. Cape Town.
22.Ibid.
23.Redmond, L. 2014. Risk Culture: A View from the Board. Risk Culture and Effective
Risk Governance. Edited by P. Jackson. Risk Books, Incisive Media Investments, Ltd.
24.Hendrikse, JH & Hendrikse, L. 2004. Business Governance Handbook. Principles
and Practice. Juta & Co. Ltd. Cape Town.
25.King Committee on Corporate Governance. (King III). 2009. The King Report on
Corporate Governance for South Africa. Pretoria: Institute of Directors in Southern
Africa.
26.Ibid.
27.Ibid.
28.Young, J. 2010. Corporate Governance and Risk Management: A South African
Perspective. Journal on Corporate Ownership and Control, (7)3, Spring 2010. Virtus
Interpress. Ukraine.
29.Alvarez, G. 2005. Operational Risk: Practical Approaches to Implementation.
Edited by E. Davis. London: Risk Books.
30.Blunden, T & Thirlwell, J. 2013. Mastering Operational Risk: A practical guide to
understanding operational risk and how to manage it. 2nd edition. Pearson
Education Limited. Edinburgh.
31.International Organisation for Standardisation (ISO 31000). 2009. Risk
Management Principles and Guidelines. Published by SABS Standards Division.
Pretoria.
32.Young, J. 2014. Risk Management. 2nd edition. Van Schaik Publishers. Pretoria.
33.Ibid.
34.Young, J. 2010. Corporate Governance and Risk Management: A South African
Perspective. Journal on Corporate Ownership and Control, (7)3, Spring 2010. Virtus
Interpress. Ukraine.
35.Ibid.
36.Basel Committee on Banking Supervision. 2004. International Convergence of
Capital Measurement and Capital Standards. Bank for International Settlements.
37.Young, J. 2014. Risk Management. 2nd edition. Van Schaik Publishers. Pretoria.
38.Young, J. 2010. Corporate Governance and Risk Management: A South African
Perspective. Journal on Corporate Ownership and Control, (7)3, Spring 2010. Virtus
Interpress. Ukraine.
39.Swenson, K. 2003. A qualitative operational risk framework: Guidance, structure
and reporting. Edited by Carol Alexander. London. Pearson Education, Ltd.
40.Edelblut, F & Murdock, H. 2008. The Role of Internal Audit. Governance, Risk and
Compliance Handbook. Technology, Finance, Environmental, and International
Guidance and Best Practices. Edited by Anthony Tarentiono. John Wiley & Sons, Inc.
Hoboken, New Jersey.
41.Blunden, T & Thirlwell, J. 2013. Mastering Operational Risk: A practical guide to
understanding operational risk and how to manage it. 2nd edition. Pearson
Education Limited. Edinburgh.
42.Young, J. 2014. Risk Management. 2nd edition. Van Schaik Publishers. Pretoria.
43.Chapman, RJ. 2011. Simple tools and techniques for enterprise risk management.
2nd edition. John Wiley & Sons Ltd. West Sussex, England.
44.Ong, M. 2007. The Basel Handbook. A guide for financial practitioners. Published
in Association with KPMG by Risk Books, a division of Incisive Financial Publishing
Ltd. Haymarket.
45.Hendrikse, JH & Hendrikse L. 2004. Business Governance Handbook. Principles
and Practice. Juta & Co. Ltd. Cape Town.
46.Ibid.
47.United Nations Economic Commission for Africa (UNECA). 2002. Guidelines for
Enhancing Good Economic and Corporate Governance in Africa.
48.Young, J. 2008. Corporate Governance and Risk Management in Africa.
Governance, Risk, and Compliance Handbook. Edited by A. Tarentino. John Wiley &
Sons, Inc. New Jersey.
49.Kaufmann, D, Kraay, A & Mastruzzi, M. 2010. The Worldwide Governance
Indicators. Methodology and Analytical Issues. The World Bank Development
Research Group. Macro and Growth Team. September 2010. Policy Research
Working Paper 5430. [Online]. Available: www.govindicators.org [9 February
2016].
50.Mining weekly. 2014. SA One of the world’s most violent, strike-prone countries.
[Online]. Available: http://www.miningweekly.com/article/sa-one-of-the-worlds-
most-violent-strike-prone-countries-2014-08-06 [9 February 2016].
chapter
Strategic management and
competitive advantage
Catherine le Roux 7
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Have a clear understanding of the strategic management process
•Explain the goal of a sustainable corporate
•Understand how to embed sustainability into strategy formulation
•Understand how to embed sustainability into strategy implementation
•Understand how to embed sustainability into strategy controls to ensure
implementation of a sustainable strategy
KEYWORDS AND CONCEPTS
-business level strategies
-business model
-competitive advantage
-corporate citizenship
-corporate level strategies
-cost leadership strategy
-differentiation strategy
-embeddedness
-external environment
-focus strategy
-internal environment
-strategic management process
-strategy control
-strategy implementation
-strategy planning
-sustainability
-sustainable competitive advantage
-sustainable corporate

OPENING CASE SCENARIO

Nedbank
At Nedbank, corporate citizenship is about moving the business from what is easy to
what is required. Known as South Africa’s green bank, Nedbank in the early 1990s
made a commitment to embark on a journey towards sustainability. Nedbank refers
to its decision to make sustainability part of its business strategy as ‘ambitious’ when
it began, but now see sustainability as a ‘way of life’ at the bank and have long-term
goals for its business in South Africa.
The journey started with the launch of the Green Trust with the World Wide Fund
for Nature (WWF) South Africa and progressed to Nedbank’s inclusion in the Dow
Jones World Sustainability Index and the Johannesburg Stock Exchange (JSE)
Social Responsibility Index (SRI) in 2004. In 2005, Nedbank adopted the Equator
Principles which form part of a risk management framework that can be adopted by
financial institutions for determining, assessing and managing environmental and
social risk in projects.1 In 2005, Nedbank also began to actively integrate
sustainability into all business processes and decision making at the corporate.
Shortly afterwards, Nedbank earned a triple-A rating from Innovest Strategic
Advisors Inc. for leading in its sector in terms of environmental and social
performance and strategies. Nedbank also received an award for South African Bank
of the Year by The Banker magazine in 2006. This was followed by an award by
the Financial Times for Emerging Markets Sustainable Bank of the Year for the
Middle East and Africa, which was awarded both in 2007 and 2008. Between 2007
and 2010, Nedbank focused on a group-wide climate change programme, introduced
green procurement principles and committed towards carbon neutrality.
Sustainability formed part of innovative and new product development that resulted
in the creation of the Green Index, the BGreen Exchange-traded Fund, the Green
Affinity banking card and led to extensive financing of renewable energy. In 2010,
Nedbank became the first carbon-neutral corporate in Africa. Sustainability
progressively became part of Nedbank’s genes and business identity and naturally
part of its reporting. In 2010, Nedbank received an award of Excellence in
Sustainability Reporting by Ernst & Young and began its Integrated Reporting
journey. In 2011, Nedbank received an award from the Chartered Secretaries
Southern Africa (CSSA) for its sustainable business reporting. Between 2012 and
2013, Nedbank became a signatory to the CEO Water Mandate, which is a United
Nations Global Compact; launched the Nedbank Green Living Guide, which included
increased social investment to R27,8 million; and introduced a ESG (Environmental,
Social and Governance) rating systems for suppliers. Nedbank also attained a
disclosure score of 100% in the South African Carbon Disclosure Project Index 2013
and was awarded the Transformation Champion of the Year in 2013.
The foundation for Nedbank’s efforts and successes in sustainability came from
the important realisation and acknowledgement about business in South Africa.
Nedbank purport that business in South Africa cannot ignore the high levels of
poverty and remaining inequality that is clearly evident. Neither can it ignore the
millions of citizens who do not have access to formal employment opportunities,
sufficient food, clean water and sanitation, safe and affordable transportation,
suitable housing, modern health care, education and financial services. Nedbank
understands that sustainability starts with acknowledging these realities and
business’s role in changing them. Nedbank sees its relationship with stakeholders as
an imperative to its success as a financial institution. Nedbank accept that human
society and economic systems are wholly dependent on the natural world and do not
exist without it. It was this thinking that started and developed Nedbank’s
sustainability journey that has evolved to become a core principle of how it does
business.
Nedbank made the decision in 2014 to set Long-term Goals for South Africa.
These goals are referred to as Nedbank’s Fair Share 2030 strategy and represent
Nedbank’s concerted and committed response to doing what needs to be done in
South Africa. Fair Share 2030 is a deliberate effort to enable sustainability through
products and services. In essence, the Long-term Goals encompass: affordable
energy services while containing carbon emissions; sustainable clean water and
sanitation; employment rates comparable to other prosperous nations; savings and
investments that support national development objectives; and good, cost-effective
health and educational outcomes. Nedbank recognises that the achievement of
these goals will also enable other desirable outcomes, including improved food
security, greater resource efficiency, less divided communities and lead to
sustainable competitive advantage. For Nedbank, it is about recognising that, to be a
sustainable, business it needs to operate within the confines of environmental limits
while meeting social needs. Fair Share 2030 is Nedbank’s strategic response to
harness business and investment capabilities to help meet the societal needs of SA
going forward. Fair Share 2030 is what Nedbank considers its blueprint for remaining
a truly successful bank and for practising corporate citizenship.2
7.1Introduction

The Nedbank opening scenario illustrates the critical role business can play in the
practice of corporate citizenship. For Nedbank, it began with the realisation that
corporate citizenship meant moving from what is easy or business-as-usual towards a
different, sustainable way of conducting business that is considered a prerequisite for
being in business. The Nedbank case demonstrates the influential position corporates
have to enable, provide and channel rights to individuals while simultaneously enhancing
financial, social and environmental resources that can be developed into
sustainable competitive advantage.
In this chapter, we focus on how corporates can practise corporate citizenship by
embedding sustainability into their strategic management process. Each section
introduces an aspect of the strategic management process and discusses how
sustainability needs to be made a central part of every strategic management choice.
7.2Theinterface between strategic management,
corporate citizenship and sustainability
The opening scenario refers to Nedbank’s Fair Share 2030 strategy which is their
‘strategic response… to help meet the societal needs of SA going forward’. Nedbank’s Fair
Share 2030 strategy is a ‘deliberate effort to enable sustainability through products and
services’ and was also described as a ‘way of life’ forming part of the corporate’s ‘business
identity’.3 Nedbank is an example of a corporate that aims to administer citizenship rights
by embedding sustainability (making it a part of) into its strategic management process
and corporate activities. In order for other corporates to follow this example, it is
necessary that they see the strong connection between these three interlinked concepts:
strategic management process, corporate citizenship and sustainability. Each concept is
discussed below and forms the foundation of this chapter.
7.2.1Strategic management process
Strategic management refers to the overall management process that strives to identify
the corporate’s purpose and to position a corporate to succeed in its
environment.4 The strategic management process consists of a series of management
decisions about the corporate’s strategy planning and development, its implementation
and its performance measurement and control.5 These decisions pertain to how the
corporate defines its value creation process and delivers on it. The process can be broken
down into three phases.
1.Strategy planning and development includes the setting of the strategic
direction. This refers to the corporate vision, mission and value statements. This
phase requires that management conducts an analysis of the internal and external
environments. Corporates in this phase also develop business models and select
corporate and business level strategies to achieve their goals and objectives6 (refer
to sections 7.4–7.6).
2.Strategy implementation refers to all the decisions and activities required to
make the chosen strategies a reality. This phase includes the integration and
application of various drivers necessary to ensure the success of the strategies and
effective performance as a corporate7 (refer to section 7.7).
3.Strategy performance and control includes management efforts and
mechanisms to monitor, evaluate and track a strategy as it is being implemented so
as to detect problems or changes that could affect the strategic performance of the
corporate8 (refer to section 7.8).

The strategic management process supports corporates to achieve their primary

objective, which is to develop competitive advantage over their competitors.9 A corporate
is said to have a competitive advantage when it is more profitable than its competitors by
creating products or offering services that are of a higher quality, lower cost or better
value than that of its competitors.10 Competitive advantage can be achieved when a
corporate capitalises on its valuable internal resources, while at the same time exploring
opportunities and neutralising threats in the external environment. A corporate’s
resources need to be rare and not available in any rival corporate. This means that
competitors should not be able to imitate, reproduce or substitute these
resources.11 When a corporate is able to secure such an advantage, retain its customers
for a long time and leverage higher profit margins than its competition, it then obtains a
sustainable competitive advantage. Sustainable competitive advantage occurs when a
corporate achieves ‘above average performance in an industry for at least ten years or
more.’12
7.2.2Corporate citizenship
Corporate citizenship was described in Chapters 1 and 2 as a concept through which
the business activity of corporates has the potential to greatly influence the
administration of citizenship rights. 13 In South Africa, millions of citizens do not have
access to basic citizenship rights including: formal employment opportunities, sufficient
food, clean water and sanitation, safe and affordable transportation, suitable housing,
modern health care, education and financial services. 14
Corporate citizenship calls for corporates to recognise that they need to support
government in addressing these unmet citizenship rights through their business
activities.15 Corporate citizenship means that corporates need to do more than just focus
on their own financial performance but also focus on the sustainability of their business,
the environment, the economy and society at large.
7.2.3Sustainability
Sustainability has often been used interchangeably with sustainable development, social
responsibility, climate change green initiatives and corporate citizenship.16 It was
introduced and discussed in Chapter 2 as ‘development that meets the needs of the
present without compromising the ability of future generations to meet their own
needs.’17 For corporates, sustainability means developing the capacity to endure, through
the internalisation of social and environmental concerns into business operations, and in
interactions with stakeholders.18 Sustainability calls for the simultaneous pursuit of
economic prosperity (Profit), environmental quality (Planet) and social equity (People).
Sustainability means that corporates no longer perform against a single, financial bottom
line but against the triple bottom line (People, Planet and Profit). The concept of
sustainability is also closely related to equity, governance and social justice, which are
critical to the conceptualisation of corporate citizenship.19 The concept is also closely
linked with strategy and the means by which corporates pursue and maintain
competitive advantage. 20
Sustainability is fundamentally a strategic issue and is the business of staying in
business, connected to a corporate’s resilience and performance over the long term. 21 The
connection between strategy and sustainability has often been referred to as the
‘business case for sustainability’. The business case for sustainability emphasises the
immense value and benefits that derive from a strategic approach and response towards
sustainability by corporates. Some of these benefits include enhanced reputation, cost
savings, increased innovation, competitiveness and employee retention, the creation of
valuable and rare resources and capabilities, and reduced risk. 22 For example, a corporate
can save costs by using fewer resources, which often has an environmental benefit too
such as using less water in the manufacturing process. When corporates are committed
to finding more sustainable ways of operating, they often become more efficient and
innovative in their processes. This can lead to the development of new or enhanced
product offerings that can also lead to improved customer satisfaction and the generation
of more sales.23 When corporates operate sustainably, then there is great potential to
achieve their desired objectives.24 The benefits of being sustainable can result in
enhanced competitive advantage and the positive performance of the corporate. 25
The strategic management process (introduced in section 7.2.1) is the means by which
a corporate pursues competitive advantage that is inextricably linked to a corporate’s
impact on the economy, society and the environment (sustainability). In other words,
corporates desiring to practice corporate citizenship (administer social, political and civil
rights), remain competitive and perform in the long-term should incorporate (embed)
sustainability into their business activities and strategic management process. 26
7.3Embeddingsustainability into the strategic
management process: the goal of a sustainable
corporate
So what does it mean to embed sustainability into the strategic management
process? Embedding sustainability is a deliberate and continuous process by corporate
leaders that involves a series of decisions focused on making sustainability part of the
strategic management process.27
Sustainability embeddedness requires that corporate leaders embed sustainability
into their strategy planning, development, and implementation and into the monitoring
of their strategies. Sustainability needs to become part of the process by which value is
added to products and services through the core activities of the
corporate.28 Sustainability needs to be embedded in corporate thinking and into decision
making so that there is a holistic and integrative consideration of a corporate’s financial
performance, with its social and environmental performance. 29 To embed sustainability,
corporates need to shift from seeing corporate citizenship and sustainability as the layout
of additional costs, an ‘add-on’ function, a business constraint or the distribution of
charitable deeds.30 Instead corporates should perceive sustainability and the
administration of citizenship rights as part of how they survive and thrive in the long
term and as part of their ‘DNA’.31
Corporates who focus on embedding sustainability into their strategic management
process and business operations are referred to as sustainable corporates. A sustainable
corporate is characterised by its strongly internalised ideology of working for a
sustainable world. These corporates actively promote sustainability efforts and
implement financially viable business models that produce economic viability, growth
and performance. Sustainable corporates choose strategies that simultaneously and
integratively contribute to solving some of the complex social and environmental
problems.32 A sustainable corporate accepts that sustainability, strategy, risk and
performance are inseparable and that a corporate’s profitability is enhanced by creating
value in a sustainable way.33 We read in the opening scenario that Nedbank are
committed to becoming a ‘sustainable business’, demonstrated through their proactive
efforts to make sustainability part of their business model, strategy and their decision
making.
A sustainable corporate has a stakeholder focus as opposed to a narrow shareholder
focus.34 This means that the corporate considers and engages with a broader group of
stakeholders (such as including environmental and community groups) as opposed to
only considering shareholders and stakeholders associated with financial performance
(that is, a narrow focus). When corporates engage with stakeholders and maintain better
relationships with them, the corporate is able to differentiate themselves from their
competitors, which can lead to above-average performance associated with improved
corporate performance and resilience. 35
Sustainability embeddedness at Nedbank attributed to many benefits for the
corporate including an enhanced reputation (from awards) and the development of new
sustainable products including the Green Index, the BGreen Exchange-traded Fund and
the creation of the Green Affinity card.
DILEMMA
Nedbank awards
Nedbank has received numerous awards over the years including: the South African Bank of
the Year by The Banker magazine in 2006, the Financial Times for Emerging Markets
Sustainable Bank of the Year for the Middle East and Africa, which was awarded both in
2007 and 2008, and the award of Excellence in Sustainability Reporting by Ernst & Young in
2011. Nedbank also received a disclosure score of 100% in the South African Carbon
Disclosure Project Index 2013 and was awarded the Transformation Champion of the Year
in the same year. These awards significantly contributed to enhancing Nedbank’s brand and
reputation, which is a known source of competitive advantage. 36

Critically discuss whether Nedbank’s awards should be considered a reflection or sign that
the corporate is indeed a ‘sustainable corporate’?
To what extent would awards convince you they are operating sustainably?

These questions are some a decision maker needs to consider about his or her corporate
and when considering the performance of other corporates.

7.4Strategic direction
A corporate’s strategic direction informs and shapes how it defines itself and where it
finds its unique competitive advantage. The strategic direction includes the basic goals
and values that shape a corporate’s strategic position. 37 A strategic direction includes a
corporate’s vision (defined long-term direction), mission (goals and aims) and value
(beliefs and philosophy) statements for how the corporate is to achieve its objectives. A
clear strategic direction becomes the basis for all decisions and actions and it is therefore
important that sustainability forms a central and embedded part of it.
When sustainability forms part of a corporate’s strategic direction, it is a good
indication that the corporate is serious about sustainability and is approaching it
strategically. Sustainability-embedded vision, mission and value statements are powerful
strategic tools for sustainability. They aid a corporate’s strategy development,
implementation and control processes, and remind employees about the purpose of the
corporate.38 A sustainable strategic direction guides employees when dealing with the
competing demands of stakeholders. 39 A good example of a corporate that has embedded
sustainability into its statements of strategic direction is Chevron.
We can see from ‘The Chevron Way’ example, on the next page that Chevron is
committed to ‘protecting people and the environment’ and to ‘sustainable economic
progress.’40 The Chevron Way establishes a common understanding that business should
be conducted in a sustainable way by not just focusing on performance outcome but also
on how that performance is achieved. Chevron’s vision and values to be ‘admired for its
people, partnership and performance’ suggest that it is committed to citizens and
stakeholders and the administration of rights to them through business.
When setting the strategic direction, sustainable corporates need to consider the role
of the corporate in society, the stakeholders affected by business and the values and
principles underpinning the business model. 41
7.5Strategic analysis
Strategic analysis refers to the part of the strategic management process where
strategies are developed by investigating the corporate environment both internally (for
strengths and weaknesses) and externally (for opportunities and threats) in which it
operates. From the information gathered by conducting a strategic analysis, corporate
decision makers will determine how the corporate will define its position relative to its
competition and operational environments. This position should be selected with
consideration of social and environmental issues.43
Example
The Chevron Way
Chevron is an energy resource corporate that has strategically formulated: The Chevron
Way.42 The Chevron Way explains Chevron’s approach to what it does, what it believes and
what it plans to accomplish. The Chevron Way is a vision to be the global energy corporate
most admired for its people, partnership and performance. Chevron aspires to safely provide
energy products vital to sustainable economic progress and human development throughout
the world, be a corporate with superior capabilities and commitment and the partner of
choice for business. Chevron aspires to earn the admiration of all its stakeholders –
investors, customers, host governments, local communities and employees and is not only
focused on its delivery of world-class performance but also the ‘how’ by which it achieves
such performance.
The Chevron Vision is underpinned by core values which include; Integrity, Trust,
Diversity, Ingenuity, Partnership, Protecting people and the environment and High
Performance.
7.5.1The internal environment
The internal environment constitutes everything inside the corporate, in particular, its
resources and capabilities that influence how management may choose to pursue certain
strategies.44 Resources are the tangible assets (physical, for example, a building) and
intangible (invisible, for example, intellectual property) assets that can be used by the
corporate to achieve its objectives.45 Resources play an important role in determining a
corporate’s strategic direction and are a source of profit when they are combined to form
unique capabilities. Capabilities are combinations of resources, people and processes that
corporates use to develop and deploy valuable products and services to achieve
corporate goals.46 You may remember from the opening scenario, that Nedbank consider
their Fair Share 2030 strategy as their ‘strategic response to harness business and
investment capabilities to help meet the societal needs of SA going forward.’ This means
that Nedbank aim to develop their business and investment resources, people and
processes internally in such a way as to deliver products and services that meet current
citizen needs in South Africa. Similarly, in the Chevron example, we read that ‘Chevron
aspires to safely provide energy products vital to sustainable economic progress and
human development throughout the world, be a corporate with superior capabilities and
commitment and the partner of choice for business.’ 47
In order to develop capabilities, corporates need to conduct an analysis of their
internal environment and of their activities in their value chain. The value chain is the
process from receiving raw materials as inputs, adding value to the raw materials
through various processes, and selling finished products to customers. 48 The purpose of
an internal analysis of a corporate’s value chain is to look critically at the strategic
importance of resources and capabilities that can add value to products and services.
Sustainable corporates conducting an internal analysis on their value chain need to ask
questions such as:49
•How can we improve our transportation to release less carbon emissions?
•How are we managing waste in our operations?
•Is there a way to make our packaging more environmentally friendly?
•Have we made sure that our marketing is truthful?
•Are we treating all stakeholders fairly?
•Is our procurement free of bribery, child labour and considerate of local producers?
•Are our research practices ethical?
•Are we compensating fairly?
•Are we reporting our finances accurately, integratively and in a transparent way?

Corporates who answer these and similar questions have often found many opportunities
within their value chain to develop resources and capabilities that simultaneously
address greater social and environmental issues and contribute to sustainable
competitive advantage. Nedbank, for example, added technological value when it
introduced the Green Index product, the BGreen Exchange-traded Fund and the Green
Affinity banking card, which added significant social and environmental value.
Just as there are many opportunities to develop social and environmental
competitiveness in the internal environment so too, are there many opportunities within
the external environment, which will now be discussed.
7.5.2The external environment
The external environment refers to global, country and industry factors that might
affect the ability of the corporate to attain its goals. These factors include political (for
example, government intervention in business), legal (for example, citizenship rights and
regulations), economic (for example, interest and inflation rates), socio-cultural (for
example, social patterns and trends such as green consumers), technological (for
example, new technological breakthroughs), demographic (for example, population
changes) and ecological factors (for example, natural disasters and climate change).
External environmental factors affecting a corporate can impact a corporate significantly.
For example, increased inflation could impact customer affordability of a corporate’s
products and services. Deforestation and climate change infringements could result in
new environmental legislation that could influence corporate resources and capabilities.
The identification of external environment factors is a practice by management to help
them make choices about strategy thus serving as an important part of the strategic
management process.50 Sustainable corporates should consider all external factors,
including those related to social and environmental issues, because they present many
opportunities to administer citizenship rights and contribute to corporate robustness
and competitiveness.51
To explain how corporates can respond to the external environmental factors in the
strategic management process, we refer you back to the Nedbank opening scenario and
to the example boxes that follow.
From the Nedbank B-BBEE example, it is evident that Nedbank has responded to the
B-BBEE legislation by making it a part of its response to government regulation (political
and legal factors) and part of its response to the current population of South Africa
(demographic factor). Nedbank’s response to the external B-BBEE factor was to make it
part of its strategy and core business and see it as part of its sustainable journey. From
the opening Nedbank scenario, we learn that Nedbank has been so successful in its
approach to B-BBEE that it received an award in 2013 for Transformation Champion of
the Year – a highlight in its sustainability journey. Nedbank also acted ahead of carbon
emissions legislation (legal factor) in South Africa and invested in carbon neutrality. 52 As
a consequence, Nedbank received an award for becoming the first carbon-neutral
corporate in Africa. Nedbank also enjoys the added benefit of a positive reputation that
derives from its choice to be a sustainable corporate. Nedbank’s proactive responses to
its external environment help it develop strategies and to be more robust to future
changes in its operating environment.
Example
Nedbank B-BBEE
B-BBEE is a vitally important policy necessary for the transformation of South African
business and society as a whole, and for the long-term sustainable development of the
country. For corporates, B-BBEE calls for the re-evaluation of strategies and the
incorporation of inclusive growth strategies that address previously disadvantaged groups
and transform the profile of those in business in South Africa. 53
Nedbank’s response to B-BBEE extracted from Nedbank’s Transformation book is as
follows:

‘At Nedbank Transformation and Sustainability go hand in hand. Transformation is key to

our sustainability as a business in both social and economic terms.’ At Nedbank
‘Transformation, sustainability, good governance and transparency are key to good
corporate citizenship and good corporate citizenship is good for business.’ 54
Tata is another example of a sustainable corporate responding to socio-cultural
external environmental factors as part of its strategic management process (see box on
the next page).
Even though the mosquito-borne Zika virus was an external factor that is beyond the
control of Tata, the corporate responded to society’s concerns and made the strategic
decision to rebrand the Zica car. This is another example of how sustainable corporates
can address environmental factors and make sustainability part of its business activity.
External environmental factors impacting a corporate can also derive from industry
relationships (and rivalry) amongst competitors, suppliers and buyers. Industry
relationships refer to the threat of new entrants and substitute products as well as
government policy.55 Part of a corporate’s strategic analysis of the external environment
is to consider the industry relationships. 56 From a good governance and corporate
citizenship perspective, healthy industry competition is when there are multiple
competitors in an industry. Healthy competition is important because it helps corporates
develop resilience, and results in new and better products and services for consumers
with, often, better prices.
When industry environments only have one contending corporate (monopoly) or very
few competitors (oligopoly) then the competitive situation is considered unhealthy.
Monopolies and oligopolies pose governance and social risks in that corporates can
charge the prices they want for products and services as opposed to what consumers can
afford.57 Oligopolistic situations can also lead to collusion amongst competitors where
corporates secretly conspire to set product prices or agree on tender offers. Consider the
following example of corporates in an oligopoly who took advantage of their competitive
position at the expense of consumers.
The example of Tiger Brands, Pioneer Foods and Premier Foods (see box on the next
page) highlights how quickly the strategic choices of corporates can result in citizenship
rights being infringed and citizens suffering higher prices for the single goal of profit. For
Tiger Brands and Premier Foods, the absence of sustainable practices led to large fines
by South Africa’s Competition Authority, which is one way to deter this type of behaviour.
Unfortunately, there is little incentive other than leadership’s conviction, government
instruction or legislation and wider social pressure for oligopolistic corporates to behave
responsibility. Sustainable corporates need to ensure that they embed sustainability into
their strategic management processes and strive to avoid behaviour that diminishes
citizenship rights such as collusion in this example.
Example
Tata Motors
Tata Motors made a public statement in February 2016 that it would be renaming its new
Zica hatchback car as there has been global alarm over an outbreak of the identical-
sounding Zika virus. The World Health Organization declared an international health
emergency over the Zika virus, which has spread to more than 20 countries and territories.
Tata Motors had been heavily promoting the small Zica whose name stands for ‘zippy car’.
However, its launch came at an unfortunate time, with the mosquito-borne Zika virus
spreading rapidly through Latin America, where it has been blamed for a surge in brain-
damaged babies.
Tata group representative said that they ‘empathise with the hardships being caused by
the recent Zika virus outbreak across many countries. Tata Motors, as a socially responsible
company, has decided to rebrand the Zica car.’ 58

Source: Reprinted with permission of Agence France-Presse.

The evaluation of internal and external contexts is important because it affects the way
business is conducted and the subsequent choices of corporate and business strategies
by corporates. In the next section we will discuss how corporates can embed
sustainability into their choices of strategies.
Example
Tiger Brands
In 2006, South Africa’s largest bread producers took advantage of their oligopolistic
competitive position at the expense of consumers. Tiger Brands, Pioneer Foods and Premier
Foods were found guilty of price fixing. For more information refer
to http://mg.co.za/article/2007-11- 12-tiger-brands-slapped-with-r98m-cartel-
finehttp://mg.co.za/article/2013-06-27-bread- cartels-concourt-ruling-leaves-big-brands-
open-to-lawsuits; http://www.fin24.com/Companies/R99m-fine-for-bread-cartel-
20071112; and http://www.moneyweb.co.za/archive/tiger-brands-admits-to-bread-pricefixing-
pays-fine/.
These articles highlight how quickly the strategic choices of corporates can result in
citizenship rights being infringed and citizens suffering higher prices for the single goal of
profit. For Tiger Brands and Pioneer Foods, the absence of sustainable practices led to large
fines by South Africa’s Competition Authority, which is one way to deter this type of
behaviour. Unfortunately, there is little incentive other than leadership’s conviction,
government instruction or legislation, and wider social pressure for oligopolistic corporates to
behave responsibility. Sustainable corporates need to ensure that they embed sustainability
into their strategic management processes and strive to avoid behaviour that diminishes
citizenship rights such as collusion in this example.59

7.6Sustainability embedded business models and

strategies
In the opening Nedbank scenario, we learnt that sustainability has progressively become
part of Nedbank’s ‘genes’ resulting in the development of Nedbank’s Fair Share 2030,
which serves as a blueprint for remaining a truly successful bank and for practising
corporate citizenship. In this section, we will discuss the fundamental shift in strategy
planning and development required by corporates towards creating sustainable business
models and strategies towards becoming sustainable corporates. 60
A business model is a powerful tool that guides the development of products and
processes, interactions with stakeholders and the measurement of
performance.61 According to a 2013 study by the Boston Consulting Group and MIT, 60%
of the companies surveyed said they had made changes to their business models towards
sustainability. 62 Designing sustainable business models and strategies that address
economic, social and environmental value can be challenging, however, it is also very
possible.63 In the next few sections, we will guide corporate decision makers on how to
make sustainability - embedded decisions about their business model and strategies.
7.6.1Business model innovation for sustainability
For many leaders and corporate decision makers, business model innovation is the key
to meeting broader society’s needs, channelling rights to citizens and maintaining
sustainability in complex global environments. 64 Business model innovation involves
changing the way business is conducted towards sustainability, by transforming business
models and creating new strategies for creating value. 65
The demand for transformed or new business models is because many corporates’
traditional business models are inherently unsustainable and often predicted on the
assumption that, critical non-financial resources such as human and natural capital are
of limitless supply.66 Business model innovation towards sustainability requires that
leaders find new or different approaches to create social or environmental value and to
distribute economic value more equitably to stakeholders in the value chain. Nedbank
offers an example of how a corporate can distribute economic value to other stakeholders
in the value chain.
Example
Green Affinity card
Nedbank’s Green Affinity banking card is the means by which stakeholders in Nedbank’s
value chain receive value.67 The Green Affinity banking card offers banking and money
management services (to customers) while simultaneously contributing to a healthy planet
by making monthly donations (at no additional cost to the customer) to the WWF-Nedbank
Green Trust for wildlife and endangered environments. By signing up for a Green Affinity
card, Nedbank is distributing economic value between at least three stakeholders: the
shareholders (through banking fees), to customers (with a service offering) and to the
environment (through donations to the trust).
Business model innovation for sustainability necessitates that corporates increase the
number of stakeholders who benefit from business. Through creativity and innovation,
corporates have the potential to develop various types of business models for
sustainability. For example, some corporates distribute value to lower income groups
through Base of Pyramid business models. Pharmaceutical corporates following a Base
of the Pyramid model have instituted differential pricing models for vital HIV/Aids drugs
between developing and developed countries. The prices are subsidised in poorer
countries by developed countries so that HIV/Aids patients have access to the medicine. 68
A sustainable business model is the mechanism for putting a sustainable strategy into
practice and generating value for more stakeholders.
7.6.2Sustainability – an integral part of strategic
choice
Formulating and choosing strategies is a process corporates use to create, or sustain, a
competitive advantage.69 It is important that corporates make sustainability an
embedded part of this process. The unfortunate reality is that many corporates tend to
‘bolt on’ sustainability like an afterthought to their core strategies, despite often having
good intentions.70 In other instances, corporates have established separate or isolated
corporate citizenship or sustainability strategies as opposed to embedding sustainability
into primary strategic choices for corporate competitiveness and positioning. 71
There are two specific levels of strategy that corporates can choose from when
selecting their strategies, these are: business and corporate level strategies. A business
level strategy deals with how corporates plan to compete successfully with existing
market conditions.72 A corporate level strategy, on the other hand, is aimed at growing
the business or defending the business. 73 In this section, we aim to demonstrate how
business and corporate level strategies can be sustainable and positively impact
citizenship rights.

Business level strategies

Business level strategies that are embedded with sustainability are aimed at supporting
the business model. There are three generic strategies that corporates can choose to
apply.74 These are: a cost leadership strategy, a differentiation strategy and a focus
strategy. Each of the strategies will be discussed briefly with reference to how they can
achieve both sustainability and competitive advantage.
A cost leadership strategy is built on low input costs where the savings are
transferred to a large price sensitive market. 75 Embedding sustainability into a cost
leadership strategy can mean using fewer materials, less energy and less waste –
attributing to a lower environmental impact and competitive advantage over
competitors.

Figure 7.1: Walmart’s aerodynamic truck prototype

Source: Walmart. Walmart Truck Fleet. [Online].
Available: http://corporate.walmart.com/global-responsibility/environment-
sustainability/truck-fleet [February 2016].

Walmart, a local and global retailer, is an example of a corporate who has made
sustainability focused changes to its business model and business level strategy. The
corporate strives to ‘save people money, so they can live better by offering affordable
products to consumers.76 Walmart combines cost saving and sustainability into its value
chain activities thereby increasing the social and environmental impact of its strategic
choices. Where possible and feasible, Walmart sources fresh produce directly from local
farmers, which enables the farmers to boost their income. The relationship also ensures
that Walmart has local sources of fresh produce that can be quickly used to stock shelves.
Local purchases by Walmart have the added benefit of reduced transportation costs
which impacts on the amount of carbon emissions. 77 There is a plan to improve
transportation and fuel efficiency with the development of a prototype aerodynamic
truck (see Figure 7.1).78 Walmart has also committed to reduce waste by removing
unnecessary packaging and to sell products that sustain corporate resources and the
environment. Walmart presents an example to corporates on how sustainability can be
leveraged through a cost leadership strategy.
Another form of business level strategy is a differentiation strategy that is built on
unique and valued offerings such as quality and convenience. A differentiation strategy is
possible when customers have very specific needs and corporates retain the unique
capabilities to satisfy those needs in ways that cannot be easily imitated by their
rivals.79 The next example box looks at FitChef Eating Concepts. It is a South African
corporate following a differentiation strategy focused on helping health-conscious
consumers eat well, lose weight and feel healthy in a convenient way.
Most corporates following a differentiation strategy like FitChef has smaller target
markets that are also willing to pay more for the offering. By embedding sustainability
into its business level strategy, FitChef can address social needs by supplying healthy food
on-the-go and address environmental issues by using organic natural foods. FitChef’s
offering also reinforces its product, process, and brand uniqueness that leads to
competitive advantage. 81
Example
FitChef
FitChef offers busy, health-conscious consumers’ quality prepared food that is delivered to
their doors and can be stored in their freezers.80 FitChef aims to be the leading responsible
food brand by encouraging better lifestyle choices. FitChef follows an EatClean Ethos that
avoids the use of chemical additives, preservatives, stabilisers or artificial flavourants and
colourants, chemical versions of food and highly- refined ingredients. All meats are free-
range or grass-fed, and FitChef attempts to use organic products where possible.

Source: Reproduced by permission of Wayne Kaminsky FitChef.co.za

A focus strategy followed by a corporate is one where its efforts are directed at a
specific niche in the marketplace. Patagonia is an example of a corporate that has chosen
to make sustainability part of its focus strategy and approach to business (see the next
example box). A focus strategy supports the underlying assumption that the targeted
segments are poorly served by broad-scope competitors.82 By choosing a focus strategy,
a corporate aims to secure a competitive edge by offering a lower cost or best value for
money. From a corporate citizenship practice perspective, a focus strategy presents an
opportunity to address a group of stakeholders whose needs have not been adequately
met by business.83
This section highlighted how corporates can embed sustainability into their business
level strategies as part of their strategic management process. The corporate’s goal
should always be to address corporate financial, social and environmental sustainability
at the same time. The next section discusses how corporates can embed sustainability
into their corporate level strategies.
Example
Patagonia
Patagonia is an outdoor apparel corporate that has a mission to build the best products,
cause no unnecessary harm to the environment and use business to inspire and implement
solutions to the environmental crisis. Patagonia is a successful corporate with revenues
topping US$500 million a year. Patagonia is also a leader in its environmentally responsible
approach to business and offers sports and outdoor enthusiasts (focus market) a range of
quality products customised to their sport that are also kind on the environment (best value
and sustainable). Patagonia avoids environmentally harmful dyes and use organic cotton
and environmentally friendly fabrics for its products. Since 1985, Patagonia has pledged 1%
of sales to the preservation and restoration of the natural environment. 84

Corporate level strategies

To ensure that a corporate will outperform its rivals and achieve its objectives,
corporates need to choose a corporate level strategy. Corporate level
strategies support corporates in determining which industries to operate in and the
building of synergy amongst its business units. Corporate decision makers need to make
realistic choices that will ensure financial, social and environmental sustainability in the
medium and long term.85 These choices include deciding whether to grow the business or
to defend the business. Growth can be pursued internally, through creating or entering
new markets or by consolidating markets. It can also be achieved through new product
development. Growth can also be pursued externally, through diversification and
integration. Defending the business entails engaging in turnaround and exit strategies.
Each of these strategic choices are discussed briefly using examples to demonstrate how
corporates can incorporate sustainability and corporate citizenship practice into their
strategy choices.86
Growthpoint Properties is an example of a corporate who adopted an internal growth
strategy that is embedded with sustainability. An internal growth strategy is when the
corporate focuses on growing the business from within (internally). 87 With the rise of
green (environmentally conscious) consumers in South Africa, came a demand for green
rental space that is environmentally friendly and uses less electricity. In response to this
market and demand, Growthpoint began building and marketing green star-rated
buildings and refurbishing some of its existing buildings to be more environmentally
friendly.88 This is an example of how Growthpoint’s corporate strategy for internal
growth assisted it to grow by gaining and maintaining customers and offering them a
more acceptable product than competitors.89 The green building decision by Growthpoint
benefited multiple stakeholders including tenants who occupy the space, the
environment through decreased impact and shareholders through return on investment.
Green buildings are sustainable products that contribute towards value resources and
capabilities for the corporate and contribute to the development of competitive
advantage. From this example, it is evident that corporates can pursue growth strategies
that focus both on growing and being sustainable.
The example box on the next page about Takealot highlights how an external
corporate growth strategy can assist corporates to achieve their goals and objectives.
Corporates grow externally by acquiring or amalgamating with suppliers (backward
integration) or customers (forward integration) or competitors (horizontal integration).
An acquisition entails purchasing the assets and skills of the takeover target.
The Takealot and Kalahari example highlights that horizontal integration (integration
of a competitor) has both positive and negative outcomes for the corporates and
implications for sustainability. The decision assisted both corporates to combat global
competition from foreign competitors and to combine resources and capabilities for
future competiveness. The integration also meant that the new corporate (Takealot) will
need to ‘trim the fat’ and remove ‘overlaps’ which usually refers to the elimination of
duplicate resources including jobs. Job losses can adversely impact citizens and society.
Thus, it is important that corporates consider the implications of their strategy choices
from a holistic sustainable viewpoint before making them. 91

Figure 7.2: Takealot and Kalahari merged

Sources: Le Cordeur, M. 2014. Kalahari merger with takealot ‘a good strategic move’. Fin 24.
[Online]. Available: http://www.fin24.com/Tech/News/Kalahari-merger-with-takealot-a-good-
strategic-move-20141007; Strydom, TJ. 2014. The Demise of Kalahari. Times Live. [Online].
Available: http://www.timeslive.co.za/thetimes/2014/10/08/the-demise-of-
kalahari.com. [February 2016].
Example
Kalahari and Takealot tie the knot
South Africa’s two largest general goods online e-tailers have ‘tied the knot’ to build a better
overall shopping experience for customers and to combat the onslaught of foreign
competitors. By joining forces, the companies will have increased scale and gained the
experience of Kalahari. The companies believe that, had they not joined forces, they would
have had a tough time surviving in the dynamic and competitive market in the future. The
decision, however, has meant the end of Kalahari.com and the forthcoming ‘trimming of fat’
and dealing with ‘overlaps’ between the two companies. Kalahari has been absorbed by
Takealot and the new entity now trades under the Takealot brand and is managed by
Takealot CEO Kim Reid.90
On the other spectrum of growth, corporates that have suffered setbacks in recent
times may consider defensive strategies to stay in business or manage their exit.
Defensive strategies include turnaround strategies that are aimed at turning the business
around and stabilising the business, and strategies to manage a failed
corporate.92 Turnaround strategies often result in retrenchments which include cost-
cutting and job losses, downsizing of products and services, reducing non-core assets
(such as selling off extra land or equipment), and the absence of dividends or profit
sharing for shareholders.93 There are various reasons for corporate setbacks such as
recessions, inefficiency and non-competitiveness. Poor corporate governance and low
productivity are also reasons for the poor performance of corporates. 94
Eskom and South African Airways (SAA) are examples of South African corporates who
have undergone turnaround strategies that included retrenchments and restructuring.
Corporate leaders, such as those in Eskom and SAA, considered retrenchments as part
of their efforts to turn around the business. Should a corporate not be successful in its
turnaround efforts, then the corporate can go into a state of failure. Failing corporates
apply strategies that involve closing down or selling off parts of the business. 95 A
consequence of a failed corporate is that there are no further opportunities to address
citizenship rights or the needs of stakeholders. Corporate failure can result in legal suits,
unpaid suppliers and large-scale job loss.98 Defensive strategies emphasise the
importance of leaders understanding the corporate’s positioning and operating context
and the making of critical and sustainable choices about business. 99
DILEMMA
Consider these two statements and the dilemma of the CEOs of these corporates.
1.In 2015, Eskom announced it would offer voluntary severance packages to its 47000
employees as part of its turnaround strategy to combat falling revenue, funding
shortfalls and credit rating downgrades.’ 96
2.Acting CEO Nico Bezuidenhout made a statement in 2015 that SAA management
were considering retrenchments along with other measures taken to turn around cash-
strapped South African Airways (SAA). 97

Imagine you are one of the senior leaders in Eskom or SAA. You have the responsibility to
turn the corporate around and keep it operational. You have exhausted all other options and
now you are faced with needing to retrench positions and business units. This means many
people will lose their jobs and livelihood. How would you handle this situation while still
maintaining a commitment to being a sustainable (and viable) corporate?
What is evident from this section is that when corporates operate strategically,
efficiently and sustainably, there are numerous benefits and opportunities for both
business and society. On the other hand, when corporates are not able to remain in
business, there are adverse effects for both the business and society. In this next section,
we will discuss how corporate leaders can follow through with their commitments by
implementing the sustainability embedded strategies.
7.7Sustainability – an integral part of strategy
implementation
The business activities of corporates have great potential to influence the administration
of citizenship rights.100 Therefore, it is important that leaders ensure that a corporate
commitment to sustainability is delivered upon through its strategy implementation
phase of its strategic management process.
Unfortunately, the reality is that many corporates fail in this implementation phase. In
spite of their commitments to operating sustainably, many corporates struggle to follow
through with their commitments. This has resulted in an implementation gap between
words (what corporates say) and deeds (what corporates do) when it comes to
sustainability, its embeddedness and its implementation. 101
Corporates that show little evidence of implementation of their
sustainability embedded strategies have been described as ‘greenwashers’. The practice
of greenwashing occurs when corporates spend more time and money claiming to be
‘green’ (that is, environmentally friendly) through advertising and marketing than
actually implementing business practices as part of their strategic management
process.102 Greenwashers pose as being environmentally concerned corporates while
actually being destructive to society and the environment. Greenwashers smear ‘green’
all over their corporate material and initiatives as part of their self-interested pursuit to
preserve and expand their markets or power and gain a positive reputation. 103 The down-
side of such behaviour by corporates is that when stakeholders discover the absence of
genuineness or results pertaining to sustainability, the corporate image is tarnished
significantly. The damage can lead to boycotts of products and services and reduced
profitability.
To ensure strategies are implemented, it is important that leaders focus on the drivers
of strategy implementation.104 In the next section, we will discuss some of the drivers and
direct you to other chapters in this textbook where the driver is further discussed in
detail.
7.7.1Leadership
In order to put the strategy into practice, top-level executives need to demonstrate
strategic leadership. Strategic leadership is about understanding the entire corporate and
the environment in which it operates. Strategic leaders use this understanding to set the
strategic direction, make strategic choices and to manage change. 105 Strategic leaders staff
the corporate, build and use knowledge, skills and abilities to achieve corporate goals and
ensure that the strategy, structure and culture are aligned. These leaders are also
expected to oversee operational and strategic responsibilities and ensure the strategy is
‘on track’.106 The tasks and responsibilities of strategic leaders are considered critical to
the implementation of strategy and the achievement of sustainability.
From a corporate citizenship perspective, strategic leaders are expected to implement
strategies ethically and make value-based decisions that positively impact society, the
environment and a broader group of stakeholders. Due to the importance of strategic
leaders operating sustainably, the terms ‘responsible and sustainable leadership’ have
emerged. Responsible leadership has to do with taking legal, moral or mental
responsibility by providing accountability for the corporate’s actions to a broader group
of stakeholders.107 Sustainable leadership refers to those behaviours, practices and
systems that create enduring value for all corporate stakeholders including investors, the
environment, other species, future generations and the community. 108 Responsible and
sustainable leaders aim to achieve excellent outcomes in a responsible way and embrace
the idea of the corporate operating sustainably. Paul Polman of Unilever demonstrates
this type of leadership. After joining Unilever, Paul Polman revised the Unilever business
model and strategy from focusing on shareholder value to one that focuses on the
corporate being socially responsible.109 Implementation efforts to deliver on this
commitment included the instilling of accountability in Unilever’s culture and the
removal of short-term reporting because it resulted in managers sacrificing long-term
performance in favour of short-term quarter targets. These are examples of some
leadership practices that are aimed at supporting the implementation of a corporate’s
sustainable strategy.110
For further reading on responsible leadership, read Chapter 5.
7.7.2Culture
Culture is seen as a system of norms, values and beliefs that bind the corporate’s
members together, unifying them in purpose.111 Culture is closely related to strategic
leadership because strategic leaders are considered the corporate’s culture creators or
transformers.112 Strategic leaders influence employee behaviour and shape the corporate
culture by demonstrating the right behaviour (that is, doing the right thing) which needs
to be followed by rewards that support the culture.113 Culture is also influenced by the
dissemination of a clear strategic message about the corporate vision by leaders. The
creation of a widely shared, entrenched sustainable culture is considered a fundamental
practice of sustainable leadership and vital for strategy implementation. 114 In fact, when
individual values differ from corporate values and commitment (that is, the wider shared
culture), it poses a barrier to strategy implementation. 115
As we saw in the opening Nedbank scenario, it was clear that Nedbank has a culture
that supports the implementation of its strategic goals and its Fair Share 2030 strategy.
Nedbank’s values and beliefs (that is, culture) towards operating sustainability were
considered a ‘way of life’ and a part of Nedbank’s ‘genes’ and ‘business identity’.
Furthermore, the motivations for Nedbank’s corporate citizenship efforts came from a
shared belief that the corporate could not ‘ignore the high levels of poverty and inequality
that is clearly evident’ in South Africa. The culture holds the values necessary for Nedbank
to achieve its goals, which is why the corporate received an award for being the ‘Financial
Times Sustainable Bank of the Year’ in 2007 and 2008. For further reading on the creation
of on ethical culture to support strategy implementation, read Chapter 9.
7.7.3Structure
A successfully implemented strategy not only relies on a supporting – and aligned–
corporate culture but also a structure that assists leaders to achieve corporate goals. A
corporate structure is how positions, business units and individuals are arranged to
deliver on their tasks.116 A corporate structure mobilises employees; facilitates
communication, workflow and streaming of operations; helps improve decision making;
and affects corporate culture.117 Typically, a corporate’s structure can be organised into
functions (for example, the human resource department), or into geographic locations
(for example, regional offices) or divisions (for example, products) or combinations of
these. The structure is determined by the skills and experience of labour, the similarities
between departments, the need for management control over employees and the amount
of authority that can be delegated to them. 118
To ensure the implementation of a sustainability embedded strategy, many leaders
make the decision to add a sustainability department to their corporate structure. While
this decision is considered a driver of strategy implementation, when the department is
disconnected from the rest of the corporate structure, it is also seen as a barrier to
implementation.119 The sustainability department includes managers and employees who
are formally tasked with implementing sustainability initiatives. It is important that the
sustainability department and all the different departments within a corporate structure
operate interdependently and not as separate ‘silos’. 120 The existence of silos within a
corporate structure means that information transfer is hindered which makes the
measurement of performance and accountability difficult to assess. Silos also inhibit
employees seeing a holistic and integrated view of corporate activities, which influences
the achievement of sustainability and how decisions are made. 121 Ultimately, silos pose
governance and compliance risk because vital information may be left out of decision
making. This hinders the implementation of strategies in a sustainable corporate. To try
and combat governance risk, the King III governance principles have called for a re-
assessment of board member positions (top management) aiming for the inclusion of
sustainability roles and responsibilities in the hope that sustainability will be considered
a vital and strategically important part of the corporate structure. 122
For further reading on corporate governance structures, read Chapter 6.
7.7.4Reward systems
How corporates reward employees is especially important for the implementation and
achievement of strategic outcomes. Rewards can be financial (for example, bonuses and
shares) or non-financial (for example, privileges and benefits) while simultaneously
serving to create loyalty and commitment in employees. 123 Rewards guide behaviour,
which is critical for the achievement of a strategy. It is very important that leaders ensure
that rewards in the corporate are aligned to desired behaviour and performance
expectation levels, especially when a corporate desires sustainable behaviour from
employees.124
From a corporate citizenship perspective, reward systems and performance bonuses
are considered vital areas from which to administer citizenship rights while
implementing strategy. Not only should rewards be honest and reflective of true
performance (calling for transparency and accountability), but they should also be
reasonable and fair.125 In South Africa, we have one of the largest gaps in remuneration
and rewards between top management and the lowest - paid worker.126 As such,
corporates are under pressure from stakeholders to revisit their reward systems and to
re-evaluate this gap which influences the lives of many citizens on a daily basis.
The absence of appropriate incentives for sustainable behaviour has been described
as a significant barrier to strategy implementation. 127 It has been found that leaders can
get so focused on revising the corporate business models and strategies towards
sustainability that they neglect to alter the performance expectations and reward
systems that support its achievement. Employees will continue to make short-term,
financial bottom-line decisions for as long as they are measured and rewarded to do so.
Thus, it is very important and necessary for strategy implementation that corporate
leaders re-evaluate their reward and performance management systems to ensure that
employees are rewarded for sustainable practices and the making of long-term
sustainable choices in their jobs.128
For further reading on how the human resource function supports corporate citizenship
practice, read Chapter 12.
7.7.5Policies and procedures
A corporate designs policies and procedures to guide its members in their activities and
behaviour.129 Policies and procedures support strategy implementation by creating
consistency in operations and by contributing to creating a corporate culture.130 Typical
examples of common policies and procedures include: a recruitment policy, a
procurement policy, and occupational health and safety procedures. By creating policies,
corporates prescribe how they want employees to behave and make decisions. Therefore,
it is important that policies are aligned with the corporate strategy and vision.
Sustainable corporates need to revisit their policies and procedures to ensure that
they correspond to their strategic direction. As part of Nedbank’s sustainability journey,
the corporate ‘introduced green procurement principles’. Nedbank insists on
environmentally friendly practices by suppliers and in all tender documents. When
registering with Nedbank, suppliers are required to fill in an environmental
questionnaire and they are rated on an ‘ESG (Environmental, Social and Governance)
rating system’.131 Nedbank found its procurement policy to be a sound business driver for
change and this should be an important consideration for all corporates. Policies and
procedures influence employee decision making, the achievement of corporate goals,
strategy and ultimately, the administration of citizenship rights.
For further reading on sustainable procurement, read Chapter 10.
7.7.6Training and education
Knowledge, skills and abilities by employees or managers form ‘competencies’ that are
fundamental drivers of strategy implementation. Competencies are defined as a
corporate’s capacity to deploy its resources using processes to achieve a desired
goal.132 There are different levels of competencies needed for a corporate to deliver on its
strategy. Basic competencies are those required by all or most members of the corporate
such as basic computer skills. Other competencies can be specific or distinctive. Specific
competencies relate to performing the key operations of the corporate that are crucial to
strategy, such as the knowledge required for product development. Distinctive
competencies are superior and unique skills that add value that contributes to corporate
competitive advantage.133 In order for a corporate to implement its strategy, all
employees are required to have the necessary knowledge, skills and abilities to deliver
on the corporate vision. Competencies can be acquired externally or developed internally.
For example, a corporate can acquire certain skills externally by offering competitors’
employees a better remuneration or employment package to change jobs or by
purchasing an entire company with the desired competencies (integration strategy).
Corporates can also develop the necessary skills internally by developing the
competencies through focused training and education.
From a corporate citizenship perspective, especially in a developing country such as
South Africa, it is highly recommended that corporates focus on internally developing the
desired and required competencies. In spite of high unemployment levels in South Africa,
there are many positions that corporates struggle to fill because there is a shortage of
knowledge, skills and abilities amongst applicants. 134 Sustainable corporates have the
opportunity to not only develop their own unique competencies amongst employees, but
also to administer citizenship rights in the form of education and training. 135 As part of a
corporate’s efforts to develop a broader set of competencies, corporates should also
consider creating sustainability - focused training programmes. Such training is known
to have a positive effect on sustainability and the implementation of strategy. The training
sessions contribute to company-wide learning and understanding about sustainability,
increased communication and cohesiveness between departments, and help employees
better understand how they can incorporate sustainability into their jobs. Sustainability
- focused training sessions also contribute to the development of specific and distinctive
skills that contribute to competitive advantage.136
For further reading on the how the human resource function supports corporate
citizenship practice, read Chapter 12.
7.7.7Stakeholders
Stakeholders are groups or individuals who can affect or are affected by the achievement
of the corporate’s objectives.137 Examples of stakeholders include shareholders, the
government, employees, the natural environment and local communities. 138 It is both
important and necessary for corporates to include and involve stakeholders in their
strategic management process.
It is important because stakeholder management practices form part of a corporate’s
commitment to sustainability and to resilience in the long term. A commitment to
sustainability means that corporates should consider a broader group of stakeholders
(not just shareholders) and be responsible for how the corporate impacts
them.139 Chevron, for example, ‘aspires to earn the admiration of all their stakeholders –
investors, customers, host governments, local communities and employees and is not
only focused on their delivery of world-class performance but also the “how” by which
they achieve it.’140
The involvement of stakeholders is necessary because they can significantly affect the
implementation of a corporate’s strategy. Their protest and political action can impede a
corporate’s ability to pursue its strategic objectives. Nedbank understands the
importance and necessity of making stakeholders part of its business. It considers its
relationships with stakeholders as ‘an imperative to their success as a financial
institution’. Nedbank consider society and economic systems to be ‘wholly dependent on
the natural world’ which necessitates the inclusion of stakeholders in how it does
business. Nedbank included the WWF Trust (environmental group) in the creation of its
new Green Affinity banking product.
The inclusion of stakeholders requires that corporates participate in dialogue with
stakeholders.141 As part of the stakeholder management process, corporate leaders
generally categorise stakeholders as primary and secondary stakeholders. Primary
stakeholders are those who directly affect business such as shareholders. Secondary
stakeholders are those who indirectly affect the business with their influential role such
as animal welfare corporates. While the categorisation of stakeholders is common
practice, it is important that corporates do not prioritise stakeholders using only
economic criteria because this can result in the exclusion of many legitimate stakeholders
and the possibility that they will be given fewer resources by the corporate. It is essential
that stakeholder management practices consider a broader group of stakeholders
including social and environmental groups such as social activist and environmental
interest groups.142
For further reading on stakeholder engagement, read Chapter 8.
7.7.8Technology
Technology is essential to effective implementation in almost all corporates. Technology
is the application of science to improve the corporate’s operational capability and
includes office technologies such as computers, service technologies such as bar-coding
systems, and manufacturing technologies such as robotic assembly lines.
Technology supports corporates in implementing their strategies and has the
potential to offer significant strategic advantage through increased market share and
higher profits, ahead of competitors.143 Green technology is the use of technology to
mitigate or reverse the effects of human activity on the environment. 144 The use of green
technology and renewable energy should form an integral part of the corporate’s
implementation processes. Growthpoint, mentioned earlier, is a corporate that applied
green technology to implement its strategy. Guided by its sustainable strategy and
commitment to creating value through sustainability, Growthpoint Properties partnered
with a lighting company, Aurora, in one of the largest energy-saving lighting projects in
South Africa.145 Together, these corporates retrofitted 157 multi-tenanted sites with
lighting that uses low-energy green technology. The initiative helps South Africa with a
carbon saving of 12 000 metric tons per year and a demand saving of 5.5 megawatts for
an annual energy saving of 22 500 megawatt hours. The magnitude and success of the
project helped Growthpoint become a leader in offering Green Space and won them an
international award for Project of the Year in Lighting 2014. 146
Successful strategy implementation by corporates can lead to many benefits as
indicated by these examples. Nedbank has received numerous awards for its
performance as a corporate. For example, Nedbank’s sustainability journey resulted in
outstanding environmental and social performance that earned it a triple-A rating from
Innovest Strategic Advisors. Nedbank also received the title of Sustainable Bank of the
Year for Emerging Markets in the Middle East and Africa in 2007 and 2008.
In the next section, we will discuss how corporate leaders can ensure that their
sustainability embedded strategy remains ‘on track’ through the application of strategic
performance management and control measures.
7.8Strategy performance management and
control
Performance management and control is the final phase of the strategic management
process. Strategic control is the critical evaluation of strategies, activities and results
within the strategic management process. 147 The evaluation aims to provide corporate
leaders with information that they can use to make decisions about the corporate’s future
and to adjust their strategies.148 Corporate evaluations also assist managers to monitor
their performance and to detect deviations from standards and goals set, especially in
volatile five environments.
As part of a corporate’s process to evaluate its current strategy, corporate leaders
should ask the following five questions: 149
1.How well are we as a corporate implementing the planned strategy? (regular
reviews on progress)
2.Are there any critical environmental and industry constraints that could affect
strategy implementation? (for example, interest rates)
3.Have any unexpected events occurred since strategy formulation that may render
our strategy impossible to achieve? (for example, major product defects)
4.What changes or trends are occurring in the environment that present
opportunities or threats to our strategy?
5.What contingency plans and strategies can we put in place to respond to the
current conditions and constraints affecting strategy implementation?

When corporates experience a deviation from their planned strategy or realise that their
strategies have been influenced by environmental and industry constraints, then it is
necessary that corporates adjust their strategies to changing conditions. 150
As part of performance management and control practices, strategic leaders should
also review their risk management and reporting procedures to assist in the achievement
of their goals and objectives.
Risk management processes assist corporates in understanding, managing,
communicating and preventing unfavourable conditions.151 The application of risk
management processes should be integrated with a corporate’s goal of sustainability.
Risk management can support the corporate in operating sustainably through the
identification of environmental and social risks. 152 As part of Nedbank’s journey to be
sustainable, the corporate instilled risk management into its operations. Nedbank
became a signatory of the Equator Principles for Financial Institutions. The principles
form part of a risk management framework for determining, assessing and managing
environmental and social risk in projects.153
Corporate reporting, especially sustainability and integrated reporting, supports a
corporate to ensure that its corporate strategy is implemented in a sustainable way.
Stakeholders and listing institutions now require triple bottom line reporting and the
inclusion of non-financial criteria in reports.154 Corporate reporting assists corporates to
convey to the public their commitment to sustainability, their adherence to King III, and
progress against sustainability standards and metrics. The purpose of corporate
reporting is to evaluate the long-term sustainability of the corporate and is considered a
valuable strategy control.155
Nedbank understands the importance of reporting and its role in the performance
management and control of its strategy. This resulted in their commitment to ‘sustainable
business reporting’. Between 2010 and 2011, Nedbank’s successes in sustainability
reporting earned it awards for Excellence in Sustainability Reporting by Ernst & Young
and from the Chartered Secretaries Southern Africa (CSSA). Nedbank also participates in
the JSE’s Social Environmental Index (SRI), which is a review of the company’s efforts
towards good corporate citizenship and the promotion of sustainable
development.156 Furthermore, Nedbank voluntarily participates in the Carbon Disclosure
Project (CDP), which focuses on the reporting of climate change information. In 2013,
Nedbank attained a disclosure score of 100% in the South African CDP. These efforts
demonstrate how Nedbank has put performance management and control systems into
its strategic management process.
7.9Conclusion

It is clear that corporate citizenship practice requires changes to the way business is
conducted towards more sustainable practices. These changes are initiated, facilitated,
implemented and monitored through the embeddedness of sustainability in the strategic
management process.
As we have seen from the various examples and discussions in this chapter, corporate
responses to sustainability are by no means generic and neither should they be. There
are many opportunities for corporates to make corporate citizenship part of their
strategy and appropriate to the way they do business. In this chapter, we learnt that a
corporate’s sustainability journey starts with a commitment to becoming a sustainable
corporate. This needs to be followed by sustainability - embedded strategic direction to
guide the corporate. When the strategic direction is set, corporates can find many
opportunities, both internally and externally, to address sustainability, ensure resilience
and robustness, and develop strategies for competitive advantage.
From the many examples provided, it was demonstrated that corporates are able to
make sustainability a part of their business models and a part of corporate and business
level strategy choices. In order to see the results of good intentions, it is vital that
corporates focus on the implementation and control phases of the strategic management
process too. In these phases, corporates apply the drivers of implementation and
performance, and control measures to ensure that sustainability - embedded strategies
are executed.
This chapter focused on how corporates can embed sustainability into the strategic
management process and demonstrated how corporate citizenship practice can be
applied. It is necessary for corporates to re-evaluate their strategic management
processes because now is the time for business to change from business-as-usual to
business-as-unusual.157

Multiple-choice questions
1.Sustained competitive advantage occurs when a corporate achieves ‘above
average performance in an industry for at least _____or more.’
a.five years
b.eight years
c.ten years
d.twenty years

2.Tata Motors responded to the Zika virus by rebranding its Zica car because:
a.Tata Motors were responding to an internal factor.
b.The Zika virus resulted in reduced sales of its product.
c.Tata Motors were worried its brand name would get damaged.
d.Tata Motors were responding to society’s concerns around the Zika virus.

3.Business model innovation towards sustainability requires that leaders find new
or different approaches to create _________value and to distribute economic value
more equitably to stakeholders in the value chain.
a.social or environmental
b.stakeholder
c.sustainable
d.shareholder

4.The creation of a widely shared, entrenched, sustainable culture is considered a

fundamental practice of sustainable leadership and vital for _________________.
a.strategy planning
b.strategy communication
c.strategy policy
d.strategy implementation

5.Corporates that experience a deviation from their planned strategy or realise that
their strategies have been influenced by environmental and industry constraints
should respond:
a.to the climate change
b.to the changing conditions
c.by changing their vision
d.by increasing their reporting

Discussion questions
1.Discuss the role of sustainability in bringing about social and environmental
change, resilience and competitive advantage.
2.Debate and discuss the reasons so many corporates are engaged in greenwashing
as opposed to implementing their sustainable strategies.

3.Discuss any potential partnerships that you can see between corporates, both in
South Africa and abroad, which would bring about a sustainable and economic
benefit.

Additional reading
•Perrott, B. 2015. The sustainable organisation: Blueprint for an integrated
model. Journal of Business Strategy, 35(3):26–37.
•Bonn, I & Fisher, J. 2011. Sustainability: The missing ingredient in strategy. Journal
of Business Strategy, 32(1):5–14.
•Le Roux, C &, Pretorius, M. 2016. Navigating Sustainability Embeddedness in
Management Decision-Making. Sustainability, 8(5):444. [Online].
Available: http://www.mdpi.com/2071-1050/8/5/444 [May 2016].
•Fowler, SJ, Hope, C. 2007. Incorporating sustainable business practices into
company strategy. Bus. Strategy Environ, 16:26–38.

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74.Bennett, Coleman & Co Ltd. 2015. Definition of ‘Generic Strategies’. The
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79.Laszlo, C & Zhexembayeva, N. 2011. Embedded Sustainability: The Next Big
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81.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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82.Laszlo, C & Zhexembayeva, N. 2011. Embedded Sustainability: The Next Big
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83.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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85.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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86.Ibid.
87.Ibid.
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91.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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92.Ibid.
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94.Pretorius, M. 2006. Risk Management, Business Failure and Turnaround. In:
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98.Pretorius, M. 2009. Defining business decline, failure and turnaround: A content
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99.Pretorius, M. 2006. Risk Management, Business Failure and Turnaround. In:
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100.Matten, D & Crane, A. 2005. Corporate Citizenship: Toward an Extended
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102.Greenwashing. 2016. The Greenwashing Index. [Online].
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104.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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105.Ibid.
106.Ibid.
107.Financial Times. 2016. Responsible leadership. [Online].
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108.Adams, CA & Frost, GR. 2008. Integrating sustainability reporting into
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109.Polman, P & Bird, A. 2009. Conversations with global leaders. McKinsey.
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110.Adams, CA & Frost, GR. 2008. Integrating sustainability reporting into
management practices. Accounting Forum, 32(4):288–302; McKinsey, C. 2010. How
companies manage sustainability: McKinsey Global Survey Results. 2014:8.
111.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
Advantage. New York: McGraw-Hill.
112.Linnenluecke, MK & Griffiths, A. 2010. Corporate sustainability and
organizational culture. J World Bus, 45(1):357–366.
113.Ashkenas, R. 2011. You Can’t Dictate Culture — but You Can Influence
It. Harvard Business Review. [Online]. Available: https://hbr.org/2011/06/you-
cant-dictate-culture-but-y/ [February 2016].
114.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
Advantage. New York: McGraw-Hill.
115.le Roux, C & Pretorius, M. 2016. Conceptualizing the Limiting Issues of
Sustainability Embeddedness. Sustainability, 8(4):364. [Online].
Available: http://www.mdpi.com/2071-1050/8/4/364 [May 2016].
116.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
Advantage. New York: McGraw-Hill.
117.Alexander, H. 2012. Strategic Management: Organizational Design and
Structure. Linked In: Tribune Global Bangalore. [Online].
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118.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
Advantage. New York: McGraw-Hill.
119.McKinsey, C. 2010. How companies manage sustainability: McKinsey Global
Survey Results. 2014:8.
120.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
Advantage. New York: McGraw-Hill; Ljubojevic, C, Ljubojevic, G & Maksimovic, N.
2012. Social responsibility and competitive advantage of the companies in Serbia.
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121.Silos. 2013. Break down silos for a cohesive view of Governance, Risk and
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122.Ljubojevic, C, Ljubojevic, G & Maksimovic, N. 2012. Social responsibility and
competitive advantage of the companies in Serbia. Proceeding of the 13th
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123.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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124.McKinsey, C. 2010. How companies manage sustainability: McKinsey Global
Survey Results. 2014:8.
125.Brandão, MR. 2015. Sustainable Organisations – an introduction to a new
model and algorithm. Linked In. [Online].
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126.The Skills Portal. 2012. SA business owners voice concerns about executive
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127.McKinsey, C. 2010. How companies manage sustainability: McKinsey Global
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128.Ljubojevic, C, Ljubojevic, G & Maksimovic, N. 2012. Social responsibility and
competitive advantage of the companies in Serbia. Proceeding of the 13th
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129.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
Advantage. New York: McGraw-Hill.
130.Ibid.
131.Nedbank. 2015. Nedbank Sustainability Journey. [Online].
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132.Saxena, KB. 2014. Capabilities versus Competence: How are they Different?
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133.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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134.Steyn, L. 2015. SA’s skills deficit has a negative effect on employment. Mail and
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135.Matten, D & Crane, A. 2005. Corporate Citizenship: Toward an Extended
Theoretical Conceptualization. The Academy of Management Review, 30(1):166–
179.
136.Bell, J, Soybel, VE & Turner, RM. .2012. Integrating Sustainability Into
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137.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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138.Carroll, AB & Buchholtz, AK. 2015. Business & Society: Ethics, Sustainability and
Stakeholder Management. Stamford, CT: Cengage Learning.
139.Carroll, AB & Buchholtz, AK. 2015. Business & Society: Ethics, Sustainability and
Stakeholder Management. Stamford, CT: Cengage Learning; Adams, CA & Frost, GR.
2008. Integrating sustainability reporting into management practices. Accounting
Forum, 32(4):288–302.
140.Chevron. 2016. The Chevron Way. [Online].
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141.Morphy, T. 2016. Stakeholder Engagement. [Online].
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142.Carroll, AB & Buchholtz, AK. 2015. Business & Society: Ethics, Sustainability and
Stakeholder Management. Stamford, CT: Cengage Learning.
143.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
Advantage. New York: McGraw-Hill.
144.Oxford Dictionary. 2016. Green Technology Definition. Oxford. [Online].
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145.Growthpoint Properties. 2015. Green Buildings. Growthpoint. [Online].
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2016].
146.Aurora. 2016. Growthpoint Project Awarded International Project of the Year.
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149.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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150.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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151.Ibid.
152.Kaye, L. 2014. Why Sustainability is Integral to Enterprise Risk Management.
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153.EP. 2011. Equator Principles. [Online]. Available: http://www.equator-
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154.JSE. 2013. JSE listing requirements. [Online].
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155.Marcus, AA. 2011. Managing Strategy: Achieving Sustained Competitive
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156.JSE. 2013. JSE SRI. [Online]. Available: https://www.jse.co.za/services/market-
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157.Ljubojevic, C, Ljubojevic, G & Maksimovic, N. 2012. Social responsibility and
competitive advantage of the companies in Serbia. Proceeding of the 13th
Management International Conference: 555–569.
chapter
Stakeholder engagement
Kudakwashe Chodokufa and Lynette Cronje
8
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Explain the emergence of the stakeholder concept
•Discuss the benefits of stakeholder identification and the approaches that can be
followed by corporates in identifying stakeholders
•Explain stakeholder prioritisation
•Discuss stakeholder engagement
•Explain stakeholder relationship management
•Elaborate on the influences of external stakeholders on corporates
•Elaborate on the influences of internal stakeholders on corporates
•Explain the barriers to implementing stakeholder engagement in corporates
KEYWORDS AND CONCEPTS
-dangerous stakeholder
-definitive stakeholder
-demanding stakeholder
-dependent stakeholder
-discretionary stakeholder
-dominant stakeholder
-dormant stakeholder
-expectant stakeholder
-external stakeholder
-high salience stakeholder
-internal stakeholder
-latent stakeholder
-legitimacy
-power
-shared value
-social capital
-stakeholder
-stakeholder engagement
-stakeholder engagement barriers
-stakeholder engagement process
-stakeholder identification
-stakeholder prioritisation
-stakeholder relationship management
-stakeholder salience
-stakeholder theory
-stakeholder tools
-urgency

OPENING CASE SCENARIO

Marikana
Lonmin Plc is a British producer of platinum group metals, operating in South Africa.
It is listed on the London Stock Exchange, with an office in London and operational
headquarters in Johannesburg, South Africa.
On 16 August 2012, 34 miners died during an illegal strike at the Lonmin
Marikana platinum mine near Rustenburg. The lead-up to this tragedy began on 10
August, when rock drill operators employed at the mine embarked on a wildcat strike
(an unprotected and unlawful work stoppage and protest). A dispute over wages and
the rising tensions between the two rival South African unions operating in the
mining sector, namely the National Union of Mineworkers (NUM) and the Association
of Mineworkers and Construction Union (AMCU), initiated the protest action. Another
issue was the retrenchment process Lonmin management had embarked on in the
preceding months.
Lonmin enlisted the help of the South African Police Services (SAPS). In the days
that followed, eight people, including two police officers, lost their lives in clashes
sparked by the rivalry between the two unions.1
Throughout the week, the strikers armed themselves with traditional weapons and
assembled on a small hill near the mine. Police monitored the situation and engaged
in talks with the miners in an attempt to disperse the group peacefully. The police, in
the hope of breaking up the crowd, also used teargas, water cannons and rubber
bullets. The police also placed a barbed-wire barrier around the hill as a barrier to
keep the strikers at bay and to act as a means of ‘crowd control’. Union leaders also
attempted to engage with the miners in the hope of ending the strike – but to no
avail. The strikers demanded that the mine’s management make an appearance and
agree to the terms of the striking miners.
In the days and hours leading up to the shooting, the SAPS had deployed
approximately 500 police officials, negotiators, riot vehicles and special task force
teams to the hill. On the morning of 16 August, police had attempted once more to
disperse the angry crowd by means of teargas and water cannons. Unfortunately,
this only managed to push the crowd back into a smaller area and make them
angrier. Believing they were going to be attacked, the police proceeded to fire live
ammunition into the marching group. Once the dust had settled and the crowd was
under control, the true impact of the day’s events became clear. The event left 34
mineworkers dead, 78 wounded and more than 250 people were arrested.2
In the days following the tragedy at Marikana, Lonmin management focused on
finding ways to deal effectively and sensitively with the situation. It assisted the
families of the deceased. This assistance included burial arrangements,
bereavement counselling and various help lines to deal with possible intimidation.
Lonmin’s management further decided that it would provide funding for the education
of the deceased’s children.3
After the nation-wide week of mourning, Lonmin management was once again
deep in wage negotiations with the trade unions. The striking employees had not
returned to work and were still demanding a salary of R12 500 per month. After the
shooting, they were more adamant about their demands. After six weeks of strike
action and intense negotiations, the parties finally reached an agreement on the
evening of 18 September. It was agreed that the miners would receive an increase of
between 11% and 22% (based on their relevant experience and job title) and a once-
off bonus of R2 000. The majority of the workers returned to work on 20 September,
although normal operations only really resumed on 1 October 2012.4
On 23 August 2012, the Marikana Commission of Inquiry was appointed by the
government to investigate matters of public, national and international concern
arising out of the tragic incidents at the Lonmin Mine in Marikana.5 Three years later
in 2015, the report from the inquiry was released. During Lonmin’s annual general
meeting (AGM) in London, the tragedy still haunted the management of Lonmin. ‘At
the entrance to the church conference hall at Westminster Cathedral, the venue for
the AGM, a campaigner handed out an envelope containing the documentary Miners
Shot Down and a letter condemning Lonmin for the manner in which it handled the
unprotected strike that led to the massacre.’6 Outside the cathedral, a group of
protesters condemned Lonmin for the way it handled the incident and the aftermath.
The shareholders asked questions of the board about the way in which Lonmin
handled the incident.7
Mining has become very risky; investors are becoming more aware of this with the
increasingly high number of deaths occurring in mines around the world. These
tragedies affect the perceptions of investors regarding the dangers of finding crucial
commodities like gold, silver and platinum, and have an impact on the reputation of
the mining industry.
8.1Introduction

In this book, we adopted the approach that corporate citizenship is about the role that
corporates might play in delivering citizenship rights to citizens. Corporates cannot fulfil
this role without a clear identification and prioritisation of engagement with, all
stakeholders. We indicated in earlier chapters that being a ‘good corporate citizen’
requires that corporates take cognisance of all their stakeholders, not only acting in the
best interest of their shareholders. The opening scenario to this chapter also illustrates
the point that it has become important for corporates to engage and communicate with
all their stakeholders. It is also evident that corporates need to move away from only
focusing on internal relationships, and that it has become imperative for them to focus on
both internal and external relationships.
Society has changed its expectations on what the modern day corporate’s role is within
the community. The set of reciprocal understandings that characterise the relationship
between major institutions8 such as corporates and the society (known as the social
contract) has also changed. With these changing expectations placed on corporates by
society, corporates are expected to be more responsible in their pursuit of profits.
Corporates whose sole mandate was considered to be profit have changed that mandate
into more than just profit, as societies have begun to demand that corporations be more
environmentally and socially responsible in the way that they do business. It has become
apparent that corporates need to address the legitimate needs of stakeholders in order
for them to be successful. What better way to meet the legitimate needs and expectations
of stakeholders than to engage them?
In this chapter, we will first focus on the history of the stakeholder concept. Then we
will discuss the stakeholder engagement process. This process involves various steps,
namely stakeholder identification and stakeholder prioritisation, stakeholder
engagement and stakeholder relationship management. We conclude with an
explanation of the influences of external and internal stakeholders on corporates and the
barriers that corporates experience when implementing stakeholder engagement
processes.
8.2Emergence of the stakeholder concept
Stakeholder theory has its roots in the mid-1980s when Freeman, in a book
titled Strategic Management: A stakeholder approach, introduced a stakeholder map that
forms the basis of a framework from which other stakeholder theories were derived. 9 It
asserts that corporates should focus on the interests of all their stakeholders to ensure
continued existence.10 It is important for corporates to not only focus on creating
shareholder value, as purported by Friedman and discussed in Chapter 1 of this book, but
also to broaden their objectives to address the expectations and interests of all other
stakeholders (including shareholders but not limited to shareholders).
Various perspectives on stakeholder concepts came from Freeman’s work.
Stakeholder literature yields diverging perspectives and different uses of stakeholder
theory. Donaldson and Preston11 argue that stakeholder theories have multiple distinct
aspects that are mutually supportive and that could be categorised into various
approaches, namely a descriptive, instrumental or normative approach:
•The descriptive stakeholder approach. This approach describes and explains the
characteristics of the corporation, including aspects such as how it is managed, who
are the stakeholders, how the corporate considers its constituencies and the way its
management thinks about managing the corporate.
•The instrumental stakeholder approach. This approach identifies the relationships
between the management of stakeholder groups and the achievement of corporate
goals and objectives.

Figure 8.1: Stakeholder engagement process

Source: Author’s own.

•The normative stakeholder approach. This approach is regarded as the core of

stakeholder theory developed by Donaldson and Preston, and it examines (i) the
function of the corporation; and (ii) the moral guidelines for the operation and
management of the corporation.12

A fourth approach to stakeholder theory can be added to the above, known as the
convergent theory. This approach seeks a balance between the normative and
instrumental approaches, arguing that neither of these approaches is complete without
the other. This theory illustrates the possibility of developing morally sound ways of
conducting profitable business. In other words, there should be interdependency
between social responsibility and the profitability of the corporate. 13 To reach such an
ideal position, corporates need to involve their stakeholders in the manner in which they
operate their business, known as stakeholder engagement. Stakeholder engagement
involves a number of steps. First, all the stakeholders of a corporation should be
identified. Second, stakeholders should be prioritised, followed by a stakeholder
engagement and relationship management process. The steps in the stakeholder
engagement process are illustrated in Figure 8.1 above. Each step in the process will be
discussed in more detail in the following sections.
8.3Who are the stakeholders of corporations?
The first step in the stakeholder engagement process, involves the identification of the
relevant stakeholders. Before we distinguish between the various kinds of corporate
stakeholders, it is important that we first establish a definition of who or what constitutes
a stakeholder. There are a number of definitions that have different views, considered as
either ‘narrow’ or ‘broader’ views of what constitutes a stakeholder. 14 The ‘narrow’ view
of stakeholders refers to a group of individuals who are included within the boundaries
of the corporate. The narrow view of stakeholders attempts to define relevant groups in
terms of their direct relevance to the corporate’s core economic interest.15 This view only
considers stakeholders who are directly linked to the corporation, in other words, it
focuses on ‘where’ the corporate does its business, and includes employees, suppliers,
customers and financial institutions.
The broader view of stakeholder theory looks beyond the stakeholders within the
corporate and also includes those that are on the outside, for example the community,
local and national government. In our opening case scenario, the protesters who marched
outside Westminster Cathedral, where Lonmin held their annual general meeting in
2015, also became stakeholders of Lonmin even though they might not have been direct
employees or directly involved in the activities of Lonmin. Lonmin was affected by the
protesters, who were expressing their dissatisfaction with the company in a very public
manner. The protesters, in turn, felt that they were affected by Lonmin, even if they might
not have been employees. They were unhappy with what occurred at Lonmin mines and
they decided to express their negative feelings toward the company. The broader view of
stakeholder theory is oriented towards the social responsibility of corporates, as it adds
other stakeholders such as the broader community, local and/or national economy, non-
governmental organisations, and any other person or group of people who are affected
by the corporate’s activities.16
Stakeholder theories have grown in number and type since the term ‘stakeholder’ was
first coined in 1963. According to R. Edward Freeman, 17 whose work in stakeholder
theory is well known, the stakeholder concept was originally defined as including ‘those
groups without whose support the organization would cease to exist.’ This is a very
broad, simple and inclusive definition of stakeholders. Freeman’s definition allows
practically anyone to be classified as a stakeholder as virtually anyone can affect or be
affected by corporations. A much more specific definition of stakeholders was given by
Clarkson from a corporate social responsibility perspective. In this book, we adopt the
Clarkson definition:

’A corporation’s stakeholders are the person or groups of people that have, or claim
ownership, rights, or interests in a corporation and its activities, past, present, or
future. Such claimed rights or interests are the result of transactions with, or actions
taken by the corporation, and may be legal or moral, individual or collective.
Shareholders with similar interests, claims, or rights can be classified as belonging to
the same group, for instance employees, shareholders and customers.’18

In general, stakeholders are classified as external or internal. The external stakeholders

of corporates are those individuals or groups of individuals, who are not directly working
within the corporate, but who are affected by its activities. Internal stakeholders on the
other hand, are those found within the corporate or those working directly in the
corporation. Table 8.1 categorises internal and external stakeholders.
External and internal stakeholders play an important role in corporates. As a
corporate citizen, corporates need to take into account the impact that the corporate has
on its stakeholders. At the same time, the influence of stakeholders on the corporation
should also be taken into account. The next section will focus on stakeholder
identification.
8.4Stakeholder identification
In this section, we will focus on two issues. First, we will address the benefits of
stakeholder identification. Second, we will focus on an approach that can be followed in
stakeholder identification.

Table 8.1: Internal and external stakeholders

External stakeholders Internal stakeholders

•The community •Shareholders/owners

•Local and national government •Investors
•Lobby/activist groups and NGOs •Employees
•Competitors •Management
•Media
•National and international industry associations
•Organised labour
•Customers
•Suppliers
•Analysts, consultants and researchers
8.4.1Benefits of stakeholder identification
In Chapter 1 of this book, we emphasised the importance of corporates considering and
protecting the interests and rights of all their stakeholders by practising good corporate
citizenship. However, corporates cannot do this unless they know exactly who their
stakeholders are. Therefore, stakeholder identification is an important aspect in
practising good corporate citizenship.
It is very important to note that the stakeholders identified by a corporate will change
over time as the corporate grows, changes its goals, adapts its strategies, enters new
markets or embarks on new projects. Stakeholder identification should therefore be an
ongoing process. The stakeholder engagement process is illustrated in Figure 8.1 as a
cycle and an ongoing process.
Stakeholder identification has a number of benefits. The first benefit is that the
identification of stakeholders indicates who and what really counts in the corporation. In
other words, who (or what) are the stakeholders of the corporate? And to whom (or
what) should management pay attention? Second, it can assist managers in the analysis
of the corporate’s larger environment. For example, suppliers and competitors emanate
from a corporate’s external environment and should be analysed. The third benefit is that
it gives management an indication of how its standard operating procedures affect
stakeholders within the corporation. For example, employees (a stakeholder within the
corporation) will be affected by standard operating procedures since these determine
their day-to-day activities. The fourth benefit is that it also gives management an
indication of the effect of its standard operating procedures on external stakeholders. For
example, customers are affected by operating procedures as this has an influence on the
cost of production and the ultimate price that customers will pay for the products and/or
services provided by the corporation. A rational manager and a rational decision maker
within a corporate will not make any major decision without an analysis of the impact of
such a decision on its stakeholders.
Various approaches exist that corporates can employ to identify their stakeholders.
These are discussed below.
8.4.2Approaches to stakeholder identification
Since R. Edward Freeman (1984) published his landmark book, Strategic management: A
stakeholder approach,19 the concept of stakeholders has been embedded in management
thinking and management scholarship. However, the question remains: ‘How do
managers identify their corporates’ stakeholders?’ Various approaches have been
developed in order to identify stakeholders in the corporate world. A well-known
approach was developed by Mitchell, Agle and Wood, called the ‘stakeholder
salience.’20 ‘Salient’ is defined by these researchers as the degree to which managers give
priority to competing stakeholder claims. In other words, it provides us with an approach
to first identify stakeholders and then to prioritise those identified. According to this
approach, stakeholder identification and prioritisation should be based on three
variables namely power, legitimacy and urgency:21
1.Power. Within the context of the stakeholder salience approach, power is defined
as the extent to which a party has or can gain access to physical, material, esteem
or social means to impose its will.22 Corporates can have power over stakeholders,
and vice versa.
2.Legitimacy. Legitimacy is defined in this context as a general perception that the
actions of an entity are desirable, proper or appropriate within some socially
constructed system of norms, values, beliefs and definitions. 23 Only entities that
have a legitimate claim or stake in a corporate should be considered a stakeholder.
Managers can’t and shouldn’t consider all possible stakeholders.
3.Urgency. Urgency is defined as the degree to which stakeholder claims call for
immediate action.24 The degree does not only depend on time sensitivity, but also
on how critical the relationship is with the stakeholder or the importance of its
legitimate claim.

Returning to the question of how managers identify corporate stakeholders, the

stakeholder salience approach states that stakeholders that matter would be those that
meet these attributes (power, legitimacy and urgency). The more attributes a stakeholder
has, the higher its salience, in other words, the higher the degree to which managers will
give priority to these stakeholders. This brings us to the second step in the stakeholder
engagement process, namely the prioritisation of stakeholders.
8.5Stakeholder prioritisation
The stakeholder salience approach can be used to prioritise the identified stakeholders.
As stated above, the more attributes (power, legitimacy and urgency) a stakeholder has,
the higher it will be prioritised. It is also important to note that these attributes are all
interrelated and they can overlap. By taking all possible combinations of the attributes,
Mitchell et al25 identified seven different classes of stakeholders: dormant, discretionary,
demanding, dominant, dangerous, dependent, definitive – where these seven classes are
separated into three groups (high, expectant and latent salience).
Table 8.2 provides a description of each group and class of stakeholders.

Table 8.2: Stakeholder salience

Stakeholder group Stakeholder Stakeholder salience

class

Definitive This group of stakeholders possesses

High salience (power, power, legitimacy and urgency with a
stakeholders legitimacy and very high salience. They should be the
urgency) highest priority of the corporate. An
example of this group is a board of
directors that has an urgent issue. In the
opening case scenario, the annual
general meeting of Lonmin in London is
an example of a stakeholder possessing
power, legitimacy and urgency.
Expectant Dominant This group possesses legitimacy and
stakeholders (legitimacy and power. This group is likely to have a
(moderate salience, power) formal mechanism in place that
active rather than acknowledges the legitimacy of the
passive stakeholders relationship with the corporate, for
and includes dominant, example its human resources
dangerous and department. In the opening case
dependent scenario, the human resources
stakeholders) department of Lonmin was a dominant
stakeholder, since wage negotiations
were conducted by this department.
Dangerous The dangerous stakeholders possess
(power and power and urgency but no legitimacy,
urgency) and will possibly be coercive and violent.
Examples are activists that use unlawful
tactics. Although the stakeholder
salience approach identifies this group, it
does not require them to be
acknowledged and thus be awarded any
legitimacy. In the opening case scenario,
various ‘dangerous stakeholders’ were
part of the situation and contributed to
the actions of the protestors. For
example, the protest actions in London
during the annual general meeting of the
Lonmin.
Dependent Dependent stakeholders have legitimacy
(legitimacy and and urgency and no power. They are
urgency) dependent on others to carry out their
will. The BP oil spill in the Gulf of Mexico
was discussed in Chapter 3. The
animals impacted by the oil spill provide
an example of dependent stakeholders –
advocacy of their interests by dominant
stakeholders (with power) can make
them high salience and definitive
stakeholders.
Latent stakeholders Dormant Dormant stakeholders possess power to
(lowest salience and (power) impose their will through various means,
includes dormant, but have little or no interaction as they
discretionary and lack legitimacy and urgency. An example
demanding of this group is contracted staff who
stakeholders). demand to be permanently employed,
and make use of protest actions and
strikes.
Discretionary Discretionary stakeholders are most
(legitimacy) likely the recipients of corporate
philanthropy. Corporate managers are
not forced to engage with this group, but
may choose to do so, for example the
beneficiaries of charity.
Demanding Demanding stakeholders have urgent
(urgency) claims, with no power or legitimacy.
People with unjustified complaints or
serial complainers are examples of
demanding stakeholders.

The stakeholder salience model is dynamic – meaning that stakeholders’ attributes in

terms of power, legitimacy and urgency, can and will change over time. For example,
dominant stakeholders with legitimacy and power can become definitive stakeholders
(with power, legitimacy and urgency) if their legitimate claim becomes urgent. For
example, a health inspector may become a definitive stakeholder for a supermarket in the
event of a complaint from a customer.
Once stakeholders have been prioritised based on their power, legitimacy and urgency
attributes, stakeholder engagement can take place, which is the focus of the next section.
8.6Stakeholder engagement
Stakeholder engagement, in broad terms, is the process of involving individuals and
groups that either affect, or are affected by, the activities of the corporate. These
individuals and groups (stakeholders) were discussed earlier in this chapter. In this
section, we look at understanding the importance of engaging with these stakeholders.
Due to the different nature of corporates, different reasons why stakeholder
engagement is important might be stated. These reasons include:
•Understanding stakeholder expectations and the interests of different stakeholders
is likely to strengthen the relationship and overall trust.
•Stakeholder engagement provides the means for the corporate to build the trust of
its stakeholders.
•Stakeholder engagement is an indicator of the quality of management and long-
term financial performance.

Corporations also differ when attempting to define stakeholder engagement. Some

corporations may look at policy commitments (binding themselves through a statement
of intent) to their stakeholders, while others focus on the performance outcomes such as
job creation and the level of community engagement. Mostly though, corporations include
the following parameters when defining stakeholder engagement:
•The extent of contributions to local communities in the environment in which the
corporate operates.
•The extent to which the corporate produces safe, high quality, useful products and
services.
•The extent of enriching the natural environment on which the corporate depends.
•How the corporate is investing in employees, including training and development.
•How the corporate treats its investors and suppliers.
•The extent of transparency between the corporate and the stakeholders.

Read the excerpt from Lonmin’s website as an example of stakeholder engagement in

practice.
Example
Stakeholder engagement at Lonmin
Regular and transparent engagement with our stakeholders is a fundamental aspect of our
Sustainable Development Strategy. It is one of the Sustainable Development Framework
Principles upheld by the ICMM, and one of Lonmin’s 15 Sustainable Development
Standards. We are committed to using the outcomes of this engagement effectively and
incorporating them into the relevant decision-making processes of the business. Through
this engagement, we aim to foster trustworthy and open relationships with our stakeholders.
We believe that the sustainability of our business is dependent on stakeholder
relationships and that sound, structured stakeholder relationships serve to strengthen the
resilience of our Company and our ability to adapt to the increasing demands placed on us
amid the uncertainty of the current business environment.
Our stakeholders are those individuals and groups, formal and informal, who affect or are
affected by Lonmin’s decisions and activities. We also take into account the needs
communicated by our interested and affected parties – those groups not directly affected by
Lonmin, but who may have indirect interests in or influence on our business. These
stakeholders include: shareholders and potential investors, employees, local communities,
contractors, unions, municipalities, various provincial and local government departments,
non-governmental organisations (NGOs), inter-governmental departments, business
partners, suppliers, customers, academics, world bodies, commentators and the media.
While our respective engagement methods vary for different stakeholders, they are all
governed by the engagement approach set out in our Stakeholder Engagement Protocol,
which is currently being reviewed and updated. Our revised engagement process is in its
infancy, and is receiving significant high-level attention. Direct community and employee
engagement are priorities and we have set out to address four critical questions:
1.Which stakeholders are most relevant to Lonmin?
2.What are the issues that matter to those stakeholders?
3.How influential and visible are these stakeholders, and which are the most relevant
and priority issues?
4.How do we engage with these stakeholders?
Source: Lonmin. 2012. Engaging with our stakeholders. [Online]. Available: http://sd-
report.lonmin.com/2012/our-approach/engaging-with-our-stakeholders#top [1 October 2013].

8.6.1How to engage stakeholders

Effective engagement practices are when the managers of a corporate and the
stakeholders of the corporation are brought together, and influence one another
positively in various ways. This communication can be categorised along an
organisational ‘ladder’ of stakeholder engagement that depicts a number of levels from
low to high engagement.26 Lower levels might only involve informing or explaining
something to stakeholders, whereas high levels of engagement might be active attempts
to involve stakeholders in organisational decision making. An example of higher-level
engagement would be when a corporate enters into a strategic alliance with a stakeholder
group to seek its opinion on product design that would be sensitive to this particular
group’s concerns.
Ihugba and Osuji (2011)27 propose six levels of stakeholder engagement, which is
derived from the original eight levels of citizenship participation ladder of Arnstein
(1969).28 The levels, the corporate reasons for each level as well as each level’s purpose
and features are shown in Table 8.3.
Deciding at which level to engage with stakeholders is difficult. It depends on the
purpose and the circumstance of the engagement. As a guideline, it is proposed that the
higher the anticipated impact on stakeholders, the higher the engagement level should
be. For example, if stakeholder engagement is carried out purely to inform or pass on
information, the level of consultation (level 2) will be sufficient. The same level will not
be sufficient when a corporation plans to execute projects that affect the community or
the natural environment (irrespective of the assumed benefit to the stakeholders). In this
instance, delegated power (level 5) will most likely be more sufficient.

Table 8.3: Levels of stakeholder engagement

Source: Adapted from Ihugba and Osuji (2011:34). Reprinted by permission of the University of
Finland.
Example
Lonmin toll-free telephone hotline
A toll-free telephone number is available for the public who want to report concerns or
complaints relating to Lonmin’s operations – especially with regard to environmental, health
and safety, community, and security issues. In addition, Lonmin also arranges regular
meetings with specific stakeholders to discuss particular problem areas. Stakeholders are
invited to raise their concerns at these meetings with Lonmin management and other key
stakeholder groups.
Source: Lonmin. 2015. Annual report and accounts. [Online].
Available: http://www.lonmin.com/reports/2015/online_annual_report_2015/pdfs/Lonmin_AR2015.pdf
[25 August 2016].

The example box above highlights a way in which to engage with stakeholders. A
telephone hotline and meetings are tools used to engage the stakeholders. Stakeholders
can be engaged in a number of different ways across the different levels of stakeholder
engagement. These tools will now be discussed.

Stakeholder engagement tools

Stakeholder engagement can take place through various practices, using different tools.
These include both internal- and external-oriented engagement practices. Externally
oriented stakeholder engagement practices include tools such as surveys, focus groups
and consultative panels to bring the expectations of stakeholders to the forefront.
Dialogue (both written and spoken interaction), community support programmes,
measures to strengthen the capability of suppliers and providing reports of a corporate’s
sustainability and social responsibility initiatives are also tools that can be used in
external engagement practices.
Internally orientated stakeholder engagement practices include tools such as
investing in the health and development of employees, and consulting stakeholders on
making changes in the corporate’s operations. Internally orientated practices can create
a learning organisation. A learning organisation is one that is continually getting smarter.
It acquires and creates information, and encourages individuals to transform this
information into knowledge so that new insight is gained. Collaboration, partnerships
and alignment between the corporate and its internal stakeholders are the trademarks of
this approach.
Stakeholder engagement is most effective when it includes both internal and external
stakeholders, as exchanges between the organisation and these stakeholders will provide
benefits for a wider range of stakeholders. For example, an IT company introduced a
product-related initiative for elderly users of technology in co-operation with a non-
governmental organisation and specialised technology developers. The exchange
between the IT company and its external stakeholders provided benefits to these
principle partners, but also to the elderly community.
The approaches used by corporates to engage stakeholders vary greatly, but it is clear
that it is the form of interaction that matters. The approaches are ultimately used to
capture information about the interests and expectations of stakeholders. The more a
corporate interacts with its stakeholders, the better it will understand them and be able
to address their concerns and interests. 29 The approaches used by a corporate will also
alert managers to areas of disagreements and potential problems. By identifying
potential problems early on, a better relationship with stakeholders is ensured.
8.7Stakeholder relationship management
While stakeholder engagement focuses on involving stakeholders, it does not necessarily
mean that a relationship is in place. Managing the relationships with stakeholders will
hold both tangible and intangible long-term rewards for the corporation. New products,
stronger supply chains and a more diverse workforce, for example, will all yield a
competitive advantage for the corporation.
Corporations and managers should understand that stakeholders have rising
expectations. Internal stakeholders – the employees – are likely to expect a steady income
and regular salary increases. External stakeholders – the community, for example – might
expect the corporation to act more sustainably towards their immediate natural
environment. Corporations should adapt their mind-sets from seeing stakeholders as
risks to seeing them as a source of opportunity. A corporation might empower the
community by involving them in a certain project, or have a meeting with a community
leader to get inputs and opinions from them. This also requires the stakeholders to be
moved to the centre of management’s vision, as well as a co-operative spirit that should
be used in building stakeholder relationships.
Engaging with stakeholders on a transactional (relationship) level is the highest goal
of stakeholder management – the extent to which management engages in transactions
(relationships) with stakeholders. This is the most developed level and is characterised
by communication, interactiveness and resource adequacy (management spending
resources on stakeholder transactions). It requires that the corporation negotiates with
the stakeholders and strives towards maintaining ‘transactional level’ status. To get to
this level, corporations go through two other levels of engagement, namely the rational
(introductory) and process (second) level. The introductory, rational level is where the
corporation identifies its stakeholders and the legitimacy of stakes (share or involvement
in the business), and the nature of these stakeholders’ power. During the second, process
level, the corporation develops processes such as approaches, policies and procedures
that will assist the corporation in scanning the environment to gather information about
its stakeholders.30 Moving through the first two levels successfully will enable a
corporation to engage with stakeholders on a transactional level.
Once a corporation reaches the transactional level, it is necessary for it to maintain the
relationship with their stakeholders. The King III report on corporate governance
proposes six relationship management principles: 31
1.The board should appreciate that stakeholders’ perceptions affect a corporate’s
reputation. The gap between stakeholders’ perceptions and the performance of the
corporation should be managed and measured to enhance and protect the
corporation’s reputation. This reputation and the link with stakeholder
relationships should also be a regular board agenda item.
2.The board should delegate to management to proactively deal with stakeholder
relationships. Management should develop a strategy and formulate policies for the
management of relationships. The board should consider formal and informal
processes of interaction with stakeholders.
3.The board should strive to achieve the appropriate balance between its various
stakeholder groupings, in the best interest of the corporation. Legitimate interests
and expectations of the stakeholders should be taken into account during decision
making.
4.Corporations should ensure the equitable treatment of shareholders (individuals,
institutions or other entities that own shares in the corporation).
5.Transparent and effective communication with stakeholders is essential for
building and maintaining their trust and confidence. Complete, timely, relevant,
accurate, honest and accessible information should be provided by the corporation
to its stakeholders. This communication should be in clear and understandable
language.
6.The board should ensure disputes are resolved as effectively, efficiently and
expeditiously (quickly) as possible. The board should adopt formal dispute
resolution processes for both internal and external disputes.
Maintaining and managing the relationships with stakeholders in a sustainable manner
also requires certain drivers. These drivers are intangible assets that form part of the
shared value and social capital of a business, which will be discussed next.
8.7.1Shared value
The concept of shared value involves creating economic value in a way that also creates
value for society by addressing its needs and challenges. It is the policies and operating
practices that enhance the competitiveness of a corporation while simultaneously
advancing the economic and social conditions in the communities in which it operates. In
essence, shared value involves creating economic value (profit) for the corporation in a
way that also creates value for society by addressing its needs and challenges. 32 The roots
of shared value are in the interdependence of the competitiveness of a business and the
health of the community around it. The business needs a successful community to create
a demand for its products and the community needs a successful business to provide jobs
and wealth creation opportunities. Simply put, it is the ‘sharing’ or redistributing of value
already created by corporations.
Shared value is not social responsibility, philanthropy, or even sustainability, but a
new way to achieve economic success. It is not about personal values or about ‘sharing’
the value that already exists within a corporation. Instead, it is about expanding the total
pool of both the social and economic value. And this is why it should be at the centre of
what a corporation does. The purpose of the corporation must be redefined as creating
shared value, not just profit. Managers need to develop new knowledge and a greater
understanding of societal needs, and reconnect the success of the corporation with social
progress.33
A good example of shared value, provided by Porter and Kramer (2011), 34 is the
Fairtrade movement. Fairtrade aims to increase the proportion of revenue that goes to
poor farmers by paying them higher prices for the same crops. Fairtrade encourages
sustainable production; makes sure that farms comply with the highest labour standards;
guarantees producers a fair price; and gives back to communities. It is mostly about
redistribution rather than expanding the overall amount of value created. A shared value
perspective will focus on improving growing techniques and strengthening the local
cluster of suppliers in order to increase their efficiency, product quality and
sustainability. This will lead to more revenue and profit, which will benefit both the
farmers and the corporations that buy from them. While initial investment and time may
be required to implement new practices and develop the cluster, the return will be
greater economic value and broader strategic benefits for all stakeholders.
The virtuous circle of shared value in Figure 8.2 indicates that improving value in one
area will give rise to opportunities in others. Opportunities are never static, they change
constantly, and therefore ongoing explorations are necessary. As previously mentioned,
economic value can be created by creating societal value. This can be done in three areas,
as indicated in Figure 8.2.

Reconceiving products and markets

The corporation should ask questions such as: ‘Are our products good enough for our
customers? What do they need?’ This will encourage innovation, and through innovation
shared value will be created.

Redefining productivity in the value chain

The corporation’s value chain is affected by numerous societal issues such as natural
resources, health and safety and the working conditions of employees as well as
employee retention. More sustainable energy use, logistics and location, natural resource
use, procurement, distribution and employee productivity is possible when reimagining
the value chain from a shared-value perspective.

Figure 8.2: Circle of shared value

Source: Adapted from Porter and Kramer, 2011.

Building supportive industry clusters at the company’s locations

Clusters are geographic concentrations of related organisations, logistical infrastructure,
suppliers and service providers in a particular field. Building clusters will amplify the
connection between the corporation’s success and the community’s success. A
corporation’s efforts to improve conditions for the cluster will spill over to the
stakeholders and the local economy. For example, looking at Fairtrade again – a
corporation can lead efforts to increase access to essential agricultural inputs, and
support a programme that teaches farmers more sustainable practices that make
production volumes more reliable. In the process, that corporation’s productivity will be
improved.
Corporations should look for opportunities to create shared value in areas that are the
most important to them. Opportunities that are closely related to the corporation’s
existing business will be the most rewarding, as they will most likely create a competitive
advantage for it, and in the process, the corporation can earn the respect of society again.
A competitive advantage can also come from the second driver for stakeholder
relationship management, social capital, which will be discussed next.
8.7.2Social capital
We define social capital as the ability to secure or obtain resources, knowledge and
information through relationships with and between individuals, communities and
stakeholder groups.35 It is all about the networks and ties between these parties.
Management can decide to focus on internal social capital (for example, emphasising the
importance of norms, values and culture to employees, and developing social
cohesiveness between employees) or external social capital (for example, deciding where
to source knowledge, resources and information from relationships with suppliers, the
community and/or government officials), or both.
Social capital has three dimensions according to the Network for Business
Sustainability South Africa:36
1.Social networks. In this dimension, an individual’s social capital will depend on
the number and strength of an individual’s ties and his or her position in a network.
This dimension goes beyond the characteristics of individuals, to also examine the
relations among individuals in a network. This links to section 8.6.3 – stakeholders
as part of a network.
2.Trust and reciprocity. This dimension focuses less on the number of ties, but more
on the quality of relationships. Focus is on the degree of interpersonal and
generalised trust as well as trust in the corporation and the formal institutions of
government (institutional trust). Reciprocity indicates an individual’s willingness
to share resources in the expectation that the recipient would provide such help in
similar circumstances.
3.Shared norms and values. This dimension emphasises that if individuals and
corporations share common norms and values, effective communication and
collective action will be enhanced.

Understanding these dimensions enables managers to recognise their relationship with

employees, as well as the corporation’s relationship with its community.

Benefits and value of social capital

Trusting relationships among internal stakeholders can lead to more effective sharing of
information and knowledge, giving rise to enhanced efficiency and reliability in the
corporation’s operations.37 Innovation will also be supported by employees sharing the
same values and norms. Furthermore, strong relationships will lead to employees being
committed and loyal to the corporation, leading to improved employee retention.
A strong relationship between employees (and the corporation) with external
stakeholders such as local communities and customers, will contribute to a competitive
advantage and cost reductions. Access to external information and knowledge, and the
corporation’s reputation among customers and communities, will increase. This means
that the corporation will also have an increased reputation among prospective
employees, enabling it to attract better talent.
Understanding and measuring social capital will also: 38
•Provide opportunities for the corporation to explore the benefits of both formal
relationships (for example, established relationships with the suppliers) and
informal relationships (for example, relationships with the community).
•Enable communities to identify benefits that can be derived from the trust they
develop with the corporation.
•Provide opportunities for the corporation to use the relationship and ties it
develops with the community to address the social needs of the community and to
create positive social changes.

Social ties between a corporation and its stakeholders can therefore be efficacious
(effective) in providing information, influence and unity. Through these ties, value is
created for both the corporation and its stakeholders. This is referred to as ‘shared value’
that was discussed in section 8.6.1.
The ties or relationships must be nurtured so as to keep them from deteriorating
systematically. A systematic approach to social capital means that management must
have knowledge about their workers and build trusting relationships with them. First,
management should identify the type of social capital. Individual or organisational
social capital can be used to develop the skills and capabilities of employees, and for
information to be shared among employees. Collective or community-based social capital
can be used to involve communities in the corporation’s initiatives. 39 A systematic
approach also involves attention being paid to relationships between employees or the
corporation with third parties. These relationships should continuously be assessed and
evaluated.
DILEMMA
Marikana through a social capital lens
Refer to the opening case scenario and identify the relationships that you think deteriorated
systematically in the lead-up to 16 August 2012. Could these have been identified and
addressed earlier through a systematic approach to social capital?

A social capital analysis should focus the attention of the corporation on trusting
relationships and ways in which the corporation could seek to support more conducive
network dynamics. Now we will look at stakeholders as part of a network.
8.7.3Stakeholders as part of a network
The key to managing stakeholder relationships is in understanding that the stakeholder
community is a network of people40 with both individual and structural ties.
Relationships are not static and will change; therefore it is important for the corporation
to review the membership of the stakeholder community regularly and continuously.
Two aspects of a corporation’s stakeholder community is network diversity and network
consistency.41
Network diversity refers to the variety of stakeholder partners. The corporation can
increase its network size by engaging in additional stakeholder relationships. When a
corporation engages and manages relationships with customers, employees and various
external stakeholders, it demonstrates more network diversity than a corporation that
only has strong ties with its consumer base. The greater variety of stakeholders in the
corporation’s network, the greater number of unique sources of information will be
available to them. Example
Example
Network diversity at Woolworths
Woolworths, a retail corporation in South Africa, lists the following stakeholders in their Good
Business Journey document: customers, employees, unions, suppliers, business partners,
NGOs, the community, shareholders and investors, industry corporations, government and
regulators, academic institutions, and the media. It is involved with a variety of educational
programmes and environmental initiatives. For example, in 2012 it signed a strategic
partnership with the World Wide Fund for Nature South Africa (WWF-SA). Through this
partnership it aims to reduce its environmental footprint in a credible and transparent
manner. By teaming up with WWF-SA it is able to take advantage of, amongst other things,
the WWF-SA’s skills in biodiversity and its view in responding to the challenge of building
ecological resilience in production landscapes. When Woolworths diversified their
stakeholder network in this way, it gained an advantage over other retailers that do not have
a targeted sustainability partnership.

Source: Adapted from Woolworths Holdings Limited. 2014. Annual reports. [Online].
Available: http://www.woolworthsholdings.co.za/investor/annual_reports/ar2014/whl_2014_gbj1.pdf [6
May 2015].

Network consistency is the uniformity of social performance across multiple

stakeholder groups, and influences the corporate reputation (and ultimately the financial
performance) of the corporation. Stakeholders should be treated the same across the
entire stakeholder network. Individuals gather information about the corporation’s
multiple stakeholders and use this to assess the corporation’s credibility. Should the
information from the sources be different, stakeholders might become less willing to
trust the corporation. For example, an employee who is treated well by his or her
respective employer is likely to have a favourable impression of the corporation. This
impression, however, might be tainted if this employee lives in the community in which
the corporation operates, and experiences the corporation’s pollution first-hand.
Similarly, a customer who frequently buys products from corporations may become less
likely to support them if he or she learns that products are sourced from unethical or
unsustainable sources.
Forming stakeholder networks will take a corporation beyond simple interactions by
treating internal and external stakeholders as components of a holistic network. These
internal and external stakeholders have been identified earlier in the chapter and their
influences on a corporation will be discussed in the next sections.
8.8Influences of external stakeholders on
corporates
While the corporate has control over its internal stakeholders, it does not have control
over external stakeholders. The business, the government, the public, consumers, the
community and the natural environment are all external stakeholders that interconnect
in their functioning in our socio-economic system. These stakeholders will now be
discussed in terms of their influence on the corporation.42
8.8.1Business, government and the public
These three stakeholders influence each other in various ways. This section will give a
brief overview of the relationships between the corporation (business), the government
and the public, and how they influence one another.

Business – Government
The government has non-regulatory as well as regulatory influences on the business.
Non-regulatory influences are ways that the government influences the business that do
not include government rules (laws or policies). This may include the fact that
government is a large purchaser of goods and services produced by the private sector.
Therefore government can exert an influence in favouring, for example, small businesses,
or depressed areas of business. Another non-regulatory influence from government is
moral persuasion. This is the government’s attempts to persuade businesses to act in the
public’s interests by taking a certain course of action.
The regulatory influence of government is the directing of government according to
rules or bringing under the control of law or constituted authority. In South Africa, King
III provides guidelines for all businesses to follow with regards to good corporate
governance, which is a type of regulatory influence. King III also recognises the
importance of stakeholders, especially with regard to corporate citizenship and
reputation. More details on King III can be found in Chapter 6 of this book.
The business can, in turn, influence the government through corporate political
activity such as lobbying and corporate political spending. Lobbying is the business’s
primary means of influencing government, and can be described as the process of
influencing public officials to promote or secure the passage or defeat of legislation.
Corporate political spending is when corporations make political contributions through
various channels to support a certain cause, and should be done responsibly so as not to
expose the corporation to reputational harm. The spending needs to reflect the deliberate
choices of senior managers and the board. Both lobbying and corporate political
spending have many levels and purposes that fall outside the scope of this chapter.

Public – Government
The public mainly influences the government through voting, and the government in turn,
uses politicking and public policy information to have an impact on the public. Politicking
includes activities such as campaigns or posters to vote for a certain political party, or the
leader of a political party addressing the public.

Business – Public
The business influences the public through its advertising and public relations. The
business should consider the subtle pressures that stem from public opinion when
making decisions. It’s about accountability: the desire to justify its conduct to those
whose support it seeks. If the business empowers and involves the local community, they
will be more inclined to support the business. The public, in turn, influences the business
through the marketplace. For example, the rising demand of a certain product or service,
might influence the business to adapt or expand its product range.

Consumers and the community

Consumers are the most important stakeholder in any corporation, as a country’s
economy is built on consumer spending. These consumers, on the most basic level, have
a right to safety, to be informed, to choose, and to be heard. Therefore, product
information issues comprise a major area in the business-consumer stakeholder
relationship. Corporations should not provide incorrect information, or do deceitful
advertising of their product’s features. For example, Duracell and Procter & Gamble were
sued in 2012 for deceptive marketing. USA consumers claimed that the marketing scheme
misled them as to the battery life of the Duracell batteries. Another example is that of car
manufacturers, Hyundai and Kia who, back in 2001, overstated the horsepower in some
of their vehicles. The Korean Ministry of Construction and Transportation uncovered the
misrepresentation, and the lawsuit claimed the companies were able to sell more cars
and charge more per vehicle because of the false claims.
Information should be clear, accurate and adequate. Today, consumers have high
expectations of corporations in general, and therefore it is important to briefly consider
the major consumer legislation that was passed recently. In South Africa, the Consumer
Protection Act 68 of 2008, gives certain rights to a corporation’s consumers. These
include:
1.The right to equality in the consumer market and protection against
discriminatory marketing practices
2.The right to privacy
3.The right to choose
4.The right to disclosure of information
5.The right to fair and responsible marketing
6.The right to fair and honest dealing
7.The right to fair, just and reasonable terms and conditions
8.The right to fair value, good quality and safety
9.The right to accountability from suppliers.

This Act applies to all transactions of goods or services being supplied or performed
within South Africa. Should these principles not be adhered to, consumers may lodge a
complaint at the National Consumer Tribunal or the Office of Consumer Protection of
South Africa. This Act forces corporations to produce and market their products and
services honestly and fairly. This is ultimately what a corporation wants – consumer
satisfaction – that will lead to profitability, a positive reputation and returning, ultimately
loyal consumers.
There are some other issues that might make consumers feel negative about
corporates. This may include things such as the corporate being guilty of price fixing,
unfair labour practices, unsustainable product sources, poor customer service and a
perceived lack of care about the environment and/or community. Consumers form part
of the community in which a corporation operates. By helping the community, a business
also helps itself. This was discussed under the section of shared value.

Sustainability and the natural environment

Carroll and Buchholtz43 list ten fundamental environmental issues: (1) climate change;
(2) energy; (3) water; (4) biodiversity and land use; (5) chemicals, toxins and heavy
metals; (6) air pollution; (7) waste management; (8) ozone layer depletion; (9) oceans
and fisheries; and (10) deforestation.
The natural environment is crucial for human survival. Individuals and corporations
are directly or indirectly responsible for this situation. Corporations should aim to
become involved in at least one of these issues through partnering with environmental
activists or starting their own initiatives.
Sustainability concerns the current and the future generation. It includes
environmental, economic and social aspects and is all about long-term maintenance, and
ensuring that the corporation conserves resources for the future.
8.9Influences of internal stakeholders on
corporates
Employees, as an internal stakeholder, have a number of rights which include, but are not
limited to, fair treatment, health and safety, and privacy. Legislation that applies to
employees in South Africa, as well as employee engagement as the key to sustainability
will be discussed next.
8.9.1Employee related legislation
In South Africa, the following legislation (Acts and amendments) apply to employees:
•Basic Conditions of Employment Act 75 of 1997 – regulates leave, working hours,
employment contracts, deductions, pay slips and termination.
Example
Woolworths’ Good Business Journey
At the heart of Woolworths’ food business is the ‘Good Food Journey’. This is the name it
has given to its ongoing quest to offer food that is better for consumers, better for the
environment and better for the people who produce it. The Good Food Journey forms part of
the ‘Good Business Journey’, which is now in its seventh year of existence as a formalised,
integrated programme. Caring for its communities and the environment has always been
part of the ethos of Woolworths.
Woolworths is committed to growth through responsible retail. It devotes a significant
amount of energy and resources to ensure sustainable development within the context of the
changing social and environmental needs of South Africa. It produces a yearly sustainability
report separate to its annual report, and launched the Good Business Journey in 2007. It
aims to be the most sustainable retailer in the southern hemisphere. The structures it has set
up and the progress made up to 2014 is creating a strong foundation for achieving this
vision.

Source: Adapted from: Woolworths Holdings Limited. 2014. Overview. [Online].

Available: http://www.woolworthsholdings.co.za/corporate/profile_overview.asp [6 May 2015];
Woolworths Holdings Limited. 2014. Annual reports. [Online].
Available: http://www.woolworthsholdings.co.za/investor/annual_reports/ar2014/whl_2014_gbj1.pdf [6
May 2015].

•Compensation for Occupational Injuries and Diseases Act 61 of 1997 – provides for
compensation for disablement caused by (or matters connected with) occupational
injuries or diseases sustained or contracted (or for death resulting from these) by
employees in the course of their employment.
•Employment Equity Act 55 of 1998 – protects workers and job seekers from unfair
discrimination, and also provides a framework for implementing affirmative action.
•Labour Relations Act 66 of 1995 – aims to advance economic development, social
justice, labour peace and the democracy of the workplace.
•Occupational Health and Safety Act 85 of 1993 – aims to provide and regulate
health and safety at the workplace for all workers.
•Skills Development Act 97 of 1998 – aims to develop and improve the skills of the
South African workforce.
•Unemployment Insurance Act 63 of 2001 – provides security to workers when they
become unemployed.

The employees of a corporation can be the key to success and profitability. Happy,
inspired employees are more productive and more committed to the corporation.
Engaging employees and enabling them so that they are part of the corporation’s
commitment to sustainability will keep employees happy.
8.9.2Employees: the key to sustainability
Environmental and sustainability initiatives can attract and retain employees with talent
to the business, while also increasing profitability and reducing environmental impact.
Motivating and empowering employees makes them positive about their jobs, and these
individuals work harder, are more innovative, are healthier and are a lower risk to the
corporation. One of the best ways to engage employees is by enabling them to be part of
the implementation of the corporation’s sustainability efforts. Corporations should have
strategies for their sustainability efforts, as once-off projects have been proven to have a
fleeting impact on both employee satisfaction and organisational profits. Therefore,
synchronising employee engagement with the sustainability strategy should be done in
order to build an innovative, environmentally responsible and socially conscious
business.44
8.10Stakeholder engagement issues
We recognise that there are challenges in pushing forward the concept of stakeholder
engagement. There will be many bumps along the path of stakeholder engagement, but
many of them are quite predictable.
Problems and challenges that can occur while engaging with stakeholders include, but
are not limited, to the following: 45, 46
•Failure to identify the right stakeholders. Affected stakeholders should always be
the corporation’s priority.
•Failure to choose the right engagement activities. Ongoing, effective and respectful
communication, as well as involvement of stakeholders are key factors for success.
•Information that is not transparent. Hiding information makes it impossible for
stakeholders to understand one another or make informed decisions.
•Not recognising that stakeholder engagement requires the internal support of
policies, procedures and systems, as well as time and resources.
•A particular stakeholder group may have strategic reasons for avoiding
engagement. In this case, the corporation should keep reaching out to them. There
are almost always reasonable individuals even in the most radical corporations.
•The corporation may want to end a formal engagement due to an attack or violation
of trust. The reason for ending the formal relationship should be specified and the
corporation should try to maintain an informal, dormant relationship if possible.
•Trust may not have been well tested by either side, therefore the corporation
should plan for violations of confidence.

Peers may be sceptical about the relationship with a certain stakeholder. They should be
engaged in conversation so the corporation can discuss the possible benefits.
There is no easy formula for addressing these challenges, except to try and manage the
process proactively. Gable and Shireman (2005)47 suggest that these problems and
challenges can most likely be overcome by: (i) acknowledging imperfections – openness
fosters understanding and trust; (ii) apologising in person if there was a
miscommunication; and (iii) acknowledging the positive impacts that stakeholder action
has had on the corporation. Both stakeholders and the corporation should be encouraged
to look at the big picture and long-term effect of their decisions.
There are a number of implications for poor stakeholder engagement. The above-
mentioned issues or conflicts can manifest in a number of different ways. These include,
but are not limited to:
•Significant and costly disruptions in projects due to miscommunication or not
including all stakeholders from the start. Stakeholders that are excluded from
dialogue with the corporation do not have meaningful opportunities for expressing
their views and concerns.
•Stakeholders not understanding each other, and therefore it can become difficult to
make decisions. There is also potential alienation of stakeholders who feel that their
concerns are not being heard.
•Distrust between the corporation and its stakeholders.
•The absence of established relationships and channels of communication puts a
corporation at an immediate disadvantage if a conflict or crisis does arise. Trying to
initiate contact with affected stakeholders when the corporation is in crisis or
reactive mode, can create lasting negative perceptions that are difficult to overcome.
•Means such as physical protests and violence to property or persons are used in
order to get a response to concerns.
•A damaged corporate reputation.
•Lost productivity due to delays or disruption.
•Frustration and turnover of staff in stakeholder engagement or community relation
functions.

Referring back to the opening case scenario, it is clear that there was a lack of stakeholder
engagement at Lonmin Marikana. The employees, the unions and management involved
in the strike were not engaging at an adequate level. There was a lack of trust and
communication between these stakeholders that ultimately led to costly disruptions for
many other stakeholders as well. Both internal and external stakeholder relationships
should be managed and maintained to avoid a similar situation in future.
There is a need for corporations to become more aware of these implications, which
in themselves demonstrate the business case for better stakeholder engagement.
Remember that ‘no conflict’ does not necessarily mean ‘good engagement’. Some conflicts
may have benefits for the corporation, while other conflicts will be unproductive. As
much as some conflict has negative effects, the positive benefits of stakeholder
engagement are far more important.
8.11Conclusion

A stakeholder is an individual or a group that claims to have a stake or interest in a

corporation. Stakeholders influence the corporation and, in turn, the corporation will
influence them in various ways. Although the stakeholder management approach is quite
complex and time consuming, it is in tune with the dynamic environment that
corporations face today.
To summarise, first we discussed who the internal and external stakeholders of a
corporation are, as well as how to identify these stakeholders. Various approaches were
discussed to assist a corporation in not only identifying, but also to prioritise the
stakeholders. Once stakeholders are identified and prioritised, they need to be engaged.
We discussed various stakeholder engagement processes, and how to manage the
relationships that come from these engagement practices. The management of a
relationship between a corporation and its stakeholders requires drivers such as social
capital and shared value. These drivers also confirm that stakeholders are part of a
network and must be treated as such. This means that individual and group relationships
should be managed in order to improve the network diversity and consistency. Next, all
the internal and external issues that may be encountered when a corporation attempts to
engage and enter into a relationship with these stakeholders was mentioned and finally
the consequences that arise from a lack of engagement were mentioned.

Multiple-choice questions
1.The _______ stakeholder theory describes why corporates should participate in
corporate social responsibility.
a.descriptive
b.instrumental
c.normative
d.convergent

2._______ stakeholders possess only legitimacy and urgency and have _______ salience.
a.Discretionary; low
b.Demanding; low
c.Dependant; moderate
d.Definitive; moderate

3.Stakeholder engagement is important for many reasons, except _______.

a.it provides the means for the corporation to build trust with its stakeholders
b.it is an indicator of the quality of management
c.understanding expectations and interests of different stakeholders will
strengthen the relationship
d.it increases the extent of involvement with the local community

4.Consider the question: ‘What is shared value?’

Suppose the following answer is given:
‘Shared value is a driver of stakeholder relationship management (SRM). It involves
creating economic value (profit) for the corporation in a way that also creates value
for society by addressing its needs and challenges. In essence, it is the redistributing of
value corporations have already created for themselves. The circle of shared value
involves a continuous process of creating economic value by creating societal value
and this can be done in four areas.’

5.What is wrong with the answer?

a.Shared value is not a driver of SRM.
b.The essence of shared value is indicated incorrectly.
c.Shared value is not about addressing society’s needs and challenges.
d.There are not four areas in the circle of shared value.

6.Which one of the following is an advantage associated with network diversity?

a.The greater the variety of stakeholders, the greater the number of unique
sources of information available to the corporation.
b.The corporation’s reputation will be positively influenced if there is greater
network diversity.
c.Organisational credibility will increase if there is greater network diversity in
a corporation.
d.Network diversity provides opportunities for the corporation to explore the
benefits of formal relationships with stakeholders.

Discussion questions
1.Discuss why it is important for corporates to engage with their stakeholders.

2.Elaborate on how corporates prioritise stakeholders.

3.What are the challenges and implications when corporates engage with
stakeholders?

Additional reading
•Carroll, AB & Buchholtz, AK. 2015. Business & Society: Ethics, Sustainability, and
Stakeholder Management. 9th ed. Stanford: Cengage Learning.
•Cooperrider, D & Fry, R. 2012. Corporate citizenship at the core: It is still about
stakeholder engagement and relational practices. Journal of Corporate Citizenship,
47:3–7.
•Crane, A, Palazzo, G, Spence, LJ & Matten, D. Contesting the value of ‘creating shared
value’. California Management Review, 56(2):130–153.
•Freeman, RE. 1984. Strategic Management: A Stakeholder Approach. Boston, Mass:
Pitman.
•Hammann, R. 2015. The high returns of social capital. [Online].
Available: http://www.bdlive.co.za/opinion/2015/02/25/the-high-returns-of-
social-capital [6 May 2015].
•Ihugba, BU & Osuji, OK. 2011. Corporate Citizenship and Stakeholder Engagement:
Maintaining an Equitable Power Balance. Electronic Journal of Business Ethics and
Organization Studies, 16(2):28–38.
•Jones T, & Wicks, A 1999. Convergent stakeholder theory. Academy of Management
Review, 24(2):206–221.
•Kwon, S & Adler, PS. 2014. Social capital: Maturation of a field of research. Academy
of Management Review, 39(4):412–422.
•Mainardes, EW, Alves, H & Raposo, M. 2011. Stakeholder theory: Issues to
resolve. Management Decision, 49(2):226–252.
•Porter, ME & Kramer, MR. 2011. Creating shared value. Harvard Business Review,
89(1/2):62–77.
•Russo, A & Perrini, P 2010. Investigating stakeholder theory and social capital: CSR
in large firms and SMEs. Journal of Business Ethics, 91(2):207–221.

References
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Available: http://www.lonmin.com/reports/2015/online_annual_report_2015/sha
reholder_information/shareholder_information.html [3 September 2016]; SAHRC.
2015. Marikana Commission of Inquiry. [Online].
Available: http://www.sahrc.org.za/home/21/files/marikana-report-1.pdf [3
September 2016]; Council for the advancement of the South African Constitution.
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[Online]. Available: http://www.casac.org.za/wp-
content/uploads/2015/02/Summary-and-Analysis-of-the-Report-of-the-
Marikana-Commission-of-Inquiry.pdf [3 September 2016].
2.Ibid.
3.Lonmin Marikana 2013, 147 beneficiaries to receive financial assistance from
Sixteen Eight Memorial Fund. [Online].
Available: http://www.overendstudio.co.za/websites/lonmin/news_article.php?ar
ticleID=1438#.VtadOuZRqVM [1 October 2013].
4.Politicsweb. 2012. [Online].
Available: http://www.politicsweb.co.za/opinion/lonmin-explains-wage-
agreement [1 September 2016].
5.Marikana Commission of Inquiry. Nd. The Marikana Commission of Inquiry.
[Online]. Available: http://www.marikanacomm.org.za/ [6 August 2015].
6.Meinjtes, M. 2015. Marikana hangs over Lonmin AGM. [Online].
Available: http://www.bdlive.co.za/business/mining/2015/01/30/marikana-
hangs-over-lonmin-agm [6 August 2015].
7.Ibid.
8.Carroll, AB & Buchholtz, AK. 2015. Business & Society: Ethics, Sustainability, and
Stakeholder Management. 9th ed. Stanford: Cengage Learning.
9.Laplume, AO, Sonpar, K, & Litz, RA. 2008. Stakeholder theory: Reviewing a theory
that moves us. Journal of Management, 34(6):1152–1189.
10.Freeman, RE, Harrison, JS, Wicks, AC, Parmar, B, De Colle S. 2010. Stakeholder
Theory: The State of the Art. Cambridge University Press: Cambridge, U.K.
11.Donaldson, T & Preston, LE. 1995. The Stakeholder Theory of the Corporation:
Concepts, Evidence, and Implications. The Academy of Management Review,
20(1)65–91.
12.Ibid.
13.Kakabadse, NK, Rozuel, C & Lee-Davies, L. 2005. Corporate social responsibility
and stakeholder approach: A conceptual review. International Journal of Business
Governance and Ethics, 1(4):277–302.
14.Mitchell, RK, Agle, BR & Wood, DJ. 1997. Toward a Theory of Stakeholder
Identification and Salience: Defining the Principle of Who and What Really
Counts. The Academy of Management Review, 22(4):853–886.
15.Orts, EW & Strudler, A. 2010. Putting a Stake in Stakeholder Theory. Journal of
Business Ethics, 88:605–615.
16.Ibid.
17.Freeman RE. 1984. Strategic Management: A Stakeholder Approach. London:
Pitman Publishing.
18.Clarkson, MBE. 1995. A stakeholder framework for analysing analysing and
evaluating corporate social performance. Academy of Management Review,
20(1):92–117.
19.Freeman RE. 1984. Strategic Management: A Stakeholder Approach. London:
Pitman Publishing.
20.Mitchell, RK, Agle, BR & Wood, DJ. 1997. Toward a theory of stakeholder
identification and salience: defining the principle of who and what
really counts. Academy of Management Review, 32(4):853–886.
21.Ibid.
22.Stakeholdermap.com. 2016. Stakeholder salience. [Online].
Available: http://www.stakeholdermap.com/stakeholder-analysis/stakeholder-
salience.html [12 May 2016].
23.Mitchell, RK, Agle, BR & Wood, DJ. 1997. Toward a theory of stakeholder
identification and salience: defining the principle of who and what really
counts. Academy of Management Review, 32(4):853–886.
24.Ibid.
25.Ibid.
26.Ihugba, BU & Osuji, OK. 2011. Corporate Citizenship and Stakeholder
Engagement: Maintaining an Equitable Power Balance. Electronic Journal of
Business Ethics and Organization Studies, 16(2):28–38.
27.Ibid.
28.Arnstein, SR. 1969. A ladder of citizen participation. American Institute of
Planners, July, 216–224.
29.Sloan, P. 2009. Redefining stakeholder engagement. Journal of Corporate
Citizenship, 36:25–40.
30.Carroll, AB & Buchholtz, AK. 2015. Business & Society: Ethics, Sustainability, and
Stakeholder Management. 9th ed. Stanford: Cengage Learning.
31.Institute of Directors in Southern Africa. 2009. The King Code of Corporate
Governance for South Africa. [Online].
Available: http://c.ymcdn.com/sites/www.iodsa.co.za/resource/collection/94445
006-4F18-4335-B7FB-
7F5A8B23FB3F/King_III_Code_for_Governance_Principles_.pdf [3 March 2016].
32.Porter, ME & Kramer, MR. 2011. Creating shared value. Harvard Business Review,
89(1/2):62–77.
33.Network for Business Sustainability South Africa. 2014. Measuring and valuing
social capital: A guide for executives. [Online]. Available: http://nbs.net/wp-
content/uploads/NBS-SA-Social-Capital-SR.pdf [24 July 2015].
34.Porter, ME & Kramer, MR. 2011. Creating shared value. Harvard Business Review,
89(1/2):62–77.
35.Hammann, R. 2015. The high returns of social capital. [Online].
Available: http://www.bdlive.co.za/opinion/2015/02/25/the-high-returns-of-
social-capital [6 May 2015].
36.Network for Business Sustainability South Africa. 2014. Measuring and valuing
social capital: A guide for executives. [Online]. Available: http://nbs.net/wp-
content/uploads/NBS-SA-Social-Capital-SR.pdf [24 July 2015].
37.Network for Business Sustainability South Africa. 2014. Measuring and valuing
social capital: A systematic review. [Online]. Available: http://nbs.net/wp-
content/uploads/NBS-SA-Social-Capital-SR.pdf [24 February 2016].
38.Ibid.
39.Ibid.
40.Bourne, L. 2010. Stakeholder relationship management: Using the stakeholder
circle methodology for more effective stakeholder engagement of senior
management. 7th Project Management National Benchmarking Forum. 24–26
November 2010. Rio de Janeiro, Brazil.
41.Peters, R & Golden, P. 2013. Stakeholder networks and strategy: The Influence
of network consistency and network diversity on firm performance. Journal of
Business Strategies, 30(2):120–144.
42.Carroll, AB & Buchholtz, AK. 2015. Business & Society: Ethics, Sustainability, and
Stakeholder Management. 9th ed. Stanford: Cengage Learning.
43.Ibid.
44.Lovins, H. 2012. Employee engagement is key to sustainable success. [Online].
Available: http://www.sustainablebrands.com/news_and_views/jul2012/employe
e-engagement-key-sustainable-success [21 July 2015].
45.Gable, C & Shireman, B. 2005. Stakeholder engagement: A three-phase
methodology. Environmental Quality Management, 14(3):9–24.
46.Shift. 2013. Stakeholder Engagement and the Extractive Industry Under the
OECD Guidelines for Multinational Enterprises. [Online].
Available: http://shiftproject.org/sites/default/files/Discussion%20Paper_Stakeh
older%20Engagement%20and%20the%20Extractive%20Industry.pdf [4 March
2016].
47.Gable, C & Shireman, B. 2005. Stakeholder engagement: A three-phase
methodology. Environmental Quality Management, 14(3):9–24.
chapter
Management of business ethics
Ireze Van Wyk
9
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Expound on the relationship between ethics, business ethics and regulations
•Discuss the drivers of business ethics and the cost involved of unethical
behaviour
•Differentiate between the levels of business ethics
•Explain how an organisation can manage business ethics – both formally and
informally
•Differentiate between the dimensions of an ethical culture
•Explain the role of ethical behaviour, ethical beliefs and ethical intentions ‘role’ in
employee ethical conduct
•Discuss the nine-step ethical decision-making model
KEYWORDS AND CONCEPTS
-auditing, accounting and reporting
-business ethics
-code of conduct
-code of ethics
-corporate ethical culture
-ethical consultants
-ethical dilemma
-ethical issue
-ethical officers and/or committees
-ethical training
-ethics
-mission statements
-reporting, advice and communication channels
-risk analysis and management
-value statements
-virtue of clarity
-virtue of congruence
-virtue of discussability
-virtue of feasibility
-virtue of sanctionability
-virtue of supportability
-virtue of transparency
OPENING CASE SCENARIO

Under the bread line

The global food regime is effectively controlled by a few transnational corporations –
and they are enjoying good profits. Half of the world’s seed market is controlled by
three transnational corporations – Monsanto, DuPont and Syngenta. The world’s top
ten food-processing companies (such as Nestlé) control 28% of the global market.1
South Africa follows the same trend. There is a small group of industry players
that control food production, processing, storing and distribution – and they control
the availability, price, quality and nutritional value of all the food consumed.2
There are only three grain storage companies (Senwes, NWK and Afgri), and only
two seed companies (Monsanto and Pioneer Hi-Bred) that supply wheat to
commercial wheat farmers. The white maize-milling segment is dominated by three
corporates, namely Tiger Brands, Premier Foods and Pioneer Foods. These white
maize milling companies, together with Foodcorp, are also the four milling industry
players that own their own bakeries.3 They produce most of the bread consumed by
South Africans.4
The South African grocery retail sector is also concentrated with four major role
players: Shoprite, Pick n Pay, Woolworths and Spar.5 In such a concentrated market,
there are a few cases where role players have abused their power or positions in
their market. Excessive executive compensation was highlighted by South Africa’s
Minister of Finance in November 2011, Minister Pravin Gordhan. The pay for
Shoprite’s CEO, amongst other CEOs, came under the spotlight, as Whitey Basson
earned R627,53 million in 2010 – that’s R2,5 million per day.6 Such excessive
remuneration links to the debate around inequality – especially when considering the
remuneration of lower staff members (cashiers) working at retail outlets.
Another example of power abuse was the collusion between Tiger Brands,
Premier Foods and Pioneer Foods. In 2006, it was found that these three milling
players were involved in bread and milling cartels.7 They had fixed the price of bread
and maize meal, seized the entire value chain and elevated the already
disadvantaged position of the poorest in South Africa’s nation. All in the name of free
capitalism and profits.8
In 2007, The Competition Commission fined Tiger Brands R98 million. The
company had 30 days to pay this fine. Upon further investigation, evidence of anti-
competitive action was also highlighted between certain Tiger Brand employees and
some competitors. Other companies also involved with the illegal price fixing were
Premier Foods and Pioneer Foods, who also faced charges.9
Anti-competition practices amongst industry players reduce or restrict competition
among corporations. Reducing or restricting competition among corporations is, in
some way, to deliberately hinder healthy competition. These practices are known as
anti-competitive behaviour and include price fixing, predatory pricing (a company
setting its price so low as to force a competitor out of the market/creating a barrier for
a new entrant into the market) and rigging bids (to agree in advance who to award a
contract to). The latter can be achieved by setting a pre-determined price on a
tender, limiting other company’s chances to compete).10 Tiger Brands, Premier
Foods and Pioneer Foods engaged in price fixing – one example of unethical
conduct and anti-competitive behaviour. Another practical example of anti-
competitive behaviour was exposed in 2015 within FIFA – soccer’s international
governing body. FIFA officials were charged with taking millions of dollars in bribes
to influence clothing sponsorship contracts and the selection process for the World
Cup. Hence there was no healthy competition for clothing sponsors to secure a
contract with FIFA.11
9.1Introduction

The example of price fixing, discussed in the opening case scenario, highlights the
possible disregard of well-known organisations and their competitors for moral
consequences in their pursuit of profits. There are numerous other examples world-wide
(see Table 9.1 for a few) where corporations did not take into consideration the moral
consequences of their actions.
Media attention on corporate and ethical scandals, cases of environmental exploitation
and power abuse, (such as the examples listed in Table 9.1), resulted in an increased focus
on business ethics and the ethical behaviour of corporates, as well as the consequences
of unethical behaviour for multiple stakeholders. With the media frequently reporting on
corporate scandals and other corporate conduct concerns, corporates have realised that
action needs to be taken to minimise unethical practices. 12 Being pressured by internal
and external stakeholders to become more ‘ethical’, and ‘good’ corporate citizens,
corporations have started to manage ethics through policies, codes of conduct and ethical
training. This renewed drive to behave ethically includes implementing formal and
informal business ethics components and the emergence of various ethical decision-
making frameworks and models.
Actions aimed towards more ethical behaviour in the business environment fall under
the banner of business ethics – a concept that is often associated or linked with corporate
citizenship (and other concepts such as corporate governance and sustainability). There
are many aspects of business ethics that we can address; however, we’d like to look at
three fundamental areas of business ethics that will assist managers in developing and
maintaining an ethical organisation. Apart from the foundational theoretical basis of
defining ethics and business ethics, Chapter 9 will look at what managing business ethics
entails, the role of corporate ethical culture, understanding employee decision making
and conclude with an ethical decision-making framework.

Table 9.1: Ethical scandals

Company Ethical scandals Outcomes

Enron Corporation Involved with security The company failed

(American energy, frauds, conspiracy to inflate (collapsed) and filed for
commodities, and corporate profits and had a bankruptcy. The former CEO
services company) corrupt corporate culture was charged with security
fraud, insider trading, making
false statements to auditors
and conspiracy. The CEO
was also sentenced to 168
months in prison.
WorldCom Involved with accounting The company failed
(a US fraud, lied, and included (collapsed) and was put into
Telecommunications false accounting entries on bankruptcy. The former CEO
company) financial statements in order was convicted of
to achieve favourable orchestrating the US$11
financial results billion accounting fraud and
was sentenced to 25 years in
prison.
Tyco International Evaded sales tax, stole The former CEO and CFO
(an American security money through corruption were found guilty of stealing
systems company) and involved with fraudulent (money) and conspiracy,
activities falsifying business records
and violating general
business laws. They were
sentenced to 15 and 30
years in prison respectively.
Parmalat (Italy) Involved in financial fraud, The company failed
(a milk falsified (invented) assets (collapsed). Founder of
processing/dairy-food and accounts and had Parmalat was found guilty of
company) flawed corporate fraud and criminal
governance (there was a association and was
lack of transparency, and no sentenced to 18 years in
compliance mechanisms, or prison.
internal regulation to detect
fraud)
Sources: Carroll, AB & Buchholtz, AK. 2015. Business and society: Ethics, sustainability, and
stakeholder management. 9th ed. U.S: Cengage Learning; Di Stefano, TF. 2005. WorldCom’s
failure: Why did it happen? [Online].
Available: http://www.ecommercetimes.com/story/45542.html [23 February 2016]; The
United States Department of Justice. 2013. Former Enron CEO Jeffrey Skilling Resentenced to
168 Months for Fraud, Conspiracy Charges. [Online].
Available: http://www.justice.gov/opa/pr/former-enron-ceo-jeffrey-skilling-resentenced-168-
months-fraud-conspiracy-charges [23 February 2016]; Crawford, K. 2005. Ex-Tyco CEO
Kozlowski found guilty: Second trial ends in guilty verdicts for former Tyco chief and the
company’s ex-CFO Swartz. [Online].
Available: http://money.cnn.com/2005/06/17/news/newsmakers/tyco_trialoutcome/ [23
February 2016]; Bloomsberg Business. 2004. How Parmalat went sour. [Online].
Available: http://www.bloomberg.com/bw/stories/2004-01-11/how-parmalat-went-sour [23
February 2016].
9.2Ethics

Chapter 4 briefly touched on ethics and morality. In this chapter, the aim is not to devote
too much attention to the philosophical side of ethics and morality. However, it is
necessary to elaborate slightly on ethics before addressing business ethics – which is the
application of ethics in a business setting.
The origin of the word ‘ethics’ is the Greek word ethos, which means ‘character’ or
‘customs’.13 Ethics, as defined in Chapter 4, is a set of moral principles, norms or
standards that govern human behaviour. It is concerned with individual character, or
‘being a good person’. It is also concerned with the overall character of society, or the
social rules and standards in a society. In essence, ethics refers to the participation in, and
the understanding of, social standards, norms or customs, which ultimately guide human
behaviour.
Looking at the definition and objective of ethics, two dimensions can be emphasised –
a social dimension and a personal dimension. The social dimension of ethics is concerned
with what is acceptable behaviour in society, while the personal dimension refers to an
individual’s personal morals or values. An individual’s values are the values learnt
throughout life and are considered personal. These values are shared by other
individuals, a group of people and/or society. 14
Ethics is an important component of living in society as it consists of unwritten rules,
developed by individuals, in order to be able to interact with one another. 15 Such
unwritten rules include waiting your turn in a queue or line and being faithful to your
partner.16 In essence, ethics is ‘a set of moral principles or values’ or principles, norms
and standards of conduct that governs individual or group behaviour. 17 Group behaviour
can be taken a step further to include organisations (a group of business people). The
need for ethics in the business setting needs no further introduction!
9.3Business ethics
9.3.1An introduction to business ethics
It has been previously mentioned that business ethics is concerned with ethical issues in
the business setting. Business ethics can be defined as a guideline for human excellence
or human quality in the business environment.18 It is concerned with ethical issues,
conflicts of interest and the morality of organisational decisions. 19 Consider the example
provided in the opening case scenario. The decision to fix the price of bread and deciding
on anti-competition actions by Tiger Brands, Premier Foods and Pioneer Foods, had an
ethical component. It is morally wrong as it violates the principles of fair competition
(within a free market economy). It also violates the competition law (previously
discussed in Chapter 4).
All corporates should consider the ethical implications of their business decisions, as
the consequences can be harmful to a corporation (for example, damaging company
reputation and customer loyalty and fines and penalties involved with unethical
behaviour). Knowing and applying the various consequential and non-consequential
ethical theories (as discussed in Chapter 4, section 4.4) is a good starting point to
determine any ethical considerations. At this point it’s necessary to differentiate between
ethical issues, and another concept you might have heard – an ethical dilemma.
An ethical issue is a situation, opportunity, or problem that requires of the decision
maker to choose between several actions that must be evaluated as ethical (right) or
unethical (wrong). Examples of ethical issues in the workplace are lying, conflict of
interests, environmental issues, sexual harassment, fraud and privacy issues. An ethical
dilemma is more complicated than an ethical issue, as it is seen as a ‘grey area’ – with no
right answer or ethical conclusion to a specific problem. An ethical dilemma usually has
‘less unethical choices’. An ethical dilemma is a situation, opportunity or problem that
requires the decision maker to choose among several unethical options (or wrongs). 20 For
example, within certain large companies, it is considered wrong to conduct personal
business on company time. This includes making doctor’s appointments or booking
vacations on a company’s phone line. It is clear that these actions are wrong, however,
what if a spouse calls to inform his or her partner that their child is seriously ill. Is it okay
to schedule a doctor’s appointment now using the company’s resources? A good guideline
it to clarify what counts as an offence in a large company by taking this matter up with a
manager or HR practitioner.21 Another ethical dilemma is when a team leader, with an
understaffed team, has unrealistic deadlines to achieve. Knowing that the team members
are overworked, the team leader is faced with two decisions: (1) stand up for their rights,
tell management more team members are needed as the deadlines are unrealistic and
risk being fired, or (2) keep on overworking the team members and achieve the deadlines.
Another practical example of an ethical dilemma is presented in the dilemma box below.
9.3.2The levels of business ethics
Employees and managers experience ethical issues in a variety of settings and at different
levels, namely:
•individual,
•organisational,
•industry or professional and
•societal or international level.

Table 9.2 lists and explain these levels in which ethical issues and dilemmas can occur.
Despite the ethical issues that individuals and organisations can face in the various
levels, there are ongoing debates about the existence of business ethics in
organisations.22 Criticism such as ‘Does business ethics exist?’ or ‘Business and ethics do not
mix!’ are responses to the concept of business ethics. The next section reviews these
arguments against and for business ethics.
9.3.3Arguments against and drivers for business
ethics
There are a variety of critical views on business ethics, especially in the business context.
Some of the popular critical views about business ethics are listed in Table 9.3.
Weiss considers these views as myths, false assumptions or beliefs that were given
uncritical acceptance (a myth was merely accepted as it supports traditional practices, or
the status quo without applying critical assessment). In many instances, these arguments
hold simplistic or unrealistic beliefs about business ethics. 23 Most of the arguments
against business ethics emphasise that an organisation should not trouble itself with
ethics.
DILEMMA
You are an employee, working in a dynamic team, who is responsible for the company’s
retail campaign. You report directly to a well-known and reputable director in the company.
One of your female team members is a single mom, who you know is struggling to make
ends meet and support her children. You noticed that she is (behind the scenes) being
verbally harassed by your director. She doesn’t report him, as she fears losing her income
and victimisation at work. Who would in any case believe her since the director has high
status? What would you do? Ignore the matter while this unethical and unfair practice
continues? Report it and risk losing both of your jobs, victimisation at the workplace, and
inflicting emotional consequences upon the female colleague?

Table 9.2: Levels of ethical issues and dilemmas

Level Explanation

Ethical challenges at the individual level are experienced by

Individual level people in their personal lives when they face issues involving
individual responsibility outside the context of their employment.
Examples of ethical issues on an individual level are cheating on
personal tax returns, calling in sick when you are needed at home
and accepting a bribe.
Organisational Ethical challenges at the organisational level are experienced by
level individuals inside the context of their employment. The biggest
distinguishing factor between challenges on the individual and
organisational level is that organisational-level ethical challenges
carry consequences for the organisation. Individuals dealing with
such issues should consult the organisation’s policies,
procedures and code of ethics to clarify the organisation’s stand
on these issues. Examples of ethical issues on the organisational
level are overstating overtime by a staff member, a manager
setting high organisational goals, knowing employees might cut
corners to achieve them, and an organisation who requires an
employee to overlook the unethical behaviour of a colleague
whose action has benefitted the organisation.
Industry or Ethical challenges at the industry or professional level are
professional experienced within an industry or profession (for example,
level accounting, medicine, law or education). Examples of ethical
challenges experienced at this level are banks that grant loans to
customers who do not meet the bank’s credit requirements; or
telemarketers calling people late in the afternoon (after 17:00).
Societal or Ethical challenges on the societal or international level are
international experienced in the global environment – in doing business
level globally. These ethical challenges are the same as the ethical
challenges experienced in domestic environments,
encompassing all aspects of product safety, plant safety,
advertising practised, human resource management, human
rights and environmental issues, to name a few. An example of
ethical challenges on a global scale is outsourcing to countries
and companies that have unacceptable or unfair working
conditions.
Source: Compiled from Carroll, AB & Buchholtz, AK. 2015. Business and society: Ethics,
sustainability, and stakeholder management. 9th ed. U.S: Cengage Learning.

Given this criticism, there are many aspects that ‘drive’ business ethics. There are
benefits associated with business ethics. Consider what happened with Tiger Brands and
the moral consequences of fixing bread prices. Consider the impact of its actions on the
food supply chain – and ultimately on the informal settlements (where bread forms a
major part of the staple diet). Also consider the impact its actions had on the organisation
– there was a fine issued which impacted its bottom line. What do you think? Is business
ethics important in the business setting? Table 9.4 lists the drivers and benefits of
business ethics.
Drivers for business ethics are ‘forces’, or variables in the management environment
that influence, affect and/or direct organisational activities and decisions towards ethical
practices. Legislation and regulations, corporate social responsibility movements that
promote, desire or expect ethical conduct are, for example, drivers of business ethics. 24 A
benefit of business ethics is when there are positive impacts or consequences associated
with ethical behaviour and decisions for organisations. 25 There are additional factors that
drive ethics in organisations over and above the ones listed above. Society and regulation
put pressure upon organisations to be ethical, and this serves as another driver of
business ethics. Consumers’ purchasing decisions are influenced by the ethics of
organisations. Some consumers will not purchase a product from a company, where there
are concerns about the way the products were made. 26 Other stakeholders also care about
this – such as investors, managers, and leaders and regulators:

Table 9.3: Arguments against business ethics

•Ethics is personal.
Critics are of the opinion that ethics is based on personal or religious beliefs. An
individual therefore decides what is ethical or not in the privacy of his or her own
conscience. However, it is also true that ethical choices are influenced by
discussions, conversations and debates in the workplace. In addition, the
corporate culture and ethical conduct also governs employee’s actions and
conduct within the workplace.
•Business and ethics do not mix.
Critics state that business, or management, is based on scientific principles and
not on ethical or religious principles. However, with the incidents such as unsafe
products, corporate corruption, toxic wastes and improper use of public funds,
this view has eroded over the last two decades.
•Business ethics is relative.
This argument is based on the perspective that ethics and morality differ from
society to society. The question is thus, what is ‘right’ and according to ‘whom’
and ‘why’. Also, how could interactions, transactions and negotiations between
individuals and groups on ethical dilemmas be completed if this ‘relativism’ is to
be carried to its logical extreme? How would one then resolve an ethical issue?
The relative business ethics perspective is particularly not possible in
international business. No one could argue or disagree with anyone about moral
issues, as each person’s values would be true for themselves.
•Good business means good ethics.
This argument states that if top managers and companies maintain good
corporate images, practise fair dealing with customers and employees and earn
‘legitimate’ profits (not in illegal ways), then they are inherently ethical. Hence,
there is no need for these companies to focus on ethics in the workplace.
However, no correlation exists between ‘good business’ and ‘material success’.
•Information is neutral and amoral.
This argument views information as amoral (it is neither moral nor immoral, but
neutral). Information has both a good and a bad side. While information
empowers and enlightens, it can also be used as a ‘form of control’, for power
and manipulation (for example, falsehood, inaccuracy, lying, deception,
disinformation and misleading information). Take the examples listed in Table
9.1, where financial performance was inaccurately (deceitfully) portrayed.
Business ethics is thus needed to ensure that truth and accuracy concerning
information is maintained.
Sources: Compiled from Weiss, JW. 2009. Business ethics: A stakeholder and issue management
approach. 5th edition. Stamford, CT: South-Western Cengage Learning; Aswathappa, K.
2008. International Human Resources. New Delhi: Tata McGraw-Hill Education; DeGeorge, R.
2000. Business ethics and the challenge of the information age. Business Ethics Quarterly,
10(1):63–72.

•Investors care about ethics as they are also concerned about what organisations
are doing to protect their interests.
•Managers care about ethics, as they can be held legally liable for the criminal
activities of their employees.
•Executive leaders care about ethics because they are concerned about the ethics in
their own organisations as well as their business’s reputation. Industries care about
ethics because bad publicity or corporate scandals can affect the whole industry
negatively.27
•Regulators care about ethics, as they are concerned about sound and sustainable
practices in respective industries.

Table 9.4: Drivers and benefits of business ethics

Drivers of business ethics Benefits of business ethics

Consumers’ purchasing decisions are •Competitive advantages

influenced by the ethics of organisations. Some associated with being ethical
consumers will not purchase a product from a because an organisation will
company, where there are concerns about the be able to attract and retain
way the products were made. This is the same high-quality employees,
for investors. Certain investors actively seek out customers, suppliers and
companies who are engaged in corporate investors
social responsibility to invest in. Organisations •Attracting high-quality
who are involved with unethical practices (such employees, customers,
as child labour) could face public boycotts; suppliers and investors, will
hence public acceptance also remains lead to the following benefits:
important. For these reasons, the following »Greater and more
drivers for business ethics exist: trustworthy information
•Protecting organisational reputations available for decision
•Maintaining customer trust making
•Maintaining public acceptance »Higher levels of employee
•Maintaining investor confidence. productivity
»Higher quality of products
Considering that shareholders (customers, and services
employees, society) desire ethical behaviour »Less employee theft
from organisations, another driver is that: »Less need for employee
•‘It is the right thing to do’ supervision
•It has an impact, by protecting: »Increased flexibility from
»Brand stakeholders in times of
»Reputation emergency.
»Customer trust
»Investor confidence.
•Minimising the possible costs associated
with unethical behaviour such as:
»Lawsuits (consider the costs associated
when Tiger Brands and Foodcorp were
taken to court)
»Theft (employees stealing, money,
products or time from an employer), loss
of productivity (staggering or idle
workers) and absenteeism in the event
of hiring untrustworthy employees
»Monitoring employees in whom trust
needs to be restored (additional costs
due to increased supervision and time
spent in monitoring emails and time
spent on a computer/the internet).
»An organisation’s damaged or
destroyed reputation
»Recruitment and turnover (in the event
of dismissing unethical employees and
hiring new employees).

Sources: Compiled from Collins, D. 2012. Business ethics: How to design and manage ethical
organisations. Hoboken, NJ: Wiley; Forcada, JW, Groe, GM, Keller, R, Lindberg, A, Vickers, MR &
Williams, R. 2006. The ethical business: Doing the right things in the right ways, today and
tomorrow. [Online]. Available: http://www.amanet.org/HREthicsSurvey06.pdf [17 August
2011]; Hurst, R. 2006. Ethics and the purchaser. Supply Management, 11(5):17; Van Wyk, I. 2014.
Ethical Culture: A study at a South African insurance company. Unpublished MCom thesis, Dept.
of Business Management, University of South Africa.

The next section will focus on regulation and business ethics specifically.
9.4Regulation and business ethics
In Chapter 4, the relationship between ethics and legislation (laws) was discussed. We
have another interesting fact – regulators also ‘care’ about ethics. In the opening case, the
Competition Commission (which is a regulator), stepped in after the unethical conduct of
Tiger Brands, Premier Foods and Pioneer Foods was suspected. As a regulator, the
Competition Commission has the power to fine industry players that engage in illegal
conduct – such as anti-competition activities. The field of regulation is vast and so we’re
going to look at regulation briefly.
Examples of well-regulated industries in South Africa are the medical and financial
industry. The best way to understand the role of regulators and regulation is to review
the various roles that they can play in various industries (see example box on next page).
From the example box, two types of regulators are evident, namely statutory and self-
regulatory bodies. Their primary concern is to protect stakeholders (and mainly
consumers). Statutory regulatory bodies are established by the government, and on the
basis of a legal mandate. They exercise a regulatory function encompassing drafting and
imposing requirements, restrictions and conditions of conduct within an industry, setting
standards in relation to any business activity, and ensuring compliance and enforcement.
Self-regulatory bodies are established by industry players and generally agree on a code
of conduct and guidelines that members should adhere to. Self-regulatory bodies are
often established in non-regulated industries or professions. 28
These statutory and self-regulatory bodies are concerned about the ethics in specific
industries – ensuring sound and sustainable practices amongst industry players and
members. However, even in regulated industries, there have been reports of unethical
conduct. The African Bank in South Africa, despite strict regulation, practised reckless
business conduct and had to be bailed out by the Reserve Bank for billions of rands and
be put under curatorship. The other businesses in the African Bank stall, for example,
several furniture chains, had to close down. 29 The Competition Act also didn’t stop Tiger
Brands, Premier Foods and Pioneer Foods from fixing the price of bread, and anti-
competition tactics from employees. Therefore, regulation, just like legislation is still not
sufficient to prevent unethical conduct.
Ethical conduct in the business setting can be driven internally and/or externally.
Externally through pressures from stakeholders, regulators and the law, and internally,
through the management of ethical conduct. The next section discusses the management
of business ethics, as a means to creating an ethical organisation.
9.5Managing business ethics
The management of ethics is a direct effort to manage ethical issues and sound conduct
formally and informally through policies, practices and programmes.30 The formal
management of business ethics includes initiatives such as having codes of ethics, ethical
officers and policies relating to ethical conduct. The informal management of business
ethics relates to developing and maintaining an ethical culture. 31 The next sections
address these formal and informal initiatives.
9.5.1Formalmanagement of business ethics in
organisations
The formal management of business ethics comprises certain components. In the next
sections, we will look at a number of these components: the mission and value
statements; code of ethics; reporting, advice and communication channels; risk analysis
and management; ethical officers and/or committees; ethical consultants; ethical
training; auditing, accounting and reporting; and a few other components.
Example

South African Scope/focus

regulator (or self-
regulatory body)

The Micro Finance Established by the South African Reserve Bank, the MFRC
Regulatory Council regulates the micro-loans industry (granting loans to the value
in South Africa of up to R10 000). They have been tasked to implement and
(MFRC) execute the terms and conditions of any exemptions issued
under the Banks Act or Usury Act.
National Credit Based in the National Credit Act, this statutory regulator
Regulator (NCR) promotes a fair and non-discriminatory marketplace for
consumer credit providers. The NCR provides, amongst other
things, for the general regulation of consumer credit, improved
standards of consumer information and responsible credit
granting. The NCR prohibits reckless lending and provides
credit counselling for over-indebtedness.
Competition The CCSA is a statutory body and founded in terms of the
Commission South Competition Act. Its mandate is to investigate, control and
Africa (CCSA) evaluate restrictive business practices, abuse of dominant
positions and mergers in order to achieve equity and
efficiency in the South African economy.
National Energy Established in the Electricity Regulation Act, NERSA (a
Regulator South statutory regulatory body) is mandated to regulate the
Africa (NERSA) electricity, piped-gas and petroleum pipelines industries.
The Advertising The ASASA is an independent regulator, established by the
Standards Authority marketing communication industry. The regulator promotes a
of South Africa Code of Advertising Practice that stipulates the rules and
(ASASA) guidelines for industry players. Through this Code, the ASASA
protects consumers and the industry against unethical
conduct by promoting advertising that is legal, decent and
honest.
ASASA was originally a self-regulatory body. It can implement
sanctions (withhold advertising space) on those who do not
adhere to the Code. Legal recognition was achieved once the
Electronic Communications Act was passed. Once the Act
was passed, the ASASA became a statutory regulatory body.
The Association of ASATA, a self-regulatory body, has a Constitution and a Code
Southern African of Conduct. These documents self-regulate the travel industry
Travel Agents and provide consumers with the comfort that the industry
(ASATA) players who are members of the ASATA are compliant with
the guidelines set in ASATA’s Constitution and Code.
Sources: Compiled from: South Africa. Department of Trade and Industry. Nd. National Credit Regulator
(NCR). [Online]. Available: https://www.thedti.gov.za/agencies/ncr.jsp [24 February 2016]; MFRC. 2015.
Micro finance in South Africa. [Online]. Available: http://www.mfrc.co.za/ [02 July 2015]; Competition
Commission South Africa. 2015. Welcome to the competition commission South Africa. [Online].
Available: http://www.compcom.co.za/ [02 July 2015]; NERSA. 2009. Welcome to the national energy
regulator of South Africa. [Online]. Available: http://www.nersa.org.za/ [02 July 2015]; ASASA. 2015.
About the ASASA. [Online]. Available: http://www.asasa.org.za/about [02 July 2015].

Mission and value statements

Many large organisations have a mission and value statement. It gives an indication of
where the company is heading, the goals they want to achieve, and what they stand for in
terms of values (such as integrity or transparency). An example is the mission statement
of Woolworths Holdings Limited, as formulated in the company’s 2015 integrated report:

‘to be the first choice for customers who care about value, innovation and
sustainability in the southern hemisphere’.

The company’s values inform and underpin the way that it does business across the
group. From value-based leadership to passionate brand advocacy, the company seeks to
embed its values across all dimensions of its business. The company’s values are quality
and style, value, service, innovation, integrity, energy and sustainability. 32
These statements include the general statements of organisational aims, beliefs and
values, as well as the social goals and commitment to conducting business ethically. 33

Code of ethics/conduct
This includes the type of conduct desired and expected from employees. It is a document
that develops an organisation’s core values, and forms an ethical point of view within
certain organisations, professions or industry. There are three types of codes of ethics,
namely:
1.Organisational code of ethics. Sets out the guiding principles of the organisation
and is specific to a single organisation. It encourages ethical behaviour within an
individual organisation, hence it is only relevant to a particular organisation, and
one cannot assume that the codes of ethics will be the same from company to
company. This document is also referred to as a code of conduct.34 Looking at, for
example, Coca-Cola’s code of business conduct, its code of business conduct (code
of ethics) addresses elements such as (i) acting with integrity around the globe; (ii)
integrity in the company; (iii) conflicts of interest and (iv) integrity in relations
with others. Its code of business conduct explicitly states what is expected of
employees, of managers when written approval is required and how to raise
concerns.35
2.Professional code of ethics. Sets out the guiding principles for a specific group of
professionals. The professions with specific codes of ethics in South Africa are
amongst others, medicine, law, engineering and accountancy. 36 The code of ethics
for nurses in South Africa, for example, states (amongst other things) that nurses
(i) are expected to act fairly and equitably where there is a potential competition of
interest (related to health-care resources, accessibility and issues linked to
inequality) among individuals or groups; (ii) must refrain from doing harm to any
individual, group or community; (iii) are required to choose the ‘best option’ of
care (to do good) given the situation and (iv) are expected to respect, protect and
maintain confidential information concerning the delivery of health-care services –
including the health records of health-care users.37 Regardless of which medical
institution nurses works for, all nurses across South Africa are expected to adhere
to these ethical standards.
3.Industry code of ethics. Sets out the guiding principles for a specific industry –
such as the banking industry or the telecommunications industry. 38 In South Africa,
the Banking industry has a Code of Banking Practice (CoBP) (see example box on
the next page) that most banks have committed to on voluntary bases.

Ethical training
This includes the training of all employees (from new recruits to executive managers) on
ethical matters. Training programmes that are effective are ongoing and encourage
ethical awareness and knowledge of the desired ethical conduct. 39 Training programmes
can be structured in various ways – from training on the ethical policies, codes of ethics
and organisational values, training on more specific areas such as ethical decision making
or prevailing ethical issues experienced in the organisation to playing ethical games that
would get employees talking about ethics within a particular content or scenario, creating
more awareness of ethics in their work environment.
Reporting, advice and communication channels
This includes the appropriate channels for reporting unethical behaviour or receiving
advice. Communication channels include newsletters, blogs, campaigns or corporate
magazines, and websites. Reporting channels also assist in early detection of unethical
practices that can be addressed before they become public. 40 Examples include ethical
hotlines or whistle-blower lines (for reporting unethical conduct) and ethical help-lines
(for advice on ethical issues).

Risk analysis and management

This includes the identification of areas of risks, the assessment of the probability and
scale of risks, and the placement of measures to prevent such risks from happening and
harming the organisation. Ethical risk management techniques focus on identifiable
legal risks and quantifiable ethical risks (such as pollution, product liability, human rights
violations, corruption and the impact of climate change). 41

Ethical officers and/or committees

These include the appointment of individuals or teams from various groups in the
organisations to co-ordinate and/or have the responsibility for managing ethics. Tasks
and responsibilities of the ethical committees or officers can include the reviewing of the
code of ethics, social programmes, involvement in decision making when an ethical issue
emerged and reporting to top managers. 42

Ethical consultants
This includes the use of external consultants instead of internal managers, committees or
officers to manage certain areas of business ethics. Examples of organisations that
provide consultations on numerous aspects, including ethics, are KMPG and Ernst &
Young.43
Example
Code of Banking Practice (CoBP)
A Code of Banking Practice refers to a voluntary code that sets out the minimum service and
conduct standards that banks need to adhere to. The objectives of the CoBP are the
following:
•By setting minimum standards, the CoBP promotes good banking practices
•Increase transparency to ensure that customers understand what can be expected from
banks in terms of products and services
•Ensure and promote fair and open relationships between banks and customers

Develop and maintain confidence in the banking system.

The code sets out customers’ entitlements, responsibilities, and a bank’s key commitments
and principles of good conduct.
Source: The banking association of South Africa. 2012. Code of banking practice. [Online].
Available: http://www.banking.org.za/docs/default-source/default-document-library/code-of-banking-
practice-2012.pdf?sfvrsn=10 [25 July 2015].

Auditing, accounting and reporting

The effective management of business ethics requires assessment and evaluation of
performance. Auditing, accounting and reporting focuses on measuring, evaluating
and communicating the impact and performance on social, ethical and environmental
issues that are of interest to stakeholders. Examples include social auditing,
environmental accounting (or reporting) and sustainability reporting. There are various
terminologies, or labels, used to describe these tools or approaches; however, a challenge
exists with distinguishing between these approaches. Toyota, for example, produces a
‘Sustainability Report’; Total a ‘CRS Report’; Microsoft a ‘Citizenship Report’ and Body
Shop a ‘Values Report’. There are five different approaches:
1.An ethical approach focuses on internal management systems (for example, code
of ethics and hotlines).
2.An environmental approach focuses on an organisation’s impact on the natural
environment (for example, recycling, emissions and pollution).
3.A social approach focuses on an organisation’s impact on stakeholders. Issues
that this approach focuses on are health and safety, human rights, corporate giving
and community relations.
4.A sustainability approach focuses on the triple bottom line (people, planet and
profits).
5.‘Accounting’ is an overall process that includes ‘auditing’ and ‘reporting’. Auditing
refers to a measurement or checking exercise, while reporting is a means of
communication.

Crane and Matten44 used the term ‘social accounting’ as a generic term that includes all
these approaches.
The challenge remains as to what exactly is ethical performance, how it can be
measured and what is an acceptable level of ethical performance. 45 The most common
example of ethical performance of South African organisations is on economic, social and
governance (ESG) issues. ESG issues are audited, accounted for and reported in annual
integrated reports. Chapter 14 elaborates more on accounting and reporting on ethical
organisational performance.

Other formal management approaches to business ethics

This includes, but is not limited to, any other management approaches to business ethics
to structurally ensure that the desired ethical behaviour is promoted, such as:
•Policies that set out the rules of the organisation 46
•Designing organisational structures that respect the human condition (encourage
employee participation and freedom in setting goals), foster personal development
and encourage ethical behaviour47
•Any other management approaches to business ethics to structurally ensure that
the desired ethical behaviour is promoted.

These formal ways of managing business ethics are also referred to as an ‘ethical
programme’ or ‘formal ethical structures’.48 These formal components set out the
parameters for conduct, communicate expectations in terms of ethical standards and
provide structures in which employees can operate.
The next section discusses the informal management of business ethics in addition to,
and in support of, the formal management of business ethics. The informal management
of business ethics involves developing and maintaining a corporate ethical culture.49
9.5.2Informal management of business ethics
A survey conducted by the Ethics Resource Centre, found a 75% reduction in
unethical behaviour in American organisations with strong ethical cultures. 50 Various
literature and studies conducted on ethical culture emphasise the important role that an
ethical culture plays on the behaviour of employees. However, before we can explore
corporate ethical culture, we need to explore corporate culture first.
9.6Organisational cultures
Every organisation has an organisational culture51 and it is often seen as the personality
or character of the organisation. Culture refers to genealogy, country of origin, language,
food and customs or traditions in which values, norms and traditions play a role.
Corporate culture is the set of norms, values and artefacts that employees of an
organisation share.52 It is conveyed or transmitted through values and leadership styles,
heroes and heroines, and rites and symbols. 53
When employees work for an organisation, they become members of that
organisation’s culture.54 It is the employees of an organisation who carry its culture (and
shape the organisation’s culture), and in turn, culture affects employee values, ethics,
attitudes, assumptions and expressions. 55 Beliefs, expectations and meanings shared in
an organisational culture influence and guide the thinking and behaviour of
employees56 (see Figure 9.1).
Figure 9.1 shows that it is evident that organisational culture impacts on the behaviour
of employees in the organisation. Although one person cannot change an organisational
culture alone, strong leaders are known to play an important role in shaping an
origination’s culture.57 They ‘set the tone at the top’. In order to understand this interplay
(becoming members of an organisation’s culture, ‘carrying’ and shaping an organisation’s
culture while at the same time being influenced by the organisation’s culture) and to
identify what influences employees, requires a deeper look at the levels of corporate
culture. Edgar H. Schein explains organisational culture in three levels, which are briefly
discussed in the following section.

Figure 9.1: What shapes corporate culture?

Source: Hartman, LP & Des Jardins, J. 2011. Business ethics: Decision-making for personal,
integrity and social responsibility. 2nd edition. New York: McGraw-Hill. p. 146. © 2011.
Reproduced with the permission of McGraw-Hill Education.
9.6.1Levels of organisational culture
The three levels that corporate culture ultimately consists of are observable artefacts,
values and basic underlying assumptions. 58 These are illustrated and explained in Figure
9.2.
We saw that a corporate culture (observable artefacts, values and underlying
assumptions) affects employee behaviour. It has been proven that a strong corporate
culture has a positive effect on organisational performance, organisational excellence,
financial performance, market valuation, reputation, employee attitude and employee
commitment. These findings have been highlighted in numerous studies – and include the
effect corporate culture has on decision making and behaviour. 59 The focus of this chapter
is on business ethics, so we’re interested in the ethical component of a corporation’s
culture.
9.7Corporate ethical culture
Ethical culture is ‘a slice’ (or element) of organisational culture. This ‘slice’ (or element)
represents the aspects of organisational culture that affect the way employees think and
act, especially in situations where ethics is applicable, 60 or when facing an ethical
issue.61 In addition, an ethical culture fosters positive organisational behaviour. An ethical
culture can be a source of guidance on how to behave or make decisions ethically.62

Figure 9.2: Three levels of organisational culture

Sources: Adapted from Schein, EH. 1990. Organisational culture. American Psychologist,
45(2):109–119; Standard Bank. 2014. Annual Integrated Report 2014. [Online].
Available: http://annualreport2014.standardbank.com/downloads/Standard-Bank-Group-
Annual-integrated-report-2014.pdf [29 February 2016]; Van Wyk, I. 2014. Ethical Culture: A
study at a South African insurance company. Unpublished MCom thesis, Dept. of Business
Management, University of South Africa.

According to the Ethics Resource Centre (ERC), an ethical culture can be strong or
weak.63 A strong ethical culture promotes employee engagement to the organisation, and
protects against risks associated with unethical behaviour (such as damaged reputations
or fines and penalties). In addition, employees feel less pressured to compromise on
ethical standards, and employees are more sensitive towards ethics (for example,
noticing or observing unethical conduct) and reporting unethical conduct. 64 A weak
ethical culture is represented by ethical values that are not promoted. An attitude of
simply getting the job done surpasses getting the job done ethically. 65 According to
Weiss,66 weak organisational cultures can encourage unethical activities. Examples of
unethical behaviour that may occur in such conditions include internet abuse, dishonesty,
stealing, discrimination, abusive behaviour and breaches in confidentiality. 67
Therefore an organisation’s ethical culture ought to empower employees to act
ethically or responsibly.68 In order to manage business ethics informally, we need to delve
deeper into the essence of corporate ethical culture – starting with the components and
characteristics.
9.7.1Components and characteristics of an ethical
culture
The ethical culture of an organisation is developed out of components such as the ones
listed in Table 9.5. What is interesting to note is that many of these components have
been listed under the formal way of managing business ethics. The reason for this is that
those components also set a tone, some of them are artefacts (codes and policies) and
values (which are found in the mission and value statements) – which develops and
shapes organisational culture.
The majority of the components were already listed and discussed under the ‘formal
way of management ethics’. That is because ethical culture is shaped through formal
(such as codes of ethics) and informal (such as attitude of senior management)
structures.
The elements (in Table 9.5) also fit in with Edgar H. Schein’s levels of corporate culture.
Codes of conduct, policies and codes and authority structures are examples of Schein’s
observable artefacts. Through ethical leadership, ethical values, attitude of senior
management, rituals and norms – the company’s values are conveyed. The last level,
underlying assumptions, is more difficult to just identify, as they manifest within the
feelings, thought processes, perceptions and conduct of employees. However, all of the
components listed above, in some way or another, shape the feelings, thought processes,
perceptions and conduct of employees.
One can also identify an ethical culture through various characteristics. Ardichvili,
Mitchell and Jondle identified characteristics or attributes of an ethical culture. They are
presented, in five clusters of statements, in Table 9.6.
9.7.2Strong and weak ethical cultures
Corporate culture influencing employee decision making and behaviour can go one of two
ways – it can influence them positively or negatively. According to the Ethics Resource
Centre (ERC), an ethical culture can be strong or weak. 69 A strong ethical culture would
be the extent to which an organisation promotes and prioritises doing the ‘right thing’. A
strong ethical culture is represented by high levels of values and norms that matter and
that are apparent in the behaviour and actions of employees, organisational policies,
procedures and decisions.70 Another study done by the ERC found that, in a strong ethical
culture, employees feel engaged and committed to the organisation. This protects the
organisation from the risks associated with unethical behaviour. In the aforementioned
study, it was also found that in stronger ethical cultures, employees feel less pressured to
compromise on ethical standards. In addition, more employees observed misconduct
because of being more aware, even though there were fewer incidents of ethical
misconduct. Employees were more likely to report unethical behaviour.71
Table 9.5: Components of the informal management of business ethics
•Codes of conduct
•Orientation and training programmes
•Internal programmes to resolve ethical issues
•Ethical leadership
•Ethics review committees
•Supervisory reinforcement
•Peer commitment
•Embedded ethical values
•Decision processes
•Authority structures
•Policies and codes
•Rewards and punishments
•Communication and reporting channels
•Attitudes of senior management
•Selection processes
•Performance management
•Norms
•Rituals
•Myths/stories
•Language

Sources: Compiled from Anonymous. 2008a. Building an ethical culture. Community Banker,
17(10):16; Melé, D. 2009. Business ethics in action: Seeking human excellence in organisations.
London: Palgrave Macmillan; Perego, M. 2011. Building an ethical culture: Strategies that make a
difference. Public Management, 93(2):2–3; Small, MW. 2005. Management development:
Developing ethical corporate culture in three organisations. Journal of Management Development,
25(6):588–600; Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about
how to do it right. 5th edition. Hoboken, NJ: Wiley; Van Wyk, I. 2014. Ethical Culture: A study at a
South African insurance company. Unpublished MCom thesis, Dept. of Business Management,
University of South Africa.

Table 9.6: Characteristics of an ethical culture: clusters of statements

Cluster Representative statement

Mission and •Mission and value statements are stated clearly and
values reflected in the ethical guidelines and behaviour
•Ethical values are institutionalised
•Relationships are built out of trust and respect
•Strong ethical cultures eliminate staff who do not share the
organisation’s values
•Corporate values are sustainable
Stakeholder •Balanced stakeholders (keep all stakeholders equally in
balance mind when making decisions, and deal with them in a
consistently ethical way)
•Stakeholders are managed on a consistent ethical and
value-oriented basis
•Balanced customer value and profit (corporate profits are
not pursued at the expense of customer value)
•Working towards good corporate citizenship
•Respectful treatment and fair compensation for all
employees
Leadership •Ethical culture starts at the top and is conveyed by example
effectiveness •Senior management demands ethical behaviour from all
employees
•The chief executive officer (CEO) and other senior
management set an example by living out their personal
integrity
•The CEO does not ‘shoot the messenger’, but gathers facts
and takes action when faced with an ethical decision
•The CEO and senior management do what they say they
are going to do
Process integrity •Dedication to quality by people, processes and products
and fairness to people in the organisation
•Continual training in ethics and communication thereof
•Values that are reinforced in performance appraisals and
promotion
•Values that are reinforced in everyday execution
•Excellent corporate governance processes
•A clear mission statement that is internalised
(institutionalised) in the company’s processes and behaviour
•Transparent decision making
Long-term •The organisation places its mission above profit, and long-
perspective term perspectives above short-term profits
•The organisation acts in the best interest of customers,
over the longer term
•The management board takes a long-term view in
managing shareholder value
•The organisation connects environmental sustainability with
social responsibility and profit
•The CEO is building a sustainable organisation that will be
there over the long term
Source: Compiled from Ardichvili, A, Mitchell, JA & Jondle, D. 2009. Characteristics of ethical
business cultures. Journal of Business Ethics, 85:445–451. With permission of Springer; Van
Wyk, I. 2014. Ethical Culture: A study at a South African insurance company. Unpublished MCom
thesis, Dept. of Business Management, University of South Africa.

On the other side of the spectrum, a weak ethical culture is represented by ethical
values that are not promoted. An attitude of simply getting the job done surpasses getting
the job done ethically.72 In weak ethical cultures, there is a higher risk of unethical
conduct occurring.73 Examples of unethical activities include: 74
•Dishonesty (lying to stakeholders, misuses of company time and resources)
•Abusive behaviour
•Discrimination
•Health and safety violations
•Stealing or theft
•Environmental abuse
•Internet abuse (including inappropriate social networking abuse)
•Breaches in confidentiality
•Alteration of financial records and time reports of hours worked
•Conflict of interest
•Sexual harassment
•Accepting kickbacks (the payment of, in any form of value to a recipient, as a
reward for providing favorable treatment to another party)75 or bribes
•Anti-competitive practices
•Poor product quality
•Contract violations
•Violation of customer or employee privacy.
In view of the preceding information, the question can be raised about which aspects or
dimensions of ethical cultures would ‘encourage’ employees to act ethically. Robert
Solomon pioneered the concept and importance of virtues in organisations. He is of the
opinion that individual employees and organisations should possess characteristics that
enable them to excel morally.76
9.7.3Virtues in an ethical culture
Based on Solomon’s work, researcher Muel Kaptein emphasises that the virtues of an
organisation can be identified through the extent to which organisational culture
stimulates employees to act ethically and prevent unethical behaviour. These virtues
create the organisation’s internal environment or setting for ethical conduct, and reflect
the capacity to stimulate the ethical behaviour of employees.77 He identified seven virtues
that should be embedded in an organisation’s ethical culture. These virtues of an ethical
culture are listed and defined in Table 9.7.
To encourage ethical behaviour and ethical decision making in organisations,
managers must also be able to understand the decision-making process of individuals as
well as formally and informally manage ethical conduct. Therefore, the last sections of
this chapter will focus on individual ethical decision making. An ethical behaviour model
will be explored that can assist managers in understanding why individuals behave
ethically or unethically. The focus then shifts towards a framework for ethical decision
making.
9.8Ethical behaviour model
In order to understand and improve ethical decision making, managers must understand
how decisions are made both on an individual and organisational level. It is difficult to
describe exactly how individuals or work groups make ethical decisions. However,
generalisations on average or typical behaviour patterns, within organisations, based on
numerous studies, might assist.78
The ethical behaviour of an individual is preceded by ethical beliefs and ethical
intentions. In general, an individual’s ethical beliefs generate ethical intentions, which
results in ethical behaviour. However, there is a ‘drop off’ from one step to another, as
many people may agree on what is ethical, but few actually do the right thing. Even fewer
people would actually have done what they thought they would do. The ethical
behavioural model (see Figure 9.3) sets out to explain this ‘drop off’ and factors that
shape ethical intuitions, intentions and behaviour.79

Table 9.7: Virtues of an ethical culture

Virtue Explanation

Kaptein’s virtue of clarity refers to the normative (or ethical)

Virtue of clarity expectations regarding the appropriate or inappropriate conduct
of employees. These expectations should be concrete, all-
inclusive and clear, so that employees know which ethical
standards to uphold.
Virtue of The virtue of congruency states that when management’s
congruency behaviour is consistent with the normative expectations of the
organisation, then employees’ behaviour to comply with these
expectations is reinforced. Hence, congruency is essential in an
organisation in order to promote ethical behaviour.
Virtue of This virtue is concerned with realistic tasks, responsibilities and
feasibility goals for employees. The virtue of feasibility refers to the extent
to which an organisation can create an environment or
conditions that enable employees to comply with normative
expectations. This virtue emphasises the importance of
achievable tasks and responsibilities, because little or no scope
for achieving tasks and responsibilities increases the risk of
unethical behaviour.
The virtue of The virtue of supportability refers to the extent to which an
supportability organisation creates a work environment in which employees
experience trust and respect; and the extent to which employees
identify with and endorse organisational values, norms and
standards.
The virtue of This virtue is concerned with the degree to which an employee’s
transparency conduct and its consequences are noticeable, or visible to
others such as colleagues and supervisors.
Virtue of This virtue is concerned with the opportunities employees have
discussability to raise and discuss ethical matters or issues that arise in the
workplace. The aim is to encourage employees to report
unethical behaviour, and to create an environment that is a
secure place, where moral issues can be raised without fear of
victimisation.
Virtue of The virtue of sanctionability refers to the likelihood of
sanctionability punishment for behaving unethically and rewarding ethical
behaviour.
Source: Kaptein, M. 2008. Developing and testing a measure for the ethical culture of
organizations: The corporate ethical virtues model. Journal of Organizational Behavior, 29:923–
947; Van Wyk, I. 2014. Ethical Culture: A study at a South African insurance company.
Unpublished MCom thesis, Dept. of Business Management, University of South Africa.

The main factors that shape ethical intuitions, intentions and behaviour are discussed
in the next sections.
9.8.1Individual characteristics (A in Figure 9.3)
Individuals make decisions based on their own values and principles – which determine
what is right or wrong to them. These values and principles are shaped throughout their
lives and through special processes (such as family, religion and education). 80
Some individuals are sensitive to ethical issues and are concerned about how their
actions affect the welfare of others, while others are unaware of ethical issues or how
their actions might affect others. This is because various characteristics determine an
individual’s ethical beliefs, sensitivities, intentions and ultimately, ethical behaviours. 81
Figure 9.3: Ethical behaviour model
Source: Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley p. 138. © 2012. Reproduced with the permission of Wiley.

Researchers Micheal O’Fallon and Kenneth Butterfield reviewed literature studies on

ethical decision making published between 1996 and 2003. During this period, 174
articles were published on the topic in top business journals. The studies they included
were those that examined decision making and behaviour in business settings. They
compared their findings to two previous studies in ethical decision making published
between 1961 and 1997.82 Their results on individual characteristics such as gender and
work experience are summarised in Table 9.8.
According to the results listed in Table 9.8, characteristics such as a higher level of (or
more) education; more work experience, a high classification for religion, reasoning on a
higher level or moral development, a high score for deontology (or idealism) and a lower
score for Machiavellianism have the biggest impact on ethical decision making. 83
9.8.2Ethical beliefs and sensitivities (B in Figure 9.3)
A belief refers to a ‘mental state of being’ that guides behaviour – and beliefs differ from
individual to individual. Some individuals believe that working hard is good as it is an
obligation or will result in financial rewards, while others believe that it is not good (to
work hard) as they prefer a leisure lifestyle. Ethical sensitivity refers to an individual’s
ethical awareness. Not all individuals are sensitive to ethics, or the ethical concerns that
may arise in a situation.
However, being sensitive to ethics is essential as it impacts behaviour and the lives of
other people.84 An ethically sensitive manager, for example, will refuse contracting with
a supplier that uses child labour or has unsafe working conditions (so, the manager
impacts the lives of children in a positive way). Being sensitive to ethics is a consequence
of a variety of individual factors (as listed in Table 9.8). Ethical beliefs and sensitivity are
essential steps in forming ethical intentions and ultimately ethical behaviour, as one
cannot behave ethically if one cannot identify the ethical issue in a situation 85 (being
sensitive to ethics).
9.8.3Ethical intuitions (C in Figure 9.3)
Ethical intuition can be defined as any reasoning process about right and wrong, with no
time for long ethical deliberation, followed by a quick insight. These quick reactions flow
out of an individual’s deeply embedded value system. 86 Individual value systems bring us
again to the realm of morality and moral judgement (or decision making).
To understand ethical intuition better, Haidt and his colleagues researched the most
apparent differences in ethical intuition of people, based on: Harm/care;
Fairness/reciprocity; In-group/loyalty; Authority/respect; and Purity/sanctity. Haidt
and his colleagues’ research assists in explaining why people, typically liberals and
conservatives, disagree on moral issues. Therefore, their study focused on liberals and
conservatives – or liberal morality and conservative morality. Liberals have always taken
a more optimistic view of human nature, whereas conservatism takes a more pessimistic
view. Conservatives, for example, view people as inherently selfish and
imperfectible.87 Typically, the moral questions in Table 9.9 would shape an individual’s
ethical intuition – depending on whether he or she is liberal or conservative.

Table 9.8: Individual characteristics

Characteristic Result from Michael O’Fallon and Kenneth Butterfield’s
study
Age There were mixed results from the study on age. Some
research studies indicate that older individuals tend to make
better ethical decisions. Other studies, on the other hand,
indicated that younger individuals make better ethical decisions.
Then there are studies that indicate no relationship between
age and ethical decision making.
Education Individuals with a higher level of education tend to make better
ethical decisions.
Gender Often it was found that there was no difference between gender
and ethical decision making. In the event that differences were
found, it was females that made better ethical decisions.
Locus of control Locus of control refers to the extent to which a person believes
his or her behaviour directly influences the consequences of his
or her actions. Certain individuals believe that they can control
their work input and take responsibility for the consequences
thereof. Such individuals, have an internal locus of control.
Others believe that whatever happens is the result of fate or
pure luck. Such people have an external locus of control. As
with age, there were mixed results from the study on the locus
of control. Some studies indicated that individuals with a high
internal locus of control tend to be better ethical decision
makers, while other studies indicated that better ethical
decision makers are those individuals with a low external locus
of control. Other studies indicated no differences.
Machiavellianism Machiavellianism was named after sixteenth-century
philosopher, statesman and political theorist Niccolò
Machiavelli, who wrote Il Principe (The Prince). Machiavelli
promoted a pragmatic leadership style that included amoral
(unethical) behaviour aimed at achieving self-interested
outcomes. Machiavellianism refers to personality types that are
simply master manipulators. They are prone to be calculating,
cunning and deceptive. What sets ‘Machs’ apart from
individuals, who have once been deceptive, is that this
behaviour is routine for ‘Machs’.

Machiavellianism is the belief that ‘the end justifies the means’.

Results showed that individuals classified as low ‘Machs’ tend
to be better ethical decision makers than those classified as
high ‘Machs’.
Moral Lawrence Kohlberg’s cognitive development theory focuses on
development how individuals think about and decide on what course of action
is ethically right. Moral theory gradually develops over time as
individuals mature (brain development) and through life
experiences. Kohlberg’s theory maintains that individuals
develop moral reasoning sequentially through stages. As
individuals move forward through the stages, they have the
cognitive capabilities to comprehend all moral reasoning at and
below the current stage that they are at. However, individuals
cannot comprehend reasoning at levels above the stage that
they are at.
Studies done on moral development levels and decision making
indicate that the better ethical decision makers tend to be those
individuals who reason at a higher level of moral development.
Nationality The study showed mixed results on nationality.
Philosophy Philosophy refers to an individual’s value orientation.
Individuals classified as high for ‘deontology’ (have a high
regard for everyone, all the time) or ‘idealism’ tend to be better
ethical decision makers.
Religion According to Martinson, Wilkening and Buttel (in Kennedy and
Lawton): ‘ … those with religious affiliations (in contrast to their
nonreligious counterparts) ought to be imbued with a repertoire
of attitudes and behaviours facilitating social integration – for
example, more complete knowledge of conduct norms, more
comfortable acquaintanceship with their neighbors, and more
feelings of satisfaction and belonging indicative of social
integration.’

Studies done on religion and decision making indicate that

individuals classified as high for being religious tend to be
better ethical decision makers.
Work experience Generally speaking, individuals in the later stages of their
career display higher ethical judgement. This links back to
Kohlberg’s cognitive development theory, stating that life
experience contributes to moral development. Individuals with
more work experience tend to be better ethical decision
makers.
Sources: O’Fallon, MJ & Butterfield, KD. 2005. A review of the empirical ethical decision-making
literature: 1996 -2003. Journal of business ethics, 159:375-413; Fraedrich, J, Ferrell, OC & Ferrell,
L. 2011. Ethical decision making for business. 8th edition. Stamford, CT: Cengage Learning;
Collins, D. 2012. Business ethics: How to design and manage ethical organisations. Hoboken, NJ:
Wiley; Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about how to do it
right. 5th edition. Hoboken, NJ: Wiley; Hartley, D. 2015. What is a Machiavellian? [Online].
Available: https://www.psychologytoday.com/blog/machiavellians-gulling-the-
rubes/201509/what-is-machiavellian [29 February 2016].

Haidt and his colleagues found that liberals are more concerned with issues on
Harm/care and Fairness/reciprocity (left column in Table 9.9) with regards to moral
judgements. Hence, liberals respond to an issue when it is framed in terms of Harm/care
and Fairness/reciprocity, and will choose the outcome that imposes the least harm – or
the outcome that would be the ‘most fair’. Conservatives, on the other hand were more
concerned with issues concerning In-group/loyalty, Authority/respect, and
Purity/sanctity (right column in Table 9.9) with regards to moral judgements. They will
respond to issues when it is framed in terms of these three value-sets, and will favour
outcomes that reinforce loyalty, authority/respect, and/or moral purity/sanctity. 88

Table 9.9: Moral questions that shape an individual’s ethical intuition

Liberals Conservatives
Harm/Care: In-group/loyalty:
Was someone harmed or not? Did someone do something to betray his or
Did someone suffer emotionally or her group or not?
not? Was the action done by a friend or relative
Did someone use violence or not? of yours or not?
Did someone care for someone weak Did someone show a lack of loyalty or not?
or vulnerable or not? Did the action affect your group or not?
Did someone put the interests of the group
above his or her own or not?
Fairness/reciprocity: Authority/respect:
Were some people treated differently Were people involved of the same rank or
than others or not? status or not?
Was someone denied his or her rights Did someone fail to fulfill the duties of his or
or not? her role or not?
Did someone act unfairly or not? Did someone show a lack of respect for
Did someone end up profiting more legitimate authority or not?
than others or not? Did an authority fail to protect his or her
subordinates or not?
Did someone respect the traditions of
society or not?
Purity/Sanctity:
Was the act morally disgusting?
Was a standard of purity and decency
violated?
Was the act unnatural and/or degrading?
Sources: Graham, J. Haidt, J & Nosek, BA. 2009. Liberals and conservatives rely on different sets
of moral foundations. Journal of Personality and Social Psychology, 96(5):1029–1046; Collins, D.
2012. Business ethics: How to design and manage ethical organisations. Hoboken, NJ: Wiley.
9.8.4Theory of planned behaviour (D in Figure 9.3)
Ajzen emphasised other elements and dimensions of ethical intuition. The basis of
formulating an intention to behave ethically, is according to Ajzen a function of an
individual’s (1) attitude towards the behaviour element; (2) the subjective norm element;
and (3) the perceived behavioural control element. Each of the three elements has two
dimensions and these are briefly elaborated on below.89
1.The attitude towards the behaviour element refers to the degree to which a
person has a positive or negative evaluation of the behaviour in question. The two
dimensions are:
•The strength of the belief (for example, ‘I strongly believe that fixing the price of
bread is wrong.’)
•The evaluation of the outcome (for example, ‘I strongly believe that me stopping
price fixing would be a good thing.’).
2.The subjective norm element refers to the perceived social pressure to perform
(or not perform) the behaviour. The two dimensions are:
•The strength of the normative belief (for example, ‘Groups, or an individual that
I respect, believe that fixing the price of bread is wrong.’)
•The motivation to comply with the referent group (for example, ‘I really want to
comply with the desires of the people I respect’).
3.The perceived behavioural control element refers to how easy or difficult it is to
perform the behaviour. Perceived behavioural control includes reflecting on past
experiences and to anticipate obstacles:
•The strength of the control belief (for example, ‘I strongly believe that I have the
abilities, resources and opportunities to stop price fixing.’)
•The perceived power of the control belief (for example, ‘Given my ability,
resources and opportunity, it would be relatively easy for me to stop price fixing’).

Ajzen’s theory of planned behaviour assists in understanding precursors to ethical

behaviour.90 In some situations, it may be attitude that has a significant impact on
intentions, while in other situations; all three predictors make a difference.91
9.8.5An issue’s moral intensity (E in Figure 9.3)
Due to a lack of focus on the characteristics of the ethical issue itself in theoretical models
of individual ethical decision making in organisations, Thomas M Jones developed an
issue-contingent model. This model contains a variable called moral intensity, which is
believed to shape ethical decision making. 92
Moral intensity refers to issue-related factors in a situation, as opposed to individual
or organisational factors. These issue-related factors are likely to determine the
magnitude to which an individual would morally approve or disapprove. 93 According to
Thomas Jones, an issue’s moral intensity is influenced by the following factors: 94
1.Magnitude of consequences. Magnitude of consequences refers to the total sum of
‘harms’ or ‘benefits’ generated by a moral act in question. ‘High moral intensity
acts’ are harmful conduct with severe consequences (the total sum of consequences
is high). Consider the following example: CEOs Peter and Patricia are involved with
money laundering and fraud at two different companies. Peter’s company employs
over 1 000 employees, while Patricia’s company has 100 employees. They both get
caught, and both of the companies collapse due to the scandal afterwards. The
magnitude of consequences (money laundering and fraud) in Peter’s situation is
much higher as it involves over 1 000 employees who are now without
employment – compared to the same incidence (money laundering and fraud) in
Patricia’s case, as less employees are without income.
2.Social consensus. The social consensus refers to the degree of social agreement
that a specific act is right or wrong. If there is a strong consensus that a specific act
is wrong, then it is wrong. For example, child labour is considered wrong in South
Africa, there is a strong consensus on this matter, and therefore it is seen as wrong.
However, the wrong of child labour in South Africa has greater social consensus,
than the wrong involved in child labour in Bolivia (where, and under certain
conditions, it is legal).
3.Probability of effect. Refers to the joint probability that (a) the act in question will
take place and (b) the act in question’s effect (harm or benefit) will occur. ‘High
moral intensity acts’ are those acts with a high likelihood of causing harm. For
example, selling a gun (act in question) to a criminal notorious for armed robberies
(act in question’s effect) has greater probability of harm compared to selling a gun
to a citizen with no criminal record.
4.Temporal immediacy. This refers to the time that passes between an act in
question and the beginning of the consequences. ‘High moral intensity acts’ are
those acts that cause immediate harm. For example, a reduction in retirement
benefits of pensioners (current retirees) has a greater temporal immediacy
compared to reducing the retirement benefits of employees aged between 40 and
50.
5.Proximity. This refers to the feeling of nearness of an act in question to the
individual who is harmed or who receives the benefits. ‘High moral intensity acts’
are those acts that are nearby. For example, moral proximity for an individual
would be high if a bomb explodes at his or her work, than a bomb exploding at a
remote place.
6.Concentration of effect. This is an opposite function of the number of individuals
affected by an act of given magnitude. Collins95 refers to a ‘concentrated area’,
which assists in determining the effect of the act in question. A lesser concentration
area can absorb the affect better than a greater concentrated area. For example,
cheating an individual out of R500 has a greater concentrated effect compared to
cheating an organisation out of R500 (the R500 can be absorbed or distributed
across the organisation). The greater the concentration, the higher the moral
intensity.
9.8.6Organisational characteristics (F in Figure 9.3)
Organisational factors also affect ethical intentions and behaviour. 96 O’Fallon and
Butterfield, in their study on ethical decision-making literature identified four
organisational factors that affect ethical behaviour, namely: 97
1.Codes of ethics
2.Ethical climate/culture
3.Organisational size
4.Rewards and sanctions.

The existence of codes of ethics and a corporate ethical culture relates positively to ethical
decision making. Codes of ethics, guide employee behaviour as it sets out the desired and
expected conduct that employees need to adhere to (see section 9.5.1). Corporate ethical
culture, on the other hand reinforces or fosters positive organisational behaviour
(see section 9.7). Organisational size has a detrimental effect on ethical decision making.
Larger organisations are more complex than smaller organisations, hence smaller
organisations tend to make better ethical decisions, and large organisations are more
prone to experience serious ethical issues.
Rewarding ethical behaviour and punishing unethical behaviour also has a positive
effect on ethical decision making. Rewarding ethical behaviour tends to increase the
frequency of such behaviour. In addition, rewarding employees for ethical behaviour
should encourage ethical behaviour from other employees. Effective sanctioning systems
tend to decrease such behaviour, as employees avoid punishment. Sanctioning has to be
effective, as mild, or no punishment will have little to no effect on unethical behaviour.98
9.8.7Ethical intentions (G in Figure 9.3)
Ethical intentions involve the mental determination to take an action that is morally
correct or appropriate. Individual characteristics, ethical beliefs and sensitivities, ethical
intuitions, planned behaviour and moral intensity contribute to the formation of an
intention to behave ethically. One of these factors, or a combination thereof, may generate
ethical intentions. However, not all individuals follow through on the ethical intentions –
even when the intention to act ethically is known. Second doubts, weakness of will, or old
habits are factors that hinder an individual from acting on an ethical intention. 99
So far in this chapter, we’ve looked at how managers can manage business ethics,
which included both formal and informal ways. We delved a little deeper by looking at
why individuals behave ethically or unethically. We’re about to go one step further, which
covers the last two elements of Figure 9.3 – and focus on a nine-step ethical decision-
making model that can assist employees in the decision-making process (H in Figure 9.3)
– and ultimately lead to ethical behaviour (I in Figure 9.3).
9.9Ethical decision making
In Chapter 4, ethical theories were elaborated on, these theories serve as a pivotal
foundation in ethical decision making. These theories attempt to determine what is ‘right’
or ‘ethical’ (or at least the ‘more right’ or ‘more ethical’). In the following sections, we
provide a nine-step ethical decision-making model – of which knowing and
understanding the ethical theories serves as a good starting point.
9.9.1Nine-step ethical decision-making model
The nine-step ethical decision-making model is presented as a linear model (in the form
of nine sequential steps). Being a linear model is a flaw, as ethical decision making is often
not linear. However, it is important to cover the steps outlined below, even though they
might not occur in the suggested sequence. 100 To guide you through the nine-step ethical
decision-making model, consider the dilemma on the next page.

1.Gather the facts of the situation

It is surprising to notice how many people jump to conclusions without having all the
facts, or a proper understanding of the situation. This step requires the decision maker to
make an honest effort in understanding the situation or disagreement – and to distinguish
facts from opinion. In some cases, perception differences (opinions) may explain why
there is a disagreement. Knowing the facts and reviewing the circumstances assist
towards resolving disagreements, and sometimes at early stages. In addition, gathering
facts will lead to (1) a better and more reasonable ethical judgement (2) the decision
makers acting in a more ethical responsible way, and (3) the ability to classify the
disagreement as an ethical dilemma or an ethical issue.
For example, the facts in the dilemma box are that a few employees will lose their jobs
and income, you have been trusted with this information and should keep it confidential
and the company is sure to communicate this formally to staff members. Another fact is
that a colleague (and friend) is about to buy a new home. However, gathering facts may
not be an easy task, as information might not be available, or there is uncertainty
involved.101 You might not have the legal requirements on informing your friend (and
other colleagues) about layoffs, you might not have enough information on when this will
happen, and how long it will take for your friend to find a new job. 102
DILEMMA
You are a regional sales representative at a renowned vehicle manufacturing company.
You’ve started off as a casual worker, with the company funding your studies and eventually
landed a permanent position, and worked yourself up. For four years, you worked as a
regional sales representative, under one manager, with a team of five other regional sales
representatives. During this time, your manager invested numerous resources to train and
develop you and your colleagues to full potential. This year, you have been promoted to
project leader – responsible for three regions.
Your manager has just informed you, in complete confidence, that the company will need
to downsize its operations. To achieve this, a business unit will be sold and a few
employees, from various sections and departments, will be laid off. You were assured that
your job is safe.
A few weeks later, rumours started circulating. One of your team members, who has also
become a good friend, approached you nervously one day and asked what is going on in the
company. Your friend further voiced concerns over his job security, providing for his family,
and that they are in the process of buying a bigger home.
What would you do?

2.Define the ethical issues or dilemmas

This step requires the decision maker to identify the ethical issue or ethical dilemma
(section 9.3.1 distinguished between these two concepts). However, the challenge is not
to stop when one ethical issue or dilemma is identified – the decision maker must seek to
identify as many ethical issues or dilemmas as possible within the situation. During this
step, it is important for a decision maker to talk, or consult others (fellow colleagues or
experts) to assist in defining the ethical issue or dilemma. Depending on the situation, the
first and second steps of this model might arise in reverse order. A decision maker might
have a selection of facts that give rise to an ethical issue or dilemma, or the problem might
be an ethical dilemma or issue right from the start (which will then lead the decision
maker to gather the facts).
In the layoff case, the ethical issue concerns the rights of the staff members and the
company. The employees have the right to know about the layoffs; while the company
has the right to keep the information private. How much time would be sufficient to notify
staff, and what are the company’s obligations? In addition, you’re faced with an ethical
issue concerning honesty (towards your friend), and loyalty (towards your manager and
company). These conflicting issues give rise to ethical dilemmas. 103

3.Identify the affected parties (applying consequential ethical

theories)
Many decisions will involve the interest of a variety of stakeholders. This is also a
challenge for decision makers in the ethical decision-making process due to the variety
of interests involved when ethical dilemmas arise. For example, what is considered right
for one party, is wrong for another – ultimately leading to two wrong options for a
decision maker to choose from. The third step involves one of this model’s critical
elements, which is to identify all people (or stakeholders) affected by the situation.
Stakeholders are those individuals or groups who are affected (positively or negatively)
by an individual’s or company’s decision, policy and/or operation. In essence, a decision
maker is applying consequential ethical theories (see section 4.4.1 in Chapter 4), and
needs to evaluate the situation from an egoism (one’s own interest) and utilitarian
(interest of others) perspective.
In our example, you, your friend and our manager, other staff members and the
company are affected parties. If the company were to close down, other affected parties
would include customers and society. 104 How are you ‘affected’ by the layoff, you might
ask? Think about the emotional impact layoffs would have on you; knowing that your
friend will lose his job and perhaps won’t be able to afford the bond payments on his
house. You’re stuck between a rock and a hard place – are you going to be honest to your
friend, or loyal to your manager and company?

4.Identify the consequences (applying consequential ethical

theories)
Once the affected parties have been identified (in step 3), the decision maker should
identify how the decisions will affect each party. In other words, the consequences of the
decisions that are most likely to happen, and/or the decisions with the highest negative
consequences (even if the probability of them occurring is low) must be identified. Once
again the decision maker will be applying consequential theories – this time focusing on
the outcomes (benefits, costs, harm or pleasure) of the decision and the alternatives. It is
vital for decision makers to consider both short-term and long-term consequences during
this step; symbolic consequences (what message or principle are you communicating to
others) and consequences of secrecy (if the decision should be kept secret, then there is
an indication that something is wrong). 105
In our example, the identified parties are you, your friend and your manager, other
staff members and the company. For the purposes of this example, we’re going to
concentrate on the situation at hand: you’re faced with conflicting values. Tell your friend
the truth; or be loyal to your manager. This step would require you to evaluate the costs
and benefits (or pleasure and pain) associated with these two options – for you, your
friend and your manager. Table 9.10 depicts a few examples of costs and benefits (or
pleasure and pain) for each party.

5.Identify your duties and obligations (applying deontology)

During this step, the decision maker needs to identify his or her obligations. Obligations
will differ from affected party to party and exists due to duties, rights and justice
(see section 4.4.2 in Chapter 4). The obligation might be to keep a promise, tell the truth,
protect human rights, adhere to moral or company standards, or to a professional
standard (such as a code of ethics for accountants). 106
In our example, you have an obligation towards your friend and towards your manager
(and company). The question is, which one gets preference? If the colleague wasn’t your
friend (and a mere fellow colleague), would you respond differently to this question?
What is the company’s take (standards or expectations) on this matter?

6.Consider your character and integrity (applying virtue of ethics)

During this step, the decision maker considers integrity. A question to answer is ‘What
would a person of integrity do?’ in a particular situation. During this step, the decision
maker is applying virtue ethics (see section 4.4.3 Chapter 4) and considering traits or
virtues within a particular situation. It is helpful for the decision maker to also consider
a relevant community, such as a professional or societal community. How would
members of the community evaluate the action or option the decision maker is
considering? Would the decision maker’s integrity still be in tact when the community
finds out about the decision or act?107
In our example, how would you feel if your friend finds out you knew, but didn’t tell
him? How would your manager (or company) feel that you shared confidential
information? Which of the two options would maintain your integrity, or reputation?
These are the pressing questions you need to ask yourself.

7.Think creatively about possible actions

This step requires the decision maker to think creatively – and not to force him or herself
into a corner (forced to choose a specific action). It often happens that a decision maker
is so focused on, for example, two options that he or she overlooks the possibility of
another option to evaluate. This step could have been step one (gather the facts of the
situation), or after step four (identify the consequences), so long as the decision maker
goes through this step, and not skip it. We’ve been focusing on two options for our
example – to tell your friend the truth, or to be loyal to your manager. Alternative options
could be:

Table 9.10: Cost-benefit analysis

Affected Cost/Harm Benefit/Pleasure

party

OPTION 1: Being honest with your friend

You Breaking the manager’s trust; Being honest with friend; provide
reputation at work is damaged friend with information that would
assist him
Your (Trust and relationship between you Will be able to look out for a job
friend and your friend is maintained) immediately; won’t get into more
debt (won’t buy the house)
Your Trust is broken in employee
-
manager
OPTION 2: Being loyal to manager
You Emotional stress knowing that friend Maintain loyalty and trust
might not find new job in time and relationship (to manager)
that he is getting into more debt
Your Might not be able to find a new job
friend in time; going to get into more debt
-
and might not be able to afford it
when loses job
Your (Trust and relationship between
manager employees and manager is -
maintained)
(a)to consult with your manager and advise him or her to communicate the layoff
decisions to internal staff sooner rather than later, and
(b)advise your friend not to get into more debt until further communication from
the company.108

8.Check your ‘gut’ feeling (applying postmodern ethics and feminist

ethics)
While following an ethical decision-making process, gathering facts, and evaluating
consequences and a variety of options, a decision maker should never forget his or her
‘gut feeling’. Sometimes it happens that individuals feel uncomfortable with a situation or
decisions, without any explanation for these feeling. Perhaps years of socialisation makes
one more sensitive towards situations where something just doesn’t ‘feel
right’.109 Postmodern ethics states that a person should follow their own emotions, inner
convictions and gut feelings about what is right and what is wrong (see section 4.4.3
in Chapter 4). Feminist ethics also stresses the importance of emotions, intuition and
feeling in solving moral issues (see section 4.4.3 in Chapter 4). The emotion empathy
might signal awareness that an individual might be harmed in the situation.
In our dilemma example, you might feel uneasy about this matter. You might have
chosen to be loyal to your manager and company (as it is strictly confidential), but your
‘gut’ feeling tells you something else.

9.Make your decision

The last step in the nine-step decision-making model is for the decision maker to make
his or her final decision. In your example – what would your decision be, and can you
justify your decision ethically?
All the steps in the nine-step ethical decision-making model involve the decision
maker applying ethical theories. Discourse ethics was the only theory not mentioned
during these steps, however, it does not mean that this theory has no place in the
decision-making process. Discourse ethics involves norm generation, or simple stated
negotiation – to reach a consensus (see section 4.4.3 in Chapter 4). In step 1 (gather the
facts of the situation), the decision maker should gather facts in order to resolve
disagreements. During step 3 (identify the affected parties), we mentioned that a variety
of interests involved could lead to ethical dilemmas, creating a situation where the
decision maker needs to choose between two wrongs. Where possible discourse ethics
could also be used in both steps to reach an agreement (affected parties, or
representatives must be present and consensus must be reached).
9.10Conclusion

In this chapter, we revisited ethics and the role of regulation to create a foundation for
business ethics. In addition, we reviewed arguments against business ethics, the levels of
business ethics and the benefits (and drivers) and costs associated with business ethics.
Thereafter, ways in which ethics can be managed through implementing formal and
informal business ethics components were looked at. Codes of ethics, ethical
training and ethical officers or committees are a few examples of the formal ways to
manage ethical conduct; while the importance of an ethical culture and the informal way
of managing ethical conduct were emphasised. Corporate ethical culture was discussed
in terms of its characteristics and embedded virtues that would constitute a strong ethical
culture.
In managing ethical culture, managers should also understand the process of ethical
decision making. The latter part of the chapter reviewed the ethical behaviour model
which can assist managers in understanding the way individuals behave, ethically or
unethically. Lastly, a model for ethical decision making was discussed, incorporating
ethical theories to assist decision makers.

Multiple-choice questions
1.An ethical dilemma _____.
a.is less complicated than an ethical issue
b.includes examples such as sexual harassment and fraud
c.requires of a decision maker to choose between the ethical and unethical
option
d.requires of a decision maker to choose among several unethical options

2.Which one of the following options represents an ethical issue at the

organisational level?
a.Sarah, a Chartered Accountant (CA) referred to the Code of Ethics set out for
CAs when she noticed a deliberate overstatement on financial performance
from her client.
b.John, a marketing manager, does his tax returns at home. Each year he is
overstating his medical expenses on his personal tax returns.
c.Tom, a procurement manager, does his tax return in his office and during after
hours. He is overstating his medical expenses on his personal tax returns, as
well as claiming overtime for the time spent doing his tax returns.
d.Lucy, a public relations manager, noticed that one of her company’s
international suppliers has an unacceptable working environment. The
buildings are a safety hazard, and they make use of child labour.

3.Which one of the following characteristics of an ethical culture concerns the

‘Process integrity’ cluster?
a.Dedication to quality by people, processes and products, and fairness to
people in the organisation
b.Balanced customer value and profit (corporate profits are not pursued at the
expense of customer value)
c.The organisation connects environmental sustainability with social
responsibility and profit
d.Strong ethical cultures eliminate staff who do not share the organisation’s
values

4.The virtue of feasibility _____.

a.states that when management’s behaviour is consistent with the normative
expectations of the organisation, then employees’ behaviour to comply with
these expectations is reinforced
b.refers to the normative (or ethical) expectations regarding the appropriate or
inappropriate conduct of employees
c.refers to the extent to which an organisation can create an environment or
conditions that enable employees to comply with normative expectations
d.is concerned with the degree to which an employee’s conduct and its
consequences are noticeable, or visible to others such as colleagues and
supervisors

5.Differences in ethical intuition of people exist, and these differences are evident
when comparing liberals with conservatives.
Which of the following questions would a liberal respond to when faced with an
ethical issue?
a.Was the act morally disgusting?
b.Did the action affect his or her group or not?
c.Did someone end up profiting more than others or not?
d.Were people involved of the same rank or status or not?

Discussion questions
1.Download any JSE listed company’s integrated report (or annual report), and
identify the formal and informal ways of managing for ethical conduct within the
report. In your answer, do the following:
a.Write down the paragraph that highlights the formal or informal way of
managing for ethical conduct.
b.Clearly indicate the identified formal or informal component (for example,
ethical training).
c.Recommend formal or informal business management components that the
company is not implementing (if there are any).

2.Your direct supervisor (or best friend if you are unemployed) asked you how
people make ethical decisions. Explain to your supervisor (or best friend) how
ethical decisions are made by briefly summarising the ethical behavioural model.

3.Revisit Chapter 4 and write down all the ethical theories discussed:
a.Next to each theory list the corresponding decision-making step (for example,
Feminist ethics: Step 1 – Gathering of facts of the situation)
b.Explain each step listed and how the ethical theories assist the decision maker
during each step (of the nine-step decision-making model).

Additional reading
•Kohlberg, L & Hersh, RH. 1977. Moral development: A review of the theory. Theory
Into Practice, 16(2):53–59.
•Beeri, I, Dayan, R, Vigoda-Gadot, E & Werner, SB. 2013. Advancing ethics in public
organizations: The impact of an ethics program on employees’ perceptions and
behaviors in a regional council. Journal of Business Ethics, 112(1):59–78.
•Jondle, D, Ardichvili, A & Mitchell, J, 2014. Modelling ethical business culture:
Development of the Ethical Business Culture Survey and its use to validate the CEBC
model of ethical business culture. Journal of Business Ethics, 119(1):29–43.
Website to visit:
•BBC’s ethics page on their website which contains links to relevant news stories
and summaries of key arguments in contemporary
debate: http://www.bbc.co.uk/religion

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31.Kaptein, M. 2010. The ethics of organizations: A longitudinal study of the US
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34.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
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36.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
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37.South African Nursing Council. 2013. Code of ethics for nursing practitioners in
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38.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. 3rd edition. New York: Oxford University
Press.
39.Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about
how to do it right. 5th edition. Hoboken, NJ: Wiley.
40.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. 3rd edition. New York: Oxford University
Press; Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about
how to do it right. 5th edition. Hoboken, NJ: Wiley.
41.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. 3rd edition. New York: Oxford University
Press.
42.American Management Association. 2006. The ethical enterprise: Doing the
right things in the right ways today and tomorrow. [Online].
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28 June 2015].
43.Crane, A & Matten, D. 2010. Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. 3rd edition. New York: Oxford University
Press.
44.Ibid.
45.Ibid.
46.Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about
how to do it right. 5th edition. Hoboken, NJ: Wiley.
47.Melé, D. 2009. Business ethics in action: Seeking human excellence in
organisations. London: Palgrave Macmillan.
48.Kaptein, M. 2009. Ethics programs and ethical culture: A next step in unravelling
their multi-faceted relationship. Journal of Business Ethics, 89:261–281; Duh, M,
Delak, J & Milfelner, B. 2010. Core values, culture and ethical climate as
constitutional elements of ethical behaviour: Exploring differences between family
and non-family enterprises. Journal of Business Ethics, 97:473–489.
49.Kaptein, M. 2010. The ethics of organizations: A longitudinal study of the US
working population. Journal of Business Ethics, 92:601–618.
50.Ethical resources centre. 2007. National business ethics survey: An inside view
of private sector ethics. [Online].
Available: http://www.ethicsa.org/phocadownloadpap/Research_Reports/The_20
07_National_Business_Ethics_Survey.pdf [24 June 2015].
51.Hartman, LP & DesJardins, J. 2011. Business ethics: Decision-making for personal
integrity and social responsibility. 2nd edition. New York: McGraw-Hill; Rakichevikj,
G, Strezoska, J & Najdeska, K. 2010. Professional ethics: Basic component of
organizational culture. Paper presented at the tourism and hospitality management
conference, S.l.:1168–1177.
52.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
8th edition. Stamford, CT: Cengage Learning.
53.Weiss, JW. 2009. Business ethics: A stakeholder and issue management approach.
5th edition. Stamford, CT: South-Western Cengage Learning.
54.Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about
how to do it right. 5th edition. Hoboken, NJ: Wiley.
55.Kreitner, R & Luthans, F. 1984. A Social learning approach to behavioural
management: Radical behaviourists mellowing out. Organizational Dynamics,
13(2):47–65.
56.Hartman, LP & DesJardins, J. 2011. Business ethics: Decision-making for personal
integrity and social responsibility. 2nd edition. New York: McGraw-Hill.
57.Ibid.
58.Schein, EH. 1990. Organisational culture. American Psychologist, 45(2)109–119.
59.See for example: De Chernatony, L & Cottam (née Drury), S. Interactions
between organisational cultures and corporate brands. Journal of Product & Brand
Management, 17(1):13–24; Schein, EH. 1984. Coming to a new awareness of
organisational culture. Sloan Management Review, 25(2):3; O’Reilly, CA, Caldwell,
DF, Chatman, JA, Doerr, B. 2014. The promise and problems of organisational
culture: CEO personality, culture, and firms performance. Group & Organisational
Management, 39(6)595–625; Lok, P & Crawford, J. 1999. Leadership & Organization
Development Journal, 20(7):365–373; Hartman, LP & DesJardins, J. 2011. Business
ethics: Decision-making for personal integrity and social responsibility. 2nd
edition. New York: McGraw-Hill; Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical
decision making for business. 8th edition. Stamford, CT: Cengage Learning.
60.Treviño, LK & Nelson, K.A. 2011. Managing business ethics: straight talk about
how to do it right. 5th edition. Hoboken, NJ: Wiley.
61.Ibid.
62.Ibid.
63.Ethics Resource Centre. 2010b. The importance of ethical culture: Increasing
trust and driving down risks. Washington: Ethics Resource Centre.
64.Kavanagh, S. 2010. Business ethics: Strong ethical cultures drive down employee
misconduct. Federal Ethics Report, 17(8):8–9.
65.Ethics Resource Centre. 2010a. Supplemental research brief: Ethics and employee
engagement. Washington: Ethics Resource Centre.
66.Weiss, JW. 2009. Business ethics: A stakeholder and issue management approach.
5th ed. Stamford, CT: South-Western Cengage Learning.
67.Ibid.
68.Hartman, LP & DesJardins, J. 2011. Business ethics: Decision-making for personal
integrity and social responsibility. 2nd edition. New York: McGraw-Hill.
69.Ethics Resource Centre. 2010b. The importance of ethical culture: Increasing
trust and driving down risks. Washington: Ethics Resource Centre.
70.Ethics Resource Centre. 2010. Supplemental research brief: Ethics and employee
engagement. Washington: Ethics Resource Centre.
71.Ibid.
72.Ibid.
73.Ethics Resource Centre. 2014. National business ethics survey of the U.S.
Workforce. Washington: Ethics Resource Centre.
74.Ethics Resource Centre. 2012. National Business ethics survey: Workplace ethics
in transit. Washington: Ethics Resource Centre.
75.Investopedia. 2016. Kickback. [Online].
Available: http://www.investopedia.com/terms/k/kickback.asp [26 February
2016].
76.Solomon, RC. 2000. Business with virtue: Maybe next year? Business Ethics
Quarterly, 10(1):339–341; Solomon, RC. 2004. Aristotle, ethics and business
organisations. Organization Studies, 25(6):1021–1043.
77.Kaptein, M. 2008. Developing and testing a measure for the ethical culture of
organizations: The corporate ethical virtues model. Journal of Organizational
Behavior, 29:923–947.
78.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
8th edition. Stamford, CT: Cengage Learning.
79.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley; Kitson, A & Campbell, R. 2008. The ethical organisation. 2nd ed.
Basingstoke: Palgrave MacMillan.
80.Fraedrich, J, Ferrell, OC & Ferrell, L. 2011. Ethical decision making for business.
8th edition. Stamford, CT: Cengage Learning.
81.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley; Kitson, A & Campbell, R. 2008. The ethical organisation. 2nd
edition. Basingstoke: Palgrave MacMillan.
82.O’Fallon, MJ & Butterfield, KD. 2005. A review of the empirical ethical decision-
making literature: 1996–2003. Journal of Business Ethics, 159:375–413.
83.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley; Kitson, A & Campbell, R. 2008. The ethical organisation. 2nd
edition. Basingstoke: Palgrave MacMillan.
84.Ibid.
85.Ibid.
86.Ibid.
87.Graham, J, Haidt, J & Nosek, BA. 2009. Liberals and conservatives rely on
different sets of moral foundations. Journal of Personality and Social Psychology,
96(5):1029–1046.
88.Ibid.
89.Ajzen, I. 1991. The theory of planned behaviour. Organizational Behaviour and
Human Decision Process, 50:179–211; Collins, D. 2012. Business ethics: How to
design and manage ethical organisations. Hoboken, NJ: Wiley.
90.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley; Kitson, A & Campbell, R. 2008. The ethical organisation. 2nd
edition. Basingstoke: Palgrave MacMillan.
91.Ajzen, I. 1991. The theory of planned behaviour. Organizational Behaviour and
Human Decision Process, 50:179–211.
92.Jones, TM. 1991. Ethical decision making by individuals in organizations: An
issue-contingent model. The Academy of Management Review, 16(2):366–395.
93.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley; Kitson, A & Campbell, R. 2008. The ethical organisation. 2nd
edition. Basingstoke: Palgrave MacMillan.
94.Jones, TM. Ethical decision making by individuals in organizations: An issue-
contingent model. The Academy of Management Review, 16(2):366–395; Collins, D.
2012. Business ethics: How to design and manage ethical organisations. Hoboken, NJ:
Wiley; Kitson, A & Campbell, R. 2008. The ethical organisation. 2nd edition.
Basingstoke: Palgrave MacMillan.
95.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley.
96.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley; Kitson, A & Campbell, R. 2008. The ethical organisation. 2nd
edition. Basingstoke: Palgrave MacMillan.
97.O’Fallon, MJ & Butterfield, KD. 2005. A review of the empirical ethical decision-
making literature: 1996–2003. Journal of Business Ethics, 159:375–413.
98.O’Fallon, MJ & Butterfield, KD. 2005. A review of the empirical ethical decision-
making literature: 1996–2003. Journal of Business Ethics, 159:375–413; Bartels, LK,
E, Harrick, K, Martell & Strickland, D. 1998. The Relationship Between Ethical
Climate and Ethical Problems Within Human Resource Management, Journal of
Business Ethics, 17(7):799–804; Chavez, GA, Wiggins, RA, III & Yolas, M. 2001,The
Impact of Membership in the Ethics Officer Association, Journal of Business Ethics,
34(1):39–56; DeConinck, JB & Lewis, WF. 1997. The Influence of Deontological and
Teleological Considerations and Ethical Climate on Sales Managers’ Intentions to
Reward or Punish Sales Force Behavior, Journal of Business Ethics, 16(5):497–506.
99.Collins, D. 2012. Business ethics: How to design and manage ethical organisations.
Hoboken, NJ: Wiley; Kitson, A & Campbell, R. 2008. The ethical organisation. 2nd
edition. Basingstoke: Palgrave MacMillan.
100.Treviño, LK & Nelson, KA. 2011. Managing business ethics: Straight talk about
how to do it right. 5th edition. Hoboken, NJ: Wiley.
101.Hartman, LP & DesJardins, J. 2011. Business ethics: decision-making for personal
integrity and social responsibility. 2nd edition. New York: McGraw-Hill; Treviño, LK
& Nelson, KA. 2011. Managing business ethics: straight talk about how to do it
right. 5th edition. Hoboken, NJ: Wiley.
102.Ibid.
103.Ibid.
104.Ibid.
105.Treviño, LK & Nelson, KA. 2011. Managing business ethics: straight talk about
how to do it right. 5th edition. Hoboken, NJ: Wiley.
106.Ibid.
107.Ibid.
108.Ibid.
109.Ibid.
PART 3
Implementation
chapter
Sustainable procurement and
supply chain management
Hannie Badenhorst-Weiss 10
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Define procurement and supply chain management
•Briefly explain procurement and the extended supply chain as drivers for
improving corporate citizenship
•Explain the creation of value through the supply chain management approach
•Explain the three areas of corporate responsibility for the procurement function
•Summarise the selection of the right suppliers from a private institution’s
perspective
•Summarise the approach to selection of suppliers by public institutions
•Explain the use of procurement as a tool for social change
•Highlight the important issues in ethical conduct in procurement and supply
chain management
•Write a case study about the supply chain environmental practices of an
organisation with which you are familiar
KEYWORDS AND CONCEPTS
-bid evaluation committee
-bid selection committee
-bid specification committee
-broad-based black economic empowerment (B-BBEE)
-‘fronting’
-green supply chain management
-supply chain management
-procurement
-‘tenderpreneurs’
-tenders

OPENING CASE SCENARIO

A new era – responsible procurement at SABMiller1

Background
SABMiller (SAB) is one of the largest breweries in the world, operating in many
countries around the world. It manages its supply chains with the view to the long-
term benefits for its operations. Beer is a local product: brewed, sold and consumed
locally. It is in SAB’s interest to invest capital in local economies, use local suppliers
and distributors, create jobs for the local people and develop their skills. SAB
recognises that its impact and accountability extends beyond its own immediate
operations to include supply-chain partners such as suppliers of raw materials and
distributors of its products. SAB’s sphere of influence varies depending on its scale
of procurement with a particular supplier, the length of its relationship with the
supplier and the role of the supplier in delivering the core part of its supply chain.

Responsible purchasing management at SABMiller

SABMiller is committed to creating a sustainable supply chain, to identify practices
that are not compatible with its supplier development framework and to working with
suppliers to improve any such practices. It is transparent and open about issues it
faces and will work towards finding solutions.
Where possible, SAB supports national priorities such as Broad-Based Black
Economic Empowerment (B-BBEE) in South Africa and minority-owned suppliers in
the United States. SAB makes sure that suppliers have a good understanding of
SAB’s approach to sustainable development, focusing major efforts on suppliers.
SAB engages with suppliers to understand their (suppliers’) own social, economic
and environmental impact, and SAB aims to move towards a position of sustainable
development partnerships with suppliers where both SAB and supplier needs are
addressed in a mutually beneficial manner.

Prosper and the UN Global Goals

In 2015, SABMiller adopted a new sustainable development strategy, Prosper, which
integrates sustainable development into the business through five Shared
Imperatives that tackle the five most material issues for the business: (1)
accelerating growth and social development through its value chains; (2) making
beer the natural choice for the moderate and responsible drinker; (3) securing
shared water resources for the business and local communities; (4) creating value
through reduced waste and carbon emissions; and (5) supporting responsible and
sustainable use of land for brewing crops.

Responsible sourcing at SABMiller

SABMiller’s Responsible Sourcing Principles have been developed to ensure basic
human rights are acknowledged and respected by both its own purchasing activities
and the activities of its suppliers. SABMiller Group companies engage with their
suppliers of goods and services, starting with primary higher risk suppliers, to
promote the following principles, and to encourage them to implement these
principles throughout their supply chains:
•Business conduct: In the conduct of its businesses, SAB will deal openly and
fairly with suppliers, adhering to contract terms.
•Working conditions: Policies and procedures for health and safety, as a
minimum, meet legal requirements and where these do not exist, are sufficient to
protect the wellbeing of employees.
•Employment: Forced or compulsory labour is prohibited. Employees should not
be forced into involuntary labour and coercion at work is not acceptable.
•Child labour: In accordance with the relevant International Labour Organization
(ILO) conventions, children may only be employed in circumstances that fully
safeguard them from potential exploitation, which protect them from moral or
physical hazard and long-term damage to their health, and which do not disrupt
their education.
•Wages and hours: Pay will not be lower than that required by local law or the
level paid generally within that industry. Hours of work will be in line with local law
or the norm within the industry and shall not be excessive.
•Diversity: While being sensitive to cultural differences, SAB expects the
development of equal opportunities in employment without discrimination on
grounds of race, religion and gender or any other arbitrary means.
•Freedom of association: There should be constructive dialogue between workers
and management. Employees shall be free to join lawful associations.
•Environment: Suppliers will be aware of and comply with local environmental
laws, and show sensitivity to other environmental issues that may impact on their
local communities or SABMiller.
10.1Introduction
This chapter introduces procurement and the extended supply chain as drivers for
improving corporate citizenship. Procurement, also known as purchasing or supply
management, entails the management of all activities relating to the purchase of
materials and services for the operations of an organisation, from an external source,
such as suppliers. ‘Procurement’ is used as a synonym for ‘purchasing’. Procurement
forms a part of ‘supply chain management’. It is aimed at adding value, maintaining and
increasing an organisation’s efficiency, sustainability and customer service.
The chapter starts with the creation of value through the supply chain
management (SCM) approach. The idea with SCM is that all the suppliers and customers
from the raw material stage, through various cycles of conversion, to the use of a product
by a final consumer, work closely together, with mutual respect, seeking the best value
for all parties in the supply chain, particularly the satisfaction of the final consumer.
Then the focus will turn to corporate social responsibility as a component of corporate
citizenship in the procurement function. As part of a business or public organisation,
procurement has (i) an economic (financial) responsibility to shareholder or
taxpayers/citizens; (ii) to comply with legal obligations; and (iii) ethical responsibilities.
The most important task of procurement is the selection of the right suppliers. Most of
the unethical practices in businesses and in public sector institutions, take place during
the selection of suppliers and the awarding of contracts. There are slight differences in
the approach to how suppliers are selected in private and public organisations.
Therefore, particular attention is paid to this aspect in both private and public
institutions. Important for both private and public institutions is the use of procurement
as a tool for social change and the empowerment of previously disadvantaged individuals.
Further in this chapter, specific ethical issues in procurement are discussed and finally,
the environmental responsibilities of procurement in the supply chain.
In a functional sense, SCM includes the activities and relationships in logistics,
marketing, procurement/supply, and production/operations. In this chapter, the focus
will be on procurement in supply chain management. The next chapter (Chapter 11) will
deal with logistics and operational management and Chapter 13 will deal with marketing
management, which forms part of supply chain management.
10.2Creating
value through supply chain
management
SCM is a term used to refer to the management of materials, information and finances as
they move in an integrated process from a supplier network to a manufacturer to
different wholesalers and/or retailers, to the final consumer. Procurement deals with the
suppliers of an organisation, upstream in a supply chain. The supplier-side of the supply
chain is upstream and the customers are downstream in the supply chain of an
organisation.
Supply chain management entails the planning and management of all activities
involved in sourcing and procurement, conversion (production or operations),
all logistics management activities and marketing. It also includes co- ordination and
collaboration with channel partners, which can be suppliers, intermediaries, third-party
service providers and customers.2
The main supply chain processes in SAB are the purchasing of raw materials, the
production of beer and the distribution of beer. SAB needs a network of suppliers to
supply it with products and materials such as barley, hops, bottles, tins and packaging
materials. After they have brewed, bottled and packaged the beer, it needs to be
distributed through a network of logistics providers to a network of retail shops, who sell
it to the final consumer. In the SCM approach, planning is done together (particularly on
the quantities and time of final products needed in the market); and a co-operative effort
is made to (i) cut costs over the supply chain; (ii) improve quality; (iii) assist other
members in the supply chain to reach the supply chain’s targets; (iv) improve the time it
takes from the raw materials supplier to the final consumer; (v) share information that
may benefit or impact the supply chain; and (vi) work towards innovative ideas (for
example, product differentiation, such as low-calorie, low-alcohol beers or new bottles),
that may improve the competitiveness of the supply chain’s offering to the final
consumer.
Example
SAB cares about the final consumer in the supply chain
SAB has adopted a systematic approach to reduce alcohol harm in South Africa and
encourage moderation, called Project Compass. This approach is driven by an integrated
commercial, regulatory and programmatic intervention strategy that addresses the concerns
of the community at large, while growing SAB’s business. This strategic approach is based
on research which indicates that it is only by addressing the holistic ecosystem whose
symptom is alcohol abuse that SAB can sustainably change alcohol consumption
behaviours. Fundamental to this approach is engagement with relevant stakeholders,
including governments, NGOs and industry, as a means of ensuring that SAB addresses
harm in a more targeted manner (as opposed to broad population-based interventions),
more effectively and at lower cost to the economy and the business.
Strategies include:
•Commercial. Create safer tavern environments and increase spend to reduce harm.
•Regulatory. Interact with government on harm reduction when engaging on issues of
licensing and increase the prominence of alcohol harm literacy available to the public.
•Programmes. Interventions have been developed to reduce harm across four harm
areas: Fetal Alcohol Syndrome (FAS), road accidents, gender violence and underage
drinking.3
Due to SAB’s high moral and ethical stance and its power in the supply chain, it can
influence the whole supply chain, including suppliers, distributers (logistics providers)
and even the retail outlets. The last stakeholder in the supply chain is the final consumer.
They are important to SAB. Project Compass, outlined in the example box above, is an
example of a SAB community initiative.
10.3Corporate social responsibility and
procurement
As part of a business or public organisation, procurement has (i) an economic (financial)
responsibility to shareholders or taxpayers/citizens (for example, continuously purchase
the best value package); (ii) to comply with legal obligations (for example, law of contract
and environmental laws and regulations); and (iii) ethical responsibilities, which are
those activities that are expected as part of societal norms but are not codified in laws
(for example, not accepting gifts, fair treatment to all suppliers, not purchasing from
suppliers who use child labour or not having a tax clearance certificate). A final group of
activities consist of those actions that are guided by discretion, rather than legal
requirements or ethical norms (for example, black economic empowerment through
procurement).4
Procurement’s social responsibilities can be defined as meeting the discretionary
responsibilities expected by society. This includes activities relating to (i) the community;
(ii) affirmative action; (iii) the environment; (iv) ethics; (v) financial responsibility; (vi)
human rights; and (vii) safety.5 We will now look at each of those activities.

i) Community
Procurement should as far as possible purchase from local suppliers, donate to local
development campaigns and philanthropic organisations and seek opportunities for
community development and poverty alleviation. In the supply chain, the procurement
function is in a position to also influence suppliers higher up in the supply chain to add
value to the community, for example, by making it part of the criteria to award contracts.

ii) Affirmative action

Affirmative action means including and focusing on previously disadvantaged groups
who did not have voting rights before 1994. In the spirit of reconstruction and
development, and setting right inequalities, there is increasing pressure on South African
businesses and even more so on government institutions to give previously
disadvantaged suppliers who show potential, an opportunity to enter the market or to
give preference to suppliers who are B-BBEE-certified. This will be covered in more detail
later in the chapter.

iii) Environment
Procurement should take a life-cycle approach when considering the impact of the
procured material and products on the environment. This means looking at the impact of
the use of the products, packaging, waste reduction, recycling or reuse opportunities, in
co-operation with suppliers. This aspect will also receive more attention later.

iv) Ethics
Ethics in procurement is based on ethical business principles. It is seen as an extension
of trade practices and rules recognised by the business sector as important for solid and
ongoing relations. This aspect will be covered in more detail later in the chapter.

v) Financial responsibility
Procurement staff must have a sound knowledge of financial issues and follow applicable
financial standards and requirements, apply sound financial practices and ensure
transparency in financial dealings. They must actively promote and practise responsible
financial behaviour throughout the supply chain, particularly to the supply side. 6

vi) Human rights

Procurement staff and managers should treat other people, including colleagues,
superiors, subordinates, suppliers and potential suppliers fairly, and with dignity and
respect. Procurement should visit suppliers’ plants to make sure that the working
conditions of employees are of an acceptable standard, they are treated fairly, and that
no children or slave labour is used.

vii) Safety
Procurement should always take the safety of colleagues and customers into
consideration when purchasing materials, products and services. A particularly
important aspect is the procurement of quality materials, products and services.
Procurement must ensure that suppliers’ operations are conducted in a safe manner, and
that the materials are packed, transported and moved in the safest possible manner to
and in the organisation.
10.4Selection of suppliers and awarding contracts
Most of the unethical practices in businesses and in public sector institutions take place
during the selection of suppliers and the awarding of contracts stages. However, this is
also where procurement can make a difference to sustainability. This might therefore be
regarded as one of the most important areas of governance in public and private
organisations.
10.4.1The importance of selecting the right suppliers 7

Effective procurement relies on the selection of the right suppliers, particularly in the
supply of strategic materials or services. As a result, the selection of suppliers is one of
the most vital tasks of the procurement function. Competitive prices, reliable quality,
timely deliveries, technical support and good after-sales service are determined
primarily by the choice of the right supplier. Therefore, it is essential for the procurement
function to proceed systematically and objectively in selecting suppliers.
An important consideration when making this choice is that a long-term relationship
with suppliers of strategic products or services is necessary to ensure effective
procurement within the supply chain management approach. The interaction between
the buying organisation and the supplier thus becomes crucial. Important elements of
such a relationship are honesty, fairness, frankness and trust.
10.4.2The selection process
As indicated above, the selection of the right suppliers is crucial with the procurement of
strategic items or services. The procurement team must ensure that the right supplier is
chosen because it must serve as a long-term strategic ‘partner’ in the supply chain.
With the procurement of non-strategic nature items, for example, consumables such
as cleaning materials or refreshments, supplier selection is an ongoing process. Existing
suppliers have to be constantly reconsidered with each new purchase, especially in view
of changing circumstances and needs. The past performance of an existing supplier
obviously counts a great deal in the selection process. This is the area where procurement
in the private sector (businesses) and public sector (government) differs.
In the public sector, the past good performance of a specific supplier is not taken into
account with the decision to award a contract to one of two equally qualifying suppliers.
The public sector believes in rotating suppliers to give everybody a chance. Therefore,
besides large, expensive infrastructure projects in the form of private-public
partnerships, long-term relationships are not practised in public supply chain
management.
The care taken in the selection process will be determined by the scope (or value) of
the transaction, the availability of materials, the strategic value of materials and whether
they are standard or custom-made. Custom-made items are items for a specific purpose
and are therefore not generally available in the market. More effort needs to be put in the
search and selection of suppliers for these items. Standard items, however, are freely
available at more or less the same quality and price, and in this case the choice of
suppliers is not particularly important. For small purchases of standard products, it will
suffice to get three quotations and select a supplier based on price and delivery.
With the procurement of large quantities, expensive or non-standard items, the
supplier selection process cannot start without the proper setting of
specifications and pre-determined criteria for the selection of suppliers. The selection
process starts with the compilation of a list of possible suppliers that may be able to satisfy
the need for materials, products or services. The list can be compiled from various
sources, including own supplier register, newspaper advertisements, the Yellow Pages,
trade guides, open tenders, shows and exhibitions. The list is then reduced to a short list,
taking into account factors such as location, progressiveness, general reputation,
environment friendliness, financial and technical ability, having a valid tax clearance
certificate and broad-based black economic empowerment (B-BBEE) certificate.
Suppliers on the short list, (if a tender was not involved) are then requested to give a
quote or negotiations are conducted with them. The aim is to obtain the best value (in
respect of price, quality, service and delivery) for the business. The final choice of a
supplier is based on considerations such as past performance, quality, price, delivery,
technical support, progressiveness, reliability and B-BBEE score.

Figure 10.1: The supplier selection process for large quantities, expensive or non-standard
items

Once the choice has been made, the next step is the continuous evaluation of the
performance of the supplier to ensure that it conforms to expectations in terms of the
contract by means of contract management. Many of the service delivery problems in the
public sector are the result of a failure to manage contracts. Non-performing suppliers
must be eliminated. The objective evaluation of supplier performance is important for the
following reasons:
•Ineffective or unreliable suppliers are identified.
•It leads to an improvement in supplier performance.
•It serves as a guideline for the development of suppliers.

Figure 10.1 illustrates the supplier selection process of large quantities, expensive or
non-standard items.
10.4.3Developing suppliers
The procurement function may become involved in the development of (assistance to)
suppliers for various reasons. Suppliers may be developed for economic empowerment
purposes, or to improve their performance as a result of performance appraisals
(important part of contract management), or if materials or services do not exist in the
(local) market.
Example
From narrow-based to broad-based black economic empowerment 8
Businesses are encouraged and sometimes compelled to rectify the injustices of the past
political dispensation through their procurement function.
With the institution of the democratic government in South Africa, a black economic
empowerment (BEE) regulation was introduced to empower people who had been
discriminated against in the past. However, this only enriched a few individuals who became
very wealthy in a short time. The government introduced the Broad-based Black Economic
Empowerment (B-BBBE) Act 53 of 2003, as an extension of black economic empowerment.
This was introduced to ensure that the economy is structured and transformed to enable the
participation of the majority of citizens and to create capacity within the broader economic
landscape at all levels through skills development, employment equity, socio-economic
development, preferential procurement, enterprise development, (particularly small and
medium enterprises), promoting the entry of black entrepreneurs into the mainstream of
economic activity, and the advancement of co-operatives. Private businesses are
encouraged to procure the products or services they need from other businesses who are B-
BBEE-compliant.

In the spirit of reconstruction and development, and setting right inequalities, there is
increasing pressure on South African businesses to give previously disadvantaged
suppliers, who show potential, an opportunity to enter the market or to give preference
to suppliers who are B-BBEE-certified. B-BBEE purchasing may be done in the following
ways:
•When comparing the quotations (prices) of the different suppliers, a certain
percentage may be ‘subtracted’ from the quoted prices of suppliers (for comparison
purposes) that are BEE-certified, according to their score.
•Specific pre-identified materials and services may be purchased from
disadvantaged (black) suppliers with potential, and such suppliers may be
supported to enable them to adhere to the contract stipulations and executing
orders.
•Support given to small disadvantaged suppliers may be in the form of managerial
and technical assistance, making facilities available, staff training and advancing
operating capital.
•Products and services that were formerly produced by the business itself may be
subcontracted or outsourced to disadvantaged suppliers. Management of a business
may, for example, decide to sell catering services to employees in the cafeteria,
which then functions as a separate business, rendering services on a contract basis.
Example
Woolworths develop small suppliers9
Woolworths has intensified small business development in the Eastern Cape region. They
developed 40 small businesses (as suppliers), which all receive business development
support and financial assistance from the retailer. In addition, small suppliers also receive
training that covers best practices in technical and business management skills, and
organisational development. Some of the 40 businesses are already Woolworths’ suppliers,
and R157-million’s worth of business was given to them. Woolworths is also assisting with
identifying other opportunities for these suppliers to grow their businesses.

If an organisation has a need for a particular material or service that is not available in
the market, it can enter into a contract with a chosen supplier of another material or
service, to manufacture this material (product) or provide this service. Assistance to such
a supplier may be in the form of staff training, the reconstruction or expansion of facilities,
or the implementation of new facilities. A joint venture can be formed with the supplier.
In any case, a long-term agreement with the supplier would be a prerequisite, because
both parties will have to make certain investments.
Normal performance appraisals can contribute to the development of suppliers by
identifying their weaknesses and encouraging them to perform better. This is an
important factor in establishing successful long-term ties with suppliers.
10.4.4Long-term relationships with suppliers
An organisation will have little involvement with suppliers of standard, easy-to-get
products or services, but a great deal of involvement with suppliers of strategic materials,
who are important for the existence of the organisation (for example, suppliers of hops,
bottles and logistics services), or custom-made equipment parts or services. An alliance
or a partnership is a high-involvement relationship, which is applicable to the supply
chain management approach. Attributes of strategic-supplier alliances are trust and co-
operation, interdependence, joint quality- improvement efforts, joint planning,
information (and systems) sharing, risk and benefit sharing, and joint problem solving.
In this type of relationship, there is almost, so to speak, an ‘integration’ of processes and
systems between the buying and supplying organisations.
Example
Supplier relations to the next level at The Foschini Group (TFG) 10
TFG bought its longstanding clothing manufacturing supplier, Prestige Clothing, to boost its
competitive advantage. Prestige has been a supplier to TFG for 20 years and handled 25%
of TFG’s local manufacturing. The two companies worked closely together in the supply
chain to set new benchmarks, creating ways to shorten lead times while maintaining
consistent quality and costs. In order to better compete with international low-cost
manufacturers, they signed a service level agreement. This brought the two companies
closer together and TFG contracted Prestige to increase the volume. Prestige became the
cornerstone manufacturer for TFG. The acquisition of Prestige by TFG was the natural next
step. The streamlined processes between the two entities (now in the same Group) will
ultimately allow for the necessary speed and flexibility for the Group to grow market share.

Source: Fastmoving.co.za 2012 FMCG Supplier News TFG press release.

10.5Procurement and supply chain management

in the public sector
One of the negative outcomes of the acceptance and application of B-BBEE Acts and
regulation in government procurement is opportunism. One of the forms of opportunism
is the practice of ‘fronting’. This is the deceitful use of people by businesses to pretend
that a potential supplier is more B-BBEE-compliant than it really is. In addition, many
government employees, politicians, their relatives and friends opened businesses to
tender for government contracts. Many of them were successful bidders (due to the
contacts and influence), and this gave rise to the infamous phenomenon
‘tenderpreneurs’, Tenderpreneurs is a word that was developed spontaneously by
media when they reported on cases where relatives and friends obtained tenders from
government institutions. They were more often than not, inexperienced business people
and could not deliver the services or quality products needed for proper service delivery
to the citizens of South Africa.
This part of the chapter will shed light on government procurement procedures.
Reading through this part, you will realise that the large-scale abuse of government or
public procurement is not the result of a lack of regulation or procedural weaknesses, but
rather unscrupulous human behaviour and an apparent culture of unethical conduct.
In the public sector (government institutions such as national, provincial departments,
municipalities and government-owned institutions), the term supply chain refers to the
product and service flow that should be delivered to citizens. The supply chain
management in the South African public sector focuses on the internal integration of
functions. SCM in private business focuses on the integration of internal functions and
integration or co-ordination with outside parties in the supply chain – that is, suppliers
and customers, with the main focus on the satisfaction of the final customer’s needs.
In 2003, it was decided to adopt a SCM approach to guide uniformity in procurement
reform processes in government, in conjunction with provincial treasuries, to replace the
outdated procurement and provisional practices. A policy guide called ‘Supply chain
management: a guide for accounting officers’ 11 (for national departments, municipalities
and entities), was developed to give guidance for the adoption of an integrated SCM
function. It also provides guidance on managerial responsibilities assigned to
accounting officers in terms of sections 62 and 95 of the Municipal Finance Management
Act 56 of 2003 (MFMA) and section 76(4) of the Public Finance Management Act 1 of
1999 (PFMA). The guidelines explain SCM regulations, policies as well as the operational
processes for accounting officers at each step of the SCM cycle. The principle behind the
policy guide is based on the fact that managers should be given the flexibility to manage
within a framework that satisfies the constitutional requirements of transparency and
accountability.
With the acceptance of the public sector supply chain, the idea was to ensure value for
money, open and effective competition, ethics and fair dealings, accountability and
reporting, and equity.
This is called the five pillars of SCM and will be briefly discussed below:
1.Value for money. According to the SCM principle, the supplier with the lowest
price will not necessarily get a contract, but rather the one that offers the best
value for money. Best value for money means the best available outcome when all
relevant costs and benefits over the procurement cycle are considered. Best value
for money includes price, quality and flexibility.
2.Open and effective competition. SCM includes openness in the procurement
process, encouragement of effective competition through procurement methods
suited to market circumstances (how many buyers and sellers there are in a
market) and observance of the provisions of the Preferential Procurement Policy
Framework Act. Government officials need to apply effort and research to get the
best possible outcome from the market by ensuring that (1) potential suppliers
have access to procurement opportunities (for example, advertisement of tenders);
(2) available opportunities are notified in the Government Tender Bulletin; (3)
adequate and timely information is provided to suppliers to enable them to bid; (4)
bias and favouritism are eliminated; (5) the costs of bidding for opportunities do
not deter competent suppliers; and (6) the costs incurred in promoting
competition are at least commensurate with the benefits received.
3.Ethics and fair dealing. During procurement, all parties need to comply with
ethical standards, ensure mutual trust and respect, and conduct their business in a
fair and reasonable manner and with integrity. All government staff associated
with procurement, particularly those dealing directly with suppliers or potential
suppliers, are required to (1) recognise and deal with conflicts of interest or the
potential thereof; (2) deal with suppliers even-handedly; (3) ensure they do not
compromise the standing of the state through acceptance of gifts or hospitality; (4)
be scrupulous in their use of public property; and (5) provide all assistance in the
elimination of fraud and corruption.
4.Accountability and reporting. This involves ensuring that government officials are
answerable for their plans, actions and outcomes. Openness and transparency in
administration, by external scrutiny through public reporting, is an essential
element of accountability.
5.Equity. The word ‘equity’ in the context of guidelines means the application and
observance of government’s policies, which are designed to advance persons or
categories of persons disadvantaged by unfair discrimination, that is historically
disadvantaged individuals (HDIs), women, disabled individuals and small, medium
and micro enterprises (SMMEs).
10.5.1SCM Framework
The South African (Department of) National Treasury provides guidelines for
implementation of the SCM policy. The model or framework for SCM constitutes demand
management, acquisition management, logistics management, disposal management,
risk and performance management. Figure 10.2 shows the model or framework for
supply chain management that was developed and accepted for government institutions
in South Africa.

Figure 10.2: The government supply chain management model in South Africa
Source: Adapted from National Treasury (2005).

Elements of the SCM model or framework are briefly discussed below. 12

Demand management
Demand management is the first element in the SCM model, also the first phase of the
SCM cycle. The objective is to ensure that the resources required to fulfil the needs
identified in strategic planning (integrated development planning for municipalities), and
budgeted for, are delivered at the correct time, price and place, and that the quantity and
quality will satisfy those needs. As part of this element of SCM, a total needs assessment
should be undertaken to ensure that the goods and services requirements are precisely
determined to deliver the agreed services; requirements are linked to the budget; and the
supply market has been analysed. Important aspects of this element are: understanding
current and future needs; linking budget to needs in strategic plans; determining
specifications of requirements; analysing the current and past expenditure and usage of
the commodities; determining the optimum method to satisfy the needs considered;
specifying the frequency of the requirements; calculating of the economic order quantity;
determining minimum and maximum levels of inventories; and determining the lead and
delivery dates accurately identified.

Acquisition management
Acquisition management is the management of the procurement function and entails
decisions on the manner in which the market will be approached, establishing the total
cost of ownership of a particular type of asset, ensuring that the bid document is complete
− including evaluation criteria, evaluating bids in accordance with published criteria, and
ensuring that proper contract documents are signed. In the acquisition management
process, all possible methods of obtaining the requirements (the materials or services
required by the state for its operations) should be investigated, for example, obtaining
the goods and/or services by means of a transversal term contract, or could other
departments or municipalities satisfy the requirements at a better price, or are the
requirements available on the list of redundant or obsolete material. Important in the
acquisition management process are an assessment of the market, sourcing strategy,
establishment of a database of suppliers and understanding procurement methodologies
for various contracts.

Logistics management
Logistics is the process of strategically managing the acquisition, movement and storage
of materials, parts and finished inventory (and the related information flows) through a
department or municipality up to where it is needed. Logistics management adds value
through creating form utility, place utility, time utility and possession utility for the
consumer (community). The most important task of logistics management is to
constantly facilitate the correct level of consumer service and simultaneously, maintain
the balance in terms of total logistical costs.

Disposal management
Disposal management means the disposal of assets that are no longer needed, including
unserviceable, redundant or obsolete assets, for example, vehicles and office equipment.
It is recommended that the accounting officer appoint a specific committee to deal with
disposals, to make recommendations with regard to the disposal of any asset. It is the
responsibility of the accounting officer to consider the recommendation of the appointed
committee. Consideration for disposal management includes: obsolescence planning,
maintaining a database of redundant material, inspecting material for potential reuse,
determining a disposal strategy, and executing the physical disposal process.

Risk management
Risk management is the provision of an effective system for the identification,
consideration and avoidance of potential risks in the SCM system. Risk refers to any
unintended or unexpected outcome of a decision or course of action. Risk management
entails the identification, analysis and economic control of risks that threaten the SCM
system and service delivery by a government entity. Risk management includes: the
identification of risks; allocation of risks to the party best suited to manage it; acceptance
of the cost of the risk where the cost of transferring the risk is greater than that of
retaining it; management of risk in a pro-active manner; the provision of adequate cover
for residual risk; and assignment of relative risks to the contracting parties through a
clear and unambiguous contract document.
Some of the risks in government SCM are:
•Risks associated with the failure to follow laid down procedures and policies
•Risks associated with inadequate specification and quantification of needs
•Risks attributable to delays in delivery, failure of service delivery by suppliers and
overstocking or shortages of stock items.

Supply chain performance management

Supply chain performance is a monitoring process, undertaking a retrospective analysis
to determine whether the proper processes have been followed and whether the desired
objectives were achieved. National Treasury has developed a reporting template for
government entities to monitor supply chain management implementation processes. To
continuously improve the supply chain performance, government entities are
encouraged to develop their own monitoring processes that would enhance their supply
chain performance.
10.5.2Bid committees
Three bodies are involved in the presentation and awarding of a tender: the bid
specification committee, the bid evaluation committee and the bid adjudication
committee. These committees must perform their roles and functions as specified by the
supply chain management policies and regulations.

Bid specification committee

This is the committee responsible for the compiling of bid specifications. The correct bid
specifications are important because they provide the criteria for the evaluation of the
bids (offerings) of the bidders or tenderers. The specifications committee must also
consider whether all the required quality assurance standards have been met with regard
to the type of goods to be purchased. The specifications should be compiled in
an unbiased manner to allow all potential bidders to offer their goods and/or services
without favour or prejudice.

Bid evaluation committee

The bid evaluation committee is responsible for the evaluation of bids received, which
includes verification of: tax clearance certificate issued by the SARS (compulsory);
registration on the supplier database of the provincial treasury (compulsory); the
capability/ability of the bidder to execute the contract, from a technical, managerial and
financial perspective; whether the bid is to specification in respect of quality,
functionality, dimensions, design, customer support, guarantee, whether a bid offers
value for money; number of contracts already awarded to bidder/s in contention during
the preceding twelve months; allocation of preference points; target group
‘representivity’ in the composition of the bidder and the possibility of fronting;
success/failure in executing contracts awarded to a bidder previously. Bids are evaluated
in accordance with the criteria specified in the bid documentation and in accordance with
the prescribed preference points system. The evaluation committee should evaluate all
bids received and submit a report with their recommendations regarding the awarding
of the bids to the adjudication committee.
Bid adjudication committee
The adjudication committee is the committee that finally decides to whom the tender or
bid will be awarded. In this committee, the potential for corruption is the biggest. The
adjudication committee must be cross-functional (for example, procurement, finance,
technical, user), of whom at least one member must be a supply chain practitioner. The
chairperson of the committee should be the chief financial officer of the institution or a
delegate. The committee should be composed of at least four members, at appropriately
senior level. The committee should consider reports and recommendations made by the
evaluation committee. Each recommendation must be supported by a clear, concise
motivation of the important points. The accounting officer should determine the
delegated powers exercised by the adjudication committee, which may include making a
recommendation for award of contract to the accounting officer, for final
approval/ratification.
In conclusion, it is clear that the intentions of the SCM Acts and framework were to
assure value for taxpayers’ money (effectiveness), efficiency of service delivery and
transparency, and combatting of unethical and fraudulent conduct. Unfortunately, this is
often not the case. There are many examples where contracts are awarded to relatives,
friends or unscrupulous suppliers; services are not delivered by suppliers; and suppliers
are not paid by public institutions; the proper procurement procedures are not followed;
and there are irregularities with the awarding of contracts. Some of the transactions are
worth multi-billions of rands, such as the infamous weapons transaction by the South
African Defence Force in the early nineties, which is not concluded yet.
Example
SASSA13
The South African Security Agency (SASSA), under the Ministry of Social Development, is
responsible for the payment of social grants to 16 million South Africans. SASSA outsources
the payments of social grants. In two judgments, in 2013 and 2014, the Constitutional Court
ruled that a R10-billion contract awarded to Cash Paymaster Services (CPS) for the handling
of social grants payments is constitutionally invalid. The court ruled that SASSA must rerun
the tender.
CPS won its contract in 2012, but was immediately challenged in the Pretoria High Court
by the losing bidder, AllPay. The outcome of the case was appealed to the Constitutional
Court. The Constitutional Court found that the tender process was invalid. Judge Froneman
concluded that ‘SASSA’s irregular conduct has been the sole cause for the declaration of
invalidity and setting aside of the contract’.
SASSA failed to interrogate the role of CPS’s purported empowerment partners properly.
SASSA’s second infraction was its last-minute notice to bidders, which stipulated the
requirements of the provision of biometric verification technology for payments. In the
original bid documents, this was not a requirement, but only a preference. Only CPS
included this in its bid. This last-minute change of specification requirements made the
process uncompetitive.
As we see in the SASSA example, the bid specification committee did not do its work
properly with regard to setting proper well- researched specifications. They also break
the procurement regulation by deviating from the advertised specifications for the bid or
tender. The bid evaluation committee also did not properly investigate the role and status
of the BEE-partners and there might be a possibility of fronting.
Fronting means a deliberate circumvention or attempted circumvention of the B-
BBEE Act and Codes. Fronting commonly involves reliance on data or claims of
compliance based on misrepresentation of facts. Fronting practices include:
•Window-dressing, which includes cases in which black people are appointed in or
introduced to an organisation on the basis of tokenism and who will not
substantially participate in the core activities of an organisation.
•Opportunistic intermediaries, includes organisations that have concluded
agreements with other enterprises with the view of leveraging the opportunistic
intermediary’s favourable B-BBEE status.14
10.6Ethical
aspects in procurement and supply
chain management
Procurement managers and staff are usually under more pressure to act ethically than
any other group in an organisation. The reason is that they have control over large
amounts of money. They have a say in who will get a contract and therefore come under
pressure from the sales people of competing suppliers, and sometimes unethical
managers or politicians, to influence the decision. With many large transactions, the
organisations’ boards make the decision to whom a contract is awarded, without
consulting Procurement or taking procurement principles, regulations and rules
into consideration. There are many such cases in both the private and public sector in
South Africa. One infamous example is the number of cases of misconduct by the CEO of
the Passenger Rail Agency of South Africa (PRASA),15 regarding procurement and tender
regulations, investigated by the Public Protector.
Sales personnel of suppliers are often under tremendous pressure and they are in
certain cases willing to use whatever means necessary to get the business, including
bribery or gift giving, often with the permission of their employers. An organisation that
is serious about ethics and ensuring the ethical conduct of its employees should have the
same ethical standards for both purchasing and sales personnel. They cannot expect their
purchasing personnel to act in an ethical way, while they are willing to allow their sales
people to treat potential clients with gifts and expensive entertainment.
However, despite the frequent occurrences of unethical conduct in the purchasing or
procurement function, no other function has more opportunity to contribute to an
organisation’s value creation and to society as a whole. SA Breweries is an example of the
positive influence and contribution of procurement to the organisation and society. In
fact, the role of purchasing or procurement in creating a more equal society is singled out
in the Constitution of South Africa. The opening case scenario outlines how SAB support
national priorities, such as broad-based black economic empowerment in South Africa.
SAB makes sure that suppliers have a good understanding of SAB’s approach to
sustainable development, focusing major efforts on suppliers. SAB engages with
suppliers to understand their own social, economic and environmental impact, and SAB
aims to move towards a position of sustainable development partnerships with suppliers
where both SAB and supplier needs are addressed in a mutually beneficial manner.
The ethical buyer will treat his or her suppliers with respect, in a just, fair, decent,
honest and fitting manner. Often in organisations, non-procurement staff and managers
are involved in procurement transactions. This is only an acceptable practice if a multi-
functional team is involved in setting the specifications and evaluation criteria and the
procurement staff forms part of the team. However, all personnel involved in the team
should ascertain themselves of and abide by procurement rules, regulations, and fair and
ethical conduct.
10.6.1Rules for ethical procurement transactions
There are three rules to be followed to ensure ethical conduct of the procurement
function in an organisation: 16
1.People involved in a procurement transaction must have the benefit of the
organisation in mind and not personal enrichment to the detriment of the
organisation. Ethical buyers do not accept gifts or favours and deal firmly with
sales people who are trying to tempt them.
2.Buyers need to treat all suppliers ethically and fairly, without favouritism. They
need to be treated professionally and with respect.
3.Buyers need to keep to the code of ethics of the organisation and the purchasing
profession.
10.6.2Areas of unethical conduct in procurement
A dishonest person involved with procurement is in a position of being able to enrich
him- or herself personally, or to gain other personal favours for granting a contract or
giving preferential treatment to a specific supplier. This is often not to the benefit of the
purchasing organisation, which can suffer as a result of an irrational decision made by a
purchaser.17 If strict selection criteria for selecting a supplier are not applied, risks such
as poor-quality products or services, or non-delivery may be possibilities. In addition, if
the unethical conduct is revealed, the people involved may end up in prison and both
organisations’ reputation will be tarnished, and they might receive penalties from
authorities for uncompetitive and fraudulent activities.
Personal favours include gifts, money in the form of kickbacks and even bribes.
However, there are more indirect areas in which a purchaser can consciously or
unconsciously act unethically:18
•A purchaser (or his or her family or friends) may, for example, have interests in a
supplier, and may put his or her own interest before those of the employer, causing
a conflict of interest. This could include the purposeful awarding of a contract to a
family member, friends and/or people with political influence.
•The loyalty of procurement staff to colleagues, or fear of retaliation from superiors
or colleagues may give rise to unethical behaviour because they may be pressured to
act unethically or not report the unethical conduct of others.
•Procurement staff may also abuse the organisation’s purchasing power by placing a
personal order in the organisation’s name in order to obtain products at a lower
price.
•Withholding important information from a supplier may be unethical if a supplier’s
position is harmed in competing for a transaction.
•It is also unethical to make a Request For Information (RFI) if the intention is not to
use the information for a bona fide purchasing decision. This creates false
expectations, is a waste of a supplier’s time and is deceitful.
•Information from competing suppliers should be kept confidential, particularly
information obtained from written quotations, tenders and communication with
sales representatives.
•The setting of specifications to suit one specific supplier, thereby cutting out
competition is unethical.
Example
CIPS code of conduct19
As a member of CIPS I will:
Maintain the highest standards of integrity in all business relationships, by:
•Rejecting any business practice which might reasonably be deemed improper
•Never using my authority or position for my own financial gain
•Declaring to my line manager any personal interest that might affect, or may be seen by
others to affect my impartiality in decision making
•Ensuring that the information that I give in the course of my work is accurate and not
misleading
•Never breaching the confidentiality of information I receive in a professional capacity
•Striving for genuine, fair and transparent competition
•Being truthful about my skills, experience and qualifications.

Promote the eradication of unethical business practices, by:

•Fostering awareness of human rights, fraud and corruption issues in all my business
relationships
•Responsibly managing any business relationships where unethical practices may come
to light, and taking appropriate action to report and remedy them
•Undertaking due diligence on appropriate supplier relationships in relation to forced
labour, human rights abuses, fraud and corruption.

In addition:
•Optimising the responsible use of resources which I have influence over for the benefit
of my organisation
•Ensuring full compliance with laws and regulations by fulfilling agreed contractual
obligations.

10.6.3Measures to prevent unethical conduct

Ethical conduct in an organisation starts at the top. If top management and the other tiers
of management act ethically towards the stakeholders and staff in subordinate positions,
a culture of ethical conduct will be instilled in the organisation. In addition, a code of
conduct and a whistle-blowers’ facility might prevent unethical conduct.
The Chartered Institute of Procurement and Supply (CIPS) require of all their
members to uphold their Code of Conduct. An excerpt of the Code is provided in the
previous example box.
In addition to their code of conduct and in line with the supply chain management
approach, SABMiller requires its suppliers to adhere to a supplier code of conduct. With
this code of conduct, it is made clear that SAB prefers to do business and build close
relationships with suppliers who share the values and ethical commitment of SAB. It
covers the protection of human rights, labour standards, business integrity and the
reduction of environmental impact.20
A whistle-blowing facility is not for exclusive use by procurement or for reporting
possible unethical conduct through procurement transactions, but can be used for this
purpose, without the fear of retaliation, because confidentiality and anonymity are
guaranteed.
Example
Whistle-blowing at SABMiller 21
All employees at SAB have the opportunity to make confidential disclosures in their own
language about suspected impropriety or wrongdoing. ‘No action or retaliation is permitted
against any employee making a good faith report about an actual or suspected violation of
SABMiller’s policy’. The ethics committee, company secretary, corporate affairs, in
consultation with the head of internal audit, will decide on the method and level of
investigation. An annual revision and report, disclosures, results of investigations and action
taken are made by the audit committee.

10.7Environmentalresponsibility in procurement
and the supply chain
Environmental or green procurement is the integration of environmental considerations
into procurement policies, programmes and actions. The objective of green procurement
is to facilitate recycling, reuse and reduce the use of resources. 22
Procurement can contribute to environmental protection in a number of ways, such
as:
•Buying packaging materials that can more easily be recycled or reused, for
example, using glass bottles for bottling of beer, which are returned, washed and
reused
•Participating in the design stage of products and suggesting alternative, more
environmentally conscious sources of supply, for example, suppliers that take
environment protection seriously
•Asking upstream members (suppliers) of the supply chain to commit to waste-
reduction goals
•Giving preference to suppliers by including environmental protection in the
selection criteria
•Evaluating suppliers’ environmental performance.

Thus, as a boundary-spanning function (beyond the boundaries of the organisation),

procurement plays an important role in communicating green principles and efforts to
other organisations in the supply chain.
Green supply chain management can be regarded as integrating environmental
thinking into supply chain management, including product design, material sourcing and
selection, production processes, delivery of the final product to the consumer, as well as
end-of-life management of the product after useful life. It encompasses a broad range of
practices from green procurement to integrated supply chains flowing from suppliers to
manufacturers, to retailers, to customers, and to the reverse supply chain. 23 The example
box on the next page looks at how SABMiller apply green or environmental procurement
and supply chain management.
Example
Responsible sourcing at SABMiller 24
‘SABMiller has set a global target to reduce the impact of our business in terms of waste and
carbon generated, the amount of materials used, the packaging and reuse of our beer
containers. By 2020 we aim to reduce our carbon footprint per hectolitre of beer across our
value chain by 25% and waste to landfill by 10%. We cannot achieve this target alone, we
will achieve it through ever enhanced collaboration with our suppliers allowing us to achieve
excellence in service, consistency, in our quality standards, bring innovation to the market,
drive value throughout the business and facilitate CO 2 reductions across every pillar of our
supply chain from raw material extraction through to material recovery’.
SABMiller is regarded as a leader in embedding sustainability into its operations and
the whole supply chain. In June 2010, SABMiller (parent company) brought aspects of its
sustainable development projects and priorities together under the banner ‘Ten
Priorities, One Future’. With this, sustainable development is integrated into the daily
operations of the business.25
The ten priorities are:
1.Making more beer using less water
2.Discouraging irresponsible drinking
3.Reducing energy use and carbon footprint
4.Reducing the weight of packaging, reusing bottles and encouraging recycling
5.Working to zero waste operations
6.Building supply chains that reflect the company’s values and commitment
7.Benefiting its communities
8.Contributing to the reduction of HIV/Aids
9.Respecting human rights
10.Transparency in reporting the company’s progress.

Let us look at those ten priorities in more depth.

Making more beer using less water

By its nature, brewing beer is a water-intensive process. Making more beer, but using less
water, is one of SABMiller’s three global focus areas for sustainable development, and it
is of particular importance for SAB’s operations in South Africa, a semi-arid, water-scarce
country. SAB’s water strategy is based on the 5Rs (pRotect, Reduce, Reuse, Recycle and
Redistribute), a comprehensive risk-based approach to managing water in its business
and in the supply chain. SAB has already made good progress. The company’s water
efficiency has improved by 8% over the past two years to an average water efficiency of
4,1 litres of water per litre of beer produced. Key imperatives in driving water
consumption efficiency include:
•Reducing the water ratio from 4,13 litres to 3,6 litres per beer by 2015, a 13%
reduction
•Improving waste discharge quality to meet legislation by investing at brewery level
or improving municipal operations
•Engaging with key suppliers to understand their manufacturing water efficiency
relative to best-in-class and their improvement plans.

Where SAB has control over water management practices, that is, inside its brewery
gates, it ranks amongst the world’s leaders in terms of responsible water management
during the brewing process. Additionally, SAB exercises strict control and management
of the quality of discharged water at the end of the production cycle. Efficiency targets
are continually increased and new technology is explored and introduced to effect
changes where they are required. When a new brewery is built, its efficiency is much
higher due to the advantage of the installation of a modern infrastructure. 26

Reducing energy and carbon footprints

Climate change, greenhouse gases and the carbon footprint are issues of global concern.
SAB also embraces the question of how it can help to reduce greenhouse gas emissions
across the entire supply chain regarding packaging, manufacture, transport and
refrigeration. SAB endeavour to minimise the impact of operations, customers and
consumers through practical, proactive strategic interventions, improve on energy
conservation targets and reporting on it, educate people in energy conservation, and
engage with authorities and suppliers on possible initiatives.27

Reducing the weight of packaging, reusing bottles and

encouraging recycling
‘Promoting a vibrant packaging reuse and recycling economy, and working towards zero
waste operations, are key components of SAB’s sustainable strategy’. 28 SAB in South
Africa has reduced the weight of its packaging, reuse bottles and encourage recycling,
thereby saving money and raw materials and reducing pressure on local waste services.
More than 80% of the beer sold by SAB in South Africa is packaged in returnable
containers. The remaining 20% is sold in convenience packs, in order to meet consumer
demands. SAB also works on decreasing the weight of product packaging by reducing the
amount of materials used while maintaining the integrity of the packaging itself. Lighter
packaging uses fewer raw materials and less energy to manufacture. For example, the
340 ml ‘Giraffe’ bottle used in South Africa was redesigned to reduce its weight by almost
10%. SAB actively promotes education programmes and recycling through organisations
like The Glass Recycling Association and Collect-a-Can.

Working towards zero waste operations

SAB aims to use its resources efficiently and limit the disposal of waste to landfill. Just
under two-thirds of SAB’s waste is organic material produced as a by-product of the
brewing process. This includes spent grains, waste yeast and trub (a residual created
from brewing). The remaining waste is made up of damaged packaging (broken bottles,
caps, cardboard, etc.), filtration medium, and effluent sludge from waste-water
treatments, boiler ash and other non-recyclable waste. SAB processes solid waste on a
cradle-to-grave (from creation to disposal) basis and opportunities for waste to be reused
or recycled are actively sought. For example, spent yeast is sold to manufacturers of
health foods and savoury spreads; farmers purchase spent grain for animal feed; spent
grain is donated to local farmers in the eastern Cape; kieselguhr (a filtration medium) is
recycled in cement and compost; malt dust, spent grains and other organic waste is sold
for pet food; segregated broken glass bottles are recycled and turned into new bottles;
and waste water is used to generate energy and produce fertiliser. 29

Building supply chains that reflect the company’s values and

commitment
SAB manages its supply chains (particularly suppliers) with a view to the long-term
benefits to its operations. Encouraging enterprise development in the value chain is a key
sustainable development priority and activities in this area are numerous and well
integrated into the day-to-day business. The strategy runs through SAB’s procurement
process and supply chain. SAB’s owner-driver initiative sees about 70% of deliveries
carried out through former employees, who have set up their own businesses, supported
by SAB; while the Taung Barley-project supports 120 smallholding farmers to generate a
guaranteed income and improve their lives. 30
10.8Conclusion

This chapter introduced procurement and the extended supply chain as drivers for
improving corporate citizenship or sustainability. The chapter started with an
explanation of the creation of value through supply chain management. The idea with
SCM is that all the suppliers and customers from the raw material stage, through various
cycles of conversion, to the use of a product by a final consumer, work closely together,
with mutual respect, seeking the best value for all parties in the supply chain, particularly
the satisfaction of the final consumer.
Then the focus turned to corporate social responsibility – the financial, legal and
ethical responsibility of the procurement function.
The approach to and procedures for the selection of suppliers in private and public
institutions were discussed in detail because most unethical practices take place during
the selection of suppliers and the awarding of contracts. The important use of
procurement as a tool for social change was discussed. Ethical issues in procurement and
the environmental responsibilities of procurement in the supply chain concluded the
chapter.
In a functional sense, SCM focuses on activities and relationships in logistics,
marketing, procurement/supply, and production/operations. In this chapter, the focus
was on procurement in supply chain management. The other parts of the internal supply
chain, namely operations management and logistics are dealt with in the next chapter
(Chapter 11), and marketing management in Chapter 13.

Multiple-choice questions
1.Identify the false statement with regard to environmental sustainability:
a.Packaging is an important source of recycling in the liquor industry.
b.SAB’s contribution to water quality is company-wide.
c.SAB involves suppliers, municipalities and NGOs in environmental
sustainability.
d.SAB selects suppliers based on environmental criteria.
e.SAB takes care of water quality released from their operational processes.

2.Identify the false statement:

a.Financial responsibility is closely connected to ethical conduct.
b.SAB develops suppliers.
c.SAB includes their employees in their programme on alcohol abuse.
d.The main purpose of a code of ethical conduct is to prevent fraud.

3.Broad-based black economic empowerment forms part of the _____ dimension of

corporate social responsibility.
a.human rights
b.community development
c.diversity
d.ethics
e.financial responsibility

4.Which one of the following must check the status and role of B-BBEE-partners in
a public sector (government) tender?
a.bid specification committee
b.bid evaluation committee
c.bid adjudication committee
d.risk management
e.audit committee

5.SAB improve their water sustainability performance by _____ and _____ .

a.increasing efficiency targets; benchmarking
b.new technology; code of conduct
c.increasing efficiency targets; new technology
d.benchmarking; commitment

Discussion questions
1.Discuss procurement and the extended supply chain as drivers for improving
corporate citizenship.

2.Discuss the three areas of the procurement function that affect corporate
responsibility.

3.Discuss the selection of the right suppliers from a private institution’s

perspective.

4.Discuss the approach to the selection of suppliers by public institutions.

5.Discuss the use of procurement as a tool for social change.

6.Discuss the important issues in ethical conduct in procurement and supply chain
management.

References
1.SABMiller Position Paper - Enterprise Development and Value Chain
Management. March 2009. [Online]. Available: http/www.sabmiller.com [3
September 2015]; Prosper and the UN Global Goals. 2016. [Online].
Available: http://www.sabmiller.com/sustainability/prosper-and-the-un-global-
goals [17 June 2016].
2.Pienaar, WJ & Vogt, JJ. 2012. Business Logistics Management: A value chain
perspective. Cape Town: Oxford, p. 8.
3.SAB Committed to Sustainable Development. [Online].
Available: http://www.sab.co.za/sablimited/action/media/downloadFile?media-
field+778 p. 1. [4 January 2015].
4.Hugo, WMJ & Badenhorst-Weiss, JA. 2011. Purchasing & Supply Management.
Pretoria, Van Schaik, pp. 91–92.
5.Monczka, RM, Handfield, RB, Giunipro, LC & Patterson, JL. 2010. Purchasing &
Supply Chain Management. Boston MA, Cengage, p. 377.
6.Ibid.
7.Horne, Badenhorst-Weiss, Cook, Heckroodt, Howell, Phume & Strydom.
2014. Supply chain management. Cape Town, Oxford. (Chapter 2).
8.Economic Development Department. [Online].
Available: http://www.economic.gov.za/about-us/programmes/economic-policy-
development/b-bbee [10 June 2016].
9.Stander, Y. 2013. Woolworths’ small business boost. The Herald, 23 January.
[Online]. Available: http://www.heraldlive.co.za/woolworths-small-enterprise-
boost/ [9 January 2014].
10.Local clothing sector boosted by TFG acquisition of fashion manufacturer.
2012. FMCG Supplier News, 30 January. [Online].
Available: http://www.fastmoving.co.za/news/supplier-news-17/local-clothing-
sector-boosted-by-tfg-aquisition-of-fashion-manufacturer [9 January 2014].
11.National Treasury, 2005. Supply Chain Management: A guide for accounting
officers and municipal entities, Republic of South Africa, October 2005. [Online].
Available: http://mfma.treasury.gov.za [11 July 2011].
12.Ibid.
13.Mckune, C. 2014. Ruling on grants tender damns SASSA. Mail & Guardian, 25
April. The story was originally published by Mail & Guardian.
14.Dti. Nd. https://www.thedti.gov.za/economic_empowerment/fronting.jsp [3
September 2015].
15.Public protector’s damming report on PRASA. News24. [Online].
Available: http://mybroadband.co.za/news/government/134612-public-
protectors-damming-report-on-prasa.html [3 September 2015].
16.Monczka, RM, Handfield, RB, Giunipro, LC & Patterson, JL. 2016. Purchasing
& Supply Chain Management. Boston MA, Cengage, p. 601.
17.Hugo, WMJ & Badenhorst-Weiss, JA. 2011. Purchasing & Supply Management.
Pretoria, Van Schaik, p. 93.
18.Ibid.
19.CIPS Code of Conduct, 2013. [Online]. Available: www.cips.org [3 September
2015].
20.SABMiller, Sustainable procurement. [Online].
Available: http//www.sabmiller.com/about-us/supplier-portal/sustainable–
procurement [3 September 2015].
21.Whistleblowing. [Online]. Available: http//www.sabmiller.com/about-
us/corporategovernance/whistleblowing [3 September 2015].
22.Hugo, WMJ & Badenhorst-Weiss, JA. 2011. Purchasing & Supply Management.
Pretoria, Van Schaik, p. 95.
23.Ibid.
24.SABMiller. Sustainable procurement. [Online].
Available: http//www.sabmiller.com/about-us/supplier-portal/sustainable-
procurement. p. 3. [3 September 2015].
25.SAB Committed to Sustainable Development. [Online].
Available: http://www.sab.co.za/sablimited/action/media/downloadFile?media-
field+778 p. 1. [4 January 2015].
26.Ibid. p. 2.
27.Ibid. p. 4.
28.Ibid. p. 5.
29.Ibid. p. 5.
30.Ibid. p. 6.
chapter
Operations and logistics
management
Hannie Badenhorst-Weiss 11
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Explain the aim of sustainable operations management
•Outline the key features of Toyota’s production system
•Write brief explanatory notes on the impact of logistics activities on the
environment and how it can be decreased
•Discuss different trade-offs in logistics management from an environmental point
of view
•Explain from an environmental impact point of view why organisations will
outsource logistics to third-party logistics providers (3PL)
•Briefly outline the process activities (stages) in reverse logistics, namely (1)
product collection; (2) inspection, separation and sorting; and (3) recovery and
disposition
•Briefly discuss the different disposition options in reverse logistics while
considering the environmental impact
•Summarise the reverse logistics activities and options in the supply chain by
means of a sketch
KEYWORDS AND CONCEPTS
-continuous improvement
-disposition options
-early supplier involvement
-Euro 5 and Euro 6
-green supply chain management
-green technologies
-incineration
-inventory
-ISO14001
-JIT system
-landfill
-lean production
-recondition
-recycle
-redistribute
-refurbish
-remanufacture
-resell
-reuse
-reverse logistics
-safety
-salvage
-sustainable logistics
-sustainable operations
-sustainable supply chain management
-Toyota production system
-value-add
-vendor management inventory
-zero-emission vehicle refrigeration

OPENING CASE SCENARIO

Leading in water conservation and usage – Coca-Cola Canners1

Coca-Cola Canners Epping was established in 1972. The Coca-Cola Epping Plant
runs two production lines with the capacity to produce 12 million cases per annum
with a workforce of 77 permanent employees. The aim of the plant is to safely return
to nature an amount of water equal to the amount of water used in the production
process.
Backwash water from the water-treatment plant filters used to be discharged as
waste. Under the reduce strategy, backwash recovery was identified as an
opportunity to reduce water usage and related costs. In addition to this water stream,
the water generated from the rinsing of the cans prior to filling them with the final
product has presented another water- saving opportunity.
By re-engineering processes, Coca-Cola Epping is recovering water from can-
rinsing and the water treatment plant filter backwash it treats for reuse. The process
is generating significant water recovery of water utilised in the plant. This recovery
process was implemented in March 2006, total water recovered to date is in excess
of 75 million litres.
11.1Introduction
In Chapter 10, the concept of supply chain management was discussed. In addition, the
first part or process of the supply chain – procurement and engaging with suppliers – was
discussed. Certain ethical, community and environmental aspects in procurement and
supply chain management were also covered. This chapter is a continuation of the supply
chain covering the processes of operations (production or conversion) and logistics
management.
The focus on this chapter will be on efficiency or productivity, also known as value-
add, and the protection of the environment in the operations and logistics processes. Due
to the labour- intensive nature of operations and logistics, there are many human-related
corporate responsibility issues such as remuneration, working hours, workers’ health
and so on. However, these issues will be covered in the human resource management
chapter (Chapter 12).
Green supply chain management can be regarded as integrating environmental
thinking in terms of supply chain management, including product design, material
sourcing and selection, production processes, delivery of the final product to the
consumer, as well as end-of-life management of the product after its useful life.
In a functional sense, green supply chain management consists of green procurement
and materials management, green production, green logistics and reverse logistics.
Reverse logistics closes the loop in supply chain management and includes reuse,
remanufacturing, and recycling to create value in the marketplace.
Sustainable or green production includes clean production methodologies, product
design with the environment impact in mind, total quality environment management and
various end-of-life practices. On the distribution side of the supply chain, the focus will
be on green marketing and environmentally friendly packaging (refer to Chapter 13),
warehousing and transportation. Transportation has a major influence on the
environment in terms of carbon footprint. Strategies to limit the environmental impact
include mode selection (for example, rail instead of road), fuel sources, routing,
scheduling and working towards the limitation of half-loads and empty backhauls.
Logistics and transport decisions are complicated because numerous aspects must be
taken into account and many trade-off options are available to optimise logistics
decisions. Therefore, logistics is a specialised area. For this reason, many manufacturers
and retailers outsource part or all of their logistics to third-party logistics (3PL)
providers.
One of the areas of logistics that is often regarded as the most important contributor
to environmental responsibility is reverse logistics. The aim of reverse logistics is to find
the most efficient ways to return materials or products back to the source for further
action. The aim of sustainability in supply chains revolves around the so-called ‘five Rs of
sustainable supply chains’, namely reduce, reuse, remanufacture, recondition, recycle.
The last four Rs are in the domain of reverse logistics.
11.2The five Rs of sustainable supply chains
The five Rs of sustainable supply chains are the reduce, reuse, remanufacture,
recondition and recycling aspects in the supply chain:
•Reduce. Fewer raw materials are used for the same purpose, for example thinner
plastic bottles. It also means the use of less or alternative materials.
•Reuse. Materials, products or equipment needs to be treated, cleaned or repaired so
that it can perform the same function or can be disassembled and the parts be
reused.
•Remanufacture. A product or part goes back to the production process, it is
reworked and returned to the market as ‘good as new’.
•Recondition. Used products are repaired or reworked and returned to the market in
working condition, but not as ‘good as new’.
•Recycling. The secondary use of materials, such as glass bottles, cans and paper.
Example
Colgate-Palmolive fabric softener packaging change
Colgate-Palmolive decided to change the packaging for its fabric softener from thick, plastic
2-litre bottles to a more concentrated content (50% less water) in thinner, 1-litre bottles and
later refills in plastic sachets. The company had to campaign to get the consumers to accept
it, but once it was accepted, transportation costs were saved due to less volume and weight.
Packaging costs and warehousing costs also decreased due to the smaller container size.
Store productivity also improved due to minimised shelf space requirements and easier
handling.
This example shows the integrated nature of supply chain management. A strategic
decision to reduce, to use less plastic and smaller containers, had implications for
operations, procurement, marketing, logistics, the consumer and eventually on the
environment.
11.3Sustainable operations management
11.3.1Objectives of sustainable operations
management
In Chapter 2, the systems theory was introduced and we highlighted the fact that
corporates need inputs from the external environment to transform them into products
and/or services, which are then made available to its customers. Governments, pressure
groups and consumers are placing increasing demands on organisations to be more
socially responsible in their operations. In other words, corporates are expected to use
inputs from the environment in a responsible manner, to keep the system in balance, and
to minimise or prevent environmental and/or human damage as a result of their
operations. There is, therefore, an increasing emphasis on sustainable operations.
The aims of sustainable operations management can be summarised as follows:
•Minimise the use of resources (reduce) and find operations methods to minimise
the impact on the environment during the operations process (for example, carbon
emission and water pollution).
•Assure the manufacturing of quality products to reduce returns or additional
processes (for example, the recalling of vehicles).
•Minimise scrap and waste.
•Find innovative ways for responsibly disposing of by-products and waste.

These aims can be obtained through the application of a lean production process.
11.3.2Sustainable operations management in practice
The example box below illustrates Toyota’s production system as an excellent example
of a corporate practising a sustainable production system.
As seen in the Toyota example, lean production entails the identification and removal
of non-value-added activities right through the whole supply chain in order to realise
quicker customer response, reduced inventories, better quality and improved human
resources. It also entails an integrated set of activities that are designed to obtain the
same output from half the resources used by older production methods – in other words,
half the resources (materials), half the number of workers and design engineers, and half
the inventory level to achieve higher levels of quality.
Example
Toyota Production System
Toyota is one of the most talked and written about companies in the world, attracting the
attention of journalists, researchers and business executives seeking to benchmark its
famous production system.2 This is because Toyota has repeatedly outperformed its
competitors in terms of quality, reliability, production and cost reduction, number of sales,
market share growth and market capitalisation. In fact, opinions were expressed that Toyota
taught the modern car industry how to make cars properly using the Toyota Production
System (TPS).3
The Toyota Production System (TPS) has become known as the world’s premier
production system, and the manufacturing process as ‘lean manufacturing’. Lean
production is one of the names given to the manufacturing strategy developed by Taijichi
Ohno and Eiji Toyoda of the Toyota Motor Company. Lean production has its roots in the
Toyota Automobile Company of Japan where waste was to be avoided at all cost. This
means ‘getting more done with less’. The process entails the identification and removal of
non-value-added activities right through the whole supply chain, in order to realise quicker
customer response, reduced inventories, better quality and improved human resources.
‘Lean’ means an integrated set of activities designed to obtain the same output from half the
resources used by older production methods – in other words, half the resources in terms of
materials, half the number of workers who are multiskilled and work in teams, half the
number of design engineers and half the level of inventory. At the same time, this involves
the use of half the resources, achieving higher levels of quality, more frequent new model
launches and more varied product variations.4 The TPS was developed to improve quality
and productivity and has its foundation in the Japanese culture – (1) elimination of waste;
and (2) respect for people.
The Just-in-time (JIT) philosophy is also incorporated in the TPS. In a system
incorporating JIT, items move only when they are needed by a downstream processing step.
In other words, supplies and assemblies are ‘pulled’ through the system when and where
they are needed. When problems are encountered, the process is stopped until the problem
is sorted out. Since reductions in throughput time allow materials to get where they need to
be on time, JIT activities are all connected to this objective. Managers work on this objective
by: reducing lot sizes, processing times, safety stocks, waste worker and material
movements, inconsistencies, and defects. These are all considered waste in the JIT
philosophy.5
Continuous improvement (CI), also called Kaizen, was developed by Taichi Ohno, the
pioneer of the Kanban system at Toyota. Kanban is the information system perfected by
Toyota in Japan to operate the JIT system. He developed continuous improvement into a
viable, tangible management approach. CI seeks the continual improvement of machinery,
materials, labour utilisation and production methods through applications of suggestions and
ideas of company teams, which might also include suppliers. 6
The management of inventory is clearly an important element of lean production.
Toyota aims to keep their inventory to the minimum by using the JIT system. This means
nothing is produced until it is requested by the customer, and subsequently, nothing is
purchased until the production process begins and materials are requested from the
supplier. Materials are therefore ‘pulled’ from their source and never ‘pushed’ into the
process. A pull system works on feedback from the user before materials and components
are introduced into the process. All elements of the supply chain system must be ready
and in perfect synchronisation in order to make the ‘pull’ supply chain work. The
objectives of a pull system are to create a flexible system capable of delaying final
assembly until a customer places an order. The benefits of such a system are quicker
delivery times, reduced inventory levels and improved quality. The JIT system at Toyota
SA is complicated by the fact that some of its suppliers are dispersed throughout South
Africa and some of the suppliers are even overseas. Inventories should be kept to provide
for risks involved in purchasing from far-away suppliers.
Toyota is trying to get its suppliers to move towards a supplier (vendor) managed
inventory system (VMI). VMI is a JIT technique in which inventory replacement
decisions are centralised with upstream suppliers. In VMI, customers no longer pull
inventory from suppliers, but inventory is automatically pushed to customers as
suppliers check the customers’ inventory levels and replenish inventory as and when
required. The supplier is therefore responsible for keeping and administering the
inventory levels of its manufactured goods at the customer’s facility. 7
As part of its long-term mindset, Toyota started to involve suppliers early on in the
design process. Early supplier involvement (ESI) occurs when a strategic supplier
provides product and process technology and knowledge to support the buyer’s
operation.8 Key strategic suppliers are able to make vital contributions in the areas of
quality, cost, timely market availability and environmental impact of new products. For
example, the core competency of designing Toyota seats now lies with Toyota Boshoku.
Toyota will indicate to Toyota Boshoku how it expects car seats to function and what it
wants them to look and feel like. Toyota Boshoku will then be responsible for the
development, design, procurement of parts and production. Toyota aims to develop a few
suppliers (two or three) who can supply a certain part in order to maintain competition
within the supplier base.
The sustainability of suppliers is important for Toyota. Sustainability means that the
supplier must be a viable business and the business must be able to adapt and survive
into the future. Therefore, Toyota does not only purchase parts from suppliers, Toyota
also develops suppliers’ capabilities. It trains suppliers in the Toyota Production System
(TPS). It uses retired employees who have knowledge in production and logistics to work
with the supplier.9
Environmental issues are becoming increasingly important. Therefore, Toyota expects
its suppliers to be ISO14001 compliant. That means that suppliers must apply certain
standards to manage their impact on the environment with the materials they use,
production processes, waste, scrap, packaging, disposal of the end product and anything
that might have an impact on the environment. Through its ‘Green Purchasing Guidelines’
Toyota communicates its global requirements for providing clean and safe products. This
includes a list of substances of concern (SOCs) that it expects suppliers to avoid in their
production processes. These include mercury, cadmium, asbestos and lead, amongst
others. In addition to the materials used in the manufacturing, Toyota is also conscious of
the environmental impact of the transport of components. To reduce this, components
are sourced from suppliers within a 100-km radius of the plant.10
Toyota is also conscious of safety – not only the safety of its cars, but also the safety in
its production processes and its suppliers’ production processes. A Toyota working
group, consisting of procurement managers and engineers, conducts safety assessments
at strategic suppliers during the year. The aim is to identify potentially dangerous aspects
of its operations. These visits are supplemented by coaching and safety workshops aimed
at reducing risks and encouraging safer behaviour. Toyota monitors progress through
monthly reports submitted by suppliers and follow-up visits made every two to three
months.11
11.4Sustainable logistics management
Freight transport is estimated to contribute 8% of energy-related CO2 emissions
worldwide. The transport sector consumes 27% of South Africa’s total final energy, 78%
of its liquid fuels and 1.6% of its electricity. Investing in green technologies and assets
such as Euro 5 and Euro 6 vehicles, green distribution centres and zero-emission
vehicle refrigeration play an important part in the reduction of environmental impact.
For example, electricity consumption for lighting purposes can be decreased by
leveraging natural light in a warehouse. Vehicle refrigeration is a further area that has
potential to decrease carbon footprint. Technology such as nitrogen-powered, zero-
emission eco-fridge and Euro 5 and Euro 6 fleets can make a big difference in the amount
of carbon emission.
Figure 11.1: Transport in a steel supply chain

Ezetho Logistics, a subsidiary of Cargo Carriers in South Africa, introduced a Euro 6

fleet in 2014. The fleet upgrade became a key differentiator in winning business tenders. 12
Let us now look at various elements of logistics in transportation.
11.4.1Transport
One of the most important elements of logistics is transportation. The management of
transport is important because it ensures that the products or materials are received on
time at the place where they are required and in a usable condition. Another reason for
the significance of managing transport efficiently is the large costs involved. Transport
costs constitute a significant part of the purchasing costs of enterprises. Transport costs
often constitute 10% or more of the total cost of a product. Furthermore, transportation
is a key component of supply chain management. Transportation links the different
parties or processes in supply chains through the materials flow. It is therefore a key
element to the coordinated flows throughout the supply chain.
Figure 11.1 is a simple representation of transport in a simple supply chain. It is, however,
much more complicated in practice because to produce one consumer item involves a
network of suppliers and customers. Due to the co-ordination required in transport, it is
a specialised and complicated activity. Therefore, it is often outsourced to organisations
specialising in transport/logistics, called third-party logistics providers. They often act
on behalf of multiple suppliers and customers in the supply chain. Successful supply chain
management requires good transportation resources because the transportation system
becomes the warehouse, with orders consolidated by the computer and carriers co-
ordinated for JIT deliveries. The bottom line is that a good transportation system can
enable a firm to achieve a competitive advantage by helping to satisfy customer needs
faster and at a lower cost.13 Another reason why transportation is important is the
environmental impact it has with a high level of carbon emissions, particularly caused by
air freight and road transportion.
Transport systems such as road, rail and airport and port infrastructures affect the
decision as to where factories, processing plants and warehouses are located. An
environmentally conscious organisation will plan to reduce transport to the minimum or
totally eliminate it in order to lower its carbon emissions. Toyota South Africa’s main
assembly plant is located in Durban, close to the port for imported parts (mostly from
Japan or other global off-shore suppliers) and for export of motor cars assembled in South
Africa. Many retail chains have large distribution warehouses in Midrand from where
they can easily distribute the merchandise to the rest of Gauteng (the economic hub of
the country) and further to other northern regions, by using good road infrastructure.
With transportation, trade-off decisions need to be made on a continuous basis, for
example, using the mode of air transport to transport goods cuts down on cycle time, and
therefore improves customer service, however, the cost is higher than road transport or
any other form of transport, which is slower. Higher customer service levels through
transport offerings are often justified as they may result in increased sales and therefore
revenue. This increased revenue is sometimes sufficient to offset the higher transport
costs. However, an organisation taking corporate citizenship seriously will also consider
the impact on the environment in this trade-off decision. To consider the environmental
impact, specifically carbon emission, it means that organisations will have to consider
different routes and different modes (for example, road, rail, air or a combination). This
might mean slightly higher transport costs and perhaps lower service levels (for example,
longer delivery time). Often environmentally conscious customers or clients will be
willing to sacrifice in terms of the higher cost or service level (for example, time) to
reduce the environmental impact, like Ezetho Logistics mentioned earlier.
The main objective of supply chain management is to satisfy final consumer demand
and to deliver service to the customer. The more cost-effective and reliable the
transportation, the better the customer service that can be delivered at acceptable levels
of cost. Efficient transport can assist in lowering inventories and order cycles as less stock
is kept. Organisations can depend on frequent and reliable transport, as needed in the
just-in-time approach. On the other hand, an ineffective transport system will hamper
attempts by organisations to increase customer service levels and lower stock levels, as
the system will fail to deliver on time, at the right place, in the right condition and at the
right price. Higher stock levels and increased costs are often the result of an ineffective
transport system.
Example
Orange River Cellars use Orange River Tankers for sustainable transport
Orange River Cellars use Orange River Tankers (ORT) to transport their wine in bulk to
bottling facilities. All the ORT vehicles are fitted with real-time satellite tracking and in-cab
cameras and cellphone communication with all vehicles. In this way, fleet managers can
monitor driver behaviour and on-road risk, while maximising vehicle productivity and
utilisation. ORT became the first South African transport company incorporating the new
Iveco Stralis Hi-Way EEV (Enhanced Environmentally Friendly Vehicle). This technology is a
stepping stone towards Euro 6 emission levels.

11.4.2Outsourcing of logistics: third-party logistics

providers
Logistics is a non-core function for manufacturers. In order to focus on the core function
(manufacturing), organisations outsource their logistics function to third parties on a
contractual basis. Sometimes own logistics activities are not well managed because it is
not regarded as a core activity of the organisation. There may also be a lack of staff
knowledge, commitment and low morale of own personnel. In addition, own fleets are
often not sufficient, undercapitalised, old technology and not maintained. This may lead
to unreliable deliveries, poor customer service, increasing distribution costs due to poor
management decisions, a lack of vehicle utilisation, high carbon footprint and general
waste.
The emphasis on service excellence and reducing environmental impact is forcing
increased specialisation in the way the logistics system is operated. The example above
looked at the outsourcing of part of the logistics function of Orange River Cellars (ORC)
to Orange River Tankers (ORT). The cellars use the third-party provider, ORT, for
transporting their wine in bulk to the bottling plants. ORT specialises in bulk fluid
transport and own state-of-the-art vehicles in terms of productivity, safety and carbon
emission.
11.4.3Reverse logistics
Reverse logistics means the reverse flow of materials, products, packaging, scrap or
equipment backwards in the supply chain to be reused, refurbished, reconditioned or
recycled. It also includes the removal of waste to landfill. Reverse logistics management
forces organisations to consider different options in terms of the impact on the
environment.
The bottom line of reverse logistics is that materials or items must be transported in
the opposite direction from the customer or any place in the supply chain back to the
source of origin (manufacturing point) or to another site of disposal. Reverse logistics
includes the return of goods or materials during any stage of the supply chain process to
its source. This may include return of unsold goods to the supplier, product returns and
exchanges because of damage, incorrect orders or deliveries, warranties and repairs. This
also includes product recalls and waste management.
A reverse logistics process may also start with the end user’s decision that the product
has reached the end of its life and the materials need to be disposed of. These processes
may include:
•Asset recovery (use it for other purposes or sell it)
•Recycling management (send broken down or as is to recycling plants to recover
raw materials for other uses)
•Service parts planning (optimally and proactively managing parts for maintenance
service through a system)
•Returns (sending the item back to the supplier for replacement or credit)
•Repair management (moving items to a place where it will be repaired for reuse or
resale).

Process activities in reverse logistics

Process activities in reverse logistics can be grouped into three stages, namely (1)
product collection; (2) inspection, separation and sorting; and (3) recovery
and disposition. Let us look at each of these stages in more detail.
1.Product collection. Involves the collecting of used products, making them
available, and transporting them physically to some point where further treatment
is carried out. It includes functions such as purchasing, transportation,
consolidation, transhipment and storage. This stage involves all the logistic
activities in the reverse chain to obtain the products from the market and to
transport them back to the facilities.14
2.Inspection, separation and sorting. Returned or redundant products need to be
classified according to quality and composition in order to determine the route in
the reverse chain. The inspection, separation and sorting stage occurs at the
collection point where the products are inspected and sorted on the basis of their
quality and then separated, which entails splitting the flow (transport) of used
products according to their disposal options. This stage involves all operations
determining whether a given product is reusable and in what way. It may
encompass testing, disassembly, shredding and storage. After this stage, the
organisation must determine the reuse manner of the product and classify it in
order to move to the next stages of reprocessing, recovery and disposition. 16
Example
Recycling of tyres in South Africa in a ‘circular economy’15
A circular economy is one where we keep resources in use for as long as possible. A good
example of this is the tyre recycling project developed by the Recycling and Economic
Development Initiative of South Africa (REDISA).
The REDISA Integrated Industry Waste Tyre Management Plan (IIWTMP) was approved
by Environmental Affairs Minister, Edna Molewa, and published in the Government
Gazette (No. 35927) in November 2012. It supports and promotes tyre recycling, provides
the collection and depot infrastructure required to collect waste tyres from across the entire
country and deliver them to approved recyclers.
Tyre producers (manufacturers and importers) are charged a waste management fee of
R2,30 + VAT on every kilogram of new tyre rubber produced. The funds collected are then
applied to developing and supporting the collectors, storage depots, recyclers, and
secondary industries that make products from recycled output.
3.Recovery and disposition. This is the process of recovering value from the
returned product, components and materials. Product disposition refers to the
different ways organisations attempt to recover the costs of products that are being
returned. Disposition involves putting the product back into inventory or
temporary storage, repackaging, repairing, refurbishing or remanufacturing.
Disposition thus refers to the determination of ultimate outcome for the product.
Ultimately, final disposition refers to the exit route returned products finally take.
At the end of these processes, numerous disposition options are available to
organisations.17

Disposition options
Disposition options include return to the seller, reuse, resell,
redistribution, salvage, reconditioning, refurbishing, remanufacturing, recycling, d
onation and disposal, which may involve either incineration or landfill.
•Reuse. To reuse is to use an item again after it has been used. This includes
conventional reuse where the item is used again for the same function, and creative
reuse where it is used for a different function.
•Return to the seller. In this option, the organisation can return the product to the
supplier for a full refund. This could be the case where there was an incentive to
order larger quantities than normal and the buyer is allowed to return the additional
units that were not sold.
•Resell. In this option the product is sold again. The organisation has many options
in terms of reselling. Organisations can either sell the products as a whole or in a
demolished form. For example, they can sell the product to scrap dealers, where the
prices obtained may depend on the condition of materials or the organisation can
sell products that are of insufficient quality to a salvage company that will normally
export these products to foreign markets. The organisation can also opt to sell
products or materials to dealers, brokers and recycling plants. If the product has not
been used, the organisation can resell the product either to a different customer or
an outlet store. Another option that the organisation can make use of is to sell
surplus materials to employees.18
•Redistribution. Redistribution is distributing reusable products to potential markets
or future users. In other words, redistribution means directing reusable items to a
market or to new markets, and physically moving them to potential new users. In
addition, redistribution can also take place where the organisation plans to sell the
recycled product, but it is essential for the organisation to determine whether or not
there is a market for the recycled products. 19
•Salvage. Salvage is closely related to redistribution where a product is sold to a
broker or some low-revenue customer. However, salvage items have been used or
damaged, and can no longer be sold as new. In salvage, items lose value relative to
the amount of use or damage and the most difficult part of managing salvage is
determining the item’s value. Any valuable materials that can be reclaimed will be
salvaged before the remainder is sent to landfill. 20
•Reconditioning. Means to restore something to a good condition through repairs or
restoration, for example, a watch. Reconditioning is almost the same as
refurbishment.
•Refurbishment. The distribution of products (usually electronics) that have been
previously returned to a manufacturer or supplier for various reasons. Refurbished
products are normally tested for functionality and defects before they are sold. The
products are repaired by the manufacturer and resold. The main difference between
‘refurbished’ and ‘used’ products is that refurbished products have been tested and
verified to function properly, and are thus free of defects, while ‘used’ products may
or may not be defective. Refurbished products may be unused customer returns that
are essentially ‘new’ items, or they may be defective products that were returned
under warranty, and resold by the manufacturer after repairing the defects and
ensuring proper function.
•Remanufacturing. This option is similar to reconditioning and refurbishing but
requires even more extensive work and repairs and often requires complete
disassembling. The process of remanufacturing consists of collecting a used product
or component from the field, assessing its condition, and replacing worn, broken, or
obsolete parts with new or refurbished parts. Remanufacturing is the process of
returning used products to at least the original equipment manufacturers’ (OEM’s),
original performance specifications from the customers’ perspective and giving the
resultant product a warranty that is at least equal to that of a newly manufactured
equivalent.
•Recycling. The reduction of products to their basic elements, which are then reused.
Recycling is the process of collecting used products, components, and/or materials
from the field, disassembling them, separating them into categories of like materials,
and processing them into recycled products, components, and/or materials. Another
description of recycling is the process by which materials that would otherwise
become waste, are collected, separated or processed and are returned to the
economic mainstream to be reused in the form of raw materials or finished goods.
Organisations can recycle when the product is broken down and ‘mined’ for
components that can be reused or resold.
•Donation. Sometimes organisations decide to give the returned products to charity
organisations without receiving any compensation for these products. As a rule,
organisations make use of this option because they pride themselves on being good
corporate citizens and feel that it is important to support charities.
•Disposal. Disposal is required for products that cannot be reused for technical or
cost reasons. This would apply to products rejected at the separation level owing to
excessive repair requirements but also to products without satisfactory market
potential owing to obsolescence.
•Landfill. A landfill is a site for the disposal of waste materials by burial, such as a
dumping ground, or a place of processing waste material, including sorting,
treatment and recycling.
•Incineration. Incineration is a waste treatment process that involves the
combustion of organic substances contained in waste materials. Incineration and
other high- temperature waste treatment systems are described as ‘thermal
treatment’. Incineration of waste materials converts the waste into ash, flue gas, and
heat. (Flue gas is usually composed of carbon dioxide (CO2) and water vapour as
well as nitrogen and excess oxygen remaining from the intake combustion air. It also
contains a small percentage of pollutants such as particulate matter, carbon
monoxide, nitrogen oxides and sulphur oxides.)

The reverse logistics activities and options are shown in Figure 11.2.

Figure 11.2: Reverse logistics activities and options

Source: Badenhorst A. 2013. Best practices in reverse logistics. Unpublished dissertation. Unisa.
11.5Conclusion

Green supply chain management consists of green procurement and materials

management (discussed in Chapter 10), green production, green logistics and reverse
logistics. Reverse logistics closes the loop in supply chain management and includes
reuse, remanufacturing and recycling to create value in the marketplace.
Sustainable or green production includes clean and mean production methodologies,
product design with the environment impact in mind, total quality environment
management and various end-of-life practices. On the distribution side of the supply
chain, the focus is on green marketing and environmentally friendly packaging (refer
to Chapter 13), warehousing and transportation. Transportation has a major influence on
the environment in terms of carbon footprint. Strategies to limit the environmental
impact include mode selection (for example, rail instead of road), fuel sources, routing,
scheduling and working towards the limitation of half-loads and empty backhauls.
Logistics and transport decisions are complicated because numerous aspects must be
taken into account and many trade-off options are available to optimise logistics
decisions. Logistics is a very specialised area. For this reason, many manufacturers and
retailers outsource part or all of its logistics to third-party logistics (3PL) providers.
One of the areas of logistics that is often regarded as the most important contributor
to environmental responsibility is reverse logistics. The aim of reverse logistics is to find
the most efficient ways to return materials or products back to the source for further
action. The aim of sustainability in supply chains revolves around the five Rs, namely
reduce, reuse, remanufacture, recondition and recycle. The last four Rs are in the domain
of reverse logistics.
In the next chapter (Chapter 12), we will look at the human resource function in
corporate citizenship. Chapter 13 will explain the final element of the sustainable supply
chain, namely marketing management.
Example
Ten priorities
SABMiller is regarded as a leader in embedding sustainability into its operations. In June
2010, SABMiller (SAB’s parent company) brought aspects of its sustainable development
projects and priorities together under the banner ‘Ten Priorities, One Future’. With this,
sustainable development is integrated into the day-to-day operations of the business.21
The ten priorities are:
1.Making more beer using less water
2.Discouraging irresponsible drinking
3.Reducing energy use and carbon footprint
4.Reducing the weight of packaging, reusing bottles and encouraging recycling
5.Working to zero-waste operations
6.Building supply chains that reflect the company’s values and commitment
7.Benefiting its communities
8.Contributing to the reduction of HIV/Aids
9.Respecting human rights
10.Transparency in reporting the company’s progress.

Multiple-choice questions
1.Which one of the 5 Rs has Coca-Cola adapted as strategy and which one of the Rs
was the outcome?
a.recycling; reduce
b.repair; redistribute
c.reduce; reuse
d.recover; refurbish

2.Which one of the following statements is correct?

a.The sustainability of Toyota’s suppliers means only that they have to survive
to ensure future supply.
b.Early supplier involvement is a practice used for all purchased products at
Toyota.
c.With lean manufacturing, workers become only a gear in the Toyota
Production System.
d.Long-term relationships means that suppliers are always assured of orders.

3.Which one of the following is not part of the Toyota Production System?
a.waste elimination
b.just-in-time
c.continuous improvement
d.automation

4.An organisation such as SAB’s responsibility with regard to corporate governance

does not start and end at the boundaries of the organisation because _____ .
a.it must encourage all stakeholders to uphold the guidelines of the King
Reports
b.it must act as regulator in the supply chain because of their powerful position
c.it must take responsibility for alcohol abuse in the country
d.it must develop their suppliers

5.Broad-based black economic empowerment in SA Breweries forms part of the

_____ dimension of corporate social responsibility.
a.human rights
b.community development
c.diversity
d.ethics
e.financial responsibility
Discussion questions
1.Discuss the different options end users have to dispose of products, items or
equipment at the end of their life cycle.

2.Discuss the key features of a sustainable production system.

3.Discuss different trade-offs in logistics management from an environmental point

of view.

References
1.SABMiller. 2015. [Online]. Available: http://wwwsabmiller.com/docs/default-
source/stories-files/keeping-sa’s-taps-running/about-the-strategic-water-
partners-network [4 January 2015].
2.Spear, SJ & Bowen, HK. 2006. Decoding the DNA of the Toyota Production System.
Harvard Business Review on Supply Chain Management. Boston: Harvard Business
School Press.
3.Glauser, EC. 2005. The Toyota Phenomenon. The Swiss Deming Institute. CH-
8126 Zumikon, 1st April 2005. [Online]. Available: http://www.deming.ch [31
August 2011].
4.Jacobs, FR & Chase, RB. 2008. Operations and Supply Management. The Core.
International Edition. Boston: McGraw-Hill. p. 404.
5.Wisner, JD, Tan, KC, Leong, GK. 2012. Supply Chain Management. A Balanced
Approach. International 3rd edition. Australia: Thomson South-Western. p. 13.
6.Jacobs, FR & Chase, RB. 2011. Operations and supply chain management. 13th
edition. New York, McGraw-Hill, p. 328.
7.Rudansky-Kloppers & Strydom. 2015. Business Cases Book. Cape Town, Oxford.
8.Wisner, JD, Tan, KC & Leong, GK. 2012. Supply Chain Management. A Balanced
Approach. International 3rd edition. Australia: Thomson South-Western. p. 117.
9.Toyota South Africa. 2013. Sustainability Report 2013.
10.Ibid.
11.Ibid.
12.Sheqafrica.com. 2012. [Online]. Available: http://sheqafrica.com/trucking-fleet-
emissions [4 January 2015].
13.Hugo, WMJ & Badenhorst-Weiss, JA. 2011. Purchasing and supply management.
6th edition. Pretoria, Van Schaik, pp. 178–9.
14.De Brito & Dekker, R. 2003. A framework for Reverse Logistics. ERIM Report
Series, Erasmus University Rotterdam; Yimsiri, S. 2009. Designing multi-objective
reverse logistics network using genetic algorithms. PhD thesis. University of Texas,
Arlington.
15.REDISA. 2016. Government Gazette No. 35927. [Online].
Available: http://www.redisa.org.za/Satellite/REDISAplan,0.pdf; http://www.redi
sa.org.za/Satellite/Waste_Tyre_Regulations.pdf [19 September 2016].
16.Ji, G-J. 2008. Reverse logistics operation management based on virtual
enterprises and complaint service management. Journal for Service Science and
Management, (1).
17.Stock, JR &Mulki, JP. 2009. Product returns processing: An examination of
practices of manufacturers, wholesalers/distributors, and retailers. Journal of
Business Logistics. 30(1):33–63.
18.Hugo, WJM, Badenhorst-Weiss, JA & Van Biljon, EBH. 2004. Supply Chain
Management: A logistics perspective. Van Schaik.
19.Fleishman, M, Krikke, HR, Dekker, R & Flapper, SDP. 2000. A characterisation of
logistics network for product recovery. Omega, 28(6):653–666.
20.Rogers, DS &Tibben-Lembke, RS. 2001. An examination of reverse logistics
practices. Journal of Business Logistics, 22(2):129–148.
21.SAB. 2015. SAB Committed to Sustainable Development. [Online].
Available: http://www.sab.co.za/sablimited/action/media/downloadFile?media-
field+778 p. 1. [4 January 2015].
chapter
The human resource function
and corporate citizenship
Anton Grobler 12
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Describe corporate citizenship within the context of the human resource (HR)
function
•Understand the impact of corporate citizenship on the traditional HR functions of
human resource planning, staffing (recruitment and selection), development of
human resources, utilisation of human resources, career development,
recognition and rewards, employee health and wellness, occupational health and
safety, and employee relations
•Think critically about the HR added-value debate and how it relates to corporate
citizenship
KEYWORDS AND CONCEPTS
-career development
-corporate citizenship
-development of human resources
-employee health and wellness
-employment relations
-human resource function
-human resource planning
-occupational health and safety
-recognition and rewards
-staffing (recruitment and selection)
-traditional HR functions
-utilisation of human resources

OPENING CASE SCENARIO

The XYZ corporate merger, an HR quandary and corporate citizenship

challenge
The merger of corporates X (32 000 employees), Y (8 000 employees) and Z (6 500
employees) took place in 1994, resulting in the formation of a new entity, XYZ. It
was, to a large extent, a political decision to join forces after the 1994 elections in
South Africa (SA). The rationale for the merger was to create a new entity and
enlarge the corporate geographical footprint in SA.
In order to make XYZ more effective and efficient, rationalisation took place
whereby redundant personnel could lose their jobs (rationalisation is often used as a
euphemism for firing employees). This had to be addressed (negotiated) and
managed on a reactive basis as limited planning took place before the actual
merger. Senior management of the new entity, HR functionaries and organisational
study practitioners were asked to minimise job losses, however redundancies and
subsequent rationalisation was a reality. The scope of the rationalisation and the
elimination of duplicate functions (mainly in the over-resourced administration
component of the different units) resulted in an over-supply of mostly administration
staff in the new entity (XYZ).
The trade unions or employee representatives were not involved in the decision-
making process leading to the merger. They were, however, involved with the
consequent management process during the implementation phase. Some of the
HR-related issues to be managed during the implementation phase were to
harmonise (align) the three different entities’ HR policies and processes. This
included the different salary and remuneration policies, structural and resource
configurations, leadership and corporate cultures and varying standards for physical
facilities and resources.
The examples provided throughout this chapter will be based on this broad
scenario, with each example providing more insight into the realities faced by XYZ,
and the corporate citizenship dilemmas associated with it.
12.1Introduction

In Chapter 1, corporate citizenship was defined as the:

‘role of the corporation in administering citizenship rights for individuals.’ 1

In this chapter, the role and responsibility of the human resource (HR) function will be
discussed, focusing mainly on the employee and employee-related stakeholders, such as
unions and occupational professional bodies. Chapter 1 further indicated that corporate
citizenship is about the roles that corporates play in administering citizenship rights to
citizens (from an HR perspective – the employees).
It is accepted that the HR function has a very important role to play in the formulation
of a corporate strategy, especially in terms of corporate citizenship, for business, legal
and values-based reasons. The functions of HR should be transformed from basic
transactional functions (performing the traditional HR functions like administration)
to key stakeholder functions. The HR functionaries are tasked with formulating and
achieving environmental and social goals within the context of the broader corporate
performance, while balancing the corporate objectives with traditional financial
performance metrics. The spirit of corporate citizenship should be seen as a stand-alone
concept, but it should be embedded in the corporate climate and culture and
subsequently in the HR policies, processes and practices as well. A typical example is the
alignment of the code of ethics (which will partly serve as an internal control mechanism
for all HR functions, mostly the responsibility of the ethical officer) with the principles of
corporate citizenship.
HR-related literature propagates the critical importance of the HR function in the
institutionalisation of policies, processes and practices that support corporate
citizenship, where the business objectives are assessed and values are re-aligned to
corporate citizenship principles. It is widely accepted that the HR function should be an
active role player in the formulation of corporate values and a sustainability strategy. This
is regarded as a higher order corporate citizenship function of HR, but the HR
functionaries also have a functional corporate citizenship responsibility, where they
should ensure the fair, transparent and consistent application of strategies, policies,
processes and other practices across the corporate. This will result in a motivated and
engaged workforce characterised by value congruence (shared values between the
employees and the corporate), trust and the necessary skills to achieve the corporate’s
goals and objectives in a mutually satisfactory manner. The HR function should therefore
constantly review its own decree and alter the way it accomplishes congruence between
core HR functions and corporate citizenship. Each of the core HR functions, and their
relation to corporate citizenship will be discussed in this chapter. See Figure 12.1 for a
depiction of the typical range of HR practices.
12.2Corporate citizenship within the HR context
One of the most important aspects of corporate citizenship is sustainability. Figure
12.2 represents HR’s role in corporate sustainability. The word ‘sustainability’ can be
replaced with ‘corporate citizenship’ in this figure (for the sake of illustration, as it often
has the same corporate outcomes), as the implication for the HR function is basically the
same.
Figure 12.2 depicts the role of the HR function in sustainability (in the context of this
chapter – corporate citizenship), and it is clear that the responsibility of the HR function
is to implement practices that support and facilitate corporate citizenship. ‘In other
words the responsibility of the HR function is to implement practices that support and
facilitate the ability of the corporate to administer citizenship rights to its employees and
other stakeholders’. Aspects that need emphasis are corporate leadership, that sets the
example, as well as culture, as this informs the alignment of policies, processes and
performance to the corporate’s citizenship values. Typical policies that need to be aligned
to the corporates’ citizenship values are, for example, the performance management
policy and the training and development policy to empower employees and to ensure a
motivated and satisfied workforce with a high morale. All of these should be based on the
notion of responsible, transparent and consistently applied practices within the
corporate. Most HR practices (including the policies, processes and the way it is
operationalised), often serve as a catalyst to create a corporate culture that subscribes to
corporate citizenship principles and ultimately becomes entrenched in the corporate
values. HR practices that adhere to corporate citizenship principles allow a corporate to
gain additional benefits such as improving its public image, increasing employee morale,
and therefore gaining support from the community.

Figure 12.1: HR practices covered in this chapter

Source: Adapted from Noe, R, Hollenbeck, J, Gerhart, B & Wright, P. 2012. Human resource
management: Gaining a competitive advantage. 8th edition. New York: McGraw-Hill. © 2012.
Reproduced with the permission of McGraw-Hill Education.

Figure 12.2: Suggested sustainable corporate roadmap – the HR function’s contribution

Source: Cohen, E, Taylor, S & Muller-Camen, M. 2012. SHRM Foundation’s Effective Practice
Guidelines Series: HRM’s Role in Corporate Social and Environmental Sustainability. Originally
published as ‘Possible Sustainable Organization Roadmap Showing the HR Contribution’ by
Cohen, E, Taylor, S & Muller-Camen, M. © 2012, the SHRM Foundation, Alexandria, VA. Used
with permission. All rights reserved.
The notion that what ‘gets measured gets managed’ is a popular notion in general
business management literature, and this notion was also emphasised in Figure 12.2. It
is important for the HR function to develop an action plan, scorecard and measurement
system that is fundamentally based on the corporate citizenship principles and values.
General HR metrics, such as turnover, health and safety, employee development and
diversity, for example, can be additional metrics which reveal the corporate citizenship
commitment and the degree to which the corporate walks its talk.
Furthermore, it is important to have an official reporting system in place, and to infuse
the results with all initiatives to improve the services rendered by HR. These
improvement initiatives should be well documented, managed through clearly assigned
roles and responsibilities, monitored and reported on regularly.
It is important to interpret corporate citizenship, and specifically the role of the HR
function’s role in it from the so-called interactionistic approach (multidirectional
interaction or feedback between the employee and the corporate). Many arguments are
skewed because of an over-emphasis on the business case perspective (utilitarian
approach), neglecting the value-base perspective (deontological approach), and vice
versa. To simplify this, it is explained through the two approaches (utilitarian and
deontological) that are relevant to all the HR practices. 2 The utilitarian approach is based
on the theoretical underpinning of psychological need fulfilment, in other words, an
employee has a skill set required by a corporate, and consequently the corporate offers
the rewards that the individual needs/wants. This is usually regulated and monitored
through compliance to the employment contract, as well as HR processes such as
performance management. In other words, the individual has the correct skills, attitude
and ability to do what is expected, and the corporate remunerates accordingly. This
transaction is often related to the question ‘what?’ (what is needed by each of the role
players).
The deontological approach, a very important aspect of corporate citizenship, mainly
focuses on the ‘how?’ This is related to value congruence between the individual and the
corporate, the subjective experience of ‘how’ these HR practices are implemented. This
transaction is often based on unwritten rules, bi-directional expectations and congruence
(similarity) between the employee and the corporate’s values, morals and principles. This
aspect of corporate citizenship is mostly ‘regulated’ by the notion of the psychological
contract, which could be defined as the relationship between an employer and its
employees, and specifically concerns mutual expectations of inputs and outcomes. In
management, economics and human resource management, the term ‘the psychological
contract’ commonly and somewhat loosely refers to the actual – but unwritten –
expectations of an employee or workforce towards the employer. 3
DILEMMA
Rationalisation and possible job losses are a reality and it can be justified from a labour law
and business perspective. However, does rationalisation and the resultant job losses adhere
to the expectations of the employees, in terms of the stability value of the corporates and the
job security of their employees? This is clearly a breach of the psychological contract. The
dilemma lies in the weight of the business/legal case perspective (based on economic and
financial principles) versus the value-based perspective.
The psychological contract is an important component of corporate citizenship, as it is
a good way to understand the behaviour of employees in the workplace. It is critical that
HR functionaries (especially the recruiters and interviewers of prospective employees),
managers and mentors should play a pivotal role in accurately communicating the
reciprocal obligations of employers and employees, but in particular, what the corporate
expects from employees.
Example
The ‘employment contract’ and the ‘psychological contract’ – both essential to
corporate citizenship, but which one supersedes the other?
This example expands on the case scenario presented at the beginning of this chapter. The
management of X, Y and Z decided that a merger would be the best option as these three
corporates were perceived as very conservative, stable corporates that meet the job security
needs of their employees. This message was emphasised during the recruitment process,
people were again reminded of job security as the corporate’s primary
characteristic/advantage during the induction phase/process. However, this agreement was
not included in the written employment contract, it therefore formed part of the unwritten
expectations of employees (the psychological contract).

12.3Human resource planning and corporate

citizenship
Strategic HR management forms part of the HR planning function even though it was not
included in Figure 12.1. Strategic HR management is the overarching process to establish
a pattern of planned human resource practices (including policies and processes)
intended to enable the corporate to achieve its goals. It is essential that corporate
citizenship and the principles underlying corporate citizenship be regarded as the
foundation for the choice of strategy, the actual HR strategy formulation (the ‘what?’) and
implementation (the ‘how?’). This is a higher order function that directly depends on the
corporate’s leadership, culture and values. For the purpose of this chapter, we focus on
the HR practices (see Figure 12.1) within the context of corporate citizenship, starting
with the human resource planning practice.
Human resource planning is usually one of the practices that follow and is dependent
on the corporate’s strategic formulation process. The human resource planning process
must, however, not be seen as a reactive process (as it is dependent on the higher
corporate functions such as strategic management processes). The human resource
planning process should rather be seen as an aligning function. Human resource planning
is also a proactive function, where the corporate considers the implications of its strategic
direction on its human resources, consisting of current employees as well as future
human resources needed to achieve the corporate’s goals. This planning is based on an
internal and external environmental scan, where an analysis of the current situation
together with projected changes in the industry, technology, economy, society and the
legal landscape is considered. This analysis process is based on assumptions, trend
projections and flexibility to quickly adjust plans when unavoidable and unpredictable
challenges occur; this is an indispensable component of sustainability. Human resource
planning is especially important in volatile times, where rapid changes might take place
and flexibility/adaptability and nimbleness of the corporate determines its success.
The key objective of human resource planning is to ensure the
appropriate staffing level (eliminate under- or over-staffing and under- or over-
representation of specific demographic groups in accordance with the employment
equity plan), having the right type of employees in terms of their skills and abilities at the
right time and at the right place. Human resource planning further serves as a mechanism
to respond to changes (internally and externally) and it serves as a basis for all the other
HR practices. Human resource planning serves as a uniting function between senior
management, the HR functionaries, line management and all employees in terms of the
implementation of the corporate strategy and ultimately the overall performance of the
corporate.
Example
Employment Equity (EE) as an important component of the human resource planning
function in accordance with the Employment Equity Act 55 of 1998
This example expands on the case scenario presented at the beginning of this chapter. A
typical element in the human resource planning process is employment equity
considerations. The race composition of the employees of the separate X, Y and Z
corporates was very diverse, mainly because of the location (geographic reality) of the
respective corporates. The one corporate (X) had mainly white employees, while the Y and Z
corporates had mainly African employees. The separate entities justified the skew race
composition in terms of geographical environment as well as their client based
characteristics, but as a national corporate, XYZ has to adhere to the Employment Equity
Act in terms of a representative workforce even on unit (functional/geographical) level. This
analysis has been included in the human resource planning process, on corporate but also
on business unit level, and the necessary HR functions aligned to move towards the planned
(ideal) situation adhering to the Employment Equity Act requirements.

DILEMMA
The dilemma is about the ‘what?’ and the ‘how?’ and will largely be determined by the
corporate’s values and its adherence to the basic corporate citizenship principles. The
dilemma is that XYZ must adhere to the Employment Equity Act (even down to business unit
level), and progress will be monitored by the Department of Labour. The ‘what?’ dilemma is
that employees should be migrated to ensure an equitable race distribution on all levels, the
‘how?’ is more concerned with the processes to obtain this equitable representation. Options
that HR functionaries can consider are forced transfers, voluntary severance packages for
employees belonging to the over-represented groups, layoffs, early retirements, etc. The
dilemma stems from the relative importance of the human resource plan compared to an
underlying corporate citizenship value of employee centredness.

12.4Staffing
(recruitment, selection and
appointments) and corporate citizenship
The HR practice that directly supports the human resource plan is the staffing function.
This is a collective name for the recruitment and selection as well as the appointment
processes. Recruitment is a process aimed at the identification and attraction of potential
employees that complement the human resource plan in terms of their characteristics
(for example, race, gender, age) as well as skills, abilities and knowledge. This is an
expensive process, aimed at attracting enough suitable potential employees to undergo
the selection process of the corporate. The use of optimal, as well as fair, recruitment
media (advertisements) is related to corporate citizenship, as the process should be
inclusive (reaching all prospective applicants in an unbiased way). The decision on the
recruitment methodology and techniques is very important, and is also a corporate
citizenship consideration (see the following example and dilemma). There are different
sources of recruitment, including the corporate’s internal recruitment capacity in the HR
department, the utilisation of printed media, television and radio, the internet,
recruitment agencies, etc.
The next step in the staffing process is the selection of the best-suited candidates to be
appointed to the target position. The selection is based on the necessary knowledge,
skills, abilities and other characteristics that will support the corporate strategy. The
corporate citizenship component of this highly contested function resorts in the fairness,
transparency, scientific and legal justification of the process and all the techniques used.
The selection process should not discriminate unfairly against any person, and should be
designed to only discriminate fairly. Fair discrimination is justifiable as it identifies the
most suitable individual for the targeted job (differentiate between the better-suited and
the less-suited candidates) based on the inherent requirements and subsequent
performance criteria for the targeted job. The techniques used in the selection process
(for example, interviews, simulations, psychometric tests, reference checks, etc.) should
all adhere to the minimum reliability and validity requirements, and should enhance the
bottom-line effectiveness of the corporate (criteria of utility).
The selection practices have direct legal and corporate citizenship considerations.
Legally, the corporate must be able to prove compliance with the relevant legislation and
professional regulations and prescripts (for example, the use of psychometric tests by the
Health Profession Council of South Africa), and this compliance is generally easy to
measure and monitor. The corporate citizenship component connects with the ‘how?’ in
terms of the conduct of the recruiters and functionaries responsible for the actual
selection process (for example, interviewers). Trained, specialised and knowledgeable
individuals are needed to perform the recruitment and selection function in the
corporate, as it does not only impact on the image of the corporate as an employer, but
may also have legal consequences if done incorrectly. A further aspect is to communicate
directly, honestly and accurately with regards to the nature of the corporate as well as
the targeted job, as it creates expectations that may pose a corporate citizenship dilemma
in terms of perceived breach of the psychological contract.
Example
Recruitment of new employees for XYZ
This example expands on the case scenario presented at the beginning of this chapter.
Based on the human resource plan of XYZ, it was decided to go on a national recruitment
drive to appoint new, young employees. These employees will undergo training in the
corporate’s newly established training centre. The main reason for the recruitment drive is to
mitigate the risk posed by an aging workforce as well as employees with outdated
knowledge and experience. The aging workforce will gradually be replaced by new recruits
through a process of natural attrition (current employees retiring) or interventions discussed
in the previous example, for example, voluntary severance packages.

DILEMMA
The dilemma in this example is once more about the ‘what?’ and the ‘how?’ as this impacts
directly on the corporate’s ability (and willingness) to adhere to basic corporate citizenship
principles. The biggest dilemma is in the ‘how?’ and specifically the recruitment medium.
Many of the prospective applicants are from the rural areas, without the necessary
technological support, eliminating a solely technological (IT)-based recruitment drive (for
example, via the internet). Many of the prospective applicants do not have access to the
printed media, in other words, newspapers and fliers, and this fact must be considered. The
use of recruitment agencies (an outsourced function) poses an ethical challenge, in terms of
fees that will have to be paid by the applicants. This is not only a ethical challenge, but it also
skews the applicant pool towards those applicants in more favourable (urban) geographic
locations. The dilemma is how XYZ can reach the majority of the prospective applicants, in a
fair, transparent and inclusive manner, and importantly with a clear message about the
specifications (inherent job requirements) of the entry level positions (without creating
unnecessary expectations from unqualifed individuals). Business considerations are first the
high costs involved in recruitment, and second the lengthy time to do a proper recruitment
drive. ‘Time is money’, and the longer a recruitment drive takes, the more expensive it
becomes. This longer process will also influence the adjustment of XYZ to the internal and
external environment, which may have serious long-term performance implications.

12.5Development of human resources and

corporate citizenship
The development of human resources, referred to as training and development from
here onwards, is a function of HR, designed to ensure that the corporate has employees
in place that have the necessary capabilities to contribute towards the corporate’s
strategy and goals. It usually consists of a wide array and combination of interventions to
help employees perform in their jobs. This function is closely related to talent
management, being one of the generally accepted pillars with attraction, deployment and
retention. It further serves as an important contributor to retention, as employees value
the investment made in them through the (very often) expensive developmental
interventions. It further serves as a process to ensure (or at least enhance) the fit between
the corporate, not only in terms of work-related capabilities (skills, ability and
knowledge), but in terms of the institutionalisation of shared values (value congruence).
Typical training and development interventions are on-the-job training, which is a
planned and structured intervention, often on a one-on-one basis. A further extension of
on-the-job training, is action learning, often project-driven, based on the principles of
continuous learning. Self-reflection is very important for action learning, and therefore it
is facilitated by means of small group participation. A third intervention is work-based
learning that is mostly self-directed and supported by a mentor. A fourth intervention is
coaching and mentoring, where employees are individually empowered with the main
focus on the achievement of career goals. Mentors are usually from inside the corporate
while coaches could be sourced from outside.
The most common training and development intervention is instructor-led learning,
based on specific (job-related) training outcomes. An additional intervention is
education, mostly hosted by external institutions, such as universities and colleges. The
intervention of education is usually accredited and can assist employees to obtain a
formal qualification. With the introduction of technology in the HR domain, the popularity
of e-learning and blended learning has increased. Computer-based learning and blended
learning became a very important intervention based on the different modes of delivery.
E-learning (or electronic learning) refers to learning conducted via electronic media,
typically the internet. A blended learning approach refers to learning conducted via the
traditional printed media combined with electronic learning. The choice of learning mode
(as explained above) would also contribute to the notion of corporate citizenship, as it
provides alternatives for employees in terms of their development. They could, for
example, decide on the mode of training based on their individual needs and their
personal realities, for example e-learning instead of classroom training, which often
necessitates being away from home for the duration of the training. It further may lead to
the so-called self-regulated learning, where employees will schedule their training
activities according to their programmes and schedules, for example, in accordance with
their after-hour family responsibilities.
The training and development function is also often tasked to facilitate the
institutionalisation of corporate values and norms. This occurs from the onset, with the
induction and orientation of newly appointed employees, and is seen as a very important
component of adjustment, and ultimately the retention of employees. The training and
development programmes should be designed in such a manner that the corporate
commitment towards corporate citizenship and its related philosophy and values is
highlighted. The leadership commitment and the commitment of the corporate’s top
management towards corporate citizenship needs to be introduced and reinforced in a
very responsible manner, in each of the training and development interventions. This will
enhance value congruence and the formalisation of acceptable behaviour, aligned to the
corporate’s philosophy of corporate citizenship and a conducive culture.
The corporate citizenship philosophy and values could further be institutionalised in
a more tangible manner, for example, by drafting and implementing employee codes of
conduct. This is an ideal opportunity to express the corporate’s commitment to
administer citizenship rights for employees, which will guide decision making in the
corporate on all levels. The code of conduct is a document that will bind all employees
together. As such, it is a key instrument for cultural integration of the corporate
citizenship philosophy and values.
In order for this function to adhere to broad corporate citizenship values and criteria,
it must be delivered in a fair and transparent manner (accessible and available to all
employees), it should be linked with the employee’s career path and ambition, and lastly,
there should be a balance between the role/job specific development as well as lifelong
competence.
Example
Recruitment of new employees for XYZ
This example expands on the case scenario presented at the beginning of this chapter. The
human resource plan of XYZ identified serious skill shortages in certain core areas within the
corporate. These shortages will gradually be filled through the staffing process discussed
previously, but a short-term intervention is required. Training and development of current
employees has been identified as a solution. An invitation was sent out to all employees,
inviting them to attend a training intervention, with the possibility of a career change, should
they complete the training successfully. The response from employees was very poor,
resulting in management instructing HR functionaries to identify (force) employees to attend
the training for six months at a centralised training centre.

DILEMMA
The dilemma stems from the fact that the corporate regards this training as compulsory, and
for the majority of the employees, it will be away from their residences, creating some
personal challenges (including family problems). Many of the employees are now forced to
attend training that is not related to the work they were initially appointed for, resulting in a
perceived breach of the psychological contract. It is also not aligned with their career
aspirations and goals, and they perceive that the corporate wants to impose a career change
on them. The dilemma is how to balance the corporate’s needs (the need for skills) with that
of the employee’s needs – a corporate citizenship quandary. A possible solution (as
discussed in the text) is to consider different modes of training, for example, online or e-
learning. This would then allow and encourage employees to become involved in the training
activities when it suits them best. It can, for example, be scheduled after hours and over
weekends in accordance with each employee’s personal circumstances, for example, family
responsibilities.

12.6Utilisationof human resources and corporate

citizenship, including performance management
Human resource utilisation is a collective term for many HR practices, including the
design of work and work systems, continuous adjustment of work in accordance with
internal as well as external demands, the formalisation of the contract between an
employee and the corporate (tangibly, what is expected by the two parties) by means of
job descriptions and performance contracts.
In a previous section of this chapter, the complexity of the subjective judgement of the
psychological contract (not necessarily facts, but how the individual feels) was discussed.
Human resource utilisation, on the other hand, is the formalisation of work expectations
from both the corporate and the employee. It is very important that a corporate allocate
specific tasks and responsibilities to employees, and that it be formalised through job
descriptions (the ‘what to do’) and performance contracts (the ‘how to do it’). This will
ensure that employees have a manageable workload, and that they are not overloaded or
overwhelmed by the type of work or the amount of work they need to do. Effective human
resource utilisation will ensure the alignment of the effort put in by employees and the
optimisation of the investment in the human resources by the corporate. It will also
ensure the realisation of the corporate vision, mission and goals. On an individual level,
well-designed work systems will keep employees productive but also motivated. The
most important challenge in designing work systems well, is to get an optimal fit between
what the corporate expects and what the employee expects. As discussed earlier, this
transaction is theoretically underpinned by psychological need fulfilment (the
psychological contract).
The work design also contributes to many other areas of the management of human
resources, for example, the allocation of job titles, job grades (based on the relative worth
and status of the job within the corporate) as well as the applicable compensation.
Human resource utilisation is a very dynamic HR practice and therefore should
constantly be reviewed. Jobs are changing due to internal and external realities:
internally, because of restructuring, mergers, new products or services and externally,
due to changes in legislation, technology, etc. Human resource utilisation is a very
important aspect of corporate citizenship, as it highlights the employees’ job expectations
as well as the mutual agreement between the two parties on what is really expected from
each other. There are two basic systems or processes that regulate this agreement,
namely the job description and the performance contract.
The job description is based on a job analysis, which is a systematic process to
determine the exact tasks, responsibilities, competencies and the context (for example,
reporting lines) of the specific job. The format of the job description will differ between
corporates, but must contain certain minimum information, such as the purpose and
scope of the job, the tasks associated with the job (the ‘what has to be done?’ information).
Certain corporates also include the person specification (competencies and individual
characteristics required to successfully perform in the job) in the job description, and this
is about the ‘who does it?’
Human resource utilisation is a very dynamic process as roles, departments and job
requirements evolve constantly. These changes mean revising job descriptions. Job
descriptions are the tangible agreement between the corporate and the employee on
what is supposed to be done, and how it fits into the broader corporate in terms of the
hierarchical level, reporting structures, compensation, etc. This agreement must be very
specific, and no room should be left for interpretation or discretion, for example, the
popular last task on the job description that states ‘or any additional task allocated by
the supervisor/management’. Although the job description is dynamic, employees should
be protected against exploitation, vague and ambiguous information in the job
description should therefore be eradicated. As the job description is the formal
agreement between the parties, non-adherence as well as disregarding the updating or
revising thereof poses serious corporate citizenship challenges.
The second human resource utilisation tool or process is performance management.
Performance management and specifically the performance contract is highly dependent
on the work design process and specifically the job description. The purpose of
performance management is to manage individual performance to ensure that it is
consistent with the corporate’s needs. A very important aspect of performance
management (including the performance contract) is that it is accepted and understood
by all parties (employees and supervisors), and most importantly, that it can be justified
in terms of the corporate goals. The performance management system entails the set of
performance expectations, the review of performance results, the assessment of
individual and corporate needs and strategic planning. Performance management is
usually done on a six-month or annual cycle. Performance management is thus a two-
sided approach, whereas performance appraisal and evaluation is a one-sided
judgemental approach.
Performance management has serious implications for corporate citizenship, not
necessarily on the ‘what?’ but rather on the ‘how?’ systems level. The question is whether
it is regarded as purely an evaluation tool (one-sided and based on the corporate’s needs)
or is it regarded as a developmental tool (two-sided, and focused on improvement and
better alignment and fit).
Example
‘Uncontracted work’
This example expands on the case scenario presented at the beginning of this chapter. The
HR planning process identified a serious shortage of skills in certain core areas of the
corporate. As a result, management has decided that certain employees must take on
additional responsibilities until the shortage gap has been addressed. The gap will eventually
be met by newly appointed employees (a process that is underway, but that may take up to
12 months to complete) or the employees that were sent for training (six months training).
The management of XYZ decided to add a task (in a standard phrase) in the job description
for each employee stating ‘or any additional task allocated by the supervisor/management’ to
cover the additional work allocated to employees.

DILEMMA
The dilemma stems from the fact that employees are now expected to do work that is not
part of their agreement with the corporate – the signed job descriptions and performance
contracts. Can the ‘or any additional task allocated by the supervisor/management’ be
regarded as part of the agreement between the corporate and the employees even though
they were not consulted, their performance contracts were not amended to include the extra
work, additional remuneration was not negotiated, etc? The adding of additional tasks can
only be justified if employees were consulted, the work is voluntary, rewards for extra work
were negotiated and the agreement was included in the performance contracts.

12.7Career development and corporate citizenship

Career development has three parts to it, first in terms of the process that is direct,
visible and has immediate benefits to the employee and the corporate; second, on the
level of the psychological contract (meeting of expectations) and last, the contribution it
makes to society in general.
Career development as an HR practice is a planned and systematic process, with very
important design features, such as the corporate’s needs, the positioning of it to ensure
that employees and supervisors have access to it and that they will participate, and to
ensure that a large and diverse talent pool is established through it. The process consists
of four distinct processes, namely:
1.Self-assessment by employees (determining their interests, behavioural
tendencies and aspirations)
2.Reality check (evaluate if the information gathered during the self-assessment
process complements [fits] the corporate’s reality)
3.Goal setting (process of setting short- and long-term career objectives)
4.Action planning (the ‘how?’ to achieve the career goals). Mechanisms to be used
in the ‘how?’ are, for example, job rotation, succession planning, shadow posting
and mentoring, deployments, training and development interventions. Grobler,
Bezuidenhout and Rudolph4 have identified three career enablers that could assist
an employee to achieve his or her career goals. The three career enablers are self-
transcendence (through technical self-affirmation), self-enhancement (through
stretched goals) and self-conservation (through work motives and values). Self-
transcendence has to do with the enhancement of technical skills through, for
example, the attendance of specialised training, conferences, mentoring by experts
and further specialised studies. Self-enhancement, on the other hand, is acquiring
skills by taking on more responsibilities (also managerial responsibilities), going
on managerial training and development, pursuing an entrepreneurial career, etc.
Self-conservation has to do with work-life balance, lifestyle, flexibility of the career
and job and financial security.

The benefits for the corporate is first, that the formal career development practice is well
managed. Some of the career development mechanisms such as succession planning are
a form of recruitment, because recruitment costs are reduced and ideal candidates are
available to fill vacancies, especially in the higher management positions. It is, however,
important that all the HR policies are aligned, specifically exceptions are made to
accommodate individual’s aspirations and ambitions in the career development process
(see the example and dilemma above).
Example
Internal/external sourcing – career development (succession planning) and
entitledness
This example expands on the case scenario presented at the beginning of this chapter. The
merger of X, Y and Z to form XYZ, resulted in some newly created senior positions
becoming vacant due to compulsary retirements and severance packages. Management
decided to appoint experienced employees (from X, Y and Z) in some of these positions,
only for a year, until they retire or take early retirement. The decision was made mainly to
ensure continuity. It was further decided to embark on a succession planning exercise, with
two employees (Mr P and Mrs Q) who were identified through the career development
process. They will succeed the retirees, and ‘shadow’ the current incumbents to gain
mentoring advice. The recruitment and selection policy (of XYZ), however, clearly states that
all positions must be advertised internally and externally when they become vacant. No job
reservation is therefore allowed.

DILEMMA
The dilemma stems from the conflict between the recruitment and selection policy and the
career development imperatives. This career development initiative created an expectation
that Mr P and Mrs Q be appointed into the two positions for which they have been
earmarked. The question is, what happens when the positions are advertised, and highly
qualified individuals apply and out-perform Mr P and Mrs Q in the selection process? The
dilemma is further complicated if they meet the race and gender representation requirements
as set out in the human resource (and EE Act) plan. Mr P and Mrs Q are entitled to be
appointed, however, will the recruitment and selection policy supersede the career
development imperatives? The corporate citizenship quandary is created internally as well
as externally. Internally, XYZ has a responsibility towards its employees, especially in terms
of the psychological contract and the management of expectations, but XYZ also has a
fairness responsibility towards all applicants (social justice and fairness is one of its values).
Second, career development as an HR practice has a direct impact on the psychological
contract.5 Career advancement is often one of the unwritten expectations, related to the
psychological contract between the employee and the corporate. Fulfilment of this need
and expectation in the form of challenging work, recognition and skills development
through assignments is seen as crucial for the psychological contract. It creates
alternatives for the employee (inside as well as outside the corporate) which is extremely
important for the individual’s growth, self-esteem as well as wellness in general.6
Last, career development also serves a bigger societal purpose, by ensuring and
increasing the employees ‘employability’ not only in terms of the individual’s ability to
perform in the work environment, but in terms of the individual’s contribution to the
broader society, outside the corporate.
12.8Recognition and rewards and corporate
citizenship
The most obvious component of recognition and rewards is regulated by the
employment contract, namely the compensation of the employee for the effort invested
in the corporate. Recognition and rewards are often seen as the most important
mechanism to retain talented employees, although many studies indicate that, the way
employees are treated (the psychological contract dimension) is more important for
retention.
It is extremely important that the compensation system is transparent, fair and
consistent. It is allowed to discriminate, as long as it is done fairly between employees.
This is especially relevant to compensation. Fairness is measured on the relative worth
of the contribution/performance of the employee in the specific job (often expressed as
a job grade). Internal and external equity and parity are important aspects when
employees consider the fairness of their compensation. Internal equity is related to the
consistency of compensation across similar jobs and job grades (levels) within the
corporate. External equity is the employee’s market value, which is a comparison made
of compensation across industries and corporates. It is important that both these
requirements are met, otherwise it will lead to a demotivated workforce, tension between
employees and high employee turnover.
The corporate citizen implications of compensation is influenced on two levels, first in
terms of fairness (internal and external equity), but also on the less obvious level where
it is seen as being to the advantage of a specific employee. It has been referred to as the
so-called ‘golden handcuffs’ or ‘modern day slavery’7 where the compensation is
extremely high (compared to the internal and external norms). This forces employees to
stay in the corporate as no other corporate can meet their compensation scale. This is
referred to by Grobler8 as a breach of volition, mostly concerning the limitation of
alternatives, where the individual has the potential, will and opportunity to decide
between alternatives. Extremely high compensation negatively impacts on the
opportunity to decide on alternatives (to leave the corporate and to get new
employment). This is often the case with executive compensation as well as highly
specialised and scarce-skill occupations. Compensation scales are over-inflated through
exponential increases. This has a serious impact on the economy and financial
sustainability in the long term.
Another ethical and therefore corporate citizenship dilemma for HR functionaries is
the different compensation systems for top and senior management, the higher-level
functionaries, line function and the support of staff functions, team-based compensation
and individual compensation systems, etc. The perceived fairness of the executive
compensation scales needs to be managed in a fair and transparent way, and this is often
outside the HR field (mostly done by remuneration committees). HR functionaries,
however, have the responsibility to communicate and contextualise the compensation
scales/structure to the general workforce.
Example
‘Modern day slavery / golden handcuffs – theft of individual volition’
This example expands on the case scenario presented at the beginning of this chapter. After
the merger, critical vacancies in XYZ were identified, one of which was the post of a
specialised IT developer, a very scarce skill in the country. After numerous unsuccessful
attempts to recruit such an individual, management instructed HR functionaries to headhunt
a suitable candidate, and to offer the individual 50% more than the market value (as
determined by the national annual remuneration surveys). This is outside the corporate’s
remuneration scales. Currently there are a few IT developers in XYZ (they have been loyal
employees for X, Y and Z respectively for years), but not specialists in the field, and they are
all on the same job grade (and remuneration level).

DILEMMA
The dilemma is that XYZ needs a specialised IT developer as the vacancy is impacting on
the corporate’s performance. The ethical and corporate citizenship concern is first on the
perceived unfairness towards the other current (loyal) IT developers. Their positions are on
the same level as the one about to be filled, and the newly appointed individual will receive
significantly higher compensation than them. Is it ethical and justifiable?
The second ethical and corporate citizenship consideration is the elimination of
employment alternatives of the newly appointed person. Due to the desperate need of the
corporate, it is offering the individual non-market-related compensation, making the
individual a ‘slave’ for the corporate, cutting all his or her employment alternatives. A true
situation of ‘golden handcuffs’. Is it ethical and justifiable from a corporate citizenship
perspective?
The principles of compensation are also applicable to other recognition and rewards
systems, such as commendation certificates, special titles (for example, ‘worker of the
month’) in the corporate, etc. It is crucial that all these initiatives be fair, transparent and
applied consistently. Well-designed recognition and reward systems have a high impact
on the motivation, engagement and citizenship behaviour of employees, but if not well
implemented, these initiatives will have serious negative implications. Remember, every
person wants recognition and it therefore forms part of the psychological contract that
needs to be respected and adhered to. It is an obligation (as per the psychological
contract) of the corporate to have managers and supervisors trained and encouraged to
use the wide array of techniques to recognise positive work behaviour, and therefore this
issue is categorised as a corporate citizenship related matter.
12.9Employee health and wellness, as well as
occupational health and safety and corporate
citizenship
Occupational health (employee health and wellness) entails the promotion and
maintenance of mental and physical health, including social wellbeing in the workplace.
This is achieved through the controlling of risks and preventative interventions including
the adaptation of work to the employee, and vice versa (a work system design function,
as discussed previously). Legislation plays a very important role in this obligation of the
corporate, and might easily be viewed as a compliance matter. The corporate, however,
has a clear obligation to provide a healthy and safe environment for employees,
regardless of the risk profile of the typical operations of the corporate, in terms of
corporate citizenship. There is often an over- emphasis on the physical health and safety
aspect within corporations, for example, in the mining sector where there is an inherent
risk of accidents and injuries to employees, without addressing the less tangible,
measureable and obvious ‘psychological injuries’ that may occur in the workplace. An
example of such ‘psychological injuries’ is, for example, the exposure of employees to
trauma. Take paramedic personnel as an example. They may have all the protective
equipment (masks, gloves and protective uniforms) to protect then against physical
injuries or harm, but they are still exposed to severe trauma (seeing mutilation and death
on a regular basis) that needs to be addressed by the employer. This obligation goes
beyond the legislation, and forms part of the psychological contract, and is definitely
within the domain of corporate citizenship.
Different configurations of corporate interventions support health and wellness. The
most common practices are tertiary and secondary assistance or interventions. Employee
assistance programmes (EAPs) are very popular, where the corporate needs to decide
between an insourced or outsourced model. It usually consists of health-care
professionals, including psychologists and social workers. Secondary interventions are
more educational, such as training in coping, stress management, conflict resolution,
work-life balance, etc. Primary interventions occur where the corporate takes the
responsibility to directly address workplace issues, such as corporate (organisational)
climate and culture interventions, for example, the quality of supervision, communication
and interpersonal work relationships, corporate structures, management style, etc. HR
functionaries have a very important role to play in the primary interventions where HR
policies shape the workplace, can improve employee wellbeing through, for example,
better working conditions (for example, flexitime) and these policies can also influence
more positive workplace cultures.
In terms of health related services within the corporate, conflict and tension exist with
questions such as:
•What is the real responsibility of the corporate concerning the health of
the employees, and what is the responsibility of employees as they are hired and
paid to do a certain job?
•How does the participation and attendance of interventions (typical employee
assistance programmes (EAP) or, for example, stress workshops, counselling, group
or individual therapy) and the impact of interventions influence the availability and
ultimately the productivity of the employees?
•Are climate and culture interventions really cost effective?
•Shouldn’t it be covered by the medical aids, and not the corporate?

These questions have to be considered, not only from a business case perspective, but
also definitely from a corporate citizenship perspective. Corporates often forget that not
everything can be converted into monetary value. Some things will contribute towards
increased productivity, lower absenteeism and most importantly, a better fit between the
employee and the corporate.
A further aspect related to employee health, which is more regulated and where the
corporate is forced to comply, is occupational health and safety. Occupational health
and safety standards, administrative requirements and enforcement mechanisms with
respect to the workplace are highly regulated by the Occupational Health and Safety Act
85 of 1993 and the Occupational Health and Safety Amendment Act 181 of 1993 in South
Africa. To ensure maximum safety and health of employees, the corporate needs to
go beyond the requirements of the law and embrace the spirit thereof. The establishment
of a safety culture will typically form part of the primary interventions, as discussed
before. In order to establish a safe culture, the corporate should consider creating an
internal response system, where all employees have a direct responsibility for safety
issues in the workplace. Typical rhetoric related to a safety culture, is ‘safety first and
safety always’, ‘safety is everybody’s responsibility’ and ‘safe work is efficient work’. The
corporate and specifically HR functionaries have the responsibility to entrench a safety
culture, and to align some of the HR practices with this important aspect. Examples of
these are training in organisational health and safety (managers as well as employees),
include safety measures in job descriptions and performance contracts, reward safety
enhancing behaviour, etc. The corporate citizenship component of organisational health
and safety goes beyond compliance. It also focuses on the behaviour and safety needs of
employees.
Example
‘Blame shifting’
This example expands on the case scenario presented at the beginning of this chapter. After
the merger of the separate entities X, Y and Z to form XYZ, a sudden increase in suicides
was reported. The corporate has a small employee assistance programme (EAP) unit to
support employees. Management requested that an external consultant investigate the
matter, and it was confirmed that the suicide rate is higher than what is expected compared
to the general public, as well as similar occupations. The consultant further reported that
possible reasons for the suicides resulted from family conflict, financial difficulty and
substance abuse. Some of the families of the employees, who have committed suicide,
blame the corporate, the physical work and specifically the way the employees were treated
by their superiors. They are threatening to expose the corporate to the media. This will have
a serious impact on the image of the corporate, who went public with its corporate
citizenship and employer of choice initiatives just after the merger.

DILEMMA
The dilemma is that XYZ can easily report (and make public) the findings of the external
consultant, where the reasons for the suicides were reported as being mainly personal in
nature (private relationship problems [mainly marriage problems], financial problems and
substance abuse) which to a large extent will shift the blame back to the employees and
their families. The ethical question from a corporate citizenship perspective is whether such
a blame-shifting approach can be justified, and whether it will contribute to the prevention of
similar occurrences in the future. If the corporate discusses the allegations made by the
family members, it will be seen as admittance of guilt with the possibility of civil claims
against the corporate. The dilemma is that the corporate should have an emphatic stance,
but at the same time they should be compassionate and supportive towards the families,
with a clear plan on how to prevent it in future.

12.10Employment relations and corporate

citizenship
Employment relations as a HR function deals with the employee-employer relationship.
The corporate will benefit from this relationship and have highly productive, motivated
and satisfied employees. Employment relations have a pro-active as well as a reactive
perspective (prevention and resolving of problems that may arise in the workplace). It is
thus an overarching practice, concerned with both the formal work arrangements, for
example, the employment contract, work design (job description) and the performance
of the employee, as well as the below-the-surface matters (psychological contract issues),
such as interaction with supervisors, perceptions of HR processes, etc.
The employment relations practice provides a space where performance and
discipline related matters can be addressed in a humane, consultative and progressive
manner. It provides an opportunity for employees to better understand the corporate’s
goals and policies. It further provides a mechanism for management to correct poor
performance or address personal issues that may affect the employee’s work behaviour
and performance.
Typical employment relations issues for the employer are poor performance,
unacceptable behaviour, absenteeism, failure to comply with health and safety
procedures, breach of corporate policies, misconduct, conflict situations, etc.
For the employee, employment relations provides the opportunity to lodge grievances
or formal complaints, report workplace misconduct allegations (including whistle-
blowing), etc. Furthermore, it deals with discrimination or harassment, problems with
health and safety, disagreement over the employment contract, misunderstanding of
poorly managed discipline, and alleged substandard performance.
Example
‘Whistle-blowing – career suicide’
This example expands on the case study presented at the beginning of this chapter. The HR
department received a complaint from an employee (via the chief executive officer’s office –
CEO) about possible dubious transactions approved by her superior. The superior is
however one of the high performers in the corporate, and he is earmarked to become the
next chief operations officer (COO). He is also close friends with the CEO. He has a clean
record, and is regarded highly in the corporate as well as in the broader industry. The
complainant (whistle-blower) is concerned about her personal safety and her career. She
was however reprimanded by her superior regarding her poor attendance and frequent
absenteeism. He issued a verbal warning, which she did not receive in the spirit of corrective
and progressive discipline.

DILEMMA
The dilemma in this case is dual – ‘all coins have two sides’. First, the identity of the
complainant (the whistle-blower) needs to be protected, but the allegation should also be
investigated, which will expose her identity. Second, the senior official could be targeted
because of the dysfunctional relationship between him and the complainant. Both are
employees of the corporate and need to be protected, not only an employment relations
dilemma, but a serious corporate citizenship concern.
The success of the employment relations practice is mostly dependant on constant
interaction with employees, and communication channels being open and transparent.
This will furthermore enhance regular performance- related feedback to employees.
Commitment to fair, assertive and prompt investigation and action steps to address
workplace challenges and problems determines the success of employment relations.
The ethical and corporate citizenship implications of the employment relations
practice are mainly concerned with the treatment of the employee, regardless of the
issue. All employees have the right to be treated fairly and with respect, and they need to
be assured that all concerns would be investigated and rectified. Furthermore, employees
need to know that confidentiality, personal and psychological (self-esteem and self-
worth) safety as well as the employee’s identity and name will be protected, regardless
of the issue.
12.11Theadded-value debate from an HR
perspective and corporate citizenship
The added-value debate is based on the premise that HR practices influence performance
and add value to the corporate’s performance. HR should effectively measure and
evaluate the contribution made by its practices with clear metrics and management
systems to determine the value of its human resources (human and intellectual capital).
The HR costs are usually a significant component of the corporate’s total budget.
Therefore corporates seek proof of the value of their investment in human resources,
resulting in the term ‘human capital’.
There is a term in management ‘what gets measured gets managed’ and it is a vital
aspect in the added-value debate. Human capital metrics, such as turnover, health and
safety, employee development and diversity, for example, are the traditional HR metrics
used to justify the HR department’s existence as well as the value it adds to the
corporate’s performance. The traditional metrics are often focused on compliance (for
example, race and gender representivity, organisational health and safety targets and
results, etc.), management information systems (for example, voluntary employee
turnover, number of promotions, absenteeism statistics, etc.). Additional corporate
citizenship related metrics should be added to the traditional metrics to reveal the
corporate’s commitment to corporate citizenship and the degree to which it ‘walks its
talk’. Corporate citizenship metrics are more based on the ‘how?’ while the traditional
metrics are about the ‘what?’ and ‘how many?’
Table 12.1 presents the typical traditional metrics and possible HR corporate
citizenship measures.
In order to contribute to the added-value debate by HR departments, HR functionaries
will have to improve their analytical abilities to function on a much higher conceptual
level. The rationale for higher-order reporting and analytics are not only to report on the
hygiene and compliance issues, but importantly to engage more scientifically and
analytically to explain certain occurrences and phenomena, and even, when the necessary
information is available, to do predictions and forecasting. The added-value debate in
terms of HR’s contribution to corporate citizenship should therefore be in the form of
direct results, such as economic savings and indirect results, like increase in employee
satisfaction, less employee turnover, as measured by staff attitude surveys. These results
will ultimately indicate the contribution to the improved corporate performance.

Table 12.1: Traditional and corporate citizenship metrics

HR practice Traditional metrics Corporate citizenship

metrics
Age staffing breakdown HR customer satisfaction
Human resource Average span of control index
planning Corporate staffing ratio Cross-functional mobility

Staffing (recruitment HR recruitment source New hire satisfaction with

and selection) breakdown recruiting
Recruitment cost per hire
Development of human Development programme Onboarding rate
resources penetration rate Employee satisfaction with
Return on human investment training
ratio
Utilisation of human Number of updated job HR customer satisfaction
resources descriptions Corporate (organisational)
Performance rating climate index
distribution
Career development Career path ratio High performer growth
rate
Successor pool coverage
Recognition and Average annual salary per Benefits satisfaction index
rewards full-time employee Compensation satisfaction
Upward salary change rate index
Offer acceptance rate
Employee health and Number of interventions Employee health and
wellness Uptake into EAP wellness index
programmes
Occupational health Average time lost due to Safety climate index
and safety accidents
Health and Safety (H&S)
incidents per 100 FTEs
Employee relations Grievance rate Employee engagement
Grievance time to resolve index
Employee satisfaction with
leadership
Metrics to be utilised across all the HR practices HR customer satisfaction
Corporate (organisational)
climate index
Employee commitment
index
12.12Conclusion
It is clear that corporates that aspire to advance along the corporate citizenship path will
have to engage with the HR functionaries as a critical partner. The HR function
(department and functionaries) should approach all HR practices in a way that reflect and
ensure corporate citizenship. By identifying the most important issues that the HR
functionaries are facing, they should examine all the policies, processes, structures and
cultural alignments required to deliver an HR service and strategy that supports
corporate citizenship. If and when these HR services and strategies are effectively aligned
with business outcomes, the collaboration within corporates will be improved.
The emerging concept of corporate citizenship in the HR function (including all HR
practices) has important implications both for corporate performance and for the HR
functionaries. First, HR functionaries must support the development and implementation
of a corporate citizenship strategy as the unique HR function’s contributions are critical
to ethical and corporate citizenship behaviour. Second, to be considered a strategic
partner and added-value function, HR functionaries must recognise the new corporate
citizenship imperatives of business and align the HR practices accordingly. HR
functionaries need to provide practical solutions to ethical (and subsequent corporate
citizenship) dilemmas. In this context, the recommended approaches include the
adoption of an iterative process for embedding corporate citizenship values, understand
and engage HR stakeholders, review and develop HR policies and functions, and track and
report performance. This will include identifying appropriate corporate citizenship
related metrics and the alignment with corporate outcomes.

Multiple-choice questions
1.The HR department is mainly focused on broader corporate performance, while
balancing the corporate objectives with traditional financial performance metrics.
a.true
b.false
2.There is a link between HR practices and corporate culture.
a.true
b.false
3.Staffing is only about the filling of positions.
a.true
b.false
4.Training is about meeting the needs of the employee.
a.true
b.false
5.Human resource utilisation in the context of corporate citizenship is:
a.determined by the HR Department
b.a mutual agreement between the two parties on what is really expected from
each other

Discussion questions
1.Critically discuss Matten and Crane’s notion that the essential message of
corporate citizenship is that it is basically the ‘role of the corporation in
administering citizenship rights for individuals’.

2.Reflect on your organisation, does the human resource function really contribute
to corporate social responsibility. If so, how?
3.Provide advice to your human resource department (as well as your strategy
department if applicable) on how to inculcate the notion of corporate citizenship
into its departmental and operational plans, with specific reference to the
importance thereof for the function, as well as the organisation as an entity.

Additional reading
•Boselie, P. 2014. Strategic Human Capital Management: A Balanced Approach. 2nd
edition. UK: McGraw-Hill.
•Cascio, WF. 2016. Managing human resources: Productivity, quality of work life,
profits. 10th edition. Boston, MA: McGraw-Hill.
•Dahlsrud, A. 2008. How Corporate Social Responsibility is Defined: An Analysis of
37 Definitions. Corporate Social Responsibility and Environmental Management,
15:1–13.
•Francis, H, Holbeche, L & Reddington, M. 2012. People and organisational
development: A new agenda for organisational effectiveness. CIPD: London.
•Lee, GJ. 2011. HR Metrics: Strategic & Quantitative Tools for People
Management. Knowledge Resources. ISBN 978-1-86922-169-0.
•Rees, G. 2014. Strategic Human Resource Management: An International Perspective.
1st edition. (ed) Paul Smith ISBN-13: 978-1446255858 ISBN-10: 1446255859.

References
1.Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended
theoretical conceptualization. Academy of Management Review, 30(1):166–179.
2.Hall, D, Pilbeam, S & Corbridge, M. 2013. Contemporary themes in strategic people
management. A case study approach. New York: Palgrave Macmillan; Grobler, A.
2014. Workplace alternatives – confront, conform, capitulate. African Journal of
Hospitality, Tourism and Leisure, 3(2).
3.Shruthi, VK & Hemanth, KP. 2012. Influence of psychological contract on
employee- employer relationship, Journal of Exclusive Management Science, August
2012 1(7).
4.Grobler, A, Bezuidenhout, ML & Rudolph, EC. 2014. Development and
institutionalisation of a career enabler model for shaping career development
systems within an ODeL environment. Journal Psychology in Africa, 24(3):293–298.
5.Hall, D, Pilbeam, S, & Corbridge, M. 2013. Contemporary themes in strategic people
management. A case study approach. New York: Palgrave Macmillan.
6.Grobler, A. 2014. Workplace alternatives – confront, conform, capitulate. African
Journal of Hospitality, Tourism and Leisure, 3(2).
7.Ibid.
8.Grobler, A, Bezuidenhout, ML & Rudolph, EC. 2014. Development and
institutionalisation of a career enabler model for shaping career development
systems within an ODeL environment. Journal Psychology in Africa, 24(3):293–298.
chapter
Marketing management
Sharon Rudansky-Kloppers and Johan Strydom
13
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Link marketing philosophy with corporate citizenship
•Understand the wants and needs of customers
•Describe how NGOs use marketing in the attainment of their objectives
•Explain how the traditional marketing instruments impact on corporate
citizenship
•Understand the place and function of ethical and cause-related marketing
KEYWORDS AND CONCEPTS
-cause-related marketing
-consumer rights
-distribution and the supply chain
-ethical marketing
-marketing communication, advertising and public relations
-marketing concept
-marketing era
-pricing decisions
-product decisions, branding and packaging
-product obsolescence
-production era
-sales era
-social marketing
-waste minimisation

OPENING CASE SCENARIO

How Shoprite sees its corporate citizenship responsibilities1

Shoprite uses different business metrics to support decision making and
management of its broad responsibility. Below are a few of the issues the Group
focuses on:

Segment analysis
The major focus is on the supermarket segment of the Shoprite Group as this
represents 90% of revenue, or 95% of trading profit.

Sustainability for the Shoprite Group means:

•To have a primary focus on the needs and expectations of its customers,
providing them with affordable, safe food
•To attract and retain over 123 000 employees who are enthusiastic and
passionate about the Shoprite business, working within the same organisational
culture and towards the same objectives
•To consider the environmental impact of the group’s operations and value chain,
as this is a major contributor to product costs and impacts on the groups’
reputation
•To work with its suppliers to ensure food security, sustainable supply, food
safety and cost effectiveness
•To consider the impact of the Group on the stakeholders that it serves.

Focusing on customers
•Affordability of products

The Shoprite Group’s main aim is to provide quality food at low prices. This means
serving customers across all Living Standards Measure (LSM) brackets and to
expand operations into underserved areas. It uses its economies of scale through its
massive buying power to serve the communities of Africa.

Stakeholders
The group has a strong tradition of empowering, sharing wealth and resources with a
broader set of stakeholders and investing in communities and societal improvement
projects that are sustainable and continue to deliver ongoing benefits where there is
a need.

Trading profit per segment

Shoprite’s internal food inflation is consistently lower than official South African food
inflation figures, and this indicates the price leadership of the group. In the 2013–
2014 financial year, the difference between the Stats SA CPI and Shoprite Group’s
Internal All Item Inflation resulted in the prevention of over R1 billion in price
increases from reaching its customer base. This can be seen as real savings for its
customers.

Food safety
Shoprite has an unwavering commitment to food safety. This commitment extends
beyond its own operations and cascades down the supply chain where it
collaborates with its suppliers to ensure that its customers buy safe, correctly
labelled food.
13.1Introduction
Marketing management as a functional area of management is sometimes seen as the
biggest culprit in misleading the customer about the product or service that it presents.
This flies in the face of the prime objective of marketing, namely to investigate the needs
and wants of the customer, to inform the customer about the product or service, and to
show the customer where these products or services may be acquired. The immediate
contact that the marketing function has with the customer implies that marketers must
be extremely careful in the way in which marketing activities are used.
In this chapter, we will look at some of the key activities of marketing and its
implications for the social responsibility of the corporation. The chapter begins with the
guiding philosophy of marketing, namely the marketing concept that ties in with the
citizenship activities of the corporation. We also discuss the issue of social marketing,
which is a continuation of the marketing concept. Thereafter, the focus is on the wants
and needs of the customer and the legislation that has been introduced to protect the
consumer in South Africa. We look at how non-profit organisations (such as NGOs) use
marketing to attain their objectives. Hereafter follows a discussion of the traditional
marketing instruments (the so-called four Ps) and how it must be managed to
synchronise with the social responsibilities of the corporation. Lastly, the focus falls on
two issues that are important to marketers in today’s turbulent business environment:
ethical marketing and cause-related marketing.
13.2Linking marketing philosophies and corporate
citizenship
13.2.1Marketing philosophies
The marketing concept and philosophy evolved as the last of three major philosophies
of marketing. These three philosophies are the production, selling, and marketing
philosophies. During the production era, which took place during the Industrial
Revolution, businesses focused mainly on production and ignored consumer needs.
Products were often scarce and were sold as soon as they were produced. Manufacturers
did not worry about marketing at all and concentrated only on production. A good
example of this philosophy was that of Henry Ford who practiced mass production
techniques in the automobile industry. His remark: ‘Any customer can have a car painted
any color that he wants so long as it is black’ 2 indicates the thinking of manufacturers at
that time.
After World War I, manufacturers found that they had a surplus of products and they
could no longer sell everything they produced. This was when the sales era started and
businesses tried to sell as much as possible, many times through dishonest practices.
Many misleading advertisements and unethical sales methods were employed to convert
the mass-produced consumer products into cash. When companies started to realise that
it is easier to sell a product that the customer wants than to sell a product that the
customer does not want, the sales or selling era developed into the marketing era or
philosophy. During this era, marketers realised that organisations should focus on
satisfying the customers’ needs and wants while meeting the organisation’s goals. The
marketing concept emphasises that it is important to understand the customers before
designing and producing a product for them. Marketers became aware of other aspects
to consider such as the quality of the products, the packaging, the selection of distribution
channels, and the promotion methods used to persuade consumers to buy the products
(see section 13.5 of this chapter). They realised that they had to focus on the needs and
wants of customers and create long-term customer relationships by effectively satisfying
the needs and wants of customers.
The experience of marketers thus forced them to follow a voluntary ethical code or
management philosophy in all their marketing tasks and activities. This ethical code is
known as the marketing concept. The marketing concept is a voluntary ethical code
according to which all marketing activities should be performed. It is based on four
principles:
1.Profit orientation
2.Consumer orientation
3.Social responsibility
4.Organisational integration.

1. Profit orientation
The first principle of the marketing concept emphasises the long-term maximisation of
profitability. The main objective of profit orientation is thus for the organisation to
survive and grow (see also in this regard the discussion in the case study on the Shoprite
group). Taking corporate citizenship into account, it is clear that companies should not
ignore the rights and needs of consumers when striving to make a profit. This is one of
the areas where the most conflict between marketers and society occurs. Marketers and
the corporations that they represent stand accused of just taking care of their own selfish
needs to maximise profits. Certain companies, for example, expect their workers to work
in unsafe and unhealthy conditions and to work overtime without pay so that the
companies can make a profit.
This point of conflict can however also be seen as an opportunity, as aptly described
by Harvard Business School Professor Michael Porter who argues that companies should
use their interactions with society – address society’s problems – to drive new business
opportunities and create a source of significant untapped profits. He believes that the
ability to address societal issues is integral to profit maximisation instead of being treated
outside the profit model.3
Example
Increasing profits through corporate citizenship4
FedEx and UPS, two well-known logistics companies, worked with manufacturers, like
Eaton, in public private partnerships in order to manufacture a new generation of trucks for
their delivery fleets. The environment benefited through a reduction in exhaust emissions,
and at the same time the companies could reduce their fuel costs, which improved their
profits.

2. Consumer orientation
According to the consumer orientation philosophy, businesses must view the customer
as king or queen, and try to satisfy the customer’s needs within the boundaries of making
a profit. Such businesses provide good customer service, including after-sales service.
The philosophy of corporate citizenship is an asset that companies can use to improve
relationships with stakeholders such as customers and employees. Among consumers,
corporate citizenship can improve the organisation’s relationships with customers,
hopefully leading to an increase in the intention to purchase and customer loyalty. A
company that helps to protect the endangered rhinoceros, as an example, will instil
positive attitudes in customers, which will help to increase customer loyalty and
purchase intentions.
Customer-oriented businesses do not consider the marketing task complete once a
sale has been made. Such enterprises provide after-sales service. They check up on how
satisfied customers are with the product or service and what can be done to enhance that
satisfaction.
When striving for consumer orientation, companies should always protect the rights
of consumers. These rights are discussed in section 13.3.1.

3. Social responsibility
The principle of social responsibility covers a fairly wide field and is becoming
increasingly important in the modern corporate world. Social responsibility primarily
implies that a corporate should make a contribution to the community and the
stakeholders with whom it does business. Corporates donate funds for community
projects such as schools, conservation programmes, welfare activities, and so on. For
example, by sponsoring the Addo Elephant Park, Total and Ford succeeded in establishing
their brands in the market as brands that care for the environment. Social responsibility
also entails sponsorship of sporting competitions, thus enabling both players and
spectators to enjoy their sport. And of course it affords the business an opportunity to
advertise its products, giving it some return for its contribution. By sponsoring the 2010
FIFA World Cup, MTN showed their commitment to sport and the development of sport
in South Africa.
But social responsibility goes further than merely contributing financially to the
community. It also requires a business to be law-abiding. This can range from absolute
openness and honesty in its business operations (for example, not taking or offering any
bribes) to taking care not to harm the environment (for example, polluting the
atmosphere with smoke, or dumping waste material in rivers). When a business adheres
to the principle of social responsibility, it will try not to offend the morals, values and
religious beliefs of the community. A liquor company that encourages teenagers to buy
its products would, for example, arouse a good deal of indignation from parents in the
community – and they might boycott the products of such a business. As indicated
in Chapter 10, SAB try to inspire responsible drinking in their advertising campaigns in
order to demonstrate their social responsibility to its customers and society. Corporate
citizenship and social responsibility are, however, not new concepts. One of the pioneers
of the industrial age, Henry Ford, had the following to say regarding social responsibility
more than a century ago:

‘To do more for the world than the world does for you – that is success.’

‘There is one rule for the industrialist and that is: make the best quality goods possible
at the lowest cost possible, paying the highest wages possible.’ 5

4. Organisational integration
The principle of organisational integration implies that every function, department and
individual needs to be marketing-oriented – that is, they must continually be aware of
how their actions will affect the image of the business. A receptionist, for example, may
not have anything to do with the selling of the business’s products, but he or she is often
the first contact a potential customer has with the company. Thus, the way in which he or
she answers the telephone (and how promptly) leaves a lasting impression on the caller
about the efficiency of the business as a whole. If a potential client has to wait too long
before the phone is answered and even longer to be put through to the right person, there
is a good chance that he or she will hang up, and call a competitor.
Organisational integration is particularly important when it comes to co-operation
between departments. Imagine the chaos if Daimler Chrysler’s marketing department
promises a customer that he or she will receive the ordered vehicles by a certain date,
and the production department does not bother to manufacture those vehicles on time.
Internal conflict, poor service and even loss of sales may be the result, which all impacts
on the profitability of the corporation.
The example box below shows how Pick n Pay follows the principles of the marketing
concept.6
13.2.2Social marketing
Social marketing is seen as a broader concept than the marketing concept and
originated in the 1970s when marketers realised that instead of selling products to
consumers, they could also sell ideas, attitudes and behaviours to consumers. The aim of
this type of marketing is to influence social behaviours for the benefit of the society and
the target market, and not solely for the benefit of the marketer.
Social marketing can be defined as the use of marketing principles and techniques to
influence a target audience to voluntarily accept, reject, modify, or abandon a behaviour
for the benefit of individuals, groups, or society as a whole. 7 With this initiative,
consumers can be encouraged to stop smoking, stop littering, protect the environment,
go for annual check-ups, exercise, use green products, wear seatbelts, donate blood, stop
the spread of HIV/Aids, and so forth.
Some of the social marketing campaigns of The World Health Organization (WHO)
include the recommendation that breastfeeding is the best for mothers and babies,
including for mothers who are HIV-positive (if they are on antiretroviral medicine), and
the WHO marketing is directed to achieve this objective. The Wilderness Foundation’s
campaign to save the rhino is another social marketing campaign and is explained in the
example box on the next page.8
Example
Pick n Pay’s application of the marketing concept
Pick n Pay holds to all four principles of the marketing concept. 9 For example, it follows
the consumer-orientation principle because it portrays itself as the customer’s friend. Pick n
Pay’s price checks show that it offers customers exceptional value, and its image is that of
offering a better shopping experience at no extra cost.
Pick n Pay also supports the profit orientation. This is clear from the increase in turnover
for the Pick n Pay Group for the year 2014. Turnover growth of 7.7% was achieved, even
though consumer spending was under a lot of pressure because of rising costs and lower
confidence. The Group also maintained the gross profit margin at 17.5%.
The principle of organisational integration is also followed, since all the different
departments work together to achieve objectives and to satisfy customer needs. For
example, Pick n Pay’s marketing section will not advertise a discount on Skip washing
powder without first checking if the purchasing department has adequate stock of Skip.
Pick n Pay shows its responsibility towards society by sponsoring various educational and
charitable events. It spent R36 million on various initiatives over the 2014 financial year. Its
Smart Shopper loyalty programme generated R1,8 million worth of points, which were
donated to charity. Through co-operation with the Ackerman Pick n Pay Foundation,
the enterprise development programme has enabled six rural community farms to supply
fresh produce through the Pick n Pay supply chain. It has also assisted a small start-up
company, which produces tortillas and wraps, to become a national supplier to its stores. An
organic vegetable farm participating in their enterprise development programme supplies
their Gauteng region. On ‘Day for Madiba’, Pick n Pay, together with its franchisees, raised
R5 million for good causes, including approximately R4 million for the Nelson Mandela
Children’s Hospital and a further R500 000 for the Nelson Mandela Children’s Fund. Pick n
Pay has also invested R55 million in energy efficient projects for all its operational facilities.
In 2014, 38 000 participants took part in its Pink Drive Women’s Walk which promotes breast
cancer.

13.3Customers’ wants and needs

13.3.1The conscious customer
In the last decade, consumers have become more aware of what they need and want from
companies and the products and services they sell. They are demanding responsibly
sourced and environmentally friendly products, and prefer to buy products from
companies that are committed to having a positive social and environmental impact.
Many of these companies make use of green marketing, which is the marketing of
products and companies that promote the environment in some way. This is also known
as environmental or eco-marketing. Whole Foods, for example, in addition to selling
green foods, introduced the first transcritical refrigeration system, which makes use of
ozone-friendly carbon dioxide as a refrigerant. 10 It also promotes wind energy,
biodegradable food packaging and water conservation.
Consumers are also becoming more aware of their rights as consumers and they are
demanding that these rights be adhered to. The generally accepted rights of consumers
are the right to safety (protection from dangerous products), the right to be informed
(adequate information should be available for consumers to make informed product
decisions and protection from false and misleading advertising), the right to choose
(competing products and services offering alternatives with regard to, among other
things, price and quality) and, the right to be heard (consumers should be able to voice
complaints and concerns about products and services in order to have these issues
handled efficiently).
The Consumer Protection Act 68 of 2008, which is discussed in the following
section, explains some of the rights of South African consumers.
Example
Save the rhino campaign
The Wilderness Foundation launched the Forever Wild – Rhino Protection Initiative in May
2011. This campaign aims to get support from the public and other stakeholders to help fight
against rhino poaching in South Africa and save the rhino from extinction.
The Wilderness Foundation drew up a petition to indicate public outcry over the cruelty of
rhino poaching. This petition, which received over 18 000 signatures, was taken to the
highest governmental powers in March 2012, and together with integrated YouTube and a
social media campaign, generated worldwide awareness of the rhino poaching crisis.
The Foundation continues to lobby various governmental and private agencies to raise
awareness for the cause.

13.3.2Consumer protection in South Africa

Internal audiences (employees) are well-protected by labour laws. The external audience
(consumers) are, however, often open to exploitation by companies. Consumer
protection laws and bodies are discussed below.

The Consumer Protection Act (CPA)

In South Africa, several Acts and laws have been promulgated to protect consumers
against possible unscrupulous actions by companies. The Consumer Protection Act 68 of
2008 came into effect on 1 April 2011. This Act outlines the rights of South African
consumers, namely the right to:
•Be heard. Consumers have the right to be heard on issues, policies, plans,
programmes and decisions which affect them.
•Be safe. Consumers must be protected against flaws or hidden dangers in products
or services.
•Redress. When a consumer is sold an inferior product or service, he or she has the
right to demand a replacement or a refund.
•Be informed. Consumers have the right to be given all the information they need
about a product or service.
•Choose. Consumers have the right to a variety of products and goods that are
competitively priced.
•Be educated. Consumers have the right to education that will empower them to
make informed choices (regarding different products).
•Satisfy basic needs. Consumers have the right to basic goods and services for
survival, such as food, water, education and sanitation.
•A healthy environment. Consumers have the right to a physical environment that
will enhance their quality of life.

The Consumer Protection Act (CPA) places restrictions on the way businesses can market
products and services to consumers. It is designed to protect consumers even before they
enter into a transaction and even if they do not buy from the business. The CPA impacts
on every aspect of marketing. It emphasises that marketers may not engage in deceptive
or misleading marketing practices. It covers, among other things, general marketing
standards, bait marketing (a low price is advertised for a product as a teaser in order to
draw the customer into the store and sell a more expensive product to him or her), direct
marketing (selling products or services directly to the public, for example, by mail order
or telephone selling, rather than through retailers), catalogue marketing (consumers
select and order products from a printed or online catalogue), trade coupons (a ticket
that can be offered in exchange for a reduction in price when a particular product is
purchased), customer loyalty programmes (a rewards programme offered by a company
to customers who frequently purchase there), and referral selling (customers are
persuaded to buy products by being promised a commission or rebate if they supply
information about other potential customers that the company can possibly sell to). Some
of these issues will be discussed later in this chapter. Discriminatory marketing
(excluding persons from access to goods and services, prioritising which groups of
persons may access offerings, or supplying a different quality or charging a different price
according to categories of persons)11 is prohibited except in cases where there are
reasonable grounds for differentiating marketing, for example, when marketing alcohol
only to people over 18 years of age.
The CPA also restricts marketing practices relating specifically to direct marketing. For
example, consumers may only be contacted within certain times (not on Sundays or
public holidays) and they must be able to opt out of direct marketing free of charge. All
existing customers must also provide confirmation if they wish to continue receiving
direct marketing from a business.

The Protection of Personal Information Act (POPI)

The purpose of the Protection of Personal Information Act 4 of 2013 is to ensure that all
South African institutions conduct themselves in a responsible manner when collecting,
processing, storing and sharing personal information of consumers. Consumers can hold
these institutions accountable should they abuse or compromise their personal
information in any way.
The POPI Act bestows on the consumers or owners of the personal information, certain
rights of protection and the ability to exercise control over: 12
•When and how they choose to share their information
•The type and extent of information they choose to share
•Transparency and accountability on how the data will be used and notification
if/when the data is compromised
•Providing them with access to their own information as well as the right to have
their data removed and/or destroyed should they so wish
•Who has access to their information (that is, there must be adequate measures and
controls in place to track access and prevent unauthorised people, even within the
same company, from accessing the information)
•How and where their information is stored (that is, there must be adequate
measures and controls in place to safeguard the information to protect it from theft,
or being compromised)
•The integrity and continued accuracy of the information (that is, the information
must be captured correctly and once collected, the institution is responsible to
maintain it).

Examples of the type of personal information referred to in the POPI Act are indicated in
the example box below.

Consumer protection organisations

There are also a number of consumer protection organisations in South Africa that aim
to protect the rights of consumers. A few of these are listed below:
•The National Consumer Commission is an agency that is responsible for publishing
consumer alerts (which warn consumers of scams or unfair business practices) and
prohibition notices.
•Provincial Consumer Affairs Offices are run at provincial level to provide
consumers with protection, information and advice. These offices may be
approached to intervene in disputes over contracts, quality of products or services.
Consumers may also contact them to find out if a company they intend doing
business with has a previous history of complaints against it.
•The National Consumer Forum is an umbrella body for consumer organisations
that is dedicated to the promotion and protection of consumer rights.
•The South African Bureau of Standards (SABS) maintains a watchful eye on
the quality of products sold. Those bearing the SABS mark indicate that they have
been tested and approved.
•The Advertising Standards Authority (ASA) has a code of conduct to which all
advertisements must adhere. Complaints from consumers are investigated and
where the code is contravened, the advertiser must withdraw the advertisement
(thereby losing money and receiving negative publicity).
•The Broadcasting Complaints Commission is a commission where consumers can
complain about television or radio broadcasts that they find offensive. This
organisation has the power to reprimand or fine broadcasters.
Example
Types of personal information
•Identity and/or passport number
•Date of birth and age
•Phone number/s
•Email address/es
•Physical address
•Gender, race and ethnic origin
•Photos, voice recordings, video footage
•Marital/relationship status and family relations
•Criminal record
•Religious beliefs and political opinions
•Employment history and salary information
•Financial information
•Education information
•Physical and mental health information.

Mass-media magazines, newspapers, radio and television frequently run articles and
programmes in which unethical business practices are exposed. Companies exploiting
consumers are named, causing irreparable damage because of the negative publicity. The
well-known television programme, Carte Blanche, is a good example of a mass medium
that informs customers about the underhanded dealings of government and large
corporations in South Africa.
The magazines Car and Wiel are known for their objective reports on vehicles
(features, prices, value, safety). Prospective buyers can consult these reports to help them
in making decisions. Fair Lady magazine’s Consumer Test House tests products and
provides an information service to consumers to help them make better choices.
13.4NGOs and marketing
A non-governmental organisation (NGO) is a non-profit, voluntary citizens’ group that is
organised on a local, national or international level. They campaign for health, education,
economics, industry, energy, the environment, human rights, justice, and other social and
governance issues. Examples are Greenpeace, Aids Foundation of South Africa, Refugee
Aid Organisation, Earthlife AFRICA, OXFAM and FoodBank South Africa.
In the last few years, NGOs have started to extend their marketing by targeting large
and powerful corporations. They have helped to focus attention on the social and
environmental operations of businesses. Multinational brands have been very
susceptible to pressure from activists and from NGOs challenging a company’s labour,
environmental or human rights activities.
For example, after NGOs and activists made Nike a target, the company became an
industry leader in promoting better working conditions in apparel and footwear factories
in Asia. In 2005, Walmart responded to activists by adopting more progressive employee,
community and environmental practices. It has also recently concentrated on initiatives
to cut energy use and require eco-responsibility among its suppliers. Some Greenpeace
campaigns are outlined in the example box on the next page. 13
13.5Thetraditional marketing instruments and
corporate citizenship
13.5.1Product decisions, branding and packaging
A product can be seen as everything of a physical or mental nature that is offered to a
customer who is prepared to buy it. This product is bought to satisfy a need or a want of
the customer. Examples of products could be a convenience product such as a loaf of
bread, a carton of milk or medical services provided by a medical practitioner. The
description of a product even includes personalities such as a soccer player or an actress
like Charlize Theron, destinations such as Cape Town, non-profit organisations such as
the Treatment Action Campaign, and the marketing of ideas such as ‘Casual Day’.
Example
The Greenpeace campaigns
•Nestlé
Palm oil has had a lot of negative press lately as rainforests are destroyed to cultivate it and
orangutans’ habitat destroyed. It is a key ingredient in chocolate. Nestlé was buying
unsustainable palm oil from Sinar Mas (an international supplier that was destroying the
south-east Asian rainforests, where orangutans were being threatened). Greenpeace
released a video of the Kit Kat –Take a Break advertisement, but instead of the office worker
eating a Kit Kat, it showed the worker gnawing on an orangutan’s finger. The tag line was
‘Kit Kat Killer’. The result was that many people posted messages encouraging the
boycotting of Kit Kat on Twitter, YouTube and Facebook. Ten weeks after the campaign
started, Nestlé announced that it would stop buying the unsustainable palm oil. The result of
this campaign was not just that Nestlé stopped using the palm oil, but Unilever, Kraft,
Sainsbury and Shell also terminated their contracts with Sinar Mas.

•Global warming
In 2009, Greenpeace hung a banner reading ‘America honors leaders, not politicians: Stop
global warming’ on the face of Mount Rushmore. This put pressure on President Obama to
provide leadership on the global warming issue.

•Kimberly Clark
Greenpeace also campaigned for Kimberly Clark, which manufactures Kleenex, to stop
using trees from the Boreal forest in Canada to manufacture tissues. Because of all the
public pressure and ongoing direct action, the company that makes popular brands like
Kleenex Scott, and Cottonelle announced a new policy that places it among the industry
leaders in sustainability.

Source: Digital Journal. 2010. Greenpeace boycotts Nestle: ‘Don’t have a Kit Kat break today’ Online.
Available: http://www.digitaljournal.com/article/289481#ixzz4IuIdK0we [26 August 2016].
Reproduced by permission of Stephanie Dearing, Digital Journal.

A product usually has a brand name. A brand name is one way to distinguish the
product from competing products. One of the most important decisions of the
organisation is the selection of the brand and brand name. The brand is usually a mark
that is unique to the product manufactured and marketed by the organisation. The
branding of a product includes the brand name and a specially designed trademark. The
brand name is a word, a letter, or a group of words (for example, Mercedes Benz).
Consumers use this name when they enquire about the product. The concept of a brand
name is therefore a more limited concept than that of a brand (in this case the three-
pointed star which typifies the Mercedes Benz trademark).
In today’s highly competitive markets, it is impossible to market products successfully
without brand identification. Organisations use branding to build brand loyalty in their
customer base that eventually transfers into repeat purchasing of the product and profits
for the corporation. Branding and brands is then also central to the discussion on
sustainability and corporate citizenship for the marketing mix that follows. The impact of
poor environmental practices for global brand names was illustrated in the previous
example box that discussed Nestlé’s problems with their branded product Kit Kat.
Packaging is another important part of the product. It can be described as those
activities concerned with the design, manufacturing and filling of a container or wrapper
with the product, so that the product can be effectively protected, stored, transported,
identified and marketed. The main aim of packaging is to ensure that the product can be
handled without impacting the integrity of the product. There have been past instances
of product tampering, which caused the deliberate contamination of a product after it had
been manufactured. The objective of the product tampering was to harm the organisation
and the brand and/or to try and blackmail the organisation. Some of these activities
resulted in the death of customers, as in the case of Tylenol (a pain capsule) that was laced
with cyanide. This resulted in the organisation losing market share and led to the
introduction of tamper-resistant packaging to prevent a re- occurrence of this.
Packaging is also used to promote the selling of the product. Packaging also includes a
label, bearing the characteristic brand name and other brand information such as
nutritional content. It is the responsibility of the corporation to ensure that the product
that it markets is not harmful or detrimental when used by the consumer. There is also a
responsibility to strive towards recycling and reusing the materials used in the
manufacturing and packaging process with the ultimate aim of realising a zero-carbon
footprint. Minimising waste and effective waste management is therefore of ultimate
concern to all corporations in the global and domestic market.
Any discussion on the range of products must also include the strategy regarding the
development of new products. A product starts its life as a mere idea, invented by
someone. The idea for a new product may be unique and original, which is called an
innovation. The product may also be a modification in that it is an improvement on, or a
modification of an existing product. The risk of failure and financial loss is usually greater
with the manufacturing and marketing of an innovative product, but so also the
opportunity of obtaining higher profits. A factor to be considered in the development of
new products is the threat of product cannibalisation. An organisation usually has a range
of products, and the introduction of a new product may cannibalise on the sales of
existing products that have progressed further in their product life cycle. A product may
be deliberately made technically and/or psychologically obsolete in order to coerce the
consumer to buy a new version of the product. This process is called product
obsolescence. At the technical level, products can be designed to have a specific life span,
such as a disposable cigarette lighter, which will be disposed of once the gas and flint has
run out. All these product strategies have a sustainability impact through the sourcing of
raw materials, carbon emissions and the consequential disposal of the old product. This
has direct implications on the environment in which the customer functions and the
corporation responsible for this product must be held accountable for its actions in the
marketing and disposal of the product.
Example
Multinational Nestlé with world-wide brands in reputational crises 14
As previously discussed, Nestlé is a global company known for its popular brands such as
Nescafe, Milo, Carnation, Nesquick, Nestea and also Kit Kat (recently in the news for the
wrong reasons). Greenpeace, the global non-governmental environmental organisation
accused Nestlé of using unsustainable Indonesian palm oil as an ingredient in the production
of Kit Kat chocolate, a long-established brand of high repute.
Nestlé India had an issue with their Maggie instant noodles when they were found to have
high lead levels as well as MSG, not listed on the packet ingredients.
These examples indicate that Nestlé is still struggling with its role in areas such as
sustainability and managing the intermittent reputational crises that impact on their range of
global branded products.
Another form of obsolescence is psychological obsolescence that refers to the
introduction of a new model or style of product that results in the consumer rejecting the
still functional older version of the product. New car models and new clothing fashions
are well-known examples of planned psychological obsolescence in practice. This
practice needs to be scrutinised in the quest for a sustainable environment, also taking
into consideration the recycling processes used in this process.
Just like human beings, products also have a life cycle. Four phases are identified in the
product life cycle: the introduction, growth, maturity and decline phases. During each
phase, different marketing decisions are taken. For example, in the introductory phase,
the brand name must be established, marketing communication is aimed at informing the
customer about the availability of the product, and where the product is available. The
growth phase brings changes as more customers know about the product and the
marketing communication is now aimed at informing and reminding the consumer about
the product. The price is usually under competitive pressure with more manufacturers
making the product, and more retailers will be stocking the product. During the maturity
phase, the focus is on selling to the existing customer base, reminding the customers
about the product, and countering price competition. During the decline phase,
uncompetitive brands that do not meet customer requirements, or are no longer
profitable, are discontinued. The decision to withdraw a product or range of products
from the market is a very difficult one. This action may be seen as negative for the image
of a business and may cause social disruption (workers could be laid off because jobs are
reduced due to a drop in sales). It is also difficult for top management to acknowledge the
fact that a product that has been previously profitable and contributed a positive cash
flow has reached the end of the road.
DILEMMA
In an ideal situation, a South African driver would keep on using his or her car for as long as
possible. This would obviate the psychological obsolescence dilemma described above. The
real life situation is, however, that this decision has unintended consequences. Car owners
that keep on using their cars for an extended period soon realise that car replacement parts
get difficult to source, the manufacturer’s appointed service agents decline to service the car,
as they do not have the technicians with knowledge to maintain the car, and the trade-in
value of the car declines at such a rate that it is not enough to serve as a full deposit on
acquiring a new car!

Example
Salt content of South African food products and the role of packaging 15
Salt is a basic commodity that is needed for the effective functioning of the human body
overall and body cells in particular. The moderate consumption of salt is thus needed for
healthy living. The problem, however, is that South Africans in general consume 250% of the
salt intake that is required by their bodies! The harmful result of this excessive use is well-
known: high blood pressure, which may lead to heart attacks, strokes and kidney damage.
There are six food categories where the South African government wants to reduce the salt
content: bread, brine in chicken, cereals, spices, snacks and soups.
This is where effective packaging and nutritional information on packaging becomes
important. Information about the specific food content must be easy to understand and must
allow the consumer to make comparisons regarding, for example, the salt content in the
product. This must also include the calorie count of the product, which would also assist with
another health problem of the South African population, namely obesity.
When marketing a new product, the organisation must consider the following
guidelines regarding the development of a new product:16
•The product must provide greater need satisfaction for the customer. This can be
done through technological modifications as in the case of the new Apple iPhone 6.
However, we can ask the question ‘Is this new version of the phone not a perfect
example of planned psychological obsolescence?’
•The new product development must include waste minimisation in its growth
process. Apple decided to increase the trade-in-credit programme for customers
that traded in their old Apple iPhones. This trade-in incentive provided a waste
saving efficiency for the customer and the organisation. It was also an option to
increase brand loyalty and to keep the customer linked to the Apple brand. The
example below shows car manufacturer Subaru’s initiative on waste minimisation in
its production processes.
•The organisation must also apply product stewardship in the development of the
product. This concept focuses on understanding the effect that the new product will
have on the whole supply chain and includes controlling the impact of the product
on the environment, as well as the health and safety aspects of it through the various
stages of its life cycle. Through this anticipation of the ripple effect of the
introduction of the new product, the organisation can obtain a first-mover
advantage that could result in a more sustainable competitive advantage for the
corporation in future. (A first-mover advantage implies that the organisation takes
the lead in product development. This lead provides the company superior brand
recognition and customer loyalty. Steve Jobs obtained a first-mover advantage with
the Apple Mackintosh personal computer in 1984, as it used a graphical user
interface and a mouse.)
Example
Comparing the iPhone 5s with the iPhone 6 17
In a comparison of the iPhone 6 versus its predecessor, the iPhone 5s, the following
differences were outlined that could make Apple fans buy the new version. The first
difference is size with the larger screen and improved resolution for the iPhone 6. The width
of the new version 6 is 0.6 mm less than the 5s but its weight is a bit more. The iPhone 6
has increased specifications: an A8 processor instead of A7, though it still remains a dual-
core product with quad-core graphics. The iPhone 6 is a slight technical improvement on the
still very acceptable performance of the iPhone 5s. This is, therefore, an example of
psychological obsolescence as discussed above.

Example
Subaru…the first automobile company that does not create waste for landfills in its
manufacturing process18
In 2002, Subaru decided to manufacture their cars without adding any garbage for waste-
disposal in the process. A year-and-a-half later they became the first manufacturer in the
United States to achieve zero-landfill status. This means that all waste generated in the
manufacturing process was either recycled or repurposed to create energy with nothing
ending up in a landfill.

•The development of the new product must be done by using clean technology. The
Apple organisation is a leader in the field of electronic manufacturing of toxin-free
products. Two of the most harmful components, namely polyvinylchloride (PVC) and
brominated flame retardants (BFRs), which also lack degradability in the
environment, have been completely excluded from all Apple products. 19 Apple has
also pledged to take further steps in eliminating hazardous chemical use in its
supply chain.
•The new product development process must acknowledge the bottom of the
pyramid consumers.20 There are millions of disadvantaged consumers who must all
be considered in one form or another and must be involved in the process of the
development of new products. Getting these customers on board will demand
innovations in technology, products and services, and business models. It also
requires large corporations to work in collaboration with civil society organisations
and local governments.
•Regulatory anticipation and advocacy. Some corporations are eager to participate in
voluntary programmes and practice stewardship in ways that go beyond what
governments expect from them. Looming regulation is one example that explains the
corporation’s eagerness to pre-empt the implementation of such rules and
regulations. It is usually the large multinational corporations with top-management
support that follow the route to pre-empt upcoming legislation that will impact on
the business. Corporations that are listening to outside stakeholders and advocacy
groups are usually keener to comply earlier than later to changes in rules and
regulations so that they can keep abreast of societies’ needs.
•There is a need for technology co-operation between the corporation and other role
players. This need for technology co-operation between developed countries and
developing countries is especially important. Currently, South Africa is considered a
developing country and is not on the cutting edge of research and development,
which could hamper the achievement of equity in this country.

The question arises: ‘Why does a business manufacture a new product or provide a new
service?’ The most obvious answer would be to make a profit. This is, however, an
oversimplified viewpoint. Recent management thinking is moving towards a balanced
approach. With corporate citizenship in mind, the aim of corporations is to help create
higher standards of living and improve the sustainable quality of life of individuals and
communities in which they operate, while still preserving the quest of profitability for
stakeholders.
13.5.2Pricing and corporate citizenship
From a marketing perspective, the price decision has always been seen as the way in
which the corporation could recover the costs incurred in developing, manufacturing and
marketing a product. In practice this means that as a first step the cost price of the product
must be determined. Obviously the final price of the product cannot be lower than the
cost price, because this would mean incurring a financial loss for the organisation. Moving
on from the cost price, the organisation must determine the market price, which is the
price the consumer is prepared to pay for the product, or the current market price at
which competing products are sold. The market price is determined by means of market
research that surveys customers’ general perceptions regarding the price and value of a
product, and the pricing strategy being followed by competitors. If the cost price is lower
than the market price; there is room to add a profit margin; and if the margin is very slim,
then the organisation must do a cost-reduction adjustment to the manufacturing of the
product (for example, a redesign of the product to make it cheaper), or the marketer will
have to make a special attempt to convince consumers that the particular product
warrants a higher price. The target price is the price that the organisation wants to
obtain, taking into consideration the cost structure, the business’s capital needs, and the
potential sales volume of the product. The final price is the price at which the product is
offered to consumers. This price is determined through finding the middle ground
between the market price and the target price by making use of various pricing strategies.
Example
How the South African fishing industry supports sustainability of fishing resources 21
In South Africa, active participation between government and the private sector have created
the Marine Stewardship Council’s MSC label and the WWF’s Southern African Sustainable
Seafood Initiative (Sassi) chart to assist consumers to verify whether the fish they consume
is from a sustainable source. Through the application of this information, new supply chain
protocols were developed to ensure the sustainability of the South African marine resources.
South African consumers indicated that the Sassi chart influenced their seafood selection
choices in restaurants and in the supermarkets.

Various adaptations, called pricing strategies, are available to adapt the price that the
consumer will pay. A skimming price strategy is when a high price is charged for a new
unique product. This may result in a higher profit margin that the organisation usually
explains as necessary to recover the research and development costs of manufacturing
the product. There are always consumers who would be prepared to pay the high price,
because such new inventions usually have prestige value (refer back to the example of
the Apple iPhone 6 discussed above). If the price was set very low, consumers could
possibly doubt the new product and the brand’s integrity. As the innovative product gains
popularity, the high initial price can gradually be reduced, usually due to more
competitors entering the field with similar products. This means that the organisation
cannot maintain a skimming price for a long time, as the high profits will attract
competitors entering the market with similar products.
The organisation may decide against using a skimming price and rather decide on
a market-penetration price strategy. Here the initial price of a new product is lower, with
the aim of penetrating the market rapidly, implying that more consumers will be able to
buy the product while discouraging potential competitors from competing, as the
profitability margin is unattractive. Both skimming and penetration pricing have some
ethical issues that will be discussed later in this chapter.
If there is keen competition and similar products available, then an organisation has
no alternative but to try and maintain the market price, which is the price asked by
competitors. If the organisation sets the price of its product higher than those of its
competitors, consumers will buy from the competitors. If the price is lower than those of
competing products, consumers could think the product is inferior. This would require
additional communication to try and convince the customer of the soundness of the
product. The organisation can escape the limitations of the market price only if its
product is successfully differentiated and is therefore regarded as a unique product.
A leader pricing strategy is followed by most retailers when marketing products to the
customer. A very small profit is made on leader-price products. These products are sold
at lower than the current market price, for a limited period only. The retailer uses this
method to attract consumers into the shop. The consumers then purchase the low-priced
‘specials’, as well as other products with a higher profit margin. Manufacturers do not
usually appreciate leader pricing. Even though they can sell more products, the profit
margin is smaller and, later, when competitors’ products are selected as a leader-price
item, sales figures for other opposing manufacturer’s products drop.
Odd prices are when the final price of a product is an odd number for example, R1,99;
R3,79 and R9,95. Even prices, for example, R2, R4 and R10, are avoided because
consumers are more likely to accept odd prices as an odd price looks smaller (cheaper)
than an even price. This type of pricing practice has been slowly losing its efficacy due to
the rounding up/down of prices at the retail tills. Odd pricing makes use of psychology to
impress the customer with the supposedly lower price of the product.
Bait prices are advertised prices that are particularly low, but when purchasers come
to buy the item, they are encouraged to buy a far more expensive item (the bait-and-
switch approach). The retailer does not really intend to sell the bait-price item – most of
the time it is not even in stock or only one is available at the low price. This type of pricing
is unethical and has a long-term negative impact when customers realise that they have
been misled.
The price decision-making process by marketers is one of the biggest challenges in
sustainable marketing practice. There are also significant barriers to the sustainable
buying of green products by consumers. Consumers are sceptical about green product
performance, the higher prices of these products, the veracity of product claims regarding
a product being manufactured according to green practices and there is a lack of customer
education regarding what sustainable practices entail. Consumers would like to buy
sustainable products but the proviso remains they will only support and buy these
products if the products perform as well or better than similar products they have bought
before. Customers also do not want to pay more for green products than the other
competing products available.
Research22 done on developing countries (three countries that were part of the BRICS
grouping) found that the quest for sustainable consumption had more support by
consumers of developing countries. High prices are seen as the main barrier to green
purchasing in developed markets, while product performance (quality of the product) is
the main concern in developing markets together with a need to better understand the
process that makes products socially and environmentally sustainable.
13.5.3Where
to sell (distribution and logistics in the
supply chain)
Distribution and the total supply chain focuses on the transfer of raw materials, and
eventually the final product so that it ends up in the possession of the consumer. Transfer
occurs through the use of distribution channels, which consist of intermediaries or
‘middlemen’ (wholesalers and retailers) that transfer products to the consumer. It is the
job of the marketer to link the manufacturer up with various middlemen so that the
product is available to the consumer in the right place and at the right time. Figure
13.1 shows the fresh food supply chain for Woolworths in South Africa and illustrates the
working of the supply chain and distribution activities.
Figure 13.1 shows two sources of fresh food supply going to the Woolworths retail
stores. The first one is the local fresh food supply chain where farmers grow and package
produce that is then forwarded to the Woolworths distribution centre for delivery to the
retail shops. The second part of the supply chain is imported produce that is delivered to
the distribution centres.
Example
EVs and Hybrids…why are customers not flocking to buy these greener alternative
motor vehicles?23
It has been a decade since the first hybrid car (Toyota Prius) was launched in South Africa. It
was, and still is, an expensive car and few customers were initially interested in buying the
car, as not many people were environmentally conscious. A decade later, the situation has
changed with more people concerned about the environment, the negative impact of fossil
fuel emissions and the resultant carbon footprint. Petrol prices have increased dramatically
in the last decade and more people are now environmentally conscious. However the sales
of these electric vehicles has been very slow with only 0.11% of the total number of cars sold
worldwide in the electronic vehicle category. Some of the main reasons for this are that
customers still buy cars based primarily on issues such as price, running costs, quality, life-
cycle costs and driving experience.

Source: ‘What you really think of EVs & Hybrids’ by Brett Hamilton, Car, February 2015.

Woolworths takes full responsibility for the entire life cycle of its products including
the reduction of direct environmental impacts occurring during production. Woolworths
has had to take custodianship of the total supply chain, which includes convincing the
customer and supplier in the supply chain to reduce their environmental impact by
accepting green practices in the growing of produce and in the use of the supply chain. 24
The place decision, as described above, therefore entails deciding on the type of
distribution channel, the specific middlemen to employ, the specific location where the
products will be sold and the logistical activities such as transport-scheduling and stock-
keeping.
The corporation that controls or dominates a distribution channel is known as
the channel captain. This is the organisation that decides who will sell the product and at
what price. Traditionally, the manufacturer of consumer products made distribution-
channel decisions and decided which retail outlets would best market the corporation’s
products. Today, it is frequently the large retailing groups, such as Checkers, Pick n Pay,
Woolworths or Spar that make the decisions regarding what products to stock and
therefore dominate the channel. Through the sheer size of their buying power, these
dominant retailing groups exert an influence on the supply chain. Obviously, some form
of coercion may occur when such a channel captain starts using non-competitive
practices to exclude some intermediaries from selling the product or by charging them a
higher price to obtain the product. See, as an example, the recent inquiry into the effect
of the competitive practices of the four major retailing groups by the Competition
Commission of South Africa.
Intermediaries such as retailers may be persuaded to ‘push’ a product by actively
encouraging sales of products in a store. This is called a push strategy. Alternatively, a
product may be ‘pulled’ through the channel by means of consumer demand (where the
middleman is obliged to stock the product, because the consumer demands the product
from them). This is called a pull strategy. Some products that are damaged in the retail
stores and are not sold, must be returned to the manufacturer. This is called reverse
logistics and also has an impact on the environment due to extra transport and the
additional carbon emissions generated. The ecological impact of the reverse logistics
activities needs to be measured and minimised. Usually there are two options in the
process of reverse logistics, namely to properly dispose of the product without harming
the environment or to remanufacture the product so that it can be resold.
Figure 13.1: The Woolworths fresh food supply chain
Example
The South African Competition Commission’s enquiry into large food retailers 25
The Competition Commission’s second inquiry into grocery retailing in South Africa will
investigate the four food retailing groups’ (Shoprite, Pick n Pay, Spar and Woolworths) effect
on small retailers and the impact of their long-term exclusive leases with landlords in
shopping malls. The Commission alleges that the four major supermarket chains now control
90% of the food retail market. The investigation will also include informal businesses and
look at the competitive situation between local and foreign-owned small retailers in
townships, mentioned as a possible reason for xenophobic attacks in the past.
Market coverage refers to the manner in which the product is distributed throughout
the market. Ideally, the manufacturer would like to have the product on all the shelves of
all the shops that could potentially sell the product. This is, however, not always possible
owing to various reasons such as finances and special agreements between suppliers and
retailers (the channel captaincy issue referred to above). The number of intermediaries
in the channel is directly linked to the type of market coverage being sought.
Three types of market coverage can be identified, namely intensive, exclusive and
selective market coverage. Intensive market coverage occurs when as many suitable
and available middlemen as possible are used. This is especially relevant to convenience-
product manufacturers, such as Coca-Cola, whose products are distributed through all
available distribution options, namely cafés, liquor stores, restaurants, supermarkets,
wholesalers, hypermarkets, spaza shops and petrol forecourts. Selective market
coverage refers to the selection of a limited number of capable intermediaries (specialist
stores) who will distribute the product efficiently. Sporting goods such as running shoes
and clothing are distributed in this manner. Exclusive market coverage happens when a
manufacturer limits the number of middlemen handling its product to only a few
intermediaries who obtain exclusive rights to sell the product in a specific geographic
area. This type of market coverage is found particularly for some shopping and speciality
products such as fast-food franchises and car dealerships.
Another aspect of distribution decision making is the logistical activities in the supply
chain that make a product available to the final consumer at the right time. These
logistical activities include:
•transportation by road, air, ship, etc.
•storage, for example, in warehouses, or in underground bunkers (containers) in the
case of fuel
•inventory holding (numerous items are kept in stock)
•receipt and despatch (the processing of orders)
•packaging (packing the items on pallets)
•administration (for example, documentation)
•stock ordering.

The purpose of the supply chain is to maintain a satisfactory service level to clients at the
lowest possible cost. The optimal service level is the level above where an increase in
costs incurred in respect of logistical activities will not result in a corresponding increase
in sales.
Logistics is becoming increasingly important in the supply chain and can result in large
cost savings for a business. In addition, it can ensure that the product is in the right place
at the right time for the convenience of consumers. Unfortunately, logistics inherently
uses some form of energy that is carbon-negative to the environment. The three main
components of the logistics decision are:
1.Selecting warehouses
2.Selecting the most suitable mode of transport
3.Selecting optimal inventory holding levels.

A compromise between cost and service levels must be reached in all three components
to develop the best alternative logistical channel while observing the most sustainable
methods of distribution.
13.5.4Marketing communication, advertising and PR
Marketing communication can be described as the process of informing, persuading
and reminding the consumer about the availability of an organisation’s products. There
are many consumers interested in buying more sustainable product alternatives but they
lack information on where to buy these products. The organisation needs to inform the
customers about where these products will be available. The organisation must also
educate the customers and its own personnel about its sustainable range of products.
Marketing communication comprises four elements that can be used in combination
to communicate with consumers. These four elements are:
1.Advertising
2.Personal selling
3.Sales promotion
4.Public relations, publicity and sponsorships.

Advertising can be described as controlled and paid for non-personal marketing-

communication activities about a good or service aimed at a specific target market. We
see advertisements on television, at the movies, on the radio, on billboards, on the web,
and in magazines and newspapers. In South Africa, advertising messages are regulated
through the Advertising Standards Authority of South Africa. 26 This authority, discussed
in section 13.3.2, subscribes to the International Code of Advertising Practice, which is a
self-regulatory system. There is a requirement that all advertising should adhere to the
basic principles of being legal, decent, truthful and honest while also having a sense of
social responsibility to society and to respect the rules of fair competition. Ethical
advertising by corporations should communicate the message honestly and accurately,
for example, not linking consumption of their product to attractive lifestyles that are
irrelevant to the ordinary customer. The corporations need to promote their products
and services on their own merits and must highlight those features that members of a
target market might find valuable and relevant to them.
Nestlé’s product problems, previously discussed, encouraged protagonists of
breastfeeding to develop an advertisement to deter Nestlé from promoting its milk
products in third-world countries. The aim of this advertisement was to stop Nestlé from
advertising their milk products to mothers of new-born babies who might substitute
breast milk with Nestlé milk formula.
Personal selling occurs where a salesperson is in direct personal contact with the
consumer. This is an expensive marketing method but has a higher opportunity for
success as the message can be adapted by the salesperson to answer all possible
questions by the customer. However, this method of communication has the potential for
misrepresentation and false claims and so must be monitored.
Outdoor advertising on billboards, posters, bus stops and public-transport vehicles
reaches consumers at a time when they are out of their homes and busy with other
activities. This is also the best alternative to reach a target market that does not read
regularly or does not have access to television and the movies. In South Africa, outdoor
advertising is used extensively but there are also issues such as misrepresentation that
need to be monitored.
The public-relations management function of a business can be seen as a separate
function to the marketing function. While the marketing function concentrates on the
direct customer or potential customer, the public-relations function has a wider range of
audiences that it targets. The aim of public-relations (PR) management is to build good
relations with the different stakeholders of the organisation (this includes internal
stakeholders, such as employees and shareholders, as well as external role players, such
as government, suppliers and competitors). Public-relations management is a formal and
systemic effort to portray the organisation in a favourable light and to counteract
unfavourable publicity. One of the main instruments of the public-relations function is
publicity, which can be described as news items appearing in the mass media about the
organisation, its products or its people. One of the methods with which to obtain
favourable publicity is through sponsorships. A sponsorship can be described as an
investment of cash or kind (for example, the provision of professional dietary advice) in
an activity such as a sport, in return for access to the exploitable commercial potential
that is presented by this sport. An example of a sponsorship is that of MTN (the South
African cellular-telephone company) which sponsored the 2010 FIFA World Cup in South
Africa. MTN spent millions of rands in sponsoring this event.
Marketing communication strategies present their own unique ethical challenges.
Advertisers have a range of less-than-ethical yet legal tools at their disposal, including
emotional appeals, taking advantage of less-educated individuals, spreading propaganda
for political campaigns and stereotyping. Sometimes specific groups are stereotyped, for
example, women are portrayed as housewives, who are completely preoccupied with
their laundry in laundry detergent advertisements. One of the most stereotypical
messages is that an abundance of earthly possessions will lead to a better life and
complete happiness. Ultimately, consumers will be more attracted to companies that do
not use underhanded, psychologically manipulative tactics to gain their custom.
13.6Ethical and cause-related marketing
13.6.1Ethical marketing
Ethical marketing can be described as the process through which corporations develop
customer interest in their range of products and services, and as a result of that also
develop a relationship with all stakeholders of society in general, and the environment in
which the corporation operates. The inherent link between ethical marketing and
corporate citizenship must be stressed. Corporate citizenship is a self-regulatory
management instrument that is used by the business to ensure that it adheres to the laws
of the country, and the national and international norms and ethical standards of the
country in which it operates. It is in this domain of ethical standards where the concept
of ethical marketing comes to the fore. Ethical marketing principles are applied in the
manufacturing and marketing of the product or service that is sold (see, for example, the
issues raised in the discussion of Nestlé products above). It is also applicable to the rest
of the marketing mix elements such as the distribution and marketing communication
that is used.
Ethical marketers that refrain from unethical practices earn the respect of customers
when they provide information that does not make use of manipulative and underhanded
strategies.27
Pricing strategies, such as penetration pricing, can be seen by customers as unethical
or deceitful. As discussed above, penetration pricing starts with low prices to attract the
customer but this could result in a bait-and-switch situation when the corporation
increases prices once consumers have grown accustomed to the prices and the
corporation they are dealing with.
Ultimately, the main reason why organisations must behave in an ethical manner is to
protect the organisation’s brands and its reputation and through this ensure the long-
term viability of the organisation.
13.6.2Cause-related marketing
Cause marketing or cause-related marketing refers to the specific type of marketing
activities joining the combined efforts of a profit-seeking business and a non-profit
seeking organisation for mutual benefit of both organisations. Cause-related marketing
is completely different from corporate philanthropy as philanthropy is aimed at making
a donation to a specific and worthy cause that is accepted by the South African Revenue
Service (SARS) as being tax deductible for the calculation of company tax. Cause-related
marketing is not always based on a donation but includes a win-win situation for both
the parties. An example of this is where the profit-seeking organisation works together
with a non-profit organisation, such as The Red Cross Hospital. Typically, in cause-
related marketing campaigns, the corporation’s brand is linked to the non-profit cause
and a percentage of the proceeds of turnover of the brand is then donated to the non-
profit organisation.
The possible reasons why a non-profit organisation would be interested in cause-
related marketing include the wider exposure of the organisations’ cause to new
supporters in the customer base of the profit-seeking corporation and the obvious
financial benefits that such an agreement can bring. The profit-seeking organisation also
has some positive spin-offs, namely improved customer relations and loyalty of its
customer base, additional marketing opportunities to attract new customers, the
opportunity to differentiate the corporation from its competitors, increasing brand
awareness and also positive public relations and hopefully the opportunity to improve
turnover and bottom-line profit.
Cause-related marketing can be seen as one way that corporations can help alleviate
some of the social problems facing South African society. It allows non-profit
organisations to raise funds, while also raising awareness for their cause. There is,
however, a possible downside in that it enhances consumption with the related problems
of increasing the carbon footprint as well as creating more wastage, consumer cynicism
and the risk of tainting the image of the non-profit organisation. Cause-related marketing
can be seen as trying to use a one-brush approach to solve all societies’ problems, which
devalues the moral essence of consumption philanthropy by making virtuous action easy
and thoughtless. It therefore complicates the link between consumption in the market
and the negative effect that corporations have on society and the wellbeing of human
beings.28
13.7Conclusion
The marketing function has an important role to play in presenting the corporation in its
daily contact with a number of stakeholders. Together with the other functional areas like
procurement, operations and logistics and human resources, discussed in earlier
chapters, it is the role of the marketing section to communicate with the range of
stakeholders that form part of the corporation’s business environment. In the next
chapter, the financial management function is discussed.

Multiple-choice questions
1.Which one of the following is not one of the four marketing philosophies that
must be linked to corporate citizenship?
a.consumer orientation
b.bait pricing
c.profit maximisation
d.organisational integration
2.The use of marketing principles and techniques to influence a target audience to
voluntarily accept, reject, modify, or abandon a behaviour for the benefit of
individuals, groups, or society as a whole is known as _____ marketing.
a.POPI
b.discriminatory
c.social
d.direct
3.Pick n Pay’s sponsorship of various educational and charitable events
demonstrates its commitment to:
a.consumer orientation
b.profit maximisation
c.baiting
d.social responsibility
4.Which one of the following is not an advantage of using product packaging?
a.Product integrity is maintained
b.Promote the selling of the product
c.Protect the product from degradation
d.Helps to price the product
5.Which one of the following is not a threat to the manufacturer or consumer of the
product?
a.product cannibalisation
b.product obsolescence
c.product innovation
d.psychological obsolescence

Discussion questions
1.Consumers are becoming more aware of their rights and they are demanding that
these rights be adhered to. There are a number of South African consumer
protection organisations and media which aim to protect the rights of consumers.
Discuss some of these organisations.

2.Discuss the advantages and disadvantages of psychological obsolescence from a

company and consumer perspective.
3.Why are environmentally friendly electronic cars not getting enough traction in
South Africa? Explain the advantages and disadvantages of these types of cars in
the South African marketplace.

Additional reading
•CSR and consumers: Sen, S & Bhattacharya, CB. 2001. Does Doing Good Always
Lead to Doing Better? Consumer Reactions to Corporate Social
Responsibility. Journal of Marketing Research, 38(2) (May, 2001), pp. 225–243.
[Online]. Available: https://faculty.fuqua.duke.edu/~moorman/Marketing-Strategy-
Seminar-2015/Session%2012/Sen%20and%20Bhattacharya%202001.pdf
•First-time mover advantage: Exclusive: Watch Steve Jobs’ First Demonstration of
the Mac for the Public, Unseen Since 1984. [Online].
Available: http://time.com/1847/steve-jobs-mac/
•Understanding How The Innovator’s Dilemma Affects You. [Online].
Available: http://www.bothsidesofthetable.com/2010/11/04/understanding-how-
the-innovators-dilemma-affects-you/

References
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2016].
3.Whaley, F. 2013. Is corporate social responsibility profitable for companies?
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5.Ford News, 3/1/1926 p. 2.
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275.
7.Kotler, Roberto & Lee
in http://academic.brooklyn.cuny.edu/economic/friedman/mmintroduction.htm [
10 June 2015].
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s&view=project&id=20%3Aforever-wild-save-the-rhino&Itemid=3 [20 June 2015].
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df [10 June 2015].
10.Maloney, C. 2014. Top Green Companies: Why Do the Largest Corporations
Always Win? [Online]. Available: http://www. poplarnetwork.com/news/top-
green- companies-why-do-largest-corporations- always-win#sthash. [10 June
2015]. CiOtPjBR.dpuf http://www.poplarnetwork.com/news/top-green-
companies-why-do- largest-corporations-always-win#sthash. CiOtPjBR.dpuf [20
June 2015].
11.Botha, M. 2011. Marketing practices now regulated by the Consumer Protection
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[Online]. Available: http://www.workpool.co.za/featured/popi/ [18 June 2015].
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[Online]. Available: http://www.digitaljournal.com/article/289481 [18 June 2015].
14.Reprinted with permission of Agence France-Presse. India capital bans Nestles
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and-lifestyle-the-cost-of-obesity [12 June 2014].
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Development, 8(1):5–17.
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Available: http://www.trustedreviews.com/opinions/iphone-6-vs-iphone-5s [9
June 2015].
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Reproduced by permission of Subaru of Indiana Automotive, Inc.
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Report. [Online].
Available: http://www.sustainablebrands.com/news_and_views/cleantech/hanna
h_ritchie/apple_voted_greenest_gadget_company_new_greenpeace_report [11 June
2015].
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Revised and Updated 5th Anniversary Edition. FT Press. London, p. 3.
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Available: http://www.bdlive.co.za/indepth/greeningyourbusiness/2014/01/17/t
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Purchasing. 2012. [Online].
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[15 June 2015].
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88–91.
24.Dos Santos, MAO, Svensson, G & Padin, C. 2013. Indicators of sustainable
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Available: http://smallbusiness.chron.com/list-ethical-legal-issues-advertising-
11466.html [27 June 2015].
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Innovation Review. [Online].
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rketing/ [2 July 2015].
chapter
Financial management
Tersia Botha, Alfred Bimha and Ireze van Wyk
14
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Define the term financial management
•Defend the maximisation of corporate value as the fundamental objective of
financial management
•Explain the ethics of maximising corporate value
•Discuss the focus of financial management and its relationship with corporate
citizenship
•Explain responsible investment from the viewpoint of corporates that invest in
assets and projects
•Explain responsible investment from the viewpoint of individual and institutional
investors
•Discuss responsible financing from a corporate perspective
•Discuss responsible financing from a financier’s perspective
•Explain responsible distribution of profits
•Explain the term integrated reporting within a corporate citizenship perspective
KEYWORDS AND CONCEPTS
-best-in-class investment strategy
-community investing strategy
-consumer protection regulation
-control
-corporate value maximisation
-ethics of corporate value maximisation
-financial education
-financial institution’s self-regulation
-financial management
-financial services industry
-impact investing strategy
-integrated reporting
-negative screening investment strategy
-positive screening investment strategy
-profit maximisation
-responsible distribution of profits
-responsible finance
-responsible investment
-return
-risk
-risk management
-societal impact
-sustainable corporate return
-sustainable-themed investing strategy

OPENING CASE SCENARIO

British Petroleum (BP) oil company

One of the worst environmental disasters in US history occurred on 10 April 2010
when the British Petroleum (BP) oil company’s Macondo well blew out in mile-deep
water in the Gulf of Mexico. This caused the Deepwater Horizon drill rig to explode,
killing 11 workers and injuring 17 others. Over the course of the next 87 days,
attempts to cap the gushing Macondo well failed and when the flow finally stopped
on 15 July 2010, an estimated 171 million gallons of oil had leaked into the highly
productive and biodiverse Gulf of Mexico. The catastrophe lead to many injuries and
loss of workers’ lives, harm to the health of many Gulf-coast residents, ecological
damage and negative economic impacts.1
The key financial impacts of the disaster as at June 2015 can be summarised as
follows: 2
•More than $11,6 billion has been paid to Gulf-coast residents and businesses,
who have suffered economic damage or medical issues as a result of the oil spill.
An amount of $1,4 billion has been paid to governments for spill-related costs.
Many claims are still outstanding.
•The Gulf of Mexico’s commercial fishing industry has lost $247 million as a result
of post-spill fisheries closures.
•Estimates of lost tourism dollars cost the Gulf coastal economy approximately
$22,7 billion through 2013.
•BP has set up a fund of $2,3 billion for the seafood industry, of which $1 billion
was paid out in December 2013. Another $1,1 billion settlement fund was set up
to compensate businesses and property owners affected by the spill.

At the time of the oil spill, BP was the United Kingdom’s largest corporation and a
major investment company in the United Kingdom. For investors and shareholders of
the company, as well as for citizens, the oil spill meant financial losses. The following
table compares the profit (loss) before interest and taxes (US$) and the earnings per
share (US$) of the company before the disaster (2008 and 2009) and the years after
that until 2015.

Profit (loss) before interest and taxes and earnings per ordinary share:
Table 8.1:
2008–20153

The profit (loss) of BP is the surplus (deficit) funds remaining after all the costs are
deducted from the company’s total revenue, and the basis on which tax is computed
and dividends are paid. The profit of any corporation is the best-known measure of
its financial success. In the years before the oil spill, BP’s profit before interest and
taxes was $35,239,000 and $26,426,000 in 2008 and 2009 respectively. In the year
in which the disaster occurred, a huge decrease in profit was realised and the
company’s loss for the year amounted to $3,702,000. The company regained its
financial strength in the years 2011 to 2014, but again made a loss in 2015.
The earnings per share represents the portion of BP’s earnings, after provision is
made for the payment of taxes and preferred stock dividends that is allocated to
each share of common stock in the company. This figure is calculated by dividing the
net income earned (during a specific financial year) by the total number of ordinary
shares outstanding for the same financial year. In the years prior to the oil spill, BP’s
earnings per share were $112,5 and $108,76 in 2008 and 2009 respectively. As in
the case of the company’s earnings before interest and taxes, its earnings per share
declined enormously in 2010 to $19,81, indicating the extent that the oil spill
contributed to the financial losses of its shareholders and investors. The loss in trust
from the stakeholders of the company is not quantifiable.
In BP’s 2011 Annual Report,4 the chairman of the company at the time, Mr Carl-
Henric Svanberg, indicated that the company relaid its foundations: ‘Our objective
was to ensure our company is able to deliver sustainable shareholder value in the
months and years ahead. Above all else, this is dependent on BP having the trust of
the societies in which it works – today and over the long term’. In order to reach this
objective, the board of the company set three priorities for BP:
•Enhance and embed safety. BP restructured and enhanced its processes,
systems and culture. Furthermore, the company pays more attention to the
management of risk to prevent such a disaster from ever happening again.
•Regain trust. The company ensured that it met commitments in the Gulf of
Mexico; co-operated with every official investigation and prepared for litigation. It
also worked closely with governments and regulators, and communicated openly
with shareholders and the wider world.
•Create value through a clear strategic plan. This plan focused on growing
operating cash flow and increasing shareholder returns.

These priorities will hopefully lead to a safer company. However, the long-term
financial effects of the disaster will take a long time to recover from.
14.1Introduction
Warren Buffett, business magnate, investor and philanthropist, famously said, ‘It takes 20
years to build a reputation and five minutes to ruin it. If you think about that, you’ll do
things differently’.5 The opening case scenario focused on BP oil company – a company
that saved money through carbon reductions, a company that was praised by the
sustainability community for years as best-in-its-class. In the 1990s, the chief executive
officer of BP at the time, Lord John Browne, set BP on a path to go ‘beyond petroleum’.
The period between 1995 and 2007 was described as BP’s golden period of expansion
and diversification and Lord Browne was praised for his contribution to BP’s increasing
interest in renewable energy sources. However, over the years, BP has quietly reduced
its investment in renewable energy to a negligible percentage of sales and profits. Also,
the company focused more and more on cutting costs, avoided ‘green’ initiatives, and
underspent on safety – leading to the Deepwater Horizon oil spill. Today, the oil spill and
its consequences are remembered vividly, and the company’s best-in-class position in the
sustainable community is long forgotten. The financial implications of the disaster
amount to billions of dollars lost – a consequence that could have been avoided by
following a responsible financial management process.
This book propagates the focus of corporate management on the triple bottom line.
Throughout the entire book, the focus is on practising good corporate citizenship and
consideration for the social, environmental and governance factors pertaining to all
corporates. However, corporates still need to realise healthy and acceptable profits in
order to satisfy their owners, investors, financiers, employees, government and all other
stakeholders, and to ensure the long-term sustainability of the corporate. It is the task of
its financial management function, to realise acceptable financial performance, while
being a good corporate citizen – indeed not an easy task! In this chapter, we will first
explain the financial management function in terms of its fundamental objective, namely
the maximisation of corporate value. Second, the focus of financial management will be
illustrated, after which corporate citizenship and the finance function will be explained.
The remainder of the chapter will explain responsible investment, responsible finance
and the responsible distribution of profits. The chapter concludes with a brief discussion
on integrated reporting.
14.2The financial management function
The effectiveness of the financial management function has a profound impact on the
future and sustainability of corporations. In this section, we will define the financial
management function and explain the fundamental objective and focus of the function.
14.2.1Defining financial management
The financial management function of corporates refers to the efficient and effective
management of money (funds) in such a manner as to accomplish the objectives of the
corporate. Corporates face three major financial decisions:
1.Which real assets and/or financial assets and/or projects should we invest in?
2.How should the corporate finance these real assets and/or financial assets
and/or projects?
3.How should the profit of the corporate be distributed?

Before we interrogate each of these decisions further, we first need to answer the
question: ‘What is the fundamental objective of financial management?’
14.2.2The
fundamental objective of financial
management
Financial management objectives usually centre on the maximisation of some variable.
For instance, the objectives of financial management are often cited as the maximisation
of profit, or maximising the value of the corporation, or maximising share prices, or
maximising shareholders’ wealth, or maximising the growth of the corporation. At the
outset, it is necessary that the finance function establishes which of these variables
should be maximised, since it often happens that one variable is maximised at the expense
of others. For example, if the focus is on the maximisation of share price, corporates will
declare and pay out as many dividends to their shareholders as they possibly can because
an increase in dividend payments usually signals a sound financial position, which will
lead to higher share prices. However, if dividends are maximised at the expense of the
reinvestment of funds into projects that are important for long-term growth and survival,
the aim of share price maximisation is at the expense of corporate growth. We need to
accept that in general, investors (corporate and individual investors) have certain
financial expectations of corporations. Investors invest their money in a corporation –
expecting some return on their investment in future. Such expectations can be quantified
and expressed as a single present (or current) value. By doing this, investors can decide
whether or not to invest in the corporate based on a comparison between the value of
their investment (in current financial terms) and the expected returns of their
investment, also expressed in current financial terms. By the same token, corporations
can decide whether or not to invest in an asset or project based on the comparison
between the initial capital outflow (again expressed in current financial terms) and the
expected returns on this investment in future (also expressed in current financial terms).
For instance, a corporation has to decide between two possible projects to invest in. Each
project has a certain cost (expressed in current financial terms), and each project is
expected to generate a future stream of income. The future stream of income can be
expressed as a single aggregate current value. The question of which variable to maximise
must therefore be determined so that all financial activities performed by the finance
function are aimed at attaining the fundamental financial objective. The fundamental
objective of the finance function should take all stakeholders into account – shareholders,
managers, government, employees, suppliers, and so on. Profit maximisation is often
regarded as an appropriate and fundamental objective of financial management, since all
stakeholders are interested in the financial wellbeing of corporates.
Why might profit maximisation not be the right objective for corporate finance? The
profitability of a corporate is important for many stakeholders, especially shareholders,
managers, suppliers and also government. A corporation that does not realise an
acceptable level of profitability will not be sustainable, and over time, will not be able to
meet its financial obligations. However, profit maximisation is only one part of the total
picture in terms of financial management. Why? Correia et al6 provide several reasons:
•First, it is possible for management to increase a corporate’s profit within a specific
financial year by reducing costs such as advertising and research and development,
or a once-off increase in earnings, such as the once-off sale of a valuable asset. A
reduction in advertising and research and development costs will, however, have a
detrimental effect on the performance of the corporation over the long term. We
have seen the effect of such a decision on BP in the opening case scenario. The
company’s focus changed from a corporate investing capital into new projects to a
company that cut back on research and development and safety measures in order
to increase share prices. The effect of this shift in focus lead to the Deepwater
Horizon disaster with billions of dollars lost over many years. Another example can
be found in South African Airways (SAA) that reported profits of R350 million in
2000. Upon investigation, it was found that this figure was a result of a once-off sale
of SAA’s aircrafts and the company did not make a single cent in profits. If the
revenue from aircraft sales were not included in SAA’s financial statements, SAA
would have actually showed a loss for the year. The profits reported in SAA’s
financial statements, were thus not a true reflection of the financial position of the
corporate. In fact, reporting such a high profit led to enormous pay-outs in terms of
executive remuneration, which SAA could actually not afford. One could argue that
such reporting is unethical since it created a false financial picture and paying out
enormous amounts as executive remuneration, could (and actually did) lead to
financial distress.7
•Second, profit maximisation does not directly factor in the time value of money. A
project that results in a profit of R10 million per year for 5 years would be preferred
to a project that generates R5 million per year for 10 years, the reason being that
profits received sooner can be reinvested to earn higher future returns.
•Third, accounting profits do not always reflect cash flows. Accounting profits are
reflected in a corporate’s statement of comprehensive income and incorporate all
income and expenses for a specific financial period. Sales revenue, cost of sales,
operating expenses, interest and taxes are disclosed in this statement. The sales
figure includes cash sales as well as sales made on credit to debtors. However, only
cash sales generate cash flows for the corporate within a certain period. It may
happen that the statement of comprehensive income reflects a healthy profit, while
the corporate is not in a position to meet its short-term financial obligations such as
rent, interest, salaries, and so on.
•Fourth, accounting profits do not include an adjustment for the cost of equity
financing (capital contributed by the owners of the corporation). Accounting profits
are usually reported in terms of the corporate’s earnings per share, which is
determined by dividing the corporate’s net profit by the number of shares issued.
Accounting profits, as expressed by earnings per share, only reflect actual costs and
not the opportunity costs of equity. For example, a corporate may report accounting
profits of R200 000 for a specific financial year, and have 4 000 ordinary shares
issued. The earnings per share for the corporate is therefore R50 per share. The
management may focus on growth in earnings per share, which may be the wrong
objective since earnings per share does not take the cost of equity into account.
•Finally, accounting profits ignore the impact of risk on the value of the corporate. In
general, shareholders are risk- averse, meaning that they will prefer less risk.
Shareholders will value a corporation not only in terms of future cash flows, but also
in terms of the risk of those cash flows. Profit maximisation may be the wrong
financial objective, since the calculations of profits ignore the risk of earning a profit
in future.

The question might now arise as to what is then a more appropriate objective for financial
management? The maximisation of the value of the corporation is an appropriate
objective for financial management, since it encompasses all the reasons why profit
maximisation is not an appropriate objective as stipulated above. In this context,
maximising the value of the corporate really means that over the long term, management
should maximise the value of the shareholders’ interest in the corporate.
The activities of any corporate exist in order to offer communities goods and/or
services that are in demand. Customers offer money in return for these goods and
services offered by the corporate. In order to establish a corporate, capital investment is
required for infrastructure and the acquisition of assets. To enable the capital to be raised,
investors (individual and corporate) must be persuaded to invest in the corporate, as
opposed to all other investment opportunities that are available to them. Once the
investor has placed funds in a corporate with the expectation that an adequate return will
be generated, the onus is placed on the management of the business to ensure that the
return is realised. Should the corporate not perform according to expectation (in terms
of expected return and risk associated with the investment), the investor can withdraw
the funds and seek an alternative investment opportunity. A clear objective of the finance
function is therefore to strive to increase the value of the corporate and to ensure that
the wealth of the investors is increased. Maximising the value of the corporate, and
especially the claims which shareholders have against that value, is therefore considered
the primary objective of financial management. Increasingly in line with corporate
citizenship, corporate governance and King III, management should also consider the
interests of all other stakeholders, not just the shareholders of the corporate, in order to
ensure its long-term sustainability. Other stakeholders, such as employees, suppliers,
government, the community and customers, have certain claims against corporations.
Employees need to receive a salary and have an interest in the corporate’s long-term
sustainability, government claims taxes on profits, suppliers need to get paid, the
community provide resources which the corporate needs to use responsibly and
customers claim need-satisfying products and services. Therefore, we adopt the
following primary objective of financial management in this book – the maximisation of
the value of the corporate, and especially the claims that all stakeholders have against the
value of the corporate.
Corporate value can only be maximised by responsible investment, financing and
profit distribution decisions made by the financial function.
It is, however, very important to discuss the ethics of maximising value and we will
look at this more closely in the next section.
14.2.3The ethics of maximising corporate value
There is essentially nothing wrong with the objective of maximising value. What may be
wrong is how value maximisation is achieved. For example, a manufacturing corporation
may reduce labour costs by employing child labour in a developing country. Profit and
possibly also value will be maximised but certainly at the expense of social issues.
Increasingly, corporations face reputational risk from following such practices, and this
may reduce their value and long-term sustainability, as we have seen in the opening case
scenario. Ethical standards are fundamental in corporate finance and it makes sense over
the long term as well. Financial managers should focus on the interest of all stakeholders
(including shareholders), but they should also act in a responsible way. In line with King
III, corporations are also required to consider the interest of society and the environment
to ensure long-term sustainability.
All kinds of managers, at all levels of management, need to make decisions that entail
the allocation of scarce resources in the most effective and efficient way. For example, a
human resources manager needs to allocate responsibilities to staff, organise them in the
most effective manner and determine remuneration levels. A marketing manager needs
to decide on the most cost-effective promotional campaigns within a budget constraint.
Financial decisions (such as deciding in which project to invest, allocating capital in the
most effective and efficient manner or deciding on the most appropriate capital structure
of the corporate) are no exception. The financial manager is responsible for the effective
and efficient management of corporate funds, which will be discussed in more detail in
the next section.
14.2.4The focus of financial management
As indicated in section 14.2.1, financial management faces three basic decisions:
1.the selection of assets and/or projects to invest in,
2.the financing of these investments, and
3.the distribution of corporate profits.

The selection of assets and/or projects to invest in requires that the finance function finds
assets (real and/or financial) and/or projects that will maximise the value of the
corporate. This decision is often referred to as the investment decision. The financial
function is responsible for the identification and selection of assets and/or projects in
which the corporate will invest that will contribute to the values and strategic objectives
of the corporate. These assets may be short term or long term in nature. Assets with a
short-term nature are often referred to as current assets. Examples of current assets are
cash on hand, inventory and the debtors of the corporation. Assets of a long-term nature
are called fixed assets and include buildings, machinery, land, and so on. The more capital
invested in short-term assets, the more liquid a corporation is considered to be, since
current assets can be converted into cash fairly quickly, making it possible for
corporations to pay their current (or short-term) liabilities on time. On the other hand, a
corporation should also invest in fixed assets to ensure long-term success, sustainability
and profitability.
The financing of investing in these assets or projects requires the raising of capital –
either equity (capital contributed by the owners of the corporation) or debt (capital
contributed by the non-owners of the corporate) to finance the investment in assets
(current and fixed assets). This decision is often referred to as the finance decision. A
general rule is that fixed assets should be financed by long-term sources (for example,
long-term loans, mortgages and equity), and that current assets should be financed by
short-term sources (for example, overdraft bank accounts, suppliers’ credit, short-term
loans and retained earnings).
The distribution of corporate profits involves the distribution of the net profit of the
corporation. The net profit for a specific financial period (usually a financial year) is
calculated by sales revenue, less all costs of sales, operating expenses, interest paid and
taxes. Therefore, net profit is the amount available for distribution as dividends to
shareholders and retained earnings, which can be reinvested in the corporate. Usually,
corporations find a balance between these two options; in other words, they find a
balance between profits to be retained in the corporate, and profits to be distributed as
dividends to shareholders. The decision to balance the profit distribution and profit
retention can affect the value of corporates. A higher dividend beyond the market
expectation will increase the market price of a corporate’s share. However, a corporate
that reinvests less of its profit may hamper its future growth. The opening case scenario
illustrates the latter. Regardless of BP’s investment in renewable energy between 1995
and 2007, the company reduced this investment, cut costs, avoided green initiatives and
underspent on safety. This lead to a period of financial distress and maybe even more
importantly, a loss of trust in the company.
The effectiveness of the finance, investment and profit distribution decisions, are
measured by the increase/decrease in the value of the corporation. It is also important to
note that these decisions should be made within a strategic context. Corporate strategy
is the compass of the corporate, and financial managers (like all other specialised areas
of management such as marketing, human resources and procurement management)
need to make decisions in line with the vision and core values of the corporate. The way
that a corporate executes these decisions has an impact on the perceptions of the
community, hence these decisions also have an impact on the corporate social
responsibility and corporate citizenship perceptions. The next section will focus on the
relationship between the finance function and corporate citizenship.
14.3Corporate citizenship and the finance
function
In Chapter 1, corporate citizenship was defined as the role of the corporation in
administering citizenship rights for individuals. In this chapter, the role that the finance
function plays in delivering citizenship rights to citizens (from a finance perspective – the
capital acquired and allocated) is discussed. It is accepted that the finance function has a
very important role to play in the formulation of corporate goals and strategies, especially
in terms of corporate citizenship, for business, investment, legal and corporate value (as
discussed in the previous section) reasons. By adopting the maximisation of corporate
value and especially the claims that all stakeholders have against the corporate, as the
fundamental finance objective, we acknowledge the importance of practising good
corporate citizenship in terms of the financial management function. The practice of good
corporate citizenship in finance is based on three pillars: responsible investment,
responsible finance and the responsible distribution of profits. These three pillars will be
discussed in more detail in the following section.
14.3.1Responsible investment
Responsible investment can be interrogated from the viewpoint of a corporate that
invests in assets and projects to ensure its long-term growth and sustainability.
Responsible investment can also apply to the viewpoint of the individual and institutional
investor that invests capital in a corporate with the hope of future returns on this
investment. In this section, we will focus on both these viewpoints.

Responsible investment from the viewpoint of the corporate that

invests in assets and projects
Principles for Responsible Investment (PRIs) define responsible investment as an
approach to investing in assets (real and financial), and/or projects that aims to (i)
incorporate environmental, social and governance (ESG) factors into investment
decisions, (ii) improve the management of risk; (iii) generate sustainable, competitive
long-term returns and (iv) achieve a positive societal impact.8 From this definition,
responsible investment is based on the following:
(i)Incorporating ESG factors in corporate investment decisions. Environmental,
social and governance (ESG) factors are numerous and forever changing. However,
the most important environmental factors to incorporate in a corporate’s
investment strategy are climate change; greenhouse gas emissions; resource
depletion (including water); waste and pollution; and deforestation. For more
information on these factors, please refer to Chapters 2 and 3. In terms of the social
factors related to corporate investment decisions, the following are the most
important to consider: working conditions (including slavery and child labour);
local communities (who need corporates as providers of job opportunities);
conflict (both inside and outside the corporation); health and safety; employee
relations; and diversity. Lastly, governance factors related to corporate investment
decisions revolve around executive pay (total remuneration packages of top
management); bribery and corruption; political lobbying and donations; board
diversity and structure (where diversity refers to various aspects such as the
educational, cultural and societal backgrounds of the board); and the corporate’s
tax strategy. By implementing an ESG incorporation strategy, corporates consider
the environmental, community, and other societal and corporate governance
criteria in the analysis of various investment alternatives. In following this
approach, corporates complement traditional and quantitative techniques of
analysing the financial risk and return of its investments in assets and projects with
qualitative and quantitative analysis of ESG issues. The dilemma box below
provides an example of this.
DILEMMA
A beer manufacturer is planning to expand its brewing facilities outside the borders of the
country. They are interested in buying the brewing facilities of a competitor. Should they do
so, the selling company wants them to take over their current staff, all the equipment and
machinery. The selling company is offering them a very reasonable price. If the
manufacturer had to build a new facility and acquire new equipment, the costs will almost be
double than the price offered to them by the existing brewing company. However, upon
reviewing the ESG principles of the selling company, it becomes evident that this company
does not have an ethical BEE programme in place. Furthermore, there are no proper
processes to ensure environmental safety and reduce harm to the environment. Also, the
selling company was involved in a recent scandal regarding excessive executive
remuneration. Should the beer manufacturer buy such a company since it comes at a very
good price, and thereby discard the ESG principles? The answer to this question is clearly
not only a financial calculation of the expected risks and return associated with such an
investment. It will require the finance function to also implement a qualitative analysis of the
ESG issues.
(ii)Investing in projects and assets which would improve the management of risk. The
term ‘risk’ normally refers to the possibility of realising a loss resulting from a
given action. In financial management, risk refers to the expectation that the actual
outcome of a financial action (such as an investment in a financial asset or project),
may be different from the expected outcome. For instance, a corporate investing in
a new ‘green’ project may realise lower returns on the project than anticipated. By
the same token, a higher return than the expected return can also be realised.
The business risk of a corporate usually results from the nature of the business itself
and includes all the uncertainty that surrounds the particular corporate and the
industry in which the corporate competes. Business risk is reflected in changes in
the sales of the corporate and the cost structure of the corporate. Changes in
corporate sales result from various factors, such as increased competition, the
availability of substitute products, state of the economy, social variables and
technological advancements. An important part of a corporate’s business risk is its
reputational risk. A corporate showing little or even no concern for ESG factors,
may suffer losses due to its bad reputational risk, as we have seen in the BP oil
company case scenario. The cost structure of a corporate is a function of the
relationship between fixed costs and variable costs of the corporate. The financial
risk of a corporate is a function of the use of debt to finance the corporate’s
investment in assets and/or projects. Debt financing requires the payment of
interest on such debt, regardless of the sales, income and profit realised by the
corporate. Usually, corporates aim to increase shareholder returns by using debt
financing. Corporates that are liable for fixed interest payments (which need to be
paid to creditors, such as banks that provide a loan that carries a certain
percentage interest) are exposed to financial risk, which is not faced by a corporate
financed exclusively by owners’ equity. In practice, corporates aim to use a
combination of debt-equity financing, which we discuss in more detail in section
14.4.1. The total corporate risk refers to a combination of the business and financial
risk of corporates. A corporate that aims to invest responsibly in assets and/or
projects, needs to take the business, financial and total risks involved in its
decisions into consideration.
(iii)Generating sustainable and competitive long-term corporate
returns. Responsible investment decisions that incorporate environmental, social
and governance issues, and that manage business and financial risk will generate
sustainable and competitive long-term corporate returns. In our opening case
scenario, evidence was provided of the negative financial consequences for BP,
when the company spent less and less on ESG issues, and focused more exclusively
on financial returns. The financial impact of the disaster, years after the event, is
still negative, which could be detrimental to the company’s survival over the years
to come.
(iv)Achieving a positive societal impact. Achieving a positive societal impact has
become a requirement for contemporary corporations. Investors are not willing to
invest in corporates, and customers are not willing to buy the products of
corporates, that demonstrate no focus or specific efforts in achieving a positive
societal impact. Furthermore, employees prefer working for corporates with good
values that invest their funds responsibly.

Responsible investing should be pursued by all corporations – even those with the sole
purpose of maximising financial return. To ignore environmental, social and governance
factors, is to ignore risks, opportunities and threats that have a significant impact on the
financial returns of the corporate – affecting all of its stakeholders. Academic research
shows a strong link between environmental, social and governance issues and the
financial performance of corporates.9 The research indicates that corporates that do
consider ESG issues when making their finance and investment decisions, tend to
perform well financially compared to corporates that do not consider these factors.
Responsible investment is therefore a holistic approach that aims to include any
information that could be material to investment performance.

Why should corporates invest responsibly?

A growing number of investors, institutions and financial professionals are deploying and
managing financial resources to build more sustainable and equitable economies. 10 This
global trend is driven by the following: 11 12
•The global financial and investment community recognises that environmental,
social and governance factors play an important role in determining the risk and
return of investments. Again, the opening case scenario illustrates the increase in
risk and significant decrease in returns of BP following the company’s decision to
decrease its investment in research and development and other environmental
issues.
•The values and goals of the corporate may be aligned with building a sustainable
and equitable economy. Moreover, the mission of corporates may also be aligned
and include responsible investments.
•The incorporation of environmental, social and governance factors in investment
decisions is part of an investor’s fiduciary duty to all of its stakeholders.
•There is great concern about the impact of short-term-orientated investment
decisions on corporate performance, return on its investments and market
behaviour over the longer term. It may happen that a corporate decides to invest in
a certain project that will realise a positive financial return over the short term, but
over the longer term, will have detrimental effects on the corporate’s performance.
For instance, an investment in a ‘sick’ building could generate a high return over the
short term because of the low lease payments. Over the longer term, such a building
could have negative effects on the health and safety of its inhabitants.
•Various legal requirements protect the long-term interests of a corporate’s
beneficiaries and the wider financial system – which should be recognised by
investors.
•Competitors differentiate themselves by offering responsible investment services
as a competitive advantage.
•Stakeholders are becoming more and more active and demand transparency in
terms of where and how their money is being invested.
•Value-destroying reputational risk (from issues such as climate change, pollution,
working conditions, employee diversity, corruption and aggressive tax strategies) is
increasing in a world of globalisation and social media.

Benefits of responsible investment

A broad consensus exists within the literature of a positive link between responsible
investment and the value of corporates. Responsible investments may have benefits
relating to corporates’ employees, customers, resource efficiency and regulations (the
benefits listed below are based on empirical research and the findings thereof over
various industries, in various countries over long periods of time): 13
•Benefits in terms of employees. A corporate implementing favourable social
responsible investment strategies, is likely to benefit from high employee morale
and productivity. Corporates developing a good reputation with employees
are better able to attract and retain them, and such corporates are able to do so at a
lower cost than less reputable employers. Furthermore, corporates that invest in
stakeholder welfare, including the welfare of employees as a primary stakeholder,
can increase a corporate’s reputation and human capital. Such investments can have
a material and positive impact on the value of the corporate – therefore attaining the
fundamental objective of financial management as we defined it in section 14.2.2 of
this chapter. Corporates can also benefit from direct investments that target
employees’ interests, for example, hiring underrepresented groups of employees.
Specific corporate investments in infrastructure, such as on-site childcare facilities,
or policies, such as work–life balance, can also contribute to attracting and retaining
human resources.
•Benefits in terms of customers. Customers prefer buying from corporates with a
positive socially responsible investment reputation. They also prefer to buy socially
responsible-inspired products. Furthermore, socially responsible investment affects
how corporates view and are willing to transact with another corporate after being
informed about the corporate’s socially responsible investment policies and efforts.
Green real estate and green construction are another two areas that can provide
benefits to corporates. Potential tenants may view this kind of building as providing
a better work environment for their employees, enhancing the corporate’s
reputation with potential clients and providing a longer-lasting, more stable
location. Green construction offers three potential sources of corporate value: higher
rental rates, higher sale prices and higher occupancy rates.
•Benefits in terms of resource efficiency. In Chapter 2, the systems theory was
explained, indicating that corporates need various resources to transform what they
offer into need-satisfying products and/or services. Corporations need these
resources from the environment in which they operate, offering their products
and/or services to customers that also form part of their environment. We also
indicated that resources are scarce, and it is the corporate’s responsibility to use
resources in a responsible manner. A corporate’s responsible investment practices
can contribute to a more efficient use of its resources, hence contributing to its
value. Examples of responsible investment initiatives that can contribute to
corporate value are the management of pollution, waste prevention and reduction,
improvements in supply chain analysis, reduced energy consumption, reduced
packaging, and recycling programmes. In our opening case scenario, we saw that
1995 to 2007 were the golden years for BP in terms of responsible investment. In
1997, the company took a proactive stance on the environmental impact of fossil
fuel on global greenhouse gas emissions. They adopted an emissions trading system
and instituted a system-wide cap on emissions. Rather than being financially
harmed by these investment outlays, BP reported a net positive financial impact of
$600 million. The savings derived from quantifying the opportunity cost of
previously undocumented losses due to pollution.14 Another example is Walmart, a
company which, through careful supply chain analysis, was able to redesign its
distribution network, which resulted in a reduction of 100 million trucking miles
and a saving of $200 million in costs in 2009. Walmart realised this saving despite
an increase in the actual quantity of products delivered. 15
•Benefits in terms of regulations. All corporates need to adhere to
government regulations. In some instances, regulatory pressures force a corporate
to conduct an environmental audit, which may result in the identification of
previously unrecognised opportunity costs. By recognising these costs, programmes
can be implemented to reduce them, thereby contributing to the value of the
corporation. There is also a second possible benefit, where corporates view
regulatory pressures as an opportunity to differentiate themselves from
competitors. For instance, a corporate can voluntarily over-comply with existing
regulations, resulting in a reduction in costs relative to competitors. The over-
complying corporate will benefit through cost savings as well as being able to use its
over-compliance as a differentiating factor from its competitors, who might be
barely complying with this specific regulation. Environmental regulations are
changing all the time and this can lead to a very heterogeneous compliance
programme within a single corporation. This being the case, many corporates adopt
rigorous environmental programmes and tend to overinvest in environmental
compliance as a proactive measure to reduce expected future costs.

Terms such as ‘social’, ‘ethical’, ‘responsible’, ‘socially responsible’ and ‘sustainable

investment’ are used descriptively in multiple overlapping and complementary ways
within responsible investment. Responsible investment also continues to evolve as new
methods and approaches in the valuation and incorporation of ESG issues into the
management of corporations emerge.
The example box on the next page describes the development of responsible
investment indices, aimed at promoting responsible investments by the corporate sector.

Responsible investment from the viewpoint of the individual and

institutional investor
From the viewpoint of an individual or institutional investor (actively seeking companies
in which they wish to invest), the asset managers and asset owners of corporates can
implement ESG issues into the investment process in a number of ways: 16
•Best-in-class investment strategy. Following this strategy, investments are made in
sectors, companies or projects that were selected for positive ESG performance
relative to their peers in the industry. This strategy also includes avoiding those
companies or projects that do not meet certain ESG performance standards.
•Negative screening investment strategy. This strategy involves the exclusion of a
company, project or industry that is involved in activities that are deemed
unacceptable or controversial.
•Positive screening investment strategy. This strategy involves the inclusion of a
company, project or industry that is involved in activities that promote and sustain
communities, the environment and governance.
•Impact investing strategy. Following an impact investment strategy refers to the
investment in an industry, company or project that is aimed at solving social and/or
environmental problems.
•Sustainable-themed investing strategy. Implementing a sustainable-themed
investing strategy means the selection of assets specifically related to sustainability
in single- or multi-themed funds.
•Community investing strategy. This strategy refers to an investor explicitly seeking
to invest in projects or institutions that will serve poor and underserved
communities, in order to provide capital, credit and training opportunities that these
communities would otherwise lack. Corporates can invest in needed services
(healthy communities, access to food, education, child and infant care, access to
transport, access to jobs and affordable housing); economic development (quality
job creation and the development of infrastructure); and sustainable communities
(income growth plans and environmentally focused community investment).
Community investments provide individuals and corporates with tools and skills to
improve the quality of life for themselves, their families and their communities. For
many, community investment is the only hope to home ownership, job creation and
small business development.
Example
Socially responsible investment indexes
The ‘Occupy Wall Street’17 movement gave rise to an awareness of how corporates misuse
profits and do not reinvest back into the society or community in which they operate. The
movement started in 2011 and received global attention as it highlighted matters of social
and economic injustices caused by big corporates that operate in one of the largest financial
centres in the world – Wall Street, New York. Since the movement started, there has been a
radical transformation in how corporates report their financial performance in annual reports.
Furthermore, responsible investment has become an important objective of many
corporates. In South Africa, the Institute of Directors in Southern Africa (IoDSA) have
developed a Code for Responsible Investing in South Africa (CRISA) in 2011. The aims of
CRISA are to promote corporate governance, and maintain and enhance the credibility of
directorship as a profession.
An excerpt from the CRISA website states the following: 18

‘The CRISA code aims to provide the investor community with the guidance needed to
give effect to the King Report on Corporate Governance for South Africa (King III) as
well as the United Nations-backed Principles for Responsible Investment (PRI) initiative.
Both require institutional investors to take ESG issues seriously. The Code is the next
step in ensuring that institutional investors actually implement policies that guide their
day-to-day actions when it comes to responsible investing.’
The Social Responsible Investment Index19 in South Africa was established in 2004. The
index philosophy is founded on the three principles of the triple bottom line. The SRI Index
has evolved since its establishment. The advent of sustainability issues globally and King III
(to be replaced by King IV in 2017) locally birthed the creation of the index to foster good
corporate citizenship and promote sustainable development. Listed companies on
FTSE/JSE All share index are reviewed annually against a set of environmental, social and
governance issues.

The above strategies clearly indicate that should a corporation not incorporate ESG issues
into how they conduct business, in other words not practising good corporate citizenship,
they might lose the trust and desire of investors to invest in them.
14.4Responsible financing
In section 14.2.1, we indicated the second fundamental financial decision as the
following: ‘How should the corporate finance its real assets and/or financial assets and/or
projects?’ In this section, we will explore the finance decision first from the viewpoint of
the corporation (who needs finances to acquire assets and invest in projects) and then
from the viewpoint of the financiers of these investments in assets and projects.
14.4.1Responsible financing from a corporate
viewpoint
In section 14.2.2, we identified the fundamental objective of financial management as the
maximisation of corporate value. In line with this objective, the objective of the finance
decision should also be the maximisation of corporate value. In other words, the finance
function is responsible for making finance decisions that will contribute to the
maximisation of corporate value for all stakeholders (including shareholders but not
limited to them either). The financial management function should consider the broad
categories of finance to be raised, the mix of debt and equity, and the cost of the finance.
Furthermore, the financial instruments that will be issued (such as ordinary shares,
preference shares and bonds), must appeal to investors otherwise they will not invest in
the corporate.
Two broad categories of finance are available to corporates, namely equity-related
instruments and debt-related instruments. The primary source of finance is that provided
by the owners of the corporation, in other words, equity. In the case of a company, equity
is contributed by means of ordinary shares, retained earnings, and preference shares.
Debt-related instruments are categorised as long-term and medium-term finance,
although the exact line of separation between long and medium term is not clear.
Normally, medium-term finance would be for periods of not less than three years and up
to between five and ten years, whereas long-term finance would be for longer periods
depending on the industry in which the corporate is doing business. In the information
technology industry, long-term decisions may be decisions made for the next year,
whereas medium-term finance can be considered as a few weeks. In the airline industry,
medium-term finance can be regarded as 10 to 20 years, and long-term finance as 30
years. Debt-related financial instruments are associated with interest that needs to be
paid to the financier (which can be either a fixed or variable interest rate) and debt can
also be either secured or unsecured. Secured debt is secured over one or more of the
assets of the corporate. In the event of liquidation of the corporate, the proceeds from
those assets would first be applied to satisfying the claims of the secured financier (or
secured creditor). In the case of unsecured debt, the financier does not have a preferential
claim over any asset of the corporate – therefore, it is a greater risk than secured debt, so
it should have a higher interest rate (all other variables being equal). Examples of debt
financing over the long and medium term are debentures and corporate bonds, mortgage
loans, bank loans and leases. Over the short term, corporates can use bank overdrafts,
bankers’ acceptance, bills and notes, debtor finance and revolving credit facilities.
The relationship between debt and equity financing of a corporate, is known as the
capital structure of the corporate. The capital structure of a corporate is a complicated
decision to make, involving many financial calculations, beyond the scope of this chapter.
However, it is important that we address a number of principles regarding capital
structure that have an influence on responsible finance and the sustainability of
corporates.
When making the decision between the use of equity and/or debt financing, the basic
principle of risk-return trade-off comes into consideration – there is always a trade-off
between risk and return. As the corporate is making use of more and more debt financing,
an increase in return is expected. The use of debt financing increases the risk of the
corporate, since it needs to make interest payments, regardless of the financial wellbeing
of the corporate or its ability to make these payments. In what follows, we will explain
certain features of debt and equity financing that need to be taken into consideration in
terms of responsible finance: return, risk and control.

Return
Making use of debt financing, the corporate will need to make interest payments as
agreed upon with the financier, irrespective of the financial performance of the corporate.
Fixed interest payments are an advantage should the corporate be in a good financial
position. However, during poor financial performance periods, the payment of interest
and the non-ability of the corporate to make these payments, can lead to the corporate
becoming insolvent. The interest charge on debt is usually tax-deductible, meaning its
effective cost to the corporate. In practice, this means that interest is subtracted from
gross profits in the statement of comprehensive income, which will lead to lower taxes.
Dividends, however, are not tax-deductible and so there is no tax-relief for the corporate
when making use of this source. The cost of debt is usually lower than the cost of equity,
as a result of the lower risk to the financier and the tax-deductibility of the interest (recall
that equity financing refers to capital contributed by the owners of the corporate).

Risk
The risk associated with debt financing is higher than that of equity financing, since debt
requires the payment of interest, whereas a corporation is not required to pay dividends
in poor financial circumstances. Furthermore, debt financing requires the repayment of
the capital amount – ultimately all debt must be repaid, in other words the corporation
must not only earn sufficient profits for the interest payments, but it must also make
adequate provision for capital payments. For instance, a corporate makes use of a 5-year
lease agreement to finance a vehicle with a cost price of R200 000 and a 12% interest
rate. In such a case, the corporate needs to pay 12% interest per annum and needs to
make provision for the capital payment of R200 000. Over the period of 5 years, both the
interest and capital payment need to be made. It is important for corporates to know that
there is a limit to the amount of debt that can be raised before the market assesses the
corporate’s risk profile – which will be reflected in its cost of capital. The market
continuously assesses the risk profiles of corporates – remember that investors are risk-
averse and will always prefer a higher return at a lower risk. If the market perceives an
imbalance between the risk-return trade-off of a corporate, in other words if investors
are not adequately compensated for the risk that they take to invest in the corporate, they
will not invest capital in such a corporate. Equity holders (the owners who contributed
capital to the corporate) will require a greater return on their investment and it will be
possible to raise more debt only from marginal lenders, who will charge higher interest
rates and/or impose other restrictions on the corporate.

Control
Making use of debt and equity financing has various control implications for
corporations. For instance, raising finance through equity dilutes the control of existing
shareholders. Shareholders have one vote for each ordinary share that they hold in the
corporate, which they can cast at the annual general meeting. The more shareholders
there are, the higher control they have in the decision making of the corporate. Debt
financiers may also impose certain restrictions on corporates as a condition of providing
the capital (for example, a loan). These restrictions are usually designed to limit the
management of the corporate from taking decisions that may have a detrimental impact
on the financier. For instance, the payment of huge dividends that may impact on the
sustainability of the corporate. Debt financiers may also insist on a seat on the board, or
a regular report on the financial performance of the corporate.
When deciding on the optimal debt-equity ratio, or capital structure, of the corporate,
the financial function has the responsibility to take the risk, return and control issues
discussed above into consideration in order to (i) maximise the value of the corporate for
all stakeholders; and (ii) ensure its long-term sustainability. Financial managers should
strive to maintain a balance in the risks (business and financial risks, as we explained
in section 14.3.1) to which the corporate is exposed. There is the convention that an
optimal finance strategy is to match long-term assets with long-term finance, and short-
term assets with short-term finance. This is generally known as maturity matching. For
example, the investment in buildings and machinery should be financed by long-term
sources of finance such as a mortgage loan, whereas stock purchases should be financed
by short-term funds such as cash on hand or suppliers’ credit.
Financial managers also need to be aware of current black economic empowerment
(BEE) legislation and how it affects the South African corporate sector in terms of its
economic, social and governance issues, namely financing for BEE entities.
14.4.2Responsible finance from a financier’s
viewpoint
In a marketplace where commodities are traded every day, sellers have products and
services to sell and buyers need these products and services. A transaction is concluded
if the buyer and seller agree upon the terms thereof, and products and services change
hand at a price. In the same way, finance is traded in the marketplace – well-developed
markets exist for the trading of financial assets.
In this section, our focus is on responsible finance from a financier’s viewpoint. From
this viewpoint, the term responsible finance has different meanings for different people
and different institutions. In its broadest sense, responsible finance is defined by the
Responsible Finance Forum20 as a guiding principle for how financial services should be
delivered to meet the challenge of promoting and advancing sustainable development.
Responsible finance should therefore incorporate social, developmental, and
environmental issues and it needs to have the support from governments, investors,
consumer organisations, educators, and all other stakeholders.
The financial sector has the responsibility to treat its clients (the borrowers of capital)
in a fair manner, and to act in ways that protect its client’s social and economic welfare.
In this context, we define responsible finance as ‘the co-ordinated public and private
sector interventions that encourage and assist financial services providers and their
clients in improving their understanding and approaches, practices, and behaviours that
can eventually contribute to creating more transparent, inclusive, and equitable financial
markets’.21 Achieving this vision in any market requires action by a variety of
stakeholders. In the financial market, three key stakeholder groups play a crucial role in
terms of responsible finance:
1.The financial services industry. Commodities are traded on a daily basis between
sellers that have excess products and buyers that are in need of these products.
Commodity markets play an intermediary role by bringing buyers and sellers
together. The financial services industry plays the same role in the world economy,
by bringing those in need of funding, in contact with entities with excess funds. The
financial services industry consists of corporates that invest, lend, insure and trade
securities. The industry has many clients, for example, individuals (who need
capital to buy a house for instance), corporates (that need funding for projects and
assets), non-profit organisations (such as churches) and agencies of government.
The financial services industry plays a key role in responsible finance through a
variety of actions, such as compliance with laws and regulations, adherence to
industry codes of conduct, standards, good practices, and institutional
commitments to transparency and fairness in its operations.
2.Governments. Governments play a key role in responsible finance through
policy and consumer protection regulation, and commitments to increasing
attention to financial literacy at the national level.
3.Consumers and corporations. Consumers and corporations need capital and access
to financial markets for various reasons. For instance, consumers need long-term
capital such as a mortgage loan to buy property. Corporations also need capital to
invest in projects and to buy fixed assets such as buildings, machinery and vehicles.
Consumers and corporations play a key role through enhanced consumer
awareness and capability. Social media especially makes consumers and corporates
more aware of the products and services available in the financial services
industry.

A multi-stakeholder approach (or the ‘three-pillar framework’) to protecting financial

consumers and promoting responsible financial products and practices is more likely to
result in success than relying on action by a single stakeholder. For instance, a financial
services provider cannot decide on the terms and conditions of granting a loan to a
consumer, without due consideration of the applicable legislation as determined by the
government, the needs and wants of the consumer, and other competitive products
available in the industry. By the same token, government cannot impose legislation that
will have a profound impact on the financial services industry, without consulting with
the industry, consumers and corporations. Furthermore, donors and investors can play
an important role by supporting this multi-stakeholder approach and facilitating joint
action between the financial services industry, governments and consumers and
corporations.
Advantages of responsible finance from a financier’s viewpoint
Development and finance institutions are becoming more and more engaged and
supportive of responsible finance. The main reasons for this trend are the following: 22
•Responsible finance activities are important contributors to macro- and micro-
economic strategies of governments that are aimed at growing inclusive business
and business development, advancing corporate access to finance, ensuring stability
and transparency in financial markets, contributing to poverty alleviation, and
ultimately contributing to a more sustainable economic, social and environmental
development.
•Responsible finance is critical for the stability of financial markets. The stability of
financial markets is affected by numerous factors, such as good and ethical business
practices, consumer protection programmes, commercial discipline and the level of
financial capability of a population. Distortions in any of these factors have an
impact on the stability of financial markets, hence also on the global economy, and
the growth and wellbeing of many population groups. Responsible finance can
correct imbalances caused by incentives for financial institutions, investors, and
clients to increase lending volumes without due regard for macro-economic
consequences, especially for low-income groups.
•Responsible finance is crucial for access to finance, financial inclusion, and inclusive
business agendas. Responsible finance establishes and promotes mandatory and
voluntary standards in terms of transparency, disclosure and ethical business
practices and engages industry players in strengthening their reputation as quality
providers. Furthermore, responsible finance increases consumers’ willingness to
trust the financial system, especially for more vulnerable customers, many of whom
are new to the financial system (such as BEE companies). For financiers, responsible
finance practices can bring business benefits such as better risk management,
growth of their customer base through consumer-focused innovation in product
design and delivery, and incentives to expand their business by including financial
services for the vulnerable and poor population groups.
•Responsible finance contributes to economic development and poverty reduction.
Stable and inclusive financial systems are associated with economic development
and poverty reduction. When financial markets and systems are more responsible
and equitable in allocating resources among all members of the population in a way
that does not create economic imbalances, it will contribute to a greater opportunity
for entrepreneurs, education and the general quality of life.

The main instruments of responsible finance

The practice of responsible finance, rests upon three main types of instruments linked to
the three main stakeholder groups identified previously in this section (financial service
providers, governments and consumers). The instruments are (i) consumer protection
regulation; (ii) financial institutions’ regulation; and (iii) financial education.23 Let us look
at the three instruments in more detail:
(i)Consumer protection regulation. Since the 1990s, we have seen sharp increases in
terms of global consumer debt and mortgage debt. 24 Consumers are making more
and more use of debt – causing their own financial distress – and need protection,
mainly through an improved regulatory environment. Consumers that are not
protected by law and that do not have the financial literacy to protect themselves,
have a negative effect in developed and developing countries. Government
regulators and policy makers play an important role in educating consumers,
protecting their interests and confidence in formal financial systems. Government
regulators and policy makers need to structure and stabilise financial markets,
formulate and implement consumer protection regulations and laws; and provide
supervision in financial markets. Such actions can help address the imbalance of
power, information, and resources between consumers and their financial services
providers; and promote better risk management, efficiency, and transparency in
financial markets. One specific example of such regulation is to force disclosure of
certain kinds of information by the consumer before debt is granted. Such
information can determine the risk associated with the consumer, preventing the
consumer from incurring debt in instances where the interest and principal
amount are not affordable.
(ii)Financial institutions’ self-regulation.25Financial institutions can also
exercise self-regulation, for example by practising transparency, disclosure,
pricing products in a fair manner, treating clients with dignity, product and service
quality, and implementing adequate policies and procedures to ensure sound risk
management in the provision of financial services. Financial institutions can also
implement voluntary rules and standards, which can be adopted before the
establishment of formal regulation in markets where regulation is weak and where
financial service providers need a framework with common rules and standards.
Not only consumers (including corporates) benefit from responsible finance – so
do financial service providers. Benefits for service providers include an
improvement in risk management (we have also identified this as a benefit of
responsible investment practices of corporates), building long-term relationships
with customers, attracting new and retaining current customers, reducing
financing costs, improving the reputation of the service provider, and providing
access to various sources of finance (in other words, diversified sources of finance,
where the consumer will be in a position to compare the benefits and costs of
alternative sources of funds). It is important to note that financial service providers
should not limit themselves to self-regulation and regulation from governments –
their approach and commitment to responsible finance should be driven not only
by ‘do no harm’, but rather by ‘doing good’ – ensuring that their financial product
and service offerings are aimed at growth, development and sustainability.
(iii)Financial education. The third instrument, financial education, focuses on two
aspects of education, namely financial capability and financial awareness. Financial
capability can be defined as a consumer’s combination of financial knowledge,
understanding, skills, attitudes and behaviours that they need to demonstrate in
order to make sound personal finance decisions. Financial awareness refers to the
consumer’s knowledge and understanding of financial products and services, terms
and concepts to enable sound personal finance decisions. Financial capability and
awareness are two crucial prerequisites for the practice of responsible finance.26
The benefits of responsible finance in any economy can only be realised by
following a balanced approach – an approach that balances consumer protection
regulation, the self-regulation of financial institutions, and the financial education
of consumers. The example box below illustrates Nedbank’s efforts in South Africa
as a responsible financial services provider.
Example
Nedbank Group’s environmental products and services 27
In an effort to stimulate green economy activity as well as to leverage the increasing number
of environmentally aware investors, both locally and internationally, we are building a range
of relevant products. The green products and services we offered in 2012 included:

NEDBANK GREEN SAVINGS BOND

The Nedbank Green Savings Bond is a fixed-term investment that offers flexible terms from
18 months up to five years, a competitive rate and guaranteed returns, while contributing to
the green economy by assisting Nedbank to fund SA’s renewable energy needs. The total
Green Savings Bond balance at the end of 2012 was close to R1bn.

NEDBANK GREEN AFFINITY

Our clients can support environmental causes through the Green Affinity simply by choosing
to use Nedbank Green Affinity banking, investment or insurance products. We donate
money to The WWFNedbank Green Trust on behalf of these clients at no cost to them.
Nedbank Green Affinity donations to the WWF-Nedbank Green Trust increased by 47% to
more than R12,8m (2011: R8,7m).

NEDBANK’S GREEN EXCHANGE-TRADED FUND (BGREEN ETF)

Following the successful launch of the Nedbank Green Index we also launched
Nedbank’s BGreen ETF in December 2011. As it is based on the index, it provides a
mechanism for environmentally conscious investors to access the Nedbank Green Index.
The BGreen ETF had a market capitalisation of R119m at 4 December 2012.
Nedgroup Life also offers the Guaranteed Exchange-traded Fund Plan as part of its Secure
Investments portfolio. As this is based on the BGreen ETF and offered through Nedbank
Financial Planners, it is another way in which our clients can gain access to the exciting work
we are doing in bringing environmentally driven investments to the market.

THE NEDBANK GREEN INDEX

The Nedbank Green Index provides an alternative equity benchmark for investors who
understand the value of incorporating an environmental dimension into their investment
decisions. It is consistent with the growing momentum in SA to incorporate environmental,
social and governance (ESG) factors into this process. This is reflected in the latest
amendments to the Pension Funds Act as well as the support of the Code for Responsible
Investing by Institutional Investors in SA (CRISA) shown by local institutional investors.

eSTATEMENTS
We continue to recommend to our clients that they convert to electronic statements
(eStatements). This offering is available to clients with current accounts, cards, home loans,
vehicle finance and personal loans. For every current-account client who chooses to convert
to eStatements we donate 25 cents to the WWF Nedbank Green Trust. This money is
earmarked for the support of projects on the trust’s Climate Change Programme.

SOLAR WATER HEATER PROGRAMME

To enable clients to lead a more environmentally conscious lifestyle and to reduce demand
on the overburdened electricity grid, we have introduced a comprehensive solar water heater
initiative, which includes the option for clients to replace burst geysers with solar geysers.
The initiative was launched in 2011 and 255 Nedbank clients have used the facility to install
affordable solar geysers in their homes or businesses. Nedbank is developing a similar
proposition for staff to proactively replace geysers with alternative solutions.

CARBON FINANCING
Carbon markets have been through a particularly turbulent time because of continued
uncertainty surrounding the long-term international carbon commitments. Given our
commitment to driving the green economy our Carbon Finance Unit will monitor
developments in this area and respond appropriately.

GREENBACKS ‘GREEN STREAM’

Our Greenbacks loyalty programme includes a ‘green stream’ that allows members to
redeem loyalty points for goods that are environmentally friendly. To date, 473 green
products have been redeemed, with a rand value of over R180 000. The Nedbank
Greenbacks Programme has grown by 15% year-on-year since its inception in 2009, and will
introduce small-business redemption offers in 2013 – a perfect platform on which to promote
our Nedbank Greening your Business Programme, in partnership with BDFM.

14.5Responsible distribution of profits

In the preceding two sections, we addressed the first two pillars of good corporate
citizenship in terms of the finance function, namely responsible investment,
and responsible finance. In this section, we will focus on the third and last pillar, namely
the responsible distribution of profits. These three pillars are distinct, yet closely
connected to each other. A decision on any one of these may affect the others and will
affect the sustainability and growth of the corporate.
A corporate that realised a profit during a specific financial year, needs to decide which
proportion of the profit will be invested back into its activities (indicated as retained
earnings in the statement of financial position), and which proportion will be distributed
amongst shareholders in the form of dividends. The payment of dividends reduces the
retained earnings. Thus, by paying out dividends, the corporate is denying itself equity
capital that will have to be raised elsewhere should the corporate want to invest in
profitable projects. On the other hand, should the corporate decide not to pay any
dividends, it will increase the corporates’ retained earnings and it would have more funds
to invest in profitable projects. However, paying no dividends will have a negative effect
on the value of the corporate. No dividends usually signals financial difficulty – current
investors will start to withdraw their investment in the corporate and new investors will
be hesitant to invest in such a corporate. The result will be a higher supply than demand
for the corporate’s shares, share prices will consequently fall and the value of the
corporate will decrease. Therefore, the decision whether or not to pay out dividends and
how big the proportion of profit is to be paid out as dividends, is clearly an important
decision to make and should be actively managed. The example box on the next page
looks at Anglo American, a corporate that decided on a total suspension of dividend pay-
outs and the consequential effects of this decision.
The dividend decision of Anglo American PLC in 2009, illustrates the complexity of
such a decision as well as the consequences (sometimes intended and sometimes
unintended) resulting from such a decision. The most important factor to consider in the
dividend decision is value maximisation of the corporate. Other factors, as listed below,
also play a significant role in the dividend decision and the responsible distribution of
profits of corporates:28
•Legal requirements. A corporate’s payment of dividends is subject to a number of
legal requirements. Dividends and share buy-backs (or repurchases) are defined as
‘distribution of profits’, which are required to be authorised by the board of
directors. In terms of the Companies Act, 2008, a company can pay dividends or
undertake a share buy-back if it satisfies the general solvency and liquidity tests as
set out in Section 4 of the Act.
•Contractual obligations. In section 14.4.1, we indicated that debt financiers may
impose certain restrictions on corporates when they provide them with capital. For
instance, the corporate may have entered into a contract with a financier, which
limits its ability to pay dividends – the financier may limit the percentage of earnings
that the corporate is permitted to pay out as a dividend.
•Information content of dividends. Investors and analysts often use dividends as a
signal of the financial performance and wellbeing of a corporate – as we have seen
with Anglo American plc. While reported earnings must often be interpreted with
caution, analysts interpret dividend announcements as a message that states the
financial wellbeing of the company. If a dividend is cut, analysts regard this as a
signal that management is pessimistic about the future financial performance of the
corporate. If dividends are increased, analysts will interpret it as a signal of
management’s confidence in more favourable future earnings. Corporates should
ensure that a specific indicator of future financial wellbeing (such as the dividend
decision), provides a true reflection of the future wellbeing of the corporate. SAA,
mentioned in section 14.2.2, is a good example of a corporate reporting profits
during a specific financial year that is not a true reflection of its financial wellbeing.
SAA paid out billions in executive remuneration, which it could not afford and which
lead to even worse financial performance later on.
•The nature of shareholders. Shareholders invest in corporates that satisfy their
needs with regard to the balance between cash income (dividends) and capital
growth (increase in share prices). In principle, the financial management function
should create wealth for all stakeholders. This implies that, if favourable
opportunities exist, the corporate should take advantage thereof and grow
accordingly. If the existing shareholders prefer a dividend pay-out in favour of
growth, they are at liberty to sell their shares and invest in another corporate which
satisfies this need better. The dividend decision is also influenced by numerous
other factors, such as transaction costs (which are incurred in the buying and selling
of shares); and shareholders may be liable for the payment of taxes on the gain as a
trading profit rather than as a capital gain.
Example
Anglo American PLC
Anglo American PLC is a globally diversified mining business, with a portfolio of world-class
competitive mining operations and undeveloped resources that provide the raw materials to
meet the growing consumer-driven demands of the world’s developed and maturing
economies. The company makes use of the newest technologies to find new resources, plan
and build its mines. The company mines, processes, moves, and markets its products – from
diamonds to platinum and other precious metals and copper, to its customers around the
world. Since its inception in 1917 in Johannesburg, South Africa, Anglo American is the
custodian of its precious resources. The company works together with key partners and
stakeholders to unlock the long-term value that those resources present for its shareholders,
but also for the communities and countries in which it operates – creating sustainable value
and making a real difference.29
In 2009, Anglo American PLC decided to suspend its dividend, and further announced
that it would shed 19 000 jobs out of a total workplace of 190 000 employees. The decision
followed a fall in metal prices arising from the global economic crises in 2008. The decision
to cut its dividend made headline news in the New York Times, Business Week, the Times of
London, and various other newspapers and television channels around the world. The Group
also decided to suspend its share buy-back programme. The impact on the company’s share
price, which lost 17% in value, was immediate. Together with the dividend decision, the
mining company underscored its commitment to reduce operating costs during tough
economic circumstances. Yet, the market did not appreciate the company’s rational
response to the difficult economic times. For investors, such a decision may indicate that the
company is in financial distress and it is expecting cash flow difficulties in future. Although
the company’s earnings per share fell from $4,36 to $2,14; they still realised an operating
profit of $4 957 million and earnings of $2 569 million for the year. Closer interrogations in
terms of the reasons for the Group’s decision, reveal that the Group was concerned about
future financing alternatives and it maintained a focus on expansion in difficult times – a
decision that paid off. When markets recovered in 2009, Anglo American PLC announced a
doubling of its profits at the interim stage in 2010. In July 2010, it resumed dividend
payments to shareholders and announced that it would follow a policy to maintain or steadily
increase dividends in the future.30

The responsible distribution of corporate profits is an intricate decision to make – with

many factors to consider. This section looked at the importance of the decision for all
stakeholders – a full discussion of all the factors applicable to such a decision is beyond
the scope of this book. The final section of this chapter focuses on integrated reporting.
14.6Integrated reporting
Traditionally, corporates were required to provide financial statements and financial
reporting at the end of each financial year. Financial statements answer questions such
as the following:
•What are the corporate’s assets and liabilities?
•How much have the shareholders contributed to equity and retained earnings?
•How much has been distributed to shareholders?
•What are the corporate’s income and expenses, gains and losses?
•What are the cash in- and outflows of the corporate?

Financial reporting, on the other hand, includes the annual financial statements as well
as reviews by the chairman, the chief executive officer, and may include segmental
reviews, analysis and reviews by the chief financial officer and the heads of operating
divisions within a corporate. With a shift of focus to sustainability issues in corporates,
corporates are also required to provide sustainability reporting.
Contemporary financial managers need to provide integrated reporting (IR).
Integrated reporting refers to the way in which corporates report on their performance,
where the aim of the integrated report is to indicate clearly and concisely who the
corporate is; what the corporate does; how it creates value; the corporate’s strategy,
opportunities and risks; the corporate’s business model and governance; and the
performance of the corporate against its strategic objectives in a way that gives
stakeholders a holistic view of the corporate and its future. 31 Integrated reporting
expands on the practice of financial reporting, and also includes ESG reporting.
Corporate scandals, environmental disasters, safety and human rights issues and
abuses have had a detrimental effect on corporate value and the maximisation of
corporate value. Non-financial performance can therefore no longer be separated from
core business strategy and management processes if performance and value optimisation
is the primary objective. The notion of integrated reporting is to ensure that governance,
strategy and sustainability are integrated (and not seen as separate issues). Although the
catalyst for driving integrated reporting in South Africa was King III, 32 integrated
reporting is driven worldwide by the International Integrated Reporting Council (IIRC).
Integrated reporting (IR) can therefore be defined as:
‘the concise communication about how an organisation’s strategy, governance,
performance and prospects, in the context of its external environment, lead to the
creation of value over the short, medium and long term.’ 33

In other words, IR (i) clearly communicates the corporate’s value creation information;
(ii) is a portal to communicate a holistic view of the current state of (financial and non-
financial) performance, where the corporation is heading and the objectives to achieve
its future position; and (iii) enables stakeholders to assess the corporate’s ability to create
future value.34
Investors are key parties to corporate reporting (including financial reporting). They
are looking to assess the financial performance of a corporation in order to determine if
it is good for investment purposes. However, it has been highlighted in this chapter that
investors also want to review the non-financial performance of organisations – looking
specifically at ESG performance.35
In light of the need to communicate non- financial performance, the International
Integrated Reporting Council (IIRC), a global coalition of regulators, investors,
companies, standard setters, accounting professions and NGOs, has developed an IR
framework to provide a foundation for IR reporting. 36
The IR framework assists corporations to prepare an IR, and is principles-based. The
IR framework provides, among other things, eight content elements that would typically
be covered in an IR.37 These content elements are formulated into questions that a
corporate should answer. They are:
1.Corporate overview and external environment:
•What does the corporate do?
•What are the circumstances under which the corporate operates?
2.Governance:
•How does the governance structure support the corporate’s ability to create
value (over the short, medium and long term)?
3.Business model:
•What does the corporate’s existing business model look like?
4.Risk and opportunities:
•What are the specific risks and opportunities that affect the corporate’s ability
to create value (over the short, medium and long term)?
•How does the corporate deal with these specific risks and opportunities?
5.Strategy and resources allocation:
•Where is the corporate heading?
•How is the corporate planning to get there?
6.Performance:
•To what extent is the corporate achieving its strategic objectives?
•What are the outcomes in terms of the transformation process from resources
to final products and/or services?
7.Outlook:
•What are the most likely challenges and uncertainties that the corporate is
encountering (in perusing its strategic objectives)?
•What are the potential implications on the business model and future
performance?
8.Preparation and presentation:
•How does the corporate identify what is relevant information to include in the
IR?
•How is the relevant information quantified or evaluated?
14.7Conclusion
In this chapter, the financial management function was discussed within the context of
corporate citizenship. We established the fundamental objective of the finance function
as the maximisation of the value of the corporate, and especially the claims that all
stakeholders have against this value. Against this objective, we addressed responsible
investment, finance and the distribution of profits.
Responsible investment was discussed from the perspective of corporates and from
the perspective of individual and institutional investors. From a corporate perspective,
various strategies can be implemented and we focused on the incorporation of ESG issues
in the investment decision; the investment in projects and assets which would improve
the management of risk, the generation of sustainable and competitive long-term returns;
and the achievement of a societal impact. From the individual and institutional investor’s
point of view, responsible investment was discussed by focusing on a number of
alternative strategies that can be implemented namely best-in-class; negative screening;
positive screening; impact investment; sustainable themed investment; and community
investment strategies.
Responsible finance was also discussed from a corporate and from a financier’s
viewpoint. From a corporate viewpoint, the risk, return and control aspects need to be
considered when making financing decisions. From a financier’s point of view, the
financial industry, government and consumers play a profound role in their decision
making. The main instruments that can be used to implement a responsible finance
decision from a financier’s viewpoint are consumer protection self-regulation, financial
institution self-regulation and financial education.
The chapter concluded with a brief discussion of the responsible distribution of profits
by corporates and integrated reporting.

Multiple-choice questions
1.The fundamental objective of financial management is ______.
a.profit maximisation
b.corporate value maximisation
c.share price maximisation
d.shareholder wealth maximisation
2.The investment decision of corporates refers to the _____.
a.financing of investment projects
b.selection of real and/or financial assets and/or projects to invest in
c.proportion of profits to be reinvested in the corporate
d.achievement of the fundamental financial objective
3.The _____ risk of a corporate usually results from the nature of the business itself
and includes all the uncertainty that surrounds the particular corporate and the
industry in which the corporate competes.
a.business
b.financial
c.investment
d.default
4.As a corporate is making more and more use of debt financing, a(n) ______ in
return is expected due to a(n) _____ in the risk of the corporate.
a.increase; increase
b.increase; decrease
c.decrease; increase
d.decrease; decrease
5.Integrated reporting:
a.communicates the corporate’s value creation information
b.is a portal to communicate a holistic view of the current state of performance,
where the corporate is heading and the objectives to achieve its future position
c.enables stakeholders to assess the corporate’s ability to create future value
d.all the above

Critical-thinking questions
1.Explain the fundamental objective and focus of the financial management
function.

2.Discuss responsible investment from the viewpoints of (i) a corporate that

invests in assets and projects to ensure its long-term sustainability; and (ii) an
individual or institutional investor that invests capital in a corporate with the hope
of future returns on this investment.

3.Discuss responsible finance from (i) a corporate viewpoint; and (ii) a financier’s
viewpoint.

4.Explain the importance of the responsible distribution of corporate profits.

5.Discuss integrated reporting, referring also to the content elements (or

information areas) of an integrated report.

Additional reading
•Baker, HK & Nofsinger, JR. (Eds). 2012. Socially responsible finance and investing:
Financial institutions, Corporations, Investors and Activists. New Jersey: John Wiley &
Sons.

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2.Ibid, p. 2
3.BP Oil 2015 Year Report, p. 103; BP Oil Year Report Annual Review, p. 1; BP Oil
Summary Review 2012, p. 25.
4.BP Annual Report and Form 20-F 2011, pp. 1–20.
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2016].
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2016]
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[Online]. http://www.ussif.org/sribasics [8 June 2016].
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Financial institutions, Corporations, Investors and Activists. New Jersey: John Wiley
& Sons, pp. 408–418.
14.Heal, G. 2005. Corporate Social Responsibiliy: An economic and financial
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15.Porter, ME & Kramer, MR. 2011. Creating shared value. Harvard Business Review,
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583b6d16/Responsible FinanceReport.pdf?MOD=AJPERES&
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Available: http://responsiblefinance forum.org/wp-content/uploads/Responsible
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25.Ibid.
26.Ibid.
27.Nedbank Group. 2016. [Online].
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2016].
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ed. Cape Town: Juta, pp. 6–16.
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glance.aspx [26 June 2016].
30.Correia, C, Flynn, D, Uliana, E & Wormald, M. 2013. Financial Management. 7th
ed. Cape Town: Juta, pp. 1-16.
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2016].
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Available: kpmg.co.za [29 July 2015].
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08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf [27 July 2015].
34.IRC. 2014. Preparing an integrated report: A starter’s guide. [Online].
Available: http://www.integratedreportingsa.org/ Portals/0/Documents/IRCSA_St
arters Guide.pdf [28 July 2015].
35.Eurosif. 2013. What do investors expect from non-financial reporting? [Online].
Available: https://www.google.co.za/#q=What+do+investors+expect+form+non-
financial+reporting [27 July 2015].
36.IRC. 2013. The International IR Framework. [Online].
Available: http://integrated reporting.org/wp-content/uploads/2013/ 12/13-12-
08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf [27 July 2015].
37.IRC. 2014. Preparing an integrated report: A starter’s guide. [Online].
Available: http://www.integratedreportingsa.org/ Portals/0/Documents/IRCSA_St
arters Guide.pdf [28 July 2015].
PART 4
Critical perspectives and conclusion
chapter
Conclusion
Neil Eccles and Tracey Cohen
15
LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

•Understand the profit premise introduced in Chapter 1 in relation to the work of
Milton Friedman
•Understand moral arguments supporting this premise
•Describe an alternative interpretation of empirical research into the business
case for corporate citizenship
•Explain bounded rationality and social dilemmas
•Understand the implications of these in terms of the collapse of the business
case
•Appreciate the limits of corporate citizenship
KEYWORDS AND CONCEPTS
-bounded rationality
-corporate citizenship limits
-egoism
-libertarianism
-social dilemmas
15.1Introduction
Corporate Citizenship comprises the following three parts:
1.a laying down of the ‘Context’ for corporate citizenship in Part 1;
2.a detailed exploration of some of the ‘How’ of corporate citizenship in Part 2; and
3.a discussion of crucial aspects of the ‘Implementation’ of corporate citizenship
in Part 3.

The first goal of this chapter is to provide a summary of some of the key points of the
book. Beyond this, however, we think it is necessary to close this book with some critical
reflection on what has been said. In particular, we feel that it is necessary to think
carefully about some of the premises upon which this book is based, and some of the
limitations that these impose in terms of what might reasonably be achieved through
corporate citizenship and what might not.
15.2Summary of the key points
Chapter 1 presents two fundamental premises that underpin most of what follows. The
premises are:
1.an understanding of corporations as privately owned entities, ultimately engaged
in the pursuit of profit (or perhaps more correctly based on Chapter 14, value) for
the owners; and
2.the assumption that within the constraints implied by this, corporates might still
play a role in administering citizenship rights to citizens through corporate
citizenship.

Chapter 2 discusses the central contextual matter of sustainable development.

Sustainable development, as typically defined, encapsulates broadly an idealised vision
of what socio- economic citizenship rights ought to entail, taking into consideration both
present and future generations of people. As such, a perspective on this is almost
certainly essential grounding for understanding how corporates might play a role in
administering citizenship rights. The chapter (and indeed the book as a whole)
approaches sustainability largely from the so-called weak sustainability paradigm. In
general, it therefore presents social, environmental and economic imperatives as
dimensions in a big balancing act where these imperatives are, to all intents and
purposes, substitutable.
This is undoubtedly the prevalent sustainability paradigm in corporate circles,
probably because it does not radically undermine the fetish for money 1 as manifest in
economic systems associated with corporate activity. Adopting a position more aligned
with strong sustainability perspectives would have necessitated a vastly different and
altogether more radical book. At this stage, we should take cognisance of the fact that the
weak sustainability paradigm is somewhat fragile, as it places less emphasis on priorities
and dependencies associated with social, environmental and economic imperatives than
it probably should. Essentially, our fundamental focus or priority ought to be on the long-
term wellbeing of society. Society’s wellbeing is, in turn, absolutely dependent on
reasonable environmental integrity of one planet – planet Earth. The economic system is
something that we construct and can thus reconstruct at will. As such, it is the economy
that ought to be moulded in such a way as to ensure that society’s long-term wellbeing is
secured and not the other way around.
Chapter 2 also presents a discussion on climate change. Although climate change has
an immense impact (and probably the biggest impact) on sustainability, there are
numerous other examples of issues that all bear heavily on our prospects as a species for
long-term wellbeing, such as growing economic equality, peak phosphates, the
destruction of ocean fisheries, the pollution of fresh water reserves, the destruction of
wetlands and ensuing hydrological impacts. Even the increasing concentration of
corporate power in fewer and fewer corporations and the excessive remuneration
packages of executive management have an impact on sustainability.
From this broad contextual chapter, the attention then shifts, in Chapter 3, to the focus
of this book – corporations – and in particular to corporate citizenship itself. While
acknowledging the critical contextual material of sustainable development, this chapter
advances further contextual content with the attention given to the World Economic
Forum’s Four Industrial Revolutions idea. 2 Having provided this extra bit of context, the
chapter proceeds to discuss the evolution of the concept of corporate citizenship largely
along the lines described in Matten and Crane’s seminal conceptualisation. 3 The heavy
borrowing from Matten and Crane is almost inevitable given the central place that their
definition of corporate citizenship occupies in this book. Respect is paid to the United
Nations Global Compact, which has historically been a very important rallying point for
thinking about the role of corporations in relation to sustainable development.
The last chapter of Part 1, Chapter 4, looks at the challenging but vital issue of the
rationales for corporate citizenship. In this chapter, we set out to answer the question
of ‘Why’ a corporation would bother worrying about the administration of citizenship
rights. In doing this, the chapter covers the full trilogy of typical rationales: ethical
rationales, legal rationales and the business case. In reading this chapter, one does need
to be extremely cautious, however, not to lose sight of the two fundamental premises that
are presented in the first chapter, namely (1) that corporations are privately owned
entities, ultimately engaged in the pursuit of profit for the owners; and (2) that within the
constraints implied by this, they can still play a role in administering citizenship rights to
citizens through corporate citizenship. From a moral perspective, the first of these frames
corporations as essentially egoist or self-interested in character. There are some
restrictions on how useful some of the rationales presented in Chapter 4, in particular the
rationales based on ethics, might actually be. In effect, the noblesse oblige (privilege
entails responsibility) notions of corporates having moral obligations, particularly
associated with their increasing power, rarely hold water under an egoist regime.
Chapters 5 through to 9 constitute Part 2 of the book and it is in these chapters where
we focus on some of the more high level ‘How’ aspects of corporate citizenship. The
starting point for this is a reflection on leadership in Chapter 5. It is simply axiomatic
that without leadership that is intent on seeing the corporates that they run making
maximum contributions to the administering of citizenship rights, within the constraints
outlined in the premises of Chapter 1, it is highly unlikely that business will play any
meaningful role in this regard. It is this axiom that has led to the emergence of a broad
field of leadership thinking that falls under the banner of ‘responsible leadership’ and this
is the ultimate emphasis in Chapter 5.
Chapter 6 covers the areas of corporate governance and risk management. These are
vital elements of the ‘How’ of corporate citizenship. Like any other corporate activity,
corporate citizenship must be governed, and must be governed well if it is to deliver on
its potential. In terms of risk management, it is clear that in many instances, the
sustainability issues discussed in Chapter 2 represent either corporate risks or present
opportunities. And as we see in Chapter 4, many of these risks and opportunities are
likely to be financially material. It is, after all, this financial materiality that is the basis for
any business case for corporate citizenship that might exist. The better these risks and
opportunities are managed, the better corporates are likely to perform financially. And
the better they are likely to perform in the administering of certain citizenship rights that
are compatible with the pursuit of this financial imperative.
Chapter 7 discusses the relationship between strategic management and competitive
advantage. In many ways this chapter provides us with even more sophisticated tools for
thinking about the rationale for corporate citizenship, specifically in terms of competitive
advantage. And in reading it, it should be clear how any competitive advantage associated
with corporate citizenship opportunities and risks might be exploited by embedding
corporate citizenship into the strategic process.
Chapter 8 considers the vital relationship between a business and its stakeholders.
When reading this chapter, it should be clear how, in many ways, stakeholder
engagement might act as the vital connective tissue binding typical profit-seeking
corporate activities to citizens. In particular, it should be obvious how effective
engagement with stakeholders would be a vital aspect of the strategic process described
in Chapter 7. Certainly, it is difficult to see how a proper strategic analysis could ever take
place without some degree of engagement with salient stakeholders. One might also think
about the content of this chapter in relation to Chapter 13 that deals with marketing
management.
The last chapter of Part 2, Chapter 9, discusses the management of business ethics.
We emphasise the word management because the content of this chapter must not be
confused with the more philosophical aspects of ethics discussed earlier in Chapter 4.
In Chapter 9, the philosophical dimensions of business ethics are pushed aside and the
focus is almost exclusively on the instrumental business architecture elements that have
typically been put in place by corporations to manage issues that fall under the broad
rubric of ‘ethics’. In many ways, we might think of this chapter as an extension of our
earlier discussion on risk management (Chapter 6). Much of what is presented in Chapter
9 comprises the control arrangements necessary for managing business risks that, for
one reason or another, carry the label ‘ethical’. Certainly, what is very clear from this
chapter is that the management of ethics is done, not in pursuit of some moral good or
because it is morally the right thing to do. It is done because it is in the interests of the
business to do so. Again, the strongly egoist character of corporations emerges.
The last five chapters of the book make up Part 3 where we look in much greater detail
at how the administration of citizenship rights might be facilitated in the day-to-day
running of corporates. Chapters 10 and 11 cannot be read independently of one another,
as they cover the very intimately linked business activities of procurement and supply
chain management (Chapter 10) and operations and logistics (Chapter 11). It is
important to acknowledge that these are difficult management concepts to grasp, even
before the matter is clouded with a corporate citizenship overlay. In spite of this, it should
be clear that these management activities make up a significant part of the fabric of what
corporates actually get up to on a day-to-day basis, and if the opportunities and risks
associated with administering citizenship rights are not woven into this, corporate
citizenship will really remain hollow rhetoric.
From here, the book moves to the matter of human resource management in Chapter
12. In this chapter, the issue of how a consideration of employees’ (as a special class of
citizens) rights ought to be given close attention in every single HR function is examined
in great detail. This is important and necessary content to understand. No matter how
sophisticated the HR functions that are put in place might be, or how embedded corporate
citizenship is in the HR ethos and strategy of the corporation, at the end of the day when
these dilemmas emerge, there will be a struggle and there will be winners and there will
be losers.
Chapter 13 looks at the marketing management function. There is an enormous
breadth of scope of corporate activities that fall under the banner of marketing. These
range from the typical advertising aspects right through to product design activities.
What emerges very powerfully out of this chapter is not so much what corporates might
deliver in terms of administering citizenship rights through their marketing activities, but
rather what corporate citizenship can do for corporates in relation to sustaining their
corporate brands. In doing this, a number of interesting cases are presented.
And finally, in Chapter 14 the financial management function in corporates is
discussed in relation to corporate citizenship. The almost inevitable starting point in this
discussion is a critical interrogation of the notion of ‘profit’ that is so integral to the
underlying premises presented in Chapter 1 in relation to the fundamental objective of
financial management. This interrogation leads to a much more technically precise
purpose of business – the pursuit of value – rather than the colloquial pursuit of profit.
One thing that is important to point out is that the value defined here must not be
confused with values more broadly defined. These are not the same thing at all. The value
defined here is quite simply anticipated long-term discounted cash flows as supposedly
reflected in share prices. This is in stark contrast to the diverse plethora of things that
humans might attribute value to and which might therefore be instrumental in defining
our values.
The chapter traces briefly the investment decisions that fall to the finance function in
a corporate; the financing options that are available to corporates; and the decisions that
are made in terms of sharing profits. It also looks at the emergent concept of integrated
reporting, a reporting phenomenon that is widely hoped will bridge the divide between
traditional financial reporting and reporting that has typically been thought of as non-
financial by emphasising the financial materiality of these so-called non-financial issues.
15.3The initial premises
Let us return to the very beginning, to the premises introduced in Chapter 1. In essence,
this represents a reconciliation of Matten and Crane’s definition of corporate citizenship
that we adopt in this book with something akin to Milton Friedman’s controversial social
responsibility of business idea.4
We need to consider the implications of these premises in terms of the limits of what
can reasonably be achieved by corporate citizenship as we have conceptualised it. To do
this, we start out with a slightly more detailed exploration of Friedman’s notion of ‘The
social responsibility of business is to increase its profits’.5 In particular, we spend some time
examining the moral underpinnings of this theory, and reflecting on some of the reaction
to Friedman’s argument. In doing this, we see how over 40 years of research, resulting
out of Friedman’s argument, might easily be interpreted as telling us that sometimes
there is a business case for administering citizenship rights and sometimes there is not.
This, in turn, leads us to examine when the business case fails. To do this, we introduce
the concepts of bounded rationality and of social dilemmas. We then see how, while
corporate citizenship certainly holds some promise in terms of dealing with bounded
rationality, it is simply no match for social dilemmas. Issues that are characterised as
social dilemmas are simply beyond its limits. While this realisation that corporations can
never be viewed as the panacea for all the world’s social problems might not be very
comforting to those who hold the hope that they can, it is nonetheless a vital realisation.
To place all of our trust in corporations to solve the world’s problems would be a grave
mistake.
15.3.1Milton
Friedman and the Holy Grail of the
business case
In 1970, the Nobel Prize winning economist, Milton Friedman, published his now
infamous critique of the corporate social responsibility movements of the day in a New
York Times Magazine article entitled: ‘The Social Responsibility of Business is to Increase
its Profits’. Friedman’s criticism focused exclusively on the practice of corporate
philanthropy or charity. In other words, it focused on situations in which corporations
voluntarily gave away some portion of their profits with no expected return. In relation
to this, Friedman argued that corporations are fundamentally the private property of the
shareholders. As such, any legitimate profit arising from the corporation’s activities ought
then to belong to the shareholders exclusively. If the shareholders wanted to give away
their profits to charitable causes, this was their choice and their choice alone. When
corporate managers, as agents supposedly representing shareholder interests,
unilaterally decided to give away a portion of the corporate profits for charitable reasons,
they were, Friedman argued, essentially imposing a tax on owners. And this, according to
Friedman, they had no right to do. In addition to declaring that corporate managers had
no right to impose such arbitrary taxes on shareholders, Friedman also raised the rather
obvious problem that corporate managers are in fact technically rather ill-equipped to
use the revenue gained from these taxes appropriately. This, he argued, was a role best
left to democratically elected governments, who acted on a formal mandate from an
electorate. On what legitimate mandate did corporate managers act he asked?
The main moral basis for Friedman’s argument was simple: what is legitimately yours
is yours and yours alone to do with as you please. In this regard, Friedman’s argument is
essentially libertarian in character and as such echoes the philosophical ideas of the likes
of Robert Nozick.6 Nozick argued that the conditions for a just distribution of stuff (wealth
and power) are very simple. There must be:
1.just acquisition in the first place; and
2.just transfer subsequently.

If these two conditions are met then whatever distribution of wealth and power emerges
would, by definition, be just. If, through just acquisition and transfer, a handful of people
ended up absurdly rich and powerful and the majority ended up toiling in miserable
grinding poverty, then this outcome was to be considered just. Any attempt to alter a
distribution of wealth and power that had emerged from a just process by coercion would
be nothing short of a violation of human rights. Returning to corporate social
responsibility in the philanthropic sense, Friedman’s contention was that this
represented an attempt to alter the distribution of wealth legitimately due to
shareholders without their consent (that is, by coercion) and ought therefore to be
deemed morally wrong. Besides this libertarian moral grounding, Friedman’s argument
also rested quite heavily on a strong undercurrent of ethical egoism (the idea that the
pursuit of self-interest is morally good) and a sense of some sort of fundamental morality
as an emergent property of market action. This sort of thinking has very often been linked
to classical economics and in particular has made use of selected pieces of the writings of
Adam Smith, for authority.7 Arguably the most common example of this is the use of
Smith’s ‘invisible hand’ metaphor.
In spite of these quite compelling philosophical underpinnings, Friedman’s article
provoked a real storm of rhetorical outrage, at first amongst advocates of corporate social
responsibility, but subsequently also amongst corporate executives themselves. 8 It
seemed that Friedman’s argument that so powerful a global institution as the corporation
could be solely governed by the desire to generate private profit was simply intuitively
unsatisfactory to many. The response to this outrage has been interesting and a little
paradoxical in some ways. In spite of all of the intuitive outrage, the response of the
outraged was not to call for any review of the fundamental moral grounding of the
corporation away from libertarianism and ethical egoism. Instead, the response focused
on essentially trying to prop up the notion of the ‘invisible hand’ by searching for a
business case for delivering citizenship rights. Part of this search is discussed in Chapter
4 where great emphasis is placed on the meta-analytic studies of Orlitzky, Schmidt and
Rynes; and Allouche and Laroche, both of whom suggest some positive relationship
between corporate citizenship and corporate financial performance. 9
However, there is another, more qualitative way of interpreting this vast body of
empirical work that set out in search of the Holy Grail of the business case. This
emphasises the fact that within this body of studies, the full spectrum of relationships
between corporate citizenship and corporate financial performance can be found:
positive, neutral and indeed negative. On the basis of this, it can then be argued that
sometimes there is a business case for good corporate citizenship, and sometimes there
is not.10 Or, stating this in relation to the definition of corporate citizenship specified
in Chapter 1 of this book we might say that sometimes there is a business case for
delivering citizenship rights to citizens and sometimes there is not. From a management
perspective, understanding this would allow management to respond where a strong
business case exists, as is suggested by Porter and Kramer. 11 And from the perspective of
society at large, an understanding of this would allow interventions to be put in place to
manage corporations where the business case is weak or absent. The key question then
becomes: ‘When is there and when is there not a business case?’
15.3.2When the business case breaks down
One way to tackle the question of what to do when the business case breaks down would
be to examine social issues one by one and ask the question: ‘Would there be a business
case for addressing this?’ So, for example, we might think about the link between energy,
fossil fuel consumption, greenhouse gas emissions and climate change and we might
ask: ‘Would there be a business case for reducing energy consumption and thus reducing
greenhouse gas emissions?’ Typically the answer would be: ‘Well there is certainly a
business case for using less energy because energy costs money.’ On the other hand, we
might think about wages paid to unskilled or semi-skilled labourers in mines in some
developing country, and we might ask: ‘Would there be a business case for increasing the
wages of these labourers as much as possible so as to improve the broad socio-economic
conditions in that country?’ The answer here would almost certainly be: ‘No. The business
case would support keeping wages as low as is absolutely possible.’
In this process of examining social issues, we see a pattern emerging. This pattern is
that sometimes the private interests of shareholders are perfectly aligned with general
social interests and delivering citizenship rights; and sometimes the private interests of
shareholders are at odds with general social interests and delivering citizenship rights.
When they are aligned, there is a business case and when they are not, there is no
business case. In the energy efficiency example above, the private interests of
shareholders are indeed aligned with the broader public interests of reducing carbon
dioxide emissions. The consequence of this is that there is likely to be a concrete business
case for pursuing energy efficiency. If you like, these are what we might commonly refer
to as win-win or mutual advantage situations. In contrast, in the case of the wages, all
other things being equal, paying more money to workers means less profit for
shareholders and so the private interests of the shareholders are best served by keeping
the wages of labourers as low as is conceivably possible.
In theory at least, where private and social interests are aligned, then technically there
should be no problem. The ‘invisible hand’ of the market ought to ensure that win-win
opportunities inherent in delivering certain citizenship rights are efficiently exposed. We
say ‘in theory’ because humans are far from infallible. In fact, quite the contrary is true. It
is probably safe to say that bounded rationality is the norm rather than the exception.
And while one might expect the ‘invisible hand’ of the market to do its work, sometimes
it just doesn’t. Countless examples of this abound. On the very dramatic end of the
spectrum, events such as BP’s Deepwater Horizon explosion in the Gulf of Mexico might
represent an example of bounded rationality at work. By many accounts, BP’s own people
had warned management that such a disaster was becoming increasingly likely in the face
of cost-cutting measures implemented by BP. However, bounded rationality prevailed
and the cost-cutting measures went on and on, presumably because these were thought
to be in the interests of shareholders. The consequence of this ongoing cost-cutting was
the explosion on Deepwater Horizon and the ensuing pollution disaster. This precipitated
massive losses, not only to society at large, but also to BP shareholders. In the immediate
aftermath of the disaster, BP’s share price plummeted from just under US$60,00 a share
to around US$30 a share. Formal corporate citizenship activities as described in this book
should go some way to addressing such bounded rationality.
It is, however, where the private interests of shareholders are not aligned with those
of society at large, that really difficult problems emerge. This type or class of problem has
not gone unnoticed. In fact, such problems even have a name. They are called social
dilemmas. Social dilemmas have been the subject of extensive research both in terms of
classification of types and in terms of contemplating solutions. Kollock 12 described a
number of different types of social dilemmas including ‘public goods dilemmas’ where an
individual or sub-section of society is expected to carry a disproportionately high portion
of the costs of delivering some sort of social good (citizenship right) while everyone
benefits and ‘tragedy of the commons’ dilemmas where society as a whole carries the costs
of some action, while a sub-section derives all of the benefits. In other words,
the benefits are not shared equitably. Ultimately, however, all social dilemmas are the
result of what economists refer to as negative externalities. These occur when we take
actions that adversely affect others in ways that we do not need to consider when making
our own decisions. Externalities represent market failures. They represent situations
where the ‘invisible hand’ simply does not work. And these situations exist and are very
often profoundly important. The important thing in terms of this book is that when these
problems exist, a business case for resolving the social issue in question or delivering the
citizenship rights in question does not exist.
The corporate citizenship presented in this book is only equipped to deal with win-
win problems, problems where the interests of the shareholders are aligned with the
broader social interests. Its contribution is as a mechanism by which bounded rationality
might be addressed. It comprises activities designed to seek opportunities (or risks)
actively, where shareholders’ interests might be served by delivering citizenship rights
or avoiding the curtailment of these rights. But its limits must be acknowledged.
15.4Conclusion
And so to conclude this chapter and the book as a whole, corporate citizenship can be
thought of as the ‘role of the corporation in administering citizenship rights for
individuals’.13 In this book, we contemplate this role from the perspective of corporations
as privately owned entities, ultimately engaged in the pursuit of profit (or value) for the
owners. We see how this essentially egoist profit motive places some restrictions on what
we might reasonably expect corporations to be able to achieve in terms of the delivery of
the rights of citizens. This, however, does not detract from the fact that corporate
citizenship can be a powerful force especially in terms of resolving bounded rationality
and unearthing mutual advantage opportunities. And it is in this regard that we trace in
detail just how corporations might go about realising the mutual advantage associated
with certain corporate citizenship efforts. This takes us all the way from high-level
activities including leadership, corporate governance, risk management, strategy
formulation and ethics management through to procurement, supply chain management,
logistics, operations, human resource management, marketing management and financial
management. We see how the opportunities and risk inherent in the administering of
citizenship rights might be embedded in every step of the management of corporations.

Multiple-choice questions
1.Which one of the following actions constitutes a business case for corporate
citizenship?
a.Reducing the carbon footprint by manufacturing cars with lower exhaust
emissions
b.Building apartment blocks to restricted heights to maintain the privacy of the
surrounding neighbourhood residents
c.Increasing the salaries of mine workers in response to strike action at the
mines
d.Donating solar panels to a community primary school

2.In Milton Friedman’s paper, he argued that the choice of ‘giving away’ profits to
philanthropic causes was the sole decision of:
a.shareholders
b.the agent
c.stakeholders
d.government

3.If a corporate executive has a social responsibility in his or her capacity as a

businessperson, he or she is to act in some way that is not in the interests of his or
her employers. According to Friedman, this statement is:
a.true
b.false
4.Select the example below which best reflects Friedman’s idea of the corporate
executive’s social responsibility in his or her capacity as a businessperson.
a.To spend money on efforts that reduce pollution, expenditure which is within
the amount that is in the best financial interests of the corporation
b.To recruit the unemployed instead of better-qualified available candidates to
contribute to the social objective of reducing poverty
c.Spending beyond the corporate budget in order to create awareness about
deforestation
d.An organisation admitting its best interests are to contribute to the social
objectives of improving the environment and reducing poverty

5.When the private interests of shareholders are not aligned with those of society
at large, problems begin to emerge. Which one of the following options does not
represent one of these problems?
a.A public goods dilemma
b.The tragedy of the commons
c.A negative externality
d.A business case for corporate citizenship

6.Corporate citizenship can be a powerful force in terms of (select all options which
apply):
a.Resolving bounded rationality
b.Unearthing mutual advantage opportunities
c.Reconciling shareholders’ and citizenship rights
d.Solving the world’s social problems
Discussion questions
1.Present your understanding of Milton Friedman’s view on business and social
responsibility. Do you agree with Milton Friedman’s view? Justify your answer.

2.In Chapter 1, you were asked to list three companies that you think are excellent
corporate citizens and three companies that you think are bad corporate citizens.
Revisit those questions and answer them again. Compare the answers you wrote
down in Chapter 1 to those you have written down now. Have your answers
changed? If so, explain why.

The objective of the next two questions is to encourage you towards holistic thinking, as
opposed to modular type thinking (in which specific questions pertain to specific
chapters). Please answer the following questions, and determine for yourself, which focus
areas are relevant.

3.Consider the company that you work for, or the organisation you aspire to work
for. Provide a comprehensive assessment of how well or not, this company is doing
in terms of administering citizenship rights, with respect to the various functional
areas of business management.

4.Based on the assessment carried out in the previous question, identify the areas
or gaps that the company should consider addressing in order to administer
citizenship rights more effectively. Next, prepare an objective argument that you
will present to the board of directors that proposes a plan as to how these rights
should be administered. Your plan should consider the financial implications in the
short- and long-term, as well as the stakeholders affected.

References
1.Marx, K. 1867. Capital Volume 1. Penguin Classics, London.
2.World Economic Forum. 2016. Fourth Industrial Revolution. [Online].
Available: https://www.weforum.org/agenda/2016/01/the-fourth-industrial-
revolution-what-it-means-and-how-to-respond/ [22 June 2016].
3.Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended
theoretical conceptualization. Academy of Management Review, 30(1):166–179.
4.Friedman, M. 1970. The social responsibility of business is to increase its
profits. The New York Times Magazine, September 13.
5.Ibid.
6.Nozick, R. 1974. Anarchy, State, and Utopia. Basic Books: New York.
7.Smith, A. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations.
8.Frynas, JG & Mellahi, K. 2005. Global Strategic Management. Oxford University
Press: Oxford.
9.Orlitzky, M, Schmidt, FL & Rynes, SL. 2003. Corporate social and financial
performance: A meta-analysis. Organization Studies, 24(3):403–411; Allouche, J &
Laroche, P. 2005. A meta-analytical investigation of the relationship between
corporate social and financial performance. Revue de Gestion des Ressources
Humaines, 57:18–41; Revelli, C & Viviani, J-L. 2015. Financial performance of
socially responsible investing (SRI): What have we learned? A meta-
analysis. Business Ethics: A European Review, 24(2):158–185.
10.Kurucz, EC, Colbert, BA & Wheeler, D. 2008. The business case for corporate
social responsibility. In: The Oxford Handbook of Corporate Social Responsibility,
(Eds). Crane, A, McWilliams, A, Matten, D, Moon, J & Siegel, D. pp 3–15, Oxford
University Press: Oxford; Vogel, DJ. 2005. Is there a market for virtue? The business
case for corporate social responsibility. California Management Review, 47(4):19–
45.
11.Porter, ME & Kramer, MR. 2003. The competitive advantage of corporate
philanthropy. In: Harvard Business Review on Corporate Responsibility. Harvard
Business School Press: Boston.
12.Kollock, P. 1998. Social dilemmas: The anatomy of cooperation. Annual Review of
Sociology, 24:183–214.
13.Matten, D & Crane, A. 2005. Corporate citizenship: Toward an extended
theoretical conceptualization. Academy of Management Review, 30(1):173.
Index
Page numbers in italics indicate figures and tables.

A
adaptation to climate change 41–43
added-value debate 317–318
administering of citizenship rights 5–6
through ethical trade 6
through packaging management 7
affirmative action
and procurement 267
see also B-BBEE
Agenda 21 33–34
areas of unethical procurement 277–278
awarding of contracts and selection of suppliers 267–271

B
Baby Boomers 60
B-BBEE 168–169, 267, 268, 269, 270, 271, 276
bid committees 275–276
Blake and Mouton’s leadership grid 119–120
boards of directors, responsibilities 139
bounded rationality 379
brand names 330
Brundtland Report 21, 22
businesses see corporations
business ethics
arguments for and against 227–231
ethical scandals 225
ethics, defined 226
introduction 226–227
levels of 227, 228
marketing concept 323–325
and regulation 231
see also ethics
business ethics management
corporate ethical culture 236–240
ethical behaviour model 240–248
ethical decision making 248–252
formal 231–235
informal 235–236
organisational cultures 236, 237
business level strategies 172
business model innovation for sustainability 171–172
business partners and responsible leadership 127

C
capitalist stance 8–9
career development 311–312
cause-related marketing 341
charismatic leadership 121–122
circle of shared value 209
citizenship 66
civil rights 66
clean technology 334
clients, customers and responsible leadership 127
climate change
adaptation to 41–43
and business strategy integration 44–45
COP21 43
corporate action 43–45
defined 38–39
employee engagement 45
facts 39–41
greenhouse gas reduction 45
mitigation 41
Paris Climate Conference 43
strategies for addressing 41–43
Club of Rome 20
community
and procurement 267
as stakeholders 213–214
companies see corporations
conscious customers 326
consequential ethical theories 79–81
consumer markets, new 63
consumer orientation 323–324
Consumer Protection Act (CPA) 327–328
consumer protection organisations 328–329
consumer protection regulation 363
consumers as stakeholders 213–214
contemporary ethical theories 83–86
contextualisation of principles of corporate governance in terms of corporate
citizenship 149–150
control implications of debt and equity financing 360
conventional view of corporate citizenship 67–68
convergent stakeholder approach 198
COP21 43
corporate citizenship
with a capitalist stance 8–9
corporations 8
defined 5–7, 64–66
and financial management 352
in HR context 301–303
interface with strategic management and sustainability 163–165
strategic management 164
see also business ethics; sustainability
corporate ethical culture
clusters of statements 239
components and characteristics 237–238, 239
strong and weak 238, 240
virtues 240, 241
corporate governance
background 136–137
board of directors, responsibilities 139
in context of corporate citizenship 149–150
defined 137–138
ethical behaviour 139
framework 135
fundamental values 138
goal of 138
King ll 137
King lll 139, 212
principles for governments 151–155
principles of 138–140, 149–150
see also risk management
corporate level strategies for sustainability 174–176
corporate power and responsibility, increasing 61–64
corporate reporting 182–183
corporate social responsibility, Milton Friedman article 62, 379–380
corporate value 351
corporations 8
action on climate change 43–45
characteristics 64–66
cross-border activities 63
potential influence 8
public goods, role in delivery 63–64
social responsibilities 66
sustainable 165–166
cost leadership strategies 172–173
cross-border activities 63
culture
organisational 236, 237
and risk management 140–141
customers, increased power and demand from 59
D
debt and equity financing, control implications 360
defensive strategies 175–176
descriptive stakeholder approach 197
development
defined 23
of human resources 307–308
differentiation strategy 173
discourse ethics 84–85
disposition options 293–295
distribution of profits, responsible 365–368
doing good to do well 87–89
duty 82–83

E
early supplier involvement (ESI) 289
ecological footprint (EF) 29–32
economy as element of sustainable development 26–27
egoism 79, 380
embedding sustainability 165–166
employee related legislation 214–215
employees
as key to sustainability 215–216
responsible leadership 126–127
employment relations 316
environment
as element of sustainable development 26
and procurement 267
as stakeholder 214
environmental responsibility, in procurement and supply chain management
(SCM) 279–281
equivalent view of corporate citizenship 67–68
ethical aspects of procurement and supply chain management (SCM) 276–279
ethical behaviour, and corporate governance 139
ethical behaviour model 240–248
ethical beliefs and sensitivities 243
ethical intentions 248
ethical intuitions 243–245
individual characteristics 241–243
moral intensity of issue 246–247
organisational characteristics 247–248
planned behaviour theory 246
ethical beliefs and sensitivities 243
ethical decision making 248–252
ethical intentions 248
ethical intuitions 243–245
ethical marketing 340–341
ethical scandals 225
ethical theories
consequential 79–81
contemporary 83–86
discourse ethics 84–85
duty 82–83
egoism 79
feminist ethics 84
non-consequential 82–83
postmodern ethics 85–86
rights and justice 83
utilitarianism 79–81
virtue ethics 83–84
ethics
defined 78, 226
of maximising corporate value 351
see also business ethics
Euro 5 and 6 vehicles 290
evolution of corporate citizenship
changing role of corporates 54–57
corporate citizenship, defined 64–66
corporate power and responsibility, increasing 61–64
customers, increased power and demand from 59
Fourth Industrial Revolution 55–57
framework for facilitating corporate citizenship 69–71
Friedman, Milton 62
Future of Jobs report 58–59
globalisation 58
history of corporate citizenship 67–69
intellectual capital and learning 59–60
political changes 64
technological advances 58–59
United Nations Global Compact (UNCG) 69–71
workers, changing roles and expectations of 60–61
world of work, radical transformation 58–59
extended view of corporate citizenship 68–69
external growth strategies 174–175

F
feminist ethics 84
Fiedler’s contingency theory 120–121
financial education 364
financial management
and corporate citizenship 352
ethics of maximising corporate value 351
focus of 351–352
fundamental objective 348–351
integrated reporting 368–369
responsible distribution of profits 365–368
responsible financing 358–365
responsible investment 352–358
financial performance
defined 96
and social responsibility, academic review 98–101
and social responsibility, arguments 96–98
financial responsibility, and procurement 267
financing, responsible 358–365
First Industrial Revolution 55
five Rs of sustainable supply chains 287
focus strategy 173
formal business ethics management 231–235
Fourth Industrial Revolution 55–57
frameworks
for facilitating corporate citizenship 69–71
for risk management 140
supply chain management 272–275
Friedman, Milton 62, 379–380
fronting 271
fundamental values of corporate governance 138
Future of Jobs report 58–59
Future we want outcomes document 35–36

G
Generation X 60–61
Generation Y 61
globalisation 58
global warming see climate change
governance, corporate see corporate governance
government
responsible leadership 128–129
as stakeholder 212–213
green supply chain management 279–280, 286
green technologies 290
greenwashing 176–177

H
health and wellness of employees 314–316
Hersey and Blanchard’s leadership model 121
history of corporate citizenship 67–69
House, Robert, path-goal theory 121
humanity 25–26
human resource function and corporate citizenship
added-value debate 317–318
career development 311–312
corporate citizenship within the HR context 301–303
development of human resources 307–308
employment relations 316
health and wellness of employees 314–316
occupational health and safety 315
planning of human resources 304–305
psychological contract 303
recognition and rewards 312–314
staffing 305–306
sustainable corporate roadmap 302
traditional metrics 317, 318
utilisation of human resources 309–310
human rights, and procurement 267

I
identifying stakeholders 199–201
individual and institutional investors 357–358
individual characteristics 241–243
informal business ethics management 235–236
instrumental stakeholder approach 197–198
integrated reporting (IR) 368–369
intellectual capital and learning 59–60
internal environment in strategic analysis 167–168
internal growth strategies 174
International Union for the Conservation of Nature (IUCN) 20
investment
in assets and projects 353–357
responsible 352–358

J
JIT system 289
just distribution of wealth and power 379–380
justice and rights ethical theories 83

K
key stakeholders and responsible leadership 126–129
King lll
ethical leadership and corporate citizenship 139
ethical leadership and risk management 146–149
good corporate governance 212
governance structures 178–179
stakeholder relationship management principles 207–208
King ll report 137

L
leadership
defined 118
vs management 118
see also responsible leadership
leadership approaches
Blake and Mouton’s leadership grid 119–120
charismatic leadership 121–122
Fiedler’s contingency theory 120–121
Hersey and Blanchard’s leadership model 121
House, Robert, path-goal theory 121
Likert’s behavioural approach 119
responsible leadership 123, 125–126
servant leadership 122–123
styles approaches 119–121
Tannenbaum and Schmidt’s continuum of behaviour 120
traits theory 119
transactional leadership 122
transformational leadership 122
learning and intellectual capital 59–60
legislation, role in business 90–95
levels of business ethics 227, 228
levels of stakeholder engagement 205
libertarianism 380
Likert’s behavioural approach 119
limited view of corporate citizenship 66
limits of what corporate citizenship can achieve 379
logistics 339
long-term relationships with suppliers 270–271

M
management
defined 116–117
vs leadership 118
levels and functional areas 117
responsibilities 117
marketing concept 323–325
marketing era 323
marketing management
cause-related marketing 341
conscious customers 326
consumer protection in South Africa 327–329
ethical marketing 340–341
marketing communication, advertising and PR 339–340
marketing philosophies 322–325
NGOs and marketing 329
place 336–339
pricing 334–336
product decisions, branding and packaging 329–334
public relations 340
societal marketing 325–326
measures to prevent unethical conduct 279
Millennials 61
Millennium Development Goals (MDGs) 34
mitigation of effects of climate change 41
moral drive for corporate citizenship 77
morality, defined 77–78
see also ethics

N
natural environment
and responsible leadership 127–128
as stakeholder 214
need satisfaction 333
network consistency 211–212
network diversity 211
new consumer markets 63
new product development 331–332
NGOs and marketing 329
nine-step ethical decision-making model 248–252
non-consequential ethical theories 82–83
normative stakeholder approach 198

O
obsolescence of products 331–332
occupational health and safety 315
organisational cultures 236, 237
organisational integration 324–325
Our Common Future report 21
outsourcing of logistics 292
P
packaging 330
Paris Climate Conference 43
place 336–339
planned behaviour theory 246
planned obsolescence 331–332
planning of human resources 304–305
political changes and the evolution of corporate citizenship 64
political rights 66
postmodern ethics 85–86
pricing 334–336
prioritising stakeholders 201–203
privatisation 62
procurement and supply chain management (SCM)
areas of unethical procurement 277–278
bid committees 275–276
corporate social responsibility 266–267
environmental responsibility 279–281
ethical aspects 276–279
measures to prevent unethical conduct 279
in the public sector 271–276
rules for ethical procurement transactions 277
SCM framework 272–275
selection of suppliers and awarding of contracts 267–271
value creation 265–266
see also place
production era 322–323
product obsolescence 331–332
product stewardship 333–334
profit orientation 323
profit, planet, people 164
Protection of Personal Information Act (POPI) 328
psychological contract 303
psychological obsolescence 332
public as stakeholders 213
public goods, role of corporates in delivery 63–64
public sector, procurement and supply chain management (SCM) 271–276
pursuit of profit 8

R
radical transformation of the world of work 58–59
rationale of corporate citizenship
consequential ethical theories 79–81
contemporary ethical theories 83–86
doing good to do well 87–89
ethics, defined 78
financial performance 95–101
legislation 90–95
moral drive for corporate citizenship 77
morality, defined 77–78
non-consequential ethical theories 82–83
recognition and rewards 312–314
regulation, and business ethics 231
regulatory anticipation and advocacy 334
responsible distribution of profits 365–368
responsible financing 358–365
control implications of debt and equity financing 360
from corporate viewpoint 359–361
from financier’s viewpoint 361–365
return 360
risk 360
responsible investment 352–358
in assets and projects 353–357
individual and institutional investors viewpoint 357–358
responsible leadership
in action 129–130
clients and customers 127
government 128–129
and key stakeholders 126–129
natural environment 127–128
shareholders 128
social environment 127
as style approach 123, 125–126
triple bottom line 125–126
values and value creation 126
return 360
reverse logistics 292–295
rights and justice ethical theories 83
Rio Summit 1992 33–34
risk 360
risk governance principles 146–149
risk management
business owners 142
culture 140–141
framework 140
principles 141
process 143–146, 182
strategy 141
structure 141–143
see also corporate governance
rules for ethical procurement transactions 277

S
safety
occupational health and safety 315
and procurement 267
in production 289–290
sales era 323
Second Industrial Revolution 55
selection of suppliers and awarding of contracts
development of suppliers 269–270
long-term relationships with suppliers 270–271
selection process 268–269
servant leadership 122–123
shared value 208–209
Silent Generation 60
social capital 209–211
social dilemmas 381
social environment and responsible leadership 127
social responsibilities of corporates 66
social responsibility and financial performance 96–101
social responsibility principle 324
social rights 66
societal impact 354
societal marketing 325–326
society as element of sustainable development 25–26
staffing 305–306
stakeholder engagement 203–206
issues 215–216
levels 205
process 198
tools 206
stakeholder relationship management 206–211
King lll principles 207–208
shared value 208–209
social capital 209–211
stakeholders
concept, emergence of 197–198
consumers and the community 213–214
defined 198–199
external 212–214
government 212–213
identifying 199–201
internal 214–215
natural environment 214
as network of people 211–212
prioritising 201–203
public 213
stakeholder salience 201–203
stakeholder theory 197
see also responsible leadership
strategic analysis 167–170
external environment 168–170
internal environment 167–168
strategic direction 166–167
strategic management
corporate citizenship 164
embedding sustainability 165–166
interface with corporate citizenship and sustainability 163–165
process 163–164
sustainability 164–165
strategy performance management and control 182–183
strong view on sustainability 33
styles approaches to leadership 119–121
suppliers see selection of suppliers and awarding of contracts
sustainability
defined 22–23
as integral part of strategic choice 172–176
interface with corporate citizenship and strategic management 163–165
of suppliers 289
see also business ethics; corporate citizenship
sustainability as integral part of strategy implementation
culture 177–178
education 180
leadership 177
policies and procedures 179
reward systems 179
stakeholders 180–181
structure 178–179
technology 181
training 180
sustainability embedded business models and strategies
business model innovation for sustainability 171–172
sustainability as integral part of strategic choice 172–176
sustainable competitive advantage 164
sustainable corporates 165–166
sustainable development
Brundtland Report 21, 22
Club of Rome 20
concept 21–25
defined 18, 23–25
development, defined 23
ecological footprint (EF) of society 29–32
emergence 19–21
future of 37–38
International Union for the Conservation of Nature (IUCN) 20
Our Common Future report 21
sustainability, defined 22–23
systems theory 21–22
United Nations Conference on the Human Environment 20–21
views on sustainability 32–33
weak and strong views on sustainability 32–33
World Conservation Strategy 21
World Council of Churches (WCC) 21
see also climate change; unsustainable development, responses to the challenges
sustainable development, elements of
the economy 26–27
environment 26
interconnections of the elements 27–29
society 25–26
Sustainable Development Goals (SDGs) 36–37
sustainable logistics management
disposition options 293–295
outsourcing 292
reverse logistics 292–295
third-party logistics providers 292
transport 290–291
sustainable operations management
objectives 287
in practice 288–290
sustainable supply chains, the five Rs 287
systems theory on sustainable development 21–22

T
Tannenbaum and Schmidt’s continuum of behaviour 120
technological advances and evolution of corporate citizenship 58–59
Technological Revolution 55
tenderpreneurs 271
Third Industrial Revolution 55
third-party logistics providers 292
tools for stakeholder engagement 206
traditional HR metrics 317, 318
traits theory 119
transactional leadership 122
transformational leadership 122
transport 290–291
triple bottom line 125–126, 134, 150

U
unethical conduct, measures to prevent 279
unethical procurement, areas of 277–278
United Nations Conference on the Human Environment 20–21
United Nations Global Compact (UNCG) 69–71
United Nations Sustainable Development Summit 2015 36–37
unsustainable development, responses to the challenges
2030 Agenda for Sustainable Development 35–36
Agenda 21 33–34
Future we want 35–36
Millennium Development Goals (MDGs) 34
Rio+20 35–36
Rio Summit 1992 33–34
Sustainable Development Goals (SDGs) 36–37
United Nations Sustainable Development Summit 2015 36–37
World Summit on Sustainable Development (WSSD) 35
see also sustainable development
utilisation of human resources 309–310
utilitarianism 79–81

V
value creation in procurement and supply chain management (SCM) 265–266
values
fundamental to corporate governance 138
and value creation 126
vendor managed inventory system (VMI) 289
virtue ethics 83–84
virtues 240

W
waste minimisation 333
weak view on sustainability 32
wellness and health of employees 314–316
workers, changing roles and expectations 60–61
World Conservation Strategy 21
World Council of Churches (WCC) 21
world of work, radical transformation 58–59
World Summit on Sustainable Development (WSSD) 35

Z
zero-emission vehicle refrigeration 290