IS CORPORATE CITIZENSHIP MAKING A DIFFERENCE IN

Wambalaba and K’aol symposium paper, Ghana, 20-22 November 2006 1

IS CORPORATE CITIZENSHIP MAKING A DIFFERENCE IN HORTICULTURAL INDUSTRY IN KENYA? THE CASE OF HOMEGROWN KENYA LTD. Dr. Francis Wambalaba, PhD., AICP Associate Professor of Economics, School of Business, United States International University Dr. George K’Aol, PhD., Associate Professor of Management, School of Business, United States International University Abstract Corporate citizenship is about the contribution a company makes to society through its core business activities, its social investment and philanthropy programs, and its engagement in public policy. The manner in which a company manages its economic, social and environmental relationships, and the way it engages with its stakeholders has an impact on the company's long-term success. Over the past decade, corporate citizenship (CC) emerged as a major issue and challenge in the Kenyan horticulture industry. In the late 1990s and early 2000, the Kenya horticulture industry was subjected to intensive investigation by key stakeholders including key customers, NGOs and the Press, especially about poor working conditions, cases of sexual harassment and exposure to harmful chemicals or pesticides among others. According to the World Bank (2002), there are dynamic linkages between voluntary approaches and regulation.

1 Thus, commitments that are made voluntarily can eventually expand and harden into

mandatory benchmarks. However, voluntary CC, at its best, supplements legal regulation by aiming for standards higher than those existing in law. Whether regulatory or voluntary, several corporations have over time increased their participation in good corporate citizenship. While one of the challenges is to determine why, it is similarly important to determine the impact of these efforts. Expenditures on such efforts can be sustainable partly because of the reciprocal benefits that the company stands to gain. The major objective of this study is to determine whether corporate citizenship efforts make a difference at the firm level in terms of social, environmental, and economic dimensions. The research methodology for this study will be based on case study design focusing on Homegrown Kenya Ltd. The company has been a leader on Corporate Citizenship strategy implementation in the Kenyan horticultural industry. The population will consist of key management and employees in relevant positions in the company. In-depth interviews will be used to collect data from top management. The Bottom Line Approach (Three Pillar Model) will be used as a basis for analyzing the case, i.e., social impact, environmental impact, and economic impact.

Introductory Background Homegrown (K) Ltd was established in Kenya in 1982 to export fresh vegetable produce to the United Kingdom. Initially the vegetables were grown on leased land. However, in 1988, Homegrown purchased its first farm, namely Flamingo Farm, near Lake Naivasha covering 80 hectares. It was on this farm that Homegrown started growing English runner beans under lights, and later where the company constructed the first metal green house structures in Kenya in 1990 to grow roses. In 2000, Homegrown registered a subsidiary company in Britain known as Flamingo Holdings which subsequently established two distribution companies in Britain, namely Flamingo UK and Flower Plus to market and distribute pre-packed and prepared vegetables and cut flowers to blue chip supermarkets in the UK including Marks and Spencer, Safeway, Sainsburys, Tesco and M&S. Between 2000 and

1 Tom Fox, Halina Ward and Bruce Howard, Public Sector Roles in Strengthening Corporate Social

Responsibility: A Baseline Study (The World Bank: October 2002), p. 1.


2003, Homegrown continued with its acquisition strategy by acquiring additional farms in Naivasha and Mount Kenya regions to expand its vegetable and flower production. In 2001, Dudutech, an Integrated Pest Management company, was established by Homegrown to provide pest management services to the company. In 2002 the company made two land mark acquisitions including Zwetsloots, a cut flower supplier to the supermarkets in UK and Sulmac, a farm in Naivasha covering 256 hectares that would create a land bank for all of Homegrown’s foreseeable expansions. In 2003, Sunbird Flowers in South Africa was acquired by the company to enhance its vertically integrated supply base. By late 2003, Homegrown had grown to be one of the largest flower and vegetable growers and exporters in Kenya with an annual turnover of $ 74 million and employing over 7,500 people in its three regional centers, namely Lake Naivasha, Mt. Kenya and Jomo Kenyatta International Airport. Under the umbrella of Flamingo Holdings, the company had extended its operations to other countries in Africa, Europe, Latin America and Asia. It had a worldwide supply base including Kenya, Zimbabwe, South Africa, Guatemala, Peru, Thailand, Holland and UK (see exhibits 1 & 2). Homegrown had a relatively flat organizational structure headed by the chairman and the managing director (MD). The company had its head office in Nairobi and field offices and staff distributed in three of its main growing areas namely Nairobi, Lake Naivasha, and Mount Kenya region. Corporate Social Responsibility (CSR) has been the core of Homegrown’s business since the 1990s to address issues related to customer requirements, standards, workers welfare, and working conditions (See Exhibit 3). The Research Process According to the World Bank (2002), there are dynamic linkages between voluntary approaches and regulation.2 However, whether regulatory or voluntary, several corporations have over time increased their participation in good corporate citizenship. Similarly, expenditures on such efforts can be sustainable partly because of the reciprocal benefits that the company stands to gain. Other impacts of these programs may include; increased costs, improved environment, better productivity, and investor opportunities. Research Problem: Over the past decade, corporate citizenship (CC) emerged as a major issue and challenge in the Kenyan horticulture industry. In the late 1990s and early 2000, the Kenya horticulture industry was subjected to intensive investigation by key stakeholders including key customers, NGOs and the Press with respect to poor working conditions, cases of sexual harassment and exposure to harmful chemicals or pesticides among others. Possible mitigation options they faced included government regulation of the industry, a voluntary participation in the development of industry-wide standards, development of individual firm level standards or a combination. However, each of them required additional expenditures and firms would need to balance these against subsequent benefits. Research Objectives: The major objective of this study is to determine whether corporate citizenship efforts make a difference at the firm level in terms of social, environmental, and economic dimensions and whether it is worth the effort. Importance of the Study: This study is expected to enhance the understanding of CSR implications with respect to; corporate management decisions, public policy decisions, and community stakeholders’ decisions. It is anticipated that corporations will be interested in the nature of costs and benefits accruing from CSR programs. This will help them in determining viable CSR strategies. It is also anticipated that public policy makers will be interested in finding behavioral control mechanisms that are incentive than punitive oriented. This may

2 Tom Fox, Halina Ward and Bruce Howard, Public Sector Roles in Strengthening Corporate Social Responsibility: A Baseline Study (The World Bank: October 2002), p. 1.


not only reduce the burden of regulatory enforcement, but may also lead to increased tax revenues. Methodology: The research methodology for this study was based on case study design focusing on Homegrown Kenya Ltd which has been a leader on Corporate Citizenship strategy implementation in the Kenyan horticultural industry. A lot of literature about the company and the industry in general was first searched and compiled. This was followed by in-depth interviews with top management. The first meeting included the CEO and the finance director who provided a general overview. The second meeting included the CEO, the CSR director, the HR coordinator and a community activities coordinator in which more detailed activities were discussed. Requests for data were also made. The third meeting was with the CEO alone including outstanding issues and collection of requested data. The Bottom Line Approach (Three Pillar Model) has been used as a basis for analyzing the case, i.e., social impact, environmental impact, and economic impact. General Literature on CSR Corporate Social Responsibility (CSR) is about how companies manage the business processes to produce an overall positive impact on society (Agle, Mitchel and Sonnenfeld, 1999). The World Business Council for Sustainable Development (WBCSD) report (2001), notes that a universally accepted definition of CSR has yet to emerge, but offers that “corporate social responsibility is the commitment of business to contribute to sustainable development, working with employees, their families, the local community and society at large to improve their quality of life”. CSR is about the acknowledging that sustainable competitive advantage requires companies to be economically viable, environmentally sound and socially responsible (Fombrun, 1997). Behaving socially responsible will increase the human development of stakeholders both within and outside the corporation (Hillman and Hatt, 1999). Traditionally in the United States, CSR has been defined much more in terms of a philanthropic model. Companies make profits unhindered except by fulfilling their duty to pay taxes. The European model is much more focused on operating the core business in a socially responsible way, complemented by investment in communities for solid business case reasons. And in different countries, there will be different priorities, and values that will shape how businesses act (Esty, 1999). Other related practices of interest that may contribute towards a strong CSR approach include corporate citizenship, corporate governance, and corporate sustainability. 1. Corporate Citizenship has the same definition as CSR as it is concerned with treating the stakeholders of the firm ethically or in a socially responsible manner. The aim of is to create higher standards of living, while preserving the profitability of the corporation, for its stakeholders both within and outside the corporation (Donaldson and Preston, 1995). 2. Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. Its aim is to align the interests of individuals, corporations and society (Fombran & Shanley, 1990). According to the Cadbury Report on Corporate Governance (1992), Corporate Governance (CG) is defined as "the system by which companies are directed and controlled". 3. Corporate Sustainability aligns an organization’s products and services with stakeholder expectations, thereby adding economic, environmental and social value (Clarkson, 1991). According to Husted (1994), there are conflicting opinions on whether firms should take social responsibilities in the communities in which they operate. The basis for support for CSR is that business today should make explicit commitments to uphold accepted values and goals, and to take account of the views and interests of a range of stakeholders; and they should demonstrates through their actions that these commitments are genuine (Clarkson, 1995). The dominant institution in any society needs to take responsibility for the whole (Brown, 1998). And according to Clarkson (1991) the position that the only social


responsibility of business is to keep the law and maximize their profits is not sound because moral responsibilities go beyond legal duties and that groups, not only individuals, have moral and social responsibilities. However, CSR raises an issue on whether and how far self-interested actions of individuals and business enterprises guided by the profit motives will further the common good (Burke and Logsdon, 1996). Some economists argue that since profits accrue to shareholders, it follows that managers of firms should act in the best interest of shareholders (Clarkson, 1990). According to Gauthier (1984), there are limits on businesses responsibilities in terms of time, capacities and resources which makes it impossible to attend effectively to all opportunities of doing good and avoiding harm. But if a firm’s commitment to act morally and promote common good is expressed in its mission, objectives and other statements of it’s intentions, then prospective investors have reasonable notice before they commit their funds to the firm (Dyer and Singh, 1998). It is argued that organizations like need to concentrate on pursuing some specific objectives in order to act effectively. Some authors like Dyer and Singh, (1998), argue that the basic responsibility of a firm is to balance the interests of all its “stakeholders.” Importance of CSR: First, stakeholders expect organizations to be socially and ethically responsible and are prepared to reward them for being so (Clarkson 1990). Secondly, CSR helps businesses to understand the role of social responsibility in corporate positioning, assess the impact of their organization on society and stakeholders, gauge effect on overall corporate reputation, and research the effectiveness of current initiatives through information generated and to review current principles and policies (Dierkes, 1995). According to Ghoshal and Moran (1996), CSR is one of the most critical issues facing businesses today. Clarkson found that firms that place a premium on ethics and social performance make the most money. He suggests that companies that concentrate exclusively on the bottom line often make poor decisions because they lack information from stakeholders and the environment that would allow them to anticipate opportunities and solve problems they are small and less costly to remedy (Clarkson, 1991). Forces Directing Corporations Towards CSR: Some of the main forces leading firms to towards corporate social responsibility as a major tool for survival include: 1. Shifting Paradigms and Stakeholder Relationships: The term stakeholder has been defined as any group or individual who can affect or is affected by the achievement of a firm’s objectives (Freeman 1984). Primary stakeholders have interests that are directly linked to the fortunes of a company including shareholders and investors, employees, customers, suppliers and residents of the communities where the company operates. Some have also added individuals and groups that speak for the natural environment non-human species and future generations to this list (Greening and Turgan, 2000). Secondary stakeholders have indirect influences on an organization or less affected by its activities including the media and pressure groups, and others such as labor unions, community groups, environmental organizations, human rights organizations and consumer advocates. Increasingly large companies are using the term sustainability based on the premise that corporate performance should be assessed against a triple bottom line of economic development, environmental quality and social justice or equity (Esty, 1999). 2. Shrinking Government Role: Governments have always played the role of the peoples’ watchman & safeguarding the environment and exploitation of other sorts. But shrinking government resources and increased criticisms of government inefficiencies has forced firms to consider CSR in shaping business to operate efficiently (Clarkson, 1991). 3. Increased Customer Interest: There is increasing evidence that the ethical conduct and environmental and social consciousness of companies make a difference in purchasing decisions of customers. According to the Council for Economic Priorities, over one in five consumers report either rewarding or punishing companies in the past year based on their perceived social performance (Clutterbuck, Dearlove and Snow, 1992). 4. Growing Investor Pressure: Investors are changing the way they assess companies’


performance and are making investment decisions based on criteria that includes issues of social ethical relevance. The Social Investment Forum reports that, in the United States of America in 1999, there was more than two trillion dollars in assets under management in portfolios that use screens linked to ethics, the environment, and corporate social responsibility before making any investment decision. 5. Competitive Labor Markets: Employees are looking beyond paychecks and benefits to policies and operating practices that are geared towards a social responsible organization. In order to employ and maintain such employees, companies are being forced not only to giving back to communities they operate in but also striving to improve the quality of life in the workplace (Burke and Logsdon, 1996). Benefits of Implementing Corporate Social Responsibility: To compete successfully, a company needs to develop responsible business policies and practices and make them an integral part of its mission, values, strategy and operations, including encouraging investors to examine the ethics of the other companies they invest in, to overhauling the working practices to give the workforce more flexibility (Husted, 2000). According to Greening and Hart (1995), it is argued that leadership companies of the future will be those that base their mission and their corporate strategies around creating, measuring and managing value. Companies failing to recognize this will risk not only their bottom line, but their very survival (Ghoshal & Moran, 1996). Specific activities may include: 1. Sponsorship: According to Clutterbuck, Dearlove & Snow (1992), sponsorship is the purest form of enlightened self-interest. Jim Collins, coauthor of “Built To Last” argues that companies will realize that what they stand for is more important than what they sell. Clutterbuck, Dearlove and Snow (1992) note that sponsorship is more cost-effective in building empathy, confidence and brand recognition than advertising. Sponsorship helps change public opinion, acquire new customers, and develop good relations with investors and government (Griffin and Mahon, 1997). In fact. Clutterbuck, Dearlove and Snow (1992) sum this up by saying that the degree to which sponsorship continues to grow will depend to a large extent on its reputation. On a smaller scale, community events often get lots of publicity in the local media (Burke & Logsdon, 1996). 2. Direct Product Promotion is another benefit that can be derived from sponsoring social activities such as tying sales of a product to donations to specific charities or activities. For example a supermarket chain Tesco developed a campaign so that each 25 pounds spent at the store earned a voucher to give to a school, which the school could eventually exchange for computer goods; (Wamalwa, 1999). 3. Governance Structures: Growing media and stakeholder attention on corporate governance have made it important and cost effective for companies to develop governance structures that proactively incorporate CSR issues. Benefits include: (1) enhanced corporate reputation among shareholders, customers, employees, communities and others, (2) reduced exposure to adverse publicity stemming from high-profile consumer or shareholder campaigns, and (3) reduced costs associated with the inclusion of shareholder resolutions in annual proxy statements (Berman, Wicks and Kotha, 1999). According to Berman, Wicks and Kotha, 1999, having formal mechanisms in place to raise CSR issues at the board level can help companies proactively identify and address situations or practices that could pose liabilities to the company. For example, in the U.S., federal and state agencies overseeing environmental and workplace regulations have formal programs that recognize and reward companies that have taken proactive measures to reduce adverse environmental, health, and safety impacts. In many cases, such companies are subject to fewer inspections and paperwork, and may be given preference or "fast-track" treatment when applying for operating permits, zoning variances, or other forms of governmental permission (Berman, Wicks and Jones, 1999). 4. Investor Interest: It has been argued that companies with responsive programs benefit from stock prices. For example, the Dow Jones Sustainability Group Index benchmarked the performance of investments in companies which strove to become more sustainable.3 It included around 200 companies that represented the top 10% of leading companies

3 http://www.mallenbaker.net/csr/CSRfiles/djsgi.html


committed to sustainable practices. The Index recognized the importance of integrating economic, environmental and social factors in business strategy and placed particular stress on innovative technology, corporate governance, the interests of shareholders, industry leadership and corporate responses to changes in society (see exhibit 7). And according to a survey by Mercer Investment Consulting (Mercer IC), and the SocialFunds.com, sponsors of institutional investment pools in the US expected moderate growth in socially responsible investing.4 The survey represented views of 183 US institutional investors responsible for over US$500 billion in assets. Individual funds in the survey ranged from less than US$250 million to more than US$5 billion AUM. Trends and Standards in the Horticultural Industry Emerging trends in global horticultural industry were first influenced by globalization, trade liberalization, changing lifestyles, and demographics. These changes presented growing market opportunities for African horticultural products. The steep increase of fruits, flowers, and vegetable exports from Kenya and Zimbabwe, and to a lesser extent, from Uganda, Zambia, Ghana, and Cote d’Ivoire reflected the potential of the sector. The 1990s witnessed private sector responses to these opportunities with rapid expansion of high value exports from Africa, shifts towards vertically integrated supply chains, and the rise of large agro-processors in private sector trade. A second key trend in the horticultural markets was expansion through consolidation of supermarkets. Supermarkets dominated food sales in developed countries and rapidly expanded their global presence. For example, the UK food retailing industry became dominated by four major supermarkets (Tesco, Asda, Sainsburys and Safeway) which together accounted for over two-thirds of retail food sales. The consolidation of retailers strengthened their control over suppliers as was evidenced by their turnover. Another related significant global trend in the industry was the practice of supermarkets buying from producers worldwide, including Africa, due to tariff reductions, trade liberalization, innovations in communications, and increased capital mobility.

In the 1990s, standards and codes of practice including ethical trading, fair trade, and social accountability in horticulture export were of interest in the global market. The interest resulted from consumer concern about working conditions and the overall impact of horticulture on society and local environment. This led to wide range of initiatives to implement standards and codes of practice in the area of horticulture. They included: Milieu Programma Sierteelt (MPS), MPS-GAP Good Agricultural Practice, Ethical Trading Initiative (ETI), Max Havelaar: Fair Trade, and Social Accountability Standard SA 8000 among others. For example, Milieu Programma Sierteelt (MPS) was created in 1993 in an effort to reduce the environmental impact of the floriculture sector. Initially, MPS was limited to inspections of floriculture in Netherlands, but later spread to other countries in Europe and Africa. MPS focused on the analysis of the firm’s a pesticide usage, recycling practices, energy, and water usage. Another notable development was the establishment of Ethical Trading Initiative (ETI) in 1998 by a Monitoring and Verification Working Group in UK to provide a road map for companies seeking to develop best practices and improve working conditions of their workers (see Exhibit 4). The international forces in Europe required supermarkets to meet regulatory requirements such as the 1990 UK Food Safety Act which required retailers to demonstrate that they had shown ‘due diligence’ in the manufacture, transportation, storage and preparation of food. In fact, there was a trend for supermarkets to go beyond mandatory regulations and to begin implementing their own private standards and codes of practice. They ‘raised the bar’, moving beyond procedures to ensure regulatory compliance to addressing broader issues

4 http://www.merceric.com/usrisurvey


such as integrated crop management, human rights and environmental protection, i.e., ‘plough to plate’ traceability. The Kenyan Horticultural Industry Trends

One of the key trends in the Kenyan horticultural industry in the 1990s and early 2000 was the rapid growth in the horticultural exports. Horticulture was Kenya’s second largest earner of foreign exchange after tea, earning the country US$ 300 million per year and a major source of new employment. It was the fastest growing sector of the Kenyan economy, and third most important in terms of foreign exchange earnings. Structural and macroeconomic reforms, plus the introduction of a more liberal trading environment under WTO arrangements provided a major boost to Kenya’s horticultural prospects. Specifically, the rapid growth of the industry was attributed to four major factors. First, Kenya had equatorial climate and fertile soil which allowed for year round production; second, Kenya had an educated workforce capable of meeting the challenges of new technologies and skills, third the preferential treatment under the Lome Convention which provided for concessionary access of Kenyan flowers, fresh vegetables and fruits to the European Union (EU) markets; and fourth, EU provided a stable and growing market particularly, the supermarket segment. Horticultural production and export in Kenya was dominated by large scale farms such as Homegrown, Finlay and Oserian Development Company which was at that time the largest single specialist flower unit in the world. The marketplace of these giants in turn was being challenged by new players such as Sian Roses, Sher Agencies, Rift Farmers and Shalimar flowers. To enhance its competitive advantage, Homegrown had developed an integral system as part of Flamingo Holdings Group of companies that had a worldwide supply base including Zimbabwe, South Africa, Guatemala, Peru, Thailand, Holland and the UK. Historical Context: The export horticulture grew from a small trade centered on Asian vegetables in the 1960’s such as okra and chillies to, by the mid 1990’s, an extensive trade delivering approximately 75 products to dozens of overseas markets. However, the industry was until 1966 a slow growing activity, producing for the domestic market, except for only two companies that were involved in horticultural exports. It was not until 1967 that the Horticultural Crops Development Authority (HCDA) was established to spearhead it. In 1968, fresh horticultural exports were only about 1476 tonnes. But by 1999, the sub-sector exported 103 260 tonnes, an average annual growth rate of more than 15 percent. Its exports were expected to rise to 130,000 tonnes by 2003. The sector grew as a percentage of agricultural exports rising from 3% at independence to 17%. 5 Exports of these products grew from $2-3 million at independence to over US$150m million in 1999, and was forecast to reach $256.4 million (or Ksh20 billion) annually in foreign exchange by 2004. The industry was a leading employer, with an estimated 500,000 people deriving their livelihood from it.6 Unlike other sub-sectors in agriculture, the horticultural sub-sector was characterized by less government intervention, relatively easy entry conditions for agribusiness enterprises, easy access to production land, a good linkage mechanism for technological transfer and a forward marketing linkage that tied most of the sectors outputs to the European marketing system. Major stakeholders in this sub-sector included; the Horticultural Department of the Ministry of Agriculture and Rural Development, the Horticultural Crops Development Authority (HCDA), the Kenya Agricultural Research Institute (KARI), and other stakeholders in the horticultural sector such as the Fresh Produce Exporters’ Association of Kenya (FPEAK), Kenya Export Development Support (KEDS) Program, and the Kenya External Trade Authority (KETA).

5 Minot, "Are horticultural exports a replicable success story? Evidence from Kenya and Côte d'Ivoire", 38 6 http://www.nationaudio.com/News/EastAfrican/16022004/Regional/Regional160220044.html


Standards: In the 1990s the Kenyan horticultural industry was under pressure to adopt standards and multi stakeholder initiative codes such as the Ethical Trading Initiative (ETI) that had been adopted by a group of supermarkets in UK. Despite the tremendous growth of the sector in terms of job creation and foreign exchange earnings, the sector was accused of poor working conditions and sexual harassment. In response to these claims, the KFC focused its attention on the social chapter of the code and adhering to the Horticultural Ethical Business Initiative (HEBI) social code that had been formulated from the ETI code. Homegrown committed itself not only to the Council’s Code of Practice, but also to the clauses of the HEBI Base Code at the local level (see Exhibit 5), and ETI code at an international level, when its holding company became a member of the UK-based Ethical Trading Initiative (ETI). To meet the stringent requirements and remain competitive in the overseas markets, the horticultural industry in Kenya had also taken various steps. The Kenya Flower Council (KFC) and the Fresh Produce Exporters Association (FPEAK) had come up with codes of practice in horticultural production and trading. These codes of practice were recognized in the international market and it was therefore advisable for all players in the industry to subscribe to them (see Exhibit 6). The Flower Industry in Kenya Although Kenya is on the equator, considerable differences in altitude allowed a great variety of climatic conditions from the hot coastal plain up to the cool highlands. In total, flower growing covered 20 square kilometres of land around Lake Naivasha, three-quarters of which was semi-arid land. Some flower farms such as Red Lands Roses and Charm Flowers, located in Thika and Kitengela respectively, had been set up in areas not suitable for food growing and therefore did not compete for land with food crops. The industry was capital-intensive, requiring a start-up capital of about $50,000 per hectare, but if managed properly, it was a high-yielding venture. Basic costs entailed land preparation, setting up irrigation systems, greenhouses, refrigerated cooling and storage, and staff welfare facilities. Nairobi, the capital city, was a major hub and was very well served by major airlines and charter operators giving easy airfreight access to the European markets and from there to the rest of the world.

Kenya had the fastest growing flower industry in the world, expanding at a rate of 200 hectares a year. With an annual production of 35,000 tonnes and control of 60 per cent of the $165 million African flower trade, Kenya was the world's leading producer of flowers, supplying about 25 per cent of the European Union's total requirements, followed by Columbia and Israel. Kenya continued to experience phenomenal growth in its exports of cut flowers even in the face of competition from Colombia, Ecuador, Israel, Zimbabwe, Zambia and Uganda. The Kenya flower industry, like the horticultural sector, continued with its rapid growth and in the year 2000, saw another 3.6 percent increase in exports to a record 38,000 tonnes. The export of roses continued to dominate the export market with sales up from 24.6 million kgs in 1999 to 28.4 million kgs, a 15 percent increase. Cut flowers were said to be worth over $100 million to the Kenyan economy. While there were about 100 registered flower growers, 60 per cent of the industry was in the hands of 50 large horticultural farms which supplied 90 per cent of the flower exports to Britain, the country's second biggest market. The Dutch Auctions took up 60 per cent of the total flowers exported from the country, while the rest went directly to supermarkets and other channels. Besides the UK, other countries that bought Kenya's flowers were Germany, Canada, Japan, Norway and South Africa (during winter). Although the US remained a huge potential market for Kenyan flowers under the Africa Growth and Opportunity Act (AGOA), the market was hampered by a lack of direct flights, a problem that also limited access to the highly lucrative Japanese market.


Homegrown’s CSR Activities Homegrown initiated the Lake Naivasha Growers’ Group Code of practice and authored the Kenya Flower Council (KFC) code of practice. The KFC Gold Standard, of which Homegrown was one of the only two holders, was recognized internationally through its benchmarking with the EurpeGAP flower standard. For Homegrown, its packing stations looked like operating theatres. Employees scrubbed up with soap, alcohol was sprayed before entering in hairnets and overalls, and integrated pest management projects cut the use of pesticides in the face of ever-tougher EU rules on minimum residues. Homegrown had to also ensure that both its own employees and out-grower farmers followed recommended technical instructions so as to produce the required quality and quantity of the commodity. The overseas markets had insisted that fresh horticultural exports were to re-adjust their regulations especially on pesticide Maximum Residue Levels (MRLs) to an analytical zero level. This therefore called for urgent action by all farmers as follows;

1. All farmers had to make choices of pesticides from approved list and ensure that harvest intervals for all chemicals were strictly adhered to and revised upwards;

2. Farmers were to strive to have clear records of all pesticides used as a matter of importance with clear details of dates, time, and rates of application against the name of the pesticide, and adherence to every minute detail of pesticide application outlined by the buyer as advised by the importer was to be adhered to.

3. Producers were to seek specific details about the pesticides to be used and applied from the buyer to ensure all produce complied with minimum pesticide residues.

Corporate Social Responsibility Impact This study covered CSR impact on social, environmental and economic basis at both industry and firm levels, specifically interviews with Homegrown management. Local Industry wide Impact There was concern that the expanding role of supermarkets and the increasing importance of food safety certification resulted in consolidation of supermarkets and only larger exporters could meet their demands. To do so and remain competitive in the overseas markets, the horticultural industry in Kenya undertook various steps. 1. Social Impact: In response to the workers’ demands and pressure from European buyers, independent growers led by Homegrown, founded the Kenya Flower Council in 1997. Homegrown committed itself not only to the Council’s Code of Practice, but also to the nine clauses of the ETI Base Code, when it’s holding company became a member of the UK-based Ethical Trading Initiative (ETI). The Kenya Flower Council and the Fresh Produce Exporters Association come up with codes of practice in horticultural production and trading. These codes of practice were recognized in the international market and it was therefore advisable for all players in the industry to subscribe to them. 2. Environmental Impact: With regard to minimum residue levels of pesticides that had become a focal point of concern, the Fresh Produce Exporters Association of Kenya produced a 31-page Code of Practice for growers, covering employment practices, agrochemical application procedures and land use guidelines, among others, to guide growers on production requirements.7 However, complying with the code involved significant costs and there were no enforcement mechanisms.

• In terms of Outgrower concerns, the overseas markets had insisted that fresh horticultural exports were to re-adjust their regulations especially on pesticide Maximum Residue Levels (MRLs) to an analytical zero level. The implication was that

7 Supermarkets Driving Kenya Flower Industry, The Daily Nation, Monday, March 15, 2004.


there will be no tolerance of the residue on the produce. This new requirement had the potential for banning most of the fresh produce from suppliers if action was not taken as a matter of urgency.8

3. Economic Impact: Implementation of CSR programs comes with costs. For example, compliance costs for Kenya Flower Council (KFC) members were classified into six different categories including general workers welfare costs, pesticides and fertilizers costs, protection of the natural environment costs, post harvest costs, management costs, and audit costs (see Exhibit 7). Management costs in terms of planning and maintaining compliance actions accounted for more than half of the total costs in the first year of implementation. Compliance costs were derived from production and overhead costs and therefore, would have major impact on consumer prices of horticultural produce. Homegrown Specific Impacts 1. Social Impact: Social programs in terms of employee support constituted the largest proportion of the cost of compliance, with the cost of transport leading followed by the cost subsidized meals. The costs of employee support services were expected to increase by about 40% by the end of the third year. And to ensure safety, Homegrown’s packing stations looked like operating theatres. Employees scrubbed up with soap, alcohol was sprayed before entering in hairnets and overalls, and integrated pest management projects cut the use of pesticides in the face of ever-tougher EU rules on minimum residues. For example, Homegrown had to ensure that both its own employees and out-grower farmers followed recommended technical instructions so as to produce the required quality and quantity of the commodity (see Exhibits 8 & 9). Even though Homegrown’s outgrower program was subject to potential conflict, certain benefits were possible in several other aspects. 1. Assured Market: By entering into a supply contract with out-growers, farmers enjoyed the benefits of an assured market for their produce; while at the same time benefiting from the fact that their farming activity risk was minimized by the certainty with which their production decisions were made. Similarly, farmers enjoyed an assured price for the various grades of farm produce that they delivered to the contracting company. 2. Ease of Conflict Resolutions: Since farmers were on contract to supply farm produce, any matters of conflict or misunderstanding were usually handled administratively. Should a farmer feel extremely disadvantaged using this process for redress then they had the option of using the district agricultural committee to lodge any complaints. In the very extreme of circumstances, farmers were also free to resolve to legal redress. Farmers were also able to minimize misunderstandings by addressing their concerns during the beginning of the season when new contracts were being signed. 3. Up-to-Date Technology: Due to the relative involvement of the contractor in the production process, farmers were supplied with the latest farming technology, such as the latest crop varieties and crop husbandry techniques. The provision of technical extension by the contractor played a key role in ensuring that farmers were able to optimize their production in terms of quality and quantity. 4. Access to Credit: Homegrown Company Ltd also supplied fertilizers, and agro-chemicals on credit to those farmers who needed material credit, so that they could be able to produce the expected quantities and qualities without exerting themselves. This was also in recognition of the fact that the credit market in Kenya was highly biased against agricultural production. 5. Business Approach to Farming: Horticultural farmers could also appreciate the fact that farming on contract basis was a business. The orientation towards treating farming as a business was probably the greatest innovation that had potential to change the structure of agricultural production and encourage efficiency.

8 http://kenyaweb.com/horticulture/challenges.html


2. Environmental Impact: Homegrown’s environmental efforts included efforts to engage surrounding communities into good practices. They had been in business for 25 years and were more concerned about sustainability of the business including recycling of harvested water. This recycled water was filtered before going into the community. They used local/native vegetation to clean the water such that the water was cleaner when it left Homegrown’s fields than when they harvested it. Local water groups were created and helped to initiate similar strategies. Prior to these efforts, these were seasonal streams of water for 6 months. Since then, these same streams were flowing all year around. Other related efforts included helping soil through rotation. This led to 50% reduction in water used. They also kept land banks left for fallow. When plastic greenhouses on the flower farms attracted criticism from environmentalists for draining and polluting the beauty spot of Lake Naivasha, Homegrown responded by building a natural water filter. All run-off from the greenhouses wound through a 2 km custom-built waterway between its farms and the lake, planted with a variety of specially chosen local water plants that gobbled up the nitrates and phosphates that would otherwise have polluted the lake. The water started off as murky effluent, but by the time it reached the lake it was full of fish, with kingfishers hovering overhead. Part of the strategy was on prevention rather than cure. For example, they helped plant about 400,000 trees such as woodlocks in the community, and provided seedlings for outgrower areas with the goal of saving the indigenous forests. Some of the trees were used for firewood to save on the use of existing trees. They also encouraged the community to meet the same standards as of Homegrown. Some participating local small holder outgrowers achieved gold/silver awards. While their benefits tended to be intangible, they considered these to be things they had to do as business. 3. Economic Impact: a) Cost Implications on Homegrown: Homegrown historically pursued varied approaches including Agri-practices, social/ethical, environment & manufacturing practices since 1982 when the company started. At the time, they had 3-4 vehicles, 15 employees and were all working long hours. In 1991, they introduced protocols on vegetables. This was followed by their own codes of practices developed as standards as they started to push for industry wide codes which eventually became a template by others around the world. One of their employee support programs included provision of health care services, provision of free or discounted meals, provision of transportation to and from work, and other related support services. For example, subsidized meals had been available at KShs 5, compared to a typical meal of KShs 40. Their quality of food served was typically good since they hired professionals to cook. Food benefited especially manual labor which needed energy replenishment. However, neighbor canteens complained about being under-priced, outpaced in quality and thus loss of market. Other companies pursued similar strategies. Another program included training of employees on technical practices such as Integrated Pest Control training which was typically 75% bio-controlled, professional training in Management and Agriculture, especially for senior managers and social leadership training on social codes of practice, hygiene, and HIV/AIDS awareness. The CSR program required several regular external audits such as from KFC, TNC, Eurogap etc on social and environmental standards. In the case of Homegorwn, as much as 80 of their operating units had to be audited, and this had to be done 11 times a year which translated into approximately an audit every month. The average cost for such external audits alone did cost about ₤100,000 annually. To meet some of the environmental concerns, Homegrown had to set up an environmentally sensitive program including water treatment, non toxic pesticides, soil conservation etc. Investment and development of a natural biological methods such as use of bugs amounted to a one time cost of ₤1 million while operating costs were ₤1 million annually. The training related costs were approximately ₤100,000 per year (see Exhibits 10 through 13).


b) Program Benefits: Despite the high costs of social programs, the implementation of the CSR codes was expected to improve productivity and profitability of the company through improved health of employees and effectiveness gained through training programs. For example, in one of their earlier programs, their internal tracking of employee performance showed decreases in productivity in the afternoons. But when lunch meals were introduced, afternoon productivity increased. Also, due to provision of clinics, the number of sick days was found to decline. In addition, they believed that productivity was enhanced due to the low level of accidents and availability of First Aid. And according to another major producer of flowers in Kenya, Sher farm’s owner, the fewer worries his workers had on their minds, the more productive they were, and the higher their productivity, the fatter were his profits. In short, what the leading players in the cut flower industry had learned, first under pressure and then perhaps to their surprise, was that they did well by doing the good thing. The Dudu Tech program had a strong impact on both the environment and cost. The program reduced parasites by 75-85%, field workers did not need masks since these were natural biological methods. Since the bugs ate specific targeted insects, when the insects were finished, the bugs perished along. 3. Investor Implications: Studies have shown relation between CSR and investor interest (see exhibit 14). Homegrown’s overall performance has also attracted external investors. For example, in 2000, the first external investor, the Modern Africa Fund, purchased a 9% share in Flamingo Holdings. In late 2002, Actis (then CDC), the British Government backed investor fund, purchased a 14% stake in Flamingo Holdings and purchased the Kingfisher Farm (then Sulmac Kenya), near Lake Naivasha, covering about 1600 hectares. This provided an essential land bank for geographical diversification of vegetable production and expansion of rose flower cultivation.


References

Bansal, P. & Roth, K. (2000). Why Companies go Green: A Model of Ecological Responsiveness. Academy of Management, 43 (4): 717-736. Berman, S.L., Wicks, A. C., Kotha, S., Jones, T. M. (1999). Does Stakeholder Orientation Matter? The Relationship Between Stakeholder Management Models and Firm Financial Performance. Academy of Management, 42 (5): 488-506. Brown, J. D. & Wahlers, R. G. (1998). The Environmentally Concerned Consumer: An Exploratory Study. Journal of Marketing Theory and Practice, 6 (2): 39-47.

Burke, L. and Logsdon, J.M. (1996). How Corporate Social Responsibility Pays Off. Long Range Planning, 29: 495-502. Clarkson, M. B. E. (1995). A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance. Academy of Management Review, 20: 92-117. Clarkson, M. B. E. (1990). Corporate Social Performance in Canada, 1976-1986. Clutterbuck, Dearlove & Snow, (1992) Actions Speak Louder than Words: A Commentaries. Irwin Inc. Dierkes, M. (1985.) Corporate Social Reporting and Auditing Theory and practice. In K. J. Donaldson, T. & Preston, L. E. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. Academy of Management Review, 20 (1): 65-91. Esty, D. (1999). Toward Optimal Environmental Governance. New York University Law Review, 74(6): 1495-1574. Fombrun, C. & Shanley, C. (1990). What’s in a Name? Reputation Building and Corporate Strategy. Academy of Management Review, 33 (2): 233-258. Fombrun, C. (1997). Three Pillars of Corporate Citizenship: Ethics, Social Benefit, Profitability. In N. M. Tichy, A. R. McGill, & L. St. Clair (Eds.), Corporate Global Citizenship: Doing Business in the Public Eye, pp. 27-42. San Francisco, CA: The New Lexington Press. Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston, MA: Pitman. Friedmann M. (1970), ‘The Social Responsibility of Business is to Increase its Profits’ Gauthier D. (1984), Morals by Agreement, Oxford: Oxford University Press. Ghoshal, S. & Moran, P. (1996). Bad for Practice: A Critique of the Transaction Cost Theory. Academy of Management, 21: 13-47. Management , 17(S2): 109-122. Greening, D. W. & Turgan, D. B. (2000). Corporate Social Performance as a Competitive Advantage in Attracting a Quality Workforce. Business & Society, 39 (3): 254-280. Griffin, J. J. and Mahon, J. F. (1997). The Corporate Social Performance and Corporate Financial Performance Debate: Twenty-five Years of Incomparable Research. Business & Society, 36 (1): 5-31. Hillman, A. J. & Hitt, M. A. (1999). Corporate Political Strategy Formulation: A Model of Approach, Participation, and Strategy Decisions. Academy of Management Review, 24 (4): 825-842.


Husted, B. W. (1994.) Transaction Costs, Norms, and Social Networks: A Preliminary Study of Cooperation in Industrial Buyer-seller Relationships in the United States and Mexico. Business & Society, 33 (1): 30-57. Husted, B. W. (2000). A Contingency Theory of Corporate Social Performance. Business & Society, 39 (1): 24-48. Jones, T. M. 1995. Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics. Academy of Management Review, 20: 404-437. Wamalwa, T & Kahneman D., Thesis: Awareness and Practice of corporate Social Responsibility in Kenya, 1999.


Exhibit 1: Chronological Developments

Key Dates Developments

1982 Homegrown Kenya original business formed. 1994 Flamingo UK formed. 2000 Flower Plus (in the UK) acquired. 2001 Dudutech Kenya formed. 2001 Albert Fisher Fresh Vegetables supply base taken over by Flamingo UK. 2002 Sulmac (Kenya) purchased (now named Kingfisher Farm). 2002/August Zwetsloots UK acquired. 2003 Sunbird Flowers SA purchased (now Flamingo Flowers SA).

Exhibit 2: Kenya & Zimbabwe Vegetable Exports

Source: Eurostat

Exhibit 3: Organizational Structure


Exhibit 4: Ethical Trading Initiative (ETI) Base Code and Principles of Implementation

Exhibit 4a: ETI Base Code The purpose of ETI is to identify, develop and promote good practice with

respect to implementing codes of labor practice. 1 Employment is freely chosen 2 Freedom of association and the right to collective bargaining are

respected. 3 Working conditions are safe and hygienic 4 Child labor shall not be used 5 Living wages are paid 6 Working hours are not excessive 7 No discrimination is practiced 8 Regular employment is provided 9 No harsh or inhumane treatment is allowed Exhibit 4b: ETI Base Code Principles of Implementation Critical areas include monitoring and verification, and transparency and

disclosure, to determine and communicate whether standards embodied in the code are being achieved. ETI members accept the following as implementation principles

1 Commitment 2 Monitoring, independent verification and reporting 3 Awareness raising and training 4 Corrective actions 5 Management procedures, pricing and incentives

Exhibit 5: Horticultural Ethical Business Initiative (HEBI)

1 Employmentis freely chosen 2 Regular employment is provided 3 Child labor shall not be used 4 No discrimination is practiced 5 Living wages are paid 6 Working hours are not excessive 7 No discrimination is practiced 8 Working hours are not excessive 9 No harsh or inhumane treatment is allowed 10 Freedom of association and right to collective bargaining are respected 11 Management systems are responsible for compliance with this base code Exhibit 6: Local and International Codes for Horticultural Industry

Scheme Owner, Country

Scheme Name and Version, Products Approved Certification Body


Kenya Flower Council Kenya

KFC Silver Standard

KFC

MPS Milieu Programma Sierteelt, Netherlands

MPS-GAP Floriculture

MPS, The Netherlands

British Ornamental Plant Producers United Kingdom

British Ornamental Plant Producers (BOPP) Silver Standard Silver Grower Standard

QualiserVice GmbH Switzerland

SwissGAP flowers & ornamentals Independent Technical Review

FPEAK, Kenya Kenya GAP Peer Review

Exhibit 7: Compliance Cost Estimates for a KFC Member Company

Source: NRI Report No. 2607, The Business Costs of Ethical Supply Chain Management:

Kenya Flower Industry Case Study.


Exhibit 8: Homegrown’s Good Business Practice Strategy

Exhibit 9: Homegrown’s CSR Activity Expenses 2001-2003 ₤ Stg’ Previous

Expenses Projected Expenses

CSR Activity 2001 2002 2003 2004 2005 1 External Audit on Standards 15,000 20,000 35,000 40,000 50,000 2 Environmental Dudu Tech 200,000 500,000 750,000 900,000 1,000,000 Tree Planting 8,000 11,000 10,000 12,500 12,500 Water Treatment/Recycling 25,000 28,000 25,000 25,000 200,000 3 Employee Support Training Programs 10,000 10,000 50,000 75,000 120,000 Transport Service 320,000 400,000 600,000 750,000 850,000 Food Service 192,000 243,000 360,000 450,000 510,000 Health Services 106,000 121,000 161,000 180,000 185,000 Education Services 15,000 19,000 18,000 20,000 20,000 4 Community Support Health Services 10,000 10,000 75,000 100,000 110,000 Education Services 18,000 20,000 20,000 20,000 20,000 5 Other Activities 30,000 45,000 50,000 50,000 75,000


Exhibit 10: Profit and Loss Statement for Homegrown for 2000-2003 Kshs Millions 2000 2001 2002 2003 Sales 2,310 2,310 2,030 2,240 Cost of Goods Sold 2,240 2,030 1,680 1,960 Gross Profit 70 280 350 280 Operating Expenses 140 208 210 280 Net Profit Before Tax - 70 72 140 0

Exhibit 11: Compliance Cost Estimates for 5 KFC Member Companies

Company A B C D E

₤ ₤ ₤ ₤ ₤ 1 General Worker Welfare

Labour Conditions 334 Health & Safety 237 2 Agrochemicals – Pesticides & Fertilizer

Applications of pesticides & protection of workers

269 174 1,750 131

Storage of pesticides 428 229 65 7,632 59 Transport of pesticides 122 Disposal of pesticides 69 33 176 3 Protection of the Natural Environment

Fertilizers 1,145 Water Sources 70 4 Post Harvest

Worker Conditions 118 Packaging Stores 9 444 5 Management Costs

Management time spent on maintaining compliance

1,741 72 3,264 417 1,567

6 Audit Costs 174 174 174 348 174 Sub total 2,750 682 5,559 9,541 2,492

Miscellaneous (5%) 137 34 278 477 125 Total 2,887 716 5,837 10,018 2,617

Source: NRI Report No. 2607, The Business Costs of Ethical Supply Chain Management: Kenya Flower Industry Case Study.


Exhibit 12: Respective Sample Compliance Cost Assumptions


Exhibit 13: Compliance Cost Estimates for a KFC Member Company

Source: NRI Report No. 2607, The Business Costs of Ethical Supply Chain Management: Kenya Flower Industry Case Study. Exhibit 14: Dow Jones Sustainability Group Index

Descriptive Statistics: Market Capitalization (in billions of USD)

Performance: Annual Total Return (in USD)

Total 8,520.595 2004 + 12.84 Float 7,916.296 2003 + 36.41 Mean 24.984 2002 - 21.26 Median 10.384 2001 - 15.44 Largest 385.376 2000 - 17.50 Smallest 0.523. 1999 + 29.70 Average + 4.125

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