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SAPPI LIMITED

Ethics, Governance and Sustainable Development

MBA FT Syndicate 4

Dear Syndicate 4:

1. Fascinatingly, it appears harder than expected to pull the extremely strong individual assignments into an even stronger syndicate assignment. The causes are easy enough to identify: time and page constraints. I thought the assignment well-researched and well-organized: given the pressures of space. Oddly, I found the writing far less compelling than it was in individual assignments: lots of multiple, run-on clause sentences. It could have used a draft and a redraft and then another redraft. Again: Time.

2. Here is what I liked, and what still left me wondering:a. The section on ethics seemed strong: it suggested that SAPPI’s paper

policy (no pun intended) was not particularly well implemented. You rightly identified this problem as one of (ethical or) organizational culture. You also note that the ethical problems exist at three levels: (a) the individual employee’s lack of understanding, (b) the failure to produce company codes in any language but English, and (c) the questionable land/equity swaps with Lereko engineered by SAPPI’s management and board. Do you think such implementation programmes as the ‘learnership course’ you suggest would address these concerns? (Good idea for a start.) How does one ensure that those learnership lessons become embedded in the company? (Just a question.)

b. One tension that went unexplored – though made evident in the text – was that SAPPI has done (from what you say) a reasonable job in terms of building community relations and social development. I am left uncertain by the assignment as to how you would benchmark that commitment. Your assignment, as it stands, makes that hard to gather.

Ethics, Governance and Sustainable Development BUSA 7010

SAPPI – on your account – does not look particularly green (pun intended). That seems odd given their reliance on an ever shrinking water table and the pressure that will invariably come from civil society at large and other businesses over this scarce resource. How does SAPPI plan to deal with this very real, very serious and immediate (a decade or so) threat to their daily operations?

c. Your placement of SAPPI between greenwashers and greenbranders seems about right. The company that the syndicate describes seems rather supine with respect to many of the kinds of issues that we discussed in class in ESG. For example, on your account, SAPPI contends that conflicting tribal loyalties makes community engagement difficult. That may occasionally be true – but so true as to make community relations (beyond farmers and communities working directly with SAPPI) impossible?

3. Although the writing could have been cleaner, and stronger, I did not experience a whole lot of ‘piffle’. It made for a quick, if less than elegant, read. [It is hard to write with one person let alone 4 or 5 – I know, because I co-author all the time.] The irony of this syndicate assignment -- as opposed to better part of the individual assignments that make it up – is that it doesn’t feel quite as strong or tight or exciting. I wonder whether the critical reading that appears up front could have been pulled through the text more effectively – you did so on ethics and your greenwashing and greenbranding analysis (which I found more compelling this time around.) Is there more secondary literature about SAPPI and paper and pulp producers out there? Must be.

4. That said, you cover all the bases. I hope that you will be satisfied with a 75.Shap shap Stu

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

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TABLE OF CONTENTSIntroduction............................................................................................................................................................................................................ 1

Literature Review................................................................................................................................................................................................. 1

Ethics..................................................................................................................................................................................................................... 1

Code of ethics................................................................................................................................................................................................ 1

Governance......................................................................................................................................................................................................... 1

Sustainable Development............................................................................................................................................................................. 1

The environment......................................................................................................................................................................................... 1

Company Overview.............................................................................................................................................................................................. 1

Ethical Behaviour.................................................................................................................................................................................................. 1

Empowerment – Lereko Investments (Pty) Limited........................................................................................................................1

Corporate Governance Structures.................................................................................................................................................................1

Codes, The Law and Best Practices..........................................................................................................................................................1

King III.............................................................................................................................................................................................................. 1

Reported Deviations or Non Compliance.........................................................................................................................................1

Unreported Deviations or Non Compliance....................................................................................................................................1

Corporate Governance Structures.......................................................................................................................................................1

Compliance with human rights codes..........................................................................................................................................................1

United Nations Global Compact............................................................................................................................................................1

Commitment to alternative business models...........................................................................................................................................1

The land reform in practice.................................................................................................................................................................... 1

Sappi’s partnering with communities................................................................................................................................................1

Environmental policies.......................................................................................................................................................................................1

Legislative landscape for the Paper and Pulp Industry in South Africa...................................................................................1

Climate Change............................................................................................................................................................................................. 1

Energy source for the pulp mill.............................................................................................................................................................1

Independent environmental standards and certification.........................................................................................................1

Sappi’s contribution to environmental sustainability through research and development......................................1

Corporate Social Responsibility programmes..........................................................................................................................................1

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Stakeholder Theory.................................................................................................................................................................................... 1

Corporate Citizenship................................................................................................................................................................................1

Conclusion................................................................................................................................................................................................................ 1

Appendix A............................................................................................................................................................................................................... 1

Appendix B............................................................................................................................................................................................................... 1

Appendix C............................................................................................................................................................................................................... 1

Appendix D............................................................................................................................................................................................................... 1

Appendix E............................................................................................................................................................................................................... 1

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INTRODUCTION

The world has witnessed an apparently growing trend of untoward business practices – from brazen fraud at Enron,

WorldCom and Lehman Brothers, to accusations of child labour abuse by Nike to environmental disasters brought on by

BP’s clear negligence in the Gulf of Mexico oil spill situation. Such events lead one to question whether Milton

Friedman’s proposition that “the business of doing business is business” is sufficient to govern multinational corporations

in an increasingly global economy. Unethical business practices, and essentially unethical decision making, has

deleteriously affected employees, shareholders, management, suppliers, customers, surrounding communities and the

environment. The consequences of unethical behaviour and unethical business institutions can no longer be ignored and

the relevance of ethics in business can no longer be denied. The question is no longer whether ethics or values should

play a role in business decisions, but how ethical codes and practices can most effectively to do it (Hartman &

DesJardins, 2011). We now need to move away from the Friedman model of doing business to one in which

organisations display a genuine commitment to ethical behaviour and to the various stakeholders who are impacted in

the general course of running business.

The objective of this assignment is to critically analyse an organisations business processes in the form of a mini-case

study; and to perform this in a manner that will evaluate their ethical behaviour, their compliance with human rights

codes, their corporate governance structures, their commitment to alternative business models, environmental policies

and their corporate social responsibilities programs. We have selected Sappi as the company of choice for our

assignment and have focussed our analysis on their South African operations. The paper and pulp industry in South

Africa generates considerable employment and income for the country. For this reason, it is important that business and

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policy makers implement initiatives to ensure the sustainability of the industry, stakeholders and the environment from

which it draws resources.

LITERATURE REVIEW

ETHICS

The ethical culture of an organisation can be proactive or reactive in nature. The proactive approach embraces

continuous engagement with the external and internal environment in an effort to identify ways of improving the way

business is done. In comparison a reactive approach focuses primarily on compliance with legislation, codes and

guidelines in order to avoid penalties. Although an organisation should take a proactive stance with respect to its

environment – firms must, at a minimum, begin by creating structures that ensure compliance with both legal sanctions

and codes meant to secure an on-going license to operate. The ethical default position for most businesses is thus an

attitude of “have to” rather than “want to” (Van Vuuren & Crous, 2005).

Research suggests that ethical behaviour in organisations is a function of both individual characteristics and contextual

factors (Meyers, 2004 in Ardichvili, Mitchell & Jondle, 2009). Business ethics is defined by Rossouw & Van Vuuren

(2004, p. 4) as “identifying and implementing standards of conduct that will ensure that, at a minimum level, business

does not detrimentally impact on the interests of its stakeholders”. Attention to ethics in the workplace sensitises leaders

and staff to how they should act.

CODE OF ETHICS

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The Code of Ethics can be defined as a document or agreement that stipulates morally acceptable behaviour within an

organisation (Rossouw & Van Vuuren, 2004). Introducing a Code of Ethics communicates to stakeholders that the

organisation has adopted norms of appropriate behaviour and adheres to and values high ethical standards (McKinney,

Emerson & Neubert, 2010). Research by McKinney et al. indicates that an ethical culture can be developed through the

institutionalisation of an ethical code.

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

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

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

Promote ethical behaviour by articulating the ethical values that should guide members of the organisation in

their actions and decisions.

Provide guidance in ethical decision making.

Promote organisational integration and co-ordination by rallying people around specific ethical values that will

strengthen commitment to the organisation.

The implementation of the Code of Ethics is as critical as the adoption of a code in the establishment of an ethical

culture. Communication within a firm is a fundamental element in the successful implementation of the process.

Furthermore, transparency and participation increases the normative legitimacy of the code and the likelihood of greater

adherence. (Rossouw & Van Vuuren, 2004)

Although a code is a step in the right direction, organisations need to be aware that without individuals capable of moral

reasoning and in possession of judgement skills, the code of ethics will largely lack efficacy when the firm and its

employees must make ethical decisions. Kohlberg’s model of moral development (in Trevino, 1986) which has been

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developed and tested over the last twenty years emphasises the cognitive or reasoning aspect of ethical decision

making. It emphasises how the cognitive processes of moral decision making become more complex and sophisticated

with development, such as education and training. It is evident from Kohlberg’s research that it is possible for individuals

to be taught ethics and move to a more developed sense of moral judgement.

GOVERNANCE

Compliance and voluntary frameworks for governance have been used to good effect in South Africa and the country has

gained some prominence in international circles for how we handle our corporate governance responsibilities.

(eStandardsForum, 2009) The King I, II and III Reports have been instrumental in encouraging corporate integrity,

enhancing listing requirements on the JSE Securities Exchange, and improving banking sector regulations and the public

sector. The King Codes are voluntary and principle-based and require companies to apply the principles or explain their

actions. This flexibility means that companies may implement alternate practices that still address the overarching

corporate governance principles exemplified in the Code (fairness, accountability, responsibility and transparency).

The King Codes and Reports have paved the way for more stringent regulatory requirements if only because they fell

short of creating the intended widespread change in the corporate landscape. The Companies Act (no 71 of 2008) aims

to tackle this shortfall by focussing on corporate governance (Bouwman, 2011) and has led to an update of the King II

Code. Subsequent to approval of the Companies Act; the latest King Report and Code were released – King III. Most of

the principles set out in King III focus on the legislative duties of the board of directors in fulfilling their responsibilities and

performing their functions on behalf of the company. It hopes to ensure that company directors act in the best interest of

their companies while exercising the appropriate level of skill, expertise and diligence. The Companies Act is much

broader in scope; but utilises the principles set out in King III in its efforts to institutionalise fairness, accountability,

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University of the Witwatersrand, 2011-06-08,

Kohlberg emphasized rational thought . . . But his primary critique has been Carol Gilligan who, IN A DIFFERENT VOICE, suggested that relationships -- and building relationships - shape ethical behaviour as much as rational thought that begins with a priori principles. Its a book very much worth reading – one of the most influential of our time. My point, of course, is not that you should choose one over the other – but awareness of Gilligan’s response to Kohlberg might offer a more nuanced way of understanding how one builds an ethical organization culture. I am happy to see anyone just mentioning Kohlberg.


responsibility and transparency. It does so most effectively by piercing the corporate veil and forcing directors to accept

direct liability for their actions and the negligent, fraudulent and reckless trading actions undertaken by their firms.

The Companies Act is a complete rewrite of the Companies Act of 1973 and covers various aspects of corporate governance in

much detail (Ernst&Young, 2009); however, it is not a stand-alone structure and stresses compliance with the Bill of Rights in the

constitution. The Act has a broad scope in that it is not constricted to economic development and seeks to employ governance

structures that promote development of the social life of South African citizens in addition to their economic development.

Organisations in South Africa cannot ignore international norms; and these have been defined in the United Nations

Global Compact. The United Nations Global Compact was formed to provide a framework for corporate citizenship in the

world economy. (UNGC, 2008) Its aim is to “align business operations and strategies everywhere with ten universally

accepted principles in the areas of human rights, labour, environment and anti-corruption.” (Refer to Appendix B) South

African compliance and voluntary frameworks closely mirror the UNGC; and organisations that are found to be compliant

with these frameworks will also likely be UNGC compliant.

SUSTAINABLE DEVELOPMENT

The concept of sustainable development focuses on two primary concepts: (1) triple bottom line accountability that

speaks to the conflicting imperatives of environmental protection, economic development and community participation;

and (2) the idea of inter-generational equity. This complex concept first gained real traction in 1987 in a report by the

World Commission of Environment and Development (also known as the Brundtland Commission). The commission

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described sustainable development as “development that meets the needs of the present without compromising the

ability of future generations to meet their own needs”.(Bader, 2008; Feris, 2008). Of course, the commission’s concerns

are not of such recent vintage. Indeed, they can be traced back well-before the modern environmental movement began

with Rachel Carsen’s seminal work “Silent Spring.”

The 1992 United Nations Conference on Environment and Development held in Rio de Janeiro added substance to the skeleton

framed by the Brundtland Commission by exploring the relationship between environmental and developmental goals. The World

Summit on Sustainable Development held in Johannesburg (2002) began the move away from exploring the concept as

a theoretical framework towards emphasising its practicality . (Bader, 2008) The meeting of these world bodies on issues

surrounding sustainability entrenched the concept as a general principle. The challenge since then has been how best to

translate this principle into practice. Many organisations have been proactive on this front and have introduced

environmental and sustainability management systems ahead of legislative requirements in the hopes that these

initiatives will identify them as good corporate citizens.

Today’s thinking on sustainable development embraces three key elements: environmental sustainability, social

sustainability and economic sustainability. The IUCN Programme (2005-8) and the United Nations Global Compact

(UNGC) have adopted this triple bottom line framework. (Adams, 2006) The UNGC’s current environmental focus is

informed by the United Nations Environment Programme (UNEP). Since inception in 1973, UNEP has contributed to the

formation of collaborative initiatives (eg, Multilateral Environmental Agreements (MEAs)) that have addressed issues

such as the threat to bio-diversity, the lack of integrated regional and global planning, and the greater need for the

enforcement of international environmental law. (UNGC, 2011)

“The UN Global Compact asks companies to embrace, support and enact, within their sphere

of influence, a set of core values in the areas of human rights, labour standards, the

environment and anti-corruption.” (UNGC website, 2011)

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Traditionally, corporate views on sustainable business were very reactionary. They looked at their inputs to determine

what products were harmful to the environment and tried to find greener alternatives that could function at the same or

better levels.

In 2002, William McDonough and Michael Braungart introduced the concept of the triple top line in their article titled

“Design for the Triple Top Line: New Tools for Sustainable Commerce”. While the triple bottom line (Elkington, 1994)

remains a useful tool for integrating sustainability into the business agenda, the new triple top line approach changes the

focus on business, product and process development from being a damage limitation exercise to one geared towards

creating safe, quality products right from the start. The article states that a business strategy focused solely on the

bottom line can obscure opportunities to pursue innovation and create value in the design process. This new design

perspective creates triple top line growth through products that enhance the well-being of our natural surroundings while

simultaneously generating economic value (McDonough & Braungart, 2002). McDonough & Braungart suggest that

business can become genuinely sustainable by adopting processes that support a triple top line approach.

.

Academic literature and the IUCN suggest that to be truly sustainable in business means to find the optimal convergence

of 3 discreet and often conflicting pillars: economy, society and the environment. See Figure 1a below. Where these

interlocking circles converge, sustainability is ostensibly achieved. But it’s important to note that Figure 1 is a diagram,

and not a geometrically accurate description of the real world and mankind’s potentially constructive role in undoing the

damage that it has done in all three spheres. W.M. Adams however, uses this interlocking circles model below to

demonstrate where we are now – as opposed to where we should be in theory. His model calls for greater integration

and the need to redress the balance between the three dimensions of sustainability (Figure 1 c).

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W.M. Adams states that in order to better integrate and balance the three pillars of sustainability above, there needs to

be a more serious commitment from business and government in moving away from business and politics as usual. We

must find better ways to use technology and more importantly, manage the trade-off between balancing the interest of

society, the environment and business (Adams, 2006). Where business focuses on sustainability as a mere box ticking

exercise, we will never achieve sustainable businesses. Businesses are merely trading long term viability for short term

gain.

THE ENVIRONMENT

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Figure 1: model for sustainable development

(Adams, 2006)


The UNGC’s principles nine and ten adumbrate the extent to which businesses must take responsibility for

environmental sustainability that goes above and beyond compliance. The process of change businesses have adopted

in response to these mounting calls for environmental accountability is referred to as organizational greening (Crane, A.,

McWilliams, A., Matten, M., Moon, J and Siegel, D., 2009). Woolman segments companies based on their intent. At the

bottom end of the scale are the greenwashers, or those businesses that strive first and foremost to uphold the UNGC’s

“precautionary approach”. According to Woolman greenwashers view environmental sustainability as a compliance

exercise and do not incorporate sustainability into their businesses core strategy. (2011) Woolman’s definition of the

greenwasher’s paradigm aligns with the “do no harm” compliance based approach described by Hartman and DesJardin.

(Hartman and DesJardins; 2011)

In the middle of the scale are the greenbranders, these businesses view their commitments to environmental

sustainability as more than a cost item; they recognize it as a genuine business priority. Woolman’s greenbranders align

with Hartman and DesJardin’s proactive “preventative harm” approach. These businesses make a conscious effort to go

beyond compliance for ethical standards. They are often strongly motivated by the premium their customers are

prepared to pay (Woolman, 2011) as a reward for their ethical business conduct (Cotte and Trudel, 2008) WSJ. On the

positive end of the continuum are the greengrowers. This group of companies embrace their responsibility to the

environment as part of their core strategy. As Woolman (2011) states,

“Greengrowers generate new technologies or new business models that enable them to

produce products and services consistent with CSR best practice.”

COMPANY OVERVIEW

Sappi Limited was founded in 1936 and is listed on the JSE and the NYSE. They are the world’s top producers of coated

fine papers, such as those used in books, magazines, brochures and annual reports. Fine paper, coated and uncoated, 13 | P a g e


is the company’s principal product. Its Forest Products business produces Kraft pulp, container board, packaging paper,

and newsprint as well as plantation timber. Sappi is also a massive producer of chemical cellulose, used to make

acetated tow and viscose fibre.

The group has divisions in Europe, North America as well as China with a consolidated operating profit of $339 million for

the 2010 financial year and 15,586 employees globally.(SAPPI, 2010a) Sappi's CEO is Ralph Boettger he held this

position since 2007, previous executive positions held have been at Imperial Holdings Limited and Safair (Pty) Ltd.

(SAPPI, 2010a)

The group structure can be seen in the following figure.

For the purpose of this assignment, the focus will be on the operations of Sappi within the local South African context.

Sappi Southern Africa, with its headquarters situated in Johannesburg, South Africa consists of 24% of the group sales,

and an operating profit of $112 million which is a significant turnaround compared to the $54 million reported loss in

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Figure 2: Sappi Global Structure


2009. (SAPPI, 2010a) The company owns 500,000ha of forest, 1 Sappi Chemical Cellulose Mill and 6 Sappi Paper and

Paper Packaging Mills in South Africa. (SAPPI, 2010a)

The company stays true to the Brundtland Commission’s definition of sustainability as, “development which meets the

needs of the present without compromising the ability of future generations to meet their own needs.” Prosperity, People

and Planet – the 3 P’s – are the three factors inherent in sustainability as set out by the world summit in Johannesburg in

2002 and forms the basis of Sappi’s commitment to sustainability (Sappi, 2008).

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ETHICAL BEHAVIOUR

Sappi’s Sustainability Charter sets out specific Prosperity, People and Plant commitments which act as the roadmap for

embedding sustainability practices into the business. Sappi has identified “Promoting an ethical culture” as a charter

commitment and indicates the Code of Ethics as a performance indicator. In addition to this commitment, focusing on

ethical performance is included in Sappi’s mission as seen in Appendix A. Each year the sustainability report reports

actual performance and future targets related to this charter commitment.

In 2008 the revised Code of Ethics was rolled-out to all employees and suppliers across the group and M-Real

employees in 2009. This Code of Ethics had been reviewed and simplified and centres around three key areas: namely,

excellence, integrity and respect. The code is seen as a framework guiding the interaction and decision making of

employees. According to the reports all employees and suppliers were trained on all aspects of the Code, ranging from

conflicts of interest, to outside activities, and to transparency and disclosure.

Although the literature on Sappi has identified a dedicated effort and focus on the promotion of an ethical culture, the

survey assessing the three year old Code of Ethics, under the heading ‘Are we walking the walk?’, indicated that

although more than 85% of respondents were familiar with the Code, the need for on-going communication and

strengthened visibility of the Code comes across strongly from all regions. As Sappi is aware of the need to focus more

on the implementation of the Code, their methods may not be as effective as viewed on face-value. Currently all Sappi

material, including the Code of Ethics is published in English only. Given the diverse cultural environment of South Africa

it is suggested that employees should be given the option of materials printed in their home language. Furthermore on-

line ethics training is proposed to be implemented in the future. The use of computer based training has been seen to be

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disadvantageous, depending on the composition of the workforce. Many rural and unskilled employees could possible

not know how to operate a computer and may feel intimidated by the process. It would also be recommended that ethics

be implemented as a core course or part of the leanership course offered at the Sappi Learnership Academy.

This evaluation of Sappi was conducted by analysing the organisational publications such as the sustainability reports for

the period 2007-2010, the Code of Ethics and various materials explaining the Sappi mission statement

(www.sappi.com), as well as information gathered from an interview conducted with Ian Horrell on the 6 th May 2011 at

Sappi Head Office. In order to evaluate whether Sappi has institutionalised the Code of Ethics, thus creating an ethical

culture; an in-depth analysis and research project would need to be conducted. It can however, be deduced from the

broad evaluation that Sappi is making a bold effort to institutionalise their Code of Ethics into tangible behaviours. Sappi

focuses on long-term profitable growth, customer satisfaction, the building of its competitive position, maintenance of its

licence to trade and the creation of value for all stakeholders. This can all be achieved when an ethical culture is

established.

EMPOWERMENT – LEREKO INVESTMENTS (PTY) LIMITED

Sappi’s interaction with Lereko may provide a framework for discussing their ethical behavior. Sappi sold a quarter of its

land to empowerment group Lereko Property Consortium (subsidiary of Lereko Investments (Pyt) Ltd in 2006. The deal

came at a time when Sappi had 43 land claims lodged against them. During our interview with Ian Horrell, Administration

Manager and a member of Sappi Corporate Affairs, we asked him to further explain what the objective was when signing

their deal with Lereko Property Consortium.

His response was to explain that the deal was an attempt by the organization to find useful purposes for Sappi land that

was currently not being utilised for production purposes. He acknowledged that there had been instances when the local

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http://www.sappi.com/


communities surrounding the properties had complained that they were not given the option of investing in this land.

They were also not seeing any widespread benefit to the sale (in terms of land redistribution); stating that it was parties

outside the community that were being advantaged in this scheme. Ian attributed this mainly to the fact that development

initiatives on the land had been slow in materializing. He reiterated that Lereko was committed to community involvement

in all of their initiatives. He also stated that Sappi works very closely with this partner but that they do not have direct

control over what the company intends to do. When asked if Lereko had any current projects, he stated that he had not

heard of any.

This begs the question of why the organization failed to deliver (if this is indeed true) on their commitment to land

redistribution and development. Lereko Property Consortium specializes in property development and town planning;

development initiatives should have been forthcoming sooner. By looking at the deal from a Black Economic

Empowerment compliance perspective we are forced to conclude that this transaction was aimed at bolstering Sappi

Limited’s BEE rating in order to improve their alignment with Broad Based Black Economic Empowerment requirements

and that there was no intention to make a real contribution to the sustainable development of the communities

surrounding Sappi land.

Pursuant to our analysis, we would like to add a supporting argument – on page 85 of this year’s Annual Financial

Report; we find that Sappi made a significant announcement of a share-based Broad Based Black Economic

Empowerment transaction in June 2010. “In one leg of the transaction Lereko Investments, our strategic empowerment

partner, exchanged its interest in Sappi’s plantation land for Sappi Limited shares.” This amounted to R814 million and a

total potential shareholding of 4.5%. This upgraded their overall empowerment scorecard performance from BB to AA.

Now that the hullabaloo about land claims is over, Sappi has managed to reclaim their land. Did Lereko Consortium in

this instance merely act as a vehicle for Sappi to reduce their risk of large scale property loss and to create a good

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University of the Witwatersrand, 06/08/11,

Is the hullabaloo really over . . . . ? Lead story in today’s Business Day was about foreign ownership . . . seems part and parcel of the same critique about redistribution . . .


BBBEE profile? Was it ethical for the company to use this black-owned organisation (founded by black individuals who

had been involved in the struggle against apartheid from the 1970s, and who continue to undertake community work

across South Africa) to further their goals of obtaining a good BBBEE score? One may argue that Sappi did not act

ethically in this instance because they leveraged the reputation of Lereko Investments (Pty) Ltd to further their own ends.

CORPORATE GOVERNANCE STRUCTURES

CODES, THE LAW AND BEST PRACTICES

KING III

As a listed member of the JSE, Sappi is mandated to report on their level of compliance to King III. Sappi employs an

independent assessment tool to measure the compliance to King III, as well as performing a gap analysis on the report in

2010 to identify any departures from the King III (SAPPI, 2010a)

REPORTED DEVIATIONS OR NON COMPLIANCE

“2.26 Companies should disclose the remuneration of each individual director and certain senior

executives.

2.26.2 The salaries of the three most highly-paid employees who are not directors,"

As taken from King (2009)

Sappi have chosen not to disclose this information on an individual basis but rather on the sum of the three salaries due

to confidentiality of international employees. (SAPPI, 2010a)

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University of the Witwatersrand, 2011-06-08,

Didn;t Lereko make out pretty well in a land for shares/equity swap? Is SAAPI alone to blame in this affair? Isn’t the tension between BEE and BBBEE equally in play?


UNREPORTED DEVIATIONS OR NON COMPLIANCE

Reviewing the 2010 Annual Report and referring to the annual reports issued in 2008 and 2009, and by reviewing the

King III requirements related to:

Ethical leadership and corporate citizenship

Boards and directors

Audit committees

Sappi appears to be in compliance with King III with the exception of the requirement to rotate one third of the board of

directors. A comparison of the 2009 and 2010 annual reports have shown that the board members have retained their

current position within the various sub-committees. No explanation has been provided on this, however it can be

assumed that the introduction of three new members to the aboard satisfies this criteria.

CORPORATE GOVERNANCE STRUCTURES

The various governance structures, board, managerial as well as the sustainability structure can be found in Appendix D.

Sappi has created a series of governance structures which continually feedback to the Board as well as the CEO and

CFO.

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A key feature is the prominence of both internal and external audit bodies. Sappi has seen much benefit through the

auditing process; this can be seen by the gap analysis performed on the King III, which highlighted the requirement for

changes to the groups risk policy. The sustainability committee was only established in 2009, in order to align the focus

of Sappi with its sustainability policy under the guidance of a non-independent board member.

By creating the Sustainability Committee, Sappi has shown its commitment and focus to the importance of sustainability,

by dedicating resources and creating internal accountability to the commitment and not just paying lip service.

COMPLIANCE WITH HUMAN RIGHTS CODES

UNITED NATIONS GLOBAL COMPACT

The United Nations Global Compact (UNGC) consists of 10 principles which cover the aspects of human rights, labour,

environment and corruption. These principles are provided in Appendix B. As with the King III, the United Nations Global

Compact participation is voluntary. However companies who participate are encouraged to report on their compliance

and the steps to integrate the UNGC within the internal operations of the company. Furthermore a company that has

indicated compliance to the UNGC is required to submit a description of compliance to the Global Compact website

within two years of being listed as a participant in order to avoid being struck of this list, subsequent reporting of progress

is required every two years(Williams,2004).

Sappi was expelled from the UNGC on the 26 March 2011, for failure to communicate on progress (UNGC, 2011a). In

response, Sappi have clarified that they are currently in the process of communicating with the UNGC, and that the

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expulsion is due to a change in format expected by the UNGC that was not complied with. Sappi has developed its

Human Rights Policy along the lines of the Universal Declaration of Human Rights, the element of Sappi's Human Rights

Policy cover all the aspects mentioned with regards to Human Rights and Labour of the UNGC. Sappi does not have any

recent issues of Human Rights abuse either admitted by Sappi or that is available on public media.

In addition, Sappi strives to be an employer of choice by providing a safe and pleasant working environment and striving

towards an injury and fatality free operation. The South African division recorded the lowest Lost Time Injury Frequency

Rate (LTIFR) amongst employees and contractors compared to all other divisions, it must be noted that three fatalities

did occur.

In 2010 Sappi initiated a web based program to identify the causes of injury in the bid to reduce injury among employees

and contractors. On the same note Sappi invested on average 12.4 hours a year per employee which equated to $147

per employee. It should be noted that this is the training spend that is mandatory for compliance, the South African

Spend is significantly less than the United States operation, $262 and 30.3 hours.(SAPPI, 2010b)

Additional training is also provided by Sappi, for the further development of their employees. This training consists of:

Management and leadership development

Knowledge and capacity building

Skills programmes and individual development

(SAPPI, 2010b)

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In 2009, Chemical, Energy, Paper, Printing, Wood and Allied Workers' Union (Ceppwawu) declared a dispute with Sappi

on the grounds that Sappi was not providing training in line with the Skills Development Act. (Sapa, 2011) No new

queries have been published related to this issue.

In 2010 Sappi increased its global training spend by $800,000 as well as the average training per employee. The new

figure of $9.8 million represented 12.7% of total employee cost (SAPPI, 2010b).

COMMITMENT TO ALTERNATIVE BUSINESS MODELS

When discussing Alternative Business Models, the `traditional' business model needs to be discussed. The traditional

business model for a forestry company would be to own all the plantation land and employ all of the staff to tend to these

plantations. Sappi has utilized its land reformation project as part of its alternate business model thus empowering the

local communities, this in essence is similar to the approach VCP used by utilizing community owned property to develop

the plantations. (Boechat and Paro, 2008)

Sappi have developed four models to facilitate land reform and community empowerment.

Plantation Management Plan (the community owns both the land and the tress), Sappi will provide Plantation

Management for at least one rotation, and other benefits include community skills development as well as free seedlings.

(Sappi, 2010)

Management Assistance Plan (the community owns both the land and the tress and has experience in forestry

management) Sappi assists with technical support, as before Sappi will provide free seedlings and any technical advice if

required. (Sappi, 2010)

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Timber Supply Agreement, this agreement is based on assumption that the community has sufficient experience and

funding to manage their allocated lands and trees. Sappi only provides technical advice, and free seedlings for long term

arrangements. (Sappi, 2010)

Lease Agreement, this model is used if the land reform is only for the land and the timber is not transferred, Sappi will

lease the land from the community, with the allowance for open space to be used by the community for other uses.

(Sappi, 2010)

LAND REFORM IN PRACTICE

Sappi has had much success with its land reform program. This can be seen in the Lothair area in Mpumalanga, where

8000Ha of land has been handed over to the community. Sappi has successfully entered into a Plantation Management

Plan and a Timber Supply Agreement with the community. (SAForestryMagazine, 2011b) Other success have occurred

in the Ixopo area (SAForestryMagazine, 2011a), Umzimhkulu Area (SAForestryMaga2011c) and the Natal Midlands

(SAForestryMagazine, 2011d).

SAPPI’S PARTNERING WITH COMMUNITIES

Sappi’s funding objective, in partnering with communities, is to effect meaningful change by providing equitable access to

resources and opportunities in response to identified needs in areas where they operate. They adopt a participatory

approach by identifying the needs of individual communities by consulting with the community, its leaders and with the

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local government. They then tailor appropriate programmes to meet the specific needs of that community and the

environment. Sappi claims that in this way, projects become more sustainable and self-sufficient (Sappi, 2008).

Below are some of the many community projects that Sappi are involved in:

Project Grow: Sappi established ‘Project Grow’ in 1983 with smallholder eucalyptus plantation growers on communal

lands of Kwazulu Natal. Under the scheme, local communities sign a contract with Sappi, entitling them to free technical

advice and training; free seedlings; an interest free loan to cover inputs. When the trees are harvested, Sappi pays the

growers the value of the produce minus any advance payments. The advantages to this scheme are that it allows these

farmers to use idle land to generate economic returns, which are then used to invest in other business activities within

the community as well as allowing families to put their children through school (Wilson, 2009).

Umjindi Resource Centre: This centre was initiated between Sappi and the Umjindi Municipality. The centre is the

largest corporate social investment of its kind in the Mpumalanga Lowveld. The centre provides educational resources

and facilities for approximately 11 500 learners in the 33 schools situated within a 15km radius (Umjindi Resource

Centre, 2011).

Sappi is involved in a host of other projects. In South Africa, where the gap between the earnings of the rich and poor

are enormous it is encouraging to see that local businesses are getting involved in communities who are less fortunate.

However, is enough being done? Government and the private sector need to address these issues more aggressively

and efficiently so as to further develop struggling communities whose afflictions have not been alleviated by initiatives

such as those done by Sappi.

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ENVIRONMENTAL POLICIES

In this section, we wish to critically assess Sappi’s organizational greening. The objective is to map Sappi’s position on to

a “Shades of Green” spectrum through a critical analysis of Sappi’s environmental commitments in terms of the triple

bottom line. The end goal is to reveal the underlying motivations for Sappi’s environmental sustainability initiatives and to

actual impulse for environmental sustainability in contemporary corporate decision-making process.

LEGISLATIVE LANDSCAPE FOR THE PAPER AND PULP INDUSTRY IN SOUTH AFRICA

The primary South African environmental laws affecting Sappi are the National Water Act, which govern forestry

operations and mills through water licences, and the National Environmental Management Act: Air Quality Act (Sappi

2011). In addition, as Sappi are a listed company on the JSE, they need to ensure that they meet the requirements as

set out by King III. The JSE Social Responsibility Index (SRI) is a measure introduced to embrace businesses

responsibility and offers an aspirational sustainability level for Sappi to meet. Sappi are currently the industry leaders on

the index -- as they are ahead of the most direct competitors, Mondi Ltd (JSE website, 2011).

The paper and pulp industry in South Africa also needs to ensure that they are certified by the ISO 14001 and are further

regulated by 3 main bodies, namely:

Stewardship Council (FSC)

Programme for the Endorsement of Forest Certification (PEFC)

Sustainable Forestry Initiative (SFI)

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In South Africa, Sappi are experiencing water problems following two years of below-average rainfall. As with energy,

Sappi realise that it makes economic sense to intensively manage water usage. While pulp and paper manufacturing

does use large quantities of water, Sappi claim to return approximately 90% of the water back to the environment. In

terms of quantity, the surface and ground water supply to the European mills has proven abundant even in very dry

summers. Sappi currently use only a small amount of the permitted water abstraction limits in this region.

CLIMATE CHANGE

The risk of plantation fires is always present during the dry winter months and for this reason, an extensive fire protection

strategy has been implemented by Sappi South Africa. This strategy increases community participation in fire prevention

and reduces the incidents of fires through regional and district Fire Protection Associations.

Sappi have also embarked on a fire crew training program. This programme has resulted in an improved response times

to fires. The above initiatives have prevented major losses to Sappi and more importantly, reduced the potential harm to

the environment

ENERGY SOURCE FOR THE PULP MILL

Pulp mills have used black liquor as an energy source since the 1930s. Black liquor is the spent cooking liquor from the

kraft process which results when pulpwood is digested into paper pulp by removing lignin, hemicellulose and other

extractives from the wood to free the cellulose fibres. Black liquor contains more than half of the energy content of the

wood fed into the digester (Stenius, 2000).

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The black liquor produced in Sappi’s integrated mills is all renewable. It is the dominant fuel for Sappi’s operations

(30.7%). This has helped Sappi reduce problems with water emissions and also reduce their use of chemicals by

recovery and reuse. From a South African perspective, Sappi are 50% self-sufficient due to the black liqueur.

INDEPENDENT ENVIRONMENTAL STANDARDS AND CERTIFICATION

The International Organization for Standardization has developed a special set of environmental management standards

called the ISO 14001. These standards aim to develop organizations’ capability to fulfil two broad obligations to the

environment:

“Minimize harmful effects on the environment” (ISO; 2011). The rationale for this converges with the UNGC’s principle

seven or “precautionary approach”, Hartman and DesJardin’s “do no harm” approach and Woolman’s description of the

“greenwasher” approach.

“And to achieve continual improvement of its environmental performance”

This principle can be linked to the UNGC’s principles eight and nine. Implicit in honouring the UNGC’s principles eight

and nine and in obtaining ISO 14001 certification is the movement up the adapted Shades of Green spectrum.

Companies that commit to pursuing best practice and continuous improvement in environmental management are

proactively trying to “prevent harm”. Such efforts correlated with Woolman’s definition of the greenbrander approach.

(ISO; 2011; Hartman et al; 2011; UNGC; 2011; Woolman; 2011)

By 2009 Sappi Claimed to be 98% covered in terms of ISO 14001 certified sales (Sappi; 2009). Over 75% of Sappi’s

forest products value chain is certified by three internationally influential forest products certification programmes: the

Forest Stewardship Council (FSC), the Sustainable Forestry Initiative (SFI) and the Programme for the Endorsement of

Forest Certification (PEFC) (Sappi; 2009). Each of these bodies sets standards and benchmarks that examine

independently determined and measured sustainability indicators.

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Sappi is currently pursuing a multi-certification strategy. The certification by multiple independent organizations enhances

their credibility and reputation. In the interests of financial sustainability, Sappi is opportunistic and exploits these

reputational advantages and the emerging trend in customer perception identified by Trudel and Cotte. This new trend

rewards and punishes companies for their ethical behaviour (2010). Sappi uses their certifications to brand and package

its products.

SAPPI’S CONTRIBUTION TO ENVIRONMENTAL SUSTAINABILITY THROUGH RESEARCH AND DEVELOPMENT

The Southern African Sappi Technology Centre possesses an Environmental Department that, in turn, embraces three

distinct spheres of environmental protection. The Water and Waste Programme aims at ensuring regulatory compliance.

The Energy and Emissions Programme attempts to create energy-efficiency savings of 15% in purchased energy by

2015 and achieve compliance with regulations pertaining to emissions. The Process Simulation Programme services the

other two with simulation facilities (Sappi; 2008). The self-stated objective of the 2004 Energy Environment and

Emissions Research Cluster E4 was a direct confirmation of Sappi’s overriding commitment to compliance.

“Identify the best available means of securing compliance with Sappi’s group, regional, and local legal

requirements, as well as environmental policies.” (Sappi; 2004)

Sappi is at best a green brander as reflected in figure 5 below. Its primary motivator is compliance. This culture of

compliance pervades the organization’s publications. Compliance with environmental legislation is viewed by Sappi

primarily as a cost of doing business and a high-priority organizational risk.

Prevent harm Do GoodDo no harm

Greenwashers Greenbranders Greengrowers

Sappi

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Figure 5: Adapted Shades of Green Spectrum for determining categories of commitment to environmental sustainability

(Hartman et al; 2011: p513; Woolman; 2011)


Sappi is most focused on the pre-cautionary approach of doing no harm. But is focusing on compliance enough? Or is

the assumption that mere compliance is enough challenged by Sappi’s past failures to successfully apply the

precautionary approach and “do no harm”? Does the failure to prevent harm oblige Sappi to focus more resources and

management attention on preventing future harm? This obligation to preventing future harm falls outside Sappi’s current

compliance-centered paradigm.

Sappi’s exploitation of customer perception using their multi-certification strategy in their branding and packaging

illustrates the importance of profitability to satisfy shareholder needs and incentivize organizational transformation.

Although required by the UNGC and the ISO to be proactive and remain committed to continuous improvement and best

practice in environmental management, these commitments to preventative action are only integral to Sappi’s current

environmental policies in so far as they satisfy legal compliance regimes and soft international law.

The fact that Sappi views environmental sustainability as a compliance exercise and a risk rather than an opportunity

suggests that Sappi remain rather reactive to new pressures placed upon them by domestic law makers and international

institutions (such as the United Nations). This mode of behavior is unlikely to change unless there are changes in

legislation and regulation that nudge Sappi to adopt a new, less self-serving, view of environmental sustainability.

CORPORATE SOCIAL RESPONSIBILITY PROGRAMMES

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University of the Witwatersrand, 06/08/11,

What will happen when we run out of water – quite soon? How does SAPPI plan to deal with that inevitable eventuality?


In order to understand Sappi with respect to Corporate Social Responsibility, the most relevant models need to be

identified and an analysis made. The two models that are congruent with Sappi are the Stakeholder Theory and the

Corporate Citizenship models.

STAKEHOLDER THEORY

In terms of the Stakeholder theory (Appendix E) Sappi does fairly well, they have effective communication with internal

and external stakeholders. Sappi provides a communication hotline for its stakeholders, who can use this to report

violations or exemplary performance of Sappi employees in compliance with King III as well as GRI, Sappi have effective

communications with their shareholders, as well as releasing memos to their shareholders when required. It is of the

utmost importance for Sappi to create a safe working environment for their staff, staff member are expected to stop

unsafe work without the fear of retribution. Sappi also invests substantial amount of money and time in training their staff

to work safe.

Sappi suggests that it is in their best interest to be environmentally friendly, ethical and social responsible in order to

remain profitable. In the interview Sappi provides an example of by polluting a community downstream of their operation,

would effectively destroy their workforce, as the community would relocate to avoid the pollution. This would be true in a

free market economy, where individuals have the ability to move unrestricted. However in the context of South Africa the

communities involved may not have the means to relocate and may be dependent on Sappi for their families’ income.

Sappi has a strong code of ethics, human rights policy and HIV/Aids policy which appears to be well entrenched within

the company. The only stakeholder Sappi seems to provide minimal support is their subcontractors, from the discussion

with Sappi the company seems to keep contractors at an arms-length and has very little influence into the operations

32 | P a g e


with regards to Safety, HIV/Aids and ethical operations. This is strange as one would expect a large company to have

active influence over its sub-contractors in order to ensure they are aligned with the core values of the company.

CORPORATE CITIZENSHIP

As stated in the interview, Sappi wants to be a good corporate citizen. Sappi does participate actively in the community

as discussed in Section 4.4, however comparing Sappi to many of the mines in South Africa and their corporate

citizenship, Sappi seems to underperform. In the interview with Sappi they claim the difficulty in expanding their

community centres has to do with the fact that much of the land is tribal owned, and this may cause tension within the

community if one tribal community is favoured over another.

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CONCLUSION

This assignment has attempted to critically analyse Sappi’s business practices in order to evaluate their ethical

behaviour, their corporate governance structures, their compliance with human rights codes, commitment to alternative

business models, environmental policies and their corporate social responsibilities programs. We have analysed these

aspects of their business from various angles and have found that Sappi has good intentions and have implemented the

correct practices to enable sustainable business practices. In some instances; however, Sappi is highly compliance-

driven and does not show a proactive stance to the aspects listed above.

Sappi have fallen short of entrenching an ethical culture in the organisation; although more than 85% of respondents

were familiar with the Code, the need for on-going communication and strengthened visibility of the Code comes across

strongly from all regions. Given the diverse cultural environment of South Africa, restricting their focus to English as the

language through which they communicate their ideal ethical behaviours may stifle uptake of these ethical frameworks by

all their staff members. Their dealings with Lereko Investments (Pty) Ltd have highlighted the fact that they have been

unable to entrench ethical behaviour, even to the highest levels of the organisation.

Sappi’s corporate governance structures are aimed at enabling appropriate corporate governance practices and are in

alignment with statutory requirements. In addition, we have found them to be compliant with human rights codes even to

the extent that they comply with voluntary frameworks such as the UNGC and King III. They show a commitment to

alternative business models and have been able to display mutually beneficial relationships between themselves and the

communities in which they operate. We have found them to be compliance driven in their attitude to the environment and

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have placed them in the greenbranders category of commitment to environmental sustainability. They take their

corporate citizenship seriously and are involved in corporate social responsibility programs that are aimed at improving

the welfare of the communities in which they do business.

Overall, our analysis of Sappi has shown them in a positive light. They have displayed a strong compliance attitude that

has stood them in good stead in the South African paper and pulp industry. Sappi have successfully implemented a

sustainable framework through its Three P approach to business. Going forward, we would suggest that they look to

engage with government and the business sector on a more regular basis. They should be looking to drive and coerce

these entities to change regulation and their behaviour in such a way that they reward moves towards sustainability.

They should also look for opportunities where they can partner with other organizations in their drive towards more

sustainable business practices.

Enterprise can be a powerful force for positive change, far outstripping the capacity of government because of its

capacity to harness individual human endeavour and self-interest. For this reason, Sappi need to engage more

purposefully with their customers, employees and their surrounding communities on a human level. Such viral, bottom-of-

pyramid solutions to sustainability will be the real driver and catalyst for truly successful sustainability initiatives.

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APPENDIX A

SAPPI

Our Vision and Mission

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http://www.iied.org/pubs/G02510.pdf

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Our Vision:

To embed the 3Ps of Prosperity, People and Planet into our everyday business processes to add value to all

stakeholders, and to help achieve the Sappi Limited goal of being, on a sustainable basis, the most profitable company in

paper, pulp and chemical cellulose solutions.

Our mission statement fulfils this aspiration. Delivering on sustainability by:

Focusing on ethical performance in keeping with our Values of Excellence, Integrity and Respect

Generating Prosperity as our ability to remain a sustainable player is founded on generating profits in the short- and long-

term.

Improving the lives of People through products and services that enrich their lives and by providing an environment in

which they can develop their full potential.

Treading more lightly on the Planet by balancing our needs with our impact on the earth

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APPENDIX B

UNITED NATIONS GLOBAL COMPACT – the 10 principles:

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. (UNGC, 2008)

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APPENDIX C

SAPPIs 3 Ps

Prosperity

Focus on long-term profitable growth

Promote an ethical culture

Drive customer satisfaction through technology and innovation

Maintain our license to trade

Create value for all stakeholders

(SAPPI, 2010b)

People

Provide training and development opportunities

Cultivate an inclusive, diverse workplace

Be a great place to work

Prioritise wellbeing, safety and health

Engage with stakeholder openly and constructively

Partner with communities

(SAPPI, 2010b)

Planet

Safeguard biodiversity by promoting sustainable forestry

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Reduce greenhouse gas emissions and increase our use of renewable energy

Continue our commitment to independent environmental, wood and fibre certification systems

Reduce solid waste and improve water quality

Promote the recovery and use of recycled fibre

Conform with best environmental practice and legislation

(SAPPI, 2010b)

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APPENDIX D

SAPPIs Governance Structures

Figure 1: Interaction between the different legs of Sappi’s Corporate Governance Structure.

Figure 2: Sappi Management Committee Structure

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Figure 3 : Sappi Sustainability Structure

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APPENDIX E

Stakeholder Theory

The below principles identify the key aspects of the Stakeholder theory:

Principle 1: Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and

should take their interests appropriately into account in decision-making and operations.

Principle 2: Managers should listen to and openly communicate with stakeholders about their respective

concerns and contributions, and about the risks that they assume because of their involvement with the

corporation.

Principle 3: Managers should adopt processes and modes of behaviour that are sensitive to the concerns and

capabilities of each stakeholder constituency.

Principle 4: Managers should recognize the interdependence of efforts and rewards among stakeholders, and

should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking

into account their respective risks and vulnerabilities.

Principle 5: Managers should work cooperatively with other entities, both public and private; to insure that risks

and harms are arising from corporate activities are minimized and, where they cannot be avoided, appropriately

compensated.

Principle 6: Managers should avoid altogether activities that might jeopardize inalienable human rights(e.g. the

right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant

stakeholders

Principle 7: Managers should acknowledge the potential conflicts between (a) their own role as corporate

stakeholders, and (b) their legal and moral responsibilities for the interests of all stakeholders, and should

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address such conflicts through open communication, appropriate reporting and incentive systems and, where

necessary, third party review. As copied from Crane et al. (2009)

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