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Home » Ethics and sustainability not (yet) top concerns of SA business

Ethics and sustainability not (yet) top concerns of SA business

By Fred Albrecht, chief executive officer of Logistics Systems Engineering

South African businesses and entrepreneurs face a multitude of challenges, which means their focus is typically on sheer survival – implying issues of ethics and sustainability are typically viewed as something esoteric and frankly just not relevant in the business environment.

Though corruption looms large as an issue in South Africa, the reality is that this country ranks only middling in global corruption listings, neither particularly bad but certainly not good. In many countries to our north, doing business invariably means being asked to pay bribes fairly consistently. South Africa is not that bad when seen in this context.

However, this is not the standard the South African business community should be measuring itself against. Domestically, we have many other business practices – which while not classified as illegal – nonetheless blur the line as to ethical and are certainly not sustainable. These primarily stem from a common obsession with cheapest price and short-term performance measures.

“Ethics and sustainability are important to us as a representative of an international company.”
“Ethics and sustainability are important to us as a representative of an international company.” Image credit: Logistics Systems Engineering

As an example: a procurement manager can opt for the cheapest tender for equipment rather than looking at the entire lifecycle cost, earning themselves a bonus for ‘good performance’. That manager most likely will no longer be around when the higher maintenance costs begin building up. His replacement may implement a good maintenance regime, but at an invariably higher cost – after four years he may leave with a poor performance record, and no bonus, despite having done a reasonable or even great job. His replacement then abandons all pretence of maintenance, also earning bonuses for keeping overheads down, thereby embarking on a dwindling spiral leading to the early ruin of the plant and equipment.

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This unfortunately does not stop with procurement as in many cases the business cases start with the Engineering or Logistics Departments, or even just project managers whose brief is to save money.

Nothing in this scenario was dishonest perhaps, but certainly not sustainable.

Another variation we frequently come across is companies which win a tender, not unethically by paying a bribe, but simply because of the old-boy network – giving the job to a friend or company they ‘always use’ notwithstanding their performance, to a company which entertains them with overseas trips (or customer tours) or gifts. We have experience of performing thousands of hours of work on a tender in the assurance we were the only company with a track record of performing the project or meeting the strict demands of the tender, only for the tender to be awarded to a company which was sent our full tender documents and asked to cut the cost by 10%, or a certain small percentage, to deem the process to be fair. They had invested no preparatory work in preparation and had no experience in the type of project in many cases. Usually, none of the people involved in this charade would even consider it unethical – they did their required job of cutting the cost and ensuring the lowest project cost. This is a cultural characteristic whereby most people who behave in this manner convince themselves that it is not wrong, and even right. However, the result of such behaviour is manifested in the fact that over the past 36 months we have been called in to consult on more than 15 collapsed racking systems. Over the last 60 months, we have seen more than 30 collapses and failures due to someone who pushes the material to such a degree, or oversells the ability of their system, that it eventually just cannot withstand the loads imposed; or meet the required throughput.

A company which has a policy on corporate governance, ethics and/or sustainability would outlaw such practices. That is for good reason – it affects the sustainability of an organisation. For the sake of perhaps a 5-20% saving on the capex, the plant may last a fraction of the lifespan of more sustainable capex – but the individual who authorised the tender is typically long gone by that time.

We have had many discussions where the customer merely states it was the right decision at the specific time. I disagree that this can be the view, as the due diligence of the total cost of ownership is inevitably overlooked and should be vital to the company’s decision.

Our company has rigid rules. We will not pay a bribe crossing the border or indeed any bribes at all – and often end up having drivers stuck at the border for days as a result, or having to detour 650km to reach a site 5km across the border. Furthermore, our company will not trade with countries embroiled in war – on principle we ceased cross-border trade with Russia and Ukraine even though Russia’s economy and our Russian factories are thriving.

These choices may imply we’d lose business, but the opposite in the long term is the reality. Companies that do not have such rigid rules typically fall foul of the law or financial rules in other ways – while we are experiencing 100% growth year-on-year. For instance, our policy is to demand payment as each section of a project is complete with no exceptions. Others justify late payment (excusing it because of their own many indiscretions) and often can go insolvent when a customer goes under. We see many competitor companies embroiled in litigation to only hear of an out-of-court settlement, or a customer who had to concede, as to not lose the investment already made; and this is just not sustainable.

Ethics and sustainability are important to us as a representative of an international company, but that is not really the case with many South Africans. Here, the attitude is one of ‘What is your price?’ When dealing with some customers ‘which I identify as shoppers’, we will send them a 31-page Ethics and Sustainability Report, but these customers do not even open the attachment because it’s too much to read.

Even in instances where distribution centres’ racking system collapses at huge cost, it is often not enough for management to recognise the error of their ways – that a policy of awarding tenders based entirely on lowest price is not sustainable in the long run. This is because typically insurance pays them out 80% to 100% of the loss, and the balance not received from insurance, is a manageable loss to them. Incredibly, many companies even go back to the same contractor whose system collapsed. They are not analysing the real loss, which is reputational loss and even permanent loss of clients who find alternative suppliers when their existing supplier is unable to deliver for months. In every single case we have seen, the customer’s representative cannot acknowledge the incorrect decision as it will cost them their own reputation and future, and therefore, a third variation is to convince themselves of an accidental damage or some maintenance regime that was not perfectly followed, as to ensure Insurance pay-outs and protection of their reputations.

For instance, when a large fruit juice company in Ceres suffered such an incident several years ago, its international clients Tesco and Sainsbury sourced new suppliers in Brazil for their juices and have never resumed supplies from the local supplier. That loss, combined with having higher maintenance costs as a result of not doing an entire lifecycle cost analysis on the racking system, is typically many times higher than a 10% saving on initial Capex. Sustainability often never enters the thought process.

We have an environmental report which is validated as to what we claim, to the extent of implementing something we call ‘sustainable driving’. EU regulations are in place for corporate ESG reporting and the impact it will have, and those regulations also have enormous applicability for South Africa where a local business is owned or partnered with a European operation.

South African companies can no longer afford to pay lip service to sustainability issues given their international networks. In future, EU companies’ reporting will need to provide tangible evidence that their group companies such as in South Africa themselves have a coherent sustainability strategy which they are actively implementing. Such reporting requires that each year’s progress achieved is clearly demonstrated. The report encourages senior executives to emphasise the business case of ESG (Environment, Social and Governance) as an investment in their future, to help shift mindsets away from treating it as a grudge compliance burden. There are significant benefits to be reaped from compliance with ESG rules, especially greater operating efficiency and lower overheads in the long term.

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In our experience, doing sustainability properly requires education, knowledge and a mindset shift: one that moves sustainability (composed as it is of Environmental, Social and Governance issues) from the periphery to the heart of a company. As the world changes, sustainability strategy will become business strategy – because it is ultimately customers who demand it.

“After a 12-month training programme in Ethics and Sustainability, our growth is based on the sustainability of the systems we operate according to and the business proposition rather than a cult of personality.”
“After a 12-month training programme in Ethics and Sustainability, our growth is based on the sustainability of the systems we operate according to and the business proposition rather than a cult of personality.” Image credit: Logistics Systems Engineering

This is happening globally, but in South Africa companies are not yet considering their end-user customers. Just as South African businesses will award a tender based on cheapest price, so too do South African shoppers opt for a product 5% cheaper even though there are serious environmental or ethical issues at stake. It starts with government where ‘cheapest cost’ dictates which tender is accepted rather than ‘value for money’. It is only once you have sold to a customer based on full lifecycle cost do they develop this methodology as a habit or pattern of behaviour that they start to see the difference of having a sustainable partner behind a purchase decision.

Sustainability affects not only the ‘buy cheap’ culture, but a stock holding culture of keeping the minimum. Given global logistics problems, many companies are now correctly focusing on holding as much stock as they can, notwithstanding the additional cost. These are tough times economically, but even tougher if you don’t have stock to deliver.

In a similar vein, we tendered for a distribution centre for South Africa’s largest e-Commerce company, which in the end opted to award the tender to a local company based on its promise it could locally manufacture the racking within four months, whereas we could only deliver imports in five months. More than a year later, I noted that local company only recently delivered. The loss to this e-Commerce company in lost revenue needs to be weighed against its policy (or strategy) of favouring local suppliers compared to using a company that has policies on ethics and sustainability. It is evident in their year-on-year results showing losses that is beyond comprehension.

Part of our sustainability is frequently looking at where we can improve and strengthen our business and investing accordingly. This should surely be everyone’s approach.

South African businesses to a large extent still subscribe to the culture of growing their business through ruthless management and short-term gains. In that scenario a company will do anything to clinch a deal. In truth, we had a similar culture until the formation of our relationship with Gonvarri five years ago. Now, after a 12-month training programme in Ethics and Sustainability, our growth is based on the sustainability of the systems we operate according to the business proposition rather than a cult of personality. But other companies are shocked when we tell them we do everything by the book. When they try argue ‘But…’, we say ‘No buts.’

The programme inculcates that ethics leads to profitability which in turn leads to sustainability. However, it doesn’t come about overnight. Customers sometimes do not understand that if one has a rigorous financial system that requires payment at the contractual milestones, then that is what we are going to require. It benefits nobody to let things slide even just a little.

Attaining sustainability means the management style has to change and strategically look at all the pressure points of the business – and investment in systems, infrastructure and training. The ethics and sustainability framework, such as codes of behaviour, have to be put in writing and adopted as inviolable policy, and distributed not just to staff but to business partners and customers. Those loyal customers will then buy from you again and again.

This is a way of doing business that people who buy and sell entirely on price may struggle to comprehend and indeed may consider it strange. Increasingly, international companies are adopting codes on ethics and sustainability and enforcing it through their own group structures, but also demanding it of their international networks before doing business with anyone. So too are international investors, before investing capital in any company, demanding reporting from such firms not just on their own compliance but their entire business network.

Soon, there will be no place to hide!

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