Skanska's Environmental Management at the Kukule Ganga

Experiences in Management for Sustainability

Contents

1 Foreword

3 The Global Compact

5 Introduction

CASE STUDIES

13 In search of ecological excellence: Skanska’s environmental management at the Kukule Ganga Hydropower Project

37 One company, one idea: Samarco Salvamar project

53 Environmental Preservation and other efforts of Kikkoman Corporation

65 Eskom and the flexible hot water load management control system The Global Compact Learning Forum | Experiences in Management for Sustainability

Disclaimer

EDITOR’S NOTE: The views expressed in this publication are the authors’ own and do not necessarily represent the views of the Global Compact. The Global Compact makes no representation concerning, and does not guarantee, the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice or opinion contained in this publication. This report is intended strictly as a learning document and should not be interpreted to indicate either effective or ineffective practices.

Printed on recycled paper. The Global Compact Learning Forum | Experiences in Management for Sustainability 1

of the Global Compact. We trust Global Compact’s online data- Foreword that the publication of these base can be found on the case studies in printed form will Global Compact website at THE FOUR CASE STUDIES present- enable further distribution and www.unglobalcopact.org. Global ed in this publication come from help continue the process of Compact participating compa- the first collection of expanded learning about corporate citizen- nies interested in being the case studies developed, since ship around the world. subject of a case study are wel- 2002, in accordance with a new For this volume, we wish to come to contact the Global approach and case study guide- thank, in particular, the com- Compact Office at globalcom- lines for the Global Compact panies Skanska, Samarco, [email protected], as are academics Learning Forum. The new Kikkoman and Eskom, the interested in writing case stud- approach encourages companies author institutions Stockholm ies or acting as peer reviewers. to join case study authors from School of Economics, our network of business schools Fundação Dom Cabral, Reitaku and other institutions with a University and the African strong interest in learning in Institute of Corporate Ellen Kallinowsky developing brief examples sub- Citizenship, and the United Head Learning Forum mitted to the Global Compact Nations Environment April 2003 web database into fully devel- Programme (UNEP) for their oped case studies that are exter- contributions. We are also very nally reviewed by peer reviewers grateful to the peer reviewers – and then presented at Learning Hans de Geer, Dr. Anton Forum meetings for open discus- Ferreira, Boleslaw Rok, sion. The four case studies Gerhold K. Becker – who pro- included here have been vided valuable feedback to the through this process and were case authors during the case presented jointly by company development process. representatives and their case We hope that all readers will study authors at the Second benefit from the experiences Annual International Global collected here, showing build- Compact Learning Forum ing blocks in management for Meeting held in Berlin in sustainable development and December 2002. The meeting responsible corporate citizen- was hosted with the support of ship. Further information and GTZ and companies from the new case studies, which are network called German Friends available for comment in the

The Global Compact Learning Forum | Experiences in Management for Sustainability 3

The Global Compact

The 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 and the environment. The principles are as follows:

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 . More information, including how to participate, Anti-Corruption Principle 10 | Business should work against corruption in all its forms, is available on the including extortion and bribery. * Global Compact website at www.unglobalcompact.org.

* The Secretary-General will introduce this principle at the Global Compact Leaders Summit on 24 June 2004.

The Global Compact Learning Forum | Experiences in Management for Sustainability 5

Introduction

CORNIS VAN DER LUGT

DIVISION OF TECHNOLOGY, INDUSTRY AND ECONOMICS (DTIE) UNITED NATIONS ENVIRONMENT PROGRAMME (UNEP)

THE CASE STUDIES PRESENTED IN THIS VOLUME are examples of companies that have proven commitment and innovation in the introduction of environmental management systems, along with related requirements such as the right policies and training of employees. The different experiences remind us that setting up the company vision, policy, strategy, assessment, targets, task assignment, monitoring and reporting systems and so forth are but one part of the full picture. Structure and content go hand in hand with process, and, in this process, we have individuals, per- sonalities, human beings. To start with, making it happen requires committed leadership. The value of personal conviction and drive at the board level is evident. With the commitment of senior management we need the commitment of individual employees. In addition, our examples show the strains that ideal structure and content can meet when faced with different cultural con- texts in different parts of the world. This is where standardisation meets its match. Of course, pollution is pollution wherever we are. One cannot give a “cultural interpretation” to the damage that an oil spill, chemical leakage 6 The Global Compact Learning Forum | Experiences in Management for Sustainability

or air pollution do to local human health, fauna and flora. Yet, to make environmental management systems happen, we have to be mindful that it is not about “managing the environment”. Rather, it is about “managing Setting yourself the goal of human beings in their interaction with the environment”. This goes having group-wide ISO beyond working with internal stakeholders. As we can see from the case 14001 certification and out- studies, it also critically requires working with external stakeholders such as consumers, NGOs and local communities. The experiences that follow performing your sector in come from Sweden, Sri Lanka, Japan, Brazil and South Africa. environmental management Setting yourself the goal of having group-wide ISO 14001 certification globally is one thing. and outperforming your sector in environmental management globally is Applying this sensibly in a one thing. Applying this sensibly in a hydropower construction project in a developing country, showing care for local impacts and needs, is another. hydropower construction This has been the experience of a Scandinavian company in Sri Lanka. project in a developing coun- Skanska is a Swedish construction group operating in over 50 countries try, showing care for local world-wide with around 75000 employees. Its case study takes us to Sri Lanka, where the company was one of seven contractors involved in a impacts and needs, is another hydropower project of which the planning goes back to the 1960s. Relying mostly on hydropower, Sri Lanka has to cope with rising electricity demands in the midst of changing rainfall patterns. In this instance, a “run of the river” dam project was undertaken in the late 1990s, following an earlier environmental impact assessment done in 1993. Lying close to a World Heritage forest in an area that suffers from illegal logging and rubber extraction presented additional challenges. Furthermore, management was tested on the seriousness of its convictions and flexibility in dis- playing care with respect to the social impact that a construction project has on poor local communities. The project in Sri Lanka was the first international hydropower project that Skanska completed within the framework of certified ISO environmental management standards. The company soon realised that its challenge was more than environmental, having to undertake some strong convincing power, environmental training and education to help raise local environmental awareness and the provision of local environmental services. Its experience presents practical insight into the boundary question of how far company responsibility and impact lies. The company has learned that blunders by other contractors in the project also put itself in the spotlight. It had to be innovative in convincing its client of the need The Global Compact Learning Forum | Experiences in Management for Sustainability 7

to use more environmentally friendly building material, having local suppliers accept questions related to the content of their chemical products, finding local partners to assist in waste management, and getting the local petroleum company to provide diesel fuel with a lower sulphur content. As far as organisation is concerned, the group has introduced an environmental policy driven by the group executive board, committed to independent audit and certification, implemented under supervision of Introducing management sys- “quality – natural environment – working environment” (QEW) depart- tems and at the same time ments in every business unit and every project, with good communication flows and regular contact between the field project management and creating entry points for inno- headquarters. Educating and training the 900 local employees involved in vative ideas to feed into the the Sri Lanka project proved valuable in advancing safety thinking and system bottom up is what overall performance. This has a lasting local impact from which the client, Ceylon Electricity Board, will benefit when it takes over the com- Brazilian company Samarco pleted product. If anything, its case study author concludes, Skanska has been able to achieve. could have ensured greater credit for its environmental work had it engaged more with local communities and NGOs in dialogue. Introducing management systems and at the same time creating entry points for innovative ideas to feed into the system bottom up is what Brazilian company Samarco has been able to achieve. This producer of iron ore pellets is owned jointly by Companhia Vale do Rio Doce and BHP Billiton. Facing pressure from shareholders abroad, the company started phasing in ISO 14000 and ISO 9000 with certification in the mid- 1990s. Its “Quality House” model with clear targets provides for regular engagement of employees at all levels and encourages the creative use of in-house knowledge. The result has been an environmental policy and management system that is not the sole responsibility of the environmental protection division, but of all employees. Employees from all divisions volunteer to assist in environmental monitoring and reporting. At Samarco, the start of a “Field of Ideas” programme at the initiative of the company president has also encouraged employees to provide innovative ideas on how to improve company performance in different areas. An example highlighted is the Salvamar project, in which the idea of a local fisherman has resulted in the company supporting a local scheme in which used oil from local fishing boats is collected and recycled to be resold to fishermen. Providing facilities for recycling, Samarco shared an 8 The Global Compact Learning Forum | Experiences in Management for Sustainability

interest with local fishermen in helping to restore and protect the local coastal environment. This is an area in which the fishermen traditionally discarded used oil into the sea or buried it in the sand. The training and environmental education that accompanied the effort resulted in a joint From co-operation between community development project that proved good eco-business sense to the mining and fisheries all involved. The project has also inspired the creation of similar initiatives at other villages in the region. sectors in Brazil we move on From co-operation between the mining and fisheries sectors in Brazil to the food and drinks we move on to the food and drinks industry in Japan. Kikkoman compris- industry in Japan. es a group with 61 companies world-wide, 48 subsidiaries and 13 affiliates involved in the production of soy sauce, juices and alcoholic beverages. Over the last four decades the company has expanded its presence to the With the commitment to the United States, Western Europe and in the Asia Pacific region. With Global Compact driven by a much of its production processes automated, the group currently employs strongly convinced CEO, around 6000 people. Expanding globally and at the same time wishing to maintain consistent quality standards in all operations brought special managing organisational challenges in different cultural environments. With the commitment to change within the company the Global Compact driven by a strongly convinced CEO, managing has involved, among others, organisational change within the company has involved, among others, reforming its corporate gover- reforming its corporate governance structure from a Japanese style to a more internationalised one. This included introducing outside directors to nance structure from a the corporate board, creating a code of conduct for employees and a busi- Japanese style to a more ness ethics committee. At the same time, traditional elements such as its internationalised one. management philosophy of co-operation and human respect have been kept intact. Responsibility for the Global Compact lies within the international operations, human resources and environmental departments of Kikkoman. The environmental departments have the main responsibility, since the environmental field is where the company feels its greatest challenge lies. The company CEO chairs its environment preservation committee, which, among others, is responsible for the group environmental management systems and annual environmental reporting. This committee has been active since the early 1990s in drawing up an environmental charter and setting voluntary action programmes, more recently on energy savings and cutting CO2 emissions beyond the Japanese Kyoto target. Regular environmental audits have been built upon by the expanded introduction of ISO 14001 The Global Compact Learning Forum | Experiences in Management for Sustainability 9

certification of plants and subsidiaries. Importantly, the company is also expanding its independently verified environmental accounting to include major group suppliers. Like any performer, the company has learned from past mistakes, such as a wine poisoning incident in 1995. Yet its efforts to address such problem areas pro-actively has produced results with recognition in the form a number of awards for this first Japanese group to have joined the Global Compact in 2001. Our next stop is Africa, Our next stop is Africa, where we have a case study from the electricity supply sector. How do you meet the increasing energy demands of the where we have a growing population of an emerging market economy in Africa, where the case study from the dominant source of power generation is coal? Do you build more coal- electricity supply sector. fired power stations? From both an economic and environmental point of How do you meet the view this is not a sustainable solution. A central part of the answer is, of course, diversification, expanding the input from renewables. A further increasing energy demands part of the answer lies in energy efficiency, both in generation and distri- of the growing population bution. Added to this, another part of the answer, not to be underestimat- of an emerging market ed, lies in helping consumers to consume sustainably. From the largest electricity producer in Africa comes an innovative example of demand economy in Africa, side management (DSM). This involves actions to influence the time, where the dominant source pattern and amount of electricity demand in ways that increase customer of power generation is coal? satisfaction and, at the same time, produce desired changes in the load shape of the power utility. As such, DSM by Eskom provides an alternative to simply expanding the power system. While it can take up to ten years to build a new power station, a DSM programme can be implemented within twelve months. It enables the consumer to save on electricity bills and make a contribution for future generations and the environment. Every kilowatt-hour of electricity saved means one less kilogram of CO2 generated by the power station. The Eskom case study focuses on a project implemented since the late 1990s in a residential area of Cape Town. Over 9000 households became involved in a voluntary programme to reduce electricity use during peaks hours. Volunteers indicate their patterns of use of their geysers, for example, using hot water in the morning or evening for bathing. Based on this information, their geysers are switched off at appropriate time intervals through radio signals. The resulting reduction in local electricity use has enabled Eskom to defer planned network cable upgrades in the area by a few years, 10 The Global Compact Learning Forum | Experiences in Management for Sustainability

adding to cost savings. The project, currently being introduced in the rest of South Africa, has been managed by a DSM department specially created for this task. The department has played an educational role by helping explain to consumers the benefits of DSM and other energy saving measures. The example underlines the value of helping consumers make informed choices if we wish to advance sustainable consumption. The contribution of the DSM department represents an important part of the company’s environmental management system and environmental policy. Our tour of three regions and four case studies in this volume displays the value of humans communicating knowledge and joining collective efforts. Again, the structure and content of environmental management systems need to take due cognisance of the human factor. Without that, ambitious concepts such as “sustainability management” will remain theory. The Global Compact has inspired these companies to share their learning experiences with other companies and stakeholders committed to corporate citizenship and sustainable development. They may not be perfect, but they are showing commitment and willingness to learn. We thank them for their contribution to this journey. Case Studies

Case Study | Skanska in Sri Lanka 13

In search of ecological excellence: Skanska’s environmental management at the Kukule Ganga Hydropower Project

HANS DE GEER AND DANIEL STRIDSMAN

STOCKHOLM SCHOOL OF ECONOMICS1

Introduction

SKANSKA IS A SWEDEN-BASED INTERNATIONAL CONSTRUCTION enterprise, active in construction-related services and project development. The original Skanska Company was founded in 1887 and was based on cement manufacturing in Sweden, but it soon expanded into activities in the construction field and began to capture market shares abroad. Today, after considerable international expansion, Skanska is one of the world’s leading construction enterprises, operating in some 50 countries throughout the world. Its primary markets are Sweden, the US, UK, Denmark, Finland, Norway, Poland, the Czech Republic, Argentina and Hong Kong.

1 Peer review of this case study was provided by Boleslaw Rok from the L. Kozminski Academy of Entrepreneurship, Poland 14 The Global Compact Learning Forum | Experiences in Management for Sustainability

Since the end of 2000, The Skanska Group has approximately 75,000 employees and covers all all of Skanska’s operations phases of construction activities from concept to operation and maintenance. The total turnover of the Skanska Group amounted to EUR 18 bil- are certified according to the lion in 2001, an increase of 53 percent compared with the previous year. ISO 14001 environmental Earnings after net financial items were approximately EUR 120 million. management standard. Certified environmental management systems form the basis for the environmental work pursued in the Skanska Group and, since the end of Skanska lies ahead of its main 2000, all of Skanska’s operations are certified according to the ISO 14001 international competitors in environmental management standard. Skanska lies ahead of its main having certified environmen- international competitors in having certified environmental management tal management systems on a systems on a Group wide basis. Group wide basis. The Kukule Ganga Hydropower Project

Sri Lanka is a developing country in South-East Asia that has recently attained peace talks after 20 years of agonizing civil war between the Singhalese majority and the separatist Tamil minority. The country is in great need of electrical power to support industrialization and development. Since Sri Lanka lacks coal, oil and nuclear power, but has a high rainfall, hydroelectric power presents itself as the obvious power alternative. To secure the country’s power supply, a huge hydropower scheme was elaborated 30 years ago, including an investigation of rainfall patterns, which provided guidelines for the location of hydroelectric projects. The problem is that these patterns have changed over time, decreasing the productivity of current hydroelectric installations. The resulting shortage of power has caused power cuts of up to eight hours a day and compelled the use of diesel-generators. However, the government has decided that increased use of hydroelectric power is the best solution to this problem.2 A hydroelectric power station on the river of Kukule Ganga, 70 kilometres southeast of the capital Colombo, was planned as early as the 1960s. At that time, an American study highlighted the possibility of extracting electricity from the river, sketching a 110-meter high dam, which would yield electricity, as well as provide irrigation. The environ-

2 www.skanska.com.; [Skanska Group magazine] Worldwide No 2, 2002.; Ceylon Electricity Board (1993), Final Environmental Assessment Report --– Kukule Ganga Hydropower Project. Case Study | Skanska in Sri Lanka 15

mental consequences of this project were considered great and 1000 families would have been forced to move. Protests from environmental organisations eventually stopped the project. Instead, a plan for a small “run of the river” dam emerged, where only a few dozen families had to move.3 The Sri Lankan government approved the new concept in 1993 and this marked the starting point of the Kukule Ganga Hydropower Project (Kukule Ganga HPP). Nevertheless, construction activities were delayed due to lack of funding until 1999, when the Japanese government granted Sri Lanka aid in the form of soft loans to finance the project. After the construction work of the Kukule Ganga HPP is completed, a certain amount of water will still be released in the original river channel to protect the river fauna. Most of the water, though, will be diverted from the river channel, led through a long mountain tunnel of 8 kilometres with a head of 176 metres. At the end of the tunnel, the water will run through two turbines powering generators, after which it is discharged back into the river channel. The hydropower station is calculated to yield 80 MW (2 x 40 MW) and an average annual energy production of 317 GWh. The forest surrounding the project is an outshoot of the World Heritage Sinharaja Forest in southern Sri Lanka, the last untouched rain forest in Sri Lanka. The area is extremely rich in biodiversity and vulnerable to human interference. The farmers in the neighbourhood make their living by cultivating rubber and tea. Many villagers have been given work during the building process and new modern roads have been constructed. This has certainly increased the general welfare of people, but unfortunately also resulted in increased deforestation.

3 origin.dailynews.lk/2002/04/06/fea04.html. 16 The Global Compact Learning Forum | Experiences in Management for Sustainability

Method

A research journey to Sri Lanka in October 2002 enabled the authors to gather information on the Kukule Ganga HPP. Lars Jennemyr, Project Manager of Skanska at the Kukule Ganga HPP, facilitated this by placing his personnel at our disposal for lengthy interviews. Relevant external stakeholders were also contacted and interviewed. Direct observations at the Kukule Ganga construction site and consultation of various written material has supplemented these interviews. The Global Compact Performance Model has been used as an analyti- cal framework for this business case study. For information on this model, see the Learning section of the UN Global Compact Internet site (www.unglobalcompact.org).

Environmental Management at Kukule Ganga

Skanska’s involvement in the Kukule Ganga HPP started in June 1999 and will end in April 2003, and mainly covers tunnel blasting and con- creting. Skanska’s contract is worth US$50 million and the labour force during constructions reached 900 people at its peak, including 50 expatri- Skanska’s work in the Kukule ates from Sweden. Skanska only holds one out of seven contracts that Ganga HPP is pioneering in constitute the Kukule Ganga HPP. Japanese and other European compa- the sense that it is the first nies perform the other contracts. When the Kukule Ganga HPP is mentioned henceforth, only Skanska’s part of the project is concerned, not international hydropower the work of other contractors. project that Skanska is Skanska’s work in the Kukule Ganga HPP is pioneering in the sense completing within the that it is the first international hydropower project that Skanska is com- framework of the pleting within the framework of the certified environmental management system ISO 14001. In this way, the project has established new practices certified environmental and acted as a guideline for later projects by Skanska. Apart from normal management system challenges faced in such a process, the fact that Sri Lanka is a developing ISO 14001. country, lacking environmental awareness among common people as well as institutional support for environmental measures, has proved especially challenging for environmental management. Case Study | Skanska in Sri Lanka 17

The ISO 14001 is an environmental management system, prepared in 1996 by the International Commission on Standardisation in Geneva.4 The system promotes environmental protection, resource conservation and improved efficiency. Unlike the vast majority of highly specific technical standards, ISO 14001 is quite flexible and could be adopted by very different companies occupied with different activities. Two different com- Skanska’s Kukule Ganga panies could come up with two different plans to fulfil the requirements HPP has nourished an of the standard. The contents are not the primary thing, rather it is the method and the end result. educational vision and In order to gain “ISO 14001 certification”, there should be independ- attracted many visits for the ent assessment and verification that operations are in agreement with the purpose of study. ISO 14001 management standard. In Skanska’s case, the Norwegian con- The project management sulting agency Det Norske Veritas Certification AB was used for independent audits at the Kukule Ganga HPP. Skanska has also trained its own engi- has stated that it is glad neers to conduct internal audits of Skanska’s activities. to share its experiences Skanska and its client, the Ceylon Electricity Board, have put forward in the environmental field. the Kukule Ganga HPP as “a model for how an environmental management system should be implemented on a large-scale project.” 5 Skanska Increasing environmental had already earlier complied with a great part of the contents of ISO awareness throughout the 14001 in trying to spread and implement safety and environmental stan- world should, in time, dards to projects on different locations in the world. However, this work ensure greater demand for was carried out ad hoc and without realising the full learning potential. Now, with the full adoption of ISO 14001, Skanska’s activities are sub- environmental friendly mitted to a firm regulatory framework, which involves continuous evalua- solutions and increase tion, feedback and improvement. the market shares of companies with Kukule Ganga HPP in the Performance Model environmental certification.

Skanska’s vision Skanska’s vision for a new environmental policy was born in 1998 in the aftermath of an environmental accident in Sweden (the Halland Ridge Tunnel). During this process, Skanska had been exposed to heavy criticism and even prosecuted for its use of a hazardous sealing material.

4 www.iso.ch. 5 [Skanska group magazine] Worldwide No 2, 2002, p. 14. 18 The Global Compact Learning Forum | Experiences in Management for Sustainability

Skanska felt the urge to ensure that this would never happen again. The Halland ridge accident in a way worked as an alarm clock for Skanska to shift perspective from retroactive mitigatory measures to a more proactive environmental approach. Skanska’s decision to adopt the environmental management system of ISO 14001 on a group-wide basis gave a clear signal of raised ambition in the environmental field, as did the formulation and approval of a company code of conduct at the beginning of 2002.6 As a part of this process, Skanska also joined the Global Compact. The vision to be number one It is Skanska’s vision to be the world leader – the client’s first choice – in environmental within construction related services and project development.7 This also management came from implies being the world leader in environmental management. Environmental practice in the construction field requires continuous the Group executive board improvement. What was considered good practice a decade ago may just and the message was clear: as well be anathema today. Consider, for instance, the use of asbestos. implement ISO 14001, gain Skanska’s Kukule Ganga HPP has nourished an educational vision and attracted many visits for the purpose of study. The project management certification and retain it. has stated that it is glad to share its experiences in the environmental field. Increasing environmental awareness throughout the world should, in time, ensure greater demand for environmental friendly solutions and increase the market shares of companies with environmental certification.

Leadership When the construction work at the Kukule Ganga HPP started, Skanska had already made the decision to implement ISO 14001, but had not yet gained certification. The vision to be number one in environmental management came from the Group executive board and the message was clear: implement ISO 14001, gain certification and retain it. In order to pursue this, the group executive board also required information on all major non-conformities to ISO 14001 in all projects. Skanska developed a new organisation with QEW-departments (QEW = Quality, Environment and Working environment) in every business unit and in every project. The responsibility for implementing ISO 14001 is delegated to the project level, where the QEW-departments develop the necessary routines. However, this has not meant that project manage-

6 Skanska’s Code of Conduct, approved by the Board of Directors in February 2002. See: www.skanska.com. 7 www.skanska.com. Case Study | Skanska in Sri Lanka 19

ment has had to work out its way alone, without support. There has been an ongoing communication process between project management and home office, and regular visits, checks and consultations are standard.

Empowerment Skanska has faced challenges in implementing ISO 14001, due to the pre- requisites of the workforce at Kukule Ganga. For instance, it proved difficult to train people in safety thinking, e.g. convincing them of the neces- sity of wearing boots and helmet during tunnel work. Many were used to walking bare-foot and felt hindered by boots. Another challenge was to get people to follow routines. For example, Skanska, from the start of the Kukule Ganga HPP, installed sediment settlement ponds, to clear water used during excavation of tunnels before dis- charging it into the river. On one occasion, an overflow from the settlement ponds occurred and additional sediment particles reached the river. Skanska’s client, the Ceylon Electricity Board, presented complaints from villagers to Skanska and the company took care of the problem. Mr. T. M. Herat, Project Director of the Ceylon Electricity Board, later remarked “We need a change in that although Skanska could have been more alert, the company policy attitude by people, was probably right. The problem had been an extraordinarily high inflow and this is accomplished of seepage water and relaxation down the line in cleaning the ponds. The through education.” QEW-manager at Kukule Ganga, Jeffrey Wambeek, underlined the problem thus: “Generally speaking, all routines must be constantly reaffirmed in Sri Lanka. The routines work for a while, but suddenly they let go.” One possible reason why routines at Kukule Ganga are let go after a while is that common people in Sri Lanka do not take environmental questions seriously enough. More down-to-earth questions are given priority, whereas environmental care is considered a luxury of the rich. To change this attitude, Skanska has concentrated on conveying new ideas to the workforce. QEW-manager Wambeek stressed the importance of education to be able to realize the importance of preserving nature. “This is the weakest link in our work, and it is seen in the environmental audits, because we have managed the tough parts, but we got caught on the easy parts.” The QEW-department launched an ambitious environmental awareness-training program for all employees from the beginning of the project. Afterwards, the lower level managers have continuously received additional training on these questions. 20 The Global Compact Learning Forum | Experiences in Management for Sustainability

Some environmentalists expressed doubts about Skanska’s environmental education of employees. When confronted with evidence, such as learning material and attendance lists, where employees allegedly have signed their participation in the educational program of Skanska, the environmentalists remarked, that in Sri Lanka, offering workers a good square meal and having them sign afterwards easily fabricates such lists.8 Such fraudulent proceedings may be plausible in Sri Lanka, but they are Skanska’s Code of Conduct diametrically opposed to the commitments made in Skanska’s Code of Conduct, functions as the general and Skanska denies any such accusations. Bengt Ivner, Operational Manager guiding principle and ethical at the divisional level of Skanska, notwithstanding his rejection of the accu- standard for Skanska. sations, showed a certain understanding for such suspicion: “They are probably right that it was not within our power to get the environmental message through to every single one of these persons. But the next time they hear it, perhaps, at least something more is grasped.” When new ideas are introduced, some time for apprehension and repe- tition is needed to integrate the new material. A theoretical course at the beginning of the project is certainly recommendable, but must be supplemented by persistently repeating the message. QEW-manager Wambeek On an operational level the stressed the importance of being realistic about learning possibilities, management system Our given the native population’s limited previous environmental awareness and the short time frame of the project. The construction time, less than Way of Working establishes 4 years for a large-scale project, admittedly does not permit far-reaching working methods, tools and educational measures. Much time has had to be devoted to rudimentary standards, including ISO construction and safety training, since pressure from local politicians and villagers has forced Skanska to recruit locally to a great extent, rather 9001 for production quality, than bringing in experienced workforce from outside. ISO 14001 for e nvironmental safety, Policies and strategies and Internal Management of Skanska’s Code of Conduct functions as the general guiding principle and ethical standard for Skanska. This document encompasses environmental the Working Environment. issues but also human rights, employee relations and business ethics. On an operational level the management system Our Way of Working9 establishes working methods, tools and standards, including ISO 9001 for

8 Piyal Parakrama, President of the Green Party of Sri Lanka; Ajanta Palihawadena, environmentalist; Samantha Gunesekera, environmentalist. 9 Our Way of Working is an internal document, although constantly accessible to Skanska employees on the company Intranet, it is not publicly available. Case Study | Skanska in Sri Lanka 21

production quality, ISO 14001 for environmental safety, and Internal Management of the Working Environment. Our Way of Working encompasses all Skanska projects and consequently has a general, broad outline. To adopt the principles of the Code of Conduct and of Our Way of Working at a project level, a Project Plan is elaborated and gradually developed throughout the phases of the project. The Project Plan is the source of detailed, project specific instructions, and it is here, that the routines of environmental work are formed in practice. The work of the QEW-department during the first year at Kukule Ganga To protect its trademark, was to a great extent about setting up the environmental management sys- Skanska abstains from tem. This involved making risk assessments, interviewing local government accepting projects that are and setting up strategies and procedures. The second year was generally very controversial. about monitoring and writing non-conformities to test the system and see if it worked. If it did not work in some respect, the personnel had to go back In line with this, and see what went wrong to make a new procedure in this respect. The Skanska pulled out of the third year involved following up and revising the system again. bidding for Turkey's

Resources controversial Ilisu Dam. The company trademark is a crucial resource of conveying trust to clients. Skanska’s vision to be number one in environmental management has sometimes distinguished itself from the crowd of other companies. The World Commission on Dams (WCD) is an international commission with representatives from governments, NGOs and business, which has developed guidelines for large dam and hydroelectric projects.10 The report on dams and development, issued by the commission in 2000, was not very well received by the hydroelectric industry. Nevertheless, Skanska went against the stream, directly declaring itself in favour of the report and pointed at ISO 14001 as a suitable tool for practical application of the report’s guidelines.11 Skanska has recently begun strengthening its trademark worldwide by renaming all subsidiaries after the parent company. To protect its trademark, Skanska abstains from accepting projects that are very controversial. In line with this, Skanska pulled out of the bidding for Turkey's controversial Ilisu Dam. Skanska is very well known in Sri Lanka, since its

10 www.dams.org. 11 www.dams.org/report/reaction/reaction_skanska.htm.; www.skanska.com. 22 The Global Compact Learning Forum | Experiences in Management for Sustainability

earlier activities on the island include the large Kotmale dam, a number An illustrative example of of bridges and roads. A strong trademark is often desirable, but in certain this problem was encoun- paradoxical situations it could work as a disadvantage. Axel Wenblad, tered when Skanska was Senior Vice President Sustainability of the Skanska Group, asserted that requested to build asbestos Skanska’s trademark might be too strong in Sri Lanka: “The name of the roofs. Use of asbestos as a Kukule Ganga project may be unknown to people, but they still know our building material for roofs name and associate us with the project. We are associated with much, was a requirement of over which we have no control.” Skanska’s contract, the Skanska’s Project Manager at Kukule Ganga, Lars Jennemyr, also technical specifications of pointed at this problem. He complained that when the project is mentioned or criticized in Sinhalese papers, readers automatically read which were prepared in Skanska, as if Skanska and the Kukule Ganga HPP were synonymous. A 1993 by the Ceylon situation where every slip by the other, more anonymous contractors of Electricity Board. the project is attributed to Skanska, is clearly not desirable. However, when construc- An example of this phenomenon was the scandalous road construction tion started, asbestos was by another contractor at the Kukule Ganga HPP. Blasted rock material put on Skanska’s list of from the construction had been thrown down the river slopes causing prohibited materials. unnecessary destruction. Even though Skanska had nothing to do with When Skanska refused to this, the trust for the company may have suffered because of people’s ignorance of the distribution of responsibility. use this material, the client replied that Skanska would Innovation and processes be paid for asbestos, but When the construction plans for the Kukule Ganga HPP were elaborated, that it, of course, had the the Ceylon Electricity Board produced a report on the environmental option to use equivalent or impact of the project. This report was the first means of Skanska to inves- better material. Skanska tigate the environmental consequences of planned construction activities, persevered with the client before taking on the Kukule Ganga HPP. and after long negotiations However, the quality of this environmental assessment report has been an agreement was reached questioned. The Ceylon Electricity Board prepared it in 1993, the first year of environmental impact assessment in Sri Lanka. Today, Dr. to use an alternative to Channa Bambaradeniya of the World Conservation Union expresses the asbestos, for which concern that many biologists have found the report not to meet contem- Skanska incurred a major porary scientific standards. He also expresses his wonder at why no rescue part of the additional costs. operations or mitigatory measures were carried out between the completion of the report in 1993 and the beginning of construction activities in 1999. According to Dr. Bambaradeniya, the responsible authorities should Case Study | Skanska in Sri Lanka 23

have taken measures during this time to prevent environmental destruction. The report, he states, only anticipated direct impacts of the project and failed to foresee the indirect consequences of road construction, such as illegal logging. For construction companies like Skanska, performing major building projects, there is certainly a problem in the time lag between cause and effect. The decision process of such projects is often quite long, ten to twenty years, the greater part of which lies outside the reach of the contractor. Problems could arise when the foundations of a project, worked out ten years ago, come in conflict with contemporary and improved standards of sustainability, or when current knowledge greatly exceeds that previously possessed. Axel Wenblad summed up the dilemma: “The contract cannot be broken, but neither should the environmental undertakings.” In line with ISO 14001, the QEW-department has carefully assessed planned purchases. Suppliers have been interrogated on the contents of their chemical products. Unfortunately, the suppliers have often proved reluctant to report this, referring to this information as business secrets and expressing fear of being copied. To overcome this problem, the QEW- department turned the inquiry the other way around and asked if products contained certain ingredients. If they did contain these ingredients, there was no purchase. To monitor compliance with environmental management principles during construction, Skanska’s QEW-department at Kukule Ganga has conducted inspection rounds every week, making unannounced spot checks. Twice yearly, a comprehensive audit of the whole project has been conducted by the external reviewer Det Norske Veritas or by engineers internally trained for this purpose. Mr. T. M. Herat, Project Manager of the Ceylon Electricity Board, appreciated the responsibility taken by Skanska performing environmental audits: “They had a special environmental unit, and as a company they were very concerned. It is there in their system.We would like to see that in other companies. They have their own monitoring team from the head office.” The QEW-department had a very hectic time in the beginning of the project trying to get ISO 14001 going before the environmental audit rounds arrived. To prepare routines for waste management the QEW- department turned to the Waste Management Department of the Colombo 24 The Global Compact Learning Forum | Experiences in Management for Sustainability

Municipal Council and asked for guidelines, but it appeared that, although there were some written guidelines, in practice there was no working system for recycling and waste management. The QEW-department was sent off to the local refuse tip, where waste and sewage were dumped together, representing a health hazard to the whole neighbourhood. The Skanska personnel at the QEW-department realised that it had to make the best out of the situation in Sri Lanka and establish its own An unforeseen problem arose methods. A suitable area for waste management near the working site was – the permission to use chosen, but then an unforeseen problem arose – the permission to use the the land for waste land for waste management proved to be difficult to obtain, owing to management proved Skanska’s commitment to reject corruption and bribery. It was a long time before pressure from the Ceylon Electricity Board finally forced the local to be difficult to obtain, authority to consent. owing to Skanska’s Soon, the land chosen for waste disposal also proved problem-ridden. It commitment to reject was a closed down rubber plantation, located at some distance from the construction site, where local people, as it appeared, obviously continued corruption and bribery. to extract rubber illegally. One day, an area near Skanska’s land for waste management burnt down, due to clashes of interests within the illegal rubber business. Skanska, however, got the blame. Another problem was theft. Combustible waste was disposed of in a pit, where diesel fuel was used to increase the intensity of the fire. The employees, who had 20 litres per day at their disposal, only used a few and sold the rest, which caused an incomplete combustion. As a consequence, dogs and children flocked round the burning pits to practice recycling. Faced with this dangerous situation, the QEW-department closed down the area and moved its waste management to within the project area bor- ders, where surveillance was easier. Skanska once received a major non-conformity note during an external environmental audit for its handling of waste. When spray cans have been used up, they were to be locked into a container, but during the environmental audit in September 2002, it was revealed that some employees, for the sake of convenience, had just thrown them down a burning pit. A great number of fluorescent tubes was also found in the pit. This caused a major non-conformity in the audit report and Det Norske Veritas Certification AB, which conducted the audit, demanded immedi- ate measures. Case Study | Skanska in Sri Lanka 25

By the time this incident occurred, the project was at a late stage and One worker, reflecting the workforce had been substantially reduced, increasing the responsibili- upon the work with the ty of individual workers. Partly, this could explain the incident. environmental manage- Nevertheless, Skanska was shown that whatever education and working principles are given, action does not always conform to proclaimed inten- ment system, described the tions. Skanska looked very seriously on this matter; if instructions are not difference between followed, the health and safety of people are endangered. Skanska and other employ- One last measure that Skanska has at hand to ensure adherence to its ers as the difference principles is dismissal of employees. Earlier, the employees had one-year between night and day: contracts, but during the current demobilization phase, the contracts only “Surely environmental run for one month at a time. Because of this, Skanska could put power aspects are not totally neg- behind words, if nothing else helps. lected in other places, but The incident with the spray cans in the burning pit caused Skanska to they do not appear in repeat the whole program of environmental awareness for all employees. In a general sense, the problem with education is that it sometimes has a teamwork. If something is tendency to be superficial, whereas old, firmly rooted values and attitudes done there, it is individual are preserved under the surface, threatening to re-emerge when behaviour initiatives. But here, every- is relaxed. QEW-manager Wambeek has continuously had to fight adverse thing is done together.” practices among workers: “People think we are insane, when we say that they should not burn up old tires – Why, when it is such a good source of Wijesooriya, a Director at heat? We have to go in and explain in an easily comprehensible manner. the Central Environmental If we do not, our instructions are ignored.” Authority of Sri Lanka, When the Kukule Ganga HPP started, a certain place was assigned for gave Skanska recognition washing of cars and provided with all facilities. This seemed to work fine for its innovative practice and the cars were kept clean, but one day Skanska personnel noticed by accident that one of the company cars was being washed in the river. The in protecting forest slopes driver was asked why he was doing this and he answered that this was the from erosion, during the accepted way of washing cars by everyone. Skanska had never imagined preparatory work for tun- this option, but faced with reality took several measures to prevent further nel construction. “They river washing. The employees were informed and prohibition signs in tried to protect the slopes English and Singhalese were installed, but Skanska was still not totally from erosion through sure of compliance. As an additional security measure, large boulders were drainage. It was a nice way dropped on the exit roads to the river, to bar entrance. This was allegedly of doing this. I have used done by mistake, since roadblocks on public roads are illegal. Nonetheless, this as an example in my no efforts were made by the relevant project department of Skanska to correct the “mistakes”. Wambeek remarked that the concern was not only training programs also.” 26 The Global Compact Learning Forum | Experiences in Management for Sustainability

for Skanska’s employees – others would also use river washing if not pre- vented from doing so. Sometimes, it evidently helps to put force behind words, but to ensure the durability of measures, even after Skanska’s departure, understanding and education are probably more important. Without personal integration of environmental principles, rules are soon neglected, when surveillance is relaxed. The systematic, practical environmental work carried out daily should contribute to this through the creation of sound habits. The habit- ual work with environmental routines has, according to the QEW-manager Wambeek, instilled a new awareness into the employees’ minds. During a journey, for example, some employees discovered the dumping of oil in a river and were very upset. Another direct consequence of the education has been improved safety thinking. Masayuki Shinzawa, the Chief Resident Engineer of the Japanese/German/Swiss Engineering and Consulting agency, which conducts monthly inspections at Skanska’s construction site, has noticed improvement: “Sri Lankan people do not consider safety to be very important and they do not want to work with helmets. In the beginning, many workers did not use their helmets, but now they nearly always do. That is an improvement.” During Skanska’s construction of the Kukule Ganga HPP, some people in Sri Lanka have noticed and learned new technical approaches to environmental care. Erosion is a common problem in areas with heavy rainfall and steep slopes. Another measure to avoid erosion was to refrain from using river sand in concrete constructions. Excavation material from tunnels was crushed to sand and used instead. If river sand had been used, there was a risk of increasing the water velocity and thereby causing erosion. Another example of innovative practice by Skanska in the Kukule Ganga HPP was waste oil management. Skanska collected 6 m3 of waste oil every month from its operations at Kukule Ganga. The oil was stored in barrels on cement floor and sawdust was provided to eradicate any spillage. Naturally, over time, the accumulated amount became substantial, so the project QEW-department went to the Central Environmental Authority in Colombo to get advice on how to dispose of the oil. Since there was no proper procedure in the country, the QEW-department con- sulted the Internet, the home office, as well as consultants and outside Case Study | Skanska in Sri Lanka 27

environmental experts. The consultation resulted in a recommendation to burn the oil at 1500° Celsius in a cement kiln, which would remove harmful substances and incorporate any residuals in cement. Skanska tried to work along these lines, but faced problems finding a proper partner. The QEW-department received offers from different per- “What concerns the environ- sons willing to pay well for the waste oil. However, ISO 14001 does not ment we have no secrets. We permit a company to flee its responsibility by simply dispatching harmful are glad to share our knowl- substances down the value-chain. The QEW-department had to investi- gate each purchaser’s procedures, to find out their environmental quality. edge. In the long run, this It appeared that almost none of the burning facilities inspected reached attitude is perhaps as impor- the high temperature needed to dissolve the carbon compounds of the oil. tant as direct environmental The only company with sufficiently high temperatures was not prepared measures, because it creates a to pay anything for the oil. As a consequence, Skanska gave away thousands of litres of waste oil for some time, but eventually the combustion domino-effect.” company got enough and rejected further free deliveries. This forced the Kieran Deasy QEW-engineer QEW-department to hunt around the island to find a new combustion contractor. One contractor with sufficiently high temperatures was eventually found near the city of Kandy. The combustion process was analysed and Skanska required the company to use more absorbent material, to improve the combustion. The oil transports of this company were also scrutinized and regulated by the Skanska QEW-department. The waste oil price which Skanska obtained was lower than the market price, but the environmental care demanded by Skanska was correspondingly higher. Similar problems faced the QEW-department when taking recycling measures. Skanska investigated and interviewed different companies concerning recycling, but found few that could meet the requirements. Batteries, tires and metals were recyclable, but recycling of glass and plastic was not feasible so these materials were buried in a safe area. In the future, when recycling measures have come into practice on Sri Lanka, this material may be unearthed and recycled. 28 The Global Compact Learning Forum | Experiences in Management for Sustainability

Clearly, Skanska’s Impact on value chain environmental management The ISO 14001 standard puts much emphasis on suppliers and subcon- tractors and Skanska has been prone to distribute environmental informa- has increased the value for its tion to them, making clear that co-operation with Skanska implies envi- client. Moreover, Skanska has ronmental care. given its suppliers the option to A single measure aimed at the environment always has a limited scope, grow in a sustainable direction but the effects of a good example on others, or of diffusing knowledge and by continuously exposing them new attitudes into the business field, could be immense. Skanska, being a to demand for environmental leading and strong company, could put pressure on its supply-chain to follow. However, influencing the value chain often has a price. In Skanska’s friendly products and services. case, suppliers were often reluctant to conform to a higher environmental Suppliers have had the norm, unless compensated by a higher price. For instance, Skanska made opportunity to test new the Ceylon Petroleum Corporation manufacture a diesel fuel with sulphur products and techniques, content below 0.2 ppm/litre. This diesel cost extra, but it reduced air pol- which the local market does lution significantly. not yet support, In addition to the increased cost of sustainable purchases, Skanska faced the problem that environmentally friendly products are often less effective but which could become from a strict construction point of view.12 Increased demand for sustainable important in the future. products in the future will perhaps ensure that products emerge whose effi- In this way, Skanska has ciency in production is equal to that of hazardous products. invested in its suppliers’ future Skanska’s clients were also reluctant to conform to Skanska’s environ- and enabled far-sightedness mental norms without compensation. The asbestos and the waste oil on their part. example illustrate this. In the former case, Skanska had to increase its building cost by introducing environmentally safe material, without being fully compensated. In the latter case, Skanska had to lower the price or even give away the waste oil for free, to ensure safe disposal. Apart from these problems when redirecting the value-chain, Skanska’s case also points to significant benefits. When construction activities are finished, the Ceylon Electricity Board will take over the Kukule Ganga HPP. It is obviously a huge gain for the Ceylon Electricity Board not to have to decontaminate Skanska’s construction area, but to receive a clean product. It is also clear that local people making their living near the hydropower project have benefitted from Skanska’s environmental ambitions, because Skanska’s efforts to minimize pollution have protected the local living space.

12 Interview with Roy Andersson, Plant and Logistics Manager of Skanska at the Kukule Ganga HPP. Case Study | Skanska in Sri Lanka 29

Skanska’s own gain from pursuing an ambitious environmental policy in the value-chain could be greater trust from its business partners and from ordinary people. Whereas the increased cost of purchases is measura- ble, trust is difficult to estimate in figures, but this does not reduce its fundamental value to business. QEW-engineer Kieran Deasy

People Satisfaction said that you have to take the There are no active trade unions at Skanska’s construction site. risk of people leaving when you According to Skanska personnel, the unions may have considered the educate them: project too small to unionise. Skanska has allegedly not opposed the “But what about the people workers. When it comes to employee satisfaction, there have been no that really want to be with the complaints about Skanska. The employees have been offered decent wages, proper accommodation and subsidized home journeys, and every- company, they could leave if one seems to have been happy and proud to work for Skanska. they do not get training. Skanska has tried to use positive examples to encourage and motivate If there is no training, then you employees. The institution “Employee of the month” involves official lose the best employees instead. recognition and a sum of money, as reward for exceptional work effort, This is a catch 22 situation. mainly in the areas of environment and safety. Enterprising workers have You have to educate.” been promoted by advancement, irrespective of caste and ethnicity. Individual development talks have also been used to deliver feedback on work performance. Education has played an important role in Skanska’s employee satisfaction. Sometimes the benefit of education became too big, for example when a number of drivers left for work in the Middle East with their newly acquired Skanska operator’s permit as a ticket.

Impact on society Whereas the employees of Skanska seem content, the local villagers in the project neighbourhood have sometimes shown antagonism. Partly, this is because the Ceylon Electricity Board does not seem to have paid enough as compensation to the people who were forced to resettle when the project began. The environmentalist Ajanta Palihawadena explained that many people had just inherited their land and were not able to prove their claims on it. This may have caused distrust from the start, although Skanska was not responsible for this. Perhaps the fact that Skanska is a foreign company also caused some antagonism. Mr. T. M. Herat, Project 30 The Global Compact Learning Forum | Experiences in Management for Sustainability

Director of the Ceylon Electricity Board, suggested this: “The Ceylon The Swedish personnel Electricity Board is associated with the building of roads, with having tried to gain trust by brought in the project and raised employment. Everybody in the region is engaging in some activi- happy about the project, but what they think about Skanska is more diffi- ties, but it did perhaps not cult to say, because Skanska has had little interaction with locals, except win the hearts of all peo- that they have employed some people.” ple. To gain more trust, The Skanska personnel at Kukule Ganga, on the other hand, claim to Skanska’s Swedish person- have engaged in the local community in different ways. Examples given nel could either have include participating in local festivities and inviting the villagers to the adopted a more modest project area. Skanska has also contributed to the functions of the neigh- way of living dispersed in bourhood by distributing plastic barrels to collect water and by building a the jungle among natives, stage, once arranging a music show in the evening. The QEW-manager or it could have bought Wambeek has also kept much contact with local Buddhist monks. The trust by giving in to the QEW-engineer Kieran Deasy said that the villagers could see that demands for charity by vil- Skanska is a friendly organisation that cares, but at the same time he lagers. However, when admitted that it is easier in Sweden to merge into the surroundings. things are concerned, the The Swedish personnel and senior local staff of Skanska live together former alternative presents in a camp built especially for them on a hill and enclosed by fences. This itself as unrealistic and the Western way of life, illuminated at night by bright lights, probably con- latter has an awkward feel- trasted sharply to the villagers’ non-electrified lives. Such contrasts create ing of buying trust. opposition and opposition creates antagonism. When confronted with the light and development of the Swedes the villagers’ poverty was in a way It seems that Skanska, in illuminated and thus accentuated. This may have caused resentment. the hectic working phase of On several occasions, Skanska was falsely accused of pollution. Local the Kukule Ganga HPP, has papers reported that people had contracted skin diseases by the water 13 missed some important from tunnel excavations that Skanska had discharged in the river. stakeholder dialogues, However, no cases of illness could be presented to Skanska. Another time, Skanska was accused of disposing the sewage from thousands of which could have inspired workers directly into the river. However, Skanska only had 900 employees the parties with more con- and tests conducted by the Central Environmental Authority found no fidence. Failing to engage support for the accusations. Mr. T. M. Herat, Project Director of the sufficiently in NGO dia- Ceylon Electricity Board, explained that the villagers tried to overempha- logues, Skanska has also size problems to gain some things, and that one could observe in their missed a great deal of well- way of bringing forward complaints that there was some affectation. deserved credit for its environmental work. 13Madavela, S., Rock powder in the stream and dust causes rashes and itching among children. Lankadipa [local Sinhalese newspaper] 19 March 2001. Case Study | Skanska in Sri Lanka 31

Skanska was, for example, requested to provide households with asphalted roads, tap water and electricity. It is important to be conscious of the size of the cultural, linguistic and national differences for people to overcome in this type of project. The limited timeframe of the project is also essential. There was not unlimited It is important to be con- time for fraternization with local people. Some environmentalists aired scious of the size of the cul- the perception that Skanska lacked transparency, complaining about tural, linguistic and national ignorance of what was going on in the project area and who was doing what. The environmentalists felt excluded from construction activities differences for people to over- and frustrated over inability to monitor what was going on. Unsupported come in this type of project. rumours were also mentioned that Skanska was in the project for some secret gain.14 Skanska has invited environmental organisations on some occasions, but maybe too seldom. If the contacts with NGOs had been more direct and on a continuous basis, perhaps some of the critical voices would have been appeased. It seems that Skanska, in the hectic working phase of the Kukule Ganga HPP, has missed some important stakeholder dialogues, which could have inspired the parties with more confidence. Failing to engage sufficiently in NGO dialogues, Skanska has also missed a great deal of well-deserved credit for its environmental work. Instead of receiv- ing honours for its achievements, Skanska has faced accusations of environmental crimes in local newspapers, as well as indignant demands for charity by villagers. Maintaining its policy of incorruptibility, Skanska has eliminated the chances of gaining trust by seeding money. The question presents itself: what is corporate social responsibility? Should it be to buy trust and sympathy by practising charity? Or should it be to be awkward enough to refuse such suggestions and instead place on people the burden of education and adhesion to an extensive set of rules, to develop and constantly reassess routines for safety and environmental care, and reshape the business in a sustainable direction? The Kukule Ganga case shows that the latter alternative may not always be the most opportunistic, but nevertheless, it must be the viable way in the long run.

14Piyal Parakrama, President of the Green Party of Sri Lanka; Ajanta Palihawadena, environmentalist; Samantha Gunesekera, environmentalist. 32 The Global Compact Learning Forum | Experiences in Management for Sustainability

The bottom lines Environmental care seldom gives quantifiable results, but usually means additional costs. Being a pioneer means development costs and groups arriving every now and then for educational visits. Nonetheless, Skanska has managed to keep within the financial and temporal confinements of its Kukule Ganga HPP contract. The increased administration and reporting associated with ISO 14001 have not delayed the project schedule and the additional cost in the environmental field has been provided for by more efficient and competitive work in the construction field. It seems that it is the competitive strength of Skanska in the construction field that has permitted the company to release additional resources for environmental care. Axel Wenblad, Senior Vice President Sustainability of the Skanska Group, properly stated: “The projects of Skanska are primarily about building things, not primarily about ethics.” Skanska’s main concern is, of course, to do competitive work within the construction field, and it is this work that has enabled the successful adoption of the Environmental Management System ISO 14001 and secured adherence to the Global Compact principles.

Unanswered questions Skanska’s project at Kukule Ganga still houses a few unanswered questions. Will the Kukule Ganga HPP keep what it has promised to bring Sri Lanka in terms of power? This depends on the rainfall. The rain patterns have changed before and there is no long run guarantee that the power station will yield the predicted 80 MW. Hopefully it will. Skanska will soon have finished the Kukule Ganga HPP, but some of the attitudes and knowledge conveyed by the company will probably pre- vail. Skanska has been able to influence its value chain in a sustainable direction. This work will now continue without Skanska’s demand and support. It is to be hoped that some environmental products and solutions, developed because of Skanska, have come to stay in Sri Lanka. The increasing environmental awareness in Sri Lanka and the fact that school children are now given the fundamentals in this field point in this direction. Still, the economic situation unfortunately does not yet permit increased environmental care in practice. The future will show what will be the yield of the seed planted by Skanska in this respect. Case Study | Skanska in Sri Lanka 33

One serious environmental issue that has emerged as a result of the road construction to the Kukule Ganga HPP is both legal and illegal logging. These activities were not feasible before, due to weak infrastructure, but with the modern, broad asphalt roads to the project, logging has escalated. A local Buddhist monk has expressed deep concern for the forest. The One serious environmental project management of Skanska has also observed the problem and repeat- issue that has emerged as a edly informed relevant stakeholders, including mass media, but seemingly result of the road construction to no avail.15 Skanska neither has the resources, nor any formal obligation to act as a forest warden and stop the logging. Moreover, Skanska’s power to the Kukule Ganga HPP is to influence the local community will soon be gone. The obligation to both legal and illegal logging. stop criminal logging obviously lies with the local authorities. The Ceylon Electricity Board will take over Skanska’s camp when the construction work is completed. What will then happen to Skanska’s high quality housing? Operation and maintenance of the Kukule Ganga Hydropower station will not require many housing facilities. One suggestion comes from the professor of biology, Gunatilleke. He has expressed his concern for the forest and suggested that Skanska’s houses could be used to establish a biodiversity training and research facility including activities such as eco- tourism. He has also suggested that the forest area around the Kukule Ganga HPP should be declared conservation area. These ideas could perhaps constitute a gleam of hope for the threatened forest.

15 Minutes from QEW-department Meeting No. 33 at Kukule Ganga HPP (20 Sept. 2002). 34 The Global Compact Learning Forum | Experiences in Management for Sustainability

Stakeholder appendix

Skanska personnel • Axel Wenblad, Senior Vice President Sustainability, is responsible for environmental questions at the group level of Skanska. • Bengt Ivner, Operational Manager of Skanska International Civil Engineering AB, is responsible for the Kukule Ganga HPP at a divisional level of Skanska. • Lars Jennemyr, Project Manager of the Kukule Ganga HPP, is in charge of activities at Skanska’s hydropower project. • Jeffrey Wambeek, QEW-manager at the Kukule Ganga HPP, is a key player in the implementation of ISO 14001 at the project level. He was born in Sri Lanka, but, in the beginning of the 1970s, Wambeek got the opportunity to study at the Royal Institute of Technology in Sweden, where he was trained as an engineer and eventually employed by Skanska. Speaking Swedish, Singhalese and English impeccably, Wambeek has proved an invaluable asset during Skanska’s construction works in Sri Lanka. • Kieran Deasy worked as QEW-engineer at the Kukule Ganga HPP during the implementation of ISO 14001. Together with Jeffrey Wambeek, he held the main responsibility for the elaboration of the environmental methods used.

Other stakeholders (key players interviewed given in brackets)

• The Ceylon Electricity Board is the governmental agency of Sri Lanka’s Ministry of Irrigation and Power, administrating Sri Lanka’s power program. This is Skanska’s client at the Kukule Ganga HPP (Mr. T. M. Herat, Project Director of the Kukule Ganga HPP) www.ceb.lk. • The Central Environmental Authority is the governmental agency responsible for the protection and management of the environment in Sri Lanka. This agency administred the production of the Final Environmental Assessment Report -in the planning stage of the Kukule Ganga HPP (W. A. D. D. Wijesooriya, Director of Environmental Management & Assessment). • JVK (Joint Venture Kukule Ganga) is formed by three independent engineering firms: Nippon KOEI CO. Ltd. (Japan), Electrowatt- Ekondo Ltd. (Switzerland) and Lahmeyer International GmbH Case Study | Skanska in Sri Lanka 35

(Germany). JVK holds the overall responsibility for the Kukule Ganga HPP and conducts monthly inspections on Skanska’s construction site (Masayuki Shinzawa, Chief Resident Engineer). www.n-koei.co.jp. • IUCN – The World Conservation Union is an international NGO, which brings together states, government agencies, and NGOs in order to conserve biodiversity and to promote sustainable management of natural resources (Channa Bambaradeniya, Senior Programme Officer Biodiversity) www.iucn.org. • The Green Party of Sri Lanka (Piyal Parakrama, President). www.greenpartysrilanka.org. • Ajanta Palihawadena and Samantha Gunesekera are two independent environmentalists engaged in the preservation of Sri Lanka’s unique nature. • Batagoda Chandrawimala Thero is a Buddhist monk in the nearest village of Kelinkanda, acting as a contact between Skanska’s project management and the villagers.

Case Study | Samarco Salvamar Project 37

One company, one idea: Samarco Salvamar project

CLÁUDIO BRUZZI BOECHAT,

FUNDAÇÃO DOM CABRAL16

SAMARCO17 PRODUCES IRON-ORE PELLETS, for use in direct reduction and blast furnace metallurgical processes, and concentrated ore fines. Its yearly production capacity is 12 million tons of iron ore pellets and 1 million tons of concentrated ore fines. Samarco was born 25 years ago as a project linked to steel-producing companies (Samitri, of the Belgo-Mineira Group, and Marcona, a North American company). Due to incorporation, privatization and selling processes, control over the company became equally shared (50% to 50%) by Companhia Vale do Rio Doce and BHP Billiton, a company belonging to the Australian group The Broken Hill Proprietary Company Limited. Only under this shareholding configuration has Samarco truly started to operate directly on the global pellet market rather than through Samitri or BHP. Today, Samarco is the second largest player in the pellet sea borne trade. To guarantee closer proximity with, and better service for clients, Samarco established offices in Europe (Amsterdam) and Asia (Hong Kong).

16 Peer review of this case study was provided by Hans de Geer of the ADG Stockholm School of Economics. 17 More information is available at the site: www.samarco.com 38 The Global Compact Learning Forum | Experiences in Management for Sustainability

A processing plant and the Alegria Mine constitute the Germano Unit, in the cities of Mariana and Ouro Preto, in the state of Minas Gerais. Its deposits amount to 5.6 billion tons. The Ponta do Ubu Unit, a complex formed by two pelletization mills and their own maritime termi- nal, is located in the city of Anchieta in the state of Espírito Santo. The two cities are linked by a 396 km-long iron ore pipeline capable of trans- The following table contains porting up to 14 million tons per year. The duct transfers concentrated the implementation ore produced in Minas Gerais to the pelletization unit in Espírito Santo. timeframe for some of these development projects and the introduction of manage- Building a successful enviroment ment systems: The ore pipeline and the conveyor belt system used in the mining process 1991 Normatization enabled economic exploration of Itabirite, a low iron content ore formerly discarded. Since its establishment, use of state-of-the-art technology and 1992 QTS – Sol Project – innovative processes has been a precondition for the enterprise’s viability. Maspet The iron market depends directly on the steel market. In the last few years, it experienced an intense process of consolidation. Today, 80% of 1993 Routine Management global production comes from three companies: Rio Tinto, BHP and Vale do Rio Doce, two of which are Samarcos’ shareholders (BHP and Vale). 1994 ISO 9000 Certification In the last four years, the price of iron ore dropped 20% and, although 1995 Beginning of the ISO some recuperation is expected, it is unlikely to reach previous levels. A 14000 Project and more competitive market, higher quality requirements and the increased Implementation of Management Systems importance of environmental concerns have all represented great chal- and Managing by lenges for Samarco and required intensive efforts towards development, Directives modernization and increase in profits and profitability.

1996 Benchmark In 1990, Samarco analyzed 250 profitable companies and selected 25 as objects for case studies deserving further examination. Based on the rea- 1998 ISO 14000 Certification sons found for their success, development projects were designed, includ- and Knowledge ing implementation of the required management processes. Management These projects are part of the Management Model and are important steps in 1999 Analysis and Solution of the development process proposed for the company. This process began with Problems implementation of internal processes and normatization, followed by quality, environmental, occupational health and safety management models. The establishment of a focus on the client, a global benchmark, and a search for domestic and international recognition completed such development processes. Case Study | Samarco Salvamar Project 39

The statement of Mission, Objectives and Values of Samarco lead the process. The Management Model that accompanies it contributes to the internal dissemination of strategic goals, ensuring the participation and commitment of employees to the objectives and goals of the company. The starting point is the so-called “Quality House”, which values the success conditions of the company. Next, there is a longer definitional phase – Samarco 2010 Vision – that was established after the presentation of scenarios and perspectives by Officers and Managers at a one-week seminar. This Vision unfolds in the Strategic Planning, in which the defined goals are considered directives for the Improvement Plans (Biannual Seminar) and the Routine Management Plans (Annual Seminar). Based on the definition of such seminars, the Annual Corporate Goals Plan is produced, and unfolds in the Goals Plans and Routine Management. Each plan has specific terms and mechanisms for its monitoring. The Monthly Routine Management Meetings involve management (Officers and Managers) and are open to any employee. Currently over 200 control items are evaluated and there is a rigorous failure analysis process. In the words of the Human Resources General Manager, Benedito Waldson Pinto, the process of Improvement Development is an important success “At Samarco there is factor of the company: “Samarco places a lot of emphasis on thinking – currently the awareness we think, develop and test technologies and, when they prove feasible, they are incorporated and become routine very rapidly”. in each department and Even though its mechanisms may eventually be refined, the process as employee that, if it does not a whole has already been integrated within the company. Currently there operate according to are around 700 rules, from the mine to the port, dealing with Quality, Environment, Health and Safety. international standards, To guarantee competitiveness for its products, the market requires the it will not be generating any company to comply with international quality standards and to certify value to the company”. its products according to the largest possible number of them. In addition, there is a great concern to avoid the generation of financial, envi- Francisco Dutra ronmental or social liabilities. As Francisco Dutra, the Management Management Risk Risk General Manager has said “at Samarco there is currently the General Manager awareness in each department and employee that, if it does not operate according to international standards, it will not be generating any value to the company”. 40 The Global Compact Learning Forum | Experiences in Management for Sustainability

A common characteristic of these certification development processes is that Samarco does not contract external consultation packages. The company starts creating a study group to assess and analyze the necessary processes. The employees involved in such groups are removed from their functions to dedicate their time to such activity. Occasionally, these groups may rely on external consultants, but only to support their understanding of a subject. The result is the creation of a group of people who know the company and who are qualified to implement the necessary processes. An intense internal persuasive process is carried out. Voluntary professionals, the so-called “multipliers”, study and are prepared to spread the knowledge throughout the company and to mobilize the organization for the necessary changes. Several initiatives have been developed this way including ISO 9000 and ISO14000, the Management System. The same process is now being carried out for the PNQ (Brazilian quality award) and the risk management system. Samarco is considered a benchmark in terms of organizational atmosphere. An internal survey was recently carried out, but the results are still under evaluation. The previous survey, carried out in July 1999 by Hay do Brasil, showed that Samarco “not only sustained the leadership in Hay’s organizational atmosphere ranking, but also increased its rate. The general satisfaction index reached 76%, compared to 74% in 1996. About 97% of employees participated in the survey”. The closeness between Samarco and its employees dates from its establishment, during which it constructed villages in Mariana and Ubu to lodge employees close to the mill and the harbour. Up to 250 families lived in the village in Mariana. The proximity of employees, their families and the company created a very close relationship. At this time, the company was a major provider. In the village in Mariana, the company made available a communal restaurant to the families of employees. The school was also maintained entirely by the company. These institutions were used extensively by the families. Measures such as these contributed to a strong sense of loyalty towards the company. Aware of their dependence on the company, whenever sales dropped or any incident required interruption of activities, the women would gather and pray for a quick recuperation. Over time, this relationship changed and the dependency was reduced. The transition process was implemented in order to preserve the good Case Study | Samarco Salvamar Project 41

relationship between the company and employees. The school was trans- ferred to the city’s administration, but the company guaranteed technical support to keep quality standards. The houses were sold to employees, but the company financed the transactions and reinvested the money in a housing program for other employees. This transition was supported by internal communications, such as events and specific publications, but also through the development and valorisation of leadership communicative behaviour and of the planning and monitoring process. Madelon Piana, Manager of Corporate Communications observed that “when direct communication from the leadership is absent and the leadership is not attentive to employee needs, the effectiveness of various channels of communication will often be undermined.” The company uses a 360 degrees evaluation process. Negotiations are based on the definition of objectives. There is a defined capability chart and a variable remuneration system. The turnover is traditionally low. Communicability is one There is a policy of investment in employee education and the instruc- of the attributes analyzed tion level indicators have been increasing as a result. during evaluation and is also a criterion Samarco’s environmental protection policy for the promotion of managers. The growing importance of environmental matters generated, in the last two decades, several initiatives to stimulate volunteer measurement and release of information related to environmental impacts. This means a significant improvement in understanding of the subject. Legislation in several countries established different assessment systems and the proliferation of indicators. Though contributing to environmental improvements, they also resulted in a very narrow base for compar- isons. Some of these initiatives established themselves gradually as important benchmarks in their own areas, for example, ISO 14000. These regulations are intended to provide companies with criteria for voluntary environmental management, so as to broaden their capability to manage impacts and risks and to improve processes that may lead to better environmental performance. Certification is based on analysis of an extensive range of parameters and represents a challenge for companies. To implement it with the nec- 42 The Global Compact Learning Forum | Experiences in Management for Sustainability

essary seriousness and comprehension, the company must carry out a true process of cultural change. In Samarco’s case, this implementation represented a third historical moment for its Environmental Protection Policy. Samitri, owned by Luxembourgian shareholders (ARBED Group) and Marcona, a North American company, both among Samarco’s original shareholders, brought from their original countries environmental awareness at a level that is not yet common in Brazil. Stabilization ponds, for instance, were still considered unnecessary expenditures, in Brazil. Even so, the first moment is characterized as of “total reactivity”. In 1991, the Federal Environmental Protection Legislation, and the subsequent creation of environmental protection agencies and implementation of environmental licensing procedures gave rise to the need for better structures to handle environmental issues. Samarco contracted out the first large environmental project, the PRAD – Programa de Recuperação de Áreas Degradadas (Degraded Areas Recuperation Program). The project sig- nalled the beginning of a second stage: instead of acting in response to external requirements, the company became more proactive. Environmental Consultancies were created in Minas Gerais and Espírito Santo, the states in which Samarco operated. However, since there was no well-defined environmental policy, each one of them acted at will, generating two distinct ways of action, disputes among them being the natural consequence. In 1996, the company’s President invited a mine-planning engineer, Vitor Feitosa, to coordinate the company’s Health, Safety and Environmental Protection initiatives, tasks formerly assigned to the Human Resources function. The Consultancies did not report to the coordinator himself but had to follow guidelines established by him. Samarco then began developing an Environmental Protection Policy that should lead to the ISO 14000 certification. As usual, no consulting pack- age was contracted – the project was internally developed. An Environmental Management System (SGA) was created and is considered as the great differential: the SGA was developed based on international standards but in accordance with Samarco’s needs and profile. A great training effort was developed, carried out by “multipliers” recruited from several areas of the company. But like many other necessary initiatives, this was not free from conflict and debate, for example, some Case Study | Samarco Salvamar Project 43

areas did not want to offer their professionals to act as multipliers. There was also resistance to change and the explanation “because we have always done that this way” was often heard. Along the way, Samarco tried to deepen its relationship with the community. Previously, this relationship was restricted to sporadic donations without any strategic intent, a form of good-neighbor policy. Now, the goal was enhanced transparency. “The door had to be opened although we knew there would be strong criticism, The goal was and it happened exactly that way.” Samarco started to voluntarily promote public hearings to present environmental and social results of its activities. enhanced transparency. An interesting initiative took place within the Pelletization Division: the GAMA – Grupo de Amigos do Meio Ambiente (Group of Friends of the Environment). The Group gathers employees who voluntarily commit themselves to the monitoring of environmental control items impacted by their activities. Such monitoring is performed along the work process itself, during daily activities. There are groups for every shift and results are presented to all during periodic meetings. New goals and alternatives of improvement are also discussed during these meetings. The GAMA is led by employees elected by colleagues and is self-managed. Interest and results of its internal activities led the Group to extend its action to the external world, supporting activities of environmental protection, giving lectures in schools and associations and contributing to the community. As Sandrely A. Lopes, environmental protection analyst, has said, “the environment is no longer the exclusive responsibility of Environmental Protection Divisions, but of everyone”. Each area manages its own control items; the environmental concern flows over the walls of the company and ‘contaminates’ the employees’ daily routines, both in their family and in the community. In 1998, Samarco was recognized as the first iron ore producer to obtain Field of ideas ISO 14001 certification The organizational atmosphere and the Social Responsibility and for all stages of its Environmental Protection Policies shape the concepts and explain the production process. concern that gave birth to the Salvamar Project, but it was the Field of Ideas (Campo de Idéias) program that made it operational and created the conditions necessary for its implementation. 44 The Global Compact Learning Forum | Experiences in Management for Sustainability

In 1989, a group of company’s executives participated in a managerial development-training program. The final activity of the course was the presentation, by the executives, of a viable project of interest for the company that would also consolidate the knowledge acquired. The company’s President suggested to one of the groups the development of a reward system to stimulate employees to contribute ideas and innovative suggestions that could improve routines or otherwise be relevant to the company’s strategy. The President was aware of one experience conducted within the Belgo Mineira Group, since Samarco, through Samitri, was also part of this Group: the Technical and Administrative Merit Award of the Belgo Mineira Group was conferred on employees that suggested and implemented innovative ideas. This suggestion accorded with the objectives of Samarco’s Mission Statement: “Continuous drive towards a high- performance organization, in which every individual accepts responsibility and is rewarded for results.” The project was developed and presented by the group in the Training Program but, back in the company, after conclusion of the course, the proposal was forgotten. Each member of the group belonged to a different sector and daily activities absorbed all their available time and efforts. However, since, as Vitor Feitosa commented: “Penido (Samarco’s President) never forgets! It must be implemented”, the instruction was given to the members of the group and the management area was chosen to manage the project. A process was defined, ranging from the presentation of the idea up to the reward process. The Program has the following objectives: • Give encouragement to the generation of ideas throughout the company • Promote innovation and creativity • Reward and recognize employees’ contributions There are two categories: Category 1, including proposals regarding Quality, Cost and Attendance; and Category 2, including proposals regarding Environmental Protection, Safety and Morale. Approved and implemented ideas are presented during the Annual Fair. More than 2,500 people, including community members and Samarco’s employees, visited the fair in 2002. Case Study | Samarco Salvamar Project 45

One hundred ideas were submitted during 2000, the first year of the “Field of Ideas.” Of these, 75 were approved by their divisions and passed to the next stage – the elaboration of action plans. A total of 148 employees of Ubu and Germano units participated in the program, together with three other employees of contracted companies Rawmec, Incorpori and The program’s results in its Construtora Ouro Preto, in Germano. three years of existence con- Currently, the “Campo de Idéias” is an important complement to the firm the positive outcome of formal process of improvement development, integrated with the Management Model. the first year. They are: GAMA’s President, Gerson Oliveira, statement shows one of the rea- • Average of three contributions per employee sons for the success of the Field of Ideas program and of Samarco itself: “I worked for several other large companies, but never got as much satisfac- • 87% of personnel have already presented tion. Here, they are willing to listen, they like ideas.” improvement proposals to the program, at least once The Salvamar project • return of US$11.01 per US$1.00 invested The seventh idea submitted within the Field of Ideas program made compa- • Of the 1,509 approved ny history. As part of the activities for the SGA (Environmental proposals between Management System) implementation, the sailor Sebastião Machado par- September 1999 and ticipated, together with other Samarco employees, in a training course June 2002, 792 were offered by Petrobrás on the elaboration of an Oil Spill Emergency Plan. implemented and 717 are currently being They were given information on how to develop such a plan, how to act in implemented. case of an accident, and about the environmental impact of oil spills into • 59 of the proposed ideas the sea. Tião, as Sebastião is known, is the son of a fisherman. Married, address environmental with two children, he lives in Perocão, a fisher village, near Ubu. About 80 improvements. fishing boats arrive there every day. Back from the training course, he men- • Samarco already patent- tioned to other colleagues – among them Sandrely Amigo Lopes, an envi- ed some of the ideas ronmental protection analyst – that the region’s fishermen discarded into presented within this the sea or buried in the sand all the oil used in their boats’ engines. program. Sandrely knew that “this kind of coastal environmental pollution is considered one of the most harmful to the environment. Although fre- quent, the doses are small and hence considered to be inoffensive. Lacking information, most of the fishermen did not understand the impact on the environment.” They noticed that some species were dwin- dling following the disappearance of the mangrove’s flora and the loss of 46 The Global Compact Learning Forum | Experiences in Management for Sustainability

the “sun’s brightness reflected on the sea”.18 Nevertheless, they did not care much about the oil’s final destination. The conversation between Tião and Sandrely inspired both of them to do something. The initial idea was to lay barrels in the areas used to park boats and collect the used oil. They wanted to do this immediately. The first factor Sandrely had to call for patience: “Let’s stay calm friends...we have experience and knowledge about oil spills but not with working with commu- required for success nities.” She talked to her boss and he agreed to the idea, committing him- had been achieved: self to finding a solution for the matter. The first factor required for suc- support of the cess had been achieved: support of the area’s leadership. “The manager area’s leadership. has to support the idea and I was lucky to have a very sensitive man as my manager”, says Sandrely. The harbour’s personnel proposed sending the idea to the Field of Ideas. Having been recently launched, the program represented a channel to achieve a commitment going beyond the good will and interest of the involved persons. If the idea were approved, it would become a company’s project. The idea was approved and the project now had to be detailed and exe- cuted. Careful planning started, including many conversations with fishermen, their associations (such as the Colônia, which is a kind of cooperative) and the Environmental Protection Agency of the Espírito Santo State. Enthusiasm and anxiety regarding the project had to be kept under control in order to allow consideration of all possibilities. This dialogue process gave birth to a project, which was later implemented in Perocão. Samarco recycles the oil it uses and its Ubu plant has all the equipment necessary for the process: the centrifuge, the filters and the laboratory to check the quality of the oil. This equipment had excess capacity, which was able to be used for the project. For the Salvamar Project, the oil would be collected, recycled and resold to fishermen at a price to cover processing costs. Fishermen who discarded at least 90% of the capacity of their oil tank would be rewarded. This would stimulate better engine maintenance, avoiding excessive burning of oil and consequent pollution of the sea. In turn, the fishermen had to participate in environmental education courses aimed at sensitizing them to the “environmental impacts of the by-products from fishing, whether garbage or oily residues.”

18José Luís Ramos – fisherman – cited in the Annual Report- 2001 Case Study | Samarco Salvamar Project 47

The first community to be included in the project was that of Perocão’s fishermen, less than half of whom have completed elementary school. Seventy percent of them have incomes in the 200-to-400 Real (US$ 60- to-120) range. They participated in meetings and courses. Besides acquir- ing knowledge about the environment, they developed their organization capabilities and learned to discuss and decide as a group. To quantify the amount of waste oil, the fishermen and their boats were registered along with the oil volumes used in each watercraft. About 300 boats with approximately 900 crewmen participated. Boats were equipped with stickers identifying them as participants in the Salvamar Project. A 680-liter collector and a tank for the sale of recycled oil were installed when the project operations started. Samarco assigned an employee to take care of the Salvamar station. Gilberto Machado, who lived in Perocão and identified with the project’s ideas, was selected. However, haste in completing and operating the project raised one problem. The period necessary for filling the collector, collecting and recycling is approximately three months. Because of that, the fishermen would initially have to collect the oil for this period without having it back, recycled. Anxiety did not allow them to wait. Pressure and the wish to see the project succeed forced Samarco to involve Shell, a Samarco supplier, with whom they negotiated the supply of new oil at prices equal to production costs until completion of the first recycling period. When the recycled oil finally arrived there was strong resistance due to its colour. Even after recycling, the oil keeps a darker colour than new oil. And new oil sold at prices equal to production costs represented immedi- ate savings. Pressure was then exerted for continued sale of new oil at production-cost prices. However, this would compromise the whole concept of recycling. Fishermen are well aware of the importance of the oil. One of them remarked: “you know ... oil is the life of the engine.” Samarco tried to convince the fishermen to accept the recycled oil, to make them understand that the colour was not related to quality, but it was difficult. After Perocão, the Salvamar project turned to the fisher community in Anchieta. This time, things proceeded differently. The fishermen themselves, after they became aware of results achieved in Perocão, sought help from the city’s Environmental Protection Agency, which, initially, did not show much interest in the idea. However, the State 48 The Global Compact Learning Forum | Experiences in Management for Sustainability

Environmental Protection Secretariat interfered, reinforcing the fishermen’s request. In November 2001, the project started operations in a similar way as had occurred in Perocão. Meetings, courses and visits to Samarco were first conducted to present the oil recycling process and the laboratory, where adequacy for use was checked. The oil sold within the project was recycled oil, right from the start. Now other fishing communities are coming to Samarco and to Municipal Environmental Protection Agencies to ask for the implementation of the Salvamar Project in their areas. The initial problem of encour- aging use of recycled oil seems to have been overcome. The Salvamar implementation leader in the community of Prainha de Muquiçaba, José Augusto Caudonazi, commonly named Deco, is already registering the fishermen. On the quality of the recycled oil, he says: “There is no problem at all. When it comes from Samarco we believe.” Deco is an enthusi- The Salvamar Project ast of the Salvamar Project. “This is a fantastic project. I tell everybody: try and implement it in your community too. The other day, my boat has received many awards. stopped in Jacareípe. I talked to people over there. They already knew about the project and they want it too.” In Muquiçaba, they once installed barrels on the beach but there was neither collection nor recycling. The oil collected ended up in the sand and was taken into sea by the tide. Implementation in Muquiçaba started with participation by all those interested. The community wanted it and went to the Municipal Environmental Protection Secretariat. They started participating as facili- tators, scheduling a meeting with Samarco and supporting the communal discussion and mobilization process. In the Municipal Secretariat, Giovana Kill believes that the process is a guarantee for the project’s permanence. Belonging to everyone, the project does not run the risk of discontinuance. The Salvamar Project has received many awards. It won first prize in an international contest promoted by BHP Billiton. Technicians and the tugboat sailor that created the idea were taken to Australia to receive the US$2,500 award, which they intend to invest in a new social project at Perocão. The annual budget of the Salvamar Project is around 15 thou- sand Reais (c. US$ 4,000). It is necessary to publish information about the project and its results in order for the company to be able to capture the public relations benefits. But the cost of publishing this information is higher than investment in the project itself. Case Study | Samarco Salvamar Project 49

In Sandrely’s opinion, an explanation for the project is that “we learned so much that the knowledge ended up being brought into the community.” Because they have the knowledge, they recognize that there is much to be done and initiatives mixing the company’s social policies and employees’ volunteer actions are multiplying themselves. The Salvamar Project is proceeding. There is still no risk of overburdening Samarco’s recycling equipment, but there is an increasing interest in finding partner companies that could expand the idea to other regions. Samarco would contribute the operational model because of their expert- ise in the impacts of oil spills and working with communities.

An idea that grew

The Salvamar Project was a far-reaching idea. From an environmental viewpoint, it encompassed the complete cycle of oil utilization, including oil recycling and reuse, and stimulated reduction in consumption. From the social standpoint, it contributed to the development of the community, broadening its knowledge and its participation in issues important to the environment they are in. It also stimulated subscription to new values and helped increase self-esteem because every citizen contributes and par- ticipates. In addition, in enabling the reuse of oil and the reduction of costs, it increases the fishermen’s income. The average saving of R$70 (seventy Reais, around US$20) in the monthly consumption of oil is significant for the fishermen and a strong reason to participate since only registered fishermen are allowed to buy recycled oil. But, after the training course and the lectures, motivation towards environmental protection increases and fishermen change their habits regarding other refuse like plastic bags, nets and fish scraps. Most of them bring trash back to land and throw it in barrels close to collectors. They even collect other objects they find in water for adequate disposal. Fishermen from other regions not yet participating in the Salvamar Project are coming to the collection stations to dispose of oil after hearing their colleagues commenting on the impact of inadequate disposal. Since the beginning of the project, more than 2,000 liters of oil have been already collected, both in Perocão and in Anchieta. The project is 50 The Global Compact Learning Forum | Experiences in Management for Sustainability

in its final implementation phase in Muquiçaba and initial contacts have already been made with Iriri and Inhaúma’s communities, including meetings and visits to Samarco. In Perocão, the recovery of the mangrove’s flora is already noticeable and it is common to hear fishermen saying such things as: “The mangrove has to be preserved because it is the sea’s nursery.” The project is also Shareholders visiting the company often inquire about Salvamar Project. The project is also of interest to banks working with the compa- of interest to banks ny, which include it in their sustainability assessment of the company. working with the company, The recognition of its importance is a stimulus for other employees and which include it in their the management to adopt and implement other new ideas. sustainability assessment Whenever the Salvamar Project is implemented in a new community, new knowledge and new improvement and action opportunities are dis- of the company. covered. Luiz Milagre, a fisherman, wrote a sentence in a text he prepared for a contest named Histórias de Pescador (Fishermen Stories), one of Salvamar’s activities, that could very well be transposed to the management and daily life of companies: “The sea is an infinite school and we will never know all its mystery.” Case Study | Samarco Salvamar Project 51

Sources

Samarco Annual Report 2001 Olinta Cardoso – Lecture at Mix ABERGE 2001

INTERVIEWS

SAMARCO Ana Paula Gomes Costa – Management Internal Consultant Benedito Waldson Pinto – Human Resources General Manager Francisco Dutra – Management Risk General Manager Gerson Oliveira – GAMA’s President Madelon Piana – Corporate Communications Manager Sandrely A. Lopes – Environmental Protection Analyst Sebastião Machado – Sailor – Salvamar Creator Vitor Feitosa – Health, Safety and Environmental Protection Initiatives Coordinator

EXTERNAL STAKEHOLDERS Giovana Kill – Environmental Municipal Secretary

MEETINGS WITH

Perocão Fisherman Group Anchieta Fishermen Group Muquiçaba Fishermen Group

Case Study | Kikkoman Corporation 53

Environmental Preservation and other efforts of Kikkoman Corporation

TAKAO INUKAI AND TORU UMEDA

REITAKU UNIVERSITY19

Introduction

IN OCTOBER 1917, eight brewery houses run by the Mogi, Takanashi and Horikiri families consolidated into one company, Noda Shoyu Co., Ltd. The resulting company was renamed Kikkoman Shoyu Co., Ltd. in 1964. In 1980, it adopted the name Kikkoman Corporation. The business of Kikkoman Corporation, hereafter referred to as Kikkoman, and 61 group companies worldwide [48 subsidiaries and 13 affiliates] involves the production and wholesale of soy sauce, soy sauce derivative products, tomato ketchup, vegetable and fruit juice, canned provisions, and alcoholic beverages. In Japan, Kikkoman has three manufacturing sites of soy sauce at Noda, Takasago and Chitose cities, one research headquarters, and eight

19Takao Inukai wrote the first draft, which was reviewed and rewritten by Toru Umeda. The second draft was read and commented on by Kikkoman's staff members. The third draft was reviewed by Prof. Gerhold K. Becker, Hong Kong Baptist University. For this case study, the case authors interviewed Mr. Kazuo Shimizu, Manager at the Office of the President, and Dr. Ayumu Nagahara, Director of the Environment Department, on August 26, 2002 at Kikkoman’s Tokyo headquarters. Peer review of this case study was provided by Gerhold K. Becker of the Hong Kong Baptist University, Centre for Applied Ethics. 54 The Global Compact Learning Forum | Experiences in Management for Sustainability

branch offices. Kikkoman has the largest share of the soy sauce market in Japan: 28%. Kikkoman's soy sauce is currently marketed in more than one hundred countries. Kikkoman started direct investment in the United States in 1957. It has since expanded business in the U.S. market. Kikkoman's share in the home-use soy sauce market in the U.S. now accounts for approximately 56%. As of April 2002, Kikkoman has sales companies in the U.S., the United Kingdom, France, Germany, Canada, Australia, Mexico, China, and Singapore. It also has six overseas manufacturing plants in the U.S. (Wisconsin and California), Singapore, Taiwan, the Netherlands, and Jiangsu Province in China. At these overseas plants, local raw materials, local packaging materials, and the local labour force are used to produce soy sauce for the local markets. In fiscal year 2001, Kikkoman's net sales revenue was 336,887 million yen; its operating income was 14,942 million yen; and its net income was 5,363 million yen, all on a consolidated basis. As of the end of March 2002, Kikkoman's capital amounts to 11,599 million yen and the number of employees totals 2,476 on a stand-alone basis and 6,240 on a consolidated basis. Mr. Yuzaburo Mogi has served as President and CEO since February 1995.

Kikkoman and the UN Global Compact

Background of its Participation in the UN Global Compact Kikkoman became the Kikkoman participated in the UN Global Compact in January 2001. first Japanese company Kikkoman became the first Japanese company to officially support the ini- to officially support the tiative. President Mogi’s personal relationships played an important role Global Compact. in the lead-up to this involvement. In autumn of 2000, Mr. Yukio Sato, Japanese ambassador to the United Nations, suggested to President Mogi that his company support the Global Compact initiative. At around the same time, Dr. John Ruggie, former Dean of Columbia University's School of International and Public Affairs and then chief advisor for strategic planning to UN Secretary-General Kofi Annan, had strongly recommended to President Mogi that he participate in the initiative. President Mogi and Dr. Ruggie were acquainted, since Mr. Mogi was the Case Study | Kikkoman Corporation 55

first Japanese citizen to receive an MBA from Columbia University, and has served as trustee since 1994 and trustee emeritus since 2000. When President Mogi later happened to attend a lecture on the Global Compact by staff of the UN Information Center in Tokyo, he began to see how well the concept of Global Compact matched the management philosophy of Kikkoman. He also knew that there were no legal problems preventing the company from participating in the Compact. The president made a decision by himself to support the initiative and sent a letter of consent to Secretary-General Kofi Annan in January 2001. Since Mr. Mogi became Kikkoman's president in 1995, one of the com- A line of the company’s pany's management philosophies has been to “endeavour to become a Action Guidelines for its company whose existence is meaningful to the global society.” A line of employees counsels them to the company’s Action Guidelines for its employees counsels them to “act with a consciousness of being a 'global citizen'.” Participation in the UN “act with a consciousness of Global Compact was, therefore, an ideal opportunity for Kikkoman to being a 'global citizen'.” show itself as a global company in the real sense. When the company declared its support for the initiative, the president had no idea of whether any other Japanese company had already joined the Global Compact. Mr. Mogi later confessed that he had never imagined that his company would become the first Japanese company ever to join the UN Global Compact.

Office responsible for Global Compact matters Since Kikkoman’s participation in the Global Compact was decided in a top-down way by President Mogi, the president may be considered as a prime driver promoting the corporate scheme for the initiative within the Kikkoman Group. The Office of the President, comprising five members, has so far been responsible for looking after wide-ranging issues involving the Global Compact, and there is no other office or division specializing in Global Compact matters in Kikkoman. While it is true to say that the Office of the President has the advantage of being able to respond swiftly to issues concerning human rights, labour and the environment, which sometimes require cross-sectional coordination among International Operations, Personnel, and Environment Departments, with the company’s priority being the three environment-related Global Compact principles, the Environment Department also has a significant role in Global Compact matters. 56 The Global Compact Learning Forum | Experiences in Management for Sustainability

Impacts of Participation in the Global Compact Kikkoman's announcement to support the Global Compact did not attract much attention among the Japanese business community, let alone among Japanese society in general: media coverage was very limited; the company received a limited number of inquiries and requests for interviews on the topic. In fact, Kikkoman had been the only supporter of the Global Compact in Japan until Ricoh Co., Ltd. joined the supporter group in April 2002, followed by several others. Compared to the limited impact on society, the internal impact of its participation in the Global Compact was more visible. The Kikkoman Group has made efforts to raise awareness of the Global Compact among its employees through the company newsletter and other means since announcing its support of the initiative. Kikkoman Group Annual Environmental Report for 2001, released in July 2001 also covers the topic. President Mogi has often stressed the significance of supporting the initiative in his messages addressed to employees. He said, at an introductory session for the UN Global Compact held at the headquarters of the Japan Business Federation on May 21, 2002: “I try to take every opportunity to talk about the Global Compact to raise employees' consciousness, emphasizing the importance of promoting the UN Global Compact.” Mr. Kazuo Shimizu, Manager at the Office of the President said in an interview with the case authors: “Kikkoman’s participation seems to have provided an opportunity for employees to think of global corporate citizenship and global-mindedness.” Kikkoman also launched corporate governance reforms to tighten up its compliance framework in the wake of its participation in the Global Compact: Corporate Governance Reforms Kikkoman, in its desire to become a global company, had to invest efforts into corporate governance reforms to streamline decision- making processes and to accelerate the execution of business operations. Since Sony Corporation introduced a corporate officer system in Japan in 1997, an increasing number of Japanese companies are cutting the size of the Board of Directors. According to one source, about 240 Japanese companies had introduced this system by the end of fiscal 2000. The Commercial Law, when revised in 2002, formally adopted the concept of a corporate officer system. Case Study | Kikkoman Corporation 57

Kikkoman introduced the system in March 2001, not long after it joined the Global Compact.

In 2002, Kikkoman also introduced outside directors with a view to enhancing its corporate governance. At the annual general meeting of shareholders held in June 2002, two outside directors and one additional outside corporate auditor were appointed. Kikkoman appears to have transformed its corporate governance structure from a conventional Japanese style into an American style. As of October 2002, the company has 10 directors on the Board, 2 being outside directors. There are 30 corporate officers, 8 of which are also Board members. Kikkoman has 4 corporate auditors, including two outside auditors.

Enhancing Business Ethics and Compliance As a company wishing As a company wishing to be a global company in the global community, Kikkoman recognizes the importance of business ethics and to be a global company compliance systems, and thus recently improved both. In March in the global community, 1995, the company published Action Guidelines for its employees based on its management philosophy. A more carefully tailored Kikkoman recognizes the Code of Conduct was formulated in August 2002. A Business importance of business ethics Ethics Committee was established in October 2002 to assume responsibility for the company and group’s compliance system. and compliance systems.

Kikkoman's Approach to Environmental Issues

As is declared in one of its example submissions on the Global Compact website, Kikkoman places a higher priority on its efforts to solve environmental problems than on its efforts in other areas of the Global Compact, namely, human rights and labour. Since its foundation, Kikkoman has always been sensitive to the environment in its business practices. Soy sauce, one of Kikkoman’s main products, is an extremely pure and natural product made from fermented soybean protein. Soy sauce is a product of Japanese traditional biotechnology mixed with the controlled use of micro-organic agents. It is imperative that Kikkoman keep its factory's environment spotlessly clean. 58 The Global Compact Learning Forum | Experiences in Management for Sustainability

Sections in Charge of Environmental Preservation The General Environment Kikkoman's commitment to addressing environmental problems started in Preservation Committee’s the 1970s. Following the enactment of a series of laws countering environ- mandate includes mental pollution and destruction, Kikkoman established the Environment 1. examining and Preservation Division as an independent division in 1972. After the Rio approving the Group's de Janeiro Summit in 1992, the company’s enthusiasm for environment environmental policies; preservation was rekindled with the establishment of a General 2. confirming findings Environment Protection Committee (the current General Environment of environmental Preservation Committee) as the highest decision-making body promoting auditing; the Kikkoman Group’s pro-environment activities. An Environmental 3. reviewing its Charter was formulated and promulgated later in the same year. Environmental Kikkoman’s Environment Department functions as the Committee’s secre- Management System. tariat. The president of Kikkoman has previously chaired the Committee. There are two sub-commit- In March 1993, the General Environment Preservation Committee tees under the Committee. drew up a voluntary plan titled “Action Program on the Environment,” One is a panel dealing which has been reviewed and revised annually since then. In order to raise employees' awareness of environmental issues, an Environmental with issues concerning pro- Charter comprising an Environmental Motto and a set of Guidelines for motion of resource/energy Activities was formulated in 1992. The Environmental Motto states: savings in manufacturing “Kikkoman will respect the working of nature, and contribute to the real- and technology sectors, ization of a society comfortable to live in through our corporate activities keeping harmony with the environment.” The Guidelines for environmental environmental assessments, activities appear in sidebar below. promotion of waste reduc- Internal environmental audits have been conducted since 1995 by the tion and its proper dispos- Environment Preservation Division, currently the Environment al. The other is a panel for Department, based on the scheme of ISO 14001. The audits covered 14 issues concerning promo- operations centring on the company’s manufacturing sector and R&D divisions. Since October 1997, the coverage of the internal environmen- tion of resource/energy sav- tal audits has extended to subsidiary and affiliate companies at home and ings in sales and indirect abroad. ISO 14001 non-certified plants have internal environmental sectors, reduction of waste, audits, including document reviews and on-site inspections, conducted on and promotion of a green a yearly basis to determine whether the internal control system works. For procurement campaign. ISO 14001 certified plants, a member of staff from the Environment Department of Kikkoman usually accompanies inspectors of the ISO cer- tifying agency. Case Study | Kikkoman Corporation 59

Kikkoman's Actions for Environmental Preservation Guidelines for Activities The General Environment Preservation Committee of Kikkoman decided, in February 2001, (1) to promote energy saving efforts including the We act vigorously and reduction of greenhouse gases; (2) to increase rates of recycling waste; and (3) to build up an environmental management system. Kikkoman has strenuously to maintain taken various measures to achieve these goals. The details and results of harmony with the these measures are disclosed in the Annual Environmental Report. environment.

Reduction of Greenhouse Gases 1. Each of us will try to Kikkoman aims to reduce the total carbon-dioxide emission of remain in harmony with operations in the Kikkoman Group, especially in its major domes- the environment in tic manufacturing plants, to 92% of the 1990 level by 2010, there- performing one’s own by going beyond the legal requirement which the Japanese govern- duty in all sectors of ment agreed to in the Kyoto Protocol. When Kikkoman's Takasago development, procure- Plant in Hyogo Prefecture completed the renovation of its facilities ment, production, sales for processing raw materials in December 2001, a co-generation and support. system was introduced. The system enables the plant, equipped 2. In addition to observing with an electric power generator using natural gas, to harness waste laws, we will formulate heat, which is the by-product of power generation, as a source of and observe our own energy for other purposes. Thanks to this system, it is estimated rules and regulations. that the Takasago Plant will be able to curtail 12% of heavy oil use, 21% of carbon-dioxide emissions and 46% of electricity con- 3. As members of society, sumption. we will participate actively in environmental preservation activi- Enhancement of Recycling Rates of Waste ties in our local commu- Kikkoman has set a target to increase, by 2005, the rates of recy- nities. cling waste to 99% in the production sector and 95% in other sectors of the Kikkoman Group centring on major domestic manufac- 4. We will study the turing companies. The following 4Rs are its policy priority: (1) environment and Refuse: Do not use or make what is not necessary; (2) Reduce: deepen our understand- Save energy and raw materials and reduce waste; (3) Reuse: Use ing about it. bottles and other reusable things again; (4) Recycle: Reuse materi- 5. We will think and act als in different ways. from a global point of view.

Building up the Environmental Management System Kikkoman has encouraged its manufacturing sites to obtain ISO 14001 certifications. In 1997, the Noda Plant, Kikkoman's major manufacturing site, became the second Japanese food making plant to obtain this certification, following Kirin Brewery Company. Since then, the following Kikkoman plants and subsidiaries have 60 The Global Compact Learning Forum | Experiences in Management for Sustainability

obtained ISO 14001 certifications: the Takasago Factory in 1998; the Chitose Factory and the Fukushima Factory of Nippon Del Monte in 1999; the Ojima Distilling Plant, the Gunma Plant of Nippon Del Monte and Manns Wine Company in 2000; the Tone Coca-Cola Bottling Company, the Nagano Factory of Nippon Del Monte and the Nakanodai Area of Kikkoman's Noda Plant in 2001. The following overseas plants obtained ISO 14001 certification during 2002: the Wisconsin Plant in June; the Netherlands Plant in August; and the Singapore Plant in October.

Release of an Annual Environmental Report Kikkoman has produced an Annual Environmental Report since 1998. Kikkoman's way of releasing the Report is unique. To save Unique recycled paper made paper and ink, Kikkoman recently stopped having its environmental report printed for circulation. Instead, the Report has been out of soy sauce cake made public on its Web site. The Report is also available in the is a certified product form of a business-card-size CD-ROM. If some printed copies should be required, only that specific number of copies is to be with “tree-free label.” printed on a unique recycled paper made out of soy sauce cake, a waste generated in the process of producing soy sauce. This recycled paper, which was invented jointly by Kikkoman and Hokuetsu Papermaking Company, is a certified product with “tree-free label,” proving that it is not made out of wood.

The Annual Environmental Report 2000 newly incorporates an environmental accounting report giving a quantitative evaluation of the outcomes of Kikkoman's environmental investment and expenditure. An independent third-party review by a private research agency was another addition made to the Report 2000 to guarantee the objectivity of its environmental accounting. With the Annual Environmental Report 2001, the coverage of environmental accounting was extended to include major related manufacturing companies in the Kikkoman Group on top of Kikkoman’s own.

Recognition for Kikkoman's Environmental Activities Kikkoman's environmental preservation activities have been recognized at home and abroad. For example, Kikkoman received the Environmental and Resource Cooperation Award from The Japan Food Journal in 1998 for its continuing efforts toward environmental protection through creat- Case Study | Kikkoman Corporation 61

ing an environmental management system and reducing the environmental load of its operations. Kikkoman also received the 23rd Excellent Food Industry Companies Award 2001 from Japan’s Ministry of Agriculture, Forestry, and Fisheries in the recycling/environmental preservation category. Abroad, Kikkoman was given recognition in September 2001 by the Environmental Protection Agency of the State of California for its efforts toward waste reduction at its California Plant.

Kikkoman's Approach to Human Rights and Labour Conditions

Though Kikkoman’s efforts in the human rights and labour fields may appear to be dwarfed compared to its environmental activities, the company has also paid attention to these issues. The company foresees no major risks in the fields of human rights and labour. As President Mogi said at an introductory session for the UN Global Compact held at the headquarters of the Japan Business Federation on May 21, 2002: “Our companies operate mainly in advanced countries. There seems to be little chance that we will face serious challenges involving human rights and labour conditions in our business operations.” The Kikkoman staff interviewed told the case authors that Kikkoman has never encountered business situations involving forced labour or child labour and that there is no danger of such forms of labour since most of the production processes are automated. According to the same staff, Kikkoman maintains a non-discrimination policy in accordance with local laws and regulations so that it “seldom” sees such practices in the workplace, in employment and promotion, either at home or abroad, and the company is keen on promoting and employing racial minorities and handicapped people. The Eighty-Year Chronicle of Kikkoman Corp., published in October 2000, which outlines the history of Kikkoman, documents that the company has long fostered a philosophy of valuing the individual and has respected human rights and labour elements in its business operations. More con- cretely, Kikkoman's concept of “Spirit of Industry,” its improved labour welfare, its “consumer-oriented” policy and its strict quality control system provide clear evidence of Kikkoman's human-based philosophy in its business operations. Let us look at each of these in turn: 62 The Global Compact Learning Forum | Experiences in Management for Sustainability

The concept of “Spirit of Spirit of Industry In Kikkoman, the concept of “Spirit of Industry,” inherited from an earli- Industry” is held as a er time, is still held as a management philosophy to the present day. Noda management philosophy. Shoyu Co. Ltd., the predecessor of Kikkoman, faced a labour strike in 1927, which lasted for 218 days. The then-President, Shichiroemon Mogi, The concept represents the founder of Kikkoman, attributed the prolonged strike to the loss of the family-like cooperative spirit in the company owing to the moderniza- a united devotion of labour tion of manufacturing systems. To recover such a spirit, the founder pro- and management to the pub- posed the Spirit of Industry as a management philosophy for his company. lic welfare, based on “mutual Kikkoman has maintained a relatively good relationship between labour and management since the settlement of the massive strike, thanks respect and trust as humans,” in large measure to this concept. Another base of this stability may be with both parties working Kikkoman’s policy of job security. The company has maintained a policy together with “the spirit of of not dismissing any employee even when under pressure to curtail the committing themselves to work force and streamline operations in the tough times of economic recession. Rather, it has tried to reduce the number of workers by encour- the public good.” aging early retirements or by cutting down on new recruits. A labour-management relationship based upon “the spirit of mutual trust” of labour and management may seem to be unique, especially to the eyes of Westerners. This aspect should not be disregarded or overlooked with regard to the Global Compact’s principles of labour conditions.

Labour Welfare Improvement It has been noted that Kikkoman had improved labour conditions well in advance of the labour policies of the Japanese government. The following are some examples. When the Health Insurance Act was enacted in 1926 in Japan, Kikkoman established a health insurance cooperative for its employees. It was only the second Japanese company to establish such a scheme. The Japanese government revised the Labour Standards Act to curtail the average weekly hours of labour from 48 to 40 in 1977. Kikkoman had already started reducing the working hours as early as 1962, and the policy of the 40-hour week had been implemented since 1971. The Child Care Leave Law was enacted in 1992 to promote measures to support working mothers. Kikkoman had introduced its own child care leave system in December 1981 where maternity leave of 6 to 12 months Case Study | Kikkoman Corporation 63

after childbirth was made available – currently, maternity leave of up to In 1998, Kikkoman’s labour 18 months is permitted. Kikkoman's system looked so advanced in those and management signed the days that a newspaper report described the company as a “considerate Declaration of company for its workers.” The Child Care and Family Care Leave Law was enacted in 1995 as an Determinations by Labour amendment to the Child Care Leave Law. The revised law provides a and Management for the leave of absence for taking care of a family member. Kikkoman had intro- New Age. This Declaration duced a family care leave system in 1978, under which an employee can is a sign of the firm determi- take a maximum of 18 months leave of absence in order to take care of a nation of both labour and family member. management to achieve continued success in the Consumer-Oriented Stance and Quality Control A policy of being consumer-oriented is a fundamental management phi- 21st century. Labour and losophy of Kikkoman. The policy denotes a priority given to matters con- management explicitly cerning its consumers, including swift and careful responses to any claims declared that, on the basis as well as the supply of safe foodstuff to consumers. The company, sensi- of “the spirit of mutual tive to the safety of its products, has made great efforts to establish and trust,” “the principle of enhance a comprehensive quality control system. equality of labour and man- The Kikkoman Group learned lessons from a wine-poisoning incident agement,” “the mutual in 1985 involving a subsidiary company of Kikkoman. The subsidiary company unknowingly marketed imported wine containing diethylene respect of each other's glycol after blending it with its own wine. When the poisoning incident rights” and “the fulfilment was revealed in the national media, it became a social problem, and the of mutual duties,” they will blame was attributed to the parent company, Kikkoman. As a result, some cooperate to make the com- top executives of Kikkoman were forced to resign, taking responsibility pany and its employees for the incident. Following this bitter experience, the Kikkoman Group prosperous. The Declaration decided to set up a Quality Control Office, currently designated the also states that labour and Quality Control Department, and launched an inspection system for quality control to ensure the quality of the processes and products in all stages management will “cooperate ranging from production to marketing. to help the company and Other businesses later followed the Kikkoman Group’s quality control labour become entities systems when they faced the need to establish such systems in response to whose values are truly the enhanced liability of producers under the Product Liability Law appreciated by the global enacted in July 1995. society.” 64 The Global Compact Learning Forum | Experiences in Management for Sustainability

Unsolved Questions

There seems to be three unsolved questions Kikkoman is expected to answer in further promoting its schemes for the Global Compact. The first is the matter of its stance regarding disclosure of information on its efforts to address issues concerning human rights and labour standards. Since the Kikkoman Group has good records in these fields, it could contribute to the global initiative by providing more input as a company representing the non-Western world. The second involves the establishment of a structure or framework inside the company or the Group. If Kikkoman is ready to further promote the Global Compact initiative, it will need to set up an office which deals specifically with the Global Compact, rather than the Office of the President which is currently looking after this as well as its routine work. During an interview conducted for this case study, Dr. Ayumu Nagahara, Director of the Environment Department, commented that the interview provided a valuable opportunity since he had seldom had such a face-to- face meeting specifically to discuss the topic of the Global Compact with staff of other departments or offices. He stressed that the interview itself constituted a precious learning process. The third is a language barrier that the company will hopefully overcome if it wishes to be an active participant in the Global Compact Learning Forum. This may be recognized as a problem not only by Kikkoman but also by other Japanese companies who are planning to participate in the forum in future. Translation of letters and documents from and to the UN Global Compact Office is a time-consuming work. In order to encourage more Japanese companies to participate in the Global Compact, it is necessary for the United Nations Global Compact Office, or any UN body, to make efforts to overcome the language barrier and establish an easier communication system for companies from non- English speaking countries. Case Study | Eskom 65

Eskom and the Flexible Hot Water Load Management Control System

M. MOSHOESHOE AND D. SONNENBERG AFRICAN INSTITUTE OF CORPORATE CITIZENSHIP20

AS A SIGNATORY TO THE United Nations Global Compact, Eskom has undertaken to integrate the 9 Global Compact principles into their operations. To showcase this integration, Eskom has opted to use its Flexicon – Flexible Hot Water Load Management Control – system as testimony to the company’s incorporation of principles 8 and 9 of the Global Compact, which relate to environmental responsibility and environmentally sound technologies. The Flexicon system forms part of Eskom’s Demand Side Management (DSM) programme, an initiative coordinated by the DSM Department at Eskom’s headquarters in Johannesburg. The main objective of the DSM Department is to find ways of reducing the demand for power during peak periods of electricity consumption. Flexicon is an ingenious way for Eskom to reduce geyser energy consumption during peak periods. With the consent of participating households, who also benefit, Eskom is able to show energy savings during these periods. These savings have numerous benefits that are outlined later in this case study.

20 Peer review of this case study was provided by Dr. Anton Ferreira of the University of South Africa. 66 The Global Compact Learning Forum | Experiences in Management for Sustainability

The compilation of this case study was facilitated by a series of interviews with the relevant personnel at Eskom, namely the responsible environmental advisor and the manager of the Demand Side Management department, who is ultimately responsible for the Flexicon case study. Additional contact with limited external stakeholders took place during the research phase of the case study, as well as collection of anecdotal accounts from Eskom and video footage of stakeholder engagement. Eskom’s environmental policy commits the company to: About Eskom • promote open communication on environ- Over the last century, Eskom21 has established itself as a leading electricity mental issues among supply company, providing over 95% of South Africa’s electricity needs employees and stake- and over 50% of Africa’s. Eskom is owned by the South African govern- holders; ment and is among the top seven utilities in the world in terms of genera- • establish an environ- tion capacity, and among the top nine in terms of sales. Eskom generates, mental management transmits, distributes and sells power to industrial, mining, commercial, system with a view to ensuring continual agricultural and residential customers and redistributors. improvement in appro- In 1999, Eskom embarked on a new strategic trajectory with the aim of priate business activi- becoming the pre-eminent African energy and related services business. ties, including preven- Eskom has set out to leverage its core competencies as products and serv- tion of pollution where ices into new markets, focussing on the African market, but with aspira- economically viable and tions to penetrate other markets, both emerging and developed. This sustainable; diversification strategy is largely implemented through Eskom Enterprises • contribute toward sustainable development (Pty) Ltd., Eskom's vehicle through which non-regulated activities are through the efficient undertaken and which has, over the last two years, created a major busi- production, distribution ness foundation for the development of Africa's energy and telecommuni- and use of energy; and cations infrastructure. • educate, train and moti- Eskom has an environmental management system that supports contin- vate its employees about ual improvement in the ways in which the organisation manages its the environment. impacts on the wider environment. The organisation promotes open communication about environmental issues and aims to educate, train and motivate its employees about environmental matters.

21 www.eskom.co.za Case Study | Eskom 67

Demand Side Management This new strategy implies that: Background • Eskom is proud of being In order to understand the reason behind selecting Flexicon as the major African; focus of this case study, it is important to understand the context within • Eskom functions as a which the programme was initiated. Put simply, the more energy that is global business; used, the more energy needs to be generated. The result is that more • Eskom promotes eco- power stations need to be built. This inevitably results in higher costs for nomic growth in South both consumers and the environment. However, by using energy wisely, Africa and Africa, through active contribu- the consumer helps to contain costs and avoids negative environmental tions to the New impacts that would have arisen with the construction of additional supply Partnership for Africa’s stations. Development Additionally, South Africa’s coal reserves are, of course, not infinite. (NEPAD); The country’s growing population rate and accompanying demands on its • Eskom has ventured energy resources have a severe impact on the country’s natural resources. into energy related products and services; Reducing coal consumption preserves this cheap and valuable resource to • Eskom has formed joint help maintain the country’s energy supply for substantially longer. The venture partnerships to environment also benefits from more efficient use of energy: every kilo- augment skills and open watt-hour of electricity saved means one less kilogram of carbon dioxide up new markets; and generated by a power station and released into the atmosphere. • Eskom will be chosen as a preferred developmen- Details tal partner. Eskom established the Demand Side Management (DSM) department to Implementation of this new deal with a range of issues, all geared towards reducing peak electricity paradigm rests on four key consumption. When a utility or local authority supplying electricity influ- strategies, namely: ences the way it is used by customers, this activity is known as Demand • Advancing Eskom’s role Side Management. DSM consists of two focus areas: the commercial sec- as the leading electricity tor and the industrial sector. For the case study under review, the main supplier in Africa; focus is on the commercial sector and, within that, the emphasis is given • Expanding Eskom’s busi- to households as customers rather than companies. ness aspirations through energy and related serv- The term “Demand Side Management” was first used in the United ices; States in the early 1980s to describe planning and implementation of util- • Expanding Eskom’s busi- ity activities designed to influence the time, pattern and/or amount of ness reach through e- electricity demand in ways that would increase customer satisfaction, and business; simultaneously produce desired changes in the utility's load-shape. 22 • Partnering South Africa into Africa. 22 The graphic that illustrates how much and when electricity is consumed. 68 The Global Compact Learning Forum | Experiences in Management for Sustainability

South Africa’s growing DSM is an alternative to power system expansion and is also a tangible population places significant means of providing customers with a valuable service. DSM initiatives have also been adopted in the United Kingdom, Europe, Australia and demands on its energy elsewhere. resources that in turn have a DSM is still a relatively new concept in South Africa. The South severe impact on the African government, in the White Paper on Energy Policy, recognises the importance of energy efficiency, and commits itself to promoting the effi- country's natural resources. cient use of energy in all demand sectors. It also commits itself to investi- gating the establishment of ‘appropriate institutional infrastructure and capacity for the implementation of energy efficiency strategies’. Although By using energy wisely, Eskom formally recognised DSM as far back as 1992, the first DSM plan was only produced in 1994. In this plan, the role of DSM was established South African consumers can and a wide range of DSM opportunities and alternatives available to help to contain costs and Eskom were identified. Although some municipalities and local service reduce environmental impacts providers have power systems (ripple control) that could be classified as DSM type interventions, these do not have the added benefit of produc- by obviating the need ing customer satisfaction. to construct additional South Africa’s growing population places significant demands on its power stations and energy resources that in turn have a severe impact on the country's natu- by utilising energy ral resources. Now more people have access to electricity and most residential houses utilise electricity at peak times. This places a strain on more efficiently. Eskom's resources requiring the company to generate more energy. As a This reduces the amount result, additional power stations are required and consumers are having to of water23 required bear the financial costs while the environment bears the hidden costs. The benefits of DSM are: to generate power, • A DSM programme can be implemented within 12 months while it the amount of emissions can take up to 10 years to build a new power station; released into the air, • It is far more cost-effective to implement a Demand Side Management programme than to build a new power station; and so on. • The customer benefits financially due to lower electricity consumption and reduced costs; • Without demand-side management, South Africa’s electricity demand could double over the next 20 years, requiring extra generation capacity. This will result in significant electricity price increases;

23 Water is used for two purposes in electricity generation – driving turbines to generate power and for cooling. Case Study | Eskom 69

• Customers can be better served by having a choice of options that enhance the benefits received from electricity while maintaining the same or lower costs; • Commercial entities benefit through savings on monthly electricity accounts, while electricity supply companies benefit by implementing and maintaining the project, as well as through shared savings; • The environment benefits from efficient use of energy. For example, every kilowatt-hour of electricity saved means one less kilogram of carbon dioxide generated by the power station and released into the atmosphere, as well as preservation of significant volumes of scarce water resources for other uses. This is in line with the South African government's White Paper on Energy Policy (1998), which places a high premium on the environment, affordable energy to all, and energy efficiency.

Tableview Case Study

Background The workings of the Flexicon system are illustrated by the following example from Tableview residential area near Cape Town. Conventional hot water load24 management systems have traditionally focused on effectively managing load during peak periods with little or no regard for customer comfort or centralised scheduling. The objective of the Tableview project was to maximise the amount of shiftable load25 during the peak periods, while ensuring that customers seldom or never experience the unpleasant fate of a cold shower or bath. One of the underlying principles of the Flexicon system is that of individual choice, particularly in how their geyser is controlled. This is made possible by the individual addressability of each load switch with this particular system via a radio signal.

Implementation The decision was taken to implement this large-scale pilot project in the Tableview area, near Cape Town, Western Province, due to sustained,

24 The amount of power used at a particular time during the day. 25 How much power can be saved during peak times and redistributed, or shifted, to off peak periods. 70 The Global Compact Learning Forum | Experiences in Management for Sustainability

unprecedented and continuing demand for electricity. Substantial network upgrades in the form of cables and transformers were planned for the Tableview area with implementation due to start in 1999. Information obtained indicated that there were approximately 9000 households in the area with an average of 1.25 geysers per household. One of the major benefits of implementing a load management system in the area was that most of the planned network upgrades could be deferred by a few years. Additionally, the Tableview DSM pilot served as a yardstick for the rollout of a national DSM initiative. Load shifting from the morning and evening peaks to off-peak periods would improve the load factor and reduce the magnitude of the demand peaks. The end result: more efficient utilisation of the existing electricity reticulation infrastructure. At the outset, it was hoped that the 1998 winter evening peak of 33 MW26 would be reduced by 10MW, to around 23MW, almost a 30% reduction. Implementation of the Tableview load management system commenced during the latter half of 1998 and continued through 1999. The system involved the installation of 9800 geyser load switches, as well as a number of other infrastructure requirements. Once the 9800 load switches were installed in the Tableview area, a series of tests was then run. The information gleaned from the testing was used to determine the amount of load that could be shifted from peak to off-peak periods and the amount of demand reduction achievable. Test results showed that the morning water heating peak occurred at 07h30 and was 8.2 MW in magnitude, while evening water heating peaked at 21h00 and was 6.4 MW in magnitude. This translates to a diversified fig- ure of 1.02 kW27 per geyser in the morning and 0.8 kW in the evening. This represents the maximum amount of load that can be removed from the load profile at each time interval. Since the testing of the load management system in Tableview there has been a tremendous amount of growth in electricity demand. During the 2001 winter, tests were conducted using the load management system with the existing 9000-odd relays installed to determine the amount of manageable load. The Tableview area has expanded to such an extent that in excess of 6000 new households have been built in the area since

26 Megawatt. 27 Kilowatt. Case Study | Eskom 71

the initial installations were completed. The acquisition of this new por- Benefits tion of the water-heating load will take place when the Tableview load The introduction of the management system expansion of 6000 relays takes place in the latter part Flexicon system in of 2001, to be completed within the first quarter of 2002. Tableview has had many

Features positive spin-offs for the The benefits to distribution of this manageable load will be the capacity customer and for Eskom. to optimise their bulk purchase costs for the region while deferring net- Customer benefits include: work (specifically cable) upgrades for a number of years depending upon • lower than expected the continued rate of growth in the area. annual increases in elec- The main feature of the hot water load control system is its flexibility. tricity prices; One of the underlying principles of the system is that of individual cus- • a better quality of sup- tomer choice, particularly in how the geyser is controlled. The load man- ply (less power interrup- tions) due to less stress agement system implemented allows each geyser relay to be addressed indi- on the local reticulation vidually. This means that it is possible to customise the manner in which network; each customer’s geyser is controlled to cater for the household’s lifestyle. • management of geyser Initially, a number of preset control algorithms, or geyser control load out of peak periods; options, were established. These permitted Eskom a greater or lesser and degree of control of the customer’s geyser. During the commissioning of • a reduction in loss of the project, households were allocated a control option based on a short power from geysers by questionnaire filled in during installation of the load switch. The infor- way of an “efficiency” mation recorded at the time of installation included the geyser tempera- switching algorithm ture, element size, number of people in the household and times at which that keeps the geyser off during the evening and baths or showers are taken. midday periods to vary- The customer is given the choice of changing from their default algo- ing degrees per customer rithm to one of a higher or lesser degree of control by contacting a 24-hr request. phone-in centre. Eskom’s benefits include: • Improvement in the Case Study Analysis national electricity sup- The purpose of this section is to determine, from a Global Compact per- ply load factor; spective, how successfully DSM and Flexicon have been integrated into • Conservation of natural Eskom. This will be assessed using the Global Compact Performance resources; and Model and with reference to the two applicable Global Compact princi- • Lower pollution levels ples. These principles ask business to: while still providing the • Principle 8: undertake initiatives to promote greater environmental same quality of service responsibility; and to the customer. 72 The Global Compact Learning Forum | Experiences in Management for Sustainability

• Principle 9: encourage the development and diffusion of environmentally friendly technologies. The energy sector is an important player in the South African economy, contributing 15% per annum to the Gross Domestic Product (GDP) The Global Compact and employing over 250 000 people. Electricity is a key factor in South Africa's prospects for economic growth, the development of communities' Performance Model is com- capabilities and the improvement of the quality of life of all South prised of ten elements, list- Africans. To this end, Eskom developed the DSM programme to plan and ed below with a selected implement activities designed to influence the time, pattern and amount comment: of electricity usage and reduce the consumption of electricity during peak times. This goal has been achieved through deliberate interventions, such • Vision – a shared ambi- as in Tableview, in the form of electricity efficiency and load management tion to achieve a highly programmes, in the residential, commercial and industrial sectors. Eskom’s desirable future; recognition that social and economic development is enhanced with the • Leadership – driving the supply of cheap and efficient electricity led them to introduce the DSM vision through the programme in the early nineties. The fact that DSM actually reduces the organisation; amount of energy consumed can be explained as follows: Eskom’s DSM • Empowerment – releas- incentives allow the end user to benefit from the supply of cheap power ing the full potential of while simultaneously facilitating the redistribution of power to other key people in line with the sectors for their use in activities which are central to the country’s economy. vision; To realise DSM meant that Eskom had to form a department with the • Resources – managing necessary skills to implement the energy savings. DSM is an important the means to implement component of Eskom with its own complement of staff. They explore the strategy and empow- numerous avenues for energy savings and also fulfill an educational role er employees; by explaining to customers the benefits of demand side management initiatives and various other energy saving measures. The latter include the • Policies & strategy – many innovations that Eskom has either developed or endorsed, such as where an organisation energy saving light bulbs, geyser blankets and water pipe insulation. All spells out its culture and these measures, be they small but effective innovations or large scale specific ambitions; efforts such as Flexicon, have broader impacts on society and people. Case Study | Eskom 73

End Comments

It is Eskom's goal to achieve the following objectives through its DSM programme: • To add value to Eskom's bottom line by initiating DSM pro- • Processes & innovation grammes that comply with sound business principles; – thrives in organisa- • To concentrate on DSM programmes that provide win-win situations for the customer and for Eskom; tions that foster systems thinking; • To create the opportunity for Eskom to improve supply-side planning, which results in lowered risks in implementing supply-side • Impact on people – solutions; commitment to princi- • To achieve market transformation and ensure DSM sustainability. ples beyond profit This should ensure that the market does not regress to lower levels impacts positively on of efficiency after active participation of the utility has ceased; people; • To reduce the maximum demand by changing the configuration or magnitude of the load shape. Eskom will thus be able to accommo- • Impact on the value date the system demand growth using existing capacity. This flexi- chain – cooperation and bility means that, in the event of market transformation or market transaction provides deregulation, Eskom will be competitive in the market and remain added value; one of the cheapest energy suppliers in the world, thus creating value for customers. • Impact on society – the perception of company Eskom has an environmental management system that supports contin- performance by society; ual improvement in the ways in which the organisation manages its impacts on the wider environment. The organisation promotes open com- • Reporting – progress munication about environmental issues and aims to educate, train and against objectives adds a motivate its employees about environmental matters. The company’s social and environmen- environmental objectives fit nicely with the environmental savings that tal ledger to financial DSM affords. results. With electricity consumption growth in the residential sector expected to be over 15% p.a. over the next ten years, the implications for Eskom as a supplier are profound. New plants would need to be constructed to meet this new load type i.e. generation plant capable of running for relatively short periods during the day and only for a few months of the year. The capacity utilisation of this new plant would thus be extremely low compared with the currently installed capacity. 74 The Global Compact Learning Forum | Experiences in Management for Sustainability

In considering the cost implications of new generation capacity provision to the country and its electricity consumers, DSM becomes an extremely attractive alternative. Although South Africa currently has sur- plus generation capacity, the lead times for new plant construction are lengthy (up to 10 years). If DSM can be used to limit residential demand growth or mitigate the impacts through the provision of incentives for industrial, commercial and residential users to move load out of the peak periods, substantial benefits for all customer groups could be derived. Inevitably, high price increases would be avoided through the deferment and probable avoid- ance of the construction of new generation facilities. The potential therefore exists to substantially defer any supply side generation construction decision through DSM until well into the next millennium. With the expansion of DSM, construction of certain new plants could well be avoided.

Contacts

• Eskom Manager Demand Side Management – Albert Africa • Eskom Senior Environmental Advisor – Peter Nelson • Eskom Manager Corporate Environmental Affairs – Vanida Govender • Case Study Author – Dan Sonnenberg, African Institute of Corporate Citizenship Case Study | Eskom 75

Via a DSM, Eskom could, if DSM is fully expanded, see the following results:

• R2,5 billion (1997 rand) savings by customers due to less kilowatt- hours of electricity consumed over the next 20 years; • Reducing peak demand by 4,000 megawatts by the year 2015. This is more than the generation capacity of Eskom’s largest power station, Kendal and means that one less power station, costing in excess of R10 billion, will need to be constructed; • Energy savings of more than 350 gigawatt-hours over 20 years due to increased efficiency. This is more than twice the electricity generated by Eskom in 1995; • 185 million tons of coal not burned over 20 years. This is more than 2.5 times the amount of coal exported by South Africa in 1995; • 490 billion litres of water saved by power stations over 20 years – equivalent to 20% of the Vaal Dam’s28 capacity; and • 118 million tons of greenhouse gases not emitted into the atmosphere – equivalent to 2% of greenhouse gas emissions from the burning of fossil fuels in 1990.

28 One of South Africa’s largest water impoundments.