12. Community impact, development

This issue relates to how genuinely the company engages with communities affected by its operations to understand their concerns, co-operate (not top-down) in community development, and evaluate the sustainability of its interventions. In South Africa, this issue also includes Socio-economic development (SED in the dti’s Codes of Good Practice), or Local Economic Development (LED) in the mining industry. This relates to the company’s impact on local communities and even broader society. Positive community relations form part of a high-impact company’s license to operate.

The rapid development of communities surrounding mines and major industrial installations entrenches migrant labour in the local area, compounding both labour and community risks. The cyclical nature of resource industries and the sectors that rely on them, interacts destructively with conditions within the labour-serving communities. Expectations of income growth out of step with the prevailing short-term economic reality, as well as the high expectations from the community for development, may lead to further influx into local towns, increasing pressure on affected industries.

Smaller workforces will require new models for engagement with communities. Current mining CSI programmes, for example, have proved inadequate in encouraging local economic development towards sustainable self-reliance.

13. Internal equity

Internal equity has two components: local ownership and local employment, in particular employment at management and control levels. Companies operating in South Africa (and the rest of Africa) are under more pressure than those operating in Europe and Australasia. More recently, with the rise of populist politics globally, the issue is gaining more prominence. Developed markets, where economies have shifted meaningfully towards services over the last generation, have seen rising inequality on the back of the rise in low-skilled service work and casualisation of labour.

Exposure is influenced by the relative exposure to the SA and other African markets, as well as brand and market exposure.

Local ownership equity
Guidance: Is the organisation’s ownership representative of the communities it impacts on  (Broad-based vs Individual enrichment), and does this group have due voting rights? How proactively is the organisation developing PDI managers at middle, senior and board level?

Red flags: political interest in ownership profile, payment mechanisms that are imbalanced, BEE status without economic transfer of ownership; fronting.

Expected behaviour: transparent timelines to achieving acceptable levels of ownership.

Best practice: equitable deals where returns are in line with contribution /value of input.

Local employment equity
Major concern in South Africa: the under-representation of black employees in senior, middle and junior management levels and the lack of concerted effort made to address this issue while maintaining the level of skills required to fulfil these roles.

Red flags: High turnover of black staff relative to other staff in the organisation; no reporting on black staff turnover.

Guidance: Often discrimination is the result of an inherited culture of recruitment and promotion, as well as the lack of appropriate structures to address and discourage such behaviour. This manifests itself through differences in remuneration, access to opportunities, intolerance, or alienation of individuals or minority groups. Awareness creation, employee training, the use of fair and pro-diversity policies and the establishment of firm structures where such concerns can safely be raised, cases analysed and transgressors prosecuted, all contribute to a more inclusive, diverse and non-discriminatory environment.

14. Industry equity

How proactively is the organisation developing suppliers, contractors and small businesses from previously disadvantaged communities?

Sub-issues:

• Development of local suppliers
• Preferential procurement
• Development of local enterprises
• Localisation of the industry
• Artisanal development & share of industry resources
• Illegal use of industry resources
• development of local downstream industry
• Dues & contributions to government and authorities

Local sourcing and the development of local suppliers
Governments are concerned that retailers use their presence to import and sell goods and services that undercut and eventually destroy local industries and jobs. For the retail sector, this issue refers to economic equity in the supply chain and includes such issues as local sourcing, enterprise and supplier development, as well as the fair treatment of suppliers (e.g. fair trade).

Artisanal and illegal mining
An emerging issue addressed by very few companies in the analysis is that of artisanal and illegal mining. This is but one expression of the frustration shown by local residents in being shut out of the apparent riches being exploited by foreign miners. The mining industry together with government and other stakeholders needs to find ways to include marginalised operators, whether at the informal, low-technology level, or at a higher, more formalised level. The challenges around illegal mining speak to the need to include this area of the market in a more sustainable and legal fashion while combatting organized crime syndicates involved in this enterprise.

From a geographical perspective, platinum miners may seem to be exposed more explicitly to these risks given their exposure to South Africa and Zimbabwe entirely. A combination of higher gold spot prices, the relative ease of gold refining vs platinum refining and the incidence of un-economic mines (eg. those on care and maintenance) within communities suffering relative economic hardship has made gold mining companies particularly exposed to this issue.

Anglogold’s Obuasi operation in Ghana remains on care and maintenance after underground mining was halted there in 2014. The company has conceded that illegal miners now control the richest deposits on the mine and has attempted to resort to international arbitration to resolve the impasse with host state Ghana to resolve the incursion of 200 miners of the site. South African miners are also exposed with the Chamber of Mines estimating the number of illegal miners operating in South Africa to around 14000.

Downstream beneficiation
There is growing realisation that local economic investment in downstream beneficiation of the primary mined product would be a way to develop the local economy rather than sending commodities offshore for others to benefit from adding value.

Example from the platinum industry: The development of fuel cell technology to augment alternative energy systems, as a complement as well as a substitute to catalytic converters as a more streamlined route towards meeting tightening environmental legislation regarding vehicle exhaust emissions.

Dues and contributions to government and authorities
Tax-avoidance is a sub-issue receiving increased scrutiny by national and transnational regulators, or the dues and contributions that should accrue to the government of the geographic market in which the retailer has presence.

Exposures
Companies with a large local procurement spend are under more pressure from the dti’s BEE Codes to promote local enterprise and supplier development. Brand and market exposure can also bring the company under scrutiny.

15. External societal risks

There are five aspects to external societal risks:

• Societal instability – involuntary migration, profound social instability (unemployment), violence, rioting
• Institutional risks – failure of governmental infrastructure (eg utilities), sovereign debt/government liquidity challenges
• Indirect political risks – failure of national governance, interstate conflict, terrorism, state collapse, at minimum resulting in business friction, eg, airport security checks, SIM card registration hurdles. Also money laundering and financing of terrorism
• Government intrusion – Management of government interference, such as censorship and monitoring
• Direct security risks – Crime and threats company infrastructure

Political risks
Political infighting and instability can influence a country’s investor friendliness and even a country’s credit rating. Further deterioration in national governance may push the country towards a more profound state of societal instability and an economic environment which businesses will need to deal with in their strategic decision-making. Companies with more highly geared balance sheets may be more exposed, while companies with higher exposure to foreign markets may benefit from currency translation effects.

Diminished ability of countries to support social safety nets may impact demand for companies operating in lower LSM categories. Hollowing out of the middle class and the emergence of national and global inequality may also impacts on businesses operating in the middle markets levels.

Indirect political risks
Businesses operating in emerging economies take on political, as well as socio-economic challenges faced by the government of the host nation. Operators need to find common ground between the interests of their stakeholders and the intended aims of the regulation. MTN’s poor stewardship of these regulations in its Nigerian market resulted in considerable value destruction for the company through the payment of fines. One consequence is more onerous terms for doing business and retaining licence to operate in the region (e.g. on-boarding and registration of new subscribers and SIM cards).

Customers’ rights need to be balanced against those of various security and enforcement agencies that are legally entitled to request customer information, and to instruct the operator to suspend service in certain circumstances.

Institutional risks
Bureaucratic red tape and corruption are toxic ingredients challenging development of business in Africa, inhibiting business in general and the cross-border movement and trade. A lack of adequate infrastructure, such as roads, rail, harbours and reliable supply of electricity are further inhibitors to growth for retailers looking to expand into Africa.

Government intrusion
Companies also may face local laws or government demands requiring censorship of culturally- or politically-sensitive material (e.g. on websites in the media industry), and these may differ from country to country. This issue has impacts on company profitability and can influence decisions to enter or operate in certain markets. Governments may insist on:

– Monitoring content
– Blocking content from access to citizens
– Filtering or censoring content, or forcing the company to remove content that is considered politically or culturally sensitive. China is particularly draconian in this regard, as well as with a tendency to act abruptly and without obvious warning.

Direct security risks
Companies also need to protect their assets against theft and damage. For example, Telkom has a track record of cable theft and generally lax controls. Collusion by an employee with a confidence trickster also defrauded the company of R500 million, another example of a direct security risk.