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ITC was incorporated in 1910 as Imperial Tobacco Company of India Limited. In 1970 the company changed ownership and became known as India Tobacco Company Limited and finally adopting I.T.C in 1974. The company has its registered office in Kolkata.
ITC has grown from just a cigarettes company to become one of India's largest conglomerates with a turnover of US $ 4.75 billion. It is ranked 3rd in pre-tax earnings among India's private sector corporations and employs well over 20,000 people at more than 60 locations across India.
The leadership of ITC consists of three levels and the current company chairman is Yogesh Chander Deveshwar. ITC uses the 3 tiered interlinked leadership processes to create a balance between the need for focus and executive freedom, and the need for supervision and control.
The 3 tiers of leadership are:
The Board of Directors is at the top and is responsible for strategic supervision of the Company;
Corporate Management Committee, made up of full time Directors and some members from senior management, is responsible for the strategic management of the company;
Divisional Management Committee (DMC) headed by the Chief executive Officer, managed by executive management of each business division. Each DMC is responsible for and totally focused on the management of its assigned business.
ITC's vision "To enhance the wealth generating capability of the enterprise in a globalising environment, delivering superior and sustainable stakeholder value" focuses the company' activity in both creating wealth and looking after its stakeholders. This focus is also linked to its mission: "Sustain ITC's position as one of India's most valuable corporations through world class performance, creating growing value for the Indian economy and the Company's stakeholders"
ITC is very well diversified and is involved in the following brands:
Hotels - ITC Welcomgroup Hotels, Palaces and Resorts
Paperboards & Specialty
Packaging & Printing Business
Packaged Foods & Confectionery
Education & Stationery Products
Outline of Report
This report is about ITC, a company in India, which started off as a tobacco company but grew rapidly through mergers and acquisitions. The report looks at ITC's approach to developing sustainable business operations by examining how the ITC engages and manages its stakeholders, creates and maintenance value, and how ITC builds and leverages from economic, natural, and social capital. The report also focuses on ITC's accountability, reporting systems and its initiatives to address criticisms of its sustainability strategy.
(Add info (mini-summary) on ITC's approach to developing sustainable business operations)
Stakeholder engagement and management requires that companies are truthful, responsible, accountable and altruistic to enable them to build "stakeholder assets" to be used when needed.
(Add info on value creation and maintenance)
(Add info on building and leveraging from economic, natural, and social capital)
(Add info (mini-summary) on ITC's accountability, reporting systems and its initiatives to address criticisms of its sustainability strategy.)
Stakeholder Engagement and Management
Introduction and definitions:
Freeman (1984) defined an organisation's stakeholder as a party that can affect or be affected by the actions of the business as a whole. Simply put a stakeholder is anyone affected by a decision and interested in its outcome. Stakeholders can be primary or secondary. They can assist a business in maintaining the viability of its product and/or service and also shape its approach to business management, production, environmental policy and regulation. Examples of primary stakeholders are employees (including managers), investors, directors, customers, suppliers, unions, government, communities and owners; and secondary stakeholders: activists, media, institutions etc
Engagement and Management
Jones, Felps and Bigley (2007) suggest that an organisation's stakeholder culture is "grounded in ethics and is based on a continuum of concern for others that runs from self-regarding to other-regarding". Communities in which businesses operate are also becoming very aware of the ways in which they can yield their power against companies that do not show concern for others. The way organisations engage and manage their stakeholders ensures that they maximise on the interests of a greater number of their stakeholders. According to the IFC report on stakeholder engagement "Engaging with stakeholders from the start - as part of your core business strategy - enables a proactive cultivation of relationships that can serve as capital during challenging times". This means that stakeholders become an intangible and immeasurable asset of the company. The companies therefore should not be the only motivated to engage stakeholders for their own selfish reasons but must also have the communities' interest at heart.
Manktelow proposes the figure below for stakeholder engagement and management surmising that those stakeholders that show high interest and yield high power need to be managed very closely as compared to those that have low interest and yield minimum power. It is worth noting that it does not take much for stakeholders to move from lower quadrants into high therefore a company has to be very vigilant in the way it relates to its stakeholders over time.
ITC uses certification by various rating bodies to ensure that their stakeholders are aware of their attempts to be a sustainable and better company. They are certified to both local and international rating bodies showing that they are not only a local but a global player too. ITC produces media statements frequently (2-3 times a month) across their brands guarantying that their stakeholders will hear and know about them and also about their efforts on sustainability and corporate responsibility (thereby building their "stakeholder capital"). They have published claims of:
â€¢ Being the only company in India to have achieved carbon positive ad water positive status
â€¢ Its operations have released close to with zero solid waste
â€¢ They were the first company to publicise their company's sustainability report (in 2003-4)
In its campaign "Let's put India First" ITC aptly says "The Company sees no conflict between the twin goals of shareholder value enhancement and societal value creation. The challenge lies in fashioning a corporate strategy that enables realisation of these goals in a mutually reinforcing and synergistic manner."
In its 2009 Sustainability report ITC indentified its stakeholders as: Shareholders, customers, employees, government, farmers, suppliers and the community.
ITC engages some of the stakeholders directly, for example they have set up e-Choupal and Choupal Sagars for the farmers in partnership with government providing evidence of the much publicised and sought public-private partnership. It appears that the relationship ITC has with these stakeholders is fraught with self interest putting ITC in a position of power. The farmers are wholly dependent on ITC for their farm inputs and also for selling their harvest. This compromises the stakeholders' saliency and the stakeholders lose what Mitchell et al (1997) calls 3 determinates of salience "power legitimacy and urgency". ITC's critics also raised the same concerns claiming that ITC's CSR is too much aligned to its business interests and therefore cannot separate wether its business move or corporate citizenship.
ITC promises its shareholders "As trustees of shareholders, we believe it is our responsibility to protect and enhance their wealth. Their primary expectations remain centred on continued profitability and growth, communication and investor servicing". They had very aggressive mergers and acquisitions over a short spate of time 'proving' they had sufficient funding and therefore a financially sound company to invest it. In fact Coopers and Lybrand Auditors revealed that they had given a dividend of 32%.
Not only as ITC grown through mergers and acquisitions it had also added value by transforming the acquired asset into successful "sustainable" brand. ITC partnered with other companies in recycling waste, providing another opportunity for its stakeholders to take note of caring attitude an also ability to form private partnerships.
ITC claims that it attracts, retains, nurtures and develops its employees and creates a good work environment. A survey of some of the employment vacancies indicate that they may not be an equal opportunity employer as some jobs are gender specific and have an age limit.
ITC claims the prime focus of their company strategy to "delight" their customers through improvement in product quality, value added services, on time delivery and cost competitiveness. ITC has a wide variety of brands to offer various market segments.
ITC forms partnerships with business to assist communities. ITC needs to examine its motives for such partnerships so that they do not seem to be seen to be having some influence on the government.
With their backward integration and cutting out the middleman (in e-Choupals) ITC seem to be trying to minimise the number of suppliers and hence their influence. This is also further evidenced by the fact that their vertically integrated wood industry - they grow their own wood to be used for both paper products and matches.
ITC claims it implements social interventions based on a survey of the community "needs". There is not much information to show what CSR ITC does in the communities they are in except for the facilities for the development of women and children.
Value Creation and Maintenance
The business model is a concept only in wide use for about ten years and there is still much disagreement and confusion about what it means. For instance, there are strong differences between commentators from a technology rather than a business background (Osterwalder et al. 2005). In this paper, it is proposed to take Osterwalder et al.'s version (2005:2): that it is a "blueprint of how a company does business. It is the translation of strategic issues, such as strategic positioning and strategic goals into a conceptual model that explicitly states how the business functions." The 'building blocks' of their approach (p. 10) are 4 "pillars" (Product, Customer Interface, Infrastructure Management, and Financial Aspects) with 9 sub categories, and the ITC story is told below under these headings (with explanations).
PRODUCT (Value Proposition)
ITC Ltd started off as a tobacco company in 1910 and went into packaging and printing in 1925 to support their cigarette products, both areas in which it has continued to expand, and extend into ancillary products, such as safety matches in 2001 (ICMR: 2008). It is now an industry conglomerate, moving into hotels in the mid 1970s, then agricultural commodity exports, greeting cards, retail clothing and information technology in 2000, and ready to eat foods, confectionary, wheat flour, and incense sticks in following years. It is not disclosed in the paper or the report what the motivation was behind the expansion into unrelated areas, or whether there is an overarching strategy which integrates such decisions. However, the 2007 Sustainability Report (ITC 2007:28) states that ITC 'posted yet another year of impressive results testifying to the robustness of our corporate strategy of creating multiple drivers of growth.' Despite the use of the word 'trategy', this description sounds more like a business model, as described by Osterwalder et al. above.
CUSTOMER INTERFACE NOT SURE WHAT TO PUT HERE!!
Target Customer Describes the segments of customers a company wants to offer value to.
Distribution Channel Describes the various means of the company to get in touch with its customers.
Relationship Explains the kind of links a company establishes between itself and its different customer segments.
INFRASTRUCTURE MANAGEMENT (Describes the arrangement of activities and resources.)
Much of the backward linkages of the firm's activities are a business connection to the cigarette business (boards, green leaf, filters) as well as areas in which its environmental and social credentials have been promoted (commodities and food), as in the Figure below (Note: FCMG stands for Food, Cigarettes, Matches, Greeting Cards.)
MATERIALS FLOW IN ITC BUSINESSES
(from ITC Sustainability Report 2007:48)
However, the focus of this report is on the environmental and social activities of ITC; in some cases the two are closely linked.
CORE COMPETENCIES (Outlines the competencies necessary to execute the company's business model.)
ITC's energy, water and waste initiatives were claimed by them to have the net outcome of a carbon positive and water positive status. This is noted as contested, but with minimal discussion in the ICMR paper (p. 10) and, with one newspaper reference, it's unclear where the truth lies ie. how much of these activities are 'Greenwash'? Again 'reportedly' (but without citing any report), the paper says that all the units of ITC tried to minimise their environmental impact and conserve natural resources.
Water harvesting was expanded by ITC and it has been 'water positive' continuously from 2003-04, although its fresh water intake has increased. Table 1 (p. 6) shows this as due to the inclusion of "offsets" for treated effluent discharged, rather than used in ITC operations. The equivalence suggested here between externally-sourced fresh water (presumably high standard) and discharged treated effluent (presumably low standard) might be questioned: it would seem preferable from a sustainability perspective to extract less fresh water and enhance its own effluent so water is recycled inside ITC's operations. Some of the units in the conglomerate recycle all (size undisclosed) their treated effluents (p. 5) but does ITC have a program to move further in that direction? Almost all of the RWH (rainwater harvesting) potential created by ITC is outside the company, and it would be useful to know how much of that comes back to ITC as fresh water intake, rather than being available for use by farmers, for drinking water etc.
ITC has expanded its use of internally generated waste as fuel for some of its operations, such as the Bhadrachalam paperboards unit (p. 6), although it is not reported what that fuel was used for previously ie. do the previous buyers now rely on more expensive or polluting fuel sources? The issue illustrated here is the ecology of business: the accounting evaluation of a company's financial performance treats it appropriately as a closed system, but an open approach is required for social and environmental evaluation, so that the externalities of forward and backwards linkages and interdepencies are identified and measured also, to know the effect of the business on its multiple stakeholders.
ITC's carbon-positive status was attained in 2006, which involves the sequestration of CO2 emissions from large-scale agro-forestry programs. The use of the Clean Development Mechanism to promote such financial assets has been questioned, as an exchange of ownership can give sequestration credits, without net increment to society. As India is a member, it would be interesting to know if ITC sold those carbon credits, which reduces the incentive for other carbon emitters to undertake their own afforestation programs. ITC predicted (Rediff India Abroad: 2006) it would sell carbon credits over a two year period worth Rs 700 million (approximately Euros 13.2 million), a substantial benefit.
The SFFI (Social Farm and Forestry Initiative) has taken "wastelands" (a description which might be contested) and planted trees which is claimed to preserve India's forest resource base, biodiversity, soil erosion, ecological balance, and biomass reduction, and also produce carbon offsets. Again, the impact of these activities on local politics, economy and society eg. on tribal people, farmers and fisherpeople, land ownership, access and prices, the water table etc., can be massive and deleterious. An appropriate question would be 'why is it wasteland?' and 'does it have a better social, environmental or economic use?' We're not told, either in the paper or its references about these issues.
Almost all of ITC's solid waste is used in the business as inputs, and some is sold outside, such as dry waste, in a joint initiative with other Indian firms, and made into various products (p. 7). This is a pilot project and little detail about its proven viability is available.
Various awards, some from international bodies, have been received by ITC businesses in paper, building construction, and hotels, for their "greenness" (p. 16). The Indian Centre for Science and Environment has ranked ITC as first in its green rating for the paper and pulp industry (Rediff: 2006). However, while a leader in the Indian context, ITC's claims to be a global leader in this field are questioned by CSE, on the grounds of much higher energy consumption and water efficiency than international firms. (Rediff India Abroad: 2006) CSE also questions the firm's claim of carbon positivity, accusing them of "misrepresenting facts." (Rediff India Abroad: 2006)
No information in the report about the Agribusiness and Information Technology units. Do they have TBL objectives too? What are they doing in cigarettes? Is there a strategy to get out of it or is there too much money to be made? (87% of profit in 2009)
PARTNER NETWORK (Portrays the network of cooperative agreements with other companies necessary to efficiently offer and commercialize value.)
ITC, through its 'e-Choupal' initiative in 2000 provided support services to farmers in water harvesting, crop research, testing and information, as well as merchandising, banking and insurance services. Reportedly (p. 4 but no reference given), one aim was to empower Indian farmers through the internet. In fact this resultd in a "highly cost effective procurement system" for its Agri-Business Divisison (p. 9), though this is also described as a benefit for farmers. A newspaper report in 2006 claimed that 80 percent of the wood harvested from the afforestation programs is bought by ITC for papermaking (Rediff India Abroad: 2006) (how are the interests of buyer and seller traded off: is it reasonable to ask who is the greater beneficiary?)
Water harvesting structures were built to support irrigation, and vocational training and entrepreneurship was supported (unclear whether this was financed on a profitable, breakeven, or subsidised basis. (p. 3)
Micro credit groups, rural education support, livestock programs all are organised by ITC, again to what extent as a charity or a business is unclear.
The firm's relationship with its workforce seems constructive: unions are recognised and it claims a "15% compounded annual growth rate in 'employee costs' in the last 3 years." (ITC 2007:50)
A big question for a company whose central core is the tobacco industry is how does this connect with CSR? ITC does not address this other than to say that "Tobacco products are often a subject of public debate. Stringent quality standards/systems are established to respond to queries/concerns and are known to all stakeholders." ITC 2007:65).
ITC's Sustainability Report 2007 gives financial data which suggests the firm has grown in Sales Turnover by about 20 percent for each of the two previous years, and profitability by about the same percentage in the last year (ITC 200). The case study does not provide segmented figures on product or divisional performance, but it seems from the Annual Report March 2009 that 87 percent of profit comes from tobacco and cigarette sales. This is also the most profitable division, with a Profit/Sales ratio of 55 percent. The large loss on Intersegment tranfers suggest that many internal sales are made a price below cost, and the effect of this on the profitability of armslength sales is to distort divisional profitability, but how much in each division is unknown.
Building and Leveraging from Economic, Natural, and Social Capital
ITC has managed to install an impressive horizontal strategy by interrelating the outputs of one ITC business with inputs of another (Porter, 1985). The main benefit is cheaper waste disposal costs and input costs respectively. One initiative, ITC's Social and Farm Forest Initiative (FSSI) converted wastelands into high-yielding plantations that supplied wood for ITC's Paperboards and Speciality Papers division. The ability to bypass traditional wood supplied and grow their own plantations was a long-term strategic response that required tremendous economic capital to start such a venture and it was envisaged that their own wood supplies could service their packaging, safety matches and other needs more economically than existing suppliers. While the plantations, being man-made, do not technically meet the criteria of natural capital (Winnett, 2005), ITC's ability to convert their economic capital to a natural supply is a testament to their size. It is further assumed that supplier risk is reduced with a higher reliability for in-house solutions, but the fate of such suppliers however is unknown as ITC would always prefer to source their materials and circulate funds internally than have to look outside the group.
Another similar strategy was ITC's entry into the safety match manufacturing business. While their FFSI reduced materials and packaging costs, the company benefits from the complimentary nature of their tobacco products. Logistics, bundling and marketing efficiencies would result and margins are taken out of the "system". These actions suggest that ITC's strategic choices ensure sustainable supplies and systems for their own company and again transfers capital from value chain participants to ITC. Given the tactics above, it is presumed that ITC does not see its external suppliers as stakeholders as the small suppliers' sustainability may be weakened brought about by the loss of a large client and the gaining of a large competitor. And, given the awards the company has received it is assumed that any reputational risk attached to supplier diminution has been effectively mitigated and left their social capital unaffected.
Social capital develops over time and provides a basis of trust, cooperation, and collective action (Jacobs 1965). Nahapiet and Ghoshal (1998a) define social capital as the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or group of people. It builds credit in the form of high credentials and can assist in gaining access to previously closed networks. However, a form of capital may have already existed amongst India's farmers, and this type of economic or natural capital was merely converted into social capital for ITC's gain. The e-Choupal model increases ITC's reach exponentially as it provides visibility and access to all value chain participants.
ITC's investment in the e-Choupal model and Choupal Sagars hypermarkets undoubtedly strengthens the community by easily connecting buyers and sellers, but it also increases ITC's potential bargaining power and social capital. According to Quinn (1992), improved social capital leads to increased intellectual capital at ITC which is the economic and producing power of the firm. While such skills are shared with the farmers, they are simply a supplier and are unlikely to share in ITC's successes or intellectual capital like an employee or shareholder would. On the surface e-Choupal provides the agriculture community with access to information such as weather, prices, scientific farm practices, and risk management. While such information is imperative to successful farming, the e-Choupal model also facilitates the sale of farm inputs and the purchasing of farm produce, possibly to ITC's favour.
Nahapiet and Ghoshal (1998a) suggest that social capital creates a high level of trust which diminishes the probability of opportunism and reduces the need for monitoring costs. The trust that ITC has established with the farming community has effectively removed the traditional retailer and wholesaler model and bypasses certain participants and reduces margins in the value chain. It is likely that such hypermarkets may have eventually formed organically without involvement or levies from ITC. While the company may argue that wasteful intermediation and multiple handling are reduced, the main beneficiary of such a model is indeed ITC with significant cost reductions. ITC freely admits that it "benefits from the lower net cost of procurement having eliminated costs in the supply chain that do not add value" (http://www.itcportal.com/sets/echoupal_frameset.htm), however no analysis is available to identify the impact of ITC's direct model of sourcing their inputs such as unemployment at the wholesale level of the value chain. Nahapiet and Ghoshal (1998b) may concur that ITC is the main beneficiary by suggesting that because of their more dense social capital firms have an advantage over markets in creating and sharing intellectual capital.
TBC - Summary - Refer back to "characteristic of a business".
ITC accountability and reporting
ITC is a large, somewhat complex conglomerate that is still diversifying. It's financial reporting is provided by ITC management to standards required by Indian law. We note that these are not Global Accounting Standards, although the company is 1/3 owned by British American Tobacco (BAT). It is suggested by Karunakaran (n.d.) that "even ITC, which bares its sustainability credentials ... ...cannot ignore the fact that around 70% of its profit comes from tobacco". Through reporting of positive aspects of sustainability, ITC stresses it is a good corporate citizen, and within India, ITC's awards for work in sustainability seem to be well received and publicised. Adams and Evans suggest that companies may benefit from using more stringent and complete global standards. WBCSD also discusses how companies could enhance the value of their sustainability reporting by addressing a broad range of their stakeholders to enhance their credibility in GRI reporting.
ITC Triple Bottom Line and Sustainability
ITC has utilised the 3rd generation of GRI Triple Bottom Line reporting for its sustainability reporting requirements, yet has not addressed details available to it within GRI standards. As suggested by Adams and Evans (2004), "The key criteria used by judging panels in the ACCA sustainability reporting awards, which are run in a number of countries and regions around the world, are completeness and credibility". Could we judge what ITC has presented with its GRI reporting to meet these two criteria at this time?
One area of concern is that in GRI reporting, credibility is lacking due to incomplete use of GRI units for reporting, and as Adams and Evans suggest, we need to pay special attention to the external assurance process elements that can be derived from the internal quality of policies, risk management, compliance records, and internal audit systems. When we note that ITC does not report on each GRI specified core indicator or provide an explanation for its omission, we find the extent of disclosure is lacking in their sustainability reporting. This would not be tolerated in financial reporting suggest Adams and Evans, and they also say that the "criteria of inclusivity and completeness are the most important aspects of accountability reporting
Morehardt (2009) looked at how many companies comply fully with GRI units available for reporting, and notes that up to 97% leave out many of the components of G3 GRI reporting standards available for their use, (remembering GRI is a voluntary system, they choose which units to report against). Therefore, when considering ITC's claims, and note what is and isn't in ITC's sustainability reports, we must use caution in accepting what they say, and in what they omit. These issues of omission are also discussed by Adams and Evans (2004), and from this perspective, can we assume that ITC is doing all it can to report to its shareholder community and meet global reporting expectations?
Corporate Social Responsibility and 'business sustainability'
Even though there is some suggestion regarding evidence around lack of completeness and credibility of ITC reporting, and note the critics claims, we still find that there are positives to take from use of GRI reporting on sustainability from ITC. But when we weigh their CSR moves to document business sustainability issues, we think it important to note critics who say big tobacco is really manipulating companies like ITC to serve a larger game being played globally. In looking at Hammond 1998, he quotes Dr. Judith Mackay, who writes of a "stunning disclosure of... ...duplicity, tobacco industry behaviour and relentless expansion throughout the world". Karunakaran (n.d.), found that claims of tobacco companies "acquiring food companies, and using them as a front for a position at health policy making tables at national and international levels". He specifically notes how "ITC has easy access to Indian policy high tables primarily on the back of its farming and food initiatives".
Action required accountability and sustainable business outcomes?
We suggest that there are things ITC can do in order to address these criticisms. The company cannot hide from the fact that they make cigarettes, while it can work as Adams and Evans say, to upgrade its unique Indian application of GRI standards to a more global standard for complete and credible reporting. As suggested by the WBCSD 2005 report, Creating business value and accountability, successful organisations need to:
â€¢ Articulate their own vision of accountability and sustainability, and embed it within core business strategies to create value
â€¢ Use accountability codes proactively as tools to change mindsets about the relationship between value creation and sustainable development - not simply being reactive for the sake of compliance
â€¢ Make accountability and value creation mutually reinforcing throughout the enterprise, integrating sustainable development across functions rather than creating a specialist silo
These things would help tremendously, and focus on gaining value by taking on reporting in a positive fashion. We think that is a key for companies like ITC going into the future, and see signs that they take GRI reporting seriously, but suggest that they proactively take a wider range of stakeholder interests into their reporting in order to minimise their risk.