SONY SUGAR COMPANYCHAPTER ONE: INTRODUCTION
Industrial sugarcane farming was introduced in Kenya in 1902. The first sugarcane factory was set-up at Miwani 10km north of Kisumu in1922 and later at Ramisi in the Coast Province in 1927. After independence, the Government explicitly expanded its vision of the role and importance of the sugar industry as set out in Sessional PaperNo 10 of 1965 which sought, inter alia, to:
Accelerate socio-economic development
Redress regional economic imbalances
Promote indigenous entrepreneurship
Promote foreign investment through joint ventures
In pursuit of the above goals, the Government established five additional factories in the1960s and 1970s: Muhoroni (1966), Chemelil (1968), Mumias (1973), Nzoia (1978), and South Nyanza (1979). Later, several more were to come on stream: West Kenya (1981), Soin Sugar Factory (2006) and Kibos Sugar & Allied Industries (2007), bringing the total number of milling companies to ten (10). The two older factories ceased operations: Ramisi sugar factory collapsed in 1988 and Miwani sugar factory was put under receivership. The establishment of the publicly owned factories was predicated on the need to:
Achieve self-sufficiency in sugar with a surplus for export in a globally competitive market
Generate gainful employment and create wealth
Supply raw material for sugar related industries
Promote economic development in the rural economy and beyond through activities linked to the sugar industry
In support of the above goals,the Government invested heavily in sugar factories, holding about 83% of the equity, later reduced to 70% after it divested 36% of its interest in Mumias Sugar Company. These resource injections into the subsector were in addition to the resources from the Sugar Development Fund (SDF), set up in 1992, that has contributed about KSh.11 billion into the industry for cane development, factory rehabilitation, research and infrastructure development.
Theseinvestments did not, however, help achieve the self-sufficiency in sugar as consumption continued to outstrip production. Total sugar production grew from 368,970 tones in 1984 to 520,000 tones in 2008 leaving Kenya a net importer of sugar with imports rising from 4,000 to 220,000 tones over the same period. The deficit is being met through imports from the COMESA region and other sugar producing countries including Brazil, United Kingdom and Mexico.
In 2003, the Government set up a Task Force on the Sugar Industry Crisis whose objective was to examine theproblems facing the sugar subsector and make recommendations for revitalizing the industry. Following the Task Force’s recommendations, the Government made the following decisions:
(a) Made changes in the management of all publicly owned milling companies with a view to improving corporate governance
(b) Reduced lending rates on SDF loans from 10% to 5%
(c) Wrote-off KSh. 4.7 billion on accrued interest and penalties on SDF loans
(d) Disbursed KSh. 800 million towards settling arrears owed by milling companies to farmers
(e) Increased research funding from the Sugar Development Levy by (SDL) doubling the allocation from 0.5% to 1%.
(f ) Successfully negotiated for a four-year COMESA safeguard to give the industry time to
Restructure and become globally competitive.
Concurrent with the structural reforms the Government was implementing, the industry continued to expand its processing capacity: Kenya Sugar Board (KSB) registered three new mill white sugar factories, namely: Butali, Kwale International Sugar Co. Ltd and Trans Mara Sugar Companies with a combined potential capacity of 5,000 TCD. It is also expected that an additional mill would be established in the Tana River basin, with a potential capacity of 9,000 TCD. With the operationalisation of these new factoriesand the upgrading of the existing mills, the industry’s capacity wouldbe close to 38,000 TCD, which would resultin a production of about 1 million tonnes of sugar per annum.
Background of the study
The Kenyan sugarcane industry is a major employer and contributor to the national economy. It is one of the most important crops alongside tea, coffee, horticulture and maize. Currently, the industry directly supports approximately 250,000 small-scale farmers who supply over 92 percent of the cane milled by the sugar companies. An estimated six million Kenyans derive their livelihoods directly or indirectly from the industry. In 2008, the industry employed about 500,000 people directly or indirectly in thesugarcane business chain from production to consumption. In addition, the industry saves Kenya in excess of USD 250 million (about KSh. 19.3 billion) in foreign exchange annually and contributes tax revenues to the exchequer (VAT, Corporate Tax, personal income taxes). In the sugar belt zones, the sugar industry contributes to infrastructure development through road construction and maintenance; construction of bridges; and to social amenities such as education, health, sports and recreation facilities.
The sugarcane industry provides raw materials for other industries such as bagasse for power co-Generation and molasses for a wide range of industrial products including ethanol. Molasses is also a key ingredient in the manufacturing of various industrial products such as beverages, confectionery and pharmaceuticals. By far,the largest contribution of the industry is its silent contributions to the fabric of communities and rural economies in the sugarcane belt. Farm households and rural businesses depend on the injection of cash derived from sugarcane. The survival of small towns and market places is also dependent on the incomes from the same. The industry is intricately weaved into the rural economies of most areas in Western Kenya.
Sugar industry Stakeholders
The Kenya Sugar industry has a wide range of stakeholders, each with a role to play.
(i) The Government of Kenya (GoK)
The Government of Kenya (GoK) through the Ministry of Agriculture (MoA) has the overall responsibility for the industry’s development. The GoK has a role of supporting the industry through regulation, enhancement of competition and fair-play, and provision of an enabling environment for all stakeholders. Currently, the GoK is the largest shareholder in the industry.
(ii) The Kenya Sugar Board (KSB)
The Kenya Sugar Board (KSB) is a public body set up by the Sugar Act, 2001, under the Ministry of Agriculture. The Board is mandated to:
Regulate, develop and promote the sugar industry
Co-ordinate the activities of individuals and organizations in the industry
Facilitate equitable access to the benefits and resources of the industry by all interested parties
(iii) Kenya Sugar Research Foundation (KESREF)
The Kenya Sugar Research Foundation (KESREF) established in 2001, is the scientific wing of the industry mandated to develop and transfer appropriate technology in the sugar sub-sector. It also carries out socio-economic studies to enhance the development of sugar as a commercial business.
The Foundation is funded mainly through grants from the Sugar Development Fund (SDF). It has its headquarters in Kibos, Kisumu with sub-stations in Mumias, Mtwapa and Opapo.
(iv) Cane Growers/Out-grower Institutions
Sugarcane farmers (out-growers) supply 92% of the cane milled. A large number of institutions including Outgrower Institutions, Societies, Unions and SACCOs represent these farmers. The role of these institutions is to promote, represent and protect the interest of the farmers. The institutions operate under the Kenya Sugarcane Growers Association (KESGA).
(v) Cane Transporters
Cane transporters are responsible for provision of cane transportation services in the industry. Transporters operate under the Kenya Cane Transporters Association (KECATRA).
The role of the millers is to make fair return on investment through efficient operation of the sugar mills or jaggeries for the production of sugar and other products for sale and making timely payments to cane growers. The millers operate under an apex institution known as the KenyaSugar Manufacturers Association (KESMA). Millers are a critical node in the sugarcane industry because of the role they play in value addition. The profitability and hence strength of the industry depends on how efficiently they operate.
Most sugar does not cross international borders. In most developing countries, sugar remains a ‘treat’ or luxury item for the poorest consumers. In developed countries, food processing, price, traceability and substitutes drive consumption. In developed countries most sugar is found in processed food, so food manufacturers are the “consumers” of sugar. Those who buy products from retailers that contain sugar have no say about where that sugar comes from or how it was produced. The increasing importance of traceability makes it hard for manufacturers and retailers to claim they know where product ingredients come from but not how they are produced. Whilst consumption issues and the various drivers of demand was outside the scope of the meeting, the direction of the demand is a key issue – sugar is, or could be, an input into a wide range of products.
(Viii) Financial institutions
A number of financial institutions have demonstrated interest in incorporating clear incentives into contracts to deliver environmental and social benefits which reduce risk without eroding competitive advantage. Today’s better practice is tomorrow’s norm – and financiers can help show the way forward; responding to initiatives such as the Equator Principles and proving mindful of corporate social responsibility issues. To be useful, better practices need to be commodity-specific and it is important to use simple metrics to measure the improvement in performance that they affect. Ideally improved performance using better practices could achieve a price premium, although it is more probable that improved performance will reduce costs and possibly become a precondition of supply to the high value-added (brand holders) section of the industry.
Figure SEQ Figure * ARABIC 1 Financial dynamics of the sugar industry
(IX) Other Industry Stakeholders
Other industry stakeholders include:
Special interest groups
KenyaSociety of Sugarcane Technologist (KSSCT)
SugarCampaign for Change (SUCAM)
Statement of the problem
The nature of power and influence, the source of this power and the way in which its used to contribute or to manipulate performance in the sugar industry underpins all the stakeholders with active role in the management, production, financing and service. A recent study by Kenya Sugar Board 2009 indicates that winning powers and holding powers for personal or political gain are against the profitability and efficiency in the running of State Corporation Sony Sugar included. This further affects the shared objectives, vision and core values of the corporation. Positional power, however is the least effective in building sustainable commitment to shared objectives, attaining a win-win results and constructive dialogue in resolving potential differences that may negatively affects the performance of the sugar industry. Therefore, different positional power vested on the stakeholders immensely affects the performance of the corporation (SONY SUGAR CO.). In this regard, this proposed study aims at establishing the influence of stakeholders on the performance of the sugar industry (a case of SONY SUGAR CO.)
Objectives of the study
General objective: the general objective of the study will be to establish the influence of stakeholders on the performance of sugar industry in Kenya
To determine the extent to which the stakeholders influence the performance of the corporation through regulation, legislation and deregulations
To outline the role of individual stakeholders in control, management, and administration of the sugar industry
To establish the degree at which different powers vested on different stakeholders are manifested in the industrial productivity and performance of Sugar industry
To establish how power, authority, and capacity are assigned to different stakeholders in the sugar industry
This proposed research seeks to answer the following questions:
To what extent do stakeholders influence the performance of the corporation through regulation, legislation and deregulations?
What role do individual stakeholders perform in relation to control, management and administration in the sugar industry?
To what degree do power vested on different stakeholders manifests themselves in the industrial productivity and performance of sugar industry?
How are power, authority and capacity assigned to stakeholders in the sugar industry?
Significance/Justification of the study
This proposed study will be deemed useful to the entire sugar industry and the ministry of agriculture in achieving sustainable economic pillars as outlined in the vision 2030. Besides, the outcome of this proposed study will be fundamental in outlining development and management policies that will be used in regulating and minimizing the negative external influence of stakeholders in determining growth in the sugar industry.
Limitations of the study
This proposed study will be restricted to SONY SUGAR CO. located in Awendo Division Migori County. This follows financial and time constraints. Other limitations of the study are inadequate resources to explore more respondents.
Before the research is conducted, the researcher will seek permission and authority from the all the concerned parties to conduct the research and collected data. In addition, the views of the respondents will be treated with utmost confidentiality it deserves. The cultural and traditional norms of the respondent will be respected and upheld.
CHAPTER TWO: LITERATURE REVIEW
2.1. Theoretical review
2.1.1 Stakeholder theory
Basically, stakeholder theory is an organizational management theory that complies with accepted business ethics addressing values and morals in the management of an organization (Phillips & Freeman, 2003). This theory was emphatically propounded initially by Edward Freeman in his book, “Strategic Management: A Stakeholder Approach”. He identified the groups that are considered as stakeholders in any business entity or corporation. He also described the various models of the groups and presented recommendations to the management to give adequate regard and respect to the interests of all these groups (Freeman, 1984). Traditionally, the shareholders of an organization were considered as the main stakeholders. Later this principle was expanded to include investors, employees, customers, and suppliers as the four major stakeholders of a company. However, the modern stakeholder theory rightly points out that several other groups such as banks that provide finance to the company, trade unions, governmental bodies such as tax authorities and company law regulators, political groups, associated corporations, and various communities with which the company interacts are all stakeholders in a company. For example, it is not possible for any organization to conduct its business in the present market conditions without seeking loans and other financial assistance from banks. As such, it is quite obvious that banks are major stakeholders in any organization with strong interests in the growth of the company.
Types of Stakeholders and Their Interests
The foremost stakeholders of an organization are the private owners or the shareholders of the entity. Their main interests are profits, along with future performance and direction of the company.
The senior management of the company concentrates on targets and objectives, performance and growth.
The non-managerial employees are concerned with job security and adequate remuneration.
The customers or clients of the company look for value and quality of the products or services of the company. They also expect the company to provide required level of customer care and follow ethical practices in dealing with them such as fair pricing.
Suppliers are expected to provide quality products or services at reasonable prices so that the end products satisfy the customers of the company.
The trade unions ensure that the minimum wages, working conditions, and legal requirements of employment are fulfilled according to accepted social norms and government regulations.
The community is interested in the number of jobs created by the company, the safe and effective handling of environmental issues by the organization, the involvement of the company in betterment of the community, and the appreciation in the value of shares held by the community.
The banks, financial institutions and other lenders to the company closely observe the present profits of the company, future risks, liquidity, credit scores, new business opportunities and contracts of the company for steady growth, and other company development-related factors.
Core Synopsis of Stakeholder Theory
The stakeholder theory integrates the resource-based viewpoint with the market-based viewpoint, while also adding social and political factors. The normative base of stakeholder theory is its main core, since identification of all moral and philosophical guidelines that are required for the management and successful operation of the company are included in this. In the above theory, eight types of stakeholders had been specifically identified as having influence on any organization. They are investors, suppliers, employees, customers, trade associations, governments, political groups, and communities (Donaldson & Preston, 1995). However, it is interesting to note that the banking sector, which is generally accepted as a major stakeholder in the functioning of any organization had not been directly included or mentioned in the above description. Hence, additional explanations to make this theory more comprehensive had been necessitated.
From the above point of view, this theory had been further expanded to include three major attributes, namely power, urgency, and legitimacy that decide the relationship of all the above stakeholders to the company. The power of the stakeholders is the means or the power to impose their will on an organization due to their various levels of relationship with the company. The urgency is the criticality or time sensitivity of the claims of the stakeholders. The legitimacy is the socially expected and accepted behaviors, structures, and norms that the company should follow to serve the interests of the stakeholders in the best possible manner (Mitchell, et al, 1997). Since banks are the major contributors of finance for running an organization, all the above three factors of power, urgency, and legitimacy play an important role in their interests and influence on the organization.
The stakeholder theory as brought out by Freeman consists of five major themes. They are definition and salience of stakeholders, actions and responses of stakeholders, actions and responses of the company, performance of the company, and debates on stakeholder theory and its validity.
The stakeholder theory of Freeman had been steadily getting prominence since 1995. There had been a substantial rise in both proponents and detractors of this theory. The proponents point out that only shareholders cannot be considered as stakeholders, since the interests of several other groups also have strong interests in the performance of an organization. On the other hand, the detractors of this theory argue that the stakeholder theory of Freeman undermines the principle of wealth maximization of the shareholders, which is the most fundamental goal or objective of any business. One of the major opponents of stakeholder theory is Charles Blattberg. He argues that the stakeholder theory mainly consists of balancing or compromising the interests of various stakeholders, which is not a full solution. He proposes a ‘patriotic’ conceptual approach by an organization as an effective option to the stakeholder theory (Blattberg, 2004). Blattberg substitutes conversation as the right alternative to the negotiation theory of Freeman while dealing with conflicts among various stakeholder interests. In spite of the forceful arguments of Blattberg, this new theory does not make any major contribution to the fundamental values of the stakeholder theory of Freeman. Banks are major financial contributors to any company and they have to negotiate different terms and conditions if any conflict of interest arises between their interests and the company performance. Mere conversation cannot solve the problem. Proper negotiation and modification of the terms of lending alone can provide proper solution to the situation.
Conflicts of Interests and Application of Stakeholder Theory
To arrive at a decision about the significance of stakeholder theory, we have to clearly understand the validity of stakeholder theory and the extent to which it can be applied to an organization. For this purpose, the stakeholders can be classified as primary stakeholders and secondary stakeholders. The interests of the company are decided by its relationship to these two types of stakeholders. The major objective of the company is to enhance its economic strength and increase the profits. The stakeholders also have the same interest but they are also keen on how the created wealth is distributed among the various groups of stakeholders. This is where the struggle starts between the different parties. The shareholders can demand that higher dividends be declared to them when profits increase. The government may intervene and decide on different tax structures for various sets of income levels. The employees can expect and fight for higher wages. The society can express that the company utilize a portion of the profits for the betterment of the communities from which the company is receiving its profits and fulfill its social obligations. The banks can increase the interest rates to benefit from the higher profits of the company. The different demands or expectations from the various stakeholders can easily create conflict and the company management might find it very hard to satisfy all of them. This is where the stakeholder theory helps an organization in balancing and compromising all these contradictory interests. Organizations are forced to explore contentious relationships and conflicts of interests among the stakeholders. They should identify compatible and incompatible interests and introduce contingency procedures to examine and solve these conflicting interests (Friedman & Miles, 2002).
Role of Banks in Stakeholder Theory
The ideal solution to the above problem is the evolution of a unique identity by each organization that distinguishes the company from its competitors. This identify helps the company to achieve an individual distinctiveness in society and to interact with the different potential stakeholders effectively (Hemmati, et al, 2002). It has to be clearly understood that the interests of all the stakeholders are not mutually exclusive but complement each other. If this principle is accepted and properly implemented, most of the apparent conflicts of interests of stakeholders can be solved in an easy manner (Marjorie, 2001). This is especially applicable to banks, which are emerging as major stakeholders in all modern organizations (Miller & Stiglitz, 1999).
In fact, due to substantial amount of funds lent by banks to the companies, the banks had converted a major portion of the lending to shares in them. This had led to a situation where the banks are main shareholders in several organizations. The representatives of banks are appointed as directors in the boards of such corporations to keep an eye on the progress of the company and to monitor the policy decisions taken by the board. The emerging importance of banks in business and other organizations had been recognized by modern analysts of stakeholder theory. Even the recent negative role of banks in the housing market collapse in the United States in 2008 through indiscriminate lending that led to global recession is a pointer to the importance of proper and timely action by banks as major stakeholders in any organization (Fitoussi & Stiglitz, 2009).
2.2. Empirical literature
There is also evidence (Dawkins and Lewis, 2003; Holt et al., 2004) that public opinion is moving towards a requirement for social responsibility in their purchasing habits, and Smith (2003) indicates how the focus on financial returns incentivizes dishonest practice. Handy (2002) reports that the top 100 NASDAQ listed companies, in the first nine months of 2001, were found to have overstated their audited profits by $100bn, which calls into question the accuracy, if not the integrity, of conventional financial indicators.
Sussland (2004) shows that financial indicators do not provide the necessary information about how they are achieved (and, by implication, how they can be sustained or improved). Also, targets based on purely financial measures are restrictive (Wheeler et al., 2003), too often arbitrary, and based upon uncertain expectations of opportunity or competition. Neither are they clearly prioritized in relation to each other and, as these measures are geared to commercial organizations, it is not apparent that they apply to the public or not-for-profit sectors at all. Porter et al. (2004) reports that shareholders retain a stake in any company for only a year on average, and that the “quick fix” strategies favored by speculators may be contrary to the enduring interests of the company (and by implication its other stakeholders). Ansoff (1987) proposes that measures of profitability and returns on capital are not sufficient to support the required decisions of managers, and that there need to be objectives and measures defined in other ways. In particular he shows how capital investment theory is inadequate to define the objectives of an organization, depending as it does on simplistic financial reductionism. He supports the view of Alfred P. Sloan that financial returns are, in the long run, an essential requirement for an organization. But he follows this with an emphasis on the concept of “long run”, and how in the middle of the 20th century short-term financial decisions were increasingly found to be unsatisfactory. This then becomes the basis of an objective-oriented strategic framework which takes the longer view into account.
Taking the viewpoint of Total Quality Management, Dahlgaard and Dahlgaard (2002) show a numerical method for analyzing customer satisfaction using a Customer Satisfaction Index, or CSI. This is simply the sum of the products of customer satisfaction and importance for each element of satisfaction, where these parameters are evaluated by questionnaire using Likert scales. This suggests a means of prioritizing action for improvement, which can act as a guide for management. Additionally, they propose that there are four basic elements of satisfaction: the company image, the customer expectation, the product and the human interactions. This model only addresses customers, it does not clearly identify service elements, it assumes that the supplier is not a service provider, and it assumes that the supplier is a commercial company. These are serious weaknesses if a model is to be developed which applies to the performance measurement of organizations generally. Nevertheless, it suggests that a relationship may be quantified and analyzed by dividing it into a small number of generic topics, and the result used as a management guide for improvement.
Heskett et al. (1994) consider the relationship between employee satisfaction and customer-related performance, and regard each to be dependent on the other. They propose a ten point audit which focuses on the organization’s performance in relation to the expectations of customers, and the awareness of those expectations within the organization. Atkinson et al. (1997) offer a compatible approach, which emphasizes the importance of having measurement systems in place which specifically support the primary (externally oriented) and secondary (internally-oriented) objectives of the organization by providing the basis for informed decisions. Nadler and Tushman (1999) provide a list of eight strategic core competencies, which they believe to be widely applicable. These relate to: the speed of response to external changes, focus on those operations that create the most value, rapid internal response to required change, flexibility in meeting market requirements, responsive formulation of strategy and adaptable product strategy. These core competencies are stated in terms of large companies, although there is no apparent reason why the same principles could not apply to organizations of any size.
Beer and Eisenstat (2000) studied 150 business units in 12 companies, and identified six particular reasons for the failure of companies to implement strategy. Top-down or laissez faire management style (one-way or no-way communication) leads to poor motivation and understanding of their expectations among junior managers. Unclear strategy and conflicting priorities lead to management time and energy being wasted on arguing over competing resources. Ineffective senior management, implying that they each pursue their career objectives without co-operating fully, leaves their junior managers isolated from effective support. Poor vertical communication prevents junior managers from gaining necessary support for difficult problems. Poor co-ordination across functions leads to problems similar to those of conflicting priorities. Inadequate junior management skills arise from lack of commitment to management training or coaching, and obstruct effective change leadership. These reasons for failure are partly a result of poor top-down communication, and partly a result of inadequate performance-driven feedback and review.
Hill and Jones (1992: 132, 134) are responsible for the most ambitious attempt to integrate the stakeholder concept with agency theory (see also, Sharplin & Phelps, 1989). These authors enlarged the standard principal-agent paradigm of financial economics, which emphasizes the relation- ship between shareowners and managers, to create “stakeholder-agency theory,” which constitutes, in their view, “a generalized theory of agency.” According to this conception, managers “can be seen as the agents of [all] other stakeholders.” They noted that stakeholders differ among themselves with respect to (a) the importance (to them) of their stake in the firm and (b) their power vis-a-vis the managers. They also noted that there is considerable friction within the stakeholder-agent negotiation process-some of it because of some participants’ ability to retard equilibrating adjustments that are unfavorable to themselves. They therefore