An independent case study by INSEAD Social Innovation Centre focusing on corporate responsibility on Sri Lankan multinational conglomerate Hayleys PLC was published in 2009 and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The study was authored by INSEAD Adjunct Prof. Mark Hunter and INSEAD Academic Director Luk Van Wassenhove. The following are excerpts from the case study.
Hayleys PLC’s different holding companies have businesses in tea and rubber plantations, textile and rubber production factories, luxury hotels, logistics, water and gas purification systems and more. Together, the case study says they formed one of Sri Lanka’s leading multinational firms, accounting for no less than 2.6% of the country’s export income with revenues of Rs.31 billion or US$300 million in 2007-8.
In 1978, the 100th anniversary of the firm’s founding, company revenues had been just US$10 million. Despite a civil war that had claimed 65,000 lives since 1983, rampant inflation and the devastation and 30,000 deaths caused by the tsunami of 2004, Hayleys had continued to grow at a double digit annual rate. Former Chairman and CEO N.G. ‘Tanky’ Wickremaratne reflected, “Hayleys business really started in the last 30 years, when it grew into the US$300 million firm it is today.” Simultaneously, the company had seen a transformation from its roots as a trading company into an industrial and services conglomerate.
By the early 21st century, the case study states that Hayleys was also recognized by its Sri Lankan peers and the public for its high social and ethical standards. Its disclosure practices had repeatedly won the national Best Corporate Report Award and Hayleys also won the Best Corporate Citizen Award from the Ceylon Chamber of Commerce in 2004. That year, Mr. Wickremaratne’s predecessor as Chairman, Rajan Yatawara, had set up and chaired a ‘corporate responsibility cluster’ within management to bring together various sustainability initiatives across the group.
Making of a Sri Lankan multinational
The firm that became Hayleys PLC was formed in 1878 by an Englishman, Charles Pickering Hayley, to trade in coconut fibres. His partners and successors expanded step by step into retailing, import and export of industrial and agricultural goods, shipping and warehousing. To this day, trading and distribution are important activities. The firm distributes agricultural inputs and consumer products from major US, European and Japanese firms.
In the 1970’s, the case study says, Hayleys’ diversification into manufacturing, first agricultural machinery and chemicals and then activated carbon from coconut shells, used for gas and water purification. The waste products from the purification business later became the basis for a new power generation business. Likewise, Hayleys’ transportation activities became a separate unit that led to an infrastructure business.
The core business began to shift from exporting raw materials and importing finished goods to exporting value-added products. The next major step in 1976 was the formation of a joint venture, Dipped Products Ltd. (DPL) to make rubber gloves for exports. Mr. Wickremaratne’s first major assignment at Hayleys was to build DPL’s first glove manufacturing plant.
The formation of a centre-right government in 1977 led to a liberalized economy, lifting many of the socialist-style controls that had been in place for nearly two decades. Simultaneously, Hayleys elected its first Sri Lankan chairman, D.S. Jayasundera. Besides recruiting the three chairmen who succeeded him, Mr. Wickremaratne noted, “He was responsible for inculcating the value set that has driven the company in the three decades that followed.”
According to the study, the 1990’s were a key decade for diversification and vertical integration. Hayleys entered the leisure business through a joint venture with a travel and hospitality firm, Jetwing Hotels. During the same decade, a joint venture to manufacture textiles, Hayleys MGT Knitting Mills was created as well as a subsidiary to manufacture pickles from local produce. Together with agricultural inputs, agriculture would account for 13% of the group’s turnover by 2008. Hayleys transportation and shipping
activities grew rapidly to keep pace.
Rubber plantations were acquired to assure a steady supply of raw material to make gloves. DPL acquired the Kelani Valley tea and rubber plantations and Hayleys purchased the Talawakelle tea plantation. In the following decade, Hayleys and its subsidiaries expanded manufacturing operations abroad with hand protection (gloves), activated carbon and fibre plants in Thailand, Indonesia and China. By 2009, the firm had marketing offices in the US, the UK, Holland, Australia, Bangladesh, Japan and Italy and its products were sold in 80 countries. In certain sectors such as purification products and hand protection, Hayleys was now among the world leaders. In Sri Lanka, it had built a major social presence. The study states that Hayleys shipping operations managed one-eighth of the total container throughput in Colombo. With the plantations came responsibility for 100,000 workers and their dependents in the Central and Southern provinces. Hayleys’ agricultural business accounted for 34% of the country’s export of fruit and vegetables (including half the bottled pickles sold in Japan) and provided inputs to 300,000 farmers. Its consumer products division operated 70,000 outlets. Even in the North, one was never far from a Hayleys business.
Management organization:
Blending oversight and autonomy
The Hayleys group dealt with its operational and territorial diversity by multiplying face-to-face exchanges of information. At the board level, the case study states that meetings were held every quarter to approve results and monthly when exceptional ssues required attention. The next formal tier was the Group Management Committees, consisting of 14 sector heads, seven of whom also served on the board. They met every month with Mr. Wickremaratne, primarily to discuss financial performance but also operational changes required by events and to formulate policy recommendations to the board. They also appointed sector managers outside the formal reporting structure.
A CEO forum was created to facilitate better communication between the CEO and senior and some mid-level management through open question and answer sessions. Its quarterly meetings brought together managers nominated by the sector heads on a revolving basis to allow different people to participate.
Similar structures ensured cross-sector exchanges at different levels. Hayleys was organized into four business groups in which monthly management meetings were held to discuss issues like technology, work in progress, overheads, marketing and energy management. Specialists below the sector head level participated in these meetings. There were also human resources, finance and communications clusters from across the group which met regularly. The corporate responsibility cluster, created in 2004, was eventually merged with the communications cluster. Each sector held its own management meetings every six weeks. Perhaps surprising, the study states that the organizational structure went hand in hand with a great deal of autonomy for managers.
Hayleys core values under pressure
Hayleys’ stated vision was ‘To be Sri Lanka’s corporate inspiration at all times.’ Its massive domestic presence made it an important player in society as well as business. However, Mr. Wickremaratne acknowledged that Hayleys’ political influence had declined. “Fifteen to thirty years ago, we had the active support of the government. The government is helping less and less. We lost support perhaps because of the conflict situation in the North – the same focus on growth has not been kept. Government is perhaps less understanding of the needs of industry. Our ability to impact government thinking, very significant ten to fifteen years ago, is less now. We could be used much better…If they’re using (our competencies for development) if has to be on a very clean basis,” Mr. Wickrearatne said.
His statement was an allusion to the increasing corruption in public affairs and the fact that Hayleys would not pay bribes. Its position was well known. In 2006, his predecessor Chairman Rajan Yatawara had blamed corruption for ‘killing’ local industry in a rare public interview and had
stressed: “We don’t go behind politicians or officials but play by the book.” Mr. Wickremaratne commented, “We may have lost business in the short term but we believe our position is enhanced in the long term.” The term ‘trust’ recurred frequently and spontaneously in the conversation of Hayleys’ management, both as a corporate value and as a business tool, the case study says. Certain acquisitions like its 40% holding in Jetwing Hotels were made in part because the board approved the character and family values of Jetwing founder Herbert Cooray. Hayleys management interpreted the success in Asian and globally of Unilever, a competitor in the tea business, as being based on ‘trust in the products they sell’ said Mr. Wickremaratne. Hayleys, he said, took a similar stance in its glove business.
“In hand protection, where you’re dealing with protection of people, reliability and the kind of thinking behind the organization has a substantial valuating component for your customers and then for their relationships with you,” Mr. Wickremaratne states. “In the UK, people were significantly impressed that here was a country, in this part of the world, speaking this language. So we could get a slight premium over a Chinese product.”
Mr. Wickremaratne said the board required that managers earn ‘trust in whatever you said and how you behaved.’ In according with group policy, ‘all promotions are earned from within the organization’ and scrutiny was intense at every level. Senior and junior managers socialized frequently and met in the same clubs. They adopted a similar casual style, reminiscent of engineers on worksites. Ostentatious displays of wealth were absent from their offices while religion played a visible role in their business style: Hindu rites of welcome greeted visitors to plantations and one executive listened to gospel music while traveling with colleagues. From the board down to the workforce, all of Sri Lanka’s principal ethnicities and religions were represented.
The study states that especially on the plantations but also in the tea and rubber factories, managers and executives saw themselves as ‘father’ to their employees. Their role was to support (and on the plantations, manage) communities, rather than to simply run businesses. Hayleys MGT Knitting Mills likewise contributed to building roads, schools and healthcare facilities that benefited thousands of people. To some extent, this role had been inherited from the colonial era but the circumstances had profoundly changed. Poverty among workers was no longer accepted at home or abroad. Hayleys employees were no longer a docile workforce.
They clearly had other options, from emigration to jobs in foreign-owned firms, as well as powerful unions with political connections and international organizations to support and defend them. From ‘Doing the Right Thing’ to Corporate Responsibility Inevitably, these social trends drove up costs. The case study saw the impact was clear at DPL, the biggest unit in the group. Since 2004, DPL’s group turnover had grown by 246% from Rs.4.9 billion to over Rs.11 billion.
Yet profits were under pressure from what management called ‘a classic example of top-line growth squeezed by burgeoning costs leading to an eroded bottom line.’ Wages were a significant factor. A month-long strike at the end of 2006 led to wage increases of 32% and 48% on rubber and tea plantations, respectively. Less apparently, a second major cost driver, the price of latex, had a strong social component. DPL depended, for a majority of its latex supplies, on thousands of small farmers in the Central and Eastern districts of Sri Lanka. That supply base was eyed enviously by Hayleys’ competitors. Loss of it ‘would be catastrophic for us,’ said DPL Managing Director, J.A.G. Anandarajah.
Hayleys was thus moving towards addressing the social needs of key stakeholders well before it began to use the term ‘corporate responsibility’. Its first key tool was the firm’s reputation for trustworthiness which it used to engage with stakeholders like smallholder farmers.
Rizvi Zaheed who ran Hayleys’ agricultural businesses noted that in recruiting farmers as suppliers, ‘trust is a critical factor.’ Besides supporting capacity-building programmes like school construction and personal ‘empowerment’ skills training, Hayleys provided loans at reasonable rates and training in the use of agricultural inputs to farmers. The company also supported ‘the right of our suppliers to join unions and bargain collectively,’ Mr. Wickremaratne said. |
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