He tells his investor relations teams to discourage “the wrong kind of investors”, wants more global environmental regulation and taxes and believes that companies have an overwhelming responsibility to their supply chains. Sunny Verghese has an unusual outlook on business.
The Olam CEO has overseen the remarkable growth of the agricultural producer and processor from a sideline operation in Nigeria to a global business spanning 65 countries. The company’s success has come in part by turning social responsibility into a competitive advantage, making a solid business case for the kind of social investment that is only now finding its way into mainstream corporate culture.
Olam began with modest goals in 1989 as an offshoot of the Kewalram Chanrai Group, which had been operating textile factories and cotton spinning operations in Nigeria since the 1960s. When the oil price slumped in the late 1980s, the country began to suffer from an acute shortage of foreign exchange, and businesses struggled to find hard currency to buy inputs and spare parts. In response, the Kewalram Chanrai Group looked for a sector with quick export potential. They began with cashews, and expanded from there.
“When we looked at what was required for us to win in this business, it became evident that the large players were already very well entrenched and we were late to this game,” Verghese says from the company’s Ivorian headquarters in Abidjan. Despite the fragile political situation in Côte d’Ivoire over the past few years, Olam has continued to invest, opening the world’s largest automated cashew processing factory in February in the northern city of Bouaké.
In the late 1980s and early 1990s, the industry was undergoing huge change, as West African economies liberalized and broke up the state monopolies overseeing their commodity exports. The cocoa and cotton boards disappeared and were replaced by a fragmented, poorly structured industry of traders and license-buying agents, who had previously bought at the farm gate on behalf of the government. The rules of the game were changing, and Verghese saw an opportunity to take on the existing players.
“[Before] they could sit in London or New York or the major commodity trading hubs and source their raw material from the government monopolies, without really having to come here, dirty their hands or manage the emerging market risk,” Verghese said. “When the government monopolies started dismantling and disappearing, they started facing significant counterparty risk issues.”
The new traders were not able to manage pricing risk, so when the markets turned against them, they would default, leaving international customers without supplies.
“It was difficult for the customer overseas to come and enforce his contractual obligations in these markets. So counterparty performance and forward selling premiums became big issues under those circumstances,” Verghese explained.
“That’s when we realised that we had a significant opportunity to develop supply chain infrastructure and build counterparty credibility that was very high, so that in other countries, given the volatile pricing environment, we were still able to deliver reliably on a contract.”
Olam thrived in the new African markets, spreading across the continent and into major commodities, such as rice, cocoa and cotton and in niche products, like cashews. To do that, he explained, “we started at the origin and we resorted to buying at the farm gate, or as close to the farm gate as possible.”
But this was only part of the struggle. Creating supply security meant building loyalty and improving the lots of the smallholders that make up the majority of growers.
“Buying from the farmer directly, helping him improve his productivity, providing him [with] microfinance—in terms of loans—or agricultural inputs and market access, helping him to upgrade the quality he was producing, allowed him to dramatically raise his income and his livelihood, and therefore become a loyal supply partner for us.”
Verghese talks in terms that are becoming common in emerging markets and agribusiness. Companies, from brewers to traders, have begun to articulate what the Olam CEO calls “mutuality” to their investors and shareholders.
The reasons, he says, are relatively straightforward. Beyond it simply being “the right thing to do”, being welcomed into a country and being sensitive to its context is fundamental to being able to work there unimpeded.
“We believe in emerging markets it’s relatively easy to get a license to operate from the government but it is tougher to get a license from the community to operate in those markets,” he says. “You can only build a sustainable business in these markets when the community gives you license to operate. If they see you as a foreigner, as an exploiter of their resources, as not adding any value, they don’t want you there.
The growing trend towards consumer activism and responsibility has added momentum to the requirement.
“Our customers, like Nestlé or Unilever, in turn have demand from their consumers who are not satisfied in snacking on a bar of chocolate or drinking a cup of coffee without asking searching questions about where this coffee or cocoa is coming from. Is there any child labor involved? How environmentally sustainable is the supply chain for this product being used in their chocolate or their coffee?”
The company is creating its own “Olam standard” of sustainability, and is in the early stages of an environmental footprinting exercise to work out the carbon impact of its individual products and supply chain.
Verghese can rattle off statistics about the threat that climate change poses to the world’s population, and the links between global energy, water and agricultural supply. He talks about the water requirement per kilogram of meat in the same terms that most CEOs talk about their financial statements. His sense that there is an imperative to act, despite the high cost, is strong, although he acknowledges that to do so alone risks unilaterally imposing a drag on the company. The competition could gain short-term advantage by avoiding unlegislated “obligations”.
“It’s a catch-22 situation,” Verghese says. “We believe that the long-term solution is that carbon should be priced and carbon should be taxed because you cannot influence behaviour if that is free.
“I think stakeholder pressure will intensify to a level where everybody will have to comply with the minimum standard. So we are taking the view that it is the right thing for the sustainability of our business so we should do the right thing here, because if you want a business that is enduring, then we can’t take [that] view.”
The issue of “enduring” business, and the kind of long-term view that encourages corporate responsibility, is difficult in the current funding environment. Olam listed on the Singapore Stock Exchange in 2005 and the demands of “typically transient” shareholders with short-term investment horizons frustrates the strategist in Verghese.
“When we are investing in plantations, say a rubber plantation, the first yield is [after seven years]. The first maturity is [after] 12 years. The cash flow break-even is in 14 years,” he said. “As a CEO there is very little incentive for you to think that far ahead, because analysts are looking at the next quarter and getting upset if you [deliver] below expectations.”
“The problem with the current capital market structures and CEOs and their time horizons persuade people to be very short-term in their outlook.”
Despite this, he has no intention to change tack.
“I tell my team your job is not to go and market the company, your job is to go and de-market the company,” he said. “You have to tell them ‘are you sure you want to invest in us? Because here is the deal: we’re going to be cash flow negative for five years’. Most people would fall off their chair.”
Continuing with the heritage of the company’s early days and trying to improve its footprint “from seed to shelf” is going to become a competitive advantage all over again, as best practice in sustainability becomes more widespread and pervasive.
“One of the reasons why we have succeeded is the way that we have innovated our business model,” he says.
“We feel that benchmarking best practice is an important first step, but is lousy strategy, because at the end of the day, everybody is trying to follow best practice, so if you achieve that goal, you will at best be at the middle of the pack.
“You can never be a leading company, or a very successful company, by just being middle of the pack. If you want to be exceptional, you need to create the next practice.”