1

The Environmental Responsibility

An ethical dilemma

Gaurav SagarAmrita VaswaniEma Hoffmann

September 2004

2© AGSM 2004

Background APP (Asian Pulp & Paper) is a major paper

manufacturer in Asia It uses low price timber from rainforest

hardwood as raw material Large international investor base

Market depression Price erosion Escalation of debt: £8.5bn debts in 2001 Sharp fall in share price from £5 to 8p

Indonesian government interferes to save APP from bankruptcy, thus perpetuating the escalation of commitment

3© AGSM 2004

Engine of destruction?

Irresponsible and unethical competition and environmental behaviour

4© AGSM 2004

Main ethical issues

APP

Environmentally damaging behaviour: clear-cutting of rainforests without re-plantation

Responsibility towards investors and shareholders vs. social responsibility

Anti-competitive actions: is price dumping ethical?

5© AGSM 2004

Main ethical issues

Investors

Ethical to invest in such a business? Ethical not to care for a remote country? Would the investors have invested

if forests in their own country would have been affected? Ethical to force APP to continue cutting trees or consider as sunk cost? To what extent can banks be held responsible for the behaviour of their

clients? Limited Liability of investors. What resources can banks allocate for investigating the ethical character of

their clients’ activities?

…Where do you draw the line?

6© AGSM 2004

Main ethical issues

Government

To what extent should the government regulate the unethical behaviour of companies?

Governmental responsibility: economic situation of the country vs. environment

…Where do you draw the line?

7© AGSM 2004

Investorvalue

◄

Corporate responsibility

Better use of resources in the

long run

Improved brand equity and company

attractiveness

Revenue Increase; higher employee

loyalty; better competitive

environment, etc

Sustainable competitive advantage

◄

8© AGSM 2004

Principle Maximizing investor wealth Social responsibility

Recommendation

Win-win solution: invest in environment-friendly actions such as recycling or replantation of trees

Situation Should companies engage in environmentally irresponsible

behaviour? Should a company consider any other stakeholders apart from

its shareholders? And if yes, then to what extent?