UFS - EOEC 2614 - 2024

Case Study 2: ‘Dithaba Construction’

Index

Introduction

Issue 1: ‘As long as you don’t look around the corner!’ Clues about Dithaba’s stance towards
corporate social responsibility.

Issue 2: ‘It’s all about the shareholders! Or is it?’ An argument about Dithaba’s role as a modern
corporation.

Issue 3: ‘A difficult ethical dilemma’: Advice on the moral soundness of a business decision.

Issue 4: ‘With their heads in the sand’: The board’s response to a bridge built on shaky ground...

Issue 5: ‘A kickback that backfired’: Receiving an anonymous tip-off on the ethics hotline.

Questions and solutions (Separate documents)

1
 Introduction CASE STUDY 2

Lynn Peters’ first day at Dithaba Construction Ltd as an ethics officer

It was Lynn Peters’ first day working as an ethics officer at Dithaba Construction Ltd ('Dithaba'). She
could feel the butterflies in her stomach, experiencing a mix of nervousness and excitement. Lynn had
graduated only two years prior, and while she felt confident in her ability to take on the role, she just
couldn't shake the tension that came with being in a
managerial position, yet being only in her mid-20s: would she
 Lynn has always dreamed of working
be taken seriously in the company? Would she be able to fulfil
at a large public company and serving as
her duties as required?
its ethics officer. Furthermore, her role as
After a welcome from the human resources (HR) director, the ethics officer at Dithaba presents an
Ms Margaret Molefe, Lynn was shown to her office. Ms Molefe exciting challenge, as she is tasked with
informed Lynn that the ethics office (that will be managed by establishing and managing an ethics
Lynn) reports to the social and ethics committee, and the office, along with implementing an ethics
committee, in turn, reports to the board of directors. management program with the
assistance of others in the company."
More about Dithaba Construction Ltd

Before applying for the job, Lynn ensured that Dithaba’s stated values on its website
aligned with her own personal values. She strongly believes that businesses should
operate ethically and not be driven by profit motives only. In this regard, Dithaba’s ‘value
statement’ indicates that the company:

❖ requires ethical conduct from its employees, including directors, managers and staff, at all times;
and
❖ strives to make a positive impact on the lives of its employees, the environment, and the communities
where it operates.

 Dithaba has been in operation for 12 years. Most of its construction contracts are with local and
provincial governments, which involve the construction of various government buildings and public
infrastructure, as well as bridges, water treatment plants and sport stadiums. The company
currently employs approximately 1 850 individuals, the majority of whom are construction workers.

To attract investment, Dithaba’s board of directors aims to list the company on the Johannesburg
Stock Exchange Ltd (JSE). Consequently, the board has been aiming to improve the corporate
ethics of Dithaba. However, over the course of the first few weeks after her appointment, Lynn
increasingly discovered that what really happens in the company is not aligned with what is stated
about ethics ‘on paper’. For example, Lynn found that:

 The social and ethics committee meets only once a year but has no previous meeting agendas
or minutes.
 Employees are scared to talk about ethics-related matters.
 There has not been any ethics training for employees in over two years.
 There is no ethics hotline (whistle-blower report line).

Board of directors

The board of Dithaba consists of nine directors of which five are non-executive.
Four directors on the board serve in executive capacity as follows:

 Chief executive officer (CEO): Mr Collin Clay

 Chief financial officer (CFO): Mr Rudy Rock
 Chief operations officer (COO): Ms Sally Setene
 Human resources (HR) director: Ms Margaret Molefe

2
 ISSUE 1: ‘As long as you don’t look around the corner!’
Clues about Dithaba’s corporate social responsibility

Lynn decided that her first task should be to visit some of Dithaba’s major
construction sites. She could speak to employees at the ‘grass-roots level’ about
their experience working for Dithaba and get a feel for the day-to-day operations
of the company.

The first site Lynn visited was for the construction of a brand-new municipal
building next to a small nature reserve in a city.

She was greeted by the construction foreman who showed her around. There was a lot of activity on
the site! With cranes overhead and cement trucks rolling in, Lynn had to be careful where she walked.
Nevertheless, she was very observant as she took handwritten notes of what she saw:

Lynn discovered that Dithaba’s construction workers are not happy, and this negatively impacts
productivity. The cause of their unhappiness is the low wages Dithaba pays them, sometimes even
below the minimum wage. There is also no process whereby employees can submit grievances to
management. Making things worse is the anger of members of the local community living in the vicinity
of the construction site who were completely ignored for job opportunities. Rather, Dithaba transports
workers from other parts of the country to all its construction sites. Dithaba also ignores local small and
medium suppliers and purchases building materials from large multinational companies only.

Back at the office, Lynn made some further enquiries from managers and other staff:

 She learned from the financial manager that Dithaba has been experiencing significant cost
overruns on many of its construction projects, because the finances of projects were in a terrible
state: records are not always kept of all expenses, and there are serious cash flow constraints
faced by the company as a whole. The CFO, Mr Rudy Rock, is almost never available to assist
with financial problems because he is on overseas holidays most of the time.

 She heard from the company’s chief engineer that there is a real risk that
Dithaba might lose the above municipal construction project and be replaced
by another construction company, seeing that the project has been run so
badly. Similar problems on other projects also exist. The engineer prescribed
the cause of these problems to the COO, who is unapproachable and does
not want to spend money on proper project management in general.

3
Issue 2: ‘It’s all about the shareholders! Or is it?’
An argument about Dithaba’s role as a modern corporation
Lynn was invited to attend a special meeting of the board of directors, who wanted her
inputs on an important strategic matter. The board is reconsidering Dithaba’s strategic
direction and must decide what Dithaba’s responsibility should be towards its shareholders
and its other stakeholders. In attendance were two executive directors (Sally Setene and
Margaret Molefe) and three non-executive directors (Bryan Butan, Themba Tshwete, and
Dr Ganitha Ginwala). Specifically, there were differences of opinion amongst the directors
as to who should benefit from Dithaba’s business activities:

“Dithaba Construction’s only responsibility is towards its shareholders. This

responsibility is about maximising profits to enable shareholders to receive good
returns on their investments. We should therefore not allow anybody to force
Dithaba to conform to the socio-political will of others. Decisions we take should
be solely in the best economic interests of the shareholders. We should just trust
that the invisible hand of the market and Dithaba’s compliance with the law will
ensure that the company automatically addresses the social needs of society.

Ms Sally Setene
“Dithaba must make an explicit
commitment to take responsibility for
the impact of its activities on society
and the natural environment. Market
forces and the law are not sufficient to
ensure the company acts ethically. As
the board, we are not acting as ‘agents’
of the shareholders!”
“We should completely rethink how Dithaba
Construction should be run. The company
should identify each of its stakeholders and
then treat them equally, because Dithaba is
dependent on each of them for its survival
and success. No single stakeholder’s interest
should be elevated above the interests of the
others, shareholders included.”
Mr Bryan Butan

Ms Margaret Molefe
“I agree with Bryan
“I do not agree with Sally Setene. Dithaba Construction should not act Butan that it is
in the best economic interests of only shareholders. This is because, important we identify
as a modern corporation, Dithaba also has a moral obligation to all the stakeholders of
society. I want to go so far as saying that Dithaba should not only be the company and act
seen as a legal entity, but also as a moral person, with ethical in their interest too.
responsibilities that go beyond just following the law.” However, we should
not forget our specific
obligation to
Ms Themba Tshwete shareholders. Also, it
will be impossible to
keep all stakeholders
Returning to her office after the meeting, equally happy at the
[Grab your
Lynn realized how different the views of same time, as their
reader’s
the directors present at the meeting were. She knew interests are too
attention with a
that the directors would have to find common diverse.”
great quote
ground. Consequently, she prepared a report for from the
the directors with her views. Dr Ganitha Ginwala
document or
4 use this space
to emphasize a
key point. To
place this text
ISSUE 3: ‘A difficult ethical dilemma’
Advice on the moral soundness of a business decision

Lynn received an email from the chief executive officer (CEO), Mr Collin
Clay, in which he sounded very worried. The email was about the awarding of
a lucrative tender by the government to Dithaba Construction to build a sports
stadium in the Free State.
At first, Lynn could not understand why the CEO was so worried: surely
the awarding of a big tender is a positive thing? But as she read on, it
became clear: Dithaba was indeed facing a major moral dilemma…

From: Collin Clay <collin.clay@dithabacon.co.za>

To: Lynn Peters <lynn.peters@dithabacon.co.za>
Date: Fri, 22 Feb 2024 at 14:16
Subject: Guidance on the moral soundness of an important business decision

Dear Lynn

I have been having sleepless nights over a stadium construction tender that was awarded to Dithaba.
We had applied for this tender a long time ago and never anticipated that Dithaba would be chosen.
Since then, Dithaba has accepted several other construction contracts. So now we face limitations:
we lack sufficient equipment and human resources, such as engineering expertise and construction
labour, to complete the stadium contract within the government's two-year deadline.

The government is relying heavily on the timely completion of the stadium due to its explicit promise
to five towns that will benefit from the stadium’s facilities. Additionally, the stadium's completion will
enhance the national competitiveness of many local sports teams and stimulate the local economy
through job creation and increased business activity. While we can accept the tender, doing so would
require pushing our employees and equipment to their limits. Even with maximum effort, we might
struggle to meet the two-year deadline. Alternatively, we could outsource part of the project to small
subcontractors. However, this approach often results in lower-quality work and slower progress.

If we accept the tender, I don’t think we should inform the government about our limitations as it
could jeopardise the contract. In fact, only the board of directors knows about the limitations. If we
decline, we will lose out on significant revenues and a great growth opportunity for the company.
Could you please prepare a presentation for the board and provide us with some guidance?

Regards

Lynn got working on the presentation right away. She consulted Dithaba’s
vision statement, which reads that the company aims to be the number one
construction company in the country, offering consistent, quality construction
services to all its clients. In the company’s code of ethics, she also saw that
employees are encouraged to be straightforward and honest in all business
dealings and must immediately disclose any concerns about a project to clients.

One of Lynn’s presentation slides contained four questions that she would advise the board
to consider when making the decision whether to accept the stadium contract:

Is it legal to accept the contract? Can the decision be disclosed?

Is it fair towards all stakeholders? Will acceptance meet Co standards?

standards?
5
Issue 4: ‘With their heads in the sand’
The board’s response to a bridge built on shaky ground...
A few weeks after her appointment, Lynn opened an online morning newspaper on her
computer and was dismayed at what she read: a pedestrian bridge built and recently
completed by Dithaba for a metropolitan municipality has collapsed! The online news
article stated the following:

Inner city bridge collapse

22-03-2024 | By Staff Reporter

Chaos! Confusion! These were some of the words used

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by eyewitnesses to describe the total collapse of the
Reginald Mahao Pedestrian Bridge in the inner city. Completed only three months ago by Dithaba
Construction Ltd, the 30-meter long bridge served thousands of pedestrians daily.

Fortunately not many people were on the bridge when it collapsed, but four people sustained injuries
and were taken to hospital, of whom one is in a critical but stable condition. Vehicle traffic had to be
diverted. The incident is a major setback for the municipality’s inner city rejuvenation project.

“I will now have to push my heavy trolley an additional 800 meters to reach the other side of the road!”,
said a concerned Joseph Mothopeng, a sidewalk vendor who sells warm meals. Residents and business
owners in the area allege that there had already been signs of cracks in the bridge’s supporting pillars,
the result of the constant vibration generated by the T5’s heavy traffic. They even encouraged the
municipality to send independent civil engineers to inspect the bridge, but this never happened.

When contacted about the matter, the executive directors of Dithaba said that the company cannot
accept any responsibility for the bridge’s collapse and referred all queries to the municipality.

At an emergency management meeting called by Collin Clay (CEO) on the day of

the bridge’s collapse, which Lynn attended, the CEO informed all executive
directors and managers to not speak to the media about the matter. Margaret
Molefe (HR director) sent out an email to all employees instructing them not to
speak internally to each other or to managers about the bridge’s collapse.

As a manager herself, Lynn was disturbed by this restriction on communication. Although she realised
the risks involved, she nevertheless enquired from some employees in private who was willing to
speak to her off the record. She determined the following:

• Dithaba’s lead engineer on the bridge’s construction resigned from the company midway
during the building of the bridge, alleging that the executive directors did not want to release
the appropriate level of funds for ongoing quality inspections as construction progressed.
• A senior employee in the company’s buying department (which purchased the building
materials for the project) said confidentially that the CEO informed them that Dithaba is
experiencing financial problems. Therefore the procurement department must purchase only
the cheapest concrete, cement, iron beams and other building materials, even if these
materials do not conform to the contractual requirements agreed upon with the municipality.
Despite this, the executive directors were paid higher bonusses compared to the prior year.

Public pressure on Dithaba to disclose information about the bridge’s collapse was mounting. A week
after the incident, another article appeared in the media. A journalist obtained comments from Dithaba’s
COO, Sally Setene, who said she and the other executive directors were shocked to learn that Dithaba’s
engineers and construction foremen on the project, including the lead engineer who resigned, took
shortcuts with the standard of building materials and avoided quality inspections requested by the board.

6
Issue 5: ‘A kickback that backfired’
Receiving an anonymous tip-off on the ethics hotline
Following the debacle with the bridge collapse (see issue 4), the shareholders
of Dithaba Construction replaced several directors on the board. The new
executive directors vowed to clean up the company and to apply appropriate
ethics governance principles They also promised to put the necessary ethics
governance structures in place and gave clear instructions to Lynn Peters to
implement appropriate ethics management practices.

One of Lynn’s first priorities was to implement a proper ethics hotline. Any person internal or
external to Dithaba can use the hotline to report incidents of unethical conduct perpetrated by
employees, managers and directors of the company (i.e. ‘blow the whistle on misconduct').

Other ethics-related processes Lynn implemented, with the help of the social and ethics
committee, include, amongst others:

 Advising new directors to attend an ethics induction course presented by an ethics consultant.
 Designing a conflict of interest register that directors must complete and sign every six months.
 Advising the board on setting ethics objectives and strategy for Dithaba.

Lynn attended a meeting of the social and ethics committee. An important

point on the agenda was a report received through the company’s ethics
hotline. An anonymous person who said they work in Dithaba’s procurement
department alleges that a senior manager (not a director) used company funds
to pay a ‘kickback’ (bribe) to a government official. The kickback was paid to
increase Dithaba’s chances of getting a construction contract to build a clinic.

The new chief operating officer (COO), who is a member of the social and ethics committee, told the
meeting that he is not aware of any such kickback having been funded by the company, but indicated
that he takes the matter seriously. The COO and chairperson of the social and ethics committee
subsequently informed the board of directors, who then immediately launched an investigation into
the matter. They also thanked Lynn for the efforts she put in at implementing the ethics hotline.

After an intensive two-month-long forensic investigation, the senior manager

in the buying department who paid the kickback was caught, and the company
filed criminal charges against him. The board released a public statement to
explain the nature of the fraud. With the assistance of Lynn and her ethics office,
an ethics risk assessment was performed, which led to the implementation of
internal controls aimed at preventing such kickbacks from recurring. Ethics
training was also ramped up to inform employees that no such behaviour will be
tolerated.

Building an ‘ethical organisational barrel’

Lynn and her ethics office had much work to do. Specifically,
she had to implement an ethics management programme in a
company that, for many years, did not take ethics seriously.

The goal was to embed ethics in the corporate culture of

Dithaba and to entrench ethics as an everyday norm. The
board too was very positive about ingraining ethics into the
purpose and identity of the company. The board wants to build
an organisational culture which encourages ethical behaviour
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and prevents unethical conduct. The board’s vision was to

ensure employees always do the right thing even if there are
not specific requirements ‘written on paper’. The board wants
to avoid ‘bad apples’ from ‘turning the barrel bad’ and they
want to make it as easy as possible for ‘good apples’ to do the
right thing.