Corporate environmental governance of TNCs in developing countries: case of Vedan Vietnam 1. Overview of corporate environmental governance * The term ‘corporate environmental governance’ (‘CEG’) implies ‘a range of internal and external hard and soft rules, such as laws, regulations, policies, practices and social understandings, which shape and constrain corporate behaviour.’ * Factors driving and shaping corporate environmental behaviour: * Internal factors: unique resources, business strategies, organisation structure, business philosophy, etc. * External factors: * Legal pressure from legal stakeholders such as regulators, legislators, etc. * Social pressure from social stakeholders such as the neighbours, environmental activist organizations, etc. * Economic pressure from economic stakeholders such as consumers, investors, business partners, etc. 2. Vedan case 3.1. Background information of Vedan * Name: Vedan Vietnam Enterprise Corporation Limited (Vedan Vietnam), a company wholly owned by Taiwanese investors. * Year of establishment: 1991 in accordance with Investment Certificate No. 171/GP issued by the State Committee of Copperation and Investment on 08/-3/1991. * Location: Phuoc Thai Commune, Long Thanh district, Dong Nai Province, Viet Nam. * Principal activities: production of monosodium glutamate (MSG), lysine, and modified starch. * Business philosophy: “Taking roots in Vietnam- Developing long-term business”. Related to environmental governance, on its website, the company asserted that since its establishment, it has ‘put into use modern sewage treatment system and equipment as well as implemented resource of recycled products for reuse’ and ‘will keep efforts basing on foundation of protecting environment, sustainable development in order to gain the long-term business targets.’ 3.2. Thi Vai pollution * Thi Vai River is 76km long, flowing through Long Thanh district (Dong Nai) and Tan Thanh district (Ba Ria – Vung Tau). By dint of the river’s geographic advantage, local residents mainly live by fishing and breeding shrimps and fishes. * Vedan had built its factories in an area of 120 hectares near Thi Vai river. Since Vedan’s first plant was put into operation in 1994, it had dumped wastewater into Thi Vai river, causing deaths of living creatures in the river and local farmers’ losses. In 1995, after negotiation, the company agreed to pay the farmers a compensation of VND 15 billion. However, the pollution had become more and more serious, destroying farmland nearby the river and pushing farmers to the edge of bankruptcy. Further, local people, due to consuming contaminated water, suffered a series of diseases such as skin rashes, digestive problems, and even cancer. * 9/2008: Receiving numerous complaints from the local community, the state agency conducted an investigation at Vedan’s factories along Thi Vai River. Their initial discovery as follows. * Vedan’s discharging amount was 5-10 times higher than that allowed. * More seriously, it was revealed that in addition to a registered sewage treatment system, Vedan had erected an underground system to illegally dispose of untreated sewage into Thi Vai River. With the grave violation, the Ministry of Natural Resources and Environment (MONRE) carried out further investigations and research on the pollution caused by Vedan. The conclusion as follows: * Vedan had been poisoning Thi Vai river for a period of 14 years (1994-2008) by directly dumping untreated wastewater into the river at a rate of 105,600 cubic meters per month, constituting systematic violations of environmental regulations. * Vedan’s sewage was the main culprit polluting Thi Vai river, contributing to about 89% of the pollution. Consequently, water, soil and air in the surrounding area had been severely contaminated by toxic chemicals with the level hundreds of times exceeding acceptable standards. 3.3. Stakeholders’ reactions 3.4.1. The government According to the decision of the MONRE on handling of Vedan’ violations of environment protection, Vedan must: * Pay administrative fine : VND 267,500,000 * Pay accrued environmental fee owed by the company for 14 years: VND 127,268,067,520. * Temporarily close its four factories that released improperly treated sewage. * Entirely dismantle the underground discharge system and create a detailed operational diary of the registered discharge system. * Upgrade the sets of treatment equipment at the plants to ensure the compliance with the national technical standards. * The other factories allowed to operate need to be put under strict oversight of local environmental authorities to ensure its compliance with the national standards. * Take measures to remedy the pollution. * Vedan’s response: full compliance. It paid the fine and accrued fee between 2008 and 2009, invested approximately in upgrading the existing treatment system, installing new modern equipment and adding recycling facilities. 3.4.2. The local communities * Require Vedan to be liable for damages they suffered, i.e. their losses of investment in farmland and breeding aquatic creatures, as a consequences of pollution caused by the company. * To assist the farmers, the Prime Minister required provincial authorities in Dong Nai, Ba Ria – Vung Tau and HCM City to conduct research to determine the economic and environmental damages Vedan caused to local people. The damage claimed by the three local communities: Community | Number of household affected (households | Compensation claimed (VND billion) | Ba Ria – Vung Tau | 1255 | 53.6 | Ho Chi Minh City | 839 | 45.7 | Dong Nai | 5,064 | 119.5 | * Vedan’s response: * Commit to compensate affected farmers. * However, during the negotiations, express its lack of responsibility and goodwill: * Intention to prolong the process without valid reasons: * Upon receiving documents stating the damages, the company had delayed responding for several times until intervention of the local authorities. * The MONRE sent an official document requesting the Chairman of Vedan, who was in Taiwan, to attend the meeting with farmers representatives and local agencies but the Chairman refused because of being occupied. In fact, the Chairman had never come to Vietnam to deal with the problems. His communication with the other parties was via correspondence. * Argugments about damage measure and the company’s liability. * The damage measure was inaccurate and exaggerated without legal basis. The compensatory damages the company offered Local communities | Compensation claimed (VND billion) | Compensation offered (VND billion) | Ba Ria – Vung Tau | 53.6 | 10 | Ho Chi Minh City | 45.7 | 12 | Dong Nai | 119.5 | 15 | * Inconsistent behaviours: Although Vedan signed the minutes of the meeting with Ba Ria - Vung Tau farmers on 27/5/2010 stating that the compensatory amount was VND 31.9 billion, it then only accepted to pay VND 10 billion. * The amount Vedan offered to Dong Nai farmers, who are most seriously impacted by the pollution, was 15 billion. Despite the severely poisoning of the environment for 14 years, Vedan offered the same as that it had paid farmers for its environmental effects in 1995. Then, experiencing local residents’ strong opposition, the company increased the amount to VND30 billion. * Because there have been a number of companies operating along Thi Vai river, Vedan should not be the only company which had to be responsible for the pollution. * The period of negotiations lasted from 2008 to 2011 (roughly 3 years). * Facing Vedan’s unwilling and uncooperative attitudes, the local communities intended to take legal action. 3.4.3. Customers * Consumer boycotts A boycott of Vedan’s products arose from consumers’ discontent with Vedan’s environmental violations and irresponsibility for local residents’ losses. The statement calling for anti-Vedan’s products appeared on websites, personal pages and facebook. Finally, Vedan agreed to paid local people 100% compensatory damages. Vedan finished sending the total amount to farmers on 12/1/2011. 3. The role of external pressures in corporate environmental governance in developing countries – analysis from Vedan case The case of Vedan illustrated the effect of three external forms of pressure (legal, social, and economic) performed and the necessity of combining the three drivers to effectively enforce CEG in a developing country like Vietnam. 4.4. Legal pressure * Legal regulations: * In developing countries, the weak legal regulations and limited regulatory capacity ease the pressure on the private sector to engage in corporate environmental responsibility. First, it is criticised that the system contains a number of loopholes and lacks enforceability. For example, as stipulated in Vietnam’s Law on Environment Protection 2005, violators of this law may be ‘examined for penal liability’ depending on the nature and severity of the violations. In this case, despite Vedan’s systematic and serious violations, it was not prosecuted; therefore, the question arises what level of severity would lead to criminal liability. It is argued that according to Vietnam's Penal Code, only persons, not organisations may bear penal liability. However, if so, penal liability regulated by the Law on Environment Protection is unenforceable for violations of organisations which contributed to environment pollution more frequently and seriously. Further, assuming that criminal penalties cannot be imposed on Vedan, why did the authorities implement further investigations on liability of relevant individuals such as the directors who are responsible for the company’s practice? The second criticism is the lack of strict sanction. In spite of Vedan’s intentional and systematic violation over 14 years, the administrative fine, even in application of the highest was only about 12,000 USD, which could hardly be an effective deterrent to others. Finally, not only did Vedan’s practice breach the environmental regulations but it also violated Vietnam's Investment Law, which stipulates investors’ obligation to comply with the environment protection law. However, there was no sanction applied in terms of investment law, for example, withdrawing or suspending Vedan’s investment certificate. It is urged that there be stricter investment regulations to push investors to pursue sustainable development and social well-being instead of profit maximisation. * Executive process: Executive agencies play an inactive role in enforcing environmental regulations. In Vedan case, the local authorities failed to supervise compliance of corporations operating in the area. Although Vedan had been breaking the law for 14 years, it was only until local residents raised their concerns that the local agencies started investigations. 4.5. The role of social pressure: * Local residents’ lack of awareness of corporate environmental responsibility: when discovering the pollution in 1995, they accepted Vedan’s compensatory sum without impeding its practice and requiring remedies to restore Thi Vai river. * Obstacles for the local community to perform their role: * They have been not empowered by the legislation to have influence on corporation environmental behaviour. They cannot participate in decision making about the future of a facility which will potentially have profound impact on their life. They, being unable to access information of company’s environmental practice, have no choice, but wait for results from the competent investigators. * There were numerous hurdles they faced when they intended to take legal action against Vedan’ environmental violation: financial shortage, lack of legal assistance, no ground for class action suits and damage measures according to legislation. For example, there had been numerous arguments between parties about how to assess the affected farmers’ damages directly and indirectly arising from the pollution, let alone their health deterioration. 4.6. The role of economic pressure: It is generally believed that consumers in poor countries have limited bargaining power with large producers. Also, due to their modest income and low awareness, their major drivers of choice of goods was price and quality without concerns about social responsibility. Nevertheless, Vedan case was a typical example proving that consumers have raised their awareness of environmental protection and business ethics. This case also illustrated that consumers, by dint of the emergence of social media, have more chance to exercise their power. In an effort to force the company to take social responsibility, they have been able to create a boycott instead of individual complaints to producers. Therefore, this case is a warning to large corporations that their failure to implement its environmental commitment may result in consumers’ opposition and threaten their position in the emerging markets. Transitional companies could no longer make light of business ethics and escape from strict environmental governance during their operation in the Third World. Summary and Recommendations In the context of a developing country, while there have been inherent insufficiency in environmental regulations, and the local community’s power has been limited, economic pressure from consumers played an effective role in shaping corporate environmental responsibility. The combination and interaction of three external factors has created a corporate environmental governance system in developing countries with higher expectations of corporate behaviours. Therefore, transnational companies operating in emerging markets should bear in mind the new trend, realising importance of environment issues in their long-term strategies.

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