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.’1
- 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
2. Vedan case
2.1. 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
2.2. Thi Vai pollution

1
Corporate Social Responsibility and Regulatory Governance, 248.
2
The New Corporate Accountability, 485
3
http://vedan.com.vn/vedan/index.php?q=en/node/385
 - 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. 4
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.5
2.3. Stakeholders’ reactions
2.3.1. The government
According to the decision of the MONRE on handling of Vedan’ violations of
environment protection, Vedan must:

4
http://cect.gov.vn/index.php?m=news&p=detailNews&newid=450
5
http://cect.gov.vn/index.php?m=news&p=detailNews&newid=450
 ▪ 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. 6
➢ 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. 7
2.3.2. 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:8
Community Number of household Compensation claimed
affected (households (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:

6
http://www.tnmtbacgiang.gov.vn/?NEWS/VN/Tintrongnuoc/Tintrongnuoc/149.3S
7
http://www.monre.gov.vn/v35/default.aspx?tabid=428&CateID=24&ID=85869&Code=VY6VQ85869
8
Công văn của Bộ trưởng Bộ Tài Nguyên và Môi trường báo cáo Thủ tưởng Chính phủ về giải quyết bồi thường
thiệt hại cho nhân dân của công ty Vedan.
http://www.monre.gov.vn/v35/default.aspx?tabid=428&CateID=24&ID=85869&Code=VY6VQ85869
 ✓ 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 offered9
Local communities Compensation claimed (VND Compensation offered
billion) (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.10
- 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.11
2.3.3. Customers
- Consumer boycotts
9
http://www.monre.gov.vn/v35/default.aspx?tabid=428&CateID=24&ID=84625&Code=POZQT84625
10
http://www.monre.gov.vn/v35/default.aspx?tabid=428&CateID=24&ID=84625&Code=POZQT84625
11
http://www.monre.gov.vn/v35/default.aspx?tabid=428&CateID=24&ID=89183&Code=8AV3289183
 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.12
 Finally, Vedan agreed to paid local people 100% compensatory damages. Vedan
finished sending the total amount to farmers on 12/1/2011.13
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.
3.1. 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.14 First,
it is criticised that the system contains a number of loopholes and lacks enforceability.15 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. 16 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. 17 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

12
http://vietnamtoday.net/Default.aspx?tabid=221&Culture=vi-VN&catid=261&entryID=6903
13
http://phuyen.gov.vn/wps/portal/songcau/!ut/p/c4/04_SB8K8xLLM9MSSzPy8xBz9CP0os3g3Z0tnT8tgY7Mw
S0M3A89AMwM_Z19HI6NQA_2CbEdFAAxjB2Q!/?WCM_GLOBAL_CONTEXT=/wps/wcm/connect/songc
au/songcau/tintucvasukien/tinkinhte/6826298045667aa5a41db6d816abc6f1
14
Jamali Dima and Ramez Mirshak 2007, ‘Corporate Social Responsibility: Theory and Practice in a
Developing Country Context’, 245.
15
The Dark Side of Development
16
Vietnam’s Law on Environment Protection 2005, Article 127
17
Dicussion about the handlings of Vedan’s violations, People’s Public Security Journal 7/2009.
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.18
▪ 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.
3.2. 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.
3.3. 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

18
The Dark Side of Development in Vietnam: Lessons from the Killing of the Thi Vai River.
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.