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Need for Social Girdles to Manage Corporate Risk

Corporates, when they focus on big project execution, often overlook the possible community and environmental dimensions of their likely interface. In a socially conscious world, where sensitivities have been sharpened by climate change accountability, lack of stakeholder confidence can cause investment plans to be derailed even after considerable investments have been made in time and money.

The Rio International F-1 circuit has been shelved and the expansion of the Charles de Gaulle and Heathrow airports has been stymied by environmental groups. Large mining projects have a long global history of facing local opposition. Now solar projects in the United States too are experiencing similar fortune. Environmental forums such as Earth (.org) have gone to the extent of calling out companies ranging from Volkswagen and petroleum majors like BP and Exxon to food companies like Nestle, Coca-Cola and Starbucks for greenwashing many of their activities and investments as ESG positive.

In India, too, there are several examples of big projects going awry – the debacle faced by the Vedanta Foundation University in Odisha, the shutting down of Sterlite’s thriving copper plant in Tuticorin and the closure of diamond exploration operations by mining major Rio Tinto in Madhya Pradesh. The common strand in all these cases is the inability of the promoters to get the buy-in of the local community because they could not suitably address concerns about their environment, health and livelihood.

Vedanta Foundation’s purpose for seeking large swathes of land in Odisha for the proposed University was viewed with incredulity by the public right from the beginning. This was a greenfield project which had nothing to show by way of prior accomplishment. Then, getting government involved in the acquiring of land for a private company too raised public heckles.  In the eyes of law, Vedanta Foundation failed to explain why they needed as much as 8000 acres of contiguous land by uprooting as many as 6000 farmers. The key argument made against them was that this being agricultural land, under cultivation, education was perhaps not the key motivation of the company and that it intended to ultimately put the land to a commercial use. It was held that Section 3(f) of the Land Acquisition Act of 1894 whose provisions were invoked could not have been used for compulsory acquisition as this was being done for a private company for a private purpose that was not permissible under the Act. To make matters worse, the Vedanta Foundation attempted to circumvent this objection by modifying the private company status of the Foundation to a public one. The Orissa High Court observed that there were only three directors on its board and less than seven shareholders, which was less than what was required for a public limited company under Section 12 (b) of the Companies Act, 1956. It even said that the pressure from the company was so great that the district collector had even bypassed the public hearing of objections to the acquisition process. Finally, the High Court ordered that all the lands should be restored to the respective land owners irrespective of whether they had challenged the acquisition of their lands or not. The court also quashed the grant of the 495 acres of government land granted by way of lease.

Awkwardly for Vedanta, in the course of hearings it was even submitted by the petitioners that while accepting the request by the Vedanta Foundation, the Government had failed to consider the company’s prior track record of being repeatedly indicted by various governments and other authorities for violation of environmental and human rights laws in Orissa, Tamil Nadu, Goa and Karnataka.

The matter reached the Supreme Court fifteen years after initiation. The apex court, too, while affirming the High Court’s decision to quash the acquisition, observed that the entire proceedings and the benefits, that were proposed by the State Government, were vitiated by favoritism and were violative of Article 14 of the Constitution of India, “The proposal was for exaggerated demand. This was mala fide intention on the part of the appellant company/foundation.” The Hon’ble Supreme Court unequivocally declared that the state’s acquisition of land was done “in utter disregard for the law”. Emphasizing the interconnectedness of the ecosystem, the court also noted that large scale construction for the university would adversely affect the wildlife sanctuary, the local ecosystem, and the ecological environment.

Could Vedanta have managed the case better? Yes. One key learning from this case is that stakeholder management in large projects has to be structured and comprehensive. Importantly, it must commence from the moment a project is ideated – such engagement should never be an afterthought. Spokespersons for Vedanta have often critiqued the Indian bureaucracy as being moribund. Here was a case of a pro-active bureaucracy, but the company itself bungled – despite the apparent goal of the project being noble.

Turning our focus to another significant case, the TATA Nano project in West Bengal also provides valuable insights into the intricacies of stakeholder engagement. Touted as a game-changer in the automotive industry, the Nano project faced vehement opposition from local farmers who felt dispossessed of their land.

The TATA Nano plant, initially planned for Singur in West Bengal, aimed to bring affordable cars to the masses. However, the project encountered unforeseen challenges that transformed it into a high-stakes industrial drama. In a carefully orchestrated announcement, TATA Group Chairman Ratan Tata revealed the strategic decision to relocate the plant from Singur. This decision marked the climax of a delicate dance between corporate foresight and the nuanced landscape of community dissent.

The TATA Nano project, initially symbolic of the harmonious convergence of investor friendly policies and corporate aspirations, metamorphosed into a narrative of collaboration and conflict.

While these cases serve as a poignant example of the pitfalls in stakeholder management, it also highlights the evolving landscape of corporate accountability. In today’s world, where information travels at the speed of light, companies can ill afford to underestimate the impact of their actions on communities and the environment.

Going forward, there will be many more instances where corporates will need to set up large stand-alone facilities in the mining, metals, energy and manufacturing sectors where land and community will be involved in a substantial way. India needs, for instance, to develop more than 100 GW of hydropower and 280 GW of solar energy to meet its energy transition goals. These aspirations have to be viewed against the backdrop of the problems that all hydro projects have faced in the past, on grounds of land acquisition, displacement of villagers, and environmental activism.

The traditional approach of relying on timely CSR spending and public relations campaigns falls short in addressing the complexities of modern socio-political milieu. We have entered the era of Environmental, Social and Governance (ESG) wherein the framework needs to be holistic and project strategy has to be customized and effective. It has to be viewed as a definitive stakeholder management tool for corporate risk mitigation.

In an age of climate-change sensitivity, with a more demanding social and political environment, it is imperative for companies to have a fortified social-risk management framework. We can call this the Social Girdle. It should be designed to manage and buttress the company’s interface with the non-market stakeholders. This should be an institutionalized structure for the duration of the project – commencing from the stage of ideation – continuing into the development and operations stage. It should include seasoned administrators with credible field experience who are located within the zone-of-impact of the project, ones who understand the sensibilities of the local community and can fathom the social and environment implications of the project and even the psyche of the powers that be. The Social Girdle should monitor a dashboard of finely calibrated parameters, act as a sounding board to the company, hold frequent meetings with stakeholders to allay their doubts and resolve with urgency all issues from the project’s evolving footprint.

Reflecting on the TATA Nano case, the need for a robust Social Girdle becomes evident. It could have acted as a shield against unforeseen challenges. The Social Girdle, monitoring finely calibrated parameters, could have helped address local community concerns, resolving evolving issues with urgency.

As industries navigate the delicate balance between progress and community engagement, a Social Girdle emerges as an indispensable component, ensuring that corporate ventures align seamlessly with local sentiments. Companies must recognize that stakeholder engagement is not merely a checkbox but a dynamic process requiring constant attention. The Social Girdle is not just a risk mitigation tool but a proactive force for sustainable development. It ensures that the concerns of local communities are not treated as obstacles but as valuable inputs in the project’s evolution.

To conclude, our exploration spanning the TATA Nano saga in Singur and the Vedanta Foundation University case, a resounding theme emerges – the imperative for corporations to adopt a Social Girdle. These distinct sagas, etched with triumphs and trials share a common narrative that the stakeholder engagement can have profound impact on the trajectory of large-scale projects. The TATA Nano’s journey, with its nuanced dance between ambition and community dynamics, imparts a crucial lesson: the foresighted implementation of a Social Girdle acts as a potent defense against unforeseen challenges. Similarly, the Vedanta Foundation’s University case serves as a stark reminder of the repercussion sidelining social and environmental considerations.

In the labyrinth of progress, the Social Girdle transcends a mere framework; it becomes the guiding compass steering corporations toward a future where economic success harmonizes seamlessly with authentic community involvement, environmental stewardship, and unwavering ethical standards. The insights gleaned from these narratives herald a transformative era—a paradigm shift where the Social Girdle takes center stage in corporate strategy, ensuring resilience, sustainability, and a positive legacy for generations to come. Only such sharp focus and endeavor will help to firewall big investments from unforeseen guillotine and safeguard the company’s precious brand image.

The author is a former Secretary, Government of India


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