Corporate governance to the lay observer conjures up images of a supranational entity to regulate and control the activities of corporate bodies, or some kind of special regulatory mechanism to clamp down on enterprises.
In reality, the phrase means something very different. It relates to the process of streamlining the internal management of a company, or the manner in which it is directed, guided and controlled. At a more abstract level, it is an attempt to ensure the representation of the various stakeholders in the management and governance of enterprises, each stakeholder seeking to preserve a specific interest.
One such interest which is today the subject of much debate is the environment. Increases in the size of corporations and the unimaginable use of natural resources by them has led to a shrill cry for regulating the impact of their activities on the environment. And the manner in which this was initially sought to be done was through environmental legislation. There are three enactments in India, which we shall briefly examine. These are the The Air (Prevention And Control Of Pollution) Act, 1981, the Water (Prevention And Control Of Pollution) Act, 1974 and the Environmental Protection Act, 1986.
As the names suggest, the first and the second were enacted for the purpose of protecting the air and water (atmosphere and hydrosphere) from the ill effects of human activity. For example, the Air Act, has a very wide definition of what an industrial plant is, including even trading activities in addition to industrial activity. Thus, virtually all kinds of commercial activity have been brought under the legislation.
Under the Air Act, the State Board has “to inspect, at all reasonable times, any control equipment, industrial plant or manufacturing process and to give, by order, such directions to such persons as it may consider necessary to take steps for the prevention, control or abatement of air pollution;” In addition, the Act also bans the establishment of any industrial plant in areas earmarked under the Act as pollution control areas. The Act therefore does two important things as far as the control of corporations is concerned.
Similar checks are found in the Water Act and The Environment Protection Act as well. The Environment Protection Act deserves to be specially cited because of the nature of the check it imposes on industrial activity. The Act sets standards across industries and enterprises, and places a stringent restriction on enterprises, prohibiting them from “discharging or emitting or permitting to be discharged or emitted any environmental pollutants in excess of such standards as may be prescribed.”
Once the standards have been laid down under the Act therefore, no industry or establishment can violate those standards. All Acts give the officers appointed by the Government power to enter and inspect the premises of polluting industries.
If implemented well, these enactments could have acted as a grid to allow industrial activity to be carried on smoothly and in an environmentally friendly manner.
If its the Government’s responsibility, why do the Courts seem to be doing all the work?
As is happening across India, a complete failure of governance has led to the Courts taking over the reins of environmental protection. In this part, I shall be exploring a few landmark decisions of the Supreme Court in which the Court has had to grapple with issues of corporate responsibility and liability for causing environmental harm. These are the decisions of the Supreme Court in Vellore Citizens Welfare Forum v. Union of India , M.C. Mehta v. Kamal Nath , and Indian Council for Enviro Legal Action v. Union of India .
Vellore Citizens Welfare Forum v. Union of India reached the Supreme Court through a writ petition filed under Art 32 of the Constitution, complaining of massive pollution and interference with water supply caused by the “enormous discharge of untreated effluent” from the tanneries and other industries in a part of Tamil Nadu. The decision was preceded by numerous instances of the Court chastising corporations and tanneries in the region for not putting in place pollution control and effluent treatment plants. On more than one previous occasion, the Court had threatened or ordered the closing down of corporations which were not complying with regulatory environmental norms.
The Court made reference to provisions of the Environment Act where there is not only a power conferred on the Central Government to check industrial activity, but also a duty cast it. Because the Government was consistently failing in its duty, the Court placed itself in the shoes of the Government.
In Indian Council for Enviro Legal Action v. Union of India , the writ petition was filed to deal with the non-implementation of a Central Government notification issued under Rule 5 (3) (d) of the Environmental Protection Rules. Here again, making use of the norms in the Act, the appropriate course of action for the Court would have been to direct the Government to perform its duty but the Court once again took the law into its own hands, literally.
In M.C. Mehta v. Kamal Nath, there had been an environmental violation by a company running a hotel and as a result, the course of a river had been diverted. Not only was there danger to the villages on the other side of the river from flooding, the move in itself had caused significant environmental harm.
The Court, for the first time in Indian history, slapped “exemplary damages” on the corporation.
How should the conflicting interests of Companies and environmental protection be reconciled?
First of all, the Government, which is the appropriate body, should learn to discharge its duty by itself and not abdicate it to the judiciary. The judiciary has many strengths, but speed and predictability are not among them. Judicial decisions in the recent past have been getting more and more strict, and uncertainty is a silent killer of enterprise.
Second, we need to also understand the situation of Companies. In India, with very high input and infrastructure costs, it is getting increasingly difficult to do business and compete against China and other emerging market producers of goods and providers of service. Even in our vaunted IT sector, countries like the Philippines and China are fast catching up.
So for the real, long term solution, we need to strengthen implementation of norms laid down in legislation and also relentlessly work towards more effective internal governance of enterprises.