Strategy and the Sustainable Enterprise

P D Jose
Analysis of the Bhopal Case Study

In the last session we asked you, how should Dow respond to activists pressing Dow to accept
responsibility for the Bhopal Gas Tragedy? What compensation should be paid? All of this a
consequence of Dow's acquisition of Union Carbide Corporation in the U.S. At the time of
acquisition, Frank Popoff, Dow's then chairman had asserted, "It's not in my power to take
responsibility for an event 15 years ago with a product we never developed at a location we never
operated in". But 30 years after the accident and nearly 15 years after the acquisition, Dow is still
troubled by the ghosts of Bhopal. Every anniversary serves both as a reminder of the terrible tragedy
as well as an opportunity for activists to browbeat Dow. In fact, in May last year, Dow once again
blocked a shareholder resolution asking for a report on the financial and operational impact of
Bhopal on its business. As these images show, while Dow's ability to carry out its operations
successfully in India is greatly challenged by social actors, even though it has legal rights to operate
in India, the questions we asked you were how should Dow deal with the problem of Bhopal? How
should it respond to the demand of the activists? What strategy should they follow? And how far
should they be willing to go to protect their interests and reputation? What are the costs and the
benefits? Let's review the facts of the case.
After the Bhopal Gas Tragedy, Union Carbide Corporation paid an out-of-court settlement of 470
million U.S. dollars as directed by the Supreme Court of India. It was then absolved of all future, civil
and criminal liabilities. Union Carbide India Limited, the subsidiary of UCC, ceased to exist as of 2001
after it was acquired by Mcleod Russell. Dow acquired shares of Union Carbide Corporation in the
U.S. more than 16 years after the tragedy for about 11.6 billion U.S. dollars. Note that at the time of
the acquisition, UCIL did not exist and the assets of UCIL had been sold off and the Bhopal plant site
reverted back to the government of Madhya Pradesh.

Dow is looking to resolve this issue but without impacting their reputation, global operations or cash
flows. Dow needs to resolve this issue because the India opportunity is huge. It needs to increase its
investments in India to capture the market potential. Dow is willing to pay for cleanup as a goodwill
gesture but does not want to be held liable for any future problems. The Indian government is rather
ambiguous on Dow's liability. It has concluded that it's not in a position to except Dow from all
potential future liabilities.

So, what are Dow's options? Just for fun, let's call them the D options. These could be do nothing,
deny culpability, deflect the blame to others, discredit the opponents or the activists, delay
commitments to resolving the issue, deploy some resources to deal with the requirements of the
victims or the demands of the government, deepen engagement with civil society and the
government to resolve this, diversify into other businesses, products or geographies and finally
decamp, or in other words, quit the country. So, how will Dow choose the most viable option? We
could analyse this in terms of operational, reputational, financial and shareholder value impacts.

In terms of operational issues, the Bhopal issue places restrictions on Dow on accessing the highly
attractive Indian market. It's clogging up the value chain. There is the possibility that Dow's assets
could be attached by Indian courts and there is the real consumer and community boycotts that the
company is facing across India and the world. In terms of reputational impacts, there is a fear of loss
of social legitimacy, adverse reputational impacts as Bhopal campaign intensifies spreading out into
other markets. There are issues of employee retention. In terms of financial impacts, there are
possibilities of compensation and environmental damage remediation expenses mounting up. There

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 Strategy and the Sustainable Enterprise
P D Jose
Analysis of the Bhopal Case Study

is the issue of the 22 million dollar deposit sought by the chemical ministry to clean up this site.
There could be other demands in the future.

Overall, in terms of shareholder value, you find that shareholder value is highly susceptible to
potential liabilities, and it's possible that analysts may downgrade Dow if Dow fails to resolve this
matter quickly. But to come to a correct decision, we also need to understand the nature of
stakeholder pressures that Dow faces today. What you see here is a simplified stakeholder map for
Bhopal. Consider the positions of the key stakeholders. I'm picking a few of them. For Dow, it faces
intense public pressure and its reputation is on the line. It fears that the company’s assets in India
could be attached. It fears that its global operations could also be impacted by the Bhopal events. If
you consider the victims and the community in Bhopal, the community is unwilling to compromise,
wants Dow to pay for complete clean up of the factory site and pay adequate compensation. It
wants Dow to provide for social and economic rehabilitation of the affected immediately. If you
consider civil society, NGOs and activists such as Students for Bhopal, they believe that Dow is 100
percent liable after it acquired Union Carbide. They would like to use this example to set an example
for other MNCs in general and to win a battle in the war against business without principles.

For at least a few, their existence is dependent on keeping the Bhopal issue alive. Consider the
Indian government. It wants to resolve the tangle of Bhopal without impacting FDI investments and
alienating the electorate. It's a very complex, complicated situation. What would stakeholder theory
say? How do you resolve this? As Freeman would argue in this case, Dow needs to arrive at a
compromise as if both the parties play hardball, this could lead to further conflicts and possible
adjudication by external agencies which will increase the overall cost of resolution for everyone
concerned. However, this solution is not straightforward in a multi-stakeholder game as each group
needs to be treated separately. Let's go back to our earlier discussions on stakeholder mapping. I
hope you remember this framework. Here's the framework that we used which mapped stakeholder
potential for threat against stakeholder potential for cooperation. We have picked three key
stakeholders—the government, local community and civil society. As you can see, government
happens to be a dominant stakeholder, a mixed blessing. You need to collaborate with the
government. Local community tends to be marginal at the moment and, therefore, Dow needs to
hold and monitor the community to see which new issues are developing. Civil society and activists
are mostly non-supportive and, therefore, Dow needs to defend itself. So, did your solution match
with the one that I proposed here? Even if it did not, don't worry too much. Your solution depends
on the salience that you provide to the different stakeholders, and this could change over different
periods of time.
It's important to map and monitor stakeholder power for cooperation or competition at varying
points of time and create strategies to deal with it. Let's look at this issue from another perspective
using Lawrence's framework which we had discussed in the last session. Once again, we had mapped
three variables—High Urgency, High Firm Power and High Resource Dependency, and in this case
you find that all of these three are high in the context of Bhopal and, therefore, Dow needs to work
it out. Broadly, in all three frameworks, we arrive at a similar conclusion that this problem can be
solved only through negotiations, building mutual trust and a spirit of forgiveness. Sadly, all of which
are missing among the key players. And so we expect to see the same issues played out during the
fortieth and the fiftieth anniversaries of the Bhopal Gas Tragedy too.

Note that for Dow too, there are no easy choices. Accepting even a limited responsibility could
potentially mean unlimited liabilities, especially under India's regulations where courts have
proposed the principle of absolute liability that is, a company's liability is limited only by its ability to

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 Strategy and the Sustainable Enterprise
P D Jose
Analysis of the Bhopal Case Study

pay opening the possibility that the entire net worth of a company could be wiped out in a single
claim. So, was Dow's managers immoral, irresponsible or incompetent in failing to anticipate these
matters at the time of acquisition? Or was Dow just plain vulnerable? Should they even said Bhopal
has surprised Dow? Or was this a predictable surprise? It is to these questions that we will turn to in
the next section.

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