Reference no: EM133359713
Introduction
The CEO of Star Sparkle (herein known as SS), a global diamond mining, refining and distribution company, Mr. Andre Smith has met with some setbacks during the past 25 years of his career in the diamond industry. However, none of them matched the scale and difficulty he faced in 2020 and 2021. As he gazed out of his office window, he was unsure how he would deal with a few big challenges. One was a failed opportunity to close a lucrative mining exploration deal in Canada. He also had to face several problems which were compounded when the global COVID-19 pandemic struck in January 2020.
Background
Around 1870, massive diamond deposits were discovered in South Africa. The founder of SS, the late Mr. Alan Joe seized the opportunities and bought many mines in South Africa. Diamonds were cherished over the ages as something which lasted forever, a girl's 'best friend', to be held and treasured as symbols of ever-lasting love. When Mr. Alan Joe passed on, the business was handed over to his two sons, Mr. B. Joe and Mr. C. Joe. SS's business became very successful under their leadership. SS ran emotive global marketing campaigns centred around the theme that "a diamond is forever" with accompanying messages of ever-lasting love and romance. Besides fine jewellery, the natural diamonds which SS mined could also be used for industrial applications such as to cut hard objects. Fine jewellery accounted for around 95% of the total value of natural diamonds sold globally. For decades, SS had been making huge profits. SS has diamond exploration and mining businesses in Botswana, Russia, Australia, and a few other countries, besides South Africa. SS was always ahead of the curve in looking for mines. It preferred those with high grade ores and they were very successful getting exploration and mining rights from various governments. SS had steadily acquired most of their competitors over the years and by early 1900s, it had already owned more than 90% of the market share of the global diamond mining, production, and distribution industry.
An Opportunity in 2019
SS's current chairman, Mr. Mark Joe (the late Mr. Alan Joe's nephew) had chanced upon an exciting opportunity in January 2019. SS had always been interested in mines in Canada as they mostly had high grade ore. Mr. Mark Joe's role was to hunt for opportunities and he would normally leave the company's operations and negotiations for mining rights to be handled by Mr. Andre Smith, the CEO.
In January 2019, the Canadian government wanted to grant sole diamond exploration and mining rights for 35 years for a mine with unusual amounts of high-grade ore to a bidder. Both the regional and national government were supportive. They were willing to give land freely to re-locate the indigenous community and also, to build supporting infrastructure, such as roads and facilities for the re-location. Eventually, the government would gain more taxes and revenue through the expanded economic development opportunity.
Mr. Mark Joe instructed Mr. Andre Smith and his COO, Mr Arith to rush through the bidding process quickly to acquire the mining rights to the new mine. They encountered the first challenge. The Canadian government had mandated that SS had to obtain approval from the indigenous natives of the land by negotiating and coming to an agreement with the community's appointed Indigenous Community Representatives (ICR). Mr. Andre Smith and his COO, Mr Arith would be the two appointed negotiators from SS to negotiate with the ICR. They would be supported by the finance and legal staff from SS. This was the first time SS negotiated with the indigenous community in Canada.
The indigenous community had 200 households and they elected three of their own delegates as the ICR to negotiate with SS. One of them, a Mr. Binesi would be the leader of the negotiating team. Mr. Binesi was one of the most educated members of their community. The government mandated that the negotiations between SS and the ICR would be conducted in the presence of a Senior Government Official in charge of mining rights and representatives from a local Non-Government Organization (NGO). The NGO would ensure that the community was well-represented and negotiations were conducted in a fair manner.
As the negotiations between SS and the ICR progressed, it was clear that one major issue of disagreement was over the amount of compensation SS had to pay ICR. The government had mandated that the compensation would have to be deposited into a designated Community Development Fund (CDF) through a Canadian Mining Framework Agreement.
From SS's perspective, it could only run the mine for 35 years. The costs of excavating the raw diamonds were expensive and hence, SS would wish to secure a sufficiently high-level of Return on its Investments. SS offered a cash compensation of US$800M to provide for the needs of the indigenous community when they had to re-locate from their land. However, the ICR which represented the community was not agreeable. They wanted proper mechanisms in place to determine a fair compensation. The ICR felt that SS's offer of US$800M was too low and they wanted it raised to US$1B instead. The ICR told Mr. Andre and his negotiating team that it was a fair amount as 200 households from the community had to give up their livelihoods, native land (although the regional and national government were willing to give land freely to them to re-locate and to build supporting infrastructure), heritage and burial sites should the Canadian government award SS mining rights.
By August 2019, after many back-and-forth negotiations between SS and the ICR, it was clear to both parties that there were serious communication problems at play. It would be impossible to come to any agreement. SS felt that the asking compensation of US$1B was too high and it was wasting time negotiating with the ICR. The ICR blamed SS and its negotiating team for the failed deal. SS decided to explore diamond exploration rights with the Angolan government. The country had a few sites for mining exploration although the diamond ores were of a more inferior quality than the mine under negotiation with the ICR. Both parties decided to break off the negotiations.
SS conducted a review of the failed negotiation for learning points. Mr. Andre Smith was a shrewd and generally strong negotiator with over 15 years of negotiation and management experience. He was the Chief Negotiator who successfully closed negotiated deals for mining rights with the governments of Australia and Botswana before. However, he felt that while he understood the culture of the South Africans and the Australians, he may not have as much knowledge and understanding of the culture and communication styles of the indigenous community in Canada. In addition, Mr. Andre felt that he may have under-estimated the efforts required to managing the expectations of all the stakeholders, especially, the youths in the community.
The youth of the indigenous community had felt left out of the mining compensation negotiations. They had anti-mining sentiments. Unlike the older community members whose main worry was to preserve their culture, the youth feared that once SS got their community's consent to re-locate, they would be 'abandoned' and they would find it difficult to get their elders to listen to their concerns post-displacement. A young boy, 18 years old Migizi aptly summed up in his speech to his community in July 2019 that SS and the elders in the community should not think that the youth were naïve and that SS's promises would only lead to unfulfilled community expectations about employment and income. Migizi also shared with his community that the youth may turn to drugs and crime if the community leaders were to be too focused on the US$1B dollars of compensation without factoring in other costs of the displacement of their community from the land. He felt that youth employment was an important consideration. He also questioned the environmental impact to "open-pit mining" once the mining was completed in 35 years.
Nonetheless, Migizi recognises that the deal was a good opportunity for the community as a whole as it had a high jobless rate and a relatively low standard of living. He told the ICR that perhaps, the more educated youth in the community who were qualified should be given some form of employment with SS. Also, ICR could seek help from SS on re-location (on top of the land the government would offer to the community) and to get SS to pay for environmental assessments to be conducted. Migizi requested for youth to be able to participate in the second round of negotiations in 2022 and for their right to be heard. The ICR who was present at the speech by Migizi shared some of the above concerns with Mr. Andre and his team in end July 2019.
Mr. Andre also felt that he and his negotiating team could have done a better job to ensure that all the community concerns were properly addressed. Besides the more obvious issues of more cash compensation and heritage preservation, there could have been a better airing of the impact on the locals' livelihoods, distribution of the community fund, measures to alleviate joblessness, and more specifics for re-settlement assistance for the 200 households.
The learning and review by SS also showed that the exercise of power by different parties could have played a role in the negotiations which broke down in August 2019. There were clearly different levels of power for everyone, be it the Canadian government, the NGO, SS and the ICR and the affected community. The community leaders were also aware that SS was a powerful and reputable company with much resources as well as some influence at their disposal.
Challenges in 2020 and Some Hope Ahead in 2022
There was no contact between SS and the ICR between September 2019 to February 2022. And in January 2020 (when the COVID-19 pandemic started), SS faced its biggest crisis in its company history. The global pandemic took a toll on many business sectors and the diamond industry took a big hit too. With travel, dining and movement restrictions, there were plenty of weddings which were postponed or cancelled. This led to a fall in demand and prices of diamond engagement and wedding rings. Singles who used to buy diamonds to dress up also re-assessed their life priorities and ended up spending substantially less on diamonds too and this affected SS's business.
The Canadian indigenous community was not immune to the pandemic too with the worsening joblessness situation. They wanted to renegotiate the deal with SS. In January 2022, SS received a surprise visit from a senior Canadian government official in charge of mining rights. Apparently, the ICR had met with the government official and told him that they would be open to re-opening the stalled SS and ICR negotiations in 2019. They wanted to explore if the indigenous community could conclude a win-win deal with SS. During the visit, the government official offered SS another opportunity to re-negotiate the terms of the mining contract for the same Canadian diamond mine with the same indigenous community. Mr. Andre Smith and Mr. Arith would still be in charge of the negotiations this time round.
Mr. Smith felt that there was some hope of reaching a deal with the indigenous community. He has the benefit of knowledge of the concerns of the stakeholders, especially the youth and importantly, had more time to prepare for the negotiations unlike the first round of negotiations in 2019. He got his senior management team to re-evaluate their terms for negotiation. SS could commit to the ICR up to $50 million additional funds for some developmental projects for the training and education for the community. This is in addition to the $800 million towards the Community Development Fund. This additional investment was in line with SS's corporate social responsibility policy and commitment and could even be increased depending on how the second round of negotiations in 2022.
Mr. Smith met the ICR in February 2022. He was hopeful that he could conclude a successful negotiation with the ICR by December 2022. He and his senior management team believes that the pandemic would be soon over and the diamond mining and distribution business would do well in the near future. He would focus on preparing for a successful negotiation deal with the ICR the next few months. He knew that he would have to revisit and re-negotiate all the past issues he had encountered with the ICR in 2019. This time round, he was adamant not to repeat the mistakes he made negotiating with the ICR last time.
Based on the given case scenario about Star Sparkle (SS), answer the following question:
Recommend four (4) ways Mr. Binesi and his Indigenous Community Representatives (ICR) negotiation team could use power to their advantage when negotiating with a dominant company in the diamond industry such as Star Sparkle (SS) for past and future negotiations.