Law and the Environment

Michael Porter and Mark Kramer Publish a Watershed Article in the Harvard Business Review on Corporate Social Responsibility Strategy and Practice

Corporate Social Responsibility has been a growing concern for companies, their management, and board of directors over the last ten years.  Non-governmental Organizations (NGOs) have been pressuring companies to not only take action to reduce negative effects on society and the environment in the communities and locations where the companies operate, but to issue reports describing the companies’ efforts.   Michael Porter, the famous business management guru and Harvard Business School professor, has joined with an associate Mark Kramer, to write an article on Corporate Social Responsibility (CSR) that has recently been published in the Harvard Business Review.  Porter and Kramer believe that the current CSR efforts of companies often reflect merely public relations campaigns.  They argue that the exercise of good corporate citizenship is an important part of corporate activity and the conduct of business.  However, they advocate a strategic approach to CSR that aligns the actual business of the company to social issues that the company can actually significantly affect and incorporate into day-to-day operations.  The article suggests a significant change in corporate governance to address corporate social responsibility.

 

"The fact is, the prevailing approaches to CSR are so fragmented and so disconnected from business and strategy as to obscure many of the greatest opportunities for companies to benefit society.” Porter and Kramer observe.  “If, instead, corporations were to analyze their prospects for social responsibility using the same frameworks that guide their core business choices, they would discover that CSR can be much more than a cost, a constraint, or a charitable deed—it can be a source of opportunity, innovation, and competitive advantage.”

 

The point Porter and Kramer are making reflects what many of us have observed who practice in environmental law and address such issues as sustainability and climate change:  too often the CSR or sustainability efforts and reports of corporations are driven by a sense of a need to satisfy NGO pressure or social responsibility investors, i.e., pension funds, rather than a real effort to determine what changes can be made at the management and business operation level. The CSR actions and reports may be seen as a means of placating outside pressure.  Often, no corporate strategic thinking takes place at all.

 

Corporate Social Responsibility reporting is often the means of addressing this outside pressure.  CSR or sustainability reports typically do not really delve into true impacts of the company’s supply chain, business activities, or their products.   Nike was sued in 1998 under California truth-in-advertising laws for allegedly making incomplete or inaccurate statements in its social responsibility reports regarding labor practices in its foreign factories.  The potential risk of making statements in these reports suggests that the reporting companies recognize that investors or shareholders have a material interest in the environmental and social practices and impacts by publicly-traded companies.  This potentially raise questions of what is disclosed in a reporting company’s Securities and Exchange Commission (SEC) filings. 

 

Moreover, reporting alone is a poor substitute for good corporate governance.  The reporting demands by NGOs may force companies to focus on image rather than substance.  Effective CRS requires actually addressing social issues, rather than simply developing public relations campaigns or reports.

 

Perhaps the most significant issue companies are struggling today with in terms of social reporting and responsibility is climate change.  Several times in their article Porter and Kramer mention climate change and the reduction of greenhouse gases.  This is an area where companies can benefit the environment, society, and their own bottom line.  Moving beyond reporting and the ratings that NGOs and investors develop, which Porter and Kramer suggest have little real value, is critical for companies to address the social impact of their business.  Climate Change is no different.  Development of a climate change strategy requires a deeper understanding of the greenhouse emissions of the company’s operations and products.

 

A good example, recognized by Porter and Kramer, of a company that has developed a business advantage in the climate change and energy conservation space is Dupont.  Linda J. Fisher, DuPont chief sustainability officer, announced a huge savings over the last several years by reducing energy consumption, and thereby reducing the carbon footprint of the company.

 

“Over a decade ago, we set a goal to hold our energy use flat at 1990 levels. We have exceeded that goal; our current energy use is 6 percent below our target. Along the way we have saved more than $3 billion and grown our businesses by 30 percent,” said Fisher. “The focus on energy has contributed to our greenhouse gas reductions, which are 72 percent below 1990 levels. Today we are looking beyond our own energy profile to develop new products and offerings to help our customers address energy efficiency. We believe this will provide growth opportunities for a number of our businesses.”

 

General Electric’s Ecomagination program is another example of how competitive advantage can be derived if corporate social responsibility and core business strategy are aligned.  The advantage is not only corporate reputation.  Too much effort is focused on this issue alone, that while extremely important, does not permit the full benefit of a the emergence of a true business or economic advantage.  These companies have achieved what Porter and Kramer belive is rare in CSR endeavors.

 

“Few companies have engaged operating management in processes that identify and prioritize social issues based on their salience to business operations and their importance to the company’s competitive contest."  Porter and Kramer conclude.  “Even fewer have united their philanthropy with the management of their CSR efforts, much less sought to embed a social dimension into their core value proposition.  Doing these things requires a far different approach to both CSR and philanthropy than the one prevalent today.  Companies must shift from a fragmented, defensive posture to an integrated, affirmative approach.  The focus must move away from an emphasis on image to an emphasis on substance.”

 

With the rising call for regulation in the United States of greenhouse gas emissions, the publicity and press garnered by the Al Gore movie An Inconvenient Truth and Academy Award for the documentary, the international demand from the European Union for the United States to join in the Kyoto Protocol or its successor, and the NGO pressure for climate change disclosure, all companies with any significant carbon footprint should be evaluating not only how their business could be adversely impacted by legislation, but  what opportunities and competitive advantage could be gained by addressing their direct and indirect greenhouse gas emissions before legislation goes into effect.

 

Porter and Kramer establish the business case for the inclusion in corporate governance and strategy social responsibility.   Climate change at this time may be the most critical concern that many companies should be analyzing.  To go beyond image and public relations pieces on websites and reports, companies must review and understand the impact they have on society and the environment and what benefits to society and their own bottom line they could achieve if their business strategy and practices were changed.  Many examples exist to demonstrate the competitive advantage proactive companies have achieved.  The publication of Porter and Kramer’s article may be a watershed event for management and directors to reconsider their corporate strategy in the context of Corporate Social Responsibility.

Webinar on April 5--Environmental Disclosure Issues Related to Recent SEC Enforcement Activity and FAS 143/FIN 47

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From the convenience of your own computer, join environmental attorney Scott Deatherage of Thompson & Knight LLP, as he addresses the environmental disclosure issues companies are facing today related to recent enforcement activity by the Securities and Exchange Commission and the development of new accounting standards.

Designed for in-house attorneys and outside counsel, environmental managers, CFOs and accountants for companies that must comply with environmental disclosure requirements, this e-seminar will concentrate on a variety of disclosure issues.

............................

Thursday, April 5, 2007 • 12:00 - 1:30 PM EST

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• The recent SEC enforcement activities relating to environmental

disclosure.

• What the SEC expects in terms of companies’ management of

their environmental disclosure processes.

• How Sarbanes-Oxley and other changes to accounting standards

impact companies’ disclosure policies.

• What you should know about the SEC’s expectations for internal

controls on reporting environmental liabilities.

• What actions auditors and the SEC expect companies to take

regarding environmental liabilities.

• The roles and responsibilities in overseeing environmental

management and disclosure.

CLE

Andrews Publications anticipates

CLE approval from all states

that accept telephone presentations

for CLE credit.

PRICING

$119 to attend -- ask about the

discount for multiple registrations.

To register for this e-seminar, call

Becky LaCroix at 800.328.9352,

ext. 85968, or e-mail her at

[email protected].

EPA Releases Long-Awaited Proposed Rule Revising the Definition of Solid Waste

EPA has, after a decade or more of consideration, finally issued a proposed rule for revising the definition of solid waste under the Resource Conservation and Recovery Act.  The definition of solid waste effects what is then classified as hazardous waste.  Competing concerns of recycling and getting materials out of the solid and hazardous waste regulatory systems and preventing sham recycling that often leads to new Superfund sites have long-delayed the revisions of the definition of solid waste.  At issue are materials that are recycled by the same generator or the same industry, and recycling that EPA approves on a case-by-case basis.

EPA has decided to define "legitimate recycling."  EPA states that defining legitimate recycling ensures that only authentic recycling, and not treatment or disposal under the guise of recycling, receives the benefits of streamlined regulations.  In order to be legitimately recycled, the material must provide a useful contribution to the recycling process; and recycling must make a valuable new product.

EPA has issued a "prepublication version of the rule" in advance of the publication of the proposed rule in the Federal Register.  Such an early release will give potentially affected parties and industries a chance to prepare to comment on the rule.

The comment period will extend for 60 days following publication of the proposed rule in the Federal Register. 

Corporate Directors and Environmental Corporate Governance Part IV: Evaluation of Financial Disclosure by the Target in an M&A Transaction May Avoid Risk and Yield Benefits in the Negotiation of the Deal

In mergers and acquisitions, I have found that when one can show the target company has a week environmental financial disclosure process and week internal controls, a significant potential advantage may arise for the acquiring entity.  On the other hand, failure to identify these weaknesses can prove problematic for the acquirer after closing the deal.  As a result, for the appropriate M&A transaction, a review of the environmental disclosure policies, processes, and internal controls can yield valuable information for the acquiring entity and protect it from future risks and liabilities.

In the context of what I’ve been discussing in the Environmental Corporate Governance area, it is important for directors and management to ensure that the company considers environmental disclosure issues in each acquisition with potential material environmental risks and liabilities, both to manage risk and to consider the opportunity to identify the true value of the target company. 

A.  Review for Understanding and Negotiating Value or Other Concessions

The first issue is the extent to which the target has properly accounted for loss contingencies under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.”  One should review lawsuits, demands, and other potential claims to attempt to assess whether the financial statements have adequately reserved for such claims.  Moreover, the policies and processes, if any, the company has in place for identifying, valuing, adjusting, and reporting FAS 5 claims can be reviewed to better understand if the internal controls are adequate.  After the SEC enforcement case against Ashland (discussed in another post on this blog), it is critical that the review and adjustment of the reserve estimates received from the environmental manager or staff be rigorous and documented.

As for asset retirement obligations (AROs) and conditional AROs under Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” and Financial Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, again a careful review of what has been accounted for and the policies and procedures that have been established and how they have been implemented can shine significant light on the value of the company and its potential liabilities, as well as its FAS 143/FIN 47 internal controls.

The other key is to try to do this early.  Deals are somewhat like basketball games, the ability to obtain and process information has to conclude within a period of time, often a very short period of time.  The other side may hold out in terms of providing information or making documents available or allowing access to sites that need to be assessed.  The “four corners” or “stall game” can “run the clock out.”  Pressure builds to close the deal as one approaches the closing date.  For environmental lawyers armed with financial disclosure expertise, time is one of our many challenges.

Another point to keep in mind is that the due diligence process has to be tailored to the deal in terms of what is the nature of the buyer’s goal in making the acquisition, how will environmental issues play into this acquisition strategy,  what type of company or asset is being acquired, what is the market in terms of how many other potential buyers are out there, and is it a buyer’s or seller’s market.

There are a variety of tools that can be used in the deal, and some or all of these may be helpful in certain transactions, but not in all of them.  The point being one must chose the weapons for each deal to fulfill the goals of the buyer.  One advantage to this approach  is that the environmental due diligence plan and process will hopefully match the business strategy of the client in making the acquisition, pricing the acquisition, and then dealing with environmental compliance, management and disclosure issues after closing.  What liabilities or costs will the acquiring entity have to address post closing?  Will this arise two years after acquisition as the new assets or company is reviewed in the acquirers environmental audit process or through review of these issues in the context of the financial disclosure review?  What if the financial auditor determines the new assets or company does not have adequate internal controls or accounting for environmental?  Will a situation arise where the acquiring entity must restate its financials as a result of the acquisition?

It is important to begin with traditional environmental due diligence—identify risks, costs, liabilities, then use this information and more advanced environmental due diligence to identify potential AROS/ CAROs or loss contingencies.  The traditional due diligence will lead to discussions with the other side and then to internal control/lack of knowledge of environmental disclosure requirements with the seller’s environmental manager and then the accounting staff. 

In some deals, the target and its financial accounting people often do not have a good understanding of the environmental accounting issues, so knowledge can become power if the other side seems uneducated and unprepared to deal with a close review of their reserves for FAS 5 and accounting for FAS 143/FIN 47.  Of course this will vary with the size of the seller.  Smaller companies are often like shooting fish in a barrel—they have little expertise in accounting for environmental liabilities and few controls in place to address the issues.  Bigger companies may be more sophisticated, but it is likely you may be able to poke holes in their accounting, reserves, internal controls, etc. 

This is true with respect to both FAS 5 and FAS 143. Do not underestimate how the other side underestimates their loss contingencies just because FAS 5 has been around awhile.  Accounting for FAS 143 and FIN 47 may be practically non-existent or poorly documented and justified. 

Typical purchase and sale agreement contain representations regarding compliance with Generally Accepted Accounting Standards (GAAP).  Some agreements call for price adjustments for liabilities not properly addressed in the financial statements under GAAP.  These GAAP provisions may provide useful tools both for rooting out failure to account for costs, liabilities, and retirement obligations, and for arguments for adjusting values in the transaction.

Whether a price reduction or other advantage can be gained in a transaction, depends on the acquirer representatives and how bad they want the deal.  Issues may have to be considered “material” either in the SEC sense or the deal sense.  With a party wishing to take a strong stand on negotiating price, the value of the environmental financial review can often greatly support price negotiations.  The overall sense of the deal drives environmental negotiations—that is, if the buyer is looking for a price reduction, then environmental issues can be a mechanism to attempt to achieve that end. 

What is important is to go into the deal with an education of the corporate or transactional lawyers and client that this is potentially a useful tool.  In my experience, it arises after the fact through the environmental lawyer educated about financial disclosure issues raising concerns and failure to account or account accurately for environmental issues. 

B.                 Environmental Due Diligence to Protect the Acquiring Entity

The other side of the coin is the need to protect the acquiring entity.  US Liquids (discussed in another post on this blog) and its directors found the company in a criminal enforcement case after acquiring waste management companies that were accused of criminal violations of environmental statutes.  The drop in the stock price found the not only the company, but the directors as well in a shareholder lawsuit.  To add further injury, the Fifth Circuit Court of Appeals ruled the directors were not covered by the director and officer insurance.

The Ashland case reveals issues the SEC identified that caused them concern in an enforcement action over environmental reserves and disclosure.  Taking care to understand the target’s practices at the environmental estimation level and the review by management could avoid future problems and identify accounting changes that need to be implemented after closing.

Thus, the value of conducting due diligence into the environmental financial disclosure practices of target companies in M&A deals provides a potential two-fold advantage:  (1) further vetting of the value and environmental practices of the target company, and (2) protecting the acquirer from potential problems if the target’s practices are far less robust then the acquirer and avoiding future restatements or identified weaknesses in future financial disclosure and auditing.  Corporate boards and management should ensure that their acquisition teams are conducting environmental disclosure due diligence in the appropriate cases where environmental risks and liabilities may be significant.

Corporate Boards and Environmental Corporate Governance Part III: Acquisitions and Environmental Compliance, Management, and Disclosure Due Diligence and Integrating the Acquired Entity or Asset Into the Corporate EMS System

As a continuation of this series on the Environmental Corporate Governance, it is important to consider the governance issues arising from mergers and acquisitions.  Environmental, health, and safety due diligence is vital in acquisitions.  A critical issue identified is the need to integrate the new employees and company or asset (plant, facility, etc.) into the EHS management system and integrity system of the acquiring company.  Failure to do so may have significant consequences.

The first step is to ensure that the appropriate due diligence is conducted.  This must be a message from the board and management on down to those involved in the acquisition.  Due diligence now consists of three parts:  (1) review of the company’s and its assets and facilities compliance with laws and regulations, (2) review of the environmental management system of the company, and (3) review of the policies, processes, and internal controls (where appropriate) for accounting for and disclosing environmental liabilities and asset retirement obligations.

Review of the target’s compliance with environmental laws and regulations and potential environmental liabilities is fairly standard.  More and more consideration of the systems in place to ensure compliance and risk reduction is occurring.  What is now becoming more clear is that the evaluation of the target’s environmental financial accounting and disclosure may be a critical issue for the acquiring entity.

The US Liquids case discussed in another post, shows that the acquisition of entities that not only have poor compliance histories, but also the failure to account for the risks and liabilities by the target and then the new owner can have significant consequences on the acquiring entity and its board of directors.  The stock price fell and trading was stopped when a criminal investigation was announced of the facilities that had been acquired.  The directors were sued and the insurance company successfully argued that the environmental exclusions in the director and officer insurance policies excluded the claims and no coverage was available for either defense costs or liability.

The details of these issues will be addressed in a future post, but areas like asset retirement obligations under the Financial Accounting Standards Board’s (FASB) Financial Accounting Standard (FAS) No. 143, Accounting for Asset Retirement Obligations, and its subsequent interpretation of this standard, Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, have created opportunities, but also pitfalls for acquiring companies.  Care should be given in evaluating the AROs as well as the more traditional reserves for claims and loss contingencies under Financial Accounting Standard No. 5, Accounting for Contingencies, or AICPA Statement of Position 96-1, Environmental Remediation Liabilities (“SOP 96 1”). 

An interrelated issue with the review of policies, processes, and practices is the need to ensure that the target company understands how these three “Ps” compare with its own.  Management, directors, and environmental VPs and managers must understand the importance of integrating the new employees and facilities immediately into the acquirer’s EHS management system and to ensure that no tolerance was provided for deviation.  Some employees would not be able to survive the transition—they simply would refuse to comply with the new system and would quit or be terminated.

Immediate imposition of the new system and review of performance and deviations was seen as critical.  Failure to do so immediately was viewed as likely to result in a very difficult process of trying to integrate the new people and facilities in the future.

Management and boards of directors should consider that the integration of new companies or assets through mergers or acquisitions requires a process-based approach.  The compliance status and environmental liabilities is just one part of this process.  Understanding the environmental management systems is critical, particularly after the Baker Panel Report regarding the explosion that killed and injured so many people a the BP refinery in Texas City, Texas.  The third leg of due diligence is the review of environmental accounting and disclosure in financial statements and any reports filed with the SEC if the target is a public company. 

The key point is understanding that the rigor of the related processes of the acquiring company must be compared with and harmonized with the target before and then after closing.  Otherwise, the buyer may find not only existing conditions that lead to environmental liabilities after closing, but potentially practices that lead to lawsuits and enforcement actions and even financial restatements months or even years after the deal is done.

What Does the Libby Conviction Have to Do with Corporate Environmental, Health, and Safety?

In reading the news about the Scooter Libby prosecution, I wondered if professionals in the corporate environmental, health, and safety field were thinking about the conviction's relevance.  What is relevant to the EHS professionals is that federal governmental agencies are using more and more the federal Criminal Code provisions and other federal statutes that contain criminal provisions for making false statements to governmental prosecutors and obstructing justice as a weapon against those they believe are violating federal substantive statutes.  (See Little Known Provision in the Federal Criminal Code Creates Trap for Those Communicating with Government Agencies post in this blog.)

Companies and their employees communicating with governmental agencies with environmental and safety jurisdiction should take care in making statements and providing documents to these agences.  They should attempt to avoid claims that any false statements were made or any obstruction of the investigative process occurred.

TXU Buyers Create New Website: Texas Energy Future

The buyout team seeking to take TXU private has set up a website to discuss its approach to operating TXU, if the acquisition goes through.  The website is called texasenergyfuture.com.

The website discusses the transaction, price cuts for electricity, meeting energy demans through new technology, the new corporate environmental focus, among other things.  A review of the website is worth the effort to understand the public approach being taken by the buyout group.  Certainly, they have brought some heavy hitters to advise the company and sit on the board of directors. 

Former Secretary of State James Baker will serve as an advisor to the investors.  Donald L. Evans, former U.S. Secretary of Commerce; James R. Huffines, Chairman of the University of Texas Board of Regents; and Lyndon L. Olson Jr., former Texas State Representative and former U.S. Ambassador to Sweden will join the board of directors.

On the environmental front. William Riley, former EPA Administrator and Chairman Emeritus of the World Wildlife Fund, will join the board of directors of TXU and lead the company’s climate change efforts of the utility.

Texas Legislature Considers Environmental Bills Last Week

On Wednesday, the House approved major water legislation aimed at managing the environmental flows of the state's rivers and streams.  House Bill 3 by Rep. Robert Puente would provide a basin-by-basin approach to managing water levels across the state to ensure adequate flows exist for ecological preservation and commercial activity in the state's rivers, bays, and estuaries.  The proposal directs the Texas Commission on Environmental Quality to develop guidelines that will govern water levels needed to maintain adequate environmental flows.  The guidelines will ensure that future decisions involving water permits are made with the full consideration of downstream effects.  The measure would provide certainty for water rights holders and ensure protection of aquatic plants and habitat in streams and lakes, as well as in estuaries and bays located downstream.

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On Thursday, the Senate Natural Resources Committee heard testimony on a major air emissions bill which would strengthen the state's ability to comply with the federal Clean Air Act in the Dallas/Fort Worth and the Houston/Galveston/Brazoria areas.  Senate Bill 12 by Senator Kip Averitt (R-Waco) expands funding and the use of certain technologies in meeting the federal requirements.  The measure would increase funding for the Texas Emissions Reduction Program (TERP) which provides grants for the reduction of diesel emissions.  The bill would also extend the program until 2013.  The proposal provides additional funding for the repair by low income owners of automobiles which fail emission inspections tests while also increasing funding for the purchase of newer, lower emission vehicles (the Low Income Repair and Assistance Program or LIRAP).  Senate Bill 12 would also mandate energy efficiency standards for certain appliances sold in Texas.

Corporate Boards and Environmental Corporate Governance Part II: Climate Change

The round table of corporate directors, CEOs, and environmental managers and vice presidents that I discussed in my previous post in fact resulted in a fascinating discussion.  What I discovered about the directors is that they are very astute, concerned, and dedicated to the companies on whose boards they sit.  As personal liability concerns have risen for directors over the last five years, particularly after Sarbanes-Oxley, and some business leaders have decided to pass on invitations to sit on corporate boards, it is reassuring to know that bright business people remain willing to devote their time and energy to publicly-traded companies.

 

Several issues evolved in the day’s discussion.  Not surprisingly, since many of the companies represented were oil and gas related entities in the upstream and midstream business, climate change and restrictions on carbon dioxide emissions consumed a significant part of the discussion.  It was clear that climate change and potential regulation in the United States and Canada are strategic issues that management and the boards of oil and gas companies should address. 

 

Developing an adequate strategy on climate change is critical.  Each CEO, director, or environmental manager needs to understand the specifics of proposed legislation, how it would affect the company’s industry, and how it would affect the company itself.  Engagement in public discourse and legislative development is a critical.  I commented that there is no shame in being in the oil and gas business.  Our society must have energy to drive our lives and our economies.  I stated that the producers, refiners, and marketers of oil and natural gas must address the issue of climate change, and get off the sidelines.

 

Whatever the controversy over the science, the leading scientific academies across the world have stated that (1) climate change, particularly global warming is occurring, and (2) human activity is contributing to this change.  Regardless of the skepticism some scientists and companies feel for these conclusions, the reports of these scientific institutions have resulted in a growing public demand for legislation restricting the emissions of greenhouse gases.  The group as a whole believed that legislation in North America appears inevitable. The recent policy shift by ExxonMobil is a an example of this strategic reality.

 

One of the issues we discussed is that the public in calling for this restriction must itself bear part of the burden as well.  It is not possible to simply pass the buck to industry without any life style changes and costs being borne by the public and the energy consumer.  One of the key issues I discussed is that the oil and gas industry should consider a public outreach that states that the oil and gas industry is willing to take action and make investments to reduce greenhouse gas emissions and wants to educate the public on how it can contribute to reducing energy use and to becoming more energy efficient.  A positive message needs to be presented.  One of the directors called on the group to begin developing such a plan.

 

Another issue that arose was public financing of research to address technological solutions.  One is carbon capture and sequestration.  (See an earlier post on the work of Total in this area).  Even in a carbon cap-and-trade system, the market price for carbon credits would be insufficient for example to pay the costs of setting up a carbon capture and sequestration system at a power plant.  Thus, the economics would not support such a system.  I suggested an idea, which I will discuss in more detail in a future post, of “Carbon Bonds.”  Public bonds could be sold to generate funds to provide low interest, long term financing of carbon capture and sequestration projects.  Through such a financing mechanism, the broader public would bear a portion of the financial burden of capturing and storing carbon dioxide underground by spreading the costs more broadly through the economy.

 

The discussion was lively, intense, and at a high level of intellect, social concern, and business acumen.  These folks are clearly leaders in environmental, health, and safety corporate governance.  Again, it is reassuring to know that these people are in charge of their corporations EHS issues.  Spreading this knowledge and expertise would be of great value to businesses all over the world.

 

The next post will go into other issues discussed at this roundtable on Environmental Corporate Governance.

What Are the Responsibilities of the Corporate Director With Respect to Environment, Health and Safety?

I am participating in a round table discussion today with several directors of corporations and environmental managers and vice presidents to discuss environmental, health and safety issues.  Last night we all had dinner and discussed the report prepared by the panel of eleven experts led by James Baker of the investigation of the explosion at the BP refinery in Texas City, Texas.

The report found that prior to the Texas City tragedy, BP emphasized personal safety but not process safety, and that the problem existed at all five of the firm's US refineries.

Former US Secretary of State James A Baker led the panel

"BP mistakenly interpreted improving personal injury rates as an indication of acceptable process safety performance at its US refineries," said the report.

"The panel found instances of a lack of operating discipline, toleration of serious deviations from safe operating practices, and apparent complacency toward serious safety risks at each refinery."

The discussion of the report led to the question of what are the  responsibilities of a corporate director of a major corporation, particularly those that sit on environmental, health, and safety committees.  As one of the two lawyers in the room, I raised the issue of the directors fiduciary duty of care to the company.  Delaware case law holds that to fulfill the duty of care, a director must make a good faith effort to be informed and to exercise appropriate judgment.  In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

In the context of the Baker Report, the director must exercise enough due diligence to understand the safety issues and to be sure that adequate information is being supplied to him or her to carry out the duty of care.  In other words, there must be sufficient gathering, boiling, down of information and presentation of that information so it is readily understandable to the director.  The key is appropriate information flow and adequate metrics being provided to the director.

The discussion moved on to what metrics are appropriate.  The BP Report concluded that personal safety, the typical how many injuries, fatalities, and accidents have occurred is not a good measure of true safety.  The Report states that it is process safety, the rigorous review of safety practices, equipment, and other aspects of the processes in place to ensure a safe workplace.  Someone may not have been hurt for example, but several near misses may have occurred.

At Texas City, this apparently had happened.  When the explosion occurred, it just so happened that an ignition source was present when there was an overflow of hydrocarbons from a particular process unit.

The rigor of a process to address environmental, health, and safety issues was also discussed.  We talked about the rigorous activities of the audit committee to be sure financial information is reported accurately and that fraud is not occurring.  The discussion was that something more akin to that is perhaps appropriate to safety and environmental matters.

One participant thought we were being "nattering nabobs of negativism" in calling for directors to address risk, when directors ought to be identifying future opportunities.  BP had been looking for new alternative and renewable energy sources.  How can a director look for opportunities and think big thoughts, if they are worried about process safety?

The response, certainly mine, was that directors have dual roles in this context.  To be sure the company is identifying and managing risk, while at the same time working to identify business opportunities.  For example, in the climate change area, BP directors were right in exploring solar and wind energy and focusing on sustainability.  However, they should also have been addressing the boring issue of process safety.  It is both the sexy and the unsexy issues that directors should address.

A lively discussion was certainly had.  The night ended with one outside or independent director saying that as a parent one must be involved and engaged in their child's life.  He believed that if you take on the role of a director you must get engaged in the business of the corporation.  You have to understand and work to address the issue of whether the employees of the company have a safe place to work.

I'm looking forward to today's discussion with great anticipation.  In my work as an environmental lawyer advising companies and directors on the duties of directors to address environmental laws, environmental compliance, and environmental disclosure, I've seen issues arise with respect to companies that have excellent environmental management systems, but lack a policy and procedure of developing the reports that are delivered to the board of directors.  The process is informal or ad hoc at best.  I'm awaiting more discussion with the directors as to what they expect of the companies on whose boards they serve.  It should be a fascinating discussion.