Introduction

At the tail end of 2018, we received two questions following the publication of a recent blog:

  1. Do recent regulatory and judicial developments mean that there are increased prosecutions of company managers and directors for EHS failures?
  2. What evidence is there that CEOs of companies taking on the challenge of sustainability, corporate social responsibility (CSR) and employee welfare outperform those that don’t?

Let’s take a look at each question in turn.

Are corporate leaders under greater scrutiny than before on EHS matters?

This is hard to evaluate systematically, globally. At Enhesa, we track interesting enforcement cases around the world on a daily basis and specifically keep an eye out for cases that will involve fines or prison sentences for senior management. By nature, is an inexact science. However, we do see a rise in enforcement globally, particularly on environmental issues. In fact, over the past four years, “Environmental Law Enforcement” was the number one topic that we covered in our Regulatory Forecaster reports[1].

Enforcement actions have increasingly focused on holding senior managers and corporate leaders responsible for non-compliance. Let’s look at a few examples from around the world:

 

The UK

Section 37 of the UK’s Health and Safety at Work Act 1974 states that if an offense has been committed by a corporate body, “with the consent or connivance of, or to have been attributable to any neglect on the part of any director, manager […] or other similar office […],”[2] then that person can also be prosecuted alongside the corporate body. This means that senior corporate leaders can face personal liability for health and safety failings.

There is increasing reliance on this provision: The number of prosecutions of directors increased in 2017; 40 directors were successfully prosecuted and six were convicted of corporate manslaughter on a personal basis[3].Of those 46 directors, 34 received a custodial sentence, 17 received suspended prison sentence and 17 received an immediate custodial sentence for an average of 21 months. For example, in February 2017 a construction company director was jailed for eight months [4]

 

The USA

In the USA, although often considered primarily financial in scope, the Sarbanes-Oxley Act of 2002[5] section 805(a)(2)(5) and the related US 2010 Federal Sentencing Guidelines[6] are explicit on EHS compliance infractions. Regulators can target any person in the chain of command, from the CEO to the EHS manager, for non-compliance. A number of Enhesa clients cite Sabanes-Oxley as one of the core reasons behind their adoption of a global EHS compliance program.

High-level personnel of the company must ensure that the company has an effective compliance program. Specific individual(s) within high-level personnel must be assigned overall responsibility for the compliance program.

Regulators can target any person in the chain of command from the CEO to the EHS manager for non-compliance.

According to the Act, the company’s Board of Directors must be knowledgeable about the content and operation of the compliance program and must exercise reasonable oversight with respect to the implementation and effectiveness of the compliance program.

The U.S. Sentencing Guidelines are also very explicit on the issue. They require any company to take reasonable steps to do the following:

  • Ensure that the company’s compliance program is followed, including monitoring and auditing to detect criminal conduct
  • Evaluate the effectiveness of the company’s compliance program
  • Publicize a system: Include mechanisms that allow for anonymity or confidentiality, whereby the company’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation

To take a couple of recent examples of company directors being found criminally liable:

  • On August 3, 2018, two senior staff members were indicted in connection with fires that occurred at a chemical plant in Crosby, Texas caused by flooding from Hurricane Harvey. The CEO of the company and the plant manager of the facility were both charged with recklessly releasing chemicals into the air. The charge for violating the Texas Water Code carries a fine of up to $1 million USD and five years imprisonment[7].
  • On May 3, 2018, the U.S. Environmental Protection Agency (EPA) announced that a federal grand jury had issued a superseding indictment to hold a former chairman of the management board of Volkswagen AG (VW) liable for conspiracy and wire fraud. The EPA had earlier discovered that VW cars contain software that circumvents the EPA's emissions standards for certain air pollutants, such as nitrogen oxides. In addition, the former chairman continued making false representations after he was informed of this discovery. This indictment is the 9th individual against whom U.S. authorities have brought criminal charges in connection to VW's diesel emissions scandal[8].

 

China

Jumping to Asia, China is witnessing a huge upsurge in EHS-related enforcement. In the first ten months of 2018, criminal prosecutions had already increased by 40 percent compared to the whole of 2017[9]. This is part of a wider sea change in China that we have focused on in the past[10].

Crucially, the government has also emphasized that the main responsible person of a company, such as the legal representative, actual controller or general manager, takes the primary responsibility; this may lead to administrative fines, custody or even criminal sanctions for environmental and safety legal compliance of that company.

Recent cases have highlighted this:

  • In November 2018 in Fujian, seven people, including three employees of the Fujian Donggang Petrochemical Company and four workers on the concerned chemical tanker, were arrested for negligence resulting in a massive chemical spill on November 4. The spill occurred as a toxic substance called C9 aromatic hydrocarbon was being transferred onto a chemical tanker ship at a petrochemical wharf in the Quangang district of the port city of Quanzhou. During the transferring process, an old tube connecting the vessel to the wharf broke, spilling out almost seven tons of the chemical into the water[11].
  • A criminal case was opened following two accidents that happened at a steel company in Guangdong on February 5 and 9 2018, caused by a gas leak and resulted in eight employees being killed and 13 suffering injuries. As a result of the accidents, the company's EHS deputy manager may face a criminal penalty and its board director and general manager may face administrative penalties[12].
  • In Zhejiang, municipal and district (county) environmental protection departments filed 687 administrative punishment cases in the first six months of 2018. A total of six suspected environmental pollution crimes were transferred to the public security organs, 13 were criminally detained, 18 cases of administrative detention environmental violations were transferred and 15 were administratively detained. A total of 38 cases were seized and 11 production orders were stopped. The majority of the environmental violations related to unapproved construction, untested/incorrect use of air pollution control facilities, and wastewater exceeding discharge limits[13].

So, compared to the situation just a couple of years ago, China is cracking down on EHS non-compliance―and cracking down hard.

 

ISO Standards Focus on Top Management

ISO 14001:2015 and ISO 45001:2018 have been (re)framed in a new high-level structure (applied to all new or updated ISO standards), to allow better integration of different management systems. This new structure supports a clear and renewed focus on the importance of leadership.

Under both standards, top management have a whole series of requirements requiring them to demonstrate an understanding of the wider business context, but also to have a grasp of the company’s internal strengths and weaknesses and how these could impact the ability to deliver their goals and commitments. Top management will need to be closely engaged with the process of management review. Again, this opens up the standards and the implementation thereof to the whole company―and the leadership hierarchy within it―not just those immediately (and traditionally) responsible for EHS.

Although the ISO standards are voluntary, many best-in-class companies structure their EHS programs around ISO EHS Management System standards. As a result, the approach taken by such companies often has an impact on the wider marketplace. The top management of those companies need to be involved in order to obtain and maintain management system certifications – and those certifications are increasingly an essential part of working with customers and suppliers.

...many best-in-class companies structure their EHS programs around ISO EHS Management System standards.

All in all, this emphasizes the (increased) responsibility on corporate leadership to be engaged and involved in EHS. But does ‘doing the right thing’ bring an ROI?

 

What evidence is there that CEOs who place a focus on CSR and EHS outperform those that do not?

Avoiding prosecution is one clear reason to embed a robust EHS compliance program in your organization, but is there also a more positive reason? Can such a program actually increase financial performance and provide a real return on investment (ROI)?

Falling Incident Rates

The first piece of evidence most EHS professionals face every day...virtually every company that I have ever dealt with has succeeded in reducing their workplace accident and fatality rates over the past twenty years. Many countries, particularly those with developed economies like the UK, have witnessed significant decreases in workplace injury and fatality rates over recent decades[14].

Safety & Health Magazine in the U.S. recently produced an infographic highlighting that injuries will cost employers tens of thousands of dollars and each fatality costs an organization USD 1.12 million[15]. Safety has a clear ROI and arguably impacts a company’s bottom line.

The Rise and Success of ‘Sustainable’ Investments

Another measure to look at for evidence is to see how investments in ‘ethical’ or ‘sustainable’ stocks have performed over similar periods (such as the FTSE4GOOD indexes) when compared with ‘non-sustainable’ investments.

A paper published in January 2018 by the Royal London Mutual Insurance Society Limited (RLAM) entitled “Is it Worth Making a Difference?” made two key findings in this respect[16]:

  • 54 UK listed companies that passed RLAM’s sustainable criteria returned 10.2 percent per year on average over the past five years. The FTSE 100 which returned 9.5 percent per year on average over the same time period.
  • As part of RLAM’s analysis they also studied the average performance if an investor split GBP 100 equally across all 54 companies. This was compared to GBP 100 split equally across the entire FTSE 100, and GBP100 split equally across every company that didn’t pass the criteria used by RLAM’s sustainable funds. RLAM found that over five years the average return of sustainable companies (per RLAM’s definition) in the FTSE 100 was 14.7 percent per annum; the average return of FTSE 100 companies was 10.3 percent per annum; the average return of the stocks that did not pass our sustainable criteria was 8.6 percent.

There is also evidence that there is growing customer demand for green investment and financing vehicles, with 2018 having been a bumper year in this regard[17].

The number of companies reporting on non-financial performance are also on the rise, indicating this remains a growing concern for industry and the adoption of CSR policies and sustainable business practices are increasingly central to market position and reputation management[18].The practice of CSR and sustainability is no longer a rare occurrence; it has become an integral part of day-to-day operations of multinational corporations.

There are a multitude of other examples of the positive impacts of sustainability, many highlighted in an excellent Harvard Business Review article from 2016[19]. In fact, as highlighted by a Forbes article, companies are increasingly themselves taking the lead on CSR issues and reaping the competitive benefits thereof[20].

The Chicken or the Egg?

However, other studies do not back this conclusion and results can be fragmented. For example, a 2014 study found that there is actually a financial price to pay for investing in a socially responsible manner[21]. There can be variations in how “sustainability performance” is defined and measured and this can cause variations in results. A recent study from May 2018 tried to regroup results from multiple studies and concluded that there is a need for a clear sustainable performance reporting network[22].

The same study raises another question when looking at the performance of ethically responsible and CSR-focused companies: What came first―the ‘performance’ or the ethical business policies and practices? Companies that are already performing well and in a healthy financial position are more likely to invest in CSR and EHS initiatives, which in turn can enhance the profile and performance of the company in question.

CEOs Flying the Sustainability Flag

There are an increasing number of high-profile examples of individual companies (or their CEOs) standing out from the crowd and putting people and planet on a par with profit. Two of the most notable recent examples of this are BlackRock’s CEO Larry Fink and the recently retired Paul Polman of Unilever.

Larry Fink published a highly publicized “Letter to CEOs”[23] in January 2018 where he backed an investment approach that promotes sustainable, long-term growth. More specifically, he outlined his expectation that all CEOs of publicly-listed companies must start accounting for their effect on society. Crucially, he stated “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate." As the CEO of the world’s largest investment fund, people sit up and listen to such statements.

For 10 years, Paul Polman was at the helm of Unilever, a consumer goods company listed on the FTSE100. This is a long time for any CEO to be at the top of a major multinational. What makes Polman’s tenure all the more remarkable was his message, from day one, that he would not focus on short-term profits, but rather long-term sustainable growth―in both the financial and environmental sense. He succeeded with the Unilever Sustainable Living Plan to embed social and environmental considerations in every aspect of the business, while maintaining profitability. Over the full length of his tenure Unilever delivered shareholder return of 290% [24].

 

Conclusion

In brief, although it is hard to give a very precise yes or no answer, there is evidence to support both assertions that form the basis of this article. There is arguably increased pressure on corporate leaders to manage EHS compliance―or they can be held personally responsible. Likewise, there is a definite current trend in companies and investors to follow the CSR/Sustainability route in their decision-making and to take a long term view on those decisions. This, coupled with notable statements and success stories from prominent business leaders in this regard, does support that having a robust, proactive and transparent approach to EHS across an organization will bring concrete results for your bottom-line and thereby increase shareholder value.

 

[1] Out of over 200 specific EHS-related topics that are covered as standard.