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Corporate Governance

Governance is a new focus for businesses today. In response to a wave of corporate scandals, new laws - such as Sarbanes-Oxley - and new non-governmental initiative - such as ISO 26000 - have been or are being developed to encourage companies to "do the right thing." This is a complex area with the potential for substantial impacts for environmental, safety and health programs.

Environmental health and safety issues can have substantial impact on a company's financial performance. Companies who have failed to manage their EHS issues have incurred multi-million dollar clean-up liabilities, faced significant erosion of their business reputation or gone bankrupt when they failed to anticipate the importance of an emerging issue, such as the potential carcinogenicity of a key ingredient in their product.

Why Is This Important Now?

There are four drivers that have focused increased attention on Corporate Governance:

Corporate Accountability Laws - Laws such as Sarbanes-Oxley are focusing new attention on the internal controls companies have in place to ensure sound fiscal management and accurate financial reporting.

Trade Globalization - The development of a global marketplace means companies have to be concerned about regulatory requirements wherever they plan to market their products. This makes environmental regulations such as the European Union's WEEE and RoHS directives important throughout the global business chain.

Reputational Risk - A 2004 survey of the members of the World Economic Forum found that over half of the survey respondents estimated that corporate brand or reputation represents more than 40% of a company's market capitalization. Given the public interest in environmental issues, negative environmental publicity impacting a company's reputation is a significant corporate concern.

Expanding Potential Liability - Increasingly, laws and standards are shifting from "buyer beware" to a focus on minimizing a product's potentially harmful environmental and safety impacts throughout all aspects of its life-cycle. This has lead to an increased focus on those entities along the product distribution chain that have the ability, or means, to prevent potential harmful impacts. With a global marketplace, this also means that ignoring safety and environmental issues may create significant world-wide liability.

Seven Key Requirements for Effective EHS Corporate Governance

1. Top Management Involvement

Studies of EHS programs unanimously conclude that effective EHS performance "starts at the top." Informed, involved and committed top management is critical to effective EHS performance.

2. Defined Roles & Responsibilities

EHS programs are only effective when there is ownership. This only happens when roles and responsibilities for EHS performance are clearly defined and individual performance reviews include an evaluation of how well EHS responsibilities have been met.

3. Appropriate & Consistent Metrics

It is impossible to proactively manage processes if you don't know where you are, where you are going or how far along you are toward meeting your goals. The development and on-going monitoring of clear, concise and relevant performance metrics is critical to effective EHS performance. For organizations with multiple business units, it is also critical that these metrics provide consistent data reporting to support sound decision-making.

4. Impartial Evaluations by Competent Assessors

Human nature being what it is, it is difficult for those who are involved in implementing and maintaining systems to provide an impartial evaluation of the system's performance. In addition, system audits require competent auditors.

5. Effective Communication

Management requires timely and effective communication. Responsibilities will be unfulfilled if they are not communicated. Metrics are meaningless unless they are available when decisions need to be made. Evaluation serves no purpose unless it drives system improvements.

6. Availability of Required Resources

Good intentions are wonderful but safety initiatives and environmental protection requires resources - money, manpower and corporate support.

7. Consideration of Sustainability & Social Responsibility

In today's global marketplace, country-specific laws and regulations can no longer be the exclusive focus of EHS programs. Laws will never address all aspects of what is fair, ethical and consistent with company values. Rather than ignoring questions of ethics and values, increasingly companies need to confront these questions directly and proactively.

ISO 26000 - ISO's Initiative on Social Responsibility

ISO, the International Organization for Standardization, has decided to develop an international standard providing guidelines for social responsibility.

ISO's goal is to involve a variety of stakeholder groups - industry, government, labor, consumers and nongovernmental organizations - in the development of a guidance document to assist organizations in acting in a socially responsible way.

It is anticipated that the standard will be published in 2008 as ISO 26000.

For more information, go to the ISO Social Responsibility web page.

Sarbanes-Oxley

In response to a wave of corporate scandals, the Public Company Accounting and Reform Act of 2002, commonly know as Sarbanes-Oxley, was signed into law in July of 2002. This Act contains a number of provisions that require publicly traded companies to improve the accuracy of their financial disclosures and establish better internal controls for financial reporting. One area where better internal controls will likely be needed is in developing processes to identify, track, quantify and assess the financial impact of potential environmental liabilities.

SEC Environmental Disclosure Obligations

The following Securities and Exchange Commission (SEC) rules require the disclosure of environmental costs and liabilities:

  • Item 101 of Regulation S-K requires companies to disclose material effects of compliance (or non-compliance) with environmental laws
  • Item 103 of Regulation S-K requires disclosure of pending, non-routine litigation (with environmental litigation typically being considered non-routine)
  • Item 303 of Regulation S-K requires disclosure of business trends or events likely to have a material effect of a company’s financial condition. One can easily see how certain environmental “trends or events” such as discovery/disclosure of environmental contamination (e.g. PCB in fish) might have such a material effect.

While these SEC environmental reporting rules have been in place for several years, the passage of Sarbanes-Oxley focused additional corporate attention on identifying and quantifying environmental liabilities and costs. A December 2001 study by the SEC found that many companies did not provide adequate disclosure on environmental issues.

Four Steps to Consider For Enhancing Your Environmental Controls

1. Review Your Current Processes.

Sarbanes-Oxley requires the CEO to personally certify that adequate systems are in place to ensure accurate and material information is made known to those certifying the financial statements. This requirement suggests that top management will want to evaluate the adequacy of any processes currently being used to identify and quantify environmental costs and liabilities. These would include the processes for identifying environmental legal requirements, determining compliance with environmental laws, estimating environmental compliance and remediation costs, and tracking important environmental “trends and events” that may impact the bottom line.

2. Establish an Environmental Management System

Given the increased public interest in environmental issues and substantial liabilities associated with environmental lawsuits, such as Superfund and toxic tort cases, many corporations have replaced their environmental compliance programs with environmental management systems based on ISO 14001.

An ISO 14001 management system can assist you in establishing environmental financial controls by:

  • Defining environmental responsibilities and internal communication processes
  • Establishing procedures for identifying legal requirements and evaluating compliance
  • Establishing processes for identifying and quantifying environmental risks
  • Monitoring stakeholder interests and establishing public communication mechanisms

One word of caution - don’t assume that just because you have an ISO 14001 certificate on the wall, your environmental internal controls meet the Sarbanes-Oxley requirements. Many existing ISO 14001 management systems do not adequately address the Sarbanes-Oxley requirements relating to litigation risk identification and evaluation, financial materiality determination and timely internal risk communication.

3. Consider Periodic Independent Third Party Reviews

One of key concepts underlying an environmental management system is continual improvement through a program of periodic evaluations or audits. Although these audits can be conducted “in-house,” many companies find significant benefits associated with independent, third-party reviews.

First, internal auditors may be reluctant to criticize colleagues they have to continue working with or programs they helped develop. Second, external auditors can bring a broader perspective to help identify typical areas of environmental concern or departures from commonly accepted industry “best practices.” Finally, there is often greater public credibility given to outside, impartial evaluations.

Given these benefits, corporate directors and officers may want to have periodic reviews conducted by an independent third-party.

4. Evaluate your Current Processes for Environmental Product Stewardship

Increasingly, environmental laws and regulations are focusing on minimizing safety, health and environmental impacts throughout a product's life cycle. One example of this is the European Union WEEE and RoHS directives. Company's need to have systems in place to address such regulatory initiatives and the environmental, safety and health impacts of their products and services.

How ENLAR can Help

ENLAR assists organizations in developing environmental safety and health management systems to improve corporate governance. We are assist organizations in developing cost-effective solutions to address their EHS concerns. We can assist you in evaluating your current EHS program, improving your existing management system, establishing product stewardship programs or conducting impartial evaluations of your existing internal controls.

 
 

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