06/07/2004

The Three Levels of Environmental Governance

Companies are scrambling to improve their governance systems. Now may be the
time to offer suggestions to executive management for upgrading your current
environmental, health and safety (EHS) governance practices. What do
corporations typically do for EHS? What constitutes the ultimate system?


Many business executives, and even some EHS managers, define EHS governance as
"good regulatory compliance audit systems." Wrong. This narrow view is
especially prevalent in companies that consider EHS functions as service-type
activities, akin to the payroll department. Prepare a paycheck or prepare a
waste manifest: what's the difference, other than the cost of this service?
Both are important, but are they strategic?




As a result, the rationale behind EHS governance programs can be reduced to a
simplistic, "Are we following the regulations?" and "Is anyone doing anything
something they should not, according to company policies" (e.g., falsifying
records). Not surprisingly, both the EHS activities and their associated
"governance" functions are sometimes outsourced or placed into shared service
organizations that back-charge their "services" to the businesses. As a final
insult to this form of governance, the sites complain about paying for these
audits that "they do not need."


EHS governance, just like business governance, is all about protecting
shareholder value. Governance focuses on assurance that the company's policies
and systems are being implemented according to the instructions of the
directors and business executives. Auditing for compliance is one dimension;
the more significant dimensions are related to strategic direction and the
protection and growth of the corporation. Governance answers the question "Are
we in compliance with the regulations and our internal policies?" but it also
explores, "Are our management systems appropriate, and could we be overlooking
any issues or opportunities that may have a material impact on the corporation
in the future?"


Companies could be in 100 percent compliance but fail miserably on governance,
as measured by these other dimensions. Corporations today get evaluated by not
only doing what they have to do, but doing what they should have been doing.


There is a wide spectrum of activities that corporations can be doing to
provide EHS governance:


Level 1: Passive

Audits are focused on compliance and are normally conducted as self-audits at
the manufacturing sites with some corporate oversight. Checklists are used with
a rudimentary system to identify and track outstanding compliance
issues.

Reporting is done at a site and business unit level. Sometimes there may be a
consolidated report to executive management with an annual report to the board
of directors or one of its subcommittees. This report may or may not be
delivered by the senior EHS manager, and the content is carefully reviewed and
controlled by executive management. Most reporting consists of lagging
indicators (outcomes such as accident and emission rates) and ongoing issues
(e.g., spills, remediation progress).

Policy statements refer to the company?s and its employees' obligation to not
violate regulations and adhere to its values. There may or may not be a
specific EHS policy and if there is, achieving compliance is dominant over
other general statements related to protecting the environment, working safely
and social responsibility.




Level 2: Active

Audits are formal and in addition to compliance, evaluate the level of EHS
management systems implementation. Information systems track the results and
have automatic reminders for closing outstanding findings. Trained, certified
auditors (e.g., certified professional environmental auditors) conduct the
audits, sometimes supplemented by outside auditors participating with internal
staff. These audits are in addition to routine site compliance audits.

Reporting includes both leading and lagging indicators, usually the same as
those tracked by others in the company?s industry sector. The system is
formalized and monthly reports are provided to business management. Targets are
established and tracked. An annual or biennial EHS and social responsibility
report is released to internal and external stakeholders. The board of
directors, or one of its subcommittees, receives an annual or bi-annual report
from the senior EHS manager.

Policy is very detailed and specific with written procedures and codes of
conduct that specify what the company will do and how it will behave relative
to EHS and social responsibility issues (e.g., cooperation with regulatory
officials, child labor, disclosure of information, investigations of possible
wrongdoing, and so on)is tied to specific, written codes of business conduct
for EHS and social responsibility.


Management Systems are formalized and, as a minimum, follow ISO 14001
standards. Business transactions and new product/raw materials are reviewed for
EHS impacts and issues.


Organizational structures and staff responsibilities are well defined. Specific
EHS governance responsibilities are overseen by the board of directors or, more
typically, the audit committee of the board. The EHS functions are staffed by
qualified EHS specialists and are led by experienced managers. The management
system audit function is embedded within the financial audit group and staffed
by experienced EHS auditors.


Level 3: Aggressive

Reporting includes indicators of emerging EHS and social responsibility issues.
Metrics are "mapped" to all key stakeholder groups, not just the metrics
commonly tracked by others in the industry sector. Reports are provided
quarterly to the EHS committee of the board of directors and annually or
bi-annually to the full board. Results are presented by a director or
officer-level experienced EHS professional. Independent, external consultation
is sought by the EHS committee of the board of directors. Externally reported
results and key audits are verified using independent auditors such as
university, community organizations or other non-governmental organizations
(NGO) resources following protocols, such as the AccountAbility's AA1000
Assurance Standard or the Fédération des Experts Comptables Européens (FEE)
protocol.


Management systems include sign-off authority on all new business ventures, raw
materials and products. Systems are not based solely on conformance-based
systems, such as ISO, but also performance-based systems, such as the Baldrige
National Quality Program (Green Zia). There is an "assurance letter process"
that has each business unit officer "sign off" that his/her business has
installed the requisite systems and has identified and disclosed significant
issues in accordance with set guidelines.


Organizational structures include (in addition to the EHS committee of the b
oard of directors) an officer council meeting at least quarterly. There is also
an external council of outside senior level EHS and social responsibility
advisors familiar with emerging issues. They meet quarterly to advise the EHS
staff and/or officer council. Ongoing activities and issues are reviewed with
both of these councils and their input is aggressively sought. The senior,
experienced EHS professional (typically an officer level individual) attends
key officer meetings and participates in the strategic planning process. This
same person is no more than one reporting layer from the CEO and has a dotted
line relationship to the EHS committee of the board of directors.


Reward systems tie EHS performance to set targets and directly affect at-risk
pay (i.e., bonuses). The company has a chairman's or president's award system
for outstanding employee performance. Both support individual accountability.

Further Information


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