Evaluating Executives’ Commitment to EHS Audit Programs

May 21st, 2016 | By | Category: Featured Articles

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Individual commitment to a group effort – that is what makes a team work, a company work, a society work, a civilization work.

Vince Lombardi

 

Corporate environmental, health, and safety (EHS) audit programs require a substantial commitment on the part of executive management in order to be successful. Programs must be defined and implemented, resources committed, audits conducted, and deficiencies corrected.  If all goes well, there is a presumption that unwanted surprises and incidents will be rare, resulting in fewer management headaches and no material adverse personal consequences for senior managers.  Truly a win-win for both the company and its executives.

Sadly, it is not always the case that senior corporate executives participate actively in EHS audit programs. A passive approach is much more common as EHS compliance and performance is often deemed to be the sole responsibility of the EHS and sustainability managers in the organization.  The premise of this article is that this passive approach is perilous for both the individual and the company.  Senior executives should be involved actively, and there are ways to test whether this involvement is real or not.[1]  What follows is a discussion of why participation is important and a way to test whether it is truly happening in a given organization.

 

Why Commitment is Important to the Executive

Some believe that environmental incidents and catastrophes will have an impact on a company’s reputation but will not directly affect senior corporate executives. For example, a recent column in the on-line Environmental Leader was titled “No Reputational Penalty for CEOs on Environmental Lawsuits.”[2]  The column referred to a study published in the Journal of Contemporary Accounting & Economics titled “Corporate litigation and changes in CEO reputation: Guidance from U.S. Federal Court lawsuits.”[3]  This study, based on almost 10,000 cases filed in U.S. federal court over an eight-year period from 2000-2007, concluded that there was:

…no evidence of any reputational penalty for CEOs following environmental allegations against their companies,” business school lecturer Dr. Chelsea Liu told Environmental Leader. “This means that the executive labor market, driven by the collective actions of corporations in the marketplace, is not inclined to ‘shun’ those CEOs whose firms are accused of environmental violations. This is very different from how the market reacts to allegations of financial fraud — prior research shows that CEOs whose firms are accused of financial fraud do experience significant reputational damage.

Yet, actual notable cases in recent history would appear to contradict the study’s conclusions. There are any number of instances where very senior executives, including several CEOs, have had their reputations permanently sullied, and some have even been sentenced to prison for negligence with respect to EHS mismanagement. These include the following cases:

  • Union Carbide Corporation (UCC). Warren Anderson, the then CEO of UCC, and seven other employees were sentenced to 2 years in prison in June 2010 for negligence (the maximum allowed by Indian Law) as a result to the December 1984 methyl isocyanate release in Bhopal, India that killed an estimated 4,000 people and injured another 500,000. Interestingly, protestors annually picket the Dow Chemical Headquarters in Midland, Michigan on the anniversary of the Bhopal disaster. Dow purchased the assets of UCC in 2001, a full 17 years after the incident. Should the Dow/DuPont merger announced on December 11, 2015 go through, one wonders if the protesters will picket in Wilmington, Delaware as well, the historical headquarters of DuPont. Not something that executives in either company presumably relish.
  • BP. After a 28-year career with BP, Tony Hayward, the now ex-CEO, was forced to resign on October 1, 2010 as a result of the April 20, 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Ironically, Mr. Hayward had replaced Lord Browne as CEO in 2007 partly as a result of the BP Texas City Refinery fire that killed 15 people in 2005.
  • Massey Energy. Don Blankenship, the now ex-CEO of Massey Energy, was forced to resign on December 3, 2010 after the April 5, 2010 explosion at the Upper Big Branch Mine in West Virginia killed 29 miners. On April 6, 2016, Mr. Blankenship was sentenced to one year in prison for “conspiracy to willfully violate mine health and safety standards.” As former U.S. Environmental Protection Agency General Counsel, Robert V. Zener, commented, “Management ignorance is no defense!”
  • Tokyo Electric Power Company (TEPCO). Three former TEPCO executives were indicted for negligence on February 29, 2016 as a result of the Fukushima nuclear power plant meltdown caused by a March 2011 tsunami. On 10 March 2015, a Japanese National Police Agency report confirmed 15,894 deaths, 6,152 injuries, and 2,562 people missing as a result of the tsunami.
  • Volkswagen. The now ex-CEO of Volkswagen, Martin Winterkorn, was forced to resign on September 23, 2015 as a result of the 2015 “Clean Diesel Scandal” in the U.S. Winterkorn accepted responsibility for the scandal while asserting that he was “not aware of any wrongdoing on my part.” Volkswagen faces criminal enforcement action from the U.S. Department of Justice and over 25 State Attorneys General.

 

It is pretty clear that there are indeed personal consequences for senior executives when significant EHS incidents occur. Any individual sitting in one of the chairs in the C-Suite would do themselves a favor by becoming more involved in the company’s EHS management, including an active participation in any audit program that has been implemented.

 

Evaluating Executives’ Commitment

EHS audit programs are designed principally to identify operations’ deficiencies that have resulted in non-compliance with regulatory requirements, corporate standards, and industry best practices. Rigorous programs also assess the effectiveness of operational controls and management systems that have been put in place to assure that compliance is achieved today and into the future.  Audits conducted over time at the same facilities can also help to detect whether performance is improving or deteriorating.  As such, an audit program can and should identify both trailing and leading indicators of performance.  When looked at in this way, one can see why the results of an audit program should be of keen interest to any invested and responsible executive.

How then does one test whether key executives have an understanding of the results (and potential consequences) of EHS audits that are conducted by the organization? One way is to interview these key executives as part of an annual review of the audit program’s performance.  These interviews are, in fact, a standard part of any third-party evaluation of an EHS audit program; evaluations which are typically commissioned periodically by many organizations.  This facet of an evaluation, whether conducted internally or by a third party, is just as important as other program performance criteria, such as conducting audits as scheduled, committing the appropriate resources to audit teams, delivering reports on time, tracking completion of corrective actions to closure, and so forth.

 

12 Questions that Test Executive Involvement

In evaluating an executive’s involvement any interviewer must be respectful of the executive’s time. They are very busy people.  The twelve questions provided below will get at the important issues succinctly.  It’s important to note that each executive must tailor his or her involvement to best support the organization as efficiently as possible.  So, the interviewer should not assume that any given executive should be involved in all the aspects suggested by the twelve questions.  For example, an executive might only review a sample of audit reports each year and may not routinely attend closing conferences.  However, he or she might take an active role in ensuring on-time closure of action items for the division for which they are responsible.

Based on actual experience the questions can be covered in 30-45 minutes. Face-to-face interviews are preferred but a phone interview or video conference can be used as well with comparable results.  Note that the questions are designed to elicit more than a yes/no response.  The interviewer might also discover that the executive will request to see the questions in advance.  That is perfectly acceptable and might actually produce a more productive session as there is a good chance that the executive will have given the questions considerable thought in advance.  In some cases, they will have written-out actual answers which can enhance the face-to-face discussion.  Here are the questions:

  1. What has been your involvement in the audit program to date?
  2. Do you understand the objectives of the program? What are they? Do you believe the objectives are being met? Why or why not?
  3. Do you believe the program is effective and adds value? Specifically, why or why not?
  4. Do you believe that the program is positioned within the organization so as to achieve the appropriate independence and authority? If not, what could or should be done?
  5. Is management’s performance/compensation tied directly or indirectly to the results of the audits? If so, how? If not, would this be a good thing?
  6. How often, if at all, do you review audit reports? If you do review them, are the reports “reader friendly”? Do they help you better understand the relative risks at the audited site? If you don’t review them, why not?
  7. Do you see what you need to see with regards to the outputs of the program? If not, what would you like to see that you don’t see now?
  8. Have you ever attended a closing conference? If not, why not? If yes, what was your reaction?
  9. Do you agree with the method by which audit team leaders and auditors are assigned (e.g., internal vs. external, part time vs. full time)? If not, how could it be improved?
  10. Do you believe sites are being audited at the correct frequency? If not, why not?
  11. Is there sufficient management attention given to correcting findings in a timely fashion? How do you know?
  12. What is the audit program doing well and should continue to do? If you could change or add one thing to the audit program to make it better what would that be?

 

Note that this very last question is extremely important. So, the interviewer has to be careful to manage the interview process so that there will be time for it to be asked and answered.  Executives are very smart and savvy people.  Asking them to identify one thing they might change or add the audit program to make the audit better will often elicit some sage advice and maybe even some “out of the box” thinking..

 

Closure

Executive participation in and commitment to EHS performance, particularly internal audit programs, is one key to assuring company-wide compliance and potentially avoiding catastrophes. Experience shows that there is no guarantee that an audit program will be a ‘fail-safe” measure but a rigorous program with support throughout the organization is a valuable preventive and corrective tool.  Involving executives in an active way can help bolster the program and provide the support necessary to accomplish goals and achieve compliance.

 

About the Author

Lawrence B. Cahill, CPEA (Master Certification) is a Technical Director with Environmental Resources Management and has over 35 years of professional EHS experience with industry and consulting.  He is the editor and principal author of the widely used text, Environmental, Health and Safety Audits, 9th Edition and its 2015 follow-up text EHS Audits: A Compendium of Thoughts and Trends, both published by Bernan Press.  He has published over 70 articles and has been quoted in numerous publications including the New York Times and the Wall Street Journal.  Mr. Cahill has worked in over 25 countries during his career. He holds a B.S. in Mechanical Engineering from Northeastern University where he was elected to Pi Tau Sigma, the International Mechanical Engineering Honor Society.  He also holds an M.S. in Environmental Health Engineering from the McCormick School of Engineering and Applied Science of Northwestern University, and an MBA from the Wharton School of the University of Pennsylvania.  He is a Certified Professional Environmental Auditor, Master Certification.

 

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Notes

[1] Although this article focuses on executive management, this holds true for plant managers as well.  I recall interviewing an impressive plant manager at a pharmaceutical facility some years ago.  He was extremely committed to EHS performance and was proud of the fact that he had initiated what he considered to be critical monthly EHS meetings involving himself and key plant supervisors and staff.  When I asked him when he last attended, he had to admit (there were records of attendance) that it had been 18 months ago.  He was clearly not completely committed and was only paying lip service to the issue.

[2] Hardcastle, Jessica Lyons, “No Reputational Penalty for CEOs on Environmental Lawsuits,” Environmental Leader, March 7, 2016.

[3] Liu, Chelsea, et.al., “Corporate litigation and changes in CEO reputation: Guidance from U.S. Federal Court lawsuits,” Journal of Contemporary Accounting & Economics, Volume 12, Issue 1, April 2016, Pages 15–34.

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