Corporate view of safety program vs environmental protection

As someone who has seen up close and personal how senior management views its health and safety program and its environmental protection program, I would like to share some of my thoughts here with our readers.

Corporate health and safety program gets much higher level of management support for a number of reasons. Cost accounting is the main one. Performance of health and safety is monitored at the corporate level through workers compensation costs. A program that drives down the workers comp costs is viewed as an effective one. And rightly so. When the management board sees an 80% reduction in workers comp cost in a few years after implementation of a safety program, it is going to continue to support it with large budgets and manpower.

Safety performance can be reduced to dollar and cents.

Environmental performance, on the other hand, is much harder to track. Environmental protection budgets are often hidden in O&M. The benefits are even harder to quantify – as opposed to a workers comp cost. An environmental program that is working for the company means the company is not being fined. There isn’t a line item in the monthly budget to senior management that reflects that. On the other hand, senior management only knows that the environmental program has failed when it is hit with a big fine. In other words, senior management does not see a need to maintain or improve the environmental budget until something bad happens.

The key really lies in environmental cost accounting. If a company’s accounting system can show management the financial benefits it is getting from its environmental program, management will continue to support it in the same manner that it is supporting the safety program.

Unfortunately, not too many companies have such an accounting system.

Harvard/Georgetown University Study on EPA Self-Audit Policy

One of our readers made the comment that a recent Harvard/Georgetown University study on EPA’s Self-audit Policy shows that it may not be good for all companies. 

Below is a brief summary of the Harvard/Georgetown findings from the reader’s website:

“Our results … demonstrate that Audit Policy participants with clean past compliance records improved their environmental performance by reducing their accidental releases of toxic chemicals to the environment.  We also find that regulators rewarded these effective self-policers with an inspection holiday.  By contrast, bad apple self-disclosers did not improve their performance compared with similar non-disclosing firms.  We find no evidence that regulators altered their scrutiny over these ineffective self-policers.

… it turns out that regulators are quite adept at … sorting the good apples from the bad.  We found that regulators had accurately parsed these two groups of self-disclosers, rewarding the former but not the latter with inspection holidays.

… self-disclosing firms on average reduce the number of abnormal events resulting in toxic chemicals being released to the environment.”

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My comments on this study are as follows:

The study is flawed in its basic premise. It presupposes that a company undertakes the self audit because it expects an “inspection holiday” AND improved performance. Quite the contrary – the MAIN focus and reason for a company to go the self-audit route with EPA is to secure substantial penalty waiver and avert possible criminal sanction in the face of uncovered environmental violations. The subsequent improvement in environmental performance is a natural byproduct and bonus as a result of the remedial action following the self  disclosure.

The study also finds out that “self disclosing firms on average reduce the number of abnormal events”. Well – the reason is very simple. They have few is because they perform audits! They discover small problems before they become major abnormal events. Nothing new here. That’s why people do environmental audits.

As to the “inspection holiday” – you do not need a Harvard study to discover that a regulatory agency carries out more inspections on the bad apples. It is common sense and it happens in the real world. Agencies generally do not waste their limited resources on good apples. Why would they?  They can get a much larger return by going after the dirty companies. Again, nothing new here.

 

EPA’s self-audit policy – a case study

Under EPA’s Audit Policy – finalized on April 11, 2000 – if a company discover environmental violations through its own voluntary audit, it can report the violations to EPA within 21 days of discovery and seek significant reduction in civil penalties from the agency. The company must meet nine conditions to be eligible for a 100% reduction of the gravity portion of the civil penalty. (More on the gravity portion later).

The 9 conditions are:

1. The audit must be systematic.
2. It must be voluntary.
3. Prompt disclosure of violations within 21 days.
4. Audits must be independent of permit or settlement conditions.
5. Correct violation within 60 days.
6. Prevent recurrence of violation.
7. No repeat violations.
8. No serious harm to human health or environment.
9. Cooperate with agency.

EPA’s civil penalty polciy has two portions: Gravity and economic benefits portions. The gravity portion of the civil penalty refers to the part of penalty that pertains to how much damage is done to the environment or the severity (gravity) of the violation. The economic benefits portion is the amount of money the violator has saved by not being in compliance.  For example, if you have been dumping your toxic wastes into the river for a year, you have saved a certain amount of money by not having to pay for the proper disposal of those wastes. The economic benefits portion of the civil penalty would be the amount of money you have saved that the agency wants from you.

Click here for a list of frequently asked questions about EPA’s self-audit policy.

On april 30, 2004, subsidiaries of Koch Industries purchased 40 manufacturing plants from DuPont. Twelve of these facilities are located in the United States. The company entered into a corporate-wide auditing agreement with EPA under EPA’s self-audit policy and uncovered over 680 violations of water, air, hazardous waste, emergency planning and preparedness and pesticide regulations. The company disclosed these violations in accordance with EPA’s  audit policy agreement. 

As part of a Consent Agreement, EPA waived the gravity portion of the civil penalty but fined the company $1.7 million as the economic benefits portion of the civil penalty. This would be the amount of money EPA estimated the company would have saved by not being in compliance from the time it acquired those 12 facilities to the time when all the violations are corrected.  The company also agreed to spend between $240 and $500 million to correct all the environmental violations at those facilities.

This is a classic case of how a large company can take advantage of EPA’s self-auditing policy to start over with a clean slate. By agreeing with EPA to conduct a self-audit, the company averted the gravity portion of the penalty and paid only $1.7 million for over 680 violations. Without the self-audit agreement beforehand, the company would have to pay a substantial gravity portion of the civil penalty in addition to the $1.7 million for economic benefits. 

This particular case has helped EPA to develop a separate self auditing policy designed specifically for “new owners” of facilities. If you acquire a facility and conduct a voluntary self-audit of that facility within 9 months from the date of acquisition, you may be eligible for waiver of the gravity portion of the civil penalty under the “new owner” policy which relaxes some of the nine conditions cited above.

You will still be liable for the economic portion of the civil penalty.

Environmental audits

There are two types of environmental audits.

The most common ones are the compliance audits. This is where you go and check to see if you are in compliance with the various environmental regulations. You often do this with a checklist. You are asking the question: “Is everything OK today?” This type of audit gives you a snap shot of your compliance status on the day you perform it. It does not tell you anything about what happens a week or a month later.

With the checklist, you are essentially asking yes/no questions. For example, you are asking “Is the accumulation start date clearly marked on the hazardous waste label?” There can be only two answers. It is either “yes, it is there” or “no, it is not there”.

The second type of audit is the environmental management audit. Here you do NOT ask  yes/no questions. You ask open-ended questions. For example, you would ask the person responsible for the waste accumulation area this type of question: “When do you put the accumulation start date on the label?” He cannot answer yes or no to your question. If he answers “when I ship the container out”, that would be the wrong answer. The correct answer is “when the first drop of waste goes into the container in the storage area”.

When you ask open-ended questions like the example above, you are trying to determine the level of understanding and knowledge of  the person who is responsible for managing the wastes.  You are not asking the “is anything wrong here today” question.  You are not taking a snap shot. You are trying to determine how that person will manage an environmental problem when it comes up a month later.

In a compliance audit, you are looking at physical things like evidence of spills, records, labels, etc. In a management audit, you are looking at people skills.

By the way, a tell tale sign of future problem is when you ask someone “why do you do it this way” and the reply is “I am not sure but we have always done it this way.”

It is all in how you ask the right questions.

A few pointers on how to manage an agency inspection

Let’s look at  a few pointers on how to manage an agency inspection.

 

If you know you are going to be inspected, you need to do you own mock inspection to make sure everything is fine. Fix any problem before the inspector shows up. 

 

There is absolutely no need nor is it desirable for you to write down all your violations. You should focus your energy on fixing the problems.   

 

Be sure that you have read and understood all your permits and what they require you to do. For example, if your air permit requires you to keep track of the amount of each coating used during each day, you should do so.

 

Make full use of agency’s inspection checklists that are available on many agencies’ websites. The checklists show you what the inspection will be looking for. Use these lists in your mock audit.

 

Take the time to look at agencies’ inspection manuals. EPA has a manual on how to conduct a multi-media inspection. There is also one on conducting hazardous wastes inspection.  These are the same documents that the agencies use to train their own inspectors. They will provide you with a lot of insights.

 

You can download these from Norman’s website. 

 

Always try to resolve issues at the lowest possible level! Why?,  because The higher the level you go, the less control you will have of the process. The last thing you want is to have a judge who has no idea how you make your products telling you how you should make your products.

 

This is one of the many topics we cover in our popular 2-day environmental seminars.

 

 

To tell or not to tell

Let’s say you have just conducted an internal environmental audit of your facilities and you discover that your company has not filed the annual Toxic Release Inventory report for the past 5 years.  

What are your options? Do you fess up to EPA or do you hide this fact and hope no one will ever find out about your transgression?   

In 1996, EPA put in place its audit policy – formally known as “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations.” It went into effect on January 22 of that year. According to EPA, over 4000 companies at 11300 locations have discovered and disclosed violations voluntarily under this program.

Here is how this program works: Once you discover a violation through your own internal audit, your company has 21 days from the time of that discovery to disclose in writing the violation to EPA. The initial disclosure should identify the means of discovery, type of violation, and facility location. 

There are nine conditions under the Audit Policy. If you meet all nine of them, EPA will waive all civil penalties. If you meet all but the first condition – systematic discovery – you can still be eligible for 75% penalty mitigation, and a recommendation for no criminal prosecution of the violations against your company. The nine conditions are as follows:

1.       Systematic discovery. The violation must have been discovered through an environmental audit or the implementation of a compliance management system.

2.       Voluntary discovery.  Your violation was not detected as a result of a legally required monitoring, sampling or auditing procedure. For example, any violations discovered as part of your Title V air permit’s compliance certification will not be eligible since the discovery is required by your permit and therefore not voluntary.

3.       Prompt disclosure. You must disclose your violations in writing to EPA within 21 days of discovery or such shorter time as may be required by law. Discovery occurs when any officer, director, employee or agent of the facility has an objectively reasonable basis for believing that a violation has or may have occurred.

4.       Independent discovery and disclosure.  The violation is discovered by you independent of any action by EPA or another regulator.

5.       Correction and remediation. You must correct the violations within 60 calendar days, in most cases, from the date of discovery. If the corrective action will take more than 60 days, you can apply to EPA for an extension. This is often the case if your corrective action involves the design, construction and installation of air emission control equipment.

6.       Prevent recurrence. You must implement procedures that will ensure that the same violation does not happen again.

7.       Repeat violations are ineligible. The specific (or closely related) violations cannot have occurred at the same facility within the past 3 years or those that have occurred as part of a pattern at multiple facilities owned or operated by the same entity within the past 5 years; if the facility has been newly acquired, the existence of a violation prior to acquisition does not trigger the repeat violations exclusion. EPA has stated that it will evaluate the issue of repeat violations by looking at “corporate pattern” of behavior. For example, if a corporation has taken all the necessary steps to correct a past violation and yet the same violation still occurs later, EPA will take that into consideration in determining the corporation’s eligibility. There are no hard and fast rules on this one. 

8.       Certain types of violations are ineligible. These are violations that result in serious actual harm, those that may have presented an imminent and substantial endangerment, and those that violate the specific terms of an administrative or judicial order or consent agreement.

9.       Cooperation.  You must cooperate with EPA. The agency expects the company to provide information related to the violation in a timely fashion. Excessive delays or non-responsiveness would be an indication of lack of cooperation.

This self-disclosure policy also has a very interesting bearing on companies that are acquiring existing facilities. According to an April 30, 2007 memo by the EPA Assistant Administrator for Enforcement and Compliance Assurance, new owners of facilities can qualify for penalty reduction if they disclose violations they uncover as part of the acquisition due diligence and follow the nine conditions.

The question of self-disclosure is a management and legal decision. Even before EPA’s self-disclosure rule came into effect in 1999, companies were faced with the decision on whether to self disclose violations to agencies. A classic example is the case of a major solvent and oil recycling company. In 1992, the corporate office conducted an internal audit of its facility in Puerto Rico. It discovered that the facility had excess on-site storage of hazardous waste fluids, off-site storage in non-permitted tanks; and waste water discharges in violation of the site’s RCRA permit. It made a management decision to voluntarily disclose its violations to the Puerto Rico Environmental Quality Board (EQB) and subsequently negotiated a settlement of $1.45 million fines with EQB. It was reported in the local press that the original fine was as high as $3.3 million. The reduction was due to the self-disclosure and fast action taken by the parent company to remedy the situation. In this case, the company was also able to forestall the possibility of criminal prosecution as a result of its decision to self disclose.

Every case is different and should be judged accordingly.

Working with your attorneys

As an environmental professional, due diligence should be an important part of your activities. Due diligence inevitably involves legal liability issues. You will need to work with your attorneys on this. Attorneys can be your best friend or your worst enemy – depending on the approach you take with them. 

Do not let anyone tell you that because you are not an attorney, you cannot talk intelligently about environmental liabilities. You do not need a degree from Harvard Law School to understand that falsifying records under the Clean Water Act is a crime – big liability there! You also don’t have to be an auto mechanic or mechanical engineer to drive a one-ton SUV. 

As in the case of hiring consultants, don’t hire big law firms to work on small legal cases. If you do, you will end up paying $200 per hour for some young lawyer to learn on the job under the supervision of a $400 per hour law partner. In most big corporations, it is the in-house counsel who chooses which outside law firm to retain. But that does not mean you should cede your role and responsibilities entirely and turn your case over to your legal team. You should work very closely with the legal team since you are the environmental manager and you know all the underlying facts about the case. Insist that you be involved in the discussions of strategies. Remember – you not only know the technical issues, you also know the folks at the agency.  Since legal strategies inevitably involve relationships between your company (represented by you) and the agency, it makes good management sense that you be involved in the discussions. If you don’t insist, you will be relegated to a mere “technician” – a “janitor in a suit” in the eyes of your legal counsel. 

The best way to ensure a meaningful role within your legal team is to develop a professional rapport with your in-house counsel. You do that by keeping your company attorney up-to-date on pending environmental issues at your plants. Don’t call your attorney only when you have a big legal problem. Invite the attorney to visit your plant before problems arise. 

Allow me to relay a funny but sad story during my previous life with a multi-national corporation. I attended a meeting at a large law firm with several of my vice presidents. This was one of those law firms with inter-floor spiral staircases, marble flooring, mahogany panels and corridors that resemble a fine arts museum – all paid for by their clients. One of the VPs made the mistake of asking a law partner a simple environmental question. The law partner jumped on it right away and said:”Let us do some legal research on it and we will get back to you”. A month later we received an invoice from the law firm for 14 hours of “legal research” (at $300 per hour). I was horrified and faxed a short paragraph to the law partner requesting that he send us the results of his “legal research” and cease work on any further research. Not only did we not get the “research” results, we received an additional invoice for $75 (minimum charge unit of 15 minutes) for reading my fax.

A true story.

Should you do regular formal internal environmental audits?

It depends. Unless you are sure that you have the financial resources andmanagement commitment to fix the problems you uncover in your internal audit, you probably should not be doing it. Why? From a compliance standpoint, there is nothing worse than having a long list of environmental problems that you have uncovered but uncorrected. They call that a smoking gun.

The purpose of your internal audit program should be to uncover small or festering environmental issues and fix them before they become too costly. Every time you walk through your plant, you are in effect performing an audit. When you say some problems, you bring it to the attention of palnt management and you make sure that they follow through with the corrective action.