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Corporate Governance and Environmental Issues

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    Corporate Governance and Environmental Issues


     Source of morals – mandated or inherent?

    The sources of the morals seem to be mandated, because many corporations are seriously considering environmental issues as a result of rapidly changing consumer pressures and Government regulations that have compiled a bewildering series of laws under which corporations must report and guarantee environmental fulfillment.

     What forces are in motion for and against corporations who use/abuse natural resources.

    Lobby groups and shareholders profit motive which have a terrible impact on the environment are the forces in motion for corporations who use/abuse natural resources.

    Government regulations, International organizations, non-governmental organizations (NGOs), socially responsible investors and consumer pressures are the forces in motion against corporations who use/abuse natural resources.

     Sustainability – a selfish or unselfish responsibility?

    Sustainability is a selfish responsibility of the corporations as they are not working to protect the environment instead they oppose laws designed to protect the environment because they hurt their business. They also use their structural power, and threat of relocation, to encourage governments to loosen regulations or to not enforce those rules on the books, (Clapp, 11-19), as well as to influence the discourse on “sustainable development.” (Sklair) As a result, large corporations stand to save millions from shortcuts in environmental care. For example the American government’s failure of to sign the Kyoto protocol was a result of those petrol and car lobbies’ in Washington.

     Prevention and Control – Internal emergency response plans
    Training is required to know the emergency response plan and handle the emergency efficiently. The environmental issues may be incorporated in the existing On-Site Emergency Plan- an integrated approach, In addition, a small booklet consisting of summary of On- Site Emergency Plan may be prepared and distributed to create awareness amongst the employees. (Rana)

    Legislation in Place
    Clean Air Act

    The Clean Air Act establishes federal standards for air pollutants from stationary and mobile sources and to work with the states to control polluting emissions. This law allows the Environmental Protection Agency (EPA) to set up National Ambient Air Quality Standards (NAAQS) to protect the environment and public health. The primary aim of the Act was to set and achieve NAAQS for SO2, NO2, total suspended particulates, CO, HC and Lead in all states by 1975. The Act was amended in 1977 primarily to set new goals for accomplishment of NAAQS as many states had failed to meet the requirements. The 1990 amendments were mainly intended to meet unaddressed problems such as acid rain, ground-level ozone, stratospheric ozone depletion and air toxics. (Demuth)

     Oil Pollution Act

    The Oil Pollution Act (OPA) inflicts legal responsibility for removal expenses and damages resulting from an incident in which oil is discharged into navigable waters or adjoining shorelines or the exclusive economic zone. Thus, improving the nation’s ability to prevent and respond to oil spills. This Act was signed into law in August 1990, largely in response to increasing public concern following the Exxon Valdez incident. The Oil Pollution Act also established the national Oil Spill Liability Trust Fund, which is manageable to offer up to one billion dollars per spill incident. (EPA)

     Toxic Substances Control Act

    The Toxic Substances Control Act of 1976 requires the Environmental Protection Agency to adopt rules requiring testing of chemical substances and mixtures that may present an awkward risk of damage to health or the environment. The EPA is authorized to regulate, limit or ban the manufacture, processing, distribution, use and disposal of these substances and mixtures. (IPL) Furthermore, EPA also tracks the thousands of new chemicals that industry develops each year with either unidentified or hazardous characteristics.

     Resource Conservation and Recovery Act

    The Resource Conservation and Recovery Act (RCRA) is the primary law governing the disposal of solid waste and hazardous waste. Congress passed RCRA on October 21, 1976 to tackle the mounting problems the nation faced from the growing volume of municipal and industrial waste. (Reibstein)This Act provides regulation for harmful waste and supports environmental agencies to regulate the cleaning of unhygienic spots. Furthermore, the Act deal with the environmental problems linked with harmless solid waste and encourages states to develop solid waste management programs, regulate solid waste landfills and abolish open dumps. RCRA also contains provisions on numerous other topics, such as resource recovery, used oil management and recycling, small town environmental planning and plastic ring carriers.

    What are the forces that pressure a corporation to push the cost down so far as to be unsafe and irresponsible “citizens”

    Stakeholder wealth

    It is obligatory for the Corporations by law to always act in the paramount interests of their shareholders, and that is almost always justified by keeping profits and the share price high. This profit drive of the shareholders has a horrible impact the environment. For example, suppose a company is discharging harmful waste which is not illegal but it could spend shareholders money on a machine to check the emissions. The typical shareholder orientation would say don’t clean up unless there is some demonstrable benefit for shareholders or unless the emission becomes illegal. (Mayes)

    Financial health

    The large corporations have grown-up to turn out to be amongst the most powerful entities in the world. About 51% of the largest economies in the world are solely corporations. (Information for action) Because of their size and the amount of wealth they control, they have significant power over other societal institutions. These companies frequently spend fraction of their profits toward influencing the government, aiding NGOs and forming support groups, mainly for proposals that benefit their temporary interests. (Erik). Pure financial wealth allows them to support politics and expect paybacks in return. For instance, the major 82 American companies made political contributions in 2000 adding over US$34 million and the corporate dominance in Brussels and Washington is considerable. (Information for action)

    Strategic Positioning
    Pollution is a major anxiety to environmentalists who agonize that corporations are unwilling to curtail on greenhouse gas emissions in their industries. Correspondingly, noise pollution and waste production are major by-products of large industries, mostly poisonous waste. To escape from the environmentalists, some corporations shift their operations to third world countries with less rigid environmental laws. Thus, as a result of globalization, many corporations work under the legislation of many different countries making legal restrictions very complicated.

                                Corporate Governance, Environmental Issue and Ethic

    Overview of Corporate Governance

    AICPA Perspective on environmental issues

    The American Institute of Certified Public Accountants (AICPA) perceives that there is a widespread absence of agreement on the part of corporations and their autonomous accountants regarding the extent of liability allied with environmental remediation. The necessity for distributing SOP 96-1 was justified by the AICPA, along with other things, a survey warning that over 50% of the companies surveyed botched to appropriately provide validity on their balance sheets to legal responsibilities associated with environmental remediation liabilities. (Reed Smith)

    Basically, the SOP 96-1 stipulates contextual discussion and accounting instructions framed to help corporations bestow appropriate impression in their financial statements to their environmental remediation responsibilities. Additionally, the SOP 96-1 requires the extent of legal responsibility enforced, and expenditure recognized to incorporate the accumulative direct remediation expenses, together with the reparation and benefits of employees concerned with the remediation process along with the legal expense incurred in relation to the environmental remediation endeavor undertaken.

    Most of the companies account for legal expenses individually by projecting them as the cost incurred under the theory that legal expenses are, at most, only indirectly connected to environmental corrective actions. Thus, the SOP 96-1 aids to sort the faith that legal expenses encompasses an essential part of environmental corrective actions by demanding these expenses to be integrated within the environmental accrual. However, this categorization could turn out to have negligible influence on the sum that corporations truly accrue in relation with these legal expenses, which can be backed by a concise examination of the three common types of legal expenses normally incurred in relation with environmental remediation. The initial type, deciding the level of corrective efforts needed and the type of curative efforts to be employed, is probably to be the simplest class to assess but also the type least prone to outcome in unduly huge expenses. The subsequent types, (i) sharing between potentially accountable parties and (ii) expecting compensation from others, correspondingly, encompass the types least prone to assessment earlier but are far more likely to be subject to excessively huge sum of expense incurrence. It can be taken for granted that the problem in estimating such total in advance will probably result in some corporations being tempted to accumulate more legal responsibilities in advance. Because, to the limitation corporations are forced by SOP 96-1 to accrue any sum for these expenses in advance, they will, in all possibly accrue sum corresponding the lower ends of the estimated limits. (Reed Smith)

    International code of ethics statement – how it relates to environmental aspect in corporate governance

    International code of ethics is formal statement of the corporation’s values on several issues including environmental such as, general principles about a corporation’s beliefs on the environment matters. Some multinational corporations that may be considered anti-environmental may have their own ethical code of conduct, be it official or unofficial. Examples could be their sole interest to increase Stakeholder wealth by Strategic Positioning and using their financial health to dominate government policies on environment. Although,

    Corporate codes of conduct do not have any certified definition, they are entirely voluntary.

    The curiosity in environmental problems has developed in the last decade particularly with chemical companies. Fro example, six codes of management practices were adopted by the Member companies of the Chemical Manufacturers’ Association in 1988 under the Responsible Care initiative, which include, Community Awareness and Emergency Response, Pollution Prevention, Process Safety, Distribution, Employee Health and Safety and Product Stewardship. (ILO) On the other hand, occasionally few corporations adopt illegal ethics, to compromise their financial interests. Such as down playing the harmful environmental impacts caused by their unsafe acts or even fabricate their records to say that there is no damage caused to the environment. These are really ethical issues, where corporate management will have to show its commitment to good governance by accepting responsibility.

    Corporate monitoring system

    COSO internal control frame work – how it relates to environmental issues

    Environmental management is an ideal application for internal control because it affects the achievement of organizational objectives in all the categories set forth in the COSO Framework, namely, effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

    A company’s environmental-related objectives in the areas of regulatory compliance, financial reporting, and risk management may be closely interrelated. For example, a company’s failure to properly account for environmental remediation liabilities under generally accepted accounting principles may also represent a violation of law or contract (such as a loan covenant), and the availability of environmental insurance may affect the degree of necessary financial disclosure. Likewise, many of the same internal control components will serve to achieve multiple objectives. For example, systematic identification of environmental loss exposures is a first step toward complying with environmental laws, advising shareholders of material environmental liabilities and risks, and acquiring appropriate insurance coverage to protect the organization and its directors and officers from environmental-related losses.

    By the process of Pollution risk oversight, the board members get reasonable assurance that the corporation’s environmental-related objectives will be met. In view of Caremark and other recent developments, the board is obligated to exercise reasonable oversight with respect to the implementation and effective operation of a framework of internal control to provide reasonable assurance that the company’s environmental objectives are achieved. Directors can become generally knowledgeable about the content and operation of internal control systems by reviewing the COSO Framework. Consultation with environmental specialists will be needed to understand how these general internal control guidelines can be applied to support a company’s environmental objectives.

    Thus, the internal control is not limited to financial reporting. For companies in industries with significant environmental exposures—including oil and gas, refining, utilities, mining, chemicals, manufacturing, printing, transportation, and waste management—it has direct application to environmental compliance and risk management, as well as environmental financial reporting. Internal control provides the foundation for understanding and fulfilling a director’s fiduciary duty to provide effective pollution risk oversight. To fulfill their oversight responsibilities, corporate directors must understand the principles of internal control and the process by which the board can reasonably assure itself that effective internal control is in place. (Rogers, 2)

    Five components – the control environment, risk assessment, control activities, information and communications and ongoing monitoring
    The Control Environment – sets the tenor of an organization,  provides the foundation for an effective system of internal controls, relates to the control consciousness of the people within the organization. Wherein, the control environment is the basis for all other components of internal control.

    Risk Assessment – is a valuable control system that enables management to be informed of, check, and handle significant risks that are related to financial statement preparation, in order to guarantee that financial statements are presented fairly and in fulfillment with generally accepted accounting ethics.

    Control Activities – refers to the corporation’s policies and procedures which make sure that necessary actions are taken to address the potential risks involved in accomplishing the entity’s objectives and they should be monitored by line management on an on-going basis and subject to periodic appraisal.

    Information and Communication – focuses “on the nature and quality of information needed for effective control, the systems used to develop such information, and reports necessary to communicate it effectively” (Internal Control Issues). Wherein, an enlightened and proactive audit committee is a powerful agent for self-regulation. (Bushman)

    Monitoring – involves evaluating the quality, efficiency, design, operation and compliance with policies and procedures over time. It also promotes for the execution of suitable actions when required. Because, properly structured and efficiently operated, internal auditing can bestow management a method to help check the consistency and integrity of financial and operating information

    Sarbanes Oxley – how it relates to environmental issue
    The Sarbanes-Oxley Act of 2002 (Speaker of the House of Representatives) (SOX) was passed to make the financial information about publicly traded companies more accessible, more reliable, and more available to those who are responsible for corporate reporting and disclosures. This new regulatory posture has brought the need for accurate environmental disclose back into the spotlight with a new focus. Many corporations have begun to re-evaluate their internal procedures for assessing and disclosing environmental liabilities and the relationship of these procedures to financial disclosure requirements.

    The primary sections of SOX that are of concern to environmental professionals set standards and higher levels of accountability for certification of financial reports and require attestation as to accuracy of internal controls and procedures for financial reporting. As a result of this higher level of accountability for top executives, the level of supervision and control over environmental issues is expected to significantly increase. Moreover, at the same time that these SEC reforms are forcing more corporate oversight, environmental management issues and systems have been experiencing increasing pressure from other directions.

     Some of this pressure comes from the following:

    • Formalization and industry-wide adoption of environmental management systems and review under ISO 14001,

    • Adoption of ASTM standards for estimating costs and disclosing environmental liabilities,

    • Broader consideration of environmental management systems in the regulatory enforcement context.

    In the face of heightened vigilance from federal regulators, shareholders, and environmental groups, companies are under increasing pressure to demonstrate reliability in assessment of environmental costs and disclosure of environmental liabilities. A company’s very survival may now be critically linked to understanding the new and evolving pressures that are being placed on its corporate management and counsel through SOX reforms and to keeping abreast of the available tools and standards that will enhance reliability of environmental and financial disclosures. A reliable, regularly reevaluated, updated, and certified EMS can play a critical role in providing evidence to support company financial disclosures and CEO attestations. In addition, these same EMSs can provide valuable evidence to support company operational decisions and mitigate possible penalties and/or criminal prosecution in the environmental or SEC enforcement context. (Barker)


    Environmental issues are forcing many senior corporate executives to reorganize how they carry out their businesses.

    Optimistic corporations identify that strategic opportunities exist for corporation that move early on environmental issues, a move that frequently requires the institution of new environmental management systems. While, moving too fast can pose significant costs, most companies are moving incrementally toward a vision of the “sustainable” corporation. Nowadays, the significance of corporate environmental actions has been lastingly eminent all over the world. Progressively, senior managers will be spiraling in the direction of new environmental strategies as shareholders, interest groups and regulators begin to question not only whether a company is operating in the red or the black, but also in the “green”.

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    Corporate Governance and Environmental Issues. (2016, Aug 17). Retrieved from

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