Standing Committee Symposium on The Role of Private Institutions in Public Environmental Decisionmaking: Private Watchdogs: Internal Auditing and External Enforcement -- Three Perspectives: B. Industry's Self-Policing

Standing Committee Symposium on The Role of Private Institutions in Public Environmental Decisionmaking: Private Watchdogs: Internal Auditing and External Enforcement — Three Perspectives: B. Industry's Self-Policing

W. Samuel Tucker

W. Samuel Tucker is Director of Environmental Affairs, Florida Power and Light Company, Juno Beach, FL.

When we consider the respective roles and responsibilities of government and the private sector in maintaining compliance with the laws of the land, it becomes evident that there are big stakes on all sides. This includes the public, whom the laws are intended to protect, and who must pay for this protection in the end.

Several years ago a man by the name of Charles Schultze wrote an insightful little treatise called "Public Use of Private Interest" (Brookings Institute, 1977). Schultze pointed out the great importance of maintaining the proper balance between government and the private sector in achieving desired social goals and of the adverse consequences of having this balance shift too far one way or the other.

The implication was that government has tried to take on too much responsibility in certain areas, and that the results have actually been counterproductive. One way in which this can be seen is in the gradual abrogation of the self-policing responsibilities intrinsic to the private sector.

I believe Schultze's concerns are quite relevant to the issue that is before us at this conference. Our country has always depended to a large degree on voluntary compliance with the law. The citizens of our nation, both individual and corporate, tend to obey laws voluntarily — even those they disagree with — to an extent that often amazes citizens of other nations. We Americans are generally wise enough to know that the alternative is either chaos or a police state. Government does not have the resources to look over everybody's shoulder all the time, nor do we want to grant it such power.

These considerations also apply to the issue of compliance with environmental laws. The proper balance between the public and private sectors in sharing such compliance is an issue with which the Environmental Protection Agency (EPA) itself has been wrestling for several years.

Let me pause for a moment to offer mysense of the larger picture. First of all, barring a nuclear holocaust or some other vast calamity, the concern over environmental quality is a public issue that is here to stay. This persistent public interest in environmental protection is now recognized in the vast majority of corporate board rooms. It has not always been that way. The attitude of management in some companies toward the environmental movement at the beginning was similar to the attitude of the Democratic establishment in Florida toward the Republican Kirk administration a few years back. Claude Kirk, whom I had the pleasure to serve as Secretary of Administration, was the first Republican governor to be elected in Florida since the Reconstruction. The entrenched Democrats of Florida consoled themselves with the notion that this Republican administration could be viewed as a four-year case of the flu: It would not be particularly pleasant; but, given time, the unfortunate "sickness" would pass. The Democrats of Florida have been partially correct, at least so far.

The same cannot be said of those who doubted the staying power of the environmental movement. Those in the private sector who thought that interest in environmental protection was a passing "illness" are now coming to the realization that they were wrong. Environmental protection, like worker safety and product quality, is of continuing importance to the consuming public. We in industry are as aware as anyone of the polls indicating solid public support for these programs.

Once a consideration such as environmental control is recognized as a valid factor of production, such control is rapidly built into the production system. It has to be that way. It's a matter of corporate survival.

My second observation with respect to the larger picture is that continued progress in environmental protection is becoming more complex and costly. We've been wrestling with the so-called "conventional" pollutants such as sulphur dioxide in the air and oil in the water for over a decade. While much progress has been made, even in these more traditional areas new issues keep arising. At the same time, we're now faced with growing concern over a vast array of toxic pollutants that may cause adverse health effects in the long term as a consequence of very low level exposures. For most of these pollutants, health effects information is either very sketchy or unavailable. Nevertheless, because of media publicity and the possibility that human health is at stake, public clamor is growing for something to be done.

EPA's NESHAP¹ program, for example, is under severe pressure because of the perception that it has not moved fast enough. Potential confusion in the public's mind between the [17 ELR 10258] obvious acute effects from disastrous accidents and the largely unknown chronic effects from routine, long term, low level releases of potential contaminants further complicates the challenge to management. Finding the answers and implementing solutions in these emerging environmental areas will be even more difficult and costly than our existing environmental programs.

My third general observation is that, while public concern for the environment is both here to stay and expanding to new areas, we are also more cognizant of government's limitations. After a generation of unparalleled growth in government activity in virtually every sector, the vision of the Great Society has been replaced largely by the apparition of the Great Budget Deficit. More spending and more government programs are not seen as the solution to all societal ills, including those in the environmental arena.

It seems clear to me from the three basic observations above that the private sector will be called upon to shoulder an everincreasing share of the responsibility for environmental improvement. This growing share of responsibility includes the area of environmental compliance assurance.

Despite what some may believe, wise companies today do not strive for better management in their environmental affairs solely because they are afraid some agency inspector may appear unannounced at the plant gate. To be sure, enforcement pressure has grown over the last several years, as regulatory requirements of state programs have become more sophisticated and new construction activity has been reduced. (We have seen a dramatic increase in enforcement pressure in Florida, in terms of both agency resources and hard-line attitudes.)

There are other powerful forces at work, however, that have made it impossible for corporations any longer to treat environmental management as a minor sideshow or enforcement game. Corporate managers today who fail to pay close attention to their environmental control responsibilities are playing a game called "you bet your career," or even "you bet your company." Environmental issues are too visible, there is too much exposure and liability lurking in the shadows, and the consequences of mismanagement are too great for companies to think lightly of their environmental activities.

Today the specter of jail terms, murder convictions, company-breaking lawsuits, and front page environmental disaster stories is enough to grab the attention of even the most isolated corporate executive. The option of insuring against these risks, moreover, has virtually disappeared. Environmental impairment liability insurance has become almost impossible to obtain, and this plays an important role in private industry's view toward strengthened internal control.

How is industry responding to the environmental management challenges it faces, considering the stakes involved? One major response has been to improve our knowledge base and internal professional expertise. Cooperative research organizations within industry, such as the Electric Power Research Institute and the Chemical Industrial Institute of Toxicology, spend millions of dollars each year on important environmental research including health effects issues. These research institutes are able to employ pooled resources to undertake difficult and expensive studies far beyond the capabilities of any individual company. This research is an important companion to government-financed environmental research, and it symbolizes a commitment to proper internal management by the private sector.

The general public may be unaware that such industry research takes place. But, in fact, it has made a substantial contribution in such areas as endangered species, human health effects, control technologies, and even acid rain. By acquiring this information, industry is better prepared to play a larger role with respect to self-monitoring and self-policing.

Industry is further responding to the need for improved internal environmental management by strengthening and diversifying professional capabilities. My firm's environmental affairs department needs and has professionals with hands-on experience in power plant pollution control operations, but we also now have life scientists, earth scientists, environmental planners, and environmentalists with MBAs. The department's two most recent positions went to Ph.D.s — one, our company's first toxicologist.

Closely related to industry efforts to increase the knowledge base and to strengthen internal professional expertise is the effort to improve internal environmental management capabilities. There are three areas that I would like to address.

The first area is issue management. Our experience suggests that getting ahead of emerging environmental issues can be quite helpful in the long run. Instead of being forced into a reactive mode and responding to important environmental questions in a helter-skelter emergency fashion, we can develop intelligent management programs to deal with these concerns in a deliberate and systematic way.

A good example for our company concerns endangered species. Florida's environment is unique in many ways. As a consequence, the state is home to a large number of endangered species. It became apparent to us early on that many of our operations could have an impact on certain endangered species or their habitat. Through careful consideration of the issue, however, it also became apparent to us that it was possible for our activities to be in harmony with and even to promote the preservation of endangered species.

Through more than a decade of planning, we have made a significant and widely recognized contribution to the protection of the West Indian Manatee, the Bald Eagle, the American Crocodile and the Green Turtle, to name a few. At the same time we have expanded our electrical system to serve one of the fastest growing areas in the nation. What could have been a source of great conflict has resulted instead in a very positive outcome for the company, concerned environmental groups, and the wildlife itself.

A second area in which we and a number of other companies are improving internal environmental management capabilities is what I call strategic thinking. The possibilities for self-policing suggest that it is hard to be a policeman and a firefighter at the same time. We have a couple of initiatives underway to reduce the time our environmental staff must spend responding to crises or unplanned situations. One of these initiatives, called the quality improvement program, or QIP, is modeled on management concepts developed by the Japanese. QIP has greatly enhanced our ability to look forward by giving us a structured system for identifying and attacking root causes of problems, improving on communications with operating departments, and establishing strategic and tactical objectives that fit into overall corporate goals.

Another strategic initiative is the development of a computerbased environmental management information system. This computer system will help us both to keep track of an ever growing volume of environmental data, and to do analyses and projections we've never been able to do before.

The third major area in which we and much of industry are now working to improve our internal management deals with management control. Most environmental controls, such as environmental monitoring, were begun initially as a result of [17 ELR 10259] government requirements. Many of the more recent environmental management control initiatives, on the other hand, have been undertaken voluntarily. They have enabled industryto improve both the efficiency and effectiveness of environmental control activities.

In concept, management control involves several sequential processes. The first is the establishment of set standards against which to measure performance. Without such standards, control becomes a meaningless abstraction. Second, performance data must be collected in a consistent, systematic manner. Third, that data must be converted to management information that identifies problems in need of correction. Finally, any remedial actions must be implemented and monitored.

These processes together form the essential ingredients for an environmental audit system. Although some companies may argue that they have always done auditing as part of their internal environmental activities, the application of the accepted auditing principles to environmental management control within a formal, structured and routinized internal program is a new development.

Environmental auditing emerged as a distinct environmental management control activity in the late 70's. Companies such as Olin, Allied, U.S. Steel, ITT, Atlantic Richfield, and, in our industry, Pennsylvania Power and Light, are generally recognized as pioneers in the development of the practice. Since the beginning of the decade, when the implications for regulatory reform first caught the attention of EPA, the use of environmental self-auditing in industry has virtually exploded. Perhaps 50 percent of large companies now have environmental auditing programs. In the electric power industry, twice as many utilities reported use of environmental auditing in 1985 as in 1982. At Florida Power and Light, we expect that our total effort in environmental auditing will require the annual equivalent of five man-years of work. This represents a substantial commitment beyond our ongoing, day-to-day environmental protection activities.

I have mentioned growing concern over availability of environmental liability insurance. To obtain environmental liability insurance in the future, if it can be obtained at all, companies will first have to conduct an environmental audit. Insurance pools likewise are hastening the implementation of auditing practices by requiring them of member companies.

Questions of insurance aside, the financial and legal exposure that environmental mismanagement creates for a company and its officers provides a strong incentive for them to make use of environmental auditing. Programs are now being expanded to include environmental risk areas as well as basic legal compliance in response to this growing concern over liability.

Having described a number of industry initiatives to improve internal environmental management, let me now make some observations on the issue of self-policing by the private sector. To begin with, there is no way that the government could afford to allocate the resources that we devote internally to self-monitoring and assuring our own compliance. Also, there is no way that the government would find all the deficiences that we can find, because we have a better sense of what is going on. The presumption that government environmental inspectors and enforcement departments are the ones on whom the public must ultimately depend for the protection of our nation's environment is not really correct.

The same can be said of the notion that the performance of a government environmental agency in assuring compliance can be measured by counting the number of violator scalps on the wall. The real measure of success is how well government encourages the private sector to do an increasingly sophisticated and efficient job in its own internal environmental management.

What does the future hold? There are several possible models of a new balance in compliance assurance responsibility. In 1980 the U.S. Department of Agriculture (USDA) implemented a program that allows meat processors to adopt their own quality control programs. If approved by USDA, such internal company programs will relieve the participating firms from constant USDA inspection. This new program is voluntary, and it acknowledges the changes that have occurred in the industry since the turn of the century, when continuous regulatory surveillance was considered necessary to protect the public.

In 1975 the Securities and Exchange Commission (SEC) changed the rules governing broker-dealer organizations. These organizations now engage in self-regulation with the SEC periodically auditing their compliance.

Movement toward an environmental regulatory system that relies on self-monitoring by industry and less government intervention would not be quick or easy, but it is possible. In light of continued public concern, growing management complexity and increased recognition of the government's limitations, such movement is in the public interest.

By way of example, I recently read about a study by the National Academy of Public Administration which looked at EPA's rules governing underground storage tanks. The study concluded that the large number of such tanks, combined with the lack of government funding, meant that effective enforcement of the rules would require innovative regulatory approaches. One such approach is for EPA to promote increased voluntary compliance.

Certainly a change in the present balance will take time. The change in the USDA program, for example, took two generations. Industry, however, must respond more quickly to perceived societal demands nowadays in order to survive, as I said before.

Change in the balance of responsibility will also require an atmosphere of greater mutual trust than is probably now the case. The public will have to trust the capability of government environmental agencies to catch and punish those who try to cheat. Enforcement may have to carry an even bigger stick. Government is moving rapidly in that direction, although the public does not seem to be much aware of it. Both government and the public will have to develop more trust in private industry's capacity to police itself.

Industry for its part, will have to develop greater trust that government will not use industry's own efforts to improve internal management control against it in a punitive way. Government and environmental groups will have to focus more on results than scalps.

One way to create an improved atmosphere of mutual understanding and trust is through increased cross-sector cooperation. An example is Clean Sites, Incorporated. Another example is the recently completed Florida Acid Deposition Study, which was a cooperative effort involving government, industry and a public peer review panel.

There have been and will continue to be setbacks in any effort to achieve a more efficient and effective balance between public and private sectors in assuring environmental compliance. Events like those that occurred at Bhopal and Institute, West Virginia, certainly do little to encourage increased public trust in industry's ability to regulate itself. What the public does not fully know, however, is the tremendous impact [17 ELR 10260] that Bhopal has had at the highest corporate levels. As with the Shuttle disaster in the area of space exploration, no other event in the environmental area has created such an impetus for industry to reevaluate its internal management control systems and to implement self-audit programs. Nobody wants another Bhopal. And the efforts since then should result in a positive, long term benefit. Individual setbacks should not deter movement in a desirable direction with respect to environmental management any more than they should in the space program.

In conclusion, it is my understanding that EPA has (or at least had) an office called Enforcement and Compliance Promotion. As things now stand, "compliance promotion" means simply more enforcement. The stern father-irresponsible child relationship that has characterized public sector-private sector interaction in the past does not tend to promote a more mature, self-policing response by industry. The best way to promote the cause of better self-policing through such activities as environmental auditing can readily be understood by a metaphor. When you train a watchdog, you reward good performance with a piece of meat, not by jerking its leash. Yet the way our environmental enforcement system is set up now, a diligent watchdog is going to get its leash jerked just like a lousy watchdog. And the better the job that the watchdog does, the harder and more often it is liable to get jerked. That is no way to treat a dog, much less a company.

We should all be open to any good ideas that will help us work toward a more reasonable, effective and efficient balance in compliance assurance, building upon all these efforts now underway within industry to strengthen internal management. In a free country, greater reliance on self-policing is in the interest of everyone.

Discussion

PARTICIPANT: When you are doing environmental auditing, how do you perceive the dilemma of disclosure in the event you are enforced against or sued?

TUCKER: This is something that causes a lot of concern in the private sector, and it has been considered carefully by EPA as well. From our perspective, we would like to be able to retain that information as confidential. We understand that as a practical matter that is virtually impossible. If we can't keep it completely confidential, the next best thing would be to get EPA to agree that if the company had an approved environmental auditing program, that that information would not be used against it. This gives the attorneys in the enforcement branch at EPA nightmares, and they don't want to give in on that one. It does present somewhat of a problem, and it does act as a disincentive to the broader adoption of environmental auditing practices.

When you get right down to it, though, the risk that a company is building a file against itself is tempered by the likelihood that the agencies will take into consideration the fact that the company found the discrepancy and corrected it on its own. They probably would not use it against the company, unless they believed that it was being used to circumvent enforcement.

1. National Environmental Standards for Hazardous Air Pollutants, 42 U.S.C. § 112, ELR STAT. 42215.