Occasionally we are asked a variation of the questions, what is the value or return on investment (ROI) associated with an environmental compliance program, and what are the potential costs of non-compliance? Recently we attended The Institute of Internal Auditors 2017 Environmental Health & Safety Exchange – West Coast in San Diego and a version of this question was asked more than once. We understand the reason why individuals wearing their “business school” hat ask questions like this. Nevertheless, we view questions like this are missing an important fundamental point.
To operate legally you need to be in compliance, or in other words, compliance establishes the minimum requirements to operate legally. To operate when you are knowingly not in compliance exposes both the company and the responsible parties to increased legal risk. Compliance gaps need to be addressed as soon as possible so that compliance is restored and then actions should be taken to prevent recurrence.
We often hear discussions of the risk of non-compliance. What concerns us in these discussions is not that a company may have non-compliances, particularly those which they are unaware of on an operational basis; but rather, when the discussion enters into operating with knowing non-compliances with no corresponding corrective action plan in place and the risk being discussed is the risk of these non-compliances being detected by Auditors or regulators. The former is an unfortunate reality that companies with a properly-managed and executed audit program are well suited to address. The latter, however, is simply unacceptable behavior. The latter is also to be distinguished from cases in which there is a legitimate dispute over whether an issue is non-compliant. In those cases, a prudent business practice is to seek to resolve the issue’s compliance status, rather than to simply do nothing.
We have seen companies after an audit calculate the penalties that could arise from issues identified and compare that to the cost of the audit. This is problematic in that not every issue identified is easily associated with a penalty amount and does not factor in the reputational cost resulting from a public disclosure of operating while non-compliant. Some are easily identified (e.g., often Department of Transportation citation fines are published), so, for example, for those that can be easily identified, one needs to find the deviation, estimate the extent of it in the population and then compute the fine/deviation for the period of record retention. For example, if hazardous waste manifests were signed by someone who was not properly trained and they signed 10 percent of the manifests over a 2-year period and the company issued 500 manifests per year (let’s set the fine at $100 per manifest in this example), then a potential fine could be $10,000 (2 × 500 × 0.1 × $100 = $10,000).
If you are not operating in accordance with your permits, you may simply be shut down until such time that you can operate in accordance with your permit or you may incur fines (in an amount often not specified) until you are operating in compliance with your permit, inclusive of past time not operating in accord with your permit. Of course there are legal costs, expert costs and reputational costs that also accompany these types of incidents.
Largely, any ROI or cost of non-compliance in a quantitative way will depend on what relative state the site is in with regard to compliance, the overall relationship the company has with the respective regulators, the skill set of the firm’s attorneys, and the skill set of the Auditors in identifying the deviations.
Business impact can be very significant. For example, the government can take punitive action against companies who are non-compliant (usually repeat and/or significant violators) by debarring them. This prohibits them from doing business with the government. If the government was a significant client, this can translate into a major loss of revenue for the company.
We list below potential costs of non-compliance to illustrate the potential breadth of impacts:
- Legal fees, Law suits
- From injured employees
- From non-governmental organizations (NGOs; pollution-related citizen actions under the Clean Water Act and Clean Air Act)
- From parties who suffered damage from pollution or harm from unsafe work conditions
- “Reputational Costs” – these can impact public perception and can influence decision makers in RFPs (e.g., many RFPs ask if you have had major incidents, etc. in the last X years)
- Loss of Revenue – debarment, boycott, inability to increase price relative to competition
- Loss of Employee Pool – current employees may opt to leave (unsafe work conditions or not wanting to work for a company that is breaking/has broken the law). Potential employees may not submit job applications
- Loss of Production due to incidents – safety or environmental incidents may cause operations to be halted or resources to the expended to respond to, to restore, to investigate, to remedy, and to prevent future incidents
- Loss of license to operate – plant shut down due to non-compliance with one or more operating permits
In summary, to operate legally you need to be in compliance. Within the United States, compliance includes federal, state, and local regulations, applicable site specific operating permits (e.g., air, water, waste), applicable industry codes (e.g., NFPA, NEC, etc.), and any court order or consent decree that involves the site. It can be a complex task. All of these requirements are designed to protect site workers, those parties living in the vicinity of the site that could be impacted by site operations, and the environment.
If you need assistance in reviewing your compliance program, please contact us.
Timothy Cory, P.G.
Senior Project Manager
Michael R. Green, Ph.D., MBA, CPEA