Thursday, May 24, 2018


Organisational Fit for Purpose
Dr Robert Howell

Introduction and Summary

If it is accepted that humankind needs to live within the capacity of the Earth to support human life, is our current law fit for purpose for authorising, regulating, directing, constraining and penalising companies and organisations and their actors whose actions are contrary to this acceptance?  How accountable are owners and/or board directors and/or senior management when their companies or organisations destroy or damage the basis of our health and survival?  What penalties do they face (including personal penalties)?  Companies are not the only organisational forms that should be considered: cooperatives and family businesses should be included.

It is argued here that companies, family firms, and cooperatives are not fit for purpose in meeting societal needs to care for the Earth, rather than exploit it. Adopting legislation based on requirements for mandatory consideration of stakeholders (which includes the environment as a stakeholder) would place the judiciary in a very awkward position choosing between stakeholders:  instead it requires Parliament to pass laws and regulations that place obligations on directors and senior managers to observe stakeholders’ essential needs.

The examples of Pike River Mine, Tiwai Point Aluminium Smelter, and Clear Ridge Station Ltd and Beejay Stud Ltd, demonstrate that existing laws are inadequate in bringing the failures of board directors and managers to account.  The law should be changed so that appropriate criminal and financial penalities can be applied to both company and personally for directors and senior management. 

The example of Tui and Martha Mines raises questions about the adequacy of bonds for rehabilitation.  More generally, the use of bonds for protecting society against risky actions that could seriously damage parts of our environment, is worth extending to include such activities as fossil fuel explorations and harmful toxin and chemical production.  Bonds should not just be for companies, but a requirement for directors and senior management personally.

While these steps would reduce the likelihood of significant abuse of our environment, it does not necessarily address the more fundamental and difficult issue of humans living within the capacity of the Earth to support human life.  There are other initiatives necessary for this accomplishment, but establishing proper laws for full accountability at the organisational level is an important step.

Companies

The Primary Duty
The primary duty of company directors is to act in the best interest of the company.  The current laws originated in Britain with the concept of a limited liability company in the Companies Act 1862.  Directors of a company should have principal regard to the interests of shareholders and the shareholders or owners are legally separate from the corporation itself so cannot be liable for all the debts of that entity.

Directors need to consider the interest of their shareholders within the rules of their legal constitutions, and the laws in regard to some stakeholders such as workers and the environment.  The areas for workers include their wage levels (minimum wage) and health and safety matters.  Companies need to follow laws in regard to such matters as building codes and pollution.

The most obvious example of company interest being in conflict with society’s interests is the oil companies.  From the late 1950’s and 1960’s Humble Oil which became Exxon Mobil knew about the threat of climate warming and the significant contribution of that threat by fossil fuels [1]. Between 1979 and 1983 The American Petroleum Institute together with the USA's largest oil companies ran a task force to monitor and share climate research between 1979 and 1983, indicating that the oil industry, not just Exxon alone, was aware of its possible impact on the world's climate far earlier than previously acknowledged.  The group's members included senior scientists and engineers from nearly every major U.S. and multinational oil and gas company, including Exxon, Mobil, Amoco, Phillips, Texaco, Shell, Sunoco, Sohio as well as Standard Oil of California and Gulf Oil, the predecessors to Chevron, according to internal documents obtained by InsideClimate News and interviews with the task force's former director [2]. 

In New Zealand when the fifth Labour Government (1999-2008) talked about introducing a carbon tax, business groups commissioned a report that estimated it would cost about $1 billion or 1% of GDP. Business leaders such as Liddell from Carter Holt Harvey, Norgate from Fonterra and McDonald from Tiwai Point Smelter, campaigned to persuade public opinion against a tax [3].

This behaviour has certainly impeded an ordered transition to a world that is free of the threats from climate warming at the very least, and at worst has brought about a future world without the human species [4].  Climate warming is not the only threat:  there are a number of other threats including human overpopulation, poor and declining water supplies, atmospheric and water-born toxins, species loss, and an unscientific and unethical economic system [5]. 

Stakeholders
Is it possible to make it compulsory for companies to consider all their stakeholders?  Stakeholders has been defined as individuals and entities who may be affected by business, and who may, in turn, bring influence to bear upon it.  Important direct stakeholders include investors, employees, customers, suppliers, and the local community where the firm is based and trades [6].  There is no legal obligation in the company’s legislation in New Zealand to observe the interest of stakeholders.

In the UK (s 172 companies act 2006) there is an attempt to maintain shareholder primacy at the same time as requiring directors to consider stakeholder interests.  The law there states:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, in doing so have regard (amongst other matters) to –
a) the likely consequences of any decision in the long term,
b) the interests of the company’s employees,
c) the need to foster the company’s business relationships with suppliers, customers, and others,
d) the impact of the company’s operations on the community and the environment,
e) the desirability of the company maintaining a reputation for high standards of business conduct, and
f) the need to act fairly as between members of the company.

There is no compulsion required.  The legal opinion of Watts, Campbell and Hare in their book Company Law in NZ [7], is that to make this mandatory would put the judiciary in an impossible position of choosing between the relevant stakeholders. They do not elaborate to much on this, but if one considers the wide range of stakeholders that are involved in a business operation, and the numerous value judgements entailed, it would not be an envious position to be a mediator between contentious parties.

Accountability of Directors

In a limited company, shareholders are not normally liable for payment beyond their invested capital.  Are there any circumstances where there is legal redress?   What requirements are there to require persons connected with the company to pay compensation to the company?   Under s 301(1) of the Companies Act, the court has the power to enforce payment when it appears that a person has misapplied, retained, or become liable or accountable for money or property of the company, or has been guilty of any negligence, default or breach of duty or trust in relation to the company [8].  This power arises on liquidation.  However, this does not appear to have been very widely applied.

Two recent examples in New Zealand illustrate the inadequate legal responses for the failure of Directors and senior management to govern responsibly, and the third example concerns the adequacy of bonds required for rehabilitation.  The first involves Pike River Mine; the second deals with waste from the Tiwai Pint Aluminium Smelter; and the third involves Tui and Martha Mines.
  
Pike River Mine
After the Royal Commission the in-seam drilling contractor Valley Longwall International pleaded guilty and was fined just under $50,000; Whittall, the General Manager of Pike River Mine pleaded not guilty; and the company, then in receivership, did not even make an appearance to plead.  District Court Judge Farish found against the company, citing “a systematic failure of the company to implement and audit its own (inadequate) safety plans and procedures”. She ordered the company pay $3.4 million in reparation to the victims’ families, and imposed a fine of $760,000 for multiple breaches of the law – well aware that any punishment she handed down to the company would be all but meaningless, given the company’s limited funds and that it owed a number of creditors [9].  
The only person considered for prosecution was Peter Whittal. The Ministry of Business, Innovation and Employment announced that it had dropped all 12 charges against him. Details emerged that one of the factors that had led to MBIE dropping the charges was a deal by which the $3.4 million in compensation owed to the families would be paid by the directors’ insurance.  MBIE says that Whittall’s offer was a relatively minor factor in their decision to withdraw the charges. Macfie says MBIE was advised that there was sufficient evidence to possibly get a conviction, but that it failed to meet the “public interest” test, which factors in the severity of the sentence if a guilty verdict is reached. In this case, the most likely outcome would have been a relatively light financial fine and no custodial sentence. The fact that relatively minor charges carrying a light sentence had been laid against Whittall became a perverse justification for dropping the changes.
Since then, there are now requirements for directors and officers to show due diligence for health and safety requirements.  The institute of Directors and Worksafe New Zealand state
§  directors and other officers will be personally liable if they breach their due diligence duty;
§  the maximum penalty for a serious breach of the due diligence duty is imprisonment for up to 5 years and/or a fine of up to $600,000.
§  insurance cannot be used to pay fines under HSWA6 [10].
While this is an improvement in accounatbility for health and safety matters, it does not extend to the health and care of the environment.
Tiwai Point Aluminium Smelter
Taha Asia Pacific, owned from Bahrain, had a contract with New Zealand Aluminium Smelters to take dross syphoned off from the main smelting operation. In August 2018 it went into liquidation. A deal was made to share the $4 million cost of cleaning up the waste: the smelter and the government will pay three quarters of the cost, and the four Southland councils and four landowners will cover the rest. Environment Minister David Parker said the government decided to pay a share of the clean up cost rather than spend it on legal fees.  "I'd have to say this should never be able to happen again and if it ever did arise again I would be expecting the Crown to be suing those responsible rather than contributing to the cost of removal of this substance [11].  The primary responsibility for the waste should rest with the smelter, Mr Parker said.

Tui and Martha Mines
The Waihi Gold Mines are required to fund a bond for rehabilitation.  There is some $43.535 million dollars held associated with the rehabilitation aspect of the Waihi Gold mines.  The bonds are all held in favour of the Waikato Regional Council and Hauraki District Council and are reviewed on an annual basis.  This review process is undertaken in conjunction with the Hauraki District Council. The bond process is determined by the consent conditions and in simple terms the process is that the Company provides a rehabilitation report each year detailing the works that have occurred over the past year and those that are proposed for the next year and the works required to rehabilitate the site.  The report is reviewed by the independent peer reviewers associated with the site and any other experts deemed necessary by the Councils depending on the nature of the forthcoming works [12].

Yet there is significant doubt about whether the amount is sufficient.   In 2007, 5000 kg of heavy metals – zinc, iron, manganese and 100 kg of arsenic, cadmium, and lead was released from the Tui mine.  The Tui and Tunakohoia streams which flow into the Waihou River, and from there into the Firth of Thames, are totally devoid of fish and invertebrate life and are unsafe for humans.  This annual dose of contamination is likely to have been occurring at similar levels since the Tui mine closed in 1973.  Heavy metals are continuously released into the waterways from approximately 135,000 tonnes of mine waste (tailings) and two small mining tunnels.
The alarming extent of the mining pollution is revealed in a March 2010 Assessment of Environmental Effects.  Plans are being prepared to clean up the Tui Mine contamination at a cost to taxpayers of approximately $17.5 million, stated Coromandel Watchdog spokesperson Denis Tegg.  It is NZ’s most contaminated site.   When you compare Tui’s 135,000 tonnes of tailings to the current 40 million tonnes of tailings at Waihi’s Martha Mine, the potential threat to waterways is a very frightening scenario,” Mr. Tegg said.
Newmont Waihi Gold’s Martha Mine has generated tailings approximately 300 times larger than those at the Tui mine. Using the Tui mine costings as a benchmark, if just 10% of the Martha mine tailings required similar remedial work in the future the cost to taxpayers would be approximately $500 million [13].
In 2016, the Coromandel Watchdog has also questioned the safety of the tailing dams in the case of an earthquake [14] .  The Minister of Energy evaded a response, saying that it was a matter for the Waikato Regional Council. 
If there was a legal requirement that held directors and senior managers truly accountable (and not just the company), the governors and managers of Waihi Gold Mines would very likely, not be so ready to continue their operations, certainly in their current form.
Clear Ridge Station Ltd and Beejay Stud Ltd
These companies with David and Frances Webster as directors, had two farms in the Far North.  They were charged by the Northland Regional Council in 2016 and entered guilty. The companies were fined $225,000 but there has been no payment. In 2018,  Environment Court Judge Craig Thompson said that they were the worst case of prolonged non-compliance he had ever seen.  The offending involving huge amounts of untreated dairy effluent was described as blatant, ongoing and serious, with one of the farms awash with dairy effluent, resulting in gross contamination [15]. 

The Clear Ridge farm was sold for $4.5 million in January 2016. The Beejay Stud property was sold but no records of when and for how much.  Emma Smith, the Websters’ lawyer said that the Council had been told that the farms had been sold, and that the companies had no assets to pay the fines. It was reported that the accountant said that if there were any funds, they were likely to be in other companies or trusts relayed to the Websters, and access to these funds would be very unlikely.

Leaving aside the legal niceties about whether the money can be recovered, at the very least this case indicates that the current law is not providing any clear message that illegal behaviour is unacceptable and that directors will not escape personal responsibilities and liabilities.  Nor does it indicate that prompt action will be taken to change the behaviour of directors of companies acting against the wider interests and society and the environment.

All these examples illustrate the need for a revision of existing law in New Zealand to adequately hold the governors and senior managers personally accountable.  They also raise questions about the adequate assessment of risk.  There is inadequate legislation authorising, regulating, directing, constraining and penalising companies and organisations and their actors whose actions are contrary to their duties towards employees and the environment.  The legislation should include adequate ways of enforcing payment when companies do not have enough funds to meet payments imposed.  This would send a clear message so that such behaviour would not occur in the future. 

Family firms

It might be thought that the family firm structure might be a more useful organisational form than publicly owned companies.  The Boston Consulting Group calculates that family companies represent 33% of American companies and 40% of French and German companies with revenues of more than $1 billion a year. In Asia and Brazil they are even more prevalent [16].  But often this form is a means of controlling a number of shares in other companies. Randall Morck, of the University of Alberta, points out that the Wallenberg family controls companies that represent up to half the market capitalisation of the Swedish stockmarket, including global giants such as Ericsson. The Agnelli family controls 10.4% of the Italian stockmarket. In Hong Kong the top 15 families control assets worth 84% of GDP, in Malaysia 76%, in Singapore 48% and in the Philippines 47%.
The majority of the world’s most successful medium-sized companies are also family firms. Hermann Simon, chairman of Simon-Kucher & Partners, a consultancy, calculates that they account for two-thirds of Germany’s mighty Mittelstand, including world leaders in doors (Dorma), balancing machines (Schenck) and industrial mixers (Ekato). Italy has a large number of family-owned global champions in taste-conscious niches: Ferrari in cars, Versace in fashion, Ferrero Rocher in chocolates.
The worst thing about family companies is succession. Family businesses that restrict their choice of heirs to their children can be left with dunces. Moreover, wealth corrupts, a principle so well-established that many languages have a phrase for it. In English it is “clogs to clogs in three generations”; in Italian “from stables to stars to stables”; in Japanese “the third generation ruins the house”; and in Chinese “wealth does not survive three generations”. According to the Family Business Institute, an American consultancy, only 30% of family businesses survive into the second generation and 12% into the third. A mere 3% make it into the fourth and beyond.   So, expecting family firms to bring a long-term perspective and bypassing some of the problems of publicly owned companies, is over-optimistic.

Cooperatives
 A report for United Nation’s Secretariat Department of Economic and Social Affairs [17] states that cooperatives world-wide generated US$2.98 trillion in annual revenue. Combined the global cooperative economy is larger than France’s economy and behind Germany’s economy as the 5th largest economic unit if it were a united country.   At a national level the cooperative economy comprises over 10% of the Gross Domestic Product in 4 countries in the world (New Zealand (20%), Netherlands (18%), France (18%) and Finland (14%).

There are a number of examples of cooperatives being very interesting and inspiring models.  The Mondragon coops in Spain has many admirable features [18].  But we know from our experience in New Zealand, with Fonterra using coal during its dairying operations, and problems with animal waste polluting waterways, that a cooperative organisational form does not necessarily improve the clash between shareholder’s interests, and wider societal interest.

Discussion

Current company law in New Zealand does not fairly and adequately authorise, regulate, direct, constrain and penalise companies and organisations and their actors whose actions are contrary to the benefit of society generally, and in particular to the wellbeing of New Zealanders and the protection of the elements of our environment that provide the means for human life on Earth.  Adopting legislation based on requirements for mandatory consideration of stakeholders would place the judiciary in a very awkward position:  instead it requires Parliament to pass laws and regulations that place obligations on directors and senior managers to observe stakeholders’ essential needs in specific areas such as minimum wages and environmental protection.

The examples of Pike River Mine and Tiwai Point Aluminium Smelter demonstrate that existing laws are inadequate in bringing the failures of board directors and managers to account.  Changes have been made for health and safety matters but not for other aspects.  The laws should be changed so that appropriate criminal and financial penalties can be applied.  One of the benefits of such action would be to deter companies from taking such risky initiatives.    The legal changes should include directors and senior managers being personally liable even when a company goes bankrupt and is liquidated. 

The example of Tui and Martha Mines raises questions about the adequacy of bonds for rehabilitation.  It appears that the bond does not fully ascertain the risks.  More generally, the use of bonds for protecting society against risky actions that could seriously damage parts of our environment, is worth extending to include such activities as fossil fuel explorations and harmful toxin and chemical production.  Bonds should not just be for companies, but a requirement for directors and senior management personally.   This could particularly apply for overseas directors who may not be so easy to pursue in comparison to New Zealanders living in New Zealand.  These legal changes should apply to privately and publicly owned, family and cooperative enterprises.

While these steps would reduce the likelihood of significant abuse of our environment, it does not necessarily address the more fundamental and difficult issue of humans living within the capacity of the Earth to support human life.  Today humanity uses the equivalent of 1.7 Earths to provide the natural resources we use and absorb our waste. The ecological footprint measures the ecological assets that a given population requires to produce the natural resources it consumes (including plant-based food and fiber products, livestock and fish products, timber and other forest products, space for urban infrastructure) and to absorb its waste, especially carbon emissions.   This means it now takes the Earth one year and six months to regenerate what we use in a year. We use more ecological resources and services than nature can regenerate through overfishing, overharvesting forests, and emitting more carbon dioxide into the atmosphere than forests can sequester [19].   This moves the issue from individual organisations to sectors, requiring a national and international effort to reduce output in those sectors significantly contributing to overreach, and major reform of all sectors.  Critical to that exercise, however, are the legal requirements to authorise, regulate, direct, constrain and penalise companies and organisations and their actors so that we care for the environment rather than exploit it.


Acknowledgements
I am grateful to Cath Wallace and Mike Joy for some of the references to the Tui and Martha Mines, and Simon Harvey for reviewing a draft.


[1] https://www.greenpeace.org/usa/global-warming/exxon-and-the-oil-industry-knew-about-climate-change/exxons-climate-denial-history-a-timeline/
[2] https://insideclimatenews.org/content/Exxon-The-Road-Not-Taken
[3] Hot Air. Film Documentary. Available at https://www.nzonscreen.com/title/hot-air-2014
[4] Hamilton, C. 2010.  Requiem for a species. EarthScan
[5] a) SANZ. 2009.  Strong Sustainability for New Zealand. Principles and Scenarios.
b) Howell, R.  How are we to live?
https://drive.google.com/file/d/0B95bmHyVng3KS1dIMVNIWXRGOWc/view
https://drive.google.com/file/d/0B95bmHyVng3KZzJxb0R1WXF1ejA/view
[6] Wheeler, D & Sillanpää. 1997. The Stakeholder Corporation.   Pitman
[7] Watts, P, Campbell N, Hare C. 2016 Company Law in NZ 2nd edition LexisNexis NZ
[8] Schenone , S and I Drinkovic. 2016.  Duties and responsibilities of directors and company secretaries in New Zealand. Wolters Kluwer, CCH New Zealand . Edition 5.

[9] White, D. May 2014. No consequence after Pike River. http://thewireless.co.nz/articles/no-consequence-at-pike-river

[10] Institute of Directors and Worksafe New Zealand.  2016.  Health and Safety Guide:  Good Governance for Directors.  https://www.iod.org.nz/Portals/0/Governance%20resources/Health%20and%20Safety%20Guide_Good%20Governance%20for%20Directors.pdf

[11] Heron, M.  March 20 2018.  Govt issues warning to smelters over toxic waste.   https://www.radionz.co.nz/news/political/352885/govt-issues-warning-to-smelters-over-toxic-waste

[12] Sheryl Roa  Principal Advisor - Consents | Resource Use.  Waikato Regional Council | Te Kaunihera ā Rohe o Waikato.  Email response 5 April 2018.

[13] CoromandelWatchdog.  The toxic legacy of a mine. https://watchdog.org.nz/older-news/mulit-media/true-extent-of-toxic-legacy-from-coromandel-mine/

[14] Tegg, D. Nov 2016.  How earthquake safe are the mine tailings dams at Waihi?  https://teggtalk.wordpress.com/2016/11/30/how-earthquake-safe-are-the-mine-tailings-dams-at-waihi/

[15] Sharpe, M.  May 15 2018.  Stuff. https://www.stuff.co.nz/environment/103892720/fine-of-225000-for-dirty-dairying-will-go-unpaid-because-companies-are-broke
[16] Economist April 18th 2015. To have and to hold.  We draw on this article for this section.
[17] Grace and Associates. 2014.   Measuring the Size and Scope of the
Cooperative Economy:  Results of the 2014 Global Census on Co-operatives.  http://www.un.org/esa/socdev/documents/2014/coopsegm/grace.pdf
[18] https://www.mondragon-corporation.com/en/about-us/
[19] Global Footprint Network.  https://www.footprintnetwork.org/our-work/ecological-footprint/