Prepare or Beware: The Environmental Audit

n this year of our Lord one thousand nine hundred and ninety-one, 1984 may have truly arrived. Big Brother administers to the resources industry through environmental legislation and bureaucracy. In many jurisdictions, such as Ontario, environmental protection legislation imposes a duty on the corporation, its directors and officers to carry on operations in a manner that will protect the environment. If this duty is breached, not only the corporation but also its directors and officers may well be open to charges under the legislation (see “Directors Beware,” June, 1988 issue).

One cannot expect reason and compromise to prevail with respect to environmental matters. Unfortunately, in some jurisdictions governmental officials who are charged with the protection of the environment seem to have consigned reasonableness and compromise to the background. In some instances, it has even happened that an operator has received the blessing of the abatement section only to find that when he proceeds to implement the “approved” course of conduct, the enforcement section of the same governmental authority lays, or threatens to lay, charges. From the point-of-view of the directors and officers, things are not particularly rosy either — at least in some jurisdictions, it seems that the enforcement section is actively looking for a board of directors against which to lay charges. Apparently, an example is required!

What can be done, other than the obvious political recourse? How can directors and officers or their corporations protect themselves?

Luckily the courts have injected a ray of hope into this dark picture by accepting a defence of “due diligence.” If a director can show that he acted reasonably, involved himself to a reasonable extent in the environmental concerns of the corporation and took all reasonable steps to ensure that the operations of the coporation were carried on in an environmentally correct manner (as contemplated in the relevant legislation), then he may have a defence to the environmental charges laid against him. Equally, if a corporation can satisfy the court that an environmental “offence” occurred, despite the corporation having taken all reasonable steps to prevent the occurrence of an “offence,” the corporation can use the “due diligence” defence. The concept of the actions being “reasonable” is important and will be interpreted by the courts and applied to the circumstances of each charge. Be forewarned, however, that the courts are becoming more and more demanding in considering the actions that must be taken in order to satisfy the “due diligence” test.

For example, it may not be reasonable to expect a director to roll up his sleeves and go out on the job to ensure that the directions of the board are being carried out, but it may be reasonable to expect a director of a mining corporation, who is himself involved in mining, to ask penetrating and extensive questions, review reports or summaries on environmental matters and, possibly, make enquiries outside of the board. If a director does these things, he will be a long way along the road leading to a successful defence. If he does not, look out! Remember that, in order to plead the defence of “due diligence” succesfully, all reasonable steps to identify and avoid the occurrence of the subject of the environmental offence must have been taken.

Obviously, in order to have this defence available, the directors and officers must know what the potential and existing environmental problems are. They can find out by carrying out a detailed environmental audit of operations. The term “environmental audit” is relatively new, but it is merely a label to identify the procedure used to identify and assess environmental risk at a facility and to suggest appropriate responses to identified or potential risks. An audit will be carried out by a team of appropriate technical and environmental specialists, including a lawyer. The lawyer is requred because of the complexity of environmental laws and, more important, to assist in the preparation of a comprehensive audit report. There are many good consulting firms that carry out such audits, for a price, or the corporation can use its own staff to do so.

Some of the more obvious things to consider when contemplating an environmental audit are:

* Why is the audit being sought? If it is to be used to answer public or governmental complaints, outside consultants should be used as the use of corporate personnel may well be suspect. Even if the audit is intended for strictly internal purposes, the use of personnel only may be ill-advised. An employee may miss a potential problem that has “always been like that,” may be biased or may just not want to embarrass himself or a fellow employee.

* Has every aspect of the operations been included in the audit? It is dangerous, and possibly foolhardy, for a mining corporation’s audit to concentrate on actual mining and processing operations and to “brush over lightly” exploration or abandoned, but still owned, projects.

* An audit does not just happen. A detailed plan and schedule for carrying it out must be prepared and agreed to by the audit team and the corporation before anything else can proceed.

* Audit personnel should be familiar with the operations that they are reviewing. It may be appropriate to use more than one consultant to carry out different aspects of an audit.

* If internal personnel are to be used, remember that they will be naturally biased in favor of existing procedures (especially if they were in charge of creating them) and there will be a natural reluctance to point out “minor” problems. Unfortunately, in environmental matters, today’s minor matter may be tomorrow’s charge.

* Recognize and accept that the audit is going to take time, money and effort, and will in all likelihood disrupt operations. Tell staff about it and instruct them to co-operate fully. Without full co-operation and access to all relevant materials and files, an audit may end up not only being of little use, but may be a principal piece of evidence for the Crown in an environmental prosecution.

* If consultants are to be involved, a lot of time and money can be saved if the corporation does a thorough job of compiling as much data as possible in a central location.

* Confidentiality is a major consideration with respect to both the report of the audit team and the information made available. If an environmental charge is laid, enforcement officers will quickly visit the corporation with a search warrant and “scoop the files.” There are legal limitations on what they may and may not do and every operator should be aware of them (see “The Inspector Knocketh” in our July, 1988 issue). If an audit has been carried out internally, it will be a corporate document, ready and waiting to be scooped. If, on the other hand, it has been prepared by outside advisers and in conjunction with ouside legal counsel, it may be possible to protect it from seizure through the use of solicitor/client privilege.

* Access to and distribution of the final audit document, and drafts thereof, should be controlled.

It is to be expected that an environmental audit will reveal problems and potential problems. The report must be reveiwed carefully by staff and directors. Each actual problem and the procedure to correct it must also be considered. It must be remembered that in many Canadian jurisdictions there is a statutory duty to report certain infringements, such as the discharge of a contaminant into the natural environment out of the normal course of events that causes an adverse effect (paraphrase of the Ontario requirement). To fail to do so is an offence and it is a further offence to assist or to be a party to such failure.

On the other hand, in all likelihood the operator will have been aware of most of the problems (although he may not have admitted to their existence or severity), so the audit will, to a large extent, be confirmatory. Besides, is it mot better for you to find out your own problems, rather than having the enforcement branch o
f the environmental ministry do it for you?

For existing problems, appropriate steps (including opening discussions with the environmental ministry if necessary) will have to be taken as quickly as possible and a plan to correct them or to minimize their impact on the environment formulated. For potential problems, preventive procedures will have to be designed and implemented.

From a director’s point-of-view, it is essential that the board receive copies of the audit report and considerate it carefully. If problems are identified, the board will have to assure itself that the appropriate remedial actions are approved. The obligations of the board and of the individual directors does not, however, stop here. The prudent board will take continuous follow-up action to see that the actions are, in fact, undertaken and completed. The board might even consider appointing a knowledgeable director to be the board’s “environmental director” with responsibility and authority to maintain communications with management and to report to the board on environmental matters. Remember that, if an environmental charge is laid against a director or the whole board, you can never have done too much or become too involved if you are looking for a successful defence of “due diligence.”

In addition, the environmental audit will form the basic document in creating an environmental plan and manual for the corporation. It is the environmental plan that will be the major line of defence for the coporation, its officers and directors in attempting to establish a “due diligence” defence. But, to paraphrase the old Saturday morning serials at the corner theatre, don’t forget to pay your money and return for the next episode in our drama: “Will the environmental audit produce an environmental plan and manual?” And if, in the meantime, you see a small robot perched on your boardroom windowsill, it may just be Big Brother watching over you.