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  • Robert Hinkley

Thought for the Day

12/3. (Part 2). Enforcing the Code. When new business regulations are proposed, two competing considerations arise. Victims of abusive corporate behaviour want strong penalties. They fear (with some justification) that companies will treat small fines as a cost of doing business and go right on with their abusive behaviour.

Business wants the new law to make clear exactly what is being prohibited. They know that they are allowed to do anything the law doesn’t specifically forbid. The more specific the law is (in terms of what it stops), the greater the freedom they retain to continue.

Photo by Richard Miller

So how does the Code answer these questions? No mention is made of penalties. The word “severe” is undefined. Both sides would seem to have concerns. This isn’t a mistake. It’s by design.

The first thing to note is that the Code doesn’t prohibit corporations from doing anything. It requires directors to behave in a specific manner when faced with specific circumstances. It works on directors not companies. The specific behaviour it requires is for directors to alter or close down operations which are causing severe harm to the environment so that the harm is reduced to a level which is less than severe or is eliminated.

Usually, business regulation is directed at a company or industry. Compliance is the primary responsibility of day-to-day managers. Board oversight tends to be of the check-the-box, not very thorough, variety. Directors ask management if they ran the managers’ proposed action by the company’s lawyers. A simple answer, “Yes,” usually will suffice.

These lawyers are either part of management or outside counsel hired by them. Their advice can be tainted by their desire to please their boss or client. They know, if they don’t give management the answers it wants, the company may decide to hire other lawyers who will.

The gravity of the Code is underlined by the fact that it is a direct obligation of the board. It will need to obtain its own legal advice regarding the Code’s impact on its business. Companies will incur great cost if they have to alter or close down an operation which is causing severe harm. The amount at risk will be too great for directors to get it wrong.

That wouldn’t be in “the company’s best interest” (which will still be the directors’ legal obligation and primary motivation). Yet, while protecting the company’s interests will remain the primary goal of directors, the Code will modify that goal by requiring that the way it’s achieved does not cause severe damage. It’s possible to do both, pursue the bottom line and keep the environment from being severely damaged.

Overall, the Code will make all directors more cautious when approving new investments. They will want to be sure that the investment’s impact on the environment will not cause severe harm, because they know the consequences under the Code of later finding out that it does.

More on how the Code will be enforced coming up in Part 3.

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