The 800-pound gorilla in the boardroom: EHS; We asked, they answered: directors are giving unprecedented attention to environmental, health and safety oversight.

• Author: Pilko, George
• Position: ENVIRONMENTAL OVERSIGHT

NEW ISSUES seem to be barging into the boardroom at an ever-faster pace as headlines announce another area of corporate governance that needs quick attention. The high-profile shareholder disasters (Enron, WorldCom, etc.) followed by Sarbanes-Oxley drove financial and accounting issues to the fore. Then came executive compensation issues and options backdating.

Some concerns, however, tend to rise more gradually onto directors' radar screens. Environmental, health and safety (EHS) issues fall into that category. Knowledgeable observers note that EHS has existed as a major risk over the past 25 years, yet only within the last two to three years has it begun to receive high-profile status as a corporate governance issue. Yet EHS has as much liability for a board as any other issue, according to Ralph Cunningham, group executive vice president and COO of Enterprise Products Partners LP.

"In years past, those with EHS responsibilities might go in and report their statistics to the board once a year," Cunningham says. "We're a long way from that today. Boards are starting to focus on EHS governance issues. There is a growing awareness of the need to spend more time on it."

He should know. Cunningham is a veteran of the energy industry who currently serves on the boards of Calgary-based natural gas giant EnCana Corp.; TETRA Technologies Inc., an oilfield service company; and Agrium Inc., a producer of agricultural nutrients, industrial products, and specialty fertilizers. He is also the former board chairman of pipeline operator TEPPCO Partners LP, so he is someone who understands the impact of EHS issues on various sectors of the energy industry.

According to Cunningham, a question for boards has been, "How are you building shareholder value by working on EHS issues? I happen to believe that you can build shareholder value in various ways, including EHS, and we can certainly prevent share value loss by governing in a way to prevent some of the incidents that we see still occurring around the world."

Scandals as the driver

Attorney Peggy Heeg, a partner with Fulbright & Jaworski LLP and former general counsel of El Paso Corp., notes that corporate scandals were the driving force leading to the increased focus on EHS.

"Basic questions arose about the role of a board in proper corporate governance," she says. "People began to question the role of the board in managing risks. Most investors believe that risk assessment and risk management are two of the most fundamental responsibilities of a board. Shareholders expect boards to ensure that there are proper processes and procedures in place to do so. EHS really brings those responsibilities together and adds a very important responsibility: ensuring there are adequate financial reserves to protect the company against EHS risks."

She cites the billions of dollars in costs to corporations through fines, liabilities, loss of shareholder value, loss of reputation, and turmoil within a company when a major EHS incident occurs. "EHS really merges the two key responsibilities of the board: assessing and managing risks and maximizing shareholder value."

As companies begin to awaken to the risks and the need for more intense EHS governance, there appears to be a wide divergence in how companies are managing these issues even within industries normally considered on the front line of these types of risks--energy and petrochemicals, for example. The report card for some companies is good, but others are just getting started in this area.

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