By: Peter Pre­vos, 22 June 2009.

Mr Free­man was a model cit­izen with a long career in pub­lic ser­vice. In 2003 he held the pos­i­tion of Dir­ector of Infra­struc­ture at the Port Macquarie-Hasting Coun­cil and was respons­ible for the imple­ment­a­tion of infra­struc­ture works. How­ever, this year Mr Free­man paid a heavy per­sonal price after an error of judge­ment res­ul­ted in the destruc­tion of hab­itat of two threatened animal spe­cies dur­ing road con­struc­tion pro­ject (Land & Envir­on­ment Court of New South Wales 2009). This case is of import­ance because Justice Lloyd pierced the cor­por­ate veil for envir­on­mental offences by hold­ing Mr Free­man par­tially per­son­ally account­able for the dam­age caused by the con­struc­tion works (Blake Dawson 2009; Thomas 2009).

Justice Lloyd pierced the cor– por­ate veil for envir­on­mental offences.

In this essay, the Cor­por­ate Gov­ernance aspects of this case are dis­cussed from the stake­holder per­spect­ive and an eth­ical per­spect­ive. A com­bin­a­tion of util­it­arian and Kan­tian eth­ics is used to argue that the Coun­cil failed to recog­nise the envir­on­ment as a stake­holder and as such gave pref­er­ence to poten­tial fin­an­cial gain over the envir­on­mental dam­age. Fur­ther­more, it is recom­men­ded that gov­ernance sys­tems based on ISO 14001 could have pre­ven­ted the destruc­tion of habitat.

In 2003, Port Macquarie-Hasting Coun­cil (the Coun­cil) engaged in the con­struc­tion of road works on land owned by the Coun­cil in an area known as Part­ridge Creek. Mr Free­man was respons­ible for over­see­ing these works. As part of the pre­par­a­tion for this pro­ject, sev­eral envir­on­mental assess­ments were under­taken and the Coun­cil was aware that this land is a hab­itat of the Grass Owl and the East­ern Chest­nut Mouse, both lis­ted as threatened spe­cies. Ignor­ing this inform­a­tion,  con­struc­tion works com­menced, caus­ing the destruc­tion of hab­itat for these spe­cies (Land & Envir­on­ment Court of New South Wales 2007, 2009).

Coun­cil and Mr Free­man were pro­sec­uted by Mr Gar­rett, rep­res­ent­ing the Depart­ment of Envir­on­ment and Con­ser­va­tion. Justice Lloyd found that Council’s sys­tem of works to mit­ig­ate envir­on­mental risk had failed in that Mr Free­man “com­pleted a tick-a-box check­list which did not even men­tion the threatened spe­cies” (Land & Envir­on­ment Court of New South Wales 2009: 28). One of Mr Freedman’s defences was that he had no train­ing in envir­on­mental assess­ments and that no manu­als were avail­able and he thus could not be held liable for the qual­ity of the ssessments.

Justice Lloyd found this not to be a suf­fi­cient defense (Land & Envir­on­ment Court of New South Wales 2009: 81). Justice Lloyd fur­ther found that: “… as a dir­ector and some­times act­ing Gen­eral Man­ager of the coun­cil Mr Free­man ought to have made proper efforts to find out what was required for a proper assess­ment after hav­ing become aware that such an assess­ment was required” (Land & Envir­on­ment Court of New South Wales 2009: 162).

Both the Coun­cil and Mr Freed­man were found guilty. Mr Free­man was con­victed to pay $57,000 in fines and $167,500 prosecutor’s costs. Coun­cil was con­victed to pay sim­ilar amounts (Land & Envir­on­ment Court of New South Wales 2009). The pro­ceed­ings against the Coun­cil and Mr Free­man have promp­ted improve­ments to the way pro­jects are man­aged, includ­ing a pro­ject man­age­ment facil­it­a­tion pro­cess aimed at ensur­ing there is a doc­u­mented and account­able pro­cess for pro­jects plan­ning and obtain­ing approvals. Envir­on­mental check­lists have been rewrit­ten and meas­ures to ensure that staff are prop­erly trained have been imple­men­ted (Land & Envir­on­ment Court of New South Wales 2009; Port Macquarie-Hastings Coun­cil 2007: 163).

Given that Port Macquarie-Hastings Coun­cil is not a cor­por­a­tion in the tra­di­tional sense of the word, i.e. it is not owned by share­hold­ers, the stand­ard owner cent­ric model for cor­por­a­tions can not be applied to this case. The Coun­cil is there­fore viewed from the stake­holder per­spect­ive. A stake­holder is any per­son or organ­isa­tion that has an interest in the deal­ings of the Coun­cil (Du Plessis et al. 2005). In this model, dir­ect­ors and man­agers have a respons­ib­il­ity to all stake­hold­ers, includ­ing the own­ers. Man­age­ment must look after the health of the organ­isa­tion, bal­an­cing the com­pet­ing claims of the dif­fer­ent stake­hold­ers (Beauchamp and Bowie 1997). Two of the stake­hold­ers that have an interest in the Coun­cil, i.e. the com­munity and the envir­on­ment, are dis­cussed below.

The com­munity in which the Coun­cil oper­ates is its most import­ant stake­holder. As the Coun­cil is a pub­lic organ­isa­tion, no spe­cific own­ers can be iden­ti­fied. The com­munity is effect­ively act­ing in this role and the own­ers of the Coun­cil are thus the people of Port Macquarie and Hast­ings. Com­plic­at­ing factor in the case of pub­lic organ­isa­tions, such as Coun­cils and util­it­ies, is that most ‘own­ers’ are also cus­tom­ers of that same organ­isa­tion. The com­munity is thus a stake­holder that embod­ies both the own­ers and the cus­tom­ers of the Council.

Cor­por­a­tions are char­ac­ter­ised by a sep­ar­a­tion of own­er­ship and con­trol of oper­a­tions. This is the gen­esis of the Agency Prob­lem, which deals with the dif­fi­culty of effect­ive cor­por­ate con­trol to ensure that man­agers act in the best interest of the own­ers. Man­agers, who act as agents for the own­ers, may not always act in the best interest of own­ers when con­trol is sep­ar­ate from own­er­ship (Bonazzi 2007).

Stake­holder the­ory effect­ively expands the realm of interest of the organ­isa­tion to all stake­hold­ers. The Agency Prob­lem is thus also expan­ded as none of the stake­hold­ers, includ­ing the com­munity, have no dir­ect con­trol over decisions made by the Coun­cil. The case under con­sid­er­a­tion is an illus­tra­tion of the Agency Prob­lem. Mr Free­man has taken envir­on­ment risk in order to obtain fin­an­cial bene­fits to the det­ri­ment of the envir­on­mental, res­ult­ing in sig­ni­fic­ant mon­et­ary dam­ages. Mr Freed­man thereby dam­aged the interests of the com­munity, as the addi­tional fin­an­cial bur­den will neg­at­ively impact on the level of ser­vice the Coun­cil can provide.

Man­agers will optim­ise decisions only if appro­pri­ate incent­ives are given, clear lim­its of respons­ib­il­ity are defined and activ­it­ies are mon­itored (Bonazzi 2007). From the court pro­ceed­ings there is, how­ever, no evid­ence that a com­pre­hens­ive pro­cess for man­aging envir­on­mental risk was in place and the internal audit pro­gram did not include envir­on­mental risk (Land & Envir­on­ment Court of New South Wales 2009). After the ini­tial court pro­ceed­ings, the Coun­cil developed a com­pre­hens­ive Pro­ject Man­age­ment Frame­work and com­pli­ance with these require­ments was added to the internal audit plan (Port Macquarie-Hastings Coun­cil 2007), thereby pro­tect­ing the interests of the com­munity. The Nat­ural Envir­on­ment is the second import­ant stake­holder in this case. Although the nat­ural envir­on­ment is voice­less and can thus not express its pref­er­ences, it is embod­ied by lobby groups and envir­on­mental reg­u­lat­ors. The envir­on­ment is gen­er­ally included as a stake­holder because of the recog­ni­tion that it is an essen­tial aspect of long term sus­tain­ab­il­ity of cor­por­a­tions and soci­ety in gen­eral (Du Plessis et al. 2005). As dis­cussed below, stand­ard eth­ical the­ory is anthro­po­centric and is as such not able to account for the envir­on­ment. This has cre­ated a situ­ation where the envir­on­ment is seen as a means to achieve fin­an­cial object­ives, res­ult­ing in its short term exploitation.

Mr Free­man made an error in judge­ment in that he pri­or­it­ised the short term fin­an­cial interests of the Coun­cil over the long term interests of the envir­on­ment. This is in line with the clas­sical view of the firm in which all bene­fits are inter­n­al­ised and costs of actions are exter­n­al­ised (Beauchamp and Bowie 1997). In effect the envir­on­ment, embod­ied by the two threatened spe­cies, has paid the price for the fin­an­cial gain anti­cip­ated by the Coun­cil. To counter the nat­ural tend­ency of cor­por­a­tions to exter­n­al­ise the cost of their actions, gov­ern­ments have put envir­on­mental legis­la­tion in place to reg­u­late the beha­viour of man­agers. It is clear from the court pro­ceed­ings that Mr Free­man did not recog­nise the envir­on­ment as a stake­holder with intrinsic value and it was only because of legis­lat­ive pres­sures that the Coun­cil adop­ted a bet­ter way to mit­ig­ate envir­on­mental dam­age in future projects.

In sum­mary, the stake­holder view of an organ­isa­tion ensures that the no harm prin­ciple applies to all stake­hold­ers, rather than only the own­ers. For activ­it­ies with poten­tial harm to the nat­ural envir­on­ment it is import­ant to con­sider it as a stake­holder, rep­res­en­ted by rel­ev­ant legis­la­tion and interest groups.

From an eth­ical point of view, the Coun­cil has given pri­or­ity to max­im­ising the fin­an­cial return of the land over its envir­on­mental value (Land & Envir­on­ment Court of New South Wales 2009: 74). To assess the moral implic­a­tions of Council’s actions, two eth­ical mod­els (Bren­nan and Lo 2008) are applied to this case.

Con­sequen­tial eth­ics con­sider an action right or wrong by assess­ing the per­ceived con­sequences. In util­it­ari­an­ism, the most widely used con­sequen­tial­ist the­ory, the out­come of an action is con­sidered good if ‘util­ity’, i.e. pleas­ure or hap­pi­ness, is max­im­ised. For util­it­arian envir­on­mental philo­soph­ers, such as Peter Singer (1979), this argu­ment is exten­ded to include anim­als. In other words, for an action to be eth­ical, the over­all util­ity as a con­sequence of the action for all sen­tient beings needs to be max­im­ised. How­ever, util­it­ari­an­ism is prob­lem­atic as an eth­ical the­ory for envir­on­mental con­cerns (Bren­nan and Lo 2008). The envir­on­ment does not only con­sist of humans and anim­als, but also of non-sentient entit­ies such as plants, rivers and land­scapes. Fol­low­ing the util­it­arian strand of thought, these are not objects of moral con­cern as they have no abil­ity to exper­i­ence pleas­ure or pain and are thus of instru­mental value to the sat­is­fac­tion of sen­tient beings (Bren­nan and Lo 2008).

To determ­ine whether the actions of the Coun­cil were eth­ical from a util­it­arian point of view would require an extens­ive cost-benefit ana­lysis, the so called Hedon­istic Cal­cu­lus, which lies out­side the scope of this essay. What can be asser­ted is that Council’s actions have reduced the util­ity of the threatened spe­cies by des­troy­ing their nat­ural hab­itat. Whether this has pref­er­ence over the anti­cip­ated fin­an­cial return anti­cip­ated through the new infra­struc­ture is not imme­di­ately clear.

Deont­o­lo­gical the­or­ies con­sider whether an action is right or wrong irre­spect­ive of the con­sequences. Fol­low­ing Emmanuel Kant’s second for­mu­la­tion of the Cat­egor­ical Imper­at­ive, human­ity can never be used as a means to an end: “Act in such a way that you treat human­ity, whether in your own per­son or in the per­son of any other, always at the same time as an end and never merely as a means to an end.” (Ken­nett and Town­send 1998: 75, emphasis added). In deont­o­lo­gical envir­on­mental eth­ics the ath­ro­po­centrism of the Cat­egor­ical Imper­at­ive is expan­ded to include the envir­on­ment (Bren­nan and Lo 2008). From a stake­holder the­ory per­spect­ive, every stake­holder, includ­ing the envir­on­ment, has intrinsic value and a right not to be treated as a means to an end. This view is expressed in con­cepts such as product liab­il­ity, indus­trial rela­tions and envir­on­mental reg­u­la­tion (Beauchamp and Bowie 1997). A deont­o­lo­gical envir­on­mental thinker could thus argue that the intrinsic value of the two threatened spe­cies was viol­ated by the Coun­cil because they were used as a means to an end; as a means to obtain fin­an­cial gain.

In sum­mary, assess­ing this case from an eth­ical per­spect­ive con­firms the import­ance of includ­ing the envir­on­ment as a stake­holder with intrinsic value. This case illus­trates that without this concept the envir­on­ment can be used as a means to and end, as a means to increase the util­ity of the other stakeholders.

This case shows that using a stake­holder view of an organ­isa­tion, as opposed to the clas­sical view which gives pref­er­ence to the own­ers, provides a bet­ter model to ensure all legal and moral oblig­a­tions can be ful­filled. Fur­ther­more, it is essen­tial to recog­nise the nat­ural envir­on­ment as a stake­holder with equal intrinsic value equal to all other stake­hold­ers. Assess­ing this case from an eth­ical per­spect­ive shows that the util­it­arian point of view can lead to infin­itely com­plex dis­cus­sions about the util­ity of the con­sequences of each action the Coun­cil can under­take. How can the Coun­cil decide which val­ues have pre­ced­ence in this case? From a legal point of view there is no issue as legis­lat­ive powers have decided to provide the threatened spe­cies with intrinsic pref­er­en­tial val­ues over the anti­cip­ated fin­an­cial gain. The prin­ciple nev­er­the­less remains. Some organ­isa­tions aim to alle­vi­ate this issue by using a Triple Bot­tom Line approach, in which fin­an­cial, social and envir­on­mental val­ues are com­pared. This inher­ently util­it­arian point of view has, how­ever, never been imple­men­ted to its fullest extent because there is no agree­ment between the rel­at­ive value of envir­on­mental versus social and fin­an­cial val­ues (Nor­man and Mac­Don­ald 2004). In prac­tical terms, what is the value of the sur­vival chances of the Grass Owl and the East­ern Chest­nut Mouse com­pared to the social and fin­an­cial bene­fits of the road con­struc­tion under­taken by Coun­cil? Regard­less of the inher­ent issues with con­sequen­tial­ism, it is an intu­it­ively appeal­ing model that is widely used in decision mak­ing processes.

The non-consequentialist deont­o­lo­gical view offers a way to mit­ig­ate the issues inher­ent with util­it­ari­an­ism. Although in prac­tise a Triple Bot­tom Line ana­lysis is required to come to decisions, the law acts as a deontic con­straint to ensure that voice­less stake­hold­ers, such as the envir­on­ment, are provided with intrinsic value. This forces organ­isa­tions to act duti­fully to the envir­on­ment and other stakeholders.

From a prac­tical point of view, the mana­gerial impact of this case is that senior man­agers can be held per­son­ally account­able and that they need to con­sider the envir­on­ment as a stake­holder with intrinsic value. Not being an expert in the issue at hand is not accep­ted as a reas­on­able defence (Thomas 2009). Being aware of envir­on­mental issues is not suf­fi­cient and tak­ing act­ive steps to imple­ment a robust Envir­on­mental Man­age­ment Sys­tem is the best risk man­age­ment approach (Blake Dawson 2009; Thomas 2009). Most Aus­tralian states and ter­rit­or­ies main­tain envir­on­mental laws which effect­ively deem cer­tain cor­por­ate officers to be guilty of offences which their cor­por­ate officers com­mit (Thomas 2009). These laws are neces­sary to ensure that cor­por­a­tions and pub­lic organ­isa­tions appro­pri­ately assign value to the envir­on­ment over anti­cip­ated fin­an­cial gains and other per­ceived inter­n­al­ised bene­fits. One mech­an­ism to con­trol envir­on­mental risk, used by many organ­isa­tions around the world, is ISO 14001:2007 Envir­on­mental Man­age­ment Sys­tems. This inter­na­tional bench­mark defines stand­ards for man­age­ment com­mit­ment to ensure that dir­ect­ors and senior man­agers are aware and act­ively involved in mit­ig­at­ing envir­on­mental risk (Maha­raj and Ram­nath 2005). The risk of hab­itat destruc­tion would have been recog­nised and mit­ig­ated had the Coun­cil imple­men­ted such a sys­tem prior to under­tak­ing the road con­struc­tion works.

Ref­er­ences

Beauchamp, Tom L. and Bowie, Nor­man E., eds. (1997) Eth­ical the­ory and busi­ness. 5th ed. Pren­tice Hall.

Blake Dawson (2009) Pro­sec­u­tion of employ­ees for breaches of envir­on­mental legislation.

Bonazzi, Livia (2007) ‘Agency the­ory and cor­por­ate gov­ernance: A study of the effect­ive­ness of board in their mon­it­or­ing of the CEO’. Journal of Mod­el­ling in Man­age­ment 2(1): 7–23.

Bren­nan, Andrew and Lo, Yeuk-Sze (2008) Envir­on­mental Eth­ics. In Edward N. Zalta, ed., The Stan­ford Encyc­lo­pe­dia of Philo­sophy, fall 2008.

Du Plessis, J, McCon­vill, J and Bagaric, M (2005) Prin­ciples of Con­tem­por­ary Cor­por­ate Gov­ernance. Mel­bourne: Cam­bridge Uni­ver­sity Press.

Ken­nett, Jeanette and Town­send, Aubrey, eds. (1998) Eth­ics. Unit Study Guide. Mon­ash University.

Land & Envir­on­ment Court of New South Wales (2007) Gar­rett v Free­man (No. 4).

Land & Envir­on­ment Court of New South Wales (2009) Gar­rett v Free­man (No. 5); Gar­rett v Port Macquarie Hast­ings Council.

Maha­raj, Priya S and Ram­nath, Kelvin (2005) ‘Bene­fits in an Envir­on­mental Man­age­ment Sys­tem’. ASQ World Con­fer­ence on Qual­ity and Improve­ment Pro­ceed­ings : 347–352.

Nor­man, Wayne and Mac­Don­ald, Chris (2004) ‘Get­ting to the Bot­tom of Triple Bot­tom Line’. Busi­ness Eth­ics Quarterly 14(2): 243–262.

Port Macquarie-Hastings Coun­cil (2007) ‘Coun­cil meet­ing 06 August 2007′.

Singer, Peter (1979) Prac­tical Eth­ics. Cam­bridge Uni­ver­sity Press.

Thomas, Nick (2009) ‘Envir­on­mental com­pli­ance for dir­ect­ors and man­agers — a timely reminder’. Keep­ing good com­pan­ies 61(4): 231–233.