Why directors should be held personally accountable for corporate failures in sustainability
In July 2021, Southern Water was slapped with a record £90 million fine after the UK utility admitted it had illegally discharged sewage into the rivers and coastal waters of southern England on 6,971 occasions between 2010 and 2015. 1
Later that month, the company’s chairman published an open letter, claiming “deep and necessary cultural change” to both the business and its leadership team meant that, since 2017, Southern Water’s “absolute priority” had been to put the environment “front and centre in everything we do." 2
Despite the apparent contrition, Southern Water faced further criticism in the Autumn for dumping sewage in 57 areas within 24 hours. It begs the question: despite the commitments to address failings in its business, has anything changed? 3
The episode was the latest example of a shortcoming in the way some companies and the people in charge of them operate. All too often it is cheaper for firms to flout environmental laws and regulations than it is to manage their business in a more responsible and sustainable way.
A similar problem applies to other types of business. Clothing retailers, for example, may find it more convenient to run the risk of abetting human rights abuses, the use of child labour or modern slavery than undertake full due diligence of their supply chains and understand all the layers of the companies and suppliers they do business with.
In response to high-profile market failures and a growing public awareness of sustainability issues, rules on how companies operate are gradually being tightened. However, gaps remain in the regulatory framework that could hamper efforts to achieve their desired goal. Although it is possible punitive fines could bring about the desired change in corporate behaviour, the danger is companies will continue to view them as the cost of doing business rather than an incentive to behave in a more sustainable manner.
While fines can be an important tool, alongside that there needs to be personal jeopardy for directors as the controlling mind of the company if they are choosing or ignoring practices that are damaging natural or social capital. At the moment, directors feel pretty safe behind the corporate veil.
One of the ways investors can focus accountability for sustainability on the shoulders of directors is through voting on their re-election. Investors should also lobby regulators to ensure people who are running companies in a way that deliberately damages either human or natural capital understand they are liable to disqualification. After all, financial institutions have a responsibility to seek to influence policymakers to ensure a more sustainable system with markets operating with integrity, since that is in line with the long-term interests of their customers.
References:
1. UK Environment Agency Press Release, Record £90m fine for Southern Water following EA prosecution, July 9 2022.
2. Source: Southern Water website
3. Jacob Heath, Outrage as Southern Water dump sewage in 57 south coast places including Worthing and Hastings, SussexLive, October 21, 2021
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310704 - 30/04/2023