What responsibility does a manager have concerning environmental ethics? 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 hefty personal price after an error of judgement destroyed the 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 corporate veil for environmental offences.
This essay discusses the Corporate Governance aspects of this case from the stakeholder perspective and an ethical perspective. A combination of utilitarian and Kantian environmental 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 roadworks 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. Construction works commenced, ignoring this information and destroyed 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 evaluations.
Justice Lloyd found this not to be a sufficient defence (Land & Environment Court of New South Wales 2009: 81). Justice Lloyd further observed 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 of paying $57,000 in fines and $167,500 prosecutor’s costs. Council was convicted of paying 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 to 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 cannot 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 characterisation 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 serve as agents for the owners, may not always work 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 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 the long-term sustainability of corporations and society in general (Du Plessis et al. 2005). As discussed below, the 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 the 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. Governments have put environmental legislation in place to regulate the behaviour of managers, to counter the natural tendency of corporations to externalise the cost of their actions. 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 essential to consider it as a stakeholder, represented by relevant legislation and interest groups.
Environmental Ethics for Managers and Deontic Constraints
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 the Council’s actions, two ethical models (Brennan and Lo 2008) are applied to this case.
Consequential environmental 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 cannot 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 the Council’s actions 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 apparent.
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 person or 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). In deontological environmental ethics, the anthropocentrism 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 Council violated the intrinsic value of the two threatened species 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 an 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 agreed 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 practice 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 of 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 before undertaking the road construction works.
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.