Governance, Operations Management, Risks Management, Non-compliance with standards, laws and regulations
Magical Seas Co. is a luxury cruise line that specializes in world travel to Australia and the Asia-Pacific region. The Board of Directors meets on the first Wednesday of each month. As a publicly traded company, Magical Seas had to meet various rules and regulations, including the appointment of independent board members. Independent directors are individuals who come from outside the company and have no existing relationships with the company. Caroline Blue, the CEO of Magical Seas Co., also serves as the chairman of the Board. Her main concern is the shareholders, and she owns 6% of the company. Dr. Ana Green is an independent board member and CEO of Green Services Co. She chairs the Environment, Social, and Governance (ESG) Committee and strongly believes in doing what is best for the environment.
At today's committee meeting, Green began by sharing several news articles about another cruise company, DarkSeas, that had been fined $40 million for dumping raw sewage and other pollutants off the coast of Australia. "I hope this isn't something Magical Seas Co. is doing," Green looked at Blue.
"We only discharge treated sewage," Blue replied. "However, sometimes we discharge it less than four nautical miles from the nearest shore, and yes, some old ships do not have the latest wastewater treatment technology," she reluctantly admitted.
"We must stop this immediately!" Green exclaimed. "Waste discharge should only occur at more than four nautical miles from land, and the boat must travel at a speed of six knots or more."
“It is a matter of time and money. How would this impact our shareholders and their value?” asks Blue. “We do not want to make decisions that negatively affect them.” Blue knows that cruise liners have razor-thin profit margins. “No one will know the difference.”
Green replies, “It would only initially bring down profits by 5 percent, but we might potentially attract more environmentally-minded customers in the future if we advertise our environmental actions.”
An enraged Blue responds, “What do you mean it would bring profits down?
Our shareholders would be negatively affected by this! We cannot decrease our profits by 5% for the possibility of new customers and good press. We are responsible to shareholders to decide what is best for the corporation. Doing anything else would breach our fiduciary duty to act in the best interest of shareholders. We are responsible for our economic success and viability to shareholders.”
Green replies, "I completely agree that this is one of our fiduciary duties. By violating the law, we are putting Magical Seas Co. in a situation of non-compliance with standards, laws, and regulations. This leads to financial and reputational risks. We also have a duty to the environment and ecosystems."
Green continues, "The ocean is being polluted based on the decisions we make.
Our competitors are already going green, and we need to be ahead of the curve regarding environmental risks, given the tightened environmental regulations worldwide, financial risks from environmental fines, and reputation risks."
Green further adds, "We can prevent the risk by gradually upgrading our waste- water treatment system across all our ships and revising operational plans and routes to comply with legislation. DarkSeas not only faced a multi-million dollar fine, but their
shares also dropped 2 percent after negative media coverage and criticism from Pro- environmental NGOs amidst a reputational crisis."
Green further advises, “The entire reason we created the ESG committee in the first place was to identify, assess and reduce risks generated by the company’s business with social or environmental consequences and with an indirect impact on the company’s reputation. The Board is also accountable for this because we could all be accused of making decisions in bad faith,” says Green.
Before leaving the meeting, Green says, “As a director, you have a loyalty to make the best decision for the shareholders and to maximize value, but more companies are moving toward a balanced decision-making approach. It has become more commonplace for companies to take social responsibility into account, as it creates a better relationship with stakeholders. We want to maintain a stakeholder form of corporate governance, maximizing benefits for investors, employees, and customers. I believe we will be more profitable with this approach!”