Avoid Watering Down Your Corporate Governance
A record fine on Southern Water is a salutary reminder for businesses to ensure they are compliant with the expectations of their regulators, and maintain adequate and effective systems of planning, governance and internal controls.
With regulators across all industries clamping down on business compliance, announcements that ‘record’ fines have been imposed on businesses are becoming par for the course in the UK. Ofwat is one of the latest regulators to impose what’s believed to be (proportionate to the size of the business) the largest ever penalty on a water authority for operational management failings.
Southern Water agreed to pay a £3m fine and £123m in rebates to customers after serious failures in the operation of its sewage treatment sites and for deliberately misreporting its performance.
The compliance breaches were so serious that they breached the company’s licence conditions and statutory obligations, and the Environment Agency has undertaken a separate criminal investigation.
The company’s failings ranged from lack of investment leading to equipment failures and wastewater spillages to significant mismanagement and poor corporate governance. The lengthy investigation found that the company’s wastewater sampling process had been manipulated; the information about the performance of sewage treatment sites was then misreported – and that meant the company was able to avoid £91m in penalties under Ofwat’s incentive regime.
The regulator said Southern Water has now committed to new governance arrangements to enable accurate monitoring and reporting, as well as a programme to change the company’s culture. There has also been further investment to improve the failing treatment sites.
Ofwat chief executive Rachel Fletcher said: “The company was being run with scant regard for its responsibilities to society and the environment. It was not just the poor operational performance, but the co-ordinated efforts to hide and deceive customers of the fact that are so troubling. The previous management failed to stamp out this behaviour and failed to manage its plants properly.
“In doing so, Southern Water let-down its customers and operated in a way completely counter to the public service ethos we expect. That is why the company deserves such a significant sanction. We also think it is important Southern Water has a formal fine on their record for this serious breach.”
What does this mean?
Companies are reminded of their responsibilities to society and to the environment, and that corporate governance and compliance are ongoing obligations. The extent of the fine imposed shows that the regulators will wield their power where it finds inadequate systems of planning, governance and internal controls and breach of statutory duties.
Where businesses have any concerns about their policies and procedures they should always take specialist legal advice.
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