Lessons on Reputation from Macondo - A time for Chairmen to reflect.

In March this year BP’s CEO, Tony Hayward, hosted a leadership meeting of hundreds of his top managers in Florida. They were celebrating a spectacular turnaround for the company under his leadership; they had overtaken Shell, their share price had rocketed to £6.50, delivered $45bn of profit and were now going after Exxon. Two months later the picture looked very different; the share price had halved, Exxon had them in their sights and Tony Hayward was quoted as being the ‘most hated man in America’.

No CEO or Chairman reading about millions of gallons spewing out of BP’s Macondo field should find his fate comfortable. It will take years for the full facts to be known as lawyers and the US government agencies pour over a forensic examination of what went wrong. Academics and researchers will prepare many case studies to help students of governance learn how to avoid their Macondo event. But there are already enough lessons from the actions of BP and its executives for companies and Boards to urgently review their own governance in the light of what we know so far.

Reputation assurance

There have been some spectacular PR disasters in this case, and they have been when the management of reputation is seen as a media exercise. The core of good reputation assurance begins with robust internal processes for managing risk and there are three essentials to this; the identification of risk, monitoring it and having a resilient mitigation plan.

It is clear that deep water drilling was seen as a risk and the CEO has given several interviews saying that BP knew that it was engaged at the cutting edge of drilling technology. Macondo would have been on the company’s risk register. But how effectively did the company monitor that risk? Did it devolve the job far too much to its contractors? One would suspect from the early finger pointing that went on that there was poor accountability for the monitoring of what was a material risk.

We now know from the Senate depositions that not only BP’s but the whole industry’s mitigation plans were wholly inadequate. The fallback plans were so amateur that anyone with a modicum of knowledge about the Gulf of Mexico would have known that the they were not worth the paper they were written on.

How many of the risks already on the corporate register are being independently monitored and how many have meaningful mitigation plans?

Governance

So far, the chairman has borne the brunt of the board’s governance responsibilities to look after investors’ interests. But how effective was board governance at BP?

The majority of risks associated with a company like BP fall into the non-financial category. Much has been made of the need for the ‘financial expert’ in UK board governance to assure financial risk. In BP’s case there was an overwhelming need for independent directors able to challenge and verify for themselves that the risks identified were being adequately managed. Just like Lehman, RBS and many other, where the financial instruments had got too complex for any of the directors to be able to challenge management, was there anyone on the BP board capable of commenting on well design or any of the risks associated with Macondo? And where was the board getting its independent verification and comfort that all non-financial risks were being adequately managed.

Does the diversity of your board reflect the nature of your business and risk profile and do you have adequate independent verification of non-financial risks?

Outsourcing and suppliers

BP like most of its peers in the industry relies heavily on suppliers for its operations and outsources more of its internal processes than any other of the majors. There is nothing inherently wrong with this approach and many other industries go much further. But a company needs to watch how far it devolves accountability and the clarity with which it demarcates the lines of responsibility between supplier and client. When things go wrong this avoids one side blaming the other as there is always a contract to fall back on. One assumes that BP had properly drawn up contracts between its drilling contractors and other suppliers that would stipulate each other’s responsibilities. However the early indications would appear to indicate the contrary as each side appeared to blame the other.

Have you examined your contract strategy lately particularly with regards to liability and responsibility of decision-making. The new UK law on fraud which places primary responsibility on the company for its prevention, makes this even more urgent.

Transparency

It is very unlikely that the management of BP or the Board knowingly took steps to circumvent safety in the organisation. Over $30bn at the last count had been spent on safety systems and processes. But did they really know the extent to which individuals connected with the drilling operations bent the rules to meet some production target or the other? Were the reports they received so massaged by the time they got to the board that any hint of a looming disaster from short cuts or poor practice would have been eliminated. Most organisations’ systems for picking up grassroots sentiment on matters relating to safety or risk taking are wholly inadequate and there is more work to be done in ways by which a company can tap into the views of its direct and non-direct workforce. Techniques employed in consumer research and used to great effect by the UK’s political parties should be considered.

Getting to know what you don’t know is the biggest challenge for any corporate board.

Boards should reflect honestly on these lessons and ask if they have a Macondo waiting to happen in their organisation.

Glyn Peters
7 July 2010