Bp and Stakeholder Mismanagement

Thesis

Poor stakeholder management led to preventable mishaps such as the disasters in Alaska and Texas. Specifically, BP's defensive approach towards stakeholder management led to lavish compensation for upper level management while creating hazardous working conditions for employees and a burden on all of society in the form of rising oil prices and environmental damage.

Background

British Petroleum was founded in 1908 and since then has rapidly grown to become the eighth largest company in the world . However, as of late, BP has come under fire for several high profile disasters, including the Texas City refinery explosion and the Prudhoe Bay oil spill. In 2005, an explosion occurred at BP's refinery at Texas City. Fifteen employees were killed and 170 were injured in a fiasco resulting in $1.6 billion in victim compensation and millions in fines . In January of 2007, former Secretary of State, James Baker, published the Baker Report, outlining BP's failing safety standards as the reason for the incident.

In March of 2006, BP faced yet another incident when its corroded pipeline in Prudhoe Bay spilled roughly 270,000 gallons of crude oil onto the Alaskan tundra. The incident crippled its North Slope operations in the Prudhoe Bay field. Although it is alarming that the incidents occurred due to negligence as a result of BP's defensive approach to stakeholder management, it is perhaps more disturbing that the company continues to employ this strategy in the face of severe public outrage and legal scrutiny.

A defensive approach is characterized by companies who "abide strictly with legal requirements but make no attempt to exercise social responsibility beyond what the law dictates- thus they can and do act unethically" . As a result, the needs of some stakeholders are sacrificed in order to fulfill those of others.

Stakeholder Snapshot: Upper-Level Management

This defensive approach has been implemented by upper level management because it helps serve their interests. Managers have the responsibility to make decisions affecting the company's performance. They also delegate the amount of resources spent on various stakeholder groups, including themselves. In return for their work, executives at BP expected financial rewards, such as high salaries, bonuses, and stock options.

At BP, executive compensation is largely performance-based with an emphasis on financial metrics . By employing a defensive approach that focused on maintaining bare minimum standards, BP was able to cut costs and thereby increase profits.

CEO John Browne came into BP in 1995 with the goal of increasing profits by cutting costs significantly. Following BP's merger with Amoco in 1998, executives announced an aggressive plan to cut costs by about $4 billion by the end of 2001, double earlier projections; many managers felt this target to be overly ambitious . Even rank-in-file employees felt pressure under the mantra of cutting costs by 10% . Sir Browne explained that these goals aimed at a "very significant improvement in underlying performance" during a time when cost-cutting was the easiest way to boost an oil company's bottom line.

To the delight of BP's stockholders, company financial performance has increased due to these cost reductions. The market capitalization has increased by a factor of four and annual dividends have also risen since 2001 (Exhibit 1). Upper level managers have also been well compensated for BP's financial success. BP's executives are some of the highest paid in the industry, with Sir Browne making more than CEOs at both Chevron and Exxon-Mobil (Exhibit 2).

Stakeholder Snapshot: Employees

A great deal of the backlash associated with such hard line cost cutting was borne by employees in the form of unsafe work environments. BP has taken the position that it "can get 100 per cent of the task completed with 90 per cent of the resources" . BP has come under fire in the Baker Report which details the internal problems at BP that led to the catastrophic explosion in the refinery in Texas City. The US Chemical Safety Board stated that there "is a solid case for citing some fault on cost cutting" in the Texas City disaster.

In fact was BP aggressively cut maintenance investment in their refinery by 84% between the years 1992-2000 . Additionally BP lacked many company wide safety standards and left the decision making to plant managers, a position which had a high turnover rate . Cost cutting was eventually handed down to the employees in the form of a hazardous work place, with 15 deaths and over 170 others injured in the Texas City explosion.

Stakeholder Snapshot: Society

BP's negligence and lackluster response to the Prudhoe Bay oil spill caused damage to the surrounding environment and forced a spike in oil prices, drawing intense criticism and scrutiny from the Federal government and the American public.

BP's handling of the cleanup has raised serious questions about the concern the company has for the environment. Five months following the accident, 17,000 gallons of crude oil remained to be drained from the surrounding areas of the pipeline.

Following the accident, BP has faced pressure from the Justice Department, the Environmental Protection Agency, and Congress due to the environmental damage. Prior to the spill, the company was already being investigated by the EPA for possible violations of the U.S. Clean Water Act due to pipeline corrosion. It now faces a grand jury investigation which may lead to charges by the Justice Department.

In addition, the House of Representatives' Energy and Commerce Committee is pressing for hearings on the disaster. The Federal government's pipeline safety rules do not apply to the particular pipeline used in Prudhoe Bay because it is a low-pressure pipeline located in rural area not close to commercially navigable waters, suggesting that BP in fact was following a minimum standard approach to fighting corrosion.

Unfortunately for BP, the shutdown of the pipeline creates a strain on the entire American economy, thereby pushing BP's actions to the forefront of public attention. The shutdown of the Prudhoe Bay field represents the closure of the nation's single biggest source of domestic crude oil, with a production capacity of 400,000 barrels a day, for months to come.

The emergency shutdown will cut shipments to West Coast oil refineries, dependent on Alaskan crude oil, by half. As such, BP's actions not only pose serious political/legal concerns, but have also created a significant strain on the US economy by driving production down and prices up. Following the news of the shutdown, crude oil prices rose $2 a barrel to $76.98, the second highest price since tracking began in 1984 (Exhibit 3). The entire process has been a public relations nightmare for BP, and until it can resume its normal production in the area its woes will only increase.

Financial Analysis

After the recent accidents in Alaska and Texas, financial performance has slumped. Over this past year, BP's share price is down by 6.18%, while those of competitors Chevron and Exxon-Mobil are up 28.03% and 23.96%, respectively (Exhibit 4). Nevertheless, upper-level management has continued to be compensated. Although Sir Browne's salary recently decreased, he is still on track to receive the entirety of the $140 million bonus allocated to him, even though many of the problems have been associated with his ambitious goals.

One of the reasons for this can be attributed to BP's decentralized management system in which responsibility and decision-making is pushed "down the chain ." Sir Browne implemented this organizational structure, and it has proven to work in his favor. He has been able to avoid claiming accountability and continue to receive lavish compensation.

Drawbacks of BP's Defensive Approach

BP's adoption of a defensive approach to stakeholder management caused them to place too much emphasis on ends goals and not enough on means-oriented goals. Ends goals refer to final, long-term outcomes, such as profits, while means-oriented goals focus on short-term stepping stones that help achieve these desired outcomes. By acting defensively, BP strived to reach end goals by minimally addressing the means goals of continuing to sustain employee well-being and addressing the peripheral effects of its actions on society at large.

In light of record profits, BP continued its hyper-aggressive cost-cutting strategy, which resulted in an imbalance between the end goal and intermediate means-oriented goal of employee safety. Although BP's profits have grown during their troubled times, their competitors have posted even larger profits while maintaining stronger safety records. Health and safety are stated goals of BP (Exhibit 5).

However, its rivals have outperformed it on this measure. BP's injury rate per hour worked was approximately ten times greater than that of Exxon-Mobil . Yet Exxon-Mobil also posted higher profits the same year, illustrating that BP's cheapskate-culture was not only unnecessary but also self-limiting. BP tried to simply appease its stakeholders without building a long term structure for perpetual profits, which could have been achieved by focusing on the intermediary, building-block goals.

Recommendations

Overall BP should implement a proactive approach to stakeholder management, which addresses social responsibility as a primary concern, which balances both ends goals and means-oriented goals. This can be done in ___ specific ways:

1.Cut Sir Browne's bonus 2.Overall decrease in executive pay 3.Standardize company safety standards 4.More soft metrics

British Petroleum is in dire need of a reprioritization of their emphasis on stakeholder groups in order to prevent catastrophes such as Alaska and Texas in the future, and thus strengthen the longevity of the company.