The paper tries to evaluate BP’s corporate governance framework. It tries to identify what responsibilities the Board of Directors and Senior Leadership should undertake before and during crisis management situations.
Before the spillBritish Petroleum is an industry where accidents occur and given the complexities of such an industry, it is critical that the Board remain vigilant about company affairs and that it learns from its previous mistakes. This note tries to evaluate actions that a Board should have taken after the resignation of Lord Browne through the current crisis in the Gulf of Mexico. The makeup of the BP board in 2007 showed a good mix of expertise and impressive credentials but was it really a glory board or did people on this board actually spend time governing BP? One important step as the chair of the Board is to reassess the Board composition to see if the existing board has the right skills, is right mix and is able to devote time to the company. Appointing the right CEO is an important board responsibility.
The actions of both the current CEO Tony Hayward and the previous CEO Lord Browne have not been consistent with the vision and priorities of the company. “Beyond petroleum” which talks about being innovative and environmentally friendly has become more of a marketing tagline rather than a way of life at BP. Lord Browne has been an aggressive risk taker and in a highly risk prone industry; does that really make him the right choice for the CEO? While both may have impressive credentials, are their personal values in line with the firm’s values?
Are they principled enough to not take the easy way out and think long term for all the stakeholders of BP? Executive compensation should be re-evaluated to see if important goals such as safety have been built into the compensation or is it just driven by short term financial metrics. The fact that Lord Browne received a severance package of $50 million despite a lacklustre performance must be questioned. Could this have affected his long term commitment to BP?
The same could be said about Tony Hayward given his recent reactions to ongoing tragedy. BP’s operations are very complex and delicate in nature. It is in an industry which is not only capital intensive but also requires a robust risk management framework. Some of the key questions that should be posed by the board to the management include, •Have you been briefed on the safetyissues with respect to each oil drill? What are they? •Is there adept technical staff on the ground?
•Is there appropriate documentation of processes? •What is the process on rig safety? •Have you implemented the lessons learnt from prior mishaps? •What are the changes you have made? (which processes) •What about the integrity of the plant and equipment used? What is your fixed asset turnover? •What is your contingency plan if things go wrong?
•Are you possibly jeopardizing security to cut costs in your enthusiasm to get more oil and generate more profits? As the board chair, carefully study whether you have the right metrics to measure the long term performance of the company. This must go beyond diagnosing financial health, and should ideally follow a more balanced approach. Thus it is important to re-examine the existing culture of safety within the company. As the Board chair, it is important to capture the root causes of various problems within the company.
Ensure that management reports to you on a periodic basis and gives you the bad news in time and in a straight forward manner. Management controls the information so make sure they are comfortable escalating their concerns and issues. Stay analytical and reflective enough to know when trust is being broken by management. Set up a platform where employees at all levels have a platform to voice their concerns and that all their concerns are documented carefully addressed. After the spill
Once the leak has occurred, the number one priority of the Board during the spill should be to focus on BP’s clean-up efforts. This needs to be done swiftly to avoid further environmental damage. The Board must immediately set up a meeting with the management to design an action plan with timelines and allocated accountability. The Board needs to carefully determine the shortcomings of such a plan and provide guidance on potential improvement. An independent consultant who understands the operational aspects could be brought in to this meeting to offer a fresh perspective and advice on clean-up efforts. The Board needs to have ongoing communications with the management on a daily basis to track the implementation of the action plan.
The key initial steps for the action plan must include the following action items. Efforts must be made to gauge the potential impact of the spill. An investigation with set timelines must be launched immediately to understand what caused the leak. It is important to seek timely external help from the Government and industry experts including those from academia and competition, to try and fix the operational leak as rapidly as possible. BP’s on ground crew must not only keep all authorities informed about the developments of the clean-up efforts, but it should also solicit the help of local authorities to ensure that relief is being provided to those who have been affected.
The Government, media and press and most importantly the affected people must be kept informed of the progress on clean-up efforts. While it may be tempting to downplay the impact, it would be in the best interest of the company to communicate openly and honestly with all stakeholders even though it may result in increasing liabilities for BP. If this is not done, it will result in further loss of confidence of the company. As the Board, it is your responsibility to reassure all stakeholders that genuine efforts are being made towards the clean-up process. Once the investigation results are out, a careful post mortem must be performed and the lessons learnt must be documented and those responsible for the mishap must be held accountable for their actions.
If investigations show negligent behaviour both before the crisis and during the crisis, those individuals must be fired while ensuring that succession planning for those positions is in place. This sends out a strong signal to the stakeholders that the company is not afraid of taking tough decisions and is making concrete efforts to clean up the mess. Tony Hayward’s reactions during the crisis were completely inappropriate. He was complaining about the amount of time he was spending dealing with the disaster, saying “I would like my life back,” and was also down playing the spill’s effect by saying “the Gulf was a big ocean, the environmental impact of this disaster is likely to be very, very modest”.
Furthermore, members of the Board must go on the ground and monitor rescue efforts themselves. They must be willing to roll up their sleeves and get their hands dirty. They should be prepared to put aside all other commitments during such an emergency. The implication is that while they should not manage the implementation, they should provide guidance and stay on top of things to ensure things are moving forward in the right manner.
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