Last Thursday was another opportunity to watch a corporate executive, Tony Hayward, BP CEO, grilled before Congress. Suddenly, our previously silent representatives sprang into action and demonstrated their new-found expertise in off shore drilling, cementing protocols, drill logs, blow out preventers and other esoteric elements of drilling and exploration.
How do these mishaps occur? Are other corporations really any better? What are the CEO’s like in these mammoth enterprises?
Risky Business
Industrial accidents occur in corporations. It is a fact of corporate life. People die at work every day, and the number is probably under reported. A significant corporate mishap that reaches the popular press always shocks the public. If there is a large enough loss of life or damage to the environment or economy, Congress jumps in to demonstrate that they are “on top” of events and protecting the public.
Some accidents are preventable, some are not. Much of the outcome depends on corporate culture.
Safety, Environmental Compliance, and Corporate Culture
Enactment of Corporate Sentencing Guidelines drove corporations to compliance and ethic programs. Safety and environmental compliance were major parts of these programs. The first programs focused on formulaic policies and procedures and appointment of a chief compliance officer. Understandably, prosecutors wanted managements to take compliance seriously. Thus, in addition to compliance manuals, programs evolved to incorporate in-depth training, comprehensive investigations of wrongdoing, self disclosure and discipline of offenders.
Safety and environmental compliance are two particularly sensitive areas, as literally they can involve life and death. Despite the best efforts of the corporation to establish robust compliance programs in these two critical areas, success still depends on corporate culture. Does the corporation take compliance seriously? Are employees provided extensive training? Does the compensation system support good practices? How will whistleblowers be treated? How much of corporate resources are devoted to compliance? Are violators punished?
Life in the Trenches
No one goes to work thinking that there is going to be a mishap. Things happen in the trenches. This is where corporate culture really plays the key role.
I am not an oil expert but we can imagine how a BP disaster could occur. On June 14th, the House Committee sent a letter to Tony Hayward, CEO of British Petroleum, querying five areas of concern:
(1) the decision to use a well design with few barriers to gas flow; (2) failure to use a sufficient number of “centralizers” to prevent channeling during the cement process; (3) failure to run a cement bond log to evaluate the effectiveness of the cement job; (4) failure to circulate potentially gas-bearing drilling mud out of the well; and (5) failure to secure the wellhead with a lockdown sleeve before allowing pressure on the seal from below. The common feature of these five decisions is that every one was a trade-off between cost and safety.
The House focused on these areas, as each represented a trade off between cost and well safety.
A dynamic tension exists within corporate environments between cost and safest practice. The rig was 43 days overdue, meaning that BP was incurring $500,000 per day of incremental rental cost. The project manager was under enormous pressure to bring the project in as close as possible to budget. It does not take much creativity to conjure the conversations or attitudes at play on the rig when employees or contractors discussed safety issues:
Is (whatever) change really necessary?
- How much is this going to cost?
- Is everyone being a “team player?”
- Are the contractors recommending this course of action so they can charge us more?
- “Who wants to call London and explain a delay to top management?
- Didn’t X Company do this safely without any problems?
- Why a design change?
- Do we really need to involve the government?
Each of these is a subtle intimidation intending to silence any naysayers standing in the way of “progress” and “profits.”
In most cases, the CEO of a mammoth corporation is detached from day to day operations. Often, a CEO seeks plausible deniability. See Timothy Geithner and Plausible Deniability. While Mr. Hayward proclaimed that safety was a major BP concern, how did the rank and file personnel operationalize that concern? CEO’s often send mixed messages and employees may have heard that while safety is important, the company is in the business of making profits for shareholders. The true litmus test is behavior on the oil rig. From all accounts it appears that cost shortcuts trumped safety.
BP is Not Alone
Every day in corporate America companies make tradeoffs. It is naïve to think that only BP is doing it. Safety, compliance, and environmental controls are cost, not profit centers. On the contrary, lots of companies exert subtle and not so subtle pressure on employees, subcontractors and even government officials.
If we are truly interested in preventing future avoidable accidents, we need to raise and enforce penalties on corporations and individuals. The Corporate Sentencing Guidelines already provide a template. Further, the government needs to intelligently enforce regulations on the books and promulgate new regulations when necessary. Finally, corporate and environmental compliance needs to rise to the top of the corporate governance checklist.
Perhaps then we can avoid the “show” of the House of Representatives examining problems after the event. We need to give prior thought to preventing calamities before they happen. On so many levels, the cost of the aftermath is simply too great.
We have learned the hard way that balancing profits, safety and environmental concerns are like mixing oil and water.
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Related posts:
- Economics and the Welfare State: Oil and Water?
- The Tragedy of the Commons Part II: Modern Finance and BP
- Is the US Economy an Impaired Asset? Part II
- The Responsibility Index
- Corporations: The Good and the Bad
Tags: BP, compliance programs, Corporate Sentencing Guidlelines, environemnt, House of Representatives, safety, Tony Hayward
