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1 Aftermath of the BP Deepwater Horizon Spill: Implications for Risk Assessment and Compliance Professionals Michele Jurgens PhD Chair, Program for Business Ethics & Compliance BP Deepwater Horizon spill of 2010 Largest oil spill seen in the Western world in a century Well spewed for 87 days BP has written off over $42 billion dollars in spill expenses Sold $38 billion in BP’s assets to cover costs Over $30 billion or more in fines against BP pending BP was barred for four years from bidding for new government contracts & oil leases

BP Deepwater Horizon spill of 2010 - SCCE Official Site · Aftermath of the BP Deepwater Horizon Spill: Implications for Risk Assessment and Compliance Professionals Michele Jurgens

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    Aftermath of the BP Deepwater Horizon Spill:

    Implications for Risk Assessment and

    Compliance Professionals

    Michele Jurgens PhDChair, Program for Business Ethics & 

    Compliance

    BP Deepwater Horizon spill of 2010

    • Largest oil spill seen in the Western world in a century

    • Well spewed for 87 days• BP has written off over $42 billion

    dollars in spill expenses• Sold $38 billion in BP’s assets to

    cover costs • Over $30 billion or more in fines

    against BP pending• BP was barred for four years from

    bidding for new government contracts & oil leases

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    Financial Damage $42-84BILLION!?POST‐SPILL CLEAN‐UP

    US GOVT CRIMINAL

    SUIT

    GULF ECORESTORATION

    SETTLEMENT OF CLASS ACTION SUIT – GULF RESIDENTS & BUSINESSES

    EPA CIVIL SUIT (CLEAN WATER ACT)

    GULF STATE LAWSUITS

    DONE SETTLED SETTLED COURTSETTLEMENT 

    BUT TOTAL STILL INCREASING

    IN PROCESS; 9/4/2014 RULED AS “GROSS 

    NEGLIGENCE”

    FILED; not yet litigated

    $14B $4B $2B $12B + Est $10 TO $18B

    UP TO $34B

    http://www.economist.com/news/business/21571463‐bad‐news‐bp‐keeps‐coming‐spills‐and‐billshttp://www.businessweek.com/news/2014‐09‐05/bp‐ruling‐wakeup‐call‐as‐risks‐mount‐in‐oil‐search

    Reputation Damage to BP

    • BP is in 2nd place for the 2014 designation as the company with the worst reputation; Halliburton is in the #4 spot http://247wallst.com/special-report/2014/05/01/companies-with-the-best-and-worst-reputations-2/5/

    • “…repairing the balance sheet is one thing, repairing BP’s reputation for management excellence will take longer. …(the events) suggest that BP has been ill-run.” The Economist, February 8, 2014

    • “It’s reputation is the one thing that BP can’t clean up” http://www.independent.co.uk/news/business/comment/its-reputation-is-the-one--thing-bp-just-cant-clean-up-9406679.html

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    What can we learn from BP’s DWH experience?

    Four Lessons

    1. The law is a moving target

    2. Compliance is not enough

    3. Be(a)ware of stakeholder claims

    4. Actively Manage Social Risk

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    1. The law is a moving target

    Poll

    Q. It is acceptable for women to work?Yes/No

    1. The law is a moving target

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    For 1936, see August 1936 poll in George H. Gallup, The Gallup Poll: Public Opinion, 1935–1971 (New York: Random House, 1972). For 1972 and subsequent years, see the Internet archive of the General Social Survey at www.icpsr.umich.edu/GSS99/codebook/fework.htm (accessed August 24, 2000).

    Accessed Sept. 2014: http://www.pbs.org/fmc/book/2work9.htm 

    Poll

    Q. The possession and use of small quantities of marijuana should be legalized

    Yes/No/Don’t Know

    1. The law is a moving target

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    Marijuana

    Marijuana – Oct 2013 Gallup poll shows for 1st time a clear majority of Americans (58%) favor legalization

    1. The law is a moving target

    http://www.gallup.com/poll/165539/first‐time‐americans‐favor‐legalizing‐marijuana.aspx

    Shifts in public opinion on social issues occur

    continuously…

    1. The law is a moving target

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    Laws are not always in sync with changes in public opinion …

    1. The law is a moving target

    Public Opinion

    Law

    Court Ruling

    “"This is America -- come on. We're going to have lots

    of illegitimate claims."

    Tony Hayward, BP CEOto the Times of London

    May 10, 2010

    1. The law is a moving target

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    BP is just now learning the definition of a legitimate claim

    • A claim’s legitimacy is determined in the courts of law • Ex: BP’s March 2012 civil suit agreement with Gulf businesses defined a legitimate claim as one that showed a dip in activity in 2010 and a recovery of business in 2011

    • BP has asked that the agreement be reviewed; lower courts have rejected BP’s suit

    • Sept. 8, 2014, BP’s conduct was classified as “grossly negligent” by US District Court’s Judge Barbier

    • BP’s civil and criminal cases are setting new precedence on the handling of ecology disasters

    1. The law is a moving target

    Zadek suggests that society matures on social issues in 4 phases

    Issue Maturity

    Zadek 2004* Senior Fellow at the Global Green Growth Institute and the International Institute of Sustainable Development, and Visiting Scholar at Tsinghua School of Economics and Management in Beijing. Former Senior Visiting Fellow at Harvard’s JK Kennedy School of Government. 

    1. The law is a moving target

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    Phases of maturity

    • Latent… little or no awareness• Emerging … concerns are raised; some research• Consolidating … consensus developing; practices developed; scientific confirmation

    • Institutionalized … norms are established; processes are embedded

    1. The law is a moving target

    Society’s views on ecology disaster responsibility & clean-up

    • Latent… little or no awareness before fire on the Cuyahoga River in Ohio in 1969

    • Emerging … Love Canal & Superfund regulation late 70’s

    • Consolidating … Exxon Valdez spill in Alaska in 1989

    • Institutionalized … Oil Pollution Act of 1990; its application to Deepwater Horizon spill …

    1. The law is a moving target

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    Firm awareness and practices also evolve at different rates

    Defensive

    Compliance

    Managerial

    Strategic

    Civil

    Issue Maturity

    Organizational Learning Opportunity

    Risk

    Zadek 2004

    1. The law is a moving target

    Was BP evolving as fast as the rest of society on oil drilling safety & clean-up?

    Doesn’t seem so. Treated regulation and compliance issues as ‘sitting ducks’ rather than ‘moving targets’

    1. The law is a moving target

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    BP’s poor safety record

    • A pattern of violations and the 2005 fire in a Texas City, Texas refinery killing 15 people

    • BP claimed to be addressing the issues, but the accident plan filled with US Mining and Minerals Service showed numerous inaccuracies and outdated information

    1. The law is a moving target

    BP was in the ‘Risk’ zone on oil drilling safety & spill clean-up

    Defensive

    Compliance

    Managerial

    Strategic

    Civil

    Issue Maturity

    Organizational Learning Opportunity

    Risk

    Zadek 2004

    1. The law is a moving target

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    2. Compliance is not enough

    PollQ. Would you say that you role and responsibilities contribute significantly to safeguarding your firm’s reputation?

    Somewhat/A great deal

    Q. Does the scope of your work (& others in your role) cover all of the possible reputation risk to which the firm is exposed?

    Yes/No

    2. Compliance is not enough

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    Safeguarding a firm’s reputation …

    • … involves ensuring its competitive ANDinstitutionallegitimacy*

    2. Compliance is not enough

    *Handelmann, Jay and Arnold, Stephen. 1999. “The Role of Marketing Actions with a Social Dimension: Appeals to the Institutional Environment”. Journal of Marketing, Vol. 63, no. 3.

    Definitions• competitive legitimacy 

    • involves those activities that allows the firm to be seen as a viable partner & competitor –legality, technology, financial viability, product quality, …

    • Institutional legitimacy• Involves meeting social norms that attribute benefits to the firm including prestige, stability, attraction of personnel, invulnerability to questioning, trust from stakeholders, etc.

    2. Compliance is not enough

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    Compliance is part of competitive legitimacy

    • Compliance with regulation demonstrates that the firm is doing the minimum legally required to compete in the industry(ries) of its choice

    2. Compliance is not enough

    Gaining institutional legitimacy requires the firm to:

    1. Anticipate the direction of societal expectations

    2. Have a strategic vision of the firm’s role and mission in society

    3. In those areas connected with its core activities, proactively implement policies that demonstrate its social commitment

    2. Compliance is not enough

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    Competitive & institutional occasionally conflict

    • BP – disclosure of the amount of oil being spilled

    • Institutional legitimacy would require that BP be completely transparent sharing all they knew about the state of the spill

    • Competitive legitimacy suggested the contrary –under the 1990 oil Pollution Act, BP’s fines would be based upon the calculations of the amount of oil spilled  

    2. Compliance is not enough

    Another example…

    • BP – Vessels of Opportunity program

    • Competitive legitimacy suggested that BP should ask boat owners to sign agreements that released BP from any damage to the boat or persons helping in the clean‐up

    • Institutional legitimacy suggested that such a request was socially inappropriate and unnecessary – given the huge liability BP had for the spill and clean‐up, additional liability for a damaged boat was insignificant & an insult to the volunteers 

    2. Compliance is not enough

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    BP emphasized competitive legitimacy

    • Most firms trade‐off the two carefully in cases of a conflict

    • …but BP safeguarded its competitive legitimacy (to the detriment of its institutional legitimacy) 

    2. Compliance is not enough

    3. Be(a)ware of Stakeholder Claims

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    Stakeholders fall into (at least) two types

    • Financial interest in the firm: Primary stakeholders

    • Shareholders• Employees• Suppliers & partners• Local community• Customers/Clients

    • Civic interest in the firm: Secondary stakeholders

    • Ecology groups• Special interest groups• Non‐governmental organizations

    • Non‐profit groups• Government & political organizations

    3. Be(a)ware of Stakeholder Claims

    Stakeholders’ interests

    • Financial interest in the firm: Primary stakeholders

    • Focus on how the resources and fruits of economic activity are shared

    • Civic interest in the firm: Secondary stakeholders

    • Focus on the alignment of firm practices with evolutions in social and ethical perspectives

    3. Be(a)ware of Stakeholder Claims

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    BP’s Stakeholders for the Deepwater Horizon spill

    • Primary stakeholders

    • Rig workers & their families• Partners: Transocean, Halliburton, Cameron

    • Gulf States & Obama admin• NOAA, MMS• Industry partners: Exxon Mobil, Chevron, …

    • Shareholders & bankers• BP customers

    • Secondary stakeholders

    • Ecological organizations: Louisiana Bucket Brigade, Sierra Club, anti‐off‐shore oil drilling groups, etc.

    • Gulf Coast residents• American Petroleum Institute• International Association of Oil Drilling Contractors

    • Fishermen & boat owners• General public & Press

    3. Be(a)ware of Stakeholder Claims

    Common practice in stakeholder management

    • Listen most to and favor primary stakeholders –they have resources the 

    firm needs 

    • BP did just that!

    3. Be(a)ware of Stakeholder Claims

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    BP missed secondary stakeholder activity on social media• Hundreds of user comments PER DAY on many blogs and boards

    • A Twitter site, @BPGlobalPR, was created to mimic BP’s own with 145,000 followers (and lots of ironic humor)

    • A Facebook movement to seize BP’s assets, supported by at least 5 groups

    • Scientific groups banded with ecology groups ‐mapped environmental damage (Louisiana Bucket Brigade, Grassroots Mapping & MIT)

    • SkyTruth published reports challenging BP’s estimates of the oil …along with members of the scientific community

    3. Be(a)ware of Stakeholder Claims

    BP missed how Gulf residents’ opinions altered• Gulf states are pro‐oil; favorable towards BP

    • So initially, sentiments against BP were mild, "They are using, I am sure, all the expertise they have to get at it to get it under control," Scheer said. "I'm sure they want that just as badly as we do."

    • By early June, "Some businesses are on the verge of bankruptcy because of the way BP is handling things," she said. "This is just not working."

    3. Be(a)ware of Stakeholder Claims

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    Tony Hayward, CEO 3. Be(a)ware of Stakeholder Claims

    • Specialized in undiplomatic remarks:

    • …the gulf "is a very big ocean" and "the environmental impact of this disaster is likely to have been very, very modest.“

    • "You know, I'd like my life back.“

    • "We will get it done. We will make this right." 

    4. Actively Manage Your Social Risk

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    Social Risk

    • Corporations are exposed to social risk when they are threatened by social advocacy organizations or a social movement

    • Targeted to bring about change in the industry or in firm practices

    • If successful, the result is a loss of firm institutional legitimacy and reputation

    Yaziji 2003

    4. Actively Manage your Social Risk

    Recognize the signs of a social movement early on

    • Different Stakeholders –with different demands

    • Different strategies –guerilla tactics

    4. Actively Manage your Social Risk

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    Different Stakeholders…Different Demands• Business as Usual: Primary stakeholders

    • Bargain with stakeholders over distribution of the ‘pie’ –discussion of $$$$

    • BP concentrated on satisfying primary stakeholders and relied on its financial resources to resolve the issue. It threw billions at the Gulf‐ but it was never enough!

    • Social Movement: Secondary stakeholders

    • Firm’s practices are no longer considered legitimate by stakeholders

    • Bargain with the firm over the adoption of new practices 

    • BP stakeholders looked to BP to alter their business culture & practices… ironically, the more money BP threw at the Gulf, the more it undermined stk trust in BP!

    4. Actively Manage your Social Risk

    …Different Strategies

    • Business as Usual:  Primary stakeholders

    • Stakeholders use a direct approach to the firm

    • They try to convince other important stakeholders

    • Occurs behind closed doors• BP wasted valuable time & energy negotiating with the Obama administration, NOAA and other large stakeholders behind doors while protests were mounting on social media sites.

    • Social Movement: Secondary stakeholders

    • ‘Guerilla tactics’• Social groups bypass other important firm stakeholders

    • They look to disenfranchised groups, the press & the public for support

    • …& they leverage social media & the internet!

    • Gulf fishermen, businessmen, locals and ecologists banded together on‐line to stand up to BP!

    4. Actively Manage your Social Risk

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    BP missed the signs of a growing social movement

    • By late June, Gulf residents had allied with national ecology organizations to protest BP’s response to the spill. “They put us out of work and now we are cleaning up their mess.” (Donny Campo, Gulf resident)

    • BP’s plans for the clean‐up were, “drawn up on the back of a bar napkin” (Billy Nungesser, President of Plaquemines’s Parish)

    Poll

    Q. Is your firm under pressure from secondary stakeholders groups to alter its practices in one way or another?

    Yes/No

    Q. How seriously does your firm view their efforts?Very seriously/Not very seriously

    4. Actively Manage your Social Risk

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    Implications for compliance & ethics officers?

    Compliance & ethics role Is expanding

    • Today, a firm’s institutional legitimacy and social risk should be actively managed as part of the risk and compliance functions

    • Compliance and ethics officers will take responsibility for anticipating and planning for evolutions in regulations and societal expectations

    Implications

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    Measuring & monitoring systems are needed

    • Yesterday - Controlling for compliance …regulations

    • Today – Controlling & monitoring compliance and ‘ESG’ (environment, social & governance) …regulations

    • Tomorrow – – Controlling & monitoring compliance and ‘ESG’ (environment, social & governance) …anticipating social expectations and regulations

    Engage a dialogue inside your firm

    • Around civic and ethical issues

    • Around measuring performance on ESG issues

    • Around institutional as well as competitive legitimacy

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    Because, as the Deepwater

    Horizon has shown us all,

    a little prevention is

    worth 87 + days of clean-

    up!

    Questions?Comments?

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    Thank you so much for your time!