Download pdf - 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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Poll

Q. It is acceptable for women to work?

Yes/No


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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


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Marijuana

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


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

Shifts in public opinion on social issues occur

continuously…


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


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


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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


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.


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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


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 …


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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


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’


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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


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


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Poll

Q. 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


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Safeguarding a firm’s reputation …

• … involves ensuring its competitive ANDinstitutionallegitimacy*


*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.


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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


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


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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


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


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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)


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


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


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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


Common practice in stakeholder management

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

firm needs

• BP did just that!


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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


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."


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Tony Hayward, CEO3. 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


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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!


…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!


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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


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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!