BP Company Corporate Governance - Case Study Example

BP COMPANY CORPORATE GOVERNANCE By Location BP Company Corporate Governance Overview of the BP Oil Spill- TheDeepwater Horizon Explosion April 20th of 2010 marked a fateful day for the BP Company because of the explosion of an oil field in the Macondo rig. The rig in question was under the ownership of Transocean and the BP Company had leased it for some time. The explosion caused the death of eleven people and the injury of many others who were working on the rig. Notably, the explosion resulted in oil spilling into the sea. In the initial day after the blowout, the BP Company indicated that the disaster was manageable and that only about 1000 barrels of oil were leaking into the Gulf of Mexico on a daily basis. The company would later highlight that about 5000 barrels were leaking, and eventually indicated 20 barrels (Alijani et al 2012, p.7). However, the reality of the matter was that almost 60 barrels of oil were leaking into the Gulf of Mexico on a daily basis. The chief executive officer of the BP Company, Tony Hayward reassures the public that the disaster was modest and could be easily be controlled, and that the vast ocean would easily take in the oil clearing the mess (Bond 2013, p. 700). At such a critical time, a blame game emerged on who exactly was responsible for the occurrence of the disaster. The BP Company laid its blame on Transocean, which was the owner of the rig. Transocean Company transferred the blame to Cameron, which had manufactured the blowout preventer, which had proved inefficient causing the disaster (Winner 2012, 450). Cameron would later blame Halliburton for pumping concrete into the rig and contributing to its explosion. Although this blames existed, it was evident that the BPs corporate governance was challenged. The company would take until July to control the spill (Boubaker, Nguyen, & Nguyen 2012, p. 96). This only means that immense environmental effects were registered by the oil spill. In efforts to control the spill, the government worked with the BP Company in an effort to ensure that things were brought to control. Many of the people who relied on the waters for their livelihood were left jobless and the safety of marine life was compromised (Arsalidou 2012, p. 356). The BP Company was compelled to cover the cost of cleaning up the ocean and compensate the Gulf residents who had been affected by the incident. In the end, Hayward, the company’s CEO admitted that there are many things that the company would have done differently in order to avoid such an occurrence (Chan, Watson, & Woodliff 2014, p. 60). Notably, according to the existing regulations governing the oil drilling industry, companies are expected to have in place a contingency plan, which highlights the worst-case scenario of an oil spill. After identifying the worst case, the company should highlight an efficient plan of handling the worst-case scenario specifically identifying the resources, equipment, and expertise that it would use to combat the work risk becoming a reality (UK Corporate Governance Code updated 2014, p. 595). A close analysis of the BP Company highlights that the company did not have such a plan in place. They had assumed that an oil spill of such a magnitude would never occur in real sense. The risk management plan they had in place only highlighted that the company had the potential to address such an issue if it ever occurred, but lacked the specific details of how the company would mobilize resources use equipment and expertise in an effort to address the issue. Therefore, when the oil spill began, the company struggled for three months before identifying a viable solution. The three months were defined by desperation on the company executives because they had to figure out the possible solutions. They relied on trial and error solutions, which proved inefficient. In the end, the company registered immense losses with its share value dropping by almost 50% (Cherry & Sneirson 2011, p. 985). The company also lost a reputation that it had established in the previous years. Without doubt, the oil spill in the Gulf of Mexico proved to be one of the worst cases in history. A closer analysis of the issues preceding the explosion reveals that the company’s activity at the rig was completed in a hurry because it was long overdue. In an effort to protect its interests, the company settled for capping the rig in the most cost efficient manner. This was despite that the fact that the cheapest method was not the most effective (Koenig & Rustad 2012, p. 391). The company did not take time to assess the potential risks of considering costs ahead of other critical factors. At that point, it needed to save as much as possible in an effort to cut the cost incurred at that specific rig. The decisions made at that time would later cost the company a lot of money after the oil spill (Filatotchev & Nakajima 2014, p. 290). Corporate Governance Issues from the Oils Spill Scandal Evidently, three corporate governance issues can be identified from the oil spill scandal. The three issues include; Corporate social responsibility Risk management and Leadership Corporate Social Responsibility Each company, especially those operating in the oil industry, which poses numerous risks to workers, the environment, and the society, should be committed to corporate social responsibility. The BP Company had indicated its commitment to promoting corporate social responsibility in the years before the oil scandal. However, it appears that the company was only engaging in campaigns in an effort to protect its public image (Michael 2010, p. 61). However, it did not have measures in place to ensure that corporate social responsibility initiatives were in place. This explains why it failed many of the stakeholders by harming the environment immensely, challenging the life of marine animals, and causing the displacement of Gulf residents and leaving them jobless. Evidently, it was the role of the company executives to ensure that the BP Company exhibited a real commitment to corporate social responsibility. This could be exhibited in its constant protection of the interest of all the stakeholders (Goodman & Schwartz 2013, p. 96). In accordance with the stakeholder theory / philosophy, a company should ensure that the managers do not only focus on making profits, but also on the protection of all the stakeholders affecting the company, and those affected by the company’s behaviour. Stakeholders of a company range from the employees, its customers, shareholders, communities, and the environment. The modern definition of stakeholder in the concept of corporate social corporate responsibility is highly inclusive of a range of stakeholders whose interest the company should protect. This explains why companies should operate in an ethical manner and have initiatives of protecting the environment, its customers, the communities the business thrives in, and all the shareholders. In the case of the BP Company, the oil industry presents a high level of risk. This means that the company should have ensured that it responded appropriately by limiting the potential risks and hazards to the environment (Gulf Spill Effects - The Bad and the Good 2010, p. 2) . A company that gives priority to stakeholder interest would have done things in a different manner. For example, BP would have calculated the potential risks associated with technological failure. Evidently, it did not consider this. Deepwater oil drilling presents a high level of uncertainty and the company did not have any justification for failing to take into consideration the environment in case of any equipment failure. If the company had taken that into consideration, it would not have settled for the cheapest technique in an effort to cut costs. The stakeholder theory and philosophy highlights that a company’s commitment should be beyond its profits (Griggs 2011, p. 60). In this specific case, the BP Company only focused on its profits. It placed all other stakeholder interests in a second position in order to promote the company’s interests. Eventually, it led to massive destruction of the environment, which may take ages to be reversed. Moreover, it lost the trust of its customers to the point that its share value dropped immensely. It was the role of the company executives, especially the CEO to ensure that stakeholder interests were given a priority (Htay, Salman, & Meera 2013, p. 10). Apparently, this did not occur. Under this issue, there is evidence that there was lack of compliance with the code of shareholders. The behaviour of the company did not exhibit the required mutuality of objectives between the company and shareholders. Notably, shareholders form a critical part of the stakeholders of the company (Hamilton, Safford, & Ulrich 2012, p. 1060). This is the reason why the company should ensure that there is maintenance of mutuality and understanding in all its operations. Risk Management Companies must engage in critical risk management, a process which involves the identification of potential risks as well as the ways of mitigating the risks. Companies should have in place a safety division whose role is to assess the level of risk and define the mitigation processes. The board of directors plays a critical role in evaluating the type of risks taken by the company. Therefore, the head of business operations, who is the chief executive officer should maintain an effective communication system of the business operations and its risks to the board of directors. Since the board of directors is comprised of individuals with expertise in different fields, and the main target is protecting the shareholder interest, then they are directly involved in risk management (Kurtz 2013, p. 370). Effective risk management reduces the occurrence of potential hazards. In accordance with the stewardship theory, risk management is easier if the chief executive officer who oversees all the business operations is also the chairperson of the board. In this case, it becomes easier for the board to evaluate all the potential risks that the company takes. Moreover, this theory leaves room for different types of legislations such as employment law, consumer protection law, contract law, and the environmental law. In the shared basis of power, exhibited in the stewardship theories, it is easier to maintain effective communication channels and efficiently coordinate all the company’s activities. Shareholders interests are protected while all the company’s stakeholders are given consideration. In the case of the BP Company, the CEO was not the chairperson of the board of directors. This separation of power led to some of the poor governance issues that limited proper risk management. The board of directors failed to evaluate the risk caused by the company’s activity of the deepwater horizon plant. This was one of the causes leading to the massive blowout. There were several activities, and decision associated with the BP Company, that contributed to the explosion and the oil spill (New Report Provides an In-depth Company Profile for Multinational Oil Company BP Plc 2007, p. 56). The company failed to carry out an analysis of the cement used at the plant and did not assess the risk associated with the capping methods used to close the rig. This failure only indicated that BP considered cost a priority that safety. Since the company did not have proper risk management plans, it failed to comply with the accountability code of corporate governance. There is lack of evidence suggesting that the board took its responsibility seriously and evaluated the risk involved before the oil spill. The board took significant risks without proper analysis of their consequences in their long term. At one point, the company opted to use the most cost effective technique without [roper consideration of the risk it was taking in terms of safety. In addition, the company did not have a full report and system of how it would handle an oil spill if it ever occurred. Leadership Issues The BP Company exhibited leadership issues because there was an evident failure of the executives and managers to ensure that it had effective links, procedures, and contract systems of accessing and utilizing resources in the environment while preventing the environment from and harm. Leaders must ensure that companies have effective systems of utilizing resources. This is because resources are of critical importance to the company. In the case of BP, the leaders must have ensured that, there was an effective system of controlling the company’s use of natural resources, in a manner that did not present adverse effects to the environment. These factors should compel a company to design effective strategies regarding their access to resources. The leaders of BP failed in this sense. In accordance with the resource dependence theory, companies rely on resources and must be strategic enough as they exploit such resources. This means that their strategies and the environmental protection should have a form of mutuality (Research and Market 2009, p. 68). Section A of the corporate governance code discusses the leadership code. The BP Company exhibits compliance with some of the requirements under this code. For example, the company has a board of directors whose responsibility is to propel the company to its destination. It has a chief executive officer who controlled all the operations. However, the occurrence of the oil spill reveals that either the board of directors or the chief executive officer failed in their responsibilities. This is because the deep water horizon explosion served as evidence that the company had poor leadership, which was unable to make the right decisions at the right time. Conclusion Evidently, the BP Company exhibited poor corporate governance, which was evident during the oil spill scandal. A close analysis of the scandal presented above reveals that the company executives and the board of directors failed to take critical measures in an effort to ensure safety to the environment and its workers. This caused immense adverse effects on the society and the environment. The company had to lose a remarkable amount of money in an effort to clean up the ocean and compensate the affected people. Unfortunately, the scandal contributed to the company losing its esteemed reputation. Moreover, it failed to consider the interests of stakeholders I accordance with corporate governance theories. 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