BP Oil Company - Perspectives Evaluation - Case Study Example

BP Company Case Study Name: Course: Institution: Date: Table of Contents Table of Contents 2 Introduction 3 Perspectives Evaluation 3 Directors’ Independence 4 Directors Tenure and Reward 5 Reporting System 6 Critical Review 6 Directors’ Independence 6 Directors Remunerations 8 Corporate Sustainability Reporting 9 Recommendations 9 Proper Reporting 10 Directors’ Independence 11 Fair Remunerations Systems 11 Conclusion 12 Reference 13 Introduction The BP Oil Company has over the decade served in the energy industry. In this regard, with is headquarters in the UK, the company has over the years expanded its influence and operations across continents to set up oil drilling equipments and infrastructure in Africa, Asia, and the USA. As such, with a rising profitable base in the energy industry, the organization attracted high investments due to its high returns on investments. However, besides its profitability and growth stage in the life cycle, the energy industry has been faced with increasing criticism of failure to adopt and apply corporate governance principles in their management (Cobbaut and Lenoble, 2003, p.40). In this context, the BP Company was highly criticized for lack of corporate governance principle application, especially after the Gulf of Mexico oil spillage crisis. In this regard, industry and environmental analysis argued that if the organization had applied corporate governance principles in the entire process, the crisis was avoidable and could not have happened to the high casualty cases; both in terms of the drilling manpower affected as well as the marine life affected (Landau, 2011, p.45). This essay develops a critical focus on the organizational corporate governance application challenges through a series of corporate governance principle criteria developed in the essay. Finally, the essay offers strategic system recommendations through which the organizational corporate governance systems could be improved in the future. Perspectives Evaluation In order to develop a conclusive and critical analysis of the BP Company corporate governance failures, this essay section develops a criteria base through which key corporate governance issues are listed and described. Among the identified influential corporate governance principles include the directors’ independence, their tenure and reward system, and the organizational reporting system transparency. This essay section offers a detailed analysis of each of the components and how they implicate on the adoption of corporate governance management approach. Directors’ Independence One of the key issues and components in any corporate governance system in organizations is the establishment of a board of directors. In this regard, a board of directors is directly involved and tasked with the mandate of directing the development and attainment of the organizational strategic goals and objectives. Therefore, a board of directors’ composition influences the nature and type of corporate governance policies developed. In this connection, an evaluation by Leblanc (2005, p.10) established that a critical approach to ensure quality in organizational corporate governance, organizations should develop and focus on building the director’s independence. Independence in this context implies the inclusion of external directors not directly involved in the organizational day to day management processes. In this regard, the International Federation of Accountants (2009, p.11) stated that through the inclusion of independent directors in an organizational board, it ensures the inclusion of stakeholder interests. Therefore, this inclusion allows for the development of a stakeholder theory, application, rather than the shareholders theory application. A key difference between the two is that through a stakeholder’s theory adoption, unlike under the shareholders theory, the interests of all the stakeholders, including the employees, the public, and the environment among others play a crucial role in the decision-making and management process (Tricker, 2011, p.389). Therefore, based on this analysis, this analysis, evaluation of the BP Company will investigate the extent and nature to which the organizational board had independent directors representing the diverse interest group’s interests such as environmental conservation and employee well-being. Directors Tenure and Reward An additional principle of corporate governance is the concept of directors’ remunerations and their tenure in service. In this case, this principle is directly related to the above-discussed principle of independence. As such, the nature of terms of service and the remuneration styles adopted to reward directors has a direct implication on their performance and retention of an independence and objective approach, which is the basis for corporate governance. On one hand, a director’s tenure security ensures the reduction of boardroom politics in a bid by the members to retain their tenure. Therefore, such instances would compromise the director’s independence and objectivity to ensuring corporate governance application. In addition, the approach and style of rewarding the directors have a direct implication on their virtual of remaining independence. In this case, a profit and revenue based reward system as Leblanc and Gillies (2003, p,7) noted, increases the director’s perception of profit as the only motivation in their decision-making process. Thus, this has a direct implication on the director’s ability to incorporate corporate governance principles and values in their business models. The organizational analysis will focus on evaluating the reward challenges through which the BP management used to compromise its directors’ objectivity into filing the corporate governance principle application. Reporting System Finally, a crucial corporate governance application and adoption criteria is the evaluation of organizational reporting systems. In this case, an organizational reporting system conforming to corporate governance principles is based on the transparency of organizational reporting systems. In this case, as Council (2007, p.19) described, that besides the annual financial reporting by organizations as under the IFRS principles, organizations pursuing corporate governance have an additional CSR reporting that demonstrates the organizational concern and care for the community. Therefore, this analysis will evaluate the extent to which the BP Company failed publicly to supply CR reports that were accurate and a representative of the organizational operations. Critical Review Directors’ Independence One of the fundamental challenges in the BP Company management and corporate governance application was the independence of its director’s both internal and external. As Weir and Laing (2001, p.88) noted, the use of independence directors in organizations is an approach through which organizations seek to employ the shareholder's theory. In this connection, Demirbas and Yukhanaev (2011, p.447) conducted an empirical study to establish the actual implications and merits of such directors’ independence. As such, the analysis concluded that through increased director’s independence and autonomy, organizations increased their concern and focused on the third party stakeholders, allowing for increased public and consumer base satisfaction. Unfortunately, an evaluation of the BP directors and project management teams illustrate a case of reduced diversity in their management. A direct example of the company lack of independence of its management process is in the infamous Deep Horizon rig accident project. In this case, the project that involved deep water drilling was managed by the organizational directors in conjunction with the external inspection and examination by the US government, through its Mineral Management Services (MMS). In this regard, the organization campaigned and popularized its project support through the assertion that the MMS agency independence guaranteed for the public welfare and interest safeguarding. In this case, the general public’s well as other environmental lobby groups were convinced on the project conformance with their interests. Therefore, the MMS official’s presence in the project management board was perceived as an independent, non-interested party in the oil drilling process. Therefore, based on the project management team composition, a perception of corporate governance was developed on the public’s perception. Nevertheless, the reality in the project team operations was different and as such failed to meet the independence element of the directors and management to guarantee corporate governance principle application. In this regard, the MMS agency had interests in the deep water oil drilling project by the BP Company. In this regard, the MMS agency was mandated with contradicting responsibilities that compromised its status as an independent observe in the organizational oil drilling project initiative. On one hand, it was expected to collect revenues from the oil drilling leasing exercise that created an economic interest in the drilling process. In this case, the lease earnings were based on the amount of oil drilled. Therefore, the agency, through expected to be a third party, was a partisan member in the need to drill more oil. Consequently, this reduced the MMS ability to conduct feasibility and objective environmental analysis of the deep water oil drilling operations. In return, this led to an environment and general public concern neglect, leading to the eventual spillage accident as a culmination of lack of independence in the project management and monitoring system. Directors Remunerations A second BP illustration of corporate governance failure was he adopted the director's reward system. In this case, Simpson and Taylor (2013, p.138) theoretically stated that the adopted reward and remuneration system for directors influences their objectivity and decision-making process rationality. Therefore, the principles of corporate responsibility and corporate governance dictate that the director's reward system should be designed in a way to promote their decision-making and performance quality. Consequently, Kovacevic (2012, p.107) argued against the use of profit benchmarks as criteria for rewarding organizational directors. As such, the author stated that through such an approach, organizations motivated their directors to focus on profit rather than the overall well being of the third party stakeholders, such as the organizational employees, suppliers, and other interest groups. In this case, this was he adopted approach by the BP Company. In this regard, an analysis of the organizational operations throughout its projects established that the executive motivated the managers through profit maximization. Therefore, a review of the Deep Water Horizon crisis in the Gulf of Mexico establishes the motivation of the project managers by the organizational headquarters. In this regard, although it was argued that the project manager and engineers reported on a regular basis that the project was risky, the executive management pushed them to venture into the project under the influence of earnings based on profits gains proportion awards. Consequently, analysts argued that the reward system allowed for the engineers endangering the lives of the employees working on the rig, although the fears of a rig collapse were eminent. In this case, legal suits following the incidence established that the respective project managers and engineers on the rig were directly responsible for the 11 employee deaths. As such, this analysis is an indication that the organization failed to apply corporate governance principles and leadership prudence through the consideration of the diverse stakeholders’ interests in the oil drilling process. This was attained through the management, leadership manipulation of the project leaders and engineers, with a profit and drilled oil profit gain reward system as a means of allowing increased risk-taking initiatives that endangered the stakeholders well being. Corporate Sustainability Reporting Finally, this analysis establishes that the BP Company failed to report the accurate information to the public. In this regard, the directors of the organization were directly involved in the development of corporate sustainability reports on environmental and other stakeholder interests incorporation. In this case, lobby groups, as Steffy, Nichols, Morgan and Gibbs (2013, p.9) stated, faulted the deep water Horizon oil drilling environmental analysis reports. In this case, the reports indicated that although the organizational directors were aware of the impending risks, such as the Gulf of Mexico and the Exxon risks, they failed to duly inform the public of the risks. Recommendations Based on the above analysis, it is apparent that the BP Company has failed to execute corporate governance systems in its management structures. In this case, this is based on the understanding that despite the BP Company promise and commitment to the application of corporate governance principles, it retained the system as a public relations aspect, rather than actually incorporating it into the actual organizational operations and management structure. Therefore, this essay section offers a series of strategic recommendations through which the challenge and vice can be corrected. Among the listed strategic recommendations for the BP Company is us of proper reporting systems, enhance director’s independence, and use of fair remuneration systems for its managers. Proper Reporting One of the fundamental principles of corporate governance is the development of fair and transparent reporting systems. In this regard, Mishra, Sarkar and Singh (2012, p.17) noted that the use of such an approach would ensure that organizational application and consideration of the other stakeholder interests is valuated, and recommendations for improvements offered. As such, in the case of the BP Company operations, this analysis recommends that the organization should develop and adopt a more transparent and informative corporate reporting system. As such, this analysis argued that the organization should hire a third party auditor to audit their corporate social responsibility accounts. In this case, the use of external organizations in the corporate audit process would enhance the development of goodwill among the external stakeholder base through their objectivity. On the other hand, as a way to supplement the external auditor efforts in the market, the organization should establish an internal audit and CSR unit. In this case, the unit should be charged with the mandate of developing a link between the organization and the external stakeholders. Thus, this would promote collaboration and the development of corporate governance ideas from all the stakeholders. Thus, this would serve as a means of ensuring trust and confidence development between the BP Company reporting system and the external stakeholders, for increased reporting authenticity as well as public confidence in the reports in the future. Directors’ Independence An additional recommendation for the BP Company to improve its corporate governance principles is through the application and adoption of a more independent board of directors. In this regard, the lack of security of tenure for the board members has led to a majority of the independent directors’ compromise in a bid to retain their terms. For instance, the case of the Gulf of Mexico spillage, illustrates that the entire board was aware of the eminent rig collapse danger, but remained silent despite their perceived independent status. Therefore, this analysis recommends the company should develop directors, security of the tenure system (Zhao, 2011, p.6). As such, independent directors, unlike the management directors should only be removed from the Board upon consultation with the interest groups they represent. As such, this would ensure that the BP Company has independent directors who will not be influenced by the financial and individual interests of the management. Instead, this would ensure a strong oversight authority that would ensure all the BP Company projects and strategies in the future will conform to the stakeholder theory needs. Fair Remunerations Systems Finally, this analysis offers a recommendation on the change of the current BP Company managers and directors payment and remuneration system. In this case, as Gates and Atherton (2007, p.103) noted, and as already discussed above the BP Company profit based reward system exposes its staff to irrational decision-making. As such, although the organization asserts to follow the stakeholder theory, its remuneration process advocates a profit orientation. Therefore, this analysis argues that the BP Company should adopt a new approach through which to remunerate its managers. Conclusion In summary, this essay has established that although many organizations have publicly declared the adoption and application of corporate governance, the actual execution remains a challenge. In this case through the development of threefold criterion on directors’ independence, remunerations and reporting structures it evaluates the BP Company case study. In this regard, the analysis concludes that the BP Company failed to apply corporate governance principles in its management projects, especially through an evaluation of the much publicized Gulf of Mexico oil spill accident. Consequently, the essay concludes that in order to improve its corporate governance, BP Company should apply an alternative reporting system and remuneration systems, as well as guarantee independent directors security of tenure. Reference Cobbaut, R., & Lenoble, J., 2003, Corporate governance: An institutionalist approach, Kluwer Law International, The Hague Council, A. C. G., 2007, Corporate governance principles and recommendations, Corporate Governance Coucil, ASX Demirbas, D. & Yukhanaev, A. 2011, "Independence of board of directors, employee relation and harmonisation of corporate governance", Employee Relations, vol. 33, no. 4, pp. 444-471 Gates, B., & Atherton, H., 2007, Learning disabilities: Toward inclusion, Elsevier/Churchill Livingstone, Edinburgh. 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