By Feso Bright
Corporate Culture, Governance, Risk and StakeholdersBefore the BP (British Petroleum) Texas city refinery accident, the Telos Group (2004) had noticed a dismal level of leadership support, a fire brigade culture and exceptions to standard practice at the BP refinery. Even after the Texas city spill, several accidents would still occur. The most recent safety and risk management incident is at the Gulf of Mexico Deepwater Horizon rig where 11 people lost their lives and since April 20, 2010 about 1.7 million gallons a day may have been spilled (British Broadcasting Corporation, 2010) into the ocean.
BP may claim to have an improving record with respect to recorded injuries (RI) as shown in figure 11; also the group has recently migrated all its refinery and petrochemical operations as well as 87% of its E & P operation to the risk mitigating Operating Management System (OMS) platform. However, some will argue that BP has
BP may claim to have an improving record with respect to recorded injuries (RI) as shown in figure 11; also the group has recently migrated all its refinery and petrochemical operations as well as 87% of its E & P operation to the risk mitigating Operating Management System (OMS) platform. However, some will argue that BP has
Figure 11: BP Health and Safety Numbers: 1999-2009
Source: (British Petroleum, 2010)
repeatedly made decisions that increase risk in order to save time or expense (Congress of the United States, 2010) . A corporate culture of unhealthy risk appetite and postponement; where “soon becomes never” (The Telos Group, 2004, p. 3) is unsustainable for competitive advantage.
Corporate governance and risk management haves implications for the stakeholders of a business. While corporate governance is focused on unity of interest between the managers and shareholders (Hitt, Freeman, & Harrison, 2005, p. 544) , risk management may also be concerned with the quality of management and their level of risk seeking or risk averse behaviour (Hitt, Freeman, & Harrison, 2005, p. 259) . Lord Browne was accused of having broken corporate rules by his alleged lover, Jeff Chevalier (Owen, 2007) . Assuming that the facts are true, Browne was alleged to have discussed privileged BP information with Jeff Chevalier while allowing him use of the corporate jet, access to BP information technology (IT) support, the use of Browne’s secretary (Owen, 2007) , as well as other actions which are not consistent with the objective practice of corporate governance. It also suggests that BP’s corporate governance systems need to be tightened in order to prevent agency problems (Hitt, Freeman, & Harrison, 2005, p. 543) Tony Hayward may be criticised for engendering the sort of risk appetite that has caused so much loss to BP (Hitt, Freeman, & Harrison, 2005, p. 259) and its stakeholders (Congress of the United States, 2010) .
Historical Performance and Current Market Outlook
An examination of the performance that BP has recorded in recent years on the pillars of
its core competencies will provide an indication of the direction in which the current business model of this global transnational is headed. As shown in figure 12, the fatality rate shot up in 2009 and in 2010 this trend remains high; this is symptomatic of an inability of the system to prevent or control these safetey issues. This may continue into
Figure 12: BP Fatality Rate: 1999-2009
Source: (British Petroleum, 2010)
Figure 13: BP Return on Average Capital Employed
Source: (British Petroleum, 2010)
the near future. As figure 13 shows the return on average capital employed (including goodwill) has been inconsistent, partially due to oil price fluctuations. Also the brand is worth $3.7 billion having dropped 5% year on year, compared to $68.7 billion for Coca-Cola; however it is a top energy brand (Interbrand, 2010) . Given that its return on average capital employed for 2009 was a 5-year low it would be expected that management would take steps to improve performance aggressively- which may account for the aggressive cost cutting excercises within the company. Figure 14 shows the net cash flow figures from which one can deduce that BP will have tighter cashflow constraints in 2010 and possibly in a few years to come, given its current circumstances.
Figure 14: Net cash flow provided by operating activities
Source: (British Petroleum, 2010)
Already, BP will freeze dividend payments and set up a $20 billion claims fund to be paid out over the next four years (British Petroleum, 2010) . Also, the company may be effectively banned from deep sea drilling for 7 years by the U.S. government in an imminent law (British Broadcasting Corporation, 2010) ; while it has also been faced with a $19 billion clean water act law suit (Environment News Service, 2010) . BP has also recently concluded the sale $7 billon sale of assets in Texas, Canada and Egypt to Apache Corp based in the United States (British Broadcasting Corporation, 2010) . The company is also set to sell further assets in Pakistan and Vietnam in a bid to ease its cashflow position based on the crystalized risks at hand.
Nonetheless the asset base of the company as well as its fundamentals remain strong. From figure 15 the reserve replacement of 129% will continue to stimulate buying pressure on BP’s shares on the FTSE and any stock exchange for that matter. In fact, the
current share price movement is making a slow rebound after reaching an all-time low as shown in figure 16; showing signs that investors still consider BP a relatively good buy. This is also coming on the backdrop of market expectations of the disposal of several assets as is already taking place.
Figure 15: Reserves replacement: 2005 - 2009
Source: (British Petroleum, 2010)
Figure 16: BP Price Movement: 2005 - 2009
Source: (British Petroleum, 2010)
Figure 17 shows in more detail that the share price more than halved in June, 2010- losing up to 51% of the value as at January- with the unraveling of the full extent of the
Figure 17: BP Price Movement: January to July 22, 2010
Source: (British Petroleum, 2010)
The outlook for BP is one of tough times ahead; a period in which a corporate culture infused with a seemingly unhealthy appetite for risk may unravel; it is one in which the corporate governance culture- occasionally subject to abuse and mismanagement- has struggled to converge with the expectations of all stakeholders; with potentially deadly consequences for BP, or in the least its brand- a tarnished reputation (Hitt, Freeman, & Harrison, 2005, p. 294) .
Way out of the Giant Mess
In order to secure its corporate existence and mitigate further damage to its reputation, it is necessary for BP to internalize the following recommendations as an action path back to survival and a truly sustainable competitive advantage.
· BP must choose to follow clearly one generic strategy; either Cost leadership or differentiation. Given the complexities arising from a cost-cutting regime and the perculiar nature of the oil and gas business it may be wiser for BP to focus on a differentiation strategy; the nature of health and safety as well as environmental sustainability imposes costs which are immutable; disregarding them may have disastrous consequences. BP may be ‘stuck in the middle’ and needs to apply only the differentiation strategy to get out of the seeming rut. (Porter, 1985, cited in Wit & Meyer, 2004, p. 265)
· As difficult as it is, it may be time for BP to admit that the end is near (Meyer, 2003) . It may be unwise to sell off assets solely for the purpose of paying claims and surviving for another year. Rather, a more intergrated rebranding and repositioning effort or merger proposition may give a fresh lease of life to the company as we know it.
· The newly installed OMS and associated risk management systems at all operational sites must be given full management and skilled staff support; also, organizational risk management mechanisms must be incorporated more deeply into the corporate governance practices of BP to protect shareholders and other stakeholders from the risks of management taking undue risks.
NUTSHELL
This 3- part series has provided an analysis of BP’s risk culture from 2005 and even the controversial issues surrounding Lord Browne’s sudden exit from the company in 2007; it has provided for a discussion of the theoretical roots in strategic thinking that may aid an understanding of the circumstances leading to both positions. Also, data on the company’s performance from 2005 were gathered and duly matched with theoretical ideas in order to point out areas of consistency with the tenets of strategic management as well as areas which are learning points and those recommended for improvement. Some of the recommendations made have since become a reality; for example Tony Hayward lost his job; also there is speculation of mergers (Shell), etc.
On the whole, it is my view that BP, a company with strong fundamentals and potential for growth, had set itself an immutable target of competitive leadership without adequate recourse to sustainable corporate governance and risk management practices which secure the interests of its stakeholders. This has inadvertently engendered a culture of risk that has now endangered its corporate existence and the very soul of its business model; even beyond petroleum.
Other Articles in this series:
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