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Safety, Corporate Responsibility, and the Oil Spillby Kirk Hanson
Over the thirty-five years I have been teaching business responsibility and ethics, there has been a new case about once every five years that defines again for us why business ethics and corporate responsibility need to be a constant concern.
Lockheed in the 1970s was the poster child for overseas bribery. In the 1980s Love Canal became the symbol of corporate neglect of toxic waste, General Dynamics the symbol of defense industry excess, errant Savings and Loan companies the symbol of banking irresponsibility. In the 1990s, Exxon and its ill-fated Valdez defined corporate indifference to both safety and the environment.
Sadly, since 2002 when Enron and WorldCom led a long list of firms engaged in financial manipulation, the cycle has accelerated dramatically. In 2008 many banking companies shared the hall of shame with Countrywide. In 2009 Toyota claimed the limelight as a symbol of hiding product safety problems. And in 2010 British Petroleum and its disastrous Gulf oil spill threatens to dominate all the others.
With each of these cases, there are a series of lessons about corporate responsibility and how companies should manage their behavior. We are only part way into this crisis, but let me suggest a few initial lessons that seem warranted.
First, corporations must invest adequately in safety. There is some evidence that BP systematically starved its investment in safety, focusing instead on higher economic returns, particularly in the operations it bought by merging with Amoco and then Arco.
Secondly, corporations must take very low probability/very big impact events more seriously. BP officials are trying to argue that the fire and well blowout were completely "unforeseeable." This won't wash. This is strangely reminiscent of financial companies arguing that they have made risk disappear by insuring for the failure of mortgage-backed securities with an insolvent and irresponsible AIG Insurance. The reality is that BP is forced to use more safety measures on its deep wells elsewhere. It chose to follow lax US safety standards in the Gulf.
Third, there is evidence that despite some increased investment in safety since 2005 when BP was heavily criticized for safety failures in Texas City and Prudhoe Bay, a company culture of cost cutting and cutting the corners on safety persisted. The lesson is that the management of incentives and rewards is central to any control system. BP apparently said "safety" out of one side of its mouth and "cut costs above all" out of the other side.
Fourth, it is painful to watch BP blame Transoceanic, which operated the deep drilling platform, and both of them blame Halliburton as the manufacturer of some of the complicated safety equipment. It is harder to create a culture favoring safety when multiple companies are involved, but in this case there seems to have been a complete breakdown in the relationship between BP and Transoceanic. Some stories have emerged to suggest it was unclear who was really in charge, and that the BP official on scene encouraged cutting corners on safety.
Finally, both the Toyota and BP stories demonstrate how quickly corporate good will can evaporate through misbehavior. Arguably, Toyota was the star among auto companies for its safety and responsibility record. Prior to 2005, BP enjoyed the same reputation among oil companies, in large part due to plaudits for CEO Lord John Browne, seen by many as the type of enlightened executive every company needed. In the matter of a few weeks, or even a few days, those reputations were swept away by disasters which showed the companies' decision making had actually been badly flawed, and by the manipulation of the truth in managing the disasters. Only consistently thoughtful and responsible decisions about safety and the welfare of all stakeholders of the firm - and complete transparency in times of crisis - will sustain a company's reputation.
Kirk Hanson is executive director of the Markkula Center for Applied Ethics and John Courtney Murray S.J. University Professor of Social Ethics.
This article originally appeared in the Entrepreneurs' Foundation newsletter.
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