How the BP Commission Dropped the BallBen W. Heineman, Jr.
Posted on Harvard Business Review: January 17, 2011 1:21 PM
What failures of the BP board of directors and its senior management led to the explosion of the Deepwater Horizon rig in the Gulf of Mexico?
Although the recent report of the National Commission on the catastrophe (http://www.oilspillcommission.gov/) purports to provide "thorough analysis and impartial judgment" on the "causes" of the explosion and "the lessons learned," one can read the 306 page report and the supporting staff papers and find barely a word — much less an assessment — about the board and senior management's role in the multiple failures of prevention, response and recovery.
Although the National Commission report emphasizes the importance of corporate safety culture and safety management "from the highest levels on down" as a necessary complement to regulatory reform, it never looks at the overall global organization of BP and never evaluates what board and business leaders did and did not do in furtherance of those goals.
Instead, the Commission's focus in the report is on the immediate causes of the explosion and on the individual and collective failures of BP (owner), Transocean (rig operator) and Haliburton (construction services) to assess and mitigate immediate risks — and to have effective crisis response plans. (It was not able to assess the failure of Cameron's blow-out preventer.) From analysis of close-to-the-accident problems — why hydrocarbons penetrated the well; why people failed to see that; and why actions weren't taken to prevent the explosion — the report reaches sweeping conclusions: instead of a safety culture in the companies there was a "culture of complacency" that never subjected to risk assessments key design and operational decisions which led to less cost and to less time — and to the explosion.
Fine. But that conclusory language isn't very illuminating. We need a much broader and deeper understanding of the role of board and senior management in a large, complex corporation. BP and other companies in the oil and gas industry (as well as any corporation with potentially catastrophic operations) need to understand these larger governance and risk management lessons in meaningful detail in order to address complicated risk across far-flung global firms more effectively. Time is of the essence because many of the public policy recommendations of the National Commission may get hung up in the new Congress, or because the reorganized Department of Interior oversight (even without legislation) is still plagued by lack of funds and expertise.
The Commission needed to ask larger questions in detail about BP governance, assessing board and senior management actions against at least three benchmarks:
With the Commission's emphasis on understanding "root causes" in order to prescribe both public and private remedies for the future, it is thus striking that it failed so completely to look at broader BP leadership and organizational failures. Such an assessment would have provided a concrete stimulus across the industry to ensure clear board and senior management accountability and responsibility for high priority substantive issues (like deepwater drilling), for essential safety management processes and, ultimately, for creating a safety culture. Such a culture, which a board can measure, truly puts avoidance of accidents first and prevents imprudent cutting of corners due to cost, time, or other pressures. Such an assessment would have exposed in detail the failure of leadership to take ultimate responsibility for oversight and management of subcontractors across the company, not just on the Deepwater Horizon. It would have highlighted how governance failures, not just on the rig but at the highest levels, can lead to catastrophe.
Ironically, BP's new CEO acknowledged the need for just such a broad analysis. When he succeeded Tony Hayward, in September 2010, Bob Dudley said: "There are lessons for us relating to the way we operate, the way we organize our company and the way we manage risk."
But, if BP has done a more comprehensive analysis of the leadership and organizational problems which led to the Gulf explosion than it revealed in its narrow September 2010 accident report, it has not made the details public. Moreover, such an analysis might have been conducted under attorney-client privilege because, even though the National Commission ignored the role of the BP board of directors and senior leaders, the plaintiffs bar has not. Derivative suits have been brought against BP directors and officers alleging violation of fiduciary duties, in among other things, failing to correct prior safety problems identified in other accidents, and in failing to carry out a settlement mandating governance changes in a prior derivative suit relating to a BP spill in Alaska. If those suits survive procedural hurdles, they may well be settled before extensive discovery and publicity about the workings of the BP board of directors and senior business leaders.
Thus, the National Commission has let the best opportunity to understand the broader governance and risk management issues behind the Gulf explosion slip away. Despite the pendancy of the derivative suits, the Commission could have asked hard questions because many of its other lines of inquiry and factual findings implicate BP liability in other suits or regulatory proceedings (such as whether it was grossly negligent, thus multiplying potential fines).
In the foreword to the report, the National Commission said that findings on the immediate causes of the explosion sounded "recurring themes of missed warning signals, failure to share information, and a general lack of appreciation of the risks involved...these findings highlight the importance of organizational culture and a consistent commitment to safety by industry, from the highest management levels on down." Given the Commission's recognition of how important was the role of the board and senior management in the systemic failures of prevention, response, and recovery, its silence on that issue is baffling and leaves a major hole in the report on the core question of how boards and business leaders should manage catastrophic risk in complex global corporations.