A few years ago, Cutter Fellow Bob Charette wrote about the travails of BP in this ERM&G E-Mail Advisor, and warned that, “if any more bad news erupts in the near future, BP’s current crisis of hubris will be perceived instead as being cynical, self-serving organizational hypocrisy. And once tarred with that brush, the time required for rehabilitation will be counted in decades, not months or years.”
Bob may have been optimistic, given what has happened and what has come out in the way of BP’s abject risk mismanagement of the whole affair.
We think Bob’s piece is remarkably prophetic, and worth republishing.
Don’t Make Out Checks You Can’t Cash
31 August 2006
by Robert N. Charette, Fellow and Director, Enterprise Risk Management & Governance Practice, Cutter Consortium
There must be a certain amount of schadenfreude in the oil industry at the continued hammering UK energy giant BP PLC is receiving in the international press. BP, which is the second largest oil company in the world behind ExxonMobil, has over the past several years touted itself as the environment-friendly, socially conscious oil company as opposed to its rivals, especially ExxonMobil. However, a series of events over the past 18 months have tarnished BP’s once sterling reputation.
This week, it was disclosed that US federal investigators are trying to determine whether BP manipulated crude-oil and unleaded gasoline markets in 2003 and 2004. This followed the 7 August 2006 announcement by BP that it had to shut down the US’s largest oilfield, Prudhoe Bay, Alaska, because of crude-oil leaks caused by corrosion in its pipelines. A host of civil and criminal investigations are underway, with preliminary reports indicating that BP took at best a lackadaisical approach to its pipeline maintenance while claiming that it was meeting industry standards.
BP’s Alaskan problems came right on the heels of being accused on 28 June by US government regulators that the company had secretly and illegally cornered part of the US propane market in 2004, something the company denied. However, an energy trader for BP has pleaded guilty to just such an act, and has indicated that senior executives at BP had approved the scheme and that steps were taken to avoid detection by market participants and others.
On 2 March 2006, BP discovered that 200,000 gallons of crude oil had leaked from a transit pipeline in its Prudhoe Bay oil field. Automated leak detection systems, which are geared to automatically shut down pipelines during catastrophic failures, failed to notice the spill, which took place over a five-day period. Corrosion was seen as the potential cause of the leak, but at the time, BP said that the corrosion was “not a big worry.”
Previously, on 23 March 2005, a fire at the BP refinery at Texas City, Texas, USA, killed 15 and injured another 170 workers. BP admitted that its safety culture at the plant had eroded to dangerous levels, and the company set aside US $700 million as compensation for the victims. BP has argued that the Texas refinery safety culture problems were not indications of any systemic problem. However, in August 2006, the US Chemical and Hazard Investigation Board became concerned enough to launch an investigation to see whether there may indeed be a systemic safety problem in BP’s refinery operations.
In any company as large as BP, operational problems will undoubtedly crop up now and again. However, BP’s problems are magnified by its claims of possessing a superior operational risk management approach, as well as its “culturally” superior approach to business. BP claims now look at best like a bad case of hubris.
A major lesson from BP’s experience for organizations embarking on enterprise risk management (ERM) is to be humble about what ERM can do for you. More and more companies have begun to tout in their annual reports that their ERM systems are a means to take increased risk, and thus create more profitable opportunities for themselves, while simultaneously being able to manage their existing risks better.
While hopefully true, remember that if a major problem does occur — and there will be one sometime, I guarantee it — the press and shareholders will loudly demand to know why such a problem could have happened, especially since the company has this “great” ERM system in place. Explaining after the fact that ERM can’t possibly make every risk avoidable will be viewed by others merely as an excuse for incompetence.
As corporations embark on ERM, it would be wise now to set public (and internal to the organization) expectations on what ERM can and, most importantly, cannot accomplish. It can’t, for instance, turn bad situations into good ones, nor can it eliminate all sources of business risk, both internally and externally generated. ERM may help you make better decisions, but it can’t guarantee successful outcomes. As Gandalf says in Tolkien’s Lord of the Rings, even the very wise cannot see all ends.
How long it will take for BP to rehabilitate its reputation is anyone’s guess. However, if any more bad news erupts in the near future, BP’s current crisis of hubris will be perceived instead as being cynical, self-serving organizational hypocrisy. And once tarred with that brush, the time required for rehabilitation will be counted in decades, not months or years. Those tempted to over tout their ERM systems, take heed from BP’s experience.