The BP oil spill in the Gulf of Mexico may be described as an environmental disaster of historic proportion ... but the fact that this has occurred was totally predictable ... and this is the matter that needs to be understood and the matter that should have been planned for.
Mark Tulay has written an interesting article about BP and the Gulf cleanup. I am sure there are going to be a lot of articles along these lines. The article can be found at this URL and the text is copied at the end of the message below: http://business-ethics.com/2010/05/28/1531-opinion-commitment-to-gulf-cleanup-will-be-true-measure-of-bp/
But in my view the problem is a lot deeper than this article embraces. Essentially the risk that is being taken by corporate industrial organizations has the same systemic potential for disaster that we have already observed in the global financial sector.
In most industrial disasters the limits of the impact are quite modest compared to the scale of society and its environment ... but the BP situation is different ... the activities of the oil industry are different ... the scale of the potential impact are large in relation to the scale of the society and the environment.
In most industrial situations the government ... the authorities ... the emergency response agencies ... have more access to technology and to support organizations that have competence in emergency situations. They can mobilize these resources more effectively than any corporate or industrial organization. In addition, the military usually have logistics technology that is way better than is available in private organizations.
But in the BP Mexican Gulf oil disaster the scale of the disaster is bigger than the scale of the company causing the disaster not any of the authorities that the public would normally expect to respond. Risk is bigger than the entities creating the risk ... a highly dangerous situation. The oil industry has the only technology that can work on the problem ... and in the past five weeks none of this technology has been good enough to fix the problem. The companies are working at the limits of their technology to "produce" and there is zero backup technology that is substantially better than the technology deployed in production. This is to be expected ... it is the way everything on the planet is being run under the watchful eye of scorekeeping stakeholders who are interested in profits and not very much else.
I have already argued that the value of BP, the corporate organization has always been less than the value of the socio-economic activity of the US Gulf Coast and the environment ... though there is no set of statistics that routinely make it easy to make such a comparison.
Society got close to having this discussion with the risk analysis associated with the nuclear industry ... the nuclear weapons industry and the nuclear power industry and other peaceful applications of nuclear technology. The rules and regulations imposed on the industry did not eliminate the risk ... but reduced the risk through layer after layer of safety. Nothing similar has ever been done in the global oil industry though the risks are big ... and maybe a lot bigger than we ever contemplated.
I have worked on assignments in various parts of the world where the oil industry operates with little regulation. The pollution is impressive ... it reminds one of the late 19th century when industry operated with an "anything goes" attitude towards safety and the environment because rules and regulations either did not/do not exist or did not/do not get enforced. The industry at the highest levels is not well known for letting ethical considerations get in the way of profit performance and growth.
The damage being done to society and the environment has a monetary value that is probably in excess of the pre-disaster market capitalization/valuation of BP ... which would normally mean that the existing BP stockholders get wiped out and the business value of BP becomes a source of pay-out for society as a whole, and especially those impacted along the US Gulf coast.
In the future there should be a "fund" ready to go to pay for the damage to society. This is, of course, what insurance is meant to do ... but rule of law has the perverse effect of making it more difficult rather than less difficult for value to be transferred from an organization like BP to an aggrieved party in the broader society. There should be, of course, ways to ensure that fraudulent claims do not get paid ... but this is no excuse for good claims to get thrown out as well ... the typical modus operandi of the legal system when society is up against large corporate interests!
There is a growing portfolio of very large scale risks ... economies of super scale are good for profits as long as the risks of superscale are ignored and not provided for in any way in the accounting and reporting for profit.
Once again we find that the accountancy profession is not understanding enough of what the accounting is trying to say ... and what reporting is needed. Why am I not surprised?
The text of the Tulay message is set out below
Opinion: Commitment to Gulf Cleanup Will Be True Measure of BP
May 28, 2010 by Mark Tulay
It’s official: the oil spill that began in the Gulf of Mexico on April 20th is now the largest in American history, surpassing the Exxon Valdez spill in 1989. Sen. Lisa Murkowski (R-Alaska) observed that "the recovery from the Exxon Valdez oil spill was long and sad, and it took 20 years for litigation over punitive damages to be resolved....That in and of itself was a tragedy we can't let happen again."
When news of the Exxon Valdez oil spill broke in March of 1989, the slow and inadequate corporate and government response to the disaster ushered in a new wave of leaders in the environmental movement. One of these new visionary leaders was the late Joan Bavaria, the driving force behind the Boston-based CERES, which was founded in 1989 to advance what was then viewed as a sweeping 10-point code of environmental conduct that became known as the CERES Principles.
In ancient Rome Ceres is the goddess of agriculture, charged with guarding humankind's survival. In the wake of the Exxon Valdez disaster, Joan Bavaria and the CERES team began to build a movement to do just that by creating a new way to hold companies to higher environmental performance and disclosure standards and to provide market based incentives to spur innovation and environmental leadership. Joan worked tirelessly to build a first-of-its-kind multi-stakeholder coalition comprising environmental organizations, corporations, faith-based institutions and institutional investors all working to find new collaborative solutions.
It was not an easy task in the early 1990's to bring corporate CEOs and leaders in the environmental movement together. At the time of the Exxon Valdez spill, a spokesman for Exxon said that the CERES Principles "do not recognize the need to balance environmental protection with the importance of adequate energy resources and a stable, healthy economy."
Five years later another oil company, Sun Oil, had an entirely different view on this when it broke ranks with the Fortune 500 and surprised everyone to become the first large company to join with CERES. The CEO of Sunoco, Robert Campbell, said at the time that his company and members of CERES developed trust for each other and realized that their goals were similar. "Their goal and our goal did not seem so far apart," Campbell said. "The Sun Company decided that by signing the CERES principles they would be placing themselves at the forefront of business' role in protecting the environment." Bob Campbell displayed true leadership and willingness to ignore pressure from his CEO counterparts, who at the time were angry at him for joining with environmentalists.
CERES continues to play an important role and is focusing on steering investor assets toward companies demonstrating a commitment to sustainability and improved environmental performance and away from more risky laggards. The original reporting framework CERES designed in the early 1990's evolved into the Global Reporting Initiative, the de facto standard for corporate disclosure of sustainability information used by 1,500 companies worldwide.
New initiatives are emerging today to tackle the new paradigm and the hard choices associated with our addiction to oil. Earthster, for example, allows companies to quickly assess the environmental impacts of thousands of household products. And consumers now have a new resource in Good Guide that rates over 75,000 products on environmental performance. These innovations and others all mark the beginning of a new era of radical transparency where the power is shifting from producer to consumer, as new information and resources become available to separate companies that are truly green from those that greenwash.
The Future for BP
BP's CEO Tony Hayward has pledged "to clean up every drop of oil" off the oil-soaked shore and to put the "Gulf coast right as fast as we can." Since April 20th, BP has spent over $800 million responding to the spill. BP's stock price has dropped over 25% during this period, eroding nearly $25 billion in market value.
More trouble lies ahead for BP as it may face the specter of EPA fines of $1,100 per gallon or up to $4,300 if gross negligence was found to cause the spill. The total costs for BP could exceed by some estimates over $25 billion, far eclipsing the $3.8 billion costs for the Exxon Valdez spill.
How BP handles these costs will be a true measure of the company. BP has come under fire for its early handling of the financial settlements from individuals. Alabama's Attorney General Troy King has said he told BP to stop encouraging settlement agreements among coastal residents that he said stripped people of their right to sue in exchange for a $5,000 settlement. Furthermore, CEO Hayward recently was quoted in The Times of London repeating his commitment to pay all verifiable individual claims but qualified his statement further by saying that because "this is America" many of the claims will likely be "illegitimate." Instead of hedging and dodging, BP would be well served to take the high road on settlement issues and learn from the lessons of Exxon
On the wall of Bavaria's cluttered Boston office was a sign that read: “Life is a test. It is only a test. If this were your real life, you would have been given better instructions.” She was put to the test in 1990 as she visited Prince William Sound on the first anniversary of the Valdez spill and wrote: ''The extent of the damage is still disputed and probably will be forever. But one thing was crystal clear: such disasters need not happen, they must not happen, and we must not let time heal this wound so well that we forget the tears, the tragedy, and bet again on luck to pull us through.'' This message rings as true today as it did in 1989. While the tragedy of the Gulf oil spill itself cannot be undone, let’s hope that Mr. Hayward is prepared to follow through on his original commitments and follow Joan's advice of 21 years ago as he deals with the aftermath of clean-up and compensation.
Mark Tulay worked for Joan Bavaria at Boston-based CERES as the organization's first full-time employee beginning in the 1990's. He has worked in the environmental movement for over 15 years and is the Founder and CEO of Sustainability Risk Advisors, a consulting firm that advises non-profit organizations and institutional investors on sustainability related issues.