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Aftermath of the
BP Deepwater
Horizon Spill:
Implications for Risk
Assessment and
Compliance
Professionals
Michele Jurgens...
BP Deepwater Horizon spill of 2010
• Largest oil spill seen in the Western
world in a century
• Well spewed for 87 days
• ...
Financial Damage $42-84BILLION!?
POST-SPILL
CLEAN-UP
US GOVT
CRIMINAL
SUIT
GULF ECO
RESTORATION
SETTLEMENT OF
CLASS ACTION...
Reputation Damage to BP
• BP is in 2nd place for the 2014 designation as the
company with the worst reputation; Halliburto...
What can we learn from BP’s
DWH experience?
Four Lessons
1. The law is a moving target
2. Compliance is not enough
3. Be(a)ware of stakeholder claims
4. Actively Mana...
1. The law is a moving target
Poll
Q. It is acceptable for women to work?
Yes/No
1. The law is a
moving target
For 1936, see August 1936 poll in George H. Gallup, The Gallup Poll: Public Opinion, 1935–1971 (New York: Random House, 19...
Poll
Q. The possession and use of small
quantities of marijuana should be legalized
Yes/No/Don’t Know
1. The law is a
movi...
Marijuana
Marijuana – Oct 2013 Gallup poll
shows for 1st time a clear majority of
Americans (58%) favor legalization
1. Th...
Shifts in public opinion on
social issues occur
continuously…
1. The law is a
moving target
Laws are not
always in
sync with
changes in
public
opinion …
1. The law is a
moving target
Public
Opinion
Law
Court
Ruling
“"This is America -- come
on. We're going to have lots
of illegitimate claims."
Tony Hayward, BP CEO
to the Times of Londo...
BP is just now learning the
definition of a legitimate claim
• A claim’s legitimacy is determined in the courts of law
• E...
Zadek suggests that society
matures on social issues in 4 phases
Issue Maturity
Zadek 2004
* Senior Fellow at the Global
G...
Phases of maturity
• Latent… little or no awareness
• Emerging … concerns are raised; some research
• Consolidating … cons...
Society’s views on ecology
disaster responsibility & clean-up
• Latent… little or no awareness before fire on the
Cuyahoga...
Firm awareness and practices
also evolve at different rates
Defensive
Compliance
Managerial
Strategic
Civil
Issue Maturity...
Was BP evolving as fast as the
rest of society on oil drilling
safety & clean-up?
Doesn’t seem so.
Treated regulation and
...
BP’s poor safety record
• A pattern of violations and the 2005 fire in
a Texas City, Texas refinery killing 15 people
• BP...
BP was in the ‘Risk’ zone on oil
drilling safety & spill clean-up
Defensive
Compliance
Managerial
Strategic
Civil
Issue Ma...
2. Compliance is not enough
Poll
Q. Would you say that you role and
responsibilities contribute significantly to
safeguarding your firm’s reputation?
...
Safeguarding a firm’s
reputation …
• … involves ensuring
its competitive AND
institutional
legitimacy*
2. Compliance is
no...
Definitions
• competitive legitimacy
• involves those activities that
allows the firm to be seen as a
viable partner & com...
Compliance is part of
competitive legitimacy
• Compliance with
regulation
demonstrates that the
firm is doing the
minimum ...
Gaining institutional
legitimacy requires the firm to:
1. Anticipate the direction of
societal expectations
2. Have a stra...
Competitive & institutional
occasionally conflict
• BP – disclosure of the amount of oil being
spilled
• Institutional leg...
Another example…
• BP – Vessels of Opportunity program
• Competitive legitimacy suggested that BP should ask
boat owners t...
BP emphasized competitive
legitimacy
• Most firms trade-off the
two carefully in cases of a
conflict
• …but BP safeguarded...
3. Be(a)ware of Stakeholder Claims
Stakeholders fall into (at
least) two types
• Financial interest in the
firm: Primary stakeholders
• Shareholders
• Employ...
Stakeholders’ interests
• Financial interest in the
firm: Primary stakeholders
• Focus on how the
resources and fruits of
...
BP’s Stakeholders for the
Deepwater Horizon spill
• Primary stakeholders
• Rig workers & their families
• Partners: Transo...
Common practice in
stakeholder management
• Listen most to and favor
primary stakeholders –
they have resources the
firm n...
BP missed secondary
stakeholder activity on social media
• Hundreds of user comments PER DAY
on many blogs and boards
• A ...
BP missed how Gulf residents’
opinions altered
• Gulf states are pro-oil; favorable
towards BP
• So initially, sentiments ...
Tony Hayward, CEO
3. Be(a)ware of
Stakeholder Claims
• Specialized in undiplomatic
remarks:
• …the gulf "is a very big oce...
4. Actively Manage Your Social Risk
Social Risk
• Corporations are exposed to social risk when they
are threatened by social advocacy organizations or a
socia...
Recognize the signs of a
social movement early on
• Different
Stakeholders –
with different
demands
• Different
strategies...
Different Stakeholders…
Different Demands
• Business as Usual:
Primary stakeholders
• Bargain with stakeholders over
distr...
…Different Strategies
• Business as Usual:
Primary stakeholders
• Stakeholders use a direct
approach to the firm
• They tr...
BP missed the signs of a growing
social movement
• By late June, Gulf residents
had allied with national
ecology organizat...
Poll
Q. Is your firm under pressure from secondary
stakeholders groups to alter its practices in one way or
another?
Yes/N...
Implications for compliance &
ethics officers?
Compliance & ethics role Is
expanding
• Today, a firm’s institutional legitimacy and social risk
should be actively manage...
Measuring & monitoring systems
are needed
• Yesterday - Controlling for compliance …regulations
• Today – Controlling & mo...
Engage a dialogue inside your firm
• Around civic and ethical issues
• Around measuring performance on
ESG issues
• Around...
Because, as
the Deepwater
Horizon has
shown us all,
a little
prevention is
worth 87 +
days of clean-
up!
Questions?
Comments?
Thank you so much for your time!
Upcoming SlideShare
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[W3] Aftermath of the BP Deepwater Horizon Spill: Implications for Risk Assessment & Compliance Professionals SCCE Compliance & Ethics Institute 2014

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[W3] Aftermath of the BP Deepwater Horizon Spill: Implications for Risk Assessment & Compliance Professionals SCCE Compliance & Ethics Institute 2014

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[W3] Aftermath of the BP Deepwater Horizon Spill: Implications for Risk Assessment & Compliance Professionals SCCE Compliance & Ethics Institute 2014

  1. 1. Aftermath of the BP Deepwater Horizon Spill: Implications for Risk Assessment and Compliance Professionals Michele Jurgens PhD Chair, Program for Business Ethics & Compliance
  2. 2. BP Deepwater Horizon spill of 2010 • Largest oil spill seen in the Western world in a century • Well spewed for 87 days • BP has written off over $42 billion dollars in spill expenses • Sold $38 billion in BP’s assets to cover costs • Over $30 billion or more in fines against BP pending • BP was barred for four years from bidding for new government contracts & oil leases
  3. 3. Financial Damage $42-84BILLION!? POST-SPILL CLEAN-UP US GOVT CRIMINAL SUIT GULF ECO RESTORATION SETTLEMENT OF CLASS ACTION SUIT – GULF RESIDENTS & BUSINESSES EPA CIVIL SUIT (CLEAN WATER ACT) GULF STATE LAWSUITS DONE SETTLED SETTLED COURT SETTLEMENT BUT TOTAL STILL INCREASING IN PROCESS; 9/4/2014 RULED AS “GROSS NEGLIGENCE ” FILED; not yet litigated $14B $4B $2B $12B + Est $10 TO $18B UP TO $34B http://www.economist.com/news/business/21571463-bad-news-bp-keeps-coming-spills-and-bills http://www.businessweek.com/news/2014-09-05/bp-ruling-wakeup-call-as-risks-mount-in-oil-search
  4. 4. Reputation Damage to BP • BP is in 2nd place for the 2014 designation as the company with the worst reputation; Halliburton is in the #4 spot http://247wallst.com/special-report/2014/05/01/companies-with-the-best-and-worst- reputations-2/5/ • “…repairing the balance sheet is one thing, repairing BP’s reputation for management excellence will take longer. …(the events) suggest that BP has been ill- run.” The Economist, February 8, 2014 • “It’s reputation is the one thing that BP can’t clean up” http://www.independent.co.uk/news/business/comment/its-reputation-is-the-one--thing-bp-just-cant-clean-up- 9406679.html
  5. 5. What can we learn from BP’s DWH experience?
  6. 6. Four Lessons 1. The law is a moving target 2. Compliance is not enough 3. Be(a)ware of stakeholder claims 4. Actively Manage Social Risk
  7. 7. 1. The law is a moving target
  8. 8. Poll Q. It is acceptable for women to work? Yes/No 1. The law is a moving target
  9. 9. For 1936, see August 1936 poll in George H. Gallup, The Gallup Poll: Public Opinion, 1935–1971 (New York: Random House, 1972). For 1972 and subsequent years, see the Internet archive of the General Social Survey at www.icpsr.umich.edu/GSS99/codebook/fework.htm (accessed August 24, 2000). Accessed Sept. 2014: http://www.pbs.org/fmc/book/2work9.htm
  10. 10. Poll Q. The possession and use of small quantities of marijuana should be legalized Yes/No/Don’t Know 1. The law is a moving target
  11. 11. Marijuana Marijuana – Oct 2013 Gallup poll shows for 1st time a clear majority of Americans (58%) favor legalization 1. The law is a moving target http://www.gallup.com/poll/165539/first-time-americans-favor-legalizing-marijuana.aspx
  12. 12. Shifts in public opinion on social issues occur continuously… 1. The law is a moving target
  13. 13. Laws are not always in sync with changes in public opinion … 1. The law is a moving target Public Opinion Law Court Ruling
  14. 14. “"This is America -- come on. We're going to have lots of illegitimate claims." Tony Hayward, BP CEO to the Times of London May 10, 2010 1. The law is a moving target
  15. 15. BP is just now learning the definition of a legitimate claim • A claim’s legitimacy is determined in the courts of law • Ex: BP’s March 2012 civil suit agreement with Gulf businesses defined a legitimate claim as one that showed a dip in activity in 2010 and a recovery of business in 2011 • BP has asked that the agreement be reviewed; lower courts have rejected BP’s suit • Sept. 8, 2014, BP’s conduct was classified as “grossly negligent” by US District Court’s Judge Barbier • BP’s civil and criminal cases are setting new precedence on the handling of ecology disasters 1. The law is a moving target
  16. 16. Zadek suggests that society matures on social issues in 4 phases Issue Maturity Zadek 2004 * Senior Fellow at the Global Green Growth Institute and the International Institute of Sustainable Development, and Visiting Scholar at Tsinghua School of Economics and Management in Beijing. Former Senior Visiting Fellow at Harvard’s JK Kennedy School of Government. 1. The law is a moving target
  17. 17. Phases of maturity • Latent… little or no awareness • Emerging … concerns are raised; some research • Consolidating … consensus developing; practices developed; scientific confirmation • Institutionalized … norms are established; processes are embedded 1. The law is a moving target
  18. 18. Society’s views on ecology disaster responsibility & clean-up • Latent… little or no awareness before fire on the Cuyahoga River in Ohio in 1969 • Emerging … Love Canal & Superfund regulation late 70’s • Consolidating … Exxon Valdez spill in Alaska in 1989 • Institutionalized … Oil Pollution Act of 1990; its application to Deepwater Horizon spill … 1. The law is a moving target
  19. 19. Firm awareness and practices also evolve at different rates Defensive Compliance Managerial Strategic Civil Issue Maturity Organizational Learning Opportunity Risk Zadek 2004 1. The law is a moving target
  20. 20. Was BP evolving as fast as the rest of society on oil drilling safety & clean-up? Doesn’t seem so. Treated regulation and compliance issues as ‘sitting ducks’ rather than ‘moving targets’ 1. The law is a moving target
  21. 21. BP’s poor safety record • A pattern of violations and the 2005 fire in a Texas City, Texas refinery killing 15 people • BP claimed to be addressing the issues, but the accident plan filled with US Mining and Minerals Service showed numerous inaccuracies and outdated information 1. The law is a moving target
  22. 22. BP was in the ‘Risk’ zone on oil drilling safety & spill clean-up Defensive Compliance Managerial Strategic Civil Issue Maturity Organizational Learning Opportunity Risk Zadek 2004 1. The law is a moving target
  23. 23. 2. Compliance is not enough
  24. 24. Poll Q. Would you say that you role and responsibilities contribute significantly to safeguarding your firm’s reputation? Somewhat/A great deal Q. Does the scope of your work (& others in your role) cover all of the possible reputation risk to which the firm is exposed? Yes/No 2. Compliance is not enough
  25. 25. Safeguarding a firm’s reputation … • … involves ensuring its competitive AND institutional legitimacy* 2. Compliance is not enough *Handelmann, Jay and Arnold, Stephen. 1999. “The Role of Marketing Actions with a Social Dimension: Appeals to the Institutional Environment”. Journal of Marketing, Vol. 63, no. 3.
  26. 26. Definitions • competitive legitimacy • involves those activities that allows the firm to be seen as a viable partner & competitor – legality, technology, financial viability, product quality, … • Institutional legitimacy • Involves meeting social norms that attribute benefits to the firm including prestige, stability, attraction of personnel, invulnerability to questioning, trust from stakeholders, etc. 2. Compliance is not enough
  27. 27. Compliance is part of competitive legitimacy • Compliance with regulation demonstrates that the firm is doing the minimum legally required to compete in the industry(ries) of its choice 2. Compliance is not enough
  28. 28. Gaining institutional legitimacy requires the firm to: 1. Anticipate the direction of societal expectations 2. Have a strategic vision of the firm’s role and mission in society 3. In those areas connected with its core activities, proactively implement policies that demonstrate its social commitment 2. Compliance is not enough
  29. 29. Competitive & institutional occasionally conflict • BP – disclosure of the amount of oil being spilled • Institutional legitimacy would require that BP be completely transparent sharing all they knew about the state of the spill • Competitive legitimacy suggested the contrary – under the 1990 oil Pollution Act, BP’s fines would be based upon the calculations of the amount of oil spilled 2. Compliance is not enough
  30. 30. Another example… • BP – Vessels of Opportunity program • Competitive legitimacy suggested that BP should ask boat owners to sign agreements that released BP from any damage to the boat or persons helping in the clean-up • Institutional legitimacy suggested that such a request was socially inappropriate and unnecessary – given the huge liability BP had for the spill and clean-up, additional liability for a damaged boat was insignificant & an insult to the volunteers 2. Compliance is not enough
  31. 31. BP emphasized competitive legitimacy • Most firms trade-off the two carefully in cases of a conflict • …but BP safeguarded its competitive legitimacy (to the detriment of its institutional legitimacy) 2. Compliance is not enough
  32. 32. 3. Be(a)ware of Stakeholder Claims
  33. 33. Stakeholders fall into (at least) two types • Financial interest in the firm: Primary stakeholders • Shareholders • Employees • Suppliers & partners • Local community • Customers/Clients • Civic interest in the firm: Secondary stakeholders • Ecology groups • Special interest groups • Non-governmental organizations • Non-profit groups • Government & political organizations 3. Be(a)ware of Stakeholder Claims
  34. 34. Stakeholders’ interests • Financial interest in the firm: Primary stakeholders • Focus on how the resources and fruits of economic activity are shared • Civic interest in the firm: Secondary stakeholders • Focus on the alignment of firm practices with evolutions in social and ethical perspectives 3. Be(a)ware of Stakeholder Claims
  35. 35. BP’s Stakeholders for the Deepwater Horizon spill • Primary stakeholders • Rig workers & their families • Partners: Transocean, Halliburton, Cameron • Gulf States & Obama admin • NOAA, MMS • Industry partners: Exxon Mobil, Chevron, … • Shareholders & bankers • BP customers • Secondary stakeholders • Ecological organizations: Louisiana Bucket Brigade, Sierra Club, anti-off-shore oil drilling groups, etc. • Gulf Coast residents • American Petroleum Institute • International Association of Oil Drilling Contractors • Fishermen & boat owners • General public & Press 3. Be(a)ware of Stakeholder Claims
  36. 36. Common practice in stakeholder management • Listen most to and favor primary stakeholders – they have resources the firm needs • BP did just that! 3. Be(a)ware of Stakeholder Claims
  37. 37. BP missed secondary stakeholder activity on social media • Hundreds of user comments PER DAY on many blogs and boards • A Twitter site, @BPGlobalPR, was created to mimic BP’s own with 145,000 followers (and lots of ironic humor) • A Facebook movement to seize BP’s assets, supported by at least 5 groups • Scientific groups banded with ecology groups - mapped environmental damage (Louisiana Bucket Brigade, Grassroots Mapping & MIT) • SkyTruth published reports challenging BP’s estimates of the oil …along with members of the scientific community 3. Be(a)ware of Stakeholder Claims
  38. 38. BP missed how Gulf residents’ opinions altered • Gulf states are pro-oil; favorable towards BP • So initially, sentiments against BP were mild, "They are using, I am sure, all the expertise they have to get at it to get it under control," Scheer said. "I'm sure they want that just as badly as we do." • By early June, "Some businesses are on the verge of bankruptcy because of the way BP is handling things," she said. "This is just not working." 3. Be(a)ware of Stakeholder Claims
  39. 39. Tony Hayward, CEO 3. Be(a)ware of Stakeholder Claims • Specialized in undiplomatic remarks: • …the gulf "is a very big ocean" and "the environmental impact of this disaster is likely to have been very, very modest.“ • "You know, I'd like my life back.“ • "We will get it done. We will make this right."
  40. 40. 4. Actively Manage Your Social Risk
  41. 41. Social Risk • Corporations are exposed to social risk when they are threatened by social advocacy organizations or a social movement • Targeted to bring about change in the industry or in firm practices • If successful, the result is a loss of firm institutional legitimacy and reputation Yaziji 2003 4. Actively Manage your Social Risk
  42. 42. Recognize the signs of a social movement early on • Different Stakeholders – with different demands • Different strategies – guerilla tactics 4. Actively Manage your Social Risk
  43. 43. Different Stakeholders… Different Demands • Business as Usual: Primary stakeholders • Bargain with stakeholders over distribution of the ‘pie’ – discussion of $$$$ • BP concentrated on satisfying primary stakeholders and relied on its financial resources to resolve the issue. It threw billions at the Gulf- but it was never enough! • Social Movement: Secondary stakeholders • Firm’s practices are no longer considered legitimate by stakeholders • Bargain with the firm over the adoption of new practices • BP stakeholders looked to BP to alter their business culture & practices… ironically, the more money BP threw at the Gulf, the more it undermined stk trust in BP! 4. Actively Manage your Social Risk
  44. 44. …Different Strategies • Business as Usual: Primary stakeholders • Stakeholders use a direct approach to the firm • They try to convince other important stakeholders • Occurs behind closed doors • BP wasted valuable time & energy negotiating with the Obama administration, NOAA and other large stakeholders behind doors while protests were mounting on social media sites. • Social Movement: Secondary stakeholders • ‘Guerilla tactics’ • Social groups bypass other important firm stakeholders • They look to disenfranchised groups, the press & the public for support • …& they leverage social media & the internet! • Gulf fishermen, businessmen, locals and ecologists banded together on-line to stand up to BP! 4. Actively Manage your Social Risk
  45. 45. BP missed the signs of a growing social movement • By late June, Gulf residents had allied with national ecology organizations to protest BP’s response to the spill. “They put us out of work and now we are cleaning up their mess.” (Donny Campo, Gulf resident) • BP’s plans for the clean-up were, “drawn up on the back of a bar napkin” (Billy Nungesser, President of Plaquemines’s Parish)
  46. 46. Poll Q. Is your firm under pressure from secondary stakeholders groups to alter its practices in one way or another? Yes/No Q. How seriously does your firm view their efforts? Very seriously/Not very seriously 4. Actively Manage your Social Risk
  47. 47. Implications for compliance & ethics officers?
  48. 48. Compliance & ethics role Is expanding • Today, a firm’s institutional legitimacy and social risk should be actively managed as part of the risk and compliance functions • Compliance and ethics officers will take responsibility for anticipating and planning for evolutions in regulations and societal expectations Implications
  49. 49. Measuring & monitoring systems are needed • Yesterday - Controlling for compliance …regulations • Today – Controlling & monitoring compliance and ‘ESG’ (environment, social & governance) …regulations • Tomorrow – – Controlling & monitoring compliance and ‘ESG’ (environment, social & governance) …anticipating social expectations and regulations
  50. 50. Engage a dialogue inside your firm • Around civic and ethical issues • Around measuring performance on ESG issues • Around institutional as well as competitive legitimacy
  51. 51. Because, as the Deepwater Horizon has shown us all, a little prevention is worth 87 + days of clean- up!
  52. 52. Questions? Comments?
  53. 53. Thank you so much for your time!

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