It’s a pity when an otherwise impressive management performance is ruined by a disaster.
But that is exactly what has happened at BP.
Prior to the oil spill in the Gulf of Mexico, Tony Hayward and his team had done a tremendous job of improving practices and restoring the reputation of the previously poor performing and accident-prone multi-national.
But now, his credibility has been (rightly) damaged.
A huge rebuilding effort …
As described by Guy Chazan in the Wall Street Journal, prior to recent events, efforts on the part of Tony Hayward and his management team to restore the fortunes of the BP had been exemplary.
After taking the helm in 2007 (at a time when the company had been plagued by poor management, allegations of impropriety and an appalling safety record), Hayward immediately set about turning things around. Operations were simplified, costs were cut, production levels were boosted and worker injury rates were reduced.
These efforts paid off. Last October, the company announced a $4.7 billion third quarter profit – well above analyst expectations. And in January this year, BP’s market capitalisation overtook that of Royal Dutch Shell for the first time in three years.
… but Deepwater changes everything
Alas, much of that has now been undone, and the credibility of Hayward and his team has been severely damaged.
Rightly so, too. And rightly so for a number of reasons:
• Magnitude of the disaster.
Consider this: eleven workers missing (presumed dead); seventeen injured; more than four-hundred species under threat; and an estimated financial impact of $2.5 billion to the fishing industry and $3 billion in tourism along Florida’s pacific coast (refer Wikipedia) – that’s a catastrophe by any standards.
To be fair, it must be acknowledged: that we do not know the extent to which (if any) these events were preventable; that some accidents do occur even where reasonable precautions are taken; and that the company does seem to be doing everything they can to stop the leak.
Nevertheless, no management team can preside over a disaster of this magnitude with their reputation intact.
• Previous assurances.
In a 52 page document which BP submitted to the federal Minerals Management Service in 2009, the company gave assurances that:
“… it was unlikely that an accidental surface or subsurface oil spill would occur from the proposed activities…”
and that even in the event that an accident occurred;
“.. due to the distance to shore (48 miles) and the response capabilities that would be implemented, no significant adverse impacts are expected.”
You can’t go giving assurances like that without significant consequences to your credibility when damage of this magnitude occurs.
• Pre spill precautions.
Related to that are issues associated with pre-spill precautions.
Specifically, although the rig had a blowout preventer installed, it was not fitted with remote control triggers in case of emergency.
Apparently, though these devices are mandatory for offshore drilling in countries such as Brazil and Norway, this is not the case in America. Nevertheless, the cost of having them (approx $500,000 – refer Wikipedia) looks pretty paltry against both impact of the spill, both in terms of the direct cost to shareholders and (more importantly) the social, environmental and economic cost from a broader perspective.
• Lack of preparedness.
Judging by responses in a Wall Street Journal online discussion forum, most folks seem pretty satisfied that the company is genuinely doing all it can to stop the leak.
Still, management don’t seem to have much idea what to do, and questions must surely be asked about why they did not have effective procedures in place to deal with events like this.
Credibility rightly affected:
Hayward has made a pretty good effort, and it’s a shame to see the reputation of his team destroyed.
But you can’t preside over anything like this without severe credibility damage.