The report is to be applauded because of its clearness, and thoroughness, as well as for recognizing the complicated and systemic nature of the reason. However, what it does not recognize would be that the structural failing of management is embedded in an even wider context, specifically how inside our culture we run our economies and companies. With all this wider economic context, it is inevitable that similar disasters – of similar apocalyptic proportions – may happen in the future.
Strikingly, when reading the statement, the parallels between this debacle and other corporate and business disasters of the recent and more faraway recent are stunningly clear. And I am sure these businesses are to blame, and their CEOs do bring responsibility for the catastrophe but to name and shame them as the only real reason behind the misfortune seems an unhealthy oversimplification.
But, as the Presidential Committee concludes “the main causes are systemic” rightly, representing an “overall failure of management”, as opposed to the activities of a particular person or even a particular company. When you analyze the lack of communication systems, safety culture, inadequate decision making processes, and so on, a tragedy – somewhere sooner or later – seemed inevitable and the proverbial accident waiting to occur. The anthropologists Anthony Oliver-Smith and Susanna Hoffman, who examined a number of man-made disasters, concluded concerning this “a tragedy becomes unavoidable in the context of the historically produced pattern of vulnerability”.
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And that is exactly what we saw at BP; a pattern that produced a situation that at some point would set off the rails. Hence, the committee is certainly right, “The missteps were rooted in systemic failures by industry management (extending beyond BP)”. Now, certainly this devastation didn’t do the shareholders of BP much good, however the true point is that, in financial conditions, there is an optimum risk-return trade-off to be produced. And everything BP did and is doing is to optimize that trade-off because of its shareholders – specifically as we expect them to do.
Whenever I ask a group of executives to whom the best responsibility of a company is they proclaim in chorus “shareholders” – some of them even get annoyed if not angry by questioning that very assumption. Because that is what they are supposed to do: maximize the worthiness of the organization for its owners.
And, as said, that suggests making risk-return trade-offs. The challenging thing is of course that such trade-offs undoubtedly sooner or later somewhere down the line business lead to something heading seriously from the rails. In fact, the real way we remunerate top managers – including Tony Hayward – is basically through commodity.
The only reason to so abundantly use stock options (and not, for example, a stock) is that they induce top managers to consider more risk. As well as the world of business and our stock markets in specific are organized in such a way that we think that that is exactly what we want: top managers who take dangers.
We applaud them when it goes well, but we vilify them when it goes wrong badly, although that’s this is the other, inevitable part of the same dangerous coin. Of course, essential oil disasters are the type of risk we would like these to avoid, but governance mechanisms such as stock options simply activate risk taking and do not discriminate between different types of risk.