Another Area Where Corporate Governance Failures Have Spreading Implications

While the financial crisis prompted this writer and Prof. Eric Pan of Cardozo Law School to write about how corporate governance law requires change to take into account outcomes as well as process in order to prevent harm to innocent bystanders – such as taxpayers – from occurring, the BP Gulf oil spill is yet another situation illustrating the need for law to prompt greater oversight of and by senior management. It is far from clear at this time whether the various claims made about BP, Transocean and Halliburton in connection with the infamous well are true, and there are obvious issues of extraterritoriality with respect to BP itself, but if a significant number of them are, this will indicate a major breakdown in corporate governance.

At the least, it appears to me that BP had no real plan in place to deal with the aftermath of a spill in extremely deep water when it started such activity. While hindsight is always 20/20, it seems reasonable to expect the governing body for a firm like this to insist upon some meaningful strategy and analysis to mitigate harm to innocent people before the firm undertakes operations which can have such widespread impact and are the subject of so little definitive learning. Even if such a plan is not technically perfect, the mere process associated with its creation, should a cause a more effective response and weighing of alternatives if the worst happens.

Yet, from what we can deduce from BP’s halting, thus far ineffective, response to the spill, the difficulties associated with dealing with a spill in literally uncharted waters and the differences between such circumstances and much more shallow water, were not the subject of much deliberation at the top levels of the company. This is inexcusably poor corporate governance and its effects are being felt by the families of those killed in the rig explosion and by tens or hundreds of thousands in the Gulf Coast region, who were not BP shareholders and thought they had no connection to the company.

Additionally, claims have been made that BP cut many corners with respect to the doomed well in its haste to conclude its operations and that such corner cutting may have played a role in the drill rig explosion. If this is the case, whether it resulted from the wrong message coming from the top of the company or from poor decision-making by midlevel managers is subject to interpretation and fact gathering. If the problems are traceable to senior level edicts, this is yet another argument for much greater board oversight.

I am not asking for boards and CEO’s to be insurers and responsible for every serious problem befalling their companies, but merely to seriously consider what can go wrong when major initiatives or changes in strategy are being pursued, and how to respond in such case, before proceeding with an approach which can have so many severe consequences for so many outside the company who can do little to protect themselves. If such consideration is done and results in a plan which is prima facie viable, yet does not ultimately solve the problem, one can use the need to take business risks to drive the economy, especially where we are pursuing alternatives to imported oil, to justify absolving executives and directors from further personal responsibility.

What is intolerable is the blank check we have seen in the financial sector where blind faith was placed in the likelihood of real estate values not declining, and apparently in the oil field when drilling moved into unprecedented areas. When commenting to (June 4, 2010; Tutton, Lessons Learned from  the Largest Oil Spill In History) on oil spill clean ups, specifically the 1991 Persian Gulf operation, Abdul Nabi Al-Ghadban of the Kuwait Institute for Scientific Research gives excellent guidance for all such risky activity:

If you have offshore operation you need to have a good contingency plan in place of spillage, damage, earthquake or a problem with the pipeline. We learned the lesson that we have to have an action plan – you have expect the unexpected.

When companies take risks that can have huge external implications, corporate law needs to require those ultimately in charge of such companies to ensure that such risks are fully understood and alternatives are in place to deal with the manifestation of such risks. With the growing external implications of so many corporate decisions, we can no longer afford a process-oriented corporate governance regimen, but must do more to link decisional authority and responsibility for outcomes. This means augmenting current initiatives around proxy access and compensation clawbacks with some sort of direct responsibility for damages suffered by third parties outside firms as a result of poor oversight within the firms.

Publisher’s Note: Thanks to guest reviewer Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.

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