January 17, 2007
BP, Social Responsibility and Internal Controls
Posted by Lisa Fairfax

Yesterday the independent panel set up to investigate safety processes at BP in the wake of the 2005 explosion at BP’s Texas refinery that killed 15 people and injured about 170 others, issued at 374 page report the primary gist of which was that ineffective monitoring procedures coupled with the adoption of aggressive cost-cutting measures created an unsafe work environment at BP.

I found the report an interesting commentary on how corporations’ social, and in this case environmental, commitments can get thrust to the side.  As I have mentioned before, BP seemed to go out of its way to project an image of environmental responsibility, in some sense embodied by its own use of BP to signify “Beyond Petroleum.”  Indeed, the report notes that BP should be commended for adopting a goal of “no accidents, no harm to people and no damage to the environment.” Yet the report makes it clear that BP failed to live up to this goal.  The report suggests that this occurred primarily because the company failed to provide any guidance regarding how that goal should be implemented or any incentive for that implementation.  Indeed, the report points out that BP placed a lot of emphasis on programs that rewarded people who focused on profit and cost-cutting measures, but did not do the same thing with regard to its social and environmental initiatives.  As a result, the report indicated that many workers believed that profit was more important than safety, and thus were less likely and less willing to report safety deficiencies. 

BP did not do enough for its managers either.  Apparently BP is a decentralized organization pursuant to which a lot of autonomy rest with managers of plants.  Thus, managers were not given clear directives regarding how to implement an appropriate safety system.  In the face of that lack of guidance coupled with the pressure to engage in cost-cutting measures, the report suggests that it was inevitable that safety-related efforts would be placed on the back burner. 

In the end, the report discusses the need for BP to put in place measures to ensure that management considers safety concerns in all aspects of its decision-making.  In essence, the report calls on BP to alter its corporate culture.  The report suggests that this can only occur when BP creates affirmative mechanisms for ensuring that everyone in the organization views BP’s environmental goals as a component of its business goals. 

Then too, BP seemed to have an ineffective internal control system when it came to safety issues.  As a result, many of the report’s recommendations are reminiscent of internal control requirements associated with financial auditing.  Thus, the report calls for BP to strengthen executive accountability, establish a comprehensive monitoring system that identifies and manages safety risks, create an integrated set of safety performance indicators, and hire an independent monitor to report on safety-related measures to the board.  Of course the entire time I was reading the report and the recommendations as they related to the ineffective monitoring system I was thinking about Caremark.

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