BP’s less than Best Practice

BP recently published the results of its internal inquiry into the causes of the Gulf of Mexico oil spill. Other oil majors have said they are examining their safety procedures in light of the report, and its release has sparked a wider debate about how the industry as a whole operates.

Among the accident report’s recommendations were strengthening procedures for conducting and interpreting well tests, bolstering the insurance on blow-out preventers, well control, cement testing and rig audit and verification.

But such practical safety recommendations are only effective if there are good communication lines between the Board, management and rig workers so that instructions and concerns are passed back and forth promptly.

In the dialogue between BP and Congress occurring soon after the spill, it emerged that, while BP engineers were exchanging emails long before the accident stating serious concerns over the safety of the Gulf’s Macondo well, the company’s House Energy Committee found no trace of those concerns reaching senior management.

The case points to a dangerously stubborn corporate culture that, according to a Financial Times article on the case, prevails in many well-established companies like BP that carry decades of distinguished history (http://www.ft.com/cms/s/0/5b89e194-820a-11df-938f-00144feabdc0.html). This culture can corrupt despite external signs of good practice. BP’s Board committee on Safety, Ethics and Assurance comprises four non-executive directors and met seven times last year with the then serving CEO, Tony Hayward, presenting to each meeting in person. Furthermore, the BP safety and operations audit team was in the midst of a three year task to audit all major operating sites worldwide and, according to a so-called independent expert appointed to report on safety at the US refineries, the tone of senior management and the Board was supportive in delivering optimum safety standards.

In response to this apparent discrepancy between the measures taken and the disastrous outcome, several investment professionals have insisted that the BP affair underlines the duty of owners to examine companies on safety. The argument runs that they should challenge companies based on such guidelines as the UK Corporate Governance Code, which states the responsibility of the Board for “determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives” and maintaining “sound risk management and internal control systems” (Main Principle C.2).

But even if an institutional shareholder had questioned the Board on its adherence to these guidelines prior to the spill, the Board would have responded with a rehearsed reassurance about the activities of the safety committee and audit team and the shareholder, obliged not to meddle with operating specifics, would have had little option for further action.

This state of affairs points to a lack of provision in global corporate governance for dealing with companies that display good Board level intentions that suffer weak execution down the management line. Unless shareholders, or another suitable party, are given the right and responsibility to dig deeper than policy statements and tick-box compliance messages, companies have the scope to quietly go on grossly mishandling safety – as well as economic and CSR – issues, with little disruption from onlookers.

Unlocking the Code: What do the changes mean for you? Continued...

Continuing the thread on the changes contained in the revised UK Corporate Governance Code, this post will look at the implications of Section B.7:

Re-election

The previous 2008 version of the Code provided that directors should seek re-election at least every three years. It was following overwhelming support from institutional investors, who felt it would promote better engagement with shareholders, that the new Code now recommends the annual re-election of all directors of FTSE 350 companies.

The change is significant for most Boards; only a few listed companies already voluntarily re-elected directors annually. The IOD, among others, has expressed concern that the new provision encourages short-term thinking and creates the potential to destabilise the Board (http://press.iod.com/2010/05/28/iod-reaction-to-uk-corporate-governance-code-revision/).

It should be noted that, on past indications, the failure to re-elect directors is rare. The effect of the requirement, therefore, is largely to tilt the power balance towards investors as directors coming up for re-election could feel subtle pressure to engage, or at least to appear to engage, more with investors.

FTSE 350 companies should consider the exposure which may be created by the new recommendation for annual re-election of directors. For example, if an executive director is not re-elected this may trigger immediate termination provisions under his or her service agreement which may not necessarily work in the company’s best interests. This would have a serious impact on the continuity of the company’s business which, in the current market, could be very detrimental.

The ball’s in... whose court?

Last week, chairman of Leicestershire County Cricket Club Neil Davidson hit the news. He is refusing to step down amid calls from the head coach and team to resign on the grounds of alleged interference in team matters.

Davidson insisted, “My job as chairman is to represent the members ... the players are trying to set the agenda ... as a members’ club, it is the board who are supposed to run the club’s affairs on behalf of those members. I was appointed by the board, and am accountable to it.” (http://news.bbc.co.uk/sport1/hi/cricket/counties/leicestershire/8940096.stm)

Everything Davidson stated here is true. But the controversy raises bigger questions over the corporate governance practices in sports clubs. Where exactly do the interests of shareholders and fans overlap (bearing in mind that fans themselves are often shareholders)? Can and should the performance on the pitch and the performance in the boardroom be kept separate?

Closely related to this is the emergence of issue-centred groups that contribute to a debate about the future governance of various sports. An example of this is the campaign led and orchestrated by Manchester United Supporters Trust (MUST) to secure a meaningful ownership stake in their football club in light of the takeover of Manchester United by the Glazer family. The latter also led to the formation of FC United of Manchester (FCUM) a semi-professional football club set up by supporters, disaffected by the Glazer takeover.

The formation of MUST and FCUM can be located within a wider attempt by supporters to try and influence the running of the game - raising questions of regulation and control - but also of participation and exclusion, of the organisation and exercise of power in sports. There are now over one hundred supporter trusts across England, Wales and Scotland, formed as democratic, transparent, representative bodies for fans whose aim is to ensure supporter representation at boardroom level through the collective ownership of shares.

Sports clubs are notoriously poor, compared with other corporations, at complying with corporate governance regulation and codes of practice. One report found, for example, that less than a quarter of football clubs responding to their survey had an internal audit committee and, even where clubs had an audit committee, almost one third of those clubs reported there being no regular board review of risk assessment reports: practices which are now seen as foundational to good corporate governance. (Sean Hamil et al., (2004) "The corporate governance of professional football clubs", Corporate Governance, Vol. 4 Iss: 2, pp.44 – 51).

It seems that sports clubs would need to implement dramatic changes in order to come into line with the UK Corporate Governance Code. An alternative is for sports to be issued with a tailored set of guidelines that are more suited to reconciling the conflicts of interest underlying decision making in this sector, not unlike the guidelines published for the voluntary sector and building societies by NCVO and BSA respectively. Without some regulatory action, disputes over the division of responsibility, authority and fiduciary duty are bound to continue, with everyone wondering in just whose court the power lies.