June 9, 2010

Five Lessons from the BP Oil Disaster

It's very easy to pile onto BP right now. The "accident," which may be due more to negligence, is bad enough. The company lost 11 employees — after losing 15 in a high-profile explosion at a refinery 5 years ago. The damage to the Gulf, its species, and the people who depend on it is almost incalculable. But surprisingly, it's even easier to criticize BP's behavior since the explosion — the company has tried hard to downplay the scale of the tragedy and it has moved slowly to stop the torrent of oil pouring into the Gulf.

The nightmare is not over and the repercussions in terms of regulations and the future of BP are far from certain. But it's high time to start sifting through the wreckage for some learning so we can avoid similar catastrophes. I'm sure there are literally dozens of good lessons (please post yours), and I think many companies already have a solid understanding of the key principles of good behavior. But why do we need to wait for each fresh disaster to relearn the lessons we already know?

Here are my top five lessons, running from geopolitical and philosophical to corporate-level branding and strategy.

1. Our reliance on old, fossil-fuel based technologies is devastating for the planet, for society, and for business. This spill is in many ways an expected result of the path we have chosen. Given the declining stocks of easy-access oil, our addiction is forcing us to dig up extremely remote oil — something very, very hard to do that comes with enormous complexity and myriad risks of catastrophic failure.

The assumption that we will continue to dig up more carbon-emitting fossil fuels may be called into question in a serious way by the Gulf oilpocalypse. Governments may very well ask for companies to invest far more in safety. It's a reasonable outcome that regulators demand that companies invest not only in the technologies to dig oil up, but also in cutting edge ways to greatly reduce the risk of it going all over the place. So far, the oil giants seem to be pursuing only the first part. Which brings me to...

2. Preparing for a world where things only go right is extremely dangerous. To hearken back to the recession for a moment, one of my favorite tidbits about the financial meltdown was something I read about the ratings agencies (you know, the groups that gave horribly risky investments triple-A ratings). In the spreadsheet models they used to estimate the value of mortgage-backed securities, analysts could only plug in a positive number in the "growth" cell. That is, they could not predict the value of those derivatives if housing prices actually went down. You have to wear very large blinders to build a model like that.

But the oil companies have done the same thing. They've invested heavily in exploration technologies, finding ways to do things — like dig a mile under water — that were only space-age fantasies until recently. But where are the technologies to avoid spills, contain them, and clean them up?

3. Downplaying your mistakes is, well, a big mistake. It's gospel in business schools that Johnson & Johnson set the bar on handling a disaster when it dealt with the poisoning of Tylenol (and thus murder of some of its customers) in 1982. The massive, and immediate, recall was unprecedented and set the standard for corporate behavior in the face of existential threats to a business.

Cut to 2010 where BP leaders apparently never read the J&J case study. CEO Tony Hayward infamously said that the spill was "relatively tiny" compared to the "very big ocean." That statement is both scientifically baseless and beside the point - the amount of leakage that the CEO should accept from his operations is approximately zero. Unfortunately, Hayward hasn't learned much in the way of media training as he told a reporter this week that he wants to end this disaster because, "I'd like my life back." Wow.

And the response has seemed awfully slow. Why, for example, has each attempt to stop the leak been done in a serial fashion? Meaning, when the "top kill" failed, why didn't BP have the next containment dome in position already instead of waiting a few more days? BP has been acting like a child that doesn't want to clean up its mess and drags its feet, which is strange, given the monumental risk to the company.

4. Environmental risks can threaten the viability of a business. Reducing risk was the core focus of environmental efforts for many years so it got a bit passé as a forward-looking argument for sustainability. But it certainly is making a comeback now. As someone who's written for years about how going green can drive profits and growth, I've probably also downplayed the role of risk reduction in creating green value. So let me make the very easy case for BP's poor risk management.

As of today, BP has lost over 40% of its market value, worth about $75 billion. The New York Times went so far as to suggest that BP could be vulnerable to takeover once all its liabilities for this spill are accounted for.

Of course for most companies, sustainability-related, enterprise-threatening risks are not quite as tangible as miles and miles of your product killing an entire ocean. But even harder-to-measure threats can destroy a business model. Think of the "stroke of the pen" risk from regulations that outlaw a component of a product due to toxicity (one recent candidate: plastics chemical BPA). Or consider at the risk to companies that do not meet the new sustainability-themed supply-chain demands from business customers. Or look at a company's ability to attract and retain talent based on how well the company manages its environmental and social performance. Ironically, BP leaders have told me in the past that their reputation as a green leader was making recruiting the best engineers far easier. But that reputation is shattered.

5. Companies can lose the reputation as a sustainability leader very fast. Warren Buffett famously said, "It takes 20 years to build a reputation and five minutes to ruin it." Having a reputation as a sustainability leader is valuable, but it's a tenuous thing, and it can be lost very fast. In the book I coauthored, Green to Gold, we open with two stories: one about Sony and environmental risk and the other about the money BP saved through carbon reductions. For years, the sustainability community has praised BP as best-in-class. In the 1990s, the CEO at the time, Lord John Browne, set BP on a path to go "beyond petroleum."

But over the last few years, BP has quietly reduced its investment in renewable energy to a negligible percentage of sales and profits. Under Hayward the focus has been on cutting costs, and the company has explicitly avoided talking about "green" initiatives in the media (give them credit at least for trying to reduce greenwash). Given the explosion of 2005 and this spill, it doesn't seem like much of a stretch to guess that the company has under-spent on safety.

BP nets about $20 billion a year. How much do you think BP should have spent on extra precautions and new clean-up technologies? Imagine if every well had a second, relief well nearly dug at all times. Expensive, yes, but so is the destruction of your reputation and business, not to mention an entire ecosystem.

The answer to how much BP, or any company, should spend to avoid these problems is somewhere between zero and how much the company is worth. Unfortunately for BP, that latter number is far smaller than it used to be.

[This post first appeared at Harvard Business Review Online]

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