Sept. 2010
BP's Disaster Raises Issue of Board Assurance Mechanisms
The July 26th issue of Fortune magazine carried a scathing editorial by Geoff Colvin regarding the BP board's inadequate governance and assurance mechanisms. He lays the blame for the spill squarely on the board. From a membership point of view, BP's board is first class, a board composed of very competent seasoned leaders, not "doddering peers" or "earnest but clueless academics." (There were five insiders on the 14 member board, however, which could have had a deleterious effect on accountability.) He says the board appears to have been doing everything right regarding risk management; it had a Safety, Ethics, and Environmental Assurance Committee to monitor non-financial risk. Internally, management had a "group operations risk committee" of executives, together with an elaborate flow chart, and even a mantra of "no accidents, no harm to people, and no damage to the environment." Nevertheless, these structural arrangements failed.
He asks the question of whether it is fair to blame the board and concludes that it is. "The board had known for years that something was wrong with safety at BP." This event was by far not the first serious accident that BP had had over the last five years; there was the Texas City explosion in 2005, a serious hydrogen fire four months later in the same facility, and another accident at the same plant a month later forcing residents to stay indoors.
At that point the Board ordered an external review and report by a very respectable independent panel regarding BP's safety. Even during the panel's work, BP had a pipeline leak 200,000 gallons of crude in Alaska.
"The panel's 347 page report was brutally direct," states Colvin. The accidents were not isolated events. They were symptoms of a systemic problem. The report called for "leadership from the top... starting with the board and going down." "BP has not provided effective process safety leadership" it stated, top to bottom. BP appeared to be unable to make all its safeguards and standards work to actually create a safe environment. It talked but couldn't execute, including "critical alarms, and emergency shutdown devices." This was in the 2007 report! Guess what the recently released internal investigation of the Macondo well blowout discovered? Exactly that! The BP board and management had had three years warning. The board, the report said, "did not ensure, ..." that management did what it was instructed to do. The Board "was on notice" that things were seriously amiss at BP concerning safety, stated Robert Monks, corporate board expert, and that "the mechanisms for informing the board were dysfunctional. The board had an affirmative duty to understand the risks involved in drilling this well." In rebuttal, BP told Colvin that " 'there were no grounds' for the allegation that the board bears particular responsibility for the Gulf disaster." And that the company "had turned around its process safety systems."
This whole event and discussion raises the very serious issue of board assurance mechanisms. Boards typically have old and traditional mechanisms of assurance, most not very effective. When the subject of risk comes up, we typically think primarily of board accountability around fiscal risks. Curiously, organizations melt down financially in spite of the usual board mechanisms and structures we cling to.
However, exactly the same phenomenon occurs regarding non-financial risks as with fiscal risks, and BP is just a dramatic demonstration of that. Boards stare at a problem they fear or even know may be present and accept management's assurance and reports without sufficient support. Boards create finance or audit committees (or other specialty committees) of experts hoping this structural approach will do the trick. It doesn't. The board as a whole defaults its values, thinking, and decision-making to the experts on the committee. The committee, in effect, acts as an accountability buffer for the board, doing the thinking and assurance for the rest of the board. Most boards do not even create policies for their committees to use as the board's standard and then check on the committee. They let the committee set the values, (and often not even know what standards the committee is using). The literature and experience demonstrate that board committees that are aligned with organizational functions eventually get co-opted by management besides confusing board-management accountability. (For example with a traditional finance committee, who does the CFO work for? The Finance Committee? The Chairman? The Treasurer? The CEO?)
The monitoring function of the board is a vital component of governance, and a board must use whatever mechanisms are required to assure itself of compliance, the more serious the risk at stake, the greater the effort and rigor the board should use.Trust but check goes the adage.
And, subject to later discussion, is the issue of courage. Even when boards learn there is something amiss, they frequently do not have the resolve (or ability) to deal with it. Monitoring is just the beginning of assurance; the duty is not completed until the assurance of compliance is, in fact, satisfied. Instead boards stare at their fingers, iPhone, off into space, or the ground when someone raises the need of enforcement. They like their CEO, executive director, president, pastor, whoever, and can't bring firmness to bear - being gracious but firm - and would rather remain blind, or watch the organization be seriously jeopardized or crash. Yes, even I have had clients that have behaved just that way.
Dick Biery
Richard M. Biery, M.D. © 2010
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