BP Risk Analysis: Ethics, Finance, and Operations

Introduction: Ethics as BP's Core Risk

One of the most significant risks BP faces concerns ethics. The company's pursuit of profits over safety on the Deepwater Horizon drilling platform is perhaps the most obvious example of this risk. Ethically, safety should have been the primary concern, but BP prioritized profit despite the consequences for worker safety. The end result ultimately cost the company over $40 billion in damages arising from the accident that followed that ethical lapse (Wearden, 2010).

Ethics remain an ongoing risk at BP because the unethical practices that led to Deepwater Horizon have not been adequately addressed. Rather than learning from that disaster, BP is still believed to lack transparency with respect to its practices. As a reflection of how deeply ingrained the company's ethical deficiencies are, the chair of the safety, ethics, and environment committee had 43% of shareholders vote against him at the latest annual meeting — a strong show of dissatisfaction with the company's efforts on this front (Maharaj, 2011).

Financial Wrongdoing and Board Governance

With respect to financial wrongdoing, BP follows the corporate governance path that most large companies adopt. In general, the most significant financial malfeasance risks are associated with CFOs and CEOs, making board oversight the most important mechanism for reducing that risk. BP's board of directors includes three internal members — two more than is advisable when ethics are a primary concern. In particular, the CFO should not serve on the board when the CEO also does, as is the case at BP. This arrangement gives the very individuals most likely to commit financial malfeasance too much influence over the board.

The safety, ethics, and environment committee is comprised of external board members, which is a positive sign. However, none of the members of the ethics committee have a financial background — a significant gap. The audit committee includes only one person with a financial background, while the others come from consulting roles and one is an engineer. This composition leaves BP at elevated risk of financial wrongdoing: executives hold too much sway over the board, and there are insufficient financial experts present to manage that risk effectively. Investors and analysts tracking corporate governance standards would regard this board structure as a meaningful vulnerability.

Operational Culture and Human Resources

In terms of operations, BP's corporate culture remains its greatest problem. The company employs skilled engineers, so there is relatively little technical risk in day-to-day operations. The more significant problem at the operational level is unethical decision-making by members of management — the same type of decision-making that led to Deepwater Horizon.

There is comparatively little risk in human resources under normal circumstances. As with any large company, BP faces minor risks associated with its hiring and promotional practices, but these are not unusual at a company of BP's scale. However, there are more notable risks associated with temporary hiring, particularly for activities such as oil spill containment. O'Brien (2010) notes that while BP hired numerous temporary workers to help clean up after Deepwater Horizon, many of these workers lacked proper training and equipment for such hazardous work. Many reported adverse health symptoms to OSHA as a result of their work with BP — a situation that could expose the company to a sizable class-action lawsuit in the future.

Conclusion

Across all risk categories, BP's most pressing vulnerabilities stem from internal governance failures rather than external market forces. The ethical culture that existed prior to Deepwater Horizon has persisted, and the board's composition leaves the company exposed to financial misconduct. Operational risk is driven less by technical failure than by poor managerial judgment rooted in that same culture. External risks — macroeconomic cycles, technological disruption, and demographic change — are real but are largely shared across the industry and do not distinguish BP from its peers. Addressing the internal ethical and governance deficiencies identified here would do more to reduce BP's overall risk profile than any response to external market conditions.

Works Cited

Maharaj, A. (2011). Transparency still a slippery issue at BP. Corporate Secretary. Retrieved December 7, 2011 from http://www.corporatesecretary.com/articles/boardrooms/11923/transparency-still-slippery-issue-bp/

O'Brien, M. (2010). HR lessons flow from BP's crisis. Human Resource Executive. Retrieved December 7, 2011 from http://www.hreonline.com/HRE/story.jsp?storyId=448983661

Wearden, G. (2010). BP oil spill cost to hit $40 bn. The Guardian. Retrieved December 7, 2011 from http://www.guardian.co.uk/business/2010/nov/02/bp-oil-spill-costs-40-billion-dollars