Ethics and BP: Corporate Governance - Part 3


Summary
BP looks to have all three elements of an effective board structure in place. They have incorporated or addressed leadership, composition, and size. If board structure acts as the lever that controls the firm’s effectiveness, then it looks like the lever is turned on. So, why does BP effectiveness not flow when the board structure is fully operational? I believe this suggest that the model described by Leblanc and Gillies might take us closer into measuring the effectiveness of Corporate Governance, which identifies board process as the key element of good governance; not board structure.

As you can see, on paper, it looks like BP addressed the management team’s responsibilities in their corporate governance program. It is this same program that is being rated by Management & Excellence and ranked accordingly as shown on the list. With BP raked number three on the list; one might want to know, what is it about BP’s ethics that they achieve the third highest ranking in the world’s most ethical oil companies? I believe BP’s ethics were based solely on board structure and policies. If the rating were based on management actions then we would have a new raking, as ethics should be based on the “verbs” that management take in the day-to-day operations of the company; not the policies.

As far as actions go, Olsen (2005) points to BP having more fatalities than any other oil company. BP continues to accumulate an even higher death rate, which includes the 11 deaths in the resent April 20, 2010 explosion of the Deepwater Horizon (Casselman, 2010). Considering just the death toll of BP and not disaster like the Texas Refinery explostion, pipeline leaks, illegal duming, and the Gulf Coast oil leak, we start to see something out of place. How many ethical points did BP lose per death? Or, do deaths not count in the ethical rating system. I think the rating system has it wrong as ethics can not be measured by looking at the policy and procedures alone. We must incorporate the “Verbs” of the corporation and how they act upon their day-to-day activities to guage ethical behavior.

Effective boardrooms need to be able to detect fraud and misdeeds within their organization. To accomplish this, directors need to ensure they have internal controls that monitor, detect, and measure the effectiveness of red flags. Employees and management must be properly trained to identify red flags within the scope of their job functions. Properly trained employees and management should be able to spot red flags sooner; leading to a reduction in cost per incident for fraudulent activities within the organization.

Creating an effective board, by utilizing Leblanc and Gillies’ (2003) model, can strengthen the overall sustainability of an organization. Effective boards have to understand the ethical risks, red flags, and internal controls within their organization. As failure to do so, often leads to a road, no one wishes to go down.



References

ACFE. (2010). Report to the Nations on Occupational Fraud and Abuse. Austin, TX: ACFE.

BP p.l.c. (n.d.). BP p.l.c. Board Governance Principles. Retrieved September 20, 2010, from bp.com: http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/B/bp_board_governance_principles.pdf
Casselman, B. (2010, September 11). Rig Workers Had Chance to Prevent Explosion. Retrieved September 23, 2010, from Wall Street Journal: http://online.wsj.com/article/SB10001424052748704505804575484053238831866.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

COSO. (2010). An Analysis of U.S. Public Companies. Retrieved October 5, 2010, from COSO.org: http://www.coso.org/documents/COSOFRAUDSTUDY2010.pdf

Dickins, D. (2010, Jul/Aug). CEO AND COB DUALITY: DOES IT MATTER? Internal Auditing. Boston: Jul/Aug 2010. Vol. 25, Iss. 4 , pp. pg. 35, 4 pgs.

DiNapoli, T. P. (2010). Red Flags for Fraud. New York: State of New York Office of the State Comptroller.

Iglesias, C. (2008, May). Finding Effectiveness in the Boardroom. Retrieved October 7, 2010, from Deloitte.com: http://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/governance-regulatory-risk-strategies/Governance-Services/3459835011011210VgnVCM100000ba42f00aRCRD.htm

Leblanc, R., & Gillies, J. (2003). The Coming Revolution in Corporate Governance. Ivey Business Journal .

Management & Excellence. (2008). World's Most Sustainable and Ethical Oil Companies 2008. Management & Excellence.

OLSEN, L. (2005, May 15). BP leads nation in refinery fatalities. Retrieved Oct 1, 2010, from chron.com: http://www.chron.com/disp/story.mpl/special/05/blast/3182510.html

Ross, M. (2008, April 1). Fraud's Red Flags. Retrieved October 5, 2010, from Directorship.com: http://www.directorship.com/frauds-red-flags/

Senate, P. S. (2002). Report 107-70 The Role of The Board of Directors in Enron's Collapse. FindLaw.com.

Svanberg, C.-H. (2009). BP Annual Report and Accounts 2009. BP.

UN Global Compact. (2009). Corporate Governance - The Foundation for Corporate Citizenship and Sustainable Businesses. Retrieved Oct 1, 2010, from unglobalcompact.org: http://www.unglobalcompact.org/docs/issues_doc/Corporate_Governance/Corporate_Governance_IFC_UNGC.pdf

Vallabhaneni, S. R. (2008). Corporate Management, Governance, and Ethics Best Practices. Hoboken, New Jersey: Wiley & Sons, Inc.

Wells, J. T. (2008). Principles of Fraud Examination 2nd edition. Hoboken, New Jersey: John Wiley & Sons, Inc.


By: Joseph Dustin


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