How should investors respond to the BP Deepwater disaster?

Demand a full, long-term environmental clean-up, board accountability and management explanation, say Mark Tulay and Stephen Viederman

“The Sea, once it casts its spell, holds one in its net of wonder forever”, wrote Jacques Cousteau. Today for thousands of residents in the Gulf coast impacted by the 40 million gallon BP spill this wonder has turned to horror and despair. Investors are also feeling the sting as BP’s share price has plummeted to nearly half of its high at the time of the explosion. BP CEO, Tony Hayward, pledged “to clean up every drop of oil” and pledged to put the “gulf coast right as fast as we can.” Yet every day we learn more about the extent of the disaster in the Gulf and on the shore, and we are now hearing that the slick might extend into Cuba and Mexico. To date, the company has spent over $1 billion responding to the oil spill. But with the launch of a criminal investigation and the steady stream of civil lawsuits being filed, BP’s troubles are only beginning. The company faces EPA fines of up to $4,300 per gallon if it is determined that gross negligence caused the spill. By some estimates, the total costs to BP could exceed over $40 billion, far eclipsing the $3.8 billion costs for the Exxon Valdez spill. Many investors are now wondering if BP can survive the tarnish to its brand. New York Times columnist Andrew Ross Sorokin reported on June 8, 2010 that Shell andExxon “are licking their lips” at the prospect of a takeover. And, he suggests, “flinty legal minds are dreaming up scenarios in which BP would file bankruptcy and separate the costs of clean up – and potentially billions of dollars in legal claims – into a separate entity.” In the wake of the spill that is now four times as big as the Exxon Valdez spill, investors must hold BP to its word.
The Deepwater Horizon debacle has exposed deep faults in BP’s corporate governance and project planning. BP was an early leader on climate change in its sector. They also made larger investments in alternatives and renewables than its peers. However, the emperor had no clothes: BP is also the most heavily fined energy company in the US. BP has already come under fire for its failed containment of the spill and its handling of the financial settlements. The Times of London reported that BP’s CEO Tony Hayward repeated his commitment to pay all legitimate claims but angered residents by saying that because “this is America,” many of the claims will likely be “illegitimate.” Alabama’s Attorney General Troy King advised BP to stop encouraging settlement
agreements among coastal residents that he said stripped people of their right to sue in exchange for a $5,000 settlement. BP has already lost credibility on all counts and would be well served to take the high road on settlement issues. The Financial Times reported on June 9th about how cultural failings at BP left the company ill-prepared: “The company’s shortage of native knowledge of America and how it responds to crisis has been painfully exposed… a series of cultural misunderstandings has made its position more difficult.”
An autopsy, especially among responsible investors, is needed to determine what went wrong. Given BP’s poor record on environmental, health and safety (EHS) issues, Deepwater was a predictable surprise. BP is the new Enron. What are investors to do?
Investors must:

• Demand board accountability. The response from the BP board on this disaster has been deafening silence. Investors should scrutinize BP’s board governance structures and demand a full and immediate accounting of their failures and the actions that they will take to strengthen their project planning and EHS policies and procedures. The BP board must be held accountable, including decisions about the future of foot-in-mouth CEO Tony Hayward. They should either make a public statement indicating why they have faith in Tony Hayward’s capacity to manage and make good on his commitments or remove him immediately and find someone that has the skills to necessary to deal with the long-term problems their failures have created.
• Must encourage, support and use research that focuses on the quality of management defined not only in financial terms but also with regard to sustainability andEHS concerns. Investors should consider making a larger investment to support good sustainability research, which will serve as a watchdog for all investors in the future.

• Engage politically to ensure that BP covers the full cost of making the Gulf whole — for as long as it takes. For fishermen and others, this cost will be measured not in years but in decades. Paying the full costs should also mean that tax deductions for any of the restoration costs they would try to take would be disallowed. Investors and governments should press BP to earmark $25bn for an oil spill restoration fund and hand over the governance and fund distributions to community-based organizations.

Experiencing a series of environmental and social disasters over many years, BP seems to have learned little that would prepare them for the next disaster. The Deepwater Horizon explosion, the Houston oil refinery explosion or the Alaska pipeline leaks, are not black swans, as in highly unlikely and unpredictable events. Rather, they are ‘predictable surprises’ resulting from the neglect of proper procedures. BP is now being re-branded not as Beyond Petroleum, but as the Bayou Polluter.

The true measure of the company will be in its conduct throughout the aftermath of the explosion. Investors have a critical role to play in holding BP accountable and ensuring they pay claims quickly and help restore the Gulf ecosystem and communities for “as long as it takes.”

Mark Tulay e-mail contact is founder of Sustainability Risk Advisors. Stephen Viederman e-mail contact is a strategic advisor to the Christopher Reynolds Foundation