Whenever people have a lot of money at stake, they are tempted to take risks they shouldn’t. It’s human nature. When individuals cut corners in their own lives, the costs can be small. But when corporations cut corners, the costs can be immense — both for the corporations and for the public.
Two of the biggest corner-cutters this decade – BP and Pacific Gas & Electric Co. – got their comeuppance this week for disasters they caused back in 2010. For both companies, self-interest wasn’t enough to compel prudent and responsible action. Their experience shows how good and well-enforced regulation might have benefited investors and others.
This week, BP (formerly British Petroleum) was ruled to be “grossly negligent” and guilty of “willful misconduct” in the explosion of its oil drilling platform, Deepwater Horizon. The platform exploded, burned and sank in April 2010, killing 11 workers and polluting coastal waters with more than 4 million barrels of crude oil. The disaster caused widespread job loss and irreparable economic harm to fishing, tourism and other nearby businesses. The judge’s ruling exposes BP to $18 billion in civil penalties in addition to the $4.5 billion BP already paid to settle criminal liability with the U.S. government.
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As Deepwater Horizon burned and sank, Pacific Gas & Electric Co., a gas and electric utility in northern California, was failing to monitor and maintain its decades-old network of gas pipelines. Not six months later, one of the company's 30-inch diameter high pressure gas lines burst into flames beneath a San Francisco suburb. Eight residents lost their lives as fire shot 1,000 feet into the air. This week the California Public Utilities Commission fined the utility company a record-breaking $1.4 billion.
Apologists for these companies would have you believe that the disasters were the result of individual “bad apples” whose errors in judgment or record-keeping could not have been foreseen or prevented. But close examination led the courts and the utilities commission to conclude that the problems were anything but isolated and idiosyncratic. In each case, top management put too much focus on delivering financial performance and gave too little authority to internal quality and safety departments. In the case of BP, critics say management pushed to move too quickly to get the well online, ignored dangerous readings and overruled warnings raised by staff.
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At Pacific Gas & Electric Co., the pressure took the form of resisting necessary inspections and maintenance. Paperwork was repeatedly “lost” which would have indicated that the pipeline that had failed – and others like it – used an old welding technology unsuited for high pressure operation in a populated area. Critics say the pipeline was never properly inspected, and pressures were deliberately spiked to higher-than-safe levels in order to sustain an unjustifiable rating.
In a modern corporation, or any large organization, no individual below the top, no matter how ethical and honest, has the power to resist intense demands for speed and profit. For an individual in management, even in relatively senior positions, the choice is stark. Everyone knows what decision will enhance your career, and what decision will end it. It’s part of the culture. You can meet the demands and cut corners. Or you can resist the demands, be sidelined and ultimately laid off. Or you can take the hard road and become a whistleblower, which leads to decades of abuse, lost wages and mounting legal bills. Nearly everyone complies.
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To be sure, the costs to the economy and society are staggering. For investors in both companies, assuming the judgments are not scaled back on appeal, more than a year's profit will be lost. And many opportunities have been squandered while senior executives managed the disaster instead of the business. But the damages go far beyond economics. Many people have been hurt in lasting ways. Some lost their lives or their loved ones. Some lost jobs or small businesses. Some lost homes. And in the Gulf coast, a valuable fishery has been severely damaged.
It doesn’t have to be this way. If the companies involved had properly funded and empowered their internal quality and safety departments, the tragedy could have been avoided. If regulatory agencies were adequately staffed to monitor policies and processes for hazardous operations, tragedy could have been avoided. If senior regulatory staff were properly restricted from overly-chummy dealings with the companies they regulate, tragedy could have been avoided. And if boards of directors exercised their fiduciary responsibility to review risks independently, all of this could have been avoided.
It’s a good thing that the courts occasionally still work to impose serious fines and penalties in egregious cases such as these. At least they provide some justice for the victims. And it dissuades others from taking similar risks. But it would be even better if well-enforced regulations and properly structured incentives prevented these disasters. The shareholders of BP and Pacific Gas & Electric Co. would agree. So would the 19 people who lost their lives in these industrial disasters.
David Brodwin is a Co-founder and board member of American Sustainable Business Council. This article appeared in U.S. News & World Report September 5, 2014, 2014.