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Attached is the case you have to read and answer the 3 questions each in 250-500 words. Please do not exceed more than 500 words per question. Below are clear instructions from the assignment.As a rule of thumb, an adequately intense answer to each question contains 250 to 500 words; if it bounds up toward 1000 words per question, it needs editing. Each answer must be based on the concepts addressed in the relevant chapter and be supported by the facts presented in the case. I’m not asking for your opinion. Provide real analysis. If you are not using the concepts and the case facts to answer the questions, then you are doing it wrong1. Describe the structure BP’s board of
directors. Is this structure appropriate?2. Which aspects of BP’s corporate
governance contributed to the safety lapses?3. How should BP’s corporate governance be
improved?
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714-017-1
BRITISH PETROLEUM:
This case was prepared by research assistant Christine Bang Andersen under the supervision of professor Torben Juul Andersen1 at the
Copenhagen Business School with the purpose of providing material for class discussion and was not developed to illustrate effective or
ineffective handling of managerial situations.
1
Professor of Strategy and International Management, Department of International Economics and Management, Copenhagen Business
School, Porcelænshaven 24B, DK-2000 Frederiksberg, Denmark.
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From Texas City to the Gulf of Mexico and Beyond
714-017-1
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The board members of British Petroleum (BP) had many reasons to reflect upon the state of affairs in
the company. BP had experienced dramatic executive changes in recent years and was now headed
by Bob Dudley, the third Group Chief Executive in less than a decade. In April 2010 the oil rig
Deepwater Horizon exploded and killed 11 men under their stewardship, putting BP on the headlines
of global news as a villain responsible for the largest environmental disaster in US history. The BP
stock price plunged in the aftermath and had only recently begun to regain earlier momentum. Tony
Hayward, the CEO then, had done well after replacing John Browne in early 2007 in the wake of the
Texas City refinery explosion that killed 15 employees and injured another 170. The verdict by the
Baker review panel investigating the circumstances around the incident concluded that “BP has not
provided effective process safety leadership and has not adequately established process safety as a
core value”.1 They also uncovered “instances of a lack of operating discipline, toleration of serious
deviations from safe operating practices, and apparent complacency toward serious process safety
risks”. These were serious allegations that a responsible board was obliged to take at heart.
Under Tony Hayward’s leadership, the company imposed new policies to safeguard personal safety
and implemented an official Code of Conduct to emphasize the key areas of running the business
highlighting health, safety and the environment. The bar was set high arguing that as a leading global
firm “we have a responsibility to set high standards to be, and be seen to be, a business which is
committed to integrity”. 2 The company did well in the competitive energy industry with players
constantly on the lookout for new sources of hydrocarbon to satisfy the needs of an expanding global
economy. They had also managed their way through the ‘great financial crisis’ of 2008 with its
rollercoaster ride in the stock markets, producing earnings comparable to their peers in the industry.
So BP condoned sensible principles of employee safety and environmental concerns in pursuit of
sustainable corporate developments. But in spite of the good intensions and efforts the company
faced environmental incidents that had severe impacts on the wealth of company stockholders.
It seemed obvious that sound management practices and values imposed by top management would
influence corporate outcomes and the way the organization deals with risky situations and
unforeseeable events. To accomplish this, corporate leadership imposed formal guidelines with
stringent policies on corporate practices expressed in an official code of conduct sending a clear
message to employees and external stakeholders.
BACKGROUND
The company was founded in 1908 as the Anglo-Persian Oil Company when it struck an oil well
after eight years of search in a remote area of Persia and it was the first company to extract oil in
Iran. In 1935 it was renamed the Anglo-Iranian Oil Company and eventually became the British
1
The Report of the BP U.S. Refineries Independent Safety Review Panel, 2007.
2
The BP Code of Conduct.
2
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FROM TEXAS CITY TO THE GULF OF MEXICO AND BEYOND
714-017-1
BP had become a truly multinational oil and gas company headquartered in London, England, with
worldwide operations and employees in different parts of the organization refining around 2,345
thousand barrels of oil per day. BP America was the largest corporate division and the second largest
producer of oil and gas in the United States. BP also owned a 19.75% stake in the Russian oil giant
Rosneft. In 2005 the company could boast at being the largest energy company in the world
measured by revenues ahead of Exxon and Shell.5 It remained a member of the so-called ‘Big Five’
of the largest global oil and gas companies: BP, Chevron, Conoco Philips, Exxon Mobil and Shell.
The firm had assembled operations in all parts of the energy value-chain in the oil and gas industry
including exploration, production, refining, petrochemicals, power generation, distribution,
marketing and trading.
A refocused strategy promoted in recent years was aiming to direct corporate operations towards
renewable energy in bio-fuels, wind and solar power. The move was promoted by John Brown, who
in a speech in 1997 called for “a balance between the needs of development and the need for
environmental protection”.5 Moving into the new millennium BP was considering alternative
sustainable low-carbon energy sources to address climate change. However, being mindful of the
continued dependence on oil as a key source for the increasing global energy needs, the company
was also engaging in major long-term oil exploration projects in Alaska, the Gulf of Mexico, Russia,
Azerbaijan, Indonesia, and elsewhere.6
THE SHIFTS IN LEADERSHIP
The company had experienced significant changes in top management and leadership over the past
decade with two shifts in the fronting position as CEO. Tony Hayward took over from John Browne
during spring 2007, and the eventual replacement of Tony Hayward by Bob Dudley took place in the
fall of 2010. The two executive changes were instigated by two different chairmen indicating interim
changes in the board composition. Peter Sutherland was appointed chairman of BP in 1997, after
3
This comprised the Arab members of OPEC by then counting Saudi Arabia, Kuwait, Libya, Algeria, Bahrain, United
Arab Emirates, Qatar, Iraq, Syria and Egypt.
4
BP Corporate Website.
5
CNNMoney: Fortune Global 500 Annual Ranking, July 25, 2005.
6
History of BP, BP Corporate Website.
3
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Petroleum Company in 1954. The company developed from these modest but venturous beginnings
and continued to grow through exploration and development of new oil fields under demanding
geopolitical and physical conditions. After the 1973 oil crisis where the Organization of Arab
Petroleum Exporting Countries3 imposed an oil embargo, BP started exploration in new locations,
such as, Prudhoe Bay in Alaska and the North Sea off of Scotland. This reduced dependency on the
Middle East but also represented technical challenges to rein in the crude oil from remote regions.
Being short of facilities in North America, BP worked with Standard Oil of Ohio (Sohio) to refine the
Alaska oil and the company was subsequently acquired to become part of BP. This was followed by
mergers with US-based Amoco and ARCO and acquisition of the Castrol brand to steadily increase
the size of the company. In less than half a century it managed to grow into one of the largest global
corporations with over 100,000 people employed in more than 100 countries around the world.4
714-017-1
serving as non-executive director 1990-93 and 1995-97, so he was instrumental in the first executive
switch. Sutherland retired as chairman in December 2009 after thirteen years of service. Carl-Henric
Svanberg, who joined the board as non-executive director in September 2009 from a prior position as
president and CEO of Ericsson, subsequently took over as chairman of BP in January 2010. That is,
Svanberg was at the helm of the board during the second executive switch (See timeline in Appendix
1).
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After occupying a seat on the board as Managing Director since 1991, John Browne was appointed
Group Chief Executive of BP in 1995 at the age of 45. In addition to this he could boast of being
knighted in 1998 and becoming a life peer in the British House of Lords in 2001. Considered one of
the most successful CEOs in the firm’s history, Browne was given substantial credit for turning it
into one of the world’s most successful energy companies.
Not only recognized for his tremendous efforts to grow the company, Browne could also take the
honor for introducing the slogan “Beyond Petroleum”, ‘BP’ for short, a slogan suggesting that BP
was serious when they talked about becoming an energy company rather than a petroleum company.
Browne shifted towards a more “green” strategic profile, emphasizing care for the environment and
employee safety more than oil and profits. This not only refocused the corporate strategy of BP, but
also reflected Browne’s personal engagement. As a consequence, he was appointed by then Prime
Minister Tony Blair as a key member of the British Sustainability Development Commission.
Similarly, BP went far under Browne’s leadership to give evidence of this change towards
environmental concerns and safety became a focal issue in corporate reports and advertising, while
the company undertook green investments and supported environmental NGOs financially. The firm
also restructured the board to form new subcommittees monitoring projects on employee security and
environmental awareness.
BP rolled out the “Beyond Petroleum” campaign that was widely praised in the press and it was
awarded a Gold Effie from the American Marketing Association (AMA) in 2007. The AMA referred
to the campaign as “a landmark platform for a company trying to change the way the world uses, and
thinks about, the fuels that are vital to human progress.” 7 Hence, BP was the first oil major to
acknowledge a link between the use of oil and the phenomenon of global warming. This market
positioning seemed to work well as total sales went from $192 billion in 2004 to $266 billion in
2006. At the same time a Landor Associates survey found that 21% of consumers perceived BP as
the greenest among the oil companies.8
However, Lord Browne was also known for his willingness to take risks in the pursuit of big
transactions. Hence, it was under his leadership the Amoco merger went through in 1998, as one of
7
Gregory Solman, BP: Coloring Public Opinion? Adweek, January 14, 2008.
8
Environmental Leader. Environmental and energy management news, ‘Beyond Petroleum’ pays off for BP,
January 15, 2008.
4
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GROWING ENVIRONMENTAL CONCERNS
714-017-1
the largest industry mergers ever.9 The deal was valued at US $48.2 billion and propelled BP Amoco
to be among the largest multinational oil companies. The merger combined different industry skills
as BP was good at exploring for oil reserves, whereas Amoco had a more substantial business in oil
refining and chemicals. These complementary activities provided a basis for more consolidated
spending on oil exploration projects that could help extend their essential upstream business activities
in the energy industry. Although the transaction was announced as a merger among equals, analysts
tended to see it as an acquisition by BP, who controlled 60 percent of the new company.
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TEXAS CITY REFINERY
On March 23, 2005 a hydrocarbon vapor cloud exploded at the ISOM isomerization process unit at
BP’s Texas City refinery in Texas City, Texas, killing 15 workers and injuring more than 170 others.
The Texas City Refinery was the third-largest oil refinery in the United States and became part of BP
in connection with the Amoco merger.
The hydrocarbon cloud was formed by liquid overflow from the F-20 blowdown stack where the
raffinate splitter pressure protection system overfilled and overheated the tower contents. The
incidence was caused by numerous technical and organizational shortcomings at the refinery and
within BP. These comprised the continued use of an insufficiently dimensioned and outdated
blowdown drum, lack of maintenance on safety critical systems, inoperative alarms, etc. It also
included corporate cost-cutting, inadequate training, poor communications between operators and
department managers, failure to invest in plant safety measures and a wanting corporate safety
culture. The US Chemical Safety and Hazard Investigation Board looked into the circumstances
around the incident (led by former US Secretary of State James Baker III) and was scheduled to
release its report in July, 2007.11
The report turned out to provide less than flattering evidence of the practices procured by BP. The
review panel expressed its belief “that BP has not provided effective process safety leadership and
has not adequately established process safety as a core value across all its five U.S. refineries.” In
addition: ”The panel found instances of a lack of operating discipline, tolerance of serious deviations
9
Youssef M. Ibrahimy, British Petroleum is buying Amoco in $48.2 billion deal, New York Times, August 12, 1998.
Oil & Gas Journal. BP/Amoco merger creates third ‘supermajor’, August 17, 1998.
10
11
Investigation Report. Refinery Explosion and Fire, U.S. Chemical Safety and Hazard Investigation Board, Report No.
2005-04-I-TX, March 2007.
5
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The merger moved the company into the top of the industry with substantial business synergies and
administrative savings. Amoco’s President William Lowrie argued for operational synergies with
cost savings of at least $2 billion annually and benefits from a streamlined corporate staffing with
potential savings of $1 billion.10 The BP Amoco merger was followed rapidly by acquisitions of
ARCO and Burmah Castrol with the possibility to gain further scale economies through the daunting
task of consolidating 100,000 people into one single organization within a lean and efficient
corporate infrastructure.
714-017-1
from safe operating practices, and apparent complacency toward serious process safety risks at each
refinery.”
Despite the impressive corporate growth strategy along with the successful Amoco merger, Lord
Browne stepped down as CEO on May 1st 2007, somewhat earlier than his originally planned
retirement. The reasons behind his resignation were intricate and abrupt and the New York Times
referred to it as ”one of the most dramatic falls in British business in memory”.12 In fact, it was
already announced on January 12, 2007 that Tony Hayward would replace John Browne as BP’s
Chief Executive in July well ahead of time. The process to replace Lord Browne had been
accelerated by fast-forwarding his resignation by 18 months from the end of 2008 to the middle of
2007, even though he would not reach the official executive retirement age of 60 until 2008. At the
occasion Peter Sutherland, the BP chairman, referred to John Brown as “the greatest British
businessman of his generation”.13 Yet, the creeping safety and environmental issues related to the
Alaska pipeline, start-up delays at the Thunder Horse project in the Gulf of Mexico, and not least the
pending report on the Texas City explosion seemed to urge his premature retirement. But, what really
prompted his abrupt resignation was the fact that he was caught lying in court about an intricate
partnership with another man while losing a four-month battle to suppress newspaper reports about
the relationship.14
John Browne had asked the High Court to prevent the Mail on Sunday from reporting on his
partnership and took the legal battle all the way to the House of Lords, which eventually refused him
permission to appeal. The judges said the newspaper could write about the alleged misuse of BP
resources in support of his partner, which “included his ‘personal use, with the claimant’s knowledge
and permission, of BP’s computers, and of its support staff; the involvement of BP personnel in
setting up and eventually winding up a company created by the claimant for [Mr. Chevalier] to run’;
and ‘the use of a senior BP employee to run a personal errand for the claimant by delivering cash’ to
Mr. Chevalier.”15
The unfortunate situation was followed by crisis meetings at the London headquarters, which caused
John Browne to resign with immediate effect. BP said “it accepted Lord Browne’s resignation with
the ‘deepest regret’” and announced that “the chief executive would lose his entitlement to a leaving
package worth £3.5 million and a potential £12 million in shares.” Allegations from Lord Browne’s
ex-boyfriend Jeff Chevalier suggested he had acted against BP’s official code of conduct for
employees. Brown denied the allegations, but found it necessary to withdraw from his position. He
12
13
14
15
Alan Cowell, John Browne steps down abruptly from BP, The New York Times, May 1, 2007.
BBC News. BP’s Browne to stand down in July, January 12, 2007.
Ian Cobain and Clare Dyer, BP’s Browne quits over lie to court about private life, The Guardian, May 1, 2007.
Joshua Rozenberg, Lord Browne resigns after revelations he lied in court about gay lover, The Telegraph, May 1, 2007.
6
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As a consequence of the explosion, BP was afterwards charged with criminal violation of federal
environmental laws and faced numerous lawsuits requesting compensation to the victims’ families.
Hence, the US District Court was trying BP on a fine around $50 million charged for environmental
violations with BP making prior payments of more than $1.6 billion to compensate the victims and
their families.
714-017-1
resigned from BP and the Head of Exploration and Production, Tony Hayward, became the new
Group Chief Executive.
THE SHIFT AT THE HELM
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